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Table of Contents

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         June 30, 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

(Registrant’s 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 website, 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         x        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 July 31, 2011, the latest practicable date, 5,889,822 of the Registrant’s common shares, $.01 par value, were issued and outstanding.


Table of Contents

JACKSONVILLE BANCORP, INC.

TABLE OF CONTENTS

 

          Page  

PART I - FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

     3      
  

Consolidated Balance Sheets

     3      
  

Consolidated Statements of Operations

     4      
  

Consolidated Statements of Changes in Shareholders’ Equity

     5      
  

Consolidated Statements of Cash Flows

     6      
  

Notes to Consolidated Financial Statements

     8      

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     31      

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     43      

Item 4.

  

Controls and Procedures

     44      

PART II - OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     45      

Item 1A.

  

Risk Factors

     45      

Item 6.

  

Exhibits

     46      

SIGNATURES

     47      

EXHIBIT INDEX

     48      

CERTIFICATIONS

  

Certification of Price W. Schwenck under Section 302 of the Sarbanes-Oxley Act of 2002

     49      

Certification of Valerie A. Kendall under Section 302 of the Sarbanes-Oxley Act of 2002

     50      

Certification under Section 906 of the Sarbanes-Oxley Act of 2002

     51      

 

 

 

 

 

2.


Table of Contents

JACKSONVILLE BANCORP, INC.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

 

     June 30,
2011
    December 31,
2010
 
     (Unaudited)        

ASSETS

    

Cash and due from financial institutions

   $ 12,612      $ 13,728   

Federal funds sold

     11,701        6,569   
  

 

 

   

 

 

 

Cash and cash equivalents

     24,313        20,297   

Securities available-for-sale

     63,796        62,356   

Loans held-for-sale

     --        13,910   

Loans, net of allowance for loan losses of $11,993 in 2011 and $13,069 in 2010

     473,449        499,696   

Premises and equipment, net

     6,730        6,943   

Bank-owned life insurance

     9,404        9,307   

Federal Home Loan Bank stock, at cost

     3,060        3,728   

Real estate owned, net

     3,172        5,733   

Deferred income taxes

     8,088        7,108   

Accrued interest receivable

     2,795        3,170   

Prepaid regulatory assessments

     1,120        1,738   

Goodwill

     14,210        12,498   

Other intangible assets, net

     2,069        2,376   

Other assets

     3,058        2,973   
  

 

 

   

 

 

 

Total assets

   $ 615,264      $ 651,833   
  

 

 

   

 

 

 

LIABILITIES

    

Deposits

    

Noninterest bearing

   $ 82,358      $ 72,428   

Money market, NOW and savings deposits

     203,254        211,057   

Time deposits

     235,621        278,702   
  

 

 

   

 

 

 

Total deposits

     521,233        562,187   

Loans from related parties

     2,000        800   

FHLB advances and other borrowings

     18,750        18,124   

Subordinated debentures

     15,994        15,962   

Accrued expenses and other liabilities

     2,712        2,901   
  

 

 

   

 

 

 

Total liabilities

     560,689        599,974   

SHAREHOLDERS’ EQUITY

    

Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued

     --        --   

Common stock, $.01 par value, 8,000,000 shares authorized, 5,889,822 and 5,888,809 shares issued and outstanding, respectively

     59        59   

Additional paid–in capital

     55,358        55,307   

Retained earnings (deficit)

     (1,670     (3,157

Accumulated other comprehensive income (loss)

     828        (350
  

 

 

   

 

 

 

Total shareholders’ equity

     54,575        51,859   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 615,264      $ 651,833   
  

 

 

   

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

3.


Table of Contents

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
  

 

 

   

 

 

 

Interest and dividend income

        

Loans, including fees

   $ 7,587      $ 5,528      $ 14,846      $ 11,112   

Taxable securities

     298        123        509        238   

Tax-exempt securities

     205        100        447        203   

Federal funds sold and other

     15        (2     43        (9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     8,105        5,749        15,845        11,544   

Interest expense

        

Deposits

     1,452        1,788        2,970        3,562   

Federal Reserve and other borrowings

     40        --        69        1   

FHLB advances

     105        242        202        497   

Subordinated debt

     223        192        443        382   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     1,820        2,222        3,684        4,442   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     6,285        3,527        12,161        7,102   

Provision for loan losses

     1,109        1,920        3,038        4,295   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     5,176        1,607        9,123        2,807   

Noninterest income

        

Service charges on deposit accounts

     216        124        451        263   

Other income

     188        162        349        271   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest income

     404        286        800        534   

Noninterest expense

        

Salaries and employee benefits

     1,877        1,281        3,585        2,518   

Occupancy and equipment

     616        412        1,276        818   

Regulatory assessment

     314        251        636        511   

Data processing

     371        250        769        495   

Merger related costs

     105        353        130        353   

Advertising and business development

     109        132        207        218   

Professional fees

     152        169        350        330   

Telephone expense

     89        34        165        66   

Other real estate owned expense

     361        379        613        844   

Other

     657        182        1,170        376   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total noninterest expense

     4,651        3,443        8,901        6,529   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     929        (1,550     1,022        (3,188

Income tax benefit

     (119     (558     (465     (1,208
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 1,048      $ (992   $ 1,487      $ (1,980
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average:

        

Common shares

     5,889,288        1,749,443        5,889,050        1,749,140   

Dilutive stock options and warrants

     1,742        --        1,534        --   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dilutive shares

     5,891,030        1,749,443        5,890,584        1,749,140   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per common share

   $ .18      $ (.57   $ .25      $ (1.13
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per common share

   $ .18      $ (.57   $ .25      $ (1.13
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

4.


Table of Contents

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)

 

 

 

     Common Stock      Additional      Retained           Accumulated Other        
     Outstanding      Paid-In      Earnings     Treasury Stock     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

             (1,980         (1,980

Change in unrealized gain on securities available-for-sale, net of tax effects

                 88        88   

Net unrealized loss on cash flow hedge, net of tax effects

                 (383     (383
                

 

 

 

Total comprehensive loss

                   (2,275

Purchase of treasury stock

     (1,817             (20       (20

Issuance of treasury stock

     1,050              (1     11          10   

Common stock issued

     911        1                  1   

Share-based compensation expense

          47               47   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2010

     1,749,387      $ 18       $ 18,678       $ 6,306      $ (12   $ 41      $ 25,031   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2011

     5,888,809      $ 59       $ 55,307       $ (3,157   $ --      $ (350   $ 51,859   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income:

                

Net income

             1,487            1,487   

Change in unrealized gain on securities available-for-sale, net of tax effects

                 1,250        1,250   

Net unrealized loss on cash flow hedge, net of tax effects

                 (72     (72
                

 

 

 

Total comprehensive income

                   2,665   

  Common stock issued

     1,013        0                  0   

Share-based compensation expense

          51               51   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

     5,889,822      $ 59       $ 55,358       $ (1,670   $ --      $ 828      $ 54,575   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

5.


Table of Contents

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

    

Six Months Ended

June 30,

 
     2011     2010  

Cash flows from operating activities

    

Net income (loss)

   $ 1,487      $ (1,980

Adjustments to reconcile net income (loss) to net cash from operating activities:

    

Depreciation and amortization

     319        211   

Net amortization of deferred loan fees

     (76     (58

Provision for loan losses

     3,038        4,295   

Net amortization (accretion) of securities

     387        (174

Net realized gain on sale of securities

     (57     --   

Net accretion of purchase accounting adjustments

     (1,526     --   

Net (gain) loss on sale of real estate owned

     (8     41   

Loss on write-down of real estate owned

     370        486   

Earnings on Bank-owned life insurance

     (97     (129

Loss on disposal of premises and equipment

     26        3   

Share-based compensation

     51        58   

Deferred income tax benefit

     (1,689     (537

Net change in accrued interest receivable and other assets

     903        (134

Net change in accrued expenses and other liabilities

     (276     (780
  

 

 

   

 

 

 

Net cash from operating activities

     2,852        1,302   

Cash flows from investing activities

    

Purchases of securities available-for-sale

     (9,690     (7,239

Proceeds from sale of securities available-for-sale

     4,599        --   

Proceeds from maturities, calls and paydown of securities available-for-sale

     5,326        4,277   

Proceeds from bulk loan sale

     13,910        --   

Loan (originations) payments, net

     23,409        3,389   

Proceeds from sale of real estate owned

     2,638        17   

Net change in Federal Home Loan Bank stock

     668        --   

Additions to premises and equipment, net

     (136     (78
  

 

 

   

 

 

 

Net cash from investing activities

     40,724        366   

Cash flows from financing activities

    

Net change in deposits

     (40,760     21,063   

Net change in Fed funds purchased

     --        (227

Proceeds from related party transactions

     1,200        --   

Repayment of fixed rate FHLB advances

     --        (5,000

Purchase of treasury stock

     --        (20
  

 

 

   

 

 

 

Net cash (used for) from financing activities

     (39,560     15,816   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     4,016        17,484   

Cash and cash equivalents at beginning of period

     20,297        5,647   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 24,313      $ 23,131   
  

 

 

   

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

6.


Table of Contents

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

   $ 4,238       $ 4,456   

Income taxes

     610         --   

Supplemental schedule of noncash investing activities

     

Acquisition of real estate owned

   $ 440       $ 2,622   

Supplemental schedule of noncash financing activities

     

Loan participation on agreements classified as secured borrowings

   $ 693       $ --   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

7.


Table of Contents

JACKSONVILLE BANCORP, INC.

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 Bank’s 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 Company’s 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 Company’s 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 June 30, 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 Company’s December 31, 2010 audited consolidated financial statements.

 

 

 

 

 

8.


Table of Contents

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)

 

Adoption of New Accounting Standards

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 creditor’s 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.

In May 2011, the FASB completed their amendments to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs and issued a final standard. Many of the changes in the U.S. final standard represent clarifications to existing guidance. However, certain of the amendments could result in significant changes in practice. Such amendments include how and when the valuation premise of highest and best use applies, the application of premiums and discounts, as well as new required disclosures. The provisions of these amendments are effective for financial statements issued for interim and annual periods beginning after December 15, 2011. The Company has not determined the impact, if any, upon the adoption of the standard.

In June 2011, the FASB issued a final standard requiring entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in shareholders’ equity is eliminated. The provisions of this new standard are effective for financial statements issued for interim and annual periods beginning after December 15, 2011 with early adoption permitted and full retrospective application required. We do not expect the adoption of this standard to have a material effect on our consolidated financial statements.

 

 

 

 

 

9.


Table of Contents

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 June 30, 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)

          

June 30, 2011

          

Available-for-sale

          

U.S. government-sponsored entities and agencies

   $ --       $ --       $ --      $ --   

State and political subdivisions

     17,363         641         (41     17,963   

Mortgage-backed securities – residential

     35,003         977         --        35,980   

Collateralized mortgage obligations – residential

     9,560         293         --        9,853   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 61,926       $ 1,911       $ (41   $     63,796   
  

 

 

    

 

 

    

 

 

   

 

 

 
     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 securities – residential

     33,545         355         (302     33,598   

Collateralized mortgage obligations – residential

     5,363         61         --        5,424   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

   $ 62,492       $ 624       $ (760   $ 62,356   
  

 

 

    

 

 

    

 

 

   

 

 

 

The proceeds from sales of available-for-sale securities and the associated gains and losses are listed below:

 

     June 30, 2011     December 31, 2010  

Gross gains

   $ 86      $ --     

Gross losses

     (29     --     
  

 

 

   

 

 

 

Net gain

   $ 57      $ --     
  

 

 

   

 

 

 

Proceeds

   $ 4,599      $ --     
  

 

 

   

 

 

 

 

 

 

 

 

10.


Table of Contents

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.

 

Amortized Amortized
     June 30, 2011  
     Amortized
Cost
     Fair
Value
 

Maturity

     

Available-for-sale

     

Within one year

   $ --       $ --   

One to five years

     205         218   

Five to ten years

     4,050         4,139   

Beyond ten years

     13,108         13,606   

Mortgage-backed securities

     35,003         35,980   

Collateralized mortgage obligations

     9,560         9,853   
  

 

 

    

 

 

 

Total

   $ 61,926       $ 63,796   
  

 

 

    

 

 

 

The following table summarizes the investment securities with unrealized losses at June 30, 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)

                

June 30, 2011

                

Available-for-sale

                

U.S. government-sponsored entities and agencies

   $ --       $ --      $ --       $ --       $ --       $ --   

State and political subdivisions

     1,412         (41     --         --         1,412         (41

Mortgage-backed securities – residential

     --         --        --         --         --         --   

Collateralized mortgage obligations – residential

     --         --        --         --         --         --   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 1,412       $ (41   $ --       $ --       $ 1,412       $ (41
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

 

11.


Table of Contents

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

   $ --       $ --      $ --       $ --       $ --       $ --   

State and political subdivisions

     14,225         (458     --         --         14,225         (458

Mortgage-backed securities – residential

     22,793         (302     --         --         22,793         (302

Collateralized mortgage obligations – residential

     --         --        --         --         --         --   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

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 Bank’s 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 investment’s 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 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.

 

 

 

 

 

12.


Table of Contents

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)

 

As of June 30, 2011, the Company’s security portfolio consisted of $63,796 of available-for-sale securities, of which $1,412 was in an unrealized loss position. The unrealized losses are related to the Company’s U.S. State and Political Securities as discussed below:

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 June 30, 2011 was primarily attributable to changes in interest rates rather than the ability or willingness of the municipality to repay.

For the six-month period ended June 30, 2011, there were no credit losses recognized in earnings.

 

 

 

 

 

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

(Dollar amounts in thousands except per share data)

Loans at June 30, 2011 and December 31, 2010, excluding loans classified as held-for-sale, were as follows:

     2011     2010  

Commercial

   $ 34,696      $ 35,976   

Real estate:

    

Residential

     123,078        136,771   

Commercial

     271,330        282,468   

Construction and land

     51,708        52,808   

Consumer

     4,922        5,110   
  

 

 

   

 

 

 

Subtotal

     485,734        513,133   

Less: Net deferred loan fees

     (292     (368

Allowance for loan losses

     (11,993     (13,069
  

 

 

   

 

 

 

Loans, net

   $     473,449      $     499,696   
  

 

 

   

 

 

 

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 June 30, 2011. The discount will be accreted into interest income as deemed appropriate over the remaining term of the related loans:

 

    

Gross Contractual
Amount Receivable

  

Carrying
Discount

  

Balance

Commercial

     $ 8,754        $ 634        $ 8,120  

Real estate:

              

Residential

       48,595          5,247          43,348  

Commercial

       71,159          7,030          64,129  

Construction and land

       26,653          4,320          22,333  

Consumer

       2,456          153          2,303  
    

 

 

      

 

 

      

 

 

 

Total

     $   157,617        $     17,384        $     140,233  
    

 

 

      

 

 

      

 

 

 

As of June 30, 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 six-month period ended June 30, 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   
  

 

 

 

 

 

 

 

 

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 by portfolio segment for the three and six months ended June 30, 2011 was as follows:

 

     Three Months      Six Months  
    

Ended

    

Ended

 

Allowance at beginning of period

   $     11,331       $  13,069   

Charge-offs:

     

Commercial loans

     99         81   

Real estate loans

     309         4,089   

Consumer and other loans

     198         210   
  

 

 

    

 

 

 

Total Charge-offs

     606         4,380   
  

 

 

    

 

 

 

Recoveries:

     

Commercial loans

     12         13   

Real estate loans

     145         250   

Consumer and other loans

     2         3   
  

 

 

    

 

 

 

Total Recoveries

     159         266   
  

 

 

    

 

 

 

Net charge-offs

     447         4,114   
  

 

 

    

 

 

 

Provision for loan losses charged to operating expenses:

     

Commercial loans

     164         91   

Real estate loans

     782         2,685   

Consumer and other loans

     163         262   
  

 

 

    

 

 

 

Total provision

     1,109         3,038   
  

 

 

    

 

 

 

Allowance at end of period

   $ 11,993       $ 11,993   
  

 

 

    

 

 

 

Activity in the allowance for loan losses for the three and six months ended June 30, 2010 was as follows:

 

     Three Months     Six Months  
    

Ended

   

Ended

 

Beginning balance

   $ 7,618      $    6,854   

Provision for loan losses

     1,920        4,295   

Loans charged off

     (1,332     (2,962

Recoveries

     42        61   
  

 

 

   

 

 

 

Ending balance

   $     8,248      $ 8,248   
  

 

 

   

 

 

 

 

 

 

 

 

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 Bancorp’s 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 prior to advancing funds. 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 borrower’s 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 June 30, 2011 and December 31, 2010:

 

          June 30, 2011     
    

Commercial

  

Real Estate

  

Consumer
and Other

  

Total

Allowance for loan losses:

                   

Ending allowance balance attributable to loans:

                   

Individually evaluated for impairment

     $ --        $ 5,221        $ --        $ 5,221  

Collectively evaluated for impairment

       503          6,160          109          6,772  

Loans acquired with deteriorated credit quality

       --          --          --          --  

Loans acquired without deteriorated credit quality

       --          --          --          --  
    

 

 

      

 

 

      

 

 

      

 

 

 

Total ending allowance balance

     $ 503        $ 11,381        $ 109        $ 11,993  
    

 

 

      

 

 

      

 

 

      

 

 

 

Loans:

                   

Loans individually evaluated for impairment

     $ --        $ 40,087        $ 2        $ 40,089  

Loans collectively evaluated for impairment

       26,575          276,221          2,616          305,412  

Loans acquired with deteriorated credit quality

       756          46,321          55          47,132  

Loans acquired without deteriorated credit quality

       7,365          83,487          2,249          93,101  
    

 

 

      

 

 

      

 

 

      

 

 

 

Total ending loans balance

     $   34,696        $ 446,116        $   4,922        $ 485,734  
    

 

 

      

 

 

      

 

 

      

 

 

 
          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 June 30, 2011 and December 31, 2010:

 

    

June 30, 2011

 
    

Unpaid

Principal

Balance

    

Recorded

Investment

    

Allowance for

Loan Losses

Allocated

 

With no related allowance recorded:

        

Real estate – residential

   $ 11,297       $ 10,753       $ --   

Real estate – commercial

     5,587         5,322         --   

Real estate – construction and land

     1,439         1,078         --   

Consumer and other

     2         2         --   

With an allowance recorded:

        

Real estate – residential

     695         516         59   

Real estate – commercial

     10,869         10,796         2,356   

Real estate – construction and land

     11,622         11,622         2,806   

Consumer and other

     --         --         --   
  

 

 

    

 

 

    

 

 

 

Total

   $ 41,511       $ 40,089       $ 5,221   
  

 

 

    

 

 

    

 

 

 
    

December 31, 2010

 
    

Unpaid

Principal

Balance

    

Recorded

Investment

    

Allowance for

Loan Losses

Allocated

 

With no related allowance recorded:

        

Real estate – residential

   $ 10,635       $ 10,635         $ --   

Real estate – commercial

     5,225         5,212         --   

Real estate – construction and land

     890         890         --   

With an allowance recorded:

        

Real estate – residential

     5,409         5,359         1,135   

Real estate – commercial

     12,318         12,279         2,527   

Real estate – construction and land

     12,097         12,097         2,722   

Consumer and other

     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:

 

    

June 30, 2011

 
    

Nonaccrual

    

Loans Past Due
Over 90 Days
Still on Accrual

 

Commercial

   $ 76       $ --   

Real estate mortgage loans:

     

Commercial

     15,180         --   

Residential

     11,585         --   

Construction and land

     12,661         --   

Consumer

     40         --   
  

 

 

    

 

 

 

Total

   $ 39,542       $ --   
  

 

 

    

 

 

 
     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 June 30, 2011 and December 31, 2010, the amounts totaled $9,787 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:

 

             

June 30, 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

    $ 7        $ 8        $ 44        $ 59        $ 34,636        $ 34,695  

Real estate:

                            

Residential

      1,007          1,311          12,309          14,627          108,451          123,078  

Commercial

      1,680          3,034          11,015          15,729          255,601          271,330  

Construction and land

      4,357          2,544          12,661          19,562          32,147          51,709  

Consumer

      29          87          34          150          4,772          4,922  
   

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

    $     7,080        $ 6,984        $ 36,063        $   50,127        $     435,607        $     485,734  
   

 

 

      

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 
             

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 June 30, 2011 and December 31, 2010, the amounts are as follows:

 

     June 30,
2011
     December 31,
2010
 

30-59 Days Past Due

   $ 2,630       $ 1,927   

60-89 Days Past Due

     6,010         2,113   

Greater than 90 Days Past Due

     9,254         2,495   
  

 

 

    

 

 

 

Total

   $     17,894       $ 6,535   
  

 

 

    

 

 

 

Troubled Debt Restructurings

As of June 30, 2011, $6,486 of net loans were considered troubled debt restructurings. The Company has allocated $194 and $374 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2011 and December 31, 2010, respectively. The Company has not committed to lend additional amounts as of June 30, 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 management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard.    Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful.    Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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 June 30, 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

     $ 28,994        $ 2,139        $ 3,563        $     --        $ 34,696  

Real estate:

                        

Residential

       92,931          12,291          17,857          --          123,079  

Commercial

       198,136          41,822          31,372          --          271,330  

Construction and land

       22,637          6,067          23,004          --          51,708  

Consumer

       4,561          326          34          --          4,921  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total

     $  347,259        $ 62,645        $ 75,830        $     --        $ 485,734  
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

 

 

 

 

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 June 30, 2011 and December 31, 2010, the amounts are as follows:

 

     June 30,
2011
     December 31,
2010
 

Special Mention

   $ 15,175       $ 35,550   

Substandard

     26,835         14,324   

Doubtful

     --         325   
  

 

 

    

 

 

 

Total

   $   42,010       $ 50,199   

 

 

 

 

 

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)

 

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, are as follows as of June 30, 2011 and December 31, 2010:

 

    

June 30,

2011

    

December 31,

2010

 

Commercial

   $ 756       $ 1,199   

Real estate mortgage loans:

     

Residential

     13,243         13,348   

Commercial

     17,889         21,321   

Construction and land

     15,189         16,224   

Consumer

     55         39   
  

 

 

    

 

 

 

Carrying amount

   $   47,132       $ 52,131   
  

 

 

    

 

 

 

The amounts reported in the table above are net of the fair value adjustments recorded on the date of acquisition. The amount of discount to principal balances remaining from these fair value adjustments was $11,330 as of June 30, 2011. This discount will be accreted into interest income over the remaining term of the related loans.

Accretable yield, or income expected to be collected, is as follows:

 

Balance at December 31, 2010

   $   33,910   

New loans purchased, including loans classified as held-for-sale

     --   

Accretion of income

     (2,069

Reclassifications from nonaccretable difference

     --   

Disposals

     --   
  

 

 

 

Balance at June 30, 2011

   $   31,841   
  

 

 

 

 

 

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 $9,451 at June 30, 2011 and are included in our nonaccrual loan balance as of June 30, 2011.

 

 

 

 

 

23.


Table of Contents

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

NOTE 4 – GOODWILL

(Dollar amounts in thousands except share data)

A rollforward of goodwill as of June 30, 2011 and December 31, 2010 is as follows:

 

    

June 30,

2011

  

December 31,

2010

Beginning of period

     $   12,498        $ --  

Additions: Goodwill related to acquisition of ABI

       1,712          12,498  

Impairment

       --          --  
    

 

 

      

 

 

 

End of period

     $   14,210        $     12,498  
    

 

 

      

 

 

 

The additions to goodwill during the six-month period ended June 30, 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.

 

 

 

 

 

24.


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 June 30, 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%

     8,057         8,124   

Advances maturing May 29, 2012 at a fixed rate of 2.11%

     5,000         5,000   
     $   18,057       $   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 Company’s first mortgage loans, second mortgage loans and commercial real estate loans. Based upon this collateral and the Company’s holdings of FHLB stock, the Company is eligible to borrow up to a total of $45,105 at June 30, 2011.

The Company has a “Borrower in Custody” line of credit with the Federal Reserve by pledging collateral. The amount of this line at June 30, 2011 was $30,976, all of which was available on that date.

Also included in FHLB Advances and other borrowings on the Company’s consolidated balance sheet at June 30, 2011 was $693 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 Company’s 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 $541 on June 30, 2011.

Credit risk may result from the inability of the counterparties to meet the terms of their contracts. The Company’s exposure is limited to the replacement value of the contracts rather than the notional amount.

 

 

 

 

 

25.


Table of Contents

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 June 30, 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

June 30, 2011

           

Total capital to risk weighted assets

           

Consolidated

  $    53,334   10.84%   $ 39,374   8.00%   N/A     N/A  

Bank

      54,058   11.00%    39,321   8.00%   $ 49,151   10.00%

Tier 1 (Core) capital to risk weighted assets

           

Consolidated

  44,295   9.00%   19,687   4.00%   N/A     N/A  

Bank

  47,842   9.73%   19,660   4.00%   29,491   6.00%

Tier 1 (Core) capital to average assets

           

Consolidated

  44,295   7.50%   23,630   4.00%   N/A     N/A  

Bank

  47,842   8.09%   23,668   4.00%   29,585   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%

 

 

 

 

 

26.


Table of Contents

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 company’s 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. 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.

 

 

 

 

 

27.


Table of Contents

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)

       

June 30, 2011

       

Available-for-sale

       

U.S. government-sponsored entities and agencies

  $           --        --     $          --              --

State and political subdivisions

    17,963        --     17,963              --

Mortgage-backed securities - residential

    35,980        --     35,980              --

Collateralized mortgage obligations - residential

    9,853        --     9,853              --

Liabilities:

       

Derivative liability

    541        --     541              --

(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.

 

 

 

 

 

28.


Table of Contents

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)

June 30, 2011

               

Impaired loans:

               

Real estate mortgage loans:

               

Residential

    $ 456         --         --       $ 456  

Commercial

      7,646         --         --         7,646  

Construction and land

      4,714         --         --         4,714  

Other real estate owned:

               

Real estate mortgage loans:

               

Residential

      309         --         --         309  

Commercial

      977         --         --         977  

Construction and land

      1,886         --         --         1,886  

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 $17,843 with a valuation allowance of $5,027 at June 30, 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 $3,172, made up of the outstanding balance of $3,930, net of a valuation allowance of $758, resulting in a write-down of $196 for the period ending June 30, 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.

 

 

 

 

 

29.


Table of Contents

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 carrying amount and estimated fair values of financial instruments at June 30, 2011 and December 31, 2010 were as follows:

 

     June 30, 2011    December 31, 2010
     Carrying    Fair    Carrying    Fair
     Amount    Value    Amount    Value

Financial assets

           

Cash and cash equivalents

   $    24,313    $    24,313    $    20,297    $    20,297

Securities available-for-sale

   63,796    63,796    62,356    62,356

Loans held-for-sale

   --    --    13,910    13,910

Loans, net

   473,449   

482,529

   499,696    511,300

Federal Home Loan Bank stock

   3,060    n/a    3,728    n/a

Non-marketable equity security

   178    n/a    178    n/a

Accrued interest receivable

   2,795    2,795    3,170    3,170
     June 30, 2011    December 31, 2010
     Carrying    Fair    Carrying    Fair
     Amount    Value    Amount    Value

Financial liabilities

           

Deposits

   $  521,233    $  512,789    $  562,187    $  551,061

Other borrowings

   20,750   

21,109

   18,924    19,546

Subordinated debentures

   15,994    6,928    15,962    6,839

Accrued interest payable

   274    274    599    599

Interest rate swap

   541    541    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.

 

 

 

 

 

30.


Table of Contents

JACKSONVILLE BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

Item 2.    Management’s 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, legal and 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 Atlantic BancGroup, Inc. (“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 Reserve’s 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 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 ABI’s 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 initially 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 half of 2011 versus five full-service branches during the first half of 2010.

On February 11, 2011, as a result of the Company’s 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 Company’s consolidated balance sheet as of December 31, 2010 and through the date of the sale at their fair value.

On June 23, 2011, Gilbert J. Pomar, III delivered to Bancorp a Notice of Termination under his employment agreement with the Bank dated May 13, 2009. Accordingly, Mr. Pomar no longer serves as the Bank’s President and Chief Executive Officer or as President of the Company effective as of June 23, 2011. Under the Company’s plan of succession, Price W. Schwenck, the Company’s Chief Executive Officer, assumed the position of President and Chief Executive Officer of the Bank and the Company.

Introduction

On the following pages, management presents an analysis of the financial condition of the Company as of June 30, 2011 compared to December 31, 2010, and the results of operations for the three and six months ended June 30, 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 June 30, 2011 and December 31, 2010

Total assets decreased $36.5 million, or 5.6%, from $651.8 million at December 31, 2010 to $615.3 million at June 30, 2011. As the primary driver of the decrease in assets, the Company experienced a significant net loan decrease, including loans classified as held-for-sale, of $40.2 million, or 7.8% during the six months ended June 30, 2011. This decrease includes loans classified as held-for-sale at December 31, 2010 of $13.9 million that were sold during the first quarter of 2011. The remaining loan decreases are driven by commercial real estate, which decreased by $11.1 million, or 3.9%, residential real estate decreased by $13.7 million, or 10.0%, construction and land real estate decreased by $1.1 million, or 2.1%, commercial loans decreased by $1.3 million, or 3.6%, and consumer loans decreased by $188,000, or 3.7%, offset by a decrease in the allowance for loan losses of $1.1 million from December 31, 2010 to June 30, 2011.

Total cash and cash equivalents increased by $4.0 million, or 19.7%, from $20.3 million at December 31, 2010 to $24.3 million at June 30, 2011. Investment securities available-for-sale increased $1.4 million to $63.8 million at June 30, 2011. During the six months ended June 30, 2011, we purchased $9.5 million GNMA securities. In addition, we received $5.3 million in proceeds from maturities, calls and principal repayments and $4.6 million in proceeds from the sale of state and political securities.

Total deposits decreased $41.0 million, or 7.3%, from $562.2 million at December 31, 2010 to $521.2 million at June 30, 2011. During the six months ended June 30, 2011, noninterest bearing deposits increased $10.0 million, or 13.8%, from $72.4 million at December 31, 2010 to $82.4 million at June 30, 2011, money market, NOW and savings deposits decreased $7.8 million, or 4.0%, from $211.1 million at December 31, 2010 to $203.3 million at June 30, 2011 and time deposits decreased $43.1 million, or 15.5%, from $278.7 million at December 31, 2010 to $235.6 million at June 30, 2011. The decrease in time deposits was driven primarily by a reduction in national and brokered CD’s of $23.4 million and a decrease in local CD’s of $19.5 million. It is the Company’s current strategy to maintain our brokered CD’s at their current level and allow our more expensive national CD’s to run-off or reprice at our current local rates as they mature.

Federal Home Loan Bank advances remained materially unchanged at June 30, 2011 from December 31, 2010. Loans from related parties increased $1.2 million from $800,000 at December 31, 2010 to $2.0 million during the six months ended June 30, 2011.

Total shareholders’ equity increased by $2.7 million from $51.9 million at December 31, 2010 to $54.6 million at June 30, 2011. The increase is mainly attributable to net income of $1.5 million, and a net increase of $1.2 million for an unrealized gain on securities and our cash flow hedge for the six months ended June 30, 2011. At June 30, 2011, the Company had 8,000,000 authorized shares of $.01 par value common stock, of which 5,889,822 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 June 30, 2011.

Comparison of Operating Results for the Six Months Ended June 30, 2011 and 2010

Net Income

The Company had net income for the first six months of 2011 of $1.5 million, compared to a $2.0 million net loss in the first six months of 2010. On a diluted per share basis, net income was $0.25 for the six months ended June 30, 2011, compared to a net loss of $1.13 per diluted share in for the same period in 2010. The increase in net income for the first six 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, and a decrease in interest expense for deposits and FHLB advances.

 

 

 

 

 

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Net Interest Income

Net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities, was $12.2 million for the six months ended June 30, 2011, compared to $7.1 million for the same period in 2010. The average yield on interest-earning assets for the first six months of 2011 was 5.54%, which was an increase of 12 basis points, compared to the 5.42% yield earned during the first six months of 2010. This was driven by the average earning asset increase of $147.1 million and the yield on these assets. Interest income increased $4.3 million when compared to the first six months of the prior year. The increase in the average earning assets was due to the merger with ABI. Further, loans acquired in the merger with ABI had a yield that was higher than the contractual rate of interest as a result of purchase accounting adjustments. This resulted in additional interest income of approximately $1.6 million for the six months ended June 30, 2011.

The average loan balances increased $115.8 million for the six months ended June 30, 2011 compared to the same period in the prior year largely as a result of the merger with ABI in November 2010. The average yield on loans for the first six months of 2011 was 5.92%, which was an increase of 17 basis points, compared to the 5.75% yield earned during the first six months of 2010.

The average cost of interest-bearing liabilities decreased 84 basis points from 2.35% in the first six months of 2010 to 1.51% 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 such as national CD’s. As previously noted, it is the Company’s current strategy to allow our more expensive national CD’s to run-off or reprice at our current local rates as they mature.

The net interest margin increased by 92 basis points from 3.33% to 4.25% when comparing the first six 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 from loans acquired from ABI adds approximately 56 basis points to the net interest margin for the six months ended June 30, 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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     Six Months Ended June 30,           
     2011    2010      
     Average             Average    Average              Average
    

Balance

    

Interest

         

Rate

        

Balance

    

Interest

        

Rate

     

(Dollars in thousands)

                          

Interest-earning assets:

                          

Loans (1)

   $ 505,286       $ 14,846            5.92      $ 389,508       $ 11,112           5.75  

Securities (2)

     65,918         956            2.92           26,339         441           3.38     

Other interest-earning assets (3)

     5,430         43            1.60           13,731         (9        (.13  
  

 

 

    

 

 

            

 

 

    

 

 

        

Total interest-earning assets

     576,634         15,845            5.54           429,578         11,544           5.42     
     

 

 

               

 

 

        

Noninterest-earning assets (4)

     46,343                    21,034             
  

 

 

               

 

 

           

Total assets

   $   622,977                  $ 450,612             
  

 

 

               

 

 

           

Interest-bearing liabilities:

                          

Savings deposits

   $ 12,565       $ 55            .88         $ 10,562       $ 68           1.30     

NOW deposits

     18,551         14            .15           5,955         6           .20     

Money market deposits

     172,980         864            1.01           99,871         752           1.52     

Time deposits

     247,334         2,037            1.66           225,372         2,736           2.45     

FHLB advances

     21,961         202            1.85           24,372         497           4.11     

Federal Reserve and other borrowings(8)

     1,602         69            8.69           398         1           .51     

Subordinated debt

     15,976         443            5.59           14,550         382           5.29     

Other interest-bearing liabilities (5)

     1,286         --            --           25         --           --     
  

 

 

    

 

 

            

 

 

    

 

 

        

Total interest-bearing liabilities

     492,255         3,684            1.51           381,105         4,442           2.35     
     

 

 

               

 

 

        

Noninterest-bearing liabilities

     77,967                    42,741             

Shareholders’ equity

     52,755                    26,766             
  

 

 

               

 

 

           

Total liabilities and shareholders’ equity

   $ 622,977                  $   450,612             
  

 

 

               

 

 

           

Net interest income

      $ 12,161                  $ 7,102          
     

 

 

               

 

 

        

Interest rate spread (6)

              4.03                3.07  
           

 

 

              

 

 

   

Net interest margin (7)

              4.25                3.33  
           

 

 

              

 

 

   

 

 

(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.

 

    

Six Months Ended June 30,

2011 Versus 2010 (1)

 
     Increase (decrease) due to changes in:  
    

Volume

   

Rate

   

Net
Change

 

(Dollars in thousands)

      

Interest income:

      

Loans

   $ 3,393      $ 341      $ 3,734   

Securities

     581        (66     515   

Other interest-earning assets

     2        50        52   
  

 

 

   

 

 

   

 

 

 

Total interest income

     3,976        325        4,301   
  

 

 

   

 

 

   

 

 

 

Interest expense:

      

Savings deposits

     11        (24     (13

NOW deposits

     10        (2     8   

Money market deposits

     424        (312     112   

Time deposits

     247        (946     (699

FHLB advances

     (45     (250     (295

Federal Reserve and other borrowings

     11        57        68   

Subordinated debt

     39        22        61   

Other interest-bearing liabilities

     --        --        --   
  

 

 

   

 

 

   

 

 

 

Total interest expense

     697        (1,455     (758
  

 

 

   

 

 

   

 

 

 

Increase in net interest income

   $ 3,279      $ 1,780      $ 5,059   
  

 

 

   

 

 

   

 

 

 

 

 

  (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 Company’s financial condition and requires management’s 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 Company’s 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 Company’s credit exposure changes. To the extent actual loan losses differ materially from management’s 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 Company’s methodology and reporting of its critical accounting policies is included in the Company’s 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 Company’s ability to collect the outstanding loan principal and interest amounts and typically when such loans are more than 90 days past due. These loans present more than the normal risk that the Company will be unable to eventually collect or realize their full carrying value. The Company’s risk elements at June 30, 2011 and December 31, 2010, excluding loans classified as held-for-sale, were as follows:

 

     June 30,
2011
    December 31,
2010
 
     (Dollars in thousands)  

Nonperforming loans:

    

Commercial real estate

   $         15,180      $ 9,843   

Residential real estate

     11,585        14,215   

Construction and land real estate

     12,661        10,582   

Commercial

     76        371   

Consumer loans and other

     40        6   

Loans past due over 90 days still on accrual

     --        --   
  

 

 

   

 

 

 

Total nonperforming loans (1)

     39,542        35,017   

Foreclosed assets, net

     3,172        5,733   
  

 

 

   

 

 

 

Total nonperforming assets

     42,714        40,750   

Troubled debt restructuring

     6,486        7,497   
  

 

 

   

 

 

 

Total nonperforming assets and troubled debt restructuring

   $ 49,200      $ 48,247   
  

 

 

   

 

 

 

Allowance for loan losses

   $ 11,993      $ 13,069   

Nonperforming loans and foreclosed assets as a percent of total assets (2)

     6.94     6.25

Nonperforming loans as a percent of gross loans (2)

     8.15     6.83

Allowance for loan losses as a percent of nonperforming loans (2)

     30.33     37.32

 

 

 

 

 

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  (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 June 30, 2011.

  (2) 

Nonperforming loans and total loans exclude amounts classified as loans held-for-sale.

The Company has loan balances of $6.5 million for customers whose loans are classified as troubled debt restructuring and such loans are included in the impaired loan balances of $40.1 million at June 30, 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 $5.2 million allowance for loan losses reserved for impaired loans, the Company has allocated $194,000 to customers whose loan terms have been modified as a troubled debt restructuring.

Nonperforming loans increased during the six-month period ended June 30, 2011 from $35.0 million at December 31, 2010 to $39.5 million at June 30, 2011. Nonperforming assets increased by $2.0 million from December 31, 2010 to June 30, 2011. The increase in nonperforming assets at June 30, 2011 was principally a result of an increase in nonaccrual commercial and construction and land real estate loans offset by a decrease in nonaccrual residential real estate and the sale of approximately $2.6 million of OREO properties during the six-month period ended June 30, 2011. General economic conditions and the real estate market continue to be challenging in the Bank’s geographic market.

Loans past due still accruing interest at June 30, 2011, are categorized as follows:

(Dollars in thousands)

 

        

    30-59 Days    

Past Due

  

60-89 Days

Past Due

  

Greater than

90 Days Past

Due

  

Total Past

Due Still

Accruing

   
 

 

Commercial

       $ 7        $ 8        $ --        $ 15    

Real estate:

                       

Residential

         1,007          1,280          --          2,287    

Commercial

         1,680          1,889          --          3,569    

Construction and land

         4,357          2,544          --          6,901    

Consumer

         29          82          --          111    
      

 

 

      

 

 

      

 

 

      

 

 

   

Total

       $  7,080        $   5,803        $     --        $  12,883    
      

 

 

      

 

 

      

 

 

      

 

 

   

The increase in total loans past due 30-89 days still accruing interest from $12.5 million at December 31, 2010 to $12.9 million at June 30, 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 an increase in adversely classified loans from $65.0 million at December 31, 2010 to $75.8 million at June 30, 2011. Of the $75.8 million at June 30, 2011, $26.8 million were adversely classified loans from the merger with ABI. The $26.8 million adversely classified ABI loans is net of a fair value adjustment of $8.7 million or 24.2% of the gross contractual amount receivable as of June 30, 2011. In addition, of the $75.8 million at June 30, 2011, $38.7 million was 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 loan’s contractual terms. At June 30, 2011, impaired loans decreased by $6.4 million to $40.1 million, compared to $46.5 million at December 31, 2010. Of the $40.1 million impaired loans at June 30, 2011, $29.9 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 Bank’s board of directors.

Allowance and Provision for Loan Losses

The allowance for loan losses decreased by $1.1 million during the first six months of 2011, amounting to $12.0 million at June 30, 2011, as compared to $13.1 million at December 31, 2010. The allowance represented approximately 2.47% of total loans at June 30, 2011 and 2.55% at December 31, 2010.

 

June 30, 2011

  

(Dollars in thousands)

  

Allowance at beginning of period

   $ 13,069   

Charge-offs:

  

Commercial loans

     171   

Real estate loans

     3,999   

Consumer and other loans

     210   
  

 

 

 

Total Charge-offs

     4,380   
  

 

 

 

Recoveries:

  

Commercial loans

     13   

Real estate loans

     250   

Consumer and other loans

     3   
  

 

 

 

Total Recoveries

     266   
  

 

 

 

Net charge-offs

     4,114   
  

 

 

 

Provision for loan losses charged to operating expenses:

  

Commercial loans

     91   

Real estate loans

     2,685   

Consumer and other loans

     262   
  

 

 

 

Total provision

     3,038   
  

 

 

 

Allowance at end of period

   $  11,993   
  

 

 

 

During the first six months of 2010, the Company had charge-offs of $3.0 million, recoveries of $61,000 and recorded a $4.3 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 six months of 2011. The increased level of charge-offs for the six months ending June 30, 2011 is due to the ongoing deterioration of collateral values as a result of the current economic environment and the Company’s strategy to strengthen its balance sheet by lowering the amount of substandard assets through such avenues as short sales.

The Bank’s identification efforts of potential losses in the portfolio are based on a variety of specific factors, including the Company’s own experience as well as industry and economic trends. Impaired loans were $40.1 million as of June 30, 2011. As of the same date, $5.2 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 Company’s 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 loan’s existing rate or at the fair value of collateral if repayment is expected solely from the sale of the collateral.

It is the Bank’s 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 Bank’s 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, virtually all such adjustments to value are downward due to the overall reduction in real estate values over the last two years in the Bank’s market area.

Real estate values in the Bank’s 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 borrower’s 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 June 30, 2011, the allowance for loan loss is considered to be adequate to absorb probable incurred credit losses in the portfolio as of that date. As more fully discussed in the “Critical Accounting Policies” section of this Management’s 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 Company’s borrowers and the value of real estate collateral securing the Company’s mortgage loans.

Future provisions and charge-offs could also be affected by environmental impairment of properties securing the Company’s mortgage loans. Under the Company’s 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 $800,000 for the six months ended June 30, 2011 compared to $534,000 for the same period in 2010. This increase is driven largely by the increased volume of noninterest income transactions as a result of the merger with ABI. In addition, there was a small gain on the sale of state and political securities in the first half of 2011.

Noninterest expense was $8.9 million for the six months ended June 30, 2011, compared to $6.5 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 June 30, 2010 to eight as of June 30, 2011.

The income tax benefit for the six months ended June 30, 2011 was $465,000, compared to an income tax benefit of $1.2 million for the six months ended June 30, 2010. The tax benefit for the six months ended June 30, 2011 is the result of benefits derived from tax-free municipal bonds and tax-free income earned on the bank-owned life insurance policies. In addition, as a result of the merger with ABI, there is a significant limitation on the amount of net operating losses and net unrealized built-in losses that can be utilized by the Company. As a result, the Company recorded a valuation allowance of $10.5 million at December 31, 2010. This was substantially related to assets acquired through the merger with ABI as they are not “more likely than not” to be realized due to Section 382 of the Internal Revenue Code. During the six-month period ending June 30, 2011, a portion of the deferred tax assets attributable to ABI has been reduced and a corresponding adjustment to the valuation allowance was recorded.

Comparison of Operating Results for the Three Months Ended June 30, 2011 and 2010

Net income for the second quarter of 2011 was $1.0 million, or $.18 per diluted share, as compared to a net loss of $992,000, or $.57 per diluted share, for the same quarter last year. The increase in net income for the second quarter of 2011 as compared to the same period in 2010 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 of $1.9 million for the quarter ended June 30, 2010 to $1.1 million for the quarter ended June 30, 2011 as well as a decrease in interest expense for deposits and FHLB advances.

Net interest income was $6.3 million for the second quarter of 2011, compared to $3.5 million for the same period in 2010. Interest income for the quarter increased $2.4 million when compared to the same period in the prior year as a result of an increase in average earning assets of $133.8 million and the yield on these assets. The increase in the average earning assets was due to the merger with ABI. Further, loans acquired in the merger with ABI had a yield that was higher than the contractual rate of interest as a result of purchase accounting adjustments. This resulted in additional interest income of approximately $980,000 for the three months ended June 30, 2011. Interest expense declined by $402,000 as a result of the reduction in short-term rates and utilizing less expensive wholesale funding to support the Company’s earning asset growth.

The net interest margin improved 118 basis points to 4.45% for the quarter, compared to 3.27% for the comparable period in 2010. 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 69 basis points to the net interest margin for the three months ended June 30, 2011.

 

 

 

 

 

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Capital

The Company’s 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 Bank’s total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios were 11.00%, 9.73% and 8.09%, respectively, at June 30, 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.

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 Company’s 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 primarily to reduce borrowings and to purchase investment securities. During the first six months of 2011, the Company’s cash and cash equivalent position increased by $4.0 million. The primary driver of the net cash increase is due to $1.2 million in related party transactions as well as $2.7 million in net cash from operating activities.

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 June 30, 2011, the Company had $63.8 million in available-for-sale securities, $13.7 million of which was pledged to the Federal Reserve Bank for the Borrower in Custody Program.

The Company’s primary external sources of liquidity are customer deposits and borrowings from other commercial banks. The Company’s 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 $122.5 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. 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.

 

 

 

 

 

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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 Company’s overall level of these financial obligations since December 31, 2010 and that any changes in the Company’s 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 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 Company’s 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. These limits and guidelines reflect the Bank’s 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 Bank’s 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.

 

 

 

 

 

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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 Bank’s 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 Bank’s 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 management’s 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, Bancorp’s 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 SEC’s 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 Bancorp’s 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, Bancorp’s internal control over financial reporting.

(c) Limitations on the Effectiveness of Controls

Bancorp’s 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 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 management’s 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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PART II - OTHER INFORMATION

 

 

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 Company’s 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 Company’s 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. 10.3: Lease Agreement between The Jacksonville Bank and Baron San Pablo II, LLC dated April 12, 2011 (5)

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 Sarbanes–Oxley Act of 2002

Exhibit No. 101.INS: XBRL Instance Document* (6)

Exhibit No. 101.SCH: XBRL Schema Document* (6)

Exhibit No. 101.CAL: XBRL Calculation Linkbase Document* (6)

Exhibit No. 101.DEF: XBRL Definition Linkbase Document* (6)

Exhibit No. 101.LAB: XBRL Label Linkbase Document* (6)

Exhibit No. 101.PRE: XBRL Presentation Linkbase Document* (6)

 

  *

Included 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 No. 10.3 to the Form 10-Q for the quarter ended March 31, 2011, filed May 16, 2011, File No. 000-30248.

  (6)

These interactive data files will not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or otherwise subject to liability under those sections.

 

 

 

 

 

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JACKSONVILLE BANCORP, INC.

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: August 12, 2011

 

/s/ Price W. Schwenck

 

Price W. Schwenck

 

President and Chief Executive Officer

Date: August 12, 2011

 

/s/ Valerie A. Kendall

 

Valerie A. Kendall

 

Executive Vice President

 

and Chief Financial Officer

 

 

 

 

 

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JACKSONVILLE BANCORP, INC.

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. 10.3: Lease Agreement between The Jacksonville Bank and Baron San Pablo II, LLC dated April 12, 2011 (5)

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 Sarbanes–Oxley Act of 2002

Exhibit No. 101.INS: XBRL Instance Document* (6)

Exhibit No. 101.SCH: XBRL Schema Document* (6)

Exhibit No. 101.CAL: XBRL Calculation Linkbase Document* (6)

Exhibit No. 101.DEF: XBRL Definition Linkbase Document* (6)

Exhibit No. 101.LAB: XBRL Label Linkbase Document* (6)

Exhibit No. 101.PRE: XBRL Presentation Linkbase Document* (6)

 

  *

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 No. 10.3 to the Form 10-Q for the quarter ended March 31, 2011, filed May 16, 2011, File No. 000-30248.

  (6)

These interactive data files will not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or otherwise subject to liability under those sections.

 

 

 

 

 

48.