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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 June 30, 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 (I.R.S. Employer Identification Number)
of incorporation)
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 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 July 31, 2004, there were 1,951,743 shares (*) of the Registrant's common
stock issued and outstanding.
(*) As of July 31, 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
JUNE 30, 2004
TABLE OF CONTENTS
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PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 (Unaudited) 1
Consolidated Statements of Income and Comprehensive Income for the Three Months
and Six Months Ended June 30, 2004 and 2003 (Unaudited) 2
Consolidated Statement of Stockholders' Equity for the Six Months Ended
June 30, 2004 (Unaudited) 3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004
and 2003 (Unaudited) 4-5
Notes to Unaudited Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20-21
Item 4. Controls and Procedures 22
PART II OTHER INFORMATION 23
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 24
EXHIBITS
Section 302 Certifications
Section 906 Certification
PART I - FINANCIAL INFORMATION
JACKSONVILLE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 2004 2003
---------------- ----------------
Cash and cash equivalents $ 6,245,069 $ 9,575,977
Federal funds sold - 500,000
Investment securities - available for sale 95,447,040 98,940,872
Mortgage-backed securities - available for sale 17,645,035 7,597,265
Federal Home Loan Bank stock 1,423,700 1,380,600
Other investment securities 578,173 592,355
Loans receivable - net of allowance for loan loss of $2,092,958 and $2,186,058
as of June 30, 2004 and December 31, 2003, respectively 127,731,526 127,079,036
Loans held for sale - net 742,600 506,300
Premises and equipment - net 7,207,100 7,419,061
Goodwill 2,726,567 2,726,567
Core deposit intangible 318,894 358,756
Accrued interest receivable 1,695,291 1,445,140
Capitalized mortgage servicing rights 1,116,433 1,168,246
Income taxes receivable 134,506 386,509
Other real estate owned 409,512 499,257
Other assets 2,373,128 1,639,722
-------------- --------------
TOTAL ASSETS $ 265,794,574 $ 261,815,663
============== ==============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 235,743,361 $ 235,172,732
Other borrowings 6,265,803 2,888,954
Advance payments by borrowers for taxes and insurance 707,612 397,941
Accrued interest payable 642,732 775,966
Deferred compensation payable 2,076,635 2,021,008
Other liabilities 1,112,066 526,909
-------------- --------------
Total liabilities 246,548,209 241,783,510
-------------- --------------
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
at June 30, 2004 and December 31, 2003, respectively 19,517 19,420
Additional paid-in-capital 6,457,244 6,399,321
Retained earnings - substantially restricted 14,153,175 13,866,849
Accumulated other comprehensive (loss) (1,383,571) (253,437)
-------------- --------------
Total stockholders' equity 19,246,365 20,032,153
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 265,794,574 $ 261,815,663
============== ==============
See accompanying notes to the unaudited consolidated financial statements.
1
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2004 2003 2004 2003
INTEREST INCOME:
Loans $ 2,092,085 $ 2,433,811 $ 4,219,685 $ 5,066,165
Investment securities 834,031 760,892 1,691,207 1,523,518
Mortgage-backed securities 153,593 17,093 244,124 51,771
Other 6,014 28,927 12,996 47,419
Total interest income 3,085,723 3,240,723 6,168,012 6,688,873
------------ ------------ ------------ ------------
INTEREST EXPENSE
Deposits 1,155,318 1,468,518 2,299,355 2,984,897
Other borrowings 13,739 4,248 22,142 10,003
------------ ------------ ------------ ------------
Total interest expense 1,169,057 1,472,766 2,321,497 2,994,900
------------ ------------ ------------ ------------
NET INTEREST INCOME 1,916,666 1,767,957 3,846,515 3,693,973
PROVISION FOR LOAN LOSSES 150,000 825,000 300,000 1,525,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,766,666 942,957 3,546,515 2,168,973
------------ ------------ ------------ ------------
OTHER INCOME:
Service charges on deposit accounts 231,211 174,899 403,203 333,851
Commission income 193,612 150,775 396,848 253,823
Loan servicing fees 97,277 101,121 196,734 199,611
Gains (losses) on sales of loans (1,064) 320,964 5,904 592,903
Gains on sales of securities 625 279,994 24,324 279,994
Recovery from insurance company - - - 562,500
Other 35,779 54,369 53,823 83,355
------------ ------------ ------------ ------------
Total other income 557,440 1,082,122 1,080,836 2,306,037
------------ ------------ ------------ ------------
OTHER EXPENSES:
Salaries and employee benefits 1,171,958 1,031,889 2,361,824 2,060,978
Occupancy and equipment expense 358,484 277,791 689,408 572,075
Data processing expense 71,255 70,709 137,652 130,444
Legal and accounting expense 54,520 38,050 100,637 63,439
Postage expense 31,262 32,731 70,896 68,452
Real estate owned expense (9,777) 24,602 18,152 58,578
Advertising expense 35,174 23,996 64,785 54,682
Other 230,093 272,840 508,711 537,878
------------ ------------ ------------ ------------
Total other expenses 1,942,969 1,772,608 3,952,065 3,546,526
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX 381,137 252,471 675,286 928,484
INCOME TAX 143,171 86,773 252,008 351,384
------------ ------------ ------------ ------------
NET INCOME $ 237,966 $ 165,698 $ 423,278 $ 577,100
OTHER COMPREHENSIVE INCOME(LOSS) - Unrealized gain
(loss) on securities available-for-sale (Net of tax of
$(740,450),$40,920, $(438,718), and$11,565, respectively) (1,907,393) 64,707 (1,130,134) 18,288
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (1,669,427) $ 230,405 $ (706,856) $ 595,388
============= ============ ============ ============
NET INCOME PER COMMON SHARE, BASIC $ 0.12 $ 0.09 $ 0.22 $ 0.30
============= ============ ============ ============
NET INCOME PER COMMON SHARE, DILUTED $ 0.12 $ 0.08 $ 0.21 $ 0.29
============= ============ ============ ============
DIVIDENDS PAID PER COMMON SHARE $ 0.075 $ 0.075 $ 0.15 $ 0.15
============= ============ ============ ============
See accompanying notes to unaudited consolidated financial statements
2
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Stockholders' Comprehensive
Stock Capital Earnings (Loss) Equity Income (Loss)
BALANCE, DECEMBER 31, 2003 $ 19,420 $ 6,399,321 $ 13,866,849 $ (253,437) $ 20,032,153
Net Income - - 423,278 - 423,278 423,278
Other comprehensive (loss) -change in
net unrealized losses on securities
available for sale, net of taxes of $(429,275) - - - (1,115,253) (1,115,253) (1,115,253)
Less: Reclassification adjustment for gains
included in net income, net of tax $(9,443) - - - (14,881) (14,881) (14,881)
-----------
Comprehensive (Loss) - - - - - $ (706,856)
===========
Exercise of stock options 140 139,765 - - 139,905
Purchase and retirement of treasury stock (43) (81,842) - - (81,885)
Dividends ($0.15 per share) - - (136,952) - (136,952)
-------- ----------- ------------ ------------ ------------
BALANCE, JUNE 30, 2004 $ 19,517 $ 6,457,244 $ 14,153,175 $ (1,383,571) $ 19,246,365
======== =========== ============ ============ ============
See accompanying notes to unaudited consolidated financial statements.
3
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
--------------------------------
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 423,278 $ 577,100
-------------- --------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion:
Premises and equipment 303,697 232,410
Accretion of loan fees and discounts, net (29,670) (29,669)
Amortization of investment premiums and discounts, net 278,322 360,607
Amortization of intangible assets 39,862 39,862
Provision for loan losses 300,000 1,525,000
Gains on sales of loans (5,904) (592,903)
(Gains) losses on sale of real estate owned (26,105) 15,695
Gains on sales of securities (24,324) (279,994)
Stock dividends on FHLB stock (43,100) (56,300)
Changes in income taxes receivable 252,003 (26,605)
Changes in other assets and liabilities 235,729 (40,330)
-------------- --------------
Net cash provided by operations before loan sales 1,703,788 1,724,873
Origination of loans for sale to Freddie Mac (7,787,152) (73,436,040)
Proceeds from sales of loans to Freddie Mac 7,608,569 72,561,370
-------------- --------------
Net cash provided by operating activities 1,525,205 850,203
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in federal funds sold, net 500,000 300,000
Maturity or call of investment securities available-for-sale 23,069,085 52,386,176
Proceeds from sale of investment and mortgage-backed securities 8,729,298 14,102,937
Principal payments on mortgage-backed and investment securities 1,653,461 490,678
Proceeds from sale of other real estate owned 190,035 472,881
(Increase) decrease in loans, net (994,155) 11,256,474
Purchases of investment and mortgage-backed securities (42,090,318) (86,683,475)
Additions to premises and equipment (91,736) (1,104,608)
-------------- --------------
Net cash (used in) investing activities (9,034,330) (8,778,937)
-------------- --------------
(Continued)
4
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
--------------------------------
2004 2003
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits $ 570,629 $ 8,872,292
Net increase (decrease) in other borrowings 3,376,849 (1,017,524)
Increase in advance payments by borrowers for taxes and insurance 309,671 343,251
Exercise of stock options 139,905 15,059
Purchase and retirement of treasury stock (81,885) -
Dividends paid - common stock (136,952) (133,720)
-------------- --------------
Net cash provided by financing activities 4,178,217 8,079,358
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,330,908) 150,624
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,575,977 11,091,626
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,245,069 $ 11,242,250
============== ==============
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits $ 2,436,489 $ 3,160,001
Interest on other borrowings 18,242 10,003
Income taxes paid - 353,989
NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans $ 256,835 $ 579,068
Loans to facilitate sales of real estate owned 185,500 61,139
See accompanying notes to unaudited consolidated financial statements
5
JACKSONVILLE BANCORP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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1. FINANCIAL STATEMENTS
The unaudited consolidated financial statements include the accounts of
Jacksonville Bancorp, Inc. and its wholly-owned subsidiary, Jacksonville
Savings Bank (the "Bank") and its wholly-owned subsidiary, Financial
Resources Group (the "Company"). All significant intercompany accounts
and transactions have been eliminated.
In the opinion of management, the prevailing unaudited financial
statements contain all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial condition
of the Company as of June 30, 2004 and December 31, 2003 and the results
of operations for the three and six month periods ended June 30, 2004
and 2003. The results of operations for the three and six month periods
ended June 30, 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 10-K filed in March 2004. The accounting and
reporting policies of the Company and its subsidiary conform to
accounting principles generally accepted in the United States of America
and to the prevailing practices within the banking industry.
Certain amounts included in the 2003 consolidated statements have been
reclassified to conform to the 2004 presentation, with no effect on net
income or stockholders' equity.
2. EARNINGS PER SHARE
EARNINGS PER SHARE - Basic earnings per share is determined by dividing
net income for the period by the weighted average number of common
shares outstanding. Diluted earnings per share considers the potential
effects of the exercise of the outstanding stock options under the
Company's Stock Option Plans.
The following reflects earnings per share calculations for the basic and
diluted methods:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2004 2003 2004 2003
Net income available to common shareholders $ 237,966 $ 165,698 $ 423,278 $ 577,100
Basic potential common shares:
Weighted average shares outstanding 1,951,743 1,928,291 1,949,842 1,924,817
---------- ---------- ---------- ----------
Diluted potential common shares:
Stock option equivalents 34,661 39,592 39,276 32,166
---------- ---------- ---------- ----------
Diluted average shares outstanding 1,986,404 1,967,883 1,989,118 1,956,983
Basic earnings per share $ 0.12 $ 0.09 $ 0.22 $ 0.30
========== ========== ========== ==========
Diluted earnings per share $ 0.12 $ 0.08 $ 0.21 $ 0.29
========== ========== ========== ==========
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. During the second
quarter of 2004, the Company granted 5,600 option shares under its 1996
Stock Option Plan. The options vest 20% per year, expire after ten
years, and are exercisable at a price of $14.00 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 2003 and all previous grants were fully
vested prior to 2003; consequently, there was no compensation expense
recognized for the three and six months periods ended June 30 2003. The
following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions
of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, on
stock-based employee compensation for stock options granted in 2004.
3 Months Ended 6 Months Ended
06/30/04 06/30/04
-------- --------
Net income, as reported $ 237,966 $ 423,278
Less value of options vested, net of tax effects (2,560) (2,560)
-------------- --------------
Pro-forma net income $ 235,406 $ 420,718
Earnings per share:
Basic: As reported $ 0.12 $ 0.22
Pro-forma $ 0.12 $ 0.22
Diluted: As reported $ 0.12 $ 0.21
Pro-forma $ 0.12 $ 0.21
7
4. LOAN PORTFOLIO COMPOSITION
At June 30, 2004 and December 31, 2003, the composition of the Company's
loan portfolio was as follows:
06/30/04 12/31/03
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
One-to-four family residential $ 41,070 32.2% $ 40,304 31.7%
Commercial and agricultural 24,834 19.4% 21,401 16.8%
Multi-family residential 2,193 1.7% 2,376 1.9%
--------- ------ --------- ------
Total real estate loans 68,097 53.3% 64,081 50.4%
Commercial agricultural business loans 27,208 21.3% 29,763 23.4%
Consumer loans:
Home equity/home improvement 24,363 19.1% 23,614 18.6%
Automobile 5,106 4.0% 6,477 5.1%
Other 5,206 4.1% 5,545 4.4%
--------- ------ --------- ------
Total consumer loans 34,675 27.1% 35,636 28.0%
--------- ------ --------- ------
Total loans receivable 129,980 101.8% 129,480 101.9%
Less:
Unearned discount and deferred loan fees, net 155 0.1% 215 0.2%
Allowance for loan losses 2,093 1.6% 2,186 1.7%
--------- ------ --------- ------
Total loans receivable, net $ 127,732 100.0% $ 127,079 100.0%
========= ====== ========= ======
* * * * * *
8
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
JUNE 30, 2004 COMPARED TO DECEMBER 31, 2003
Total assets grew $3,979,000 to $265,795,000 at June 30, 2004, from the
$261,816,000 at December 31, 2003. The increase in assets was funded by
increases of $571,000 in deposits and $3,377,000 in borrowed funds. Net loans
increased by $652,000 to $127,732,000 at June 30, 2004. Investment securities,
available-for-sale, decreased $3,465,000 due to calls and sales of investments.
Cash received from the investment securities, borrowed funds, and the $3,331,000
decrease in cash and cash equivalents were used to fund the $10,048,000 growth
in mortgage-backed securities during the first half of 2004. The increase in
borrowed funds was comprised of short-term advances from the FHLB, which equaled
$4,500,000 at June 30, 2004.
Stockholders' equity decreased $786,000 to $19,246,000 at June 30, 2004. The
decrease resulted from the payment of $137,000 in dividends and a $1,130,000
increase in unrealized losses, net of tax, on available-for-sale securities,
partially offset by net income of $423,000. The change in unrealized gains or
losses on securities classified as available-for-sale is affected by market
conditions and, therefore, can fluctuate daily. As of July 31, 2004, the market
value of the available-for sale securities portfolio had increased $406,000, net
of tax, from June 30, 2004. Stockholders' equity also benefited from the receipt
of $58,000 from the exercise of stock options during the first half of 2004. The
$58,000 reflects the $140,000 received from the exercise of stock options net of
the $82,000 cost to acquire the shares underlying the options.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND
2003
GENERAL: The Company reported net income for the three months ended June 30,
2004, of $238,000, or $0.12 per share of common stock, basic and diluted,
compared to net income of $166,000, or $0.09 per share of common stock, basic,
and $0.08 per common share, diluted, for the three months ended June 30, 2003.
The increase of $72,000 in net income is primarily due to a $149,000 increase in
net interest income and a
9
$675,000 decrease in provision for loan losses, offset by a decrease in other
income of $525,000 and increases in other expenses of $170,000 and $57,000 in
income taxes.
INTEREST INCOME: Total interest income decreased $155,000 during the three
months ended June 30, 2004, compared to the same three months in 2003. The
primary reason for the decrease is $342,000 in lower interest income on loans
during this three month period. The average balance of the loan portfolio during
the second quarter of 2004 decreased to $129.0 million from $140.3 million for
the second quarter of 2003. In addition, the loan portfolio's average yield
decreased to 6.49% from 6.94% for the three months ended June 30, 2004 and 2003,
respectively. 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.
Interest income on investment securities increased $73,000 during the three
months ended June 30, 2004, compared to the same period in 2003. The additional
income is primarily due to an increase in the portfolio resulting from the
investment of cash generated by loan sales. The average balance of the
investment portfolio increased to $98.0 million during the second quarter of
2004 compared to $86.0 million during the second quarter of 2003. The average
yield decreased during this same time frame to 3.40% from 3.54% for the three
months ended June 30, 2004 and 2003, respectively. The decrease in 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 and sales. An additional $29.5
million of investment securities has been purchased during the first half of
2004.
Interest income on mortgage-backed securities increased $137,000 during the
three months ended June 30, 2004, compared to the same period in 2003. The
increase is due to an increase in the average balance of mortgage-backed
securities to $16.1 million from $1.5 million for the three months ended June
30, 2004 and 2003, respectively, offset by a decrease in the average yield to
3.83% from 4.52% for the same periods. The increase in the average balance of
mortgage-backed securities is due to the reinvestment of funds from investment
calls and sales in order to improve the cash flow, average yield, and
diversification of the Company's overall investment portfolio.
Interest income on other investments, which include federal funds sold and
interest earning deposit accounts, decreased $23,000 during the three months
ended June 30, 2004, compared to the same period in 2003. The decreased interest
income from other investments is primarily due to a lower average balance of
$2.7 million from $10.5 million for the three months ended June 30, 2004 and
2003, respectively. The decrease in interest income on other investments is also
due to a decline in the average yield to 0.89% from 1.10% for the comparative
three month periods, reflecting the declining interest rate environment during
2003.
INTEREST EXPENSE: Total interest expense for the three months ended June 30,
2004 decreased $304,000 from the same period in 2003. The decrease in interest
expense was due to a decrease in the cost of deposits of $314,000 partially
offset by an increase in interest expense on borrowed funds of $10,000 for the
three months ended June 30, 2004, compared to the same in 2003. The average
balance of deposits increased to $225.1 million during the second quarter of
2004 compared to $219.0 million during the same quarter of 2003, due to normal
deposit growth. The average cost of deposits has decreased to 2.05% from 2.68%
during the comparative quarters. The decreased cost of funds is attributed to
declining market rates of interest.
Interest paid on borrowings increased $10,000 during the three months ended June
30, 2004, compared to the same period of 2003, due to a $3.4 million increase in
the average balance of borrowed funds. The increase in average balance of
borrowed funds is mostly due to the use of short-term advances from the FHLB,
which averaged $3.0 million during the second quarter of 2004. The remainder of
borrowed funds consists of securities sold under agreements to repurchase. The
growth in average balances was offset by a decreased
10
average cost of borrowings to 1.15% from 1.22% for the three months ended June
30, 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 six months
ended June 30, 2004 and 2003.
The allowance for loan losses decreased to $2,093,000 at June 30, 2004 from
$2,186,000 at December 31, 2003. The decrease is the result of net charge-offs
exceeding the provision for loan losses. Net charge-offs decreased to $253,000
during the second quarter of 2004 compared to net charge-offs of $701,000 during
the second quarter of 2003. The provision for loan losses decreased to $150,000
from $825,000 for the three months ended June 30, 2004 and 2003, respectively.
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.
6/30/2004 12/31/2003
--------- ----------
(In thousands)
Non-accruing loans:
One-to-four family residential 955 1,022
Commerical and agricultural real estate 175 224
Commercial and agricultural business 268 613
Home equity/Home improvement 648 1,101
Automobile 74 139
Other consumer 133 22
---------- ----------
Total 2,253 3,121
========== ==========
Accruing loans delinquent more than 90 days:
One-to-four family residential 106 168
Automobile 2 15
Other consumer 2 7
---------- ----------
Total 110 190
========== ==========
Foreclosed assets:
One-to-four family residential 410 499
Automobile 30 18
---------- ----------
Total 440 517
========== ==========
Total nonperforming assets $ 2,803 $ 3,828
========== ==========
Total as a percentage of total assets 1.05% 1.46%
==== ====
11
The following table shows the aggregate principal amount of potential problem
credits on the Company's watch list at June 30, 2004 and December 31, 2003. All
nonaccrual loans are automatically placed on the watch list.
06/30/04 12/31/03
--------- ---------
(In thousands)
Special Mention credits $ 6,921 $ 6,087
Substandard credits 4,358 7,555
--------- ---------
Total watch list credits $ 11,279 $ 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, 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
12
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 decreased $525,000 during the three months
ended June 30, 2004, compared to the same period of 2003. The decrease in other
income is primarily due to decreased gains on the sale of loans to the secondary
market of $322,000 and decreased gains on the sale of securities of $279,000 for
the three months ended June 30, 2004 compared to the same period of 2003. The
increased market interest rates of 2004 have resulted in fewer opportunities for
the sale of loans and securities at a gain. Service charges on deposits and
brokerage commissions increased $56,000 and $43,000, respectively, during the
three months ended June 30, 2004 compared to 2003. The increase in service
charges on deposits is due to the growth in deposits, as well as a new fee
structure implemented on April 1, 2004. Brokerage commissions increased due to a
growth in accounts.
OTHER EXPENSES: Total other expenses increased $170,000 during the three months
ended June 30, 2004 compared to the three months ended June 30, 2003. The
increase in other expenses was mostly due to increases of $140,000 in salaries
and benefits and $81,000 in occupancy expense, partially offset by a decrease of
$34,000 in real estate owned expense and a $43,000 decrease in other expenses.
Of this $43,000 decrease in other expenses, the majority is comprised of a
decrease in service charges due to the reversal of prior period accruals as the
result of a third party vendor's waiver of charges. Salaries and benefits have
been impacted by a decrease in the deferral of salaries capitalized as loan
costs, due to decreased loan originations, and the hiring of additional
personnel in the lending department. The increase in occupancy expense reflects
the expansion of the main office facility, which includes the new lending
center.
INCOME TAXES: The provision for income taxes increased $57,000 during the three
months ended June 30, 2004, compared to the three months ended June 30, 2003.
The increase is directly attributable to a higher level of income during the
second quarter of 2004 as compared to 2003.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
GENERAL: The Company reported net income for the six months ended June 30, 2004,
of $423,000, or $0.22 per share, basic, and $0.21 per share, diluted, compared
to net income of $577,000, or $0.30 per share, basic and $0.29 per share,
diluted, for the six months ended June 30, 2003. Net income decreased $154,000
during the six months ended June 30, 2004 compared to the same period of 2003,
due to a decrease in other income of $1,225,000 and an increase in other expense
of $406,000, partially offset by a decrease in provision for loan losses of
$1,225,000, an increase in net interest income of $153,000 and a decrease in
income taxes of $99,000. Other income in 2003 included a $562,500 negotiated
settlement with the Company's insurance carrier received during the first
quarter of 2003.
INTEREST INCOME: Total interest income decreased $521,000 during the six months
ended June 30, 2004, compared to the same period in 2003. The primary reason for
the decrease is $846,000 in lower interest income on loans during the six month
period. The average balance of the loan portfolio during the first half
13
of 2004 equalled $128.8 million compared to $143.4 million for the first half of
2003. The decrease in the average balance of loans is primarily due to increased
sales of loans to the secondary market. In addition, the loan portfolio's
average yield decreased to 6.55% from 7.07% for the six months ended June 30,
2004 and 2003, respectively, reflecting the unprecedented decrease in market
interest rates.
Interest income on investment securities increased $167,000 during the six
months ended June 30, 2004, compared to the same period in 2003. The additional
income during the first six months of 2004 is primarily due to an increase in
the portfolio resulting from the investment of cash generated by loan sales. The
average balance of the investment portfolio increased to $99.7 million during
the first half of 2004 compared to $81.2 million during the first half of 2003.
The higher average balances were partially offset by a decrease in the average
yield to 3.39% from 3.75% during the first six months of 2004 and 2003,
respectively.
Interest income on mortgage-backed securities increased $192,000 during the six
months ended June 30, 2004, compared to the same period in 2003. The increase in
interest income is due to an increase in the average balance of mortgage-backed
securities to $12.8 million from $2.1 million for the six months ended June 30,
2004 and 2003, respectively, offset by a decrease in the average yield to 3.81%
from 5.02% for the same periods.
Interest income on other investments, which include federal funds sold and
interest earning deposit accounts, decreased $34,000 during the six months ended
June 30, 2004, compared to the same period in 2003. The decreased interest
income from other investments is primarily due to a lower average balance of
$3.1 million from $8.6 million, as well as a lower average yield of 0.85% from
1.10% for the six months ended June 30, 2004 and 2003, respectively.
INTEREST EXPENSE: Total interest expense for the six months ended June 30, 2004
decreased $674,000 from the same period in 2003. The decrease in interest
expense was due to a decrease in the cost of deposits of $686,000 partially
offset by an increase in interest expense on borrowed funds of $12,000 for the
six months ended June 30, 2004, compared to the same in 2003. The average
balance of deposits increased to $224.5 million during the first half of 2004
compared to $216.0 million during the first half of 2003, due to normal deposit
growth. The average cost of deposits has decreased to 2.05% from 2.76% during
the first six months of 2004 as compared to the six months ended June 30, 2003.
The decreased cost of funds is attributed to declining market rates of interest.
Interest paid on borrowings increased $12,000 during the six months ended June
30, 2004, compared to the same period of 2003. The increase in interest paid is
mostly due to a higher average balance of borrowed funds of $3.9 million
compared to $1.6 million for the first half of 2004 and 2003, respectively. The
higher balance of borrowed funds is mostly due to the use of short-term advances
from the FHLB, which averaged $1.9 million during the first six months of 2004.
The remainder of borrowed funds consists of securities sold under agreements to
repurchase. The growth in average balances was offset by a decreased average
cost of borrowings to 1.12% from 1.29% for the six months ended June 30, 2004
and 2003.
PROVISION FOR LOAN LOSSES: The provision for loan losses is determined by
management as the amount needed to replenish the allowance for loan losses,
after net charge-offs have been deducted, to a level considered adequate to
absorb probable losses in the loan portfolio, in accordance with accounting
principles generally accepted in the United States of America.
14
6 Months Ended
6/30/2004 6/30/2003
--------- ---------
(In thousands)
Balance at beginning of period $ 2,186 $ 2,073
Charge-offs:
One-to-four family residential 59 220
Commercial and agricultural real estate 187 22
Commercial and agricultural business - 154
Home equity/home improvement 180 353
Automobile 119 159
Other Consumer 16 109
--------- ---------
Total 561 1,017
--------- ---------
Recoveries:
One-to-four family residential 2 1
Commercial and agricultural real estate 119 -
Commercial and agricultural business 12 -
Home equity/home improvement 6 3
Automobile 15 11
Other Consumer 14 7
--------- ---------
Total 168 22
--------- ---------
Net loans charged off 393 995
Additions charged to operations 300 1,525
--------- ---------
Balance at end of period $ 2,093 $ 2,603
========= =========
The provision for loan losses decreased $1.2 million to $300,000 during the six
months ended June 30, 2004 compared to the same six months in 2003. The
provisions were made to bring the allowance for loan losses to a level deemed
adequate following management's evaluation of the repayment capacity and
collateral protection afforded by each problem credit identified by management.
The allowance for loan losses decreased to $2.1 million at June 30, 2004 from
$2.2 million at December 31, 2003. The decrease is the result of net charge-offs
exceeding the provision for loan losses. Net charge-offs decreased to $393,000
during the first six months of 2004 compared to net charge-offs of $995,000
during the first six months of 2003. The increase in commercial and agricultural
real estate charge-offs is due to the default of two commercial borrowers.
OTHER INCOME: Total other income decreased $1,225,000 during the six months
ended June 30, 2004, compared to the same period of 2003. The decrease in other
income is mostly comprised of a $562,500 negotiated settlement with the
Company's insurance carrier received during the first quarter of 2003. The
remainder of the decrease in other income is primarily due to decreased gains on
the sale of loans to the secondary market of $587,000 and decreased gains on the
sale of securities of $256,000 for the six months ended June 30, 2004 and 2003,
respectively, partially offset by increases in brokerage commissions and service
charges on deposits. Brokerage commissions increased $143,000 during the six
months ended June 30, 2004 compared to 2003. Service charges on deposits also
increased $69,000 due to the growth in deposits, as well as a new fee structure.
OTHER EXPENSES: Total other expenses increased $406,000 during the six months
ended June 30, 2004 compared to the six months ended June 30, 2003. Changes for
the six months ended June 30, 2004 from the comparative period in 2003 include
increases of $301,000 in salaries and benefits, $117,000 in occupancy expenses,
and $37,000 in legal and accounting expense, offset by a decrease of $40,000 in
real estate owned expense and $29,000 in other expenses. Of this $29,000
decrease in other expenses, the majority is comprised of a decrease in service
charges due to the reversal of prior period accruals as the result of a third
party vendor's waiver of charges.
15
INCOME TAXES: The provision for income taxes decreased $99,000 during the six
months ended June 30, 2004, compared to the six months ended June 30, 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 June 30, 2004 and December
31, 2003, cash and cash equivalents totalled $6.2 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 and
calls of investment securities and principal repayments from mortgage-backed
securities (both scheduled and prepayments). During the past twelve months, the
most significant sources of funds have been deposit growth, advances from the
FHLB, and loan sales to the secondary market. These funds have been used for new
loan originations and the purchase of investment and mortgage-backed securities.
While scheduled loan repayments and proceeds from maturing investment securities
and principal repayments on mortgage-backed securities are relatively
predictable, deposit flows and early prepayments are more influenced by interest
rates, general economic conditions, and competition. The Company attempts to
price its deposits to meet asset-liability objectives and stay competitive with
local market conditions.
Liquidity management is both a short-term and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected purchases of
investment and mortgage-backed securities, (iii) expected deposit flows, (iv)
yields available on interest-bearing deposits, and (v) liquidity of its
asset-liability management program. Excess liquidity is generally invested in
interest-earning overnight deposits and other short-term U.S. Agency
obligations. If the Company requires funds beyond its ability to generate them
internally, it has the ability to borrow funds from the FHLB. The Company may
borrow from the FHLB under a blanket agreement which assigns all investments in
FHLB stock as well as qualifying first mortgage loans equal to 150% of the
outstanding balance as collateral to secure the amounts borrowed. This borrowing
arrangement is limited to a maximum of 30% of the Company's total assets or
twenty times the balance of FHLB stock held by the Company. At June 30, 2004,
the Company had outstanding advances of $4.5 million. In addition, the Company
had approximately $24.0 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 liquidity ratios at June 30, 2004 and December
31, 2003 were 44.3% and 43.3%, respectively. These ratios represent 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
June 30, 2004 and December 31, 2003.
06/30/04 12/31/03
-------- --------
(Dollars in thousands)
Commitments to fund loans - own portfolio $ 16,804 $ 15,695
Commitments to fund loans - for sale to Freddie Mac 2,133 369
Standby letters of credit 57 410
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and Tier 1 capital (as
defined) to average assets
16
(as defined). Management believes, at June 30, 2004, that the Bank meets all its
capital adequacy requirements.
Under Illinois law, Illinois-chartered savings banks are required to maintain a
minimum core capital to total assets ratio of 3%. The Illinois Commissioner of
Savings and Residential Finance (the Commissioner) is authorized to require a
savings bank to maintain a higher minimum capital level if the Commissioner
determines that the savings bank's financial condition or history, management or
earnings prospects are not adequate. If a savings bank's core capital ratio
falls below the required level, the Commissioner may direct the savings bank to
adhere to a specific written plan established by the Commissioner to correct the
savings bank's capital deficiency, as well as a number of other restrictions on
the savings bank's operations, including a prohibition on the declaration of
dividends by the savings bank's board of directors. At June 30, 2004, the Bank's
core capital ratio was 6.64% of total average assets, which exceeded the
required amount.
The Bank is also required to maintain regulatory capital requirements imposed by
the Federal Deposit Insurance Corporation. The Bank's actual ratios at June 30,
2004 and the required minimums to be considered adequately capitalized are shown
in the table below. In order to be considered well-capitalized, the Bank must
maintain: (i) Tier 1 Capital to Average Assets of 5.0%, (ii) Tier 1 Capital to
Risk-Weighted Assets of 6.0%, and (iii) Total Capital to Risk-Weighted Assets of
10.0%.
06/30/04 12/31/03 Minimum
Actual Actual Required
------ ------ --------
Tier 1 Capital to Average Assets 6.64% 6.54% 4.00%
Tier 1 Capital to Risk-Weighted Assets 12.09% 11.88% 4.00%
Total Capital to Risk-Weighted Assets 13.35% 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 accounting principles generally accepted in the United States of America,
which require the measurement of financial position and operating results in
terms of historical dollars, without considering the change in relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in increased cost of the Company's operations. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
17
CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------- -------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
------------------------------------- -------------------------------------
Interest-earnings assets:
Loans $ 129,039 $ 2,092 6.49% $ 140,259 $ 2,434 6.94%
Investment securities 98,031 834 3.40% 85,990 761 3.54%
Mortgage-backed securities 16,057 154 3.83% 1,513 17 4.52%
Other 2,698 6 0.89% 10,548 29 1.10%
--------- ------- --------- -------
Total interest-earning assets 245,825 3,086 5.02% 238,310 3,241 5.44%
Non-interest earnings assets 19,468 16,341
--------- ---------
Total assets $ 265,293 $ 254,651
========= =========
Interest-bearing liabilities:
Deposits $ 225,060 $ 1,155 2.05% $ 219,022 $ 1,469 2.68%
Short-term borrowings 4,797 14 1.15% 1,396 4 1.22%
--------- ------- --------- -------
Total interest-bearing liabilities 229,857 1,169 2.03% 220,418 1,473 2.67%
Non-interest bearing liabilities 15,875 13,593
Stockholders' equity 19,561 20,640
--------- ---------
Total liabilities/stockholders' equity $ 265,293 $ 254,651
========= =========
Net interest income $ 1,917 $ 1,768
======= =======
Interest rate spread (average yield earned
minus average rate paid) 2.99% 2.77%
===== =====
Net interest margin (net interest income
divided by average interest-earning assets) 3.12% 2.97%
===== =====
ANALYSIS OF VOLUME AND RATE CHANGES
(Dollars in thousands)
--------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------
2004 Compared to 2003
Increase(Decrease) Due to
--------------------------------
Rate Volume Net
--------------------------------
Interest-earnings assets:
Loans $ (154) $ (188) $ (342)
Investment securities (30) 103 73
Mortgage-backed securities (3) 140 137
Other (5) (18) (23)
------- ------- -------
Total net change in income on
interest-earning assets (192) 37 (155)
------- ------- -------
Interest-bearing liabilities:
Deposits (352) 38 (314)
Other borrowings (1) 11 10
------- ------- -------
Total net change in expense on
interest-bearing liabilities (353) 49 (304)
------- ------- -------
Net change in net interest income $ 161 $ (12) $ 149
======= ======= =======
18
CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------- -------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
------------------------------------- -------------------------------------
Interest-earnings assets:
Loans $ 128,804 $ 4,220 6.55% $ 143,406 $ 5,066 7.07%
Investment securities 99,681 1,691 3.39% 81,216 1,524 3.75%
Mortgage-backed securities 12,827 244 3.81% 2,062 52 5.02%
Other 3,066 13 0.85% 8,649 47 1.10%
--------- ------- --------- -------
Total interest-earning assets 244,378 6,168 5.05% 235,333 6,689 5.68%
Non-interest earnings assets 19,597 17,586
--------- ---------
Total assets $ 263,975 $ 252,919
========= =========
Interest-bearing liabilities:
Deposits $ 224,526 $ 2,299 2.05% $ 215,999 $ 2,985 2.76%
Short-term borrowings 3,942 22 1.12% 1,552 10 1.29%
--------- ------- --------- -------
Total interest-bearing liabilities 228,468 2,321 2.03% 217,551 2,995 2.75%
Non-interest bearing liabilities 15,635 14,857
Stockholders' equity 19,872 20,511
--------- ---------
Total liabilities/stockholders' equity $ 263,975 $ 252,919
========= =========
Net interest income $ 3,847 $ 3,694
======= =======
Interest rate spread (average yield earned
minus average rate paid) 3.02% 2.93%
===== =====
Net interest margin (net interest income
divided by average interest-earning assets) 3.15% 3.14%
===== =====
ANALYSIS OF VOLUME AND RATE CHANGES
(Dollars in thousands)
--------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------
2004 Compared to 2003
Increase(Decrease) Due to
--------------------------------
Rate Volume Net
--------------------------------
Interest-earnings assets:
Loans $ (353) $ (493) $ (846)
Investment securities (155) 322 167
Mortgage-backed securities (15) 207 192
Other (9) (25) (34)
------- ------- -------
Total net change in income on
interest-earning assets (532) 11 (521)
------- ------- -------
Interest-bearing liabilities:
Deposits (799) 113 (686)
Other borrowings (2) 14 12
------- ------- -------
Total net change in expense on
interest-bearing liabilities (801) 127 (674)
------- ------- -------
Net change in net interest income $ 269 $ (116) $ 153
======= ======= =======
19
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, which provides
monthly cash flow. 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.
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 June 30, 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
(Dollars in thousands)
--------------------------------------------------------
06/30/04 12/31/03
------------------------------------------- ALCO
Rate Shock: $ Change % Change $ Change % Change Benchmark
--------------------------------------------------------
+ 200 basis points (28) -0.37% 240 3.30% > (20.00)%
+ 100 basis points 149 1.98% 358 4.90% > (12.50)%
- 100 basis points 432 5.75% 529 7.25% > (12.50)%
- 200 basis points 495 6.59% 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 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.
20
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.
21
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-15(e) and 15d-15(e)) 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.
22
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of stockholders held on April
27, 2004, the following matters were submitted to a vote:
1. The election of the following persons as directors for a
three-year term:
Name Votes for Votes Withheld
---- --------- --------------
Andrew F. Applebee 1,817,222 1,000
Emily J. Osburn 1,815,922 2,300
Harvey D. Scott III 1,816,947 1,275
2. The ratification of the appointment of McGladrey &
Pullen, LLP as auditors for the Company for the year
ended December 31, 2004.
Votes for Against Abstain
--------- ------- -------
1,813,375 1,447 3,400
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
31.1 - Certification of the Chief Executive Officer Pursuant to
Rule 13a-15(e)/15d-15(e)
31.2 - Certification of the Chief Financial Officer Pursuant to
Rule 13a-15(e)/15d-15(e)
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 2003
EXHIBITS ON FORM 8-K
Item 12 - Results of Operations and Financial Condition -
Earnings release filed with the Securities Exchange Commission
on April 13, 2004
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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: 08/4/2004 /S/ Richard A. Foss
----------------------- -------------------------------------
Richard A. Foss
President and Chief Executive Officer
/S/ Diana S. Tone
-------------------------------------
Diana S. Tone
Chief Financial Officer
24