UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period of _________ to _________
Commission File Number 000-49792
Jacksonville Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Federal 33-1002258
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(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification Number)
1211 West Morton Avenue
Jackonville, Illinois 62650
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (217) 245-4111
Check here whether issuer (1) has filed all reports required to be filed by
Sections 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.
[X] Yes [ ] No
As of July 31, 2002, there were 1,909,304 shares (*) of the Registrant's common
stock issued and outstanding.
(*) As of July 31, 2002, 1,038,738 shares were owned by Jacksonville Bancorp,
M.H.C., the Company's mutual holding company parent.
JACKSONVILLE BANCORP, INC.
FORM 10-Q
JUNE 30, 2002
TABLE OF CONTENTS
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Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2002 and
December 31 , 2001 (Unaudited) 1
Consolidated Statements of Income and Comprehensive Income
for the Three Months and Six Months Ended June 30, 2002
and 2001 (Unaudited) 2
Consolidated Statement of Stockholders' Equity for the Six Months
Ended June 30, 2002 (Unaudited) 3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (Unaudited) 4-5
Notes to Unaudited Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II OTHER INFORMATION 17
Signatures 18
PART I - FINANCIAL INFORMATION
JACKSONVILLE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001 (UNAUDITED)
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June 30, December 31,
ASSETS 2002 2001
-------------------- --------------------
Cash and cash equivalents $ 14,559,344 $ 13,397,002
Federal funds sold 1,011,000 1,010,000
Investment securities - available for sale 55,442,949 44,482,026
Mortgage-backed securities - available for sale 3,402,516 4,264,448
Federal Home Loan Bank stock 1,247,800 1,215,100
Other investment securities 766,625 662,504
Loans receivable - net of allowance for loan loss of $1,082,791 and $1,106,647 as of
June 30, 2002 and December 31, 2001 152,677,451 156,280,173
Loans held for sale - net 1,315,570 4,801,717
Premises and equipment - net 5,361,750 5,442,675
Intangible assets 3,204,909 3,244,770
Accrued interest receivable 2,006,953 1,845,536
Capitalized mortgage servicing rights 998,854 951,375
Income taxes receivable 946,224 1,550,403
Real estate owned 446,539 945,364
Other assets 1,179,283 1,208,034
TOTAL ASSETS $ 244,567,767 $ 241,301,127
TOTAL LIABILITES AND STOCKHOLDERS' EQUITY
Deposits $ 219,141,615 $ 216,898,771
Other borrowings 927,798 1,395,455
Advance payments by borrowers for taxes and insurance 178,029 129,238
Accrued interest payable 1,071,040 1,251,676
Deferred compensation payable 1,833,351 1,736,726
Other liabilities 1,567,290 725,575
Total liabilities 224,719,123 222,137,441
Preferred stock, $0.01 par value - authorized 10,000,000 shares;
none issued and outstanding - -
Common stock, $0.01 par value - authorized 20,000,000 shares;
issued and outstanding, 1,909,304 shares 19,093 19,093
Additional paid-in-capital 6,268,623 6,268,623
Retained earnings - substantially restricted 13,287,451 12,738,711
Accumulated other comprehensive income 273,477 137,259
Total stockholders' equity 19,848,644 19,163,686
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 244,567,767 $ 241,301,127
See accompanying notes to the unaudited consolidated financial statements.
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
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-------------------------------- -------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
INTEREST INCOME:
Loans $2,934,572 $3,728,688 $6,031,905 $7,514,783
Mortgage-backed securities 56,319 104,988 118,427 222,467
Investment securities 835,078 495,953 1,468,514 1,053,911
Other 43,196 107,819 81,655 242,457
Total interest income 3,869,165 4,437,448 7,700,501 9,033,618
INTEREST EXPENSE
Deposits 1,863,336 2,458,430 3,833,075 4,901,641
Other borrowings 2,861 4,956 6,092 66,164
Total interest expense 1,866,197 2,463,386 3,839,167 4,967,805
NET INTEREST INCOME 2,002,968 1,974,062 3,861,334 4,065,813
PROVISION FOR LOAN LOSSES 225,000 180,000 375,000 285,000
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,777,968 1,794,062 3,486,334 3,780,813
OTHER INCOME:
Service charges on deposit accounts 171,745 174,940 332,064 343,727
Loan servicing fees 92,621 76,650 175,730 147,196
Commission income 86,790 78,500 198,283 180,419
Gains on sales of loans 46,428 129,831 162,572 190,587
Gains on sales of securities 106,254 - 106,254 -
Other 23,227 10,919 49,385 42,579
Total other income 527,065 470,840 1,024,288 904,508
OTHER EXPENSES:
Salaries and employee benefits 1,009,413 945,016 2,004,298 1,927,018
Occupancy and equipment expense 266,367 278,721 518,852 566,362
Data processing expense 49,075 45,306 97,488 91,824
Advertising expense 38,353 33,877 73,311 67,826
Real estate owned expense 88,062 26,576 89,390 57,981
Amortization of intangible assets 19,932 56,776 39,861 113,553
Loss due to loan defalcation 12,299 1,612,223 50,733 1,612,223
Other 266,236 295,302 569,168 550,541
Total other expenses 1,749,737 3,293,797 3,443,101 4,987,328
INCOME(LOSS) BEFORE INCOME TAX(BENEFIT) 555,296 (1,028,895) 1,067,521 (302,007)
INCOME TAX (BENEFIT) 199,278 (407,194) $ 388,195 $ (136,120)
NET INCOME (LOSS) $ 356,018 $ (621,701) $ 679,326 $ (165,887)
OTHER COMPREHENSIVE INCOME - Unrealized gain
(loss) on securities available-for-sale (Net of tax of
$365,090, $(26,131), $86,142, and $30,049,
respectively) 577,322 (41,321) 136,218 47,516
COMPREHENSIVE INCOME (LOSS) $ 933,340 $(663,022) $ 815,544 $ (118,371)
NET INCOME(LOSS) PER COMMON SHARE, BASIC $ 0.19 $ (0.33) $ 0.36 $ (0.09)
NET INCOME(LOSS) PER COMMON SHARE, DILUTED $ 0.18 $ (0.32) $ 0.35 $ (0.09)
See accompanying notes to unaudited consolidated financial statements
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
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Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders' Comprehensive
Stock Capital Earnings Income Equity Income
BALANCE, DECEMBER 31, 2001 $ 19,093 $ 6,268,623 $ 12,738,711 $ 137,259 $ 19,163,686
Net Income - - 679,326 - 679,326 679,326
Other comprehensive income -change in
net unrealized gains and losses on securities
available for sale (net of tax) - - - 136,218 136,218 136,218
Comprehensive Income - - - - - 815,544
Dividends ($0.15 per share) - - (130,586) - (130,586)
BALANCE, JUNE 30, 2002 $ 19,093 $ 6,268,623 $ 13,287,451 $ 273,477 $ 19,848,644
See accompanying notes to unaudited consolidated financial statements
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
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Six Months Ended
June 30,
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2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 679,326 $ (165,887)
Adjustments to reconcile net income(loss) to net cash provided
by (used in) operating activities:
Depreciation, amortization and accretion:
Premises and equipment 225,170 297,402
Accretion of loan fees and discounts, net (28,466) 33,464
Amortization of investment premiums and discounts, net (12,637) (323,111)
Amortization of intangible assets 39,861 113,553
Provision for loan losses 375,000 285,000
Unrealized loss (gain) on loans held for sale - (283)
Gains on sales of loans (162,572) (190,587)
Loss on sale of real estate owned 36,394 3,214
Origination of loans for sale to Freddie Mac (21,464,777) (26,082,834)
Proceeds from sales of loans to Freddie Mac 25,066,017 24,214,586
Gains on sales of securities (106,254) -
Stock dividends on FHLB stock (32,700) (42,700)
Changes in assets and liabilities, net
Income taxes payable 604,179 (731,520)
Other, net 588,455 402,467
Net adjustments 5,127,670 (2,021,349)
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Net cash provided (used in) operating activities 5,806,996 (2,187,236)
========== ============
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in federal funds sold, net (1,000) 3,704,000
Maturity of investment securities available-for-sale 14,250,000 10,800,000
Proceeds from sale of securities 6,647,746 -
Principal payments received on mortgage-backed securities 811,029 1,557,709
Proceeds from sale of other real estate owned 638,398 57,149
Loan originations, net of repayments 3,038,751 6,003,001
Purchases of investment securities available-for-sale (31,578,725) (17,194,983)
Additions to premises and equipment (144,245) (436,769)
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Net cash provided by (used in) investing activities (6,338,046) 4,490,107
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JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
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Six Months Ended
June 30,
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2002 2001
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 2,242,844 $ 7,775,689
Repayment of advances from Federal Home Loan Bank of Chicago
and other borrowings (467,657) (4,972,555)
Increase in advance payments by borrowers for taxes and insurance 48,791 97,118
Dividends paid - common stock (130,586) (130,589)
Net cash provided by financing activities 1,693,392 2,769,663
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,162,342 5,072,534
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,397,002 9,475,973
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CASH AND CASH EQUIVALENTS, END OF YEAR $14,559,344 $ 14,548,507
=========== ============
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits $ 4,013,789 4,882,488
Interest on other borrowings 6,014 96,149
Income taxes paid (received) (215,984) 641,400
NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans $ 344,472 124,831
Loans to facilitate sales of real estate owned 127,035 -
See accompanying notes to unaudited consolidated financial statements (Concluded)
JACKSONVILLE BANCORP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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1. FINANCIAL STATEMENTS
The unaudited consolidated financial statements include the accounts of
Jacksonville Bancorp, Inc. and its wholly-owned subsidiary,
Jacksonville Savings Bank (the "Bank") and its wholly-owned subsidiary,
Financial Resources Group (the "Company"). All significant intercompany
accounts and transactions have been eliminated.
In the opinion of management, the prevailing unaudited financial
statements contain all adjustments necessary for a fair presentation of
the financial condition of the Company as of June 30, 2002 and December
31, 2001 and the results of operations for the three and six month
periods ended June 30, 2002 and 2001. The results of operations for the
three and six month periods ended June 30, 2002 are not necessarily
indicative of the results which may be expected for the entire year.
These consolidated financial statements should be read in conjunction
with the consolidated financial statements of the Bank for the year
ended December 31, 2001 filed as an exhibit to the Bank's 10-K filed in
March 2002. The accounting and reporting policies of the Company and
its subsidiary conform to accounting principles generally accepted in
the United States of America and to the prevailing practices within the
banking industry.
Certain amounts included in the 2001 consolidated statements have been
reclassified to conform to the 2002 presentation.
2. EARNINGS PER SHARE
Earnings Per Share - Basic earnings per share is determined by dividing
net income for the period by the weighted average number of common
shares. Diluted earnings per share considers the potential effects of
the exercise of the outstanding stock options under the Company's Stock
Option Plans.
The following reflects earnings per share calculations for the basic
and diluted methods:
Three Months Ended Six Months Ended
June 30, June 30,
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2002 2001 2002 2001
Net income(loss) available to common shareholders $ 356,018 $ (621,701) $ 679,326 $ (165,887)
Basic potential common shares:
Weighted average shares outstanding 1,909,304 1,909,304 1,909,304 1,909,304
---------- --------- --------- ---------
Diluted potential common shares:
Stock option equivalents 38,587 6,226 31,698 6,853
Diluted average shares outstanding 1,947,891 1,915,530 1,941,002 1,916,157
Basic earnings (loss) per share $ 0.19 $ (0.33) $ 0.36 $ (0.09)
========== ========== ========= =========
Diluted earnings (loss) per share $ 0.18 $ (0.32) $ 0.35 $ (0.09)
The loss for 2001 was due to a loan defalcation discovered during the
second quarter of 2001. This nonrecurring expense totalled $1,612,000
during the three and six months ended June 30, 2001. Excluding this
nonrecurring expense and related tax effect, the Company's operations
would have resulted in net income of $365,000, or $0.19 per share of
common stock, basic and diluted, for the three months ended June 30,
2001. Excluding this nonrecurring expense and related tax effect, net
income for the six months ended June 30, 2001, from the Company's
operations would have equalled $821,000, or $0.43 per common share,
basic and diluted.
3. REORGANIZATION INTO MID-TIER MUTUAL HOLDING COMPANY
On May 3, 2002, Jacksonville Savings Bank and Jacksonville Bancorp,
M.H.C., the mutual holding company parent, reorganized into the
two-tier mutual holding company form of ownership by establishing a
mid-tier stock holding company, Jacksonville Bancorp, Inc. All
outstanding shares of Jacksonville Savings Bank common stock were
converted on a one for one basis into shares of Jacksonville Bancorp,
Inc. common stock in the reorganization. Jacksonville Bancorp, Inc. now
owns 100% of the outstanding shares of Jacksonville Savings Bank.
4. IDENTIFICATION OF LOAN DEFALCATION
During the second quarter of 2001, management uncovered loan
irregularities at its branch in Virden, Illinois. The Company's
investigation of these irregularities has been completed and the
identified losses have been recorded on the Company's financial
statements. While management believes that all significant losses have
been identified, there can be no assurance that additional losses will
not be recognized; however, management does not believe that any such
amount would be material. For the year ended December 31, 2001, the
Company recognized a nonrecurring expense associated with the loan
defalcation of $4,458,000, consisting of identified losses of
$4,016,000 and $442,000 in legal and accounting expenses. For the six
months ended June 30, 2002, expenses related to the loan defalcation
totalled $51,000. These losses are exclusive of any tax effect or
potential recovery from the Company's insurance carrier. The Company
filed its proof of loss claim with its insurance carrier on October 11,
2001; however, there can be no assurance of the amount that the Company
will obtain from its insurance carrier.
5. ACCOUNTING CHANGE
Effective January 1, 2002, the Company adopted FASB Statement No. 142,
Goodwill and Other Intangible Assets. Among its provisions is a
requirement to disclose what reported net income would have been in all
periods presented, exclusive of amortization expense (net of related
tax effects) recognized in those periods, related to goodwill,
intangible assets no longer being amortized, and changes in
amortization periods for intangible assets that will continue to be
amortized together with related per share amounts.
Three Months Ended Six Months Ended
June 30 June 30
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2002 2001 2002 2001
Reported net income $356,018 ($621,701) $679,326 ($165,887)
Add goodwill amortization, net of tax - -
22,571 45,142
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Adjusted net income $356,018 ($599,130) $679,326 ($120,745)
============================== =========================
Basic earnings (loss) per share:
Reported net income $0.19 ($0.33) $0.36 ($0.09)
Goodwill amortization - $0.01 - $0.02
------------------------------ -------------------------
Adjusted net income $0.19 ($0.32) $0.36 ($0.07)
============================== =========================
Diluted earnings (loss) per share:
Reported net income $0.18 ($0.32) $0.35 ($0.09)
Goodwill amortization - $0.01 - $0.02
------------------------------ -------------------------
Adjusted net income $0.18 ($0.31) $0.35 ($0.07)
============================== =========================
* * * * * *
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of the Company. Statements contained in this Form 10-Q, which are not
historical facts, are forward-looking statements, as the term is defined in the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to risks and uncertainties which could cause actual
results to differ materially from those currently anticipated due to a number of
factors, which include, but are not limited to, factors discussed in documents
filed by the Company with the Securities Exchange Commission from time to time.
The information contained in this section should be read in conjunction with the
unaudited consolidated financial statements and accompanying notes thereto.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain "forward-looking statements" which may be
identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated," and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors that could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage and other loans,
real estate values, and competition; changes in accounting principles, policies,
or guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing of products and services.
MID-TIER REORGANIZATION
On May 3, 2002, Jacksonville Savings Bank and Jacksonville Bancorp, M.H.C., the
mutual holding company parent, reorganized into the two-tier mutual holding
company form of ownership by establishing a mid-tier stock holding company,
Jacksonville Bancorp, Inc. All outstanding shares of Jacksonville Savings Bank
common stock were converted on a one for one basis into shares of Jacksonville
Bancorp, Inc. common stock in the reorganization. Jacksonville Bancorp, Inc. now
owns 100% of the outstanding shares of Jacksonville Savings Bank.
FINANCIAL CONDITION
June 30, 2002 Compared to December 31, 2001
Total assets grew $3,267,000 to $244,568,000 at June 30, 2002, from the
$241,301,000 at December 31, 2001. This increase is primarily due to increases
in investment securities and cash and cash equivalents of $11,098,000 and
$1,162,000, respectively. Our loan portfolio decreased $7,089,000 due to
increased loan sales to the secondary market. Mortgage-backed securities
declined $862,000 due to principal payments and the reinvestment of these funds
into U.S. Agency securities. During this same time frame, deposits increased
$2,243,000.
Other changes included a $604,000 decrease in income taxes receivable mostly due
to a $522,000 tax refund received during the first quarter of 2002. Other real
estate owned decreased $499,000 due to the sale of several properties during
this period. Other borrowings decreased $468,000 due to lower balances on
overnight repurchase agreements. Other liabilities increased $842,000 due to
higher balances on overnight settlement arrangements with vendors and the normal
accrual of expenses to be paid at year-end.
Stockholders' equity increased $685,000 to $19,849,000 at June 30, 2002. The
increase resulted from net income of $679,000 offset by the payment of $130,000
in dividends, and a $136,000 increase in unrealized gains, net of tax, on
available-for-sale securities.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three and Six Months
Ended June 30, 2002 and 2001
General: The Company reported net income for the three months ended June 30,
2002, of $356,000, or $0.19 per share of common stock, basic, and $0.18 per
share, diluted, compared to a net loss of $(621,701), or $(0.33) per share of
common stock, basic, and $(0.32) per common share, diluted, for the three months
ended June 30, 2001. The increase of $978,000 in net income is primarily due to
the $1,612,000 nonrecurring expense related to the loan defalcation recognized
during the second quarter of 2001, as compared to the $12,000 recognized in the
second quarter of 2002. This reduced expense was partially offset by an increase
of $606,000 in income tax expense. Excluding the nonrecurring expense and
related tax effect, operations resulted in net income of $365,000 or $0.19 per
share, basic and diluted, for the three months ended June 30, 2001. The
Company's operations resulted in increases of $29,000 in net interest income,
$56,000 in other income, $45,000 in provision for loan losses, and $56,000 in
other expenses for the quarter ended June 30, 2002, compared to the second
quarter of 2001.
The Company reported net income for the six months ended June 30, 2002, of
$679,000, or $0.36 per share, basic, and $0.35 per share, diluted, compared to a
net loss of $(166,000), or $(0.09) per share, basic and diluted, for the six
months ended June 30, 2001. The increase of $845,000 in net income is mostly due
to a $1,612,000 nonrecurring expense related to the loan defalcation realized
during the first half of 2001 compared to a $51,000 nonrecurring expense related
to the loan defalcation realized during the first six months of 2002, partially
offset by a $524,000 increase in income tax expense. Excluding this nonrecurring
expense and the related tax effect, operations resulted in net income of
$821,000, or $0.43 per common share, basic and diluted, for the six months ended
June 30, 2001. The Company's operations included a decrease of $204,000 in net
interest income and increases of $120,000 in other income, $90,000 in provision
for loan losses, and $17,000 in other expenses.
Consolidated Average Balance Sheet and Interest Rates
(dollars in thousands)
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Six Months Ended June 30,
------------------------------------------------------------------------
------------------------------------------------------------------------
2002 2001
------------------------------------------------------------------------
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------------------------------------
Interest-earnings assets:
Loans $ 155,060 6,032 7.78% 172,124 7,515 8.73%
Investment securities 50,677 1,468 5.80% 22,105 1,054 9.54%
Mortgage-backed securities 3,746 118 6.32% 6,038 223 7.37%
Other 10,453 82 1.56% 9,970 242 4.86%
Total interest-earning assets 219,936 7,700 7.00% 210,237 9,034 8.59%
Non-interest earnings assets 19,684 18,656
Total assets $ 239,620 228,893
Interest-bearing liabilities:
Deposits $ 206,546 3,833 3.71% 190,456 4,902 5.15%
Short-term borrowings 792 6 1.54% 2,290 66 5.78%
Total interest-bearing liabilities 207,338 3,839 3.70% 192,746 4,968 5.09%
Non-interest bearing liabilities 13,033 15,109
Stockholders' equity 19,249 21,038
Total liabilities/stockholders' equity $ 239,620 228,893
Net interest income $3,861 4,066
Interest rate spread (average yield earned
minus average rate paid) 3.30% 3.44%
Net interest margin (net interest income
divided by average interest-earning
assets) 3.51% 3.87%
Analysis of Volume and Rate Changes
(in thousands)
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- ----------------------------------------------------------------------------
Six Months Ended June 30,
- ----------------------------------------------------------------------------
2002 Compared to 2001
Increase(Decrease) Due to
----------------------------------------
Rate Volume Net
----------------------------------------
Interest-earnings assets:
Loans $ (777) (706) (1,483)
Investment securities (538) 954 414
Mortgage-backed securities (28) (77) (105)
Other (172) 12 (160)
Total net change in income on
interest-earning assets (1,515) 183 (1,334)
Interest-bearing liabilities:
Deposits (1,455) 387 (1,069)
Other borrowings (32) (28) (60)
Total net change in expense on
interest-bearing liabilities (1,487) 359 (1,129)
Net change in net interest income $ (56) (148) (204)
Interest Income: Total interest income decreased $568,000 and $1,333,000 during
the three and six months ended June 30, 2002, compared to the same periods of
2001. The primary reason for the decreases is $794,000 and $1,483,000 in lower
interest income on loans during the respective three and six month periods. The
average balance of the loan portfolio during the first half of 2002 equalled
$155.1 million compared to $172.1 million for the first half of 2001. The
decrease in the average balance of loans is mostly due to increased sales of
loans to the secondary market. In addition, the loan portfolio's weighted
average yield decreased to 7.78% from 8.73% for the six months ended June 30,
2002 and 2001, respectively.
Interest income on investment securities increased $339,000 and $415,000 during
the three and six months ended June 30, 2002, compared to the same period of
2001. The additional income is primarily due to an increase in the portfolio
resulting from the investment of cash generated by loan sales. The average
balance of the investment portfolio increased to $50.7 million during the first
half of 2002 compared to $22.1 million during the first half of 2001. The
weighted average yield decreased to 5.80% from 9.54% for the six months ended
June 30, 2002 and 2001, respectively. On July 3, 2000, when the Company acquired
Chapin State Bank, many of the acquired investments were carrying unrealized
losses, which are being amortized over the life of the investments in accordance
with purchase accounting rules. As market rates of interest have declined, many
of these investments have been called or sold, resulting in gains and losses
from securities transactions. These adjustments resulted in an additional
$75,000 and $220,000 interest income during the six months ended June 30, 2002
and 2001, respectively. Without these adjustments, the weighted average yield on
investments would have equalled 5.50% and 7.54% for the six months ended June
30, 2002 and 2001, respectively.
Interest income on mortgage-backed securities decreased $49,000 and $104,000
during the three and six months ended June 30, 2002, compared to the same
periods of 2001. The decrease is due to a decrease in the average balance of
mortgage-backed securities to $3.7 million from $6.0 million for the six months
ended June 30, 2002 and 2001, respectively, and a decrease in the weighted
average yield to 6.32% from 7.37% for the same periods.
Interest income on other investments, which include federal funds sold and
interest bearing deposit accounts, decreased $65,000 and $161,000 during the
three and six months ended June 30, 2002, compared to the same period of 2001.
The decreased interest income from other investments is primarily due to a lower
weighted average yield of 1.56% from 4.86% for the six months ended June 30,
2002 and 2001, respectively, due to the current falling rate environment. The
average balance of these investments equalled $10.5 million and $10.0 million
for the six months ended June 30, 2002 and 2001, respectively.
Interest Expense: Total interest expense for the three and six months ended June
30, 2002 decreased $597,000 and $1,129,000, respectively, from the same periods
of 2001. The decreased in interest expense was due to $595,000 and $1,069,000
decreases in the cost of deposits and decreases in interest expense on borrowed
funds of $2,000 and $60,000 for the three and six months ended June 30, 2002,
compared to the same in 2001. The average balance of deposits increased to
$206.5 million during the first half of 2002 compared to $190.5 million during
the first half of 2001, due to normal deposit growth. The weighted average cost
of deposits has decreased to 3.71% from 5.15% during the first six months of
2002 as compared to the six months ended June 30, 2001. The decreased cost of
funds is attributed to declining market rates of interest.
Interest paid on borrowings decreased $2,000 and $60,000 during the three and
six months ended June 30, 2002, compared to the same period of 2001. The Company
repaid all advances on February 28, 2001. The only outstanding borrowed funds
consist of securities sold under agreement to repurchase. The reduction in
average balances to $792,000 from $2.3 million was coupled with decreased costs
of 1.54% and 5.78% for the six months ended June 30, 2002 and 2001,
respectively.
Provision for Loan Losses: The provision for loan losses is determined by
management as the amount needed to replenish the allowance for loan losses,
after net charge-offs have been deducted, to a level considered adequate to
absorb inherent losses in the loan portfolio, in accordance with accounting
principles generally accepted in the United States of America.
The provision for loan losses increased $45,000 and $90,000 for the three and
six months ended June 30, 2002 compared to the same periods of 2001. The
allowance for loan losses decreased to $1,083,000 at June 30, 2002 from
$1,107,000 at December 31, 2001. The decrease in the allowance is the result of
net charge-offs exceeding the provision for loan losses. Net charge-offs
increased to $399,000 during the first six months of 2002 compared to net
charge-offs of $108,000 during the first six months of 2001. The increase in
charge-offs includes $158,000 in additional credit losses identified during the
resolution of loan irregularities. The increased charge-offs also reflect the
continued emphasis on consumer loans, which typically involve greater risk than
residential lending. Notwithstanding the level of charge-offs, the provision for
loan losses was deemed appropriate since the level of nonperforming loans
decreased to $3,299,000, or 2.16% of net loans, at June 30, 2002, from
$3,571,000, or 2.28% of net loans, at June 30, 2001.
The allowance for loan losses is maintained to absorb potential losses inherent
in the loan portfolio. The balance of the allowance is based on ongoing,
quarterly assessments of the probable estimated losses in the loan portfolio.
The Company's methodology for assessing the appropriateness of the allowance
consists of applying several methods to idenitified problem loan and portfolio
segments. The allowance for loan losses is calculated by estimating the exposure
on identified problem loans and applying loss factors to the remainder of the
portfolio based upon an internal risk grade of such loans or pools of loans.
Changes in risk grades of both performing and nonperforming loans affect the
amount of the allowance. Loss factors are based primarily on historical loss
experience over the past three years, and may be adjusted for other significant
conditions that, in management's judgement, affect the collectibility of the
loan portfolio.
Since the allowance for loan losses is based upon estimates of probable losses,
the amount actually observed can vary significantly from the estimated amounts.
The historical loss factors attempt to reduce this variance by taking into
account recent loss experience. Management evaluates several other conditions in
connection with the allowance, including general economic and business
conditions, credit quality trends, collateral values, loan volumes and
concentrations, seasoning of the portfolio, and regulatory examination results.
The formulas used in the analysis were changed in 2002 to reflect the changing
mix of the loan portfolio and increased loan losses. Management will continue to
monitor the loan portfolio and assess the adequacy of the allowance at least
quarterly.
Other Income: Total other income increased $56,000 and $120,000 during the three
and six months ended June 30, 2002, compared to the same periods of 2001. The
increase in other income is primarily due to gains on the sale of securities of
$106,000 during the second quarter of 2002. Approximately $6.6 million of
available-for-sale securities were sold in anticipation of potential calls and
to realize gains. These gains were partially offset by declines in gains on the
sale of loans to the secondary market of $83,000 and $28,000 for the three and
six months ended June 30, 2002 compared to the same period in 2001. Loan
servicing fees were $16,000 and $29,000 higher during the three and six months
ended June 30, 2002 compared to 2001, due to a larger volume of loans serviced
for Freddie Mac.
Other Expenses: Total other expenses decreased $1,544,000 during the three and
six months ended June 30, 2002 compared to the comparative three and six months
ended June 30, 2001. The decrease in other expenses is primarily due to the
$1,612,000 nonrecurring expense related to the loan defalcation realized during
the second quarter of 2001. Expenses related to the loan defalcation totalled
$12,000 and $51,000 during the three and six months ended June 30, 2002. The
remaining changes in other expenses for the second quarter of 2002 compared to
2001 were increases of $64,000 in salaries and $61,000 in real estate owned
expenses partially offset by decreases of $37,000 in amortization of intangible
assets and $12,000 in occupancy expenses. Changes for the six months ended June
30, 2002 compared to the comparative period in 2001 include increases of $77,000
in salaries and $31,000 in other real estate owned expenses offset by decreases
of $74,000 in amortization of intangible assets and $48,000 in occupancy
expenses.
Income Taxes: The provision for income taxes increased $606,000 and $524,000
during the three and six months ended June 30, 2002, compared to the first half
of 2001. The increase is directly attributable to increase in net income of
$679,000 for 2002 as compared to the net loss of $(166,000) realized during
2001.
Liquidity and Capital Resources: The Company's most liquid assets are cash and
cash equivalents. The levels of these assets are dependent on the Company's
operating, financing, and investing activities. At June 30, 2002 and December
31, 2001, cash and cash equivalents totalled $14.6 million and $13.4 million,
respectively. The Company's primary sources of funds include principal and
interest repayments on loans (both scheduled and prepayments), maturities of
investment securities and principal repayments from mortgage-backed securities
(both scheduled and prepayments). During the past twelve months, the most
significant sources of funds have been deposit growth and loan sales to the
secondary market. These funds have been used for new loan originations and the
purchase of investment securities.
While scheduled loan repayments and proceeds from maturing investment securities
and principal repayments on mortgage-backed securities are relatively
predictable, deposit flows and early prepayments are more influenced by interest
rates, general economic conditions, and competition. The Company attempts to
price its deposits to meet asset-liability objectives and stay competitive with
local market conditions.
Liquidity management is both a short-term and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected purchases of
investment and mortgage-backed securities, (iii) expected deposit flows, (iv)
yields available on interest-bearing deposits, and (v) liquidity of its
asset-liability management program. Excess liquidity is generally invested in
interest-earning overnight deposits and other short-term U.S. Agency
obligations. If the Company requires funds beyond its ability to generate them
internally, it has the ability to borrow funds from the FHLB. The Company may
borrow from the FHLB under a blanket agreement which assigns all investments in
FHLB stock as well as qualifying first mortgage loans equal to 150% of the
outstanding balance as collateral to secure the amounts borrowed. This borrowing
arrangement is limited to a maximum of 30% of the Company's total assets or
twenty times the balance of FHLB stock held by the Company. At June 30, 2002,
the Company had no outstanding advances and approximately $25.0 million
available to it under the above-mentioned borrowing arrangement.
The Company maintains miminum levels of liquid assets as established by the
Board of Directors. The Company's year-to-date liquidity ratios at June 30, 2002
and December 31, 2001 were 32.4% and 23.8%, respectively. This ratio represents
the volume of short-term liquid assets as a percentage of net deposits and
borrowings due within one year.
The Company must also maintain adequate levels of liquidity to ensure the
availability of funds to satisfy loan commitments. At June 30, 2002, the Company
has outstanding commitments to originate loans of approximately $20.9 million,
including $4.6 million committed for sale in the secondary market. The Company
anticipates that it will have sufficient funds available to meet its current
commitments principally through the use of current liquid assets and through its
borrowing capacity discussed above.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and Tier 1 capital (as
defined) to average assets (as defined). Management believes, at June 30, 2002,
that the Bank meets all its capital adequacy requirements.
Under Illinois law, Illinois-chartered savings banks are required to maintain a
minimum core capital to total assets ratio of 3%. The Illinois Commissioner of
Savings and Residential Finance (the Commisssioner) is authorized to require a
savings bank to maintain a higher minimum capital level if the Commissioner
determines that the savings bank's financial condition or history, management or
earnings prospects are not adequate. If a savings bank's core capital ratio
falls below the required level, the Commissioner may direct the savings bank to
adhere to a specific written plan established by the Commissioner to correct the
savings bank's capital deficiency, as well as a number of other restrictions on
the savings bank's operations, including a prohibition on the declaration of
dividends by the savings bank's board of directors. At June 30, 2002, the Bank's
core capital ratio was 6.78% of total average assets, which exceeded the
required amount.
The Bank is also required to maintain regulatory capital requirements imposed by
the Federal Deposit Insurance Corporation. The Bank `s actual ratios at June 30,
2002 and the required minimums to be considered adequately capitalized are shown
in the table below. In order to be considered well-capitalized, the Bank must
maintain: (i) Tier 1 Capital to Average Assets of 5.0%, (ii) Tier 1 Capital to
Risk-Weighted Assets of 6.0%, and (iii) Total Capital to Risk-Weighted Assets of
10.0%.
To Be Well- Minimum
Capitalized Required Actual
Tier 1 Capital to Average Assets 5.00% 4.00% 6.78%
Tier 1 Capital to Risk-Weighted Assets 6.00% 4.00% 9.97%
Total Capital to Risk-Weighted Assets 10.00% 8.00% 10.64%
Future capital levels should benefit from the decision of the Company's parent
company, Jacksonville Bancorp, MHC, to waive its right to receive dividends,
subject to the receipt of regulatory non-objection.
Effect of Inflation and Changing Prices: The consolidated financial statements
and related financial data presented herein have been prepared in accordance
with accounting principles generally accepted in the United States of America,
which require the measurement of financial position and operating results in
terms of historical dollars, without considering the change in relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in increased cost of the Company's operations. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
JACKSONVILLE BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Company's policy in recent years has been to reduce its exposure to interest
rate risk by better matching the maturities of its interest rate sensitive
assets and liabilities, selling its long-term fixed-rate residential mortgage
loans with terms of fifteen years or more to Freddie Mac, originating adjustable
rate loans, balloon loans with maturities ranging from three to five years, and
originating consumer, commercial, and agricultural loans which typically are for
a shorter duration and at higher rates of interest than one-to-four family
loans. The Company also maintains a portfolio of mortgage-backed securities,
virtually all of which have adjustable interest rates. The remaining investment
portfolio has been laddered to better match the interest-bearing liabilities.
With respect to liabilities, the Company has attempted to increase its savings
and transaction deposit accounts, which management believes are more resistant
to changes in interest rates than certificate accounts. The Board of Directors
appoints the Asset Liability Management Committee, which is responsible for
reviewing the Company's asset and liability policies. The Committee meets
quarterly to review interest rate risk and trends, as well as liquidity, capital
ratios, and requirements. The Board's policy establishes a goal for the
cumulative gap ratio within 15% for the one and three-year time frames. However,
the policy is meant to be flexible and allow the Committee to exceed these
limits to deal with rapidly changing conditions, such as the recent declines in
market interest rates. The following table illustrates the Company's estimated
interest rate sensitivity and cumulative gap positions as calculated as of June
30, 2002.
Time to Maturity or Repricing
< 1 Year 1-3 Years 3-5 Years > 5 Years Total
------------------------------------------------------------------------
(Dollars in Thousands)
Rate Sensitive Assets:
Net loans (1) $ 47,826 $ 64,914 $ 20,269 $ 17,472 $ 150,481
Loans held for sale 1,316 - - - 1,316
Mortgage-backed securities 3,361 5 36 - 3,402
Investment securities 48 2,737 11,740 42,934 57,459
Federal funds sold 1,011 - - - 1,011
Interest bearing deposits 9,669 - - - 9,669
--------- -------- -------- -------- ---------
Total $ 63,231 $ 67,656 $ 32,045 $ 60,406 $ 223,338
========= ======== ======== ======== =========
Rate Sensitive Liabilities
NOW and MMDA 3,198 6,396 6,396 15,990 31,980
Savings 2,840 5,681 5,681 14,200 28,402
Time deposits 105,984 36,508 5,988 - 148,480
FHLB borrowings - - - - -
Repurchase agreements 928 - - - 928
Total $ 112,950 $ 48,585 $ 18,065 $30,190 $209,790
Cumulative Gap (RSA-RSL) $ (49,719) $(30,648) $(16,668) $13,548 $ 13,548
========================================================================
Cum. Gap / Total Assets -20.33% -12.53% -6.82% 5.54%
=======================================================
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Bank's annual meeting of stockholders held on April 30, 2002, the
following matters were submitted to a vote:
1. The election of the following persons as directors for a three-year term:
Name Votes For Votes Withheld
Dean H. Hess 1,772,484 11,422
John C. Williams 1,766,976 16,930
2. The ratification of the appointment of McGladrey & Pullen, LLP as auditors
for the Bank for the year ended December 31, 2002.
Votes For Against Abstain
--------- --------- -------
1,735,392 48,497 17
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 - Officers' Certification Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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.
Registrant
Date: August 2, 2002 /s/ Diana S. Tone
--------------------------
Diana S. Tone
Chief Financial Officer
Date: August 2, 2002 /s/ Richard A. Foss
--------------------------
Richard A. Foss
President and Chief
Executive Officer
Exhibit 99.1
Exhibit 99.1
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Richard A. Foss, Chief Executive Officer and Diana S. Tone, Chief Financial
Officer of Jacksonville Bancorp, Inc. (the "Company") each certify in his or her
capacity as an officer of the Company that he has reviewed the quarterly report
on Form 10-Q for the quarter ended June 30, 2002 and that to the best of his
knowledge:
(1) the report fully complies with the requirements of Sections 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) the information contained in the report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
August 7, 2002 /s/ Richard A. Foss
-------------------------
Richard A. Foss
President and
Chief Executive Officer
August 7, 2002
/s/ Diana S. Tone
--------------------------
Diana S. Tone
Chief Financial Officer