Attached files

file filename
EX-31.1 - EXHIBIT 31.1 - JACKSONVILLE BANCORP INC /FL/ex31_1.htm
EX-32.1 - EXHIBIT 32.1 - JACKSONVILLE BANCORP INC /FL/ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - JACKSONVILLE BANCORP INC /FL/ex31_2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended            June 30, 2015             
 
or

 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ____________.

Commission file number  000-30248

JACKSONVILLE BANCORP, INC.
(Exact name of registrant as specified in its charter)

Florida
 
59-3472981
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
100 North Laura Street, Suite 1000
Jacksonville, Florida
 
32202
(Address of principal executive offices)
 
(Zip Code)
 
 
(904) 421-3040
 
 
(Registrant’s telephone number, including area code)
 

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
No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
No
 
As of July 31, 2015, the latest practicable date, there were 3,214,461 shares of the Registrant’s common stock outstanding and 2,581,821 shares of the Registrant’s nonvoting common stock outstanding.



JACKSONVILLE BANCORP, INC.
 
TABLE OF CONTENTS

Description
Page
1
   
PART I – FINANCIAL INFORMATION
 
     
Item 1.
3
     
 
3
     
 
4
     
 
5
     
 
6
     
 
7
     
 
9
     
Item 2.
35
     
Item 3.
52
     
Item 4.
52
    
PART II – OTHER INFORMATION
 
     
Item 1.
53
     
Item 1A.
53
     
Item 6.
54
     
55
     
56
 
JACKSONVILLE BANCORP, INC.
 
SPECIAL CAUTIONARY NOTICE REGARDING
FORWARD-LOOKING STATEMENTS
 
Various of the statements contained in this Quarterly Report on Form 10-Q, the Annual Report on Form 10-K for the year ended December 31, 2014, Current Reports on Form 8-K, and reports to shareholders are “forward-looking statements” within the meaning and protections of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
 
Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, including economic and market conditions, which may be beyond our control, and which may cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  You should not expect us to update any forward-looking statements, and we have no obligation to do so.
 
All statements other than statements of historical fact are statements that could be forward-looking statements. Words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “evaluate,” “continue,” “further,” “plan,” “point to,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future identify forward-looking statements.  These forward-looking statements may not be realized due to a variety of factors, including, without limitation:
 
the effects of future economic, business and market conditions and changes, domestic and foreign, including seasonality;
 
monetary and fiscal policies of the U.S. government;
 
legislative and regulatory changes, including changes in banking, securities and tax laws, regulations and policies and their application by our regulators;
 
our ability to comply with the extensive laws and regulations to which we are subject;
 
changes in accounting rules, practices and interpretations;
 
the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest-sensitive assets and liabilities;
 
changes in borrower credit risks and payment behaviors;
 
the frequency and magnitude of foreclosure of our loans;
 
changes in the availability and cost of credit and capital in the financial markets;
 
changes in the prices, values and sales volumes of residential and commercial real estate;
 
the effects of concentrations in our loan portfolio;
 
our ability to resolve nonperforming assets;
 
the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;
 
the accuracy of our financial statement assumptions and estimates, including assumptions and estimates underlying the establishment of reserves for possible loan losses;
 
the loss of key personnel;
 
our need and ability to secure additional debt or equity financing;
 
the concentration of ownership of our common stock;
 
the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth, expense savings and/or other results from such transactions;
 
changes in technology or products that may be more difficult, costly, or less effective than anticipated; and
 
the effects of war or other conflicts, acts of terrorism, hurricanes, floods, tornados or other catastrophic events that may affect economic conditions.
 
JACKSONVILLE BANCORP, INC.
 
All forward-looking statements that are made by or attributable to the Company are qualified in their entirety by and should be read in conjunction with this cautionary notice and the risks described or referred to in Item 1A – Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 16, 2015 and in the Company’s other filings with the SEC.
 
JACKSONVILLE BANCORP, INC.
 
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)

   
June 30,
2015
   
December 31,
2014
 
ASSETS
       
Cash and due from financial institutions
 
$
27,583
   
$
23,778
 
Federal funds sold and other
   
1,972
     
594
 
Cash and cash equivalents
   
29,555
     
24,372
 
Securities available-for-sale
   
73,235
     
77,633
 
Loans, net of allowance for loan losses of $12,861 and $14,377 as of June 30, 2015 and December 31, 2014, respectively
   
372,838
     
360,279
 
Premises and equipment, net
   
4,936
     
5,147
 
Assets held for sale
   
711
     
786
 
Bank-owned life insurance
   
11,938
     
11,857
 
Federal Home Loan Bank stock, at cost
   
1,140
     
1,243
 
Other real estate owned, net
   
4,047
     
4,061
 
Accrued interest receivable
   
1,340
     
1,464
 
Other intangible assets, net
   
455
     
570
 
Other assets
   
1,661
     
1,172
 
Total assets
 
$
501,856
   
$
488,584
 
                 
LIABILITIES
               
Deposits
               
Noninterest-bearing demand deposits
 
$
116,013
   
$
107,840
 
Money market, NOW and savings deposits
   
187,142
     
174,693
 
Time deposits
   
123,033
     
133,223
 
Total deposits
   
426,188
     
415,756
 
Federal Home Loan Bank short-term borrowings
   
5,000
     
6,000
 
Federal Home Loan Bank and other long-term borrowings
   
11,617
     
11,629
 
Subordinated debentures
   
16,250
     
16,218
 
Accrued expenses and other liabilities
   
1,730
     
1,869
 
Total liabilities
   
460,785
     
451,472
 
                 
SHAREHOLDERS' EQUITY
               
Preferred stock
   
-
     
-
 
Common stock, $.01 par value, 3,214,461 and 3,180,300 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively
   
32
     
32
 
Nonvoting common stock, $.01 par value, 2,581,821 and 2,614,821 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively
   
26
     
26
 
Additional paid–in capital
   
138,121
     
138,096
 
Retained deficit
   
(96,736
)
   
(100,759
)
Accumulated other comprehensive loss
   
(372
)
   
(283
)
Total shareholders’ equity
   
41,071
     
37,112
 
Total liabilities and shareholders’ equity
 
$
501,856
   
$
488,584
 

See accompanying notes to the Consolidated Financial Statements.
 
JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)


   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
Interest and dividend income:
               
Loans, including fees
 
$
4,820
   
$
5,099
   
$
9,497
   
$
9,759
 
Taxable securities
   
278
     
302
     
568
     
622
 
Tax-exempt securities
   
73
     
91
     
147
     
191
 
Federal funds sold and other
   
35
     
41
     
68
     
79
 
Total interest income
   
5,206
     
5,533
     
10,280
     
10,651
 
                                 
Interest expense:
                               
Deposits
   
470
     
541
     
952
     
1,105
 
Federal Reserve and other borrowings
   
8
     
11
     
15
     
22
 
Federal Home Loan Bank advances
   
49
     
75
     
100
     
149
 
Subordinated debentures
   
206
     
205
     
408
     
408
 
Total interest expense
   
733
     
832
     
1,475
     
1,684
 
                                 
Net interest income
   
4,473
     
4,701
     
8,805
     
8,967
 
Provision for loan losses
   
(2,011
)
   
287
     
(2,011
)
   
287
 
Net interest income after provision for loan losses
   
6,484
     
4,414
     
10,816
     
8,680
 
                                 
Noninterest income:
                               
Service charges on deposit accounts
   
179
     
190
     
365
     
364
 
Other income
   
193
     
189
     
380
     
392
 
Total noninterest income
   
372
     
379
     
745
     
756
 
                                 
Noninterest expense:
                               
Salaries and employee benefits
   
1,569
     
2,177
     
3,159
     
4,336
 
Occupancy and equipment
   
552
     
616
     
1,109
     
1,265
 
Regulatory assessments
   
181
     
169
     
367
     
361
 
Data processing
   
513
     
490
     
1,057
     
1,030
 
Advertising and business development
   
68
     
83
     
127
     
141
 
Professional fees
   
271
     
256
     
528
     
494
 
Telephone expense
   
88
     
96
     
179
     
189
 
Other real estate owned expense
   
75
     
41
     
160
     
110
 
Other
   
398
     
358
     
806
     
977
 
Total noninterest expense
   
3,715
     
4,286
     
7,492
     
8,903
 
                                 
Net income before income taxes
   
3,141
     
507
     
4,069
     
533
 
Income tax expense
   
32
     
-
     
46
     
-
 
Net income
 
$
3,109
   
$
507
   
$
4,023
   
$
533
 
                                 
Weighted average common shares outstanding:
                               
Basic shares
   
5,796,260
     
5,795,095
     
5,795,874
     
5,795,095
 
Dilutive stock options
   
11,661
     
544
     
8,460
     
3,923
 
Diluted shares
   
5,807,921
     
5,795,639
     
5,804,334
     
5,799,018
 
                                 
Earnings per common share:
                               
Basic
 
$
0.54
   
$
0.09
   
$
0.69
   
$
0.09
 
Diluted
 
$
0.54
   
$
0.09
   
$
0.69
   
$
0.09
 
 
See accompanying notes to the Consolidated Financial Statements.
 
JACKSONVILLE BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2015
   
2014
   
2015
   
2014
 
                 
Net income
 
$
3,109
   
$
507
   
$
4,023
   
$
533
 
Other comprehensive (loss) income:
                               
Change in unrealized holding (losses) gains on available-for-sale securities
   
(433
)
   
531
     
(121
)
   
1,054
 
Net unrealized derivative loss (gain) on cash flow hedge
   
82
     
(39
)
   
32
     
(33
)
Other comprehensive (loss) income
   
(351
)
   
492
     
(89
)
   
1,021
 
Tax effect
   
-
     
-
     
-
     
-
 
Other comprehensive (loss) income, net of tax effect
   
(351
)
   
492
     
(89
)
   
1,021
 
Total comprehensive income
 
$
2,758
   
$
999
   
$
3,934
   
$
1,554
 
 
See accompanying notes to the Consolidated Financial Statements.
 
JACKSONVILLE BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands)

   
Common Stock
   
Nonvoting
Common Stock
   
Preferred Stock
   
Additional
Paid-In
   
Retained
   
Accumulated Other
Comprehensive
     
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Loss
   
Amount
 
Balance as of December 31, 2013
   
3,177,090
   
$
32
     
2,618,005
   
$
26
     
-
   
$
-
   
$
138,050
   
$
(102,688
)
 
$
(1,488
)
 
$
33,932
 
Net income
                                                           
533
             
533
 
Other comprehensive income
                                                                   
1,021
     
1,021
 
Total comprehensive income
                                                                           
1,554
 
Permitted transfer of nonvoting common stock to common stock
   
3,184
             
(3,184
)
                                                   
-
 
Share-based compensation expense
                                                   
34
                     
34
 
Balance as of June 30, 2014
   
3,180,274
   
$
32
     
2,614,821
   
$
26
     
-
   
$
-
   
$
138,084
   
$
(102,155
)
 
$
(467
)
 
$
35,520
 
                                                                                 
Balance as of December 31, 2014
   
3,180,300
   
$
32
     
2,614,821
   
$
26
     
-
   
$
-
   
$
138,096
   
$
(100,759
)
 
$
(283
)
 
$
37,112
 
Net income
                                                           
4,023
             
4,023
 
Other comprehensive loss
                                                                   
(89
)
   
(89
)
Total comprehensive income
                                                                           
3,934
 
Permitted transfer of nonvoting common stock to common stock
   
33,000
             
(33,000
)
                                                   
-
 
Exercise of common stock options, including tax benefit
   
1,125
                                             
11
                     
11
 
Vesting of restricted stock
   
36
                                                                     
-
 
Share-based compensation expense
                                                   
14
                     
14
 
Balance as of June 30, 2015
   
3,214,461
   
$
32
     
2,581,821
   
$
26
     
-
   
$
-
   
$
138,121
   
$
(96,736
)
 
$
(372
)
 
$
41,071
 
 
See accompanying notes to the Consolidated Financial Statements.
 
JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(Dollars in thousands)

   
Six Months Ended
June 30,
 
   
2015
   
2014
 
Cash flows from operating activities:
       
Net income
 
$
4,023
   
$
533
 
Adjustments to reconcile net income to net cash from operating activities:
               
Depreciation and amortization
   
260
     
353
 
Net amortization of deferred loan fees
   
86
     
81
 
Provision for loan losses
   
(2,011
)
   
287
 
Premium amortization for securities, net of accretion
   
397
     
441
 
Net accretion of purchase accounting adjustments
   
(232
)
   
(572
)
Net loss on sale of other real estate owned
   
2
     
1
 
Write-downs of other real estate owned
   
91
     
36
 
Write-down of assets held for sale
   
75
     
-
 
Earnings on bank-owned life insurance
   
(81
)
   
(97
)
Loss on disposal of premises and equipment
   
-
     
7
 
Share-based compensation
   
14
     
34
 
Net change in:
               
Accrued interest receivable and other assets
   
(365
)
   
(301
)
Accrued expenses and other liabilities
   
(105
)
   
(196
)
Net cash from operating activities
   
2,154
     
607
 
                 
Cash flows (used for) from investing activities:
               
Available-for-sale securities:
               
Maturities, prepayments and calls
   
9,945
     
8,344
 
Purchases
   
(6,066
)
   
(5,127
)
Loan (originations) payments, net
   
(10,440
)
   
46
 
Proceeds from sale of other real estate owned
   
89
     
7
 
Additions to premises and equipment, net
   
(49
)
   
(203
)
Proceeds from Federal Home Loan Bank stock, net
   
103
     
224
 
Net cash (used for) from investing activities
   
(6,418
)
   
3,291
 
                 
Cash flows from (used for) financing activities:
               
Net change in deposits
   
10,436
     
(14,093
)
Proceeds from Federal Home Loan Bank advances
   
5,000
     
-
 
Repayment of Federal Home Loan Bank advances
   
(6,000
)
   
-
 
Proceeds from exercise of common stock options
   
11
     
-
 
Net cash from (used for) financing activities
   
9,447
     
(14,093
)
                 
Net change in cash and cash equivalents
   
5,183
     
(10,195
)
Cash and cash equivalents at beginning of period
   
24,372
     
40,325
 
Cash and cash equivalents at end of period
 
$
29,555
   
$
30,130
 
 
See accompanying notes to the Consolidated Financial Statements.
 
JACKSONVILLE BANCORP, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
(Unaudited)
(Dollars in thousands)

   
Six Months Ended
June 30,
 
   
2015
   
2014
 
         
Supplemental disclosures of cash flow information:
       
Cash paid during the period for
       
Interest
 
$
1,493
   
$
1,699
 
Income taxes
   
14
     
-
 
                 
Supplemental schedule of noncash investing activities:
               
Acquisition of other real estate owned
 
$
167
   
$
965
 
Transfer of assets to held for sale
   
-
     
944
 
 
See accompanying notes to the Consolidated Financial Statements.
 
JACKSONVILLE BANCORP, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)

NOTE 1 – BASIS OF PRESENTATION
 
Principles of Consolidation
 
The accounting and reporting policies of the Company reflect banking industry practice and conform to U.S. generally accepted accounting principles (“U.S. GAAP”). The Consolidated Financial Statements include the accounts of Jacksonville Bancorp, Inc. (“Bancorp”), its wholly owned, primary operating subsidiary The Jacksonville Bank, and The Jacksonville Bank’s wholly owned subsidiary, Fountain Financial, Inc.  The consolidated entity is referred to as the “Company” and The Jacksonville Bank and Fountain Financial, Inc. are collectively referred to as the “Bank.”  The Company’s financial condition and operating results principally reflect those of the Bank.  All intercompany transactions and balances have been eliminated in consolidation.  In preparing the Consolidated Financial Statements, management makes 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 and assumptions.
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2014. In the Company’s opinion, all adjustments, consisting primarily of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods have been made.
 
Nature of Operations
 
Bancorp is a financial holding company headquartered in Jacksonville, Florida. The Bank currently provides financial services through eight full-service branches in Jacksonville and Jacksonville Beach, Duval County, Florida, as well as its virtual branch.  The Company’s primary business segment is community banking and consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans, commercial real estate loans, residential mortgage loans and a variety of consumer loans.  Substantially all loans are secured by specific items of collateral, including business assets, consumer assets, and commercial and residential real estate.  Commercial loans are expected to be repaid from cash flow from operations of businesses.  There are no significant concentrations of loans to any one industry or customer.  However, the customers’ ability to repay their loans is dependent on the local real estate market and general economic conditions in the area.  For further information, please 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, 2014, as filed with the SEC on March 16, 2015.
 
Investment Securities
 
Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.  Debt securities are classified as available-for-sale when they might be sold before maturity. Equity securities with readily determinable fair values are classified as available-for-sale.  Available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.  Other securities, such as Federal Home Loan Bank (“FHLB”) stock, are carried at cost.
 
Interest income includes amortization of purchase premiums and accretion of purchase discounts. Premiums and discounts on securities are amortized on the level yield without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated.
 
Gains and losses are recorded on the trade date and determined using the specific identification method.  Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses.
 
JACKSONVILLE BANCORP, INC.
 
NOTE 1 – BASIS OF PRESENTATION (Continued)
 
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 OTTI decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
 
In order to determine OTTI for purchased beneficial interests that, on the purchase date, were rated below AA, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows.  OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.  It is not the Bank’s policy to purchase securities rated below AA.
 
When OTTI occurs for either debt securities or purchased beneficial interests that, on the purchase date, were rated below AA, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more-likely-than-not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss.  If an entity intends to sell or it is more-likely-than-not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI must 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 must 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.
 
Loans
 
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and allowance for loan losses.  Interest income is accrued on the unpaid principal balance of the loans.  Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level‑yield method without anticipating prepayments.
 
Interest income on a loan in any of our portfolio segments is discontinued at the time the loan is 90 days delinquent unless the loan is well secured and in process of collection.  Past due status is based on the contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.  All unsecured loans in our consumer and other portfolio segment are charged off once they reach 90 days delinquent.  This is the only portfolio segment in which the Company charges off loans solely based on the number of days of delinquency.  For real estate mortgage, commercial loan, secured consumer and other portfolio segments, the charge-off policy is that a loan is fully or partially charged off when, based on management’s assessment, it has been determined that it is highly probable that the Company would not collect all principal and interest payments according to the contractual terms of the loan agreement.  This assessment is determined based on a detailed review of all substandard and doubtful loans each month.  This review considers such criteria as the value of the underlying collateral, financial condition and reputation of the borrower and guarantors and the amount of the borrower’s equity in the loan.  The Company’s charge-off policy has remained materially unchanged for all periods presented.
 
JACKSONVILLE BANCORP, INC.

NOTE 1 – BASIS OF PRESENTATION (Continued)
 
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
 
Overdrawn customer checking accounts are reclassified as commercial loans and are evaluated on an individual basis for collectability.  These balances are included in the estimate of allowance for loan losses and are charged off when collectability is considered doubtful.  As of June 30, 2015 and December 31, 2014, overdrawn customer deposit accounts reclassified as commercial loans were $61,000 and $78,000, respectively.
 
Certain Purchased Loans
 
The Company has purchased individual loans and groups of loans, some of which have shown evidence of credit deterioration since origination.  These purchased loans were recorded at fair value, such that there was no carryover of the seller’s allowance for loan losses.  Fair values were preliminary and subject to refinement for up to one year after the closing as new information relative to the closing date fair value became available.  After acquisition, losses were recognized by an increase in the allowance for loan losses if the reason for the loss was due to events and circumstances that did not exist as of the acquisition date.
 
The Company has purchased loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  Such purchased loans are accounted for individually.  The Company estimates the amount and timing of expected cash flows for each purchased loan, and the expected cash flows in excess of the amount paid are recorded as interest income over the remaining life of the loan (accretable yield).  The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference).
 
Over the life of the loan, expected cash flows continue to be estimated.  If the present value of expected cash flows is less than the carrying amount, a loss is recorded.  If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income as earned.
 
Allowance for Loan Losses
 
The allowance for loan losses is a valuation allowance for probable incurred credit losses.  Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.  Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is likely.  Subsequent recoveries, if any, are credited to the allowance.
 
The allowance consists of specific and general components.  The specific components relate to loans that are individually classified as impaired.  The general components relate to all loans not specifically identified as impaired and are modeled on loss by portfolio, weighted by recent historic data and economic factors.
 
JACKSONVILLE BANCORP, INC.

NOTE 1 – BASIS OF PRESENTATION (Continued)
 
The Company’s policy for assessing loans for impairment is the same for all classes of loans and is included in our allowance for loan losses policy.  The Company classifies a loan as impaired when it is probable that the Company will be unable to collect all amounts due, including both principal and interest, according to the contractual terms of the loan agreement.  An impairment determination is performed utilizing the following general factors:  (i) a risk rating of substandard or doubtful, (ii) a loan amount greater than $100, and/or (iii) a past due aging of 90 days or more.  In addition, the Company also considers the following: the financial condition of the borrower, the Company’s best estimate of the direction and magnitude of any future changes in the borrower’s financial condition, the fair value of collateral if the loan is collateral dependent, the loan’s observable market price, expected future cash flow and, if a purchased loan, the amount of the remaining unaccreted carrying discount.  For loans acquired in the acquisition of Atlantic BancGroup, Inc. (“ABI”), if the loss was attributed to events and circumstances that existed as of the acquisition date as a result of new information obtained during the measurement period (i.e., 12 months from date of acquisition) that, if known, would have resulted in the recognition of additional deterioration, the additional deterioration was recorded as additional carrying discount with a corresponding increase to goodwill.  If not, the additional deterioration was recorded as additional provision expense with a corresponding increase in the allowance for loan losses.  After the measurement period, any additional impairment above the current carrying discount is recorded as additional provision expense with a corresponding increase in the allowance for loan losses.
 
If a loan is deemed to be impaired, a portion of the allowance for loan losses may be allocated so that the loan is reported, net, at the present value of estimated expected future cash flows, using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the sale or operation of the underlying collateral.  If an impaired loan is on nonaccrual, then recognition of interest income would follow our nonaccrual policy, which is to no longer accrue interest and account for any interest received on the cash-basis or cost-recovery method until qualifying again for interest accrual.  If an impaired loan is not on nonaccrual, then recognition of interest income would accrue on the unpaid principal balance based on the contractual terms of the loan.  All impaired loans are reviewed on at least a quarterly basis for changes in the measurement of impairment.  For impaired loans measured using the present-value-of-expected-cash-flows method, any change to the previously-recognized impairment loss is recognized as a change in the allowance for loan loss account and recorded in the Consolidated Statement of Operations as a component of the provision for loan losses.
 
Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired.  TDRs are measured at the present value of estimated expected future cash flows using the loan’s effective rate at inception unless they are collateral dependent.  Key factors that the Company considers at the time a loan is restructured to determine whether the loan should accrue interest include if the loan is less than 90 days past due and if the loan is in compliance with the modified terms of the loan.  The Company determines that the loan has been restructured to be reasonably assured of repayment and of performance according to the modified terms by performing an analysis that documents exactly how the loan is expected to perform under the modified terms.  Once loans become TDRs, they remain TDRs until they mature or are paid off in the normal course of business.
 
The general component covers all other loans not identified as impaired and is based on historical losses with consideration given to current environmental factors.  The historical loss component of the allowance is determined by losses recognized by each portfolio segment over the preceding five years with the most recent years carrying more weight.  This is supplemented by the risks for each portfolio segment.  In calculating the historical component of our allowance, we aggregate the portfolio segments by class of loans as follows:  commercial loans, residential real estate mortgage loans, commercial real estate mortgage loans (which include construction and land loans), and consumer and other loans.  Actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment.  These economic factors include consideration of the following:  the concentration of criticized loans as a percentage of total loans, levels of loan concentration within a portfolio segment or division of a portfolio segment and broad economic conditions.
 
JACKSONVILLE BANCORP, INC.

NOTE 1 – BASIS OF PRESENTATION (Continued)
 
Fair Value of Financial Instruments
 
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 7—Fair Value.  Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect these estimates.
 
Assets Held-for-Sale
 
The Company reclassifies long-lived assets to assets held-for-sale when all required criteria for such reclassification are met.  The assets held for sale are recorded at the lower of the carrying value or fair value less costs to sell.  An asset held-for-sale must meet the following conditions:  (i) management, having authority to approve the action, commits to a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated, (iv) the sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year, (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and (vi) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
 
In the second quarter of 2014, a determination was made that certain assets met the criteria to be classified as held-for-sale. In the third quarter of 2014, the fair value for the related assets was less than their carrying value.  Therefore, a loss of $140,000 was recorded to noninterest expense during 2014.  As of June 30, 2015, the assets were under contract to be sold. Based on the sales contract price, the fair value was determined to be less than the carrying value and a charge was recorded to noninterest expense in the amount of $75,000 during the second quarter of 2015.
 
Reclassifications
 
Certain amounts in the prior year’s financial statements were reclassified to conform to the current year’s presentation.  These reclassifications had no impact on the prior periods’ net income or shareholders’ equity.
 
Recently Issued Accounting and Reporting Standards
 
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This update to the Accounting Standards Codification is the culmination of efforts by the FASB and the International Accounting Standards Board to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards.  ASU 2014-09 supersedes Topic 605 – Revenue Recognition and most industry-specific guidance.  The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance in ASU 2014-09 describes a five-step process entities can apply to achieve the core principle of revenue recognition and requires disclosures sufficient to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and the significant judgments used in determining that information.  This standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and early application is allowed as of the original effective date for annual periods beginning after December 15, 2016.  The Company is currently evaluating the effects of the adoption of this standard on its Consolidated Financial Statements and disclosures, if any.
 
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  This standard will require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances.  In connection with each annual and interim period, management will have to assess if there is substantial doubt about the entity’s ability to continue as a going concern within one year after the issuance date.  Management must consider relevant conditions that are known (and reasonably knowable) at the issuance date.  Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date.  The new standard defines substantial doubt and provides example indicators.  The definition of substantial doubt incorporates a likelihood threshold of “probable” similar to the current use of the term in U.S. GAAP for loss contingencies.  Disclosures will be required if conditions give rise to substantial doubt.  However, management will need to assess if its plans will alleviate substantial doubt to determine the specific disclosures.  This standard will be effective for all entities in the first annual period ending after December 15, 2016. Earlier application is permitted. The Company is currently evaluating the effects of the adoption of this standard on its Consolidated Financial Statements and disclosures, if any.
 
JACKSONVILLE BANCORP, INC.

NOTE 1 – BASIS OF PRESENTATION (Continued)
 
In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change the accounting for a customer’s accounting for service contracts. The adoption of this standard is not expected to have a significant impact on the Company’s Consolidated Financial Statements and disclosures, if any.
 
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
 
NOTE 2 - INVESTMENT SECURITIES
 
The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio as of June 30, 2015 and December 31, 2014 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income (loss):

(Dollars in thousands)
 
Amortized
 Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair Value
 
June 30, 2015
               
Available-for-sale:
               
U.S. government-sponsored entities and agencies
 
$
7,179
   
$
169
   
$
(30
)
 
$
7,318
 
State and political subdivisions
   
6,241
     
447
     
-
     
6,688
 
Mortgage-backed securities - residential
   
28,205
     
834
     
(65
)
   
28,974
 
Collateralized mortgage obligations
   
27,918
     
94
     
(340
)
   
27,672
 
Corporate bonds
   
2,519
     
64
     
-
     
2,583
 
Total
 
$
72,062
   
$
1,608
   
$
(435
)
 
$
73,235
 

   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair Value
 
December 31, 2014
               
Available-for-sale:
               
U.S. government-sponsored entities and agencies
 
$
7,019
   
$
161
   
$
(23
)
 
$
7,157
 
State and political subdivisions
   
6,535
     
525
     
-
     
7,060
 
Mortgage-backed securities - residential
   
30,454
     
928
     
(22
)
   
31,360
 
Collateralized mortgage obligations
   
29,306
     
94
     
(438
)
   
28,962
 
Corporate bonds
   
3,025
     
69
     
-
     
3,094
 
Total
 
$
76,339
   
$
1,777
   
$
(483
)
 
$
77,633
 
 
As of June 30, 2015 and December 31, 2014, the Company’s investment securities portfolio did not include any held-to-maturity securities.
 
JACKSONVILLE BANCORP, INC.

NOTE 2 - INVESTMENT SECURITIES (Continued)
 
The amortized cost and fair value of the investment securities portfolio are presented below in order of contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, primarily mortgage-backed securities – residential and collateralized mortgage obligations, are shown separately.
 
(Dollars in thousands)
June 30, 2015
 
Amortized
Cost
   
Fair
Value
 
Available-for-sale:
       
Within one year
 
$
-
   
$
-
 
One to five years
   
2,494
     
2,540
 
Five to ten years
   
4,350
     
4,430
 
Beyond ten years
   
9,095
     
9,619
 
Mortgage-backed securities – residential
   
28,205
     
28,974
 
Collateralized mortgage obligations
   
27,918
     
27,672
 
Total
 
$
72,062
   
$
73,235
 

The following table summarizes the investment securities with unrealized losses as of June 30, 2015 and December 31, 2014 listed by aggregated major security type and length of time in a continuous unrealized loss position:
 
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
(Dollars in thousands)
June 30, 2015
Fair
Value
 
Unrealized
 losses
 
Fair
Value
 
Unrealized
losses
 
Fair
Value
 
Unrealized
losses
 
Available-for-sale:
                       
U.S. government-sponsored entities and agencies
 
$
588
   
$
(12
)
 
$
982
   
$
(18
)
 
$
1,570
   
$
(30
)
State and political subdivisions
   
-
     
-
     
-
     
-
     
-
     
-
 
Mortgage backed securities – residential
   
2,576
     
(38
)
   
1,167
     
(27
)
   
3,743
     
(65
)
Collateralized mortgage obligations
   
5,938
     
(38
)
   
9,251
     
(302
)
   
15,189
     
(340
)
Corporate bonds
   
-
     
-
     
-
     
-
     
-
     
-
 
Total available-for-sale securities
 
$
9,102
   
$
(88
)
 
$
11,400
   
$
(347
)
 
$
20,502
   
$
(435
)
 
   
Less Than 12 Months
   
12 Months or Longer
   
Total
 
December 31, 2014
 
Fair
Value
   
Unrealized
losses
   
Fair
Value
   
Unrealized
losses
   
Fair
Value
   
Unrealized
losses
 
Available-for-sale:
                       
U.S. government-sponsored entities and agencies
 
$
-
   
$
-
   
$
977
   
$
(23
)
 
$
977
   
$
(23
)
State and political subdivisions
   
-
     
-
     
-
     
-
     
-
     
-
 
Mortgage backed securities – residential
   
1,849
     
(1
)
   
1,192
     
(21
)
   
3,041
     
(22
)
Collateralized mortgage obligations
   
6,599
     
(40
)
   
11,258
     
(398
)
   
17,857
     
(438
)
Corporate bonds
   
-
     
-
     
-
     
-
     
-
     
-
 
Total available-for-sale securities
 
$
8,448
   
$
(41
)
 
$
13,427
   
$
(442
)
 
$
21,875
   
$
(483
)
 
As of June 30, 2015 and December 31, 2014, the Company’s security portfolio consisted of $73.2 million and $77.6 million, respectively, in available-for-sale securities, of which $20.5 million and $21.9 million were in an unrealized loss position for the related periods.  The unrealized losses as of June 30, 2015 and December 31, 2014 were related to all securities types held by the Company, as discussed below.
 
U.S. Government-Sponsored Entities and Agency Securities:
All of the U.S. Agency securities held by the Company were issued by U.S. government-sponsored entities and agencies. As of June 30, 2015 and December 31, 2014, the number of U.S. Agency securities with unrealized losses was two and one, respectively.  As of June 30, 2015 and December 31, 2014, these securities had depreciated 1.88% and 2.30%, respectively, from the Company’s amortized cost basis.
 
JACKSONVILLE BANCORP, INC.

NOTE 2 - INVESTMENT SECURITIES (Continued)

Mortgage-backed Securities – Residential:
All of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Ginnie Mae and Fannie Mae, institutions which have the full faith and credit of the U.S. government.  As of June 30, 2015 and December 31, 2014, mortgage-backed securities with unrealized losses were sixteen and three, respectively.  As of June 30, 2015 and December 31, 2014, these securities had depreciated 1.71% and 0.71%, respectively, from the Company’s amortized cost basis.
 
Collateralized Mortgage Obligations:
All of the collateralized mortgage obligation securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Ginnie Mae, an institution which has the full faith and credit of the U.S. government.  As of June 30, 2015 and December 31, 2014, collateralized mortgage obligations with unrealized losses were four and eighteen, respectively.  As of June 30, 2015 and December 31, 2014, these securities had depreciated 2.19% and 2.40%, respectively, from the Company’s amortized cost basis.
 
For the securities with unrealized losses at June 30, 2015 and December 31, 2014, the unrealized losses resulted from market interest rate changes, as opposed to credit losses.  The Company does not intend to sell these securities, and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company expects to recover the entire amortized cost basis of the securities. Having reviewed these securities for OTTI, the Company does not consider them to be other-than-temporarily impaired and no impairment loss has been recognized in the Consolidated Statements of Operations.
 
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
Loans as of June 30, 2015 and December 31, 2014 were as follows:
 
(Dollars in thousands)
 
June 30, 2015
   
December 31, 2014
 
Commercial loans
 
$
61,537
   
$
57,876
 
Real estate mortgage loans:
               
Residential
   
70,384
     
71,002
 
Commercial
   
224,865
     
222,468
 
Construction and land
   
27,729
     
22,319
 
Consumer and other loans
   
1,720
     
1,489
 
Loans, gross
   
386,235
     
375,154
 
Less:
               
Net deferred loan fees
   
(536
)
   
(498
)
Allowance for loan losses
   
(12,861
)
   
(14,377
)
Loans, net
 
$
372,838
   
$
360,279
 

Loans acquired as a result of the merger with ABI were recorded at fair value on the date of acquisition.  The amounts reported in the table above are net of the fair value adjustments.  The table below reflects the contractual amount of purchased loans less the discount to principal balances remaining from these fair value adjustments by class of loan as of June 30, 2015 and December 31, 2014.  This discount will be accreted into interest income as deemed appropriate over the remaining term of the related loans or to support unidentified losses.
 
JACKSONVILLE BANCORP, INC.
 
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
 
(Dollars in thousands)
June 30, 2015
 
Gross Contractual
Amount Receivable
   
Discount
   
Carrying Amount
 
Commercial loans
 
$
1,686
   
$
127
   
$
1,559
 
Real estate mortgage loans:
                       
Residential
   
12,952
     
647
     
12,305
 
Commercial
   
35,247
     
1,993
     
33,254
 
Construction and land
   
3,085
     
259
     
2,826
 
Consumer and other loans
   
373
     
3
     
370
 
Total
 
$
53,343
   
$
3,029
   
$
50,314
 
 
December 31, 2014
 
Gross Contractual
Amount Receivable
   
Discount
   
Carrying Amount
 
Commercial loans
 
$
1,758
   
$
144
   
$
1,614
 
Real estate mortgage loans:
                       
Residential
   
15,748
     
761
     
14,987
 
Commercial
   
37,481
     
2,167
     
35,314
 
Construction and land
   
3,452
     
334
     
3,118
 
Consumer and other loans
   
400
     
3
     
397
 
Total
 
$
58,839
   
$
3,409
   
$
55,430
 
 
The Company has divided the loan portfolio into three portfolio segments, each with different risk characteristics and methodologies for assessing risk.  The three portfolio segments identified by the Company are described below.
 
Commercial Loans
Commercial loans are primarily underwritten on the basis of the borrowers’ ability to service such debt from operating cash flows. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. As a general practice, loans are secured by a security interest in any available real estate, equipment, or other chattel, although loans may also be made on an unsecured basis.  Collateralized working capital loans typically are secured with short-term assets whereas long-term loans are primarily secured with long-term assets.  Credit risk is mitigated by the diversity and number of borrowers as well as loan type within the commercial portfolio.
 
Real Estate Mortgage Loans
Real estate mortgage loans are typically segmented into three classes:  commercial real estate, residential real estate and construction and land development. Commercial real estate loans are secured by the subject property and are underwritten based upon standards set forth in the underwriting guidelines authorized by the Bank’s Board of Directors. Such standards include, among other factors, loan-to-value limits, debt service coverage and general creditworthiness of the obligors. Residential real estate loans are underwritten in accordance with policies set forth and approved by the Bank’s Board, including repayment capacity and source, value of the underlying property, credit history, stability and purchaser guidelines.  Construction loans to borrowers are to finance the construction of owner occupied and lease properties.  These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Bank carefully monitors these loans with on-site inspections and requires the receipt of invoices and lien waivers prior to advancing funds. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Bank considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, cost estimates and pre-construction sale information. The Bank also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for the future development of either commercial or residential use by the borrower. The Bank carefully analyzes the intended use of the property and the viability thereof.
 
JACKSONVILLE BANCORP, INC.

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
 
Repayment of real estate loans is primarily dependent upon the personal income or business income generated by the secured property of the borrowers, which can be impacted by the economic conditions in their market area. Risk is mitigated by the fact that the properties securing the Company’s real estate loan portfolio are diverse in type and spread over a large number of borrowers.
 
Consumer and Other Loans
Consumer and other loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. The Company also offers home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas, such as unemployment levels.  Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates and may be made on terms of up to ten years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
 
Activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2015 and 2014 was as follows:
 
   
Three Months Ended
June 30,
   
Six Months Ended  
June 30,
 
(Dollars in thousands)
 
2015
   
2014
   
2015
   
2014
 
Allowance at beginning of period
 
$
14,371
   
$
15,104
   
$
14,377
   
$
15,760
 
                                 
Charge-offs:
                               
Commercial loans
   
(166
)
   
-
     
(166
)
   
(203
)
Real estate mortgage loans
   
(179
)
   
(825
)
   
(390
)
   
(1,489
)
Consumer and other loans
   
-
     
(3
)
   
(4
)
   
(15
)
Total charge-offs
   
(345
)
   
(828
)
   
(560
)
   
(1,707
)
                                 
Recoveries:
                               
Commercial loans
   
15
     
11
     
39
     
28
 
Real estate mortgage loans
   
813
     
37
     
979
     
237
 
Consumer and other loans
   
18
     
5
     
37
     
11
 
Total recoveries
   
846
     
53
     
1,055
     
276
 
                                 
Net recoveries (charge-offs)
   
501
     
(775
)
   
495
     
(1,431
)
                                 
Provision for loan losses charged to operating expenses:
                               
Commercial loans
   
24
     
(126
)
   
125
     
128
 
Real estate mortgage loans
   
(1,569
)
   
563
     
(1,780
)
   
241
 
Consumer and other loans
   
(466
)
   
(150
)
   
(356
)
   
(82
)
Total provision
   
(2,011
)
   
287
     
(2,011
)
   
287
 
Allowance at end of period
 
$
12,861
   
$
14,616
   
$
12,861
   
$
14,616
 
 
JACKSONVILLE BANCORP, INC.
 
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2015 and December 31, 2014:
 
(Dollars in thousands)
June 30, 2015
 
Commercial
Loans
   
Real Estate
Mortgage Loans
   
Consumer and
Other Loans
   
Total
 
Allowance for loan losses:
               
Ending allowance balance attributable to loans:
               
Individually evaluated for impairment
 
$
62
   
$
1,916
   
$
-
   
$
1,978
 
Collectively evaluated for impairment
   
1,227
     
9,055
     
601
     
10,883
 
Loans acquired with deteriorated credit quality
   
-
     
-
     
-
     
-
 
Total ending allowance balance
 
$
1,289
   
$
10,971
   
$
601
   
$
12,861
 
Loans:
                               
Loans individually evaluated for impairment
 
$
62
   
$
13,124
   
$
25
   
$
13,211
 
Loans collectively evaluated for impairment
   
61,363
     
297,664
     
1,695
     
360,722
 
Loans acquired with deteriorated credit quality
   
112
     
12,190
     
-
     
12,302
 
Total ending loans balance
 
$
61,537
   
$
322,978
   
$
1,720
   
$
386,235
 
 
 
December 31, 2014
 
Commercial
Loans
   
Real Estate
Mortgage Loans
   
Consumer
 and
Other Loans
   
Total
 
Allowance for loan losses:
               
Ending allowance balance attributable to loans:
               
Individually evaluated for impairment
 
$
21
   
$
539
   
$
-
   
$
560
 
Collectively evaluated for impairment
   
1,270
     
11,622
     
925
     
13,817
 
Loans acquired with deteriorated credit quality
   
-
     
-
     
-
     
-
 
Total ending allowance balance
 
$
1,291
   
$
12,161
   
$
925
   
$
14,377
 
Loans:
                               
Loans individually evaluated for impairment
 
$
21
   
$
16,033
   
$
28
   
$
16,082
 
Loans collectively evaluated for impairment
   
57,749
     
285,371
     
1,461
     
344,581
 
Loans acquired with deteriorated credit quality
   
106
     
14,385
     
-
     
14,491
 
Total ending loans balance
 
$
57,876
   
$
315,789
   
$
1,489
   
$
375,154
 
 
JACKSONVILLE BANCORP, INC.
 
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The following table presents loans individually evaluated for impairment, by class of loans as of June 30, 2015 and December 31, 2014:
 
   
June 30, 2015
   
December 31, 2014
 
(Dollars in thousands)
 
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance for
Loan Losses
Allocated
   
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance for
Loan Losses
Allocated
 
With no related allowance recorded:
                       
Commercial loans
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
Real estate mortgage loans:
                                               
Residential
   
461
     
409
     
-
     
2,288
     
2,211
     
-
 
Commercial
   
9,225
     
8,739
     
-
     
14,012
     
11,104
     
-
 
Construction and land
   
1,119
     
1,090
     
-
     
1,174
     
1,126
     
-
 
Consumer and other loans
   
28
     
25
     
-
     
31
     
28
     
-
 
Subtotal
   
10,833
     
10,263
     
-
     
17,505
     
14,469
     
-
 
With an allowance recorded:
                                               
Commercial loans
 
$
62
   
$
62
   
$
62
   
$
21
   
$
21
   
$
21
 
Real estate mortgage loans:
                                               
Residential
   
2,170
     
2,121
     
1,549
     
692
     
629
     
103
 
Commercial
   
476
     
476
     
202
     
489
     
489
     
214
 
Construction and land
   
323
     
289
     
165
     
493
     
474
     
222
 
Consumer and other loans
   
-
     
-
     
-
     
-
     
-
     
-
 
Subtotal
   
3,031
     
2,948
     
1,978
     
1,695
     
1,613
     
560
 
                                                 
Total
 
$
13,864
   
$
13,211
   
$
1,978
   
$
19,200
   
$
16,082
   
$
560
 
 
The following table presents the average recorded investment in impaired loans and the related interest income recognized during impairment for the three and six months ended June 30, 2015 and 2014.
 
   
Three Months Ended
June 30, 2015
   
Six Months Ended
June 30, 2015
 
 
(Dollars in thousands)
 
Average
 Impaired
Loans
   
Interest
Income
   
Cash-Basis
   
Average
 Impaired
Loans
   
Interest
Income
   
Cash Basis
 
Commercial loans
 
$
118
   
$
-
   
$
-
   
$
147
   
$
-
   
$
-
 
Real estate mortgage loans:
                                               
Residential
   
1,273
     
14
     
14
     
1,436
     
21
     
21
 
Commercial
   
9,636
     
240
     
240
     
10,239
     
289
     
289
 
Construction and land
   
1,508
     
9
     
9
     
1,546
     
18
     
19
 
Consumer and other loans
   
25
     
-
     
-
     
26
     
-
     
-
 
Total
 
$
12,560
   
$
263
   
$
263
   
$
13,394
   
$
328
   
$
329
 

   
Three Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2014
 
 
(Dollars in thousands)
 
Average
 Impaired
Loans 
   
Interest
Income
   
Cash-Basis
   
Average
 Impaired
Loans
   
Interest
Income
   
Cash Basis
 
Commercial loans
 
$
155
   
$
-
   
$
-
   
$
272
   
$
-
   
$
-
 
Real estate mortgage loans:
                                               
Residential
   
2,948
     
15
     
29
     
3,504
     
34
     
42
 
Commercial
   
16,473
     
54
     
57
     
14,357
     
109
     
113
 
Construction and land
   
5,372
     
10
     
11
     
5,448
     
21
     
14
 
Consumer and other loans
   
348
     
-
     
-
     
353
     
-
     
-
 
Total
 
$
25,296
   
$
79
   
$
97
   
$
23,934
   
$
164
   
$
169
 
 
JACKSONVILLE BANCORP, INC.
 
NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
 
The following table presents the recorded investment in nonaccrual loans by class of loans as of June 30, 2015 and December 31, 2014:
 
(Dollars in thousands)
 
June 30, 2015
   
December 31, 2014
 
Commercial loans
 
$
62
   
$
21
 
Real estate mortgage loans:
               
Residential
   
2,374
     
1,151
 
Commercial
   
3,027
     
7,408
 
Construction and land
   
389
     
574
 
Consumer and other loans
   
25
     
28
 
Total
 
$
5,877
   
$
9,182
 

There were no loans past due 90 days or greater and still accruing at June 30, 2015 and December 31, 2014.
 
The following table presents the aging of the recorded investment in past due loans by class of loans as of June 30, 2015 and December 31, 2014:
 
   
Past Due Loans
         
(Dollars in thousands)
June 30, 2015
 
30-59
Days
   
60-89
Days
   
90 Days and
Greater
   
Total
   
Loans Not
Past Due
   
Total
 
Commercial loans
 
$
50
   
$
41
   
$
21
   
$
112
   
$
61,425
   
$
61,537
 
Real estate mortgage loans:
                                               
Residential
   
716
     
169
     
671
     
1,556
     
68,828
     
70,384
 
Commercial
   
74
     
-
     
1,006
     
1,080
     
223,785
     
224,865
 
Construction and land
   
-
     
-
     
289
     
289
     
27,440
     
27,729
 
Consumer and other loans
   
-
     
-
     
-
     
-
     
1,720
     
1,720
 
Total
 
$
840
   
$
210
   
$
1,987
   
$
3,037
   
$
383,198
   
$
386,235
 
 
   
Past Due Loans
         
December 31, 2014
 
30-59
Days
   
60-89
Days
   
90 Days and
Greater
   
Total
   
Loans Not
Past Due
   
Total
 
Commercial loans
 
$
218
   
$
-
   
$
-
   
$
218
   
$
57,658
   
$
57,876
 
Real estate mortgage loans:
                                               
Residential
   
874
     
579
     
681
     
2,134
     
68,868
     
71,002
 
Commercial
   
5,032
     
1,701
     
4,784
     
11,517
     
210,951
     
222,468
 
Construction and land
   
-
     
-
     
350
     
350
     
21,969
     
22,319
 
Consumer and other loans
   
269
     
-
     
-
     
269
     
1,220
     
1,489
 
Total
 
$
6,393
   
$
2,280
   
$
5,815
   
$
14,488
   
$
360,666
   
$
375,154
 
 
The delinquency status of purchased credit impaired loans that resulted from our acquisition of ABI is based on the contractual terms of the loan.  In effect, past due status of an acquired loan is determined in the same manner as loans originated by the Bank.
 
Troubled Debt Restructurings
 
During the normal course of business, the Company may restructure or modify the terms of a loan for various reasons.  The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) a concession is granted that otherwise would not have occurred under normal circumstances.
 
JACKSONVILLE BANCORP, INC.

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
 
The following table presents the recorded investment and specific reserves allocated to loans modified as TDRs as of June 30, 2015 and December 31, 2014.
 
(Dollars in thousands)
 
June 30, 2015
   
December 31, 2014
 
Recorded investment(1)
 
$
10,563
   
$
10,794
 
Specific reserves allocated(2)
   
331
     
372
 
 

(1) Of the total recorded investment in loans modified as TDRs, $1,105 and $1,285, respectively, were for customers whose loans were collateral dependent with collateral shortfalls.
(2) Of the specific reserves allocated to customers whose loan terms were modified as TDRs, $331 and $372, respectively, were allocated to customers whose loans were collateral dependent with collateral shortfalls.
 
The following table represents loans by class modified as TDRs that occurred during the three and six months ended June 30, 2015 and 2014:
 
   
Three Months Ended
June 30, 2015
   
Six Months Ended
June 30, 2015
 
(Dollars in thousands)
 
Number
of loans
   
Pre-
Modification
Outstanding
Recorded
Investment
   
Post-
Modification
Outstanding
Recorded
Investment
   
Number
of loans
   
Pre-
Modification
Outstanding
Recorded
 Investment
   
Post-
Modification
Outstanding
Recorded
Investment
 
Commercial loans
   
-
   
$
-
   
$
-
     
-
   
$
-
   
$
-
 
Real estate mortgage loans:
                                               
Residential
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial
   
1
     
1,496
     
1,689
     
1
     
1,496
     
1,689
 
Construction and land
   
-
     
-
     
-
     
-
     
-
     
-
 
Consumer and other loans
   
-
     
-
     
-
     
-
     
-
     
-
 
Total
   
1
   
$
1,496
   
$
1,689
     
1
   
$
1,496
   
$
1,689
 
 
   
Three Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2014
 
(Dollars in thousands)
 
Number
of loans
   
Pre-
Modification
Outstanding
Recorded
Investment
   
Post-
Modification
Outstanding
Recorded
Investment
   
Number
of loans
   
Pre-
Modification
Outstanding
Recorded
Investment
   
Post-
Modification
Outstanding
Recorded
Investment
 
Commercial loans
   
1
   
$
62
   
$
62
     
1
   
$
62
   
$
62
 
Real estate mortgage loans:
                                               
Residential
   
1
     
147
     
121
     
2
     
171
     
151
 
Commercial
   
1
     
664
     
904
     
6
     
3,579
     
3,629
 
Construction and land
   
2
     
281
     
219
     
2
     
281
     
219
 
Consumer and other loans
   
-
     
-
     
-
     
1
     
239
     
239
 
Total    
5
   
$
1,154
   
$
1,306
     
12
   
$
4,332
   
$
4,300
 
 
JACKSONVILLE BANCORP, INC.

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
 
During the three and six months ended June 30, 2015, there was 1 collateral-impaired loan modified as a TDR. During the three and six months ended June 30, 2014, there were five and twelve loans, respectively, modified as TDRs. For the three and six months ended June 30, 2014, there were three and eight collateral-impaired loans modified as TDRs, respectively. The terms of these loans were modified as TDRs because the borrower was experiencing financial difficulties. The loan modifications allowed the borrowers to make reduced payments, such as (i) reduced fixed interest rate through maturity and an advance to cover a deficiency from sale of a separate foreclosed property, (ii) change from principal and interest payments to interest only payments for a limited period of time, (iii) reduced principal and interest payments through maturity, (iv) change from variable rate interest only payments through maturity to fixed rate interest only payments for a limited period of time and reduced principal and interest payments through maturity, (v) change from variable rate interest only payments through maturity to fixed rate and reduced principal and interest payments through maturity, or (vi) proposed forgiveness of principal contingent upon the satisfaction of the modified terms.  The TDR described above did not increase the allowance for loan losses as of June 30, 2015 and there were no related charge-offs for the three and six months ended June 30, 2015. For the three and six months ended June 30, 2014, the TDRs described above did not increase the allowance for loan losses as of June 30, 2014 and resulted in charge-offs of $61,000 and $256,000, respectively.
 
As of June 30, 2015 and December 31, 2014, the Company had no commitments to lend additional amounts to customers with outstanding loans whose terms were modified as TDRs.
 
There were no TDRs for which there was a payment default within twelve months following the modification during the three and six months ended June 30, 2015 and 2014.  A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
 
Loans modified that did not meet the definition of a TDR had a total recorded investment of $7.2 million for the three and six months ended June 30, 2015 and $6.9 million and $10.1 million for the three and six months ended June 30, 2014, respectively. These modifications involved loans to borrowers who were not experiencing financial difficulties and included (i) allowing the borrowers to make interest-only payments for a limited period of time, (ii) adjusting the interest rate to a market interest rate through maturity, (iii) extension of interest-only payments for a limited period of time, or (iv) extension of maturity date.
 
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.
 
Credit Quality Indicators
 
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.
 
The Company analyzes loans individually by classifying the loans as to credit risk.  All loans are graded upon initial issuance.  Loans classified as substandard or special mention are reviewed at least quarterly by the Company for further deterioration or improvement to determine if they are appropriately classified and whether there is any impairment.  Further, commercial loans are typically reviewed at least annually to determine the appropriate loan grading.  In addition, during the renewal process of any loan, as well as if a loan becomes past due, the Company determines the appropriate loan grade.
 
JACKSONVILLE BANCORP, INC.

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
 
Loans excluded from the review process above are generally classified as pass credits until:  (i) they become past due; (ii) management becomes aware of a deterioration in the credit worthiness of the borrower; or (iii) the customer contacts the Company for a modification.  In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or doubtful.  The Company uses the following definitions for risk ratings:
 
Special Mention:
Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
 
Substandard:
Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
 
Doubtful:
Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
 
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass-rated loans.  As of June 30, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans was as follows:
 
(Dollars in thousands)
June 30, 2015
 
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
Commercial loans
 
$
61,135
   
$
77
   
$
106
   
$
-
   
$
61,537
 
Real estate mortgage loans:
                                       
Residential
   
61,674
     
4,860
     
3,850
     
-
     
70,384
 
Commercial
   
210,100
     
4,959
     
9,806
     
-
     
224,865
 
Construction and land
   
25,261
     
1,358
     
1,110
     
-
     
27,729
 
Consumer and other loans
   
1,679
     
16
     
25
     
-
     
1,720
 
Total
 
$
360,068
   
$
11,270
   
$
14,897
   
$
-
   
$
386,235
 
 
December 31, 2014
 
Pass
   
Special
Mention
   
Substandard
   
Doubtful
   
Total
 
Commercial loans
 
$
56,704
   
$
1,103
   
$
69
   
$
-
   
$
57,876
 
Real estate mortgage loans:
                                       
Residential
   
61,666
     
4,717
     
4,619
     
-
     
71,002
 
Commercial
   
202,225
     
5,278
     
14,965
     
-
     
222,468
 
Construction and land
   
20,799
     
62
     
1,458
     
-
     
22,319
 
Consumer and other loans
Total
   
1,437
     
24
     
28
     
-
     
1,489
 
 
$
342,831
   
$
11,184
   
$
21,139
   
$
-
   
$
375,154
 
 
JACKSONVILLE BANCORP, INC.

NOTE 3 – LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
 
Purchased Loans
 
The Company has purchased loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The unpaid principal balance and carrying amounts of these loans were as follows as of June 30, 2015 and December 31, 2014:
 
(Dollars in thousands)
 
June 30,
2015
   
December 31,
2014
 
Commercial loans
 
$
147
   
$
150
 
Real estate mortgage loans:
               
Residential
   
2,152
     
3,625
 
Commercial
   
11,129
     
11,937
 
Construction and land
   
234
     
240
 
Consumer and other loans
   
-
     
-
 
Unpaid principal balance
 
$
13,662
   
$
15,952
 
                 
Carrying amount
  $ 12,302    
$
14,491
 
 
Accretable yield, or income collected, from these loans was as follows:
 
(Dollars in thousands)
   
Balance as of December 31, 2013
 
$
8,993
 
New loans purchased, including loans classified as held-for-sale
   
-
 
Accretion of income
   
(548
)
Reduction for loans sold, paid off and other
   
(1,619
)
Loans charged off
   
(28
)
Reclassifications from nonaccretable difference
   
-
 
Disposals
   
-
 
Balance as of June 30, 2014
 
$
6,798
 
         
Balance as of December 31, 2014
 
$
6,329
 
New loans purchased, including loans classified as held-for-sale
   
-
 
Accretion of income
   
(423
)
Reduction for loans sold, paid off and other
   
(28
)
Loans charged off
   
-
 
Reclassifications from nonaccretable difference
   
4
 
Disposals
   
-
 
Balance as of June 30, 2015
 
$
5,882
 
 
For those purchased loans disclosed above, the Company did not increase the allowance for loan losses as of June 30, 2015 or December 31, 2014, respectively.
 
NOTE 4 – REVOLVING LOAN AGREEMENTS
 
During the year ended December 31, 2011, Bancorp entered into revolving loan agreements (collectively, the “Revolvers”) with several of its directors and other related parties.  There was no amount outstanding under the Revolvers as of December 31, 2014 with $2.2 million remaining funds available as of the same date.  Each Revolver paid an annual rate of interest equal to 8% on a quarterly basis of the Revolver amount outstanding.  To the extent that any Revolver was not fully drawn, an unused revolver fee was calculated and paid quarterly at an annual rate of 2% on the revolving loan commitment less the daily average principal amount outstanding.  The Revolvers matured on January 1, 2015.
 
JACKSONVILLE BANCORP, INC.

NOTE 4 – REVOLVING LOAN AGREEMENTS (Continued)
 
On January 8, 2015, Bancorp entered into a loan agreement with Castle Creek SSF-D Investors, LP (“Castle Creek”) under which Castle Creek agreed to make revolving loans to the Company not to exceed $1.5 million outstanding at any time (the “Castle Creek Revolver”).  In connection with the Castle Creek Revolver, the Company executed a revolving loan note in favor of Castle Creek.  The principal amount of the Castle Creek Revolver outstanding from time to time will accrue interest at 8% per annum, payable quarterly in arrears.  All amounts borrowed under the Castle Creek Revolver will be due and payable by the Company on January 7, 2017, unless payable sooner pursuant to the provisions of the related loan agreement.  To the extent that the Castle Creek Revolver is not fully drawn, an unused revolver fee will be calculated and paid quarterly at an annual rate of 2% on the revolving loan commitment less the daily average principal amount outstanding.  There was no amount outstanding under the Castle Creek Revolver as of June 30, 2015.
 
NOTE 5 – SHORT-TERM BORROWINGS AND FEDERAL HOME LOAN BANK ADVANCES

As of June 30, 2015 and December 31, 2014, advances from the FHLB were as follows:
 
(Dollars in thousands)
 
June 30, 2015
   
December 31, 2014
 
Overnight advances maturing daily at a daily variable interest rate of 0.35% on June 30, 2015
 
$
5,000
   
$
-
 
Advance maturing January 9, 2015 at a fixed rate of 0.88%
   
-
     
4,000
 
Advances maturing March 2, 2015 at a fixed rate of 0.76%
   
-
     
2,000
 
Advances maturing July 15, 2016 at a fixed rate of 2.81%
   
2,500
     
2,500
 
Advances maturing January 9, 2017 at a fixed rate of 1.40%
   
4,000
     
4,000
 
Advances maturing May 30, 2017 at a fixed rate of 1.23%
   
5,000
     
5,000
 
Total advances from the FHLB  
$
16,500
   
$
17,500
 

Each advance is payable at its maturity date, with a prepayment penalty for early termination.  The advances are collateralized by a blanket lien arrangement on 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 was eligible to borrow up to a total of $55.3 million as of June 30, 2015 and had borrowed $16.5 million, leaving $38.8 million available.  As of December 31, 2014, the Company was eligible to borrow up to a total of $52.0 million and had borrowed $17.5 million, leaving $34.5 million available as of the same date.
 
The Company also has a “Borrower in Custody” line of credit with the Federal Reserve by pledging collateral.  The amount of this line as of June 30, 2015 and December 31, 2014 was $25.1 million and $24.4 million, respectively, all of which was available as of the respective dates.
 
NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS
 
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 $7.6 million, the Company 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).  The fair value of this derivative instrument was $693,000 and $725,000 as of June 30, 2015 and December 31, 2014, respectively.  The fair value of the hedged item was $4.9 million and $5.0 million as of the same dates.
 
The hedge was designated as a cash flow hedge and was determined to be fully effective during all periods presented.  As such, no amount of ineffectiveness has been included in net income and the aggregate fair value of the swap was recorded in Accrued expenses and other liabilitiess on the consolidated balance sheets with changes in fair value recorded in other comprehensive income (“OCI”).  The amount included in accumulated other comprehensive income would be reclassified to current earnings should the hedge no longer be considered effective.  The Company expects the hedge to remain fully effective during the remaining term of the swap.
 
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.
 
JACKSONVILLE BANCORP, INC.
 
NOTE 7 – FAIR VALUE
 
Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Assets and liabilities are measured using valuation techniques specific to the following three-tier hierarchy, which prioritizes the inputs used in measuring fair value.
 
Level I, II and III Valuation Techniques
 
Level I: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
 
Level II: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
 
Level III: Unobservable inputs for the asset or liability.
 
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 by level within the hierarchy:
 
(Dollars in thousands)
June 30, 2015
Total
 
Level I
 
Level II
 
Level III
 
Assets:
               
Securities available-for-sale:
               
U.S. government-sponsored entities and agencies
 
$
7,318
   
$
-
   
$
7,318
   
$
-
 
State and political subdivisions
   
6,688
     
-
     
6,688
     
-
 
Mortgage-backed securities - residential
   
28,974
     
-
     
28,974
     
-
 
Collateralized mortgage obligations
   
27,672
     
-
     
27,672
     
-
 
Corporate bonds
   
2,583
     
-
     
2,583
     
-
 
Liabilities:
                               
Derivative liability
   
693
     
-
     
693
     
-
 
                                 
December 31, 2014
Total
 
Level I
 
Level II
 
Level III
 
Assets:
                               
Securities available-for-sale:
                               
U.S. government-sponsored entities and agencies
 
$
7,157
   
$
-
   
$
7,157
   
$
-
 
State and political subdivisions
   
7,060
     
-
     
7,060
     
-
 
Mortgage-backed securities - residential
   
31,360
     
-
     
31,360
     
-
 
Collateralized mortgage obligations
   
28,962
     
-
     
28,962
     
-
 
Corporate bonds
   
3,094
     
-
     
3,094
     
-
 
Liabilities:
                               
Derivative liability
   
725
     
-
     
725
     
-
 
 
There were no transfers between Level 1 and Level 2 during the three and six months ended June 30, 2015 and the year ended December 31, 2014.
 
The Company used the following methods and significant assumptions to estimate the fair value of each type of recurring financial instrument:
 
Securities Available-for-Sale:
The fair value of securities available-for-sale is determined by obtaining quoted prices on nationally-recognized securities exchanges (Level I inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level II inputs).
 
Derivatives:
The fair value of derivatives is based on valuation models using observable market data as of the measurement date resulting in a Level II classification.
 
JACKSONVILLE BANCORP, INC.
 
NOTE 7 – FAIR VALUE (Continued)
 
The following table presents information about our assets measured at fair value on a non-recurring basis as of June 30, 2015 and December 31, 2014, by level within the fair value hierarchy.  The amounts in the tables represent only assets for which the carrying amount has been adjusted for impairment during the period; therefore, these amounts will differ from the total amounts outstanding.
 
(Dollars in thousands)
June 30, 2015
Total
 
Level I
 
Level II
 
Level III
 
Impaired Loans (Collateral Dependent):
               
Real estate mortgage loans:
               
Residential
 
$
548
   
$
-
   
$
548
   
$
-
 
Commercial
   
202
     
-
     
-
     
202
 
Construction and land
   
216
     
-
     
109
     
107
 
Other real estate owned:
                               
Real estate mortgage loans:
                               
Residential
   
-
     
-
     
-
     
-
 
Commercial
   
-
     
-
     
-
     
-
 
Construction and land
   
3,699
     
-
     
3,699
     
-
 
Assets held for sale
   
711
     
-
     
711
     
-
 
                                 
December 31, 2014
Total
 
Level I
 
Level II
 
Level III
 
Impaired Loans (Collateral Dependent):
                               
Real estate mortgage loans:
                               
Residential
 
$
495
   
$
-
   
$
-
   
$
495
 
Commercial
   
275
     
-
     
-
     
275
 
Construction and land
   
252
     
-
     
-
     
252
 
Other real estate owned:
                               
Real estate mortgage loans:
                               
Residential
   
-
     
-
     
-
     
-
 
Commercial
   
-
     
-
     
-
     
-
 
Construction and land
   
3,773
     
-
     
-
     
3,773
 
Assets held for sale
   
786
     
-
     
786
     
-
 
 
The Company used the following methods and significant assumptions to estimate the fair value of each type of non-recurring financial instrument:
 
Impaired Loans (Collateral Dependent):
Management determined fair value measurements on impaired loans primarily through evaluations of appraisals performed.  The Company considered the appraisal as the starting point for determining fair value and then considered other factors and events in the environment that affected the fair value.  Appraisals for impaired loans are obtained by the Chief Credit Officer and performed by certified general appraisers whose qualifications and licenses have been reviewed and verified by the Company.  Once reviewed, a third-party specialist reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison to independent data sources such as recent market data or industry-wide statistics.  On at least an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustments, if any, should be made to the appraised value of existing collateral to arrive at fair value.  Adjustments may be made to reflect the age of the appraisal and the type of underlying property.  Certain current appraised values were discounted to estimated fair value based on current market data such as recent sales of similar properties, discussions with potential buyers and negotiations with existing customers.  The Company’s ongoing strategy is to accelerate the disposition of substandard assets through such arrangements.
 
JACKSONVILLE BANCORP, INC.

NOTE 7 – FAIR VALUE (Continued)
 
Other Real Estate Owned (“OREO”):
Assets acquired as a result of, or in lieu of, loan foreclosure are initially recorded at fair value (based on the lower of the current appraised value or listing price) at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or fair value less cost to sell.  Management has determined fair value measurements on OREO primarily through evaluations of appraisals performed and current and past offers for the OREO under evaluation.  Appraisals of OREO are obtained subsequent to acquisition as deemed necessary by the Chief Credit Officer.  Appraisals are reviewed for accuracy and consistency by a third-party specialist. Third-party specialists are selected from the approved appraisers list, which is maintained by management, and supervised by the Chief Credit Officer. Certain current appraised values were discounted to estimated fair value based on factors such as sales prices for comparable properties in similar geographic areas and/or assessment through observation of such properties.
 
Assets Held-for-Sale
The Company reclassifies long-lived assets to assets held-for-sale when all criteria for such reclassification are met.  The assets held-for-sale are recorded at the lower of carrying value or fair value less costs to sell.  Management determined the fair value of the assets held-for-sale using an offer made to the Company for the property.
    
Transfers of assets and liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs.  During the six months ended June 30, 2015, there were transfers from Level III to Level II in impaired loans and OREO as the fair value is based on current appraised values that were not further discounted or contracted offers to purchase certain properties. There were no transfers between fair value levels during the three months ended June 30, 2015 and 2014 or during the six months ended June 30, 2014.
   
Quantitative Information about Level III Fair Value Measurements
 
The following table presents quantitative information about unobservable inputs for assets measured on a non-recurring basis using Level III measurements as of June 30, 2015 and December 31, 2014.  This quantitative information is the same for each class of loans.

(Dollars in thousands)
June 30, 2015
 
Fair
Value
 
Valuation Technique
Unobservable Inputs
 
Range of
Inputs
 
 
Weighted
Average
 
Impaired loans (collateral dependent)
 
$
309
 
Market comparable properties
Marketability discount
   
10.0%-75.0
%
   
20.8
%
 
December 31, 2014
 
Fair
Value
 
Valuation Technique
Unobservable Inputs
 
Range of
Inputs
   
Weighted Average
 
Impaired loans (collateral dependent)
 
$
1,022
 
Market comparable properties
Marketability discount
   
0% – 20.0
%
   
6.2
%
Other real estate owned
   
3,773
 
Market comparable properties
Comparability adjustments
   
0% – 8.1
%
   
2.8
%
 
The table below summarizes the outstanding balance, valuation allowance and net carrying amount related to Level III non-recurring instruments for the six months ended June 30, 2015 and 2014:
 
(Dollars in thousands)
June 30, 2015
Outstanding
Balance
 
Valuation
Allowance
 
Net Carrying
Amount
 
Impaired loans (collateral dependent)
 
$
599
   
$
290
   
$
309
 
 
June 30, 2014
 
Outstanding
Balance
   
Valuation
Allowance
   
Net Carrying
Amount
 
Impaired loans (collateral dependent)
 
$
6,259
   
$
2,648
   
$
3,611
 
Other real estate owned
   
3,880
     
994
     
2,886
 
 
For the three and six months ended June 30, 2015, expense related to Level III impaired loans was $101,000 and $227,000, respectively, compared to $1.6 million and $1.7 million for the same periods last year. For the three and six months ended June 30, 2014, expense related to Level III OREO was $13,000 and $36,000, respectively. There was no expense for Level III OREO for the three and six months ended June 30, 2015.
 
JACKSONVILLE BANCORP, INC.

NOTE 7 – FAIR VALUE (Continued)
 
Fair Value of Financial Instruments
The carrying amount and estimated fair values of financial instruments as of June 30, 2015 and December 31, 2014 were as follows:
 
   
June 30, 2015
   
December 31, 2014
 
(Dollars in thousands)
 
Carrying
Amount
   
Fair
Value
   
Carrying
Amount
   
Fair
Value
 
Financial assets:
               
Cash and cash equivalents
 
$
29,555
   
$
29,555
   
$
24,372
   
$
24,372
 
Securities available-for-sale
   
73,235
     
73,235
     
77,633
     
77,633
 
Loans, net
   
372,838
     
377,940
     
360,279
     
366,686
 
Federal Home Loan Bank stock
   
1,140
     
N/A
   
1,243
     
N/A
Accrued interest receivable
   
1,340
     
1,340
     
1,464
     
1,464
 
                                 
Financial liabilities:
                               
Deposits
 
$
426,188
   
$
426,814
   
$
415,756
   
$
416,432
 
Federal Home Loan Bank advances and other borrowings
   
16,617
     
16,732
     
17,629
     
17,743
 
Subordinated debentures
   
16,250
     
8,434
     
16,218
     
8,552
 
Accrued interest payable
   
110
     
110
     
130
     
130
 
Interest rate swap
   
693
     
693
     
725
     
725
 
 
The methods and assumptions not previously presented, used to estimate fair value are described as follows:
 
Cash and cash equivalents:
The carrying amounts of cash and cash equivalents approximate the fair value and are classified as either Level I or Level II in the fair value hierarchy, with Level II comprised solely of national certificates of deposit held by the Bank.  As of June 30, 2015 and December 31, 2014, respectively, the breakdown of cash and cash equivalents between Level I and Level II were as follows:
 
 
June 30, 2015
December 31, 2014
(Dollars in thousands)
 
Level I
 
 
Level II
 
 
Level I
 
 
Level II
 
Cash and cash equivalents
 
$
25,868
   
$
3,687
   
$
20,186
   
$
4,186
 
 
Loans, net:
The fair value of variable-rate loans that re-price frequently and with no significant change in credit risk is based on the carrying value and results in a classification of Level III within the fair value hierarchy, excluding impaired loans as previously discussed. Fair value for other loans is estimated using discounted cash flow analysis using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level III classification in the fair value hierarchy, excluding impaired loans as previously discussed. The methods used to estimate the fair value of loans do not necessarily represent an exit price.
   
Nonmarketable equity securities:
Nonmarketable equity securities include FHLB stock and other nonmarketable equity securities. It is not practicable to determine the fair value of nonmarketable equity securities due to restrictions placed on their transferability.
 
Deposits:
The fair value of demand deposits (e.g., interest and noninterest-bearing, savings and certain types of money market accounts) is, by definition, equal to the amount payable on demand at the reporting date (i.e., carrying value) resulting in a Level II classification in the fair value hierarchy.  The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair value at the reporting date resulting in a Level II classification in the fair value hierarchy. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level II classification.
 
Federal Home Loan Bank advances:
The fair value of FHLB advances is estimated using a discounted cash flow analysis based on the current borrowing rates for similar types of borrowings and is classified as a Level II in the fair value hierarchy.
 
JACKSONVILLE BANCORP, INC.
 
NOTE 7 – FAIR VALUE (Continued)
 
Accrued interest receivable/payable:
The carrying amounts of accrued interest receivable approximate fair value resulting in a Level III classification. The carrying amounts of accrued interest payable approximate fair value resulting in a Level II classification.
 
Subordinated debt:
The fair value of subordinated debt, where a market quote is not available, is based on discounted cash flows, using a rate appropriate to the instrument and the term of the issue resulting in a Level II classification.
 
Off-balance sheet instruments:
The fair value of off-balance sheet instruments is based on the current fees that would be charged to enter into or terminate such arrangements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.  The fair value of these commitments as of June 30, 2015 was not material.
 
NOTE 8 – CAPITAL ADEQUACY
 
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can initiate regulatory action.
 
Effective July 2, 2013, the Federal Reserve approved final rules known as the “Basel III Capital Rules” substantially revising the risk-based capital and leverage capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank. The Basel III Capital Rules address the components of capital and other issues affecting the numerator in banking institutions’ regulatory capital ratios. Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to remove references to credit ratings from the federal banking agencies’ rules. Certain of the Basel III Capital Rules came into effect for the Company and the Bank on January 1, 2015; these rules are subject to a phase-in period which began on January 1, 2015.
 
The Basel III Capital Rules introduced a new capital measure “Common Equity Tier 1” (“CET1”). The rules specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements. CET1 capital consists of common stock instruments that meet the eligibility criteria in the final rules, retained earnings, accumulated other comprehensive income and common equity Tier 1 minority interest. The rules also define CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1, and not to the other components of capital. They also expand the scope of the adjustments as compared to existing regulations.
 
When fully phased-in on January 1, 2019, the Basel III Capital Rules will require banking organizations to maintain:

a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased-in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0% upon full implementation);
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased-in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation);
a minimum ratio of total capital (that is, Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased-in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and
a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets.
 
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer will face limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers based on the amount of the shortfall.
 
JACKSONVILLE BANCORP, INC.

NOTE 8 – CAPITAL ADEQUACY (Continued)
 
Bank
 
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal banking agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements.  FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.
 
Under Basel I, the “prompt corrective action” rules provide that a bank will be: (i) “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, a leverage capital ratio of 5% or greater and is not subject to certain written agreements, orders, capital directives or prompt corrective action directives by a federal bank regulatory agency to maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and generally has a leverage capital ratio of 4% or greater; (iii) “undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 4% or generally has a leverage capital ratio of less than 4%; (iv) “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3% or a leverage capital ratio of less than 3%; or (v) “critically undercapitalized” if its ratio of tangible equity to total assets is equal to or less than 2%.  The federal bank regulatory agencies have authority to require additional capital.
 
The Basel III Capital Rules revised the “prompt corrective action” regulations pursuant to Section 38 of the FDICIA, by:

introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status;
increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 risk-based capital ratio for well-capitalized status being 8.0% (as compared to the current 6.0%); and
eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3.0% leverage ratio and still be well-capitalized.

Under the applicable rules, the Bank was well capitalized as of June 30, 2015 and December 31, 2014.  Depository institutions that are no longer “well capitalized” for bank regulatory purposes must receive a waiver from the Federal Deposit Insurance Corporation (“FDIC”) prior to accepting or renewing brokered deposits.  FDICIA generally prohibits a depository institution from making any capital distribution (including paying dividends) or paying any management fee to its holding company, if the depository institution would thereafter be undercapitalized.
 
The Bank had a Memorandum of Understanding (“MoU”) with the FDIC and the Florida Office of Financial Regulation (“OFR”) that was entered into in 2008 (the “2008 MoU”), which required the Bank to have a total risk-based capital of at least 10% and a Tier 1 leverage capital ratio of at least 8%.  On July 13, 2012, the 2008 MoU was replaced by a new MoU  (the “2012 MoU”), which, among other things, required the Bank to have a total risk-based capital of at least 12% and a Tier 1 leverage capital ratio of at least 8%.   The Bank received notification from the FDIC and the OFR on June 11, 2015 and June 15, 2015, respectively, stating that the Bank is now considered to be in substantial compliance with the 2012 MoU and that the FDIC and the OFR terminated their interests in the 2012 MoU as of the dates mentioned above.
 
JACKSONVILLE BANCORP, INC.

NOTE 8 – CAPITAL ADEQUACY (Continued)
 
Bancorp
 
The Federal Reserve requires bank holding companies, including Bancorp, to act as a source of financial strength for their depository institution subsidiaries.
 
The Federal Reserve has a minimum guideline for bank holding companies of Tier 1 capital to adjusted average quarterly assets (“leverage ratio”) equal to at least 4.00%, and total capital to risk-weighted assets of at least 8.00%, at least half of which must be Tier 1 capital.  As of June 30, 2015 and December 31, 2014, the Company met these requirements.
 
The following table presents the capital ratios and related information for the Company and the Bank in accordance with Basel III as of June 30, 2015 and Basel I as of December 31, 2014:
 
(Dollars in thousands)
 
Actual
   
For Capital
Adequacy Purposes
   
Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
June 30, 2015
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
Total capital to risk-weighted assets:
                       
Consolidated
 
$
62,594
     
15.69
%
 
$
31,910
     
8.00
%
 
$
N/A
 
   
N/A
%
Bank
   
61,772
     
15.50
     
31,891
     
8.00
     
39,864
     
10.00
 
Tier 1 (Core) capital to risk-weighted assets:
                                               
Consolidated
   
55,075
     
13.81
     
23,933
     
6.00
     
N/A
 
   
N/A
 
Bank
   
56,691
     
14.22
     
23,918
     
6.00
     
31,891
     
8.00
 
Common equity Tier I capital (CET1):
                                               
Consolidated
   
55,075
     
13.81
     
17,950
     
4.50
     
N/A
 
   
N/A
 
Bank
   
56,691
     
14.22
     
17,939
     
4.50
     
25,912
     
6.50
 
Tier I (Core) capital to average assets:
                                               
Consolidated
   
55,075
     
11.17
     
19,716
     
4.00
     
N/A
 
   
N/A
 
Bank
   
56,691
     
11.52
     
19,688
     
4.00
     
24,611
     
5.00
 
 
   
Actual
   
For Capital
Adequacy Purposes
   
Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
December 31, 2014
 
Amount
   
Ratio
   
Amount
   
Ratio
   
Amount
   
Ratio
 
Total capital to risk-weighted assets:
                       
Consolidated
 
$
57,949
     
15.13
%
 
$
30,643
     
8.00
%
 
$
N/A
   
N/A
%
Bank
   
56,400
     
14.74
     
30,619
     
8.00
     
38,274
     
10.00
 
Tier 1 (Core) capital to risk-weighted assets:
                                               
Consolidated
   
49,290
     
12.87
     
15,322
     
4.00
     
N/A
 
   
N/A
 
 Bank
   
51,497
     
13.45
     
15,310
     
4.00
     
22,964
     
6.00
 
Tier 1 (Core) capital to average assets:
                                             
Consolidated
   
49,290
     
9.85
     
20,014
     
4.00
     
N/A
 
   
N/A
 
Bank
   
51,497
     
10.31
     
19,980
     
4.00
     
24,975
     
5.00
 
 
JACKSONVILLE BANCORP, INC.
 
NOTE 8 – CAPITAL ADEQUACY (Continued)
 
Dividends and Distributions
 
Prior to October 2009, dividends received from the Bank were Bancorp’s principal source of funds to pay its expenses and interest on and principal of Bancorp’s debt.  Banking regulations require the maintenance of certain capital levels and restrict the payment of dividends by the Bank to Bancorp or by Bancorp to its shareholders.  Commercial banks generally may only pay dividends without prior regulatory approval out of the total of current net profits plus retained net profits of the preceding two years, and banks and bank holding companies are generally expected to pay dividends from current earnings.  Banks may not pay a dividend if the dividend would result in the bank being “undercapitalized” for prompt corrective action purposes, or would violate any minimum capital requirement specified by law or the banks’ regulators.  The Bank has not paid dividends since October 2009 and cannot currently pay dividends.  Bancorp cannot currently pay dividends on its capital stock under applicable Federal Reserve policies.  Bancorp has relied upon revolving loan agreements to pay its expenses during such time.  As of June 30, 2015 and December 31, 2014, remaining funds available under the revolving loan agreements were $1.5 million and $2.2 million, respectively.
 
JACKSONVILLE BANCORP, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Management’s discussion and analysis of the financial condition and results of operations represents an overview of the consolidated financial condition as of June 30, 2015 and December 31, 2014 and results of operations for the three and six months ended June 30, 2015 compared to the same periods in 2014.  This discussion is designed to provide a more comprehensive review of the financial condition and operating results than could be obtained from an examination of the financial statements alone.  This analysis should be read in conjunction with the interim consolidated financial statements and related notes to consolidated financial statements included herein, and the Company’s audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 16, 2015.
 
General
 
Jacksonville Bancorp, Inc. (“Bancorp”) was incorporated on October 24, 1997 and was organized to conduct the operations of The Jacksonville Bank (the “Bank”).  The Bank is a Florida state-chartered commercial bank that opened for business on May 28, 1999, and its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”).  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.  Through Fountain Financial, Inc., and our marketing agreement with New England Financial (an affiliate of MetLife), we are able to meet the investment and insurance needs of our customers.  On November 16, 2010, Bancorp acquired Atlantic BancGroup, Inc. (“ABI”) by merger, and, on the same date, ABI’s wholly owned subsidiary, Oceanside Bank, merged with and into the Bank.  Bancorp, the Bank, and Fountain Financial, Inc. are collectively referred to herein as the “Company.”
 
Business Strategy
 
Our primary business segment is community banking and consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans, commercial real estate loans, residential mortgage loans and a variety of consumer loans.  We also invest in mortgage-backed securities and securities backed by the United States government, and agencies thereof, as well as other securities.  Our profitability depends primarily on our net interest income, which is the difference between the income we receive from our loan and investment securities portfolios and costs incurred on our deposits, the Federal Home Loan Bank (“FHLB”) advances, Federal Reserve borrowings and other sources of funding.  Net interest income is also affected by the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income is generated as the relative amounts of interest-earning assets grow in relation to the relative amounts of interest-bearing liabilities.  In addition, the levels of noninterest income earned and noninterest expenses incurred affect profitability.  Included in noninterest income are service charges earned on deposit accounts and increases in the cash surrender value of Bank-Owned Life Insurance (“BOLI”).  Included in noninterest expense are costs incurred for salaries and employee benefits, occupancy and equipment expenses, data processing expenses, marketing and advertising expenses, federal deposit insurance premiums, legal and professional fees, loan related expenses, and other real estate owned (“OREO”) expenses.
 
Our operations are influenced by 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 fiscal policy and the Federal Reserve’s decisions on monetary policies, including interest rate targets, impact interest-earning assets and our cost of funds and, thus, our net interest margin.  In addition, the local economy and real estate market of Northeast Florida, and the demand for our products and loans, impact our margin.  The local economy and viability of local businesses can also impact the ability of our customers to make payments on loans, thus impacting our loan portfolio.  The Company evaluates these factors when valuing its allowance for loan losses. The Company also believes its underwriting procedures are relatively conservative and, as a result, the Company is not being any more affected than the overall market in the current economic downturn.
 
Our goal is to sustain profitable, controlled growth by focusing on increasing our loan and deposit market share in the Northeast Florida market by developing new financial products, services and delivery channels; closely managing yields on earning assets and rates on interest-bearing liabilities; focusing on noninterest income opportunities; controlling the growth of noninterest expenses; and maintaining strong asset quality.
 
JACKSONVILLE BANCORP, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
As of June 30, 2015 and December 31, 2014, the Bank was well-capitalized with total risk based capital of 15.50% and 14.74% and Tier 1 leverage capital of 11.52% and 10.31%, respectively.  During the six months ended June 30, 2015 and looking forward, the Company intends to maintain the quality of its loan portfolio through the continued reduction of problem assets in a prudent and reasonable manner and to continue to improve the overall credit process including, but not limited to, loan origination disciplines, strict underwriting criteria, and succinct funding and onboarding processes.  In addition, the Company will carry on with the repositioning of its loan and deposit portfolio mix to better align with our targeted market segment of professional services, wholesalers, distributors, and other service industries.  Such improvements have impacted our financial condition and results of operations as well as the recent improvements in the Company’s overall asset quality.
 
To further supplement the Company’s business strategy, the Bank has adopted a philosophy of seeking and retaining the best available personnel for positions of responsibility, who we believe will provide us with a competitive edge in the local banking market.  On December 4, 2013, the Company appointed Kendall L. Spencer as President and Chief Executive Officer to provide advanced leadership and commercial banking expertise as well as additional proficiencies in strategic financial planning and execution of operational initiatives.  On June 2, 2014, Margaret A. Incandela resigned as Executive Vice President and Chief Credit Officer of the Company and the Bank effective August 29, 2014.  Following her resignation, on September 2, 2014, the Company appointed Joseph W. Amy as Executive Vice President and Chief Credit Officer of the Company and the Bank.
 
Financial Condition and Results of Operations
 
The Company’s performance during the periods ended June 30, 2015 and December 31, 2014 is reflective of the completion of a restructuring plan that better aligned the Company’s and the Bank’s processes and procedures with the best industry practices and standards.  As a result of these efforts, as well as recent indicators of stabilization in the local real estate markets and continued general improvement in asset quality, the Company reversed $2.0 million of loan provision expense and reduced noninterest expense during the six months ended June 30, 2015.
 
Comparison of Financial Condition as of June 30, 2015 and December 31, 2014
 
Total assets increased $13.3 million, or 2.7%, from $488.6 million as of December 31, 2014 to $501.9 million as of June 30, 2015.  The Company experienced an increase in cash and cash equivalents in the amount of $5.2 million and an increase in net loans of $12.6 million during the six months ended June 30, 2015. This amount was offset by a decrease in securities available-for-sale of $4.4 million during the same period.
 
Investment securities available-for-sale decreased $4.4 million, or 5.7%, from $77.6 million as of December 31, 2014 to $73.2 million as of June 30, 2015.  During the six months ended June 30, 2015, the Company received $9.9 million in proceeds from principal repayments, maturities and calls and purchased $6.1 million in investment securities. The remaining variance is due to the change in fair market value during the same year-to-date period.
 
Total deposits increased by $10.4 million, or 2.5%, during the six months ended June 30, 2015, from $415.8 million as of December 31, 2014 to $426.2 million as of June 30, 2015.  The following is an explanation of the changes in each of the major deposit categories during the six months ended June 30, 2015:
 
· Noninterest-bearing deposits increased $8.2 million, or 7.6%. This represents 27.2% of total deposits as of June 30, 2015;
 
· Money market, NOW and savings deposits increased $12.4 million, or 7.1%, due to natural fluctuations in account balances; and
 
· The time deposit portfolio decreased by $10.2 million, or 7.7%, driven primarily by a $5.9 million reduction in brokered CDs.  The remaining variance was due to a net decrease in local and national CDs when compared to the prior year-end.
 
JACKSONVILLE BANCORP, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
FHLB advances and other borrowings decreased during the six months ended June 30, 2015, with FHLB advances and other borrowings of $16.6 million and $17.6 million as of June 30, 2015 and December 31, 2014, respectively.  This was due to two fixed rate advances that matured in the first quarter of 2015 totaling $6.0 million and an increase in daily rate credit advances of $5.0 million.
 
Total shareholders’ equity increased during the six months ended June 30, 2015, from $37.1 million as of December 31, 2014 to $41.1 million as of June 30, 2015.  This increase was attributable to net income during the six months ended June 30, 2015 of $4.0 million and a decrease in accumulated comprehensive income of $89,000. Accumulated comprehensive income decreased based on changes in interest rates during the six months ended June 30, 2015.
 
Comparison of Operating Results for the Six Months Ended June 30, 2015 and 2014
 
Net Income
The Company had net income of $4.0 million for the six months ended June 30, 2015 compared to net income of $533,000 for the six months ended June 30, 2014.  On a diluted per share basis, the Company had earnings per share of $0.69 for the six months ended June 30, 2015, compared to $0.09 earnings per share of for the same period in the prior year.
 
Net Interest Income
Net interest income, the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities, was $8.8 million for the six months ended June 30, 2015 compared to $9.0 million for the same period in 2014.
 
Total interest income had a decrease of $371,000 to $10.3 million for the six months ended June 30, 2015 compared to a $10.7 million in the same period in 2014. This decrease is primarily the result of a lower average yield on loans which decreased 15 basis points to 5.10% for the six months ended June 30, 2015 compared to 5.25% for the six months ended June 30, 2014.  The decrease in the loan yield was driven by a decrease in accretion recognized on acquired loans of approximately $371,000.
 
The average cost of interest-bearing liabilities decreased 6 basis points to 0.88% for the six months ended June 30, 2015 compared to 0.94% for the same period in 2014.  The decrease is driven by a decline in the cost of time deposits. During the first quarter of 2015, two brokered certificates of deposit totaling $5.9 million matured which reduced the overall cost of certificates of deposits to 1.03% in the six months ended June 30, 2015 from 1.19% in the same period last year.
 
The net interest margin increased by 3 basis points to 3.81%, from 3.78%, when comparing the first six months of 2015 to the same period in the prior year.  The Company closely monitors its liquidity needs in conjunction with the cost of its funding sources and evaluates rates paid on its core deposits to ensure they remain competitive in the local market environment.
 
JACKSONVILLE BANCORP, INC.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Average Balance Sheet; Interest Rates and Interest Differential:
The following table sets forth, for the periods indicated, information regarding: (1) the total dollar amount of interest and dividend income from interest-earning assets and the resultant average yield; (2) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (3) net interest/dividend income; (4) interest rate spread; and (5) net interest margin. Average balances are based on average daily balances.
 
   
Six Months Ended June 30,
 
   
2015
   
2014
 
(Dollars in thousands)
 
Average
Balance
   
Interest
   
Average
Rate
   
Average
Balance
   
Interest
   
Average
Rate
 
Interest-earning assets:
                       
Loans (1)
 
$
375,446
   
$
9,497
     
5.10
%
 
$
375,169
   
$
9,759
     
5.25
%
Securities available-for-sale:
                                               
Taxable
   
69,189
     
568
     
1.66
     
75,434
     
622
     
1.66
 
Tax-exempt(2)
   
6,816
     
147
     
4.35
     
7,800
     
191
     
4.94
 
Other interest-earning assets(3)
   
14,598
     
68
     
0.94
     
19,719
     
79
     
0.81
 
Total interest-earning assets
   
466,049
     
10,280
     
4.45
     
478,122
     
10,651
     
4.49
 
Noninterest-earning assets(4)
   
24,173
                     
18,675
                 
Total assets
 
$
490,222
                   
$
496,797
                 
Interest-bearing liabilities:
                                               
Savings deposits
 
$
9,804
   
$
7
     
0.14
%
 
$
9,674
   
$
8
     
0.17
%
NOW deposits
   
30,619
     
13
     
0.09
     
27,451
     
12
     
0.09
 
Money market deposits
   
141,707
     
284
     
0.40
     
149,877
     
280
     
0.38
 
Time deposits
   
126,563
     
648
     
1.03
     
136,990
     
805
     
1.19
 
FHLB advances
   
13,859
     
100
     
1.46
     
20,000
     
149
     
1.50
 
Federal Reserve and other borrowings
   
33
     
-
     
-
     
6
     
-
     
0.00
 
Subordinated debt
   
16,231
     
408
     
5.07
     
16,169
     
408
     
5.09
 
Other interest-bearing liabilities(5)
   
-
     
15
     
N/A
   
-
     
22
     
N/A
 
Total interest-bearing liabilities
   
338,816
     
1,475
     
0.88
     
360,167
     
1,684
     
0.94
 
Noninterest-bearing liabilities
   
113,314
                     
102,180
                 
Shareholders' equity
   
38,092
                     
34,450
                 
Total liabilities and shareholders' equity
 
$
490,222
                   
$
496,797
                 
Net interest income
         
$
8,805
                   
$
8,967
         
Interest rate spread(6)
                   
3.57
%
                   
3.55
%
Net interest margin(7)
                   
3.81
%
                   
3.78
%
 

(1) Average loans include nonperforming loans.  Interest on loans included loan fees (in thousands) of $153 and $78 for the six months ended June 30, 2015 and 2014, respectively.
(2)
Interest income and rates do not include the effects of a tax equivalent adjustment using a federal tax rate of 34% in adjusting tax-exempt interest on tax-exempt investment securities to a fully taxable basis.
(3)
Includes federal funds sold.
(4)
For presentation purposes, the BOLI acquired by the Bank has been included in noninterest-earning assets.
(5)
Includes federal funds purchased and revolving loans that pay an annual rate of interest equal to 8% on a quarterly basis of the amount outstanding or an unused revolver fee calculated and paid quarterly at an annual rate of 2% on the revolving loan commitment less the daily average principal amount outstanding.
(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.
 
JACKSONVILLE BANCORP, INC.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Rate/Volume Analysis:
The following table sets forth the effect of changes in volumes, changes in rates, and changes in rate/volume on tax-equivalent interest income, interest expense and net interest income.
 
   
Six Months Ended June 30, 2015 vs. 2014
 
   
Increase (Decrease) Due to(1)
 
(Dollars in thousands)
 
Rate
   
Volume
   
Total
 
Interest-earning assets:
           
Loans
 
$
(269
)
 
$
7
   
$
(262
)
Securities available-for-sale:
                       
Taxable
   
(3
)
   
(51
)
   
(54
)
Tax-exempt
   
(21
)
   
(23
)
   
(44
)
Other interest-earning assets
   
12
     
(23
)
   
(11
)
Total interest-earning assets
 
$
(281
)
 
$
(90
)
 
$
(371
)
                         
Interest-bearing liabilities:
                       
Savings deposits
 
$
(1
)
 
$
-
   
$
(1
)
NOW deposits
   
-
     
1
     
1
 
Money market deposits
   
20
     
(16
)
   
4
 
Time deposits
   
(99
)
   
(58
)
   
(157
)
FHLB advances
   
(5
)
   
(44
)
   
(49
)
Federal Reserve and other borrowings
   
(7
)
   
-
     
(7
)
Subordinated debt
   
(2
)
   
2
     
-
 
Other interest-bearing liabilities
   
-
     
-
     
-
 
Total interest-bearing liabilities
 
$
(94
)
 
$
(115
)
 
$
(209
)
                         
Net change in net interest income
 
$
(187
)
 
$
25
   
$
(162
)
                                        

(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 component.
 
Noninterest Income, Noninterest Expense and Income Taxes
Noninterest income remained relatively flat period-over-period, with $745,000 and $756,000 in service charges and other income for the six months ended June 30, 2015 and 2014, respectively.
 
Noninterest expense decreased to $7.5 million for the six months ended June 30, 2015, compared to $8.9 million for the same period in 2014.  This decrease was due to a decrease in salaries and employee benefits of $1.2 million, mainly due to the two reductions in workforce that occurred in 2014 during the second and fourth quarters.  Occupancy and equipment expense decreased to $1.1 million from $1.3 million in the same period last year. Leasehold improvement expense decreased $67,000 for the six months ended June 30, 2015 as a portion of the leasehold improvements became fully amortized in the fourth quarter of 2014. In addition, during the first six months of 2014, the Bank incurred additional maintenance and repair expenses related to its branch relocation. During the six months ended June 30, 2015, there was a decrease of $48,000 for director fees and $187,000 for loan expenses as a result of the Company’s continued execution of its ongoing strategy to reduce problem assets. Other real estate owned expense increased to $160,000 from $110,000 in the same period in 2014. This is a result of several write-downs taken during the six month period ended June 30, 2015 in the aggregate amount of $91,000 compared to $36,000 in the same period last year. Included in other expense for the six months ended June 30, 2015 is a $75,000 write-down to assets classified as held-for-sale. During the second quarter of 2015, the fair value was determined to be less than the carrying value and a charge was recorded to noninterest expense.
 
Income tax expense increased to $46,000 for the six months ended June 30, 2015 compared to none in the same period of the prior year.  This was the result of Alternative Minimum Taxes.  The Company recorded a full valuation allowance against its deferred taxes as of December 31, 2011.  This was substantially due to the fact that it was more-likely-than-not that the benefit would not be realized in future periods due to the uncertainty of future taxable income and Section 382 of the Internal Revenue Code.  Based on an analysis performed as of June 30, 2015 and December 31, 2014, it was determined that the need for a full valuation allowance still existed.
 
JACKSONVILLE BANCORP, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Comparison of Operating Results for the Three Months Ended June 30, 2015 and 2014
 
Net Income
The Company had net income of $3.1 million for the three months ended June 30, 2015, compared to $507,000 of net income for the three months ended June 30, 2014.  On a diluted per share basis, the Company had net income of $0.54 for the three months ended June 30, 2015, compared to net income of $0.09 for the same period in the prior year.
 
Net Interest Income
Net interest income was $4.5 million for the three months ended June 30, 2015, compared to $4.7 million for the same period in 2014.
 
Total interest income decreased $327,000 to $5.2 million for the three months ended June 30, 2015 compared to $5.5 million in the same period in 2014. This decrease was primarily driven by a decrease in average earning assets, in particular, average investment securities decreased by $6.3 million when compared to the same period in the prior year.  The average yield on investment securities remained relatively flat at 1.89% compared to 1.93% during the three months ended June 30, 2015 and 2014, respectively. During the same periods, average loans increased $3.0 million and the average yield on loans for the three months ended June 30, 2015 and 2014 was 5.12% and 5.46%, respectively. The decrease in the loan yield was driven primarily by a decrease in the core average yield earned on loans and a decrease in accretion recognized on acquired loans of approximately $404,000.
 
The average cost of interest-bearing liabilities decreased 6 basis points to 0.87% for the three months ended June 30, 2015, compared to 0.93% for the same period in 2014.  The decrease is driven by a decline in the cost of time deposits. During the first quarter of 2015, two brokered certificates of deposit totaling $5.9 million matured which reduced the overall cost of certificates of deposits to 1.02% in the second quarter of 2015 from 1.15% in the same period last year.
 
The net interest margin decreased by 12 basis points to 3.83% from 3.95%, when comparing the second quarter of 2015 to the same period in the prior year.  This was driven primarily by the decrease in the average yield on loans while the improvement in the cost of interest-bearing liabilities somewhat mitigated the decline. The Company closely monitors its liquidity needs in conjunction with the cost of its funding sources and evaluates rates paid on its core deposits to ensure they remain competitive in the local market environment.
 
Noninterest Income, Noninterest Expense and Income Taxes
Noninterest income remained relatively consistent quarter-over-quarter, with $372,000 and $379,000 in service charges and other income for the three months ended June 30, 2015 and 2014, respectively.
 
Noninterest expense decreased to $3.7 million for the three months ended June 30, 2015, compared to $4.3 million for the same period in 2014.  This decrease was mainly due to a reduction in salaries and employee benefits of $608,000. This decrease was due to a decrease in salaries and employee benefits mainly due to a reduction in workforce that occurred in 2014 during the second and fourth quarters. Occupancy and equipment decreased by $64,000 in the three months ended June 30, 2015 compared to the same period last year as the Bank incurred additional maintenance and repair expenses related to its branch relocation. Other real estate owned expense increased $34,000 primarily due to write-downs during the second quarter of 2015. Loan expenses decreased $24,000 period over period as a result of the Company’s continued execution of its ongoing strategy to reduce problem assets.   Included in other expense for the three months ended June 30, 2015 is a $75,000 write-down to assets classified as held-for-sale. During the second quarter of 2015, the fair value was determined to be less than the carrying value and a charge was recorded to noninterest expense.
 
Income tax expense increased to $32,000 for the three months ended June 30, 2015 compared to none in the same period of the prior year.  This was the result of Alternative Minimum Taxes.  As previously discussed, the Company has recorded a full valuation allowance against its deferred taxes.
 
JACKSONVILLE BANCORP, INC.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Asset Quality
 
The Company has identified certain assets as risk elements.  These assets include nonperforming loans, loans that are contractually past due 90 days or more as to principal or interest payments and still accruing, TDRs, and other real estate owned (i.e., foreclosed assets).  Loans are placed on nonaccrual status when management has concerns regarding the Company’s ability to collect the outstanding loan principal and interest amounts and typically when such loans are more than 90 days past due.  These loans present more than the normal risk that the Company will be unable to eventually collect or realize their full carrying value. The Company’s nonperforming loans, foreclosed assets and TDRs as of June 30, 2015 and December 31, 2014 were as follows:
 
(Dollars in thousands)
 
June 30, 2015
   
December 31, 2014
 
Nonperforming loans:
       
Commercial
 
$
62
   
$
21
 
Real estate mortgage loans
               
Residential
   
2,374
     
1,151
 
Commercial
   
3,027
     
7,408
 
Construction and land
   
389
     
574
 
Consumer loans and other
   
25
     
28
 
Total nonperforming loans(1)
   
5,877
     
9,182
 
Other real estate owned, net
   
4,047
     
4,061
 
Total nonperforming assets
 
$
9,924
   
$
13,243
 
Performing loans classified as TDRs
 
$
6,845
   
$
8,585
 
Nonperforming loans classified as TDRs
   
3,718
     
2,209
 
Total loans classified as troubled debt restructuring
 
$
10,563
   
$
10,794
 
Nonperforming loans as a percent of gross loans
   
1.52
%
   
2.45
%
Nonperforming loans and other real estate owned as a percent of total assets
   
1.98
%
   
2.71
%
                                        

(1) Includes nonperforming loans classified as TDRs.
 
As shown in the table above, nonperforming assets decreased $3.3 million as of June 30, 2015 from December 31, 2014, respectively.  The improvement is due to a decrease in nonperforming loans totaling $3.3 million as of the same dates. During the second quarter ended June 30, 2015, one nonperforming loan with a recorded investment of $2.2 million was repaid.
 
Loans are deemed impaired when it is considered probable that the Company will not collect the outstanding loan principal and interest amounts according to the loan’s contractual terms. As of June 30, 2015, impaired loans decreased by $2.9 million to $13.2 million, compared to $16.1 million as of December 31, 2014.  Nonperforming impaired loans were $4.9 million as of June 30, 2015. Specific reserves in the amount of $2.0 million were allocated to impaired loans as of June 30, 2015.
 
During the normal course of business, the Company may restructure or modify the terms of a loan for various reasons.  The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) a concession was granted that otherwise would not have occurred under normal circumstances.  As of June 30, 2015, the Company had loan balances of $10.6 million for customers whose loans were classified as TDRs, of which $9.8 million were included in the impaired loans balance as of the same date.  Of the total loans classified as TDRs, $1.1 million were classified as TDRs with collateral shortfalls.  The Company has allocated $331,000 of the allowance for loan losses to customers whose loan terms have been modified as TDRs with collateral shortfalls with none to the remaining TDRs included in the impaired loans balance as of June 30, 2015.
 
JACKSONVILLE BANCORP, INC.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
The TDR that occurred during the six months ended June 30, 2015 allowed the borrowers to make reduced payments, such as (i) reduced fixed interest rate through maturity and an advance to cover a deficiency from sale of a separate foreclosed property, (ii) change from principal and interest payments to interest only payments for a limited period of time, (iii) reduced principal and interest payments through maturity, (iv) change from variable rate interest only payments through maturity to fixed rate interest only payments for a limited period of time and reduced principal and interest payments through maturity, (v) change from variable rate interest only payments through maturity to fixed rate and reduced principal and interest payments through maturity, or (vi) proposed forgiveness of principal contingent upon the satisfaction of the modified terms.  As of June 30, 2015, the Company had not extended any additional credit to customers whose loans were classified as TDRs.
 
Loans modified that did not meet the definition of a TDR had a total recorded investment of $7.2 million and $10.1 million as of June 30, 2015 and 2014, respectively.  These modifications involved loans to borrowers who were not experiencing financial difficulties and included (i) allowing the borrowers to make interest-only payments for a limited period of time, (ii) adjusting the interest rate to a market interest rate through maturity, (iii) extension of interest-only payments for a limited period of time, or (iv) extension of maturity date.
 
In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.  This evaluation is performed under the Company’s internal underwriting policy.
 
Loans past due still accruing interest as of June 30, 2015 and December 31, 2014 were categorized as follows:
 
 
(Dollars in thousands)
June 30, 2015
 
30-59 Days Past
Due
   
60-89 Days
 Past Due
   
Greater than 90
Days Past Due
   
Total Past Due
Still Accruing
Interest
 
Commercial loans
 
$
50
   
$
-
   
$
-
   
$
50
 
Real estate mortgage loans:
                               
Residential
   
716
     
145
     
-
     
861
 
Commercial
   
74
     
-
     
-
     
74
 
Construction and land
   
-
     
-
     
-
     
-
 
Consumer and other loans
   
-
     
-
     
-
     
-
 
Total
 
$
840
   
$
145
   
$
-
   
$
985
 
 
December 31, 2014
 
30-59 Days Past
Due
   
60-89 Days
Past Due
   
Greater than 90
Days Past Due
   
Total Past Due
Still Accruing
Interest
 
Commercial loans
 
$
218
   
$
-
   
$
-
   
$
218
 
Real estate mortgage loans:
                               
Residential
   
848
     
527
     
-
     
1,375
 
Commercial
   
4,894
     
-
     
-
     
4,894
 
Construction and land
   
-
     
-
     
-
     
-
 
Consumer and other loans
   
269
     
-
     
-
     
269
 
Total
 
$
6,229
   
$
527
   
$
-
   
$
6,756
 
 
The decrease in total loans past due 30-89 days still accruing interest to $840,000 as of June 30, 2015 from $6.2 million as of December 31, 2014 was driven primarily by one large commercial real estate loan that was between 30-59 days past due as of December 31, 2014 and became current at the beginning of 2015 as well as continued general improvements in overall asset quality during the six months ended June 30, 2015.
 
Adversely classified loans decreased to $14.9 million as of June 30, 2015 compared to $21.1 million as of December 31, 2014. Of the total adversely classified loans as of June 30, 2015, $5.9 million were nonperforming.
 
All adversely classified loans are monitored closely and the majority of these loans are collateralized by real estate.  In addition, the Company critically evaluates all requests for additional funding on classified loans to determine whether the borrower has the capacity and willingness to repay.  Any requests of this nature require concurrence by the Director’s Loan Committee of the Bank’s Board of Directors.
 
JACKSONVILLE BANCORP, INC.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
The same criteria used for all Company loans greater than 90 days past due and still accruing interest applies to loans acquired with deteriorated credit quality.  Loans acquired with deteriorated credit quality will be placed on nonaccrual status if the amount and timing of future cash flows cannot be reasonably estimated or if repayment of the loan is expected to be from collateral that has become deficient.  As of June 30, 2015, we had loans acquired with deteriorated credit quality on nonaccrual in the amount of $929,000.
 
Allowance and Provision for Loan Losses
 
The allowance for loan losses decreased by $1.5 million during the six months ended June 30, 2015, amounting to $12.9 million as of June 30, 2015 as compared to $14.4 million as of December 31, 2014.  The allowance represented approximately 3.33% and 3.84% of total loans as of June 30, 2015 and December 31, 2014, respectively.
 
Activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2015 and 2014 was as follows:
 
   
Six Months Ended
June 30,
 
(Dollars in thousands)
 
2015
   
2014
 
Allowance at beginning of period
 
$
14,377
   
$
15,760
 
                 
Charge-offs:
               
Commercial loans
   
166
     
203
 
Real estate mortgage loans
   
390
     
1,489
 
Consumer and other loans
   
4
     
15
 
Total charge-offs
   
560
     
1,707
 
                 
Recoveries:
               
Commercial loans
   
39
     
28
 
Real estate mortgage loans
   
979
     
237
 
Consumer and other loans
   
37
     
11
 
Total recoveries
   
1,055
     
276
 
                 
Net recoveries (charge-offs)
   
495
     
(1,431
)
                 
Provision for loan losses charged to operating expenses:
               
Commercial loans
   
125
     
128
 
Real estate mortgage loans
   
(1,780
)
   
241
 
Consumer and other loans
   
(356
)
   
(82
)
Total provision
   
(2,011
)
   
287
 
                 
Allowance at end of period
 
$
12,861
   
$
14,616
 
    
The decrease in the allowance for loan losses as of June 30, 2015, compared to June 30, 2014, was driven primarily by lower nonperforming loans at June 30, 2015 compared to June 30, 2014 and net recoveries on charge-offs taken in prior periods. The decrease in the allowance for loan losses is further supported by our trends in net charge-offs for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 of $1.7 million, $5.6 million, $30.8 million, $12.4 million and $10.8 million, respectively. This is in direct correlation with the Company’s efforts to reduce problem assets and improve asset quality.  As a result of these efforts, as well as recent indicators of stabilization in the local real estate markets and continued general improvement in asset quality, the Company reversed $2.0 million of loan provision expense in the second quarter of 2015.
 
The Bank’s identification efforts of potential losses in the portfolio are based on a variety of specific factors, including the Company’s own historical experience as well as industry and economic trends.  In calculating the Company’s allowance for loan losses, the Company’s historical loss experience is supplemented with various current qualitative and economic trends.  These current qualitative factors can include any of the following: changes in volume and severity of past due status, special mention, substandard and nonaccrual loans; levels of any trends in charge-offs and recoveries; changes in nature, volume and terms of loans; changes in lending policies and procedures; changes in lending management and quality of loan review; changes in economic and business conditions; and changes in underlying collateral values and effects of concentrations. There were no changes in the current qualitative factors from December 31, 2014 to June 30, 2015.  Although the Company’s overall asset quality, as well as the economy in the markets served, is moving in a positive direction, management does not yet view this as a trend and will continue to monitor these metrics until such time as the trends are considered to be sustainable.
 
JACKSONVILLE BANCORP, INC.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
As of June 30, 2015, of the $10.9 million of the allowance for loan losses from loans collectively evaluated for impairment, the real estate mortgage loans portfolio segment had total weighted average qualitative factors of 1.06%, or $2.8 million; the commercial loans portfolio segment had total weighted average qualitative factors of 1.30%, or $779,000; and the consumer and other loans portfolio segment had total qualitative factors of 1.59%, or $21,000.  Impaired loans were $13.2 million as of June 30, 2015, of which $2.0 million was specifically allocated to the allowance for loan losses which was deemed appropriate to absorb probable incurred credit losses.
 
As part of the Company’s allowance for loan losses policy, loans acquired from ABI with evidence of deteriorated credit quality were included in our evaluation of the allowance for loan losses for each period.  For loans acquired with deteriorated credit quality, if the loss was attributed to events and circumstances that existed as of the acquisition date as a result of new information obtained during the measurement period (i.e., 12 months from date of acquisition) that, if known, would have resulted in the recognition of additional deterioration, the additional deterioration was recorded as additional carrying discount with a corresponding increase to goodwill.  If not, the additional deterioration was recorded as additional provision expense with a corresponding increase to the allowance for loan losses.  After the measurement period, any additional impairment above the current carrying discount was recorded as additional provision for loan loss expense with a corresponding increase to the allowance for loan losses.  As of June 30, 2015, there were $1.7 million in loans acquired with deteriorated credit quality that were included in the evaluation of the allowance for loan losses.
 
All loans acquired as a result of the merger with ABI were recorded at fair value on the date of the acquisition.  The loan amounts reported for these loans are net of fair value adjustments.  As of June 30, 2015, there were $3.0 million of fair value adjustments that will be accreted into interest income over the remaining term of the acquired loans or to support unidentified losses.
 
For loans acquired with deteriorated credit quality that were deemed TDRs prior to the Company’s acquisition of them, these loans were not considered TDRs as they were accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.  Subsequent to the acquisition, the same criteria used for all other loans applied to loans acquired with deteriorated credit quality and their treatment as TDRs.  As of June 30, 2015, there was one acquired loan with deteriorated credit quality that was deemed a TDR in the amount of $761,000.
 
The allowance for loan losses is a valuation allowance for credit losses in the loan portfolio.  Management 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 probable incurred credit losses in the Company’s loan and lease portfolio.  Due to their similarities, the Company has grouped the loan portfolio as follows: commercial loans, residential real estate loans, commercial real estate loans, and consumer and other loans. The Company has created a loan classification system to calculate the allowance for loan losses.  Loans are periodically evaluated for impairment.  If a loan is deemed to be impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the sale or operation of the underlying collateral.
 
It is the Bank’s policy to obtain updated third-party appraisals on all OREO and real estate collateral on substandard loans on, at least, an annual basis.  Value adjustments are sometimes made to appraised values on properties for which the existing appraisal is approximately one year old at period-end.  Occasionally, at period-end, an updated appraisal has been ordered, but not yet received, on a property for which the existing appraisal is approaching one year old.  In this circumstance, an adjustment is typically made to the existing appraised value to reflect the Bank’s best estimate of the change in the value of the property, based on evidence of changes in real estate market values derived by the review of current appraisals received by the Bank on similar properties.
 
Real estate values in the Bank’s market area have experienced deterioration over the last several years.  The expectation for further deterioration for all property types appears to be leveling off with recent indicators of stabilization in the market.  On at least a quarterly basis, management reviews several factors, including underlying collateral, and writes down impaired loans to their net realizable value.
 
JACKSONVILLE BANCORP, INC.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
In estimating the overall exposure to loss on impaired loans, the Company has considered a number of factors, including the borrower’s character, overall financial condition, resources and payment record, the prospects for support from any financially responsible guarantors, and the realizable value of any collateral.  The Company also considers other internal and external factors when determining the allowance for loan losses.  These factors include, but are not limited to, changes in national and local economic conditions, commercial lending staff limitations, impact from lengthy commercial loan workout and charge-off periods, loan portfolio concentrations and trends in the loan portfolio.
 
Based on the results of the analysis performed by management as of June 30, 2015, the allowance for loan losses was considered adequate to absorb probable incurred credit losses in the portfolio as of that date.  As more fully discussed in the “Critical Accounting Policies and Estimates” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the process for estimating credit losses and determining the allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates and judgments.  Actual results may differ significantly from these estimates and judgments.
 
The amount of future charge-offs and provisions for loan losses could be affected by several factors including, but not limited to, economic conditions in Jacksonville and Jacksonville Beach, Florida, and the surrounding communities.  Such conditions could affect the financial strength of the Company’s borrowers and the value of real estate collateral securing the Company’s mortgage loans.  Future charge-offs and provisions could also be affected by environmental impairment of properties securing the Company’s mortgage loans.  Under the Company’s current policy, an environmental risk assessment is required on the majority of all commercial-type properties that are considered for a mortgage loan.  At the present time, the Company is not aware of any existing loans in the portfolio where there is environmental pollution existing on the mortgaged properties that would materially affect the value of the portfolio.
 
Liquidity and Capital Resources
 
Cash Flows
 
The Company’s primary sources of cash are deposit growth, maturities and amortization of investment securities, FHLB advances, Federal Reserve Bank borrowings and federal funds purchased.  The Company uses cash from these and other sources to fund loans.  Any remaining cash is used primarily to reduce borrowings and to purchase investment securities.
 
Cash Flows from Operating Activities:
Net cash from operating activities was $2.1 million and $0.6 million for the six months ended June 30, 2015 and 2014, respectively. Net cash from operating activities for the six months ended June 30, 2015 was primarily impacted by net income of $4.0 million, as adjusted for (i) net accretion of purchase accounting adjustments, mainly purchased loans, of $232,000, (ii) premium amortization for securities, net of accretion, of $397,000, (iii) depreciation and amortization of $260,000, (iv) net change in accrued interest receivable and other assets of $365,000, (v) reversal of provision for loan losses expense of $2.0 million and (vi) net change in accrued expenses and other liabilities of $107,000. Net cash from operating activities for the same period in the prior year reflected net income of $533,000, as adjusted for (i) net accretion of purchase accounting adjustments, mainly purchased loans, of $572,000, (ii) premium amortization for securities, net of accretion, of $441,000, (iii) depreciation and amortization of $353,000, (iv) net change in accrued interest receivable and other assets of $301,000, (v) provision for loan losses of $287,000, and (vi) net change in accrued expenses and other liabilities of $196,000.
 
Cash Flows from Investing Activities:
Net cash used by investing activities was $6.4 million and net cash provided from investing activities was $3.3 million for the six months ended June 30, 2015 and 2014, respectively. The decrease for the six months ended June 30, 2015 was primarily due to an increase in loan originations net of repayments.
 
Cash Flows from Financing Activities:
Net cash from financing activities was $9.4 million and used for financing activities was $14.1 million for the six months ended June 30, 2015 and 2014, respectively.  The period-over-period increase in cash inflows was due to a net increase of $10.4 million in deposits during the six months ended June 30, 2015, compared to the same period in the prior year.  This was offset by $1.0 million in net cash outflows to repay Federal Home Loan Bank fixed rate advances.
 
JACKSONVILLE BANCORP, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Capital Resources
 
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 include 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.  As of June 30, 2015, the Company had $73.2 million in available-for-sale securities, $4.8 million of which was pledged to the Federal Reserve Bank for the Borrower-in-Custody Program as well as the State of Florida.  Scheduled maturities and paydowns of the Company’s investment securities are an additional source of liquidity.  The Company also has the ability to convert marketable securities into cash or access new or existing sources of incremental funds if the need should arise.
 
The Company’s primary external sources of liquidity are customer deposits and borrowings from other commercial banks. The Company’s deposit base consists of both deposits from businesses and consumers in its local market as well as national market deposits.
 
In the second quarter of 2014, the Bank moved the majority of its correspondent bank activity to the Federal Reserve Bank. As of June 30, 2015, the Bank had unsecured federal funds purchased accommodations with its correspondent banks totaling $19.5 million, all of which was available on that date. Availability of funds under the unsecured federal funds purchased accommodations is based on the Company’s capital adequacy as of that date; therefore, total funds available under these accommodations could fluctuate period-over-period.
 
In addition, the Bank has invested in FHLB stock for the purpose of establishing a line of credit with the FHLB.  This line is collateralized by a lien arrangement on the Bank’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 $55.3 million as of June 30, 2015 and had borrowed $16.5 million, leaving $38.8 million available as of the same date.  The Bank also has a “Borrower in Custody” line of credit with the Federal Reserve Bank that utilizes excess loan collateral and pledged municipal securities.  The amount of this line as of June 30, 2015 was $25.1 million, all of which was available as of that date.  While these lines of credit were available to the Company as of June 30, 2015, they do not represent legal commitments to extend credit.
 
The Bank also has access to the non-brokered national and brokered deposit markets to supplement liquidity needs.  As of June 30, 2015, the Bank had $66.3 million in national CDs and $2.4 million in brokered CDs.  Our ability to utilize brokered CDs and the rates we can pay on deposits will be limited if the Bank fails to remain well capitalized for regulatory purposes.
 
During the year ended December 31, 2011, Bancorp entered into revolving loan agreements (collectively, the “Revolvers”) with several of its directors and other related parties.  Each Revolver paid an annual rate of interest equal to 8% on a quarterly basis of the Revolver amount outstanding.  To the extent that any Revolver was not fully drawn, an unused revolver fee was calculated and paid quarterly at an annual rate of 2% on the revolving loan commitment less the daily average principal amount outstanding.  The Revolvers matured on January 1, 2015.  There were no amounts outstanding under the Revolvers with $2.2 million remaining available as of December 31, 2014.
 
On January 8, 2015, Bancorp entered into a loan agreement with Castle Creek SSF-D Investors, LP (“Castle Creek”) under which Castle Creek agreed to make revolving loans to the Company not to exceed $1.5 million outstanding at any time (the “Castle Creek Revolver”). In connection with the Castle Creek Revolver, Bancorp executed a revolving loan note in favor of Castle Creek.  The principal amount of the Castle Creek Revolver outstanding from time to time will accrue interest at 8% per annum, payable quarterly in arrears.  All amounts borrowed under the Castle Creek Revolver will be due and payable by the Company on January 7, 2017, unless payable sooner pursuant to the provisions of the related loan agreement.  To the extent that the Castle Creek Revolver is not fully drawn, an unused revolver fee will be calculated and paid quarterly at an annual rate of 2% on the revolving loan commitment less the daily average principal amount outstanding. There was no amount outstanding under the Castle Creek Revolver as of June 30, 2015.
 
JACKSONVILLE BANCORP, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
In the past, Bancorp has depended on the Revolvers and more recently, the Castle Creek Revolver, in addition to cash on hand and net proceeds from capital raise activities, to pay its operating and interest expenses.  Management believes the maximum borrowings available under the Castle Creek Revolver as of June 30, 2015 and other sources of liquidity are sufficient through December 31, 2015.
 
Historically, the primary source of Bancorp’s income was expected to be dividends from the Bank.  A Florida state-chartered commercial bank may not pay cash dividends that would cause the bank’s capital to fall below the minimum amount required by federal or state law.  Accordingly, commercial banks may only pay dividends out of the total of current net profits plus retained net profits of the preceding two years to the extent it deems expedient, except as follows: No bank may pay a dividend at any time that the total of net income for the current year, when combined with retained net income from the preceding two years, produces a loss.  The Bank met this restriction as of June 30, 2015 as our net income for the six months ended June 30, 2015 combined with retained earnings from the preceding two years produced a loss.  The future ability of the Bank to pay dividends to Bancorp will also depend in part on the FDIC capital requirements in effect at such time and our ability to comply with such requirements.
 
Bancorp cannot currently pay dividends on its capital stock under applicable Federal Reserve policies.  Under Federal Reserve policy, the board of directors of a bank holding company must consider different factors to ensure that its dividend level is prudent relative to maintaining a strong financial position, and is not based on overly optimistic earnings scenarios, such as potential events that could affect its ability to pay dividends, while still maintaining a strong financial position.  As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should consult with the Federal Reserve and eliminate, defer or significantly reduce the bank holding company’s dividends if:
 
its net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;
its prospective rate of earnings retention is not consistent with its capital needs and overall current and prospective financial condition; or
it will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios.
 
Capital
 
Banks and bank holding companies are subject to extensive regulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can initiate regulatory action.
 
The federal regulatory authorities’ current risk-based capital guidelines are based upon the 1988 capital accord of the Basel Committee on Banking Supervision. The Basel Committee is a committee of central banks and bank regulators from the major industrialized countries that develops broad policy guidelines for use by a country’s regulators in determining appropriate supervisory policies. In December 2010 and January 2011, the Basel Committee published the final texts of reforms on capital and liquidity supervisory policies generally referred to as “Basel III.”
 
Effective July 2, 2013, the Federal Reserve approved final rules known as the “Basel III Capital Rules” substantially revising the risk-based capital and leverage capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank. The Basel III Capital Rules address the components of capital and other issues affecting the numerator in banking institutions’ regulatory capital ratios. Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to remove references to credit ratings from the federal banking agencies’ rules. Certain of the Basel III Capital Rules came into effect for the Company and the Bank on January 1, 2015; these rules are subject to a phase-in period which began on January 1, 2015.
 
The Basel III Capital Rules introduced a new capital measure “Common Equity Tier 1” (“CET1”). The rules specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements. CET1 capital consists of common stock instruments that meet the eligibility criteria in the final rules, retained earnings, accumulated other comprehensive income and common equity Tier 1 minority interest. The rules also define CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1, and not to the other components of capital.
 
JACKSONVILLE BANCORP, INC.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
They also expand the scope of the adjustments as compared to existing regulations.
 
When fully phased-in on January 1, 2019, the Basel III Capital Rules will require banking organizations to maintain:
 
a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased-in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0% upon full implementation);
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased-in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation);
a minimum ratio of total capital (that is, Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased-in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and
a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets.
 
The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer will face limitations on the payment of dividends, common stock repurchases and discretionary cash payments to executive officers based on the amount of the shortfall.

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under current capital standards, the effects of accumulated other comprehensive income items included in capital are excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the Company and the Bank are given a one-time election (the “Opt-out Election”) to filter certain accumulated other comprehensive income (“AOCI”) components, comparable to the treatment under the current general risk-based capital rule. The AOCI Opt-out Election had to be made on the March 30, 2015 Call Report for the Bank and the June 30, 2015 FR Y-9SP for the Company. The Bank and the Company have chosen the Opt-out Election.
 
Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a five-year period (20% per year). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased-in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
 
In addition, the Basel III Capital Rules revise the rules for calculating risk-weighted assets to enhance their risk sensitivity. They establish a new framework under which mortgage-backed securities and other securitization exposures will be subject to risk-weights ranging from 20% to 1,250%. The rules also establish adjusted risk-weights for credit exposures, including multi-family and commercial real estate exposures that are 90 days or more past due or on non-accrual, which will be subject to a 150% risk-weight, except in situations where qualifying collateral and/or guarantees are in place. The existing treatment of residential mortgage exposures will remain subject to either a 50% risk-weight (for prudently underwritten owner-occupied first liens that are current or less than 90 days past due) or a 100% risk-weight (for all other residential mortgage exposures including 90 days or more past due exposures).
 
As of June 30, 2015 and December 31, 2014, the Bank, and the Company met all capital adequacy requirements to which they were subject.  For additional information related to the Company’s capital adequacy information, please refer to Note 8 – Capital Adequacy in the accompanying notes to the Consolidated Financial Statements.
 
JACKSONVILLE BANCORP, INC.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Bank
 
The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, requires the federal banking agencies to take “prompt corrective action” regarding depository institutions that do not meet minimum capital requirements.  FDICIA establishes five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”  A depository institution’s capital tier will depend upon how its capital levels compare to various relevant capital measures and certain other factors, as established by regulation.
 
Under Basel I, the “prompt corrective action” rules provide that a bank will be: (i) “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, a leverage capital ratio of 5% or greater and is not subject to certain written agreements, orders, capital directives or prompt corrective action directives by a federal bank regulatory agency to maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater, and generally has a leverage capital ratio of 4% or greater; (iii) “undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 4% or generally has a leverage capital ratio of less than 4%; (iv) “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 3% or a leverage capital ratio of less than 3%; or (v) “critically undercapitalized” if its ratio of tangible equity to total assets is equal to or less than 2%.  The federal bank regulatory agencies have authority to require additional capital.
 
The Basel III Capital Rules revised the “prompt corrective action” regulations pursuant to Section 38 of the FDICIA, by:
 
introducing a CET1 ratio requirement at each level (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status;
increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 risk-based capital ratio for well-capitalized status being 8.0% (as compared to the current 6.0%); and
eliminating the current provision that provides that a bank with a composite supervisory rating of 1 may have a 3.0% leverage ratio and still be well-capitalized.

Under the applicable rules, the Bank was well capitalized as of June 30, 2015 and December 31, 2014.  Depository institutions that are no longer “well capitalized” for bank regulatory purposes must receive a waiver from the FDIC prior to accepting or renewing brokered deposits.  FDICIA generally prohibits a depository institution from making any capital distribution (including paying dividends) or paying any management fee to its holding company, if the depository institution would thereafter be undercapitalized.
 
The Bank had a Memorandum of Understanding (“MoU”) with the FDIC and the Florida Office of Financial Regulation (“OFR”) that was entered into in 2008 (the “2008 MoU”), which required the Bank to have a total risk-based capital of at least 10% and a Tier 1 leverage capital ratio of at least 8%.  On July 13, 2012, the 2008 MoU was replaced by a new MoU  (the “2012 MoU”), which, among other things, required the Bank to have a total risk-based capital of at least 12% and a Tier 1 leverage capital ratio of at least 8%.   The Bank received notification from the FDIC and the OFR on June 11, 2015 and June 15, 2015, respectively, stating that the Bank is now considered to be in substantial compliance with the 2012 MoU and that the FDIC and the OFR terminated their interests in the 2012 MoU as of the dates mentioned above.
 
JACKSONVILLE BANCORP, INC.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
In December 2006, bank regulators issued “Joint Guidance on Concentrations in Commercial Real Estate Lending.”  This document outlines regulators’ concerns regarding the high level of growth in commercial real estate loans on banks’ balance sheets.  Many banks, especially those in Florida, have substantial exposure to commercial real estate loans. The concentration in this category is considered when analyzing the adequacy of the loan loss allowance based on sound, reliable and well-documented information.  As of June 30, 2015, the ratio of total loans secured by non-owner occupied multi-family, nonfarm, and nonresidential properties, as well as construction, land development and other land loans as a percentage of total risk-based capital was 229.8% compared to 252.1% as of December 31, 2014.  Both our June 30, 2015 and December 31, 2014 ratios did not exceed applicable regulatory guidance of 300% of total loans secured by non-owner occupied multi-family, nonfarm, and nonresidential properties, as well as construction, land development and other land loans.
 
Bancorp
 
The Federal Reserve requires bank holding companies, including Bancorp, to act as a source of financial strength for their depository institution subsidiaries.  The Federal Reserve has a minimum guideline for bank holding companies of Tier 1 capital to adjusted average quarterly assets (“leverage ratio”) equal to at least 4.00%, and total risk-based capital of at least 8.00%, at least half of which must be Tier 1 capital.  As of June 30, 2015 and December 31, 2014, Bancorp met these requirements.
 
Higher capital may be required in individual cases and depending upon a bank holding company’s risk profile.  All bank holding companies and banks are expected to hold capital commensurate with the level and nature of their risks including the volume and severity of their problem loans. The Federal Reserve will continue to consider a “tangible Tier 1 leverage ratio” (deducting all intangibles) in evaluating proposals for expansion or new activity.  The level of Tier 1 capital to risk-adjusted assets is becoming more widely used by bank regulators to measure capital adequacy.  The Federal Reserve has not advised the Company of any specific minimum capital ratios applicable to it.  Under Federal Reserve policies, bank holding companies are generally expected to operate with capital positions well above the minimum ratios.  The Federal Reserve believes the risk-based ratios do not take into account the quality of capital and interest rate, liquidity, market and operational risks.  Accordingly, supervisory assessments of capital adequacy may differ significantly from conclusions based solely on an organization’s risk-based capital ratios.
 
Dividends and Distributions
 
Prior to October 2009, dividends received from the Bank were Bancorp’s principal source of funds to pay its expenses and interest on and principal of Bancorp’s debt.  Banking regulations require the maintenance of certain capital levels and restrict the payment of dividends by the Bank to Bancorp or by Bancorp to shareholders.  Commercial banks generally may only pay dividends without prior regulatory approval out of the total of current net profits plus retained net profits of the preceding two years, and banks and bank holding companies are generally expected to pay dividends from current earnings.  Banks may not pay a dividend if the dividend would result in the bank being “undercapitalized” for prompt corrective action purposes, or would violate any minimum capital requirement specified by law or the bank’s regulators. The Bank has not paid dividends to Bancorp since October 2009 and cannot currently pay dividends, and Bancorp cannot currently pay dividends on its capital stock under applicable Federal Reserve policies.  Bancorp has relied upon revolving loan agreements to pay its expenses during such time.  As of June 30, 2015 and December 31, 2014, there were $1.5 million and $2.2 million in remaining funds available under the revolving loan agreements, respectively.  During the six months ended June 30, 2015 and the year ended December 31, 2014, Bancorp used cash on hand and net proceeds from capital raise activities to fund operations.
 
Contractual Obligations, Commitments and Contingent Liabilities
 
The Company has various financial obligations, including contractual obligations and commitments that are expected to require future cash payments.  Management believes that there have been no material changes in the Company’s overall level of these financial obligations since December 31, 2014 and that any changes in the Company’s obligations which have occurred are routine for the industry.  Further discussion of the nature of each type of obligation is included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 16, 2015.
 
JACKSONVILLE BANCORP, INC.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Off-Balance Sheet Arrangements
 
Management believes that there have been no material changes in off-balance sheet arrangements and related risks since the Company’s disclosure in its Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 16, 2015.
 
Critical Accounting Policies and Estimates
 
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.  The following is a brief description of the Company’s critical accounting estimates involving significant valuation judgments.
 
Allowance for Loan Losses
 
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable incurred credit losses on existing loans that may become uncollectible based on evaluations of the collectability of the loans. The evaluations take into consideration such objective factors as changes in the nature and volume of the loan portfolio and historical loss experience. The evaluation also considers certain subjective factors such as overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrowers’ ability to pay. The level of allowance for loan losses 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 losses, and related allowance can, and will, fluctuate.
 
Other Real Estate Owned (“OREO”)
 
OREO includes real estate acquired through foreclosure or deed taken in lieu of foreclosure. These amounts are recorded at estimated fair value (based on the lower of current appraised value or listing price), less costs to sell the property, with any difference between the fair value of the property and the carrying value of the loan being charged to the allowance for loan losses.  Subsequent changes in fair value are reported as adjustments to the carrying amount. Those subsequent changes, as well as any gains or losses recognized on the sale of these properties, are included in noninterest expense.  Fair values are preliminary and subject to refinement after the acquisition date as new information relative to the acquisition date fair value becomes available.  Valuation adjustments and gains or losses recognized on the sale of these properties occurring within 90 days of acquisition are charged against, or credited to, the allowance for loan losses.
 
Deferred Income Taxes
 
Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income.  From an accounting standpoint, deferred tax assets are reviewed to determine if a valuation allowance is required based on both positive and negative evidence currently available.  Based on these criteria, the Company determined that it was necessary to establish a full valuation allowance against our deferred tax asset as of December 31, 2014 and December 31, 2013.  The Company performed an analysis as of June 30, 2015 and determined the need for a valuation allowance still existed.  To the extent that we generate taxable income in a given quarter, the valuation allowance may be reduced to fully or partially offset the corresponding income tax expense.  Any remaining deferred tax asset valuation allowance may be reversed through income tax expense once the Company can demonstrate a sustainable return to profitability and conclude that it is more-likely-than-not that the deferred tax asset will be utilized prior to expiration.
 
Additional information with regard to the Company’s methodology and reporting of its critical accounting policies and associated estimates is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 16, 2015.
 
JACKSONVILLE BANCORP, INC.
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
 
Recently Issued Accounting and Reporting Standards
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This update to the Accounting Standards Codification is the culmination of efforts by the FASB and the International Accounting Standards Board to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards.  ASU 2014-09 supersedes Topic 605 – Revenue Recognition and most industry-specific guidance.  The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The guidance in ASU 2014-09 describes a five-step process entities can apply to achieve the core principle of revenue recognition and requires disclosures sufficient to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and the significant judgments used in determining that information. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and early application is allowed as of the original effective date for annual periods beginning after December 15, 2016.  The Company is currently evaluating the effects of the adoption of this standard on its Consolidated Financial Statements and disclosures, if any.
 
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  This standard will require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances.  In connection with each annual and interim period, management will have to assess if there is substantial doubt about the entity’s ability to continue as a going concern within one year after the issuance date.  Management must consider relevant conditions that are known (and reasonably knowable) at the issuance date.  Substantial doubt exists if it is probable that the entity will be unable to meet its obligations within one year after the issuance date.  The new standard defines substantial doubt and provides example indicators.  The definition of substantial doubt incorporates a likelihood threshold of “probable” similar to the current use of the term in U.S. GAAP for loss contingencies.  Disclosures will be required if conditions give rise to substantial doubt.  However, management will need to assess if its plans will alleviate substantial doubt to determine the specific disclosures.  This standard will be effective for all entities in the first annual period ending after December 15, 2016.  Earlier application is permitted.  The Company is currently evaluating the effects of the adoption of this standard on its Consolidated Financial Statements and disclosures, if any.

In April 2015, the FASB issued ASU No. 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change the accounting for a customer’s accounting for service contracts. The adoption of this standard is not expected to have a significant impact on the Company’s Consolidated Financial Statements and disclosures, if any.
 
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
Disclosure under this item is not required as the Registrant is a smaller reporting company.

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, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”).  Based upon management’s evaluation of those controls and procedures as of the end of the fiscal quarter covered by this quarterly report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer of the Company concluded that, subject to the limitations noted below, the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
 
JACKSONVILLE BANCORP, INC.
 
Item 4. Controls and Procedures (Continued)
 
(b)            Changes in Internal Control over Financial Reporting
In the ordinary course of business, the Company may routinely modify, upgrade and enhance its internal controls and procedures for financial reporting.  In an effort to improve internal control over financial reporting, the Company continues to emphasize the importance of identifying areas for improvement and to create and implement new policies and procedures where deficiencies exist.  There have been no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
(c)            Limitations on the Effectiveness of Controls
The Company’s management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and internal controls will prevent all error and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.
 
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, as a normal incident of the nature and kind of business in which we are engaged, various claims or charges are asserted against us and/or our directors, officers or affiliates.  In the ordinary course of business, the Company is also subject to regulatory examinations, information gathering requests, inquiries and investigations.  Other than ordinary routine litigation incidental to our business, management believes after consultation with legal counsel that there are no pending legal proceedings against Bancorp or any of its subsidiaries that will, individually or in the aggregate, have a material adverse effect on the consolidated results of operations or financial condition of the Company.

Item 1A. Risk Factors

Management believes that there have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 16, 2015.
 
JACKSONVILLE BANCORP, INC.
Item 6.
Exhibits

Exhibit No.
 
Description of Exhibit
     
Exhibit No. 3.1
 
Amended and Restated Articles of Incorporation of Jacksonville Bancorp, Inc., as amended through September 27, 2012 (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 10-Q filed on November 14, 2012, File No. 000-30248).
     
Exhibit No. 3.1a
 
Articles of Amendment to the Amended and Restated Articles of Incorporation Designating Series B Preferred Stock, effective as of December 27, 2012 (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on January 3, 2013, File No. 000-30248).
     
Exhibit No. 3.1b
 
Articles of Amendment to the Amended and Restated Articles of Incorporation Designating Series A Preferred Stock, effective as of December 27, 2012 (incorporated herein by reference to Exhibit 3.2 of the Registrant’s Form 8-K filed on January 3, 2013, File No. 000-30248).
     
Exhibit No. 3.1c
 
Articles of Amendment to the Amended and Restated Articles of Incorporation, effective as of February 19, 2013 (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on February 20, 2013, File No. 000-30248).
     
Exhibit No. 3.1d
 
Articles of Amendment to the Amended and Restated Articles of Incorporation, effective as of April 23, 2013 (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on April 24, 2013, File No. 000-30248).
     
Exhibit No. 3.1e
 
Articles of Amendment to the Amended and Restated Articles of Incorporation, effective as of October 24, 2013 (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on October 23, 2013, File No. 000-30248).
     
Exhibit No. 31.1
 
Certification of Chief Executive Officer (principal executive officer) required by Rule 13a-14(a)/15d-14(a) of the Exchange Act.*
     
Exhibit No. 31.2
 
Certification of Chief Financial Officer (principal financial officer) required by Rule 13a-14(a)/15d-14(a) of the Exchange Act.*
     
Exhibit No. 32.1
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002. *
     
Exhibit No. 101.INS
 
XBRL Instance Document.*
     
Exhibit No. 101.SCH
 
XBRL Schema Document.*
     
Exhibit No. 101.CAL
 
XBRL Calculation Linkbase Document.*
     
Exhibit No. 101.DEF
 
XBRL Definition Linkbase Document.*
     
Exhibit No. 101.LAB
 
XBRL Label Linkbase Document.*
     
Exhibit No. 101.PRE
 
XBRL Presentation Linkbase Document.*
                   

 
*
Included herewith.
 
JACKSONVILLE BANCORP, INC.

SIGNATURES
 

 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
JACKSONVILLE BANCORP, INC.
     
Date:  August 10, 2015
By:
/S/    KENDALL L. SPENCER
   
Kendall L. Spencer
   
President and Chief Executive Officer
   
(Principal executive officer)
     
Date:  August 10, 2015
By:
/S/    VALERIE A. KENDALL
   
Valerie A. Kendall
   
Executive Vice President and
   
Chief Financial Officer
   
(Principal financial officer and
   
Chief accounting officer)
 
JACKSONVILLE BANCORP, INC.

EXHIBIT INDEX
 
Exhibit No.
 
Description of Exhibit
     
Exhibit No. 3.1
 
Amended and Restated Articles of Incorporation of Jacksonville Bancorp, Inc., as amended through September 27, 2012 (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 10-Q filed on November 14, 2012, File No. 000-30248).
     
Exhibit No. 3.1a
 
Articles of Amendment to the Amended and Restated Articles of Incorporation Designating Series B Preferred Stock, effective as of December 27, 2012 (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on January 3, 2013, File No. 000-30248).
     
Exhibit No. 3.1b
 
Articles of Amendment to the Amended and Restated Articles of Incorporation Designating Series A Preferred Stock, effective as of December 27, 2012 (incorporated herein by reference to Exhibit 3.2 of the Registrant’s Form 8-K filed on January 3, 2013, File No. 000-30248).
     
Exhibit No. 3.1c
 
Articles of Amendment to the Amended and Restated Articles of Incorporation, effective as of February 19, 2013 (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on February 20, 2013, File No. 000-30248).
     
Exhibit No. 3.1d
 
Articles of Amendment to the Amended and Restated Articles of Incorporation, effective as of April 23, 2013 (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on April 24, 2013, File No. 000-30248).
     
Exhibit No. 3.1e
 
Articles of Amendment to the Amended and Restated Articles of Incorporation, effective as of October 24, 2013 (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on October 23, 2013, File No. 000-30248).
     
Exhibit No. 3.2
 
 
Amended and Restated Bylaws of Jacksonville Bancorp, Inc. (incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on March 3, 2014, File No. 000-30248).
     
 
Certification of Chief Executive Officer (principal executive officer) required by Rule 13a-14(a)/15d-14(a) of the Exchange Act.*
     
 
Certification of Chief Financial Officer (principal financial officer) required by Rule 13a-14(a)/15d-14(a) of the Exchange Act.*
     
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002. *
     
Exhibit No. 101.INS
 
XBRL Instance Document.*
     
Exhibit No. 101.SCH
 
XBRL Schema Document.*
     
Exhibit No. 101.CAL
 
XBRL Calculation Linkbase Document.*
     
Exhibit No. 101.DEF
 
XBRL Definition Linkbase Document.*
     
Exhibit No. 101.LAB
 
XBRL Label Linkbase Document.*
     
Exhibit No. 101.PRE
 
XBRL Presentation Linkbase Document.*
 
      
 
*
Included herewith.
 
 
56