UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
------------------
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from __________ to ____________.
Commission file number 000-30248
JACKSONVILLE BANCORP, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3472981
------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 North Laura Street, Suite 1000, Jacksonville, Florida 32202
---------------------------------------------------------------
(Address of principal executive offices)
(904) 421-3040 (Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of The
Exchange Act).
Large Accelerated Filer |_| Accelerated Filer |_| Non-accelerated Filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of The Exchange Act).
Yes |_| No |X|
As of November 6, 2006, the latest practicable date, 1,742,872 of the
Registrant's common shares, $.01 par value, were issued and outstanding.
JACKSONVILLE BANCORP, INC.
TABLE OF CONTENTS
Page
PART I -FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets ............................................................ 3
Consolidated Statements of Income ...................................................... 4
Consolidated Statements of Changes in Shareholders' Equity.............................. 5
Consolidated Statements of Cash Flows .................................................. 6
Notes to Consolidated Financial Statements ............................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation....................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................... 24
Item 4. Disclosure Controls and Procedures................................................. 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................................. 25
Item 1A. Risk Factors....................................................................... 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........................ 25
Item 3. Defaults Upon Senior Securities.................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders................................ 25
Item 5. Other Information.................................................................. 25
Item 6. Exhibits........................................................................... 26
SIGNATURES ........................................................................................... 27
CERTIFICATIONS........................................................................................ 28
2
JACKSONVILLE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
September 30, December 31,
2006 2005
---- ----
(Unaudited)
ASSETS
Cash and due from banks $ 3,985 $ 4,399
Federal funds sold 5,063 368
--------- ---------
Total cash and cash equivalents 9,048 4,767
Securities available for sale 26,739 24,211
Securities held to maturity 50 50
Loans, net of allowance for loan losses
of $2,514 at 2006 and $2,207 at 2005 268,408 232,031
Premises and equipment, net 4,675 3,821
Bank-owned life insurance (BOLI) 4,791 4,635
Federal Home Loan Bank (FHLB) stock 1,975 1,062
Accrued interest receivable 2,082 1,425
Other assets 1,056 1,042
--------- ---------
Total assets $ 318,824 $ 273,044
========= =========
LIABILITIES
Deposits
Noninterest bearing $ 30,750 $ 40,582
Money market, NOW and savings deposits 143,861 127,425
Time deposits 85,525 66,204
--------- ---------
Total deposits 260,136 234,211
FHLB advances 31,750 13,650
Subordinated debt 4,000 4,000
Accrued expenses and other liabilities 780 1,337
--------- ---------
Total liabilities 296,666 253,198
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 8,000,000 shares authorized,
1,730,495 and 1,716,366 shares issued 17 17
Additional paid-in capital 17,915 17,526
Retained earnings 4,592 2,718
Treasury stock, 1,650 and 1,650 shares (61) (54)
Accumulated other comprehensive loss (305) (361)
--------- ---------
Total shareholders' equity 22,158 19,846
--------- ---------
Total liabilities and shareholders' equity $ 318,824 $ 273,044
========= =========
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
3
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Interest and dividend income
Loans, including fees $ 5,457 $ 3,926 $ 14,961 $ 10,405
Securities 310 233 884 730
Other 15 16 148 36
---------- ---------- ---------- ----------
Total interest income 5,782 4,175 15,993 11,171
Interest expense
Deposits 2,454 1,590 6,931 4,173
FHLB advances 354 77 646 196
Subordinated debt 84 64 238 177
Other 6 2 12 12
---------- ---------- ---------- ----------
Total interest expense 2,898 1,733 7,827 4,558
---------- ---------- ---------- ----------
Net interest income 2,884 2,442 8,166 6,613
Provision for loan losses 138 141 406 369
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 2,746 2,301 7,760 6,244
Noninterest income
Service charges on deposit accounts 144 169 400 494
Other income 146 106 377 245
---------- ---------- ---------- ----------
Total noninterest income 290 275 777 739
Noninterest expense
Salaries and employee benefits 962 740 2,755 2,354
Occupancy and equipment 395 278 1,133 861
Other 586 493 1,680 1,423
---------- ---------- ---------- ----------
Total noninterest expense 1,943 1,511 5,568 4,638
---------- ---------- ---------- ----------
Income before income taxes 1,093 1,065 2,969 2,345
Income tax expense 416 389 1,095 859
---------- ---------- ---------- ----------
Net income $ 677 $ 676 $ 1,874 $ 1,486
========== ========== ========== ==========
Weighted average:
Common shares 1,725,494 1,712,236 1,721,965 1,710,306
Dilutive stock options and warrants 91,105 86,951 86,720 86,800
---------- ---------- ---------- ----------
Dilutive shares 1,816,599 1,799,187 1,808,685 1,797,106
========== ========== ========== ==========
Basic earnings per common share $ .39 $ .39 $ 1.09 $ .87
========== ========== ========== ==========
Diluted earnings per common share $ .37 $ .38 $ 1.04 $ .83
========== ========== ========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
4
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Common Stock Additional Treasury Accumulated Other
Outstanding Paid-In Retained Stock Comprehensive
Shares Amount Capital Earnings Amount Income (Loss) Total
------ ------ ------- -------- ------ ------------- -----
Balance at January 1, 2005 1,708,366 $17 $17,381 $546 $ $(140) $17,804
Comprehensive income:
Net income 1,486 1,486
Change in unrealized gain (loss)
on securities available for
sale, net of tax effects (80) (80)
-------
Total comprehensive income 1,406
Purchase of treasury stock (4,500) (128) (128)
Issuance of treasury stock 3,000 1 83 84
Exercise of stock options,
including tax benefits of $21 4,800 69 69
--------- --- ------- ------ ---- ----- -------
Balance at September 30, 2005 1,711,666 $17 $17,451 $2,032 $(45) $(220) $19,235
========= === ======= ====== ==== ===== =======
Balance at January 1, 2006 1,714,716 $17 $17,526 $2,718 $(54) $(361) $19,846
Comprehensive income:
Net income 1,874 1,874
Change in unrealized gain (loss)
on securities available for
sale, net of tax effects 56 56
-------
Total comprehensive income 1,930
Purchase of treasury stock (5,250) (173) (173)
Issuance of treasury stock 5,250 6 166 172
Compensation expense and exercise
of common stock options,
including tax benefits of $112 14,129 383 383
--------- --- ------- ------ ---- ----- -------
Balance at September 30, 2006 1,728,845 $17 $17,915 $4,592 $(61) $(305) $22,158
========= === ======= ====== ====- ===== =======
Balance at July 1, 2005 1,711,666 $17 $17,450 $1,356 $(43) $(114) $18,666
Comprehensive income:
Net income 676 676
Change in unrealized gain (loss)
on securities available for
sale, net of tax effects (106) (106)
-------
Total comprehensive income 570
Purchase of treasury stock (1,500) (45) (45)
Issuance of treasury stock 1,500 1 43 44
--------- --- ------- ------ ---- ----- -------
Balance at September 30, 2005 1,711,666 $17 $17,451 $2,032 $(45) $(220) $19,235
========= === ======= ====== ==== ===== =======
Balance at July 1, 2006 1,721,852 $17 $17,725 $3,915 $(54) $(686) $20,917
Comprehensive income:
Net income 677 677
Change in unrealized gain (loss)
on securities available for
sale, net of tax effects 381 381
-------
Total comprehensive income 1,058
Purchase of treasury stock (1,650) (61) (61)
Issuance of treasury stock 1,800 3 54 57
Compensation expense and exercise
of common stock options,
including tax benefits of $54 6,843 187 187
--------- --- ------- ------ ---- ----- -------
Balance at September 30, 2006 1,728,845 $17 $17,915 $4,592 $(61) $(305) $22,158
========= === ======= ====== ====- ====== =======
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
5
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
2006 2005
---- ----
Cash flows from operating activities
Net income $ 1,874 $ 1,486
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization 384 314
Net amortization of deferred loan fees (142) (113)
Provision for loan losses 406 369
Premium amortization, net of accretion 31 31
Increase in cash surrender value of BOLI (156) (82)
Stock-based compensation 279 122
Loss on disposal of assets 9 --
Net change in accrued interest receivable and other assets (761) (668)
Net change in accrued expenses and other liabilities (559) 54
-------- --------
Net cash from operating activities 1,365 1,513
Cash flows from investing activities
Purchases of securities available for sale (5,203) (5,422)
Proceeds from maturities of securities available for sale 2,733 4,783
Loan (originations) payments, net (36,641) (34,043)
Purchase of BOLI -- (4,500)
Additions to premises and equipment, net (1,188) (275)
Purchases of Federal Home Loan Bank stock (913) (364)
-------- --------
Net cash from investing activities (41,212) (39,821)
Cash flows from financing activities
Net change in deposits 25,925 31,112
Net change in short-term FHLB advances 18,100 2,000
Net change in Fed funds purchased -- 267
Proceeds from long-term FHLB advances -- 3,000
Proceeds from exercise of stock options 164 48
Excess tax benefits from stock-based payment arrangements 112 21
Purchase of treasury stock (173) (128)
-------- --------
Net cash from financing activities 44,128 36,320
-------- --------
Net change in cash and cash equivalents 4,281 (1,988)
Cash and cash equivalents at beginning of period 4,767 6,735
-------- --------
Cash and cash equivalents at end of period $ 9,048 $ 4,747
======== ========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 7,708 $ 4,545
Income taxes 1,722 1,069
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
6
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
Jacksonville Bancorp, Inc. is a bank holding company headquartered in
Jacksonville, Florida. Jacksonville Bancorp, Inc. owns and operates The
Jacksonville Bank, which has a total of five operating branches in Jacksonville,
Florida.
The consolidated financial statements include the accounts of Jacksonville
Bancorp, Inc. and its wholly owned 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 subsidiary is collectively
referred to as the "Bank." The Company's financial condition and operating
results principally reflect those of the Bank. All intercompany balances and
amounts have been eliminated. For further information refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2005.
The accounting and reporting policies of the Company reflect banking industry
practice and conform to generally accepted accounting principles in the United
States of America. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported asset and liability balances and revenue and expense amounts and the
disclosure of contingent assets and liabilities. Actual results could differ
significantly from those estimates.
The consolidated financial information included herein as of and for the periods
ended September 30, 2006 and 2005 is unaudited; however, such information
reflects all adjustments which are, in the opinion of management, necessary for
a fair statement of results for the interim periods. The December 31, 2005
consolidated balance sheet was derived from the Company's December 31, 2005
audited consolidated financial statements.
NOTE 2 - STOCK-BASED COMPENSATION AND STOCK PLANS
Prior to January 1, 2006, the Company followed 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 Statement 123, the Company followed the guidelines of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("Opinion 25") and disclosed pro forma compensation expense in
accordance with Statement 148. No compensation expense for stock options was
recorded in the financial statements prior to January 1, 2006.
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS 123R (Revised 2004), Share-Based Payment ("Statement 123(R)"), which is a
revision of Statement 123. Statement 123(R) supersedes Opinion 25. Generally,
the approach in Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
Statement of Income based on their fair values. Pro forma disclosure is no
longer an alternative method under Statement 123(R).
Statement 123(R) is effective for fiscal years beginning after June 15, 2005.
The Company adopted Statement 123(R) using the "modified prospective" method in
which compensation cost is recognized beginning with the effective date (a)
based on the requirement of Statement 123(R) for all stock-based payments
granted after the effective date and (b) based on the requirements of Statement
123 for all awards granted to employees prior to the effective date of Statement
123(R) that remain unvested as of the effective date. Additionally, compensation
costs for the portion of outstanding awards for which service has not been
rendered (such as unvested options) that are outstanding as of the date of
adoption are recognized as the remaining services are rendered. The Company
recognizes the fair value of stock-based compensation awards in salaries and
benefits in the condensed consolidated statement of income on a straight-line
basis over the vesting period.
- --------------------------------------------------------------------------------
7
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
The Company recorded stock-based compensation expense for the periods ended
September 30, 2006 and 2005 as follows, the components of which are further
discussed below:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- -----------------
2006 2005 2006 2005
---- ---- ---- ----
Stock Options $ 36 $ -- $ 98 $ --
Stock Issued for Director Compensation 57 44 172 122
Restricted Stock 6 -- 9
---- ---- ---- ----
Total $ 99 $ 44 $279 $122
==== ==== ==== ====
The recorded amounts of stock-based compensation expense for stock options in
2006 represent amortization related to stock-based payments in accordance with
Statement 123(R). The Company recognized no tax benefits related to the above
stock option expense, as all stock options expensed above are incentive stock
options. However, the Company recognized tax benefits of $54 and $112 related to
the exercise of stock options during the three and nine months ended September
30, 2006, respectively. In addition, the Company recognized tax benefits of $2
and $3 related to restricted stock expense for the three and nine month periods,
respectively.
SFAS 123R requires the recognition of stock-based compensation for the number of
awards that are ultimately expected to vest. As a result, for most awards,
recognized stock compensation was reduced for estimated forfeitures prior to
vesting primarily based on historical annual forfeiture rates of approximately
2.56%. Estimated forfeitures will be reassessed in subsequent periods and may
change based on new facts and circumstances. Prior to January 1, 2006, actual
forfeitures were accounted for as they occurred for purposes of required pro
forma stock compensation disclosures.
During 2005, the Company accounted for stock-based payments to employees using
Opinion 25's intrinsic value method and recognized no compensation costs for
employee stock options in prior years. Had the Company adopted Statement 123(R)
in 2005, the impact of that Standard would have approximated the impact of
Statement 123 in the disclosure of pro forma net income and earnings per share
described as follows:
For the Three Months For the Nine Months
Ended September 30, 2005 Ended September 30, 2005
Net income as reported $ 676 $ 1,486
Deduct: Stock-based compensation
expense determined under fair
value based method 30 89
--------------- ---------------
Pro forma net income $ 646 $ 1,397
=============== ===============
Basic--as reported $ .39 $ .87
Basic--pro forma $ .38 $ .82
Diluted--as reported $ .38 $ .83
Diluted--pro forma $ .36 $ .78
- --------------------------------------------------------------------------------
8
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Following approval by the shareholders at the 2003 Annual Meeting, the Company
established the Directors' Stock Purchase Plan for non-employee directors. Under
this Stock Purchase Plan, Directors may elect to receive shares of the Company's
common stock as an alternative to the equivalent amounts of cash for director's
fees. A total of 100,000 shares of the Company's common stock were made
available for issuance, all of which remained available at September 30, 2006,
as all transactions executed to date were open market purchases. The Company's
expense in connection with this Plan was $172 and $122, for the nine months
ended September 30, 2006 and 2005, respectively, which is included in other
expenses in the Consolidated Statements of Income.
On April 25, 2006, the Company's shareholders approved the Jacksonville Bancorp,
Inc. 2006 Stock Incentive Plan (the "2006 Plan"). Under the 2006 Plan, the
Compensation Committee of the Board of Directors, or other such committee
appointed by the Board, consisting of only "non-employee, independent
directors," has full authority to select the eligible individuals to whom awards
will be granted, the types of awards granted, the number of shares subject to an
award, the exercise price, and other terms and conditions of the award. Up to
20,000 shares of the Company's common stock, par value of $.01 per share, were
made available for issuance for awards under the 2006 Plan, in the form of
incentive stock options, restricted stock, restricted stock units, performance
grants, and stock appreciation rights. Shares subject to an award may be
authorized and unissued shares, treasury shares, or shares of common stock
purchased on the open market. Any award that expires or is forfeited for any
reason is returned to the 2006 Plan. On April 25, 2006, 904 shares of restricted
stock were granted under the 2006 Plan, with a vesting date of March 9, 2008; on
July 25, 2006, 1,200 shares of restricted stock were granted under the 2006 Plan
with a vesting date of July 25, 2009.
The 2006 Plan is a new plan and does not supersede the Company's original Stock
Option Plan, adopted by the Company's shareholders on April 26, 2000, which
continues to govern awards made under it. Under the Company's original Stock
Option Plan, options to buy stock are granted to directors, officers and
employees. Options available to be issued under the original Stock Option Plan
are equal to 15% of the total shares outstanding. At September 30, 2006, the
original Stock Option Plan provided for the issuance of up to 259,327 shares, of
which 27,470 shares remain available for issuance.
Stock options are granted under both stock option plans with an exercise price
equal to or greater than the stock fair market value at the date of grant. All
stock options granted have ten-year lives, generally containing vesting terms of
three to five years. Certain grants have been made that vest immediately. Common
stock issued upon exercise of stock options are newly-issued shares.
The fair value of each option award is estimated on the date of grant using the
Black Scholes-Merton Closed-Form ("Black-Scholes") option valuation model that
uses the assumptions such as expected stock price volatility, expected option
life, risk-free interest rate, and dividend yield. Expected volatilities are
based on historical volatilities of the Company's stock. The Company uses
historical data to estimate option exercises and employee terminations within
the valuation model. The expected term of options granted is determined based on
guidance contained in Staff Accounting Bulletin No. 107, Share-based Payment.
The risk-free rate for periods within the contractual life of the option is
based on the U.S. Treasury yield curve in effect at the time of grant. The
dividend yield is zero as the Company has not historically paid any dividends
and does not anticipate payment of dividends in the future.
- --------------------------------------------------------------------------------
9
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
The Company believes that the use of the Black-Scholes model meets the fair
value measurement objectives of Statement 123(R) and reflects all substantive
characteristics of the instruments being valued. On July 25, 2006, the Company
granted 8,000 incentive stock options at an exercise price of $32.50 under its
original Stock Option Plan. Likewise, on September 30, 2005, the Company granted
5,000 incentive stock options at an exercise price of $29.00 under its original
Stock Option Plan. The following table represents the assumptions used for the
Black-Scholes option-pricing model for options granted during the following
periods:
Nine months ended September 30,
2006 2005
---- ----
Dividend yield 0.00% 0.00%
Risk-free interest rate 5.03% 3.49%
Expected stock price volatility 27.22% 23.05%
Expected option life 7.50 years 8.65 years
Weighted average grant date fair
value options granted $14.01 $11.03
The following table reports stock option activity for the three and nine months
ended September 30, 2006:
- --------------------------------------------------------------------------------
10
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Weighted
Weighted Average
Average Remaining Aggregate Weighted
Number of Exercise Contractual Intrinsic Average
Options Price Term Value Fair Value
Outstanding at January 1, 2006 193,857 $ 13.94 $ 5.41
Granted -- -- -- --
Exercised (5,286) 10.00 111 3.50
Forfeited -- -- -- --
------------------------------------------------------------------------------
Outstanding at March 31, 2006 188,571 $ 14.05 $ 5.46
Granted -- -- -- --
Exercised (2,000) 10.00 43 4.32
Forfeited -- -- -- --
------------------------------------------------------------------------------
Outstanding at June 30, 2006 186,571 $ 14.09 $ 5.47
Granted 8,000 32.50 20 14.01
Exercised (6,843) 13.32 154 4.90
Forfeited -- -- -- --
------------------------------------------------------------------------------
Outstanding at September 30, 2006 187,728 14.91 5.00 3,772 5.86
Fully vested and expected to vest 179,050 14.60 5.50 3,652 5.74
------------------------------------------------------------------------------
Exercisable at September 30, 2006 135,828 $ 12.01 4.45 $ 3,112 $ 4.69
==============================================================================
As of September 30, 2006, there was $397 of total unrecognized compensation cost
related to unvested stock options granted. The cost is expected to be recognized
over a remaining weighted average period of 1.6 years.
The following table reports restricted stock activity during the nine months
ended September 30, 2006:
Aggregate
Number of Intrinsic
Shares Value
----------- -------------
Unvested shares at January 1, 2006 --
Shares granted 2,104
Shares vested and distributed --
Shares forfeited (102)
------------ -------------
Unvested shares at September 30, 2006 2,002 $ 70
NOTE 3 - CAPITAL ADEQUACY
Federal banking regulators have established certain capital adequacy standards
required to be maintained by banks and bank holding companies. The minimum
requirements established in the regulations are set forth in the table below,
along with the actual ratios at September 30, 2006 and December 31, 2005:
- --------------------------------------------------------------------------------
11
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Adequately
Capitalized September 30, 2006 December 31, 2005
Requirement Actual Actual
--------------- ---------------------------- --------------
Tier 1 Capital (to Average Assets)
Consolidated >4% 8.55% 9.06%
Bank >4% 8.44% 8.34%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated >4% 9.55% 10.05%
Bank >4% 9.30% 9.25%
Total Capital (to Risk Weighted Assets)
Consolidated >8% 10.47% 10.97%
Bank >8% 10.19% 10.17%
In addition, under such standards, a well-capitalized bank is one that has a
total risk-based capital ratio equal to or greater than 10%, a Tier 1 risk-based
capital ratio equal to or greater than 6%, and a Tier 1 leverage capital ratio
equal to or greater than 5%. Management believes, as of September 30, 2006, that
the Company and the Bank met all capital requirements to which they are subject.
The Company has included in Tier 1 Capital and Total Capital the trust preferred
securities that were issued in June 2004.
NOTE 4 - FHLB ADVANCES
FHLB advances at September 30, 2006 consisted of a $3,000 fixed rate advance and
a $28,750 overnight advance. The interest rate on the overnight advance was
5.61% at September 30, 2006. The interest rate on the fixed rate advance, which
matures April 11, 2008, is 4.36%. The advances are collateralized by a blanket
lien on the Company's residential and commercial real estate loan portfolio. The
Company had $13,650 in advances outstanding at December 31, 2005, which
consisted of the $3,000 fixed rate advance discussed above and $10,650 in
overnight advances.
- --------------------------------------------------------------------------------
12
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General
Jacksonville Bancorp, Inc. ("Bancorp") was incorporated on October 24, 1997 and
was organized to conduct the operations of The Jacksonville Bank (the "Bank"),
collectively (the "Company"). The Bank is a Florida state-chartered commercial
bank that opened for business on May 28, 1999, and its deposits are insured by
the Federal Deposit Insurance Corporation. The Bank provides a variety of
community banking services to businesses and individuals in the greater
Jacksonville area of Northeast Florida. During 2000, the Bank formed Fountain
Financial, Inc., a wholly owned subsidiary. The primary business activities of
Fountain Financial, Inc. consist of referral of our customers to third parties
for the sale of insurance products.
Forward Looking Statements
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Quantitative and Qualitative Disclosures About Market Risk"
contain various forward-looking statements with respect to financial performance
and business matters. Such statements are generally contained in sentences
including the words or phrases "will likely result," "are expected to," "is
anticipated," or "estimate," "project" or "believe." The Company cautions that
these forward-looking statements are subject to numerous assumptions, risks and
uncertainties, including changes in local economic conditions, changes in
regulatory requirements, fluctuations in interest rates, demand for products,
and competition, and, therefore, actual results could differ materially from
those contemplated by the forward-looking statements. In addition, the Company
assumes no duty to update forward-looking statements to reflect events or
circumstances after the date of such statements.
Business Strategy
Our primary business segment is community banking and consists of attracting
deposits from the general public and using such deposits and other sources of
funds to originate commercial business loans, commercial real estate loans,
residential mortgage loans and a variety of consumer loans. We also invest in
securities backed by the United States Government, and agencies thereof, as well
as municipal tax-exempt bonds. Our profitability depends primarily on our net
interest income, which is the difference between the income we receive from our
loan and securities investment portfolios and our costs incurred on our
deposits, FHLB advances, and other sources of funding. Net interest income is
also affected by the relative amounts of interest-earning assets and
interest-bearing liabilities. Net interest income is generated as the relative
amounts of interest-earning assets grow in relation to the relative amounts of
interest-bearing liabilities. In addition, the level of noninterest income
earned and noninterest expenses incurred also affects profitability. Included in
noninterest income are service charges earned on deposit accounts, increases in
cash surrender value of Bank Owned Life Insurance ("BOLI") and mortgage
origination fees. Included in noninterest expense are costs incurred for
salaries and employee benefits, occupancy and equipment expenses, marketing and
advertising expenses, federal deposit insurance premiums and legal and
professional fees.
Our goal is to sustain profitable, controlled growth by focusing on increasing
our loan and deposit market share in the Northeast Florida market by developing
new financial products, services and delivery channels; closely managing yields
on interest-earning assets and rates on interest-bearing liabilities; focusing
on noninterest income opportunities; controlling the growth of noninterest
expenses and maintaining strong asset quality. We have initiated programs to
expand our scope of services and achieve these goals. The Bank has adopted a
philosophy of seeking out and retaining the best available personnel for
positions of responsibility which we believe will provide us with a competitive
edge in the local banking industry. In addition, the Bank opened its fourth
location in February 2006 and fifth location in June 2006 in key areas of
Jacksonville, which provide additional visibility and access to businesses and
individuals and will likely result in additional loan and deposit growth.
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13
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Our operations are influenced by the local economic conditions and by policies
of financial institution regulatory authorities. Fluctuations in interest rates,
due to factors such as competing financial institutions as well as the Federal
Reserve, impact interest-earnings assets and our cost of funds, and thus our net
interest margin. In addition, the local economy and real estate market of
Northeast Florida and the demand for our products and loans impacts our margin.
The local economy and viability of local businesses can also impact the ability
of our customers to make payments on loans, thus impacting our loan portfolio.
The Company evaluates these factors when valuing its allowance for loan losses
and believes that the local economy and real estate market has stabilized. In
addition, the Company believes its underwriting procedures are relatively
conservative and, as a result, the Company should not be any more affected than
the overall market in the event of economic downturn.
As stated above, fluctuations in interest rates impact our yield on
interest-earning assets and our cost of funds, and thus our net interest margin.
Beginning in June 2004, the Federal Reserve implemented a tightening policy that
has resulted in 17 interest rate increases in the prime rate, which was 8.25% at
October 19, 2006. These rate increases have improved our yield on our earning
assets, but also serve to increase our cost of funds by increasing interest
rates paid on deposits, as well as rates charged on FHLB advances and other
borrowings.
Introduction
In the following pages, management presents an analysis of the financial
condition of Jacksonville Bancorp, Inc. as of September 30, 2006 compared to
December 31, 2005, and the results of operations for the three and nine months
ended September 30, 2006 compared with the same periods in 2005. This discussion
is designed to provide a more comprehensive review of the operating results and
financial position than could be obtained from an examination of the financial
statements alone. This analysis should be read in conjunction with the interim
financial statements and related footnotes included herein.
Comparison of Financial Condition at September 30, 2006 and December 31, 2005
Total assets increased $45.8 million, or 17%, from $273.0 million at December
31, 2005 to $318.8 million at September 30, 2006. During the nine months ended
September 30, 2006, the Company experienced net loan growth of $36.4 million, or
16%. The increase in net loans was driven by increases in commercial real estate
loans of $32.6 million, or 21%, and residential real estate loans of $3.0
million, or 5%. The Company funded the increase in earning assets through an
increase in deposits of $25.9 million and an increase in Federal Home Loan Bank
advances of $18.1 million.
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14
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Total deposits increased $25.9 million, or 11%, from $234.2 million at December
31, 2005 to $260.1 million at September 30, 2006. During the nine months ended
September 30, 2006, noninterest bearing deposits decreased $9.8 million to $30.8
million, primarily due to the reallocation of deposits (by one large depositor)
into a money market account. Money market, NOW and savings deposits increased
$16.4 million to $143.9 million.
Investment securities available for sale increased $2.5 million to $26.7 million
at September 30, 2006. During the nine months ended September 30, 2006, we
purchased $5.2 million of securities and received $2.7 million in proceeds from
maturities and principal repayments. Of the $5.2 million of securities purchased
in the current year, approximately $2.0 million was invested in tax-exempt
municipal securities.
Total shareholders' equity increased by $2.3 million, or 12%, from $19.8 million
at December 31, 2005 to $22.2 million at September 30, 2006. The increase is
mainly attributable to net income of $1.9 million. At September 30, 2006, the
Company had 8,000,000 authorized shares of $.01 par value common stock, of which
1,730,495 shares were issued and 1,728,845 shares were outstanding. In addition,
the Company had 2,000,000 authorized shares of $.01 par value preferred stock,
none of which were issued or outstanding at September 30, 2006.
Comparison of Operating Results for the Nine Months Ended September 30, 2006 and
2005
Net Income
Net income increased $388,000, or 26%, from $1.5 million for the nine months
ended September 30, 2005 to $1.9 million for the nine months ended September 30,
2006. Diluted earnings per share increased $.21 from $.83 for the nine months
ended September 30, 2005 to $1.04 for the nine months ended September 30, 2006.
This increase in net income and diluted earnings per share was due to an
increase in net interest income, offset by an increase in noninterest expenses
and income tax expense. Net interest income increased as a result of an increase
in interest-earning assets, as well as an increase in the average interest rates
earned on those assets. Salaries and employee benefits, which accounted for the
largest portion of the increase in noninterest expenses, increased primarily due
to $107,000 incurred related to stock option expense resulting from adoption of
FAS 123(R) on January 1, 2006, along with the costs associated with the opening
of two additional branches during the first six months of 2006. The increase in
income tax expense was directly related to the increase in net income.
Net Interest Income
Net interest income, the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities, increased $1.6
million, or 23.0% from $6.6 million for the nine months ended September 30, 2005
to $8.2 million for the nine months ended September 30, 2006. This increase
resulted from an increase in interest income of $4.8 million, offset by an
increase in interest expense of $3.3 million. The average net interest margin
increased two basis points from 3.81% for the nine months ended September 30,
2005 to 3.83% for the nine months ended September 30, 2006. Refer to the table
and discussion on the following pages for a detailed analysis of the increase in
net interest income.
Average Balance Sheet; Interest Rates and Interest Differential. The following
table sets forth the average daily balances for each major category of assets,
liabilities and shareholders' equity as well as the amounts and average rates
earned or paid on each major category of interest-earning assets and
interest-bearing liabilities.
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15
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
2006 2005
------------------------------ ----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
Interest-earning assets:
Loans (1) $ 254,143 $ 14,961 7.87% $ 205,966 $ 10,405 6.75%
Securities (2) 27,148 884 4.35 23,869 730 4.09
Other interest-earning assets (3) 4,030 148 4.91 1,938 36 2.48
----------- -------- ----------- --------
Total interest-earning assets 285,321 15,993 7.49 231,773 11,171 6.44
-------- --------
Noninterest-earning assets (4) 13,597 10,034
----------- -----------
Total assets $ 298,918 $ 241,807
=========== ===========
Interest-bearing liabilities:
Savings and NOW deposits $ 18,300 $ 253 1.85 $ 22,200 $ 201 1.21
Money market deposits 135,385 4,464 4.41 84,921 2,268 3.57
Time deposits 67,574 2,214 4.38 71,672 1,704 3.18
FHLB advances 16,577 646 5.21 7,473 196 3.51
Subordinated debt 4,000 238 7.69 4,000 177 5.92
Other interest-bearing liabilities (5) 272 12 5.90 523 12 3.07
----------- -------- ----------- --------
Total interest-bearing liabilities 242,108 7,827 4.32 190,789 4,558 3.19
-------- --------
Noninterest-bearing liabilities 36,124 32,698
Shareholders' equity 20,686 18,320
----------- ------------
Total liabilities and
shareholders' equity $ 298,918 $ 241,807
=========== ===========
Net interest income $ 8,166 $ 6,613
======== ========
Interest rate spread (6) 3.17% 3.25%
==== ====
Net interest margin (7) 3.83% 3.81%
==== ====
____________
(1) Includes nonaccrual loans.
(2) Due to immateriality, the interest income and yields related to certain
tax exempt assets have not been adjusted to reflect a fully taxable
equivalent yield.
(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 the effect of changes in
volumes, changes in rates, and changes in rate/volume on tax-equivalent interest
income, interest expense and net interest income.
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16
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
2006 Versus 2005 (1)
Increase (decrease)
due to changes in:
Net
Volume Rate Change
------- ------- -------
(Dollars in thousands)
Interest income:
Loans $ 2,670 $ 1,886 $ 4,556
Securities 105 49 154
Other interest-earning assets 59 53 112
------- ------- -------
Total interest income 2,834 1,988 4,822
------- ------- -------
Interest expense:
Savings and NOW deposits (40) 92 52
Money market deposits 1,574 622 2,196
Time deposits (102) 612 510
FHLB advances 322 128 450
Subordinated debt -- 61 61
Other interest-bearing liabilities (8) 8 --
------- ------- -------
Total interest expense 1,746 1,523 3,269
------- ------- -------
Increase in net interest income $ 1,088 $ 465 $ 1,553
======= ======= =======
(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.
Volume Variance. When comparing the first nine months of 2006 to the same period
last year, the Company experienced substantial growth in its loan portfolio,
with the most significant impact occurring in commercial real estate and
residential real estate loans. The Company also experienced growth in core
deposit products, with the largest increase occurring in money market deposit
accounts.
Although deposit growth contributed to the positive volume variance shown in the
table above, recent increases in short-term interest rates, coupled with local
market competition, has put pressure on the Bank's ability to continue to grow
these balances at rates historically experienced. Additionally, the Company
utilized overnight Federal Home Loan Bank advances, which further supported the
funding of interest-earning assets. The aggregate positive impact of the loan
and core deposit growth largely comprised the positive volume variance of $1.1
million.
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17
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Rate Variance. The increase in short-term interest rates by the Federal Reserve,
which drove an increase in the Bank's prime lending rate, contributed to the
positive rate variance. In addition, the Bank's earnings also increased to the
extent that it was able to reinvest cash flows from short-term securities in
higher yielding securities of similar duration.
The increase in short-term interest rates also drove the increase in the Bank's
cost of deposits and borrowings. The variance shown in the preceding table was
primarily caused by the amount of deposits and borrowings that were impacted by
the change in short-term interest rates being less than the amount of interest
earning assets impacted. The average rate earned by the Company on
interest-earning assets increased by 105 basis points to 7.49% for the nine
months ended September 30, 2006, whereas, the average rate paid by the Company
on interest-bearing liabilities increased 113 basis points to 4.32% for the same
period driving the $465,000 positive rate variance.
Net Interest Margin. Net interest margin increased by two basis points from
3.81% to 3.83% when comparing the first nine months of 2006 to the same period
last year. This increase is mainly the result of an increase in interest-earning
assets, and the positive impact from the increase in short-term interest rates.
The Company closely monitors its cost of funds and has taken action to reduce
such costs. Furthermore, variable rates adjust to increasing rates, and proceeds
from maturity, amortization and prepayment of loans and securities continue to
be invested at higher rates, mitigating the rising costs of core funding.
Additionally, management is currently implementing various strategies to impact
the rising cost of funding.
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 allowance for loan loss is also impacted by
increases and decreases in loans outstanding because either more or less
allowance is required as the amount of the Company's credit exposure changes. To
the extent actual loan losses differ materially from management's estimate of
these subjective factors, loan growth/run-off accelerates, or the mix of loan
types changes, the level of provision for loan loss, and related allowance can,
and will, fluctuate.
Additional information with regard to the Company's methodology and reporting of
the allowance for loan losses is included in the 2005 Annual Report on Form
10-K.
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18
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Asset Quality
The Company has identified certain assets as nonperforming. These assets include
nonaccruing loans, loans that are contractually past due 90 days or more as to
principal or interest payments and still accruing, and foreclosed real estate.
Loans are placed on nonaccrual status when management has concerns regarding its
ability to collect the outstanding loan principal and interest amounts and
typically when such loans are more than 90 days past due. These loans present
more than the normal risk that the Company will be unable to eventually collect
or realize their full carrying value. Loans are impaired when it is considered
probable that management will not collect the outstanding loan principal and
interest amounts or realize the full carrying value of the loan. The Company's
nonperforming assets at September 30, 2006 and December 31, 2005 are as follows:
September 30, December 31,
2006 2005
---- ----
(Dollars in thousands)
Nonaccruing loans $ 445 $ 319
Loans past due over 90 days still on accrual (1) -- 447
-------------- ---------------
Total nonperforming loans 445 766
Foreclosed assets, net -- --
-------------- ---------------
Total nonperforming assets $ 445 $ 766
============== ===============
Allowance for loan losses $ 2,514 $ 2,207
Nonperforming loans and foreclosed assets as a percent of total assets .14% .28%
Nonperforming loans as a percent of gross loans .16% .33%
Allowance for loan losses as a percent of nonperforming loans 564.94% 288.12%
(1) The $447,000 loans past due over 90 days and still on accrual was
comprised of one outstanding loan which was paid off on June 6, 2006.
Allowance and Provision for Loan Losses
The allowance for loan losses grew by $307,000 during the first nine months of
2006, amounting to $2.5 million at September 30, 2006 as compared to $2.2
million at December 31, 2005. The allowance represented approximately .93% and
..94% of total loans at both dates, respectively. During the first nine months of
2006, the Company had charge-offs of $103,000, recoveries of $4,000 and recorded
a $406,000 provision for loan losses compared to charge-offs of $109,000, no
recoveries and a provision for loan losses of $369,000 for the first nine months
of 2005. The larger provision for loan losses in 2006 resulted primarily from a
continued loan growth and management's assessment of local and national economic
conditions.
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19
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The allowance for loan losses grew by $307,000 during the first nine months of
2006, amounting to $2.5 million at September 30, 2006 as compared to $2.2
million at December 31, 2005. The allowance represented approximately .93% and
..94% of total loans at both dates, respectively. During the first nine months of
2006, the Company had charge-offs of $103,000, recoveries of $4,000 and recorded
a $406,000 provision for loan losses compared to charge-offs of $109,000, no
recoveries and a provision for loan losses of $369,000 for the first nine months
of 2005. The larger provision for loan losses in 2006 resulted primarily from a
continued loan growth and management's assessment of local and national economic
conditions.
The allowance for loan losses is a valuation allowance for credit losses in the
loan portfolio. Management has adopted a methodology to properly analyze and
determine an adequate loan loss allowance. The analysis is based on sound,
reliable and well documented information and is designed to support an allowance
that is adequate to absorb all estimated 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. 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.
Based on the results of the analysis performed by management at September 30,
2006, the allowance for loan loss is considered to be adequate to absorb
estimated loan losses in the portfolio as of that date. As more fully discussed
in the "Application of Critical Accounting Policies" section of this discussion
and analysis of financial condition and results of operations, the process for
estimating credit losses and determining the allowance for loan losses as of any
balance sheet date is subjective in nature and requires material estimates.
Actual results could differ significantly from these estimates.
The amount of future charge-offs and provisions for loan losses could be
affected by, among other things, economic conditions in Jacksonville, Florida,
and the surrounding communities. Such conditions could affect the financial
strength of the Company's borrowers and do affect the value of real estate
collateral securing the Company's mortgage loans. Loans secured by real estate
represent approximately 92% of the Company's total loans outstanding at
September 30, 2006. In recent years, economic conditions in Jacksonville and the
surrounding communities have been strong and real estate values have appreciated
in a healthy manner. Presently, economic conditions remain healthy in this
market and real estate values appear to have stabilized. Conditions and values
could deteriorate in the future, and such deterioration could be substantial. If
this were to occur, some of the Company's borrowers may be unable to make the
required contractual payments on their loans, and the Company may be unable to
realize the full carrying value of such loans through foreclosure. However,
management believes that the Company's underwriting policies are relatively
conservative and, as a result, the Company should not be any more affected than
the overall market.
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20
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Future provisions and charge-offs could also be affected by environmental
impairment of properties securing the Company's mortgage loans. Under the
Company's current policy, an environmental audit is required on practically all
commercial-type properties that are considered for a mortgage loan. At the
present time, the Company is not aware of any existing loans in the portfolio
where there is environmental pollution existing on the mortgaged properties that
would materially affect the value of the portfolio.
Noninterest Income, Noninterest Expense and Income Taxes
Noninterest income was $777,000 for the nine months ended September 30, 2006,
compared to $739,000 for the 2005 period. The increase was primarily due to an
increase in other income of $132,000 driven by the increase in cash surrender
value of the BOLI asset recorded as tax-free noninterest income as well as an
increase in mortgage origination fees, offset by a decrease in service charges
on deposit accounts. The decrease in income from service charges was primarily
the result of a reduction in insufficient funds and return check charges and
maintenance and activity charges.
Noninterest expense increased to $5.6 million for the nine months ended
September 30, 2006, from $4.6 million for the nine months ended September 30,
2005. Salaries and employee benefits and occupancy and equipment accounted for
the majority of noninterest expense, increasing $673,000 over the same period of
2005. This increase is a result of the absorption of additional staffing, rent
and equipment expense related to the Company's two newest locations. The Company
opened its fourth location in February 2006 and its fifth location in June 2006.
Salaries and employee benefits also increased due to $107,000 in stock-based
compensation expense resulting from the adoption of FAS 123(R) on January 1,
2006.
Income taxes for the nine months ended September 30, 2006 were $1,095,000 (an
effective rate of 36.88%) compared to income taxes of $859,000 for the nine
months ended September 30, 2005 (an effective tax rate of 36.63%). Income tax
expense increased due to the increase in net income. Likewise, the effective tax
rate increased due to the adoption of SFAS 123R, as the majority of the recorded
expense is related to the vesting of incentive stock options and is not tax
deductible.
Comparison of Operating Results for the Three Months Ended September 30, 2006
and 2005
Net income for the third quarter of 2006 was $677,000, a slight increase over
the $676,000 earned for the same quarter last year. Net income remained
relatively flat because, while our net interest income increased by $442,000
over last year, this increase was offset by the $432,000 increase in noninterest
expenses and the $27,000 increase in income tax expense. Diluted earnings per
share decreased $0.01 to $.37 per diluted share because of the increase in
weighted average diluted shares outstanding associated with additional vesting
of outstanding stock grants.
As stated above, net interest income increased by $442,000, or 18%, from $2.4
million for the third quarter of 2005 to $2.9 million for the current quarter.
The increase is primarily comprised of a positive volume variance of $354,000
and a positive rate variance of $88,000. The reasons for the positive volume
variance and positive rate variance are the same as those discussed above with
respect to the nine-month periods.
The increase in other noninterest income and decrease in service charges on
deposit accounts, as well as the increase in salaries, occupancy and equipment
expense, and other operating expense are the same as those discussed above with
respect to the nine-month periods.
- --------------------------------------------------------------------------------
21
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Capital
The Company's capital management policy is designed to build and maintain
capital levels that meet regulatory standards. Under current regulatory capital
standards, banks are classified as well capitalized, adequately capitalized or
undercapitalized. Under such standards, a well-capitalized bank is one that has
a total risk-based capital ratio equal to or greater than 10%, a Tier 1
risk-based capital ratio equal to or greater than 6%, and a Tier 1 leverage
capital ratio equal to or greater than 5%. The Company's total risk-based
capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios were
10.47%, 9.55% and 8.55%, respectively, at September 30, 2006.
Cash Flows and Liquidity
Cash Flows. The Company's primary sources of cash are deposit growth, maturities
and amortization of investment securities, FHLB advances and federal funds
purchased. The Company uses cash from these and other sources to fund loan
growth. Any remaining cash is used primarily to reduce borrowings and to
purchase investment securities. During the first nine months of 2006, the
Company's cash and cash equivalent position increased by $4.3 million. The
increase in cash mainly resulted from an increase in deposit accounts of
approximately $25.9 million from $234.2 million at December 31, 2005 to $260.1
million at September 30, 2006, as well as FHLB advances of $18.1 million, offset
by net loan originations of $36.6 million.
Liquidity. The Company has both internal and external sources of near-term
liquidity that can be used to fund loan growth and accommodate deposit outflows.
The primary internal sources of liquidity are principal and interest payments on
loans; proceeds from maturities and monthly payments on the balance of the
investment securities portfolio; and its overnight position with federal funds
sold. At September 30, 2006, the Company had $31.8 million in federal funds sold
and available-for-sale securities not subject to pledge agreements.
The Company's primary external sources of liquidity are customer deposits and
borrowings from other commercial banks. The Company's deposit base consists of
both core deposits from businesses and consumers in its local and national
market. The Company can also borrow overnight federal funds and fixed-rate term
products under credit facilities established with the Federal Home Loan Bank and
other commercial banks. These lines in the aggregate amount of approximately
$85.2 million do not represent legal commitments to extend credit on the part of
the other banks.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans -- An Amendment of FASB
Statements No. 87, 88, 106, and 132R. This new standard requires an employer to:
(a) recognize in its statement of financial position an asset for a plan's
overfunded status or a liability for a plan's underfunded status; (b) measure a
plan's assets and its obligations that determine its funded status as of the end
of the employer's fiscal year (with limited exceptions); and (c) recognize
changes in the funded status of a defined benefit postretirement plan in the
year in which the changes occur. Those changes will be reported in comprehensive
income of a business entity and in changes in net assets of a not-for-profit
organization. Statement 158 applies to plan sponsors that are public and private
companies and nongovernmental not-for-profit organizations. The requirement to
recognize the funded status of a benefit plan and the disclosure requirements
are effective as of the end of the fiscal year ending after December 15, 2006,
for entities with publicly traded equity securities, and at the end of the
fiscal year ending after June 15, 2007, for all other entities. The requirement
to measure plan assets and benefit obligations as of the date of the employer's
fiscal year-end statement of financial position is effective for fiscal years
ending after December 15, 2008. Adoption is not expected to have a material
impact on the financial condition, results of operations, or liquidity of the
Company.
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22
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
In September 2006, FASB issued Statement No. 157, Fair Value Measurements. This
new standard provides guidance for using fair value to measure assets and
liabilities. Under Statement 157, fair value refers to the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the market in which the reporting
entity transacts. In this standard, the FASB clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing the asset or liability. In support of this principle, Statement 157
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The fair value hierarchy gives the highest priority
to quoted prices in active markets and the lowest priority to unobservable data.
Under the standard, fair value measurements would be separately disclosed by
level within the fair value hierarchy. The provisions of Statement 157 are
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years, with earlier
application encouraged. The Company has not yet determined the effect of
adopting this Statement.
In September 2006, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 108 ("SAB 108"). Due to diversity in practice among
registrants, SAB 108 expresses SEC staff views regarding the process by which
misstatements in financial statements are evaluated for purposes of determining
whether financial statement restatement is necessary. The Company has not yet
determined the effect of implementing this pronouncement, which is effective for
fiscal years ending after November 15, 2006.
In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of
Financial Assets--an Amendment to Statement No. 140 ("Statement 156"). Statement
156 requires an entity to recognize a servicing asset or servicing liability if
certain criteria exist in the contract; requires initial fair value measurement
of all separately identifiable servicing assets and servicing liabilities;
permits use of either the amortization method or fair value measurement method
for each class of separately recognized servicing assets or servicing
liabilities; permits a one-time reclassification of available-for-sale
securities to trading securities for servicing assets and servicing liabilities;
and requires separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value. Statement 156 is effective in fiscal years
beginning after September 15, 2006 (January 1, 2007). Adoption is not expected
to have a material impact on the financial condition, results of operations, or
liquidity of the Company.
In July 2006, the FASB released Interpretation No. 48, Accounting for
Uncertainty of Income Taxes." This interpretation revises the recognition tests
for tax positions taken in tax returns such that a tax benefit is recorded only
when it is more likely than not that the tax position will be allowed upon
examination by taxing authorities. The amount of such a tax benefit to record is
the largest amount that is more likely than not to be allowed. Any reduction in
deferred tax assets or increase in tax liabilities upon adoption will
correspondingly reduce retained earnings. The Company has not yet determined the
effect of adopting this Interpretation, which is effective on January 1, 2007.
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23
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance
Sheet Arrangements. The Corporation has various financial obligations, including
contractual obligations and commitments that may require future cash payments.
Management believes that there have been no material changes in the
Corporation's overall level of these financial obligations since December 31,
2005 and that any changes in the Corporation's obligations which have occurred
are routine for the industry. Further discussion of the nature of each type of
obligation is included in Management's Discussion and Analysis in the
Corporation's Annual Report on Form 10-K and is incorporated herein by
reference.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk that a financial institution will be adversely impacted
by unfavorable changes in market prices. These unfavorable changes could result
in a reduction in net interest income, which is the difference between interest
earned on interest-earning assets and interest paid on interest-bearing
liabilities.
Interest rate risk is the sensitivity of income to variations in interest rates
over both short-term and long-term horizons. The primary goal of interest rate
risk management is to control this risk within limits approved by the Board and
narrower guidelines approved by ALCO. These limits and guidelines reflect the
Bank's tolerance for interest rate risk. The Bank attempts to control interest
rate risk by identifying and quantifying exposures. The Bank quantifies its
interest rate risk exposures using sophisticated simulation and valuation models
as well as simpler gap analyses performed by a third-party vendor specializing
in this activity.
The Bank's internal policy on interest rate risk specifies that if interest
rates were to shift immediately up or down 200 basis points, estimated net
interest income for the next 12 months should change by less than 15%. The most
current simulation projects the Bank's net interest income to be within the
parameters of its internal policy and has not changed significantly from our
December 31, 2005 disclosures in Form 10-K. Such simulation involves numerous
assumptions and estimates, which are inherently subjective and are subject to
substantial business and economic uncertainties. Accordingly, the actual effects
of an interest rate shift under actual future conditions may be expected to vary
significantly from those derived from the simulation to the extent that the
assumptions used in the simulation differ from actual conditions.
Item 4. Controls and Procedures
a. Evaluation of disclosure controls and procedures. 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 principal financial officer of the
Company concluded that the Company's disclosure controls and procedures
were adequate.
b. Changes in internal controls. The Company made no changes in its internal
control over financial reporting during its most recent quarter that has
materially affected the Company's internal control over financial
reporting.
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24
PART II - OTHER INFORMATION
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Item 1. 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 any 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,
except as set forth below.
On April 11, 2006, The Jacksonville Bank was served with a Summons
and a copy of the Complaint filed by Wells Fargo Financial Leasing,
Inc. in the Circuit Court of the Fourth Judicial Circuit in and for
Duval County, Florida. The basis of the Complaint stems from an
erroneous wire transfer that was made by Wells Fargo on February 16,
2005 to one of our customers, offsetting an overdraft in our
customer's account in the amount of $33,143.95. The Bank retained
the amount and Wells Fargo is pursuing the refund plus interest and
costs. The Bank does not expect to incur any material loss with
regard to this matter.
On September 13, 2006, The Jacksonville Bank was served with a
Summons and a copy of a Complaint filed by Harrell & Harrell, P.A.
in the Circuit Court of the Fourth Judicial Circuit in and for Duval
County, Florida. The Complaint states that the Bank "cashed or
otherwise converted instruments of Harrell & Harrell, P.A. for the
benefit of parties who were not entitled to enforce the instruments
or receive payment." The "parties" referred to are Daniel J. Glary
and Jonathan B. Israel, local attorneys who are indebted to The
Jacksonville Bank. The action calls for damages that exceed the sum
of $15,000, exclusive of costs, interest and attorneys' fees.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed
in the Annual Report on Form 10-K for the year ended December 31,
2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
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Item 6. Exhibits
(a) Exhibit No. 3.1: Articles of Incorporation of the Company (1)
Exhibit No. 3.2: Amended and Restated Bylaws of the Company (2)
Exhibit No. 3.3: Amendment to Amended and Restated Bylaws of the
Company (3)
Exhibit No. 31.1: Certification of principal executive officer
required by Rule 13a-14(a)/15d-14(a) of the
Exchange Act
Exhibit No. 31.2: Certification of principal financial officer
required by Rule 13a-14(a)/15d-14(a) of the
Exchange Act
Exhibit No. 32: Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(1) Incorporated herein by reference to Exhibit No. 3.1 to Form
SB-2, Registration Statement and amendments thereto,
effective as of September 30, 1998, Registration No.
333-64815.
(2) Incorporated herein by reference to Exhibit No. 3.2 to Form 10-QSB
for the quarter ended June 30, 2002, filed August 14, 2002.
(3) Incorporated herein by reference to Exhibit No. 3.3 to Form 10-QSB
for the quarter ended June 30, 2005, filed August 10, 2005.
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26
JACKSONVILLE BANCORP, INC.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 6, 2006 /s/ Gilbert J. Pomar, III
------------------------------------------
Gilbert J. Pomar, III
President and Chief Executive Officer
Date: November 6, 2006 /s/ Valerie A. Kendall
------------------------------------------
Valerie A. Kendall
Executive Vice President
and Chief Financial Officer
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27