UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from __________ to ____________.
Commission file number 000-30248
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JACKSONVILLE BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Florida 59-3472981
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 North Laura Street, Suite 1000, Jacksonville, Florida 32202
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(Address of principal executive offices)
(904) 421-3040
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(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes | | No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes | | No |X|
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
|X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes | | No |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes | | No |X|
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (based upon the per share closing sale price of
$28.13 on June 30, 2005) was approximately $33,590,624 [as of the last business
day of registrant's most recently completed second quarter].
There were 1,721,009 shares of common stock as of March 1, 2006.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for the
2006 Annual Meeting of Shareholders are incorporated by reference in
Parts II and III of this Annual Report.
TABLE OF CONTENTS
Description Page
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PART I
Item 1. Description of Business......................................3
Forward-Looking Statements................................3
General...................................................3
Market Area and Competition...............................3
Deposits..................................................4
Loan Portfolio............................................5
Investments...............................................6
Employees.................................................6
Data Processing...........................................6
Regulation and Supervision................................6
Item 1A. Risk Factors.................................................8
Item 2. Description of Properties...................................12
Item 3. Legal Proceedings...........................................12
Item 4. Submission of Matters to a Vote of Security Holders.........13
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PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters......................................13
Item 6. Selected Financial Data.....................................14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................15
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk.....................................................32
Item 8. Financial Statements and Supplementary Data.................33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................34
Item 9A. Controls and Procedures.....................................34
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PART III
Item 10. Directors and Executive Officers............................35
Item 11. Executive Compensation......................................35
Item 12. Security Ownership of Certain Beneficial Owners and
Management...............................................35
Item 13. Certain Relationships and Related Transactions..............35
Item 14. Principal Accountant Fees and Services......................35
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PART IV
Item 15. Exhibits....................................................35
Signatures..................................................37
Notice Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains certain forward-looking statements.
Assumptions relating to forward-looking statements involve judgments with
respect to, among other things, future economic, competitive, and market
conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. When
used in this report, the words "estimate", "project", "anticipate", "intend",
"believe", "expect", and similar expressions, are intended to identify
forward-looking statements. Although we believe that assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate, and we may not realize the results contemplated by these statements.
Management decisions are subjective in many respects and susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause us to alter our business strategy or
capital expenditure plans and may, in turn, affect our results of operations. In
light of the significant uncertainties inherent in the forward-looking
information included in this report, you should not regard the inclusion of such
information as our representation that we will achieve any strategy, objectives,
or other plans. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
does not undertake any obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
PART I
Unless the context requires otherwise, references in this report to "the
Company," "we," "us," or "our" refer to Jacksonville Bancorp, Inc., its wholly
owned subsidiary, The Jacksonville Bank, and the Bank's wholly owned subsidiary,
Fountain Financial, Inc., on a consolidated basis. References to "Bancorp"
denote Jacksonville Bancorp, Inc.; The Jacksonville Bank is referred to as the
"Bank".
ITEM 1. DESCRIPTION OF BUSINESS
General
We were incorporated under the laws of the State of Florida on October
24, 1997 for the purpose of organizing the Bank. Bancorp is a one-bank holding
company owning 100% of the outstanding shares of the Bank. Our only business is
the ownership and operation of the Bank. The Bank is a Florida state-chartered
commercial bank, and its deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank opened for business on May 28, 1999 and currently
provides a variety of community banking services to businesses and individuals
through its four offices in Jacksonville, Duval County, Florida. The Bank will
open its fifth office in the second quarter of 2006.
We offer a variety of competitive commercial and retail banking services. In
order to compete with the financial institutions in the market, we use our
independent status to the fullest extent. This includes an emphasis on
specialized services for small business owners along with the professional and
personal relationships of our officers, directors and employees. Loan
participations are arranged for customers whose loan demands exceed legal
lending limits. Our product lines include personal and business online banking
and sweep accounts tied to Goldman Sachs proprietary funds, in addition to our
traditional banking products. In 2002, we began offering standard mortgage
products with various long-term fixed rate alternatives, pursuant to an
agreement with PHH Mortgage Services. Furthermore, through our subsidiary,
Fountain Financial, Inc., and our marketing agreement with New England Financial
(an affiliate of MetLife), we are able to meet the investment and insurance
needs of our customers.
Substantial consolidation of the Florida banking market has occurred since the
early 1980's. As more out-of-state bank holding companies enter the Florida
market, we believe that the number of depository institutions headquartered and
operating in Florida will continue to decline. Our marketing programs focus on
the advantages of local ownership and management, personal service and customer
relationships. Particular emphasis is placed on building personal face-to-face
relationships. Our management and business development teams have extensive
experience with individuals and companies within our targeted market segments in
the Jacksonville area. Based on our experience, we believe that we have been and
will continue to be effective in gaining market share.
Market Area and Competition
Our primary market area is all of Duval County (including primarily the
Southside, Arlington, Mandarin, Beaches and Downtown areas of Jacksonville).
Jacksonville is the largest city in the United States covering 841 square miles
and is a leading financial and insurance center. Jacksonville is home to the
Jacksonville Jaguars and is the corporate headquarters to a number of regional
and national companies. Duval County has a strong commercial and industrial
base, which has been steadily expanding in recent years.
3
Financial institutions primarily compete with one another for deposits. In turn,
a bank's deposit base directly affects such bank's loan activities and general
growth. Primary competitive factors include interest rates on deposits and
loans, service charges on deposit accounts, the availability of unique financial
services products, a high level of personal service, and personal relationships
between our officers and customers. We compete with financial institutions that
have greater resources, and that may be able to offer more services, unique
services, or possibly better terms to their customers. We believe, however, that
we will be able to continue to attract sufficient deposits to effectively
compete with other area financial institutions.
We are in competition with existing area financial institutions, including
commercial banks and savings institutions, insurance companies, consumer finance
companies, brokerage houses, mortgage banking companies, credit unions, and
other business entities which target traditional banking markets. We face
increased competition due to the GLB Act, discussed under Regulation and
Supervision, which allows insurance firms, securities firms, and other
non-traditional financial companies to provide traditional banking services. Due
to the growth of the Jacksonville area, it can be anticipated that significant
competition will continue from existing financial services providers, as well as
new entrants to the market.
Deposits
We offer a wide range of deposit accounts, including commercial and
retail checking, money market, individual retirement and statement savings
accounts, and certificates of deposit with fixed rates and a range of maturity
options. Our sources of deposits are primarily residents, businesses, and
employees of businesses within our market areas, obtained through personal
solicitation by our officers and directors, direct mail solicitation, and
advertisements published in the local media. We also have the ability to obtain
deposits from the "national CD market" as an additional source of funding. We
pay competitive interest rates on interest-bearing deposits. In addition, our
service charge schedule is competitive with other area financial institutions,
covering such matters as maintenance and per item processing fees on deposit
accounts and special handling charges. We are also part of the Star, Cirrus,
Presto and Plus ATM networks, and a member of VISA.
Lending Activities
Our board of directors has adopted certain policies and procedures to guide
individual loan officers in carrying out lending functions. The board of
directors has formed a Directors' Loan Committee and appointed six directors to
provide the following oversight:
o ensure compliance with loan policy, procedures and guidelines as
well as appropriate regulatory requirements;
o approve secured loans above an aggregate amount of $500,000 and
unsecured loans above an aggregate amount of $100,000 to any entity
and/or related interests;
o monitor overall loan quality through review of information relative
to all new loans;
o approve lending authority for individual officers;
o monitor our loan review systems; and
o review the adequacy of the loan loss reserve.
The board of directors realizes that occasionally loans need to be made which
fall outside the typical policy guidelines. Consequently, the Chief Executive
Officer and Senior Loan Officer have the authority to make certain policy
exceptions on secured loans up to $500,000. In addition, the Chief Executive
Officer and Senior Loan Officer have the authority to make certain policy
exceptions on unsecured loans up to $100,000 and $20,000, respectively. Policy
exceptions on secured and unsecured loans greater than $500,000 and $100,000,
respectively, must be approved by the Directors' Loan Committee, and the full
board of directors reviews reports of all loans and policy exceptions at its
regular meetings. Additionally, the Bank has an independent company that also
evaluates the quality of loans and determines if loans are originated in
accordance with the guidelines established by the board of directors.
We recognize that credit losses will be experienced and the risk of loss will
vary with, among other things, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a collateralized
loan, the quality of the collateral, as well as general economic conditions. We
intend to maintain an adequate allowance for loan losses based on, among other
things, industry standards, management's experience, historical loan loss
experience, evaluation of economic conditions, and regular reviews of
delinquencies and loan portfolio quality. We follow a conservative lending
policy, but one which permits prudent risks to assist businesses and consumers
primarily in our principal market areas. Interest rates vary depending on our
cost of funds, the loan maturity, the degree of risk, and other loan terms. As
appropriate, some interest rates are adjustable with fluctuations in the "prime"
rate. The long term loan-to-deposit ratio target is 85% to 90%. We believe this
range will allow us to meet the credit needs of customers while maintaining
adequate liquidity.
4
Loan Portfolio Composition
The composition of the Bank's loan portfolio at December 31, 2005 and 2004 is
indicated below, along with the growth from the prior year.
% Increase
Total Loans % of Total Total Loans % of Total (Decrease) from
December 31, Loans December 31, Loans December 31,
(dollars in thousands) 2005 2004 2004 to 2005
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Real estate mortgage loans:
Commercial $ 135,115 56.1% $ 113,761 59.9% 18.8%
Residential 57,985 24.7% 46,663 24.6% 24.3%
Construction(1) 20,245 10.2% 5,621 3.0% 260.2%
Farmland 900 0.4% 2,160 1.0% (58.3)%
Commercial loans 16,681 7.1% 15,855 8.3% 5.2%
Consumer loans 3,461 1.5% 6,013 3.2% (42.4)%
--------------- --------------- --------------- --------------- ---------------
TOTAL $ 234,387 100.0% $ 190,073 100.0% 23.3%
=============== =============== =============== =============== ===============
(1) Of the $20,245 construction loans at December 31, 2005, $18,832 are
permanent commercial real estate loans in the construction phase.
Our nonperforming loans as a percentage of gross loans decreased from 0.34% at
December 31, 2004 to 0.33% at December 31, 2005.
Commercial Loans
Commercial loans are primarily underwritten on the basis of the borrowers'
ability to service such debt from income. 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.
Commercial Real Estate
Commercial real estate loans are typically segmented into three categories:
owner occupied commercial properties, properties used by non-profit
organizations (i.e., churches and schools) and commercial properties leased to
third parties for investment purposes. Commercial real estate loans are secured
by the subject property and are underwritten based upon standards set forth in
the policy as approved by the Board of Directors. Such standards include, among
other factors, loan to value limits, cash flow coverage and general
creditworthiness of the obligors.
Residential
Residential real estate loans include loans secured by first or second mortgages
on one to four family residential properties. Loans in the residential real
estate portfolio are underwritten in accordance with policies set forth and
approved by the Board of Directors, including repayment capacity and source,
value of the underlying property, credit history and stability.
Other
Consumer loans are extended for various purposes, including purchases of
automobiles, recreational vehicles, and boats. We also offer home improvement
and second mortgage loans, home equity loans and lines of credit, personal
loans, and deposit account collateralized loans. 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.
Loan Referral Programs
Referred residential mortgage loans are underwritten and closed by a third party
lender. We are paid a fee for procuring these loans.
Additionally, during the third quarter of 2005, the Bank entered into a loan
referral agreement with a third party lender whereby we can offer an unsecured
line of credit up to $100,000 to small business customers. The product, which is
branded by The Jacksonville Bank, is underwritten and closed by the third party.
We are paid a fee for each referral in addition to participating in a revenue
sharing arrangement on outstanding balances. The program was kicked off in the
fourth quarter.
5
Investments
The primary objective of the investment portfolio is to develop a mixture of
investments with maturities and compositions so as to earn an acceptable rate of
return while meeting liquidity requirements. We invest primarily in obligations
guaranteed by the U.S. government and government-sponsored agencies. We also
enter into federal funds transactions through our principal correspondent banks.
Investments with maturities in excess of one year are generally readily salable
on the open market.
Employees
As of December 31, 2005, the Bank had 46 employees, 45 of whom were full time.
Except for certain officers of the Bank who presently serve as officers of the
Company, the Company does not have any employees. Management believes Company
relations have been good.
Data Processing
We currently have an agreement with Metavante Corporation, formerly known as M &
I Data Services, to provide our core processing and support certain customer
products and delivery systems. We believe that Metavante Corporation will
continue to be able to provide state of the art data processing and customer
service related processing at a competitive price to support our future growth.
Regulation and Supervision
We operate in a highly regulated environment, where statutes, regulations, and
administrative policies govern our business activities. We are supervised by,
examined by, and submit reports to, a number of regulatory agencies, including
the Federal Reserve Board, the FDIC, and the Florida Department of Financial
Services.
We are regulated by the Federal Reserve Board under the Federal Bank Holding
Company Act ("BHC Act"), which requires every bank holding company to obtain the
prior approval of the Federal Reserve Board before acquiring more than 5% of the
voting shares of any bank or all or substantially all of the assets of a bank,
and before merging or consolidating with another bank holding company. The
Federal Reserve Board, under its regulations and published policy statements,
has maintained that a bank holding company must serve as a source of financial
strength to its subsidiary bank(s). In adhering to the Federal Reserve Board
policy, Bancorp may be required to provide financial support for the Bank at a
time when, absent such policy, Bancorp may not otherwise deem it advisable to
provide such assistance.
At one time, a bank holding company was generally prohibited from acquiring
control of any company which was not a bank and from engaging in any business
other than the business of banking or managing and controlling banks. In April
1997, the Federal Reserve Board revised and expanded the list of permissible
non-banking activities in which a bank holding company could engage; however,
limitations continue to exist under certain laws and regulations. The
Gramm-Leach-Bliley Act ("GLB Act") repeals certain regulations pertaining to
bank holding companies and eliminates many of the previous prohibitions.
Specifically, Title I of the Gramm-Leach-Bliley Act repeals Sections 20 and 32
of the Glass-Steagall Act and is intended to facilitate affiliations among
banks, securities firms, insurance firms, and other financial companies. To
further this goal, the GLB Act amends Section 4 of the BHC Act to authorize bank
holding companies that qualify as "financial holding companies" to engage in
securities, insurance and other activities that are financial in nature or
incidental to a financial activity. The activities of bank holding companies
that are not financial holding companies continue to be limited to activities
authorized under the BHC Act, such as activities that the Federal Reserve Board
previously has determined to be closely related to banking and permissible for
bank holding companies.
With respect to expansion, we may establish branch offices anywhere within the
state of Florida with regulatory approval. We are also subject to the Florida
banking and usury laws limiting the amount of interest that can be charged when
making loans or other extensions of credit. In addition, the Bank, as a
subsidiary of Bancorp, is subject to restrictions under federal law in dealing
with Bancorp and other affiliates. These restrictions apply to extensions of
credit to an affiliate, investments in the securities of an affiliate, and the
purchase of assets from an affiliate.
While not its only source of income, the primary source of Bancorp's income is
expected to be dividends from the Bank. A Florida state-chartered commercial
bank may not pay cash dividends that would cause the bank's capital to fall
below the minimum amount required by federal or state law. Accordingly,
commercial banks may only pay dividends out of the total of current net profits
plus retained net profits of the preceding two years to the extent it deems
expedient, except as follows. No bank may pay a dividend at any time that the
total of net income for the current year when combined with retained net income
from the preceding two years produces a loss. The future ability of the Bank to
pay dividends to Bancorp will also depend in part on the FDIC capital
requirements in effect at such time and our ability to comply with such
requirements.
6
Loans and extensions of credit by all banks are subject to legal lending
limitations. Under state law, a state bank may generally grant unsecured loans
and extensions of credit in an amount up to 15% of its unimpaired capital and
surplus to any person. In addition, a state bank may grant additional loans and
extensions of credit to the same person of up to 10% of its unimpaired capital
and surplus, provided that the transactions are fully secured. This 10%
limitation is separate from, and in addition to, the 15% limitation for
unsecured loans. Loans and extensions of credit may exceed these general lending
limits only if they qualify under one of several exceptions.
We are subject to regulatory capital requirements imposed by the Federal Reserve
Board and the FDIC. Both the Federal Reserve Board and the FDIC have established
risk based capital guidelines for bank holding companies and banks which make
regulatory capital requirements more sensitive to differences in risk profiles
of various banking organizations. The capital adequacy guidelines issued by the
Federal Reserve Board are applied to bank holding companies on a consolidated
basis with the banks owned by the holding company. The FDIC's risk based capital
guidelines apply directly to state banks regardless of whether they are a
subsidiary of a bank holding company. Both agencies' requirements (which are
substantially similar) provide that banking organizations must have minimum
capital equivalent to 8% of risk weighted assets to be considered adequately
capitalized. The risk weights assigned to assets are based primarily on the
perceived levels of risk to capital. For example, securities with an
unconditional guarantee by the United States government are assigned the lowest
risk weighting. A risk weight of 50% is assigned to loans secured by
owner-occupied one-to-four family residential properties. The aggregate amount
of assets assigned to each risk category is multiplied by the risk weight
assigned to that category to determine the weighted values, which are added
together to determine total risk weighted assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
created and defined five capital categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized), which are used to determine the nature of any corrective
action the appropriate regulator may take in the event an institution reaches a
given level of undercapitalization. For example, an institution which becomes
undercapitalized must submit a capital restoration plan to the appropriate
regulator outlining the steps it will take to become adequately capitalized.
Upon approving the plan, the regulator will monitor the institution's
compliance. Before a capital restoration plan will be approved, an entity
controlling a bank (i.e., the holding company) must guarantee compliance with
the plan until the institution has been adequately capitalized for four
consecutive calendar quarters. The liability of the holding company is limited
to the lesser of 5% of the institution's total assets at the time it became
undercapitalized or the amount necessary to bring the institution into
compliance with all capital standards. Further, in the event of the bankruptcy
of the parent holding company, such guarantee would take priority over the
parent's general unsecured creditors. Undercapitalized institutions also will be
restricted from paying management fees, dividends, and other capital
distributions, will be subject to certain asset growth restrictions, and will be
required to obtain prior approval from the appropriate regulator to open new
branches or expand into new lines of business. As an institution drops to lower
capital levels, the extent of action to be taken by the appropriate regulator
increases, restricting the types of transactions in which the institution may
engage and ultimately providing for the appointment of a receiver for certain
institutions deemed to be critically undercapitalized.
The FDICIA also required each federal banking agency to prescribe, and the
Federal Reserve Board and the FDIC have adopted, for all insured depository
institutions and their holding companies, safety and soundness standards
relating to such items as: internal controls, information and audit systems,
asset quality, loan documentation, classified assets, credit underwriting,
interest-rate risk exposure, asset growth, earnings, compensation, fees and
benefits, valuation of publicly traded shares, and such other operational and
managerial standards as the agency deems appropriate. Finally, each federal
banking agency was required to prescribe standards for employment contracts and
other compensation arrangements with executive officers, employees, directors,
and principal shareholders of insured depository institutions that would
prohibit compensation and benefits and other arrangements that are excessive or
that could lead to a material financial loss. If an insured depository
institution or its holding company fails to meet any of the standards described
above, it will be required to submit to the appropriate federal banking agency a
plan specifying the steps that will be taken to cure the deficiency. If an
institution fails to submit an acceptable plan or fails to implement a plan, the
appropriate federal banking agency will require the institution or holding
company to correct the deficiency and, until corrected, may impose further
restrictions on the institution or holding company, including any of the
restrictions applicable under the prompt corrective action provisions of the
FDICIA. Both the capital standards and the safety and soundness standards that
the FDICIA implements were designed to bolster and protect the deposit insurance
fund.
In response to the directives issued under the FDICIA, the regulators have
adopted regulations which, among other things, prescribe the capital thresholds
for each of five established capital categories. The following table reflects
these capital thresholds:
7
Total Risk-Based Tier 1 Risk-Based Tier 1
Capital Ratio Capital Ratio Leverage Ratio
----------------- ----------------- -----------------
Well capitalized (1) 10% 6% 5%
Adequately capitalized (1) 8% 4% 4%(2)
Undercapitalized (3) Less than 8% Less than4% Less than 4%
Significantly undercapitalized Less than 6% Less than 3% Less than 3%
Critically undercapitalized -- -- Less than 2%
(1) An institution must meet all three minimums.
(2) 3% for composite 1 rated institutions, subject to appropriate federal
banking agency guidelines.
(3) An institution falls into this category if it is below the adequately
capitalized level for any of the three capital measures.
Under these capital categories, the Bank is classified as well capitalized. At
December 31, 2005, the Bank's total risk-based capital and Tier 1 risk-based
capital ratios were 10.17% and 9.25%, respectively. The Tier 1 leverage ratio
was 8.34% as of the same date.
Under federal law and regulations and subject to certain exceptions, the
addition or replacement of any director, or the employment, dismissal, or
reassignment of a senior executive officer at any time that the Bank is not in
compliance with applicable minimum capital requirements, or otherwise in a
troubled condition, or when the FDIC has determined that such prior notice is
appropriate, is subject to prior notice to, and potential disapproval by, the
FDIC.
Proposals to change the laws and regulations governing the banking industry are
frequently introduced in Congress, in the state legislatures and by the various
bank regulatory agencies. Accordingly, the scope of regulation and permissible
activities of Bancorp and the Bank are subject to change by future federal and
state legislation or regulation.
For Additional Information
We are required to comply with the informational requirements of the Exchange
Act and, accordingly, we file annual reports, quarterly reports, current
reports, proxy statements and other information with the SEC. You may read or
obtain a copy of these reports at the SEC's public reference room at 100 F.
Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on
the operation of the public reference room and their copy charges by calling the
SEC at 1-800-SEC-0330. The SEC maintains a website that contains registration
statements, reports, proxy information statements and other information
regarding registrants that file electronically with the SEC. The address of the
website is http://www.sec.gov.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a number of risks. Before making an
investment decision, you should carefully consider all of the risks. If any of
the events contemplated by the risk factors discussed below actually impact us,
our business, financial condition and results of operations could be materially
adversely affected. If this were to occur, the trading price of our common stock
could decline.
RISKS RELATED TO OUR BUSINESS
Since we commenced operations in 1999, we have had a relatively short history of
experiencing profits.
We rely on the profitability of the Bank to provide funding for our operations.
We can not assure you that we will consistently operate profitably in the
future. While we project that the Bank will be profitable in all future periods,
we are unable to assure you that we will earn profits as projected, that we will
be able to maintain profitability, or that the Bank will be able to consistently
fund our ongoing operations.
We are not certain that our capital will be adequate to continue to support the
current rate of growth.
Future capital requirements depend on many factors, including the ability to
successfully attract new customers and provide additional services, the timing
of opening new branch locations, and our profitability levels. If adequate
capital is not available, we will be subject to an increased level of regulatory
supervision, we may not be able to expand our operations, and our business
operating results and financial condition could be adversely affected.
8
We may require additional capital in the future, which could result in dilution
of your ownership interest.
Any capital that is likely to be generated by our operations over the next
several years is expected to be needed to continue expanding our operations.
Additionally, current proposed FDIC guidance entitled, Concentrations in
Commercial Real Estate Lending, Sound Risk Management Practices, addresses high
and increasing concentrations of commercial real estate loans. If the proposed
regulation is passed, additional capital levels could be required. If we sell
additional equity securities to meet capital requirements or finance future
growth and expansion of our operations, such sale could result in significant
dilution of your ownership percentage.
Customers may not repay their loans, which could have a material adverse effect
on our profitability.
The risk that customers may fail to repay their loans is inherent in any bank
lending relationship. If our loans are not repaid in accordance with the loan
terms, it could have a material adverse effect on our earnings and overall
financial condition as well as the value of our common stock. We focus our
lending activity in commercial, commercial real estate, residential, home equity
and consumer loans.
Our management attempts to minimize credit exposure by carefully monitoring the
concentration of loans within specific industries and through loan application
and approval procedures. However, we are unable to assure you that such
monitoring and procedures will reduce lending risks. Credit losses can cause
insolvency and failure of a financial institution and, in such event,
shareholders could lose their entire investment.
Our business focus in the Jacksonville area of Florida could make us vulnerable
to adverse economic conditions in the area.
Our operations are materially affected by and sensitive to the economy of our
market areas in northeastern Florida, and are particularly impacted by the
economic conditions in Duval County and the Jacksonville metropolitan area.
Because our business is focused in the Jacksonville area, we could be more
affected by a weakening of the Jacksonville area economy than banking
institutions with operations in diverse geographical areas.
A slowdown in the economy could diminish the quality of our loan portfolio and
our financial performance.
Recent economic indicators have shown declines in U.S. economic activities.
Adverse economic developments can impact the collectibility of loans and may
negatively affect our earnings and financial condition. In addition, the banking
industry in general is affected by economic conditions such as inflation,
recession, unemployment, and other factors beyond our control. A prolonged
economic recession or other economic dislocation could cause increases in
nonperforming assets and impair the values of real estate collateral, thereby
causing operating losses, decreasing liquidity, and eroding capital. Although we
believe our loan policy and loan review processes result in sound and consistent
credit decisions on our loans, we can not assure you that future declines in the
economy, particularly in our market areas, would not have a material adverse
effect on our financial condition, results of operations, or cash flows.
Our location on the east coast of Florida makes us susceptible to
weather-related problems.
We rely on our ongoing operations to sustain profitability. Although we have a
disaster recovery plan in place, we cannot ensure that severe weather conditions
will not have a material adverse effect on our financial condition, results of
operations, or cash flows.
We are subject to government regulation and monetary policy that could constrain
our growth and profitability.
Bank regulators have imposed various conditions. The conditions include, among
other things, that: (1) the Company would not assume additional debt without
prior approval by the Federal Reserve Board; (2) the Company and the Bank will
remain well-capitalized at all times; (3) we will make appropriate filings with
the regulatory agencies; and (4) the Bank will meet all regulatory requirements
as set forth. The regulatory capital requirements imposed on the Bank could have
the effect of constraining growth.
We are subject to extensive state and federal government supervision and
regulations that impose substantial limitations with respect to loans, purchase
of securities, payment of dividends, and many other aspects of the banking
business. Regulators include the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"), the Federal Deposit Insurance Corporation
("FDIC"), and the Florida Department of Banking and Finance (the "Florida DBF").
Applicable laws, regulations, interpretations, and enforcement policies have
been subject to significant and sometimes retroactively applied changes and may
be subject to significant future changes. Many of these regulations are intended
to protect depositors, the public, and the FDIC, not shareholders. Future
legislation or government policy could adversely affect the banking industry,
our operations, or shareholders. The burden imposed by federal and state
regulations may place banks, in general, and us, specifically, at a competitive
disadvantage compared to less regulated competitors. Federal economic and
monetary policy may affect our ability to attract deposits, make loans, and
achieve satisfactory operating results.
9
We could be negatively impacted by changes in interest rates and economic
conditions.
Our results of operations may be materially and adversely affected by changes in
prevailing economic conditions, including declines in real estate market values,
rapid changes in interest rates, and the monetary and fiscal policies of the
federal government. Our profitability is partly a function of the spread between
the interest rates earned on investments and loans and those paid on deposits
and other liabilities. Recently, our interest rate spreads have widened due to
rising interest rates and changing market conditions. This has had a positive
impact on our net interest income; however, we are unable to guarantee that such
factors will continue. As with most banking institutions, our net interest
spread is affected by general economic conditions and other factors that
influence market interest rates and our ability to respond to changes in such
rates. At any given time, our assets and liabilities may be affected differently
by a given change in interest rates. As a result, an increase or decrease in
rates could have a material adverse effect on our net income, capital and
liquidity. While we take measures to reduce interest-rate risk, these measures
may not adequately minimize exposure to interest-rate risk.
The Company is dependent on the operating performance of the Bank to provide the
Company with operating funds.
The Company is a bank holding company and is dependent upon dividends from the
Bank for funds to pay expenses and any cash dividends to shareholders. The Bank
is subject to regulatory limitations regarding the payment of dividends, and no
cash dividends are anticipated in the foreseeable future. Therefore, the Bank
may not be able to provide us with adequate funds to conduct our ongoing
operations.
We face competition from a variety of competitors.
We face competition for deposits, loans and other financial services from other
community banks, regional banks, out-of-state and in-state national banks,
savings banks, thrifts, credit unions and other financial institutions as well
as other entities which provide financial services, including consumer finance
companies, securities brokerage firms, mortgage brokers, insurance companies,
mutual funds, and other lending sources and alternative investment providers.
Some of these financial institutions and financial services organizations are
not subject to the same degree of regulation as we are. We face increased
competition due to the Gramm-Leach-Bliley Act which allows insurance firms,
securities firms, and other non-traditional financial companies to provide
traditional banking services. Due to the growth of the Jacksonville area, it can
be expected that significant competition will continue from existing financial
services providers, as well as new entrants to the market. Many of these
competitors have been in business for many years, have established customers,
are larger, have substantially higher lending limits than we do, and are able to
offer certain services that we do not provide, such as certain loan products and
international banking services. In addition, many of these entities have greater
capital resources than we have, which among other things may allow them to price
their services at levels more favorable to the customer or to provide larger
credit facilities. If we are unable to attract and retain customers with
personal services, attractive product offerings and competitive rates, our
business, results of operations, future growth and operational results will be
adversely affected.
Our lending limit restricts our ability to compete with larger financial
institutions.
Our per customer lending limit is approximately $5.4 million, subject to further
reduction based on regulatory criteria relevant to any particular loan.
Accordingly, the size of loans which we can offer to potential customers is less
than the size which many of our competitors with larger lending limits are able
to offer. This limit has affected and will continue to affect our ability to
seek relationships with larger businesses in the market. We accommodate loans in
excess of our lending limit through the sale of portions of such loans to other
banks. However, we may not be successful in attracting or maintaining customers
seeking larger loans or in selling portions of such larger loans on terms that
are favorable to us.
10
We may need to spend significant money to keep up with technology so we can
remain competitive.
The banking industry continues to undergo rapid technological changes with
frequent introduction of new technology-driven products and services. In
addition to providing better service to customers, the effective use of
technology increases efficiency and enables us to reduce costs. Our future
success depends in part upon our ability to address the needs of our customers
by using technology to provide products and services that will satisfy customer
demands for convenience as well as to create additional operating efficiencies.
Many of our competitors have substantially greater resources to invest in
technological improvements. Such technology may permit competitors to perform
certain functions at a lower cost than we can. We may not be able to effectively
implement new technology-driven products and services or be successful in
marketing these to our customers.
We are dependent on the experience and expertise of our current management and
their departure may impair our operations.
We are dependent primarily upon the services of Gilbert J. Pomar, III, Chief
Executive Officer and President of the Company and the Bank, Valerie Kendall,
Chief Financial Officer, and Scott Hall, Senior Loan Officer. If the services of
these individuals were to become unavailable for any reason, or if we were
unable to hire highly qualified and experienced personnel to replace them, our
operating results could be adversely affected. While we have an employment
agreement with Mr. Pomar and Mr. Hall, we do not have an agreement with Ms.
Kendall.
RISKS RELATED TO OUR COMMON STOCK
Our common stock is thinly traded and, therefore, you may have difficulty
selling shares.
Our common stock is traded on the NASDAQ. However, we are unable to provide
assurance that an active market will exist in the future or that shares can be
liquidated without delay.
We do not anticipate paying dividends for the foreseeable future.
We do not anticipate dividends will be paid on our common stock for the
foreseeable future. The Company is largely dependent upon dividends paid by the
Bank to provide funds to pay cash dividends if and when the board of directors
may declare such dividends. No assurance can be given that future earnings will
be sufficient to satisfy regulatory requirements and permit the legal payment of
dividends to shareholders at any time in the future. Even if we could legally
declare dividends, the amount and timing of such dividends would be at the
discretion of our board of directors. The board may in its sole discretion
decide not to declare dividends.
The market price of our common stock may be volatile.
The market price of our common stock is subject to fluctuations as a result of a
variety of factors, including the following:
o quarterly variations in our operating results or those of other
banking institutions;
o changes in national and regional economic conditions, financial
markets, or the banking industry; and
o other developments affecting us or other financial institutions.
The trading volume of our common stock is limited, which may increase the
volatility of the market price for our stock. In addition, the stock market has
experienced significant price and volume fluctuations in recent years. This
volatility has had a significant effect on the market prices of securities
issued by many companies for reasons not necessarily related to the operating
performance of these companies.
Our articles of incorporation and bylaws contain provisions that may delay or
prevent a change of control.
Sections 607.0901 through 607.0908 of the Florida Business Corporation Act (the
"FBCA") provide for supermajority voting and impose other requirements on
certain business combinations with interested shareholders and limit voting
rights of certain acquirers of control shares. Federal law requires the approval
of the Federal Reserve Board before acquisition of "control" of a bank holding
company. Our articles of incorporation provide that the FBCA's control shares
statute applies to acquisitions of our shares unless the acquirer has acquired
the shares (1) for others in good faith and not to circumvent the control shares
statute and requires instruction from others to vote the shares or (2) through a
distribution conducted by us in a private or public offering or under a warrant,
option or employee benefit plan, under the laws of descent and distribution,
from a donee of a lifetime gift, through a transfer between immediate family
members or through satisfaction of a pledge or security interest.
11
Our articles of incorporation also (1) provide for a board of directors that is
divided into three classes of directors; (2) require the shareholders to take
action at a duly called meeting and not by written consent; (3) limit the
board's ability to increase the number of directors; (4) require the affirmative
vote of holders of two-thirds of our voting stock for certain affiliated
transactions such as mergers, consolidations, sales, leases, pledges, transfers,
dissolutions, reclassifications with or loans to shareholders owning more than
10% of our shares or their affiliates unless the transaction is approved by the
disinterested directors and certain other conditions are met; (5) require the
board of directors to consider a variety of factors when evaluating any proposal
involving a potential tender or exchange offer, merger, sale or business
combination, including the social and economic impact of such a proposal on
customers, employees, and the communities in which we operate or are located,
and on our ability to fulfill our corporate objectives and perform under
applicable statutes and regulations; and (6) require the affirmative vote of
holders of at least 66% of the voting stock to change any provisions of the
articles of incorporation relating to the right of shareholders to act by
consent, the classification of the board, affiliated transactions or control
share acquisitions. These provisions may have the effect of delaying or
preventing a change in control. As a result, these provisions could adversely
affect the price of our common stock by reducing the gain which could
potentially be realized by a shareholder in a change of control.
ITEM 2. DESCRIPTION OF PROPERTIES
Year Location Approximate
Property Location Established Square Footage Owned / Leased
- --------------------------------------------------------------------------------
Headquarters(1)
100 North Laura Street 2004 14,815 Leased
Branch Office
10325 San Jose Boulevard 1998 3,567 Owned
Branch Office
12740-200 Atlantic Boulevard 2000 3,080 Owned
Branch Office(2)
4343 Roosevelt Boulevard 2005 3,127 Leased
Branch Office(3)
7880 Gate Parkway 2006 9,372 Leased
(1) The Bank has a ten-year lease that expires September 30, 2014 for our
headquarters location which specifies rent of $20.00 per square foot and
is subject to annual increases of $0.50 per square foot on October 1st of
each year through September 30, 2014. The Bank has five options of five
years each commencing on October 1, 2014, and the last option term shall
end on September 30, 2039.
(2) The Bank took occupancy of this Branch on November 1, 2005 and opened for
business on February 6, 2006. The Bank has a ten-year lease that expires
November 1, 2015 for this branch, which specifies rent of $90,000 per
annum and is subject to annual increases of 3% on November 1 of each year
through November 1, 2015. The Bank has four renewal options of five years
each commencing on November 1, 2015, and the last option term shall end on
November 1, 2035.
(3) The Bank took occupancy of this branch on January 13, 2006 and expects to
open for business in the second quarter of 2006. The Bank has a 10-year
lease that expires January 13, 2016 for this branch, which specifies rent
of $210,870 per annum and is subject to annual increases on the
anniversary date to the extent of any percentage change that occurs in the
consumer price index for all urban consumers. The Bank has two renewal
options of five years each commencing January 13, 2016 and the last option
shall end on January 13, 2026.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which we are a party or to
which any of our properties are subject; nor are there material proceedings
known to be contemplated by any governmental authority; nor are there material
proceedings known to us, pending or contemplated, in which any of our directors,
officers, affiliates or any principal security holders, or any associate of any
of the foregoing, is a party or has an interest adverse to us.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is traded on NASDAQ under the symbol JAXB. The following table
shows the high and low sale prices of our common stock for each quarter of 2004
and 2005.
Year Quarter High Low
---- ------- ---- ---
2004 First $20.88 $15.85
Second $26.34 $20.63
Third $26.65 $24.90
Fourth $27.85 $25.72
2005 First $30.00 $25.75
Second $30.00 $26.40
Third $30.90 $25.50
Fourth $34.00 $27.96
As of March 1, 2006, the Corporation had 1,721,009 outstanding shares of common
stock, par value $.01 per share, held by approximately 161 registered
shareholders of record.
It is the policy of our board of directors to reinvest earnings for such period
of time as is necessary to ensure our successful operations. There are no
current plans to initiate payment of cash dividends, and future dividend policy
will depend on our earnings, capital and regulatory requirements, financial
condition, and other factors considered relevant by our board of directors. For
more information regarding the Company's ability to pay dividends, please refer
to the Regulation and Supervision section under Item 1.
The information regarding equity compensation plans contained under the caption
"Equity Compensation Plans" in our Definitive Proxy Statement for the 2006
Annual Meeting of Shareholders is incorporated herein by reference.
Following approval by the shareholders at the 2003 Annual Meeting, the Company
established the Directors' Stock Purchase Plan for non-employee directors. Under
this Plan, directors may elect to receive shares of the Company's common stock
as an alternative to the equivalent of cash for directors' fees. All
transactions executed under this Plan were open market purchases and were
accounted for as treasury stock on the date of purchase. The Company repurchased
1,650 shares of its common stock during the last quarter for issuance under this
Plan.
13
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the years
ended December 31, 2005, 2004, 2003, 2002 and 2001 is unaudited and has been
derived from our Consolidated Financial Statements and from our records. The
information presented below should be read in conjunction with the Consolidated
Financial Statements and related notes and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
At or for the Year Ended December 31,
(Dollars in thousands, except per share figures)
Financial Condition Data: 2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Cash and cash equivalents ..................... $ 4,767 $ 6,735 $ 3,894 $ 4,281 $ 5,288
Securities .................................... 24,261 23,175 16,830 12,531 7,532
Loans, net .................................... 232,031 188,137 150,976 108,933 68,134
All other assets .............................. 11,985 5,697 5,167 5,086 5,524
----------- ----------- ----------- ----------- -----------
Total assets ............................. $ 273,044 $ 223,744 $ 176,867 $ 130,831 $ 86,478
=========== =========== =========== =========== ===========
Deposit accounts .............................. 234,211 201,188 158,539 110,128 75,619
Other borrowings .............................. 17,650 4,000 4,296 7,747 3,360
All other liabilities ......................... 1,337 752 625 389 202
Shareholders' equity .......................... 19,846 17,804 13,407 12,567 7,297
----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 273,044 $ 223,744 $ 176,867 $ 130,831 $ 86,478
=========== =========== =========== =========== ===========
Operations Data: 2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Total interest income ......................... 15,748 10,858 8,729 6,699 4,273
Total interest expense ........................ 6,529 3,928 3,111 2,763 2,060
----------- ----------- ----------- ----------- -----------
Net interest income ........................... 9,219 6,930 5,618 3,936 2,213
Provision for loan losses ..................... 481 282 1,580 443 343
----------- ----------- ----------- ----------- -----------
Net interest income after provision for
loan losses .............................. 8,738 6,648 4,038 3,493 1,870
----------- ----------- ----------- ----------- -----------
Noninterest income ............................ 964 767 1,550 580 458
Noninterest expenses .......................... 6,287 5,274 3,971 3,134 2,645
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (benefit) ... 3,415 2,141 1,617 939 (317)
Income taxes (benefit) ........................ 1,242 806 613 355 (119)
----------- ----------- ----------- ----------- -----------
Net income (loss) ............................. $ 2,173 $ 1,335 $ 1,004 $ 584 $ (198)
=========== =========== =========== =========== ===========
Per Share Data:
Basic earnings (loss) per share ............... $ 1.27 $ .86 $ .68 $ .44 $ (.19)
Diluted earnings (loss) per share ............. 1.21 .79 .67 .44 (.19)
Dividends declared per share .................. -- -- -- -- --
Total shares outstanding at end of year ....... 1,714,716 1,708,366 1,467,166 1,467,066 1,017,066
Book value per share at end of year ........... $ 11.57 $ 10.42 $ 9.14 $ 8.57 $ 7.17
Ratios and Other Data:
Return on average assets ...................... 0.88% 0.66% 0.64% 0.53% (0.32)%
Return on average equity ...................... 11.69% 8.84% 7.80% 5.40% (2.68)%
Average equity to average assets .............. 7.49% 7.46% 8.16% 9.85% 11.95%
Interest rate spread during the period ........ 3.27% 3.14% 3.31% 3.37% 3.24%
Net yield on average interest-earning assets .. 3.88% 3.53% 3.72% 3.89% 4.11%
Noninterest expenses to average assets ........ 2.53% 2.60% 2.52% 2.86% 4.28%
Average interest-earning assets to average
interest-bearing liabilities ............. 1.22 1.19 1.20 1.19 1.22
Nonperforming loans and foreclosed assets as a
percentage of total assets at end of year .28% .29% .63% .68% .12%
Allowance for loan losses as a percentage of
total loans at end of year ............... 0.94% 0.97% 1.10% 1.00% 0.96%
Total number of banking offices(1) ............ 3 3 3 3 3
1) Amount represents banking offices operating at December 31 of each year.
The Bank currently has four operating offices, with a fifth expected to
open in the second quarter of 2006.
14
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Years Ended December 31, 2005, 2004 and 2003
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 Duval County, Florida. During 2000, the Bank
formed Fountain Financial, Inc., a wholly owned subsidiary. The primary business
activities of Fountain Financial, Inc. consist of the referral of our customers
to third parties for the sale of insurance products.
Business Strategy
Our primary business segment is community banking and consists of attracting
deposits from the general public and using such deposits and other sources of
funds to originate commercial business loans, commercial real estate loans,
residential mortgage loans and a variety of consumer loans. We also invest in
mortgage-backed securities and securities backed by the United States
Government, and agencies thereof, as well as other securities.
Our goal is to sustain profitable, controlled growth by focusing on increasing
our loan and deposit market share in the Northeast Florida market by developing
new financial products, services and delivery channels; closely managing yields
on earning assets and rates on interest-bearing liabilities; focusing on
noninterest income opportunities, controlling the growth of noninterest expenses
and maintaining strong asset quality. Although our current strategy is to grow
organically, growth through acquisition would be considered if price, culture
and market fit within our strategies.
2005 Executive Overview
The following were significant factors related to 2005 results as compared to
2004. The 2005 performance is reflective of the successful execution of our
strategy to focus on organic growth within the Northeast Florida market. Our net
income was $2.2 million in 2005 as compared to $1.3 million in 2004, an increase
of $838,000, or 62.8%. Our diluted earnings per share were $1.21 in 2005 as
compared to $0.79 in 2004, an increase of $0.42 per diluted share, or 53.2%.
Return on average assets and return on average equity were 0.88% and 11.69%,
respectively, in 2005 compared to 0.66% and 8.84%, respectively, in 2004.
During 2005, the Company fully absorbed the 2004 investments in staffing and the
relocation of its main office and headquarters. Two additional branch locations
were announced in the first and third quarters of 2005. The first of the new
branches opened on February 6, 2006 and is a former SouthTrust branch which
became available as a result of the merger between Alabama's SouthTrust Bank and
North Carolina's Wachovia Bank. The other branch is strategically located in one
of the fastest growing areas of Jacksonville and is anticipated to open during
the second quarter of 2006. This will bring the total branches in the
Jacksonville market to five. The Company is now well positioned to support
ongoing organic growth.
Credit quality remained healthy in 2005 with no substantial charge-offs in 2005
or 2004. The allowance for loan loss as a percentage of total loans outstanding
was 0.94% at December 31, 2005, compared to 0.97% at December 31, 2004.
Interest income was $15.7 million in 2005 as compared to $10.9 million in 2004,
an increase of $4.9 million, or 45.0%, primarily due to an increase in 2005 of
$41.4 million in average interest-earning assets compared to 2004. Additionally,
the net interest margin increased by 35 basis points due to the successful
implementation of the Bank's strategy to attract and retain low-cost core
deposits as well as benefiting from the rise in short-term rates by the Federal
Reserve Board.
During 2005, we recorded strong growth in both residential and commercial real
estate loans. During the year, residential real estate loans increased by $11.3
million, or 24.3%, while commercial real estate loans increased by $34.7
million, or 28.6%. Total loans increased by $44.3 million, or 23.3%.
15
Total deposits increased by $33.0 million, or 16.4%, during 2005. The following
are changes in the deposit categories:
o Noninterest-bearing deposits increased $12.8 million, or 46.1%. This
is primarily due to an increase in commercial deposits of $11.0
million, or 40.1%, resulting from the Company's strategy to
transition into low-cost core deposits.
o Money market deposits increased by $40.3 million, or 58.4%. This is
primarily due to the popularity of the WOW money market account
which was introduced in 2004. The product was closed for new
accounts in July 2004; however, existing account holders have
continued to add deposits. Additionally, commercial accounts have
increased $4.5 million due to a strategic focus on enhancing new and
existing relationships. The certificate of deposit portfolio
declined by $12.9 million, or 16.3%. The Company's management
decided to pursue local deposits more aggressively by offering
competitive deposit products in an effort to attract core deposits,
while not being as aggressive in the National CD market.
During 2004, all remaining stock warrants resulting from a 2002 offering, which
were set to expire on September 30, were exercised resulting in additional
capital of $2.9 million. This was the primary driver of the basic average shares
outstanding increasing to 1,711,148 in 2005 from 1,555,266 in 2004. The diluted
weighted average shares outstanding increased to 1,799,674 from 1,697,734 in the
same periods.
Noninterest income increased $197,000 in 2005 primarily due to income earned on
a $4.5 million Bank Owned Life Insurance contract entered into by the Bank
during the second quarter of 2005. Service charges increased in conjunction with
the growth in core transaction deposits. Mortgage origination fees increased
20.8% during 2005.
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 policy is the
establishment and maintenance of an 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 collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
inherent losses on existing loans that may become uncollectible based on
evaluations of the collectibility 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 the 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 the provision for loan loss, and related allowance
can, and will, fluctuate.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), Share-Based Payment ("Statement 123(R)"), which is
a revision of Statement 123 and supersedes Opinion 25. Statement 123(R) requires
expensing of the fair value of employee stock options and other forms of
stock-based compensation. The Company adopted Statement 123(R) using the
"modified prospective" method on January 1, 2006. Under the "modified
prospective" method, the Company will begin recognizing compensation cost
beginning on the grant date for all options granted after the adoption date as
well as any remaining unvested options. The Company does not anticipate any
major changes in compensation strategies or business practices as a result of
adoption of Statement 123(R).
The adoption of SFAS 123(R) is expected to result in additional compensation
expense of:
2006 $ 124
2007 121
2008 98
2009 33
2010 8
16
In December 2004, the FASB issued Statement No. 153, Exchange of Nonmonetary
Assets, ("Statement 153"), an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions. This statement amends the principle of APB No. 29 and
generally requires that the transaction is recorded at fair value with gain or
loss recognition in income. Statement 153 removed the APB 29 exception that
exchanges of "similar, productive" nonmonetary assets be accounted for at book
value and more broadly provides exceptions only for transactions that lack
"commercial substance." Statement 153 is effective for exchanges in fiscal years
beginning after June 15, 2005. The Company adopted Statement 153 on January 1,
2006, and adoption is not expected to have a material impact on the financial
condition, results of operations or liquidity of the Company.
In May 2005, the FASB issued Statement No. 154, Accounting for Changes and Error
Corrections, as amended, ("Statement 154"), which replaces APB No. 20 and FASB
Statement 3. Statement 154 modifies prior guidance on accounting changes and
error corrections and requires retrospective application for changes in
accounting principles (unless that principle designates otherwise), retroactive
restatement for error corrections and prospective method for changes in
estimates. Statement 154 is effective for accounting changes and corrections of
errors in fiscal years beginning after December 15, 2005. The Company adopted
Statement 154 on January 1, 2006, and adoption is expected to change the
Company's procedures for accounting changes and error corrections (if any)
according to the methods required by Statement 154.
In March 2004, the FASB Emerging Issues Task Force (EITF) released Issue 03-1,
The Meaning of Other-Than- Temporary Impairment and Its Application to Certain
Investments, which addressed other-than-temporary impairment for certain debt
and equity investments. The recognition and measurement requirements of Issue
03-1, and other disclosure requirements not already implemented, were effective
for periods beginning after June 15, 2004. In September 2004, the FASB Staff
issued FASB Staff Position (FSP) EITF-03-1a, which delayed the effective date
for certain measurement and recognition guidance contained in Issue 03-1. The
FSP required the application of pre-existing other-than-temporary guidance
during the period of delay until a final consensus is reached. In November 2005,
the FASB staff issued FSP FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
which permanently delayed certain measurement and recognition guidance
(paragraphs 10-18) of Issue 03-1 and amended FAS 115 and FAS 124. According to
FSP FAS 115-1 and FAS 124-1, impaired securities should be written down to fair
value as of the Balance Sheet date and the amount is recognized based on
expected cash flows. FSP FAS 115-1 and FAS 124-1 applies to all investments and
is effective for periods beginning after December 15, 2005. The Company adopted
FSP FAS 115-1 and FAS 124-1 on January 1, 2006, and adoption is not expected to
materially impact the financial condition, results of operations or liquidity of
the Company.
SOP 03-3 requires acquired loans, including debt securities and loans acquired
in a business combination, to be recorded at the amount of the purchaser's
initial investment and prohibits carrying over valuation allowances from the
seller for these loans that have evidence of deterioration in credit quality
since origination, and it is probable all contractual cash flows on the loan
will be unable to be collected. The provisions of this SOP are effective for
loans acquired in fiscal years beginning after December 15, 2004 and their
adoption is not expected to have a material impact on the financial condition,
the results of operations or liquidity of the Company.
Securities
The securities portfolio is categorized as either "held to maturity," "available
for sale," or "trading." Securities held to maturity represent those securities
which the Bank has the positive intent and ability to hold to maturity.
Securities available for sale represent those investments which may be sold for
various reasons, including changes in interest rates and liquidity
considerations. These securities are reported at fair market value and
unrealized gains and losses are excluded from earnings and reported in
accumulated other comprehensive income (loss). Trading securities are held
primarily for resale and are recorded at their fair values. Unrealized gains or
losses on trading securities are included immediately in earnings. During 2005,
2004 and 2003, the Bank had no trading securities.
17
The following table sets forth the amortized costs and fair value of our
securities portfolio (dollars in thousands):
At December 31, 2005 At December 31, 2004 At December 31, 2003
---------------------- ---------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ----------
Securities available for sale:
U.S. Government agency securities $ 7,295 $ 7,108 $ 8,295 $ 8,116 $ 14,089 $ 14,006
Mortgage-backed securities 12,458 12,231 14,369 14,325 2,769 2,774
State and municipal securities 5,036 4,872 686 684 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total $ 24,789 $ 24,211 $ 23,350 $ 23,125 $ 16,858 $ 16,780
========== ========== ========== ========== ========== ==========
Security held to maturity:
State of Israel bond $ 50 $ 50 $ 50 $ 50 $ 50 $ 50
========== ========== ========== ========== ========== ==========
The following table sets forth, by maturity distribution, certain information
pertaining to the securities (dollars in thousands):
After 1 Year After 5 Years
Within 1 Year Within 5 Years Within 10 Years After 10 Years
Amount Yield Amount Yield Amount Yield Amount Yield
-------- -------- -------- -------- -------- -------- -------- --------
At December 31, 2005:
Securities available for sale:
U.S. Government agency $ -- -- $ 1,973 3.86% $ 2,729 4.66% $ 2,406 5.00%
securities
Mortgage-backed securities -- -- 2,602 3.78% 1,086 4.20% 8,543 4.00%
State and municipal securities -- -- -- -- 2,725 5.54% 2,147 6.03%
-------- -------- -------- -------- -------- -------- -------- --------
Total $ -- -- $ 4,575 3.81% $ 6,540 4.95% $ 13,096 4.52%
Security held to maturity:
State of Israel bond $ 50 7.50%
-------- --------
Total $ 50 7.50%
Totals
Amount Yield
-------- --------
At December 31, 2005:
Securities available for sale:
U.S. Government agency $ 7,108 4.55%
securities
Mortgage-backed securities 12,231 3.97%
State and municipal securities 4,872 5.76%
-------- --------
Total $ 24,211 4.51%
Security held to maturity:
State of Israel bond $ 50 7.50%
-------- --------
Total $ 50 7.50%
Loan Portfolio Composition
Commercial real estate loans comprise the largest group of loans in our
portfolio amounting to $156.3 million, or 66.7% of the total loan portfolio, at
December 31, 2005, increasing from $121.5 million, or 63.9%, at December 31,
2004. Residential real estate loans comprise the second largest group of loans
in the portfolio, amounting to $58.0 million, or 24.7% of the total loan
portfolio, at December 31, 2005, as compared to $46.7 million, or 24.6%, at
December 31, 2004. As of December 31, 2005, commercial loans amounted to $16.7
million, or 7.1% of total loans, which were $15.9 million, or 8.3%, at December
31, 2004. The following table sets forth the composition of our loan portfolio
(dollars in thousands):
18
At December 31,
----------------------------------------------------------------------------
2005 2004 2003
---- ---- ----
% of % of % of
Amount Total Amount Total Amount Total
----------- -------- ----------- -------- ----------- --------
Commercial real estate(1) $ 156,260 66.7% $ 121,542 63.9% $ 93,899 61.5%
Commercial .............. 16,681 7.1 15,855 8.3 16,443 10.8
Residential real estate . 57,985 24.7 46,663 24.6 36,594 24.0
Consumer and other ...... 3,461 1.5 6,013 3.2 5,729 3.7
----------- -------- ----------- -------- ----------- --------
$ 234,387 100.0% $ 190,073 100.0% $ 152,665 100.0%
======== ======== ========
Add (deduct):
Allowance for
loan losses . (2,207) (1,843) (1,679)
Net deferred
(fees) costs (149) (93) (10)
----------- ----------- -----------
Loans, net .............. $ 232,031 $ 188,137 $ 150,976
=========== =========== ===========
At December 31,
--------------------------------------------------
2002 2001
---- ----
% of % of
Amount Total Amount Total
Commercial real estate(1) ----------- -------- ----------- --------
Commercial .............. $ 63,520 57.7% $ 26,159 38.0%
Residential real estate . 16,648 15.1 25,105 36.5
Consumer and other ...... 25,825 23.5 13,595 19.8
4,057 3.7 3,917 5.7
----------- -------- ----------- --------
$ 110,050 100.0% $ 68,776 100.0%
======== ========
Add (deduct):
Allowance for
loan losses . (1,100) (657)
Net deferred
(fees) costs (17) 15
----------- -----------
Loans, net .............. $ 108,933 $ 68,134
=========== ===========
The following table reflects the contractual principal repayments by period of
our loan portfolio at December 31, 2005 (in thousands):
Commercial
Real Residential
Years Ending Commercial Estate Mortgage Consumer
December 31, Loans Loans(1) Loans Loans Total
- ------------ ----------- ----------- ----------- ----------- -----------
Less than 1 year ... $ 12,993 $ 31,594 $ 6,693 $ 1,356 $ 52,636
1-5 years .......... 3,021 81,329 16,545 1,415 102,310
Greater than 5 years 667 43,337 34,747 690 79,441
----------- ----------- ----------- ----------- -----------
Total .............. $ 16,681 $ 156,260 $ 57,985 $ 3,461 $ 234,387
=========== =========== =========== =========== ===========
(1) For presentation purposes, construction and farmland loans have been
classified as commercial real estate loans.
Loans Maturing
-------------------------------------------------------------
(in thousands) Within 1 Year 1-5 Years After 5 Years Total
- ---------------------------------------------------------------------------------------
Loans with:
Fixed interest rates .. $ 10,751 $ 62,746 $ 37,222 $ 110,719
Variable interest rates 41,885 39,564 42,219 123,668
-------------------------------------------------------------
Total Loans ........... $ 52,636 $ 102,310 $ 79,441 $ 234,387
=============================================================
Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets. The average life of loans is substantially less than their
average contractual terms due to prepayments. In addition, due-on-sale clauses
on loans generally give us the right to declare a conventional loan immediately
due and payable in the event, among other things, that the borrower sells real
property subject to a mortgage and the loan is not repaid. The average life of
mortgage loans tends to increase, however, when current mortgage loan rates are
substantially higher than rates on existing mortgage loans and, conversely,
decrease when rates on existing mortgages are substantially higher than current
mortgage loan rates.
19
Credit Risk
Our primary business is making commercial, real estate, business, and consumer
loans. That activity entails potential loan losses, the magnitude of which
depends on a variety of economic factors affecting borrowers which are beyond
our control. While the Company has instituted underwriting guidelines and credit
review procedures to protect it from avoidable credit losses, some losses will
inevitably occur. At December 31, 2005, the Company had nonperforming assets of
$766,000, of which $447,000 was past due 90 days or more but still accruing
interest. In addition, it charged off loans totaling $117,000 in 2005.
Loans are placed on nonaccrual status when management has concerns relating to
the ability to collect the loan principal and interest and generally when such
loans are 90 days or more past due. A loan is considered impaired when it is
probable that not all principal and interest amounts will be collected according
to the loan contract. The following table sets forth certain information
regarding nonaccrual loans, including the ratio of such loans to total assets as
of the dates indicated (dollars in thousands):
At December 31,
--------------------------------
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Nonperforming loans:
Commercial loans ........................ $753 $413 $596 $442 $ --
Residential real estate loans ........... 10 33 130 409 99
Consumer loans and other ................ 3 208 -- -- 2
---- ---- ---- ---- ----
Total nonperforming loans .......... $766 $654 $726 $851 $101
---- ---- ---- ---- ----
Total nonperforming loans to total
assets........................... 0.28% 0.29% 0.41% 0.65% 0.12%
==== ==== ==== ==== ====
Nonperforming loans includes a loan past due over 90 days and still on accrual
totaling $447,000, which was brought current by the customer in January, 2006.
In addition to the nonperforming loans identified above, the Company has
identified approximately $92,000 in additional impaired loans at December 31,
2005 through its ongoing loan review process.
Allowance and Provision for Loan Losses
The allowance for loan losses is a valuation allowance for credit losses in the
loan portfolio. During 2004, management adopted a new 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 incurred losses in the
Company's loan and lease portfolio.
Due to their similarities, the Company has grouped the loan portfolio into three
components. The components are residential real estate, consumer loans and
commercial loans. The Company has created a loan classification system to
properly calculate the allowance for loan losses. Commercial and commercial real
estate loans are individually evaluated for impairment. If a loan is 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. Large groups of smaller balance homogeneous loans, such as
consumer and residential real estate loans, are collectively evaluated for
impairment and, accordingly, they are not separately identified for impairment
disclosures
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.
20
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 period,
loan portfolio concentrations and trends in the loan portfolio.
Senior management and the Board of Directors review this calculation and the
underlying assumptions on a routine basis not less frequently than quarterly.
The allowance for loan losses amounted to $2.2 million and $1.8 million at
December 31, 2005 and December 31, 2004, respectively. Based on an analysis
performed by management at December 31, 2005, the allowance for loan losses is
considered to be adequate to cover estimated loan losses in the portfolio as of
that date. However, management's judgment is based upon a number of assumptions
about future events, which are believed to be reasonable, but which may or may
not prove valid. Thus, there can be no assurance that charge-offs in future
periods will not exceed the allowance for loan losses or that significant
additional increases in the allowance for loan losses will not be required.
The following table sets forth information with respect to activity in the
allowance for loan losses for the periods indicated (dollars in thousands):
Year Ended December 31,
------------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Allowance at beginning of year ............................ $1,843 $1,679 $1,100 $ 657 $ 344
Charge-offs:
Consumer and other loans .............................. 15 -- -- -- 30
Commercial real estate ................................ -- -- 171 -- --
Commercial loans ...................................... 102 130 778 -- --
Residential real estate ............................... -- -- 52 -- --
------ ------ ------ ------ ------
117 130 1,001 -- 30
------ ------ ------ ------ ------
Recoveries:
Consumer loans ........................................ -- -- -- -- --
Commercial real estate ................................ -- -- -- -- --
Commercial loans ...................................... -- 12 -- -- --
Residential real estate ............................... -- -- -- -- --
------ ------ ------ ------ ------
-- 12 -- -- --
------ ------ ------ ------ ------
Net charge-offs .................................... 117 118 1,001 -- 30
------ ------ ------ ------ ------
Provision for loan losses charged to operating expenses 481 282 1,580 443 343
------ ------ ------ ------ ------
Allowance at end of year............................... $2,207 $1,843 $1,679 $1,100 $ 657
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans outstanding.. 0.06% 0.07% 0.75% 0.00% 0.06%
====== ====== ====== ====== ======
Allowance as a percent of total loans ................. 0.94% 0.97% 1.10% 1.00% 0.96%
====== ====== ====== ====== ======
21
The following table presents information regarding the total allowance for loan
losses as well as the allocation of such amounts to the various categories of
loans (dollars in thousands):
At December 31,
-------------------------------------------------------------
2005 2004 2003
---- ---- ----
% of % of % of
Loans Loans Loans
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
-------- -------- -------- -------- -------- --------
Commercial real estate ...... $ 1,286 66.7% $ 979 63.9% $ 413 61.5%
Commercial .................. 268 7.1 380 8.3 265 10.8
Residential real estate ..... 621 24.7 425 24.6 166 24.0
Consumer and other .......... 32 1.5 59 3.2 45 3.7
Unallocated general allowance -- -- -- -- 790 --
-------- -------- -------- -------- -------- --------
Total allowance for
loan losses ............. $ 2,207 100.0% $ 1,843 100.0% $ 1,679 100.0%
======== ======== ======== ======== ======== ========
Allowance for loan losses
as a percentage of total
loans outstanding ....... 0.94% 0.97% 1.10%
======== ======== ========
At December 31,
---------------------------------------
2002 2001
---- ----
% of % of
Loans Loans
to Total to Total
Amount Loans Amount Loans
-------- -------- -------- --------
Commercial real estate ...... $ 254 57.7% $ 222 38.0%
Commercial .................. 330 15.1 239 36.5
Residential real estate ..... 134 23.5 62 19.8
Consumer and other .......... 30 3.7 33 5.7
Unallocated general allowance 352 -- 101 --
-------- -------- -------- --------
Total allowance for
loan losses ............. $ 1,100 100.0% $ 657 100.0%
======== ======== ======== ========
Allowance for loan losses
as a percentage of total
loans outstanding ....... 1.00% 0.96%
======== ========
As discussed previously, management revised its valuation process during 2004.
This change in methodology resulted in the unallocated portion of the allowance
for loan losses at December 31, 2003 being more precisely allocated between the
Company's individual loan categories as shown above.
Deposits and Other Sources of Funds
General. In addition to deposits, the sources of funds available for lending and
other business purposes include loan repayments, loan sales, Federal Home Loan
Bank (FHLB) advances, federal funds purchased lines of credit, and securities
sold under agreements to repurchase. Loan repayments are a relatively stable
source of funds, while deposit inflows and outflows are influenced significantly
by general interest rates and money market conditions. Borrowings may be used on
a short-term basis to compensate for reductions in other sources, such as
deposits, or due to favorable differentials in rates and other costs.
Deposits. Deposits are attracted principally from our primary geographic market
areas in Duval County, Florida. The Bank also enhanced its geographical
diversity by offering certificates of deposits nationally to other financial
institutions. The Bank offers a broad selection of deposit products, including
demand deposit accounts, NOW accounts, money market accounts, regular savings
accounts, term certificates of deposit, and retirement savings plans (such as
IRAs). Certificate of deposit rates are set to encourage longer maturities as
cost and market conditions will allow. Deposit account terms vary, with the
primary differences being the minimum balance required, the time period the
funds must remain on deposit, and the associated interest rates. The Company
holds quarterly Asset Liability Committee (ALCO) meetings, comprised of members
of the Board of Directors and management. In addition, pricing meetings are held
by members of management on a monthly basis or more frequently if economic
conditions dictate. The Bank emphasizes commercial banking and small business
relationships in an effort to increase demand deposits as a percentage of total
deposits.
The following table shows the distribution of, and certain other information
relating to, our deposit accounts by type (dollars in thousands):
22
At December 31,
------------------------------------------------------------------------
2005 2004 2003
---------------------- ---------------------- ----------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
---------- ---------- ---------- ---------- ---------- ----------
Demand deposits $ 34,475 0.00% $ 22,607 0.00% $ 19,008 0.00%
NOW deposits 8,103 0.22 7,980 0.14 4,024 0.17
Money market deposits 89,987 3.77 41,888 2.37 5,744 1.36
Savings deposits 13,495 1.97 13,817 1.25 16,384 1.31
Time deposits 69,411 3.25 98,391 2.69 97,235 2.86
---------- ---------- ---------- ---------- ---------- ----------
Total deposits $ 215,471 2.75% $ 184,683 2.07% $ 142,395 2.16%
========== ========== ========== ========== ========== ==========
The following table presents maturity of our time deposits at December 31, 2005:
Deposits Deposits
$100,000 Less Than
and Greater $100,000 Total
----------- ----------- -----------
Due three months or less $ 7,436 $ 15,594 $ 23,030
Due more than three months to six months 4,832 4,953 9,785
More than six months to one year 4,011 8,803 12,814
One to five years 8,187 12,317 20,504
More than five years -- 71 71
----------- ----------- -----------
$ 24,466 $ 41,738 $ 66,204
=========== =========== ===========
Liquidity
The Company's liquidity is its ability to maintain a steady flow of funds to
support its ongoing operating, investing and financing activities. Our Board
establishes policies and analyzes and manages liquidity to ensure that adequate
funds are available to meet normal operating requirements in addition to
unexpected customer demands for funds, such as high levels of deposit
withdrawals or loan demand, in a timely and cost-effective manner. The most
important factor in the preservation of liquidity is maintaining public
confidence that facilitates the retention and growth of a large, stable supply
of core deposits and wholesale funds. Ultimately, public confidence is generated
through profitable operations, sound credit quality and a strong capital
position. Liquidity management is viewed from a long-term and a short-term
perspective as well as from an asset and liability perspective. We monitor
liquidity through a regular review of loan and deposit maturities and loan and
deposit forecasts to minimize funding risk. Sources of liquidity include
converting liquid assets to cash, customer deposits and borrowings.
As discussed above, sources of liquidity include principal paydowns of loans and
investment securities, customer deposits, and borrowings. The Bank has an
unsecured federal funds purchased accommodation with its main correspondent
bank, totaling $5 million at December 31, 2005, none of which was utilized as of
that date. In addition, the Company has invested in FHLB stock for the purpose
of establishing credit lines with FHLB. This line is collateralized by a blanket
lien arrangement on the Company's first mortgage loans, second mortgage loans
and commercial real estate loans. Based on this collateral and the Company's
holdings of FHLB stock, the Company was eligible to borrow up to $39.3 million
from this credit line, of which it had borrowed $13.7 million at December 31,
2005. In addition, the Company had available credit lines with other
correspondent banks totaling $27.2 million.
Scheduled maturities and paydowns of its investment securities are an additional
source of liquidity. During 2005, the Company had received approximately $5.8
million from maturities and paydowns of investment securities. The Bank also has
the ability to convert marketable securities into cash or access new or existing
sources of incremental funds if the need should arise.
At December 31, 2005, the Bank had outstanding commitments to borrowers for
available lines of credit and letters of credit totaling $31.3 million and
$549,000, respectively. Based on the sources of liquidity discussed above, the
Company believes that it has access to sufficient funds to cover such
commitments, should the need arise.
23
Regulatory Capital Requirements
The Bank is required to meet certain minimum regulatory capital requirements.
Quantitative measures established by regulation to ensure capital adequacy
require us to maintain minimum amounts and percentages of total and Tier 1
capital (as defined in the regulations) to risk weighted assets (as defined),
and of Tier 1 capital (as defined) to average assets (as defined). As of
December 31, 2005, the Bank and Company met all capital adequacy requirements to
which they were subject. The regulatory capital minimums and the Company's and
Bank's actual data for the indicated periods are set forth in the table below
(dollars in thousands).
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- --------- --------- --------- ---------
2005
- ----
Total Capital to risk weighted assets
Consolidated $ 26,413 10.97% $ 19,258 8.00% N/A N/A
Bank 24,505 10.17 19,284 8.00 $ 24,105 10.00%
Tier 1 (Core) Capital to risk weighted assets
Consolidated 24,206 10.05 9,629 4.00 N/A N/A
Bank 22,298 9.25 9,642 4.00 14,463 6.00
Tier 1 (Core) Capital to average assets
Consolidated 24,206 9.06 10,682 4.00 N/A N/A
Bank 22,298 8.34 10,698 4.00 13,373 5.00
2004
- ----
Total Capital to risk weighted assets
Consolidated $ 23,787 12.15% $ 15,662 8.00% N/A N/A
Bank 19,781 10.11 15,651 8.00 $ 19,564 10.00%
Tier 1 (Core) Capital to risk weighted assets
Consolidated 21,944 11.21 7,831 4.00 N/A N/A
Bank 17,938 9.17 7,826 4.00 11,738 6.00
Tier 1 (Core) Capital to average assets
Consolidated 21,944 10.09 8,699 4.00 N/A N/A
Bank 17,938 8.24 8,704 4.00 10,880 5.00
Off-Balance-Sheet Arrangements and Contractual Obligations
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments are commitments to extend credit, unused lines of
credit, and standby letters of credit, and may involve, to varying degrees,
elements of credit and interest-rate risk in excess of the amount recognized in
the consolidated balance sheet. The contract amounts of these instruments
reflect the extent of involvement the Company has.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments as for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers.
24
The following is a summary of the Company's contractual obligations, including
certain on-balance-sheet obligations, at December 31, 2005 (in thousands):
Payments Due by Period
----------------------------------------------------------
Less than 1-3 3-5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
---------- ---------- ---------- ---------- ----------
Certificates of deposit.......... $ 66,204 $ 45,629 $ 18,277 $ 2,227 $ 71
FHLB advances.................... 13,650 10,650 3,000 -- --
Subordinated debt................ 4,000 -- -- -- 4,000
Operating leases................. 6,421 608 1,311 1,375 3,127
Standby letters of credit........ 549 549 -- -- --
Unused line of credit loans...... 31,277 31,277 -- -- --
---------- ---------- ---------- ---------- ----------
Total........................ $ 122,101 $ 88,713 $ 22,588 $ 3,602 $ 7,198
========== ========== ========== ========== ==========
Asset - Liability Structure
As part of its asset and liability management, the Bank has emphasized
establishing and implementing internal asset-liability decision processes as
well as communications and control procedures to aid in enhancing its earnings.
It is believed that these processes and procedures provide the Bank with better
capital planning, asset mix and volume controls, loan pricing guidelines, and
deposit interest rate guidelines, which should result in tighter controls and
less exposure to interest-rate risk.
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are interest-rate sensitive and by
monitoring an institution's interest-rate sensitivity gap. An asset or liability
is said to be interest-rate sensitive within a specific time period if it will
mature or reprice within that time period. The interest-rate sensitivity gap is
defined as the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. The gap ratio is
computed as rate-sensitive assets less rate-sensitive liabilities as a
percentage of total assets. A gap is considered positive when the total of
rate-sensitive assets exceeds rate-sensitive liabilities. A gap is considered
negative when the amount of rate-sensitive liabilities exceeds rate-sensitive
assets. During a period of rising interest rates, a negative gap would be
expected to adversely affect net interest income, while a positive gap should
result in an increase in net interest income. During a period of falling
interest rates, a negative gap would be expected to result in an increase in net
interest income, while a positive gap should adversely affect net interest
income.
In order to minimize the potential for adverse effects of material and prolonged
changes in interest rates on the results of operations, the Bank continues to
monitor asset and liability management policies to appropriately match the
maturities and repricing terms of interest-earning assets and interest-bearing
liabilities. Such policies have consisted primarily of: (1) emphasizing the
origination of variable-rate loans; (2) maintaining a stable core deposit base;
and (3) maintaining a sound level of liquid assets (cash and securities).
The following table sets forth certain information relating to our
interest-earning assets and interest-bearing liabilities at December 31, 2005
that are estimated to mature or are scheduled to reprice within the period shown
(dollars in thousands):
25
Over 3 Over
Months Over 6 Over 1 5 Years Over
3 Months to 6 Months Year to to 10 10
or Less Months to 1 Year 5 Years Years Years Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loans (1):
Variable rate $ 125,978 $ 1,297 $ 3,679 $ 27,240 $ 263 $ -- $ 158,457
Fixed rate 10,633 8,303 12,340 43,403 938 313 75,930
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total loans 136,611 9,600 16,019 70,643 1,201 313 234,387
Securities -- -- -- 4,625 6,540 13,096 24,261
Federal funds sold 368 -- -- -- -- -- 368
Federal Home Loan Bank stock 1,062 -- -- -- -- -- 1,062
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total rate sensitive assets $ 138,041 $ 9,600 $ 16,019 $ 75,268 $ 7,741 $ 13,409 $ 260,078
========== ========== ========== ========== ========== ========== ==========
Deposit accounts:
NOW deposits 6,440 -- -- -- -- -- 6,440
Money market accounts 109,188 -- -- -- -- -- 109,188
Savings deposits 11,797 -- -- -- -- -- 11,797
Time deposits 23,030 9,785 12,814 20,504 71 -- 66,204
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total deposit accounts (2) 150,455 9,785 12,814 20,504 71 -- 193,629
FHLB advances 10,650 -- -- 3,000 -- -- 13,650
Subordinated debt 4,000 -- -- -- -- -- 4,000
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total rate sensitive
liabilities $ 165,105 $ 9,785 $ 12,814 $ 23,504 $ 71 $ -- $ 211,279
========== ========== ========== ========== ========== ========== ==========
Gap repricing difference $ (27,064) $ (185) $ 3,205 $ 51,764 $ 7,670 $ 13,409 $ 48,799
========== ========== ========== ========== ========== ========== ==========
Cumulative gap $ (27,064) $ (27,249) $ (24,044) $ 27,720 $ 35,390 $ 48,799
========== ========== ========== ========== ========== ==========
Cumulative gap to
total rate-sensitive assets (10.4)% (10.5)% (9.2)% 10.7% 13.6% 18.8%
========== ========== ========== ========== ========== ==========
(1) Variable rate loans are included in the period in which the interest
rates are next scheduled to adjust rather than in the period in
which the loans mature. Fixed rate loans are scheduled, including
repayments, according to their contractual maturities.
(2) Certain liabilities such as NOW, money market and savings accounts,
while technically subject to immediate repricing in response to
changing market rates, historically do not reprice as quickly nor to
the extent as other interest-sensitive accounts.
Results of Operations
Our operating results depend primarily on our net interest income, which is the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities, consisting primarily of deposits. Net
interest income is determined by the difference between yields earned on
interest-earning assets and rates paid on interest-bearing liabilities
("interest rate spread") and the relative amounts of interest-earning assets and
interest-bearing liabilities. Our interest rate spread is affected by
regulatory, economic, and competitive factors that influence interest rates,
loan demand, and deposit flows. In addition, our net earnings are also affected
by the level of nonperforming loans and foreclosed assets, as well as the level
of noninterest income and noninterest expense, such as salaries and employee
benefits, occupancy and equipment costs, and income taxes.
The following table sets forth, for the periods indicated, information
regarding: (1) the total dollar amount of interest and dividend income from
interest-earning assets and the resultant average yield; (2) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average costs; (3) net interest/dividend income; (4) interest rate spread; and
(5) net interest margin. Average balances are based on average daily balances
(dollars in thousands).
26
Year Ended December 31,
-----------------------------------
2005 2004
---------------------------------- ----------------------------------
Interest Average Interest Average
Average and Yield/ Average and Yield/
Balance Dividends Rate Balance Dividends Rate
---------- ---------- ---------- ---------- ---------- ----------
Interest-earning assets:
Loans (1).......................... $ 211,456 $ 14,708 6.96% $ 168,954 $ 9,886 5.85%
Securities(2)...................... 24,034 992 4.13 18,722 880 4.70
Other interest-earning assets(3)... 2,183 50 2.29 8,626 92 1.07
---------- ---------- ---------- ----------
Total interest-earning assets... $ 237,673 $ 15,750 6.63 $ 196,302 $ 10,858 5.53
---------- ----------
Noninterest-earning assets(4)......... 10,493 6,337
---------- ----------
Total assets.................... $ 248,166 $ 202,639
========== ==========
Interest-bearing liabilities:
Savings deposits................... 13,495 266 1.97 13,817 173 1.25
NOW deposits....................... 8,103 18 0.22 7,980 11 0.14
Money market deposits.............. 89,987 3,394 3.77 41,888 991 2.37
Time deposits...................... 69,411 2,255 3.25 98,391 2,650 2.69
FHLB advances...................... 8,879 337 3.80 -- -- --
Subordinated debentures............ 4,000 246 6.15 2,164 99 4.57
Other interest-bearing
liabilities(5)................... 414 13 3.14 241 4 1.66
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities................... 194,289 6,529 3.36 164,481 3,928 2.39
---------- ----------
Noninterest-bearing liabilities....... 35,281 23,049
Shareholders' equity.................. 18,596 15,109
---------- ----------
Total liabilities and
shareholders' equity.......... $ 248,166 $ 202,639
========== ==========
Net interest/dividend income.......... $ 9,221 $ 6,930
========== ==========
Interest rate spread (6).............. 3.27% 3.14%
========== ==========
Net interest margin (7)............... 3.88% 3.53%
========== ==========
Ratio of average interest-
earning assets to average
interest-bearing liabilities....... 1.22 1.19
========== ==========
2003
----------------------------------
Interest Average
Average and Yield/
Balance Dividends Rate
---------- ---------- ----------
Interest-earning assets:
Loans (1).......................... $ 133,109 $ 7,816 5.87%
Securities(2)...................... 15,956 897 5.62
Other interest-earning assets(3)... 1,769 16 1.06
---------- ----------
Total interest-earning assets... $ 150,834 $ 8,729 5.80
----------
Noninterest-earning assets(4)......... 6,865
----------
Total assets.................... $ 157,699
==========
Interest-bearing liabilities:
Savings deposits................... 16,384 214 1.31
NOW deposits....................... 4,024 7 0.17
Money market deposits.............. 5,744 78 1.36
Time deposits...................... 97,235 2,779 2.86
FHLB advances...................... -- -- --
Subordinated debentures............ -- -- --
Other interest-bearing
liabilities(5)................... 1,948 33 1.69
---------- ---------- ----------
Total interest-bearing
liabilities................... 125,335 3,111 2.48
----------
Noninterest-bearing liabilities....... 19,490
Shareholders' equity.................. 12,874
----------
Total liabilities and
shareholders' equity.......... $ 157,699
==========
Net interest/dividend income.......... $ 5,618
==========
Interest rate spread (6).............. 3.31%
==========
Net interest margin (7)............... 3.72%
==========
Ratio of average interest-
earning assets to average
interest-bearing liabilities....... 1.20
==========
(1) Average loans include nonperforming loans. Interest on loans includes loan
fees of $269 in 2005, $162 in 2004 and $61 in 2003.
(2) Interest income and rates 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.
Rate/Volume Analysis
The following table sets forth certain information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) changes in rate (change in rate
multiplied by prior volume); (2) changes in volume (change in volume multiplied
by prior rate); and (3) changes in rate-volume (change in rate multiplied by
change in volume). Dollars are in thousands.
27
Years Ended December 31, 2005 vs. 2004:
Increase (Decrease) Due to (1)
------------------------------------
Rate Volume Total
---------- ---------- ----------
Interest-earning assets:
Loans ............................ $ 2,067 $ 2,755 $ 4,822
Securities ....................... (116) 228 112
Other interest-earning assets .... 58 (100) (42)
---------- ---------- ----------
Total ........................... 2,009 2,883 4,892
---------- ---------- ----------
Interest-bearing liabilities:
Savings deposits ................. 97 (4) 93
NOW deposits ..................... 7 -- 7
Money market deposits ............ 819 1,584 2,403
Time deposits .................... 480 (875) (395)
FHLB advances .................... -- 337 337
Subordinated debentures .......... 42 105 147
Other interest-bearing liabilities 5 4 9
---------- ---------- ----------
Total ........................... 1,450 1,151 2,601
---------- ---------- ----------
Net change in net interest income ... $ 559 $ 1,732 $ 2,291
========== ========== ==========
28
Years Ended December 31, 2004 vs. 2003:
Increase (Decrease) Due to (1)
------------------------------------
Rate Volume Total
---------- ---------- ----------
Interest-earning assets:
Loans ............................ $ (27) $ 2,097 $ 2,070
Securities ....................... (159) 142 (17)
Other interest-earning assets .... 3 73 76
---------- ---------- ----------
Total ........................... (183) 2,312 2,129
---------- ---------- ----------
Interest-bearing liabilities:
Savings deposits ................. (9) (32) (41)
NOW deposits ..................... (2) 6 4
Money market deposits ............ 96 817 913
Time deposits .................... (162) 33 (129)
FHLB advances .................... -- -- --
Subordinated debentures .......... -- 99 99
Other interest-bearing liabilities (1) (28) (29)
---------- ---------- ----------
Total ........................... (78) 895 817
---------- ---------- ----------
Net change in net interest income ... $ (105) $ 1,417 $ 1,312
========== ========== ==========
(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.
29
Year Ended December 31, 2005 compared to year ended December 31, 2004
General. Net earnings for the year ended December 31, 2005 was $2.2 million,
or $1.27 per basic share, and $1.21 per diluted share compared to a net
earnings of $1.3 million, or $.86 per basic and $.79 per diluted share in
2004.
Interest Income and Expense. Interest income totaled $15.7 million for the
year ended December 31, 2005, compared to $10.9 million in 2004. Interest
earned on loans was $14.7 million in 2005, compared to $9.9 million in
2004. This increase resulted from an increase in the average loan
portfolio balance from $169.0 million for the year ended December 31, 2004
to $211.5 million for the year ended December 31, 2005, combined with an
increase in the average rate paid on loans from 5.85% in 2004 to 6.96% in
2005. The Company was able to benefit from an increase in short-term
interest rates by the Federal Reserve Board in 2005.
Interest on securities was $990,000 for the year ended December 31, 2005,
compared to $880,000 for the year ended December 31, 2004. The Company
invested approximately $7.2 million in new securities in the current year
while continuing with the plan executed by management in 2004 to mitigate
extension risk within the securities portfolio by shortening the duration.
This, along with called securities, resulted in an overall decline in the
portfolio yield of 57 basis points.
Interest expense on deposit accounts amounted to $5.9 million for the year
ended December 31, 2005, compared to $3.8 million in 2004. The increase
resulted from an increase in the average balance of interest-bearing
deposits from $162.1 million in 2004 to $181.0 million in 2005, combined
with an increase in the weighted average cost of interest-bearing deposits
from 2.36% in 2004 to 3.28% in 2005 due to the increases in short-term
interest rates by the Federal Reserve Board during 2005. Interest on FHLB
advances, subordinated debt and other borrowings amounted to $596,000 for
the year ended December 31, 2005, with a weighted average cost of 4.48%.
In June 2004, the Company issued $4.0 million of trust preferred
securities priced at three-month LIBOR plus 263 basis points.
Provision for Loan Losses. The provision for loan losses is charged to
earnings to bring the total allowance to a level deemed appropriate by
management and is based upon the volume and type of lending conducted by
the Company, the amount of nonperforming loans, and general economic
conditions, particularly as they relate to the Company's market areas, and
other factors related to the collectibility of the Company's loan
portfolio. The provision for the year ended December 31, 2005 was
$481,000, compared to $287,000 in 2004. This increase was a result of the
increase in average loans outstanding during 2005, as credit quality
remained healthy with nonperforming loans at 0.33% of total loans
outstanding at year-end and net charge-offs at 0.06% of average loans for
the year. Management believes that the allowance for loan losses of $2.2
million at December 31, 2005 is adequate.
Noninterest Income. Noninterest income increased to $964,000 for the year
ended December 31, 2005, compared to $767,000 for the year ended December
31, 2004. This increase is mainly the result of $135,000 earned on the
$4.5 million Bank Owned Life Insurance contract entered into during the
second quarter of 2005.
Noninterest Expense. Noninterest expense totaled $6.3 million for the year
ended December 31, 2005, compared to $5.3 million in 2004. During 2005,
the Company fully absorbed the cost of 2004 staff additions and the
relocation of its main office and headquarters. Additionally, during the
fourth quarter, the Company began absorbing personnel and occupancy
expenses related to its fourth branch (announced during the third quarter
of 2005) which opened for business February 6, 2006. Advertising and
business development expenses increased slightly due to the Company's
campaign to attract small business customers as well as its ongoing
efforts to promote its current product lines. Professional fees decreased
during 2005 primarily as a result of the SEC's decision to postpone the
external audit requirements of Section 404 of the Sarbanes-Oxley Act of
2002 for companies with less than $75 million in public float. However,
the Company will continue with its internal implementation of Section 404
during 2006.
Income Taxes (Benefit). Income taxes for the year ended December 31, 2005 was
$1,242,000 (an effective rate of 36.4%) compared to $806,000 in 2004 (an
effective rate of 37.6%).
30
Year Ended December 31, 2004 compared to year ended December 31, 2003
General. Net earnings for the year ended December 31, 2004 was $1.3 million,
or $.86 per basic share, and $.79 per diluted share compared to a net
earnings of $1.0 million, or $.68 per basic and $.67 per diluted share in
2003.
Interest Income and Expense. Interest income totaled $10.9 million for the
year ended December 31, 2004, compared to $8.7 million in 2003. Interest
earned on loans was $9.9 million in 2004, compared to $7.8 million in
2003. This increase resulted primarily from an increase in the average
loan portfolio balance from $133.1 million for the year ended December 31,
2003 to $169.0 million for the year ended December 31, 2004, and was
partially offset by a slight decrease in the weighted average yield from
5.87% for 2003 to 5.85% for 2004.
Interest on securities was $880,000 for the year ended December 31, 2004,
compared to $897,000 for the year ended December 31, 2003. This decrease
resulted primarily from a plan executed by management to mitigate
extension risk within the securities portfolio by shortening the duration.
This, along with called securities, resulted in an overall decline in the
portfolio yield of 92 basis points.
Interest expense on deposit accounts amounted to $3.8 million for the year
ended December 31, 2004, compared to $3.1 million in 2003. The increase
resulted from an increase in the average balance of interest-bearing
deposits from $123.4 million in 2003 to $162.1 million in 2004, offset
slightly by a decrease in the weighted average cost of interest-bearing
deposits from 2.49% in 2003 to 2.36% in 2004. Interest on other borrowings
amounted to $103,000 for the year ended December 31, 2004, with a weighted
average cost of 4.28%. In June of 2004, the Company issued $4.0 million of
trust preferred securities priced at three-month LIBOR plus 263 basis
points.
Provision for Loan Losses. The provision for loan losses is charged to
earnings to bring the total allowance to a level deemed appropriate by
management and is based upon the volume and type of lending conducted by
the Company, the amount of nonperforming loans, and general economic
conditions, particularly as they relate to the Company's market areas, and
other factors related to the collectibility of the Company's loan
portfolio. The provision for the year ended December 31, 2004 was $282,000
compared to $1.6 million in 2003. The decrease for 2004 was due to
specific allowances and charge-offs during 2003 partially offset by growth
in the loan portfolio. Management believes that the allowance for loan
losses of $1.8 million at December 31, 2004 is adequate.
Noninterest Income. Noninterest income decreased to $767,000 for the year
ended December 31, 2004, compared to $1.6 million for the year ended
December 31, 2003. The year-to-year change included two one-time events.
First was an $850,000 litigation settlement received in 2003. The
litigation settlement resulted from a lessor's noncompliance with certain
provisions of a lease agreement. Second was a $68,000 loss on the disposal
of premises and equipment. The loss was due to the relocation of the
corporate headquarters during the fourth quarter. Partially offsetting the
decrease in noninterest income from 2003 to 2004 were increases in fees
and service charges on deposit accounts. The increases arose primarily
from growth in the number of new deposit accounts, including accounts
generated from the successful WOW account campaign conducted during the
second quarter of 2004.
Noninterest Expense. Noninterest expense totaled $5.3 million for the year
ended December 31, 2004, compared to $4.0 million in 2003. The increase
resulted primarily from an increase in salaries and employee benefits
expense of $572,000, an increase in professional fees of $211,000, an
increase in advertising of $204,000, an increase in occupancy and
equipment expense of $169,000 and an increase in other expense of $76,000.
The increase in salaries resulted mainly from a number of staff increases,
such as a risk manager, a human resource director and a financial
controller, all considered important in supporting the continuing growth
of the Company. There were also a number of additions to staff in our
customer contact areas. The increase in advertising expense was primarily
associated with the successful WOW account campaign which was designed to
significantly change the mix of deposits from fewer certificates of
deposits to more money market accounts. The increase in professional fees
was primarily associated with the ongoing strengthening of our
infrastructure and providing for the more stringent reporting requirements
set forth by the Sarbanes-Oxley Act of 2002.
Income Taxes. Income taxes for the year ended December 31, 2004 was $806,000
(an effective rate of 37.6%) compared to $613,000 in 2003 (an effective
rate of 37.9%).
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates.
Our market risk arises primarily from interest-rate risk inherent in lending and
deposit-taking activities. To that end, we actively monitor and manage
interest-rate risk exposure. Disclosures about the fair value of financial
instruments, which reflect changes in market prices and rates, can be found in
Note 14 of the Notes to Consolidated Financial Statements.
The Company utilizes a third party and its proprietary simulation model to
assist in identifying and managing interest-rate risk. The December 31, 2005
analysis of the Company's sensitivity to changes in net interest income under
varying assumptions for changes in market interest rates is presented below.
Specifically, the model derives expected interest income and interest expense
resulting from an immediate and parallel shift in the yield curve in the amounts
shown.
Rate changes are matched with known repricing intervals and assumptions about
new growth and expected prepayments. Assumptions are based on the Company's
experience as well as industry standards under varying market and interest-rate
environments. The measurement of market risk associated with financial
instruments is meaningful only when all related and offsetting on- and
off-balance-sheet transactions are aggregated and the resulting net positions
are identified.
The analysis exaggerates the sensitivity to changes in key interest rates by
assuming an immediate change in rates with no management intervention to change
the composition of the balance sheet. The Bank's primary objective in managing
interest-rate risk is to minimize the adverse impact of changes in interest
rates on net interest income and capital, while adjusting our asset-liability
structure to obtain the maximum yield-cost spread on that structure. However, a
sudden and substantial change in interest rates may adversely impact earnings,
to the extent that the interest rates borne by assets and liabilities do not
change at the same speed, to the same extent, or on the same basis. The Bank
does not engage in trading activities.
Interest Rates Most Likely Interest Rates
Decrease 200 BP Interest Rate Forecast Increase 200 BP
---------------------- ---------------------- ----------------------
Hypothetical Interest Income $ 17,038,289 $ 20,494,811 $ 23,793,305
Hypothetical Interest Expense 5,237,585 8,078,554 10,968,771
---------------------- ---------------------- ----------------------
Hypothetical Net Interest Income 11,800,704 12,416,256 12,824,534
====================== ====================== ======================
After tax change in net income (382,209) 253,586
Hypothetical Market Value of Equity 26,324,893 24,193,354 21,154,949
Hypothetical Change in Market Value 2,131,539 (3,038,405)
While management carefully monitors the exposure to changes in interest rates
and takes necessary actions as warranted to decrease any adverse impact, there
can be no assurance on the actual effect on net interest income as a result of
rate changes.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, substantially all
of our assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on our performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
Index to Consolidated Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm.....................F-1
Consolidated Balance Sheets, December 31, 2005 and 2004.....................F-2
Consolidated Statements of Income for the Years Ended
December 31, 2005, 2004 and 2003......................................F-3
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2005, 2004 and 2003..........................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003......................................F-5
Notes to Consolidated Financial Statements..................................F-6
All schedules are omitted because of the absence of the conditions under which
they are required or because the required information is included in the
Consolidated Financial Statements and related Notes.
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Jacksonville Bancorp, Inc.
Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Jacksonville
Bancorp, Inc. as of December 31, 2005 and 2004, and the related consolidated
statements of income, shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated statements of income, changes
in shareholders' equity, and cash flows of Jacksonville Bancorp, Inc. for the
year ended December 31, 2003 were audited by other auditors whose report dated
February 13, 2004 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 2005 and 2004 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of the
Company as of December 31, 2005 and 2004, and the results of its operations and
its cash flows for the years then ended, in conformity with U.S. generally
accepted accounting principles.
Crowe Chizek and Company LLC
Fort Lauderdale, Florida
February 8, 2006
F-1
JACKSONVILLE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollar amounts in thousands except per share data)
- --------------------------------------------------------------------------------
2005 2004
--------- ---------
ASSETS
Cash and due from financial institutions $ 4,399 $ 4,715
Federal funds sold 368 2,020
--------- ---------
Cash and cash equivalents 4,767 6,735
Securities available for sale 24,211 23,125
Securities held to maturity
(fair value 2005-$50, 2004-$50) 50 50
Loans, net of allowance for loan losses of $2,207
in 2005 and $1,843 in 2004 232,031 188,137
Bank owned life insurance 4,635 --
Federal Home Loan Bank stock, at cost 1,062 353
Premises and equipment, net 3,821 3,794
Accrued interest receivable 1,425 973
Deferred income taxes 464 110
Other assets 578 467
--------- ---------
Total assets $ 273,044 $ 223,744
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 40,582 $ 27,779
Money market, NOW and savings deposits 127,425 94,324
Time deposits 66,204 79,085
--------- ---------
Total deposits 234,211 201,188
Federal Home Loan Bank advances 13,650 --
Subordinated debentures 4,000 4,000
Other liabilities 1,337 752
--------- ---------
Total liabilities 253,198 205,940
Shareholders' equity
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none issued or outstanding -- --
Common stock, $.01 par value; 8,000,000 shares
authorized; 1,716,366 and 1,708,366 shares issued
in 2005 and 2004 17 17
Additional paid-in capital 17,526 17,381
Retained earnings 2,718 546
Treasury stock, at cost (2005-1,650 shares, 2004-0
shares) (54) --
Accumulated other comprehensive loss (361) (140)
--------- ---------
Total shareholders' equity 19,846 17,804
--------- ---------
Total liabilities and shareholders' equity $ 273,044 $ 223,744
========= =========
See accompanying notes to financial statements.
F-2
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
(Dollar amounts in thousands except per share data)
- --------------------------------------------------------------------------------
2005 2004 2003
-------- -------- --------
Interest and dividend income
Loans, including fees $ 14,708 $ 9,886 $ 7,816
Taxable securities 910 876 897
Tax-exempt securities 80 4 --
Federal funds sold and other 50 92 16
-------- -------- --------
Total interest income 15,748 10,858 8,729
Interest expense
Deposits 5,933 3,825 3,078
Federal Home Loan Bank advances 337 -- --
Subordinated debentures 246 99 --
Federal funds purchased and repurchase
agreements 13 4 33
-------- -------- --------
Total interest expense 6,529 3,928 3,111
-------- -------- --------
Net interest income 9,219 6,930 5,618
Provision for loan losses 481 282 1,580
-------- -------- --------
Net interest income after provision for loan losses 8,738 6,648 4,038
Noninterest income
Service charges on deposit accounts 625 654 557
Litigation settlement -- -- 850
Net gain on sales of securities -- 5 --
Net gain (loss) on sales of foreclosed assets -- 20 (2)
Net loss on disposal of premises and equipment -- (68) --
Other 339 156 145
-------- -------- --------
Total noninterest income 964 767 1,550
Noninterest expense
Salaries and employee benefits 3,195 2,543 1,971
Occupancy and equipment 1,012 724 555
Data processing 438 400 391
Advertising and business development 415 399 195
Professional fees 375 469 258
Telephone 62 64 67
Director fees 202 165 125
Courier, freight and postage 124 98 73
Other 464 412 336
-------- -------- --------
Total noninterest expense 6,287 5,274 3,971
-------- -------- --------
Income before income taxes 3,415 2,141 1,617
Income tax expense 1,242 806 613
-------- -------- --------
Net income $ 2,173 $ 1,335 $ 1,004
======== ======== ========
Earnings per share:
Basic $ 1.27 $ .86 $ .68
Diluted $ 1.21 $ .79 $ .67
See accompanying notes to financial statements.
F-3
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31,
(Dollar amounts in thousands except per share data)
-------------------------------------------------------------
Retained
Common Stock Additional Earnings
----------------------------- Paid-In (Accumulated
Shares Amount Capital Deficit)
------------- ------------- ------------- -------------
Balance at January 1, 2003 1,467,066 $ 15 $ 14,229 $ (1,793)
Comprehensive income:
Net income 1,004
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax benefit of $29
Total comprehensive income
Exercise of common stock warrants 100 1
------------- ------------- ------------- -------------
Balance at December 31, 2003 1,467,166 15 14,230 (789)
Comprehensive income:
Net income 1,335
Change in unrealized gain (loss) on
securities available for sale, net of
sale, net of reclassification and tax
benefit of $85
Total comprehensive income
Exercise of common stock options,
including tax benefit of $65 16,300 230
Exercise of common stock warrants 224,900 2 2,921
------------- ------------- ------------- -------------
Balance at December 31, 2004 1,708,366 17 17,381 546
Comprehensive income:
Net income 2,173
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax benefit of $218
Total comprehensive income
Purchase of treasury stock (6,150)
Issuance of treasury stock 4,500 (1)
Exercise of common stock options,
including tax benefit of $53 8,000 145
------------- ------------- ------------- -------------
Balance at December 31, 2005 1,714,716 $ 17 $ 17,526 $ 2,718
============= ============= ============= =============
---------------------------------------------
Accumulated
Other
Treasury Comprehensive
Stock Income (Loss) Total
------------- ------------- -------------
Balance at January 1, 2003 $ -- $ 116 $ 12,567
Comprehensive income:
Net income 1,004
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax benefit of $29 (165) (165)
-------------
Total comprehensive income 839
Exercise of common stock warrants 1
------------- ------------- -------------
Balance at December 31, 2003 -- (49) 13,407
Comprehensive income:
Net income 1,335
Change in unrealized gain (loss) on
securities available for sale, net of
sale, net of reclassification and tax
benefit of $85 (91) (91)
-------------
Total comprehensive income 1,244
Exercise of common stock options,
including tax benefit of $65 230
Exercise of common stock warrants 2,923
------------- ------------- -------------
Balance at December 31, 2004 -- (140) 17,804
Comprehensive income:
Net income 2,173
Change in unrealized gain (loss) on
securities available for sale, net of
reclassification and tax benefit of $218 (221) (221)
-------------
Total comprehensive income 1,952
Purchase of treasury stock (186) (186)
Issuance of treasury stock 132 131
Exercise of common stock options,
including tax benefit of $53 145
------------- ------------- -------------
Balance at December 31, 2005 $ (54) $ (361) $ 19,846
============= ============= =============
See accompanying notes to financial statements.
F-4
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(Dollar amounts in thousands except per share data)
- --------------------------------------------------------------------------------
2005 2004 2003
-------- -------- --------
Cash flows from operating activities
Net income $ 2,173 $ 1,335 $ 1,004
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 481 282 1,580
Depreciation and amortization 424 309 278
Earnings on Bank owned life insurance (135) -- --
Issuance of treasury stock as compensation 131 -- --
Loss on disposal of premises and equipment -- 68 --
Deferred income tax (benefit) expense (221) 419 613
Net amortization of deferred loan fees (201) (97) (25)
Net amortization (accretion) of securities 45 13 (14)
Net realized gain on sales of securities -- (5) --
Net realized (gain) loss on sale of
foreclosed asset -- (20) 2
Net change in:
Other assets (525) (158) (250)
Accrued expenses and other liabilities 638 191 236
-------- -------- --------
Net cash from operating activities 2,810 2,337 3,424
Cash flows from investing activities
Available for sale securities:
Sales -- 3,800 --
Maturities, prepayments and calls 5,750 7,928 8,155
Purchases (7,235) (18,227) (12,704)
Loan originations and payments, net (44,174) (37,345) (44,266)
Purchase of Bank owned life insurance (4,500) -- --
Additions to premises and equipment (489) (1,421) (96)
Purchase of Federal Home Loan Bank stock,
net of redemptions (709) (87) (134)
Proceeds from sale of foreclosed assets, net -- 415 273
-------- -------- --------
Net cash from investing activities (51,357) (44,937) (48,772)
Cash flows from financing activities
Net change in deposits 33,023 42,649 48,411
Net change in federal funds purchased -- (4,296) 1,296
Net change in short-term Federal Home Loan Bank
advances 10,650 -- --
Net change in other borrowings -- -- (4,747)
Proceeds from issuance of subordinated debt -- 4,000 --
Proceeds from long-term Federal Home Loan Bank
advances 3,000 -- --
Proceeds from exercise of common stock warrants -- 2,923 1
Proceeds from exercise of common stock options 92 165 --
Purchase of treasury stock (186) -- --
-------- -------- --------
Net cash from financing activities 46,579 45,441 44,961
Net change in cash and cash equivalents (1,968) 2,841 (387)
Beginning cash and cash equivalents 6,735 3,894 4,281
-------- -------- --------
Ending cash and cash equivalents $ 4,767 $ 6,735 $ 3,894
======== ======== ========
Supplemental cash flow information:
Interest paid $ 6,487 $ 3,939 $ 3,097
Income taxes paid 1,131 65 --
Supplemental noncash disclosures:
Transfers from loans to repossessed assets $ -- $ -- $ 668
See accompanying notes to financial statements.
F-5
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: Jacksonville Bancorp, Inc.
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 the Bank's wholly owned subsidiary, Fountain Financial, Inc. The
consolidated entity is referred to as "the Company," and the Bank and its
subsidiaries are 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 four offices in
Jacksonville, Duval County, Florida, with one additional Duval County office
expected to open in the second quarter of 2006. 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. 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.
Use of Estimates: To prepare financial statements in conformity with U.S.
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and actual results could differ from those estimates. Changes in
assumptions or in market conditions could significantly affect the estimate.
Cash Flows: For the purposes of the consolidated statements of cash flows, cash
and cash equivalents include cash on hand, noninterest-bearing deposits with
other financial institutions under 90 days and federal funds sold. Net cash
flows are reported for customer loan and deposit transactions, interest-bearing
deposits in other financial institutions, short-term Federal Home Loan Bank
(FHLB) advances, federal funds purchased and other borrowings.
Securities: Debt securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Debt securities are classified as available for sale when they
might be sold before maturity. Equity securities with readily determinable fair
values are classified as available for sale. Securities available for sale are
carried at fair value, with unrealized holding gains and losses reported in
other comprehensive income, net of tax. Other securities, such as FHLB stock,
are carried at cost.
F-6
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income includes amortization of purchase premiums and accretion of
purchase discounts. Premiums and discounts on securities are amortized on the
level yield without anticipating prepayments, except for mortgage-backed
securities where prepayments are anticipated. Gains and losses are recorded on
the trade date and determined using the specific identification method.
Declines in the fair value of securities below their cost that are
other-than-temporary are reflected as realized losses. In estimating
other-than-temporary losses, management considers: the length of time and extent
that fair value has been less than cost; the financial condition and near term
prospects of the issuer; and the Company's ability and intent to hold the
security for a period sufficient to allow for any anticipated recovery in fair
value.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs, and
allowance for loan losses. Interest income is accrued on the unpaid principal
balance. Loan origination fees, net of certain direct origination costs, are
deferred and recognized in interest income using the level-yield method without
anticipating prepayments.
Interest income on mortgage and commercial loans is discontinued at the time the
loan is 90 days delinquent unless the loan is well-secured and in process of
collection. Unsecured consumer loans are typically charged off when the loan
becomes 90 days past due. Consumer loans secured by collateral other than real
estate are charged off after a review of all factors affecting the ability to
collect on the loan, 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.
Past due status is based on the contractual terms of the loan. In all cases,
loans are placed on nonaccrual or charged-off at an earlier date if collection
of principal or interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Overdrawn customer checking accounts are reclassified as consumer loans and are
evaluated on an individual basis for collectibility. The balances, which totaled
$178 and $357 at December 31, 2005 and 2004, respectively, are included in the
estimate of allowance for loan losses and are charged off when collectibility is
considered doubtful.
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions, and
other factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's judgment,
should be charged off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as special mention, substandard or doubtful. The general
component covers non-classified loans by loan type and is based on historical
loss experience for each loan type adjusted for current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is 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. Large groups of
smaller balance homogeneous loans, such as consumer and residential real estate
loans, are collectively evaluated for impairment and, accordingly, they are not
separately identified for impairment disclosures.
Foreclosed Assets: Assets acquired through or in place of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines subsequent to foreclosure, a valuation allowance is
recorded through expense. Costs incurred after acquisition are expensed.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Buildings and related components
are depreciated using the straight-line method with useful lives ranging from 5
to 40 years. Furniture, fixtures and equipment are depreciated using the
straight-line method with useful lives ranging from 3 to 10 years.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
fair value.
Loan Commitments and Related Financial Instruments: Financial instruments
include off-balance-sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bank Owned Life Insurance: The Bank has purchased life insurance policies on
certain key employees. Bank owned life insurance is recorded at its cash
surrender value or its realizable value. Changes in cash surrender value are
recognized as tax-free noninterest income and are included in other income on
the Statement of Income.
Stock Compensation: The Company follows the provisions of SFAS 148, Accounting
for Stock-Based Compensation-Transition and Disclosure ("Statement 148"), which
provides transition methods to and enhances the disclosure requirements of SFAS
123, Accounting for Stock-Based Compensation ("Statement 123"). As permitted
under Statements 148 and 123, the Company currently follows the guidelines of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("Opinion 25") and discloses pro forma compensation expense in
accordance with Statement 148.
As permitted by Statement 123, employee compensation expense under stock options
is calculated using the intrinsic value method. No stock-based compensation cost
is reflected in net income, as all options granted had an exercise price equal
to or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation.
2005 2004 2003
------- ------- -------
Net income as reported $ 2,173 $ 1,335 $ 1,004
Deduct: Stock-based compensation expense
determined under fair value based method 120 117 76
------- ------- -------
Pro forma net income 2,053 1,218 928
======= ======= =======
Basic earnings per share as reported 1.27 .86 .68
======= ======= =======
Pro forma basic earnings per share 1.20 .78 .63
======= ======= =======
Diluted earnings per share as reported 1.21 .79 .67
======= ======= =======
Pro forma diluted earnings per share 1.14 .72 .62
======= ======= =======
The fair value of options granted and pro forma effects are computed using
option pricing models, using the following weighted average assumptions as of
grant date.
2005 2004 2003
---------- ---------- ----------
Risk-free interest rate 3.49% 4.32% 4.28%
Expected option life 8.65 years 8.59 years 10 years
Expected stock price volatility 23.05% 20.99% 14.00%
Dividend yield 0.00% 0.00% 0.00%
Weighted average fair value of
options granted during year $ 11.03 $ 9.05 $ 4.70
========== ========== ==========
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options.
The effect of stock options and warrants is the sole common stock equivalent for
the purposes of calculating diluted earnings per common share.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity.
Treasury Stock: Treasury stock is carried at cost. Gains and losses on issuances
are based on the market price of the underlying common stock at the date of sale
and are determined using the first-in, first-out (FIFO) method. Gains on
issuances are credited to additional paid-in capital while losses are charged to
additional paid-in capital to the extent that previous net gains from issuances
are included therein, otherwise to retained earnings. Gains or losses on the
issuances of treasury stock are not credited or charged to income.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank
of $450 and $772 was required to meet regulatory reserve and clearing
requirements at year end 2005 and 2004, respectively. These balances do not earn
interest. In addition, cash and cash equivalents include deposits at the Federal
Home Loan Bank of Atlanta (FHLB) totaling $93 and $164 in 2005 and 2004,
respectively. These balances earn interest and are required to cover interest
payments and stock purchases associated with advances on the FHLB line of
credit.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Operating Segments: While the chief decision makers monitor the revenue streams
of the various products and services, operations are managed and financial
performance is evaluated on a Company-wide basis. Accordingly, all of the
financial service operations are considered by management to be aggregated into
one reportable operating segment.
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
Effect of Newly Issued but Not Yet Effective Accounting Standards: On December
16, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123
(revised 2004), Share-Based Payment ("Statement 123(R)"), which is a revision of
Statement 123 and supersedes Opinion 25. Statement 123(R) requires expensing of
the fair value of employee stock options and other forms of stock-based
compensation. The Company adopted Statement 123(R) using the "modified
prospective" method on January 1, 2006. Under the "modified prospective" method,
the Company will begin recognizing compensation cost beginning on the grant date
for all options granted after the adoption date as well as any remaining
unvested options. The Company does not anticipate any major changes in
compensation strategies or business practices as a result of adoption of
Statement 123(R).
The adoption of SFAS 123(R) is expected to result in additional compensation
expense of:
2006 $ 124
2007 121
2008 98
2009 33
2010 8
In December 2004, the FASB issued Statement No. 153, Exchange of Nonmonetary
Assets, ("Statement 153"), an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions. This statement amends the principle of APB No. 29 and
generally requires that the transaction is recorded at fair value with gain or
loss recognition in income. Statement 153 removed the APB 29 exception that
exchanges of "similar, productive" nonmonetary assets be accounted for at book
value and more broadly provides exceptions only for transactions that lack
"commercial substance." Statement 153 is effective for exchanges in fiscal years
beginning after June 15, 2005. The Company adopted Statement 153 on January 1,
2006, and adoption is not expected to have a material impact on the financial
condition, results of operations or liquidity of the Company.
In May 2005, the FASB issued Statement No. 154, Accounting for Changes and Error
Corrections, as amended, ("Statement 154"), which replaces APB No. 20 and FASB
Statement 3. Statement 154 modifies prior guidance on accounting changes and
error corrections and requires retrospective application for changes in
accounting principles (unless that principle designates otherwise), retroactive
restatement for error corrections and prospective method for changes in
estimates. Statement 154 is effective for accounting changes and corrections of
errors in fiscal years beginning after December 15, 2005. The Company adopted
Statement 154 on
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
January 1, 2006, and adoption is expected to change the Company's procedures for
accounting changes and error corrections (if any) according to the methods
required by Statement 154.
In March 2004, the FASB Emerging Issues Task Force (EITF) released Issue 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments, which addressed other-than-temporary impairment for certain debt
and equity investments. The recognition and measurement requirements of Issue
03-1, and other disclosure requirements not already implemented, were effective
for periods beginning after June 15, 2004. In September 2004, the FASB Staff
issued FASB Staff Position (FSP) EITF-03-1a, which delayed the effective date
for certain measurement and recognition guidance contained in Issue 03-1. The
FSP required the application of pre-existing other-than-temporary guidance
during the period of delay until a final consensus is reached. In November 2005,
the FASB staff issued FSP FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
which permanently delayed certain measurement and recognition guidance
(paragraphs 10-18) of Issue 03-1 and amended FAS 115 and FAS 124. According to
FSP FAS 115-1 and FAS 124-1, impaired securities should be written down to fair
value as of the Balance Sheet date and the amount is recognized based on
expected cash flows. FSP FAS 115-1 and FAS 124-1 applies to all investments and
is effective for periods beginning after December 15, 2005. The Company adopted
FSP FAS 115-1 and FAS 124-1 on January 1, 2006, and adoption is not expected to
materially impact the financial condition, results of operations or liquidity of
the Company.
Adoption of New Accounting Standards: SOP 03-3 requires acquired loans,
including debt securities and loans acquired in a business combination, to be
recorded at the amount of the purchaser's initial investment and prohibits
carrying over valuation allowances from the seller for these loans that have
evidence of deterioration in credit quality since origination, and it is
probable all contractual cash flows on the loan will be unable to be collected.
The provisions of this SOP are effective for loans acquired in fiscal years
beginning after December 15, 2004 and their adoption is not expected to have a
material impact on the financial condition, the results of operations or
liquidity of the Company.
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 2 - SECURITIES
The fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss)
were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
---------- ---------- ----------
2005
- ----
U.S. Treasury and federal agency $ 7,108 $ 7 $ (194)
Mortgage-backed 12,231 16 (243)
State and county municipal 4,872 -- (164)
---------- ---------- ----------
Total $ 24,211 $ 23 $ (601)
========== ========== ==========
2004
- ----
U.S. Treasury and federal agency $ 8,116 $ 20 $ (199)
Mortgage-backed 14,325 41 (85)
State and county municipal 684 -- (2)
---------- ---------- ----------
Total $ 23,125 $ 61 $ (286)
========== ========== ==========
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows:
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
------------ ------------ ------------ ------------
2005
- ----
Other $ 50 $ -- $ -- $ 50
============ ============ ============ ============
2004
- ----
Other $ 50 $ -- $ -- $ 50
============ ============ ============ ============
Sales of available for sale securities
were as follows: 2005 2004 2003
------- ------- -------
Proceeds $ -- $ 3,800 $ --
Gross gains -- 43 --
Gross losses -- (38) --
The tax provision related to these net realized gains and losses was $0, $2 and
$0.
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 2 - SECURITIES (Continued)
The fair value of debt securities and carrying amount, if different, at year end
2005 by contractual maturity were as follows. Securities not due at a single
maturity date, primarily mortgage-backed securities, are shown separately.
Held-to-maturity Available
---------------------- for sale
Carrying Fair Fair
Amount Value Value
---------- ---------- ----------
Due in one year or less $ -- $- $ --
Due from one to five years 50 50 1,973
Due from five to ten years -- -- 5,454
Due after ten years -- -- 4,553
Mortgage-backed -- -- 12,231
---------- ---------- ----------
Total $ 50 $ 50 $ 24,211
========== ========== ==========
Securities pledged at year end 2005 and 2004 had a carrying amount of $0 and
$2,249 and were pledged to secure repurchase agreements. At year end 2005 and
2004, there were no holdings of securities of any one issuer, other than the
U.S. Government and its agencies, in an amount greater than 10% of shareholders'
equity.
Securities with unrealized losses at year end 2005 and 2004, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position, are as follows:
Less than 12 Months 12 Months or More Total
---------------------- ---------------------- ----------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
---------- ---------- ---------- ---------- ---------- ----------
2005
- ----
U.S. Treasury and federal agency $ 495 $ (5) $ 6,106 $ (189) $ 6,601 $ (194)
Mortgage-backed 4,226 (82) 6,536 (161) 10,762 (243)
State and county municipal 4,872 (164) -- -- 4,872 (164)
---------- ---------- ---------- ---------- ---------- ----------
Total temporarily impaired $ 9,593 $ (251) $ 12,642 $ (350) $ 22,235 $ (601)
========== ========== ========== ========== ========== ==========
2004
- ----
U.S. Treasury and federal agency $ 4,270 $ (29) $ 3,325 $ (170) $ 7,595 $ (199)
Mortgage-backed 7,826 (72) 360 (13) 8,186 (85)
State and county municipal 684 (2) -- -- 684 (2)
---------- ---------- ---------- ---------- ---------- ----------
Total temporarily impaired $ 12,780 $ (103) $ 3,685 $ (183) $ 16,465 $ (286)
========== ========== ========== ========== ========== ==========
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 2 - SECURITIES (Continued)
The Company evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to the length of time and the extent to
which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer, and the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. In analyzing an issuer's financial
condition, the Company may consider whether the securities are issued by the
federal government or its agencies, whether downgrades by bond rating agencies
have occurred, and the results of reviews of the issuer's financial condition.
The Company views these unrealized losses to be temporary in nature. The driving
factor behind the reduction in fair value below cost is the increase in market
interest rates, not the credit quality of the debt securities, most of which are
rated Aaa or higher and have not been downgraded. The Company's portfolio value
has declined 2.63% from cost which is consistent with normal fluctuations of
value due to changes in interest rates. The Company expects that the value of
its portfolio will recover over time as the debt securities approach maturity.
As management has the ability to hold these securities until maturity, or for
the foreseeable future if classified as available for sale, no declines are
deemed to be other-than-temporary.
NOTE 3 - LOANS
Loans at year end were as follows:
2005 2004
------- -------
Commercial $16,681 $15,855
Real estate:
Residential 57,985 46,663
Commercial 135,115 113,761
Construction(1) 20,245 5,621
Farmland 900 2,160
Consumer 3,461 6,013
------- -------
Subtotal 234,387 190,073
Less: Net deferred loan fees (149) (93)
Allowance for loan losses (2,207) (1,843)
------- -------
Loans, net $232,031 $188,137
======== ========
(1) Of the $20,245 construction loans at December 31, 2005, $18,832 are
permanent commercial real estate loans in the construction phase.
Activity in the allowance for loan losses was as follows:
2005 2004 2003
------- ------- -------
Beginning balance $ 1,843 $ 1,679 $ 1,100
Provision for loan losses 481 282 1,580
Loans charged-off (117) (130) (1,001)
Recoveries -- 12 --
------- ------- -------
Ending balance $ 2,207 $ 1,843 $ 1,679
======= ======= =======
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 3 - LOANS (Continued)
Impaired loans were as follows:
2005 2004
------ ------
Year-end loans with no allocated allowance
for loan losses $ -- $ 209
Year-end loans with allocated allowance
for loan losses 408 342
------ ------
Total $ 408 $ 551
====== ======
Amount of the allowance for loan losses allocated $ 165 $ 245
====== ======
2005 2004 2003
------ ------ ------
Average of impaired loans during the year $ 481 $ 758 $1,318
Interest income recognized during impairment 24 25 --
Cash-basis interest income recognized 24 25 --
Nonperforming loans were as follows:
2005 2004
------ ------
Loans past due over 90 days still on accrual $ 447 $ --
Nonaccrual loans 319 654
Loans past due over 90 days and still on accrual includes one loan totaling
$447, which was brought current by the customer in January, 2006. Nonperforming
loans includes both smaller balance homogeneous loans totaling $450 in 2005 and
$453 in 2004 that are collectively evaluated for impairment and individually
classified impaired loans totaling $316 in 2005 and $201 in 2004.
NOTE 4 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2005 2004
------- -------
Land $ 1,075 $ 1,075
Buildings 1,358 1,358
Furniture, fixtures and equipment 1,546 1,391
Leasehold improvements 980 940
Construction in progress 96 --
------- -------
5,055 4,764
Less: Accumulated depreciation (1,234) (970)
------- -------
$ 3,821 $ 3,794
======= =======
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 4 - PREMISES AND EQUIPMENT (Continued)
Depreciation expense, including amortization of leasehold improvements, was
$320, $216 and $191 for the years ended December 31, 2005, 2004 and 2003,
respectively.
Construction in Progress: Construction in progress represents leasehold
improvements and furniture and equipment for the Company's two newest office
facilities expected to open in 2006.
Operating Leases: The Company leases certain office facilities under operating
leases that generally contain annual escalation clauses and renewal options.
Rent expense was $419, $257 and $187 for 2005, 2004 and 2003, respectively. Rent
commitments under noncancelable operating leases, before considering renewal
options that generally are present, were as follows:
2006 $ 608
2007 640
2008 671
2009 682
2010 693
Thereafter 3,127
---------
Total $ 6,421
=========
NOTE 5 - DEPOSITS
Time deposits of $100,000 or more were $24,466 and $20,904 at year end 2005 and
2004.
Scheduled maturities of time deposits for the next five years were as follows:
2006 $ 45,629
2007 16,048
2008 2,229
2009 1,952
2010 275
Thereafter 71
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES
At year end, advances from FHLB were as follows:
2005 2004
------- -------
Advances maturing April 11, 2008, at a
fixed rate of 4.36% $ 3,000 $ --
Overnight advances maturing daily, at a
daily variable interest rate of 4.40%
at December 31, 2005 10,650 --
------- -------
$13,650 $ --
======= =======
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES (Continued)
Each advance is payable at its maturity date, with a prepayment penalty for
fixed rate advances. The advances were collateralized by a blanket lien
arrangement of the Company's first mortgage loans, second mortgage loans and
commercial real estate loans. Collateralized loans totaled $51,852 at December
31, 2005. Based on this collateral and the Company's holdings of FHLB stock, the
Company was eligible to borrow up to $39,260 at year end 2005.
Payment Information
Required payments over the next five years are:
2006 $ 10,650
2007 --
2008 3,000
2009 --
2010 --
NOTE 7 - SUBORDINATED DEBENTURES
On June 17, 2004, the Company participated in a pooled offering of trust
preferred securities. The Company formed Jacksonville Statutory Trust I (the
"Trust"), a wholly owned statutory trust subsidiary for the purpose of issuing
the trust preferred securities. The Trust used the proceeds from the issuance of
$4,000 in trust preferred securities to acquire junior subordinated debentures
of the Company. The trust preferred securities essentially mirror the debt
securities, carrying a cumulative preferred dividend at a variable rate equal to
the interest rate on the debt securities (three-month LIBOR plus 263 basis
points). The initial rate in effect at the time of issuance was 4.06% and is
subject to change quarterly. The rate in effect at December 31, 2005 was 7.13%.
The debt securities and the trust preferred securities each have 30-year lives.
The trust preferred securities and the debt securities are callable by the
Company or the Trust, at their respective option after five years, and at
varying premiums and sooner in specific events, subject to prior approval by the
Federal Reserve Board, if then required. The Company has treated the trust
preferred securities as Tier 1 capital up to the maximum amount allowed, and the
remainder as Tier 2 capital for federal regulatory purposes (see Note 12).
In relation to the issuance, bank regulators have imposed various conditions on
the Company. The conditions include, among other things, that: (1) the Company
would not assume additional debt without prior approval by the Federal Reserve
Board; and (2) the Company and the Bank will remain well-capitalized at all
times.
Under FASB Interpretation No. 46, the trust is not consolidated with the
Company. Accordingly, the Company does not report the securities issued by the
trust as liabilities, and instead reports as liabilities the subordinated
debentures issued by the Company and held by the trust.
There are no required principal payments on subordinated debentures over the
next five years.
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 8 - BENEFIT PLANS
Profit Sharing Plan: The Company sponsors a 401(k) profit sharing plan which is
available to all employees electing to participate after meeting certain
length-of-service requirements. The plan allows contributions by employees up to
15% of their compensation, which are matched equal to 100% of the first 6% of
the compensation contributed. Expense for 2005, 2004 and 2003 was $113, $105 and
$90, respectively.
Directors' Stock Purchase Plan: Following approval by the shareholders at the
2003 Annual Meeting, the Company established the Directors' Stock Purchase Plan
for nonemployee directors. Under this Plan, directors may elect to receive
shares of the Company's common stock as an alternative to the equivalent amounts
of cash for directors' fees. A total of 100,000 shares of the Company's common
stock were made available for issuance, all of which remained available for
issuance at December 31, 2005 and 2004, as all transactions executed to date
were open market purchases. The Company's expense in connection with this plan
was $187, $176 and $116 in 2005, 2004 and 2003, respectively, which is included
in director fees and other expenses in the accompanying consolidated statements
of income.
NOTE 9 - INCOME TAXES
Income tax expense (benefit) was as follows:
2005 2004 2003
------- ------- -------
Current federal $ 1,228 $ 330 $ --
Current state 235 57 --
Deferred federal (188) 358 523
Deferred state (33) 61 90
-------- ------- -------
Total $ 1,242 $ 806 $ 613
======= ======= =======
Effective tax rates differ from federal statutory rate of 34% applied to income
before income taxes due to the following:
2005 2004 2003
------- ------- -------
Federal statutory rate times financial statement
income $ 1,161 $ 728 $ 550
Effect of:
Tax-exempt income (70) (1) -
State taxes, net of federal benefit 145 78 59
Other, net 6 1 4
------- ------- -------
Total $ 1,242 $ 806 $ 613
======= ======= =======
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 9 - INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
2005 2004
------- -------
Deferred tax assets:
Allowance for loan losses $ 605 $ 497
Net unrealized loss on securities available for sale 218 85
Other 43 --
------- -------
866 582
------- -------
Deferred tax liabilities:
Depreciation 369 405
Other 33 67
------- -------
402 472
------- -------
Net deferred tax asset $ 464 $ 110
======= =======
NOTE 10 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors and their affiliates in 2005 were as
follows:
Beginning balance $ 5,745
New loans 4,329
Repayments (2,066)
-------
Ending balance $ 8,008
=======
Deposits from principal officers, directors and their affiliates at year end
2005 and 2004 were $6,464 and $5,129, respectively.
NOTE 11 - STOCK OPTIONS AND WARRANTS
Stock Options: Options to buy stock are granted to directors, officers and
employees under the Company's Stock Option Plan. Options available to be issued
are equal to 15% of the total shares outstanding. As of December 31, 2005 and
2004, the Plan provided for the issuance of up to 257,207 and 256,254 options,
respectively. Exercise price is the market price at date of grant, so there is
no compensation expense recognized in the income statement. The maximum option
term is ten years, and options vest over three to five years.
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 11 - STOCK OPTIONS AND WARRANTS (Continued)
A summary of the activity in the plan is as follows:
2005 2004 2003
------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year 197,657 $ 13.50 172,357 $ 10.48 139,857 $ 10.00
Granted 5,000 29.00 46,500 23.25 32,500 12.55
Exercised (8,000) 11.48 (16,300) 10.09 -- --
Forfeited or expired (800) 23.25 (4,900) 11.25 -- --
-------- -------- -------- -------- -------- --------
Outstanding at end of year 193,857 $ 13.94 197,657 $ 13.50 172,357 $ 10.48
======== ======== ======== ======== ======== ========
Options exercisable at year end 133,157 $ 11.06 124,357 $ 10.12 126,757 $ 10.00
======== ======== ======== ======== ======== ========
Options outstanding at year end 2005 were as follows:
Outstanding Exercisable
------------------------- -----------
Weighted
Average
Remaining
Contractual
Number Life Number
----------- ----------- -----------
$ 10.00 115,357 4.93 113,757
$ 12.55 28,500 7.18 10,800
$ 23.25 45,000 8.27 8,600
$ 29.00 5,000 9.70 --
----------- -----------
Outstanding at year end 193,857 133,157
=========== ===========
Stock Warrants: During 2002, the Company had completed an offering of 225,000
investment units, initially to existing shareholders through a rights offering,
and then to the general public in a community offering. Each unit offered for
$21.00 consisted of two shares of common stock and one warrant to purchase one
share of common stock for $13.00 through September 30, 2004. All stock warrants
issued have been exercised. During 2004, there were 224,900 warrants exercised,
resulting in additional capital of $2,923.
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 12 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON
RETAINED EARNINGS
Banks and bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure
to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. At year end 2005 and
2004, the most recent regulatory notifications categorized the Bank and Company
as well capitalized under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that management
believes have changed the institution's category.
Actual and required capital amounts (in millions) and ratios are presented below
at year end.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
2005
- ----
Total Capital to risk
weighted assets
Consolidated $ 26,413 10.97% $ 19,258 8.00% N/A N/A
Bank 24,505 10.17 19,284 8.00 $ 24,105 10.00%
Tier 1 (Core) Capital to risk
weighted assets
Consolidated 24,206 10.05 9,629 4.00 N/A N/A
Bank 22,298 9.25 9,642 4.00 14,463 6.00
Tier 1 (Core) Capital to
average assets
Consolidated 24,206 9.06 10,682 4.00 N/A N/A
Bank 22,298 8.34 10,698 4.00 13,373 5.00
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 12 - CAPITAL REQUIREMENTS AND RESTRICTIONS
ON RETAINED EARNINGS (Continued)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
2004
- ----
Total Capital to risk
weighted assets
Consolidated $ 23,787 12.15% $ 15,662 8.00% N/A N/A
Bank 19,781 10.11 15,651 8.00 $ 19,564 10.00%
Tier 1 (Core) Capital to risk
weighted assets
Consolidated 21,944 11.21 7,831 4.00 N/A N/A
Bank 17,938 9.17 7,826 4.00 11,738 6.00
Tier 1 (Core) Capital to
average assets
Consolidated 21,944 10.09 8,699 4.00 N/A N/A
Bank 17,938 8.24 8,704 4.00 10,880 5.00
Dividend Restrictions - The Company's principal source of funds for dividend
payments is dividends received from the Bank. Banking regulations require
maintaining certain capital levels and restrict the payment of dividends by the
Bank to the Company or by the Company to shareholders. Specifically, a Florida
state-chartered commercial bank may not pay cash dividends that would cause its
capital to fall below the minimum amount required by federal or state law.
Accordingly, commercial banks may only pay dividends out of the total of current
net profits plus retained net profits of the preceding two years to the extent
it deems expedient, except that no bank may pay a dividend at any time that the
total of net income for the current year when combined with retained net income
from the preceding two years produces a loss. The future ability of the Bank to
pay dividends to the Company also depends in part on the FDIC capital
requirements in effect and the Company's ability to comply with such
requirements.
During 2006, the Bank could, without prior approval, declare dividends of
approximately $4,044 plus any 2006 net profits retained to the date of the
dividend declaration.
NOTE 13 - LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 13 - LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES (Continued)
There are no unused lines of credit or letters of credit offered at a fixed
rate. The contractual amount of variable rate financial instruments with
off-balance-sheet risk was as follows at year end.
2005 2004
------- -------
Loan commitments and unused lines of credit $31,277 $24,512
Standby letters of credit 549 1,045
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year end:
2005 2004
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial assets
Cash and cash equivalents $ 4,767 $ 4,767 $ 6,735 $ 6,735
Securities available for sale 24,211 24,211 23,125 23,125
Securities held to maturity 50 50 50 50
Loans, net 232,031 230,714 188,137 187,575
Federal Home Loan Bank stock 1,062 1,062 353 353
Accrued interest receivable 1,425 1,425 973 973
Financial liabilities
Deposits 234,211 231,934 201,188 202,656
Federal funds purchased -- -- -- --
FHLB advances 13,650 13,650 -- --
Subordinated debentures 4,000 4,000 4,000 4,000
Accrued Interest Payable 161 161 119 119
The methods and assumptions used to estimate fair value are described as
follows:
Carrying amount is the estimated fair value for cash and cash equivalents,
interest-bearing deposits, FHLB stock, accrued interest receivable and payable,
demand deposits, short-term debt, including FHLB advances, subordinated
debentures and variable rate loans or deposits that reprice frequently and
fully. Security fair values are based on market prices or dealer quotes and, if
no such information is available, on the rate and term of the security and
information about the issuer. For fixed rate loans or deposits and for variable
rate loans or deposits with infrequent repricing or repricing limits, fair value
is based on discounted cash flows using current market rates applied to the
estimated life and credit risk. Fair values for impaired loans are estimated
using discounted cash flow analysis or underlying collateral values. Fair value
of loans held for sale is based on market quotes. Fair value of debt is based on
current rates for similar financing. The fair value of off-balance-sheet items
is considered nominal.
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Jacksonville Bancorp, Inc. follows:
CONDENSED BALANCE SHEETS
December 31,
2005 2004
-------- -------
ASSETS
Cash and cash equivalents $ 1,669 $ 3,441
Investment in banking subsidiaries 21,938 17,798
Other assets 360 665
-------- -------
Total assets $ 23,967 $21,904
======== =======
LIABILITIES AND EQUITY
Subordinated debt $ 4,000 $ 4,000
Accrued expenses and other liabilities 121 100
Shareholders' equity 19,846 17,804
-------- -------
Total liabilities and shareholders' equity $ 23,967 $21,904
======== =======
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
2005 2004 2003
-------- -------- --------
Other income $ 5 $ 2 $ --
Interest expense (246) (99) --
Other expense (528) (508) (416)
-------- -------- --------
Income (loss) before income tax
and undistributed subsidiary income (769) (605) (416)
Income tax expense (benefit) (282) (227) (157)
Equity in undistributed subsidiary income 2,660 1,713 1,263
-------- -------- --------
Net income $ 2,173 $ 1,335 $ 1,004
======== ======== ========
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL
INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
2005 2004 2003
------- ------- -------
Cash flows from operating activities
Net income $ 2,173 $ 1,335 $ 1,004
Adjustments:
Equity in undistributed subsidiary income (2,660) (1,713) (1,263)
Amortization 2 1 3
Issuance of treasury stock as compensation 131 -- --
Change in other assets 302 (297) 261
Change in other liabilities 74 20 68
------- ------- -------
Net cash from operating activities 22 (654) 73
Cash flows from investing activities
Investments in subsidiaries (1,700) (3,500) --
------- ------- -------
Net cash from investing activities (1,700) (3,500) --
Cash flows from financing activities
Proceeds from issuance of subordinated debt -- 4,000 --
Proceeds from exercise of common stock warrants -- 2,923 1
Proceeds from exercise of stock options 92 165 --
Purchase of treasury stock (186) -- --
------- ------- -------
Net cash from financing activities (94) 7,088 1
------- ------- -------
Net change in cash and cash equivalents (1,772) 2,934 74
Beginning cash and cash equivalents 3,441 507 433
------- ------- -------
Ending cash and cash equivalents $ 1,669 $ 3,441 $ 507
======= ======= =======
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 16 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow:
2005 2004 2003
----------- ----------- -----------
Basic
Net income $ 2,173 $ 1,335 $ 1,004
=========== =========== ===========
Weighted average common shares
outstanding 1,711,148 1,555,266 1,467,070
=========== =========== ===========
Basic earnings per common share $ 1.27 $ .86 $ .68
=========== =========== ===========
Diluted
Net income $ 2,173 $ 1,335 $ 1,004
=========== =========== ===========
Weighted average common shares
outstanding for basic earnings per
common share 1,711,148 1,555,266 1,467,070
Add: Dilutive effects of assumed
exercises of stock options and warrants 88,526 142,468 30,815
----------- ----------- -----------
Average shares and dilutive potential
common shares 1,799,674 1,697,734 1,497,885
=========== =========== ===========
Diluted earnings per common share $ 1.21 $ .79 $ .67
=========== =========== ===========
Stock options for 47,000, 34,000 and 33,000 shares of common stock were not
considered in computing diluted earnings per common share for 2005, 2004 and
2003, respectively, because they were anti-dilutive.
NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related tax effects were as
follows:
2005 2004 2003
------ ------ ------
Unrealized holding gains (losses) on
available for sale securities $ (354) $ (142) $ (264)
Reclassification adjustment for (gains) losses
realized in income -- (5) --
------ ------ ------
Net unrealized gains (losses) (354) (147) (264)
Tax effect 133 56 99
------ ------ ------
Other comprehensive income (loss) $ (221) $ (91) $ (165)
====== ====== ======
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Net Interest
Income after Earnings per Share
Interest Provision for Net ----------------------------
Income Loan Loss Income Basic Diluted
------------- ------------- ------------- ------------- -------------
2005
- ----
First Quarter 3,356 1,980 367 .21 .20
Second Quarter 3,639 1,963 443 .26 .25
Third Quarter 4,175 2,301 676 .39 .38
Fourth Quarter 4,578 2,494 687 .41 .38
2004
- ----
First Quarter 2,433 1,455 383 .26 .24
Second Quarter 2,528 1,575 335 .23 .20
Third Quarter 2,840 1,698 317 .20 .19
Fourth Quarter 3,057 1,920 300 .17 .16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 30, 2004, Hacker, Johnson & Smith PA ("Hacker, Johnson") was advised
that the firm's services as auditors of the Company were terminated. The Company
further engaged Crowe Chizek and Company LLC ("Crowe Chizek") to serve as its
principal independent accountant in auditing the Company's financial statements
and performing review of interim filings, subject only to the finalization of
Crowe Chizek's routine due diligence procedures. The decision to replace
auditors was approved by the Company's Board of Directors, pursuant to the
recommendation of the Audit Committee.
In connection with the audit of the Company's consolidated financial statements
for the year ended December 31, 2003, and through the date of this Form 10-K,
there were no disagreements with Hacker, Johnson on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to the satisfaction of Hacker, Johnson, would
have caused Hacker, Johnson to make reference to the matter in their report.
In addition, the Company did not engage Crowe Chizek during the year ended
December 31, 2003, or any subsequent interim period prior to engaging Crowe
Chizek, regarding the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and procedures
performed as of the end of the period covered by this report the Chief Executive
and Chief Financial Officers of the Company concluded that the Company's
disclosure controls and procedures were adequate.
(b) Changes in internal controls. The Company made no significant changes in its
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the Chief
Executive and Chief Financial Officers.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information regarding our directors and executive officers contained under
the captions "Proposal 1: Election of Directors," "Executive Officers of the
Registrant," and "Section 16(a) Beneficial Ownership Reporting Compliance" in
our Definitive Proxy Statement for the 2006 Annual Meeting of Shareholders is
incorporated herein by reference.
We have adopted a code of ethics which is applicable to our principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The full text of our code
of ethics is available on our website (www.jaxbank.com).
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the captions "Executive Compensation,"
"Directors' Fees," and "Compensation Committee Interlocks and Insider
Participation" in our Definitive Proxy Statement for the 2006 Annual Meeting of
Shareholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Security Ownership of Directors and
Officers and Certain Beneficial Owners" in our Definitive Proxy Statement for
the 2006 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Certain Relationships and Related
Transactions" in our Definitive Proxy Statement for the 2006 Annual Meeting of
Shareholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the caption "Principal Accountant Fees and
Services" in our Definitive Proxy Statement for the 2006 Annual Meeting of
Shareholders is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS
--------
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1 Articles of Incorporation of Registrant (incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement
on Form SB-2, as effective with the Securities and Exchange
Commission on September 30, 1998, Registration No. 333-64815).
3.2 Bylaws of Registrant (incorporated by reference to Exhibit 3.2 of
the Company's Quarterly Report on Form 10-QSB for period ending
June 30, 2002 filed on August 14, 2002, File No. 000-30248)
4.1 Specimen Common Stock Certificate of Registrant (incorporated by
reference to Exhibit 4.0 of the Company's Registration Statement
on Form SB-2, as effective with the Securities and Exchange
Commission on September 30, 1998, Registration No. 333-64815).
10.1 Stock Option Plan (incorporated by reference to Exhibit 99.1 to
the Company's Registration Statement on Form S-8 filed on
November 9, 1999, File No. 333-90609).
10.2 Amendment to Stock Option Plan (incorporated by reference to
Exhibit 10.2 of the Company's Quarterly Report on Form 10-QSB for
the period ending June 30, 2002 filed on August 14, 2002, File
No. 000-30248).
10.3 Amendment No. 1 to Stock Option Plan (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form
S-8 filed on August 28, 2003, Registration No. 333-108331).
10.4 Jacksonville Bancorp, Inc., Directors' Stock Purchase Plan
(incorporated by reference to Appendix A of the Company's Proxy
Statement filed on April 10, 2003, File No. 000-30248)
10.5 Servicing Agreement with M & I Data Services (now known as
Metavante Corporation) (incorporated by reference to Exhibit 10.3
to the Company's Registration Statement on Form SB-2, as
effective with the Securities and Exchange Commission on
September 30, 1998, Registration No. 333-64815).
35
10.6 Employment Agreement with Gilbert J. Pomar, III (incorporated by
reference to Exhibit 10.1 to the Company's Form 10-QSB for the
quarter ended June 30, 1999, filed on August 13, 1999, File No.
000-30248).
10.7 Lease Agreement between The Jacksonville Bank and ABS Laura
Street, LLC (incorporated herein by reference from the Exhibits
to Form 10-QSB for the quarter ended September 30, 2004, filed
November 15, 2004).
14 Code of Ethics
16.1 Letter re Change in Certifying Accountant (incorporated herein by
reference to Exhibit 16 to the Company's Current Report on Form
8-K filed on May 6, 2004, File No. 000-30248).
21 Subsidiaries of the Registrant
23.1 Consent of Crowe Chizek and Company LLC, Independent Registered
Public Accounting Firm
23.2 Consent of Hacker, Johnson & Smith PA, Independent Registered
Public Accounting Firm
31.1 Certification of Chief Executive Officer required by Rule
13a-14(a)/15d-14(a) of the Exchange Act.
31.2 Certification of Chief Financial Officer required by Rule
13a-14(a)/15d-14(a) of the Exchange Act.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.1 Report of Hacker, Johnson & Smith PA dated February 13, 2004
36
SIGNATURES
Pursuant to the requirements of Sections 13 and 15(d) 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.
Dated: March 13, 2006 By:
--------------------------------------
Gilbert J. Pomar, III
President and Chief Executive Officer
Dated: March 13, 2006 By:
--------------------------------------
Valerie A. Kendall
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has
been signed by the following persons in the capacities and as of the dates
indicated:
Signature Title Date
- --------- ----- ----
Director March 13, 2006
- -----------------------------
D. Michael Carter, C.P.A.
Director March 13, 2006
- -----------------------------
Melvin Gottlieb
Director March 13, 2006
- -----------------------------
James M. Healey
Director March 13, 2006
- -----------------------------
John C. Kowkabany
Director March 13, 2006
- -----------------------------
Rudolph A. Kraft
Director March 13, 2006
- -----------------------------
R. C. Mills
Director March 13, 2006
- -----------------------------
Gilbert J. Pomar, III
Director March 13, 2006
- -----------------------------
John W. Rose
Chairman of the Board March 13, 2006
- ----------------------------- of Directors
Donald E. Roller
Director March 13, 2006
- -----------------------------
John R. Schultz
Director March 13, 2006
- -----------------------------
Price W. Schwenck
Director March 13, 2006
- -----------------------------
Charles F. Spencer
Director March 13, 2006
- -----------------------------
Bennett A. Tavar
Director March 13, 2006
- -----------------------------
Gary L. Winfield, M.D.
37