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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number 000-30248
JACKSONVILLE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Florida | 59-3472981 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
100 North Laura Street, Suite 1000, Jacksonville, Florida 32202
(Address of principal executive offices)
(904) 421-3040
(Registrants telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 30, 2011 the latest practicable date, 5,888,809 of the Registrants common shares, $.01 par value, were issued and outstanding.
Table of Contents
TABLE OF CONTENTS
2.
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PART IFINANCIAL INFORMATION
Item 1. | Financial Statements |
(Dollars in thousands, except per share amounts)
March 31, 2011 |
December 31, 2010 |
|||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Cash and due from financial institutions |
$ | 10,926 | $ | 13,728 | ||||
Federal funds sold |
1,675 | 6,569 | ||||||
Cash and cash equivalents |
12,601 | 20,297 | ||||||
Securities available-for-sale |
65,189 | 62,356 | ||||||
Loans held-for-sale |
| 13,910 | ||||||
Loans, net of allowance for loan losses of $11,331 in 2011 and $13,069 in 2010 |
492,588 | 499,696 | ||||||
Premises and equipment, net |
6,870 | 6,943 | ||||||
Bank-owned life insurance |
9,362 | 9,307 | ||||||
Federal Home Loan Bank stock, at cost |
3,728 | 3,728 | ||||||
Real estate owned, net |
3,543 | 5,733 | ||||||
Deferred income taxes |
7,529 | 7,108 | ||||||
Accrued interest receivable |
2,826 | 3,170 | ||||||
Prepaid regulatory assessments |
1,418 | 1,738 | ||||||
Goodwill |
13,621 | 12,498 | ||||||
Other intangible assets, net |
2,223 | 2,376 | ||||||
Other assets |
3,145 | 2,973 | ||||||
Total assets |
$ | 624,643 | $ | 651,833 | ||||
LIABILITIES |
||||||||
Deposits |
||||||||
Noninterest bearing |
$ | 78,959 | $ | 72,428 | ||||
Money market, NOW and savings deposits |
205,954 | 211,057 | ||||||
Time deposits |
244,870 | 278,702 | ||||||
Total deposits |
529,783 | 562,187 | ||||||
Loans from related parties |
2,000 | 800 | ||||||
FHLB advances and other borrowings |
21,522 | 18,124 | ||||||
Subordinated debentures |
15,978 | 15,962 | ||||||
Accrued expenses and other liabilities |
2,576 | 2,901 | ||||||
Total liabilities |
571,859 | 599,974 | ||||||
SHAREHOLDERS EQUITY |
||||||||
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding |
| | ||||||
Common stock, $.01 par value, 8,000,000 shares authorized, 5,888,809 shares issued at March 31, 2011 and December 31, 2010 |
59 | 59 | ||||||
Additional paidin capital |
55,333 | 55,307 | ||||||
Retained deficit |
(2,718 | ) | (3,157 | ) | ||||
Accumulated other comprehensive income (loss) |
110 | (350 | ) | |||||
Total shareholders equity |
52,784 | 51,859 | ||||||
Total liabilities and shareholders equity |
$ | 624,643 | $ | 651,833 | ||||
See accompanying notes to unaudited consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Interest and dividend income |
||||||||
Loans, including fees |
$ | 7,259 | $ | 5,584 | ||||
Taxable securities |
211 | 115 | ||||||
Tax-exempt securities |
242 | 103 | ||||||
Federal funds sold and other |
28 | (7 | ) | |||||
Total interest income |
7,740 | 5,795 | ||||||
Interest expense |
||||||||
Deposits |
$ | 1,518 | $ | 1,774 | ||||
Federal Reserve and other borrowings |
29 | 1 | ||||||
FHLB advances |
97 | 255 | ||||||
Subordinated debt |
220 | 190 | ||||||
Total interest expense |
1,864 | 2,220 | ||||||
Net interest income |
5,876 | 3,575 | ||||||
Provision for loan losses |
1,929 | 2,375 | ||||||
Net interest income after provision for loan losses |
3,947 | 1,200 | ||||||
Noninterest income |
||||||||
Service charges on deposit accounts |
235 | 139 | ||||||
Other income |
161 | 109 | ||||||
Total noninterest income |
396 | 248 | ||||||
Noninterest expense |
||||||||
Salaries and employee benefits |
1,708 | 1,237 | ||||||
Occupancy and equipment |
660 | 406 | ||||||
Regulatory assessment |
322 | 260 | ||||||
Data processing |
398 | 245 | ||||||
Advertising and business development |
98 | 86 | ||||||
Professional fees |
198 | 161 | ||||||
Telephone expense |
76 | 32 | ||||||
Other real estate owned expense |
252 | 464 | ||||||
Other |
538 | 195 | ||||||
Total noninterest expense |
4,250 | 3,086 | ||||||
Income (loss) before income taxes |
93 | (1,638 | ) | |||||
Income tax benefit |
(346 | ) | (650 | ) | ||||
Net income (loss) |
$ | 439 | $ | (988 | ) | |||
Weighted average: |
||||||||
Common shares |
5,888,809 | 1,748,832 | ||||||
Dilutive stock options and warrants |
1,497 | | ||||||
Dilutive shares |
5,890,306 | 1,748,832 | ||||||
Basic earnings (loss) per common share |
$ | .07 | $ | (.56 | ) | |||
Diluted earnings (loss) per common share |
$ | .07 | $ | (.56 | ) | |||
See accompanying notes to unaudited consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
(Unaudited)
(Dollars in thousands)
Common Stock Outstanding |
Additional Paid-In |
Retained Earnings |
Treasury Stock | Accumulated Other Comprehensive |
||||||||||||||||||||||||
Shares | Amount | Capital | (Deficit) | Amount | Income (Loss) | Total | ||||||||||||||||||||||
Balance at January 1, 2010 |
1,749,243 | $ | 17 | $ | 18,631 | $ | 8,287 | $ | (3 | ) | $ | 336 | $ | 27,268 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net (loss) |
(988 | ) | (988 | ) | ||||||||||||||||||||||||
Change in unrealized gain (loss) on securities available-for-sale, net of tax effects |
(10 | ) | (10 | ) | ||||||||||||||||||||||||
Net unrealized loss on cash flow hedge, net of tax effects |
(76 | ) | (76 | ) | ||||||||||||||||||||||||
Total comprehensive (loss) |
(1,074 | ) | ||||||||||||||||||||||||||
Purchase of treasury stock |
(560 | ) | (6 | ) | (6 | ) | ||||||||||||||||||||||
Share-based compensation expense |
23 | 23 | ||||||||||||||||||||||||||
Balance at March 31, 2010 |
1,748,683 | $ | 17 | $ | 18,654 | $ | 7,299 | $ | (9 | ) | $ | 250 | $ | 26,211 | ||||||||||||||
Balance at January 1, 2011 |
5,888,809 | $ | 59 | $ | 55,307 | $ | (3,157 | ) | $ | | $ | (350 | ) | $ | 51,859 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
439 | 439 | ||||||||||||||||||||||||||
Change in unrealized gain on securities available-for-sale, net of tax effects |
403 | 403 | ||||||||||||||||||||||||||
Net unrealized gain on cash flow hedge, net of tax effects |
57 | 57 | ||||||||||||||||||||||||||
Total comprehensive income |
899 | |||||||||||||||||||||||||||
Share-based compensation expense |
26 | 26 | ||||||||||||||||||||||||||
Balance at March 31, 2011 |
5,888,809 | $ | 59 | $ | 55,333 | $ | (2,718 | ) | $ | | $ | 110 | $ | 52,784 | ||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net income (loss) |
$ | 439 | $ | (988 | ) | |||
Adjustments to reconcile net income (loss) to net cash from operating activities: |
||||||||
Depreciation and amortization |
158 | 104 | ||||||
Net amortization of deferred loan fees |
(55 | ) | (25 | ) | ||||
Provision for loan losses |
1,929 | 2,375 | ||||||
Premium amortization for securities, net of accretion |
164 | 9 | ||||||
Net accretion of purchase accounting adjustments |
(628 | ) | | |||||
Net gain on sale of real estate owned |
(1 | ) | | |||||
Loss on write-down of real estate owned |
100 | 335 | ||||||
Earnings on Bank-owned life insurance |
(55 | ) | (26 | ) | ||||
Loss on disposal of premises and equipment |
8 | | ||||||
Share-based compensation |
26 | 23 | ||||||
Deferred income tax benefit |
(698 | ) | (264 | ) | ||||
Net change in accrued interest receivable and other assets |
490 | (104 | ) | |||||
Net change in accrued expenses and other liabilities |
(234 | ) | (567 | ) | ||||
Net cash from operating activities |
1,643 | 872 | ||||||
Cash flows from investing activities |
||||||||
Purchases of securities available-for-sale |
(4,991 | ) | (2,000 | ) | ||||
Proceeds from maturities, calls and paydown of securities available-for-sale |
2,641 | 833 | ||||||
Proceeds from bulk loan sale |
13,910 | | ||||||
Loan (originations) payments, net |
8,028 | (1,200 | ) | |||||
Proceeds from sale of real estate owned |
2,243 | | ||||||
Additions to premises and equipment, net |
(94 | ) | (11 | ) | ||||
Net cash from (used for) investing activities |
21,737 | (2,378 | ) | |||||
Cash flows from financing activities |
||||||||
Net change in deposits |
(32,276 | ) | 15,309 | |||||
Net change in Fed funds purchased |
| (227 | ) | |||||
Proceeds from related party transactions |
1,200 | | ||||||
Purchase of treasury stock |
| (6 | ) | |||||
Net cash from financing activities |
(31,076 | ) | 15,076 | |||||
Net change in cash and cash equivalents |
(7,696 | ) | 13,570 | |||||
Cash and cash equivalents at beginning of period |
20,297 | 5,647 | ||||||
Cash and cash equivalents at end of period |
$ | 12,601 | $ | 19,217 | ||||
See accompanying notes to unaudited consolidated financial statements.
6.
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JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
Supplemental disclosures of cash flow information |
||||||||
Cash paid during the period for |
||||||||
Interest |
$ | 2,156 | $ | 2,217 | ||||
Income taxes |
| | ||||||
Supplemental schedule of noncash investing activities |
||||||||
Acquisition of real estate owned |
$ | 152 | $ | | ||||
Supplemental schedule of noncash financing activities |
||||||||
Loan participation on agreements classified as secured borrowings |
$ | 3,438 | $ | |
See accompanying notes to unaudited consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 1 BASIS OF PRESENTATION
Jacksonville Bancorp, Inc. (Bancorp) is a financial holding company headquartered in Jacksonville, Florida. The consolidated financial statements include the accounts of Jacksonville Bancorp, Inc. and its wholly owned, primary operating subsidiary, The Jacksonville Bank, and one of The Jacksonville Banks wholly owned subsidiaries, Fountain Financial, Inc. The consolidated entity is referred to as the Company, and The Jacksonville Bank and Fountain Financial, Inc. are collectively referred to as the Bank. The Companys financial condition and operating results principally reflect those of the Bank. All intercompany transactions and balances are eliminated in consolidation.
The Company currently provides financial services through its eight full-service branches in Duval County, Florida, as well as its virtual branch. Its primary business segment is community banking and consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans, commercial real estate loans, residential mortgage loans and a variety of consumer loans. Substantially all loans are secured by specific items of collateral, including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the customers ability to repay their loans is dependent on the real estate and general economic conditions in the area. For further information, refer to the consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the U.S. Securities and Exchange Commission (the SEC) on March 31, 2011.
The accounting and reporting policies of the Company reflect banking industry practice and conform to U.S. generally accepted accounting standards. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts, and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates.
The consolidated financial information included herein as of and for the periods ended March 31, 2011 and 2010 is unaudited. Accordingly, it does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The December 31, 2010 consolidated balance sheet was derived from the Companys December 31, 2010 audited consolidated financial statements.
Adoption of New Accounting Standards
In January 2010, the FASB issued guidance requiring increased fair value disclosures. There are two components to the increased disclosure requirements set forth in the update: (1) a description of, as well as the disclosure of, the dollar amount of transfers in or out of level one or level two, and (2) in the reconciliation for fair value measurements using significant unobservable inputs (level 3), a reporting entity should present separately information about purchases, sales, issuances and settlements (that is, gross amounts shall be disclosed as opposed to a single net figure). Increased disclosures regarding the transfers in or out of level one and two were required for interim and annual periods beginning after December 15, 2009. The adoption of this portion of the standard has not had a material impact on the Companys consolidated financial position, results of operations or cash flows. Increased disclosures regarding the level 3 fair value reconciliation are required for fiscal years beginning after December 15, 2010. The adoption of this portion of the standard did not have a material impact on the Companys consolidated financial position, results of operations or cash flows.
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JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 1 BASIS OF PRESENTATION (Cont.)
(Dollar amounts in thousands except per share data)
In July 2010, the FASB updated disclosure requirements with respect to the credit quality of financing receivables and the allowance for credit losses. According to the guidance, there are two levels of detail at which credit information must be presentedthe portfolio segment level and class level. The portfolio segment level is defined as the level where financing receivables are aggregated in developing a Companys systematic method for calculating its allowance for credit losses. The class level is the second level at which credit information will be presented and represents the categorization of financing related receivables at a slightly less aggregated level than the portfolio segment level. Companies will now be required to provide the following disclosures as a result of this update: a roll-forward of the allowance for credit losses at the portfolio segment level with the ending balances further categorized according to impairment method along with the balance reported in the related financing receivables at period end; additional disclosure of nonaccrual and impaired financing receivables by class as of period end; credit quality and past due/aging information by class as of period end; information surrounding the nature and extent of loan modifications and troubled-debt restructurings and their effect on the allowance for credit losses during the period; and detail of any significant purchases or sales of financing receivables during the period. The increased period-end disclosure requirements become effective for periods ending on or after December 15, 2010, with the exception of the additional disclosures surrounding troubled-debt restructurings which were deferred in December 2010 and will be required for annual and interim reporting periods ending on or after June 15, 2011. The increased disclosures for activity within a reporting period become effective for periods beginning on or after December 15, 2010. The provisions of this update significantly expanded the Companys current disclosures.
In April 2011, the FASB amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditors evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has not determined the impact, if any, upon the adoption of the standard.
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JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 2 INVESTMENT SECURITIES
(Dollar amounts in thousands except per share data)
The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at March 31, 2011 and December 31, 2010 and the corresponding amounts of unrealized gains and losses therein:
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
March 31, 2011 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. government-sponsored entities and agencies |
$ | | $ | | $ | | $ | | ||||||||
State and political subdivisions |
23,174 | 431 | (177 | ) | 23,428 | |||||||||||
Mortgage-backed securitiesresidential |
36,342 | 406 | (214 | ) | 36,534 | |||||||||||
Collateralized mortgage obligationsresidential |
5,162 | 65 | | 5,227 | ||||||||||||
Total available-for-sale securities |
$ | 64,678 | $ | 902 | $ | (391 | ) | $ | 65,189 | |||||||
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
December 31, 2010 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. government-sponsored entities and agencies |
$ | | $ | | $ | | $ | | ||||||||
State and political subdivisions |
23,584 | 208 | (458 | ) | 23,334 | |||||||||||
Mortgage-backed securitiesresidential |
33,545 | 355 | (302 | ) | 33,598 | |||||||||||
Collateralized mortgage obligationsresidential |
5,363 | 61 | | 5,424 | ||||||||||||
Total available-for-sale securities |
$ | 62,492 | $ | 624 | $ | (760 | ) | $ | 62,356 | |||||||
10.
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JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 2 INVESTMENT SECURITIES (Cont.)
(Dollar amounts in thousands except per share data)
The amortized cost and fair value of the investment securities portfolio are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities and collateralized mortgage obligations, are shown separately.
March 31, 2011 | ||||||||
Amortized Cost |
Fair Value |
|||||||
Maturity |
||||||||
Available-for-sale |
||||||||
Within one year |
$ | | $ | | ||||
One to five years |
2,411 | 2,508 | ||||||
Five to ten years |
7,659 | 7,753 | ||||||
Beyond ten years |
13,104 | 13,167 | ||||||
Mortgage-backed securities |
36,342 | 36,534 | ||||||
Collateralized mortgage obligations |
5,162 | 5,227 | ||||||
Total |
$ | 64,678 | $ | 65,189 | ||||
The following table summarizes the investment securities with unrealized losses at March 31, 2011 and December 31, 2010 by aggregated major security type and length of time in a continuous unrealized loss position:
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
U.S. government-sponsored entities and agencies |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
States and political |
5,431 | (177 | ) | | | 5,431 | (177 | ) | ||||||||||||||||
Mortgage-backed securitiesresidential |
18,183 | (214 | ) | | | 18,183 | (214 | ) | ||||||||||||||||
Collateralized mortgage obligationsresidential |
| | | | | | ||||||||||||||||||
Total available-for-sale securities |
$ | 23,614 | $ | (391 | ) | $ | | $ | | $ | 23,614 | $ | (391 | ) | ||||||||||
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JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 2 INVESTMENT SECURITIES (Cont.)
(Dollar amounts in thousands except per share data)
Less Than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
|||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
U.S. government-sponsored entities and agencies |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
States and political |
14,225 | (458 | ) | | | 14,225 | (458 | ) | ||||||||||||||||
Mortgage-backed securitiesresidential |
22,793 | (302 | ) | | | 22,793 | (302 | ) | ||||||||||||||||
Collateralized mortgage obligationsresidential |
| | | | | | ||||||||||||||||||
Total available-for-sale securities |
$ | 37,018 | $ | (760 | ) | $ | | $ | | $ | 37,018 | $ | (760 | ) | ||||||||||
Other-Than-Temporary-Impairment
Management evaluates securities for other-than-temporary impairment (OTTI) at least on a quarterly basis and more frequently when economic or market conditions warrant such an evaluation.
In determining OTTI for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial conditions and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
In order to determine OTTI for purchased beneficial interests that, on the purchase date, were rated below AA, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows. It is not the Banks policy to purchase securities rated below AA.
When OTTI occurs for either debt securities or purchased beneficial interests that, on the purchase date, were rated below AA, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investments amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be
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JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 2 INVESTMENT SECURITIES (Cont.)
(Dollar amounts in thousands except per share data)
collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
As of March 31, 2011, the Companys security portfolio consisted of $65,189 of available-for-sale securities, of which $23,614 was in an unrealized loss position. The unrealized losses are related to the Companys U.S. State and Political Securities and Residential Mortgage-backed Securities, as discussed below:
Residential Mortgage-backed Securities
All of the residential mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Ginnie Mae and Fannie Mae, institutions which the government has affirmed its commitment to support. The decline in fair value is primarily attributable to changes in interest rates and illiquidity, and not credit quality.
Because the Company does not have the intent to sell these securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these to be other-than-temporarily impaired at March 31, 2011.
State and Political Securities
All of the State and Political Securities (Municipal Bonds) held by the Company were issued by a city or other local government. The Municipal Bonds are general obligations of the issuer and are secured by specified revenues. The decline in fair value at March 31, 2011 was primarily attributable to changes in interest rates and the ratings of the underlying insurers rather than the ability or willingness of the municipality to repay.
Because it is unlikely that the Company will be required to sell the securities before their anticipated recovery, the Company does not consider these to be other-than-temporarily impaired at March 31, 2011.
For the three-month period ended March 31, 2011, there were no credit losses recognized in earnings.
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES
(Dollar amounts in thousands except per share data)
Loans at March 31, 2011 and December 31, 2010, excluding loans classified as held-for-sale, were as follows:
2011 | 2010 | |||||||
Commercial |
$ | 36,962 | $ | 35,976 | ||||
Real estate: |
||||||||
Residential |
131,777 | 136,771 | ||||||
Commercial |
279,020 | 282,468 | ||||||
Construction and land |
51,896 | 52,808 | ||||||
Consumer |
4,577 | 5,110 | ||||||
Subtotal |
504,232 | 513,133 | ||||||
Less: Net deferred loan fees |
(313 | ) | (368 | ) | ||||
Allowance for loan losses |
(11,331 | ) | (13,069 | ) | ||||
Loans, net |
$ | 492,588 | $ | 499,696 | ||||
13.
Table of Contents
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)
(Dollar amounts in thousands except per share data)
Loans acquired as a result of the merger with Atlantic BancGroup, Inc. (ABI) in November 2010 were recorded at fair value on the date of acquisition. The amounts reported in the table above are net of the fair value adjustments. The table below reflects the contractual amount less the discount to principal balances remaining from these fair value adjustments by class of loan as of March 31, 2011. The discount will be accreted into interest income over the remaining term of the related loans:
Gross Contractual Amount Receivable |
Carrying Discount |
Balance | ||||||||||
Commercial |
$ | 10,410 | $ | 872 | $ | 9,538 | ||||||
Real estate: |
||||||||||||
Residential |
49,353 | 5,416 | 43,937 | |||||||||
Commercial |
74,756 | 6,891 | 67,865 | |||||||||
Construction and land |
28,545 | 5,109 | 23,436 | |||||||||
Consumer |
2,352 | 159 | 2,193 | |||||||||
Total |
$ | 165,415 | $ | 18,448 | $ | 146,967 | ||||||
As of March 31, 2011, there were no loans classified as held-for-sale. As of December 31, 2010, loans classified as held-for-sale were $13,910 and were sold on February 11, 2011 through a bulk loan sale. There was no gain or loss recorded for the period ending March 31, 2011 as a result of the bulk loan sale. The composition of the loans sold were as follows:
Commercial loans |
$ | 20 | ||
Real estate mortgage loans: |
||||
Residential |
1,401 | |||
Commercial |
11,649 | |||
Construction and land |
840 | |||
Consumer loans |
| |||
$ | 13,910 | |||
Activity in the allowance for loan losses by portfolio segment for the period ending March 31, 2011 was as follows:
Allowance at beginning of period |
$ | 13,069 | ||
Charge-offs: |
||||
Commercial loans |
81 | |||
Real estate loans |
3,684 | |||
Consumer and other loans |
9 | |||
Total Charge-offs |
3,774 | |||
Recoveries: |
||||
Commercial loans |
1 | |||
Real estate loans |
105 | |||
Consumer and other loans |
1 | |||
Total Recoveries |
107 | |||
Net charge-offs |
3,667 | |||
Provision for loan losses charged to operating expenses: |
||||
Commercial loans |
35 | |||
Real estate loans |
1,897 | |||
Consumer and other loans |
(3 | ) | ||
Total provision |
1,929 | |||
Allowance at end of period |
$ | 11,331 | ||
14.
Table of Contents
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)
(Dollar amounts in thousands except per share data)
Activity in the allowance for loan losses for the period ending March 31, 2010 was as follows:
Beginning balance |
$ | 6,854 | ||
Provision for loan losses |
2,375 | |||
Loans charged off |
(1,630 | ) | ||
Recoveries |
19 | |||
Ending balance |
$ | 7,618 | ||
15.
Table of Contents
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)
(Dollar amounts in thousands except per share data)
The Company has divided the loan portfolio into three portfolio segments, each with different risk characteristics and methodologies for assessing risk. The portfolio segments identified by the Company are as follows:
Real Estate Mortgage Loans
Real estate mortgage loans are typically segmented into three classes: Commercial real estate, Residential real estate and Construction and Land real estate. Commercial real estate loans are secured by the subject property and are underwritten based upon standards set forth in the policies approved by Bancorps board of directors (the Board). Such standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors. Residential real estate loans are underwritten in accordance with policies set forth and approved by the Board, including repayment capacity and source, value of the underlying property, credit history and stability. Construction loans to borrowers are to finance the construction of owner occupied and lease properties. These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Bank carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Bank considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrowers equity in the project, independent appraisals, costs estimates and pre-construction sale information. The Bank also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for the future development for either commercial or residential use by the borrower. The Bank carefully analyzes the intended use of the property and the viability thereof.
Commercial Loans
Commercial loans are primarily underwritten on the basis of the borrowers ability to service such debt from income. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. As a general practice, we take as collateral a security interest in any available real estate, equipment, or other chattel, although loans may also be made on an unsecured basis. Collateralized working capital loans typically are secured by short-term assets whereas long-term loans are primarily secured by long-term assets.
Consumer Other Loans
Consumer and other loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. We also offer home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates and may be made on terms of up to ten years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
16.
Table of Contents
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)
(Dollar amounts in thousands except per share data)
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment, excluding loans classified as held-for-sale, and based on impairment method as of March 31, 2011 and December 31, 2010:
March 31, 2011 | ||||||||||||||||
Commercial | Real Estate | Consumer and Other |
Total | |||||||||||||
Allowance for loan losses: |
||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||
Individually evaluated for impairment |
$ | | $ | 4,603 | $ | | $ | 4,603 | ||||||||
Collectively evaluated for impairment |
525 | 6,160 | 43 | 6,728 | ||||||||||||
Loans acquired with deteriorated credit quality |
| | | | ||||||||||||
Loans acquired without deteriorated credit quality |
| | | | ||||||||||||
Total ending allowance balance |
$ | 525 | $ | 10,763 | $ | 43 | $ | 11,331 | ||||||||
Loans: |
||||||||||||||||
Loans individually evaluated for impairment |
$ | | $ | 43,845 | $ | | $ | 43,845 | ||||||||
Loans collectively evaluated for impairment |
27,424 | 283,609 | 2,385 | 313,418 | ||||||||||||
Loans acquired with deteriorated credit quality |
973 | 49,837 | 32 | 50,842 | ||||||||||||
Loans acquired without deteriorated credit quality |
8,565 | 85,402 | 2,160 | 96,127 | ||||||||||||
Total ending loans balance |
$ | 36,962 | $ | 462,693 | $ | 4,577 | $ | 504,232 | ||||||||
December 31, 2010 | ||||||||||||||||
Commercial | Real Estate | Consumer and Other |
Total | |||||||||||||
Allowance for loan losses: |
||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||
Individually evaluated for impairment |
$ | | $ | 6,384 | $ | 2 | $ | 6,386 | ||||||||
Collectively evaluated for impairment |
570 | 6,061 | 52 | 6,683 | ||||||||||||
Loans acquired with deteriorated credit quality |
| | | | ||||||||||||
Loans acquired without deteriorated credit quality |
| | | | ||||||||||||
Total ending allowance balance |
$ | 570 | $ | 12,445 | $ | 54 | $ | 13,069 | ||||||||
Loans: |
||||||||||||||||
Loans individually evaluated for impairment |
$ | | $ | 46,472 | $ | 2 | $ | 46,474 | ||||||||
Loans collectively evaluated for impairment |
25,699 | 287,711 | 2,546 | 315,956 | ||||||||||||
Loans acquired with deteriorated credit quality |
1,199 | 50,893 | 39 | 52,131 | ||||||||||||
Loans acquired without deteriorated credit quality |
9,078 | 86,971 | 2,523 | 98,572 | ||||||||||||
Total ending loans balance |
$ | 35,976 | $ | 472,047 | $ | 5,110 | $ | 513,133 | ||||||||
17.
Table of Contents
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)
(Dollar amounts in thousands except per share data)
The following tables present loans individually evaluated for impairment, excluding loans classified as held-for-sale, by class of loans as of March 31, 2011 and December 31, 2010:
March 31, 2011 | ||||||||||||
Unpaid Principal Balance |
Recorded Investment |
Allowance for Loan Losses Allocated |
||||||||||
With no related allowance recorded: |
||||||||||||
Real estateresidential |
$ | 13,631 | $ | 12,423 | $ | | ||||||
Real estatecommercial |
8,240 | 8,205 | | |||||||||
Real estateconstruction and land |
1,439 | 1,079 | | |||||||||
With an allowance recorded: |
||||||||||||
Real estateresidential |
1,917 | 1,885 | 36 | |||||||||
Real estatecommercial |
8,717 | 8,665 | 1,928 | |||||||||
Real estateconstruction and land |
11,589 | 11,588 | 2,639 | |||||||||
Total |
$ | 45,533 | $ | 43,845 | $ | 4,603 | ||||||
December 31, 2010 | ||||||||||||
Unpaid Principal Balance |
Recorded Investment |
Allowance for Loan Losses Allocated |
||||||||||
With no related allowance recorded: |
||||||||||||
Real estateresidential |
$ | 10,635 | $ | 10,635 | $ | | ||||||
Real estatecommercial |
5,225 | 5,212 | | |||||||||
Real estateconstruction and land |
890 | 890 | | |||||||||
With an allowance recorded: |
||||||||||||
Real estateresidential |
5,409 | 5,359 | 1,135 | |||||||||
Real estatecommercial |
12,318 | 12,279 | 2,527 | |||||||||
Real estateconstruction and land |
12,097 | 12,097 | 2,722 | |||||||||
Consumer |
8 | 2 | 2 | |||||||||
Total |
$ | 46,582 | $ | 46,474 | $ | 6,386 | ||||||
18.
Table of Contents
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)
(Dollar amounts in thousands except per share data)
The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual, excluding loans classified as held-for-sale, by class of loans as of:
March 31, 2011 | ||||||||
Nonaccrual | Loans Past Due Over 90 Days Still on Accrual |
|||||||
Commercial |
$ | 121 | $ | | ||||
Real estate mortgage loans: |
||||||||
Commercial |
13,965 | | ||||||
Residential |
14,928 | | ||||||
Construction and land |
8,079 | | ||||||
Consumer |
8 | | ||||||
Total |
$ | 37,101 | $ | | ||||
December 31, 2010 | ||||||||
Nonaccrual | Loans Past Due Over 90 Days Still on Accrual |
|||||||
Commercial |
$ | 371 | $ | | ||||
Real estate mortgage loans: |
||||||||
Commercial |
9,843 | | ||||||
Residential |
14,215 | | ||||||
Construction and land |
10,582 | | ||||||
Consumer |
$ | 6 | $ | | ||||
Total |
$ | 35,017 | $ | | ||||
Included in the nonaccrual and loans past due over 90 days still on accrual tables above are loans acquired in the merger with ABI. As of March 31, 2011 and December 31, 2010 the amounts totaled $7,496 and $5,540, respectively.
19.
Table of Contents
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)
(Dollar amounts in thousands except per share data)
The following tables present the aging of the recorded investment in past due loans, excluding loans classified as held-for-sale, by class of loans, as of:
March 31, 2011 | ||||||||||||||||||||||||
30-59 Days Past Due |
60-89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due |
Loans Not Past Due |
Total | |||||||||||||||||||
Commercial |
$ | 341 | $ | 210 | $ | | $ | 551 | $ | 36,411 | $ | 36,962 | ||||||||||||
Real estate: |
||||||||||||||||||||||||
Residential |
746 | 960 | 13,959 | 15,665 | 116,112 | 131,777 | ||||||||||||||||||
Commercial |
9,304 | 1,159 | 9,118 | 19,580 | 259,439 | 279,020 | ||||||||||||||||||
Construction and land |
4,425 | | 8,079 | 12,504 | 39,392 | 51,896 | ||||||||||||||||||
Consumer |
110 | 43 | 3 | 156 | 4,421 | 4,577 | ||||||||||||||||||
Total |
$ | 14,926 | $ | 2,372 | $ | 31,159 | $ | 48,457 | $ | 455,775 | $ | 504,232 | ||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
30-59 Days Past Due |
60-89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due |
Loans Not Past Due |
Total | |||||||||||||||||||
Commercial |
$ | 140 | $ | 36 | $ | 42 | $ | 218 | $ | 35,758 | $ | 35,976 | ||||||||||||
Real estate: |
||||||||||||||||||||||||
Residential |
4,580 | 846 | 13,126 | 18,552 | 118,219 | 136,771 | ||||||||||||||||||
Commercial |
655 | 4,087 | 5,871 | 10,613 | 271,855 | 282,468 | ||||||||||||||||||
Construction and land |
295 | 1,659 | 8,877 | 10,831 | 41,977 | 52,808 | ||||||||||||||||||
Consumer |
201 | 28 | 5 | 234 | 4,876 | 5,110 | ||||||||||||||||||
Total |
$ | 5,871 | $ | 6,656 | $ | 27,921 | $ | 40,448 | $ | 472,685 | $ | 513,133 | ||||||||||||
Included in the past due loan tables above are loans acquired in the merger with ABI. As of March 31, 2011 and December 31, 2010 the amounts are as follows:
March 31, 2011 |
December 31, 2010 |
|||||||
30-59 Days Past Due |
$ | 7,401 | $ | 1,927 | ||||
60-89 Days Past Due |
1,131 | 2,113 | ||||||
Greater than 90 Days Past Due |
5,555 | 2,495 | ||||||
Total |
$ | 14,087 | $ | 6,535 | ||||
Troubled Debt Restructurings
As of March 31, 2011, $7,612 of net loans were considered troubled debt restructurings. The Company has allocated $179 and $374 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2011 and December 31, 2010, respectively. The Company has not committed to lend additional amounts as of March 31, 2011 and December 31, 2010 to customers with outstanding loans that are classified as troubled debt restructurings.
20.
Table of Contents
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)
(Dollar amounts in thousands except per share data)
Credit Quality Indicators
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.
The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment. All loans are graded upon initial issuance. Further, commercial loans are typically reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as if a loan becomes past due, the Company will determine the appropriate loan grade.
Loans excluded from the review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of a deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged off. The Company uses the following definitions for risk ratings:
Special Mention. Loans classified as special mention have a potential weakness that deserves managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institutions credit position at some future date.
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of March 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans, excluding loans classified as held-for-sale, is as follows:
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
Commercial |
$ | 30,915 | $ | 4,968 | $ | 1,079 | $ | | $ | 36,962 | ||||||||||
Real estate: |
||||||||||||||||||||
Residential |
98,103 | 17,186 | 16,488 | | 131,777 | |||||||||||||||
Commercial |
204,547 | 50,272 | 24,201 | | 279,020 | |||||||||||||||
Construction and land |
20,696 | 9,342 | 21,858 | | 51,896 | |||||||||||||||
Consumer |
4,533 | | 44 | | 4,577 | |||||||||||||||
Total |
$ | 358,794 | $ | 81,768 | $ | 63,670 | $ | | $ | 504,232 | ||||||||||
21.
Table of Contents
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)
(Dollar amounts in thousands except per share data)
As of December 31, 2010, the risk category of loans by class of loans, excluding loans classified as held-for-sale, is as follows:
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
Commercial |
$ | 29,903 | $ | 4,950 | $ | 918 | $ | 205 | $ | 35,976 | ||||||||||
Real estate: |
||||||||||||||||||||
Residential |
96,836 | 21,375 | 18,440 | 120 | 136,771 | |||||||||||||||
Commercial |
205,447 | 53,129 | 23,892 | | 282,468 | |||||||||||||||
Construction and land |
20,301 | 11,179 | 21,328 | | 52,808 | |||||||||||||||
Consumer |
4,946 | 83 | 81 | | 5,110 | |||||||||||||||
Total |
$ | 357,433 | $ | 90,716 | $ | 64,659 | $ | 325 | $ | 513,133 | ||||||||||
Included in the risk category of loans by class of loans tables above are loans acquired in the merger with ABI. As of March 31, 2011 and December 31, 2010, the amounts are as follows:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Special Mention |
$ | 30,004 | $ | 35,550 | ||||
Substandard |
16,261 | 14,324 | ||||||
Doubtful |
| 325 | ||||||
Total |
$ | 46,265 | $ | 50,199 |
Purchased loans:
The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amounts of these loans, excluding loans classified as held-for-sale, is as follows as of March 31, 2011 and December 31, 2010:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Commercial |
$ | 973 | $ | 1,199 | ||||
Real estate mortgage loans: |
||||||||
Residential |
13,105 | 13,348 | ||||||
Commercial |
20,969 | 21,321 | ||||||
Construction and land |
15,763 | 16,224 | ||||||
Consumer |
32 | 39 | ||||||
Carrying amount |
$ | 50,842 | $ | 52,131 | ||||
22.
Table of Contents
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Cont.)
(Dollar amounts in thousands except per share data)
Accretable yield, or income expected to be collected, is as follows:
Balance at December 31, 2009 |
||||
New loans purchased, including loans classified as held-for-sale |
$ | 34,144 | ||
Accretion of income |
(234 | ) | ||
Reclassifications from nonaccretable difference |
| |||
Disposals |
| |||
Balance at December 31, 2010 |
$ | 33,910 | ||
New loans purchased, including loans classified as held-for-sale |
| |||
Accretion of income |
(979 | ) | ||
Reclassifications from nonaccretable difference |
| |||
Disposals |
| |||
Balance at March 31, 2011 |
$ | 32,931 | ||
For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during 2011. Additionally, no allowance for loan losses was reversed during 2011.
Income is not recognized on certain purchased loans if the company cannot reasonably estimate cash flows expected to be collected. The carrying amounts of such loans were $6,877 at March 31, 2011 and are included in our nonaccrual loan balance as of March 31, 2011.
NOTE 4 GOODWILL
(Dollar amounts in thousands except share data)
Goodwill: A rollforward of goodwill as of March 31, 2011 and December 31, 2010 is as follows:
March 31, 2011 |
December 31, 2010 |
|||||||
Beginning of period |
$ | 12,498 | $ | | ||||
Additions: Goodwill related to acquisition of ABI |
1,123 | 12,498 | ||||||
Impairment |
| | ||||||
End of period |
$ | 13,621 | $ | 12,498 | ||||
The additions to goodwill during the period ending March 31, 2011 are the result of additional purchase accounting adjustments made specifically to other real estate owned and loans acquired from ABI as new information was obtained.
23.
Table of Contents
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 5 SHORT-TERM BORROWING AND FEDERAL HOME LOAN BANK ADVANCES
(Dollar amounts in thousands except share data)
At March 31, 2011 and December 31, 2010, advances from the Federal Home Loan Bank (FHLB) were as follows:
2011 | 2010 | |||||||
Convertible advances maturing June 8, 2012 with a quarterly call option beginning September 10, 2007 at a fixed rate of 4.68% |
5,000 | 5,000 | ||||||
Advances maturing January 9, 2012 at a fixed rate of 2.30% |
8,084 | 8,124 | ||||||
Advances maturing May 29, 2012 at a fixed rate of 2.11% |
5,000 | 5,000 | ||||||
$ | 18,084 | $ | 18,124 | |||||
Each advance is payable at its maturity date, with a prepayment penalty for early termination. The advances are collateralized by a blanket lien arrangement of the Companys first mortgage loans, second mortgage loans and commercial real estate loans. Based upon this collateral and the Companys holdings of FHLB stock, the Company is eligible to borrow up to a total of $54,628 at March 31, 2011.
The Company has a Borrower in Custody line of credit with the Federal Reserve by pledging collateral. The amount of this line at March 31, 2011 was $35,668, all of which was available on that date.
Also included in FHLB Advances and other borrowings on the Companys consolidated balance sheet at March 31, 2011 was $3,438 that relates to certain loan participation agreements that are classified as secured borrowings as they do not qualify for sale accounting treatment. A corresponding amount is recorded as an asset within Loans on the Companys Consolidated Balance Sheets.
NOTE 6 DERIVATIVE FINANCIAL INSTRUMENT
(Dollar amounts in thousands except share data)
On July 7, 2009, the Company entered into an interest rate swap transaction with SunTrust Bank to mitigate interest rate risk exposure. Under the terms of the agreement, which relates to the subordinated debt issued to Jacksonville Bancorp, Inc. Statutory Trust III in the amount of $7,550, the Company has agreed to pay a fixed rate of 7.53% for a period of ten years in exchange for the original floating rate contract (90-day LIBOR plus 375 basis points). This derivative instrument is recognized on the balance sheet in other liabilities at its fair value of $335 on March 31, 2011.
Credit risk may result from the inability of the counterparties to meet the terms of their contracts. The Companys exposure is limited to the replacement value of the contracts rather than the notional amount.
24.
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JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 7 CAPITAL ADEQUACY
(Dollar amounts in thousands except share data)
Federal banking regulators have established certain capital adequacy standards required to be maintained by banks and bank holding companies. The minimum requirements established in the regulations are set forth in the table below, along with the actual ratios for the Company at March 31, 2011 and December 31, 2010. Management and the Board have committed to maintain Total Risk-Based Capital at 10% and Tier 1 Capital to Average Assets at 8% at the Bank.
Actual | For Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
March 31, 2011 |
||||||||||||||||||||||||
Total capital to risk weighted assets |
||||||||||||||||||||||||
Consolidated |
$ | 54,032 | 10.54 | % | $ | 41,010 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank |
54,473 | 10.66 | % | 40,899 | 8.00 | % | $ | 51,124 | 10.00 | % | ||||||||||||||
Tier 1 (Core) capital to risk weighted assets |
||||||||||||||||||||||||
Consolidated |
44,602 | 8.70 | % | 20,505 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank |
48,022 | 9.39 | % | 20,449 | 4.00 | % | 30,674 | 6.00 | % | |||||||||||||||
Tier 1 (Core) capital to average assets |
||||||||||||||||||||||||
Consolidated |
44,602 | 7.29 | % | 24,478 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank |
48,022 | 7.83 | % | 24,529 | 4.00 | % | 30,661 | 5.00 | % | |||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Total capital to risk weighted assets |
||||||||||||||||||||||||
Consolidated |
$ | 55,232 | 10.40 | % | $ | 42,498 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank |
55,083 | 10.39 | % | 42,402 | 8.00 | % | $ | 53,003 | 10.00 | % | ||||||||||||||
Tier 1 (Core) capital to risk weighted assets |
||||||||||||||||||||||||
Consolidated |
48,512 | 9.13 | % | 21,249 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank |
48,378 | 9.13 | % | 21,201 | 4.00 | % | 31,802 | 6.00 | % | |||||||||||||||
Tier 1 (Core) capital to average assets |
||||||||||||||||||||||||
Consolidated |
48,512 | 9.09 | % | 21,347 | 4.00 | % | N/A | N/A | ||||||||||||||||
Bank |
48,378 | 8.97 | % | 21,576 | 4.00 | % | 26,970 | 5.00 | % |
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JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 8 FAIR VALUE
(Dollar amounts in thousands except share data)
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a companys own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Investment Securities: The fair values for investment securities are determined based on market prices of similar securities resulting in a Level 2 classification.
Derivatives: The fair value of the derivatives is based on valuation models using observable market data as of the measurement date resulting in a Level 2 classification.
Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Other Real Estate Owned: Nonrecurring adjustment to certain commercial and residential real estate properties classified as other real estate owned (OREO) is measured at fair value, less costs to sell. Fair values are generally based on third party appraisals of the property. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. A Level 2 classification can result when there are outstanding commitments from third party investors.
Loans Held-for-Sale: Loans held-for-sale are carried at the lower of cost or fair value as determined by outstanding commitments from third party investors resulting in a Level 2 classification.
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JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 8 FAIR VALUE (Cont.)
(Dollar amounts in thousands except share data)
The following assets and liabilities are measured on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option:
Fair Value Measurements Using | ||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant
Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Assets: |
||||||||||||||||
(Dollars in thousands) |
||||||||||||||||
March 31, 2011 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. government-sponsored entities and agencies |
$ | | | $ | | | ||||||||||
State and political subdivisions |
23,428 | | 23,428 | | ||||||||||||
Mortgage-backed securities - residential |
36,534 | | 36,534 | | ||||||||||||
Collateralized mortgage obligations - residential |
5,227 | | 5,227 | | ||||||||||||
Liabilities: |
||||||||||||||||
Derivative liability |
335 | | 335 | | ||||||||||||
(Dollars in thousands) |
||||||||||||||||
December 31, 2010 |
||||||||||||||||
Available-for-sale |
||||||||||||||||
U.S. government-sponsored entities and agencies |
| | | | ||||||||||||
State and political subdivisions |
$ | 23,334 | | 23,334 | | |||||||||||
Mortgage-backed securities - residential |
33,598 | | 33,598 | | ||||||||||||
Collateralized mortgage obligations - residential |
5,424 | | 5,424 | | ||||||||||||
Liabilities: |
||||||||||||||||
Derivative liability |
425 | 425 |
There were no significant transfers between Level 1 and Level 2 during 2011.
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JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 8 FAIR VALUE (Cont.)
(Dollar amounts in thousands except share data)
Assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements Using | ||||||||||||||||
Total | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
March 31, 2011 |
||||||||||||||||
Impaired loans: |
||||||||||||||||
Real estate mortgage loans: |
||||||||||||||||
Residential |
$ | 447 | | | $ | 447 | ||||||||||
Commercial |
5,942 | | | 5,942 | ||||||||||||
Construction and land |
4,821 | | | 4,821 | ||||||||||||
Other real estate owned: |
||||||||||||||||
Real estate mortgage loans: |
||||||||||||||||
Residential |
65 | | | 65 | ||||||||||||
Commercial |
1,012 | | | 1,012 | ||||||||||||
Construction and land |
2,466 | | | 2,466 | ||||||||||||
Loans held-for-sale |
$ | | | | | |||||||||||
December 31, 2010 |
||||||||||||||||
Impaired loans: |
||||||||||||||||
Real estate mortgage loans: |
||||||||||||||||
Residential |
$ | 2,811 | | | $ | 2,811 | ||||||||||
Commercial |
5,116 | | | 5,116 | ||||||||||||
Construction and land |
8,301 | | | 8,301 | ||||||||||||
Other real estate owned: |
||||||||||||||||
Real estate mortgage loans: |
||||||||||||||||
Residential |
1,301 | | $ | 648 | 653 | |||||||||||
Commercial |
1,077 | | | 1,077 | ||||||||||||
Construction and land |
3,355 | | | 3,355 | ||||||||||||
Loans held-for-sale |
$ | 13,910 | | $ | 13,910 | |
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $15,634 with a valuation allowance of $4,424 at March 31, 2011 compared to a carrying amount of $22,239 with a valuation allowance of $6,011 at December 31, 2010.
Other real estate owned, which is measured using the collateral values less costs to sell or outstanding commitments from third party investors, had a net carrying amount of $3,543, made up of the outstanding balance of $4,530, net of a valuation allowance of $987, resulting in a write-down of $100 for the period ending March 31, 2011. At December 31, 2010, other real estate owned had a net carrying amount of $5,733, made up of the outstanding balance of $7,834, net of a valuation allowance of $1,870, resulting in a write-down of $1,840 for the year ended December 31, 2010.
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JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
NOTE 8 FAIR VALUE (Cont.)
(Dollar amounts in thousands except share data)
Collateral dependent impaired loans and other real estate owned, valued under Level 3, were measured using current appraised values along with information on recent market transactions as well as managements assumptions about the criteria that market participants would use in pricing the assets.
The carrying amount and estimated fair values of financial instruments at March 31, 2011 and December 31, 2010 were as follows:
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents |
$ | 12,601 | $ | 12,601 | $ | 20,297 | $ | 20,297 | ||||||||
Securities available-for-sale |
65,189 | 65,189 | 62,356 | 62,356 | ||||||||||||
Loans held-for-sale |
| | 13,910 | 13,910 | ||||||||||||
Loans, net |
492,588 | 501,947 | 499,696 | 511,300 | ||||||||||||
Federal Home Loan Bank stock |
3,728 | n/a | 3,728 | n/a | ||||||||||||
Non-marketable equity security |
178 | n/a | 178 | n/a | ||||||||||||
Accrued interest receivable |
2,826 | 2,826 | 3,170 | 3,170 | ||||||||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
|||||||||||||
Financial liabilities |
||||||||||||||||
Deposits |
$ | 529,783 | $ | 518,148 | $ | 562,187 | $ | 551,061 | ||||||||
Other borrowings |
23,522 | 23,984 | 18,924 | 19,546 | ||||||||||||
Subordinated debentures |
15,978 | 7,136 | 15,962 | 6,839 | ||||||||||||
Accrued interest payable |
280 | 280 | 599 | 599 | ||||||||||||
Interest rate swap |
335 | 335 | 425 | 425 |
The methods and assumptions, not previously presented, used to estimate fair value, are described as follows:
Carrying amount is the estimated fair value for cash and cash equivalents, interest-bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and deposits that reprice frequently and fully. The methods for determining the fair values for securities were described previously. For loans, excluding loans classified as held-for-sale, fair value is based on discounted cash flows using current market rates applied to the estimated life adjusted for the allowance for loan losses. For fixed rate deposits and variable rate deposits with infrequent repricing, fair value is based on discounted cash flows using current market rates applied to the estimated life. Fair value of debt, including FHLB advances, is based on current rates for similar financing. It was not practicable to determine fair value of FHLB stock and other nonmarketable equity securities due to restrictions placed on transferability. The fair value of off-balance-sheet items is considered nominal.
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MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
General
Jacksonville Bancorp, Inc. (Bancorp) was incorporated on October 24, 1997 and was organized to conduct the operations of The Jacksonville Bank (the Bank). The Bank is a Florida state-chartered commercial bank that opened for business on May 28, 1999, and its deposits are insured by the Federal Deposit Insurance Corporation. The Bank provides a variety of community banking services to businesses and individuals in the greater Jacksonville area of Northeast Florida. During 2000, the Bank formed Fountain Financial, Inc., a wholly owned subsidiary. The primary business activities of Fountain Financial, Inc. consist of referral of our customers to third parties for the sale of insurance products. Bancorp, the Bank, and Fountain Financial, Inc. are collectively referred to herein as the Company.
Forward Looking Statements
All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding our estimates, expectations, beliefs, intentions, projections or strategies for the future, results of operations, financial position, prospects and plans and objectives of management for future operations may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, as amended. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements can be identified by the use of terms and phrases such as believe, plan, intend, anticipate, target, estimate, expect, and the like, and/or future-tense or conditional constructions (will, may, could, should, etc.). Items contemplating or making assumptions about actual or potential future operating results also constitute forward-looking statements. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, including changes in local economic conditions, changes in regulatory requirements, fluctuations in interest rates, demand for products, and competition, and, therefore, actual results could differ materially from those contemplated by the forward-looking statements. In addition, the Company assumes no duty to update forward-looking statements to reflect events or circumstances after the date of such statements.
Business Strategy
Our primary business segment is community banking and consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans, commercial real estate loans, residential mortgage loans and a variety of consumer loans. We also invest in securities backed by the United States government, and agencies thereof, as well as municipal tax-exempt bonds. Our profitability depends primarily on our net interest income, which is the difference between the income we receive from our loan and securities investment portfolios and costs incurred on our deposits, the Federal Home Loan Bank (FHLB) advances, Federal Reserve borrowings and other sources of funding. Net interest income is also affected by the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income is generated as the relative amounts of interest-earning assets grow in relation to the relative amounts of interest-bearing liabilities. In addition, the level of noninterest income earned and noninterest expenses incurred also affects profitability. Included in noninterest income are service charges earned on deposit accounts and increases in cash surrender value of Bank Owned Life Insurance (BOLI). Included in noninterest expense are costs incurred for salaries and employee benefits, occupancy and equipment expenses, data processing expenses, marketing and advertising expenses, federal deposit insurance premiums and legal, professional fees, and OREO expenses.
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Our goal is to sustain profitable, controlled growth by focusing on increasing our loan and deposit market share in the Northeast Florida market by developing new financial products, services and delivery channels; closely managing yields on interest-earning assets and rates on interest-bearing liabilities; focusing on noninterest income opportunities; controlling the growth of noninterest expenses; and maintaining strong asset quality. Our current strategy is to grow organically and through acquisition if price, culture and market fit within our strategies. We have initiated programs to expand our scope of services and achieve these goals. This was demonstrated through our acquisition of ABI and its wholly owned subsidiary, Oceanside Bank, in November 2010. The Bank has adopted a philosophy of seeking out and retaining the best available personnel for positions of responsibility which we believe will provide us with a competitive edge in the local banking industry.
Our operations are influenced by the local economic conditions and by policies of financial institution regulatory authorities. Fluctuations in interest rates, due to factors such as competing financial institutions as well as the Federal Reserves decisions on changes in interest rates, impact interest-earning assets and our cost of funds and, thus, our net interest margin. In addition, the local economy and real estate market of Northeast Florida, and the demand for our products and loans, impacts our margin. The local economy and viability of local businesses can also impact the ability of our customers to make payments on loans, thus impacting our loan portfolio. The Company evaluates these factors when valuing its allowance for loan losses. The Company also believes its underwriting procedures are relatively conservative and, as a result, the Company is not being any more affected than the overall market in the current economic downturn.
On November 16, 2010, Bancorp acquired Atlantic BancGroup, Inc. (ABI) pursuant to an agreement and plan of merger that provided for the merger of ABI with and into Bancorp. The merger agreement also included the consolidation of ABIs wholly owned subsidiary, Oceanside Bank, into the Bank. Under the terms of the merger agreement, ABI shareholders received 0.2 shares of Bancorp common stock and $0.67 in cash for each share of ABI common stock. A total of 249,483 shares were issued to ABI shareholders. The ABI merger increased our branch locations from five full-service branches to eight full-service branches as well as expanded our geographic footprint in the Jacksonville beach market. In addition, we acquired approximately $158.0 million in net loans, $62.8 million in cash and cash equivalents and securities, $231.3 million in deposits and $9.5 million in borrowings in the ABI merger. We recorded $12.5 million in goodwill and $2.5 million in core deposit intangibles as a result of the ABI merger.
As a result of the acquisition of ABI, the Bank had eight full-service branches during the first quarter of 2011 versus five full-service branches during the first quarter of 2010.
On February 11, 2011, as a result of the Companys strategy to strengthen its balance sheet by lowering the amount of substandard assets, the Bank sold 40 substandard loans for $13.9 million through a bulk loan sale. These loans were classified as held-for-sale on the Companys consolidated balance sheet as of December 31, 2010 and through the date of the sale at their fair value.
Introduction
On the following pages, management presents an analysis of the financial condition of the Company as of March 31, 2011 compared to December 31, 2010, and the results of operations for the three months ended March 31, 2011 compared with the same period in 2010. This discussion is designed to provide a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the interim financial statements and related footnotes included herein.
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Comparison of Financial Condition at March 31, 2011 and December 31, 2010
Total assets decreased $27.2 million, or 4.2%, from $651.8 million at December 31, 2010 to $624.6 million at March 31, 2011. During the three months ended March 31, 2011, the Company experienced a net loan decrease, including loans classified as held-for-sale, of $21.0 million, or 4.1%. Loans classified as held-for-sale at December 31, 2010 of $13.9 million were sold during the first quarter of 2011. In addition, commercial real estate decreased by $3.4 million, or 1.2%, residential real estate decreased by $5.0 million, or 3.7%, construction and land real estate decreased by $912,000, or 1.7% and consumer loans decreased by $533,000, or 10.4%, offset by a $986,000, or 2.7%, increase in commercial loans and a decrease in the allowance for loan losses of $1.7 million from December 31, 2010 to March 31, 2011.
Total cash and cash equivalents decreased $7.7 million from $20.3 million at December 31, 2010 to $12.6 million at March 31, 2011. Investment securities available-for-sale increased $2.8 million to $65.2 million at March 31, 2011. During the three months ended March 31, 2011, we purchased $5.0 million GNMA securities. In addition, we received $400,000 in proceeds from maturities, calls and principal repayments.
Total deposits decreased $32.4 million, or 5.8%, from $562.2 million at December 31, 2010 to $529.8 million at March 31, 2011. During the three months ended March 31, 2011, noninterest bearing deposits increased $6.5 million to $79.0 million, money market, NOW and savings deposits decreased $5.1 million to $206.0 million and time deposits decreased $33.8 million to $244.9 million. The decrease in time deposits was driven primarily by a reduction in National and Brokered CDs of $15.8 million and a decrease in Local CDs of $17.8 million.
Federal Home Loan Bank advances remained materially unchanged at March 31, 2011 from December 31, 2010. Loans from related parties increased $1.2 million from $800,000 at December 31, 2010 to the period ending March 31, 2011.
Total shareholders equity increased by $925,000 from $51.9 million at December 31, 2010 to $52.8 million at March 31, 2011. The increase is mainly attributable to net income of $439,000, and an increase of a net unrealized gain on securities and our cash flow hedge of $460,000 for the period ending March 31, 2011. At March 31, 2011, the Company had 8,000,000 authorized shares of $.01 par value common stock, of which 5,888,809 shares were issued and outstanding. In addition, the Company had 2,000,000 authorized shares of $.01 par value preferred stock, none of which were issued or outstanding at March 31, 2011.
Comparison of Operating Results for the Three Months Ended March 31, 2011 and 2010
Net Income
The Company had net income for the first three months of 2011 of $439,000, compared to a $988,000 net loss in the first three months of 2010. On a diluted per share basis, net income was $0.07 for the three months ended March 31, 2011, compared to a net loss of $0.56 per diluted share in 2010. The increase in net income for the first three months of 2011 was driven primarily by the acquisition of ABI that resulted in net accretion of purchase accounting adjustments. Net income also increased due to a decrease in the provision for loan losses.
Net Interest Income
Net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities, was $5.9 million for the three months ended March 31, 2011, compared to $3.6 million for the same period in 2010. The average yield on interest-earning assets for the first three months of 2011 was 5.35%, which was a decrease of 16 basis points, compared to the 5.51% yield earned during the first three months of 2010. This was offset by the average earning asset increase of $160.4 million.
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Interest income increased $1.9 million when compared to the first three months of the prior year. This was due to interest income on the loans acquired in the merger with ABI that was above the contractual rate of interest as a result of purchase accounting adjustments and was approximately $632,000.
The average loan balances increased $125.4 million for the three months ended March 31, 2011 compared to the same period in the prior year largely as a result of the merger with ABI in 2010. The average yield on loans for the first three months of 2011 was 5.70%, which was a decrease of 9 basis points, compared to the 5.79% yield earned during the first three months of 2010.
The average cost of interest-bearing liabilities decreased 89 basis points from 2.39% in the first three months of 2010 to 1.50% in the comparable period in 2011. The average cost of interest-bearing deposits and all interest-bearing liabilities reflect the ongoing reduction in interest rates paid on deposits as a result of the repricing of deposits in the current market environment.
The net interest margin increased by 66 basis points from 3.40% to 4.06% when comparing the first three months of 2011 to the same period last year. This increase is mainly the result of the decreased costs of our interest-bearing liabilities in the current low interest rate environment coupled with the additional interest income on the loans acquired from ABI as discussed above. The impact of the additional interest income adds approximately 43 basis points to the net interest margin for the period ending March 31, 2011. The Company closely monitors its liquidity needs in conjunction with the cost of its funding sources and has taken action to reduce costs through reductions in the rates paid on its core deposits.
Average Balance Sheet; Interest Rates and Interest Differential. The following table sets forth the average daily balances for each major category of assets, liabilities and shareholders equity as well as the amounts and average rates earned or paid on each major category of interest-earning assets and interest-bearing liabilities.
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Three Months Ended March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
(Dollars in thousands) | Average Balance |
Interest | Average Rate |
Average Balance |
Interest | Average Rate |
||||||||||||||||||
Interest-earning assets: |
||||||||||||||||||||||||
Loans (1) |
$ | 516,477 | $ | 7,259 | 5.70 | % | $ | 391,073 | $ | 5,584 | 5.79 | % | ||||||||||||
Securities (2) |
65,048 | 453 | 2.82 | 25,340 | 218 | 3.49 | ||||||||||||||||||
Other interest-earning assets (3) |
5,342 | 28 | 2.13 | 10,037 | (7 | ) | (.28 | ) | ||||||||||||||||
Total interest-earning assets |
586,867 | 7,740 | 5.35 | 426,450 | 5,795 | 5.51 | ||||||||||||||||||
Noninterest-earning assets (4) |
45,951 | 21,416 | ||||||||||||||||||||||
Total assets |
$ | 632,818 | $ | 447,866 | ||||||||||||||||||||
Interest-bearing liabilities: |
||||||||||||||||||||||||
Savings deposits |
$ | 12,546 | $ | 28 | .91 | $ | 11,058 | $ | 36 | 1.32 | ||||||||||||||
NOW deposits |
18,271 | 7 | .16 | 5,878 | 3 | .21 | ||||||||||||||||||
Money market deposits |
175,479 | 435 | 1.01 | 94,308 | 368 | 1.58 | ||||||||||||||||||
Time deposits |
256,715 | 1,048 | 1.66 | 225,751 | 1,367 | 2.46 | ||||||||||||||||||
FHLB advances |
24,897 | 97 | 1.58 | 25,000 | 255 | 4.14 | ||||||||||||||||||
Federal reserve and other borrowings(8) |
1,189 | 29 | 9.89 | 800 | 1 | .51 | ||||||||||||||||||
Subordinated debt |
15,968 | 220 | 5.59 | 14,550 | 190 | 5.30 | ||||||||||||||||||
Other interest-bearing liabilities (5) |
95 | | | 50 | | | ||||||||||||||||||
Total interest-bearing liabilities |
505,160 | 1,864 | 1.50 | 377,395 | 2,220 | 2.39 | ||||||||||||||||||
Noninterest-bearing liabilities |
75,363 | 43,105 | ||||||||||||||||||||||
Shareholders equity |
52,295 | 27,366 | ||||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 632,818 | $ | 447,866 | ||||||||||||||||||||
Net interest income |
$ | 5,876 | $ | 3,575 | ||||||||||||||||||||
Interest rate spread (6) |
3.85 | % | 3.12 | % | ||||||||||||||||||||
Net interest margin (7) |
4.06 | % | 3.40 | % | ||||||||||||||||||||
(1) | Average loans include nonperforming loans and loans classified as held-for-sale. Interest on loans includes deferred loan fees. |
(2) | Interest income and rates do not include the effects of a tax equivalent adjustment using a federal tax rate of 34% in adjusting tax-exempt interest on tax-exempt investment securities to a fully taxable basis. |
(3) | Includes federal funds sold. |
(4) | For presentation purposes, the BOLI acquired by the Bank has been included in noninterest-earning assets. |
(5) | Includes federal funds purchased. |
(6) | Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
(7) | Net interest margin is net interest income divided by average interest-earning assets. |
(8) | Federal Reserve and other borrowings include loans from related parties that pay an annual rate of interest equal to 8% on a quarterly basis of the amount outstanding |
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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, | ||||||||||||
2011 Versus 2010 (1) | ||||||||||||
Increase (decrease) due to changes in: | ||||||||||||
(Dollars in thousands) | Volume | Rate | Net Change |
|||||||||
Interest income: |
||||||||||||
Loans |
$ | 1,764 | $ | (89 | ) | $ | 1,675 | |||||
Securities |
284 | (49 | ) | 235 | ||||||||
Other interest-earning assets |
2 | 33 | 35 | |||||||||
Total interest income |
2,050 | (105 | ) | 1,945 | ||||||||
Interest expense: |
||||||||||||
Savings deposits |
4 | (12 | ) | (8 | ) | |||||||
NOW deposits |
5 | (1 | ) | 4 | ||||||||
Money market deposits |
236 | (169 | ) | 67 | ||||||||
Time deposits |
169 | (488 | ) | (319 | ) | |||||||
FHLB advances |
(1 | ) | (157 | ) | (158 | ) | ||||||
Federal Reserve and other borrowings |
1 | 27 | 28 | |||||||||
Subordinated debt |
19 | 11 | 30 | |||||||||
Other interest-bearing liabilities |
| | | |||||||||
Total interest expense |
433 | (789 | ) | (356 | ) | |||||||
Increase in net interest income |
$ | 1,617 | $ | 684 | $ | 2,301 | ||||||
(1) | The change in interest due to both rate and volume has been allocated to the volume and rate components in proportion to the relationship of the dollar amounts of the absolute change in each. |
Critical Accounting Policies
A critical accounting policy is one that is both very important to the portrayal of the Companys financial condition and requires managements most difficult, subjective or complex judgments. The circumstances that make these judgments difficult, subjective or complex have to do with the need to make estimates about the effect of matters that are inherently uncertain. Based on this definition, the Companys primary critical accounting policies are as follows:
Allowance for Loan Loss
The allowance for loan loss is established through a provision for loan loss charged to expense. Loans are charged against the allowance for loan loss when management believes that the collectability of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable incurred credit losses on existing loans that may become uncollectible based on evaluations of the collectability of the loans. The evaluations take into consideration such objective factors as changes in the nature and volume of the loan portfolio and historical loss experience. The evaluation also considers certain subjective factors such as overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrowers ability to pay. The level of allowance for loan loss is also impacted by increases and decreases in loans outstanding, because either more or less allowance is required as the amount of the Companys credit exposure changes. To the extent actual loan losses differ materially from managements estimate of these subjective factors, loan growth/run-off accelerates, or the mix of loan types changes, the level of provision for loan loss, and related allowance can, and will, fluctuate.
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Other Real Estate Owned
Other real estate owned includes real estate acquired through foreclosure or deed taken in lieu of foreclosure. These amounts are recorded at estimated fair value, less costs to sell the property, with any difference between the fair value of the property and the carrying value of the loan being charged to the allowance for loan losses. Subsequent changes in fair value are reported as adjustments to the carrying amount, not to exceed the initial carrying value of the assets at the time of transfer. Those subsequent changes, as well as any gains or losses recognized on the sale of these properties, are included in noninterest expense.
Deferred Income Taxes
Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. From an accounting standpoint, deferred tax assets are reviewed to determine if a valuation allowance is required based on both positive and negative evidence currently available. Positive evidence includes the historical levels of our taxable income, estimates of our future taxable income including tax planning strategies as applicable, the reversals of deferred tax liabilities and taxes available in carry-back years. Negative evidence primarily includes a cumulative three-year loss for financial reporting purposes. Additionally, current and future economic and business conditions are considered. Management believes the Company will generate sufficient operating income to realize the deferred tax asset.
Additional information with regard to the Companys methodology and reporting of its critical accounting policies is included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 31, 2011.
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 Companys 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 Companys risk elements at March 31, 2011 and December 31, 2010, excluding loans classified as held-for-sale, were as follows:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(Dollars in thousands) | ||||||||
Nonperforming loans: |
||||||||
Commercial real estate |
$ | 13,965 | $ | 9,843 | ||||
Residential real estate |
14,928 | 14,215 | ||||||
Construction and land real estate |
8,079 | 10,582 | ||||||
Commercial |
121 | 371 | ||||||
Consumer loans and other |
8 | 6 | ||||||
Loans past due over 90 days still on accrual |
| | ||||||
Total nonperforming loans (1) |
37,101 | 35,017 | ||||||
Foreclosed assets, net |
3,543 | 5,733 | ||||||
Total nonperforming assets |
40,644 | 40,750 | ||||||
Troubled debt restructuring |
7,612 | 7,497 | ||||||
Total nonperforming assets and troubled debt restructuring |
$ | 48,256 | $ | 48,247 | ||||
Allowance for loan losses |
$ | 11,331 | $ | 13,069 | ||||
Nonperforming loans and foreclosed assets as a percent of total assets (2) |
6.51 | % | 6.25 | % | ||||
Nonperforming loans as a percent of gross loans (2) |
7.36 | % | 6.83 | % | ||||
Allowance for loan losses as a percent of nonperforming loans (2) |
30.54 | % | 37.32 | % |
(1) | Total nonperforming loans at December 31, 2010 excludes $3.7 million of nonperforming loans that were classified as held-for-sale on the balance sheet. There were no loans classified as held-for-sale as of March 31, 2011. |
(2) | Nonperforming loans and total loans exclude amounts classified as loans held-for-sale. |
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The Company has loan balances of $7.6 million for customers whose loans are classified as troubled debt restructuring and such loans are included in the impaired loan balances of $43.8 million at March 31, 2011. There are no additional funds committed to customers whose loans are classified as troubled debt restructuring. Most of these loans were modified to suspend principal payments for a period of time less than or equal to one year, and the interest rate was modified from a fixed rate to a floating rate tied to the Prime rate. Of the $4.6 million allowance for loan losses reserved for impaired loans, the Company has allocated $179,000 to customers whose loan terms have been modified as a troubled debt restructuring.
Nonperforming loans increased during the three-month period ended March 31, 2011 from $35.0 million at December 31, 2010 to $37.1 million at March 31, 2011. Nonperforming assets decreased $106,000 from December 31, 2010 to March 31, 2011. The slight decrease in nonperforming assets at March 31, 2011 was principally a result of an increase in nonaccrual commercial and residential real estate loans offset by the sale of approximately $2.2 million of OREO properties in the first quarter of 2011. General economic conditions and the real estate market continue to be challenging in the Banks geographic market.
Loans past due still accruing interest at March 31, 2011, are categorized as follows:
30-59 Days Past Due |
60-89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due Still Accruing |
|||||||||||||
Commercial |
$ | 255 | $ | 210 | $ | | $ | 465 | ||||||||
Real estate: |
||||||||||||||||
Residential |
746 | 100 | | 846 | ||||||||||||
Commercial |
8,481 | | | 8,481 | ||||||||||||
Construction and land |
4,425 | | | 4,425 | ||||||||||||
Consumer |
109 | 39 | | 148 | ||||||||||||
Total |
$ | 14,016 | $ | 349 | $ | | $ | 14,365 | ||||||||
The increase in total loans past due 30-89 days still accruing interest from $12.5 million at December 31, 2010 to $14.4 million at March 31, 2011 is being driven by loan absorption as a result of the merger with ABI as well as the continued softening of the economy.
The Bank has experienced a decrease in adversely classified loans from $65.0 million at December 31, 2010 to $63.7 million at March 31, 2011. Of the $63.7 million at March 31, 2011, $16.3 million are adversely classified loans from the merger with ABI. In addition, of the $63.7 million at March 31, 2011, $39.7 million is listed as impaired. All adversely classified loans are monitored closely and the majority of these loans are collateralized by real estate.
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Loans are impaired when it is considered probable that the Company will not collect the outstanding loan principal and interest amounts according to the loans contractual terms. At March 31, 2011, impaired loans decreased by $2.7 million to $43.8 million, compared to $46.5 million at December 31, 2010. Of the $43.8 million impaired loans at March 31, 2011, $31.9 million are nonperforming loans.
The Company critically evaluates all requests for additional funding on classified loans to determine whether the borrower has the capacity and willingness to repay. Any requests of this nature require concurrence by the Loan Committee of the Banks board of directors.
Allowance and Provision for Loan Losses
The allowance for loan losses decreased by $1.8 million during the first three months of 2011, amounting to $11.3 million at March 31, 2011, as compared to $13.1 million at December 31, 2010. The allowance represented approximately 2.25% of total loans at March 31, 2011 and 2.55% at December 31, 2010.
March 31, 2011 |
||||
Allowance at beginning of period |
$ | 13,069 | ||
Charge-offs: |
||||
Commercial loans |
81 | |||
Real estate loans |
3,684 | |||
Consumer and other loans |
9 | |||
Total Charge-offs |
3,774 | |||
Recoveries: |
||||
Commercial loans |
1 | |||
Real estate loans |
105 | |||
Consumer and other loans |
1 | |||
Total Recoveries |
107 | |||
Net charge-offs |
3,667 | |||
Provision for loan losses charged to operating expenses: |
||||
Commercial loans |
35 | |||
Real estate loans |
1,897 | |||
Consumer and other loans |
(3 | ) | ||
Total provision |
1,929 | |||
Allowance at end of period |
$ | 11,331 | ||
During the first three months of 2010, the Company had charge-offs of $1.6 million, recoveries of $19,000 and recorded a $2.4 million provision for loan losses.
The smaller allowance for loan losses in 2011 was driven primarily by the decrease in the amount of allowance needed on loans individually evaluated for impairment as a portion of the amount reserved as of December 31, 2010 was charged off in the first quarter of 2011. The increased level of charge-offs for the first quarter is due to the Companys strategy to strengthen its balance sheet by lowering the amount of substandard assets through such avenues as short sales and the timing of the recognition of anticipated losses. In addition, the decrease in adversely classified loans of $1.3 million from December 31, 2010 to March 31, 2011 was largely due to the charge-offs as evidenced in the table above.
The Banks identification efforts of potential losses in the portfolio are based on a variety of specific factors, including the Companys own experience as well as industry and economic trends. Impaired loans were $43.8 million as of March 31, 2011. As of the same date, $4.6 million was specifically allocated to the allowance for loan losses which is deemed appropriate to absorb probable losses.
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The allowance for loan losses is a valuation allowance for credit losses in the loan portfolio. Management has adopted a methodology to properly analyze and determine an adequate loan loss allowance. The analysis is based on sound, reliable and well documented information and is designed to support an allowance that is adequate to absorb all estimated credit losses in the Companys loan and lease portfolio. Due to their similarities, the Company has grouped the loan portfolio into portfolio segments. The segments are real estate mortgage loans, commercial loans and consumer and other loans. The Company has created a loan classification system to properly calculate the allowance for loan losses. Loans are evaluated for impairment. If a loan is deemed to be impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loans existing rate or at the fair value of collateral if repayment is expected solely from the sale of the collateral.
It is the Banks policy to obtain updated third party appraisals on all other real estate owned and real estate collateral on substandard loans on, at least, an annual basis. Value adjustments are often made to appraised values on properties wherein the existing appraisal is approximately one-year old at period end. Occasionally, at period end, an updated appraisal has been ordered, but not yet received, on a property wherein the existing appraisal is approaching one-year old. In this circumstance, an adjustment is typically made to the existing appraised value to reflect the Banks best estimate of the change in the value of the property, based on evidence of changes in real estate market values derived by the review of current appraisals received by the Bank on similar properties. In the current environment, all such adjustments to value are downward due to the overall reduction in real estate values over the last two years in the Banks market area.
Real estate values in the Banks market area have experienced deterioration over the last several quarters. The expectation for further deterioration for all property types is a leveling off. On a quarterly basis, management reviews several factors, including underlying collateral, and will write down impaired loans to the net realizable value.
In estimating the overall exposure to loss on impaired loans, the Company has considered a number of factors, including the borrowers character, overall financial condition, resources and payment record, the prospects for support from any financially responsible guarantors, and the realizable value of any collateral. The Company also considers other internal and external factors when determining the allowance for loan losses. These factors include, but are not limited to, changes in national and local economic conditions, commercial lending staff limitations, impact from lengthy commercial loan workout and charge-off periods, loan portfolio concentrations and trends in the loan portfolio.
Bank regulators have issued Joint Guidance on Concentrations in Commercial Real Estate Lending. This document outlines regulators concerns regarding the high level of growth in commercial real estate loans on banks balance sheets. Many banks, especially those in Florida, have seen a substantial increase in exposure to commercial real estate loans. The concentration in this category is considered when analyzing the adequacy of the loan loss allowance based on sound, reliable and well documented information.
Based on the results of the analysis performed by management at March 31, 2011, the allowance for loan loss is considered to be appropriate to absorb estimated loan losses in the portfolio as of that date. As more fully discussed in the Critical Accounting Policies section of this Managements Discussion and Analysis of Financial Condition and Results of Operations, the process for estimating credit losses and determining the allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates. Actual results could differ significantly from these estimates.
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The amount of future charge-offs and provisions for loan losses could be affected by, among other things, economic conditions in Jacksonville, Florida, and the surrounding communities. Such conditions could affect the financial strength of the Companys borrowers and the value of real estate collateral securing the Companys mortgage loans.
Future provisions and charge-offs could also be affected by environmental impairment of properties securing the Companys mortgage loans. Under the Companys current policy, an environmental audit is required on the majority of all commercial-type properties that are considered for a mortgage loan. At the present time, the Company is not aware of any existing loans in the portfolio where there is environmental pollution existing on the mortgaged properties that would materially affect the value of the portfolio.
Noninterest Income, Noninterest Expense and Income Taxes
Noninterest income was $396,000 for the three months ended March 31, 2011 compared to $248,000 for the same period in 2010. This increase is driven largely by the increased volume of non-interest income transactions as a result of the merger with ABI. In addition, there was an increase in our bank-owned life insurance income as well as income from OREO properties.
Noninterest expense was $4.3 million for the three months ended March 31, 2011, compared to $3.1 million in the same period in 2010. The increase in noninterest expense is attributable to additional costs absorbed as a result of the merger with ABI as our branch locations increased from five as of March 31, 2010 to eight as of March 31, 2011.
The income tax benefit for the three months ended March 31, 2011 was $346,000, compared to an income tax benefit of $650,000 for the three months ended March 31, 2010. The tax benefit for the three months ended March 31, 2011 is the result of benefits derived from tax-free municipal bonds, tax-free income earned on the bank-owned life insurance policies, the tax-free accretion of interest income from the purchase accounting adjustments as a result of our merger with ABI as well as the increase in the level of charge-offs from the period ended March 31, 2010 compared to the period ended March 31, 2011 that are deductible for income tax purposes.
Capital
The Companys capital management policy is designed to build and maintain capital levels that meet regulatory standards. Under current regulatory capital standards, banks are classified as well-capitalized, adequately-capitalized or undercapitalized. Under such standards, a well-capitalized bank is one that has a total risk-based capital ratio equal to or greater than 10%, a Tier 1 risk-based capital ratio equal to or greater than 6%, and a Tier 1 leverage capital ratio equal to or greater than 5%. The Banks total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios were 10.66%, 9.39% and 7.83%, respectively, at March 31, 2011. Bancorp also maintains capital levels that meet the same regulatory standards. If the capital ratios of Bancorp and the Bank were to fall below levels required under regulatory standards, it is their policy to increase capital in an amount sufficient to meet regulatory requirements within 30 days. Although the Banks Tier 1 Leverage ratio was below 8% as of March 31, 2011, the threshold that management and the Board are committed to maintaining, this ratio was above 8% as of April 30, 2011.
The Company has included in Tier 1 Capital and Total Capital a portion of the trust preferred securities that were issued in June 2004, December 2006 and June 2008 and acquired from ABI in November 2010.
Cash Flows and Liquidity
Cash Flows. The Companys primary sources of cash are deposit growth, maturities and amortization of investment securities, FHLB advances, Federal Reserve Bank borrowings and federal funds purchased. The Company uses cash from these and other sources to fund loan growth. Any remaining cash is used
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primarily to reduce borrowings and to purchase investment securities. During the first three months of 2011, the Companys cash and cash equivalent position decreased by $7.7 million. The decrease in cash mainly resulted from a decrease in deposit accounts of approximately $32.4 million from $562.2 million at December 31, 2010 to $529.8 million at March 31, 2011, offset by cash from operating activities of $1.6 million, proceeds from the sale of real estate owned and related party transactions of $3.4 million, net loan payments of $7.7 million and $14.3 million of proceeds received from the bulk loan sale in February 2011.
Liquidity. The Company has both internal and external sources of near-term liquidity that can be used to fund loan growth and accommodate deposit outflows. The primary internal sources of liquidity are principal and interest payments on loans; proceeds from maturities and monthly payments on the balance of the investment securities portfolio; and its overnight position with federal funds sold. At March 31, 2011 the Company had $65.2 million in available-for-sale securities, $17.7 million of which was pledged to the Federal Reserve Bank for the Borrower in Custody Program.
The Companys primary external sources of liquidity are customer deposits and borrowings from other commercial banks. The Companys deposit base consists of both deposits from businesses and consumers in its local market as well as national market and brokered certificates of deposit. The Company can also borrow overnight federal funds and fixed-rate term products under credit facilities established with the FHLB, Federal Reserve Discount Window and other commercial banks. These lines, in the aggregate amount of approximately $132.0 million, do not represent legal commitments to extend credit.
On November 16, 2010, Bancorp closed on a $35.0 million financing through the sale of 3,888,889 shares of its common stock at $9.00 per share to accredited investors led by CapGen Capital Group IV LP (CapGen). The amount of cash raised was directly tied to the amount of additional capital Bancorp needed in order to obtain regulatory approval to consummate the merger with ABI. Net proceeds from the sale after offering expenses were $34.7 million and were used to fund the merger and integration of ABI and Oceanside Bank into the Company.
Contractual Obligations, Commitments and Contingent Liabilities. The Company has various financial obligations, including contractual obligations and commitments that may require future cash payments. Management believes that there have been no material changes in the Companys overall level of these financial obligations since December 31, 2010 and that any changes in the Companys obligations which have occurred are routine for the industry. Further discussion of the nature of each type of obligation is included in the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations in the Companys Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 31, 2011.
Off-Balance Sheet Arrangements. There have been no material changes in the risks related to off-balance sheet arrangements since the Companys disclosure in its Annual Report on Form 10-K for the year ended December 31, 2010.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Market risk is the risk that a financial institution will be adversely impacted by unfavorable changes in market prices. These unfavorable changes could result in a reduction in net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities.
Interest rate risk is the sensitivity of income to variations in interest rates over both short-term and long-term horizons. The primary goal of interest rate risk management is to control this risk within limits approved by the board of directors and narrower guidelines approved by the Asset Liability Committee.
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These limits and guidelines reflect the Banks tolerance for interest rate risk. The Bank attempts to control interest rate risk by identifying and quantifying exposures. The Bank quantifies its interest rate risk exposures using sophisticated simulation and valuation models as well as simpler gap analyses performed by a third-party vendor specializing in this activity. There have been no significant changes in the Banks primary market risk exposure or how those risks are managed since our disclosures in our Annual Report on Form 10-K for the year ended December 31, 2010.
Management believes, under normal economic conditions, the best indicator of interest rate risk is the +/- 200 basis point shock (parallel shift) scenario. However, due to the current rate environment, the Banks internal policy on interest rate risk specifies that if interest rates were to shift immediately up or down 100 basis points, estimated net interest income for the next 12 months should change by less than 15%. The most current simulation projects the Banks net interest income to be within the parameters of its internal policy and has not changed significantly from our disclosures in our Annual Report on Form 10-K for the year ended December 31, 2010. Such simulation involves numerous assumptions and estimates, which are inherently subjective and are subject to substantial business and economic uncertainties. Accordingly, the actual effects of an interest rate shift under actual future conditions may be expected to vary significantly from those derived from the simulation to the extent that the assumptions used in the simulation differ from actual conditions.
Item 4. | Controls and Procedures |
(a) Evaluation of Disclosure Controls and Procedures
Bancorp maintains controls and procedures designed to ensure that information required to be disclosed in the reports that Bancorp files or submits under the Securities Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon managements evaluation of those controls and procedures as of the end of the fiscal quarter covered by this quarterly report on Form 10-Q, the Chief Executive Officer and the Chief Financial Officer of Bancorp concluded that, subject to the limitations noted below, Bancorps disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that the information required to be disclosed by Bancorp in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.
(b) Changes in Internal Controls
In the ordinary course of business, Bancorp may routinely modify, upgrade and enhance its internal controls and procedures for financial reporting. In an effort to improve internal control over financial reporting, Bancorp continues to emphasize the importance of identifying areas for improvement and to create and implement new policies and procedures where deficiencies exist. There have not been any changes in Bancorps internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Bancorps internal control over financial reporting.
(c) Limitations on the Effectiveness of Controls
Bancorps management, including its Chief Executive Officer and its Chief Financial Officer, does not expect that its disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been
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detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by managements override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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Item 1. | Legal Proceedings |
From time to time, as a normal incident of the nature and kind of business in which the Company is engaged, various claims or charges are asserted against Bancorp, its subsidiaries and/or their directors, officers or affiliates. In the ordinary course of business, Bancorp and its subsidiaries are also subject to regulatory examinations, information gathering requests, inquiries and investigations. Other than ordinary routine litigation incidental to the Companys business, management believes after consultation with legal counsel that there are no pending legal proceedings against Bancorp, any of its subsidiaries and any of their directors, officers or affiliates that will, individually or in the aggregate, have a material adverse effect on the consolidated results of operations or financial condition of Bancorp.
Item 1A. | Risk Factors |
There have been no material changes from the risk factors disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on March 31, 2011.
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Item 6. | Exhibits |
Exhibit No. 2.1: Agreement and Plan of Merger by and between Jacksonville Bancorp, Inc. and Atlantic BancGroup, Inc. dated as of May 10, 2010 (1)
Exhibit No. 2.2: First Amendment to Agreement and Plan of Merger by and between Jacksonville Bancorp, Inc. and Atlantic BancGroup, Inc. dated as of September 20, 2010 (2)
Exhibit No. 3.1: Amended and Restated Articles of Incorporation of Jacksonville Bancorp, Inc. (3)
Exhibit No. 3.2: Amended and Restated Bylaws of Jacksonville Bancorp, Inc. (4)
Exhibit No. 10.1: Form of Loan Agreement by and between Jacksonville Bancorp, Inc. and each of certain of the directors, their affiliates, entities and family members dated as of January 1, 2011 (5)
Exhibit No. 10.2: Form of Revolving Loan Note of Jacksonville Bancorp, Inc. payable to each of certain of the directors, their affiliates, entities and family members dated as of January 1, 2011 (6)
Exhibit No. 10.3: Lease Agreement between The Jacksonville Bank and Baron San Pablo II, LLC dated April 12, 2011*
Exhibit No. 31.1: Certification of principal executive officer required by Rule 13a-14(a)/15d-14(a) of the Exchange Act
Exhibit No. 31.2: Certification of principal financial officer required by Rule 13a-14(a)/15d-14(a) of the Exchange Act
Exhibit No. 32: Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002
* | Filed herewith |
(1) | Incorporated herein by reference to Exhibit 2.1 to Form 8-K filed May 14, 2010, File No. 000-30248. |
(2) | Incorporated herein by reference to Exhibit 2.1 to Form 8-K filed September 20, 2010, File No. 000-30248. |
(3) | Incorporated herein by reference to Exhibit No. 3.1 to Form 8-K filed November 17, 2010, File No. 000-30248. |
(4) | Incorporated herein by reference to Exhibit No. 3.2 to Form 8-K filed November 17, 2010, File No. 000-30248. |
(5) | Incorporated herein by reference to Exhibit 10.24to the Form 10-K for the year ended December 31, 2010, filed March 31, 2011, File No. 000-30248. |
(6) | Incorporated herein by reference to Exhibit 10.25 to the Form 10-K for the year ended December 31, 2010, filed March 31, 2011, File No. 000-30248. |
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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. | ||
Date: May 16, 2011 | /s/ Price W. Schwenck | |
Price W. Schwenck | ||
Chief Executive Officer | ||
Date: May 16, 2011 | /s/ Valerie A. Kendall | |
Valerie A. Kendall | ||
Executive Vice President | ||
and Chief Financial Officer |
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EXHIBIT INDEX
Exhibit No. 2.1: Agreement and Plan of Merger by and between Jacksonville Bancorp, Inc. and Atlantic BancGroup, Inc. dated as of May 10, 2010 (1)
Exhibit No. 2.2: First Amendment to Agreement and Plan of Merger by and between Jacksonville Bancorp, Inc. and Atlantic BancGroup, Inc. dated as of September 20, 2010 (2)
Exhibit No. 3.1: Amended and Restated Articles of Incorporation of Jacksonville Bancorp, Inc. (3)
Exhibit No. 3.2: Amended and Restated Bylaws of Jacksonville Bancorp, Inc. (4)
Exhibit No. 10.1: Form of Loan Agreement by and between Jacksonville Bancorp, Inc. and each of certain of the directors, their affiliates, entities and family members dated as of January 1, 2011 (5)
Exhibit No. 10.2: Form of Revolving Loan Note of Jacksonville Bancorp, Inc. payable to each of certain of the directors, their affiliates, entities and family members dated as of January 1, 2011 (6)
Exhibit No. 10.3: Lease Agreement between The Jacksonville Bank and Baron San Pablo II, LLC dated April 12, 2011*
Exhibit No. 31.1: Certification of principal executive officer required by Rule 13a-14(a)/15d-14(a) of the Exchange Act
Exhibit No. 31.2: Certification of principal financial officer required by Rule 13a-14(a)/15d-14(a) of the Exchange Act
Exhibit No. 32: Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002
* | Filed herewith |
(1) | Incorporated herein by reference to Exhibit 2.1 to Form 8-K filed May 14, 2010, File No. 000-30248. |
(2) | Incorporated herein by reference to Exhibit 2.1 to Form 8-K filed September 20, 2010, File No. 000-30248. |
(3) | Incorporated herein by reference to Exhibit No. 3.1 to Form 8-K filed November 17, 2010, File No. 000-30248. |
(4) | Incorporated herein by reference to Exhibit No. 3.2 to Form 8-K filed November 17, 2010, File No. 000-30248. |
(5) | Incorporated herein by reference to Exhibit 10.24 to the Form 10-K for the year ended December 31, 2010, filed March 31, 2011, File No. 000-30248. |
(6) | Incorporated herein by reference to Exhibit 10.25 to the Form 10-K for the year ended December 31, 2010, filed March 31, 2011, File No. 000-30248. |
47.