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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 September 30, 2003
------------------
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 (I.R.S. Employer Identification Number)
of incorporation)
1211 West Morton Avenue
Jacksonville, Illinois 62650
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (217) 245-4111
Indicate by check 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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
[ ] Yes [X] No
As of October 31, 2003, there were 1,942,004 shares (*) of the Registrant's
common stock issued and outstanding.
(*) As of October 31, 2003, 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
SEPTEMBER 30, 2003
TABLE OF CONTENTS
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Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2003 and
December 31, 2002 (Unaudited) 1
Consolidated Statements of Income and Comprehensive
Income for the Three Months and Nine Months Ended
September 30, 2003 and 2002 (Unaudited) 2
Consolidated Statement of Stockholders' Equity for the
Nine Months Ended September 30, 2003 (Unaudited) 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2003 and 2002 (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 9-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21-22
Item 4. Controls and Procedures 23
PART II OTHER INFORMATION 24
Signatures 25
EXHIBITS
Section 302 Certifications
Section 906 Certification
PART I - FINANCIAL INFORMATION
JACKSONVILLE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
September 30, December 31,
ASSETS 2003 2002
------------- -------------
Cash and cash equivalents $ 8,984,372 $ 11,091,626
Federal funds sold 500,000 800,000
Investment securities - available for sale 102,701,638 72,922,995
Mortgage-backed securities - available for sale 2,579,777 2,822,119
Federal Home Loan Bank stock 1,356,900 1,279,200
Other investment securities 658,285 701,765
Loans receivable - net of allowance for loan loss of $2,799,156 and $2,073,095
as of September 30, 2003 and December 31, 2002, respectively 130,863,217 142,928,599
Loans held for sale - net 2,718,618 6,271,435
Premises and equipment - net 7,059,724 5,668,211
Goodwill 2,726,567 2,726,567
Core deposit intangible 378,687 438,480
Accrued interest receivable 2,237,354 1,719,477
Capitalized mortgage servicing rights 1,164,716 1,077,318
Income taxes receivable 169,585 222,241
Real estate owned 401,371 442,048
Other assets 2,177,606 1,391,812
------------- -------------
TOTAL ASSETS $ 266,678,417 $ 252,503,893
============= =============
TOTAL LIABILITES AND STOCKHOLDERS' EQUITY
Deposits $ 233,143,226 $ 225,303,617
Other borrowings 9,722,441 2,874,707
Advance payments by borrowers for taxes and insurance 239,864 442,439
Accrued interest payable 820,586 995,263
Deferred compensation payable 2,005,257 1,924,718
Other liabilities 866,779 710,738
------------- -------------
Total liabilities 246,798,153 232,251,482
------------- -------------
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, 1,941,004 shares and 1,921,304 shares
at September 30, 2003 and December 31, 2002, respectively 19,410 19,213
Additional paid-in-capital 6,389,331 6,374,463
Retained earnings - substantially restricted 13,812,800 13,294,959
Accumulated other comprehensive income (loss) (341,277) 563,776
------------- -------------
Total stockholders' equity 19,880,264 20,252,411
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 266,678,417 $ 252,503,893
============= =============
See accompanying notes to the unaudited consolidated financial statements.
1
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
INTEREST INCOME:
Loans $ 2,310,943 $ 2,940,303 $ 7,377,109 $ 8,972,208
Investment securities 780,618 753,621 2,304,136 2,222,135
Mortgage-backed securities 6,025 47,553 57,796 165,980
Other 10,949 37,971 58,368 119,626
----------- ----------- ----------- -----------
Total interest income 3,108,535 3,779,448 9,797,409 11,479,949
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Deposits 1,416,847 1,803,529 4,401,745 5,636,604
Other borrowings 11,722 16,122 21,725 22,214
----------- ----------- ----------- -----------
Total interest expense 1,428,569 1,819,651 4,423,470 5,658,818
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,679,966 1,959,797 5,373,939 5,821,131
PROVISION FOR LOAN LOSSES 300,000 1,300,000 1,825,000 1,675,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,379,966 659,797 3,548,939 4,146,131
----------- ----------- ----------- -----------
OTHER INCOME:
Gains on sales of loans 180,504 159,944 773,407 322,516
Gains on sales of securities 19,439 185,960 299,433 292,214
Service charges on deposit accounts 164,981 189,452 498,831 521,516
Commission income 90,779 125,450 344,602 323,733
Loan servicing fees 102,666 90,278 302,277 266,008
Recovery from insurance company -- -- 562,500 --
Other 106,002 9,989 189,357 59,374
----------- ----------- ----------- -----------
Total other income 664,371 761,073 2,970,407 1,785,361
----------- ----------- ----------- -----------
OTHER EXPENSES:
Salaries and employee benefits 1,073,022 1,008,679 3,133,999 3,012,977
Occupancy and equipment expense 301,706 276,478 873,781 795,330
Data processing expense 73,971 58,009 204,415 155,497
Legal and accounting expense 21,541 30,949 84,980 73,002
Postage expense 40,943 38,597 109,395 112,532
Real estate owned expense 4,509 74,369 63,087 163,759
Advertising expense 30,774 42,257 85,456 115,568
Other 273,493 237,832 811,371 781,605
----------- ----------- ----------- -----------
Total other expenses 1,819,959 1,767,170 5,366,484 5,210,270
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX 224,378 (346,300) 1,152,862 721,222
INCOME TAX EXPENSE (BENEFIT) 82,245 (138,487) 433,629 249,708
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 142,133 $ (207,813) $ 719,233 $ 471,514
OTHER COMPREHENSIVE INCOME - Unrealized gain
(loss) on securities available-for-sale (Net of tax of
$(583,908), $30,709, $(572,343), and $116,852, respectively) (923,341) 48,561 (905,053) 184,779
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ (781,208) $ (159,252) $ (185,820) $ 656,293
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE, BASIC $ 0.07 $ (0.11) $ 0.37 $ 0.25
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE, DILUTED $ 0.07 $ (0.11) $ 0.36 $ 0.24
=========== =========== =========== ===========
DIVIDENDS PAID PER COMMON SHARE $ 0.08 $ 0.08 $ 0.23 $ 0.23
=========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements
2
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders' Comprehensive
Stock Capital Earnings Income (Loss) Equity Income (Loss)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2002 $ 19,213 $ 6,374,463 $ 13,294,959 $ 563,776 $ 20,252,411
Net Income -- -- 719,233 -- 719,233 719,233
Other comprehensive income -
change in net unrealized
gains (losses) on securities
available for sale, net of
income taxes of $(456,343) -- -- -- (721,620) (721,620) (721,620)
Less: Reclassification
adjustment for gains included
in net income, net of
income taxes of $(116,000) -- -- -- (183,433) (183,433) (183,433)
------------
Comprehensive Income -- -- -- -- -- (185,820)
============
Exercise of stock options 197 14,868 -- -- 15,065
Dividends ($0.225 per share) -- -- (201,392) -- (201,392)
------------ ------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 2003 $ 19,410 $ 6,389,331 $ 13,812,800 $ (341,277) $ 19,880,264
============ ============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
3
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
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Nine Months Ended
September 30,
------------------------------
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 719,233 $ 471,514
------------- -------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion:
Premises and equipment 350,762 340,946
Accretion of loan fees and discounts, net (45,107) (42,699)
Amortization of investment premiums and discounts, net 525,715 21,821
Amortization of intangible assets 59,793 59,793
Provision for loan losses 1,825,000 1,675,000
Gains on sales of loans (773,407) (322,516)
(Gain) Loss on sale of real estate owned (12,974) 67,576
Writedowns on real estate owned 51,749 95,804
Gains on sales of securities (299,433) (292,214)
Stock dividends on FHLB stock (77,700) (48,200)
Changes in income taxes receivable 52,656 129,692
Changes in other assets and liabilities (657,042) (319,950)
------------- -------------
Net cash provided by operations before loan sales 1,719,245 1,836,567
Origination of loans for sale to Freddie Mac (94,902,111) (45,852,971)
Proceeds from sales of loans to Freddie Mac 99,140,937 46,889,332
------------- -------------
Net cash provided by operating activities 5,958,071 2,872,928
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in federal funds sold, net 300,000 (990,000)
Maturity or call of investment securities available-for-sale 64,357,401 31,775,000
Proceeds from sale of investment and mortgage-backed securities 19,910,873 17,066,102
Principal payments on investment and mortgage-backed securities 689,908 1,099,007
Proceeds from sale of other real estate owned 572,453 781,538
Loan originations, net of repayments 9,702,560 5,505,040
Purchases of investment and mortgage-backed securities (116,154,686) (66,622,082)
Additions to premises and equipment (1,742,275) (270,475)
------------- -------------
Net cash (used in) investing activities (22,363,766) (11,655,870)
------------- -------------
4
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
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Nine Months Ended
September 30,
----------------------------
2003 2002
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 7,839,609 $ 3,688,823
Proceeds of advances from Federal Home Loan Bank of Chicago
and other borrowings 7,500,000 --
Repayment of advances from Federal Home Loan Bank of Chicago
and other borrowings (652,266) 2,362,934
Increase in advance payments by borrowers for taxes and insurance (202,575) (38,915)
Exercise of stock options 15,065 105,960
Dividends paid - common stock (201,392) (195,881)
------------ ------------
Net cash provided by financing activities 14,298,441 5,922,921
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,107,254) (2,860,021)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,091,626 13,397,002
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,984,372 $ 10,536,981
============ ============
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits $ 4,579,922 $ 5,854,774
Interest on other borrowings 18,225 22,214
Income taxes paid 376,971 120,016
NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans $ 699,068 $ 641,145
Loans to facilitate sales of real estate owned 116,139 127,035
See accompanying notes to unaudited consolidated financial statements (Concluded)
5
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 unaudited financial statements
contain all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the financial condition of the
Company as of September 30, 2003 and December 31, 2002 and the results
of operations for the three and nine month periods ended September 30,
2003 and 2002. The results of operations for the three and nine month
periods ended September 30, 2003 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 Company for the year ended
December 31, 2002 filed as an exhibit to the Company's 10-K filed in
March 2003. 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 2002 consolidated statements have been
reclassified to conform to the 2003 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 outstanding. 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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss) available to shareholders $ 142,133 $ (207,813) $ 719,233 $ 471,514
Basic potential common shares:
Weighted average shares outstanding 1,940,753 1,909,434 1,934,355 1,909,348
----------- ----------- ----------- -----------
Diluted potential common shares:
Stock option equivalents 43,217 23,715 36,297 27,231
----------- ----------- ----------- -----------
Diluted average shares outstanding 1,983,970 1,933,149 1,970,652 1,936,579
Net income (loss) per common share, basic $ 0.07 $ (0.11) $ 0.37 $ 0.25
=========== =========== =========== ===========
Net income (loss) per common share, diluted $ 0.07 $ (0.11) $ 0.36 $ 0.24
=========== =========== =========== ===========
6
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.
owns 100% of the outstanding shares of Jacksonville Savings Bank.
4. STOCK OPTION PLANS
The Company's 1996 Stock Option Plan was adopted on April 23, 1996 with
a total of 83,625 shares of common stock reserved and awarded. Awards
vested 20% per year and expire after ten years and are exercisable at a
price of $8.83 per share. The Company's 2001 Stock Option Plan was
adopted on April 30, 2001 with a total of 87,100 shares reserved and
awarded. Awards granted in 2001 vested immediately and expire after ten
years and are exercisable at a price of $10 per share.
As permitted under accounting principles generally accepted in the
United States of America, grants of options under the plans are
accounted for under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. Because options granted under the plans had an
exercise price equal to market value of the underlying common stock on
the date of grant, no stock-based employee compensation cost is
included in determining net income.
No options were granted in 2002 or 2003, therefore, there was no
compensation expense recognized for the three and nine months ended
September 30, 2003 or 2002, under APB Opinion No 25 or the fair value
recognition provisions of FAS No 123, Accounting for Stock-Based
Compensation.
7
5. LOAN PORTFOLIO COMPOSITION
At September 30, 2003 and December 31, 2002, the composition of the
Company's loan portfolio was as follows:
09/30/03 12/31/02
------------------- -------------------
Amount Percent Amount Percent
-------- -------- -------- --------
(Dollars in Thousands)
Real estate loans:
One-to-four family residential $ 40,623 31.0% $ 43,883 30.7%
Commercial and agricultural 21,314 16.3% 18,421 12.9%
Multi-family residential 2,423 1.9% 2,678 1.9%
-------- -------- -------- --------
Total real estate loans 64,360 49.2% 64,982 45.5%
Commercial agricultural business loans 31,122 23.8% 31,502 22.0%
Consumer loans:
Home equity/home improvement 25,947 19.8% 31,181 21.8%
Automobile 7,199 5.5% 10,491 7.3%
Other 5,597 4.3% 7,127 5.0%
-------- -------- -------- --------
Total consumer loans 38,743 29.6% 48,799 34.1%
-------- -------- -------- --------
Total loans receivable 134,225 102.6% 145,283 101.6%
Less:
Unearned discount and deferred loan fees, net 563 0.4% 281 0.2%
Allowance for loan losses 2,799 2.1% 2,073 1.4%
-------- -------- -------- --------
Total loans receivable, net $130,863 100.0% $142,929 100.0%
======== ======== ======== ========
* * * * * *
8
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.
FINANCIAL CONDITION
September 30, 2003 Compared to December 31, 2002
Total assets grew $14,174,000 to $266,678,000 at September 30, 2003, from the
$252,504,000 at December 31, 2002. This increase is primarily due to a
$29,779,000 increase in investment securities. The total investment portfolio
now represents 40.2% of total assets, compared to 30.8% at December 31, 2002.
Loans receivable and loans held for sale decreased a total of $15,618,000 during
this same period due to increased loan sales. Premises and equipment increased
$1,392,000 due to the ongoing expansion of the main office facility, which will
be completed during the fourth quarter of 2003. The total cost of the project
will be approximately $2.2 million. We funded our asset growth through a
$7,840,000 growth in deposits and an increase of $6,848,000 in other borrowings.
The increase in borrowings is comprised of $7,500,000 of advances from the
Federal Home Loan Bank procured during September 2003, partially offset by a
$652,000 decrease in repurchase agreements.
Stockholders' equity decreased $372,000 to $19,880,000 at September 30, 2003.
The decrease resulted from net income of $719,000 offset by the payment of
$201,000 in dividends and a $905,000 decrease in unrealized gains, net of tax,
on available-for-sale securities. The change in the unrealized gains on
securities is driven by market conditions and, therefore, can fluctuate daily.
Stockholders' equity also benefited in the amount of $15,000 from the exercise
of stock options during this period.
9
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended September 30, 2003
and 2002
General: The Company reported net income for the three months ended September
30, 2003, of $142,000, or $0.07 per share of common stock, basic and, diluted,
compared to a net loss of $(208,000), or $(0.11) per share of common stock,
basic and diluted, for the three months ended September 30, 2002. Net income
increased $350,000 due to a decrease of $1.0 million in the provision for loan
losses during the third quarter of 2003 compared to the prior year quarter. The
decrease in the provision was partially offset by decreases of $280,000 in net
interest income and $97,000 in other income, and increases of $53,000 in other
expenses and $221,000 in income taxes.
Interest Income: Total interest income decreased $671,000 during the three
months ended September 30, 2003, compared to the three months ended September
30, 2002. The primary reason for the decrease is $629,000 in lower interest
income on loans. The average balance of the loan portfolio during the third
quarter of 2003 was $136.6 million compared to $153.1 million for the third
quarter of 2002. The decrease in the average balance of loans is primarily due
to increased sales of loans to the secondary market. During the first nine
months of 2003, the Company sold $94.9 million of fixed-rate loans to Freddie
Mac, compared to $45.9 million of sales during the first nine months of 2002. In
addition, the loan portfolio's weighted average yield decreased to 6.77% from
7.68% for the three months ended September 30, 2003 and 2002, respectively,
reflecting the continuing decrease in market interest rates in 2003.
Interest income on investment securities increased $27,000 during the three
months ended September 30, 2003, compared to the same period in 2002. The
increase in income from investments is primarily due to an increase in the
average balance of the securities portfolio resulting from the investment of
cash generated by loan sales. The average balance of the investment portfolio
increased to $99.8 million during the third quarter of 2003 compared to $57.8
million during the third quarter of 2002. The increase in the average balance
was partially offset by a decrease in the portfolio's weighted average yield to
3.13% from 5.22% during the third quarters of 2003 and 2002, respectively. The
decrease in the average yield reflects the investment of these funds during the
current low interest-rate environment. Investment purchases totaled $113.4
million during the first nine months of 2003, partially due to the reinvestment
of funds from calls of $64.4 million and sales of $17.6 million. The average
life of the investment portfolio is 3.26 years.
Interest income on mortgage-backed securities decreased $42,000 during the three
months ended September 30, 2003, compared to the three months ended September
30, 2002. The decrease is due to a decline in the average balance of
mortgage-backed securities to $1.2 million from $3.2 million for the third
quarter of 2003 and 2002, respectively, and a decrease in the weighted average
yield to 1.96% from 5.99% for the same periods. The sale of $2.3 million of
mortgage-backed securities during 2003 contributed to the decline in the average
balance and average yield of these investments.
Interest income on other investments, which include federal funds sold and
interest bearing deposit accounts, decreased $27,000 during the three months
ended September 30, 2003, compared to the three months ended September 30, 2002.
The lower level of interest income from other investments is due to a lower
average balance of $4.5 million from $9.4 million, as well as a lower weighted
average yield of 0.98% from 1.61% for the third quarters of 2003 and 2002,
respectively. The decrease in the average balance of these investments is due to
management's decision to reinvest most of these funds into the investment
portfolio at higher yields.
10
Interest Expense: Total interest expense for the three months ended September
30, 2003 decreased $391,000 from the three months ended September 30, 2002. The
decrease in interest expense during this same period is primarily due to a
decrease in the cost of deposits of $387,000. The average balance of deposits
increased to $221.0 million during the third quarter of 2003 compared to $208.0
million during the third quarter of 2002, due to normal deposit growth. The
weighted average cost of deposits has decreased to 2.56% from 3.47% during the
third quarter of 2003 and 2002, respectively. The decreased cost of funds
reflects lower market rates of interest.
Interest paid on borrowings decreased $4,000 during the three months ended
September 30, 2003, compared to the same three months of 2002. The increase in
the average balance of borrowed funds to $4.9 million from $3.2 million was
partially offset by decreased costs of 0.97% from 2.04% for the three months
ended September 30, 2003 and 2002, respectively. The increase in the average
balance is due to the borrowing of $7.5 million in funds from the Federal Home
Loan Bank during September 2003. As management has attempted to maintain lower
cash balances in order to improve earnings, these advances have been used to
fund short-term cash needs. Management expects these advances to be repaid in
full by year-end 2003. The remainder of borrowed funds, which averaged $2.7
million for the third quarter of 2003, consist of securities sold under
agreement to repurchase.
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 probable losses in the loan portfolio, in accordance with accounting
principles generally accepted in the United States of America.
The allowance for loan losses increased to $2.8 million at September 30, 2003
from $2.1 million at December 31, 2002. The increase is the result of the
provision for loan losses exceeding the net charge-offs. Net charge-offs
decreased during the third quarter of 2003 to $104,000 from $257,000 during the
third quarter of 2002. The provision for loan losses decreased $1.0 million to
$300,000 during the three months ended September 30, 2003 compared to the same
three months in 2002. The provisions in 2002 and 2003 were made to bring the
allowance for loan losses to a level deemed adequate following management's
evaluation of the repayment capacity and collateral protection afforded by each
problem credit identified by management. This review also considered the current
economic downturn in the local economy, which has resulted in increased
bankruptcies and foreclosures in the Company's market area and which have
further contributed to the recent increases in delinquencies and charge-offs.
Set forth below is a table regarding the Bank's nonperforming assets.
11
09/30/03 12/31/02
-------- --------
(Dollars in Thousands)
Non-accruing loans:
One-to-four family residential 1,076 769
Commerical and agricultural real estate 443 186
Commercial and agricultural business 1,021 301
Home equity/Home improvement 1,401 1,860
Automobile 247 196
Other consumer 56 198
-------- --------
Total 4,244 3,510
======== ========
Accruing loans delinquent more than 90 days:
One-to-four family residential 104 64
Commerical and agricultural real estate -- 259
Automobile 16 --
Other consumer 9 28
-------- --------
Total 129 351
======== ========
Foreclosed assets:
One-to-four family residential 401 422
Commercial and agricultural real estate -- 20
Automobile 25 38
-------- --------
Total 426 480
======== ========
Total nonperforming assets $ 4,799 $ 4,341
======== ========
Total as a percentage of total assets 1.80% 1.72%
======== ========
The increase at September 30, 2003 in the commercial and agricultural business
category of nonaccrual loans is primarily due to the bankruptcy of a single
commercial borrower with total loans of $578,000. The following table shows the
aggregate principal amount of potential problem credits on the Company's watch
list at September 30, 2003 and December 31, 2002. All nonaccrual loans are
automatically placed on the watch list.
09/30/03 12/31/02
-------- --------
(Dollars in thousands)
Watch credits $ 6,060 $ 4,084
Substandard credits 8,137 4,298
-------- --------
Total watch list credits $ 14,197 $ 8,382
======== ========
During the fourth quarter of 2002, with the help of an outside consultant, the
Company revised its lending policies and procedures in order to strengthen
underwriting practices. The Company also hired an additional loan collector
during the first quarter of 2003 to help manage the level of delinquencies,
bankruptcies, and foreclosures. In order to address the rising trend in
delinquencies and loan losses and prevent any further deterioration in asset
quality, the Company hired an experienced senior loan administrator during the
third quarter of 2003. This individual oversees all lending functions of the
Company and is assisting in the collection and workout of problem credits, as
well as reviewing and further enhancing all lending policies and
12
procedures. The recent policy changes, including a more stringent review of
outstanding credits, has contributed to the increase in the volume of watch list
credits.
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of operations and financial condition
in preparing its financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
significantly from those estimates under different assumptions and conditions.
The Company believes that critical accounting policies, which include the
allowance for loan losses, are those most important to the portrayal of the
Company's financial condition and results and requires management's most
difficult, subjective and complex judgements, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
The allowance for loan losses is a material estimate that is susceptible to
significant changes in the near term and is established through a provision for
loan losses. The allowance is based upon past loan experience and other factors
which, in management's judgement, deserve current recognition in estimating loan
losses. The balance of the allowance is based on ongoing, quarterly assessments
of the probable estimated losses in the loan portfolio. The evaluation includes
a review of all loans on which full collectibility may not be reasonably
assured. Management uses an internal asset classification system as a means of
reporting problem and potential problem assets. Management maintains a watch
list of problem credits, which are presented to the Board of Directors
quarterly. This list includes those loans rated as "watch," "substandard,"
"doubtful," and "loss." Loans rated as "watch" include loans to borrowers
displaying a weak and/or leveraged financial condition that may also be having
difficulty servicing the debt. Loans rated "substandard" are assets inadequately
protected by the net worth or paying capacity of the obligor or of the pledged
collateral. The Company does not have any loans graded as "doubtful" and all
loans rated as "loss" have been charged off.
The allowance is calculated by estimating the exposure on identified problem
loan and portfolio segments 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 to five 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.
Management believes it uses the best information available to make such
determinations. If circumstances differ substantially from the assumptions used
in making determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be affected. While the Company
believes it has established its existing allowance for loan losses in conformity
with accounting principles generally accepted in the United States, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio, will not
request an increase in the allowance for loan losses. Because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that increases to the allowance will not be necessary if loan
quality deteriorates. Management will continue to monitor the loan portfolio and
assess the adequacy of the allowance at least quarterly.
13
Other Income: Total other income decreased $97,000 during the three months ended
September 30, 2003, compared to the comparable period in 2002. The decrease in
other income is mostly due to decreased gains on the sales of securities of
$167,000, partially offset by increased trust income of $90,000, during the
third quarter of 2003 compared to the third quarter of 2002. Approximately $5.8
million and $10.5 million of available-for-sale securities were sold during the
third quarters of 2003 and 2002, respectively, to realize gains. The increase in
trust income results from additional trust work performed during the third
quarter of 2003; this level of trust fees is not expected to continue after
year-end 2003. The remainder of the increase is primarily due to increased gains
of $21,000 from the sales of loans to the secondary market during the three
months ended September 30, 2003 compared to the three months ended September 30,
2002.
Other Expenses: Total other expenses increased $53,000 during the three months
ended September 30, 2003 compared to the three months ended September 30, 2002.
The increase in other expenses is mostly due to increases of $64,000 in salaries
and benefits, $25,000 in occupancy expense, and $16,000 in data processing
expense partially offset by a decrease of $70,000 in real estate owned expense.
The increase in salaries and benefits is primarily due to increased insurance
costs and the hiring of additional personnel in the lending department. The
Company had full-time equivalent employees of 118 and 111 at September 30, 2003
and 2002, respectively. The increases in data processing and occupancy expense
are mostly due to additional costs related to the offering of check imaging
services beginning in February 2003.
Income Taxes: The provision for income taxes increased $221,000 during the three
months ended September 30, 2003, compared to the three months ended September
30, 2002. The increase is attributable to the $571,000 increase in income before
income taxes. The marginal tax rate for the third quarter of 2003 and 2002 was
36.7% and 40.0%, respectively.
Comparison of Operating Results for the Nine Months Ended September 30, 2003 and
2002
General: The Company reported net income for the nine months ended September 30,
2003, of $719,000, or $0.37 per share, basic, and $0.36 per share, diluted,
compared to net income of $471,000, or $0.25 per share, basic and $0.24 per
share, diluted, for the nine months ended September 30, 2002. Net income
increased $248,000 due to an increase in other income of $1.2 million partially
offset by a decrease in net interest income of $447,000 and increases of
$150,000 in the provision for loan losses, $156,000 in other expenses, and
$184,000 in income taxes.
Interest Income: Total interest income decreased $1.7 million during the nine
months ended September 30, 2003, compared to the nine months ended September 30,
2002. The primary reason for the decrease is $1.6 million in lower interest
income on loans. The average balance of the loan portfolio during the first nine
months of 2003 was $141.1 million compared to $154.4 million for the first nine
months of 2002. The decrease in the average balance of loans is primarily due to
increased sales of loans to the secondary market. During the first nine months
of 2003, the Company sold $94.9 million of fixed-rate loans to Freddie Mac,
compared to $45.9 million of sales during the first nine months of 2002. In
addition, the loan portfolio's weighted average yield decreased to 6.97% from
7.75% for the nine months ended September 30, 2003 and 2002, respectively,
reflecting the continuing decrease in market interest rates in 2003 .
Interest income on investment securities increased $82,000 during the nine
months ended September 30, 2003, compared to the same period in 2002. The
increase in income from investments is primarily due to an increase in the
average balance of the securities portfolio resulting from the investment of
cash generated by loan sales. The average balance of the investment portfolio
increased to $87.4 million during the first nine months of 2003 compared to
$53.1 million during the first nine months of 2002. The increase in the average
balance was partially offset by a decrease in the portfolio's average yield to
3.52% from 5.58% during the first nine months of 2003 and 2002, respectively.
The decrease in the average yield reflects the investment of these funds during
the current low interest rate environment. Investment purchases totaled $113.4
million
14
during the first nine months of 2003, partially due to the reinvestment of funds
from calls of $64.4 million and sales of $17.6 million. The average life of the
investment portfolio is 3.26 years.
Interest income on mortgage-backed securities decreased $108,000 during the nine
months ended September 30, 2003, compared to the comparable nine months in 2002.
The decrease is due to a decline in the average balance of mortgage-backed
securities to $1.8 million from $3.6 million for the first nine months of 2003
and 2002, respectively, and a decrease in the average yield to 4.32% from 6.22%
for the same periods. The sale of $2.3 million of mortgage-backed securities
during 2003 contributed to the decline in the average balance and average yield
of these investments.
Interest income on other investments, which include federal funds sold and
interest bearing deposit accounts, decreased $62,000 during the nine months
ended September 30, 2003, compared to the nine months ended September 30, 2002.
The lower level of interest income from other investments is due to a lower
average balance of $7.3 million from $10.1 million, as well as a lower weighted
average yield of 1.07% from 1.58% for the first nine months of 2003 and 2002,
respectively. The decrease in the average balance of these investments is due to
management's decision to reinvest most of these funds into the investment
portfolio at higher yields.
Interest Expense: Total interest expense for the nine months ended September 30,
2003 decreased $1.2 million from the nine months ended September 30, 2002. The
decrease in interest expense during this same period is due to a decrease in the
cost of deposits of $1.2 million. The average balance of deposits increased to
$217.7 million during the first nine months of 2003 compared to $207.0 million
during the first nine months of 2002, due to normal deposit growth. The weighted
average cost of deposits has decreased to 2.70% from 3.63% during the first nine
months of 2003 and 2002, respectively. The decreased cost of funds reflects
lower market rates of interest.
Interest paid on borrowings decreased approximately $1,000 during the nine
months ended September 30, 2003, compared to the same nine months of 2002. The
increase in the average balance of borrowed funds to $2.9 million from $1.6
million was partially offset by decreased costs of 0.99% from 1.88% for the nine
months ended September 30, 2003 and 2002, respectively. The increase in the
average balance is due to the borrowing of $7.5 million in funds from the
Federal Home Loan Bank during September 2003. As management has attempted to
maintain lower cash balances in order to improve earnings, these advances have
been used to fund short-term cash needs. Management expects these advances to be
repaid in full by year-end 2003. The remainder of borrowed funds consist of
securities sold under agreement to repurchase.
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 probable losses in the loan portfolio, in accordance with accounting
principles generally accepted in the United States of America.
The provision for loan losses increased $150,000 to $1.8 million during the nine
months ended September 30, 2003 compared to the same nine months in 2002. The
additional provisions were made to bring the allowance for loan losses to a
level deemed adequate following management's evaluation of the repayment
capacity and collateral protection afforded by each problem credit identified by
management. This review also considered the current economic downturn in the
local economy, which has resulted in increased bankruptcies and foreclosures in
the Company's market area and which have further contributed to the recent
increases in delinquencies and charge-offs. The allowance for loan losses
increased to $2.8 million at September 30, 2003 from $2.1 million at December
31, 2002. The increase is the result of the provision for loan losses exceeding
the net charge-offs. Net charge-offs increased to $1.1 million during the first
nine months of 2003 compared to net charge-offs of $656,000 during the first
nine months of 2002.
15
Other Income: Total other income increased $1.2 million during the nine months
ended September 30, 2003, compared to the same nine months of 2002. The increase
in other income is comprised of a $562,500 insurance recovery received during
the first quarter of 2003. This amount represents the negotiated settlement with
the Company's insurance carrier regarding a loan defalcation discovered during
2001. The remainder of the increase in other income is primarily due to
increased gains of $451,000 from the sale of loans to the secondary market and
increased trust income of $123,000 during the first nine months of 2003 compared
to the first nine months of 2002. The increase in trust income results from
additional trust work performed during the third quarter of 2003; this level of
trust fees is not expected to continue after year-end 2003.
Other Expenses: Total other expenses increased $156,000 during the nine months
ended September 30, 2003 compared to the nine months ended September 30, 2002.
The increase in other expenses is mostly due to increases of $121,000 in
salaries and benefits, $78,000 in occupancy expense, and $49,000 in data
processing expense, partially offset by a decrease of $101,000 in real estate
owned expense. The increase in salaries and benefits is primarily due to
increased insurance costs and the hiring of additional personnel in the lending
department. The increases in data processing and occupancy expense are mostly
due to additional costs related to the offering of check imaging services
beginning in February 2003.
Income Taxes: The provision for income taxes increased $184,000 during the nine
months ended September 30, 2003, compared to the nine months ended September 30,
2002. The increase is directly attributable to the $432,000 increase in income
before income taxes during this same time frame. The marginal tax rate equals
37.6% and 34.7% for the nine months ended September 30, 2003 and 2002,
respectively.
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 September 30, 2003 and December 31, 2002, cash and cash
equivalents totalled $9.0 million and $11.1 million, respectively. The Company's
primary sources of funds include principal and interest repayments on loans
(both scheduled and prepayments), maturities and calls 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, loan sales to the secondary market, and advances
from the FHLB. Funds received from these sources 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 September 30,
2003, the Company had outstanding advances of $7.5 million and an additional
$19.6 million available to it under the above-mentioned borrowing arrangement.
16
The Company maintains minimum levels of liquid assets as established by the
Board of Directors. The Company's year-to-date liquidity ratios at September 30,
2003 and December 31, 2002 were 45.3% and 34.4%, 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. 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. The following table summarizes these commitments at
September 30, 2003 and December 31, 2002.
09/30/03 12/31/02
-------- --------
(In thousands)
Commitments to fund loans - own portfolio $ 15,768 $ 15,672
Commitments for loan sales to Freddie Mac 2,141 6,155
Standby letters of credit 423 226
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 September 30,
2003, 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 Commissioner) 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 September 30, 2003, the
Bank's core capital ratio was 6.60% 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 September
30, 2003 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% 6.60%
Tier 1 Capital to Risk-Weighted Assets 6.00% 4.00% 11.54%
Total Capital to Risk-Weighted Assets 10.00% 8.00% 12.80%
Future capital levels should benefit from the decision of Jacksonville Bancorp,
MHC, to waive its right to receive dividends on the class of Company common
stock it holds, subject to the receipt of regulatory non-objection.
17
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.
18
Consolidated Average Balance Sheet and Interest Rates
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended September 30,
----------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- -------- -------- -------- --------
Interest-earnings assets:
Loans $136,570 $ 2,311 6.77% $153,117 $ 2,940 7.68%
Investment securities 99,752 781 3.13% 57,802 754 5.22%
Mortgage-backed securities 1,231 6 1.96% 3,178 48 5.99%
Other 4,471 11 0.98% 9,436 38 1.61%
-------- -------- -------- --------
Total interest-earning assets 242,024 3,109 5.14% 223,533 3,780 6.76%
Non-interest earnings assets 17,801 20,574
-------- --------
Total assets $259,825 $244,107
======== ========
Interest-bearing liabilities:
Deposits $221,046 $ 1,417 2.56% $208,020 $ 1,804 3.47%
Short-term borrowings 4,853 12 0.97% 3,154 16 2.04%
-------- -------- -------- --------
Total interest-bearing liabilities 225,899 1,429 2.53% 211,174 1,820 3.45%
Non-interest bearing liabilities 14,532 13,492
Stockholders' equity 19,394 19,441
-------- --------
Total liabilities/stockholders' equity $259,825 $244,107
======== ========
Net interest income $ 1,680 $ 1,960
======== ========
Interest rate spread (average yield earned
minus average rate paid) 2.61% 3.32%
======== ========
Net interest margin (net interest income
divided by average interest-earning assets) 2.78% 3.51%
======== ========
Analysis of Volume and Rate Changes
(Dollars in thousands)
- --------------------------------------------------------------------------------
Three Months Ended September 30,
- --------------------------------------------------------------------------------
2003 Compared to 2002
Increase(Decrease) Due to
--------------------------------
Rate Volume Net
-------- -------- --------
Interest-earnings assets:
Loans $ (329) $ (300) $ (629)
Investment securities (379) 406 27
Mortgage-backed securities (22) (20) (42)
Other (11) (16) (27)
-------- -------- --------
Total net change in income on
interest-earning assets (741) 70 (671)
-------- -------- --------
Interest-bearing liabilities:
Deposits (494) 107 (387)
Other borrowings (10) 6 (4)
-------- -------- --------
Total net change in expense on
interest-bearing liabilities (504) 113 (391)
-------- -------- --------
Net change in net interest income $ (237) $ (43) $ (280)
======== ======== ========
19
Consolidated Average Balance Sheet and Interest Rates
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
----------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- -------- -------- -------- --------
Interest-earnings assets:
Loans $141,127 $ 7,377 6.97% $154,412 $ 8,972 7.75%
Investment securities 87,395 2,304 3.52% 53,052 2,222 5.58%
Mortgage-backed securities 1,785 58 4.32% 3,557 166 6.22%
Other 7,256 58 1.07% 10,114 120 1.58%
-------- -------- -------- --------
Total interest-earning assets 237,563 9,797 5.50% 221,135 11,480 6.92%
Non-interest earnings assets 17,658 19,981
-------- --------
Total assets $255,221 $241,116
======== ========
Interest-bearing liabilities:
Deposits $217,681 $ 4,402 2.70% $207,037 $ 5,637 3.63%
Short-term borrowings 2,936 21 0.99% 1,579 22 1.88%
-------- -------- -------- --------
Total interest-bearing liabilities 220,617 4,423 2.67% 208,616 5,659 3.62%
Non-interest bearing liabilities 14,353 13,160
Stockholders' equity 20,251 19,340
-------- --------
Total liabilities/stockholders' equity $255,221 $241,116
======== ========
Net interest income $ 5,374 $ 5,821
======== ========
Interest rate spread (average yield earned
minus average rate paid) 2.83% 3.31%
======== ========
Net interest margin (net interest income
divided by average interest-earning assets) 3.02% 3.51%
======== ========
Analysis of Volume and Rate Changes
(Dollars in thousands)
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
- --------------------------------------------------------------------------------
2003 Compared to 2002
Increase(Decrease) Due to
--------------------------------
Rate Volume Net
-------- -------- --------
Interest-earnings assets:
Loans $ (859) $ (736) $ (1,595)
Investment securities (1,017) 1,099 82
Mortgage-backed securities (41) (67) (108)
Other (33) (29) (62)
-------- -------- --------
Total net change in income on
interest-earning assets (1,950) 267 (1,683)
-------- -------- --------
Interest-bearing liabilities:
Deposits (1,512) 277 (1,235)
Other borrowings (14) 13 (1)
-------- -------- --------
Total net change in expense on
interest-bearing liabilities (1,526) 290 (1,236)
-------- -------- --------
Net change in net interest income $ (424) $ (23) $ (447)
======== ======== ========
20
JACKSONVILLE BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Company's policy in recent years has been to reduce its 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 15 years or more to Freddie Mac, originating adjustable rate loans,
balloon loans with terms ranging from three to five years and originating
consumer and commercial business loans, which typically are for a shorter
duration and at higher rates of interest than one-to-four family loans. The
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 (ALCO), which is
responsible for reviewing the Company's asset and liability policies. The ALCO
meets quarterly to review interest rate risk and trends, as well as liquidity
and capital ratio requirements.
During 2002, the Company began using a comprehensive asset/liability software
package provided by a third-party vendor to perform interest rate sensitivity
analysis for all product categories. The primary focus of the Company's analysis
is on the effect of interest rate increases and decreases on net interest
income. Management believes that this analysis reflects the potential effects on
current earnings of interest rate changes. Call criteria and prepayment
assumptions are taken into consideration for investment securities and loans.
All of the Company's interest sensitive assets and liabilities are analyzed by
product type and repriced based upon current offering rates. The software
performs interest rate sensitivity analysis by performing rate shocks of plus or
minus 300 basis points in 100 basis point increments.
The following table shows projected results at September 30, 2003 and December
31, 2002 of the impact on net interest income from an immediate change in
interest rates, as well as the benchmarks established by the ALCO. The results
are shown as a dollar and percentage change in net interest income over the next
twelve months.
Change in Net Interest Income
(Dollars in thousands)
---------------------------------------------------------
9/30/03 12/31/02
------------------------------------------ ALCO
Rate Shock: $ Change % Change $ Change % Change Benchmark
---------------------------------------------------------
+ 200 basis points (310) (4.20)% 202 2.60% > (20.00)%
+ 100 basis points (157) (2.12)% 211 2.71% > (12.50)%
- 100 basis points 123 1.66% 222 2.86% > (12.50)%
- 200 basis points 185 2.51% 227 2.92% > (20.00)%
The foregoing computations are based upon numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit mix. The
computed estimates should not be relied upon as a projection of actual results.
Despite the limitations on precision inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the Company's
current mix of interest earning assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its computer model projections, in order to maximize current earnings
while positioning the Company to minimize the effect of a prolonged shift in
interest rates that would adversely affect future results of operations.
21
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
22
JACKSONVILLE BANCORP, INC.
CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of its disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of the period covered by this quarterly report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this quarterly
report, the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the Company's
internal control over financial reporting during the most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
23
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
---------------------------------------------------
None.
Item 5. Other Information
-----------------
None.
Item 6. Exhibits
--------
31.1 - Certification of the Chief Executive Officer Pursuant
to Rule 13a-14(a)/15d-14(a)
31.2 - Certification of the Chief Financial Officer Pursuant
to Rule 13a-14(a)/15d-14(a)
32.1 - Certification of the Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibits on Form 8-K
--------------------
Item 12. FD disclosure - Earnings Release filed with SEC on
October 14, 2003
24
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: 11/07/03 /s/ RICHARD A. FOSS
--------------- ------------------------------------------
Richard A. Foss
President and Chief Executive Officer
/s/ DIANA S. TONE
------------------------------------------
Diana S. Tone
Chief Financial Officer
25
EXHIBITS