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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 September 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 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 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 October 31, 2004, there were 1,966,143 shares (*) of the Registrant's
common stock issued and outstanding.
(*) As of October 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
SEPTEMBER 30, 2004
TABLE OF CONTENTS
- -----------------------------------------------------------------------------------------------------------------
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2004 and December 31, 2003 (Unaudited) 1
Consolidated Statements of Income and Comprehensive Income for the Three Months
and Nine Months Ended September 30, 2004 and 2003 (Unaudited) 2
Consolidated Statement of Stockholders' Equity for the Nine Months Ended
September 30, 2004 (Unaudited) 3
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004
and 2003 (Unaudited) 4-5
Notes to Unaudited Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22-23
Item 4. Controls and Procedures 24
PART II OTHER INFORMATION 25
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
Signatures 26
EXHIBITS
Section 302 Certifications
Section 906 Certification
PART I - FINANCIAL INFORMATION
JACKSONVILLE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 2004 2003
-------------- --------------
Cash and cash equivalents $ 7,159,030 $ 9,575,977
Federal funds sold - 500,000
Investment securities - available for sale 93,742,860 98,940,872
Mortgage-backed securities - available for sale 16,093,391 7,597,265
Federal Home Loan Bank stock 1,444,700 1,380,600
Other investment securities 577,327 592,355
Loans receivable - net of allowance for loan loss of $2,171,425 and $2,186,058
as of September 30, 2004 and December 31, 2003, respectively 124,729,825 127,079,036
Loans held for sale - net 461,539 506,300
Premises and equipment - net 7,146,785 7,419,061
Goodwill 2,726,567 2,726,567
Core deposit intangible 298,964 358,756
Accrued interest receivable 2,182,025 1,445,140
Capitalized mortgage servicing rights 1,102,723 1,168,246
Income taxes receivable - 386,509
Other real estate owned 563,533 499,257
Other assets 1,479,950 1,639,722
-------------- --------------
TOTAL ASSETS $ 259,709,219 $ 261,815,663
============== ==============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 226,035,309 $ 235,172,732
Other borrowings 9,231,421 2,888,954
Advance payments by borrowers for taxes and insurance 146,345 397,941
Accrued interest payable 647,868 775,966
Income taxes payable 4,896 -
Deferred compensation payable 2,106,554 2,021,008
Other liabilities 805,125 526,909
-------------- --------------
Total liabilities 238,977,518 241,783,510
-------------- --------------
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, 1,953,466 shares and 1,942,004 shares
at September 30, 2004 and December 31, 2003, respectively 19,535 19,420
Additional paid-in-capital 6,457,257 6,399,321
Retained earnings - substantially restricted 14,334,962 13,866,849
Accumulated other comprehensive (loss) (80,053) (253,437)
-------------- --------------
Total stockholders' equity 20,731,701 20,032,153
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 259,709,219 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
2004 2003 2004 2003
INTEREST INCOME:
Loans $ 2,123,775 $ 2,310,943 $ 6,343,459 $ 7,377,109
Investment securities 827,449 780,618 2,518,657 2,304,136
Mortgage-backed securities 166,979 6,025 411,103 57,796
Other 6,397 10,949 19,394 58,368
------------ ------------ ------------ ------------
Total interest income 3,124,600 3,108,535 9,292,613 9,797,409
------------ ------------ ------------ ------------
INTEREST EXPENSE
Deposits 1,117,053 1,416,847 3,416,408 4,401,745
Other borrowings 33,561 11,722 55,703 21,725
------------ ------------ ------------ ------------
Total interest expense 1,150,614 1,428,569 3,472,111 4,423,470
------------ ------------ ------------ ------------
NET INTEREST INCOME 1,973,986 1,679,966 5,820,502 5,373,939
PROVISION FOR LOAN LOSSES 150,000 300,000 450,000 1,825,000
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,823,986 1,379,966 5,370,502 3,548,939
------------ ------------ ------------ ------------
OTHER INCOME:
Service charges on deposit accounts 213,417 164,981 616,618 498,831
Commission income 138,968 90,779 535,816 344,602
Loan servicing fees 95,216 102,666 291,950 302,277
Gains on sales of loans 21,203 180,504 27,107 773,407
Gains on sales of securities 3,696 19,439 28,020 299,433
Recovery from insurance company - - - 562,500
Other 20,786 106,002 74,609 189,357
------------ ------------ ------------ ------------
Total other income 493,286 664,371 1,574,120 2,970,407
------------ ------------ ------------ ------------
OTHER EXPENSES:
Salaries and employee benefits 1,203,132 1,073,022 3,564,955 3,133,999
Occupancy and equipment expense 343,931 301,706 1,033,339 873,781
Data processing expense 64,883 73,971 202,535 204,415
Legal and accounting expense 35,802 21,541 136,649 84,980
Postage expense 36,240 40,943 107,136 109,395
Real estate owned expense (20,623) 4,509 (2,471) 63,087
Advertising expense 25,293 30,774 90,078 85,456
Other 228,885 273,493 737,386 811,371
------------ ------------ ------------ ------------
Total other expenses 1,917,543 1,819,959 5,869,607 5,366,484
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX 399,729 224,378 1,075,015 1,152,862
INCOME TAX 149,402 82,245 401,410 433,629
------------ ------------ ------------ ------------
NET INCOME $ 250,327 $ 142,133 $ 673,605 $ 719,233
OTHER COMPREHENSIVE INCOME(LOSS) - Unrealized gain
(loss) on securities available-for-sale (Net of tax of
$827,110, $(583,908), $110,014, and $(572,343),
respectively) 1,303,518 (923,341) 173,384 (905,053)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 1,553,845 $ (781,208) $ 846,989 $ (185,820)
============ ============ ============ ============
NET INCOME PER COMMON SHARE, BASIC $ 0.13 $ 0.07 $ 0.35 $ 0.37
============ ============ ============ ============
NET INCOME PER COMMON SHARE, DILUTED $ 0.13 $ 0.07 $ 0.34 $ 0.36
============ ============ ============ ============
DIVIDENDS PAID PER COMMON SHARE $ 0.075 $ 0.075 $ 0.225 $ 0.225
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements
2
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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 - - 673,605 - 673,605 673,605
Other comprehensive income -change in
net unrealized losses on securities
available for sale, net of taxes of $120,893 - - - 190,527 190,527 190,527
Less: Reclassification adjustment for gains
included in net income, net of tax $(10,877) - - - (17,143) (17,143) (17,143)
---------
Comprehensive Income - - - - - $ 846,989
=========
Exercise of stock options 179 173,845 - - 174,024
Purchase and retirement of treasury stock (64) (115,909) - - (115,973)
Dividends ($0.225 per share) - - (205,492) - (205,492)
-------- ----------- ------------ ----------- ------------
BALANCE, SEPTEMBER 30, 2004 $ 19,535 $ 6,457,257 $ 14,334,962 $ (80,053) $ 20,731,701
======== =========== ============ =========== ============
See accompanying notes to unaudited consolidated financial statements.
3
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 673,605 $ 719,233
---------------- ----------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion:
Premises and equipment 451,826 350,762
Accretion of loan fees and discounts, net (44,505) (45,107)
Amortization of investment premiums and discounts, net 398,122 525,715
Amortization of intangible assets 59,792 59,793
Provision for loan losses 450,000 1,825,000
Gains on sales of loans (27,107) (773,407)
Gains on sale of real estate owned (74,396) (12,974)
Gains on sales of securities (28,020) (299,433)
Stock dividends on FHLB stock (64,100) (77,700)
Changes in income taxes receivable (payable) 391,405 52,656
Changes in other assets and liabilities (454,811) (605,293)
---------------- ----------------
Net cash provided by operations before loan sales 1,731,811 1,719,245
Origination of loans for sale to Freddie Mac (12,946,026) (94,902,111)
Proceeds from sales of loans to Freddie Mac 13,083,417 99,140,937
---------------- ----------------
Net cash provided by operating activities 1,869,202 5,958,071
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in federal funds sold, net 500,000 300,000
Maturity or call of investment securities available-for-sale 26,707,974 64,357,401
Proceeds from sale of investment and mortgage-backed securities 9,646,349 19,910,873
Principal payments on mortgage-backed and investment securities 2,638,027 689,908
Proceeds from sale of other real estate owned 341,894 572,453
Decrease in loans, net 1,616,406 9,702,560
Purchases of investment and mortgage-backed securities (42,363,256) (116,154,686)
Additions to premises and equipment (179,550) (1,742,275)
---------------- ----------------
Net cash (used in) investing activities (1,092,156) (22,363,766)
---------------- ----------------
(Continued)
4
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
2004 2003
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ (9,137,423) $ 7,839,609
Net increase in other borrowings 6,342,467 6,847,734
Decrease in advance payments by borrowers for taxes and insurance (251,596) (202,575)
Exercise of stock options 174,024 356,580
Purchase and retirement of treasury stock (115,973) (341,515)
Dividends paid - common stock (205,492) (201,392)
---------------- ----------------
Net cash provided by (used in) financing activities (3,193,993) 14,298,441
---------------- ----------------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (2,416,947) (2,107,254)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 9,575,977 11,091,626
---------------- ----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 7,159,030 $ 8,984,372
================ ================
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits $ 3,553,406 $ 4,579,922
Interest on other borrowings 46,803 18,225
Income taxes paid 10,005 376,971
NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans $ 648,810 $ 699,068
Loans to facilitate sales of real estate owned 321,500 116,139
See accompanying notes to unaudited consolidated financial statements
5
JACKSONVILLE BANCORP, INC.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 consolidated
financial statements contain all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the financial
condition of the Company as of September 30, 2004 and December 31, 2003
and the results of operations for the three and nine month periods ended
September 30, 2004 and 2003. The results of operations for the three and
nine month periods ended September 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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2004 2003 2004 2003
Net income available to common shareholders $ 250,327 $ 142,133 $ 673,605 $ 719,233
Basic potential common shares:
Weighted average shares outstanding 1,951,921 1,940,753 1,950,540 1,934,355
----------- ----------- ----------- -----------
Diluted potential common shares:
Stock option equivalents 30,129 43,217 36,540 36,297
----------- ----------- ----------- -----------
Diluted average shares outstanding 1,982,050 1,983,970 1,987,080 1,970,652
Basic earnings per share $ 0.13 $ 0.07 $ 0.35 $ 0.37
=========== =========== =========== ===========
Diluted earnings per share $ 0.13 $ 0.07 $ 0.34 $ 0.36
=========== =========== =========== ===========
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. The fair value of the options granted during 2004 was determined
to be $3.84 per share, using the Black-Scholes pricing model. The fair
value calculation was made with estimated values for the risk free rate
of 3.96%, volatility rate of 32%, and average lives of 6.2 years.
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 pro-forma compensation
expense for the three and nine months periods ended September 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 9 Months Ended
09/30/04 09/30/04
---------------------------------
Net income, as reported $ 250,327 $ 673,605
Less value of options vested, net of tax effects (885) (3,445)
-------------- --------------
Pro-forma net income $ 249,442 $ 670,160
Earnings per share:
Basic: As reported $ 0.13 $ 0.35
Pro-forma $ 0.13 $ 0.35
Diluted: As reported $ 0.13 $ 0.34
Pro-forma $ 0.13 $ 0.34
7
4. LOAN PORTFOLIO COMPOSITION
At September 30, 2004 and December 31, 2003, the composition of the
Company's loan portfolio was as follows:
09/30/04 12/31/03
----------------------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
One-to-four family residential $ 40,840 32.7% $ 40,304 31.7%
Commercial and agricultural 24,415 19.6% 21,401 16.8%
Multi-family residential 2,213 1.8% 2,376 1.9%
---------- ------ ---------- ------
Total real estate loans 67,468 54.1% 64,081 50.4%
Commercial agricultural business loans 25,810 20.7% 29,763 23.4%
Consumer loans:
Home equity/home improvement 24,661 19.8% 23,614 18.6%
Automobile 4,700 3.8% 6,477 5.1%
Other 4,834 3.9% 5,545 4.4%
---------- ------ ---------- ------
Total consumer loans 34,195 27.4% 35,636 28.0%
---------- ------ ---------- ------
Total loans receivable 127,473 102.2% 129,480 101.9%
Less:
Unearned discount and deferred loan fees, net 572 0.5% 215 0.2%
Allowance for loan losses 2,171 1.7% 2,186 1.7%
---------- ------ ---------- ------
Total loans receivable, net $ 124,730 100.0% $ 127,079 100.0%
========== ====== ========== ======
8
5. INVESTMENT LOSSES
Declines in the fair value of available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in
earnings as realized losses. In estimating other-than-temporary
impairment losses, management considers (1) the length of time and the
extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in
fair value. The following table shows the gross unrealized losses over
and under twelve months at September 30, 2004.
Less Than Twelve Months Over Twelve Months Total
----------------------------- ---------------------------- -----------------------------
Gross Gross Gross
Unrealized Fair Unrealized Fair Unrealized Fair
Losses Value Losses Value Losses Value
----------------------------- ---------------------------- -----------------------------
State and political
organizations $ 497 $ 239,503 $ - $ - $ 497 $ 239,503
U.S. government
and agencies 294,614 40,733,570 51,163 2,452,829 345,777 43,186,399
----------------------------- ---------------------------- -----------------------------
Subtotal 295,111 40,973,073 51,163 2,452,829 346,274 43,425,902
Mortgage-backed
securities 50,119 7,597,596 - - 50,119 7,597,596
----------------------------- ---------------------------- -----------------------------
Total $ 345,230 $ 48,570,669 $ 51,163 $ 2,452,829 $ 396,393 $ 51,023,498
============================= ============================ =============================
6. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in legal actions arising from normal business
activities. Management, after consultation with legal counsel, believes
that the resolution of these actions will not have any material adverse
effect on the Company's consolidated financial statements.
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers in the way of commitments to extend credit. Commitments to
extend credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and
may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates
each customer's creditworthiness on a case-by-case basis. Substantially
all of the Company's loans are to borrowers located in Cass, Morgan,
Macoupin, Montgomery, and surrounding counties in Illinois.
9
The following table summarizes these commitments at September 30, 2004
and December 31, 2003.
09/30/04 12/31/03
-------- --------
(In thousands)
Commitments to fund loans - own portfolio $ 20,139 $ 15,695
Commitments to fund loans - for sale to Freddie Mac 55 369
Standby letters of credit 473 410
The Company does not engage in the use of interest rate swaps, futures
or option contracts.
The Company's exposure to credit loss, in the event of nonperformance
by the other party to the financial instruments for commitments to
extend credit and letters of credit, is represented by the contractual
notional amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements and, generally, have terms of one year or less.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loans to customers. The Company
holds collateral, which may include accounts receivables, inventory,
property and equipment, income producing properties, supporting those
commitments if deemed necessary. In the event the customer does not
perform in accordance with the terms of the agreement with the third
party, the Company would be required to fund the commitment. The
maximum potential amount of future payments the Company could be
required to make is represented by the contractual amount shown in the
summary above. If the commitment is funded, the Company would be
entitled to seek recovery from the customer. At September 30, 2004 and
December 31, 2003, no amounts have been recorded as liabilities for the
Company's potential obligations under these guarantees.
* * * * * *
10
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
SEPTEMBER 30, 2004 COMPARED TO DECEMBER 31, 2003
Total assets decreased $2.1 million to $259.7 million at September 30, 2004,
from the $261.8 million at December 31, 2003. The decrease in assets resulted
from a decrease in available funds reflecting a decrease of $9.1 million in
deposits partially offset by an increase of $6.3 million in borrowed funds. The
Company's decision to hold deposit rates at existing levels in an effort to
better manage interest expense has contributed to the decrease in deposits. Net
loans decreased by $2.3 million to $124.7 million at September 30, 2004.
Investment securities, available-for-sale, decreased $5.2 million due to calls
and sales of investments. Cash received from investment securities, borrowed
funds, and the $2.4 million decrease in cash and cash equivalents were used to
fund the $8.5 million growth in mortgage-backed securities during the first nine
months of 2004. The increase in borrowed funds was comprised of short-term
advances from the FHLB, which equaled $6.5 million at September 30, 2004.
Stockholders' equity increased $700,000 to $20.7 million at September 30, 2004.
The increase resulted from net income of $674,000 and a $173,000 decrease in
unrealized losses, net of tax, on available-for-sale securities, partially
offset by the payment of $205,000 in dividends. The change in unrealized gains
or losses on securities classified as available-for-sale is affected by market
conditions and, therefore, can fluctuate daily. Stockholders' equity also
benefited from the receipt of $58,000 from the exercise of stock options during
the first nine months of 2004. The $58,000 reflects the $174,000 received from
the exercise of stock options net of the $116,000 cost to acquire the shares
underlying the options in open market purchases.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
AND 2003
GENERAL: The Company reported net income for the three months ended September
30, 2004, of $250,000, or $0.13 per share of common stock, basic and diluted,
compared to net income of $142,000, or $0.07 per share
11
of common stock, basic and diluted, for the three months ended September 30,
2003. The increase of $108,000 in net income is primarily due to a $294,000
increase in net interest income and a $150,000 decrease in provision for loan
losses, partially offset by a decrease in other income of $171,000 and increases
in other expenses of $98,000 and income taxes of $67,000.
INTEREST INCOME: Total interest income increased $16,000 during the three months
ended September 30, 2004, compared to the same three months in 2003. The
increase is primarily due to increases in interest income of $47,000 on
investment securities and $161,000 on mortgage-backed securities, partially
offset by a decrease of $187,000 in interest on loans. The average balance of
the loan portfolio during the third quarter of 2004 decreased to $128.3 million
from $136.6 million for the third quarter of 2003. In addition, the loan
portfolio's average yield decreased to 6.62% from 6.77% for the three months
ended September 30, 2004 and 2003, respectively. The average balance of the loan
portfolio has decreased partly due to 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 $47,000 during the three
months ended September 30, 2004, compared to the same period in 2003. The
additional income is primarily due to an increase in the average yield of the
portfolio to 3.45% during the third quarter of 2004 from 3.13% during the third
quarter of 2003. The improved yield is partly due to the mix of the portfolio,
which included lower-yielding U.S. Treasury securities during 2003. The average
balance of the investment portfolio has decreased to $96.0 million from $99.8
million during this same time frame, as funds from calls and sales have been
reinvested into mortgage-backed securities.
Interest income on mortgage-backed securities increased $161,000 during the
three months ended September 30, 2004, compared to the same period in 2003. The
average balance of mortgage-backed securities increased to $17.4 million from
$1.2 million for the three months ended September 30, 2004 and 2003,
respectively, and the average yield increased to 3.83% from 1.96% during 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 $5,000 during the three months
ended September 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 $2.2 million from $4.5 million for the three months ended September
30, 2004 and 2003, respectively, partially offset by an increase in the average
yield to 1.17% from 0.98% for the same periods.
INTEREST EXPENSE: Total interest expense for the three months ended September
30, 2004 decreased $278,000 from the same period in 2003. The decrease in
interest expense was due to a decrease of $300,000 in the interest expense of
deposits partially offset by an increase of $22,000 in interest expense on
borrowed funds for the three months ended September 30, 2004, compared to the
same in 2003. The average balance of deposits decreased to $219.4 million during
the third quarter of 2004 compared to $221.0 million during the same quarter of
2003. The average cost of deposits has also decreased to 2.04% from 2.56% during
the comparative quarters. The decreases in the average balance and the average
cost have been affected by the Company's decision to hold deposit rates at
current levels.
Interest paid on borrowings increased $22,000 during the three months ended
September 30, 2004, compared to the same period of 2003, due to an increase in
the average balance of borrowed funds to $8.3 million from $4.9 million during
the third quarters of 2004 and 2003, respectively, as well as an increase in the
average cost of borrowings to 1.62% from 0.97% for the comparative periods. The
increase in the average balance of borrowed funds is mostly due to the use of
short-term advances from the FHLB, which averaged $6.1 million
12
during the third quarter of 2004. The remainder of borrowed funds consists of
securities sold under agreements to repurchase.
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.
The allowance for loan losses decreased to $2,171,000 at September 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 $72,000
during the third quarter of 2004 compared to net charge-offs of $104,000 during
the third quarter of 2003. The provision for loan losses decreased to $150,000
from $300,000 for the three months ended September 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.
9/30/2004 12/31/2003
---------- ----------
(In thousands)
Non-accruing loans:
One-to-four family residential 1,013 1,022
Commerical and agricultural real estate 180 224
Commercial and agricultural business 271 613
Home equity/Home improvement 273 1,101
Automobile 49 139
Other consumer 11 22
---------- ----------
Total 1,797 3,121
========== ==========
Accruing loans delinquent more than 90 days:
One-to-four family residential 57 168
Automobile 17 15
Other consumer 2 7
---------- ----------
Total 76 190
========== ==========
Foreclosed assets:
One-to-four family residential 564 499
Automobile 17 18
---------- ----------
Total 581 517
========== ==========
Total nonperforming assets $ 2,454 $ 3,828
========== ==========
Total as a percentage of total assets 0.94% 1.46%
==== ====
The following table shows the aggregate principal amount of potential problem
credits on the Company's watch list at September 30, 2004 and December 31, 2003.
All nonaccrual loans are automatically placed on the watch list.
13
09/30/04 12/31/03
-------- --------
(In thousands)
Special Mention credits $ 6,566 $ 6,087
Substandard credits 3,912 7,555
--------- ---------
Total watch list credits $ 10,478 $ 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.
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
14
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 $171,000 during the three months
ended September 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 $159,000 and decreased trust fees of $83,000 for the three
months ended September 30, 2004 compared to the same period of 2003, partially
offset by increases in service charges on deposits and brokerage commissions.
The increased market rates of 2004 have resulted in fewer loan sales to the
secondary market. As disclosed in previous filings, the higher level of trust
fees during 2003 was not expected to continue into 2004. The increase in service
charges on deposits of $48,000 is primarily due to a new fee structure
implemented during 2004. Brokerage commissions increased $48,000 due to a
continued growth in accounts.
OTHER EXPENSES: Total other expenses increased $98,000 during the three months
ended September 30, 2004 compared to the three months ended September 30, 2003.
The increase in other expenses was mostly due to increases of $130,000 in
salaries and benefits and $42,000 in occupancy expense, partially offset by a
decrease of $25,000 in real estate owned expense. 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 during 2003. Salaries expense has also been
impacted by the increased brokerage commissions. 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 $67,000 during the three
months ended September 30, 2004, compared to the three months ended September
30, 2003. The increase is directly attributable to a higher level of income
during the third quarter of 2004 as compared to 2003.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND
2003
GENERAL: The Company reported net income for the nine months ended September 30,
2004, of $674,000, or $0.35 per share, basic, and $0.34 per share, diluted,
compared to net income of $719,000, or $0.37 per share, basic and $0.36 per
share, diluted, for the nine months ended September 30, 2003. Net income
decreased $46,000 during the nine months ended September 30, 2004 compared to
the same period of 2003, due to a decrease in other income of $1.4 million and
an increase in other expense of $503,000, partially offset by a decrease in the
provision for loan losses of $1.4 million, an increase in net interest income of
$447,000 and a decrease in income taxes of $32,000. Other income in 2003
included a $563,000 negotiated settlement with the Company's insurance carrier
received during the first quarter of 2003.
INTEREST INCOME: Total interest income decreased $504,000 during the nine months
ended September 30, 2004, compared to the same period in 2003. The primary
reason for the decrease is $1.0 million in lower interest income on loans during
the nine month period. The average balance of the loan portfolio during the
first nine months of 2004 equalled $128.6 million compared to $141.1 million for
the first nine months of 2003. The decrease in the average balance of loans is
primarily due to increased sales of loans to the secondary market during 2003.
In addition, the loan portfolio's average yield decreased to 6.57% from 6.97%
for the nine months ended September 30, 2004 and 2003, respectively, reflecting
the unprecedented decrease in market interest rates.
15
Interest income on investment securities increased $215,000 during the nine
months ended September 30, 2004, compared to the same period in 2003. The
additional income during the first nine 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 $98.5
million during the first nine months of 2004 compared to $87.4 million during
the first nine months of 2003. The higher average balances were partially offset
by a decrease in the average yield to 3.41% from 3.52% during the first nine
months of 2004 and 2003, respectively.
Interest income on mortgage-backed securities increased $353,000 during the nine
months ended September 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 $14.4 million from $1.8 million for the nine
months ended September 30, 2004 and 2003, respectively, offset by a decrease in
the average yield to 3.82% from 4.32% for the same periods.
Interest income on other investments, which include federal funds sold and
interest earning deposit accounts, decreased $39,000 during the nine months
ended September 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 $2.8 million from $7.3 million, as well as a lower average yield of
0.93% from 1.07% for the nine months ended September 30, 2004 and 2003,
respectively.
INTEREST EXPENSE: Total interest expense for the nine months ended September 30,
2004 decreased $951,000 from the same period in 2003. The decrease in interest
expense was due to a decrease of $986,000 in the interest expense of deposits
partially offset by an increase of $35,000 in interest expense on borrowed funds
for the nine months ended September 30, 2004, compared to the same in 2003. The
average balance of deposits increased to $222.8 million during the first nine
months of 2004 compared to $217.7 million during the first nine months of 2003,
due to normal deposit growth. The average cost of deposits has decreased to
2.04% from 2.70% during the first nine months of 2004 as compared to the nine
months ended September 30, 2003. The decreased cost of funds is primarily
attributed to the repricing of time deposits at lower interest rates.
Interest paid on borrowings increased $35,000 during the nine months ended
September 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
$5.6 million compared to $2.9 million for the first nine months of 2004 and
2003, respectively, as well as a higher average cost of 1.32% from 0.99% for the
same periods. The higher balance of borrowed funds is mostly due to the use of
short-term advances from the FHLB, which averaged $3.3 million during the first
nine months of 2004. The remainder of borrowed funds consists of securities sold
under agreements to repurchase.
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.
16
9 Months Ended
09/30/04 09/30/03
---------- ----------
(In thousands)
Balance at beginning of period $ 2,186 $ 2,073
Charge-offs:
One-to-four family residential 80 221
Commercial and agricultural real estate 187 20
Commercial and agricultural business - 153
Home equity/home improvement 263 412
Automobile 132 211
Other Consumer 21 160
---------- ----------
Total 683 1,177
---------- ----------
Recoveries:
One-to-four family residential 35 1
Commercial and agricultural real estate 119 18
Commercial and agricultural business 12 -
Home equity/home improvement 12 4
Automobile 21 18
Other Consumer 19 37
---------- ----------
Total 218 78
---------- ----------
Net loans charged off 465 1,099
Additions charged to operations 450 1,825
---------- ----------
Balance at end of period $ 2,171 $ 2,799
========== ==========
The provision for loan losses decreased $1.4 million to $450,000 during the nine
months ended September 30, 2004 compared to the same period 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 remained steady at $2.2 million at September 30,
2004 and December 31, 2003. Net charge-offs decreased to $465,000 during the
first nine months of 2004 compared to net charge-offs of $1.1 million during the
first nine 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 $1.4 million during the nine months
ended September 30, 2004, compared to the same period of 2003. The decrease in
other income includes a $563,000 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 $746,000 and decreased gains on the sale of
securities of $271,000 for the nine months ended September 30, 2004 and 2003,
respectively, partially offset by increases in brokerage commissions and service
charges on deposits. Brokerage commissions increased $191,000 during the nine
months ended September 30, 2004 compared to 2003. Service charges on deposits
also increased $118,000 due to the growth in deposits, as well as a new fee
structure.
OTHER EXPENSES: Total other expenses increased $503,000 during the nine months
ended September 30, 2004 compared to the nine months ended September 30, 2003.
Changes for the nine months ended September 30, 2004 from the comparative period
in 2003 include increases of $431,000 in salaries and benefits, $160,000 in
occupancy expenses, and $52,000 in legal and accounting expense, offset by a
decrease of $66,000 in real estate owned expense and $74,000 in other expenses.
Of this $74,000 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.
17
INCOME TAXES: The provision for income taxes decreased $32,000 during the nine
months ended September 30, 2004, compared to the nine months ended September 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 September 30, 2004 and
December 31, 2003, cash and cash equivalents totalled $7.2 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 September 30,
2004, the Company had outstanding advances of $6.5 million. In addition, the
Company had approximately $22.4 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 September 30, 2004 and
December 31, 2003 were 44.7% 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.
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 (as defined). Management believes, at September 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
18
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 September 30, 2004, the
Bank's core capital ratio was 6.76% 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 September
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%.
09/30/04 12/31/03 Minimum
Actual Actual Required
------ ------ --------
Tier 1 Capital to Average Assets 6.76% 6.54% 4.00%
Tier 1 Capital to Risk-Weighted Assets 12.52% 11.88% 4.00%
Total Capital to Risk-Weighted Assets 13.77% 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. An application has been filed with the Office of Thrift
Supervision to extend this approval through the quarter ended September 30,
2005.
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.
19
CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------- -------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
------------------------------------- -------------------------------------
Interest-earnings assets:
Loans $ 128,337 $ 2,124 6.62% $ 136,570 $ 2,311 6.77%
Investment securities 96,025 828 3.45% 99,752 781 3.13%
Mortgage-backed securities 17,449 167 3.83% 1,231 6 1.96%
Other 2,183 6 1.17% 4,471 11 0.98%
--------- ------- --------- -------
Total interest-earning assets 243,994 3,125 5.12% 242,024 3,109 5.14%
Non-interest earnings assets 19,675 17,801
--------- ---------
Total assets $ 263,669 $ 259,825
========= =========
Interest-bearing liabilities:
Deposits $ 219,383 $ 1,117 2.04% $ 221,046 $ 1,417 2.56%
Short-term borrowings 8,303 34 1.62% 4,853 12 0.97%
--------- ------- --------- -------
Total interest-bearing liabilities 227,686 1,151 2.02% 225,899 1,429 2.53%
Non-interest bearing liabilities 15,994 14,532
Stockholders' equity 19,989 19,394
--------- ---------
Total liabilities/stockholders' equity $ 263,669 $ 259,825
========= =========
Net interest income $ 1,974 $ 1,680
======= =======
Interest rate spread (average yield earned
minus average rate paid) 3.10% 2.61%
===== =====
Net interest margin (net interest income
divided by average interest-earning assets) 3.24% 2.78%
===== =====
ANALYSIS OF VOLUME AND RATE CHANGES
(In thousands)
--------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
2004 Compared to 2003
Increase(Decrease) Due to
--------------------------------
Rate Volume Net
--------------------------------
Interest-earnings assets:
Loans $ (50) $ (137) $ (187)
Investment securities 77 (30) 47
Mortgage-backed securities 11 150 161
Other 1 (6) (5)
------- ------- -------
Total net change in income on
interest-earning assets 39 (23) 16
------- ------- -------
Interest-bearing liabilities:
Deposits (289) (11) (300)
Other borrowings 10 12 22
------- ------- -------
Total net change in expense on
interest-bearing liabilities (279) 1 (278)
------- ------- -------
Net change in net interest income $ 318 $ (24) $ 294
======= ======= =======
20
CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES
(Dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
2004 2003
------------------------------------- -------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
------------------------------------- -------------------------------------
Interest-earnings assets:
Loans $ 128,649 $ 6,344 6.57% $ 141,127 $ 7,377 6.97%
Investment securities 98,462 2,519 3.41% 87,395 2,304 3.52%
Mortgage-backed securities 14,368 411 3.82% 1,785 58 4.32%
Other 2,772 19 0.93% 7,256 58 1.07%
--------- ------- --------- -------
Total interest-earning assets 244,251 9,293 5.07% 237,563 9,797 5.50%
Non-interest earnings assets 19,622 17,658
--------- ---------
Total assets $ 263,873 $ 255,221
========= =========
Interest-bearing liabilities:
Deposits $ 222,812 $ 3,416 2.04% $ 217,681 $ 4,402 2.70%
Short-term borrowings 5,618 56 1.32% 2,936 21 0.99%
--------- ------- --------- -------
Total interest-bearing liabilities 228,430 3,472 2.03% 220,617 4,423 2.67%
Non-interest bearing liabilities 15,625 14,353
Stockholders' equity 19,818 20,251
--------- ---------
Total liabilities/stockholders' equity $ 263,873 $ 255,221
========= =========
Net interest income $ 5,821 $ 5,374
======= =======
Interest rate spread (average yield earned
minus average rate paid) 3.05% 2.83%
===== =====
Net interest margin (net interest income
divided by average interest-earning assets) 3.18% 3.02%
===== =====
ANALYSIS OF VOLUME AND RATE CHANGES
(In thousands)
--------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
2004 Compared to 2003
Increase(Decrease) Due to
--------------------------------
Rate Volume Net
--------------------------------
Interest-earnings assets:
Loans $ (403) $ (630) $(1,033)
Investment securities (70) 285 215
Mortgage-backed securities (7) 360 353
Other (7) (32) (39)
------ ------ -------
Total net change in income on
interest-earning assets (487) (17) (504)
------ ------ -------
Interest-bearing liabilities:
Deposits (1,087) 101 (986)
Other borrowings 9 26 35
------ ------ -------
Total net change in expense on
interest-bearing liabilities (1,078) 127 (951)
------ ------ -------
Net change in net interest income $ 591 $ (144) $ 447
====== ======= ======
21
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 September 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)
-----------------------------------------------------------------------
09/30/04 12/31/03
--------------------------------------------------------- ALCO
Rate Shock: $ Change % Change $ Change % Change Benchmark
-----------------------------------------------------------------------
+ 200 basis points (71) -0.94% 240 3.30% > (20.00)%
+ 100 basis points 115 1.50% 358 4.90% > (12.50)%
- 100 basis points 422 5.54% 529 7.25% > (12.50)%
- 200 basis points 497 6.52% 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.
22
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.
23
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.
24
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
None.
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 2002
25
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: 11/10/04 /s/ Richard A. Foss
---------------------- -------------------------------------
Richard A. Foss
President and Chief Executive Officer
/s/ Diana S. Tone
-------------------------------------
Diana S. Tone
Chief Financial Officer
26