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Jacksonville Bancorp 10-Q 2010 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
For the
transition period from __________ to ____________.
Commission
file number 000-30248
JACKSONVILLE BANCORP,
INC.
(Exact
name of registrant as specified in its charter)
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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No x
As of
July 31, 2010, the latest practicable date, 1,750,437 of the
Registrant’s common shares, $.01 par value, were issued and
outstanding.
JACKSONVILLE
BANCORP, INC.
TABLE OF
CONTENTS
2
JACKSONVILLE
BANCORP, INC. PART I—FINANCIAL
INFORMATION
Item
1. Financial Statements
CONSOLIDATED
BALANCE SHEETS
(Dollars
in thousands, except per share amounts)
See
accompanying notes to unaudited consolidated financial statements.
3
JACKSONVILLE
BANCORP, INC.
CONSOLIDATED
STATEMENTS OF INCOME (LOSS)
(Unaudited)
(Dollars
in thousands, except per share amounts)
See
accompanying notes to unaudited consolidated financial statements.
4
JACKSONVILLE
BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars
in thousands)
See
accompanying notes to unaudited consolidated financial statements.
5
JACKSONVILLE
BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars
in thousands)
See
accompanying notes to unaudited consolidated financial statements.
6
JACKSONVILLE
BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars
in thousands)
See
accompanying notes to unaudited consolidated financial
statements.
7
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.
In 2010,
The Jacksonville Bank formed TJB Properties, LLC, a wholly owned subsidiary of
The Jacksonville Bank for the sole purpose of managing property acquired through
foreclosure. The consolidated financial statements include the
accounts of Jacksonville Bancorp, Inc. and its wholly owned subsidiary, The
Jacksonville Bank, and The Jacksonville Bank’s wholly owned subsidiaries,
Fountain Financial, Inc. and TJB Properties, LLC. The consolidated
entity is referred to as the “Company” and The Jacksonville Bank and its
subsidiaries are 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, 2009, as filed with the U.S.
Securities and Exchange Commission (the “SEC”) on March 19, 2010.
The
accounting and reporting policies of the Company reflect banking industry
practice and conform to U.S. generally accepted accounting
standards. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported asset and liability balances and revenue and expense amounts, and the
disclosure of contingent assets and liabilities. Actual results could
differ significantly from those estimates.
The
consolidated financial information included herein as of and for the periods
ended June 30, 2010 and 2009 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, 2009
consolidated balance sheet was derived from the Company's December 31, 2009
audited consolidated financial statements.
Adoption
of New Accounting Standards
In June
2009, the FASB amended guidance for Accounting for Transfers of
Financial Assets which eliminates the concept of a qualifying special
purpose entity, introduces participating interests concept in circumstances in
which a portion of a financial asset has been transferred, changes the
requirements for derecognizing financial assets, and requires additional
disclosures for transfers of financial assets. This guidance is effective
as of the beginning of a company’s first fiscal year that begins after
November 15, 2009, and for subsequent interim and annual reporting periods.
The disclosure requirements must be applied to transfers that occurred
before and after its effective date. The adoption did not have a material
impact on the Company’s results of operations or financial
position.
In June
2009, the FASB issued new guidance to improve financial reporting for companies
involved with variable interest entities by providing more relevant and reliable
information to users of financial statements. This guidance was effective
as of January 1, 2010. The adoption did not have a material impact on the
Company’s financial statements.
8
JACKSONVILLE
BANCORP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, except per share amounts)
NOTE
2 - INVESTMENT SECURITIES
The
following table summarizes the amortized cost and fair value of the
available-for-sale and held-to-maturity investment securities portfolio at June
30, 2010 and December 31, 2009 and the corresponding amounts of unrealized
gains and losses therein:
9
JACKSONVILLE
BANCORP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, except per share amounts)
NOTE
2 - INVESTMENT SECURITIES (Cont.)
The
amortized cost and fair value of the investment securities portfolio are shown
by expected maturity. Expected maturities may differ from contractual maturities
if borrowers have the right to call or prepay obligations with or without call
or prepayment penalties.
The
following table summarizes the investment securities with unrealized losses at
June 30, 2010 and December 31, 2009 by aggregated major security type and
length of time in a continuous unrealized loss position:
10
JACKSONVILLE
BANCORP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, except per share amounts)
NOTE
2 - INVESTMENT SECURITIES (Cont.)
Other-Than-Temporary-Impairment
Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis and more frequently when economic or market conditions warrant
such an evaluation.
In
determining OTTI for debt securities, management considers many factors,
including: (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial conditions and near-term
prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the entity has the intent to sell the
debt security or more likely than not will be required to sell the debt security
before its anticipated recovery. The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in
time.
In order
to determine OTTI for purchased beneficial interests that, on the purchase date,
were rated below AA, the Company compares the present value of the remaining
cash flows as estimated at the preceding evaluation date to the current expected
remaining cash flows. OTTI is deemed to have occurred if there has been an
adverse change in the remaining expected future cash flows. It is not
the Bank’s policy to purchase securities rated below AA.
11
JACKSONVILLE
BANCORP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, except per share amounts)
NOTE
2 - INVESTMENT SECURITIES (Cont.)
When OTTI
occurs for either debt securities or purchased beneficial interests that, on the
purchase date, were rated below AA, the amount of the OTTI recognized in
earnings depends on whether an entity intends to sell the security or it is more
likely than not it will be required to sell the security before recovery of its
amortized cost basis, less any current-period credit loss. If an entity
intends to sell or it is more likely than not it will be required to sell the
security before recovery of its amortized cost basis, less any current-period
credit loss, the OTTI shall be recognized in earnings equal to the entire
difference between the investment’s amortized cost basis and its fair value at
the balance sheet date. If an entity does not intend to sell the security
and it is not more likely than not that the entity will be required to sell the
security before recovery of its amortized cost basis less any current-period
loss, the OTTI shall be separated into the amount representing the credit loss
and the amount related to all other factors. The amount of the total OTTI
related to the credit loss is determined based on the present value of cash
flows expected to be collected and is recognized in earnings. The amount
of the total OTTI related to other factors is recognized in other comprehensive
income, net of applicable taxes. The previous amortized cost basis less
the OTTI recognized in earnings becomes the new amortized cost basis of the
investment.
As of
June 30, 2010, the Company’s security portfolio consisted of $25,448 of
available-for-sale securities, of which $7,197 was in an unrealized loss
position. The unrealized losses are related to the Company’s U.S. Agency, and
State and political securities, as discussed below:
U.S. Agency
Securities
All of
the U.S. Agency securities held by the Company were issued by U.S.
government-sponsored entities and agencies. The decline in fair value
is attributable to changes in interest rates and illiquidity, and not credit
quality.
Because
the Company does not have the intent to sell these securities, and it is likely
that it will not be required to sell the securities before their anticipated
recovery, the Company does not consider these to be other-than-temporarily
impaired at June 30, 2010.
State and Political
Securities
All of
the State and Political Securities (“Municipal Bonds”) held by the Company were
issued by a city or other local government. The Municipal Bonds are
general obligations of the issuer and are secured by specified
revenues. The decline in fair value is primarily attributable to
changes in interest rates and the ratings of the underlying insurers rather than
the ability or willingness of the municipality to repay.
Because
the Company does not have the intent to sell these securities, it is likely that
it will not be required to sell the securities before their anticipated
recovery. The Company does not have state and political securities at
an unrealized loss position at June 30, 2010. The Company had
$987,000 of these securities at December 31, 2009.
Mortgage-Backed
Securities
The
mortgage-backed securities portfolio includes collateralized mortgage
obligations with a market value of $5,619 at June 30, 2010. Of the
$5,619 of collateralized mortgage obligations, $5,381 was in an unrealized loss
position of $12.
12
JACKSONVILLE
BANCORP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, except per share amounts)
NOTE
2 - INVESTMENT SECURITIES (Cont.)
Because
the Company does not have the intent to sell these securities, and it is likely
that it will not be required to sell the securities before their anticipated
recovery, the Company does not consider these to be other-than-temporary
impaired at June 30, 2010.
For the
six-month period ended June 30, 2010, there were no credit losses recognized in
earnings.
NOTE
3 – LOAN PORTFOLIO COMPOSITION
The
composition of the Bank’s loan portfolio at June 30, 2010 and December 31, 2009
is presented below along with the change from December 31, 2009.
(1) Includes construction, land development and other land loans. NOTE
4 – ALLOWANCE FOR LOAN LOSSES
Activity
in the allowance for loan losses for the three and six months ended June 30,
2010 and 2009 follows:
Impaired
loans were as follows:
13
JACKSONVILLE
BANCORP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, except per share amounts)
NOTE
5 – SHORT-TERM BORROWING AND FEDERAL HOME LOAN BANK ADVANCES
At June
30, 2010 and December 31, 2009, advances from the Federal Home Loan Bank (FHLB)
were as follows:
Each
advance is payable at its maturity date, with a prepayment penalty for early
termination. The advances are collateralized by a blanket lien
arrangement of the Company’s first mortgage loans, second mortgage loans and
commercial real estate loans. Based upon this collateral and the
Company’s holdings of FHLB stock, the Company is eligible to borrow up to a
total of $62,452 at June 30, 2010.
The
Company has a “Borrower in Custody” line of credit with the Federal Reserve by
pledging excess collateral. The amount of this line at June 30, 2010
was $29,279, all of which was available on that date.
NOTE
6 – DERIVATIVE FINANCIAL INSTRUMENT
On July
7, 2009, the Company entered into an interest rate swap transaction with
SunTrust Bank to mitigate interest rate risk exposure. Under the terms of the
agreement, which relates to the subordinated debt issued to Jacksonville
Bancorp, Inc. Statutory Trust III in the amount of $7,550, the Company has
agreed to pay a fixed rate of 7.53% for a period of ten years in exchange for
the original floating rate contract (90-day LIBOR plus 375 basis points).
This derivative instrument is recognized on the balance sheet in other
liabilities at its fair value of $598 on June 30, 2010.
Credit
risk may result from the inability of the counterparties to meet the terms of
their contracts. The Company’s exposure is limited to the replacement
value of the contracts rather than the notional amount.
14
JACKSONVILLE
BANCORP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, except per share amounts)
NOTE
7 – 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 for the Company at June 30, 2010 and
December 31, 2009. Management and the Board of Directors have
committed to maintain Total Risk-Based Capital at 10% and Tier 1 Capital to
Average Assets at 8% at the Bank.
15
JACKSONVILLE
BANCORP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, except per share amounts)
NOTE
8 – FAIR VALUE
Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants
on the measurement date. There are three levels of inputs that may be
used to measure fair value:
Level
1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.
Level
2: Significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated
by observable market data.
Level
3: Significant unobservable inputs that reflect a company’s own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.
The
Company used the following methods and significant assumptions to estimate the
fair value of each type of financial instrument:
Investment
Securities: The fair values for investment securities are
determined by quoted market prices, if available (Level 1). For securities
where quoted prices are not available, fair values are calculated based on
market prices of similar securities (Level 2). For securities where quoted
prices or market prices of similar securities are not available, fair values are
calculated using discounted cash flows or other market indicators (Level 3).
Discounted cash flows are calculated using spread to swap and LIBOR curves
that are updated to incorporate loss severities, volatility, credit spread and
optionality. During times when trading is more liquid, broker quotes
are used (if available) to validate the model. Rating agency and industry
research reports as well as defaults and deferrals on individual securities are
reviewed and incorporated into the calculations.
Derivatives: The
fair value of the derivatives is based on valuation models using observable
market data as of the measurement date (Level 2).
Impaired
Loans: The fair value of impaired loans with specific
allocations of the allowance for loan losses is generally based on recent real
estate appraisals. These appraisals may utilize a single valuation
approach or a combination of approaches including comparable sales and the
income approach. Adjustments are routinely made in the appraisal
process by the appraisers to adjust for differences between the comparable sales
and income data available. Such adjustments are typically significant
and result in a Level 3 classification of the inputs for determining fair
value.
Other Real Estate
Owned: Nonrecurring adjustment to certain commercial and
residential real estate properties classified as other real estate owned (OREO)
is measured at fair value, less costs to sell. Adjustments are
routinely made in the appraisal process by the appraisers to adjust for
differences between the comparable sales and income data
available. Fair values are generally based on third party appraisals
of the property, resulting in a Level 3 classification.
16
JACKSONVILLE
BANCORP, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars
in thousands, except per share amounts)
NOTE
8 – FAIR VALUE (Cont.)
The
following assets and liabilities are measured on a recurring basis, including
financial assets and liabilities for which the Company has elected the fair
value option:
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