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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
--------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to _____________________
Commission File Number 0-28070
-----------
Jacksonville Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Texas 75-2632781
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Commerce at Neches
Jacksonville, Texas 75766
- ------------------------------- ----------------------
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (903) 586-9861
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
As of August 7, 2002, the latest practicable date, 2,738,569 shares of the
registrant's common stock, $.01 par value, were issued and 1,776,824 shares
were outstanding.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARIES
INDEX
PART I. Financial Information
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Page
----
Item 1. Financial Statements
Consolidated Statements of Financial
Condition as of June 30, 2002
(Unaudited)and September 30, 2001(Audited) 3
Consolidated Statements of Earnings for the
Nine and Three Months Ended June 30, 2002
and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows for
the Nine Months Ended June 30, 2002 and
2001 (Unaudited) 5
Consolidated Statement of Changes in
Stockholders' Equity for the Nine Months Ended
June 30, 2002 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
for the Nine and Three Months Ended June 30, 2002
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 15
PART II. Other Information
- -------------------------------------------------------------------------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures
Part I - Financial Information
Item 1., Financial Statements
JACKSONVILLE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
June 30, September 30,
-------------- -------------
2002 2001
-------------- -------------
(Unaudited) (Audited)
ASSETS
Cash on hand and in banks $ 3,665 $ 2,804
Interest-bearing deposits 13,820 10,835
Investment securities:
Held-to-maturity, at cost 13,503 4,500
Available-for-sale, at estimated market value 15,103 14,273
Mortgage-backed certificates:
Held-to-maturity, at cost 42,377 14,603
Available-for-sale, at estimated market value 38,307 44,255
Loans receivable, net 263,401 246,432
Accrued interest receivable 2,902 2,727
Foreclosed real estate, net 117 63
Premises and equipment, net 5,271 4,782
Stock in Federal Home Loan Bank of Dallas, at cost 3,145 2,613
Investment in real estate at cost 1,215 1,176
Mortgage servicing rights 609 597
Intangible assets, net 3,404 -
Other assets 944 1,334
----------- -----------
Total assets $ 407,783 $ 350,994
=========== ===========
LIABILITIES
Deposits $ 333,186 $ 260,304
FHLB Advances 30,507 48,108
Advances from borrowers for taxes and insurance 2,992 4,060
Accrued expenses and other liabilities 3,326 2,538
----------- -----------
Total liabilities 370,011 315,010
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 25,000,000
shares authorized; 2,738,569 and 2,705,395 27 27
shares issued and 1,776,824 and 1,835,835
shares outstanding at June 30, 2002
and September 30, 2001, respectively
Additional paid in capital 23,407 23,046
Retained earnings, substantially restricted 30,738 27,189
Less:
Treasury shares, at cost (15,653) (13,676)
(961,745 & 869,560 shares, respectively)
Shares acquired by Employee Stock Ownership Plan (936) (989)
Shares acquired by Management Recognition Plan - (14)
Accumulated other comprehensive income (loss) 189 401
----------- -----------
Total stockholders' equity 37,772 35,984
Total liabilities and stockholders' equity $ 407,783 $ 350,994
=========== ===========
-3-
JACKSONVILLE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
Unaudited
Nine Months Ended Three Months Ended
June 30, June 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- --------- --------
INTEREST INCOME
Loans receivable $ 16,281 $ 14,726 $ 5,416 $ 4,971
Mortgage-backed securities 3,363 1,997 1,119 690
Investment securities 1,105 957 414 267
Other 233 371 70 137
-------- -------- --------- --------
Total interest income 20,982 18,051 7,019 6,065
INTEREST EXPENSE
Deposits 8,991 8,556 2,904 2,937
Other 1,511 1,981 436 626
-------- -------- --------- --------
Total interest expense 10,502 10,537 3,340 3,563
-------- -------- --------- --------
Net interest income 10,480 7,514 3,679 2,502
PROVISION FOR LOSSES ON LOANS 74 63 26 22
-------- -------- --------- --------
Net interest income after
provision for losses on loans 10,406 7,451 3,653 2,480
NONINTEREST INCOME
Fees and deposit service charges 1,740 1,362 567 503
Real estate operations, net 52 276 4 88
Gain on sale of investments - 42 - -
Other 176 112 32 10
-------- -------- --------- --------
Total noninterest income 1,968 1,792 603 601
NONINTEREST EXPENSE
Compensation and benefits 3,569 3,117 1,182 1,049
Occupancy and equipment 724 585 211 203
Insurance expense 84 71 29 23
Amortization of intangible assets 268 - 101 -
Other 1,326 1,015 446 328
-------- -------- --------- --------
Total noninterest expense 5,971 4,788 1,969 1,603
INCOME BEFORE TAXES ON INCOME 6,403 4,455 2,287 1,478
TAXES ON INCOME 2,209 1,524 791 501
-------- -------- --------- --------
Net earnings $ 4,194 $ 2,931 $ 1,496 $ 977
======== ======== ========= ========
EARNINGS PER SHARE
Basic $ 2.43 $ 1.60 $ .88 $ .54
======== ======== ========= ========
Diluted $ 2.31 $ 1.53 $ .83 $ .52
======== ======== ========= ========
-4-
JACKSONVILLE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Unaudited
Nine Months Nine Months
Ended Ended
June 30, June 30,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,194 $ 2,931
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 373 244
Amortization 270 4
Provision for losses on loans and real estate 73 63
Loans originated for sale (27,179) (15,429)
Loans sold 27,179 15,429
Gain on sale of other real estate (15) (192)
Gain on loans sold (12) 9
Accrual of MRP awards 14 125
Release of ESOP shares 102 77
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable (175) 13
(Increase) decrease in prepaid expenses and
other assets (3,282) (236)
(Increase) Decrease in accrued expenses
and other liabilities 788 793
----------- -----------
Net cash provided by (used in)operating activities 2,328 3,831
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on maturity of investment securities 21,425 19,257
Purchase of investment securities (31,472) (17,486)
Net principal payments (origination) on loans (17,115) (11,640)
Proceeds from sale of foreclosed real estate 34 65
Purchase of mortgage-backed securities (50,689) (30,561)
Principal paydowns on mortgage-backed securities 28,863 15,636
Capital expenditures (862) (219)
Purchase of stock in FHLB Dallas (532) (429)
Investment in real estate (39) 79
----------- -----------
Net cash used in investing activities (50,387) (25,298)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 72,882 23,981
Net decrease in advances for taxes and insurance (1,068) (1,028)
Dividends paid (645) (680)
Advances from FHLB 31,000 32,000
Payment of FHLB advances (48,601) (28,542)
Purchase of Treasury stock (1,977) (1,931)
Proceeds from exercise of stock options 312 179
----------- -----------
Net cash provided by (used in) financing
activities 51,903 23,979
----------- -----------
Net increase (decrease) in cash
and cash equivalent 3,846 2,512
----------- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,639 7,521
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,485 $ 10,033
=========== ===========
-5-
JACKSONVILLE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 2002
(DOLLARS IN THOUSANDS)
Unaudited
Total
Stockholders'
Equity
-------------
Balance at September 30, 2001 $ 35,984
Net earnings 4,194
Other comprehensive income - net change in
unrealized gain on securities available for sale (212)
Comprehensive income ----- 3,982
Accrual of MRP awards 14
Accrual of ESOP compensation 102
Cash dividends (645)
Treasury shares purchased (1,977)
Proceeds from exercise of stock options 312
------------
Balance at June 30, 2002 $ 37,772
============
-6-
JACKSONVILLE BANCORP, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited financial statements were prepared in accordance with
instructions for Form 10-Q and, therefore, do not include information or
footnotes necessary for a complete presentation of financial position,
results of operations, and cash flows in conformity with generally accepted
accounting principles. However, all adjustments (consisting only of normal
recurring adjustments) which, in the opinion of management, are necessary
for a fair presentation of the financial statements have been included.
The results of operations for the nine-month and three-month periods ended
June 30, 2002 and 2001 are not necessarily indicative of the results which
may be expected for an entire fiscal year.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share for the nine and three month periods ended June 30,
2002 and 2001 have been computed by dividing net earnings by the weighted
average number of shares outstanding. Shares controlled by the ESOP are
accounted for in accordance with Statement of Position 93-6 under which
unallocated shares are not considered in the weighted average number of
shares of common stock outstanding. Diluted earnings per share have been
computed, giving effect to outstanding stock purchase options by application
of the treasury stock method.
Following is a summary of shares used for calculating basic and diluted
earnings per share:
Nine Months Ended Three Months Ended
June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Basic EPS - Average
shares outstanding 1,723,528 1,832,990 1,698,484 1,796,194
Effect of dilutive
stock options 91,706 85,881 107,351 95,241
--------- --------- --------- ---------
Diluted EPS - Average
shares outstanding 1,815,234 1,918,871 1,805,834 1,891,435
========= ========= ========= =========
NOTE 3 - RECLASSIFICATION OF PREVIOUS STATEMENTS
Certain items previously reported have been reclassified to conform with
the current period's reporting format.
-7-
NOTE 4 -RECENT ACCOUNT PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement Number
141, "Business Combinations" (SFAS No. 141), and Statement Number 142,
"Goodwill and Other Intangible Assets" (SFAS No. 142), in June 2001. The
Statements require that all business combinations be accounted for using the
purchase method of accounting and prohibit use of the pooling-of-interests
method. Intangible assets acquired in a business combination shall be
recognized as an asset apart from goodwill (goodwill is measured as the excess
of the cost of an acquired entity over the net amounts assigned to assets
acquired and liabilities assumed) if the assets arise from contractual or
other legal rights. If an intangible asset does not arise from contractual or
other legal rights, it shall be recognized as an asset apart from goodwill
only if it is separable, that is, capable of being separated or divided from
the acquired enterprise and sold, transferred, licensed, rented, or exchanged
(regardless of whether there is an intent to do so). Goodwill will not be
amortized but must be tested for impairment annually at the reporting unit
level. The provision of the Statements applies to all combinations initiated
after June 30, 2001. Management evaluated the provisions of these Statements
which impact the accounting for future business combinations including the
acquisition of the Carthage, Texas branch in November, 2001 and adopted
statements 141 and 142 in the quarter ending December 31, 2001.
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and (or) the normal operation
of a long-lived asset, except for certain obligations of lessees. As used in
this Statement, a legal obligation is an obligation that a party is required
to settle as a result of an existing or enacted law, statute, ordinance, or
written or oral contract or by legal construction of a contract under the
doctrine of promissory estoppel. This Statement requires that the fair value
of a liability for an asset retirement obligation be recognized in the period
in which it is incurred if a reasonable estimate of fair value can be made.
The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset.
This Statement amends FASB Statement No. 19, Financial Accounting and
Reporting by Oil and Gas Producing Companies, and it applies to all entities.
It is effective for financial statements issued for fiscal years beginning
after June 15, 2002. Earlier application is encouraged. The Company does not
expect the adoption of the Statement to have an impact on it's earnings,
financial condition, or equity.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses
financial accounting and reporting for the impairment or disposal of long-
lived assets and supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. However, the
Statement retains the fundamental provisions of Statement 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale.
This Statement supersedes the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
-8-
Infrequently Occurring Events and Transactions, for the disposal of a segment
of a business. However, this Statement retains the requirement of Opinion 30
to report discontinued operations separately from continuing operations and
extends that reporting to a component of an entity that either has been
disposed of (by sale, by abandonment, or in distribution to owners) or is
classified as held for sale. This Statement also amends ARB No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a temporarily controlled subsidiary.
The provisions of this Statement are effective for financial statements
issued for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years, with earlier application encouraged. The
provisions of this Statement generally are to be applied prospectively. The
Company does not expect the adoption of the Statement to have an impact on
it's earnings, financial condition, or equity.
-9-
Item 2., Management's Discussion and Analysis
of Financial Condition and Results of Operations
Discussion of Changes in Financial Condition from September 30, 2001 to June
30, 2002.
Jacksonville Bancorp, Inc., is the indirect parent holding company of
Jacksonville Savings Bank, the Company's principal subsidiary. Jacksonville
Bancorp, Inc., became the holding company of Jacksonville Savings Bank as part
of a second step conversion to stock form in 1996. At present, Jacksonville
Savings Bank is directly held by Jacksonville IHC, Inc., (established as the
holding company for Jacksonville Savings Bank in 1997) which is in turn wholly
owned by Jacksonville Bancorp Inc. Jacksonville IHC, Inc., was formed in
order to minimize Company taxes that must be paid based upon Texas source
income. In addition to holding all the issued and outstanding shares of
Jacksonville Savings Bank, Jacksonville IHC's only other business activity was
to loan funds to Jacksonville's Employee Stock Ownership Plan. Jacksonville
Savings Bank currently owns 100% of the capital stock of JS&L Corporation
("JS&L"), established in December 1979. JS&L is used as a diversification
vehicle by the Company. Its main activity has been the servicing of purchased
residential first and second lien notes and real estate development.
At June 30, 2002, the assets of Jacksonville totaled $407.8 million
compared to $351.0 million at September 30, 2001, an increase of $56.8
million. This increase was primarily due to an increase in investment
securities of $9.8 million; an increase in mortgage backed securities of $21.8
million, and an increase in loans receivable, net of $17.0 million. The
increases in assets were primarily funded with deposits obtained from the
acquisition of the Carthage, Texas branch.
On November 9, 2001, Jacksonville finalized the purchase of the branch
in Carthage, Texas from Jefferson Heritage Bank. A premium of 8% on the
deposits was paid for the branch which produced a total of $3.7 million in
intangible assets. Approximately 40% of the premium was identified by
management as core base intangibles with the remaining premium representing
unidentified intangibles. Core-based intangibles are the values of those
deposits management determined to be the only identifiable intangible asset
acquired. Based upon interpretations of current accounting literature the
premiums are being amortized over their respective estimated lives. For the
nine months ended June 30, 2002, premium amortization totaled $268,000.
In anticipation of receiving these funds, management elected to utilize
FHLB short term advances to purchase mortgage-backed securities, including
collateralized mortgage obligations, investment securities, and to fund loan
originations. These advances were paid in full from funds received upon
closing the Carthage branch transaction.
Cash on hand increased during the period ending June 30, 2002, to $3.7
million from the $2.8 million reported at September 30, 2001, while interest-
bearing deposits increased $3.0 million to $13.8 million during the period
primarily in deposits at Federal Home Loan Bank, and deposits in other insured
financial institutions.
The investment securities portfolios, held-to-maturity and available-
for-sale, increased during the period from a total of $18.8 million at
September 30, 2001 to $28.6 million at June 30, 2002. The $9.8 million
increase was primarily the result of purchases of investment securities, net
of investment calls and maturities, in both the available-for -sale and held-
to-maturity portfolios.
Mortgage-backed securities, held-to-maturity and available-for-sale,
increased from a total of $58.9 million at September 30, 2001 to $80.7 million
at June 30, 2002, primarily from the purchase of this product in anticipation
of using funds from the Carthage branch acquisition as described above.
Loans receivable, net increased by $17.0 million from $246.4 million at
September 30, 2001, to $263.4 million at June 30, 2002. The increase was
primarily funded from increases in deposits. For the nine month period ended
June 30, 2002, Jacksonville also originated $27.2 million in loans sold to the
secondary market. Of the total loans sold, $7.5 million were whole loan
sales, servicing released, with the balance of $19.7 million sold with
servicing retained.
-10-
Accrued interest receivable increased $175,000 to $2.9 million at June
30, 2002, as a result of increased in loans receivable, net.
Premises and equipment, net increased $489,000, during the period
primarily as a result of the addition of the Carthage branch and renovations
at the Palestine, Texas branch and at the home office.
Stock in Federal Home Loan Bank, at cost, increased from $2.6 million at
September 30, 2001 to $3.1 million at June 30, 2002 primarily due to
additional stock purchased and dividends received during the nine month
period.
All remaining asset classifications for June 30, 2002 remained
relatively comparable to those numbers disclosed at September 30, 2001 with
the exception of a decline in other assets of $390,000; and the recording of
intangible assets, net of $3.4 million which represents the unamortized
balance of the 8% premium paid in connection with the Carthage branch
acquisition.
The Company's nonperforming assets, which primarily consist of
nonaccrual loans, real estate and other assets acquired through foreclosure
totaled $825,000, or .20% of assets, at June 30, 2002, compared to $687,000,
or .20% of assets, at September 30, 2001. The following table sets forth
information relating to the Company's nonperforming assets at the dates
indicated.
June 30, 2002 September 30, 2001
------------- ------------------
(Dollars in thousands)
Mortgage Loans
Single family residential $483 $401
Multi-family residential - -
Commercial - -
Construction - -
Land 69 89
Business and Consumer Loans
Commercial business - -
Consumer 156 134
---- ----
Total nonperforming loans $708 $624
Real estate owned and other
acquired assets, net 117 63
---- ----
Total non-performing assets $825 $687
==== ====
Nonperforming loans to total
loans .27% .25%
Total nonperforming assets
to total assets .20% .20%
At June 30, 2002, the accrued interest reserve for mortgage loans and
non-mortgage loans for interest in excess of ninety days was $36,000 compared
to $63,000 at September 30, 2001. During the three and nine month periods
ended June 30, 2002, no interest income was actually recorded on any loans
after they were placed on non-accrued status.
At June 30, 2002 liabilities of the Company totaled $370.0 million
compared to $315.0 million at September 30, 2001. Deposits grew $72.9 million
for the period from $260.3 million to $333.2 million at June 30, 2002,
principally as a result of the growth in savings deposits, of which $44.3
million is attributable to the Carthage branch deposit acquisition. FHLB
advances decreased from $48.1 million to $30.5 million for the comparable
periods.
Advances from borrowers for taxes and insurance decreased from $4.1 million
to $3.0 million for the nine month period ended June 30, 2002. This decrease
is the result of the payment from customers' escrow accounts all amounts due
to taxing agencies for the year 2001, net of monthly escrow payments by loan
customers.
-11-
Accrued expenses and other liabilities increased from $2.5 million at
September 30, 2001 to $3.3 million at June 30, 2002.
Stockholders' equity increased during the nine month period ended June 30,
2002 by $1.8 million from $36.0 million to $37.8 million. Retained earnings
increased from $27.2 million at September 30, 2001 to $30.7 million at June
30, 2002 primarily as a result of net income for the period after dividends.
Treasury shares increased for the period from $13.7 million to $15.7 million
due to the repurchase of 92,185 shares during the period, bringing total
treasury shares to 961,745.
Shares acquired by the Employee Stock Ownership Plan decreased by $53,000
due to the release of ESOP shares during the period ended June 30, 2002.
Shares acquired by the Management Recognition Plan ("M.R.P.") decreased by
$14,000 to a zero balance as all M.R.P. shares became fully vested during the
period.
Net unrealized gain/loss on investment and mortgage-backed securities,
available for sale, decreased from a $401,000 unrealized gain at September 30,
2001 to a $189,000 unrealized gain at June 30, 2002 which reflects a decline
in investment value. These gains were based on "marked-to-market" values of
the portfolios at the respective periods in accordance with FASB 115.
Comparison of Operating Results for the three and nine months ended June 30,
2002 and 2001.
Net income for the three months ended June 30, 2002 totaled $1.5 million
compared to $977,000 for the same period in 2001. The increase of $519,000
was primarily due to an increase of $954,000 in total interest income; a
decrease in total interest expense of $223,000; offset by an increase in non-
interest expense of $366,000. Federal income tax increased $290,000 from
$501,000 for the three months ended June 30, 2001 to $791,000 for the current
quarter.
Non-interest income increased $2,000 from $601,000 for the quarter ended
June 30, 2001 to $603,000 for the June 30, 2002 quarter.
Non-interest expense increased from $1.6 million for the quarter ended June
30, 2001 to $2.0 million for the June 30, 2002 period.
Net income for the nine months ended June 30, 2002 was $4.2 million
compared to $2.9 million for the same period in 2001, an increase of 43.1%.
Net interest income after provision for losses on loans increased $3.0 million
from $7.5 million at June 30, 2001 to $10.4 million at June 30, 2002. Non-
interest income increased from $1.8 million for the nine months ended June 30,
2001 to $2.0 million at June 30, 2002, while non-interest expenses increased
from $4.8 million to $6.0 million for the comparable periods.
Net Interest Income
Total interest income increased by $954,000 to $7.0 million during the
three months ended June 30, 2002 compared to the same period in the prior
year. Interest income from loans receivable increased $445,000 due primarily
to an increase in the average balances of loans in the comparative periods.
Interest on mortgage-backed securities increased $429,000 from $690,000 for
the quarter ended June 30, 2001, to $1.1 million for the quarter ended June
30, 2002 due primarily to an increase in average portfolio balances for the
comparable periods. Interest on investment securities increased $147,000 from
$267,000 for the quarter ended June 30, 2001, to $414,000 at June 30, 2002
which is also attributable to increased portfolio balances. Other interest
income decreased from $137,000 for the three month period ended June 30, 2001
to $70,000 for the comparable period ended June 30, 2002. The decrease was
primarily due to a reduction in interest received on interest bearing deposits
in other banks.
Total interest expense decreased by $223,000 for the three months ended
June 30, 2002 compared to the same period in 2001. Interest on deposits
decreased by $33,000 from $2.94 million for the three months ended June 30,
2001 to $2.90 million for June 30, 2002, even though deposits increased
$88.4 million since June 30, 2001, a 36.1% increase. Interest on FHLB advances
decreased $190,000 for the comparable periods.
-12-
For the nine month period ended June 30, 2002, interest on deposits
increased to $9.0 million from $8.6 million for the nine months ended June 30,
2001. For the comparable periods interest on advances decreased to $1.5
million from $2.0 million.
For the nine months ended June 30, 2002 net interest income before
provision for loan losses increased by $3.0 million to $10.5 million, a 39.5%
increase from the comparable period ended June 30, 2001. Total interest
income for the nine month period ended June 30, 2002 was $21.0 million
compared to $18.1 million at June 30, 2001.
Total interest expense remained at $10.5 million, the same amount reported
for the nine month period ended June 30, 2001.
Provisions for Losses on Loans
The provisions for losses on loans are the result of management's decision
to have adequate reserves based on historical experience, industry standards,
the amount of non-performing assets, general economic conditions in the
Company's market area, and the collectability of the loan portfolio. Based
on these factors, the loan loss provision was increased by $4,000 from $22,000
during the quarter ended June 30, 2001 to $26,000 during the quarter ended
June 30, 2002. For the nine month period ended June 30, 2002 the provision
was $74,000 compared to $63,000 at June 30, 2001.
The following table sets forth the activity in the Company's allowance for
loan losses during the periods indicated.
Nine Months Ended June 30, Three Months Ended June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Allowance at beginning of period $1,257 $1,227 $1,276 $1,227
Provision for loan losses 74 63 26 22
Charge-offs:
Consumer (57) (54) (26) (13)
Recoveries 2 3 - 3
--------- --------- --------- ---------
Net Charge-offs (55) (51) (26) (10)
--------- --------- --------- ---------
Allowance at end of period $1,276 $1,239 $1,276 $1,239
========= ========= ========= =========
Allowance for loan losses to
total nonperforming loans at
end of period 180% 266% 180% 266%
========= ========= ========= =========
Allowance for loan losses to
total loans at end of period .48% .52% .48% .52%
========= ========= ========= =========
Non-Interest Income
Non-interest income consists primarily of fees collected on mortgage and
consumer loans, service charges on deposit accounts and income from real
estate operations. This income increased $2,000 from $601,000 for the three
month period ended June 30, 2001 to $603,000 for the comparable period in
2002. The increase was primarily due to an increase in fees and deposit
service charges of $64,000 from $503,000 at June 30, 2001 to $567,000 at June
30, 2002; and an increase of other non-interest income of $22,000; offset by a
decrease of $84,000 in real estate operations, net.
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The decrease in real estate operations, net was primarily due to decreases in
gains on sale of foreclosed and non-foreclosed properties for the comparable
periods.
For the nine month period, non-interest income increased from $1.8 million
at June 30, 2001 to $2.0 million at June 30, 2002 primarily due to an increase
in fees and deposit service charges of $378,000; and an increase in other non-
interest income of $64,000; offset by a decrease in real estate operations,
net of $224,000 and a decrease in gain on sale of investment securities of
$42,000.
Non-Interest Expense
Non-interest expense increased to $2.0 million at June 30, 2002 from $1.6
million for the quarter ended June 30, 2001. The increase was primarily due
to an increase in compensation and benefits of $133,000; amortization of
intangible assets of $101,000 and an increase of $118,000 in other non-
interest expense. A large part of the increase was attributable to the costs
associated with the acquisition of the Carthage, Texas branch.
Non-interest expense increased by $1.2 million for the nine month period
from $4.8 million at June 30, 2001 to $6.0 million at June 30, 2002. This
increase was primarily due to an increase in compensation and benefits of
$452,000; an increase of $139,000 in occupancy and equipment, amortization of
intangible assets of $268,000 and an increase in other non-interest expense of
$311,000.
On March 12, 2002, the Company granted 81,000 options to officers and
directors of the Company following approval of the Company's 2001 Stock Option
Plan by the Company's shareholders at the annual meeting held on January 22,
2002. In accordance with generally accepted accounting principles, the
Company does not currently account for the granting of options as an expense;
however, the required disclosures will be presented in the notes to the
Company's annual financial statements.
Taxes
The provision for income tax amounted to $791,000 and $2.2 million for the
three and nine months ended June 30, 2002 respectively, compared to $501,000
and $1.5 million for the three and nine months ended June 30, 2001,
respectively, based on earnings for the period.
Liquidity
The State of Texas regulations require the Company's wholly owned
subsidiary, Jacksonville Savings Bank, SSB ("the Bank") to maintain liquidity
in an amount not less than 10% of an amount equal to its average daily
deposits for the most recently completed calendar quarter in cash and readily
marketable investments. For the quarter ended June 30, 2002 the Bank's
liquidity was $129.9 million with a liquidity ratio of 40.45%.
The Company is subject to borrowing limitations with respect to the amount
of advances it may receive from the Federal Home Loan Bank of Dallas. At June
30, 2002, outstanding borrowings from the Federal Home Loan Bank of Dallas
totaled $ 30.5 million. The Company's borrowing limit with the Federal Home
Loan Bank is $146.3 million and is based upon the amount of stock ownership
and available collateral held by the Company. The Federal Home Loan Bank of
Dallas is an important source of liquidity to the Company, and the ability to
tap into that source is not without limits.
Regulatory Capital Requirements
The Bank is required to maintain specified amounts of capital pursuant to
the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") and regulations promulgated by the FDIC thereunder. The capital
standards generally require the maintenance of regulatory capital sufficient
to meet Tier 1 leveraged capital requirement, a Tier 1 risk-based capital
requirement and a total risk-based capital requirement. At June 30, 2002, the
Bank had Tier 1 leveraged capital, Tier 1 risk-based capital and total risk-
based capital levels of 7.82%, 13.41%, 13.95%, respectively, which levels
exceed all current regulatory capital standards. These capital levels
exceeded the minimum requirements at that date by approximately $15.4 million,
$22.2 million, and $14.0 million, respectively.
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"Safe Harbor" Statement
In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-
looking statements. Factors that could cause future results to vary from
current expectations, include, but are not limited to, the impact of economic
conditions (both generally and more specifically in the markets in which the
Company operates), the impact of competition for the Company's customers from
other providers of financial services, the impact of government legislation
and regulation (which changes from time to time and over which the Company has
no control), and other risks detailed in this Form 10-Q and in the Company's
other Securities and Exchange Commission filings. Readers are cautioned not
to place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements, to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents Jacksonville
files from time to time with the Securities and Exchange Commission.
Item 3., Quantitative and Qualitative Disclosures about Market Risk
The Bank's interest rate risk and asset-liability management are the
responsibility of the Interest Rate Risk Committee which reports to the Board
of Directors and is comprised of members of the Bank's senior management. The
Committee is actively involved in formulating the economic projections used by
the Bank in its planning and budgeting process and establishes policies which
monitor and coordinate the Bank's sources, uses and pricing of funds.
Interest rate risk, including mortgage prepayment risk, is the most
significant non-credit related risk to which the Bank is exposed. Net
interest income, the Bank's primary source of revenue, is affected by changes
in interest rates as well as fluctuations in the level and duration of assets
and liabilities on the Bank's balance sheet.
Interest rate risk can be defined as the exposure of the Bank's net
interest income or financial position to adverse movements in interest rates.
In addition to directly impacting net interest income, changes in the level of
interest rates can also affect, (i) the amount of loans originated and sold by
the institution, (ii) the ability of borrowers to repay adjustable or variable
rate loans, (iii) the average maturity of loans, which tend to increase when
new loan rates are substantially higher than rates on existing loans and
conversely, decrease when rates on new loans are substantially lower than
rates on existing loans, (iv) the value of the Bank's mortgage loans and the
resultant ability to realize gains on the sale of such assets and (v) the
carrying value of investment securities classified as available-for-sale and
the resultant adjustments to shareholder's equity.
The primary objective of the Bank's asset-liability management is to
maximize net interest income while maintaining acceptable levels of interest
rate sensitivity. To accomplish this the Bank monitors interest rate
sensitivity by use of a sophisticated simulation model which analyzes
resulting net interest income under various interest rate scenarios and
anticipated levels of business activity. Complicating management's efforts to
measure interest rate risk is the uncertainty of assumptions used for the
maturity, repricing, and/or runoff characteristics of some of the Bank's
assets and liabilities.
To cope with these uncertainties, management gives careful attention to its
assumptions. For example, certain of the Bank's interest-bearing deposit
products (NOW accounts, savings and money market deposits) have no contractual
maturity and based on historical experience have only a fractional sensitivity
to movements in market rates. Because management believes it has some control
with respect to the extent and timing of rates paid on non-maturity deposits,
certain assumptions based on historical experience are built into the model.
Another major assumption built into the model involves the ability customers
have to prepay loans, often without penalty. The risk of prepayment tends to
increase when interest rates fall. Since future prepayment behavior of loan
customers is uncertain, the resultant interest rate sensitivity of loan assets
cannot be determined exactly. The Bank utilizes market consensus prepayment
assumptions related to residential mortgages.
The Bank uses simulation analysis to measure the sensitivity of net
interest income over a specified time period (generally 1 year) under various
interest-rate scenarios using the assumptions discussed above. The Bank's
policy on interest rate risk specifies that if interest rates were to shift
immediately up or down 200 basis points, estimated net
-15-
interest income should decline by less than 20%. Management estimates, based
on its simulation model, that an instantaneous 200 basis point increase in
interest rates at June 30, 2002, would result in a 4.77% decrease in net
interest income over the next twelve months, while a 200 basis point decrease
in rates would result in a 10.41% decrease in net interest income over the
next twelve months. It should be emphasized that the results are highly
dependent on material assumptions such as those discussed above. It should
also be noted that the exposure of the Bank's net interest income to gradual
and/or modest changes in interest rates is relatively small.
Upon learning that the Bank was the successful bidder for the Carthage,
Texas branch from Jefferson Heritage Bank, the Interest Rate Risk Committee
saw the necessity of investing the $40.4 million proceeds of the pending
acquisition. The committee felt that the greatest value for these funds would
be to invest in longer term products including C.M.O.'s, mortgage-backed
securities, mortgage loans and investment securities. In doing so the members
recognized that this would negatively impact the Bank's net portfolio values
in a rising rate scenario, and thus adversely affect interest rate risk.
However, there were limited options available for investing these funds at the
time.
At June 30, 2002, the Bank was within the Bank's policy limits for changes
in the market value of portfolio equity set forth in the Interest Rate Risk
Policy. Based on the simulation model, a 200 basis point increase in
interest rates would result in an estimated change in the market value of
portfolio equity of 31.95%, a 23.0% decrease from the number reported at March
31, 2002. The Bank's policy limit for a 200 basis point increase in interest
rates is currently set at 50%.
At June 30, 2002 the Bank had $15.1 million in available-for-sale
investments and $38.3 million in mortgage-backed securities, available-for-
sale. Management is closely monitoring the securities portfolio's and are
aware that they can take steps to sell the securities to go to shorter term
investments should market conditions dictate.
-16-
JACKSONVILLE BANCORP, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Jacksonville Bancorp, Inc., is involved only in routine legal
proceedings occurring in the ordinary course of business which in the
aggregate are believed by management to be immaterial to the financial
condition of the Bank.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350).
99.2 Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (18
U.S.C. 1350).
(b) 8K dated April 15, 2002 - Announces Second Quarter Earnings
8K dated June 18, 2002 - Announces Declaration of Cash Dividend
-17-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Jacksonville Bancorp, Inc.
DATE: August 7, 2002 By: /s/ Jerry Chancellor
----------------------------------
Jerry Chancellor, President and
Chief Executive Officer
DATE: August 7, 2002 By: /s/ Bill W. Taylor
----------------------------------
Bill W. Taylor
Exec. Vice President
Chief Financial Officer
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