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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transaction period from ________________ to _________________
Commission File Number: 000-49792
JACKSONVILLE BANCORP, INC.
----------------------------------
FEDERAL 33-1002258
- ---------------------------------- ----------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1211 WEST MORTON AVENUE, JACKSONVILLE, ILLINOIS 62650
- ----------------------------------------------------- ---------
(Address of Principal Office) Zip Code
(217) 245-4111
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
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 twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
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 NO X
--- ---
As of March 10, 2003, there were 1,921,304 shares issued and outstanding of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of March 10, 2003 ($12.17) was $10.7
million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 2002 (Parts II and IV).
2. Proxy Statement for the 2003 Annual Meeting of Stockholders (Parts I and
III).
PART I
ITEM 1. BUSINESS
GENERAL
Jacksonville Bancorp, Inc. (the "Company") is a Federal corporation. On May
3, 2002, Jacksonville Savings Bank (the "Bank") completed its reorganization
into the two-tier form of mutual holding company ownership. At that time each
outstanding share of the Bank's common stock was converted into a share of the
Company's common stock. The only significant asset of the Company is its
investment in the Bank. The Company is majority owned by Jacksonville Bancorp,
MHC, a Federal-chartered mutual holding company (the "Mutual Holding Company").
The Bank is an Illinois-chartered savings bank headquartered in
Jacksonville, Illinois. The Bank conducts its business from its main office and
six branches, two of which are located in Jacksonville, one of which is located
in Virden, Illinois, one of which is located in Chapin, Illinois, one of which
is located in Concord, Illinois, and one of which is located in Litchfield,
Illinois. The Bank was originally chartered in 1916 as a state-chartered savings
and loan association and converted to a state-chartered savings bank in 1992.
The Bank has been a member of the Federal Home Loan Bank System since 1932. The
Bank's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC"). At December 31, 2002, the Bank had total assets of $252.5 million,
total deposits of $226.0 million, and stockholders' equity of $20.0 million.
The Bank is a community-oriented savings bank engaged primarily in the
business of attracting retail deposits from the general public in the Bank's
market area and using such funds together with borrowings and funds from other
sources to primarily originate mortgage loans secured by one- to four-family
residential real estate and consumer loans. The Bank also originates commercial
and agricultural real estate loans, multi-family real estate loans and
commercial and agricultural business loans. Additionally, the Bank invests in
mortgage-backed securities primarily issued or guaranteed by the United States
Government or agencies thereof, and maintains a portion of its assets in liquid
investments, such as overnight funds at the Federal Home Loan Bank ("FHLB").
The Bank's principal sources of funds are deposits, FHLB advances, funds
received from the repayment and prepayment of loans and mortgage-backed
securities, on-going operations, and the sale or maturity of investment
securities. Principal sources of income are interest income on residential,
commercial and consumer loans, interest on investments, commissions and fees.
The Bank's principal expenses are interest paid on deposits and employee
compensation and benefits.
The Bank operates an investment center at its main office. The investment
center is operated through Financial Resources Group, the Bank's wholly-owned
subsidiary. The investment center is not anticipated to have a material effect
on the ability of the Bank to attract retail deposits.
As a result of an internal audit of the Bank's lending operations,
management became aware of irregularities in the processing, underwriting and
servicing of loans at its Virden branch. The irregularities stemmed from actions
taken by a loan officer that resulted in the misapplication of loan repayments.
The Bank intends to pursue all means of recovery, and has taken all necessary
steps to date to perfect its claims under its insurance policy. While management
does not anticipate incurring additional significant losses as a result of the
loan irregularities, there can be no assurance that additional losses are not
incurred.
The Bank's principal executive office is located at 1211 W. Morton,
Jacksonville, Illinois, and its telephone number at that address is (217)
245-4111.
1
MARKET AREA AND COMPETITION
The Bank is a community-oriented savings institution offering a range of
retail banking services to residents of its market area. The Bank's market area
is Morgan, Macoupin and Montgomery Counties, Illinois. Management believes that
its offices are located in communities that can generally be characterized as
stable residential communities of predominantly one- to four-family residences.
The Bank's market for deposits is concentrated in the communities surrounding
its main office and six branches. The Bank is the largest independent financial
institution headquartered in its primary market area.
The economy of the Bank's market area consists primarily of agriculture and
related businesses, light industry and state and local government. The largest
employers in the Bank's primary market area are Pactiv Corporation, Passavant
Area Hospital, and the State of Illinois.
The Bank faces significant competition in attracting deposits from
commercial banks, other savings institutions and credit unions. The Bank faces
additional competition for deposits from short-term money market funds, from
other corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies. The Bank also
faces significant competition in the origination of loans from savings
institutions, mortgage banking companies, credit unions, insurance companies and
commercial banks.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the Bank has been
the origination of mortgage loans for the purpose of financing or refinancing
one- to four-family residential properties in the Bank's local market areas. The
Bank also emphasizes consumer lending, primarily the origination of home equity
loans and loans secured by automobiles. At December 31, 2002, the Bank's loans
receivable totaled $142.9 million, of which $43.9 million, or 30.7% consisted of
one- to four-family residential mortgage loans. The remainder of the Bank's
loans receivable at such date consisted of commercial and agricultural real
estate loans (12.9%), multi-family residential loans (1.9%), commercial and
agricultural business loans (22.0%), and consumer loans (34.1%). Of the amount
included in consumer loans $31.2 million, or 21.8% of total loans consisted of
home equity and home improvement loans.
The Bank has managed to make its interest-earning assets more interest rate
sensitive by, among other things, originating variable interest rate loans, such
as ARM loans and balloon loans with terms ranging from three to five years, as
well as medium-term consumer loans and commercial business loans, and by
investing in adjustable-rate mortgage-backed securities. The ability of the Bank
to originate ARM loans is substantially affected by market interest rates.
The Bank actively originates fixed-rate residential mortgage loans secured
by one- to four-family residential properties with terms up to 30 years. The
Bank sells a significant portion of its one- to four-family fixed-rate
residential mortgage loan originations directly to Freddie Mac. During the years
ended December 31, 2002 and 2001, the Bank sold $86.1 million and $80.3 million
of fixed-rate residential mortgage loans, respectively. Loans are generally sold
without recourse and with servicing retained. At December 31, 2002 the Bank was
servicing approximately $150.4 million in loans for which it received servicing
income of approximately $361,000 for the year ended December 31, 2002. The Bank
does not purchase whole loans.
2
ANALYSIS OF LOAN PORTFOLIO
Set forth below are selected data relating to the composition of the Bank's
loan portfolio, excluding loans held for sale, by type of loan as of the dates
indicated.
AT DECEMBER 31,
-----------------------------------------------------------------------------------
2002 2001 2000 1999
------------------ -------------------- -------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- --------- --------- --------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Real estate loans:
One-to four-family residential (1).. 43,883 30.7% $ 46,473 29.8% $ 48,418 28.1% $ 41,634 29.4%
Commercial and agricultural......... 18,421 12.9 18,297 11.7 18,596 10.8 8,334 5.9
Multi-family residential............ 2,678 1.9 2,566 1.6 2,690 1.6 2,150 1.5
-------- --------- --------- --------- --------- --------- --------- --------
Total real estate loans........... 64,982 45.5 67,336 43.1 69,704 40.5 52,118 36.8
-------- --------- --------- --------- --------- --------- --------- --------
Commercial agricultural business
loans (1)........................... 31,502 22.0 30,582 19.6 31,767 18.4 23,145 16.3
-------- --------- --------- --------- --------- --------- --------- --------
Consumer loans :
Home equity/Home improvement........ 31,181 21.8 38,590 24.7 45,816 26.6 40,965 28.9
Automobile.......................... 10,491 7.3 12,966 8.3 15,452 9.0 15,631 11.0
Other............................... 7,127 5.0 8,255 5.2 11,056 6.4 10,735 7.6
-------- --------- --------- --------- --------- --------- --------- --------
Total consumer loans.............. 48,799 34.1 59,811 38.2 72,324 42.0 67,331 47.5
-------- --------- --------- --------- --------- --------- --------- --------
Total loans receivable.......... 145,283 101.6 157,729 100.9 173,795 100.9 142,594 100.6
Less:
Unearned discount and deferred loan 281 0.2 342 0.2 408 0.2 62 --
fees, net.............................
Allowance for loan losses........... 2,073 1.4 1,107 0.7 1,206 0.7 827 0.6
-------- --------- --------- --------- --------- --------- --------- --------
Total loans receivable, net....... 142,929 100.0% $156,280 100.0% $172,181 100.0% $141,705 100.0%
======== ========= ========= ========= ========= ========= ========= ========
---------------------
1998
---------------------
AMOUNT PERCENT
---------- ---------
Real estate loans:
One-to four-family residential (1).. $ 41,950 32.6%
Commercial and agricultural......... 8,352 6.5
Multi-family residential............ 2,111 1.6
---------- ---------
Total real estate loans........... 52,413 40.7
---------- ---------
Commercial agricultural business
loans (1)........................... 17,471 13.6
---------- ---------
Consumer loans :
Home equity/Home improvement........ 35,499 27.6
Automobile.......................... 13,862 10.8
Other............................... 10,268 7.9
---------- ---------
Total consumer loans.............. 59,629 46.3
---------- ---------
Total loans receivable.......... 129,513 100.6
Less:
Unearned discount and deferred loan 39 --
fees, net.............................
Allowance for loan losses........... 801 0.6
---------- ---------
Total loans receivable, net....... $128,673 100.0%
========== =========
- ---------------------------------
(1) Includes a portion of real estate construction loans.
3
ONE- TO FOUR-FAMILY MORTGAGE LOANS. The Bank's primary lending activity is
the origination of one- to four-family, owner-occupied, residential mortgage
loans secured by property located in the Bank's market area. Loans are generated
through the Bank's marketing efforts, its existing customers and referrals, real
estate brokers, builders and local businesses. The Bank generally has limited
its real estate loan originations to the financing of properties located within
its market area. At December 31, 2002, the Bank had $43.9 million, or 30.7% of
its total loan portfolio, invested in mortgage loans secured by one- to
four-family residences.
The Bank originates for resale to Freddie Mac fixed-rate residential one-
to four-family loans with terms of 15 years or more. The Bank's fixed-rate
mortgage loans amortize monthly with principal and interest due each month.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The Bank offers fixed-rate one- to four-family mortgage
loans with terms of up to 30 years.
The Bank currently offers ARM loans for terms ranging up to 30 years. The
Bank generally offers ARM loans that adjust every year from the date of
origination, with interest rate adjustment limitations up to two percentage
points per year and with a cap of up to six percentage points on total interest
rate increases over the life of the loan. In a rising interest rate environment,
such rate limitations may prevent ARM loans from repricing to market interest
rates, which would have an adverse effect on net interest income. The Bank has
used different interest indices for ARM loans in the past, and primarily uses
the one-year Constant Maturity Treasury Index. ARM loans secured by residential
one- to four-family real estate totaled $8.6 million, or 19.6% of the Bank's
total one- to four-family residential real estate loans receivable at December
31, 2002. The origination of fixed-rate mortgage loans versus ARM loans is
monitored on an ongoing basis and is affected significantly by the level of
market interest rates, customer preference, the Bank's interest rate gap
position and loan products offered by the Bank's competitors. Particularly in a
relatively low interest rate environment, borrowers may prefer fixed-rate loans
to ARM loans. During 2002, the Bank originated $87.0 million of fixed-rate
residential mortgage loans and $12.5 million of ARM and balloon loans.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Bank predictable cash flows as would long-term, fixed-rate loans. ARM loans
carry increased credit risk associated with potentially higher monthly payments
by borrowers as general market interest rates increase. It is possible,
therefore, during periods of rising interest rates, that the risk of
delinquencies and defaults on ARM loans may increase due to the upward
adjustment of interest costs to the borrower, resulting in increased loan
losses.
The Bank's residential first mortgage loans customarily include due-on-sale
clauses, which are provisions giving the Bank the right to declare a loan
immediately due and payable in the event, among other things, that the borrower
sells or otherwise disposes of the underlying real property serving as security
for the loan. Due-on-sale clauses are a means of imposing assumption fees and
increasing the interest rate on the Bank's mortgage portfolio during periods of
rising interest rates.
When underwriting residential real estate loans, the Bank reviews and
verifies each loan applicant's income and credit history. Management believes
that stability of income and past credit history are integral parts in the
underwriting process. Generally, the applicant's total monthly mortgage payment,
including all escrow amounts, is limited to 28% of the applicant's total monthly
income. In addition, total monthly obligations of the applicant, including
mortgage payments, should not generally exceed 36% of total monthly income.
Written appraisals are generally required on real estate property offered to
secure an applicant's loan. For real estate loans with loan to value ("LTV")
ratios of between 80% and 95%, the Bank requires private mortgage insurance. The
Bank requires fire and casualty insurance on all properties securing real estate
loans. The Bank may require title insurance, or an attorney's title opinion, as
circumstances warrant.
4
COMMERCIAL AND AGRICULTURAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL REAL
ESTATE LOANS. The Bank originates commercial and agricultural real estate and
multi-family residential real estate loans. At December 31, 2002, $18.4 million,
or 12.9%, of the Bank's total loan portfolio consisted of commercial and
agricultural real estate loans and $2.7 million, or 1.9%, consisted of
multi-family real estate loans. The Bank's commercial and agricultural real
estate loans are secured primarily by improved properties such as retail
facilities and office buildings, farms, churches and other non-residential
buildings. At December 31, 2002, the Bank's commercial real estate loan
portfolio included $1.8 million in loans secured by hotels, $600,000 in loans
secured by restaurants, $6.3 million in loans secured by land, and $9.7 million
in loans secured by other commercial properties. The maximum LTV ratio for
commercial real estate loans originated by the Bank is 80%. During the year
ended December 31, 2002, the Bank originated $5.5 million in commercial and
agricultural real estate loans. The largest commercial real estate loan had a
principal balance of $1.8 million, all of which was secured by a local hotel. At
December 31, 2002, the largest multi-family residential real estate loan had a
principal balance of $269,000.
The underwriting standards employed by the Bank for commercial and
agricultural real estate and multi-family residential real estate loans include
a determination on the applicant's credit history and an assessment of the
applicant's ability to meet existing obligations and payments on the proposed
loan. The income approach is primarily utilized to determine whether income
generated from the applicant's business or real estate offered as collateral is
adequate to repay the loan. The value of the real estate offered as collateral
is reviewed by the Bank in relation to the proposed loan amount. Generally, the
loan amount cannot be greater than 80% of the value of the real estate. Written
appraisals are usually obtained by the Bank from either licensed or certified
appraisers on all multi-family, commercial, and agricultural real estate loans.
The Bank assesses the creditworthiness of the applicant by reviewing a credit
report, financial statements and tax returns of the applicant, as well as
obtaining other public records regarding the applicant.
Loans secured by commercial, agricultural, and multi-family real estate
generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the effects of general economic
conditions on income producing properties and the successful operation or
management of the properties securing the loans. Furthermore, the repayment of
loans secured by commercial, agricultural, and multi-family real estate is
typically dependent upon the successful operation of the related business and
real estate property. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
COMMERCIAL AND AGRICULTURAL BUSINESS LOANS. The Bank originates commercial
and agricultural business loans to borrowers located in its market area which
are secured by collateral other than real estate or which can be unsecured. Such
business loans are generally secured by equipment and inventory and generally
are offered with adjustable rates and various terms of maturity. The Bank will
originate unsecured business loans in those instances where the applicant's
financial strength and creditworthiness has been established. Commercial and
agricultural business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Bank generally obtains personal guarantees from the
borrower or a third party as a condition to originating its business loans.
Commercial and agricultural business loans totaled $31.5 million, or 22.0%, of
the Bank's total loan portfolio at December 31, 2002. The Bank has increased its
level of business loan originations in response to customer demand. During the
year ended December 31, 2002, the Bank originated $22.8 million in commercial
and agricultural business loans. At that date, the Bank's largest commercial
business loan had a principal balance of $1.2 million, and was secured by
aircraft. This loan was performing in accordance with its terms at December 31,
2002.
The underwriting standards used by the Bank for commercial and agricultural
business loans include a determination of the applicant's ability to meet
existing obligations and payments on the proposed loan from normal cash flows
generated in the applicant's business. The financial strength of each applicant
also is assessed through review of financial statements and tax returns provided
by the applicant. The creditworthiness of an applicant is derived from a review
of credit reports as well as a search of public records. Once originated,
business loans are reviewed periodically by the Bank. Financial statements are
requested at least annually and are reviewed by the Bank for substantial
deviations or changes that might affect repayment of the loan. Loan officers of
the Bank also
5
visit the premises of borrowers to observe the business premises, facilities,
and personnel and to inspect the pledged collateral. Underwriting standards for
business loans are different for each type of loan depending on the financial
strength of the applicant and the value of collateral offered as security.
CONSUMER LOANS. As of December 31, 2002, consumer loans totaled $48.8
million, or 34.1%, of the Bank's total loan portfolio. The principal types of
consumer loans offered by the Bank are home equity loans and automobile loans.
Consumer loans generally are offered on a fixed-rate basis. The largest category
of consumer loans in the Bank's portfolio consists of home equity loans. At
December 31, 2002, home equity and home improvement loans totaled $31.2 million,
or 21.8%, of the Bank's total loan portfolio. The Bank's home equity loans are
generally secured by the borrower's principal residence. The maximum amount of a
home equity line of credit is generally 90% of the appraised value of a
borrower's real estate collateral less the amount of any prior mortgages or
related liabilities. Home equity loans are approved with both fixed and
adjustable interest rates which are determined by the Bank based upon market
conditions. Such loans may be fully amortized over the life of the loan or have
a balloon feature. The Bank's home equity loans are generally approved at rates
at least 100 basis points higher than rates offered on first mortgage loans. The
maximum term for home equity loans is 10 years.
The second largest category of consumer loans in the Bank's portfolio
consists of loans secured by automobiles. At December 31, 2002, consumer loans
secured by automobiles totaled $10.5 million, or 7.3%, of the Bank's total loan
portfolio. Automobile loans are offered with maturities of up to 60 months for
new automobiles. Loans secured by used automobiles will have maximum terms which
vary depending upon the age of the automobile. The Bank generally makes
automobile loans with a LTV ratio below 90%, although in the case of a new car
loan the LTV ratio may be greater or less depending on the borrower's credit
history, debt to income ratio, home ownership and other banking relationships
with the Bank.
Consumer loans entail greater risks than one- to four-family residential
mortgage loans, particularly consumer loans secured by rapidly depreciating
assets such as automobiles or loans that are unsecured. In such cases,
collateral repossessed after a default may not provide an adequate source of
repayment of the outstanding loan balance because of damage, loss or
depreciation. Further, consumer loan payments are dependent on the borrower's
continuing financial stability, and therefore are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Such events would
increase the Bank's risk of loss on unsecured loans. Finally, the application of
various Federal and state laws, including Federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans in
the event of a default. At December 31, 2002, consumer loans 90 days or more
delinquent totaled $2.3 million, or 4.7%, of the Bank's total consumer loans.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's credit history and an assessment of the
applicant's ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income may be determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. The Bank also considers the length of
employment with the borrower's present employer as well as the amount of time
the borrower has lived in the local area. Creditworthiness of the applicant is
of primary consideration; however, the underwriting process also includes a
comparison of the value of the collateral in relation to the proposed loan
amount. Of this amount, over 50% is secured by one-to-four family real estate,
upon which a material loss is not expected to be realized. The two largest loans
in this category total $381,000 and are secured by first mortgages on
residential real estate. No assurance can be given, however, that the Bank's
delinquency rate or loss experience on consumer loans will not increase in the
future.
6
LOAN MATURITY SCHEDULE. The following table sets forth certain information
at December 31, 2002 regarding the dollar amount of loans maturing in the Bank's
portfolio based on their contractual terms to maturity. Demand loans, loans
having no stated schedule of repayments and no stated maturity, and overdraft
loans are reported as due in one year or less.
OVER 1
WITHIN YEAR TO BEYOND
1 YEAR 5 YEARS 5 YEARS TOTAL
------ ------- ------- -----
(IN THOUSANDS)
Real estate loans:
One-to four-family real estate...... $ 4,445 $ 22,133 $ 17,305 $ 43,883
Commercial and agricultural real estate 614 3,767 14,040 18,421
Multi-family residential............ 445 1,695 538 2,678
Commercial and agricultural business loans 11,996 17,398 2,108 31,502
Consumer Loans:
Home equity/Home improvement........ 7,263 21,673 2,245 31,181
Automobile.......................... 1,347 8,878 266 10,491
Other............................... 3,048 3,642 437 7,127
--------- --------- --------- ---------
Total................................. $ 29,158 $ 79,186 $ 36,939 $ 145,283
========= ========= ========= =========
The following table sets forth at December 31, 2002, the dollar amount of
all fixed-rate and adjustable-rate loans. At December 31, 2002, fixed-rate loans
include $35.9 million in fixed-rate balloon payment loans with original
maturities of five years or less. The total dollar amount of fixed-rate loans
and adjustable-rate loans due after December 31, 2003, was $104.9 million and
$11.2 million, respectively.
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(IN THOUSANDS)
Real estate loans:
One- to four-family real estate............. $ 35,277 $ 8,606 $ 43,883
Commercial and agricultural real estate..... 8,002 10,419 18,421
Multi-family real estate 2,312 366 2,678
Commercial and agricultural business loans.... 28,045 3,457 31,502
Consumer loans:
Home equity/Home improvement................ 31,171 10 31,181
Automobile.................................. 10,491 -- 10,491
Other....................................... 7,036 91 7,127
--------- --------- ---------
Total......................................... $ 122,334 $ 22,949 $ 145,283
========= ========= =========
LOAN ORIGINATION, SOLICITATION AND PROCESSING. Loan originations are
derived from a number of sources such as real estate broker referrals, existing
customers, borrowers, builders, attorneys and walk-in customers. Upon receipt of
a loan application, a credit report is made to verify specific information
relating to the applicant's employment, income, and credit standing. In the case
of a real estate loan, an appraisal of the real estate intended to secure the
proposed loan is undertaken by an independent appraiser approved by the Bank. A
loan application file is first reviewed by a loan officer in the Bank's loan
department who checks applications for accuracy and completeness, and verifies
the information provided. The financial resources of the borrower and the
borrower's credit history, as well as the collateral securing the loan, are
considered an integral part of each risk evaluation prior to approval. The Board
has established individual lending authorities for each loan officer by loan
type. These limits are based upon length of service at the Bank and the
individual loan officer's lending experience. Loans over an individual officer's
lending limits must be approved by the officers' loan committee consisting of
Chairman, president and all lending officers and, which meets daily and has
lending authority up to $300,000 depending on the type of loan. Loans with a
principal balance over this limit, up to $500,000, must be approved by the
directors' loan committee, which meets weekly and consists of Chairman,
president and at least two outside directors, plus all lending officers as
non-voting members. The Board of Directors approves all loans with a principal
balance over $500,000. The Board of Directors ratifies all loans made by the
Bank. Fire and casualty insurance are required at the time the loan is made and
throughout the term of the loan. Once the loan is approved, the applicant is
informed and a closing date is scheduled. The Bank typically funds its loan
commitments within 30 days.
7
If the loan is approved, the borrower must provide proof of fire and
casualty insurance on the property serving as collateral which insurance must be
maintained during the full term of the loan; flood insurance is required in
certain instances. Title insurance or an attorney's opinion based on a title
search of the property is generally required on loans secured by real property.
ORIGINATION AND SALE OF LOANS. Set forth below is a table showing the
Bank's loan originations, sales and repayments for the periods indicated. It is
the Bank's policy to originate for sale into the secondary market (primarily to
Freddie Mac) fixed-rate mortgage loans with maturities of 15 years or more and
to originate for retention in its portfolio ARM loans and loans with balloon
payments. Currently, the Bank usually obtains commitments prior to selling its
fixed-rate mortgage loans. It is the Bank's policy to sell fixed-rate mortgage
loans as market conditions permit.
AT DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Total loans receivable at beginning of period.............. $ 157,977 $ 173,827 $ 142,635 $ 129,516 $ 128,824
--------- --------- --------- --------- ---------
Originations:
Real estate loans:
One- to four-family residential...................... 99,480 99,081 22,864 39,035 79,322
Commercial and agricultural.......................... 5,519 2,662 4,575 2,484 7,286
Multi-family residential............................. 293 552 395 160 388
Commercial and agricultural.............................. 22,850 26,627 9,549 6,817 10,077
Consumer:
Home equity/Home improvement......................... 16,536 20,761 22,159 26,262 22,222
Automobile........................................... 5,790 7,826 9,289 12,216 9,818
Other................................................ 6,309 6,483 9,466 9,479 11,060
--------- --------- --------- --------- ---------
Total originations................................. 156,777 163,992 78,297 96,453 140,173
Participation loans purchased (sold)....................... 723 1,312 633 618 (298)
Transfer of mortgage loans to foreclosed real estate owned. 806 1,191 659 563 1,057
Repayments................................................. 83,326 99,668 32,810 52,905 69,486
Loan sales................................................. 86,062 80,295 14,269 30,484 68,640
--------- --------- --------- --------- ---------
Total loans receivable at end of period......... $ 145,283 $ 157,977 $ 173,827 $ 142,635 $ 129,516
========= ========= ========= ========= =========
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on loans,
the Bank may charge loan origination fees. The ability of the Bank to charge
loan origination fees is influenced by the demand for mortgage loans and
competition from other lenders in the Bank's market area. In December 1986, the
FASB issued SFAS No. 91 on the accounting for non-refundable fees and costs
associated with originating or acquiring loans. To the extent that loans are
originated or acquired for the Bank's portfolio, SFAS No. 91 requires that the
Bank defer loan origination fees and costs and amortize such amounts as an
adjustment of yield over the life of the loan by use of the level yield method.
SFAS No. 91 applies to fiscal years beginning after December 15, 1987. SFAS No.
91 reduces the amount of revenue recognized by many financial institutions at
the time such loans are originated or acquired. Fees deferred under SFAS No. 91
are recognized into income immediately upon the sale of the related loan. At
December 31, 2002, the Bank had $66,000 of net deferred loan fees. Loan
origination fees are volatile sources of income. Such fees vary with the volume
and type of loans and commitments made and purchased and with competitive
conditions in the mortgage markets, which in turn respond to the demand and
availability of money.
In addition to loan origination fees, the Bank also receives other fees and
service charges that consist primarily of transaction account service charges
and late charges. The Bank recognized fees and service charges of $142,000,
$151,000, and $192,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
8
LOAN CONCENTRATION. With certain exceptions, an Illinois-chartered savings
bank may not make a loan or exceed credit for secured and unsecured loans for
business, commercial, corporate or agricultural purposes to a single borrower in
excess of 25% of the savings bank's total stockholders' equity. At December 31,
2002, the Bank's loans-to-one borrower limit was $4.6 million. At December 31,
2002 the Bank had no loans in excess of its loan-to-one borrower limitation.
DELINQUENCIES AND CLASSIFIED ASSETS
The Bank's collection procedures provide that when a mortgage loan is
either ten days (in the case of ARM and balloon loans) or 15 days (in the case
of fixed-rate loans) past due, a computer-generated late charge notice is sent
to the borrower requesting payment plus a late charge. If the mortgage loan
remains delinquent, a telephone call is made or a letter is sent to the borrower
stressing the importance of reinstating the loan and obtaining reasons for the
delinquency. When a loan continues in a delinquent status for 90 days or more,
and a repayment schedule has not been made or kept by the borrower, a notice of
intent to foreclose upon the underlying property is then sent to the borrower,
giving 30 days to cure the delinquency. If not cured, foreclosure proceedings
are initiated. Consumer loans receive a ten-day grace period before a late
charge is assessed. Collection efforts begin after the grace period expires. At
December 31, 2002, 2001 and 2000 the percentage of nonperforming loans to net
loans receivable were 2.70%, 2.58%, and 1.13%, respectively.
IDENTIFICATION OF LOAN DEFALCATION. During an internal audit of loan
operations in 2001, the Bank uncovered loan irregularities at its branch in
Virden, Illinois. The irregularities, which included recording fictitious loans,
making unauthorized advances on loans, diversion of loan proceeds and payoff
checks, and misapplication of funds, are limited to loans originated and
serviced at the Banks' Virden branch. The investigation, in which the Bank has
been assisted by its independent outside auditor, has been substantially
completed and the identified losses have been recorded on the Bank's financial
statements. While management believes that all significant losses have been
identified, there can be no assurance that additional losses will not be
recognized; however, management does not believe that any such amount would be
material. For the year ended December 31, 2002, the Bank has recognized a
nonrecurring expense associated with the loan irregularities of $62,000,
consisting of identified losses of $62,000 and no related legal and audit
expenses. Since the losses are due to irregularities, rather than credit
quality, the losses have been directly expensed to the income statement and are
not reflected in the allowance for loan losses. This non-recurring expense is
exclusive of any tax effect or potential recovery from the Bank's insurance
carrier. At December 31, 2002, the Bank has taken all steps required in order to
process its claim for recovery under its insurance policies, including filing
its proof of loss claim with its insurance carrier on October 11, 2001. However,
there can be no assurance that the Bank will obtain payment from its insurance
carrier for all or part of its losses.
DELINQUENT LOANS AND NONPERFORMING ASSETS. Loans are reviewed on a regular
basis and are placed on a nonaccrual status when, in the opinion of management,
the collection of additional interest is doubtful. Mortgage loans are placed on
nonaccrual status when either principal or interest is 90 days or more past due
and management considers the interest uncollectible. Interest accrued and unpaid
at the time a loan is placed on nonaccrual status is charged against interest
income. Subsequent payments are either applied to the outstanding principal
balance or recorded as interest income, depending on management's assessment of
the ultimate collectibility of the loan.
Management monitors all past due loans and nonperforming assets. Such loans
are placed under close supervision with consideration given to the need for
additional allowance for loan loss, and (if appropriate) partial or full
charge-off. At December 31, 2002, the Bank had $351,000 of loans 90 days or more
delinquent that were still accruing interest.
Real estate acquired through foreclosure or by deed-in-lieu of foreclosure
is classified as real estate owned until such time as it is sold. When real
estate owned is acquired, it is recorded at the lower of the unpaid principal
balance of the related loan, or its fair market value, less estimated selling
expenses. Any further write-down of real estate owned is charged against
earnings. At December 31, 2002, the Bank owned $442,000 of property classified
as real estate owned.
9
DELINQUENT LOANS.
The following table sets forth information regarding delinquent loans and
other real estate owned by the Bank at the dates indicated. As of the dates
indicated, the Bank had immaterial restructured loans within the meaning of SFAS
No. 15, 114, and 118.
AT DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Non-accruing loans:
One-to-four family residential.............. 769 805 417 686 110
Commercial and agricultural real estate 186 273 -- -- 475
Multi-family residential.................... -- -- -- -- 21
Commercial and agricultural business........ 301 24 237 48 38
Home equity/Home improvement................ 1,860 971 745 512 144
Automobile.................................. 196 181 408 98 135
Other consumer.............................. 198 106 121 354 109
------- ------- ------- ------- -------
Total..................................... 3,510 2,360 1,928 1,698 1,032
------- ------- ------- ------- -------
Accruing loans delinquent more than 90 days:
One-to-four family residential............ 64 -- -- -- --
Commercial and agricultural real estate... 259 1,658 -- -- --
Other consumer............................ 28 9 23 1 1
------- ------- ------- ------- -------
Total..................................... 351 1,667 23 1 1
------- ------- ------- ------- -------
Foreclosed assets:
One-to-four family residential............ 442 945 460 357 534
Automobile................................ 38 60 87 96 --
------- ------- ------- ------- -------
Total..................................... 480 1,005 547 453 534
------- ------- ------- ------- -------
Total nonperforming assets..................... $ 4,341 $ 5,032 $ 2,498 $ 2,152 $ 1,567
------- ------- ------- ------- -------
Total as a percentage of total assets.......... 1.72% 2.09% 1.10% 1.27% 0.93%
------- ------- ------- ------- -------
Loans delinquent 60 to 89 days totaled $1.7 million, or 1.16% of net loans.
The aggregate principal balance of loans on nonaccrual was approximately
$3,510,000, $2,360,000, and $1,928,000 at December 31, 2002, 2001 and 2000,
respectively. Interest income that would have been recorded under the original
terms of such loans totaled approximately $193,000, $129,000, and $131,000 for
the years ended December 31, 2002, 2001, and 2000, respectively. The aggregate
recorded principal of other loans being monitored at December 31, 2002 and 2001
was $4,298,000 and $3,764,000, respectively. The Bank provided reserves of
$1,379,000 related to these loans.
CLASSIFIED ASSETS. Federal and state regulations require that each insured
savings institution classify its assets on a regular basis. In addition, in
connection with examination of insured institutions, Federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. For assets classified "substandard" and "doubtful," the institution
is required to establish general loan loss reserves in accordance with
accounting principles
10
generally accepted in the United States of America. Assets classified "loss"
must be either completely written off or supported by a 100% specific reserve.
The Bank also maintains a classification category designated "special mention"
which is established and maintained for assets not currently requiring
classification but having potential weaknesses or risk characteristics that
could result in future problems. An institution is required to develop an
in-house program to classify its assets, including investments in subsidiaries,
on a regular basis and set aside appropriate loss reserves on the basis of such
classification. As part of the periodic exams of the Bank by the FDIC and the
Illinois Commissioner of Banks and Real Estate ("Commissioner"), the staff of
such agencies reviews the Bank's classifications and determine whether such
classifications are adequate. Such agencies have, in the past, and may in the
future require the Bank to classify certain assets which management has not
otherwise classified or require a classification more severe than established by
management. At December 31, 2002, the Bank's classified assets totaled $4.3
million, all of which were classified substandard.
At December 31, 2002, the Bank's largest nonperforming loan had a principal
balance of $259,000 and was secured by a first mortgage on two commercial
properties. The Bank has established reserves totaling $135,000 for potential
losses associated with this loan. For the years ended December 31, 2002 and
2001, the Bank recognized no interest income on loans classified as nonaccrual.
If such loans had performed in accordance with their terms, the Bank would have
recorded $193,000 and $129,000, respectively, on such loans for the years ended
December 31, 2002 and 2001.
While the Company has a loan review and monitoring system in place,
management has been reviewing its procedures in order to strengthen collection
and underwriting practices. During 2002, management hired an outside consultant
to review the Company's lending policies and procedures, as well as staffing
levels. Based upon this review, management has revised its lending policy to (i)
provide more specific underwriting guidelines, (ii) lower individual officer
lending limits, and (iii) expand the role the officers' loan committee, which
now meets daily. Management will continue to evaluate the Company's underwriting
standards and procedures to identify areas that can be further strengthened.
ALLOWANCE FOR LOAN LOSSES
Management's policy is to provide for estimated losses on the Bank's loan
portfolio based on management's evaluation of the probable losses that may be
incurred. Management regularly reviews the Bank's loan portfolio, including
problem loans, to determine whether any loans require classification or the
establishment of appropriate reserves or allowances for losses. Such evaluation,
which includes a review of all loans of which full collectibility of interest
and principal may not be reasonably assured, considers, among other matters, the
estimated net realizable value of the underlying collateral. Other factors
considered by management include the size and risk exposure of each segment of
the loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in future
periods. Management calculates the general allowance for loan losses in part
based on past experience. While general loss allowances are charged against
earnings, a portion of general loan loss allowances are added back to capital to
the extent permitted in computing risk-based capital under Federal and state
regulations.
The balance of the allowance for loan losses is based on ongoing, quarterly
assessments of the probable estimated losses in the loan portfolio. The Bank's
methodology for assessing the appropriateness of the allowance consists of
applying several formula methods to identified problem loans and portfolio
segments. The allowance is calculated by applying loss factors to outstanding
loan balances, based on 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 judgment, 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
11
values, loan volumes and concentrations, seasoning of the portfolio, and
regulatory examination results. The formulas used in the analysis were changed
in 2002 to reflect the changing composition of the loan portfolio and actual
loss history by loan type. Management believes the current balance of the
allowance for loan losses is adequate. Management will continue to monitor the
loan portfolio and assess the adequacy of the allowance at least quarterly.
For the years ended December 31, 2002, 2001 and 2000, the Bank provided
$2.0 million, $1.0 million, and $610,000, respectively, to the allowance for
loan losses. The Bank's allowance for loan losses totaled $2.1 million, $1.1
million, and $1.2 million at December 31, 2002, 2001 and 2000, respectively.
Although the Bank maintains its allowance for loan losses at a level which it
considers to be adequate to provide for potential losses, there can be no
assurance that such losses will not exceed the estimated amounts or that the
Bank will not be required to make additions to the allowance for loan losses in
the future. Future additions to the Bank's allowance for loan losses and changes
in the related ratio of the allowance for loan losses to nonperforming loans are
dependent upon the economy, changes in real estate values and interest rates,
the view of the regulatory authorities toward adequate loan loss reserve levels,
and inflation. Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loan loss provisions
may be deemed necessary.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the breakdown of the allowance for loan losses by loan category for the periods
indicated. The table reflects the allowance for loan losses as a percentage of
net loans receivable. Management believes that the allowance can be allocated by
category only on an approximate basis. The allocation of the allowance by
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period................... $ 1,107 $ 1,206 $ 827 $ 801 $ 665
Charge-offs:
One-to-four family residential................. 251 109 39 37 3
Commercial and agricultural real estate........ 55 61 6 -- --
Multi-family residential....................... -- -- -- -- --
Commercial and agricultural business........... 44 89 10 30 46
Home equity/home improvement................... 395 267 240 80 74
Automobile..................................... 213 296 181 207 116
Other consumer................................. 163 322 140 147 230
--------- --------- --------- --------- --------
Total....................................... 1,121 1,144 616 501 469
Recoveries:
One-to-four family residential................ 17 -- 12 8 --
Commercial and agricultural real estate....... 2 -- -- -- --
Multi-family residential...................... -- -- -- -- --
Commercial and agricultural business.......... 11 -- 10 -- --
Home equity/Home improvement.................. 10 5 1 1 --
Automobile.................................... 26 26 17 22 --
Other Consumer................................ 21 14 34 51 55
--------- --------- --------- --------- --------
Total....................................... 87 45 74 82 55
Net loans charged-off............................ 1,034 1,099 542 419 414
Additions charged to operations.................. 2,000 1,000 610 445 550
Additions through acquisitions................... -- -- 311 -- --
--------- --------- --------- --------- --------
Balance at end period............................ $ 2,073 $ 1,107 $ 1,206 $ 827 $ 801
======== ========= ========= ========= ========
Total loans outstanding.......................... $ 145,283 $ 157,977 $ 173,827 $ 142,635 $129,516
Average net loans outstanding.................... $ 152,848 $ 162,230 $ 161,915 $ 135,048 $129,426
Allowance for loan losses as a percent
of total loans at end of period................ 1.43% 0.70% 0.70% 0.58% 0.60%
Net loans charged off as a percent
of average net loans outstanding............... 0.68% 0.68% 0.34% 0.31% 0.32%
Ratio of allowance for loan losses to
nonperforming loans............................ 53.69% 27.37% 62.55% 48.68% 77.62%
Ratio of allowance for loan losses to total
nonperforming assets at end of period.......... 47.75% 22.00% 48.28% 38.43% 51.12%
12
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of allowance for loan losses by loan category for the periods
indicated.
AT DECEMBER 31,
-----------------------------------------------------------------
2002 2001 2000
-------------------- -------------------- --------------------
% OF % OF % OF
LOANS IN LOANS IN LOANS IN
EACH CATEGORY EACH CATEGORY EACH CATEGORY
TO NET TO NET TO NET
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
One-to-four family residential................ $ 516 30.7% $ 95 29.8% $ 161 28.1%
Commercial and agricultural real estate....... 180 12.9 19 11.7 158 10.8
Multi-family residential...................... 10 1.9 2 1.6 7 1.6
Commercial and agricultural business.......... 169 22.0 155 19.6 169 18.4
Home equity/Home improvement.................. 653 21.8 429 24.7 187 26.6
Automobile.................................... 329 7.3 253 8.3 227 9.0
Other consumer................................ 216 5.0 154 5.2 177 6.4
Unallocated................................... -- 0.0 -- 0.0 120 0.0
------- -------- ------- --------- ------- ---------
Total .................................... $ 2,073 101.6% $ 1,107 100.9% $ 1,206 100.9%
====== ======== ======= ========= ======= =========
------------------------------------------
1999 1998
-------------------- --------------------
% OF % OF
LOANS IN LOANS IN
EACH CATEGORY EACH CATEGORY
TO NET TO NET
AMOUNT LOANS AMOUNT LOANS
--------- --------- --------- ---------
One-to-four family residential................ $ 253 29.4% $ 212 32.6%
Commercial and agricultural real estate....... 57 5.9 22 6.5
Multi-family residential...................... 5 1.5 5 1.6
Commercial and agricultural business.......... 152 16.3 186 13.6
Home equity/Home improvement.................. 103 28.9 89 27.6
Automobile.................................... 78 11.0 78 10.8
Other consumer................................ 158 7.6 98 7.9
Unallocated................................... 21 0.0 111 0.0
------ -------- ------ ------
Total .................................... $ 827 100.6% $ 801 100.6%
====== ======== ====== ======
13
INVESTMENT ACTIVITIES
The Bank's investment portfolio consists primarily of mortgage-backed
securities (discussed below) and interest-bearing deposits in other financial
institutions, Federal funds sold, U.S. Treasury Notes and Agency Securities,
Municipal Bonds and FHLB stock. The Bank's portfolio of equity investment
securities totaled $48,000 at December 31, 2002 consisting of an interest in a
local community development corporation and Farmer Mac Stock. In addition, the
Bank's investment portfolio included $731,000 of local municipal bonds. The Bank
had $800,000 in Federal funds sold holdings at December 31, 2002. The Bank's
portfolio of U.S. Government and Agency Securities totaled $72.8 million at
December 31, 2002. The Bank's holdings of FHLB stock totaled $1.3 million at
December 31, 2002. The Bank had $3.9 million of investments in interest-bearing
deposits at December 31, 2002 consisting of deposits in the Federal Home Loan
Bank Account. Total long-term investments at December 31, 2002 were $64.9
million. The Bank's short-term and long-term investment portfolio is expected to
continue to change based on liquidity needs associated with loan origination
activities.
The Bank is required under Federal regulations to maintain a minimum amount
of liquid assets that may be invested in specified short-term securities and
certain other investments. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities and its expectation of the level of yield that will be
available in the future, as well as management's projections as to the
short-term demand for funds to be used in the Bank's loan origination and other
activities. The Bank's liquidity ratio at December 31, 2002 was 34.8%, which was
adequate to meet its normal business activities.
MORTGAGE-BACKED SECURITIES. The Bank occasionally invests in
mortgage-backed securities issued or guaranteed by the United States Government
or agencies thereof. These securities, which consist primarily of
mortgage-backed securities issued or guaranteed by GNMA, FNMA, and FHLMC, had an
amortized cost of $2.7 million, $4.1 million, and $6.6 million at December 31,
2002, 2001 and 2000, respectively, and consisted of $2.8 million of
adjustable-rate mortgage-backed securities and $6,000 of fixed-rate
certificates. The market value of the Bank's mortgage-backed securities
portfolio was $2.8 million, $4.3 million, and $6.7 million at December 31, 2002,
2001 and 2000, respectively, and the weighted average rate at the end of
December 31, 2002, 2001 and 2000 was 6.09%, 7.12%, and 6.88%, respectively.
Adjustable mortgage-backed securities typically are issued with stated
principal amounts and the securities are backed by pools of mortgage loans with
varying interest rates and maturities. The mortgage loans backing the
mortgage-backed securities are ARM loans. The interest rate risk characteristics
of the underlying pool of mortgages as well as the prepayment risk are passed on
to the holder of the mortgage-backed securities. Consequently, in a declining
interest rate environment there is a risk that mortgage-backed securities will
prepay faster than anticipated, thereby adversely affecting the yield to
maturity and the related market value of the mortgage-backed securities.
Moreover, there can be no assurance that the Bank would be able to reinvest the
cash flow from prepaid mortgage-backed securities into comparable yielding
investments. In a rising interest rate environment the value of mortgage-backed
securities with adjustable-rate underlying mortgage loans may be impaired due to
contractual limits on interest rate adjustments. Such mortgage-backed securities
have a weighted average life of approximately seven years.
14
Set forth below is a table showing the Bank's purchases and repayments of
mortgage-backed securities for the periods indicated. The Bank did not sell any
of its mortgage-backed securities during the periods indicated.
AT DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- --------
(IN THOUSANDS)
Mortgage-backed securities at beginning of
period..................................... $ 4,264 $ 6,689 $ 7,353 $ 9,974 $ 13,995
Purchases.................................... -- -- 797 -- --
Repayments................................... 1,410 2,499 1,472 2,584 3,859
Premium amortization......................... -- (2) (3) (8) (14)
Net unrealized gain (loss)................... (32) 72 14 (29) (148)
--------- --------- --------- --------- --------
Mortgage-backed securities at end of period.. $ 2,822 $ 4,264 $ 6,689 $ 7,353 $ 9,974
========= ========= ========= ========= ========
INVESTMENT SECURITIES AND SHORT-TERM INVESTMENT PORTFOLIO. The following
table sets forth the carrying value of the Bank's investment securities
portfolio and short-term investments at the dates indicated. At December 31,
2002, the market value of the Bank's investment and short-term investment
portfolios approximated their cost.
AT DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- --------
(IN THOUSANDS)
Investment securities:
FHLB stock.................................... $ 1,279 $ 1,215 $ 1,135 $ 920 $ 917
Equity securities and municipal bonds......... 779 1,498 1,641 120 160
U.S. Government and Agency Securities......... 72,846 42,984 18,519 490 502
Corporate Bonds............................... -- -- -- 299 599
--------- --------- --------- --------- --------
Total investment securities.......... $ 74,904 $ 46,359 $ 21,295 $ 1,829 $ 2,178
========= ========= ========= ========= ========
Short-term investments:
Certificates of deposit in other financial
institutions................................. $ -- $ -- $ -- $ -- $ 95
Interest-bearing deposits in other depository
institutions................................. 3,865 6,506 2,853 4,768 12,497
Federal funds sold............................ 800 1,010 4,967 -- --
--------- --------- --------- --------- --------
Total short-term investments............ $ 4,665 $ 7,516 $ 7,820 $ 4,768 $ 12,592
========= ========= ========= ========= ========
The following table sets forth the maturities and weighted average yields
of the bank's securities portfolio, excluding FHLB stock and equity securities,
at December 31, 2002.
CARRYING VALUE AT DECEMBER 31, 2002
---------------------------------------------------------------
TOTAL
LESS THAN 1 TO 5 5 TO 10 OVER INVESTMENT
1 YEAR YEARS YEARS 10 YEARS SECURITIES
--------- --------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
U.S. Government............................... $ 7,986 $ 19,117 $ 43,995 $ 1,748 $ 72,846
Municipal bonds............................... 79 277 -- 375 731
--------- --------- --------- --------- --------
Total..................................... $ 8,065 $ 19,394 $ 43,995 $ 2,123 $ 73,577
========= ========= ========= ========= ========
Weighted average yield.......................... 2.98% 3.50% 4.93% 4.43% 4.32%
15
SOURCES OF FUNDS
GENERAL. Deposits and borrowings are the major sources of funds for lending
and other investment purposes. In addition, the Bank derives funds from the
repayment and prepayment of loans and mortgage-backed securities, operations,
and the sale or maturity of investment securities. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and market conditions. Other sources of funds include advances from the
FHLB. For further information see "--Borrowings." Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources or on a longer term basis for general business purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within the Bank's market areas through the offering of a broad selection of
deposit instruments including interest-bearing checking accounts,
noninterest-bearing checking accounts, savings accounts, money market demand
accounts, term certificate accounts and individual retirement accounts. The Bank
accepts deposits of $100,000 or more and may offer negotiated interest rates on
such deposits. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. The Bank regularly evaluates its internal cost of
funds, surveys rates offered by competing institutions, reviews the Bank's cash
flow requirements for lending and liquidity and executes rate changes when
deemed appropriate. The Bank does not obtain funds through brokers, nor does it
solicit funds outside its market area. The Bank has on occasion offered above
market interest rates in order to attract deposits.
DEPOSIT ACTIVITY
The following table sets forth the deposit activities of the Bank for the
periods indicated.
AT DECEMBER 31,
-------------------------------------------------------------------
2002 2001 2000 (1) 1999 1998
----------- ----------- ----------- ----------- ----------
(IN THOUSANDS)
Deposits......................................... $ 1,067,912 $ 838,886 $ 611,070 $ 443,376 $ 450,690
Withdrawals...................................... 1,064,640 827,381 557,631 456,508 454,932
----------- ----------- ----------- ----------- ----------
Net increase (decrease) before interest credited. 3,272 11,505 53,439 (13,132) (4,242)
Interest credited................................ 5,431 7,595 5,170 4,474 4,955
----------- ----------- ----------- ----------- ----------
Net increase (decrease) in deposits........... $ 8,703 $ 19,100 $ 58,609 $ (8,658) $ 713
=========== =========== =========== ============ ==========
- ------------------------------------
(1) Deposits during 2000 include $45,747,000 in deposits acquired from Chapin
State Bank.
16
DEPOSIT PORTFOLIO
Deposits in the Bank as of December 31, 2002 were represented by the
various types of deposit programs described below:
WEIGHTED PERCENTAGE
AVERAGE MINIMUM OF TOTAL
INTEREST RATE MINIMUM TERM DEMAND ACCOUNTS AMOUNT BALANCES DEPOSITS
------------- ------------ --------------- ------ -------- --------
(IN THOUSANDS)
0.00% None Noninterest-bearing checking $ 50 $ 13,529 6.00%
0.72 None Interest-bearing checking 50 24,042 10.66
1.49 None Money market deposit accounts 2,500 10,652 4.72
1.18 None Savings 50 26,215 11.62
CERTIFICATES OF DEPOSIT
-----------------------
3.58 Less than 1 year Fixed term, fixed rate $ 500 $109,672 48.61
4.44 1-2 years Fixed term, fixed rate 500 26,009 11.53
5.37 2-3 years Fixed term, fixed rate 500 10,409 4.61
5.02 3-4 years Fixed term, fixed rate 500 2,207 0.98
4.68 Over 4 years Fixed term, fixed rate 500 2,867 1.27
-------- ---------
$225,602 100.00%
======== =========
17
DEPOSIT FLOW
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
AT DECEMBER 31,
----------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------- ------------------------------ -----------------------------
BALANCE PERCENT CHANGE BALANCE PERCENT CHANGE BALANCE PERCENT CHANGE
--------- -------- -------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Club accounts.................. $ 214 0.10% $ 12 $ 202 0.09% $ (12) $ 214 0.11% $ 17
Noninterest-bearing checking... 13,529 6.00 2,466 11,063 5.10 1,561 9,502 4.81 4,182
Interest-bearing checking...... 24,042 10.66 456 23,586 10.87 938 22,648 11.45 6,904
Passbooks...................... 26,001 11.52 826 25,175 11.61 2,741 22,434 11.34 (819)
Money market deposit accounts.. 10,652 4.72 2,999 7,653 3.53 (411) 8,064 4.08 1,861
Certificates of deposit that
mature:
within 12 months............. 109,672 48.61 4,113 105,559 48.67 12,390 93,169 47.10 31,080
within 12-36 months.......... 36,418 16.14 (1,185) 37,603 17.34 3,402 34,201 17.29 10,080
beyond 36 months............. 5,074 2.25 (984) 6,058 2.79 (1,509) 7,567 3.82 5,304
--------- -------- -------- --------- -------- -------- --------- ------- --------
Total...................... $ 225,602 100.00% $ 8,703 $ 216,899 100.00% $ 19,100 $ 197,799 100.00% $ 58,609
========= ======== ======== ========= ======== ======== ========= ======= ========
-----------------------------
1999
-----------------------------
BALANCE PERCENT CHANGE
--------- --------- ---------
Club accounts.................. $ 197 0.14% $ 20
Noninterest-bearing checking... 5,320 3.82 93
Interest-bearing checking...... 15,744 11.31 969
Passbooks...................... 23,253 16.71 517
Money market deposit accounts.. 6,203 4.46 1,534
Certificates of deposit that
mature:
within 12 months............. 62,089 44.61 (10,575)
within 12-36 months.......... 24,121 17.33 (503)
beyond 36 months............. 2,263 1.62 (713)
--------- ------- ---------
Total...................... $ 139,190 100.00% $ (8,658)
========= ======= =========
18
TIME DEPOSITS BY RATES
The following table sets forth the certificates of deposit of the Bank
classified by rates as of the dates indicated:
AT DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Rate
- ----
3.99% or less.................................. $ 87,431 $ 40,338 $ 52 $ 49 $ 90
4.00-5.99%..................................... 41,164 63,363 57,379 70,312 65,593
6.00-7.99%..................................... 20,407 43,011 75,440 17,123 33,348
8.00 and greater............................... 2,162 2,508 2,066 989 1,233
--------- --------- --------- --------- ---------
$ 151,164 $ 149,220 $ 134,937 $ 88,473 $ 100,264
========= ========= ========= ========= =========
The following table sets forth the amount and maturities of
certificates of deposit at December 31, 2002.
AMOUNT DUE
------------------------------------------------------------------
OVER 1 OVER 2 OVER 3
LESS THAN YEAR TO 2 YEARS TO 3 YEARS TO 4 OVER 4
ONE YEAR YEARS YEARS YEARS YEARS TOTAL
----------- --------- ---------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
Rate
- ----
3.99% or less................................ $71,411 $11,614 $ 3,236 $ 433 $ 737 $87,431
4.00-5.99%................................... 25,760 9,266 2,886 1,144 2,108 41,164
6.00-7.99%................................... 12,459 4,806 2,490 630 22 20,407
8.00 and greater............................. 42 323 1,797 -- -- 2,162
Weighted average rate........................ 3.58% 4.44% 5.37% 5.02% 4.68% 3.88%
LARGE CERTIFICATES OF DEPOSIT. The following table indicates the balances
of certificates of deposit of $100,000 or more by time remaining until maturity
as of December 31, 2002.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- ----------
(IN THOUSANDS)
Less than 3 months............................ $ 16,366
3-6 months.................................... 11,065
6-12 months................................... 13,821
Over 12 months................................ 11,765
--------
Total...................................... $ 53,017
========
BORROWINGS
Deposits are the primary source of funds for the Bank's lending and
investment activities. If the need arises, the Bank may rely upon advances from
the FHLB to supplement its supply of available funds and to fund deposit
withdrawals. Advances from the FHLB are typically secured by the Bank's one- to
four-family residential mortgage loans, United States Government and agency
securities and mortgage-backed securities. The FHLB functions as a central
reserve bank providing credit for the Bank and other member savings associations
and financial institutions. As a member, the Bank is required to own capital
stock in the FHLB and is authorized to
19
apply for advances on the security of such stock and certain of its home
mortgages, provided certain standards related to creditworthiness have been met.
Advances are made pursuant to several different programs. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
a member institution's stockholders' equity or on the FHLB's assessment of the
institution's creditworthiness. At December 31, 2002, the Bank had no FHLB
advances outstanding.
Other borrowings consist of securities sold under agreements to repurchase
which are swept daily from commercial deposit accounts. The Company may be
required to provide additional collateral based on the fair value of the
underlying securities.
The following table sets forth certain information regarding borrowings by
the Bank for the dates indicated.
AT DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Weighted average rate paid on:(1)
FHLB advances.................................. --% 6.80% 6.52% 5.8% --
Other borrowings............................... 1.81% 1.51% 5.30% 9.0% 9.0%
FHLB advances:
Maximum balance................................ $ -- $ 5,000 $ 14,000 $ 8,000 $ --
Average balance................................ $ -- $ 795 $ 7,877 $ 1,723 $ --
Other:
Maximum balance............................... $ 4,364 $ 1,560 $ 896 $ -- $ 215
Average balance............................... $ 2,097 $ 849 $ 106 $ 17 $ 189
- ------------------------------------
(1) Calculated using the daily weighted average interest rates.
TRUST SERVICES
Through its acquisition of Chapin State Bank, the Bank is now able to offer
personal trust services. As of December 31, 2002, the Bank's Trust Department
was managing $11.0 million in trust assets. Trust fees collected in 2002 totaled
$35,000. On March 14, 2000, the State of Illinois and the FDIC granted to the
Bank trust powers.
SUBSIDIARY ACTIVITIES
The Bank has one wholly owned subsidiary, Financial Resources Group, Inc.
("Financial Resources"), an Illinois corporation. Financial Resources is engaged
in the business of originating commercial business loans and, to a lesser
extent, commercial real estate loans, one- to four-family loans, pursuant to
Veteran's Administration ("VA") and Federal Housing Administration ("FHA")
guidelines, and multi-family loans. In addition, Financial Resources operates an
investment center engaged in the business of buying and selling stocks, bonds,
annuities and mutual funds for its customers' accounts. At December 31, 2002,
the Bank had $1.6 million in equity and retained earnings in Financial
Resources. For the year ended December 31, 2002, Financial Resources had net
income of $132,000.
COMPETITION
The Bank encounters significant competition both in attracting deposits and
in originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, other savings banks,
savings associations and credit unions in its market area, and the Bank expects
continued strong competition from such financial institutions in the foreseeable
future. The Bank competes for savings by offering depositors a high level of
personal service and expertise together with a wide range of financial services.
20
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings banks and savings
associations. This competition for loans has increased substantially in recent
years as a result of the large number of institutions competing in the Bank's
market areas as well as the increased efforts by commercial banks to expand
mortgage loan originations. The Bank competes for loans primarily through the
interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers and home builders. Factors that affect
competition include general and local economic conditions, current interest rate
levels and the volatility of the mortgage markets.
The Bank's market areas consist of Morgan, Macoupin, and Montgomery
Counties, Illinois. The Bank's market areas have a number of financial
institutions, however, the Bank is the largest independent financial institution
headquartered in Jacksonville.
REGULATION AND SUPERVISION
GENERAL. Jacksonville Bancorp, Inc. and Jacksonville Bancorp, MHC are
nondiversified mutual savings and loan holding companies within the meaning of
the Home Owners' Loan Act. As such they are registered with the Office of Thrift
Supervision and are subject to regulation by the Office of Thrift Supervision.
The Bank is an Illinois-chartered savings bank subject to extensive regulation
by the Illinois Commissioner of Banks and Real Estate (the "Commissioner") and
the FDIC. Its deposit accounts are insured up to applicable limits by the FDIC.
The Bank must file reports with the Commissioner and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers or
acquisitions with other depository institutions. There are periodic examinations
of the Bank by the Commissioner and the FDIC to review the Bank's compliance
with various regulatory requirements. The Bank is also subject to certain
reserve requirements established by the Board of Governors of the Federal
Reserve (the "FRB"). This regulation and supervision establishes a comprehensive
framework of activities in which a savings bank can engage and is intended
primarily for the protection of the FDIC and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Commissioner, the FDIC, or Congress
could have a material impact on the operations of the Bank. Certain of the
regulatory requirements applicable to the Bank are referred to below or
elsewhere herein.
CAPITAL MAINTENANCE. Under FDIC regulations, the Bank must maintain minimum
levels of capital. The regulations establish a minimum leverage capital
requirement of not less than 3% core capital to total assets for banks in the
strongest financial and managerial condition, with a CAMEL Rating of 1 (the
highest rating of the federal regulators for banks). For all other banks, the
minimum leverage capital requirement is between 4% and 5% of total assets. Core
capital is composed of the sum of common stockholders' equity, noncumulative
perpetual preferred stock (including any related surplus) and minority interests
in consolidated subsidiaries, minus all intangible assets (other than qualifying
mortgage servicing rights and qualifying supervisory intangible core deposits),
identified losses and investments in certain subsidiaries.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as core capital and supplementary capital) to risk
weighted assets of 8.0%. In determining the amount of risk-weighted assets, all
assets, including certain off balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the federal regulators believe are
inherent in the type of asset. The components of core capital are equivalent to
those discussed earlier under the 3% leverage requirement. The components of
supplementary capital currently include cumulative perpetual preferred stock,
long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and allowance for loan and
lease losses. Allowance for loan and lease losses includible in supplementary
capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the
amount of capital counted toward supplementary capital cannot exceed 100% of
core capital.
21
Set forth below is a summary of the Bank's compliance with its capital
requirements as of December 31, 2002. At December 31, 2002, the Bank exceeded
its applicable capital requirements.
AT DECEMBER 31, 2002
------------------------
PERCENT OF
AMOUNT ASSETS
--------- -----------
(DOLLARS IN THOUSANDS)
Tier 1(Core) Capital to Total Adjusted Assets (Leverage Ratio)
Actual level................................................... $ 16,310 6.66%
Required level................................................. 9,789 4.00
--------- -------
Excess......................................................... $ 6,521 2.66%
========= =======
Tier 1 Capital to Risk-Weighted Assets:
Actual level................................................... $ 16,310 10.42%
Required level................................................. 6,264 4.00
--------- -------
Excess......................................................... $ 10,046 6.42%
========= =======
Total Capital to Risk-Weighted Assets:
Actual level................................................... $ 18,268 11.67%
Required level................................................. 12,528 8.00
--------- -------
Excess......................................................... $ 5,740 3.67%
========= =======
ILLINOIS SAVINGS BANK REGULATION. As an Illinois-chartered savings bank,
the Bank is subject to regulation and supervision by the Commissioner. The
Commissioner's regulation of the Bank covers, among other things, the Bank's
internal organization (i.e., charter, bylaws, capital requirements, transactions
with directors and officers, and composition of the board of directors), as well
as supervision of permissible activities and mergers and acquisitions. The Bank
is required to file periodic reports with, and is subject to periodic
examinations at least once within every 18-month period by the Commissioner. The
lending and investment authority of the Bank is prescribed by Illinois law and
regulations, as well as applicable Federal laws and regulations, and the Bank is
prohibited from engaging in any activities not permitted by such laws and
regulations.
Under Illinois law, savings banks are required to maintain a minimum core
capital to total assets ratio of 3%. 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.
Under Illinois law, a savings bank may make both secured and unsecured
loans. However, loans for business, corporate, commercial or agricultural
purposes, whether secured or unsecured, may not in the aggregate exceed 15% of a
savings bank's total assets unless authorized by the Commissioner. With the
prior written consent of the Commissioner, savings banks may also engage in real
estate development activities, provided that the total investment in any one
project may not exceed 15% of total capital, and the total investment in all
projects may not exceed 50% of total capital. The total loans and extensions of
credit outstanding at one time, both direct and indirect, by a savings bank to
any borrower may not exceed 25% of the savings bank's total capital. At December
31, 2002, the Bank did not have any loans-to-one borrower which exceeded this
limitation.
Illinois-chartered savings banks generally have all lending, investment and
other powers which are possessed by federal savings banks based in Illinois.
Recent federal and state legislative developments have reduced distinctions
between commercial banks and savings institutions in Illinois with respect to
lending and investment authority. As federal law has expanded the authority of
federally chartered savings institutions to engage in activities previously
reserved for commercial banks, Illinois legislation and regulations ("parity
legislation") have given Illinois-chartered savings institutions such as the
Bank the powers of federally chartered savings institutions.
22
The board of directors of a savings bank may declare dividends on its
capital stock based upon the savings bank's annualized net profits except (1)
dividends may not be declared if the bank fails to meet its capital
requirements, (2) dividends are limited to 100% of net income in that year and
(3) if total capital is less than 6% of total assets, dividends are limited to
50% of net income without prior approval of the Illinois Commissioner of Banks
and Real Estate.
An Illinois-chartered savings bank may not make a loan to a person owning
10% or more of its stock, an affiliated person, an agent or an attorney of the
savings bank, either individually or as an agent or partner of another, except
under the rules of the Commissioner and regulations of the FDIC. This
restriction does not apply, however, to loans made (i) on the security of
single-family residential property used by the borrower as his or her residence,
and (ii) to a non-profit, religious, charitable or fraternal organization or a
corporation in which the savings bank has been authorized to invest by the
Commissioner. Furthermore, a savings bank may not purchase, lease or acquire a
site for an office building or an interest in real estate from an officer,
director, employee or the holder of more than 10% of the savings bank's stock or
certain affiliated persons as set forth in Illinois law, unless the prior
written approval of the Commissioner is obtained.
Illinois law provides that any depository institution may merge into a
savings bank operating under the Illinois Savings Bank Act. The Board of
Directors of each merging institution must approve a plan of merger by
resolution adopted by majority vote of all members of the respective boards.
After such approval, the plan of merger must be submitted to the Commissioner
for approval. The Commissioner may make an examination of the affairs of each
merging institution (and their affiliates). The Commissioner shall not approve a
merger agreement unless he finds that, among other things, (i) the resulting
institution meets all requirements of the SBA; (ii) the merger agreement is fair
to all persons affected; and (iii) the resulting institution will be operated in
a safe and sound manner. If approved by the Commissioner, the plan of merger
must be submitted to stockholders of the depository institution for approval,
and may be required to be submitted to members if a mutual savings bank is one
of the constituent entities. A two-thirds affirmative vote is required for
approval of the plan of merger.
COMMUNITY REINVESTMENT ACT
FEDERAL REGULATION. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution.
GRAMM-LEACH-BLILEY FINANCIAL SERVICES MODERNIZATION ACT OF 1999
In November 1999, the Gramm-Leach-Bliley Financial Services Modernization
Act of 1999 (the "Gramm-Leach-Bliley Act") became law. The Gramm-Leach-Bliley
Act established a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms and other financial
service providers. To the extent the Gramm-Leach-Bliley Act permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. This could result in a growing
number of larger financial institutions that offer a wider variety of financial
services than the Bank currently offers and that can aggressively compete in the
markets the Bank currently serves.
THE USA PATRIOT ACT
In response to the events of September 11th, the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October
26, 2001. The USA PATRIOT Act gives the federal government new powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information
23
sharing and broadened anti-money laundering requirements. By way of amendments
to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures
intended to encourage information sharing among bank regulatory agencies and law
enforcement bodies. Further, certain provisions of Title III impose affirmative
obligations on a broad range of financial institutions, including banks,
thrifts, brokers, dealers, credit unions, money transfer agents and parties
registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the following
requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i) internal
policies, procedures, and controls; (ii) specific designation of an
anti-money laundering compliance officer; (iii) ongoing employee
training programs; and (iv) an independent audit function to test the
anti-money laundering program.
o Section 326 authorizes the Secretary of the Department of Treasury, in
conjunction with other bank regulators, to issue regulations by
October 26, 2002 that provide for minimum standards with respect to
customer identification at the time new accounts are opened.
o Section 312 requires financial institutions that establish, maintain,
administer, or manage private banking accounts or correspondence
accounts in the United States for non-United States persons or their
representatives (including foreign individuals visiting the United
States) to establish appropriate, specific, and, where necessary,
enhanced due diligence policies, procedures, and controls designed to
detect and report money laundering.
o Financial institutions are prohibited from establishing, maintaining,
administering or managing correspondent accounts for foreign shell
banks (foreign banks that do not have a physical presence in any
country), and will be subject to certain record keeping obligations
with respect to correspondent accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
The federal banking agencies have begun to propose and implement
regulations pursuant to the USA PATRIOT Act. These proposed and interim
regulations would require financial institutions to adopt the policies and
procedures contemplated by the USA PATRIOT Act.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of
2002 ("Sarbanes-Oxley"), which implemented legislative reforms intended to
address corporate and accounting fraud. In addition to the establishment of a
new accounting oversight board that will enforce auditing, quality control and
independence standards and will be funded by fees from all publicly traded
companies, Sarbanes-Oxley places certain restrictions on the scope of services
that may be provided by accounting firms to their public company audit clients.
Any non-audit services being provided to a public company audit client will
require preapproval by the company's audit committee. In addition,
Sarbanes-Oxley makes certain changes to the requirements for audit partner
rotation after a period of time. Sarbanes-Oxley requires chief executive
officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the Securities and Exchange Commission,
subject to civil and criminal penalties if they knowingly or willingly violate
this certification requirement. The Company's Chief Executive Officer and Chief
Financial Officer have signed certifications to this Form 10-K as required by
Sarbanes-Oxley. In addition, under Sarbanes-Oxley, counsel will be required to
report evidence of a material violation of the securities laws or a breach of
fiduciary duty by a company to its chief executive officer or its chief legal
officer, and, if such officer does not appropriately respond, to report such
evidence to the audit committee or other similar committee of the board of
directors or the board itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate
executives who violate federal securities laws; the period during which certain
types of suits can be brought against a company or its officers is
24
extended; and bonuses issued to top executives prior to restatement of a
company's financial statements are now subject to disgorgement if such
restatement was due to corporate misconduct. Executives are also prohibited from
trading the company's securities during retirement plan "blackout" periods, and
loans to company executives (other than loans by financial institutions
permitted by federal rules and regulations) are restricted. In addition, a
provision directs that civil penalties levied by the Securities and Exchange
Commission as a result of any judicial or administrative action under
Sarbanes-Oxley be deposited to a fund for the benefit of harmed investors. The
Federal Accounts for Investor Restitution provision also requires the Securities
and Exchange Commission to develop methods of improving collection rates. The
legislation accelerates the time frame for disclosures by public companies, as
they must immediately disclose any material changes in their financial condition
or operations. Directors and executive officers must also provide information
for most changes in ownership in a company's securities within two business days
of the change.
Sarbanes-Oxley also increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit Committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert"
(as such term is defined by the Securities and Exchange Commission) and if not,
why not. Under Sarbanes-Oxley, a company's registered public accounting firm is
prohibited from performing statutorily mandated audit services for a company if
such company's chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. Sarbanes-Oxley also
prohibits any officer or director of a company or any other person acting under
their direction from taking any action to fraudulently influence, coerce,
manipulate or mislead any independent accountant engaged in the audit of the
company's financial statements for the purpose of rendering the financial
statements materially misleading. Sarbanes-Oxley also requires the Securities
and Exchange Commission to prescribe rules requiring inclusion of any internal
control report and assessment by management in the annual report to
shareholders. Sarbanes-Oxley requires the company's registered public accounting
firm that issues the audit report to attest to and report on management's
assessment of the company's internal controls.
Although we anticipate that we will incur additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
HOLDING COMPANY REGULATION
PERMITTED ACTIVITIES. Pursuant to Section 10(o) of the Home Owners' Loan
Act and Office of Thrift Supervision regulations and policy, a mutual holding
company and a federally chartered mid-tier holding company such as Jacksonville
Bancorp, Inc. may engage in the following activities: (i) investing in the stock
of a savings association; (ii) acquiring a mutual association through the merger
of such association into a savings association subsidiary of such holding
company or an interim savings association subsidiary of such holding company;
(iii) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association; (iv) investing in a corporation, the
capital stock of which is available for purchase by a savings association under
federal law or under the law of any state where the subsidiary savings
association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of such company; (viii) acting as
trustee under deeds of trust; (ix) any other activity (A) that the Federal
Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the
Director, by regulation, prohibits or limits any such activity for savings and
loan holding companies; or (B) in which multiple savings and loan holding
companies were authorized (by regulation) to directly engage on March 5, 1987;
(x) any activity permissible for financial holding companies under Section 4(k)
of the Bank Holding Company Act, including securities and insurance
underwriting; and (xi) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
savings and loan holding company is approved by the Director. If a mutual
holding company acquires or merges with another holding company, the holding
company acquired or the holding company resulting from such merger
25
or acquisition may only invest in assets and engage in activities listed in (i)
through (xi) above, and has a period of two years to cease any nonconforming
activities and divest of any nonconforming investments.
The Home Owners' Loan Act prohibits a savings and loan holding company,
including Jacksonville Bancorp, Inc. and Jacksonville Bancorp, MHC, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
Office of Thrift Supervision. It also prohibits the acquisition or retention of,
with certain exceptions, more than 5% of a nonsubsidiary savings institution, a
nonsubsidiary holding company, or a nonsubsidiary company engaged in activities
other than those permitted by the Home Owners' Loan Act; or acquiring or
retaining control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the Office of
Thrift Supervision must consider the financial and managerial resources, future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance fund, the convenience and needs of the community
and competitive factors.
The Office of Thrift Supervision is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
WAIVERS OF DIVIDENDS BY JACKSONVILLE BANCORP, MHC. Office of Thrift
Supervision regulations require Jacksonville Bancorp, MHC to notify the Office
of Thrift Supervision of any proposed waiver of its receipt of dividends from
Jacksonville Bancorp, Inc. The Office of Thrift Supervision reviews dividend
waiver notices on a case-by-case basis, and, in general, does not object to any
such waiver if: (i) the mutual holding company's board of directors determines
that such waiver is consistent with such directors' fiduciary duties to the
mutual holding company's members; (ii) for as long as the savings association
subsidiary is controlled by the mutual holding company, the dollar amount of
dividends waived by the mutual holding company are considered as a restriction
on the retained earnings of the savings association, which restriction, if
material, is disclosed in the public financial statements of the savings
association as a note to the financial statements; (iii) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, and, in accordance with SFAS 5,
where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; and (iv) the amount of any waived dividend is considered as
having been paid by the savings association in evaluating any proposed dividend
under Office of Thrift Supervision capital distribution regulations.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. For federal income tax purposes, the Company files a
federal income tax return based upon a tax year ended December 31. Because the
Mutual Holding Company owns less than 80% of the outstanding Common Stock of the
Company it is not permitted to file a consolidated federal income tax return
with the Company. Since the Mutual Holding Company has no assets other than the
stock of the Company and $1.3 million in cash, it will have no material federal
income tax liability.
The Mutual Holding Company and the Company are subject to the rules of
federal income taxation generally applicable to corporations under the Internal
Revenue Code. Most corporations are not allowed to make tax deductible additions
to bad debt reserves under the Code. However, banks are allowed to compute a tax
deductible bad debt reserve based on their historical loss experience.
Historically, banks were also allowed to compute tax bad debt reserves using a
percentage of taxable income. The tax law was changed in 1987 and 1996 so that
now the Company is allowed to maintain a tax deductible bad debt reserve at the
greater of the amount computed using the experience method or the amount of the
bad debt reserve at December 31, 1987 (base year). The Company has taken
advantage of this tax benefit in computing its tax deductible bad debt reserve
and maintains a tax bad debt reserve equal to the tax bad debt reserve at the
base year.
26
Deferred income taxes arise from the recognition of certain items of income
and expense for tax purposes in years different from those in which they are
recognized in the consolidated financial statements.
The Bank was last audited by the Internal Revenue Service for the tax years
ended December 31, 1998 and 1997. For additional information regarding taxation,
see Note 9 of Notes to Consolidated Financial Statements. As a result of
adjustments made during the audit, the Bank was due a refund of $8,000 for 1998
and required to pay an additional $31,000 for 1997.
ILLINOIS TAXATION. The State of Illinois imposes a tax on the Illinois
taxable income of corporations, including savings banks, at the rate of 7.18%.
Illinois taxable income is generally similar to federal taxable income except
that interest from state and municipal obligations is taxable and no deduction
is allowed for state income taxes. However, a deduction is allowed for certain
U.S. Government and agency obligations. The Bank's state income tax returns for
the tax years ended December 31, 1991, 1990 and 1989, have been audited by the
Illinois tax authorities. Such returns did not have to be amended as a result of
such audit.
PERSONNEL
As of December 31, 2002, the Bank and its subsidiary had a total of 93
full-time and 29 part-time employees. None of the Bank's employees is
represented by a collective bargaining group. Management believes that its
relationship with the Bank's employees is good.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K is available on its website at
www.Jacksonvillesavings.com.
ITEM 2. PROPERTIES
The Bank conducts its business through its main office and two branch
offices located in Jacksonville, and branch offices located in Virden,
Litchfield, Chapin, and Concord, Illinois. The following table sets forth
certain information concerning the main office and each branch office of the
Bank at December 31, 2002. At December 31, 2002, the Bank's premises and
equipment had an aggregate net book value of approximately $5.7 million. The
Bank began its expansion of the main office, the cost of which is expected to be
approximately $2.2 million. The Bank believes that its branch facilities are
adequate to meet the present and immediately foreseeable needs of the Bank and
the Holding Company. All facilities are owned.
27
NET
BOOK VALUE
YEAR AT DECEMBER 31,
LOCATION OCCUPIED 2002
- ------------------------------ ------------- ------------------
(IN THOUSANDS)
Main Office
1211 West Morton Avenue
Jacksonville, Illinois 1994 $ 3,082
Branch Office
211 West State Street
Jacksonville, Illinois 1961 712
Branch Office
903 South Main
Jacksonville, Illinois 1989 247
Branch Office
501 North State Street
Litchfield, Illinois 1997 675
Branch Office
100 North Dye
Virden, Illinois 1986 273
Branch Office
510 Superior
Chapin, Illinois 2000 641
Branch Office
202 State
Concord, Illinois 2000 38
ITEM 3. LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Company is periodically
involved incident to the Company's business. In the opinion of management after
consultation with legal counsel, such claims and lawsuits in the aggregate are
immaterial to the Company and/or Bank's financial condition and results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The "Stockholder Information" section of the Company's annual report to
stockholders for the fiscal year ended December 31, 2002 (the "2002 Annual
Report to Stockholders") is filed as an exhibit to this Form 10-K and is
incorporated herein by reference. No other sections of the 2002 Annual Report to
Stockholders are incorporated herein by this reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Consolidated Financial Information" section of the 2002
Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is
incorporated herein by reference.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Bank's 2002 Annual Report to Stockholders
is filed as an exhibit to this Form 10-K and is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Bank's 2002 Annual Report to Stockholders
is filed as an exhibit to this Form 10-K and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The material identified in Item 15(a)(1) hereof is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Information concerning the directors and certain officers of the Bank
is incorporated by reference hereunder in the Bank's Proxy Statement for the
2003 Annual Meeting.
(b) Set forth below is information concerning the Principal Officers of
the Bank who are not described in the Proxy Statement.
NAME AGE POSITION HELD WITH THE BANK YEARS POSITION HELD
- ---- --- --------------------------- -------------------
Diana S. Tone 34 Chief Financial Officer and Compliance Officer 1
Thomas A. Luber 51 Vice President - Mortgage Banking 10
Steven L. Waltrip 51 Vice President - Mortgage/Consumer Lending 19
Susan L. Harpole 41 Vice President - Mortgage/Consumer Lending 4
John D. Eilering 40 Vice President - Operations 3
Paul W. Miller 48 Vice President - Lending 2
Laura A. Marks 44 Vice President - Retail Banking 1
ITEM 11. MANAGEMENT COMPENSATION
Information with respect to management compensation and transactions
required under this item is incorporated by reference hereunder in the Bank's
Proxy Statement for the 2003 Annual Meeting.
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required under this item is incorporated by reference to the
Bank's Proxy Statement for the 2003 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is incorporated by reference to the
Bank's Proxy Statement for the 2003 Annual Meeting.
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days prior to filing date of this
report, that the Company's disclosure controls and procedures (as defined by the
Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) 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 Commissions' rules and forms.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of the foregoing
evaluation.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The documents filed as a part of this Form 10-K are:
(A) Independent Auditors' Report;
(B) Consolidated Balance Sheets - December 31, 2002 and 2001.
(C) Consolidated Statements of Income - years ended December 31,
2002, 2001 and 2000;
(D) Consolidated Statements of Stockholders' Equity - years ended
December 31, 2002, 2001 and 2000
(E) Consolidated Statements of Cash Flows - years ended December
31, 2002, 2001 and 2000; and
(F) Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(b) REPORTS ON FORM 8-K
30
None.
(c) EXHIBITS
(1) Federal Charter and Bylaws
(2) Instruments defining the rights of security holders, including
debentures (Not Applicable).
(7) Letter re: change in accounting principles (Not Applicable)
(10)Material contracts
(A) Employment Agreement and Employee Severance Agreement
(B) Incentive Stock Option Plan
(C) Stock Option Plan for Outside Directors
(D) Employee's Recognition and Retention Plan and Trust
(E) Recognition and Retention Plan and Trust for Outside
Directors
(F) Jacksonville Savings Bank Stock Option Plan
(G) Jacksonville Savings Bank Stock Option Plan for Outside
Directors
(H) Jacksonville Savings Bank Recognition and Retention Plan
and Trust Agreement
(I) Jacksonville Savings Bank Recognition and Retention Plan
and Trust Agreement for Outside Directors
(13)2002 Annual Report to Stockholders
(21)Subsidiaries
(99.1) Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
31
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard A. Foss, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Jacksonville Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
March 24, 2003 /s/ Richard A. Foss
- ---------------------------------- ----------------------------------
Date Richard A. Foss
President and Chief Executive
Officer
32
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Diana S. Tone, Chief Financial Officer and Compliance Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Jacksonville Bancorp,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
March 24, 2003 /s/ Diana S. Tone
- ---------------------------------- ----------------------------------
Date Diana S. Tone
Chief Financial Officer and
Compliance Officer
33
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Jacksonville Bancorp, Inc.
Date: March 24, 2003 By: /s/ Richard A. Foss
---------------------------
Richard A. Foss, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Richard A. Foss By: /s/ Andrew F. Applebee
---------------------------------------- ----------------------------------------------
Richard A. Foss, President, Andrew F. Applebee, Chairman of the Board
Chief Executive Officer and Director
Date: March 24, 2003 Date: March 24, 2003
By: /s/ Diana S. Tone By: /s/ Emily J. Osburn
---------------------------------------- ----------------------------------------------
Diana S. Tone Emily J. Osburn, Director
Chief Financial Officer
Date: March 24, 2003 Date: March 24, 2003
By: /s/ Roger D. Cannell By: /s/ Harvey D. Scott, III
---------------------------------------- ----------------------------------------------
Roger D. Cannell, Director Harvey D. Scott III, Director
Date: March 24, 2003 Date: March 24, 2003
By: /s/ Michael R. Goldasich By: /s/ John C. Williams
---------------------------------------- ----------------------------------------------
Michael R. Goldasich, Director John C. Williams, Director,
Senior Vice President and Trust Officer
Date: March 24, 2003 Date: March 24, 2003
By: /s/ Dean H. Hess
----------------------------------------
Dean H. Hess, Director
Date: March 24, 2003
EXHIBIT INDEX
(1) Federal Charter and Bylaws *
(10) Material contracts *
(A) Employment Agreement and Employee Severance Agreement
(B) Incentive Stock Option Plan
(C) Stock Option Plan for Outside Directors
(D) Employee's Recognition and Retention Plan and Trust
(E) Recognition and Retention Plan and Trust for Outside
Directors
(F) Jacksonville Savings Bank Stock Option Plan
(G) Jacksonville Savings Bank Stock Option Plan for Outside
Directors
(H) Jacksonville Savings Bank Recognition and Retention Plan and
Trust Agreement
(I) Jacksonville Savings Bank Recognition and Retention Plan and
Trust Agreement for Outside Directors
(13) 2002 Annual Report to Stockholders
(21) Subsidiaries
(99.1) Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Previously Filed