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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period of to
--------- ---------
Commission File Number 000-49792
---------
Jacksonville Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Federal 33-1002258
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
1211 West Morton Avenue
Jacksonville, Illinois 62650
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (217) 245-4111
Indicate by check mark whether issuer (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
[ ] Yes [X] No
As of April 30, 2003, there were 1,921,304 shares (*) of the Registrant's common
stock issued and outstanding.
(*) As of April 30, 2003, 1,038,738 shares were owned by Jacksonville Bancorp,
M.H.C., the Company's mutual holding company parent.
JACKSONVILLE BANCORP, INC.
FORM 10-Q
MARCH 31, 2003
TABLE OF CONTENTS
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PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2003 (Unaudited) and December 31, 2002 1
Consolidated Statements of Income and Comprehensive Income (Loss) for the
Three Months Ended March 31, 2003 and 2002 (Unaudited) 2
Consolidated Statement of Stockholders' Equity for the Three Months Ended
March 31, 2003 (Unaudited) 3
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003
and 2002 (Unaudited) 4-5
Notes to the Unaudited Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-15
Item 3. Quantative and Qualitative Disclosures about Market Risk 16-17
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION 19
Section 302 Certifications 20-23
Signatures 24
EXHIBITS
Section 906 Certification
PART I - FINANCIAL INFORMATION
JACKSONVILLE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 (UNAUDITED) AND DECEMBER 31, 2002
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MARCH 31, DECEMBER 31,
ASSETS 2003 2002
---- ----
Cash and cash equivalents $ 13,208,634 $ 11,091,626
Federal funds sold 2,500,000 800,000
Investment securities - available-for-sale 80,841,611 72,922,995
Mortgage-backed securities - available-for-sale 2,548,326 2,822,119
Federal Home Loan Bank stock 1,314,600 1,279,200
Other investment securities 699,093 701,765
Loans receivable - net of allowance for loan loss of $2,479,219 and $2,073,095 as of
March 31, 2003 and December 31, 2002 136,508,589 142,928,599
Loans held for sale - net 6,939,999 6,271,435
Premises and equipment - net 5,977,840 5,668,211
Accrued interest receivable 1,719,406 1,719,477
Goodwill 2,726,567 2,726,567
Core deposit intangible 418,549 438,480
Capitalized mortgage servicing rights 1,111,458 1,077,318
Real estate owned 622,922 442,048
Income taxes receivable 152,630 222,241
Other assets 1,523,191 1,391,812
------------- -------------
TOTAL ASSETS $ 258,813,415 $ 252,503,893
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 232,784,963 $ 225,303,617
Other borrowings 1,276,281 2,874,707
Advance payments by borrowers for taxes and insurance 646,113 442,439
Accrued interest payable 883,891 995,263
Deferred compensation plan 1,948,296 1,924,718
Other liabilities 722,671 710,738
------------- -------------
Total liabilities 238,262,215 232,251,482
------------- -------------
Commitments and contingencies - -
Preferred stock, $0.01 par value - authorized 10,000,000 shares;
none issued and outstanding - -
Common stock, $0.01 par value - authorized 20,000,000 shares;
issued and outstanding, 1,921,304 shares 19,213 19,213
Additional paid-in capital 6,374,463 6,374,463
Retained earnings - substantially restricted 13,640,167 13,294,959
Accumulated other comprehensive income 517,357 563,776
------------- -------------
Total stockholders' equity 20,551,200 20,252,411
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 258,813,415 $ 252,503,893
============= =============
See accompanying notes to the unaudited consolidated financial statements.
1
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
2003 2002
---- ----
INTEREST INCOME:
Loans 2,632,353 3,097,333
Investment securities 762,626 633,436
Mortgage-backed securities 34,678 62,108
Other 18,492 38,459
------------ -----------
Total interest income 3,448,149 3,831,336
------------ -----------
INTEREST EXPENSE:
Deposits 1,516,378 1,969,739
Other borrowings 5,755 3,231
------------ -----------
Total interest expense 1,522,133 1,972,970
------------ -----------
NET INTEREST INCOME 1,926,016 1,858,366
PROVISION FOR LOAN LOSSES 700,000 150,000
------------ -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,226,016 1,708,366
------------ -----------
OTHER INCOME:
Service charges on deposit accounts 158,952 160,320
Loan servicing fees 98,490 83,109
Commission Income 103,048 111,493
Gains on sales of loans 271,939 116,144
Recovery from insurance company 562,500 -
Other 28,987 26,157
------------ -----------
Total other income 1,223,916 497,223
------------ -----------
OTHER EXPENSES:
Salaries and employee benefits 1,029,090 994,885
Occupancy and equipment expense 294,285 252,485
Data processing expense 59,735 48,413
Stationary and supplies 41,115 43,078
Other real estate expenses 33,976 1,328
Postage expense 35,721 34,917
Advertising expense 30,686 34,958
Other 249,312 283,300
------------ -----------
Total other expenses 1,773,920 1,693,364
------------ -----------
INCOME BEFORE INCOME TAXES 676,012 512,225
INCOME TAXES 264,611 188,917
------------ -----------
NET INCOME 411,401 323,308
OTHER COMPREHENSIVE INCOME-Unrealized gain (loss) on
securities available-for-sale (Net of tax of $29,355 and $278,948) (46,419) (441,104)
------------ -----------
COMPREHENSIVE INCOME (LOSS) $ 364,982 $ (117,796)
============ ===========
NET INCOME PER COMMON SHARE - BASIC AND DILUTED $ 0.21 $ 0.17
============ ===========
See accompanying notes to the unaudited consolidated financial statements.
2
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2003 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME EQUITY INCOME
BALANCE, DECEMBER 31, 2002 $ 19,213 $ 6,374,463 $ 13,294,959 $ 563,776 $ 20,252,411
Net income - - 411,401 - 411,401 $ 411,401
Other comprehensive income - change in
net unrealized gains and losses on
securities available-for-sale (net of tax) - - - (46,419) (46,419) (46,419)
---------
Comprehensive Income - - - - - $ 364,982
=========
Dividends ($.075 per share) - - (66,193) - (66,193)
- - - - -
-------- ----------- ------------ --------- ------------
BALANCE, MARCH 31, 2003 $ 19,213 $ 6,374,463 $ 13,640,167 $ 517,357 $ 20,551,200
======== =========== ============ ========= ============
See accompanying notes to the unaudited consolidated financial statements.
3
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 411,401 $ 323,308
------------ ------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion:
Premises and equipment 116,216 114,680
Accretion of loan fees and discounts, net (56,932) (10,165)
Amortization of investment premiums and discounts, net 203,237 37,049
Amortization of intangible assets 19,931 19,931
Provision for loan losses 700,000 150,000
FHLB stock dividends (35,400) (17,600)
Gains on sales of loans (271,939) (116,144)
Change in income taxes receivable 69,611 711,401
Changes in other assets and liabilities (121,203) (338,055)
------------ ------------
Net cash provided by operations before loan sales 623,521 551,097
------------ ------------
Originations of loans for sale to Freddie Mac (31,394,918) (13,083,592)
Proceeds of sale of loans to Freddie Mac 30,964,153 17,424,080
------------ ------------
Net cash provided by operating activities 604,157 5,214,893
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in federal funds sold, net (1,700,000) (1,000)
Purchases of investment securities (34,084,927) (11,326,894)
Maturity of investment securities available-for-sale 25,886,176 6,500,000
Principal payments received on mortgage-backed securities 277,589 437,878
Loan (originations) in excess of repayments 5,305,874 3,045,929
Proceeds from sales of real estate owned 233,583 118,306
Additions to premises and equipment (425,845) (42,499)
------------ ------------
Net cash (used in) investing activities (4,507,550) (1,268,280)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 7,481,346 1,211,723
Repayment of advance from Federal Home Loan Bank of Chicago
and other borrowings (1,598,426) (674,578)
Increase in advance payments by borrowers for taxes and insurance 203,674 185,286
Dividends Paid (66,193) (65,294)
------------ ------------
Net cash provided by financing activities 6,020,401 657,137
------------ ------------
(Continued)
4
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
2003 2002
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 2,117,008 $ 4,603,750
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,091,626 13,397,002
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 13,208,634 18,000,752
============ ============
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the year for:
Interest on deposits $ 1,627,750 $ 2,107,777
Interest on other borrowings 5,820 3,166
Income taxes, net of (refunds) 195,000 (522,484)
NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans 471,068 150,267
Loans to facilitate sales of real estate owned - 127,035
See accompanying notes to the unaudited consolidated financial statements. (Concluded)
5
JACKSONVILLE BANCORP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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1. FINANCIAL STATEMENTS
The unaudited consolidated financial statements include the accounts of
Jacksonville Bancorp, Inc. and its wholly-owned subsidiary, Jacksonville
Savings Bank (the "Bank") and its wholly-owned subsidiary, Financial
Resources Group, Inc. collectively (the "Company"). All significant
intercompany accounts and transactions have been eliminated.
In the opinion of management, the preceding unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial
condition of the Company as of March 31, 2003 and December 31, 2002 and the
results of its operations for the three month periods ended March 31, 2003
and 2002. The results of operations for the three month period ended March
31, 2003 are not necessarily indicative of the results which may be
expected for the entire year. These consolidated financial statements
should be read in conjunction with the consolidated financial statements of
the Company for the year ended December 31, 2002 filed as an exhibit to the
Company's Form 10-K filed in March, 2003. The accounting and reporting
policies of the Company conform to accounting principles generally accepted
in the United States of America (GAAP) and to prevailing practices within
the industry.
Certain amounts included in the 2002 consolidated statements have been
reclassified to conform to the 2003 presentation.
2. EARNINGS PER SHARE
EARNINGS PER SHARE - Basic earnings per share is determined by dividing net
income for the period by the weighted average number of common shares.
Diluted earnings per share considers the potential effects of the exercise
of the outstanding stock options under the Company's Stock Option Plan.
The following reflects earnings per share calculations for basic and
diluted methods:
MARCH 31,
---------
2003 2002
---- ----
Net income available to common stockholders $ 411,401 $ 323,308
Basic average shares outstanding 1,921,304 1,909,304
Diluted potential common shares:
Stock option equivalents 33,557 22,156
----------- -----------
Diluted average shares outstanding 1,954,861 1,931,460
----------- -----------
Basic earnings per share $ 0.21 $ 0.17
=========== ===========
Diluted earnings per share $ 0.21 $ 0.17
=========== ===========
6
3. REORGANIZATION INTO MID-TIER MUTUAL HOLDING COMPANY
On May 3, 2002, Jacksonville Savings Bank and Jacksonville Bancorp, M.H.C.,
the mutual holding company parent, reorganized into the two-tier mutual
holding company form of ownership by establishing a mid-tier,
federally-chartered stock holding company, Jacksonville Bancorp, Inc. All
outstanding shares of Jacksonville Savings Bank common stock were converted
on a one for one basis into shares of Jacksonville Bancorp, Inc. common
stock in the reorganization. Jacksonville Bancorp, Inc. now owns 100% of
the outstanding shares of Jacksonville Savings Bank.
4. STOCK OPTION PLANS
The Company's 1996 Stock Option Plan was adopted on April 23, 1996 with a
total of 83,625 shares of common stock reserved and awarded. Awards vested
20% per year and expire after ten years and are exercisable at a price of
$8.83 per share. The Company's 2001 Stock Option Plan was adopted on April
30, 2001 with a total of 87,100 shares reserved and awarded. Awards granted
in 2001 vested immediately and expire after ten years and are exercisable
at a price of $10 per share.
As permitted under accounting principles generally accepted in the United
States of America, grants of options under the plans are accounted for
under the recognition and measurement principles of APB Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations.
Because options granted under the plans had an exercise price equal to
market value of the underlying common stock on the date of grant, no
stock-based employee compensation cost is included in determining net
income. The following table illustrates the effect on the net income (loss)
(in thousands) and earnings (loss) per share if the Company had applied the
fair value recognition provisions of FASB Statement No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, to stock-based employee compensation.
No options were granted in 2002 or 2003, therefore, there was no
compensation expense recognized for the three months ended March 31, 2003
or 2002, under APB Opinion No 25 or the fair value recognition provisions
of FAS No 123.
* * * * * *
7
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of the Company. Statements contained in this Form 10-Q, which are not
historical facts, are forward-looking statements, as the term is defined in the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements are subject to risks and uncertainties which could cause actual
results to differ materially from those currently anticipated due to a number of
factors, which include, but are not limited to, factors discussed in documents
filed by the Company with the Federal Deposit Insurance Corporation from time to
time. The information contained in this section should be read in conjunction
with the unaudited consolidated financial statements and accompanying notes
thereto.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain "forward-looking statements" which may be
identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated," and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors that could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage and other loans,
real estate values, and competition; changes in accounting principles, policies,
or guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing of products and services.
MID-TIER REORGANIZATION
On May 3, 2002, Jacksonville Savings Bank and Jacksonville Bancorp, M.H.C., the
mutual holding company parent, reorganized into the two-tier mutual holding
company form of ownership by establishing a mid-tier, federally-chartered stock
holding company, Jacksonville Bancorp, Inc. All outstanding shares of
Jacksonville Savings Bank common stock were converted on a one for one basis
into shares of Jacksonville Bancorp, Inc. common stock in the reorganization.
Jacksonville Bancorp, Inc. now owns 100% of the outstanding shares of
Jacksonville Savings Bank.
FINANCIAL CONDITION
MARCH 31, 2003 COMPARED TO DECEMBER 31, 2002
Total assets grew $6.3 million to $258,813,000 at March 31, 2003, from the
$252,504,000 at December 31, 2002. The increase in assets was funded by a
$7,481,000 increase in deposits during this same time frame. Loans declined by
$6,420,000 due to increased loan sales to the secondary market. Consequently,
our investment portfolio increased by a $7,951,000, cash and cash equivalents
increased by $2,117,000, and federal funds sold increased by $1,700,000.
Mortgage backed securities declined $274,000 due to principal payments and the
reinvestment of these funds into U.S. Agency securities. Other borrowings
decreased $1,598,000 due to lower balances on overnight repurchase agreements.
8
Stockholders' equity increased $299,000 to $20,551,000 at March 31, 2003. The
increase resulted from net income of $411,000 offset by the payment of $66,000
in dividends and a $46,000 decrease in unrealized gains, net of tax, on
available-for-sale securities.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND
2002
GENERAL: Net income for the three months ended March 31, 2003 was $411,000, or
$0.21 per common share, basic and diluted. Net income totalled $323,000, or
$0.17 per common share, basic and diluted, for the three months ended March 31,
2002. The increase of $88,000 in net income is primarily due to an increase of
$68,000 in net interest income and an increase of $727,000 in other income,
offset by increases of $550,000 in the provision for loan losses, $81,000 in
other expenses, and $76,000 in income taxes. The increase in other income is
mostly comprised of a $562,500 insurance recovery. This amount represents the
negotiated settlement with the Company's insurance carrier regarding the loan
defalcation discovered during 2001.
INTEREST INCOME: Total interest income for the three months ended March 31, 2003
decreased $383,000 from the same period of 2002. The primary reason for this
decrease is a $465,000 decrease in interest income on loans for the three months
ended March 31, 2003 compared to the three months ended March 31, 2002. The
decrease in interest income on loans is primarily due to the decline in the
average balance of the loan portfolio to $146.6 million for the first three
months of 2003 compared to $156.5 million for the same period of 2002, as well
as a decrease in the average yield of the loan portfolio to 7.18% at March 31,
2003 from 7.92% at March 31, 2002. The loan portfolio has decreased due to the
increased sales of fixed-rate, long-term residential loans to the secondary
market. These loans are sold in order to reduce the Company's exposure to
interest rate risk. Management believes these loans will experience much slower
prepayment speeds given the unprecedented low interest rates experienced during
the past two years.
Interest income on investment securities increased $130,000 for the three months
ended March 31, 2003 compared to the three months ended March 31, 2002. The
increase in interest income on investment securities reflects the increased
average balance of the investment portfolio of $76.4 million during the first
quarter of 2003 compared to the average of $47.0 million during the first
quarter of 2002. The weighted average yield decreased during this same time
frame to 3.99% from 5.39% for the three months ended March 31, 2003 and 2002,
respectively. The average yield has been affected by the short-term nature of
the investment portfolio. The effective duration of the investment portfolio is
0.95 years as of March 31, 2003. Management has maintained a short duration of
the portfolio in order to reinvest when market rates begin to rise, and in order
to provide sufficient funds for loan demand. The investment portfolio consists
primarily of short-term Treasury securities and U.S. Agency securities with call
features.
Interest income on mortgage-backed securities declined $27,000 during the first
quarter of 2003 compared to the same quarter in 2002. The change is due to a
decrease in the average balance of mortgage-backed securities to $2.6 million
from $3.9 million for the first three months of 2003 and 2002, respectively, and
a decrease in the weighted average yield to 5.31% at March 31, 2003 from 6.31%
at March 31, 2002.
Interest income on other investments, which include federal funds sold and
interest bearing deposit accounts, decreased $21,000 during the three months
ended March 31, 2003 as compared to the same period in 2002. The average balance
of these investments equalled $6.7 million and $10.5 million for the three
months ended March 31, 2003 and 2002, respectively. The decrease in interest
income on other investments is also due to a decline in the weighted average
yield on these investments to 1.10% for the first quarter of 2003 from 1.47% for
the first quarter of 2002, reflecting the declining interest rate environment.
9
INTEREST EXPENSE: Total interest expense for the three months ended March 31,
2003 decreased $451,000 compared to the three months ended March 31, 2002. The
lower interest expense was due to a decrease of $454,000 in the cost of
deposits, offset by a $3,000 increase in interest expense on borrowed funds. The
average balance of deposits increased to $213.0 million for the first quarter of
2003 from $205.0 million during the first quarter of 2002. The increase of $8.0
million in the average balance of deposits is due to normal deposit growth. The
weighted average cost of deposits decreased to 2.85% from 3.84% during the first
three months of 2003 and 2002, respectively.
Interest paid on borrowed funds increased $3,000 primarily due to a $854,000
growth in the average balance of borrowings during the first three months of
2003 compared to the same period in 2002. The only outstanding borrowed funds
consist of securities sold under agreements to repurchase. The growth in average
balances was offset by decreased average cost of deposits to 1.35% from and
1.52% for the three months ended March 31, 2003 and 2002, respectively.
PROVISION FOR LOAN LOSSES: The provision for loan losses is determined by
management as the amount needed to replenish the allowance for loan losses,
after net charge-offs have been deducted, to a level considered adequate to
absorb inherent losses in the loan portfolio, in accordance with accounting
principles generally accepted in the United States of America.
The provision for loan losses increased $550,000 to $700,000 for the three
months ended March 31, 2003 compared to the same period in 2002. The additional
provision was made to bring the allowance for loan losses to a level deemed
adequate following management's evaluation of the repayment capacity and
collateral protection afforded by each problem credit identified by management.
This review also considered the current economic downturn, which has resulted in
increased bankruptcies and foreclosures in the Company's market area, which have
further contributed to the recent increases in delinquencies and charge-offs.
During the fourth quarter of 2002, the Company revised its lending policies and
procedures in order to strengthen underwriting practices. The Company hired an
additional collector during the first quarter of 2003 to help manage the level
of delinquencies, bankruptcies, and foreclosures. The Company's officer loan
committee continues to meet daily to address these issues and attempt to prevent
any further deterioration in asset quality.
The allowance for loan losses increased to $2,479,000 at March 31, 2003 from
$2,073,000 at December 31, 2002. The increase is the result of the provision for
loan losses exceeding the net charge-offs. Net charge-offs increased to $294,000
during the first quarter of 2003 compared to net charge-offs of $238,000 during
the first quarter of 2002. Refer to the following table regarding nonperforming
assets.
10
3/31/03 12/31/02
------- --------
(Dollars in Thousands)
Non-accruing loans:
One-to-four family residential 677 769
Commerical and agricultural real estate 186 186
Commercial and agricultural business 488 301
Home equity/Home improvement 1,392 1,860
Automobile 170 196
Other consumer 173 198
---------- ----------
Total 3,086 3,510
========== ==========
Accruing loans delinquent more than 90 days:
One-to-four family residential 192 64
Commerical and agricultural real estate 259 259
Automobile 14 -
Other consumer 31 28
---------- ----------
Total 496 351
========== ==========
Foreclosed assets:
One-to-four family residential 603 422
Commercial and agricultural real estate 20 20
Automobile 51 38
---------- ----------
Total 674 480
========== ==========
Total nonperforming assets $ 4,256 $ 4,341
========== ==========
Total as a percentage of total assets 1.64% 1.72%
==== ====
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of operations and financial condition
in preparing its financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
significantly from those estimates under different assumptions and conditions.
The Company believes that critical accounting policies, which include the
allowance for loan losses, are those most important to the portrayal of the
Company's financial condition and results and requires management's most
difficult, subjective and complex judgements, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
The allowance for loan losses is a material estimate that is particularly
susceptible to significant changes in the near term and is established through a
provision for loan losses. The allowance is based upon past loan experience and
other factors which, in management's judgement, deserve current recognition in
estimating loan losses. The balance of the allowance is based on ongoing,
quarterly assessments of the probable estimated losses in the loan portfolio.
The evaluation includes a review of all loans on which full collectibility may
not be reasonable assured. The Company's methodology for assessing the
appropriateness of the allowance consists of applying several formula methods to
identified problem loan and portfolio segments. The allowance is calculated by
estimating the exposure on identified problem loan and portfolio segments and
applying loss factors to the remainder of the portfolio based upon an internal
risk grade of such loans or pools of loans. Changes in risk grades of both
performing and nonperforming loans affect the amount of the allowance. Loss
factors are based primarily on historical loss experience over the past three to
five years, and may be adjusted for other significant conditions that, in
management's judgement, affect the collectibility of the loan portfolio.
11
Since the allowance for loan losses is based upon estimates of probable losses,
the amount actually observed can vary significantly from the estimated amounts.
The historical loss factors attempt to reduce this variance by taking into
account recent loss experience. Management evaluates several other conditions in
connection with the allowance, including general economic and business
conditions, credit quality trends, collateral values, loan volumes and
concentrations, seasoning of the portfolio, and regulatory examination results.
Management believes it uses the best information available to make such
determinations. If circumstances differ substantially from the assumptions used
in making determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be affected. While the Company
believes it has established its existing allowance for loan losses in conformity
with accounting principles generally accepted in the United States, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio, will not
request an increase in the allowance for loan losses. Because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that increases to the allowance will not be necessary if loan
quality deteriorates. Management will continue to monitor the loan portfolio and
assess the adequacy of the allowance at least quarterly.
OTHER INCOME: Total other income for the three months ended March 31, 2003
increased $727,000 from the comparable period in 2002. The increase in other
income is primarily due to the $562,500 recovery from the Company's insurance
carrier. The remainder of the increase is due to $156,000 in additional gains on
loan sales to the secondary market. Declining market interest rates have
resulted in a larger volume of fixed rate loans sold in the secondary market of
$31.0 million and $17.4 million for the first quarter of 2003 and 2002,
respectively.
OTHER EXPENSE: Total other expense for the three months ended March 31, 2003
increased $81,000 from the same period of 2002. Increases of $42,000 in
occupancy expense, $33,000 in real estate owned expense, and $34,000 in salaries
and benefits were offset by a decrease of $38,000 in losses and expenses related
to the loan defalcation, which were recognized during the first quarter of 2002.
INCOME TAXES: The provision for income taxes increased $76,000 for the three
months ended March 31, 2003 compared to the same period in 2002. The increase is
directly attributable to a higher level of income in 2003 as compared to 2002.
LIQUIDITY AND CAPITAL RESOURCES: The Company's most liquid assets are cash and
cash equivalents. The levels of these assets are dependent on the Company's
operating, financing, and investing activities. At March 31, 2003 and December
31, 2002, cash and cash equivalents totaled $13.2 million and $11.1 million,
respectively. The Company's primary sources of funds include principal and
interest repayments on loans (both scheduled and prepayments), maturities of
investment securities and principal repayments from mortgage-backed securities
(both scheduled and prepayments). During the past twelve months, the most
significant sources of funds have been deposit growth and loan sales to the
secondary market. These funds have been used for new loan originations and the
purchase of investment securities.
While scheduled loan repayments and proceeds from maturing investment securities
and principal repayments on mortgage-backed securities are relatively
predictable, deposit flows and early prepayments are more influenced by interest
rates, general economic conditions, and competition. The Company attempts to
price its deposits to meet asset-liability objectives and stay competitive with
local market conditions.
Liquidity management is both a short- and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected purchases of
investment and mortgage-backed securities, (iii) expected deposit flows, (iv)
yields available on interest-bearing deposits, and (v) liquidity of its
asset/liability management program. Excess liquidity is generally invested in
interest-earning overnight deposits and other short-term U.S. agency
obligations. If the Company requires funds beyond its ability to generate them
internally, it has the ability to borrow funds from
12
the FHLB. The Company may borrow from the FHLB under a blanket agreement which
assigns all investments in FHLB stock as well as qualifying first mortgage loans
equal to 150% of the outstanding balance as collateral to secure the amounts
borrowed. This borrowing arrangement is limited to a maximum of 30% of the
Company's total assets or twenty times the balance of FHLB stock held by the
Company. At March 31, 2003, the Company had no outstanding advances and
approximately $26.3 million available to it under the above-mentioned borrowing
arrangement.
The Company maintains minimum levels of liquid assets as established by the
Board of Directors. The Company's year-to-date liquidity ratios at March 31,
2003 and December 31, 2002 were 41.7% and 34.4%, respectively. This ratio
represents the volume of short-term liquid assets as a percentage of net
deposits and borrowings due within one year.
The Company must also maintain adequate levels of liquidity to ensure the
availability of funds to satisfy loan commitments and operations. At March 31,
2003, the Company had outstanding commitments to originate loans of
approximately $33.0 million, including $19.4 million committed for sale in the
secondary market. The Company also has $96,000 in outstanding letters of credit.
The Company has a contract for the construction of an addition to the main
office facility, with approximately $1.6 million remaining to be funded. The
construction is expected to be completed by October 2003. The Company
anticipates that it will have sufficient funds available to meet its current
commitments principally through the use of current liquid assets and through its
borrowing capacity discussed above.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and Tier 1 capital (as defined) to average
assets (as defined). Management believes, at March 31, 2003, that the Company
meets all its capital adequacy requirements.
Under Illinois law, Illinois-chartered savings banks are required to maintain a
minimum core capital to total assets ratio of 3%. The Illinois Commissioner of
Savings and Residential Finance (the "Commissioner") is authorized to require a
savings bank to maintain a higher minimum capital level if the Commissioner
determines that the savings bank's financial condition or history, management or
earnings prospects are not adequate. If a savings bank's core capital ratio
falls below the required level, the Commissioner may direct the savings bank to
adhere to a specific written plan established by the Commissioner to correct the
savings bank's capital deficiency, as well as a number of other restrictions on
the savings bank's operations, including a prohibition on the declaration of
dividends by the savings bank's board of directors. At March 31, 2003, the
Bank's core capital ratio was 6.73% of total average assets, which substantially
exceeded the required amount.
The Bank is also required to maintain regulatory capital requirements imposed by
the Federal Deposit Insurance Corporation. The Bank must have: (i) Tier 1
Capital to Average Assets of 4.0%, (ii) Tier 1 Capital to Risk-Weighted Assets
of 4.0%, and (iii) Total Capital to Risk-Weighted Assets of 8.0%. At March 31,
2003, minimum requirements and the Bank's actual ratios are as follows:
03/31/03 12/31/02 MINIMUM
ACTUAL ACTUAL REQUIRED
Tier 1 Capital to Average Assets 6.73 % 6.66 % 4.00 %
Tier 1 Capital to Risk-Weighted Assets 10.73 % 10.42 % 4.00 %
Total Capital to Risk-Weighted Assets 11.98 % 11.67 % 8.00 %
Future capital levels should benefit from the decision of the Bank's parent
company, Jacksonville Bancorp, MHC, to waive its right to receive dividends. The
mutual holding company has received approval from its
13
primary regulator, the Office of Thrift Supervision, for such waivers through
the quarter ended September 30, 2003.
EFFECT OF INFLATION AND CHANGING PRICES: The consolidated financial statements
and related financial data presented herein have been prepared in accordance
with GAAP which require the measurement of financial position and operating
results in terms of historical dollars, without considering the change in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
14
CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES
(dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31
-------------------------------------------------------------------------
2003 2002
----------------------------------- -----------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
----------------------------------- -----------------------------------
Interest-earnings assets:
Loans $ 146,553 $ 2,632 7.18% $ 156,464 $ 3,097 7.92%
Investment securities 76,442 763 3.99% 46,981 633 5.39%
Mortgage-backed securities 2,611 35 5.31% 3,936 62 6.31%
Other 6,749 18 1.10% 10,508 39 1.47%
---------- -------- ---------- --------
Total interest-earning assets 232,355 3,448 5.94% 217,889 3,831 7.03%
Non-interest earnings assets 18,833 20,494
---------- ----------
Total assets $ 251,188 $ 238,383
========== ==========
Interest-bearing liabilities:
Deposits $ 212,976 $ 1,516 2.85% $ 205,048 $ 1,970 3.84%
Short-term borrowings 1,707 6 1.35% 853 3 1.52%
---------- -------- ---------- --------
Total interest-bearing liabilities 214,683 1,522 2.84% 205,901 1,973 3.83%
Non-interest bearing liabilities 16,202 13,189
Stockholders' equity 20,303 19,293
---------- ----------
Total liabilities/stockholders' equity $ 251,188 $ 238,383
========== ==========
Net interest income $ 1,926 $ 1,858
======== ========
Interest rate spread (average yield earned
minus average rate paid) 3.10% 3.20%
==== ====
Net interest margin (net interest income
divided by average interest-earning assets) 3.32% 3.41%
==== ====
ANALYSIS OF VOLUME AND RATE CHANGES
(in thousands)
----------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31
----------------------------------------------------------------------------------
2003 COMPARED TO 2002
INCREASE(DECREASE) DUE TO
-------------------------------------
RATE VOLUME NET
-------------------------------------
Interest-earnings assets:
Loans $ (276) $ (189) $ (465)
Investment securities (195) 325 130
Mortgage-backed securities (9) (18) (27)
Other (8) (13) 21
Total net change in income on
interest-earning assets (488) 105 (341)
Interest-bearing liabilities:
Deposits (527) 73 (454)
Other borrowings - 3 3
Total net change in expense on
interest-bearing liabilities (527) 76 (451)
Net change in net interest income $ 39 $ 29 $ 68
15
JACKSONVILLE BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Company's policy in recent years has been to reduce its interest rate risk
by better matching the maturities of its interest rate sensitive assets and
liabilities, selling its long-term fixed-rate residential mortgage loans with
terms of 15 years or more to Freddie Mac, originating adjustable rate loans,
balloon loans with terms ranging from three to five years and originating
consumer and commercial business loans, which typically are for a shorter
duration and at higher rates of interest than one-to-four family loans. The
Company also maintains a portfolio of mortgage-backed securities, virtually all
of which have adjustable interest rates. The remaining investment portfolio has
been laddered to better match the interest-bearing liabilities. With respect to
liabilities, the Company has attempted to increase its savings and transaction
deposit accounts, which management believes are more resistant to changes in
interest rates than certificate accounts. The Board of Directors appoints the
Asset-Liability Management Committee (ALCO), which is responsible for reviewing
the Company's asset and liability policies. The ALCO meets quarterly to review
interest rate risk and trends, as well as liquidity and capital ratio
requirements.
During 2002, the Company began using a comprehensive asset/liability software
package provided by a third-party vendor to perform interest rate sensitivity
analysis for all product categories. The primary focus of the Company's analysis
is on the effect of interest rate increases and decreases on net interest
income. Management believes that this analysis reflects the potential effects on
current earnings of interest rate changes. Call criteria and prepayment
assumptions are taken into consideration for investment securities and loans.
All of the Company's interest sensitive assets and liabilities are analyzed by
product type and repriced based upon current offering rates. The software
performs interest rate sensitivity analysis by performing rate shocks of plus or
minus 300 basis points in 100 basis point increments.
The following table shows projected results at March 31, 2003 and December 31,
2002 of the impact on net interest income from an immediate change in interest
rates, as well as the benchmarks established by the ALCO. The results are shown
as a dollar and percentage change in net interest income over the next twelve
months.
CHANGE IN NET INTEREST INCOME
(000's omitted)
--------------------------------------------------------------
3/31/03 12/31/02
-------------------------------------------------- ALCO
$ Change % Change $ Change % Change Benchmark
Rate Shock: --------------------------------------------------------------
+ 200 basis points (156) -2.01% 202 2.60% > (20.00)%
+ 100 basis points (166) -2.14% 211 2.71% > (12.50)%
- 100 basis points (196) -2.52% 222 2.86% > (12.50)%
- 200 basis points (210) -2.71% 227 2.92% > (20.00)%
The foregoing computations are based upon numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit mix. The
computed estimates should not be relied upon as a projection of actual results.
Despite the limitations on precision inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the Company's
current mix of interest earning assets and interest bearing
16
liabilities. Management continues to use the results of these computations,
along with the results of its computer model projections, in order to maximize
current earnings while positioning the Company to minimize the effect of a
prolonged shift in interest rates that would adversely affect future results of
operations.
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
17
JACKSONVILLE BANCORP, INC.
CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
EVALUATION OF DISCLOSURE 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.
CHANGES IN INTERNAL CONTROLS
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.
18
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
99.1 Section 906 Certification
REPORTS ON FORM 8-K
Item 9 FD disclosure - Earnings Release filed with SEC on April 10,
2003.
19
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
20
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.
May 14, 2003 /s/ Richard A. Foss
- ------------------------ -------------------------------------
Date Richard A. Foss
President and Chief Executive Officer
21
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Diana S. Tone, Chief Financial 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 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 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
22
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.
May 14, 2003 /S/ Diana S. Tone
- ------------------------ -------------------------------------
Date Diana S. Tone
Chief Financial Officer
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JACKSONVILLE BANCORP, INC.
Registrant
Date: May 14, 2003 /S/ Richard A. Foss
------------------------ -------------------------------------
Richard A. Foss
President and Chief Executive Officer
/S/ Diana S. Tone
-------------------------------------
Diana S. Tone
Chief Financial Officer
24