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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, 2004
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
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation) (I.R.S. Employer
Identification Number)
1211 West Morton Avenue
Jacksonville, Illinois 62650
- --------------------------------------------------------------------------------
(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, 2004, there were 1,951,743 shares (*) of the Registrant's common
stock issued and outstanding.
(*) As of April 30, 2004, 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, 2004
TABLE OF CONTENTS
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PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2004 and
December 31, 2003 (Unaudited) 1
Consolidated Statements of Income and Comprehensive
Income (Loss) for the Three Months Ended
March 31, 2004 and 2003 (Unaudited) 2
Consolidated Statement of Stockholders' Equity for
the Three Months Ended March 31, 2004 (Unaudited) 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2004 and 2003
(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. Quantitative and Qualitative Disclosures about Market Risk 16-17
Item 4. Controls and Procedures 18
PART II OTHER INFORMATION 19
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 20
EXHIBITS
Section 302 Certifications
Section 906 Certification
PART I - FINANCIAL INFORMATION
JACKSONVILLE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
ASSETS 2004 2003
---- ----
Cash and cash equivalents $ 10,867,892 $ 9,575,977
Federal funds sold - 500,000
Investment securities - available-for-sale 97,044,442 98,940,872
Mortgage-backed securities - available-for-sale 12,143,717 7,597,265
Federal Home Loan Bank stock 1,403,000 1,380,600
Other investment securities 585,835 592,355
Loans receivable - net of allowance for loan
loss of $2,195,704 and $2,186,058 as of
March 31, 2004 and December 31, 2003 126,837,836 127,079,036
Loans held for sale - net 1,047,764 506,300
Premises and equipment - net 7,322,403 7,419,061
Accrued interest receivable 1,696,141 1,445,140
Goodwill 2,726,567 2,726,567
Core deposit intangible 338,825 358,756
Capitalized mortgage servicing rights 1,147,965 1,168,246
Real estate owned 571,930 499,257
Income taxes receivable 277,671 386,509
Other assets 1,181,580 1,639,722
------------- -------------
TOTAL ASSETS $ 265,193,568 $ 261,815,663
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 238,006,366 $ 235,172,732
Other borrowings 1,931,556 2,888,954
Advance payments by borrowers for taxes
and insurance 566,648 397,941
Accrued interest payable 724,683 775,966
Deferred compensation plan 2,045,536 2,021,008
Other liabilities 934,514 526,909
------------- -------------
Total liabilities 244,209,303 241,783,510
------------- -------------
Stockholders' Equity
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, 1,951,743
shares and 1,942,004 shares as of
March 31, 2004 and December 31, 2003,
respectively 19,517 19,420
Additional paid-in capital 6,457,244 6,399,321
Retained earnings - substantially restricted 13,983,682 13,866,849
Accumulated other comprehensive income 523,822 (253,437)
------------- -------------
Total stockholders' equity 20,984,265 20,032,153
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 265,193,568 $ 261,815,663
============= =============
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, 2004 AND 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
2004 2003
---- ----
INTEREST INCOME:
Loans 2,127,600 2,632,353
Investment securities 857,176 762,626
Mortgage-backed securities 90,531 34,678
Other 6,982 18,492
------------ -----------
Total interest income 3,082,289 3,448,149
------------ -----------
INTEREST EXPENSE:
Deposits 1,144,037 1,516,378
Other borrowings 8,403 5,755
------------ -----------
Total interest expense 1,152,440 1,522,133
------------ -----------
NET INTEREST INCOME 1,929,849 1,926,016
PROVISION FOR LOAN LOSSES 150,000 700,000
------------ -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 1,779,849 1,226,016
------------ -----------
OTHER INCOME:
Service charges on deposit accounts 171,992 158,952
Loan servicing fees 99,457 98,490
Commission income 203,236 103,048
Gain on sales of loans 6,968 271,939
Gain on sales of securities 23,699 -
Recovery from insurance company - 562,500
Other 18,044 28,987
------------ -----------
Total other income 523,396 1,223,916
------------ -----------
OTHER EXPENSES:
Salaries and employee benefits 1,189,866 1,029,090
Occupancy and equipment expense 330,924 294,285
Data processing expense 66,397 59,735
Stationary and supplies 29,869 41,115
Legal and accounting expense 46,326 25,390
Postage expense 39,634 35,721
Other 306,080 288,584
------------ -----------
Total other expenses 2,009,096 1,773,920
------------ -----------
INCOME BEFORE INCOME TAXES 294,149 676,012
INCOME TAXES 108,837 264,611
------------ -----------
NET INCOME 185,312 411,401
OTHER COMPREHENSIVE INCOME-Unrealized gain
(loss) on securities available-for-sale
(Net of tax of $491,528 and $(29,355)) 777,259 (46,419)
------------ -----------
COMPREHENSIVE INCOME $ 962,571 $ 364,982
============ ===========
NET INCOME PER COMMON SHARE - BASIC $ 0.10 $ 0.21
============ ===========
NET INCOME PER COMMON SHARE - DILUTED $ 0.09 $ 0.21
============ ===========
See accompanying notes to the unaudited consolidated financial statements.
2
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2004 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME EQUITY INCOME
BALANCE, DECEMBER 31, 2003 $ 19,420 $ 6,399,321 $ 13,866,849 $ (253,437) $ 20,032,153
Net income - - 185,312 - 185,312 $ 185,312
Other comprehensive income -
change in net unrealized gains
and losses on securities
available-for-sale, net of
income taxes of $500,709 - - - 791,777 791,777 791,777
Less: Reclassification adjustment
for gains included in net income,
net of tax of $(9,181) - - - (14,518) (14,518) (14,518)
---------
Comprehensive Income - - - - - $ 962,571
=========
Exercise of stock options 140 139,765 - - 139,905
Purchase and retirement of treasury
stock (43) (81,842) - - (81,885)
Dividends ($.075 per share) - - (68,479) - (68,479)
- - - - -
--------- ------------ ------------ ---------- ------------
BALANCE, MARCH 31, 2004 $ 19,517 $ 6,457,244 $ 13,983,682 $ 523,822 $ 20,984,265
========= ============ ============ ========== ============
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, 2004 AND 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 185,312 $ 411,401
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, amortization and accretion:
Premises and equipment 157,545 116,216
Accretion of loan fees and discounts, net (14,835) (56,932)
Amortization of investment premiums and
discounts, net 138,742 203,237
Amortization of intangible assets 19,931 19,931
Provision for loan losses 150,000 700,000
FHLB stock dividends (22,400) (35,400)
Gains on sales of loans (6,968) (271,939)
Gains on sales of securities (23,699) -
Change in income taxes receivable 108,838 69,611
Changes in other assets and liabilities 87,545 (121,203)
------------ ------------
Net cash provided by operations
before loan sales 594,699 623,521
------------ ------------
Originations of loans for sale to Freddie Mac (3,773,736) (31,394,918)
Proceeds of sale of loans to Freddie Mac 3,259,521 30,964,153
------------ ------------
Net cash provided by operating
activities 265,796 604,157
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in federal funds sold, net 500,000 (1,700,000)
Purchases of investment securities (28,724,401) (34,084,927)
Maturity and call of investment securities
available-for-sale 18,044,086 25,886,176
Principal payments on investment and
mortgage-backed securities 461,883 277,589
Proceeds from the sale of investment and
mortgage-bcked securities 8,728,674 -
(Increase)decrease in loans, net (20,760) 5,305,874
Proceeds from sales of real estate owned 63,040 233,583
Additions to premises and equipment (60,887) (425,845)
------------ ------------
Net cash (used in) investing
activities (1,008,365) (4,507,550)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 2,833,634 7,481,346
Net repayment of advances from Federal
Home Loan Bank of Chicago and other borrowings (957,398) (1,598,426)
Increase in advance payments by borrowers for
taxes and insurance 168,707 203,674
Exercise of stock options 139,905 -
Purchase and retirement of treasury stock (81,885) -
Dividends Paid (68,479) (66,193)
------------ ------------
Net cash provided by financing
activities 2,034,484 6,020,401
------------ ------------
(Continued)
4
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
2004 2003
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 1,291,915 $ 2,117,008
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,575,977 11,091,626
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,867,892 $ 13,208,634
============= ============
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the year for:
Interest on deposits $ 1,195,220 $ 1,627,750
Interest on other borrowings 8,503 5,820
Income taxes paid - 195,000
NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans 222,295 471,068
Loans to facilitate sales of real estate owned 95,500 -
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, 2004 and December 31, 2003 and
the results of its operations for the three month periods ended March
31, 2004 and 2003. The results of operations for the three month period
ended March 31, 2004 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, 2003 filed as
an exhibit to the Company's Form 10-K filed in March, 2004. 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 2003 consolidated statements have been
reclassified to conform to the 2004 presentation.
2. EARNINGS PER SHARE
EARNINGS PER SHARE - Basic earnings per share is determined by dividing
net income for the period by the weighted average number of common
shares. Diluted earnings per share considers the potential effects of
the exercise of the outstanding stock options under the Company's Stock
Option Plans.
The following reflects earnings per share calculations for basic and
diluted methods:
MARCH 31,
---------
2004 2003
---- ----
Net income available to common stockholders $ 185,312 $ 411,401
Basic average shares outstanding 1,947,941 1,921,304
Dilutive potential common shares:
Stock option equivalents 46,568 33,557
------------- ------------
Diluted average shares outstanding 1,994,509 1,954,861
------------- ------------
Basic earnings per share $ 0.10 $ 0.21
============= ============
Diluted earnings per share $ 0.09 $ 0.21
============= ============
6
3. STOCK OPTION PLANS
The Company's 1996 Stock Option Plan was adopted on April 23, 1996 with
a total of 83,625 shares of common stock reserved and awarded. Awards
vested 20% per year and expire after ten years and are exercisable at a
price of $8.83 per share. The Company's 2001 Stock Option Plan was
adopted on April 30, 2001 with a total of 87,100 shares reserved and
awarded. Awards granted in 2001 vested immediately and expire after ten
years and are exercisable at a price of $10 per share.
As permitted under accounting principles generally accepted in the
United States of America, grants of options under the plans are
accounted for under the recognition and measurement principles of APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
Interpretations. Because options granted under the plans had an exercise
price equal to market value of the underlying common stock on the date
of grant, no stock-based employee compensation cost is included in
determining net income.
No options were granted in 2004 or 2003, and there is no proforma impact
of options granted in prior periods.
4. LOAN PORTFOLIO COMPOSITION
At March 31, 2004 and December 31, 2003, the composition of the
Company's loan portfolio was as follows:
03/31/04 12/31/03
-------- --------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
One-to-four family residential $ 38,942 30.7 $ 40,304 31.7
Commercial and agricultural 23,649 18.6 21,401 16.8
Multi-family residential 2,267 1.8 2,376 1.9
---------- ------ ---------- ------
Total real estate loans 64,858 51.1 64,081 50.4
Commercial agricultural business loans 29,271 23.1 29,763 23.4
---------- ------ ---------- ------
Consumer loans:
Home equity/home improvement 24,121 19.0 23,614 18.6
Automobile 5,791 4.6 6,477 5.1
Other 5,188 4.1 5,545 4.4
---------- ------ ---------- ------
Total consumer loans 35,100 27.7 35,636 28.1
---------- ------ ---------- ------
Total loans receivable 129,229 101.9 129,480 101.9
Less:
Unearned discount and deferred
loan fees, net 195 0.2 215 0.2
Allowance for loan losses 2,196 1.7 2,186 1.7
---------- ------ ---------- ------
Total loans receivable, net $ 126,838 100.0% $ 127,079 100.0%
========== ====== ========== ======
7
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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. The information contained in this section should be read
in conjunction with the unaudited consolidated financial statements and
accompanying notes thereto.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain "forward-looking statements" which may be
identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated," and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors that could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage and other loans,
real estate values, and competition; changes in accounting principles, policies,
or guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing of products and services.
FINANCIAL CONDITION
MARCH 31, 2004 COMPARED TO DECEMBER 31, 2003
Total assets increased $3.4 million to $265,194,000 at March 31, 2004, from the
$261,816,000 at December 31, 2003. The increase in assets was funded by a
$2,834,000 increase in deposits during this same time frame. Net loans remained
stable at $126,838,000. Investment securities decreased $1,881,000 due to calls
and sales of investments. Cash received from the investment securities was used
to fund the growth in mortgage backed securities of $4,546,000 and cash and cash
equivalents of $1,292,000 during the first quarter of 2004. Other borrowings
decreased $957,000 due to lower balances on overnight repurchase agreements.
Stockholders' equity increased $952,000 to $20,984,000 at March 31, 2004. The
increase resulted from net income of $185,000, offset by the payment of $68,000
in dividends, and a $777,000 increase in unrealized gains, net of tax, on
available-for-sale securities. Stockholders' equity also increased as a result
of the receipt of $58,000 from the exercise of stock options during the first
quarter of 2004. The $58,000 reflects the $140,000 received from the exercise of
stock options net of the $82,000 purchase and retirement of treasury stock
related to the options. The change in unrealized gains on securities is driven
by market conditions and, therefore, can fluctuate daily.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND
2003
GENERAL: Net income for the three months ended March 31, 2004 was $185,000, or
$0.10 per common share, basic, and $0.09 per common share, diluted. Net income
totalled $411,000, or $0.21 per common share, basic and diluted, for the three
months ended March 31, 2003. The decrease of $226,000 in net income is primarily
8
due to a decrease in other income of $701,000 and an increase in other expense
of $235,000, partially offset by an increase in net interest income of $4,000
and decreases in the provision for loan losses of $550,000 and income taxes of
$156,000. The decrease in other income is mostly comprised of a $562,500
insurance recovery during the first quarter of 2003. This amount represents the
negotiated settlement with the Company's insurance carrier regarding the loan
defalcation.
INTEREST INCOME: Total interest income for the three months ended March 31, 2004
decreased $366,000 from the same period of 2003. The primary reason for this
decrease is a $504,000 decrease in interest income on loans for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003. The
decrease in interest income on loans is primarily due to the decline in the
average balance of the loan portfolio to $128.6 million for the first three
months of 2004 compared to $146.6 million for the same period of 2003, as well
as a decrease in the average yield of the loan portfolio to 6.62% at March 31,
2004 from 7.18% at March 31, 2003. The loan portfolio has decreased due to
increased sales of fixed-rate, long-term residential loans to the secondary
market during 2003. These loans were 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 $94,000 for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003. The
increase in interest income on investment securities reflects the increased
average balance of the investment portfolio of $101.3 million during the first
quarter of 2004 compared to the average of $76.4 million during the first
quarter of 2003. The increase in the average balance is due to the investment of
funds received from loan sales during 2003. The weighted average yield decreased
during this same time frame to 3.38% from 3.99% for the three months ended March
31, 2004 and 2003, respectively. The decrease in the average yield reflects the
purchase of investments during the current low interest-rate environment.
Investment purchases totaled $126.6 million during 2003, partially due to the
reinvestment of funds from calls of $72.3 million and sales of $26.4 million.
The average life of the investment portfolio is 2.5 years.
Interest income on mortgage-backed securities increased $55,000 during the first
quarter of 2004 compared to the same quarter in 2003. The increase reflects a
growth in the average balance of mortgage-backed securities to $9.6 million from
$2.6 million for the first three months of 2004 and 2003, respectively,
partially offset by a decrease in the weighted average yield to 3.77% at March
31, 2004 from 5.31% at March 31, 2003.
Interest income on other investments, which include federal funds sold and
interest earning deposit accounts, decreased $11,000 during the three months
ended March 31, 2004 as compared to the same period in 2003. The average balance
of these investments equalled $3.4 million and $6.7 million for the three months
ended March 31, 2004 and 2003, respectively. The decrease in interest income on
other investments is also due to a decline in the weighted average yield on
these investments to 0.81% for the first quarter of 2004 from 1.10% for the
first quarter of 2003, reflecting the declining interest rate environment of
2003.
INTEREST EXPENSE: Total interest expense for the three months ended March 31,
2004 decreased $370,000 compared to the three months ended March 31, 2003. The
lower interest expense was due to a decrease of $372,000 in the cost of
deposits, offset by a $2,000 increase in interest expense on borrowed funds. The
average balance of deposits increased to $224.0 million for the first quarter of
2004 from $213.0 million during the first quarter of 2003. The increase of $11.0
million in the average balance of deposits is due to normal deposit growth. The
weighted average cost of deposits decreased to 2.04% from 2.85% during the first
three months of 2004 and 2003, respectively.
Interest paid on borrowed funds increased $2,000 primarily due to a $1.4 million
increase in the average balance of borrowings during the first three months of
2004 compared to the same period in 2003. The increase in the average balance in
borrowed funds is mostly due to the use of short-term advances from the
9
FHLB, which averaged $824,000 during the first quarter of 2004. The remainder of
borrowed funds consists of securities sold under agreements to repurchase. The
growth in average balances was offset by decreased average cost of borrowings to
1.09% from 1.35% for the three months ended March 31, 2004 and 2003,
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 following
table shows the activity in the allowance for loan losses for the three months
ended March 31, 2004 and 2003.
3/31/2004 3/31/2003
--------- ---------
(In thousands)
Balance at beginning of period $ 2,186 $ 2,073
Charge-offs:
One-to-four family residential 46 55
Commercial and agricultural real estate 116 20
Commercial and agricultural business - 78
Home equity/home improvement 72 54
Automobile 49 77
Other Consumer 5 24
---------- ----------
Total 288 308
Recoveries:
One-to-four family residential 1 1
Commercial and agricultural real estate 118 -
Commercial and agricultural business 12 -
Home equity/home improvement 1 1
Automobile 10 8
Other Consumer 6 4
---------- ----------
Total 148 14
---------- ----------
Net loans charged off 140 294
Additions charged to operations 150 700
---------- ----------
Balance at end of period $ 2,196 $ 2,479
========== ==========
The allowance for loan losses increased to $2,196,000 at March 31, 2004 from
$2,186,000 at December 31, 2003. The increase is the result of the provision for
loan losses exceeding the net charge-offs. Net charge-offs decreased to $140,000
during the first quarter of 2004 compared to net charge-offs of $294,000 during
the first quarter of 2003. The provision for loan losses decreased to $150,000
for the first quarter of 2004 compared to $700,000 for the first quarter of
2003. Provisions for loan losses have been 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 delinquencies and
charge-offs. Refer to the following table regarding nonperforming assets.
10
3/31/2004 12/31/2003
--------- ----------
(In thousands)
Non-accruing loans:
One-to-four family residential 783 1,022
Commerical and agricultural real estate 176 224
Commercial and agricultural business 229 613
Home equity/Home improvement 925 1,101
Automobile 131 139
Other consumer 204 22
---------- ----------
Total 2,448 3,121
========== ==========
Accruing loans delinquent more than 90 days:
One-to-four family residential 46 168
Automobile 68 15
Other consumer 12 7
---------- ----------
Total 126 190
========== ==========
Foreclosed assets:
One-to-four family residential 572 499
Automobile 30 18
---------- ----------
Total 602 517
========== ==========
Total nonperforming assets $ 3,176 $ 3,828
========== ==========
Total as a percentage of total assets 1.20% 1.46%
========== ==========
The following table shows the aggregate principal amount of potential problem
credits on the Company's watch list at March 31, 2004 and December 31, 2003. All
nonaccrual loans are automatically placed on the watch list.
03/31/04 12/31/03
-------- --------
(In thousands)
Special Mention credits $ 6,106 $ 6,087
Substandard credits 6,187 7,555
---------- ----------
Total watch list credits $ 12,293 $ 13,642
========== ==========
During the fourth quarter of 2002, the Company revised its lending policies and
procedures in order to strengthen underwriting practices. The Company also hired
an additional loan collector during the first quarter of 2003 to help manage the
level of delinquencies, bankruptcies, and foreclosures. During the second
quarter of 2003, the Company increased the staffing of the loan review and
internal audit departments. The scope of the loan review program was expanded to
assess the effectiveness of new policies and procedures. In order to address the
rising trend in delinquencies and loan losses and prevent any further
deterioration in asset quality, the Company hired an experienced senior loan
administrator during the third quarter of 2003. This individual oversees all
lending functions of the Company and is assisting in the collection and workout
of problem credits, as well as reviewing and further enhancing all lending
policies and procedures. The Company has also contracted with an outside firm
for the collection of prior period losses and assistance,
11
upon request, on any active accounts. The recent policy changes, including a
more stringent review of outstanding credits, has contributed to the volume of
watch list credits.
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of operations and financial condition
in preparing its financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
significantly from those estimates under different assumptions and conditions.
The Company believes that critical accounting policies, which include the
allowance for loan losses, are those most important to the portrayal of the
Company's financial condition and results and requires management's most
difficult, subjective and complex judgements, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
The allowance for loan losses is a material estimate that is 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 five
years, and may be adjusted for other significant conditions that, in
management's judgement, affect the collectibility of the loan portfolio.
Since the allowance for loan losses is based upon estimates of probable losses,
the amount actually observed can vary significantly from the estimated amounts.
The historical loss factors attempt to reduce this variance by taking into
account recent loss experience. Management evaluates several other conditions in
connection with the allowance, including general economic and business
conditions, credit quality trends, collateral values, loan volumes and
concentrations, seasoning of the portfolio, and regulatory examination results.
Management believes it uses the best information available to make such
determinations. If circumstances differ substantially from the assumptions used
in making determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be affected. While the Company
believes it has established its existing allowance for loan losses in conformity
with accounting principles generally accepted in the United States, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio, will not
request an increase in the allowance for loan losses. Because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that increases to the allowance will not be necessary if loan
quality deteriorates. Management will continue to monitor the loan portfolio and
assess the adequacy of the allowance at least quarterly.
OTHER INCOME: Total other income for the three months ended March 31, 2004
decreased $701,000 from the comparable period in 2003. The decrease in other
income is primarily due to the $562,500 negotiated settlement from the Company's
insurance carrier received during the first quarter of 2003. The remainder of
the change in other income is due to a decrease of $265,000 in gains on loan
sales to the secondary market, partially offset by an increase of $100,000 in
brokerage commissions. Brokerage commissions increased partly due to a normal
growth in accounts from investors seeking retirement options.
OTHER EXPENSE: Total other expense for the three months ended March 31, 2004
increased $235,000 from the same period of 2003. The increase in other expense
is mainly comprised of increases of $161,000 in salaries and benefits, $37,000
in occupancy expense, and $21,000 in legal and accounting expense. Salaries and
12
benefits have been impacted by a decrease in the deferral of salaries
capitalized as loan costs and the hiring of additional personnel in the lending
department. The increase in occupancy expense is partially due to the expansion
of the main office facility, which houses the new lending center, that was
completed during the fourth quarter of 2003. The additional space has allowed
the Company to add the necessary personnel in the loan department.
INCOME TAXES: The provision for income taxes decreased $156,000 for the three
months ended March 31, 2004 compared to the same period in 2003. The decrease is
directly attributable to a lower level of income in 2004 as compared to 2003.
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, 2004 and December
31, 2003, cash and cash equivalents totaled $10.9 million and $9.6 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, loan sales to the
secondary market, and the call of investment securities. 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 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, 2004,
the Company had no outstanding advances and approximately $28.1 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,
2004 and December 31, 2003 were 45.0% and 43.3%, respectively. This ratio
represents the volume of short-term liquid assets as a percentage of net
deposits and borrowings due within one year.
The Company must also maintain adequate levels of liquidity to ensure the
availability of funds to satisfy loan commitments. The Company anticipates that
it will have sufficient funds available to meet its current commitments
principally through the use of current liquid assets and through its borrowing
capacity discussed above. The following table summarizes these commitments at
March 31, 2004 and December 31, 2003.
13
03/31/04 12/31/03
-------- --------
(In thousands)
Commitments to fund loans - own portfolio $ 17,114 $ 15,695
Commitments for loan sales to Freddie Mac 1,900 369
Standby letters of credit 410 410
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, 2004, 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, 2004, the
Bank's core capital ratio was 6.62% 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,
2004, minimum requirements and the Bank's actual ratios are as follows:
03/31/04 12/31/03 MINIMUM
ACTUAL ACTUAL REQUIRED
Tier 1 Capital to Average Assets 6.62 % 6.54 % 4.00 %
Tier 1 Capital to Risk-Weighted Assets 12.00 % 11.88 % 4.00 %
Total Capital to Risk-Weighted Assets 13.25 % 13.13 % 8.00 %
Future capital levels should benefit from the decision of the Company's parent
company, Jacksonville Bancorp, MHC, to waive its right to receive dividends. The
mutual holding company has received approval from its primary regulator, the
Office of Thrift Supervision, for such waivers through the quarter ended
September 30, 2004.
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
(In thousands)
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31
----------------------------------------------------------------------------
2004 2003
------------------------------------- -------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
----------- ---------- -------------- ----------- ---------- --------------
Interest-earnings assets:
Loans $128,570 $ 2,128 6.62% $146,553 $ 2,632 7.18%
Investment securities 101,330 857 3.38% 76,442 763 3.99%
Mortgage-backed securities 9,597 91 3.77% 2,611 35 5.31%
Other 3,434 7 0.81% 6,749 18 1.10%
---------- --------- ---------- ---------
Total interest-earning assets 242,931 3,083 5.08% 232,355 3,448 5.94%
Non-interest earnings assets 19,726 18,833
---------- ----------
Total assets $262,657 $251,188
========== ==========
Interest-bearing liabilities:
Deposits $223,993 $ 1,144 2.04% $212,976 $ 1,516 2.85%
Short-term borrowings 3,086 8 1.09% 1,707 6 1.35%
---------- --------- ---------- ---------
Total interest-bearing liabilities 227,079 1,152 2.03% 214,683 1,522 2.84%
Non-interest bearing liabilities 15,440 16,202
Stockholders' equity 20,138 20,303
---------- ----------
Total liabilities/stockholders' equity $262,657 $251,188
========== ==========
Net interest income $ 1,930 $ 1,926
========= =========
Interest rate spread (average yield earned
minus average rate paid) 3.05% 3.10%
===== =====
Net interest margin (net interest income
divided by average interest-earning assets) 3.18% 3.32%
===== =====
ANALYSIS OF VOLUME AND RATE CHANGES
(In thousands)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31
- --------------------------------------------------------------------------------
2004 COMPARED TO 2003
INCREASE(DECREASE) DUE TO
------------------------------------
RATE VOLUME NET
------------------------------------
Interest-earnings assets:
Loans $ (197) $ (307) $ (504)
Investment securities (128) 222 $ 94
Mortgage-backed securities (13) 68 $ 55
Other (4) (7) $ (11)
------- ------- -------
Total net change in income on
interest-earning assets (342) (24) (366)
------- ------- -------
Interest-bearing liabilities:
Deposits (447) 75 $ (372)
Other borrowings (2) 4 $ 2
------- ------- -------
Total net change in expense on
interest-bearing liabilities (449) 79 (370)
------- ------- -------
Net change in net interest income $ 107 $ (103) $ 4
======= ======= =======
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
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.
The Company uses 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, 2004 and December 31,
2003 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
(In thousands)
--------------------------------------------------------
3/31/2004 12/31/2003
-------------------------------------------- ALCO
Rate Shock: $ Change % Change $ Change % Change Benchmark
--------------------------------------------------------
+ 200 basis points 307 4.07% 240 3.30% > (20.00)%
+ 100 basis points 386 5.13% 358 4.90% > (12.50)%
- 100 basis points 478 6.35% 529 7.25% > (12.50)%
- 200 basis points 447 5.93% 543 7.44% > (20.00)%
The foregoing computations are based upon numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit mix. The
computed estimates should not be relied upon as a projection of actual results.
Despite the limitations on precision inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the Company's
current mix of interest earning assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its
16
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, USE OF PROCEEDS, AND ISSUER PURCHASES
During the first quarter of 2004, the Company purchased and
retired treasury stock in connection with the exercise of stock
options as follows:
Month Shares Purchased and Retired Average Price Paid
----- ---------------------------- ------------------
January 4,170 $9.953
February - -
March 4,038 $10.000
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
31.1 - Certification of the Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a)
31.2 - Certification of the Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a)
32.1 - Certification of the Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
EXHIBITS ON FORM 8-K
Item 12. Results of Operations and Financial Condition -
Earnings Release filed with the Securities Exchange Commission
on January 14, 2004
19
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 10, 2004 /s/ Richard A. Foss
------------------- ----------------------------------------
Richard A. Foss
President and Chief Executive Officer
/s/ Diana S. Tone
---------------------------------------
Diana S. Tone
Chief Financial Officer
20
EXHIBITS