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JFGI > SEC Filings for JFGI > Form 10-Q on 22-Apr-2013All Recent SEC Filings

Show all filings for JACOBS FINANCIAL GROUP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for JACOBS FINANCIAL GROUP, INC.


22-Apr-2013

Quarterly Report


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

During fiscal 2012 and the nine-month period ended February 28, 2013, the Company has focused its primary efforts on the development and marketing of its surety business in West Virginia and Ohio, arranging for potential strategic relationships that will accelerate the progression of the Company's business plan and raising additional capital to increase the capital base of its insurance subsidiary, First Surety Corporation ("FSC"), to facilitate entry into other state markets.

RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED FEBRUARY 29, 2012

The Company experienced a loss from operations for the three-month period ended February 28, 2013 of $121,370 as compared with a loss from operations of $91,956 for the corresponding period ended February 29, 2012.

REVENUES

Revenues from operations for the three-month period ended February 28, 2013 were $307,553 as compared with $347,436 for the corresponding period ended February 29, 2012. The overall decrease in revenues is largely attributable to a decrease in premiums written by FSC in the current year, despite more gains recognized in the current year on the sale of investments held by the Company. For the three-month period ended February 28, 2013 net investment income declined due to the re-allocation of assets in the investment portfolio compared to the previous year. Some interest bearing mortgage backed securities were sold at various times during the previous twelve-month period and replaced with non-interest bearing, or zero coupon bonds. In addition, investment advisory fees declined due to the slight decrease in assets under management.

INVESTMENT ADVISORY REVENUES

Quarterly revenues from the Company's investment management segment (Jacobs & Company or J&C), net of advisory referral fees, were $43,363 for the three-month period ended February 28, 2013 as compared with $46,963 for the corresponding period ended February 29, 2012. Investment advisory fees are based on the market value of assets under management, some fluctuation will occur due to overall market conditions. For the most part, however, such revenues will remain relatively constant from quarter to quarter with any large fluctuations being attributable to the growth or decline of assets under management.

INSURANCE AND INVESTMENT REVENUES

Quarterly  revenues from the Company's surety insurance  segment,  consisting of
FSC and Triangle Surety Agency,  Inc ("TSA"),  were $263,822 for the three-month
period ended  February 28, 2013 as compared with $295,090 for the  corresponding
period ended February 29, 2012.  Revenues  attributable to premium  earned,  net
investment income and commissions earned are as follows:

                                      -3-
                                                  Three-month Period Ended
                                                    February 28 and 29,
                                             -----------------------------------
                                                   2013              2012
                                             ----------------- -----------------

Premium earned                               $        197,414  $        224,652
Commissions earned                                        463               432
Net investment income                                  50,801            72,369
Net realized investment gains (losses)                 15,144            (2,363)
                                             ----------------- -----------------
                                      Total  $        263,822  $        295,090
                                             ================= =================

Premium revenue is recognized ratably over the term of the policy period and thus is relatively stable from period to period with fluctuations for comparable periods generally reflecting the overall growth or loss of business. Commission revenue, which is dependent on the timing of issuance or renewal of bonds, is somewhat more seasonal from quarter-to-quarter with fluctuations for comparable periods largely reflecting the overall growth or loss of business. The decrease in premium earned for the three-month period ended February 28, 2013 in comparison to the corresponding period from the prior year is a result of decrease in bonds issued for existing clients.

Investment income should remain relatively consistent but can fluctuate based on interest rates, dividends and market conditions as well as the average assets held for investment. The decrease in corresponding periods reflects a slight decrease in average assets held for investment in FSC's investment portfolio, from $7.836 million for the three-month period ended February 29, 2012 to $7.652 million for the three-month period ended February 28, 2013, as well as a decrease in investment yield from approximately 3.67% for the three-month period ended February 29, 2012 to 2.46% for the three-month period ended February 28, 2013. This decrease in investment yield is mostly attributable to the diversification of some invested assets from interest earning, mortgage backed securities to tax-exempt zero coupon bonds. The ultimate effect of zero coupon bonds will be reflected over the life of the bond through accretion rather than yield. During the period, equity securities in the portfolio provided dividends and gains from the covered call strategy utilized on the equities.

During the three-month period ending February 28, 2013, the Company sold certain equity investments and municipal bonds for $770,918, resulting in realized gains of $15,144. In the three-month period ending February 29, 2012, the Company sold certain equity investments for $57,826, resulting in realized losses of $2,363.

EXPENSES

INCURRED POLICY LOSSES

The Company has experienced no claims for losses as of February 28, 2013. However, "incurred but not reported" (IBNR) policy losses for the three-month periods ending February 28, 2013 and February 29, 2012 amounted to $42,853 and $50,386 respectively. Such amounts represent the provision for estimated loss and loss adjustment expense attributable to surety bonds issued by FSC. Such

-4-

estimates are based on industry averages adjusted for factors that are unique to FSC's underwriting approach and are routinely reviewed for adequacy based on current market conditions and other factors unique to FSC's business. For each of these periods, IBNR policy losses were approximately 22% and 22% of earned premium.

POLICY ACQUISITION COSTS

Insurance  policy  acquisition  costs of $65,868 and $71,876 for the three-month
periods ended February 28, 2013 and February 29, 2012,  respectively,  represent
charges  to  operations   for  policy   acquisition   expense  and  premium  tax
attributable to surety polices issued by FSC and are recognized ratably over the
period in which premiums are earned. Such cost as a percentage of earned premium
was  approximately  33% and 32% for the  periods  ended  February  28,  2013 and
February 29, 2012 respectively.
GENERAL AND ADMINISTRATIVE

General and administrative  expenses for the three-month  periods ended February
28,  2013 and  February  29,  2012  were  $317,531  and  $314,451  respectively,
representing  an increase of  approximately  $3,000,  and were  comprised of the
following:
                                                                 Three-month Period Ended
                                                                   February 28 and 29,
                                                           -------------------------------------
                                                                  2013               2012            Difference
                                                           ------------------ ------------------ -------------------
Salaries and related costs                                 $         170,017  $         161,047  $            8,970
General office expense                                                26,367             27,891              (1,524)
Legal and other professional fees and costs                           18,022             46,482             (28,460)
Audit, accounting and related services                                30,743             19,638              11,105
Travel, meals and entertainment                                       22,993             21,093               1,900
Other general and administrative                                      49,389             38,300              11,089
                                                           ------------------ ------------------ -------------------
                         Total general and administrative  $         317,531  $         314,451  $            3,080
                                                           ================== ================== ===================

Salaries and related costs, net of deferred internal policy  acquisition  costs,
increased approximately $9,000 and are comprised of the following:

                                                                Three-month Period Ended
                                                                   February 28 and 29,
                                                          --------------------------------------
                                                                  2013               2012            Difference
                                                          ------------------- ------------------ -------------------
Salaries and taxes                                        $        $ 151,266  $         168,212  $          (16,946)
Commissions                                                           12,391             64,486             (52,095)
Fringe benefits                                                       21,422             20,029               1,393
Key-man insurance                                                     13,115             12,608                 507
Deferred payroll costs                                               (28,177)          (104,288)             76,111
                                                          ------------------- ------------------ -------------------
                         Total salaries and related costs $          170,017  $         161,047  $            8,970
                                                          =================== ================== ===================

-5-

The decrease in salaries and taxes is due to the retirement of an employee. The decrease in commissions is attributable to the timing of payment of commissions based upon collections. The Company's commission structure pays a larger commission percentage on the origination of a policy but reduced for subsequent policy renewals.

Legal and other professional fees and costs were comprised of the following:

                                                                Three-month Period Ended
                                                                   February 28 and 29,
                                                          --------------------------------------
                                                                   2013               2012            Difference
                                                          -------------------- ------------------- -----------------
General corporate services                                $            5,623   $          1,309    $          4,314
Coal reclamation consulting                                            6,100             12,130              (6,030)
Acquisition and financing related costs                                6,299             33,043             (26,744)
                                                          -------------------- ------------------- -----------------
                  Total legal and other professional fees $           18,022   $         46,482    $        (28,460)
                                                          ==================== =================== =================

The increase in general corporate services expense results primarily from increased legal and consulting expenses affecting the insurance subsidiary. Coal reclamation consulting costs decreased in the current quarter compared to the previous year due to the prior year's additional efforts to expand the surety business into nearby states and the additional understanding needed of regulatory issues in those states. Legal and other professional services and costs related to the Company's pending acquisitions and on-going efforts to obtain financing necessary to expand the Company's business and penetrate new markets amounted to $6,299 and $33,043 for the three-month periods ended February 28, 2013 and February 29, 2012, respectively.

Other general and administrative expense increased approximately $11,000 for the three-month period ended February 28, 2013 as compared to the corresponding 2012 period. This increase is attributable to increases in bank fees, outside contracted services and temporary help, as well as overall increases in several less significant items.

INTEREST EXPENSE

Interest expense for the three-month period ended February 28, 2013 was $231,393
as compared with $220,634 for the corresponding  period ended February 29, 2012.
Components of interest expense are comprised of the following:

                                                                    Three-month Period Ended
                                                                      February 28 and 29,
                                                               -----------------------------------
                                                                      2013              2012           Difference
                                                               ----------------- ----------------- -----------------
Interest expense on bridge-financing                           $        146,713  $        148,343  $         (1,630)
Expense of common shares issued or to be issued in
 connection with bridge financing and other arrangements                 39,155            26,984            12,171
Interest expense on demand and term notes                                41,802            43,103            (1,301)
Other finance charges                                                     3,723             2,204             1,519
                                                               ----------------- ----------------- -----------------
                                       Total interest expense  $        231,393  $        220,634  $         10,759
                                                               ================= ================= =================

-6-

The increased expense of common shares issued (or to be issued) for the three-month period ended February 28, 2013 as compared to the previous year period is attributable to rise in market value of the common stock used to calculate the price of shares to be issued for the semi-annual bridge loan issuance. Other finance charges for the three-month period ended February 28, 2013 consists of interest charged on past due Federal and State payroll taxes.

ACCRETION AND DIVIDENDS

Accretion of  mandatorily  redeemable  convertible  preferred  stock issued at a
discount and accrued  dividends for three-month  periods ended February 28, 2013
and February 29, 2012 are as follows:
                                                                   Three-month Period Ended
                                                                      February 28 and 29,
                                                             --------------------------------------
                                                                      2013               2012            Difference
                                                             -------------------- ------------------ ------------------
Accrued dividends - mandatorily redeemable preferred stock   $          18,941             32,282    $       (13,341)
Accrued dividends - equity preferred stock                             232,979            215,190             17,789
                                                             -------------------- ------------------ ------------------
                            Total accretion and dividends    $         251,920    $       247,472    $      $  4,448
                                                             ==================== ================== ==================

The remaining Series B class of stock became treated as a liability November 30, 2009 after the majority was exchanged for Series C equity stock. Therefore, for the three-month period ending February 28, 2013, dividends of $96,781 associated with the Series B after November 30, 2009 are deductions from net income and not included in the table above. For the thee-month period ending February 29, 2012, dividends of $89,392 associated with the Series B remaining after that date are deductions from net income and not included in the table above. During the year ended May 31, 2012, two holders of Series A stock released all of their outstanding bonds held with FSC. Therefore, these shares of Series A Preferred are listed in the liability section of the Consolidated Condensed Balance Sheet and the dividends after February 29, 2012 associated with these shares are a deduction from net income in the amount of $14,655 (for the three-month period ended February 28, 2013) and not included in the table above. Series C equity stock is not mandatorily redeemable and does not accrete.

RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED FEBRUARY 28, 2013

The Company experienced a loss from operations for the nine-month period ended February 28, 2013 of $392,230 as compared with a loss from operations of $49,418 for the corresponding period ended February 29, 2012.

REVENUES

Revenues from operations for the nine-month period ended February 28, 2013 were $1,032,476 as compared with $1,328,311 for the corresponding period ended February 29, 2012. The decrease in revenues is largely attributable to the receipt in 2012 of a cumulative No Claims Bonus from its reinsurers for the two years ending June 30, 2010 and June 30, 2011, as well as the need to recognize additional ceded premium in the current year in order to meet the minimum amount

-7-

set forth in the Reinsurance contract. For the nine-month period ended February 28, 2013 net investment income declined due to the re-allocation of assets in the investment portfolio compared to the previous year. Some interest bearing mortgage backed securities were sold at various times during the previous twelve-month period and replaced with U.S. Treasury-backed zero coupon bonds. In addition, investment advisory fees declined due to the decrease in the amount of assets in portfolios under management.

INVESTMENT ADVISORY REVENUES

Quarterly revenues from the Company's investment management segment, Jacobs & Company (J&C), net of advisory referral fees, were $140,694 for the nine-month period ended February 28, 2013 as compared with $178,034 for the corresponding period ended February 29, 2012. Investment advisory fees are based on the market value of assets under management and some fluctuation will occur due to overall market conditions. For the most part, however, such revenues will remain relatively constant from quarter to quarter with any large fluctuations being attributable to the growth or loss of assets under management.

INSURANCE AND INVESTMENT REVENUES

Quarterly  revenues from the Company's surety insurance  segment,  consisting of
FSC and Triangle Surety Agency,  Inc. ("TSA"),  were $886,036 for the nine-month
period ended February 28, 2013 as compared with $1,142,654 for the corresponding
period ended February 29, 2012.  Revenues  attributable to premium  earned,  net
investment income and commissions earned are as follows:

                                                Nine-month Period Ended
                                                   February 28 and 29,
                                           -----------------------------------
                                                  2013              2012
                                           ----------------- -----------------

Premium earned                             $        555,715  $        686,527
Commissions earned                                   20,781            23,023
No Claims Bonus from Reinsurers                      98,000           213,281
Net investment income                               170,516           207,468
Net realized investment gains                        41,024            12,355
                                           ----------------- -----------------
                                    Total  $        886,036  $      1,142,654
                                           ================= =================

Premium revenue is recognized ratably over the term of the policy period and thus is relatively stable from period to period with fluctuations for comparable periods generally reflecting the overall growth or loss of business. Commission revenue is dependent on the timing of issuance or renewal of bonds and is somewhat more seasonal quarter-to-quarter, with fluctuations for comparable periods largely reflecting overall growth or loss of business. The decrease in premium earned for the nine-month period ended February 28, 2013, in comparison to the corresponding period from the prior year is a result of the need to recognize additional ceded premium in the current year in order to meet the minimum premium set forth in the Reinsurance contract, as well as a decrease in premium written for existing clients.

For the nine-month period ended February 29, 2012, the Company's insurance subsidiary, FSC, recorded $213,281 from its reinsurers representing cumulative No Claims Bonus under the terms of its reinsurance agreement for the claim years

-8-

ending June 30, 2010 and June 30, 2011. For the nine-month period ended February 28, 2013 the Company recorded $98,000 of No Claims Bonus for the claim year ending June 30, 2012.

Investment income should remain relatively consistent, but can fluctuate based on interest rates and market conditions. The decrease in corresponding periods reflects a decrease in average assets held for investment in FSC's investment portfolio, from approximately $7.740 million for the nine-month period ended February 29, 2012 to approximately $7.630 million for the nine-month period ended February 28, 2013, as well as a decrease in investment yield from approximately 3.62% for the nine-month period ended February 29, 2012 to approximately 2.78% for the nine-month period ended February 28, 2013. This decrease in investment yield is mostly attributable to the diversification of some invested assets from interest earning, mortgage backed securities to non-interest earning, zero coupon bonds. The ultimate effect of zero coupon bonds will be reflected over the life of the bond through accretion rather than yield. During the period, equity securities in the portfolio provided dividends and gains from the covered call strategy utilized on the equities.

During the nine-month period ending February 28, 2013, the Company sold certain equity investments and municipal bonds for $993,462, resulting in realized gains of $41,024. During the nine-month period ending February 29, 2012, the Company sold certain US Government agency mortgage backed securities and equity investments for $186,395, resulting in realized gains of $12,355.

EXPENSES

INCURRED POLICY LOSSES

The Company has experienced no claims for losses as of February 28, 2013. However, "incurred but not reported" (IBNR) policy losses for the nine-month period ended February 28, 2013 and February 29, 2012 amounted to $139,258 and $153,982 respectively. Such amounts represent the provision for loss and loss adjustment expense that may be incurred by surety bonds issued by FSC. Those estimates are based on industry averages adjusted for factors that are unique to the FSC's underwriting approach and are routinely reviewed for adequacy based on current market conditions and other factors unique to FSC's business. IBNR policy loss provisions were approximately 25% and 22% of earned premium for the nine-month periods ending February 28, 2013 and February 29, 2012, respectively. The increase as a percentage of earned premium for the current period is due to FSC's need to recognize the minimum ceded premium amount required in the Reinsurance contract, without corresponding premium written.

POLICY ACQUISITION COSTS

Insurance policy acquisition costs of $203,325 and $225,184 for the nine-month periods ended February 28, 2013 and February 29, 2012, respectively, represent charges to operations for policy acquisition expense and premium tax attributable to surety polices issued by FSC and are recognized ratably over the period in which premiums are earned. Such costs as a percentage of earned premium were approximately 37% and 33% for the periods ended February 28, 2013

-9-

and February 29, 2012 respectively. The increase as a percentage of earned premium for the current period is due to FSC's need to recognize the minimum ceded premium amount required in the Reinsurance contract, without corresponding premium written.

GENERAL AND ADMINISTRATIVE

General and  administrative  expenses for the nine-month  periods ended February
28,  2013 and  February  29, 2012 were  $1,074,109  and  $990,498  respectively,
representing  an increase of  approximately  $84,000,  and were comprised of the
following:
                                                                 Nine-month Period Ended
                                                                   February 28 and 29,
                                                           -------------------------------------
                                                                  2013               2012             Difference
                                                           ------------------ ------------------ -------------------
Salaries and related costs                                 $         573,951  $         510,466  $           63,485
General office expense                                                81,462             83,643              (2,181)
Legal and other professional fees and costs                          112,730            110,404               2,326
Audit, accounting and related services                               112,613            105,693               6,920
Travel, meals and entertainment                                       66,074             65,030               1,044
Other general and administrative                                     127,279            115,262              12,017
                                                           ------------------ ------------------ -------------------
                         Total general and administrative  $       1,074,109  $         990,498  $           83,611
                                                           ================== ================== ===================

Salaries and related costs, net of deferred internal policy  acquisition  costs,
increased approximately $63,000 and are comprised of the following:
. . .
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