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

Show all filings for JACKSONVILLE BANCORP INC /FL/

Form 10-Q for JACKSONVILLE BANCORP INC /FL/


9-Aug-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 June 30, 2013 and December 31, 2012 and results of operations for the three and six months ended June 30, 2013 compared to the same periods 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 strategy to accelerate the disposition of substandard assets on an individual customer basis. This strategy materially impacted the Company's earnings for the year ended December 31, 2012 as a result of the increased provision for loan losses, expenses related to protecting our collateral position, and aggressively pursuing foreclosure actions when necessary. Additionally, the aggressive pursuit of foreclosure actions resulted in an increase in other real estate owned expenses during the same period.

With the initial framework established in the second quarter of 2012, this strategic initiative has been, and continues to be, ongoing. The collateral for substandard assets that are deemed impaired is evaluated quarterly and an estimate of fair value of the collateral is determined based on appraised values, current market data such as recent sales of similar properties, discussions with potential buyers and negotiations with existing borrowers.
Appraisals are obtained during the regular course of business in accordance with the required appraisal cycle set forth by Bank policy. Based on specific facts and circumstances surrounding a specific loan, off-cycle appraisals may be obtained when new information becomes available to management. Additionally, in certain cases, discounts have been applied to appraised values based on the age of the appraisal, type of loan, general market factors and/or market data regarding sales of similar properties.

The Company received updated appraisals on a majority of its substandard assets during the second half of 2012. As a result of having current appraisals, more modest discounts were required due to the factors noted above.


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

Appraisals were discounted an average of 9% as of December 31, 2012 compared to 28% as of June 30, 2012. Likewise, the average discount on OREO appraisals decreased to 10% from 25% as of the same dates. The discounts applied to appraisals were anticipated to remain at these lower levels for the foreseeable future due to recent indicators of stabilization in the local real estate market; however, discounts applied to appraisals on OREO increased as of June 30, 2013 due to a significant increase in pending purchase and sale agreements that are aggressively priced due to our overall strategy to accelerate the disposition of substandard assets. This increase was contrary to the Company's expectations in the first half of 2013; however, the Company expects this average to be reduced in the near future as pending purchase and sale agreements are finalized.

Looking forward, the Company intends to maintain the quality of its loan portfolio by improving the overall credit process including, but not limited to, loan origination disciplines, stricter underwriting criteria, and succinct funding and onboarding processes. In addition, 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.
Such improvements have not yet impacted our financial statements but are expected to in future periods.

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. Upon 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. In June of 2013, Mr. Green resigned as President and Chief Executive Officer of the Company, and as Chief Executive Officer of the Bank. Following his resignation, the Company's Board of Directors appointed Donald F. Glisson, Jr., Chairman of the Board of the Company, to serve as the Company's principal executive officer on an interim basis until a new President and Chief Executive Officer is elected. Please refer to Item 1A. Risk Factors of Part II-Other Information for additional information related to these events and the potential impact on our operating results.

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 Mandatorily Convertible, Noncumulative, Nonvoting Perpetual Preferred Stock, Series A ("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.

Asset Sale

On December 28, 2012, the Bank entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") with a real estate investment firm (the "Asset Purchaser") for the purchase by the Asset Purchaser of approximately $25.1 million of the Bank's loans and other assets for approximately $11.7 million (the "Asset Sale"). The Asset Sale was consistent with the Company's strategy to accelerate the disposition of substandard assets. Assets underlying the Asset Sale included OREO, non-accrual loans, loans with a history of being past due, and other loans that were part of an overall customer relationship. Proceeds from the Asset Sale included $11.3 million from the sale of loans and $0.4 million from the sale of OREO. The Asset Sale was completed on December 31, 2012 including the immediate transfer of servicing from the Bank.


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

All assets disposed of in conjunction with the Asset Sale were sold exclusively to the Asset Purchaser due to the relatively small size and composition of the assets being sold, particularly with respect to the current market demand for such loans. The overall pricing methodology employed by management during the Asset Sale was influenced by several factors including, but not limited to, (i) the engagement of a third-party financial advisor, (ii) management's experience in loan sale activities and knowledge of the local markets in which the Company operates, and (iii) the pricing expectations of prospective buyers.

Additional discounts (i.e., charge-offs) applied in excess of those assessed in the normal course of business represented a combination of the bulk sale value of the loans and the Asset Purchaser's assumption of risk and expected rate of return. Management reviewed information provided by our third-party financial advisor to evaluate the additional discounts applied to the Asset Sale in comparison to similar transactions and to ensure reasonableness.

Of the $13.3 million in charge-offs related to the Asset Sale, $4.5 million was determined to be due to one or a combination of the following factors: (i) the most recent appraisal (discounted if appropriate), (ii) settlement discussions with the borrower, or (iii) underlying cash flows of the borrower/guarantor as compared to the borrower's recorded investment. This amount was included in the historical loss component in determining the appropriateness of the Company's allowance for loan losses as of December 31, 2012 as it was determined to be indicative of historical loss experience (under the historically determined allowance for loan loss methodology) and, therefore, determined to be part of management's estimate of the probable incurred losses on the remainder of the portfolio.

The additional $8.8 million of charge-offs required to expedite the disposition through the Asset Sale were not considered indicative of our historical loss experience and, therefore, were excluded in the determination of the appropriateness of our allowance for loan losses for the remaining portfolio as of December 31, 2012. Asset sales and the respective discounts are not a traditional element of the Company's normal business activities and, therefore, were excluded in order to properly estimate incurred losses associated with the remainder of the loan portfolio. Further, management does not anticipate an asset sale in the foreseeable future.

For additional information related to the Asset Sale, please refer to Note 4 - Loans and Allowance for Loan Losses in the accompanying notes to the Consolidated Financial Statements.

Introduction

The Company's performance during the periods ended June 30, 2013 and December 31, 2012 is reflective of the Company's ongoing strategy to accelerate the disposition of substandard assets on an individual customer basis. As a result, our noninterest expenses, specifically loan expenses, have increased. However, as a result of these efforts as well as recent indicators of stabilization in the local real estate markets, during the second quarter of 2013, the Company recognized a provision for loan loss benefit as well as improvements in our overall asset quality and a general reduction in substandard assets during the first six months of 2013.

Comparison of Financial Condition as of June 30, 2013 and December 31, 2012

Total assets decreased $42.7 million, or 7.5%, from $565.1 million as of December 31, 2012 to $522.4 million as of June 30, 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 $30.9 million and a decrease in net loans of $13.2 million as a result of foreclosure activities, net charge-offs and loan payoffs that outpaced loan originations during the six months ended June 30, 2013. Other real estate owned increased $2.2 million as a result of the aggressive pursuit of foreclosures in the first half of 2013.
These amounts were slightly offset by a decrease in securities available-for-sale of $0.8 million, or 0.9%, during the six months ended June 30, 2013.

During the first half of 2013, investment securities available-for-sale decreased from $84.0 million as of December 31, 2012 to $83.2 million as of June 30, 2013. During the six months ended June 30, 2013, the Company purchased $19.3 million in securities and received $13.2 million in proceeds from principal repayments, maturities and calls. In addition, the Company sold securities during the first half of 2013 for proceeds of $4.2 million and a $46 thousand realized gain. The remaining variance is due to the change in fair market value during the first six months of 2013.


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

Total deposits decreased by $40.7 million, or 8.3%, during the six months ended June 30, 2013, from $490.0 million as of December 31, 2012 to $449.3 million as of June 30, 2013. The following is an explanation of the changes in each of the major deposit categories during the first half of 2013:

Noninterest-bearing deposits increased $10.6 million, or 11.2%, as a result of a continued emphasis on core deposit growth, especially business relationships with a tendency towards carrying higher account balances;

Money market, NOW and savings deposits decreased $9.7 million, or 4.9%, largely due to a sizable decline in money market account balances attributable to the loss of a single significant customer, which was renewed subsequent to period-end; and

The time deposit portfolio decreased by $41.7 million, or 21.1%, driven primarily by a $24.2 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 six months ended June 30, 2013, with loans from related parties of $2.2 million as of June 30, 2013 and December 31, 2012, respectively, and FHLB advances and other borrowings of $20.2 million as of the same dates.

Total shareholders' equity decreased slightly during the six months ended June 30, 2013, from $33.6 million as of December 31, 2012 to $32.0 million as of June 30, 2013. This decrease was attributable to a decrease in accumulated comprehensive income of $1.8 million, offset by net income during the six months ended June 30, 2013 of $228 thousand. Accumulated comprehensive income decreased based on changes in interest rates during the six months ended June 30, 2013. Total shareholders' equity did not change as a result of the mandatory conversion of the Company's 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 $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 Six Months Ended June 30, 2013 and 2012

Net Income
The Company had net income of $228 thousand for the six months ended June 30, 2013 compared to $10.5 million of net loss for the six months ended June 30, 2012. The net income for the first six months of 2013 compared to the net loss for the same period in 2012 was driven primarily by a decrease in the provision for loan losses from $11.7 million of expense for the six months ended June 30, 2012 to a benefit of $267 thousand in 2013.

On a diluted per share basis, the Company had a net loss of $0.40 for the six months ended June 30, 2013, compared to net loss of $1.79 for the same period in the prior year. The Company experienced a net loss per diluted common share due to a reduction of net income 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.
This reduction resulted in a net loss available to common shareholders of $31.2 million for the six months ended June 30, 2013 and an antidilutive impact of stock options as it pertained to the Company's weighted average common shares outstanding for the same period.

Net Interest Income
Net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities, was $9.9 million for the six months ended June 30, 2013, compared to $10.4 million for the same period in 2012.

Total interest income decreased $1.0 million for the six months ended June 30, 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 $64.5 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 5.75% for the six months ended June 30, 2013 compared to 5.33% for the six months ended June 30, 2012. The increase in the loan yield was driven by an increase in accretion recognized on acquired loans of approximately $0.5 million as well as a decrease in total nonperforming loans.


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

The average cost of interest-bearing liabilities decreased 7 basis points to 1.12% for the six months ended June 30, 2013 compared to 1.19% 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 average noninterest-bearing deposits to $95.6 million for the six months ended June 30, 2013, compared to $88.1 million for the same period in the prior year.

The net interest margin increased by 13 basis points to 3.93% from 3.80%, when comparing the first six 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.

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.

                                                                       Six Months Ended June 30,
                                                     2013                                                     2012
(Dollars in thousands)        Average Balance       Interest        Average Rate       Average Balance       Interest        Average Rate
Interest-earning assets:
Loans (1)                    $         392,912     $    11,196               5.75 %   $         457,385     $    12,132               5.33 %
Securities
available-for-sale:
Taxable                                 75,925             579               1.54                58,447             592               2.04
Tax-exempt(2)                           15,750             332               4.25                18,090             380               4.22
Other interest-earning
assets(3)                               25,154              52               0.42                17,170              41               0.48
Total interest-earning
assets                                 509,741          12,159               4.81               551,092          13,145               4.80
Noninterest-earning
assets(4)                               19,051                                                   30,164
Total assets                 $         528,792                                        $         581,256
Interest-bearing
liabilities:
Savings deposits             $           9,783     $        14               0.29 %   $          10,971     $        23               0.42 %
NOW deposits                            21,903              11               0.10                22,224              18               0.17
Money market deposits                  160,647             528               0.66               173,310             688               0.80
Time deposits                          169,170           1,000               1.19               215,539           1,277               1.19
FHLB advances                           20,000             149               1.50                21,722             169               1.56
Federal Reserve and other
borrowings(8)                            2,206             107               9.78                 3,048             133               8.77
Subordinated debt                       16,105             413               5.17                16,042             424               5.32
Other interest-bearing
liabilities(5)                               6               -                  -                   262               -                  -
Total interest-bearing
liabilities                            399,820           2,222               1.12               463,118           2,732               1.19
Noninterest-bearing
liabilities                             95,604                                                   88,066
Shareholders' equity                    33,368                                                   30,072
Total liabilities and
shareholders' equity         $         528,792                                        $         581,256
Net interest income                                $     9,937                                              $    10,413
Interest rate spread(6)                                                      3.69 %                                                   3.61 %
Net interest margin(7)                                                       3.93 %                                                   3.80 %



(1) Average loans include nonperforming loans. Interest on loans included loan fees (in thousands) of $123 and $109 for the six months ended June 30, 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.


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

(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.

. . .

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