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JAXB > SEC Filings for JAXB > Form 10-Q on 9-May-2013All Recent SEC Filings

Show all filings for JACKSONVILLE BANCORP INC /FL/

Form 10-Q for JACKSONVILLE BANCORP INC /FL/


9-May-2013

Quarterly Report


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

Management's discussion and analysis of the financial condition and results of operations represents an overview of the consolidated financial condition as of March 31, 2013 and December 31, 2012 and results of operations for the three months ended March 31, 2013 compared to the same period in 2012. This discussion is designed to provide a more comprehensive review of the financial condition and operating results than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the interim financial statements and related footnotes included herein, and the Company's audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the SEC on March 26, 2013.

General

Jacksonville Bancorp, Inc. ("Bancorp") was incorporated on October 24, 1997 and was organized to conduct the operations of The Jacksonville Bank (the "Bank"). The Bank is a Florida state-chartered commercial bank that opened for business on May 28, 1999, and its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank provides a variety of community banking services to businesses and individuals in the greater Jacksonville area of Northeast Florida. During 2000, the Bank formed Fountain Financial, Inc., a wholly owned subsidiary. Through Fountain Financial, Inc., and our marketing agreement with New England Financial (an affiliate of MetLife), we are able to meet the investment and insurance needs of our customers. Bancorp, the Bank, and Fountain Financial, Inc. are collectively referred to herein as the "Company."

Business Strategy

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

Our goal is to sustain profitable, controlled growth by focusing on increasing our loan and deposit market share in the Northeast Florida market by developing new financial products, services and delivery channels; closely managing yields on earning assets and rates on interest-bearing liabilities; focusing on noninterest income opportunities; controlling the growth of noninterest expenses; and maintaining strong asset quality. During the second quarter of 2012, the Company adopted a new overall strategy to accelerate the disposition of substandard assets on an individual customer basis. This strategy is ongoing and supports the continued reduction of problem assets as needed. In addition, the Company has been and will continue to fine tune the current credit processes. The Company is working to reposition its loan and deposit portfolio mix to better align with our targeted market segment of professional services, wholesalers, distributors and other service industries resulting in greater diversification in our balance sheet mix. The capital received in late 2012 is being deployed into short-term investments to maximize earnings while the desired loan growth is achieved.

Our operations are influenced by local economic conditions and by policies of financial institution regulatory authorities. Fluctuations in interest rates due to factors such as competing financial institutions as well as fiscal policy and the Federal Reserve's decisions on monetary policies, including interest rate targets, impact interest-earning assets and our cost of funds and, thus, our net interest margin. In addition, the local economy and real estate market of Northeast Florida, and the demand for our products and loans, impact our margin. The local economy and viability of local businesses can also impact the ability of our customers to make payments on loans, thus impacting our loan portfolio. The Company evaluates these factors when valuing its allowance for loan losses. The Company also believes its underwriting procedures are relatively conservative and, as a result, the Company is not being any more affected than the overall market in the current economic downturn. To further supplement the Company's business strategy, the Bank has adopted a philosophy of seeking and retaining the best available personnel for positions of responsibility, whom we believe will provide us with a competitive edge in the local banking market. Since the retirement of Mr. Price Schwenck, the Company's former Chief Executive Officer, the Company appointed Stephen C. Green as President and Chief Executive Officer and Margaret A. Incandela as Chief Operating Officer and Chief Credit Officer during 2012 as a means of adding critical management expertise.


Table of Contents

JACKSONVILLE BANCORP, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Capital Raise Transactions

During 2012, the Company executed a financial advisory agreement with an investment banking firm to assist in raising capital. Efforts to secure additional equity capital were realized on December 31, 2012 with the sale of an aggregate of 50,000 shares of the Company's Series A Preferred Stock, at a purchase price of $1,000 per share, in the Private Placement. For the year ended December 31, 2012, gross proceeds from the issuance of preferred stock in the amount of $50.0 million, $45.1 million net of offering expenses, were used for general operating expenses, mainly for the subsidiary bank, to improve capital ratios, and will be used to support the Company's business strategy going forward. Please refer to Note 2 - Capital Raise Transactions in the accompanying notes to the Consolidated Financial Statements for additional information related to the Company's recent capital raise transactions.

Introduction

The Company's performance during the periods ended March 31, 2013 and December 31, 2012 is reflective of the current low interest rate environment which has placed significant pressure on our margin, largely on the repricing of our assets. It also demonstrates the continued depressed real estate market that has been ongoing in the market in which the Bank operates.

Comparison of Financial Condition as of March 31, 2013 and December 31, 2012

Total assets decreased $44.2 million, or 7.8%, from $565.1 million as of December 31, 2012 to $520.9 million as of March 31, 2013. The Company experienced a significant decrease in cash and cash equivalents as a result of a reduction in federal funds sold in the amount of $47.3 million due to the purchase of investment securities available-for-sale and the timing of the natural maturity of deposit accounts, particularly time deposits. In addition, the Company experienced a decrease in net loans of $4.7 million, primarily due to foreclosure activities during the three months ended March 31, 2013. These amounts were offset by an increase in securities available-for-sale of $7.3 million, or 8.7%, during the three months ended March 31, 2013.

During the first three months of 2013, investment securities available-for-sale increased from $84.0 million as of December 31, 2012 to $91.3 million as of March 31, 2013. During the three months ended March 31, 2013, the Company purchased $16.3 million in securities and received $6.2 million in proceeds from principal repayments, maturities and calls. In addition, the Company sold securities in the first quarter of 2013 for proceeds of $2.2 million and a $37 thousand realized gain.

Total deposits decreased by $43.8 million, or 8.9%, during the three months ended March 31, 2013, from $490.0 million as of December 31, 2012 to $446.2 million as of March 31, 2013. The following are changes in each of the major deposit categories during the first three months of 2013:

Noninterest-bearing deposits decreased $4.7 million, or 5.0%, as a result of natural and expected fluctuations in average account balances slightly offset by organic deposit growth from new customers;

Money market, NOW and savings deposits decreased $9.2 million, or 4.6%, largely due to a sizable decline in money market account balances attributable to the loss of a single significant customer during the period;

The time deposit portfolio decreased by $29.9 million, or 15.2%, driven primarily by a $19.0 million reduction in national CDs (the Company is not currently offering or renewing national or brokered CDs).

Loans from related parties and FHLB advances and other borrowings remained unchanged during the three months ended March 31, 2013, with loans from related parties of $2.2 million as of March 31, 2013 and December 31, 2012 and FHLB advances and other borrowings of $20.2 million as of the same dates.

Total shareholders' equity remained relatively consistent during the three months ended March 31, 2013, from $33.6 million as of December 31, 2012 to $33.4 million as of March 31, 2013. This decrease was attributable to a decrease in accumulated comprehensive income of $363 thousand, offset by net income during the three months ended March 31, 2013 of $199 thousand. Total shareholders' equity did not change as a result of the mandatory conversion of the Company's preferred stock, Series A ("Series A Preferred Stock"), into approximately 47.6 million shares of common stock and 52.4 million shares of a new class of nonvoting common stock, each class with a par value of $0.01 per share (the "Conversion"). The Conversion resulted in (i) the full balance transfer of the discount due to the beneficial conversion feature on the Series A Preferred Stock from common stock additional paid-in capital to preferred stock in the amount of $31.5 million, (ii) the conversion of the outstanding balance of preferred equity to common equity, resulting in an increase in common stock of


Table of Contents

JACKSONVILLE BANCORP, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

$0.5 million, nonvoting common stock of $0.5 million and additional paid-in capital of $49.0 million, and (iii) an increase in the retained deficit of $31.5 million due to the noncash, implied preferred stock dividend recognized in conjunction with the transfer of the discount due to the beneficial conversion feature to preferred stock. In addition to its impact on the retained deficit balance, the noncash, implied preferred stock dividend also reduced net income available to common shareholders in the earnings per share calculation (as discussed below).

Comparison of Operating Results for the Three Months Ended March 31, 2013 and 2012

Net Income

The Company had net income for the three months ended March 31, 2013 of $199 thousand, compared to $1.3 million of net income for the three months ended March 31, 2012. On a diluted per share basis, the Company had a net loss of $0.61 for the three months ended March 31, 2013, compared to net income of $0.22 for the same period in the prior year. The Company experienced a net loss per diluted common share due to the reduction of net income available to common shareholders in the amount of $31.5 million as a result of the noncash, implied preferred stock dividend recognized in conjunction with the Company's capital raise transactions and the previously described Conversion.

Net Interest Income

Net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities, was $5.2 million for the three months ended March 31, 2013, compared to $5.3 million for the same period in 2012. This slight decrease was due to the period-over-period decrease in the average yield on interest-earning assets of 2 basis points, to 4.96% for the three months ended March 31, 2013, as compared to 4.98% for the first three months of 2012.

Total interest income decreased $0.3 million for the three months ended March 31, 2013 when compared to the same period in 2012. This decrease was primarily driven by a decrease in average earning assets, in particular, average loan balances which declined by $63.6 million when compared to the same period in the prior year. The decrease in average loan balances was partially offset by an increase in the average yield on loans to 6.03% for the three months ended March 31, 2013 compared to 5.41% for the three months ended March 31, 2012. The increase in the loan yield was driven by an increase in accretion recognized on acquired loans of approximately $0.4 million as well as a decrease on total nonperforming loans of $29.0 million for the three months ended March 31, 2013 when compared to the same period in 2012.

The average cost of interest-bearing liabilities decreased 9 basis points to 1.11% for the three months ended March 31, 2013 compared to 1.20% for the same period in 2012. The overall decrease in the average cost of interest-bearing deposits reflects an ongoing reduction in interest rates paid on deposits as a result of the re-pricing activities in the current low interest rate environment coupled with an increase in noninterest-bearing deposits to $89.9 million as of March 31, 2013 from $80.8 million as of March 31, 2012.

The net interest margin increased by 11 basis points to 4.08% from 3.97%, when comparing the first three months of 2013 to the same period in the prior year. The Company closely monitors its liquidity needs in conjunction with the cost of its funding sources and evaluates rates paid on its core deposits to ensure they remain competitive in the local market environment.


Table of Contents

JACKSONVILLE BANCORP, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Average Balance Sheet; Interest Rates and Interest Differential:

The following table sets forth, for the periods indicated, information regarding: (1) the total dollar amount of interest and dividend income from interest-earning assets and the resultant average yield; (2) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (3) net interest/dividend income; (4) interest rate spread; and
(5) net interest margin. Average balances are based on average daily balances.

                                                                        Three Months Ended March 31,
                                                              2013                                        2012
                                              Average                      Average        Average                      Average
(Dollars in thousands)                        Balance       Interest        Rate          Balance       Interest        Rate
Interest-earning assets:
Loans (1)                                    $ 395,589     $    5,879          6.03 %    $ 459,166     $    6,180          5.41 %
Securities
Taxable                                         74,297            278          1.52         52,354            284          2.18
Tax-exempt(2)                                   16,889            175          4.20         18,073            190          4.23
Other interest-earning assets(3)                32,816             30          0.37          8,741             17          0.78

Total interest-earning assets                  519,591          6,362          4.97        538,334          6,671          4.98

Noninterest-earning assets(4)                   18,464                                      30,184

Total assets                                 $ 538,055                                   $ 568,518

Interest-bearing liabilities:
Savings deposits                             $   9,778     $        7          0.29 %    $  11,043     $       12          0.44 %
NOW deposits                                    21,693              5          0.09         22,221              7          0.13
Money market deposits                          164,115            273          0.67        170,329            346          0.82
Time deposits                                  178,859            514          1.17        208,161            623          1.20
FHLB advances                                   20,000             74          1.50         23,499             89          1.52
Federal Reserve and other borrowings(8)          2,211             53          9.72          3,011             66          8.82
Subordinated debt                               16,097            207          5.22         16,033            213          5.34
Other interest-bearing liabilities(5)               -              -             -             316             -             -

Total interest-bearing liabilities             412,753          1,133          1.11        454,613          1,356          1.20

Noninterest-bearing liabilities                 91,734                                      84,400
Shareholders' equity                            33,568                                      29,505

Total liabilities and shareholders' equity   $ 538,055                                   $ 568,518

Net interest income                                        $    5,229                                  $    5,315

Interest rate spread(6)                                                        3.86 %                                      3.78 %

Net interest margin(7)                                                         4.08 %                                      3.97 %

(1) Average loans include nonperforming loans. Interest on loans included loan fees (in thousands) of $70 and $35 for the three months ended March 31, 2013 and 2012, respectively.

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

(3) Includes federal funds sold.

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

(5) Includes federal funds purchased.

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

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

(8) Federal Reserve and other borrowings include loans from related parties that pay an annual rate of interest equal to 8% on a quarterly basis of the amount outstanding or an unused revolver fee calculated and paid quarterly at an annual rate of 2% on the revolving loan commitment less the daily average principal amount outstanding.


Table of Contents

JACKSONVILLE BANCORP, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Rate/Volume Analysis:

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



                                                    Three Months Ended March 31, 2013 vs. 2012
                                                           Increase (Decrease) Due to(1)
(Dollars in thousands)                           Rate                 Volume                 Total
Interest-earning assets:
Loans                                         $       606           $      (907 )         $      (301 )
Securities
Taxable                                              (104 )                  98                    (6 )
Tax-exempt                                             (3 )                 (12 )                 (15 )
Other interest-earning assets                         (13 )                  25                    12

Total interest-earning assets                 $       486           $      (796 )         $      (310 )


Interest-bearing liabilities:
Savings deposits                              $        (4 )         $        (1 )         $        (5 )
NOW deposits                                           (2 )                  -                     (2 )
Money market deposits                                 (61 )                 (12 )                 (73 )
Time deposits                                         (24 )                 (85 )                (109 )
FHLB advances                                          (2 )                 (13 )                 (15 )
Federal Reserve and other borrowings                    6                   (19 )                 (13 )
Subordinated debt                                      (7 )                   1                    (6 )
Other interest-bearing liabilities                     -                     -                     -

Total interest-bearing liabilities            $       (94 )         $      (129 )         $      (223 )


Net change in net interest income             $       580           $      (667 )         $       (87 )

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

Noninterest Income, Noninterest Expense and Income Taxes

Noninterest income remained relatively consistent period-over-period, with $0.4 million in service charges and other income for the three months ended March 31, 2013 and 2012. During the three months ended March 31, 2013, the Company received proceeds of $2.2 million from the sale of municipal securities for a realized gain of $37 thousand included in other income for the period.

Noninterest expense increased to $5.2 million for the three months ended March 31, 2013, compared to $4.4 million for the same period in 2012. This increase was mainly due to an increase in professional fees of $0.3 million and other expenses of $0.5 million, primarily loan-related expenses, while the remainder of the components of noninterest expense remained relatively flat period-over-period.

There was no income tax expense recorded during the three months ended March 31, 2013 and 2012. The Company recorded a full valuation allowance against its deferred taxes as of December 31, 2011. This was substantially due to the fact that it was more-likely-than-not that the benefit would not be realized in future periods due to Section 382 of the Internal Revenue Code. Based on an analysis performed as of March 31, 2013 and December 31, 2012, it was determined that the need for a full valuation allowance still existed.


Table of Contents

JACKSONVILLE BANCORP, INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)

Asset Quality

The Company has identified certain assets as risk elements. These assets include nonperforming loans, loans that are contractually past due 90 days or more as to principal or interest payments and still accruing, troubled debt restructurings, and foreclosed real estate. Loans are placed on nonaccrual status when management has concerns regarding the Company's ability to collect the outstanding loan principal and interest amounts and typically when such loans are more than 90 days past due. These loans present more than the normal risk that the Company will be unable to eventually collect or realize their full carrying value. The Company's nonperforming loans, foreclosed assets and troubled debt restructurings as of March 31, 2013 and December 31, 2012 were as follows:

(Dollars in thousands)                           March 31, 2013              December 31, 2012
Nonperforming loans:
Commercial real estate                           $           257            $                98
Residential real estate                                    5,423                          4,813
Construction and land real estate                          6,014                          6,151
Commercial                                                 8,121                         11,372
Consumer loans and other                                     252                            246
Loans past due over 90 days still on
accrual                                                       -                              67

Total nonperforming loans(1)                              20,067                         22,747
Foreclosed assets, net                                     9,920                          6,971

Total nonperforming assets                                29,987                         29,718

Performing loans classified as troubled
debt restructuring                                         5,459                          4,406
Nonperforming loans classified as
troubled debt restructuring(1)                             6,047                          6,585

Total loans classified as troubled debt
restructuring                                    $        11,506            $            10,991

Nonperforming loans as a percent of
gross loans                                                 5.10 %                         5.71 %
Nonperforming loans and foreclosed
assets as a percent of total assets                         5.76 %                         5.26 %

(1) Nonperforming loans classified as troubled debt restructurings are also included in the total nonperforming loans above.

Nonperforming loans decreased to $20.1 million as of March 31, 2013 from $22.7 million as of December 31, 2012. Nonperforming assets remained relatively flat at $30.0 million as of March 31, 2013 compared to $29.7 million as of December 31, 2012.

The Company had loan balances of $11.5 million for customers whose loans were classified as troubled debt restructurings, of which $11.0 million of such loans were included in the impaired loans balance of $16.9 million as of March 31, 2013. Of the loans classified as troubled debt restructurings, $4.8 million were classified as troubled debt restructurings with collateral shortfalls. There were no additional funds committed to customers whose loans were classified as . . .

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