JACKSONVILLE BANCORP INC /FL/ - FORM 10-Q

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EX-31.2 - EXHIBIT 31.2 - JACKSONVILLE BANCORP INC /FL/	ex31_2.htm
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

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 September 30, 2015

☐

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 October 30, 2015, the latest practicable date, there were 3,481,273 shares of the Registrant’s common stock outstanding and 2,315,321 shares of the Registrant’s nonvoting common stock outstanding.

JACKSONVILLE BANCORP, INC.

TABLE OF CONTENTS

Description		Page
Special Cautionary Notice Regarding Forward-Looking Statements		1

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)	3

	Consolidated Balance Sheets	3

	Consolidated Statements of Operations	4

	Consolidated Statements of Comprehensive Income	5

	Consolidated Statements of Changes in Shareholders’ Equity	6

	Consolidated Statements of Cash Flows	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47

Item 4.	Controls and Procedures	47

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	48

Item 1A.	Risk Factors	48

Item 6.	Exhibits	50

SIGNATURES		51

EXHIBIT INDEX		52

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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;

•

the effects of war or other conflicts, acts of terrorism, hurricanes, floods, tornados or other catastrophic events that may affect economic conditions;

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JACKSONVILLE BANCORP, INC.

•

the merger agreement with Ameris Bancorp (“Ameris”) may be terminated if certain conditions are not satisfied or waived under the terms of the merger agreement;

•

delays in closing the merger with Ameris, including the possibility that the merger may not be completed prior to the end of the termination period agreed to with Ameris, may have an adverse impact on the Company’s business; and

•

the outcome of any litigation related to the merger with Ameris.

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.

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JACKSONVILLE BANCORP, INC.

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(dollars in thousands, except per share amounts)

	September 30, 2015			December 31, 2014
ASSETS
Cash and due from financial institutions	$	24,538		$	23,778
Federal funds sold and other		1,872			594
Cash and cash equivalents		26,410			24,372
Securities available-for-sale		67,375			77,633
Loans, net of allowance for loan losses of $12,570 and $14,377 as of September 30, 2015 and December 31, 2014, respectively		386,941			360,279
Premises and equipment, net		4,961			5,147
Assets held for sale		-			786
Bank owned life insurance		11,984			11,857
Federal Home Loan Bank stock, at cost		928			1,243
Other real estate owned, net		3,768			4,061
Accrued interest receivable		1,366			1,464
Other intangible assets, net		372			570
Other assets		1,149			1,172
Total assets	$	505,254		$	488,584

LIABILITIES
Deposits
Noninterest-bearing demand deposits	$	122,520		$	107,840
Money market, NOW and savings deposits		193,502			174,693
Time deposits		117,010			133,223
Total deposits		433,032			415,756
Federal Home Loan Bank short-term borrowings		2,500			8,500
Federal Home Loan Bank and other long-term borrowings		9,360			9,129
Subordinated debentures		16,266			16,218
Accrued expenses and other liabilities		1,976			1,869
Total liabilities		463,134			451,472

SHAREHOLDERS' EQUITY
Preferred stock		-			-
Common stock, $.01 par value, 3,480,961 and 3,180,300 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively		35			32
Nonvoting common stock, $.01 par value, 2,315,321 and 2,614,821 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively		23			26
Additional paid–in capital		138,128			138,096
Retained deficit		(95,744	)		(100,759	)
Accumulated other comprehensive loss		(322	)		(283	)
Total shareholders’ equity		42,120			37,112
Total liabilities and shareholders’ equity	$	505,254		$	488,584

See accompanying notes to the Consolidated Financial Statements.

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JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(dollars in thousands, except per share amounts)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2015			2014		2015			2014
Interest and dividend income:
Loans, including fees	$	4,833		$	4,832	$	14,330		$	14,591
Taxable securities		273			295		841			917
Tax-exempt securities		158			80		305			271
Federal funds sold and other		33			44		101			123
Total interest income		5,297			5,251		15,577			15,902

Interest expense:
Deposits		469			514		1,421			1,619
Federal Reserve and other borrowings		8			11		23			33
Federal Home Loan Bank advances		49			58		149			207
Subordinated debentures		209			207		617			615
Total interest expense		735			790		2,210			2,474

Net interest income		4,562			4,461		13,367			13,428
Provision for loan losses		-			-		(2,011	)		287
Net interest income after provision for loan losses		4,562			4,461		15,378			13,141

Noninterest income:
Service charges on deposit accounts		198			187		563			551
Other income		174			680		554			1,072
Total noninterest income		372			867		1,117			1,623

Noninterest expense:
Salaries and employee benefits		1,645			1,850		4,804			6,186
Occupancy and equipment		574			611		1,683			1,876
Regulatory assessments		102			187		469			548
Data processing		555			509		1,612			1,539
Advertising and business development		53			60		180			201
Professional fees		216			403		744			897
Telephone expense		88			93		267			282
Other real estate owned expense		228			71		388			181
Other		509			716		1,315			1,693
Total noninterest expense		3,970			4,500		11,462			13,403

Net income before income taxes		964			828		5,033			1,361
Income tax (benefit) expense		(28	)		20		18			20
Net income	$	992		$	808	$	5,015		$	1,341

Weighted average common shares outstanding:
Basic shares		5,796,282			5,795,121		5,796,012			5,795,104
Dilutive stock options		19,466			1,981		12,604			3,349
Diluted shares		5,815,748			5,797,102		5,808,616			5,798,453

Earnings per common share:
Basic	$	0.17		$	0.14	$	0.87		$	0.23
Diluted	$	0.17		$	0.14	$	0.86		$	0.23

See accompanying notes to the Consolidated Financial Statements.

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JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(dollars in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014

Net income	$	992		$	808		$	5,015		$	1,341
Other comprehensive income:
Change in unrealized holding gains (losses) on available-for-sale securities		111			(156	)		(10	)		898
Net unrealized derivative (loss) gain on cash flow hedge		(61	)		110			(29	)		77
Other comprehensive income (loss)		50			(46	)		(39	)		975
Tax effect		-			-			-			-
Other comprehensive income (loss), net of tax effect		50			(46	)		(39	)		975
Total comprehensive income	$	1,042		$	762		$	4,976		$	2,316

See accompanying notes to the Consolidated Financial Statements.

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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		-		-		-			-			-		-		-		1,341			-			1,341
Other comprehensive income		-		-		-			-			-		-		-		-			975			975
Total comprehensive income		-		-		-			-			-		-		-		-			-			2,316
Permitted transfer of nonvoting common stock to common stock		3,184		-		(3,184	)		-			-		-		-		-			-			-
Vesting of restricted stock		26		-		-			-			-		-		-		-			-			-
Share-based compensation expense		-		-		-			-			-		-		46		-			-			46
Balance as of September 30, 2014		3,180,300	$	32		2,614,821		$	26			-	$	-	$	138,096	$	(101,347	)	$	(513	)	$	36,294

Balance as of December 31, 2014		3,180,300	$	32		2,614,821		$	26			-	$	-	$	138,096	$	(100,759	)	$	(283	)	$	37,112
Net income																		5,015			-			5,015
Other comprehensive loss		-		-		-			-			-		-		-		-			(39	)		(39	)
Total comprehensive income		-		-		-			-			-		-		-		-			-			4,976
Permitted transfer of nonvoting common stock to common stock		299,500		3		(299,500	)		(3	)		-		-		-		-			-			-
Exercise of common stock options, including tax benefit		1,125		-		-			-			-		-		11		-			-			11
Vesting of restricted stock		36		-		-			-			-		-				-			-			-
Share-based compensation expense		-		-		-			-			-		-		21		-			-			21
Balance as of September 30, 2015		3,480,961	$	35		2,315,321		$	23			-	$	-	$	138,128	$	(95,744	)	$	(322	)	$	42,120

See accompanying notes to the Consolidated Financial Statements.

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JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(dollars in thousands)

	Nine Months Ended September 30,
	2015			2014
Cash flows from operating activities:
Net income	$	5,015		$	1,341
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		391			526
Net amortization of deferred loan fees		18			134
Provision for loan losses		(2,011	)		287
Premium amortization for securities, net of accretion		482			678
Net accretion of purchase accounting adjustments		(364	)		(957	)
Net loss (gain) on sale of other real estate owned		1			(38	)
Write-downs of other real estate owned		291			48
Write-down and loss on sale of assets held for sale		101			15
Gain from bank-owned life insurance death benefits		-			(489	)
Earnings on bank-owned life insurance		(127	)		(150	)
Share-based compensation		21			46
Net change in:
Accrued interest receivable and other assets		122			(131	)
Accrued expenses and other liabilities		77			(33	)
Net cash from operating activities		4,017			1,277

Cash flows (used for) from investing activities:
Available-for-sale securities:
Maturities, repayments and calls		15,832			12,842
Purchases		(6,066	)		(10,277	)
Loan (originations) payments, net		(24,252	)		7,007
Proceeds from bank owned life insurance death benefits		-			797
Proceeds from sale of other real estate owned and other assets held for sale		854			1,340
Additions to premises and equipment, net		(205	)		(300	)
Redemptions of Federal Home Loan Bank stock, net of purchases		315			337
Net cash (used for) from investing activities		(13,522	)		11,746

Cash flows from financing activities:
Net change in deposits		17,282			3,414
Proceeds from Federal Home Loan Bank advances		20,000			-
Repayment of Federal Home Loan Bank advances		(26,000	)		(2,518	)
Proceeds from other borrowings		250			-
Proceeds from exercise of common stock options		11			-
Net cash from financing activities		11,543			896

Net change in cash and cash equivalents		2,038			13,919
Cash and cash equivalents at beginning of period		24,372			40,325
Cash and cash equivalents at end of period	$	26,410		$	54,244

See accompanying notes to the Consolidated Financial Statements.

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JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

(dollars in thousands)

	Nine Months Ended September 30,
	2015		2014

Supplemental disclosures of cash flow information:
Cash paid during the period for
Interest	$	2,223	$	2,534
Income taxes		70		-

Supplemental schedule of noncash investing activities:
Acquisition of other real estate owned	$	167	$	2,887
Transfer of assets to held for sale		-		944

See accompanying notes to the Consolidated Financial Statements.

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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 accounting principles generally accepted in the United States of America (U.S. GAAP). The consolidated financial statements include the accounts of Jacksonville Bancorp, Inc. (Bancorp), its wholly owned, 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 significant intercompany transactions and balances have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. In management’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. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates and assumptions. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. These financial statements should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2014. There have been no significant changes to the Company’s accounting policies as disclosed in the 2014 Annual Report on Form 10-K.

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.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. 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

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JACKSONVILLE BANCORP, INC.

NOTE 1 – BASIS OF PRESENTATION (continued)

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 and for annual periods and interim periods thereafter. Early 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. This standard is effective for public business entities for fiscal years, and for interim fiscal periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have a significant impact on the Company’s Consolidated Financial Statements and disclosures, if any.

In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This standard will require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This update will require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Prior to the issuance of this standard, entities were required to retrospectively apply adjustments made to provisional amounts recognized in a business combination. This standard is effective for public business entities for fiscal years, and for interim fiscal periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. 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 – RECENT DEVELOPMENTS

On September 30, 2015, Ameris Bancorp, a Georgia corporation (Ameris), and Bancorp entered into an Agreement and Plan of Merger (the Merger Agreement) pursuant to which, subject to the terms and conditions therein, Bancorp will merge with and into Ameris, with Ameris remaining as the surviving entity. The Merger Agreement provides that immediately following the merger of Ameris and Bancorp, Bank will be merged into Ameris Bank, a Georgia Bank wholly owned by Ameris, with Ameris Bank remaining as the surviving entity. The Merger Agreement has been unanimously approved by the boards of directors of each of Ameris and Bancorp.

Under the terms and subject to the conditions of the Merger Agreement, Bancorp’s shareholders will have the right to receive 0.5861 shares of Ameris common stock or $16.50 in cash for each share of the common stock and nonvoting common stock of Bancorp they hold. The total consideration in the merger will be prorated as necessary to ensure that 25% of the total outstanding shares of common stock and nonvoting common stock of Bancorp will be exchanged for cash and 75% of the total outstanding shares of common stock and nonvoting common stock of Bancorp will be exchanged for shares of Ameris common stock in the merger.

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JACKSONVILLE BANCORP, INC.

NOTE 2 – RECENT DEVELOPMENTS (continued)

NOTE 3 - INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale investment securities portfolio as of September 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
September 30, 2015
Available-for-sale:
U.S. government-sponsored entities and agencies	$	6,878	$	146	$	(10	)	$	7,014
State and political subdivisions		5,267		341		-			5,608
Mortgage-backed securities - residential		26,197		874		(34	)		27,037
Collateralized mortgage obligations		25,233		115		(200	)		25,148
Corporate bonds		2,516		52		-			2,568
Total	$	66,091	$	1,528	$	(244	)	$	67,375

	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 September 30, 2015 and December 31, 2014, the Company’s investment securities portfolio did not include any held-to-maturity securities.

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) September 30, 2015	Amortized Cost		Fair Value
Available-for-sale:
Within one year	$	503	$	509
One to five years		1,988		2,027
Five to ten years		4,253		4,330
Beyond ten years		7,917		8,324
Mortgage-backed securities – residential		26,197		27,037
Collateralized mortgage obligations		25,233		25,148
Total	$	66,091	$	67,375

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JACKSONVILLE BANCORP, INC.

NOTE 3 - INVESTMENT SECURITIES (continued)

The following table summarizes the investment securities with unrealized losses as of September 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) September 30, 2015	Fair Value		Unrealized losses			Fair Value		Unrealized losses			Fair Value		Unrealized losses
Available-for-sale:
U.S. government-sponsored entities and agencies	$	595	$	(5	)	$	996	$	(5	)	$	1,591	$	(10	)
State and political subdivisions		-		-			-		-			-		-
Mortgage backed securities – residential		1,424		(22	)		1,172		(12	)		2,596		(34	)
Collateralized mortgage obligations		4,140		(17	)		6,802		(184	)		10,942		(201	)
Corporate bonds		-		-			-		-			-		-
Total available-for-sale securities	$	6,159	$	(44	)	$	8,970	$	(201	)	$	15,129	$	(245	)

	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 September 30, 2015 and December 31, 2014, the Company’s security portfolio consisted of $67.4 million and $77.6 million, respectively, in available-for-sale securities, of which $15.1 million and $21.9 million were in an unrealized loss position for the related periods. The unrealized losses as of September 30, 2015 and December 31, 2014 were related to the 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 September 30, 2015 and December 31, 2014, the number of U.S. Agency securities with unrealized losses was two and one, respectively. As of September 30, 2015 and December 31, 2014, these securities had depreciated 0.60% and 2.30%, respectively, from the Company’s amortized cost basis.

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 September 30, 2015 and December 31, 2014, mortgage-backed securities with unrealized losses were two and three, respectively. As of September 30, 2015 and December 31, 2014, these securities had depreciated 1.30% 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 September 30, 2015 and December 31, 2014, collateralized mortgage obligations with unrealized losses were twelve and eighteen, respectively. As of September 30, 2015 and December 31, 2014, these securities had depreciated 1.80% and 2.40%, respectively, from the Company’s amortized cost basis.

For the securities with unrealized losses at September 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.

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JACKSONVILLE BANCORP, INC.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans as of September 30, 2015 and December 31, 2014 were as follows:

(dollars in thousands)	September 30, 2015			December 31, 2014
Commercial loans	$	64,658		$	57,876
Real estate mortgage loans:
Residential		74,979			71,002
Commercial		229,165			222,468
Construction and land		29,799			22,319
Consumer and other loans		1,513			1,489
Loans, gross		400,114			375,154
Less:
Net deferred loan fees		(603	)		(498	)
Allowance for loan losses		(12,570	)		(14,377	)
Loans, net	$	386,941		$	360,279

Loans acquired as a result of the merger with Atlantic BancGroup, Inc. (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 September 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.

(dollars in thousands) September 30, 2015	Gross Contractual Amount Receivable		Discount		Carrying Amount
Commercial loans	$	1,557	$	115	$	1,442
Real estate mortgage loans:
Residential		12,847		616		12,231
Commercial		32,683		1,834		30,849
Construction and land		2,907		235		2,672
Consumer and other loans		366		3		363
Total	$	50,360	$	2,803	$	47,557

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.

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JACKSONVILLE BANCORP, INC.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

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.

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.

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JACKSONVILLE BANCORP, INC.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

Activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2015 and 2014 was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2015			2014			2015			2014
Allowance at beginning of period	$	12,861		$	14,616		$	14,377		$	15,760

Charge-offs:
Commercial loans		(4	)		(70	)		(170	)		(272	)
Real estate mortgage loans		(874	)		(545	)		(1,264	)		(2,034	)
Consumer and other loans		-			(154	)		(4	)		(170	)
Total charge-offs		(878	)		(769	)		(1,438	)		(2,476	)

Recoveries:
Commercial loans		14			10			53			37
Real estate mortgage loans		457			1,306			1,436			1,545
Consumer and other loans		116			7			153			17
Total recoveries		587			1,323			1,642			1,599

Net (charge-offs) recoveries		(291	)		554			204			(877	)

Provision for loan losses charged to operating expenses:
Commercial loans		(1	)		(26	)		(43	)		102
Real estate mortgage loans		(15	)		(312	)		(1,271	)		(73	)
Consumer and other loans		16			338			(697	)		258
Total provision		-			-			(2,011	)		287
Allowance at end of period	$	12,570		$	15,170		$	12,570		$	15,170

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 September 30, 2015 and December 31, 2014:

(dollars in thousands) September 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	$	59	$	1,526	$	-	$	1,585
Collectively evaluated for impairment		1,072		9,536		377		10,985
Loans acquired with deteriorated credit quality		-		-		-		-
Total ending allowance balance	$	1,131	$	11,062	$	377	$	12,570
Loans:
Loans individually evaluated for impairment	$	59	$	14,454	$	23	$	14,536
Loans collectively evaluated for impairment		64,517		308,102		1,490		374,109
Loans acquired with deteriorated credit quality		82		11,387		-		11,469
Total ending loans balance	$	64,658	$	333,943	$	1,513	$	400,114

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JACKSONVILLE BANCORP, INC.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

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

The following table presents loans individually evaluated for impairment, by class of loans as of September 30, 2015 and December 31, 2014:

	September 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		790		734		-		2,288		2,211		-
Commercial		9,173		8,675		-		14,012		11,104		-
Construction and land		1,100		1,071		-		1,174		1,126		-
Consumer and other loans		26		23		-		31		28		-
Subtotal		11,089		10,503		-		17,505		14,469		-
With an allowance recorded:
Commercial loans		60		59		59		21		21		21
Real estate mortgage loans:
Residential		1,797		1,740		693		692		629		103
Commercial		1,957		1,948		655		489		489		214
Construction and land		332		286		178		493		474		222
Consumer and other loans		-		-		-		-		-		-
Subtotal		4,146		4,033		1,585		1,695		1,613		560

Total	$	15,235	$	14,536	$	1,585	$	19,200	$	16,082	$	560

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JACKSONVILLE BANCORP, INC.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

The following table presents the average recorded investment in impaired loans and the related interest income recognized during impairment for the three and nine months ended September 30, 2015 and 2014.

	Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015
(dollars in thousands)	Average Impaired Loans		Interest Income		Cash Basis		Average Impaired Loans		Interest Income		Cash Basis
With no related allowance recorded:
Commercial loans	$	-	$	-	$	-	$	56	$	-	$	-
Real estate mortgage loans:
Residential		806		5		5		884		16		16
Commercial		7,530		72		72		9,015		349		349
Construction and land		1,078		9		9		1,191		28		28
Consumer and other loans		23		-		-		25		-		-
Subtotal		9,437		86		86		11,171		393		393
With an allowance recorded:
Commercial loans		61		-		-		62		-		-
Real estate mortgage loans:
Residential		1,742		5		5		939		15		16
Commercial		474		6		6		480		17		17
Construction and land		288		-		-		294		-		-
Consumer and other loans		-		-		-		-		-		-
Subtotal		2,565		11		11		1,775		32		33

Total	$	12,002	$	97	$	97	$	12,946	$	425	$	426

	Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
(dollars in thousands)	Average Impaired Loans		Interest Income		Cash Basis		Average Impaired Loans		Interest Income		Cash Basis
With no related allowance recorded:
Commercial loans	$	68	$	-	$	-	$	192	$	-	$	-
Real estate mortgage loans:
Residential		2,063		18		18		2,407		63		63
Commercial		10,556		42		42		10,651		126		126
Construction and land		2,503		7		7		4,119		21		21
Consumer and other loans		32		-		-		35		-		-
Subtotal		15,222		67		67		17,404		210		210
With an allowance recorded:
Commercial loans		16		-		-		17		-		-
Real estate mortgage loans:
Residential		830		7		7		830		21		21
Commercial		5,496		13		13		4,291		38		38
Construction and land		591		3		3		545		10		10
Consumer and other loans		308		-		-		314		-		-
Subtotal		7,241		23		23		5,997		69		69

Total	$	22,463	$	90	$	90	$	23,401	$	279	$	279

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JACKSONVILLE BANCORP, INC.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

The following table presents the recorded investment in nonaccrual loans by class of loans as of September 30, 2015 and December 31, 2014:

(dollars in thousands)	September 30, 2015		December 31, 2014
Commercial loans	$	59	$	21
Real estate mortgage loans:
Residential		2,092		1,151
Commercial		4,485		7,408
Construction and land		386		574
Consumer and other loans		23		28
Total	$	7,045	$	9,182

There were no loans past due 90 days or greater and still accruing at September 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 September 30, 2015 and December 31, 2014:

	Past Due Loans
(dollars in thousands) September 30, 2015	30-59 Days		60-89 Days		90 Days and Greater		Total		Loans Not Past Due		Total
Commercial loans	$	199	$	-	$	21	$	220	$	64,438	$	64,658
Real estate mortgage loans:
Residential		589		163		235		987		73,992		74,979
Commercial		-		1,477		2,699		4,176		224,989		229,165
Construction and land		-		-		122		122		29,677		29,799
Consumer and other loans		258		-		-		258		1,255		1,513
Total	$	1,046	$	1,640	$	3,077	$	5,763	$	394,351	$	400,114

	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 troubled debt restructuring (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.

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JACKSONVILLE BANCORP, INC.

NOTE 4 – 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 September 30, 2015 and December 31, 2014.

(dollars in thousands)	September 30, 2015		December 31, 2014
Recorded investment⁽¹⁾	$	10,671	$	10,794
Specific reserves allocated⁽²⁾		342		372

⁽¹⁾	Of the total recorded investment in loans modified as TDRs, $1,101 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, $342 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 nine months ended September 30, 2015 and 2014:

	Three Months Ended September 30, 2015						Nine Months Ended September 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		1		214		208		1		214		208
Commercial		-		-		-		1		1,496		1,689
Construction and land		-		-		-		-		-		-
Consumer and other loans		-		-		-		-		-		-
Total		1	$	214	$	208		2	$	1,710	$	1,897

	Three Months Ended September 30, 2014						Nine Months Ended September 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
Real estate mortgage loans:
Residential		-		-		-		2		171		151
Commercial		-		-		-		6		3,579		3,629
Construction and land		-		-		-		2		281		219
Consumer and other loans		1		208		208		2		447		447
Total		1	$	208	$	208		13	$	4,540	$	4,508

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JACKSONVILLE BANCORP, INC.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

During the three and nine months ended September 30, 2015, respectively, there was one and two collateral-impaired loan modified as TDRs. During the three and nine months ended September 30, 2014, there were one and thirteen loans, respectively, modified as TDRs. The terms of these loans were modified as TDRs because the borrowers were 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 TDRs described above did not increase the allowance for loan losses as of September 30, 2015 and there were no related charge-offs for the three and nine months ended September 30, 2015, respectively. For the three and nine months ended September 30, 2014, the TDRs described above did not increase the allowance for loan losses as of September 30, 2014 and resulted in charge-offs of $0 and $256,000, respectively.

As of September 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 nine months ended September 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 $7.3 million and $14.7 million for the three and nine months ended September 30, 2015, respectively, and $1.9 million and $12.1 million for the three and nine months ended September 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.

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JACKSONVILLE BANCORP, INC.

NOTE 4 – 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 September 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) September 30, 2015	Pass		Special Mention		Substandard		Doubtful		Total
Commercial loans	$	64,480	$	76	$	102	$	-	$	64,658
Real estate mortgage loans:
Residential		66,702		4,628		3,649		-		74,979
Commercial		218,529		2,552		8,084		-		229,165
Construction and land		27,013		1,688		1,098		-		29,799
Consumer and other loans		1,477		13		23		-		1,513
Total	$	378,201	$	8,957	$	12,956	$	-	$	400,114

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		1,437		24		28		-		1,489
Total	$	342,831	$	11,184	$	21,139	$	-	$	375,154

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JACKSONVILLE BANCORP, INC.

NOTE 4 – 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 September 30, 2015 and December 31, 2014:

(dollars in thousands)	September 30, 2015		December 31, 2014
Commercial loans	$	112	$	150
Real estate mortgage loans:
Residential		2,111		3,625
Commercial		10,320		11,937
Construction and land		233		240
Consumer and other loans		-		-
Unpaid principal balance	$	12,776	$	15,952

Carrying amount	$	11,469	$	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		(766	)
Reduction for loans sold, paid off and other		(1,837	)
Loans charged off		(28	)
Reclassifications from nonaccretable difference		-
Disposals		-
Balance as of September 30, 2014	$	6,362

Balance as of December 31, 2014	$	6,329
New loans purchased, including loans classified as held-for-sale		-
Accretion of income		(599	)
Reduction for loans sold, paid off and other		(673	)
Loans charged off		-
Reclassifications from nonaccretable difference		127
Disposals		-
Balance as of September 30, 2015	$	5,184

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses as of September 30, 2015 or December 31, 2014, respectively.

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JACKSONVILLE BANCORP, INC.

NOTE 5 – BORROWED FUNDS

Short-term borrowings

Short-term borrowings at September 30, 2015 and December 31, 2014 were as follows:

(dollars in thousands)	September 30, 2015		December 31, 2014

FHLB short-term borrowings
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
Total short-term borrowing	$	2,500	$	8,500

Short-term borrowings mature either overnight or have a maturity due within one year.

Federal Home Loan Bank (FHLB) borrowings maturing in less than one year are transferred from long-term debt to short-term borrowings on the Consolidated Balance Sheets. Advances from the FHLB are collateralized by FHLB stock and certain 1-4 residential, multifamily, home equity lines of credit and commercial real estate loans to secure a total commitment amount of $59.0 million and $52.0 million as of September 30, 2015 and December 31, 2014, respectively.

The Company has entered into line of credit agreements with various financial institutions to purchase federal funds with an aggregate commitment amount of $19.5 million as of September 30, 2015 and December 31, 2014. As of September 30, 2015 and December 31, 2014, there were no federal funds purchased.

The Company also has a “Borrower in Custody” line of credit arrangement with the Federal Reserve Bank through which it has pledged a portion of its unencumbered loan portfolio to secure a total commitment amount of $26.1 million and $24.4 million as of September 30, 2015 and December 31, 2014, respectively. The commitment level varies proportionally to the collateral balances. There was no outstanding balance related to this agreement as of September 30, 2015 and December 31, 2014.

Long-Term Debt

Long-term debt at September 30, 2015 and December 31, 2014 was as follows:

(dollars in thousands)	September 30, 2015		December 31, 2014

FHLB long-term debt
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 long-term debt	$	9,000	$	9,000

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% of the Revolver amount outstanding on a quarterly basis. 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.

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 $250,000 outstanding under the Castle Creek Revolver as of September 30, 2015.

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JACKSONVILLE BANCORP, INC.

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 $754,000 and $725,000 as of September 30, 2015 and December 31, 2014, respectively. The fair value of the hedged item was $5.2 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 liabilities 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.

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.

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JACKSONVILLE BANCORP, INC.

NOTE 7 – FAIR VALUE (continued)

The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 by level within the hierarchy:

(dollars in thousands)
September 30, 2015	Total		Level I		Level II		Level III
Assets:
Securities available-for-sale:
U.S. government-sponsored entities and agencies	$	7,014	$	-	$	7,014	$	-
State and political subdivisions		5,608		-		5,608		-
Mortgage-backed securities - residential		27,037		-		27,037		-
Collateralized mortgage obligations		25,148		-		25,148		-
Corporate bonds		2,568		-		2,568		-
Liabilities:
Derivative liability		754		-		754		-

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 nine months ended September 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.

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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 September 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)
September 30, 2015	Total		Level I		Level II		Level III
Impaired Loans (Collateral Dependent):
Real estate mortgage loans:
Residential	$	1,037	$	-	$	1,037	$	-
Commercial		1,293		-		1,018		275
Construction and land		109		-		109		-
Other real estate owned:
Real estate mortgage loans:
Construction and land		3,768		-		3,768		-
Assets held for sale		-		-		-		-

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:
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. Appraised values may be 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.

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. Appraised values may be 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.

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JACKSONVILLE BANCORP, INC.

NOTE 7 – FAIR VALUE (continued)

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 three and nine months ended September 30, 2015, there were transfers from Level III to Level II in impaired loans and OREO, as the current fair value was based on current appraised values that do not include significant unobservable inputs and that were not further discounted, or contracted offers to purchase certain properties. There were no transfers between fair value levels during the three months and nine months ended September 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 September 30, 2015 and December 31, 2014. This quantitative information is the same for each class of loans.

(dollars in thousands) September 30, 2015	Fair Value			Valuation Technique		Unobservable Inputs		Range of Inputs				Weighted Average
Impaired loans (collateral dependent)	$	275		Market comparable properties		Marketability discount			10	%			10	%

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 and period expense related to Level III non-recurring instruments for the nine months ended September 30, 2015 and 2014:

(dollars in thousands) September 30, 2015	Outstanding Balance			Valuation Allowance			Net Carrying Amount			Period Expense
Impaired loans (collateral dependent)	$	471		$	196		$	275		$	(18	)

September 30, 2014	Outstanding Balance		Valuation Allowance		Net Carrying Amount		Period Expense
Impaired loans (collateral dependent)	$	6,094	$	2,220	$	3,874	$	434
Other real estate owned		3,880		1,006		2,874		48
Assets held for sale		940		-		925		15

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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 September 30, 2015 and December 31, 2014 were as follows:

	September 30, 2015				December 31, 2014
(dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	26,410	$	26,410	$	24,372	$	24,372
Securities available-for-sale		67,375		67,375		77,633		77,633
Loans, net		386,941		392,896		360,279		366,686
Federal Home Loan Bank stock		928		N/A		1,243		N/A
Accrued interest receivable		1,366		1,366		1,464		1,464

Financial liabilities:
Deposits	$	433,032	$	433,555	$	415,756	$	416,432
Federal Home Loan Bank advances and other borrowings		11,860		11,721		17,629		17,743
Subordinated debentures		16,266		8,951		16,218		8,552
Accrued interest payable		116		116		130		130
Interest rate swap		754		754		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 September 30, 2015 and December 31, 2014, respectively, the breakdown of cash and cash equivalents between Level I and Level II were as follows:

	September 30, 2015						December 31, 2014
(dollars in thousands)	Level I			Level II			Level I			Level II
Cash and cash equivalents		$	23,197		$	3,213		$	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 a 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.

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JACKSONVILLE BANCORP, INC.

NOTE 7 – FAIR VALUE (continued)

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.

Accrued interest receivable/payable:

The carrying amounts of accrued interest receivable approximate fair value resulting in a Level II or 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 September 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.

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JACKSONVILLE BANCORP, INC.

NOTE 8 – CAPITAL ADEQUACY (continued)

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.

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 September 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 ratio 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 ratio 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.

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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 September 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 September 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
September 30, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets:
Consolidated	$	64,009		15.67	%	$	32,686		8.00	%		N/A		N/A
Bank		63,370		15.52			32,670		8.00		$	40,838		10.00	%
Tier 1 (Core) capital to risk-weighted assets:
Consolidated		56,442		13.81			24,515		6.00			N/A		N/A
Bank		58,173		14.24			24,503		6.00			32,670		8.00
Common equity Tier I capital (CET1):
Consolidated		56,442		13.81			18,386		4.50			N/A		N/A
Bank		58,173		14.24			18,377		4.50			26,545		6.50
Tier I (Core) capital to average assets:
Consolidated		56,442		11.35			19,896		4.00			N/A		N/A
Bank		58,173		11.71			19,871		4.00			24,839		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

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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 September 30, 2015 and December 31, 2014, remaining funds available under the revolving loan agreements were $1.3 million and $2.2 million, respectively.

NOTE 9- LEGAL

Since the announcement of the proposed merger with Ameris on October 1, 2015, two putative shareholder class action lawsuits have been filed against Bancorp, the directors of Bancorp, and Ameris, in the Circuit Court of Duval County, Florida: (i) Paul Parshall v. Jacksonville Bancorp, Inc. et al., Case No. 16-2015-CA-006607, filed on October 16, 2015; and (ii) Patrick Donovan v. Kendall Spencer et al., Case No. 16-2015-CA-006738, filed October 22, 2015 (together, the “Florida Actions”). In the Florida Actions, plaintiffs allege that the individual director defendants breached their fiduciary duties to Bancorp’s shareholders in negotiating and approving the Merger Agreement through an unfair process, that the merger consideration negotiated in the Merger Agreement does not adequately value the company, that Bancorp’s shareholders will not receive fair value for their common stock in the merger, and that the terms of the Merger Agreement impose improper deal-protection devices that purportedly preclude competing offers. The complaints in the Florida Actions further allege that Bancorp and Ameris aided and abetted the alleged breaches of fiduciary duty by Bancorp’s directors. In the Florida Actions, plaintiffs seek preliminary and permanent injunctive relief, including enjoining or rescinding the merger, an award of unspecified damages, attorneys’ fees, and other relief.

The outcome of the Florida Actions cannot be predicted with certainty. A preliminary injunction could delay or jeopardize the completion of the merger transaction, and an adverse judgment granting permanent injunctive relief could indefinitely enjoin completion of the merger. Additional lawsuits arising out of or relating to the Merger Agreement or the merger transaction may be filed in the future. The Company and its directors intend to vigorously defend against these lawsuits.

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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 September 30, 2015 and December 31, 2014 and results of operations for the three and nine months ended September 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 SEC on March 16, 2015.

Recent Developments

The closing of the merger is subject to the required approval of Bancorp’s shareholders, requisite regulatory approvals, the effectiveness of the registration statement to be filed by Ameris with respect to the stock to be issued in the merger, an amendment to the Bancorp articles of incorporation to provide for conversion of Bancorp nonvoting common stock to Ameris common stock, and other customary closing conditions. The merger is expected to close during the first quarter of 2016. On October 1, 2015, Bancorp filed a Current Report on Form 8-K with the SEC that provides additional details relating to the Merger Agreement. A copy of the Merger Agreement was filed as Exhibit 2.1 to such Form 8-K.

General

Bancorp was incorporated on October 24, 1997 and was organized to conduct the operations of 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 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, 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 OREO expenses.

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JACKSONVILLE BANCORP, INC.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

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.

As of September 30, 2015 and December 31, 2014, the Bank was well-capitalized with total risk based capital of 15.52% and 14.74% and Tier 1 leverage capital of 11.71% and 10.31%, respectively. During the nine months ended September 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.

Financial Condition and Results of Operations

The Company’s performance during the periods ended September 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 nine months ended September 30, 2015.

Comparison of Financial Condition as of September 30, 2015 and December 31, 2014

Total assets increased $16.7 million, or 3.4%, from $488.6 million as of December 31, 2014 to $505.3 million as of September 30, 2015. The Company experienced an increase in cash and cash equivalents in the amount of $2.0 million and an increase in net loans of $26.7 million during the nine months ended September 30, 2015. This amount was offset by a decrease in securities available-for-sale of $10.2 million during the same period.

Investment securities available-for-sale decreased $10.2 million, or 13.2%, from $77.6 million as of December 31, 2014 to $67.4 million as of September 30, 2015. During the nine months ended September 30, 2015, the Company received $15.8 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 $17.2 million, or 4.2%, during the nine months ended September 30, 2015, from $415.8 million as of December 31, 2014 to $433.0 million as of September 30, 2015. The following is an explanation of the changes in each of the major deposit categories during the nine months ended September 30, 2015:

Noninterest-bearing deposits increased $14.7 million, or 13.6%. This represents 28.3% of total deposits as of September 30, 2015;

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JACKSONVILLE BANCORP, INC.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Money market, NOW and savings deposits increased $18.8 million, or 10.8%, due to natural fluctuations in account balances; and

The time deposit portfolio decreased by $16.2 million, or 12.2%, including reductions of $7.1 million in brokered CDs and $6.7 million in national CDs.

FHLB advances and other borrowings decreased during the nine months ended September 30, 2015, with FHLB advances and other borrowings of $11.9 million and $17.6 million as of September 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.

Total shareholders’ equity increased during the nine months ended September 30, 2015, from $37.1 million as of December 31, 2014 to $42.1 million as of September 30, 2015. This increase was attributable to net income during the nine months ended September 30, 2015 of $5.0 million.

Comparison of Operating Results for the Nine Months Ended September 30, 2015 and 2014

Net Income

The Company had net income of $5.0 million for the nine months ended September 30, 2015 compared to net income of $1.3 million for the nine months ended September 30, 2014. On a diluted per share basis, the Company had earnings per share of $0.86 for the nine months ended September 30, 2015, compared to $0.23 earnings per share 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, decreased $61,000 to $13.4 million for the nine months ended September 30, 2015.

Total interest income decreased $325,000 to $15.6 million for the nine months ended September 30, 2015 compared to $15.9 million in the same period in 2014. This decrease was primarily the result of a lower average yield on loans which decreased 23 basis points to 5.03% for the nine months ended September 30, 2015 compared to 5.26% for the nine months ended September 30, 2014. The decrease in the loan yield was driven by a decrease in accretion recognized on acquired loans of approximately $603,000.

The average cost of interest-bearing liabilities decreased 5 basis points to 0.87% for the nine months ended September 30, 2015 compared to 0.92% for the same period in 2014. The decrease was driven primarily by a decline in the cost of time deposits. During the nine months ended September 30, 2015, brokered certificates of deposit totaling $7.1 million and $6.7 million in national CDs matured which reduced the overall cost of certificates of deposits to 1.03% in the nine months ended September 30, 2015 from 1.15% in the same period last year.

The net interest margin increased by 4 basis points to 3.81%, from 3.77%, when comparing the first nine 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

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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.

	Nine Months Ended September 30,
	2015							2014
(dollars in thousands)	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
Interest-earning assets:
Loans⁽¹⁾	$	380,647	$	14,330		5.03	%	$	371,146	$	14,591		5.26	%
Securities available-for-sale:
Taxable		67,891		841		1.66			75,348		917		1.63
Tax-exempt⁽²⁾		6,541		305		6.23			7,703		271		4.70
Other interest-earning assets⁽³⁾		14,189		101		0.95			22,360		123		0.76
Total interest-earning assets		469,268		15,577		4.44			476,557		15,902		4.46
Noninterest-earning assets⁽⁴⁾		23,383							21,174
Total assets	$	492,651						$	497,731
Interest-bearing liabilities:
Savings deposits	$	9,910	$	10		0.13	%	$	9,791	$	12		0.16	%
NOW deposits		30,935		20		0.09			27,861		18		0.09
Money market deposits		142,278		432		0.41			151,165		430		0.38
Time deposits		124,997		959		1.03			134,193		1,159		1.15
FHLB advances		13,659		149		1.46			19,286		207		1.44
Federal Reserve and other borrowings		37		-		-			4		-		-
Subordinated debt		16,239		617		5.08			16,177		615		5.08
Other interest-bearing liabilities⁽⁵⁾		-		23		N/	A		-		33		-
Total interest-bearing liabilities		338,055		2,210		0.87			358,477		2,474		0.92
Noninterest-bearing liabilities		115,358							104,351
Shareholders' equity		39,238							34,903
Total liabilities and shareholders' equity	$	492,651						$	497,731
Net interest income			$	13,367						$	13,428
Interest rate spread⁽⁶⁾						3.57	%						3.54	%
Net interest margin⁽⁷⁾						3.81	%						3.77	%

⁽¹⁾	Average loans include nonperforming loans. Interest on loans included loan fees (in thousands) of $244 and $160 for the nine months ended September 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.

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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.

	Nine Months Ended September 30, 2015 vs. 2014
	Increase (Decrease) Due to⁽¹⁾
(dollars in thousands)	Rate			Volume			Total
Interest-earning assets:
Loans	$	(629	)	$	368		$	(261	)
Securities available-for-sale:
Taxable		16			(92	)		(76	)
Tax-exempt		79			(45	)		34
Other interest-earning assets		30			(52	)		(22	)
Total interest-earning assets	$	(504	)	$	179		$	(325	)

Interest-bearing liabilities:
Savings deposits	$	(2	)	$	-		$	(2	)
NOW deposits		-			2			2
Money market deposits		28			(26	)		2
Time deposits		(124	)		(76	)		(200	)
FHLB advances		3			(61	)		(58	)
Federal Reserve and other borrowings		-			-			-
Subordinated debt		-			2			2
Other interest-bearing liabilities		(10	)		-			(10	)
Total interest-bearing liabilities	$	(105	)	$	(159	)	$	(264	)

Net change in net interest income	$	(399	)	$	338		$	(61	)

⁽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 decreased to $1.1 million for the nine months ended September 30, 2015, compared to $1.6 million for the nine months ended September 30, 2015 and 2014, respectively. Service charges remained relatively flat at $563,000 compared to $551,000 for the nine months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2014, the Company recorded a gain of $489,000 from bank-owned life insurance due to life insurance benefits received in excess of cash surrender value from the death of a former employee.

Noninterest expense decreased to $11.5 million for the nine months ended September 30, 2015, compared to $13.4 million for the same period in 2014. This decrease was due to a decrease in salaries and employee benefits of $1.4 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 $1.7 million from $1.9 million in the same period last year. Leasehold improvement expense decreased $169,000 for the nine months ended September 30, 2015 as a portion of the leasehold improvements became fully amortized in the fourth quarter of 2014. Professional fees decreased to $744,000 from $897,000 for the nine month periods ended September 30, 2015 and 2014, respectively. Accounting and auditing fees declined $118,000 while legal declined $42,000. During the nine months ended September 30, 2015, there was a decrease of $409,000 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 $207,000 to $388,000 from $181,000 in the same period in 2014. This is primarily a result of several write-downs taken during the nine month period ended September 30, 2015 in the aggregate amount of $291,000 compared to $48,000 in the same period last year. Included in other noninterest expense for the nine months ended September 30, 2015 is a $75,000 write-down to assets classified as held-for-sale. During the third quarter of 2015, the assets were sold and a $26,000 loss was recorded to other noninterest expense.

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JACKSONVILLE BANCORP, INC.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Income tax expense was $18,000 for the nine months ended September 30, 2015 compared to $20,000 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 September 30, 2015 and December 31, 2014, it was determined that the need for a full valuation allowance still existed.

Comparison of Operating Results for the Three Months Ended September 30, 2015 and 2014

Net Income

The Company had net income of $992,000 for the three months ended September 30, 2015, compared to $808,000 of net income for the three months ended September 30, 2014. On a diluted per share basis, the Company had net income of $0.17 for the three months ended September 30, 2015, compared to net income of $0.14 for the same period in the prior year.

Net Interest Income

Net interest income was $4.6 million for the three months ended September 30, 2015, compared to $4.5 million for the same period in 2014.

Total interest income was $5.3 million for the three months ended September 30, 2015 and 2014, increasing $46,000 over the same period last year. The increase was related to additional interest income recorded on the call of an investment security during the three month period ended September 30, 2015 totaling $93,000. During the same periods, total interest on loans remained flat. Average loans increased $27.6 million while the average yield on loans for the three months ended September 30, 2015 and 2014 was 4.91% and 5.28%, 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 $233,000.

Average interest-bearing liabilities decreased $18.6 million, while the average cost of interest-bearing liabilities remained flat, decreasing 1 basis point to 0.87% for the three months ended September 30, 2015, compared to 0.88% for the same period in 2014.

The net interest margin increased 7 basis points to 3.81% from 3.74%, when comparing the third quarter of 2015 to the same period in the prior year. This was driven primarily by the increase in the average balance of loans while the average balance of interest-bearing liabilities declined. Additionally, higher priced brokered and national certificates of deposit were replaced with noninterest-bearing deposits with an average balance totaling $12.6 million for the three months ended September 30, 2015. 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 decreased to $372,000 for the three months ended September 30, 2015, compared to $867,000 for the three months ended September 30, 2014. Service charges increased to $198,000 compared to $187,000 for the three months ended September 30, 2015 and 2014, respectively. During the three months ended September 30, 2014, the Company recorded a gain of $489,000 from bank-owned life insurance due to life insurance benefits received in excess of cash surrender value from the death of a former employee.

Noninterest expense decreased to $4.0 million for the three months ended September 30, 2015, compared to $4.5 million for the same period in 2014. This decrease was in part due to a reduction in salaries and employee benefits of $205,000, mainly due to a reduction in workforce that occurred in 2014 during the second and fourth quarters. Professional fees decreased $187,000 to $216,000 from $403,000 in the three months ended September 30, 2015 compared to the same period last year. Other real estate owned expense increased $157,000 primarily due to several write-downs during the third quarter of 2015 totaling $200,000 compared to write-downs totaling $12,000 in the same period last year. Loan expenses decreased $222,000 period over period as a result of the Company’s continued execution of its ongoing strategy to reduce problem assets.

The Company recorded an income tax benefit of $28,000 for the three months ended September 30, 2015 compared to expense of $20,000 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.

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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 OREO. 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 September 30, 2015 and December 31, 2014 were as follows:

(dollars in thousands)	September 30, 2015			December 31, 2014
Nonperforming loans:
Commercial	$	59		$	21
Real estate mortgage loans
Residential		2,092			1,151
Commercial		4,485			7,408
Construction and land		386			574
Consumer loans and other		23			28
Total nonperforming loans⁽¹⁾		7,045			9,182
Other real estate owned, net		3,768			4,061
Total nonperforming assets	$	10,813		$	13,243
Performing loans classified as TDRs	$	8,824		$	8,585
Nonperforming loans classified as TDRs		1,847			2,209
Total loans classified as troubled debt restructuring	$	10,671		$	10,794
Nonperforming loans as a percent of gross loans		1.76	%		2.45	%
Nonperforming loans and other real estate owned as a percent of total assets		2.14	%		2.71	%

⁽¹⁾	Includes nonperforming loans classified as TDRs.

As shown in the table above, nonperforming assets decreased $2.4 million as of September 30, 2015 from December 31, 2014. The improvement is due to a decrease in nonperforming loans totaling $2.1 million as of the same dates. During the second quarter of 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 September 30, 2015, impaired loans decreased by $1.6 million to $14.5 million, compared to $16.1 million as of December 31, 2014. Nonperforming impaired loans were $6.1 million as of September 30, 2015. Specific reserves in the amount of $1.6 million were allocated to impaired loans as of September 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 September 30, 2015, the Company had loan balances of $10.7 million for customers whose loans were classified as TDRs, of which $9.9 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 $342,000 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 September 30, 2015.

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JACKSONVILLE BANCORP, INC.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The TDR that occurred during the nine months ended September 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 September 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 $14.7 million and $12.1 million as of September 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.

Loans past due still accruing interest as of September 30, 2015 and December 31, 2014 were categorized as follows:

(dollars in thousands) September 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	$	199	$	-	$	-	$	199
Real estate mortgage loans:
Residential		589		163		-		752
Commercial		-		1,477		-		1,477
Construction and land		-		-		-		-
Consumer and other loans		258		-		-		258
Total	$	1,046	$	1,640	$	-	$	2,686

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 $1.0 million as of September 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 nine months ended September 30, 2015.

Adversely classified loans decreased to $13.0 million as of September 30, 2015 compared to $21.1 million as of December 31, 2014. Of the total adversely classified loans as of September 30, 2015, $7.0 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.

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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 September 30, 2015, we had loans acquired with deteriorated credit quality on nonaccrual in the amount of $1.0 million.

Allowance and Provision for Loan Losses

The allowance for loan losses decreased by $1.8 million during the nine months ended September 30, 2015, amounting to $12.6 million as of September 30, 2015 as compared to $14.4 million as of December 31, 2014. The allowance represented approximately 3.15% and 3.84% of total loans as of September 30, 2015 and December 31, 2014, respectively.

The decrease in the allowance for loan losses as of September 30, 2015, compared to September 30, 2014, was driven primarily by lower nonperforming loans at September 30, 2015 compared to September 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. There was no loan provision recorded for the third 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 significant changes in the above current qualitative factors from December 31, 2014 to September 30, 2015. The Company’s overall asset quality, as well as the economy in the markets served, is moving in a positive direction and management continues to monitor these metrics.

As of September 30, 2015, of the $11.0 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 0.99%, or $2.7 million; the commercial loans portfolio segment had total weighted average qualitative factors of 1.20%, or $758,000; and the consumer and other loans portfolio segment had total qualitative factors of 1.38%, or $16,000. Impaired loans were $14.5 million as of September 30, 2015, of which $1.6 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 September 30, 2015, there were $1.6 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 September 30, 2015, there were $2.8 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.

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JACKSONVILLE BANCORP, INC.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

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 September 30, 2015, there was one acquired loan with deteriorated credit quality that was deemed a TDR in the amount of $729,000.

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 may be 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.

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 September 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 Item 7, “Critical Accounting Policies”, of 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, 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.

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JACKSONVILLE BANCORP, INC.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Liquidity

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 $4.0 million and $1.3 million for the nine months ended September 30, 2015 and 2014, respectively. Net cash from operating activities for the nine months ended September 30, 2015 was primarily impacted by net income of $5.0 million, as adjusted for (i) net accretion of purchase accounting adjustments, mainly purchased loans, of $364,000, (ii) premium amortization for securities, net of accretion, of $482,000, (iii) depreciation and amortization of $391,000, (iv) net change in accrued interest receivable and other assets of $122,000, (v) reversal of provision for loan losses expense of $2.0 million and (vi) net change in accrued expenses and other liabilities of $77,000. Net cash from operating activities for the same period in the prior year reflected net income of $1.3 million, as adjusted for (i) net accretion of purchase accounting adjustments, mainly purchased loans, of $957,000, (ii) premium amortization for securities, net of accretion, of $678,000, (iii) depreciation and amortization of $526,000, (iv) net change in accrued interest receivable and other assets of $131,000, and (v) provision for loan losses of $287,000.

Cash Flows from Investing Activities:

Net cash used by investing activities was $13.5 million and net cash provided from investing activities was $11.7 million for the nine months ended September 30, 2015 and 2014, respectively. The decrease for the nine months ended September 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 $11.5 million and $896,000 for the nine months ended September 30, 2015 and 2014, respectively. The period-over-period increase in cash inflows was due to a net increase of $17.3 million in deposits during the nine months ended September 30, 2015, compared to the same period in the prior year. This was offset by $6.0 million in net cash outflows to repay FHLB fixed rate advances.

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.

The Basel III Capital Rules introduced a new capital measure CET1. The rules specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements.

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JACKSONVILLE BANCORP, INC.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

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 leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to adjusted average consolidated assets.

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 1250%. 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 September 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.

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JACKSONVILLE BANCORP, INC.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Bank

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.

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;

•

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 September 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 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 ratio 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 ratio 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.

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JACKSONVILLE BANCORP, INC.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (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 risk-based capital of at least 8.00%, at least half of which must be Tier 1 capital. As of September 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 September 30, 2015 and December 31, 2014, there were $1.3 million and $2.2 million in remaining funds available under the revolving loan agreements, respectively. During the nine months ended September 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.

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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

There have been no significant changes to our Critical Accounting Policies as described in our 2014 Annual Report on Form 10-K.

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 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.

(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.

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.

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JACKSONVILLE BANCORP, INC.

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, and except as set forth below, 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.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on March 16, 2015, as well as the additional risk factors discussed below. The risks described below and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Termination of the Merger Agreement could adversely affect the Company.

The Merger Agreement is subject to a number of conditions that must be fulfilled in order to complete the merger with Ameris. Those conditions include required approval of our shareholders, requisite regulatory approvals, the effectiveness of the registration statement to be filed by Ameris with respect to the stock to be issued in the merger, an amendment to our articles of incorporation to provide for conversion of our nonvoting common stock to Ameris common stock, and other customary closing conditions. If the conditions to the closing of the merger are not fulfilled by June 30, 2016, Ameris will have the right to terminate the Merger Agreement. There can be no assurances that the merger will be completed by June 30, 2016 or that Ameris will not exercise its right to terminate the Merger Agreement in accordance with its terms.

If the Merger Agreement is terminated, and the merger with Ameris is not consummated, there may be various adverse consequences on the Company:

If the Merger Agreement is terminated, our business may be adversely impacted by not having pursued other beneficial opportunities due to the focus of management on the merger.

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JACKSONVILLE BANCORP, INC.

Item 1A.

Risk Factors (continued)

The Company has incurred substantial costs in connection with the merger, including legal, accounting and investment banking fees.

If the Merger Agreement is terminated, the market price of our common stock might decline to the extent that the current market price reflects a market assumption that the merger will be completed. In the event the market price of our common stock does so decline, we may be required to recognize a goodwill impairment charge.

In addition, if the Merger Agreement is terminated and our Board of Directors seeks another merger or business combination, our shareholders cannot be certain that the Company will be able to find a party willing to offer equivalent or more attractive consideration than the consideration Ameris has agreed to provide in the merger.

Under certain circumstances, the Company will be required to pay Ameris a termination fee of $3.6 million.

The Company will be subject to business uncertainties and contractual restrictions while the merger with Ameris is pending.

Uncertainty about the effect of the potential merger with Ameris on employees and customers may have an adverse effect on the Company. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. Retention of certain employees may be challenging during the pendency of the merger with Ameris, as certain employees may experience uncertainty about their future roles. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the business, the Company’s business could be negatively impacted. In addition, the Merger Agreement restricts the Company from making certain acquisitions and taking other specified actions outside of the ordinary course of business, without the consent of Ameris, until the merger is completed. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the merger with Ameris.

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JACKSONVILLE BANCORP, INC.

Item 6.

Exhibits

Exhibit No.		Description of Exhibit

Exhibit No. 2.1		Agreement and Plan of Merger, dated as of September 30, 2015, by and between Jacksonville Bancorp, Inc. and Ameris Bancorp (incorporated herein by reference to Exhibit 2.1 of the Registrant’s Form 8-K filed on October 1, 2015, File No. 000-30248).

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).

Exhibit No. 10.1		The Jacksonville Bank Executive Officer Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed on July 29, 2015, File No. 000-30248). †

Exhibit No. 10.2		Form of Voting and Support Agreement (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed on October 1, 2015, 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.

†

Identifies management contracts or compensatory plans or arrangements.

Table of Contents

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: November 10, 2015	By:	/S/ KENDALL L. SPENCER
		Kendall L. Spencer
		President and Chief Executive Officer
		(Principal executive officer)

Date: November 10, 2015	By:	/S/ VALERIE A. KENDALL
		Valerie A. Kendall
		Executive Vice President and
		Chief Financial Officer
		(Principal financial officer and
		Chief accounting officer)

Table of Contents

JACKSONVILLE BANCORP, INC.

EXHIBIT INDEX

Exhibit No.		Description of Exhibit

Exhibit No. 2.1		Agreement and Plan of Merger, dated as of September 30, 2015, by and between Jacksonville Bancorp, Inc. and Ameris Bancorp (incorporated herein by reference to Exhibit 2.1 of the Registrant’s Form 8-K filed on October 1, 2015, File No. 000-30248).

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).

Exhibit No. 10.1		The Jacksonville Bank Executive Officer Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed on July 29, 2015, File No. 000-30248). †

Exhibit No. 10.2		Form of Voting and Support Agreement (incorporated herein by reference to Exhibit 10.1 of the Registrant’s Form 8-K filed on October 1, 2015, 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.

†

Identifies management contracts or compensatory plans or arrangements.

Attached files

JACKSONVILLE BANCORP INC /FL/ Reports

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