| JACKSONVILLE BANCORP INC /FL/ Item 1A Risk Factors |
| 8 ITEM 1A RISK FACTORS An investment in our common stock involves a number of risks |
| Before making an investment decision, you should carefully consider all of the risks |
| If any of the events contemplated by the risk factors discussed below actually impact us, our business, financial condition and results of operations could be materially adversely affected |
| If this were to occur, the trading price of our common stock could decline |
| RISKS RELATED TO OUR BUSINESS Since we commenced operations in 1999, we have had a relatively short history of experiencing profits |
| We rely on the profitability of the Bank to provide funding for our operations |
| We can not assure you that we will consistently operate profitably in the future |
| While we project that the Bank will be profitable in all future periods, we are unable to assure you that we will earn profits as projected, that we will be able to maintain profitability, or that the Bank will be able to consistently fund our ongoing operations |
| We are not certain that our capital will be adequate to continue to support the current rate of growth |
| Future capital requirements depend on many factors, including the ability to successfully attract new customers and provide additional services, the timing of opening new branch locations, and our profitability levels |
| If adequate capital is not available, we will be subject to an increased level of regulatory supervision, we may not be able to expand our operations, and our business operating results and financial condition could be adversely affected |
| 8 We may require additional capital in the future, which could result in dilution of your ownership interest |
| Any capital that is likely to be generated by our operations over the next several years is expected to be needed to continue expanding our operations |
| Additionally, current proposed FDIC guidance entitled, Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, addresses high and increasing concentrations of commercial real estate loans |
| If the proposed regulation is passed, additional capital levels could be required |
| If we sell additional equity securities to meet capital requirements or finance future growth and expansion of our operations, such sale could result in significant dilution of your ownership percentage |
| Customers may not repay their loans, which could have a material adverse effect on our profitability |
| The risk that customers may fail to repay their loans is inherent in any bank lending relationship |
| If our loans are not repaid in accordance with the loan terms, it could have a material adverse effect on our earnings and overall financial condition as well as the value of our common stock |
| We focus our lending activity in commercial, commercial real estate, residential, home equity and consumer loans |
| Our management attempts to minimize credit exposure by carefully monitoring the concentration of loans within specific industries and through loan application and approval procedures |
| However, we are unable to assure you that such monitoring and procedures will reduce lending risks |
| Credit losses can cause insolvency and failure of a financial institution and, in such event, shareholders could lose their entire investment |
| Our business focus in the Jacksonville area of Florida could make us vulnerable to adverse economic conditions in the area |
| Our operations are materially affected by and sensitive to the economy of our market areas in northeastern Florida, and are particularly impacted by the economic conditions in Duval County and the Jacksonville metropolitan area |
| Because our business is focused in the Jacksonville area, we could be more affected by a weakening of the Jacksonville area economy than banking institutions with operations in diverse geographical areas |
| A slowdown in the economy could diminish the quality of our loan portfolio and our financial performance |
| Recent economic indicators have shown declines in US economic activities |
| Adverse economic developments can impact the collectibility of loans and may negatively affect our earnings and financial condition |
| In addition, the banking industry in general is affected by economic conditions such as inflation, recession, unemployment, and other factors beyond our control |
| A prolonged economic recession or other economic dislocation could cause increases in nonperforming assets and impair the values of real estate collateral, thereby causing operating losses, decreasing liquidity, and eroding capital |
| Although we believe our loan policy and loan review processes result in sound and consistent credit decisions on our loans, we can not assure you that future declines in the economy, particularly in our market areas, would not have a material adverse effect on our financial condition, results of operations, or cash flows |
| Our location on the east coast of Florida makes us susceptible to weather-related problems |
| We rely on our ongoing operations to sustain profitability |
| Although we have a disaster recovery plan in place, we cannot ensure that severe weather conditions will not have a material adverse effect on our financial condition, results of operations, or cash flows |
| We are subject to government regulation and monetary policy that could constrain our growth and profitability |
| Bank regulators have imposed various conditions |
| The conditions include, among other things, that: (1) the Company would not assume additional debt without prior approval by the Federal Reserve Board; (2) the Company and the Bank will remain well-capitalized at all times; (3) we will make appropriate filings with the regulatory agencies; and (4) the Bank will meet all regulatory requirements as set forth |
| The regulatory capital requirements imposed on the Bank could have the effect of constraining growth |
| We are subject to extensive state and federal government supervision and regulations that impose substantial limitations with respect to loans, purchase of securities, payment of dividends, and many other aspects of the banking business |
| Regulators include the Board of Governors of the Federal Reserve System (the "e Federal Reserve Board "e ), the Federal Deposit Insurance Corporation ( "e FDIC "e ), and the Florida Department of Banking and Finance (the "e Florida DBF "e ) |
| Applicable laws, regulations, interpretations, and enforcement policies have been subject to significant and sometimes retroactively applied changes and may be subject to significant future changes |
| Many of these regulations are intended to protect depositors, the public, and the FDIC, not shareholders |
| Future legislation or government policy could adversely affect the banking industry, our operations, or shareholders |
| The burden imposed by federal and state regulations may place banks, in general, and us, specifically, at a competitive disadvantage compared to less regulated competitors |
| Federal economic and monetary policy may affect our ability to attract deposits, make loans, and achieve satisfactory operating results |
| 9 We could be negatively impacted by changes in interest rates and economic conditions |
| Our results of operations may be materially and adversely affected by changes in prevailing economic conditions, including declines in real estate market values, rapid changes in interest rates, and the monetary and fiscal policies of the federal government |
| Our profitability is partly a function of the spread between the interest rates earned on investments and loans and those paid on deposits and other liabilities |
| Recently, our interest rate spreads have widened due to rising interest rates and changing market conditions |
| This has had a positive impact on our net interest income; however, we are unable to guarantee that such factors will continue |
| As with most banking institutions, our net interest spread is affected by general economic conditions and other factors that influence market interest rates and our ability to respond to changes in such rates |
| At any given time, our assets and liabilities may be affected differently by a given change in interest rates |
| While we take measures to reduce interest-rate risk, these measures may not adequately minimize exposure to interest-rate risk |
| The Company is dependent on the operating performance of the Bank to provide the Company with operating funds |
| The Company is a bank holding company and is dependent upon dividends from the Bank for funds to pay expenses and any cash dividends to shareholders |
| The Bank is subject to regulatory limitations regarding the payment of dividends, and no cash dividends are anticipated in the foreseeable future |
| Therefore, the Bank may not be able to provide us with adequate funds to conduct our ongoing operations |
| We face competition from a variety of competitors |
| We face competition for deposits, loans and other financial services from other community banks, regional banks, out-of-state and in-state national banks, savings banks, thrifts, credit unions and other financial institutions as well as other entities which provide financial services, including consumer finance companies, securities brokerage firms, mortgage brokers, insurance companies, mutual funds, and other lending sources and alternative investment providers |
| Some of these financial institutions and financial services organizations are not subject to the same degree of regulation as we are |
| We face increased competition due to the Gramm-Leach-Bliley Act which allows insurance firms, securities firms, and other non-traditional financial companies to provide traditional banking services |
| Due to the growth of the Jacksonville area, it can be expected that significant competition will continue from existing financial services providers, as well as new entrants to the market |
| Many of these competitors have been in business for many years, have established customers, are larger, have substantially higher lending limits than we do, and are able to offer certain services that we do not provide, such as certain loan products and international banking services |
| In addition, many of these entities have greater capital resources than we have, which among other things may allow them to price their services at levels more favorable to the customer or to provide larger credit facilities |
| If we are unable to attract and retain customers with personal services, attractive product offerings and competitive rates, our business, results of operations, future growth and operational results will be adversely affected |
| Our lending limit restricts our ability to compete with larger financial institutions |
| Our per customer lending limit is approximately dlra5dtta4 million, subject to further reduction based on regulatory criteria relevant to any particular loan |
| Accordingly, the size of loans which we can offer to potential customers is less than the size which many of our competitors with larger lending limits are able to offer |
| This limit has affected and will continue to affect our ability to seek relationships with larger businesses in the market |
| We accommodate loans in excess of our lending limit through the sale of portions of such loans to other banks |
| However, we may not be successful in attracting or maintaining customers seeking larger loans or in selling portions of such larger loans on terms that are favorable to us |
| 10 We may need to spend significant money to keep up with technology so we can remain competitive |
| The banking industry continues to undergo rapid technological changes with frequent introduction of new technology-driven products and services |
| In addition to providing better service to customers, the effective use of technology increases efficiency and enables us to reduce costs |
| Our future success depends in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional operating efficiencies |
| Many of our competitors have substantially greater resources to invest in technological improvements |
| Such technology may permit competitors to perform certain functions at a lower cost than we can |
| We may not be able to effectively implement new technology-driven products and services or be successful in marketing these to our customers |
| We are dependent on the experience and expertise of our current management and their departure may impair our operations |
| We are dependent primarily upon the services of Gilbert J Pomar, III, Chief Executive Officer and President of the Company and the Bank, Valerie Kendall, Chief Financial Officer, and Scott Hall, Senior Loan Officer |
| If the services of these individuals were to become unavailable for any reason, or if we were unable to hire highly qualified and experienced personnel to replace them, our operating results could be adversely affected |
| While we have an employment agreement with Mr |
| Pomar and Mr |
| Hall, we do not have an agreement with Ms |
| RISKS RELATED TO OUR COMMON STOCK Our common stock is thinly traded and, therefore, you may have difficulty selling shares |
| Our common stock is traded on the NASDAQ However, we are unable to provide assurance that an active market will exist in the future or that shares can be liquidated without delay |
| We do not anticipate paying dividends for the foreseeable future |
| We do not anticipate dividends will be paid on our common stock for the foreseeable future |
| The Company is largely dependent upon dividends paid by the Bank to provide funds to pay cash dividends if and when the board of directors may declare such dividends |
| No assurance can be given that future earnings will be sufficient to satisfy regulatory requirements and permit the legal payment of dividends to shareholders at any time in the future |
| Even if we could legally declare dividends, the amount and timing of such dividends would be at the discretion of our board of directors |
| The board may in its sole discretion decide not to declare dividends |
| The market price of our common stock may be volatile |
| The market price of our common stock is subject to fluctuations as a result of a variety of factors, including the following: o quarterly variations in our operating results or those of other banking institutions; o changes in national and regional economic conditions, financial markets, or the banking industry; and o other developments affecting us or other financial institutions |
| The trading volume of our common stock is limited, which may increase the volatility of the market price for our stock |
| In addition, the stock market has experienced significant price and volume fluctuations in recent years |
| This volatility has had a significant effect on the market prices of securities issued by many companies for reasons not necessarily related to the operating performance of these companies |
| Our articles of incorporation and bylaws contain provisions that may delay or prevent a change of control |
| Sections 607dtta0901 through 607dtta0908 of the Florida Business Corporation Act (the "e FBCA "e ) provide for supermajority voting and impose other requirements on certain business combinations with interested shareholders and limit voting rights of certain acquirers of control shares |
| Federal law requires the approval of the Federal Reserve Board before acquisition of "e control "e of a bank holding company |
| Our articles of incorporation provide that the FBCAapstas control shares statute applies to acquisitions of our shares unless the acquirer has acquired the shares (1) for others in good faith and not to circumvent the control shares statute and requires instruction from others to vote the shares or (2) through a distribution conducted by us in a private or public offering or under a warrant, option or employee benefit plan, under the laws of descent and distribution, from a donee of a lifetime gift, through a transfer between immediate family members or through satisfaction of a pledge or security interest |
| 11 Our articles of incorporation also (1) provide for a board of directors that is divided into three classes of directors; (2) require the shareholders to take action at a duly called meeting and not by written consent; (3) limit the boardapstas ability to increase the number of directors; (4) require the affirmative vote of holders of two-thirds of our voting stock for certain affiliated transactions such as mergers, consolidations, sales, leases, pledges, transfers, dissolutions, reclassifications with or loans to shareholders owning more than 10prca of our shares or their affiliates unless the transaction is approved by the disinterested directors and certain other conditions are met; (5) require the board of directors to consider a variety of factors when evaluating any proposal involving a potential tender or exchange offer, merger, sale or business combination, including the social and economic impact of such a proposal on customers, employees, and the communities in which we operate or are located, and on our ability to fulfill our corporate objectives and perform under applicable statutes and regulations; and (6) require the affirmative vote of holders of at least 66prca of the voting stock to change any provisions of the articles of incorporation relating to the right of shareholders to act by consent, the classification of the board, affiliated transactions or control share acquisitions |
| These provisions may have the effect of delaying or preventing a change in control |
| As a result, these provisions could adversely affect the price of our common stock by reducing the gain which could potentially be realized by a shareholder in a change of control |