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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transaction period from ________________ to _________________
Commission File Number: 000-49792
JACKSONVILLE BANCORP, INC.
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(Exact name of registrant as specified in its charter)
FEDERAL 33-1002258
- ------------------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1211 WEST MORTON AVENUE, JACKSONVILLE, ILLINOIS 62650
- ------------------------------------------------- -------------------
(Address of principal office) Zip Code
(217) 245-4111
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
YES NO X
--- ---
As of June 30, 2004, there were 1,951,743 shares issued and outstanding of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of June 30, 2004 ($13.75) was $12.6 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 2004 (Parts II and IV).
2. Proxy Statement for the 2005 Annual Meeting of Stockholders (Parts I and
III).
PART I
ITEM 1. BUSINESS
GENERAL
Jacksonville Bancorp, Inc. (the "Company") is a Federal corporation. On
May 3, 2002, Jacksonville Savings Bank (the "Bank") completed its reorganization
into the two-tier form of mutual holding company ownership. At that time each
outstanding share of the Bank's common stock was converted into a share of the
Company's common stock. The only significant asset of the Company is its
investment in the Bank. The Company is majority owned by Jacksonville Bancorp,
MHC, a Federal-chartered mutual holding company (the "Mutual Holding Company").
The Bank is an Illinois-chartered savings bank headquartered in
Jacksonville, Illinois. The Bank conducts its business from its main office and
six branches, two of which are located in Jacksonville, one of which is located
in each of the following Illinois communities: Virden, Chapin, Concord and
Litchfield. The Bank was originally chartered in 1916 as a state-chartered
savings and loan association and converted to a state-chartered savings bank in
1992. The Bank has been a member of the Federal Home Loan Bank System since
1932. The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). At December 31, 2004, the Bank had total assets of $253.3
million, total deposits of $225.9 million, and stockholders' equity of $20.5
million.
The Bank is a community-oriented savings bank engaged primarily in the
business of attracting retail deposits from the general public in the Bank's
market area and using such funds together with borrowings and funds from other
sources to primarily originate mortgage loans secured by one- to four-family
residential real estate and consumer loans. The Bank also originates commercial
and agricultural real estate loans, multi-family real estate loans and
commercial and agricultural business loans. Additionally, the Bank invests in
United States Government agency securities, local municipal issues, and
mortgage-backed securities primarily issued or guaranteed by the United States
Government or agencies thereof, and maintains a portion of its assets in liquid
investments, such as overnight funds at the Federal Home Loan Bank ("FHLB").
The Bank's principal sources of funds are customer deposits, proceeds
from sale of loans, funds received from the repayment and prepayment of loans
and mortgage-backed securities, and the sale, call, or maturity of investment
securities. Principal sources of income are interest income on residential,
commercial and consumer loans, interest on investments, commissions and fees.
The Bank's principal expenses are interest paid on deposits, employee
compensation and benefits and occupancy and equipment expense.
The Bank operates an investment center at its main office. The
investment center is operated through Financial Resources Group, Inc., the
Bank's wholly-owned subsidiary. The investment center is not anticipated to have
a material effect on the ability of the Bank to attract retail deposits.
The Bank's principal executive office is located at 1211 W. Morton,
Jacksonville, Illinois, and its telephone number at that address is (217)
245-4111.
MARKET AREA AND COMPETITION
The Bank is a community-oriented savings institution offering a range of
retail banking services to residents of its market area. The Bank's market area
is Morgan, Macoupin and Montgomery Counties, Illinois. Management believes that
its offices are located in communities that can generally be characterized as
stable residential communities of predominantly one- to four-family residences.
The Bank's market for deposits is concentrated in the communities surrounding
its main office and six branches. The Bank is the largest independent financial
institution headquartered in its primary market area.
1
The economy of the Bank's market area consists primarily of agriculture
and related businesses, light industry and state and local government. The
largest employers in the Bank's primary market area are Pactiv Corporation,
Passavant Area Hospital, and the State of Illinois.
The Bank faces significant competition in attracting deposits from
commercial banks, other savings institutions and credit unions. The Bank faces
additional competition for deposits from short-term money market funds, other
corporate and government securities funds and other financial institutions such
as brokerage firms and insurance companies. The Bank also faces significant
competition in the origination of loans from savings institutions, mortgage
banking companies, credit unions, insurance companies and commercial banks.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the Bank has
been the origination of mortgage loans for the purpose of financing or
refinancing one- to four-family residential properties in the Bank's local
market areas. The Bank also emphasizes consumer lending, primarily the
origination of home equity loans and loans secured by automobiles. At December
31, 2004, the Bank's loans receivable totaled $127.9 million, of which $41.6
million, or 33.1% consisted of one- to four-family residential mortgage loans.
The remainder of the Bank's loans receivable at such date consisted of
commercial and agricultural real estate loans (19.5%), multi-family residential
loans (1.8%), commercial and agricultural business loans (20.8%), and consumer
loans (26.4%). Of the amount included in consumer loans, $24.3 million, or 19.3%
of total loans consisted of home equity and home improvement loans. During the
year ended December 31, 2004 the loan portfolio decreased to $127.9 million from
$129.5 million at December 31, 2003. The $2.0 million (30.3%) decrease in
automobile loans was impacted by alternative funding sources available to
consumers, such as special financing offered by the automobile manufacturers'
captive financing companies.
The Bank has managed to make its interest-earning assets more interest
rate sensitive by, among other things, originating variable interest rate loans,
such as ARM loans and balloon loans with terms ranging from three to five years,
as well as medium-term consumer loans and commercial business loans, and by
investing in adjustable-rate mortgage-backed securities. The ability of the Bank
to originate ARM loans is substantially affected by market interest rates.
The Bank actively originates fixed-rate residential mortgage loans
secured by one- to four-family residential properties with terms up to 30 years.
The Bank sells a significant portion of its one- to four-family fixed-rate
residential mortgage loan originations directly to Freddie Mac. During the years
ended December 31, 2004 and 2003, the Bank sold $16.9 million and $107.7 million
of fixed-rate residential mortgage loans, respectively. Loans are generally sold
without recourse and with servicing retained. At December 31, 2004 the Bank was
servicing approximately $148.6 million in loans for which it received servicing
income of approximately $386,000 for the year ended December 31, 2004. The Bank
does not purchase whole loans.
2
ANALYSIS OF LOAN PORTFOLIO
Set forth below are selected data relating to the composition of the
Bank's loan portfolio, excluding loans held for sale, by type of loan as of the
dates indicated.
AT DECEMBER 31,
-----------------------------------------------------------------------------
2004 2003 2002
--------------------- --------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans:
One-to four-family residential (1)... $ 41,616 33.1% $ 40,304 31.7% $ 43,883 30.7%
Commercial and agricultural.......... 24,587 19.5 21,401 16.8 18,421 12.9
Multi-family residential............. 2,207 1.8 2,376 1.9 2,678 1.9
--------- --------- --------- --------- --------- ---------
Total real estate loans............ 68,410 54.4 64,081 50.4 64,982 45.5
--------- --------- --------- --------- --------- ---------
Commercial agricultural business
loans (1)............................ 26,227 20.8 29,763 23.4 31,502 22.0
--------- --------- --------- --------- --------- ---------
Consumer loans:
Home equity/Home improvement......... 24,322 19.3 23,614 18.6 31,181 21.8
Automobile........................... 4,516 3.6 6,477 5.1 10,491 7.3
Other................................ 4,380 3.5 5,545 4.4 7,127 5.0
--------- --------- --------- --------- --------- ---------
Total consumer loans............... 33,218 26.4 35,636 28.1 48,799 34.1
--------- --------- --------- --------- --------- ---------
Total loans receivable........... 127,855 101.6 129,480 101.9 145,283 101.6
Less:
Unearned premium on purchased
loans, unearned discount and
deferred fees, net................. 174 0.1 215 0.2 281 0.2
Allowance for loan losses............ 1,888 1.5 2,186 1.7 2,073 1.4
--------- --------- --------- --------- --------- ---------
Total loans receivable, net........ $ 125,793 100.0% $ 127,079 100.0% $ 142,929 100.0%
========= ========= ========= ========= ========= =========
(CONTINUED)
AT DECEMBER 31,
----------------------------------------------
2001 2000
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Real estate loans:
One-to four-family residential (1)... $ 46,473 29.8% $ 48,418 28.1%
Commercial and agricultural.......... 18,297 11.7 18,596 10.8
Multi-family residential............. 2,566 1.6 2,690 1.6
--------- --------- --------- ---------
Total real estate loans............ 67,336 43.1 69,704 40.5
--------- --------- --------- ---------
Commercial agricultural business
loans (1)............................ 30,582 19.6 31,767 18.4
--------- --------- --------- ---------
Consumer loans:
Home equity/Home improvement......... 38,590 24.7 45,816 26.6
Automobile........................... 12,966 8.3 15,452 9.0
Other................................ 8,255 5.2 11,056 6.4
--------- --------- --------- ---------
Total consumer loans............... 59,811 38.2 72,324 42.0
--------- --------- --------- ---------
Total loans receivable........... 157,729 100.9 173,795 100.9
Less:
Unearned premium on purchased
loans, unearned discount and
deferred fees, net................. 342 0.2 408 0.2
Allowance for loan losses............ 1,107 0.7 1,206 0.7
--------- --------- --------- ---------
Total loans receivable, net........ $ 156,280 100.0% $ 172,181 100.0%
========= ========= ========= =========
- ---------------------------------
(1) Includes a portion of real estate construction loans.
3
ONE- TO FOUR-FAMILY MORTGAGE LOANS. The Bank's primary lending activity
is the origination of one- to four-family, owner-occupied, residential mortgage
loans secured by property located in the Bank's market area. Loans are generated
through the Bank's marketing efforts, its existing customers and referrals, real
estate brokers, builders and local businesses. The Bank generally has limited
its real estate loan originations to the financing of properties located within
its market area. At December 31, 2004, the Bank had $41.6 million, or 33.1% of
its net loan portfolio, invested in mortgage loans secured by one- to
four-family residences.
The Bank originates for resale to Freddie Mac fixed-rate residential
one- to four-family loans with terms of 15 years or more. The Bank's fixed-rate
mortgage loans amortize monthly with principal and interest due each month.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The Bank offers fixed-rate one- to four-family mortgage
loans with terms of up to 30 years.
The Bank currently offers ARM loans for terms ranging up to 30 years.
The Bank generally offers ARM loans that adjust every year from the date of
origination, with interest rate adjustment limitations up to two percentage
points per year and with a cap of up to six percentage points on total interest
rate increases over the life of the loan. In a rising interest rate environment,
such rate limitations may prevent ARM loans from repricing to market interest
rates, which would have an adverse effect on net interest income. The Bank has
used different interest indices for ARM loans in the past, and primarily uses
the one-year Constant Maturity Treasury Index. ARM loans secured by residential
one- to four-family real estate totaled $11.7 million, or 28.1% of the Bank's
total one- to four-family residential real estate loans receivable at December
31, 2004. The origination of fixed-rate mortgage loans versus ARM loans is
monitored on an ongoing basis and is affected significantly by the level of
market interest rates, customer preference, the Bank's interest rate gap
position and loan products offered by the Bank's competitors. Particularly in a
relatively low interest rate environment, borrowers have shown a preference for
fixed-rate loans over ARM loans. During 2004, the Bank originated $16.6 million
of fixed-rate residential mortgage loans and $12.9 million of ARM and balloon
loans.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Bank predictable cash flows in the same manner as long-term, fixed-rate loans.
ARM loans carry increased credit risk associated with potentially higher monthly
payments by borrowers as general market interest rates increase. It is possible,
that during periods of rising interest rates, that the risk of delinquencies and
defaults on ARM loans may increase due to the upward adjustment of interest
costs to the borrower, resulting in increased loan losses.
The Bank's residential first mortgage loans customarily include
due-on-sale clauses, which are provisions giving the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells or otherwise disposes of the underlying real property serving as
security for the loan. Due-on-sale clauses are a means of imposing assumption
fees and increasing the interest rate on the Bank's mortgage portfolio during
periods of rising interest rates.
When underwriting residential real estate loans, the Bank reviews and
verifies each loan applicant's income and credit history. Management believes
that stability of income and past credit history are integral parts in the
underwriting process. Generally, the applicant's total monthly mortgage payment,
including all escrow amounts, is limited to 28% of the applicant's total monthly
income. In addition, total monthly obligations of the applicant, including
mortgage payments, should not generally exceed 38% of total monthly income.
Written appraisals are generally required on real estate property offered to
secure an applicant's loan. For real estate loans with loan to value ("LTV")
ratios of between 80% and 95%, the Bank requires private mortgage insurance. The
Bank requires fire and casualty insurance on all properties securing real estate
loans. The Bank may require title insurance, or an attorney's title opinion, as
circumstances warrant.
4
COMMERCIAL AND AGRICULTURAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL
REAL ESTATE LOANS. The Bank originates commercial and agricultural real estate
and multi-family residential real estate loans. At December 31, 2004,
$24.6million, or 19.5%, of the Bank's total loan portfolio consisted of
commercial and agricultural real estate loans and $2.2 million, or 1.8%,
consisted of multi-family real estate loans. The Bank's commercial and
agricultural real estate loans are secured primarily by improved properties such
as retail facilities and office buildings, farms, churches and other
non-residential buildings. At December 31, 2004, the Bank's commercial real
estate loan portfolio included $1.2 million in loans secured by churches, $17.2
million in loans secured by land, and $6.2 million in loans secured by other
commercial properties. The maximum LTV ratio for commercial real estate loans
originated by the Bank is 80%. The largest commercial real estate loan had a
principal balance of $2.0 million, all of which was secured by farmland. At
December 31, 2004, the largest multi-family residential real estate loan had a
principal balance of $245,000.
The underwriting standards employed by the Bank for commercial and
agricultural real estate and multi-family residential real estate loans include
a determination on the applicant's credit history and an assessment of the
applicant's ability to meet existing obligations and payments on the proposed
loan. The income approach is primarily utilized to determine whether income
generated from the applicant's business or real estate offered as collateral is
adequate to repay the loan. The value of the real estate offered as collateral
is reviewed by the Bank in relation to the proposed loan amount. Generally, the
loan amount cannot be greater than 80% of the value of the real estate. Written
appraisals are usually obtained by the Bank from either licensed or certified
appraisers on all multi-family, commercial, and agricultural real estate loans.
The Bank assesses the creditworthiness of the applicant by reviewing a credit
report, financial statements and tax returns of the applicant, as well as
obtaining other public records regarding the applicant.
Loans secured by commercial, agricultural, and multi-family real estate
generally involve a greater degree of credit risk than one- to four-family
residential mortgage loans and carry larger loan balances. This increased credit
risk is a result of several factors, including the effects of general economic
conditions on income producing properties and the successful operation or
management of the properties securing the loans. Furthermore, the repayment of
loans secured by commercial, agricultural, and multi-family real estate is
typically dependent upon the successful operation of the related business and
real estate property. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
COMMERCIAL AND AGRICULTURAL BUSINESS LOANS. The Bank originates
commercial and agricultural business loans to borrowers located in its market
area which are secured by collateral other than real estate or which can be
unsecured. Such business loans are generally secured by equipment and inventory
and generally are offered with adjustable rates and various terms of maturity.
The Bank will originate unsecured business loans in those instances where the
applicant's financial strength and creditworthiness has been established.
Commercial and agricultural business loans generally bear higher interest rates
than residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Bank generally obtains personal guarantees from the
borrower or a third party as a condition to originating its business loans.
Commercial and agricultural business loans totaled $26.2 million, or 20.8%, of
the Bank's total loan portfolio at December 31, 2004. The Bank has increased its
level of business loan originations in response to customer demand. During the
year ended December 31, 2004, the Bank originated $11.3 million in commercial
and agricultural business loans. At that date, the Bank's largest commercial
business loan had a principal balance of $736,000, and was secured by inventory
and equipment. This loan was performing in accordance with its terms at December
31, 2004.
The underwriting standards used by the Bank for commercial and
agricultural business loans include a determination of the applicant's ability
to meet existing obligations and payments on the proposed loan from normal cash
flows generated in the applicant's business. The financial strength of each
applicant also is assessed through review of financial statements and tax
returns provided by the applicant. The creditworthiness of an applicant is
derived from a review of credit reports as well as a search of public records.
Once originated, business loans are reviewed periodically by the Bank. Financial
statements are requested at least annually and are reviewed by the Bank for
substantial deviations or changes that might affect repayment of the loan. Loan
officers of the Bank also visit the premises of borrowers to observe the
business premises, facilities, and personnel and to inspect the pledged
5
collateral. Underwriting standards for business loans are different for each
type of loan depending on the financial strength of the applicant and the value
of collateral offered as security.
CONSUMER LOANS. As of December 31, 2004, consumer loans totaled $33.2
million, or 26.4%, of the Bank's total loan portfolio. The principal types of
consumer loans offered by the Bank are home equity loans and automobile loans.
Consumer loans generally are offered on a fixed-rate basis. The largest category
of consumer loans in the Bank's portfolio consists of home equity loans. At
December 31, 2004, home equity and home improvement loans totaled $24.3 million,
or 19.3%, of the Bank's total loan portfolio. The Bank's home equity loans are
generally secured by the borrower's principal residence. The maximum amount of a
home equity line of credit is generally 95% of the appraised value of a
borrower's real estate collateral less the amount of any prior mortgages or
related liabilities. Home equity loans are approved with both fixed and
adjustable interest rates which are determined by the Bank based upon market
conditions. Such loans may be fully amortized over the life of the loan or have
a balloon feature. The Bank's home equity loans generally bear rates of interest
in excess of the prime rate. The maximum term for home equity loans is 10 years.
The second largest category of consumer loans in the Bank's portfolio
consists of loans secured by automobiles. At December 31, 2004, consumer loans
secured by automobiles totaled $4.5 million, or 3.6%, of the Bank's total loan
portfolio. Automobile loans are offered with maturities of up to 60 months for
new automobiles. Loans secured by used automobiles will have maximum terms which
vary depending upon the age of the automobile. The Bank generally makes
automobile loans with a LTV ratio below the greater of 80% of the purchase price
or 100% of NADA loan value, although in the case of a new car loan the LTV ratio
may be greater or less depending on the borrower's credit history, debt to
income ratio, home ownership and other banking relationships with the Bank.
Consumer loans entail greater risks than one- to four-family residential
mortgage loans, particularly consumer loans secured by rapidly depreciating
assets such as automobiles or loans that are unsecured. In such cases,
collateral repossessed after a default may not provide an adequate source of
repayment of the outstanding loan balance because of damage, loss or
depreciation. Further, consumer loan payments are dependent on the borrower's
continuing financial stability, and therefore are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy. Such events would
increase the Bank's risk of loss on unsecured loans. Finally, the application of
various Federal and state laws, including Federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans in
the event of a default. At December 31, 2004, consumer loans 90 days or more
delinquent, including those for which the accrual of interest has been
discontinued, totaled $477,000 million, or 1.4%, of the Bank's total consumer
loans.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's credit history and an assessment of
the applicant's ability to meet existing obligations and payments on the
proposed loan. The stability of the applicant's monthly income may be determined
by verification of gross monthly income from primary employment, and
additionally from any verifiable secondary income. The Bank also considers the
length of employment with the borrower's present employer as well as the amount
of time the borrower has lived in the local area. Creditworthiness of the
applicant is of primary consideration; however, the underwriting process also
includes a comparison of the value of the collateral in relation to the proposed
loan amount. Of the consumer loans 90 days or more delinquent, over 50% is
secured by one-to-four family real estate, upon which a material loss is not
expected to be realized. The two largest loans in this category total $231,000
and are secured by first mortgages on residential real estate. No assurance can
be given, however, that the Bank's delinquency rate or loss experience on
consumer loans will not increase in the future.
6
LOAN MATURITY SCHEDULE. The following table sets forth certain
information at December 31, 2004 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdraft loans are reported as due in one year or less.
OVER 1
WITHIN YEAR TO BEYOND
1 YEAR 5 YEARS 5 YEARS TOTAL
-------------- ------------- -------------- ------------
(IN THOUSANDS)
Real estate loans:
One-to four-family real estate........... $ 7,731 $ 15,045 $ 18,840 $ 41,616
Commercial and agricultural real estate.. 1,273 2,988 20,326 24,587
Multi-family residential................. 514 1,297 396 2,207
Commercial and agricultural business loans.. 12,115 12,996 1,116 26,227
Consumer Loans:
Home equity/Home improvement............. 7,982 14,626 1,714 24,322
Automobile............................... 704 3,801 11 4,516
Other.................................... 2,313 1,911 156 4,380
----------- ----------- ----------- -----------
Total....................................... $ 23,632 $ 52,664 $ 42,559 $ 127,855
=========== =========== =========== ===========
The following table sets forth at December 31, 2004, the dollar amount
of all fixed-rate and adjustable-rate loans. At December 31, 2004, fixed-rate
loans include $25.2 million in fixed-rate balloon payment loans with original
maturities of five years or less. The total dollar amount of fixed-rate loans
and adjustable-rate loans due after December 31, 2005, was $71.0 million and
$24.2 million, respectively.
FIXED ADJUSTABLE TOTAL
-------------- --------------- --------------
(IN THOUSANDS)
Real estate loans:
One- to four-family real estate............... $ 35,214 $ 6,402 $ 41,616
Commercial and agricultural real estate....... 10,539 14,048 24,587
Multi-family real estate 1,965 242 2,207
Commercial and agricultural business loans....... 23,263 2,964 26,227
Consumer loans:
Home equity/Home improvement.................. 23,507 815 24,322
Automobile.................................... 4,516 -- 4,516
Other......................................... 4,321 59 4,380
-------------- --------------- --------------
Total............................................ $ 103,325 $ 24,530 $ 127,855
============== =============== ==============
LOAN ORIGINATION, SOLICITATION AND PROCESSING. Loan originations are
derived from a number of sources such as real estate broker referrals, existing
customers, borrowers, builders, attorneys and walk-in customers. Upon receipt of
a loan application, a credit report is obtained to verify specific information
relating to the applicant's employment, income, and credit standing. In the case
of a real estate loan, an appraisal of the real estate intended to secure the
proposed loan is undertaken by an independent appraiser approved by the Bank. A
loan application file is first reviewed by a loan officer in the Bank's loan
department who checks applications for accuracy and completeness, and verifies
the information provided. The financial resources of the borrower and the
borrower's credit history, as well as the collateral securing the loan, are
considered an integral part of each risk evaluation prior to approval. The Board
has established individual lending authorities for each loan officer by loan
type. Loans over an individual officer's lending limits must be approved by the
officers' loan committee consisting of the chairman of the board, president,
senior loan administrator and all lending officers, which meets daily and has
lending authority up to $300,000 depending on the type of loan. Loans with a
principal balance over this limit, up to $500,000, must be approved by the
directors' loan committee, which meets weekly and consists of the chairman of
the board, president, senior vice president, senior loan administrator and at
least two outside directors, plus all lending officers as non-voting members.
The Board of Directors approves all loans with a principal balance over
$500,000. The Board of Directors ratifies all loans made by the Bank. Once the
loan is approved, the applicant is informed and a closing date is scheduled. The
Bank typically funds its loan commitments within 30 days.
If the loan is approved, the borrower must provide proof of fire and
casualty insurance on the property serving as collateral which insurance must be
maintained during the full term of the loan; flood insurance is required
7
in certain instances. Title insurance or an attorney's opinion based on a title
search of the property is generally required on loans secured by real property.
ORIGINATION AND SALE OF LOANS. Set forth below is a table showing the
Bank's loan originations, sales and repayments for the periods indicated. It is
the Bank's policy to originate for sale into the secondary market (primarily to
Freddie Mac) fixed-rate mortgage loans with maturities of 15 years or more and
to originate for retention in its portfolio ARM loans and loans with balloon
payments. Currently, the Bank usually obtains commitments prior to selling its
fixed-rate mortgage loans. It is the Bank's policy to sell fixed-rate mortgage
loans as market conditions permit.
AT DECEMBER 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- --------
(IN THOUSANDS)
Total loans receivable at beginning of period.......... $ 129,480 $ 145,283 $ 157,977 $ 173,827 $142,635
--------- --------- --------- --------- --------
Originations:
Real estate loans:
One- to four-family residential....................... 29,599 110,440 99,480 99,081 22,864
Commercial and agricultural........................... 10,821 9,154 5,519 2,662 4,575
Multi-family residential.............................. 290 216 293 552 395
Commercial and agricultural............................... 21,907 19,880 22,850 26,627 9,549
Consumer:
Home equity/Home improvement........................ 15,009 12,968 16,536 20,761 22,159
Automobile........................................... 2,808 2,516 5,790 7,826 9,289
Other............................................... 3,805 5,009 6,309 6,483 9,466
--------- --------- --------- --------- --------
Total originations.................................. 84,239 160,183 156,777 163,992 78,297
Participation loans purchased............................... 1,700 2,120 723 1,312 633
Transfer of mortgage loans to foreclosed real estate owned.. 999 1,023 806 1,191 659
Repayments.................................................. 69,634 69,363 83,326 99,668 32,810
Loan sales.................................................. 16,931 107,720 86,062 80,295 14,269
--------- --------- --------- --------- --------
Total loans receivable at end of period.......... $ 127,855 $ 129,480 $ 145,283 $ 157,977 $173,827
========= ========= ========= ========= ========
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on
loans, the Bank may charge loan origination fees. The ability of the Bank to
charge loan origination fees is influenced by the demand for mortgage loans and
competition from other lenders in the Bank's market area. In December 1986, the
FASB issued SFAS No. 91 on the accounting for non-refundable fees and costs
associated with originating or acquiring loans. To the extent that loans are
originated or acquired for the Bank's portfolio, SFAS No. 91 requires that the
Bank defer loan origination fees and costs and amortize such amounts as an
adjustment of yield over the life of the loan by use of the level yield method.
SFAS No. 91 applies to fiscal years beginning after December 15, 1987. SFAS No.
91 reduces the amount of revenue recognized by many financial institutions at
the time such loans are originated or acquired. Fees deferred under SFAS No. 91
are recognized into income immediately upon the sale of the related loan. At
December 31, 2004, the Bank had $60,000 of net deferred loan fees. Loan
origination fees are volatile sources of income. Such fees vary with the volume
and type of loans and commitments made and purchased and with competitive
conditions in the mortgage markets, which in turn respond to the demand and
availability of money.
In addition to loan origination fees, the Bank also receives other fees
and service charges that consist primarily of extension fees and late charges.
The Bank recognized fees and service charges of $88,000, $111,000 and $142,000
for the years ended December 31, 2004, 2003 and 2002, respectively.
LOAN CONCENTRATION. With certain exceptions, an Illinois-chartered
savings bank may not make a loan or exceed credit for secured and unsecured
loans for business, commercial, corporate or agricultural purposes to a single
borrower in excess of 25% of the savings bank's total capital, as defined by
regulation. At December 31, 2004, the Bank's loans-to-one borrower limit was
$4.9 million. At December 31, 2004 the Bank had no loans in excess of its
loans-to-one borrower limitation.
8
DELINQUENCIES AND CLASSIFIED ASSETS
The Bank's collection procedures provide that when a mortgage loan is
either ten days (in the case of ARM and balloon loans) or 15 days (in the case
of fixed-rate loans) past due, a computer-generated late charge notice is sent
to the borrower requesting payment plus a late charge. If the mortgage loan
remains delinquent, a telephone call is made or a letter is sent to the borrower
stressing the importance of reinstating the loan and obtaining reasons for the
delinquency. When a loan continues in a delinquent status for 90 days or more,
and a repayment schedule has not been made or kept by the borrower, a notice of
intent to foreclose upon the underlying property is then sent to the borrower,
giving 30 days to cure the delinquency. If not cured, foreclosure proceedings
are initiated. Consumer loans receive a ten-day grace period before a late
charge is assessed. Collection efforts begin after the grace period expires. At
December 31, 2004, 2003 and 2002 the percentage of nonperforming loans to net
loans receivable were 1.58%, 2.61% and 2.70%, respectively.
RECOVERY FROM INSURANCE COMPANY. In March 2003, the Company received a
$563,000 recovery, which represents the negotiated settlement with the Company's
insurance carrier. The recovery related to the loss suffered by the Company from
a loan defalcation discovered during 2001, as previously reported.
DELINQUENT LOANS AND NONPERFORMING ASSETS. Loans are reviewed on a
regular basis and are placed on nonaccrual status when, in the opinion of
management, the collection of additional interest is doubtful. Commercial and
home equity loans are placed on nonaccrual status when either principal or
interest is 90 days or more past due and management considers the interest
uncollectible. Mortgages and other consumer loans are placed on nonaccrual
status when either principal or interest is 120 days or more past due and
management considers the interest uncollectible. Interest accrued and unpaid at
the time a loan is placed on nonaccrual status is charged against interest
income. Subsequent payments are either applied to the outstanding principal
balance or recorded as interest income, depending on management's assessment of
the ultimate collectibility of the loan.
Management monitors all past due loans and nonperforming assets. Such
loans are placed under close supervision with consideration given to the need
for additional allowance for loan loss, and (if appropriate) partial or full
charge-off. At December 31, 2004, the Bank had $298,000 of loans 90 days or more
delinquent that were still accruing interest.
Real estate acquired through foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until such time as it is sold.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan, or its fair market value, less estimated
selling expenses. Any further write-down of real estate owned is charged against
earnings. At December 31, 2004, the Bank owned $565,000 of property classified
as real estate owned.
9
DELINQUENT LOANS. The following table sets forth information regarding
delinquent loans and other real estate owned by the Bank at the dates indicated.
As of the dates indicated, the Bank had immaterial restructured loans within the
meaning of SFAS No. 15, 114, and 118.
AT DECEMBER 31,
---------------------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Non-accruing loans:
One-to-four family residential............. 711 1,022 769 805 417
Commercial and agricultural real estate.... 181 224 186 273 --
Commercial and agricultural business....... 57 613 301 24 237
Home equity/Home improvement............... 652 1,101 1,860 971 745
Automobile................................. 68 139 196 181 408
Other consumer............................. 20 22 198 106 121
------- ------ ------ ------ -------
Total.................................... 1,689 3,121 3,510 2,360 1,928
------- ------ ------ ------ -------
Accruing loans delinquent more than 90 days:
One-to-four family residential........... 270 168 64 -- --
Commercial and agricultural real estate.. -- -- 259 1,658 --
Commercial and agricultural business..... 23 -- -- -- --
Automobile............................... 4 15 -- -- --
Other consumer........................... 1 7 28 9 23
------- ------ ------ ------ -------
Total.................................... 298 190 351 1,667 23
------- ------ ------ ------ -------
Foreclosed assets:
One-to-four family residential....... 426 499 442 945 460
Commercial and agricultural real estate.. 139 -- -- -- --
Automobile............................... 19 18 38 60 87
------- ------ ------ ------ -------
Total.................................... 584 517 480 1,005 547
------- ------ ------ ------ -------
Total nonperforming assets.................... $ 2,571 $3,828 $4,341 $5,032 $ 2,498
======= ====== ====== ====== =======
Total as a percentage of total assets......... 1.01% 1.46% 1.72% 2.09% 1.10%
======= ====== ====== ====== =======
- -----------------------------
Loans delinquent 60 to 89 days at December 31, 2004 totaled $655,000, or 0.52%
of net loans.
Interest income that would have been recorded under the original terms
of loans classified as non-accruing loans totaled approximately $79,000 for the
year ended December 31, 2004. Interest income from such loans that was included
in net income for the year ended December 31, 2004 totaled $35,000.
CLASSIFIED ASSETS. Federal and state regulations require that each
insured savings institution classify its assets on a regular basis. In addition,
in connection with examination of insured institutions, Federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. For assets classified "substandard" and "doubtful," the institution
is required to establish general loan loss reserves in accordance with
accounting principles generally accepted in the United States of America. Assets
classified "loss" must be either completely written off or supported by a 100%
specific reserve. The Bank also maintains a category designated "special
mention" which is established and maintained for assets not currently requiring
classification but having potential weaknesses or risk
10
characteristics that could result in future problems. An institution is required
to develop an in-house program to classify its assets, including investments in
subsidiaries, on a regular basis and set aside appropriate loss reserves on the
basis of such classification. As part of the periodic exams of the Bank by the
FDIC and the Illinois Commissioner of Banks and Real Estate ("Commissioner"),
the staff of such agencies reviews the Bank's classifications and determine
whether such classifications are adequate. Such agencies have, in the past, and
may in the future require the Bank to classify certain assets which management
has not otherwise classified or require a classification more severe than
established by management. At December 31, 2004, the Bank's classified assets
totaled $3.5 million, all of which were classified substandard.
At December 31, 2004, the Bank's largest nonperforming loan had a
principal balance of $181,000 and was secured by a first mortgage on commercial
property. The Bank has established reserves totaling $9,000 for potential losses
associated with this loan.
The decrease in the level of nonperforming assets and watch list credits
reflects the actions taken by management over the past several years. During
2003, the Company hired an experienced senior loan administrator and increased
staffing in the collections and loan review departments, in order to address
problems in the loan portfolio and prevent any further deterioration of asset
quality. The Company, under the guidance of the senior loan administrator,
continues to review and further enhance its lending policies and underwriting
and collection procedures.
ALLOWANCE FOR LOAN LOSSES
Management's policy is to provide for estimated losses on the Bank's
loan portfolio based on management's evaluation of the probable losses that may
be incurred. Management regularly reviews the Bank's loan portfolio, including
problem loans, to determine whether any loans require classification or the
establishment of appropriate reserves or allowances for losses. Such evaluation,
which includes a review of all loans of which full collectibility of interest
and principal may not be reasonably assured, considers, among other matters, the
estimated net realizable value of the underlying collateral. Other factors
considered by management include the size and risk exposure of each segment of
the loan portfolio, present indicators such as delinquency rates and the
borrower's current financial condition, and the potential for losses in future
periods. Management calculates the general allowance for loan losses in part
based on past experience. While current year additions to the general loss
allowances are charged against earnings, a portion of general loan loss
allowances are added back to capital to the extent permitted in computing
risk-based capital under Federal and state regulations.
The balance of the allowance for loan losses is based on ongoing,
quarterly assessments of the probable estimated losses in the loan portfolio.
The Bank's methodology for assessing the appropriateness of the allowance
consists of applying several formula methods to identified problem loans and
portfolio segments. The allowance is calculated by applying loss factors to
outstanding loan balances, based on an internal risk grade of such loans or
pools of loans. Changes in risk grades of both performing and nonperforming
loans affect the amount of the allowance. Loss factors are based primarily on
historical loss experience over the past five years, and may be adjusted for
other significant conditions that, in management's judgment, affect the
collectibility of the loan portfolio.
Since the allowance for loan losses is based upon estimates of probable
losses, the amount actually observed can vary significantly from the estimated
amounts. The historical loss factors attempt to reduce this variance by taking
into account recent loss experience. Management evaluates several other
conditions in connection with the allowance, including general economic and
business conditions, credit quality trends, collateral
11
values, loan volumes and concentrations, seasoning of the portfolio, and
regulatory examination results. The formulas used in the analysis were changed
in 2002 to reflect the changing composition of the loan portfolio and actual
loss history by loan type. Management believes the current balance of the
allowance for loan losses is adequate. Management will continue to monitor the
loan portfolio and assess the adequacy of the allowance at least quarterly.
For the years ended December 31, 2004, 2003 and 2002, the Bank provided
$550,000, $2.1 million and $2.0 million, respectively, to the allowance for loan
losses. The Bank's allowance for loan losses totaled $1.9 million, $2.2 million
and $2.1 million at December 31, 2004, 2003 and 2002, respectively. Although the
Bank maintains its allowance for loan losses at a level which it considers to be
adequate to provide for potential losses, there can be no assurance that such
losses will not exceed the estimated amounts or that the Bank will not be
required to make additions to the allowance for loan losses in the future.
Future additions to the Bank's allowance for loan losses and changes in the
related ratio of the allowance for loan losses to nonperforming loans are
dependent upon the economy, changes in real estate values and interest rates,
the view of the regulatory authorities toward adequate loan loss reserve levels,
and inflation. Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loan loss provisions
may be deemed necessary.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table
summarizes changes in the allowance for loan losses by loan categories for each
period and additions to the allowance for loan losses, which have been charged
to operations.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period............................. $ 2,186 $ 2,073 $ 1,107 $ 1,206 $ 827
Charge-offs:
One-to four-family residential........................... 179 365 251 109 39
Commercial and agricultural real estate.................. 244 432 55 61 6
Commercial and agricultural business..................... 186 153 44 89 10
Home equity/home improvement............................. 294 666 395 267 240
Automobile............................................... 137 256 213 296 181
Other consumer........................................... 33 182 163 322 140
--------- --------- --------- --------- --------
Total................................................. 1,073 2,054 1,121 1,144 616
Recoveries:
One-to four-family residential.......................... 36 5 17 -- 12
Commercial and agricultural real estate................. 119 18 2 -- --
Commercial and agricultural business.................... 12 -- 11 -- 10
Home equity/Home improvement............................ 14 5 10 5 1
Automobile.............................................. 23 20 26 26 17
Other Consumer.......................................... 21 44 21 14 34
--------- --------- --------- --------- --------
Total................................................. 225 92 87 45 74
Net loans charged-off...................................... 848 1,962 1,034 1,099 542
Additions charged to operations............................ 550 2,075 2,000 1,000 610
Additions through acquisitions............................. -- -- -- -- 311
--------- --------- ---------- --------- --------
Balance at end period...................................... $ 1,888 $ 2,186 $ 2,073 $ 1,107 $ 1,206
========= ========= ========= ========= ========
Total loans outstanding.................................... $ 127,855 $ 129,480 $ 145,283 $ 157,729 $173,795
Average net loans outstanding.............................. $ 128,279 $ 138,792 $ 152,848 $ 162,230 $161,915
Allowance for loan losses as a percent
of total loans at end of period.......................... 1.48% 1.69% 1.43% 0.70% 0.70%
Net loans charged off as a percent
of average net loans outstanding......................... 0.66% 1.41% 0.68% 0.68% 0.34%
Ratio of allowance for loan losses to nonperforming loans.. 95.02% 66.02% 53.69% 27.37% 62.55%
Ratio of allowance for loan losses to total nonperforming
assets at end of period.................................. 73.43% 57.11% 47.75% 22.00% 48.28%
12
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. The table reflects the allowance for loan losses as a percentage of
net loans receivable. Management believes that the allowance can be allocated by
category only on an approximate basis. The allocation of the allowance by
category is not necessarily indicative of future losses and does not restrict
the use of the allowance to absorb losses in any category.
AT DECEMBER 31,
--------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------- ------------------- -------------------- ------------------- -------------------
% OF % OF % OF % OF % OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
TO NET TO NET TO NET TO NET TO NET
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
One-to four-family
residential............ $ 520 33.1% $ 555 31.7% $ 516 30.7% $ 95 29.8% $ 161 28.1%
Commercial and
agricultural real
estate................. 198 19.5 285 16.8 180 12.9 19 11.7 158 10.8
Multi-family residential. 8 1.8 3 1.9 10 1.9 2 1.6 7 1.6
Commercial and
agricultural business.. 71 20.8 192 23.4 169 22.0 155 19.6 169 18.4
Home equity/Home
improvement............ 845 19.3 817 18.6 653 21.8 429 24.7 187 26.6
Automobile............... 140 3.6 194 5.1 329 7.3 253 8.3 227 9.0
Other consumer........... 106 3.5 140 4.4 216 5.0 154 5.2 177 6.4
Unallocated.............. -- -- -- -- -- -- -- -- 120 --
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
Total ............... $ 1,888 101.6% $ 2,186 101.9% $ 2,073 101.6% $ 1,107 $ 100.9% $ 1,206 100.9%
======== ========= ======== ========= ======== ========= ======== ========= ======== =========
13
INVESTMENT ACTIVITIES
The Bank's investment portfolio consists primarily of U. S. government
and agency securities, along with mortgage-backed securities (discussed below),
interest-earning deposits in other financial institutions, Federal funds sold,
Municipal Bonds and FHLB stock. The Bank's portfolio of equity investment
securities totaled $48,000 at December 31, 2004 consisting of an interest in a
local community development corporation and Farmer Mac stock. In addition, the
Bank's investment portfolio included $2.0 million of local municipal bonds. The
Bank had no Federal funds sold at December 31, 2004. The Bank's portfolio of
U.S. Government and Agency Securities totaled $83.2 million at December 31,
2004. The Bank's holdings of FHLB stock totaled $1.5 million at December 31,
2004. The Bank had $4.8 million of investments in interest-earning deposits at
December 31, 2004 consisting of deposits in the Federal Home Loan Bank and other
correspondent accounts. Total long-term investments at December 31, 2004 were
$84.5 million. The Bank's short-term and long-term investment portfolio is
expected to continue to change based on liquidity needs associated with loan
origination activities.
The Bank is required under Federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short-term securities
and certain other investments. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities and its expectation of the level of yield that will be
available in the future, as well as management's projections as to the
short-term demand for funds to be used in the Bank's loan origination and other
activities. The Bank's liquidity ratio at December 31, 2004 was 42.4%, which was
adequate to meet its normal business activities.
MORTGAGE-BACKED SECURITIES. The Bank occasionally invests in
mortgage-backed securities issued or guaranteed by the United States Government
or agencies thereof. These securities, which consist primarily of
mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac,
had an amortized cost of $15.2 million, $7.6 million and $2.7 million at
December 31, 2004, 2003 and 2002, respectively. At December 31, 2004, all of the
mortgage-backed securities in the investment portfolio had fixed-rates of
interest. The market value of the Bank's mortgage-backed securities portfolio
was $15.2 million, $7.6 million and $2.8 million at December 31, 2004, 2003 and
2002, respectively, and the weighted average rate as of December 31, 2004, 2003
and 2002 was 4.74%, 3.88% and 6.09%, respectively.
Set forth below is a table showing the Bank's purchases, sales and
repayments of mortgage-backed securities for the periods indicated.
AT DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Mortgage-backed securities at beginning of period.. $ 7,597 $ 2,822 $ 4,264 $ 6,689 $ 7,353
Purchases.......................................... 12,605 8,082 -- -- 797
Sales.............................................. 1,470 2,305 60 -- --
Repayments......................................... 3,439 910 1,350 2,499 1,472
Premium amortization............................... (113) (29) -- 2 (3)
Net unrealized gain (loss)......................... (9) (63) (32) 72 14
---------- ---------- ---------- ---------- ----------
Mortgage-backed securities at end of period........ $ 15,171 $ 7,597 $ 2,822 $ 4,264 $ 6,689
========== ========== ========== ========== ==========
14
INVESTMENT SECURITIES AND SHORT-TERM INVESTMENT PORTFOLIO. The following
table sets forth the carrying value of the Bank's investment securities
portfolio and short-term investments at the dates indicated. At December 31,
2004, the market value of the Bank's short-term investment portfolio
approximated its cost.
AT DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Investment securities:
FHLB stock.................................... $ 1,466 $ 1,381 $ 1,279 $ 1,215 $ 1,135
Equity securities and municipal bonds......... 2,015 1,955 779 2,160 1,641
U.S. Government and agency securities......... 83,192 97,578 72,846 42,984 18,519
---------- ---------- ---------- ---------- ----------
Total investment securities.......... $ 86,673 $ 100,914 $ 74,904 $ 46,359 $ 21,295
========== ========== ========== ========== ==========
Short-term investments:
Interest-bearing deposits in other depository
institutions................................ $ 4,793 $ 1,842 $ 3,865 $ 6,506 $ 2,853
Federal funds sold............................ -- 500 800 1,010 4,967
---------- ---------- ---------- ---------- ----------
Total short-term investments............ $ 4,793 $ 2,342 $ 4,665 $ 7,516 $ 7,820
========== ========== ========== ========== ==========
The following table sets forth the maturities and weighted average
yields of the Bank's securities portfolio, excluding FHLB stock and equity
securities, at December 31, 2004.
CARRYING VALUE AT DECEMBER 31, 2004
---------------------------------------------------------------
TOTAL
LESS THAN 1 TO 5 5 TO 10 OVER INVESTMENT
1 YEAR YEARS YEARS 10 YEARS SECURITIES
--------- --------- --------- --------- -------------
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
U.S. Government............................... $ 494 $ 42,944 $ 38,513 $ 1,241 $ 83,192
Municipal bonds............................... 196 426 952 393 1,967
--------- --------- --------- --------- --------
Total..................................... $ 690 $ 43,370 $ 39,465 $ 1,634 $ 85,159
========= ========= ========= ========= ========
Weighted average yield.......................... 2.23% 3.02% 4.22% 4.62% 3.60%
15
SOURCES OF FUNDS
GENERAL. Deposits and borrowings are the major sources of funds for
lending and other investment purposes. In addition, the Bank derives funds from
the repayment and prepayment of loans and mortgage-backed securities,
operations, sales of loans into the secondary market, and the sale, call, or
maturity of investment securities. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are influenced significantly by general interest rates and market
conditions. Other sources of funds include advances from the FHLB. For further
information see "--Borrowings." Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources or on
a longer term basis for general business purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally
from within the Bank's market areas through the offering of a broad selection of
deposit instruments including interest-bearing checking accounts,
noninterest-bearing checking accounts, savings accounts, money market demand
accounts, term certificate accounts and individual retirement accounts. The Bank
accepts deposits of $100,000 or more and may offer negotiated interest rates on
such deposits. Deposit account terms vary according to the minimum balance
required, the time periods the funds must remain on deposit and the interest
rate, among other factors. The Bank regularly evaluates its internal cost of
funds, surveys rates offered by competing institutions, reviews the Bank's cash
flow requirements for lending and liquidity and executes rate changes when
deemed appropriate. The Bank does not obtain funds through brokers, nor does it
solicit funds outside its market area. The Bank has on occasion offered above
market interest rates in order to attract deposits.
DEPOSIT ACTIVITY
The following table sets forth the deposit activities of the Bank for
the periods indicated.
AT DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000(1)
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Deposits......................................... $ 820,349 $ 895,755 $1,067,912 $ 838,886 $ 611,070
Withdrawals...................................... 833,264 890,499 1,064,640 827,381 557,631
---------- ---------- ---------- ---------- ----------
Net increase (decrease) before interest credited. (12,915) 5,256 3,272 11,505 53,439
Interest credited................................ 3,476 4,315 5,431 7,595 5,170
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in deposits........... $ (9,439) $ 9,571 $ 8,703 $ 19,100 $ 58,609
========== ========== ========== ========== ==========
- ------------------------------------
(1) Deposits during 2000 include $45,747,000 in deposits acquired from Chapin
State Bank.
16
DEPOSIT PORTFOLIO
Deposits in the Bank as of December 31, 2004 were represented by the
various types of deposit programs described below:
WEIGHTED PERCENTAGE
AVERAGE MINIMUM OF TOTAL
INTEREST RATE MINIMUM TERM DEMAND ACCOUNTS AMOUNT BALANCES DEPOSITS
- ------------- ------------ --------------- ------ -------- --------
(IN THOUSANDS)
0.00% None Noninterest-bearing checking $ 50 $ 14,224 6.30%
0.49 None Interest-bearing checking 50 27,237 12.10
1.03 None Money market deposit accounts 2,500 9,250 4.09
0.68 None Savings 50 30,093 13.33
CERTIFICATES OF DEPOSIT
2.48 Less than 1 year Fixed term, fixed rate $ 500 $106,230 47.05
3.01 1-2 years Fixed term, fixed rate 500 20,764 9.19
3.71 2-3 years Fixed term, fixed rate 500 7,546 3.34
3.77 3-4 years Fixed term, fixed rate 500 5,881 2.60
4.39 Over 4 years Fixed term, fixed rate 500 4,509 2.00
-------- ---------
$225,734 100.00%
======== =========
17
DEPOSIT FLOW
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
AT DECEMBER 31,
-----------------------------------------------------------------------
2004 2003
---------------------------------- ----------------------------------
BALANCE PERCENT CHANGE BALANCE PERCENT CHANGE
--------- --------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Club accounts........................ $ 126 0.06% $ (94) $ 220 0.09% $ 6
Noninterest-bearing checking.......... 14,224 6.30 1,373 12,851 5.46 (678)
Interest-bearing checking............. 27,237 12.10 (842) 28,079 11.94 4,037
Savings............................... 29,967 13.27 (492) 30,459 12.96 4,458
Money market deposit accounts......... 9,250 4.09 (444) 9,694 4.12 (958)
Certificates of deposit that mature:
within 12 months.................... 106,230 47.05 (6,349) 112,579 47.87 2,907
within 12-36 months................. 28,310 12.53 (4,781) 33,091 14.07 (3,327)
beyond 36 months.................... 10,390 4.60 2,190 8,200 3.49 3,126
--------- --------- -------- --------- --------- --------
Total............................. $ 225,734 100.00% $ (9,439) $ 235,173 100.00% $ 9,571
========= ========= ======== ========= ========= ========
(CONTINUED)
AT DECEMBER 31,
-----------------------------------------------------------------------
2002 2001
---------------------------------- ----------------------------------
BALANCE PERCENT CHANGE BALANCE PERCENT CHANGE
--------- --------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Club accounts........................ $ 214 0.10% $ 12 $ 202 0.09% $ (12)
Noninterest-bearing checking.......... 13,529 6.00 2,466 11,063 5.10 1,561
Interest-bearing checking............. 24,042 10.66 456 23,586 10.87 938
Savings............................... 26,001 11.52 826 25,175 11.61 2,741
Money market deposit accounts......... 10,652 4.72 2,999 7,653 3.53 (411)
Certificates of deposit that mature:
within 12 months.................... 109,672 48.61 4,113 105,559 48.67 12,390
within 12-36 months................. 36,418 16.14 (1,185) 37,603 17.34 3,402
beyond 36 months.................... 5,074 2.25 (984) 6,058 2.79 (1,509)
--------- --------- -------- --------- --------- --------
Total............................. $ 225,602 100.00% $ 8,703 $ 216,899 100.00% $ 19,100
========= ========= ======== ========= ========= ========
18
TIME DEPOSITS BY RATES
The following table sets forth the certificates of deposit of the Bank
classified by rates as of the dates indicated:
AT DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
RATE
1.99% or less.................................. $ 39,500 $ 33,579 $ 3,757 $ -- $ --
2.00-3.99%..................................... 82,670 87,935 83,674 40,338 52
4.00-5.99%..................................... 17,803 22,201 41,164 63,363 57,379
6.00-7.99%..................................... 3,102 7,983 20,407 43,011 75,440
8.00 and greater............................... 1,855 2,172 2,162 2,508 2,066
---------- ---------- ---------- ---------- ----------
$ 144,930 $ 153,870 $ 151,164 $ 149,220 $ 134,937
========== ========== ========== ========== ==========
The following table sets forth the amount and maturities of certificates
of deposit at December 31, 2004.
AMOUNT DUE
-----------------------------------------------------------------------------
RATE OVER 2 OVER 3
LESS THAN OVER 1 YEAR YEARS TO 3 YEARS TO 4 OVER 4
ONE YEAR TO 2 YEARS YEARS YEARS YEARS TOTAL
----------- ------------ ----------- ------------ ----------- ----------
(DOLLARS IN THOUSANDS)
1.99% or less.................... $ 37,439 $ 1,644 $ 317 $ -- $ 100 $ 39,500
2.00-3.99%....................... 59,552 14,227 3,807 3,409 1,675 82,670
4.00-5.99%....................... 5,039 4,467 3,416 2,466 2,415 17,803
6.00-7.99%....................... 2,345 426 6 6 319 3,102
8.00 and greater................. 1,855 -- -- -- -- 1,855
Weighted average balance......... 2.48% 3.01% 3.71% 3.77% 4.39% 2.73%
LARGE CERTIFICATES OF DEPOSIT. The following table indicates the
balances of certificates of deposit of $100,000 or more by time remaining until
maturity as of December 31, 2004.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
--------------- ----------
(IN THOUSANDS)
Less than 3 months...................................... $ 20,073
3-6 months.......................................... 14,436
6-12 months......................................... 10,256
Over 12 months........................................ 10,727
--------
Total............................................ $ 55,492
========
BORROWINGS
Deposits are the primary source of funds for the Bank's lending and
investment activities. If the need arises, the Bank may rely upon advances from
the FHLB to supplement its supply of available funds and to fund deposit
withdrawals. Advances from the FHLB are typically secured by the Bank's one- to
four-family residential mortgage loans, United States Government and agency
securities and mortgage-backed securities. The FHLB functions as a central
reserve bank providing credit for the Bank and other member savings associations
and financial institutions. As a member, the Bank is required to own capital
stock in the FHLB and is authorized to apply for advances on the security of
such stock and certain of its home mortgages, provided certain standards
19
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of a member institution's stockholders'
equity or on the FHLB's assessment of the institution's creditworthiness. At
December 31, 2004, the Bank had no FHLB advances outstanding.
Our borrowings consist of securities sold under agreements to repurchase
which are swept daily from commercial deposit accounts. The Company may be
required to provide additional collateral based on the fair value of the
underlying securities.
The following table sets forth certain information regarding borrowings
by the Bank for the dates indicated.
AT DECEMBER 31,
--------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Weighted average rate paid on:(1)
FHLB advances.................................. 1.68% 1.30% --% 6.80% 6.52%
Other borrowings............................... 1.40% 1.16% 1.81% 1.51% 5.30%
FHLB advances:
Maximum balance................................ $ 9,000 $ 7,500 $ -- $ 5,000 $ 14,000
Average balance................................ $ 2,993 $ 1,243 $ -- $ 795 $ 7,877
Other:
Maximum balance............................... $ 3,372 $ 3,845 $ 4,364 $ 1,560 $ 896
Average balance............................... $ 2,185 $ 2,192 $ 2,097 $ 849 $ 106
- ------------------------------------
(1) Calculated using the daily weighted average interest rates.
TRUST SERVICES
The Bank operates a full-service trust department. As of December 31,
2004, the Bank's trust department was managing $27.3 million in trust assets.
Assets managed by the trust department grew $900,000 during 2004. Trust fees
collected in 2004 totaled $82,000, which represented an decrease of $177,000
from 2003. The decrease in fees is due to both asset growth and additional trust
work performed during 2003, which management did not expect to continue into
2004.
SUBSIDIARY ACTIVITIES
The Bank has one wholly owned subsidiary, Financial Resources Group,
Inc. ("Financial Resources"), an Illinois corporation. Financial Resources is
engaged in the business of originating commercial business loans and, to a
lesser extent, commercial real estate loans, one- to four-family loans, pursuant
to Veteran's Administration ("VA") and Federal Housing Administration ("FHA")
guidelines, and multi-family loans. In addition, Financial Resources operates an
investment center engaged in the business of buying and selling stocks, bonds,
annuities and mutual funds for its customers' accounts. At December 31, 2004,
the Bank had $2.0 million in equity and retained earnings in Financial
Resources. For the year ended December 31, 2004, Financial Resources had net
income of $217,000.
COMPETITION
The Bank encounters significant competition both in attracting deposits
and in originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, other savings banks,
savings associations and credit unions in its market area, and the Bank expects
continued strong competition from such financial institutions in the foreseeable
future. The Bank competes for savings by offering depositors a high level of
personal service and expertise together with a wide range of financial services.
20
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies and other savings banks and savings
associations. This competition for loans has increased substantially in recent
years as a result of the large number of institutions competing in the Bank's
market areas as well as the increased efforts by commercial banks to expand
mortgage loan originations.
The Bank competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers and home builders. Factors that affect competition include general and
local economic conditions, current interest rate levels and the volatility of
the mortgage markets.
The Bank's market areas consist of Morgan, Macoupin, and Montgomery
Counties, Illinois. The Bank's market areas have a number of financial
institutions, however, the Bank is the largest independent financial institution
headquartered in Jacksonville.
REGULATION AND SUPERVISION
GENERAL. Jacksonville Bancorp, Inc. and Jacksonville Bancorp, MHC are
nondiversified mutual savings and loan holding companies within the meaning of
the Home Owners' Loan Act. As such, they are registered with the Office of
Thrift Supervision and are subject to regulation by the Office of Thrift
Supervision. The Bank is an Illinois-chartered savings bank subject to extensive
regulation by the Illinois Commissioner of Banks and Real Estate (the
"Commissioner") and the FDIC. Its deposit accounts are insured up to applicable
limits by the FDIC. The Bank must file reports with the Commissioner and the
FDIC concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
or acquisitions with other depository institutions. There are periodic
examinations of the Bank by the Commissioner and the FDIC to review the Bank's
compliance with various regulatory requirements. The Bank is also subject to
certain reserve requirements established by the Board of Governors of the
Federal Reserve (the "FRB"). This regulation and supervision establishes a
comprehensive framework of activities in which a savings bank can engage and is
intended primarily for the protection of the FDIC and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Commissioner, the FDIC, or Congress
could have a material impact on the operations of the Bank. Certain of the
regulatory requirements applicable to the Bank are referred to below or
elsewhere herein.
CAPITAL MAINTENANCE. Under FDIC regulations, the Bank must maintain
minimum levels of capital. The regulations establish a minimum leverage capital
requirement of not less than 3% core capital to total assets for banks in the
strongest financial and managerial condition, with the highest supervisory
rating of the federal regulators for banks. For all other banks, the minimum
leverage capital requirement is between 4% and 5% of total assets. Core capital
is composed of the sum of common stockholders' equity, noncumulative perpetual
preferred stock (including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets (other than qualifying
mortgage servicing rights and qualifying supervisory intangible core deposits),
identified losses, investments in certain subsidiaries, and unrealized gains
(losses) on investment securities.
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as core capital and supplementary capital) to risk
weighted assets of 8.0%. In determining the amount of risk-weighted assets, all
assets, including certain off balance sheet assets, are multiplied by a
risk-weight of 0% to 100%, based on the risks the federal regulators believe are
inherent in the type of asset. The components of core capital are equivalent to
those discussed earlier under the 3% leverage requirement. The components of
supplementary capital currently include cumulative perpetual preferred stock,
long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock and allowance for loan and
lease losses. Allowance for loan and lease losses includible in supplementary
capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the
amount of capital counted toward supplementary capital cannot exceed 100% of
core capital.
21
Set forth below is a summary of the Bank's compliance with its capital
requirements as of December 31, 2004. At December 31, 2004, the Bank exceeded
its applicable capital requirements.
AT DECEMBER 31, 2004
-----------------------
PERCENT
OF
AMOUNT ASSETS
---------- -------
(DOLLARS IN THOUSANDS)
Tier 1(Core) Capital to Total Adjusted Assets (Leverage Ratio)
Actual level................................................... $ 17,780 7.06%
Required level................................................. 10,071 4.00
---------- -------
Excess......................................................... $ 7,709 3.06%
========== =======
Tier 1 Capital to Risk-Weighted Assets:
Actual level................................................... $ 17,780 12.77%
Required level................................................. 5,569 4.00
---------- -------
Excess......................................................... $ 12,211 8.77%
========== =======
Total Capital to Risk-Weighted Assets:
Actual level................................................... $ 19,522 14.02%
Required level................................................. 11,139 8.00
---------- -------
Excess......................................................... $ 8,383 6.02%
========== =======
ILLINOIS SAVINGS BANK REGULATION. As an Illinois-chartered savings bank,
the Bank is subject to regulation and supervision by the Commissioner. The
Commissioner's regulation of the Bank covers, among other things, the Bank's
internal organization (I.E., charter, bylaws, capital requirements, transactions
with directors and officers, and composition of the board of directors), as well
as supervision of permissible activities and mergers and acquisitions. The Bank
is required to file periodic reports with, and is subject to periodic
examinations at least once within every 12-month period by the Commissioner. The
lending and investment authority of the Bank is prescribed by Illinois law and
regulations, as well as applicable Federal laws and regulations, and the Bank is
prohibited from engaging in any activities not permitted by such laws and
regulations.
Under Illinois law, savings banks are required to maintain a minimum
core capital to total assets ratio of 3%. The Commissioner is authorized to
require a savings bank to maintain a higher minimum capital level if the
Commissioner determines that the savings bank's financial condition or history,
management or earnings prospects are not adequate. If a savings bank's core
capital ratio falls below the required level, the Commissioner may direct the
savings bank to adhere to a specific written plan established by the
Commissioner to correct the savings bank's capital deficiency, as well as a
number of other restrictions on the savings bank's operations, including a
prohibition on the declaration of dividends by the savings bank's board of
directors.
Under Illinois law, a savings bank may make both secured and unsecured
loans. However, loans for business, corporate, commercial or agricultural
purposes, whether secured or unsecured, may not in the aggregate exceed 15% of a
savings bank's total assets unless authorized by the Commissioner. With the
prior written consent of the Commissioner, savings banks may also engage in real
estate development activities, provided that the total investment in any one
project may not exceed 15% of total capital, and the total investment in all
projects may not exceed 50% of total capital. The total loans and extensions of
credit outstanding at one time, both direct and indirect, by a savings bank to
any borrower may not exceed 25% of the savings bank's total capital. At December
31, 2004, the Bank did not have any loans-to-one borrower which exceeded this
limitation.
Illinois-chartered savings banks generally have all lending, investment
and other powers which are possessed by federal savings banks based in Illinois.
Recent federal and state legislative developments have reduced distinctions
between commercial banks and savings institutions in Illinois with respect to
lending and investment authority. As federal law has expanded the authority of
federally chartered savings institutions to engage in activities previously
reserved for commercial banks, Illinois legislation and regulations ("parity
legislation") have given Illinois-chartered savings institutions, such as the
Bank, the powers of federally chartered savings institutions.
22
The board of directors of a savings bank may declare dividends on its
capital stock based upon the savings bank's annualized net profits except (1)
dividends may not be declared if the bank fails to meet its capital
requirements, (2) dividends are limited to 100% of net income in that year and
(3) if total capital is less than 6% of total assets, dividends are limited to
50% of net income without prior approval of the Illinois Commissioner of Banks
and Real Estate.
An Illinois-chartered savings bank may not make a loan to a person
owning 10% or more of its stock, an affiliated person, an agent or an attorney
of the savings bank, either individually or as an agent or partner of another,
except under the rules of the Commissioner and regulations of the FDIC. This
restriction does not apply, however, to loans made (i) on the security of
single-family residential property used by the borrower as his or her residence,
and (ii) to a non-profit, religious, charitable or fraternal organization or a
corporation in which the savings bank has been authorized to invest by the
Commissioner. Furthermore, a savings bank may not purchase, lease or acquire a
site for an office building or an interest in real estate from an officer,
director, employee or the holder of more than 10% of the savings bank's stock or
certain affiliated persons as set forth in Illinois law, unless the prior
written approval of the Commissioner is obtained.
Illinois law provides that any depository institution may merge into a
savings bank operating under the Illinois Savings Bank Act. The Board of
Directors of each merging institution must approve a plan of merger by
resolution adopted by majority vote of all members of the respective boards.
After such approval, the plan of merger must be submitted to the Commissioner
for approval. The Commissioner may make an examination of the affairs of each
merging institution (and their affiliates). The Commissioner shall not approve a
merger agreement unless he finds that, among other things, (i) the resulting
institution meets all requirements of the SBA; (ii) the merger agreement is fair
to all persons affected; and (iii) the resulting institution will be operated in
a safe and sound manner. If approved by the Commissioner, the plan of merger
must be submitted to stockholders of the depository institution for approval,
and may be required to be submitted to members if a mutual savings bank is one
of the constituent entities. A two-thirds affirmative vote is required for
approval of the plan of merger.
COMMUNITY REINVESTMENT ACT
FEDERAL REGULATION. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution.
THE USA PATRIOT ACT
The USA PATRIOT Act gives the federal government powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. Title III of the USA PATRIOT Act amended the Bank
Secrecy Act to encourage information sharing among bank regulatory agencies and
law enforcement bodies. Moreover, certain provisions of Title III impose
affirmative obligations on a broad range of financial institutions, including
banks, savings associations, brokers, dealers, credit unions, money transfer
agents and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must
establish anti-money laundering programs that include, at a
minimum: (i) internal policies, procedures, and controls; (ii)
specific designation
23
of an anti-money laundering compliance officer; (iii) ongoing
employee training programs; and (iv) an independent audit
function to test the anti-money laundering program.
o Section 326 authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations that provide for minimum standards with respect to
customer identification at the time new accounts are opened. On
July 23, 2002, the Office of Thrift Supervision and the other
federal bank regulators jointly issued proposed rules to
implement Section 326. The proposed rules require financial
institutions to establish a program specifying procedures for
obtaining identifying information from customers seeking to open
new accounts. This identifying information would be essentially
the same information currently obtained by most financial
institutions for individual customers.
o Section 312 requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondence accounts in the United States for non-United
States persons or their representatives (including foreign
individuals visiting the United States) to establish
appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to detect
and report money laundering.
o Effective December 25, 2001, financial institutions are
prohibited from establishing, maintaining, administering or
managing correspondent accounts for foreign shell banks (foreign
banks that do not have a physical presence in any country), and
will be subject to certain record keeping obligations with
respect to correspondent accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on
Federal Reserve Act and Bank Merger Act applications.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act
of 2002 ("Sarbanes-Oxley"), which implemented legislative reforms intended to
address corporate and accounting fraud. In addition to the establishment of a
new accounting oversight board that enforces auditing, quality control and
independence standards, Sarbanes-Oxley places certain restrictions on the scope
of services that may be provided by accounting firms to their public company
audit clients. Any non-audit services being provided to a public company audit
client requires preapproval by the company's audit committee. In addition,
Sarbanes-Oxley makes certain changes to the requirements for audit partner
rotation after a period of time. Sarbanes-Oxley requires chief executive
officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the Securities and Exchange Commission,
subject to civil and criminal penalties if they knowingly or willingly violate
this certification requirement. The Company's Chief Executive Officer and Chief
Financial Officer have signed certifications to this Form 10-K as required by
Sarbanes-Oxley. In addition, under Sarbanes-Oxley, counsel is required to report
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company to its chief executive officer or its chief legal officer,
and, if such officer does not appropriately respond, to report such evidence to
the audit committee or other similar committee of the board of directors or the
board itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate
executives who violate federal securities laws; the period during which certain
types of suits can be brought against a company or its officers is extended; and
bonuses issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading the company's
securities during retirement plan "blackout" periods, and loans to company
executives (other than loans by financial institutions permitted by federal
rules and regulations) are restricted. In addition, a provision directs that
civil penalties levied by the Securities and Exchange Commission as a result of
any judicial or administrative action under Sarbanes-Oxley be deposited to a
fund for the benefit of harmed investors. The Federal Accounts for Investor
Restitution provision also requires the Securities and Exchange Commission to
develop methods of improving collection rates. The legislation accelerates the
time frame for disclosures by public companies, as they must immediately
disclose any material changes in their financial condition or operations.
Directors and executive officers must also provide information for most changes
in ownership in a company's securities within two business days of the change.
24
Sarbanes-Oxley increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit Committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert"
(as such term is defined by the Securities and Exchange Commission) and if not,
why not. Under Sarbanes-Oxley, a company's registered public accounting firm is
prohibited from performing statutorily mandated audit services for a company if
such company's chief executive officer, chief financial officer, comptroller,
chief accounting officer or any person serving in equivalent positions had been
employed by such firm and participated in the audit of such company during the
one-year period preceding the audit initiation date. Sarbanes-Oxley also
prohibits any officer or director of a company or any other person acting under
their direction from taking any action to fraudulently influence, coerce,
manipulate or mislead any independent accountant engaged in the audit of the
company's financial statements for the purpose of rendering the financial
statements materially misleading. Sarbanes-Oxley also requires the Securities
and Exchange Commission to prescribe rules requiring inclusion of any internal
control report and assessment by management in the annual report to
shareholders. Sarbanes-Oxley requires the company's registered public accounting
firm that issues the audit report to attest to and report on management's
assessment of the company's internal controls.
Compliance with the Sarbanes-Oxley Act has not had a material impact on
our results of operations or financial condition.
HOLDING COMPANY REGULATION
PERMITTED ACTIVITIES. Pursuant to Section 10(o) of the Home Owners' Loan
Act and Office of Thrift Supervision regulations and policy, a mutual holding
company and a federally chartered mid-tier holding company such as Jacksonville
Bancorp, Inc. may engage in the following activities: (i) investing in the stock
of a savings association; (ii) acquiring a mutual association through the merger
of such association into a savings association subsidiary of such holding
company or an interim savings association subsidiary of such holding company;
(iii) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association; (iv) investing in a corporation, the
capital stock of which is available for purchase by a savings association under
federal law or under the law of any state where the subsidiary savings
association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of such company; (viii) acting as
trustee under deeds of trust; (ix) any other activity (A) that the Federal
Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the
Director, by regulation, prohibits or limits any such activity for savings and
loan holding companies; or (B) in which multiple savings and loan holding
companies were authorized (by regulation) to directly engage on March 5, 1987;
(x) any activity permissible for financial holding companies under Section 4(k)
of the Bank Holding Company Act, including securities and insurance
underwriting; and (xi) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
savings and loan holding company is approved by the Director of the Office of
Thrift Supervision. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (xi) above, and has a period of two years to
cease any nonconforming activities and divest of any nonconforming investments.
The Home Owners' Loan Act prohibits a savings and loan holding company,
including Jacksonville Bancorp, Inc. and Jacksonville Bancorp, MHC, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
Office of Thrift Supervision. It also prohibits the acquisition or retention of,
with certain exceptions, more than 5% of a nonsubsidiary savings institution, a
nonsubsidiary holding company, or a nonsubsidiary company engaged in activities
other than those permitted by the Home Owners' Loan Act; or acquiring or
retaining control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings institutions, the Office of
Thrift Supervision must consider the financial and managerial resources, future
prospects of the company and institution involved, the effect of the acquisition
on the risk to the insurance fund, the convenience and needs of the community
and competitive factors.
25
The Office of Thrift Supervision is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
WAIVERS OF DIVIDENDS BY JACKSONVILLE BANCORP, MHC. Office of Thrift
Supervision regulations require Jacksonville Bancorp, MHC to notify the Office
of Thrift Supervision of any proposed waiver of its receipt of dividends from
Jacksonville Bancorp, Inc. The Office of Thrift Supervision reviews dividend
waiver notices on a case-by-case basis, and, in general, does not object to any
such waiver if: (i) the mutual holding company's board of directors determines
that such waiver is consistent with such directors' fiduciary duties to the
mutual holding company's members; (ii) for as long as the savings association
subsidiary is controlled by the mutual holding company, the dollar amount of
dividends waived by the mutual holding company are considered as a restriction
on the retained earnings of the savings association, which restriction, if
material, is disclosed in the public financial statements of the savings
association as a note to the financial statements; (iii) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, and, in accordance with SFAS 5,
where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; and (iv) the amount of any waived dividend is considered as
having been paid by the savings association in evaluating any proposed dividend
under Office of Thrift Supervision capital distribution regulations.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. For federal income tax purposes, the Company files a
federal income tax return based upon a tax year ended December 31. Because the
Mutual Holding Company owns less than 80% of the outstanding Common Stock of the
Company it is not permitted to file a consolidated federal income tax return
with the Company. Since the Mutual Holding Company has no assets other than the
stock of the Company and $1.0 million in cash, and a $186,000 investment in the
local Bankers' Bancorp, Inc., it will have no material federal income tax
liability.
The Mutual Holding Company and the Company are subject to the rules of
federal income taxation generally applicable to corporations under the Internal
Revenue Code. Most corporations are not allowed to make tax deductible additions
to bad debt reserves under the Code. However, banks are allowed to compute a tax
deductible bad debt reserve based on their historical loss experience.
Historically, banks were also allowed to compute tax bad debt reserves using a
percentage of taxable income. The tax law was changed in 1987 and 1996 so that
now the Company is allowed to maintain a tax deductible bad debt reserve at the
greater of the amount computed using the experience method or the amount of the
bad debt reserve at December 31, 1987 (base year). The Company has taken
advantage of this tax benefit in computing its tax deductible bad debt reserve
and maintains a tax bad debt reserve equal to the tax bad debt reserve at the
base year.
Deferred income taxes arise from the recognition of certain items of
income and expense for tax purposes in years different from those in which they
are recognized in the consolidated financial statements.
The Bank was last audited by the Internal Revenue Service for the tax
years ended December 31, 1998. As a result of adjustments made during the audit,
the Bank received a refund of $8,000 for 1998. For additional information
regarding taxation, see Note 9 of Notes to Consolidated Financial Statements.
ILLINOIS TAXATION. The State of Illinois imposes a tax on the Illinois
taxable income of corporations, including savings banks, at the rate of 7.30%.
Illinois taxable income is generally similar to federal taxable income except
that interest from state and municipal obligations is taxable and no deduction
is allowed for state income taxes. However, a deduction is allowed for certain
U.S. Government and agency obligations. The Bank's state income tax returns for
the tax years ended December 31, 1991, 1990 and 1989, have been audited by the
Illinois tax authorities and did not have to be amended as a result of such
audit.
26
PERSONNEL
As of December 31, 2004, the Bank and its subsidiary had a total of 98
full-time and 23 part-time employees. None of the Bank's employees is
represented by a collective bargaining group. Management believes that its
relationship with the Bank's employees is good.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K is available on its website at
WWW.JACKSONVILLESAVINGS.COM.
ITEM 2. PROPERTIES
The Bank conducts its business through its main office and two branch
offices located in Jacksonville, and branch offices located in Virden,
Litchfield, Chapin, and Concord, Illinois. The following table sets forth
certain information concerning the main office and each branch office of the
Bank at December 31, 2004. At December 31, 2004, the Bank's premises and
equipment had an aggregate net book value of approximately $7.1 million. The
Bank completed an expansion of its main office during the fourth quarter of
2003, at a cost of $2.5 million. The Bank believes that its branch facilities
are adequate to meet the present and immediately foreseeable needs of the Bank
and the Holding Company. All facilities are owned.
NET
BOOK VALUE
YEAR AT DECEMBER 31,
LOCATION OCCUPIED 2004
- ------------------------ --------------- --------------------
(IN THOUSANDS)
Main Office
1211 West Morton Avenue
Jacksonville, Illinois 1994 $ 4,758
Branch Office
211 West State Street
Jacksonville, Illinois 1961 663
Branch Office
903 South Main
Jacksonville, Illinois 1989 223
Branch Office
501 North State Street
Litchfield, Illinois 1997 607
Branch Office
100 North Dye
Virden, Illinois 1986 275
Branch Office
510 Superior
Chapin, Illinois 2000 585
Branch Office
202 State
Concord, Illinois 2000 35
ITEM 3. LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Company is
periodically involved incident to the Company's business. In the opinion of
management after consultation with legal counsel, such claims and lawsuits in
the aggregate are immaterial to the Company and/or Bank's financial condition
and results of operations.
27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The "Stockholder Information" section of the Company's annual report to
stockholders for the fiscal year ended December 31, 2004 (the "2004 Annual
Report to Stockholders") is filed as an exhibit to this Form 10-K and is
incorporated herein by reference. No shares of common stock were purchased by
the Company during the fourth quarter of 2004.
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Consolidated Financial Information" section of the 2004
Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the 2004 Annual Report to Stockholders is
filed as an exhibit to this Form 10-K and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the 2004 Annual Report to Stockholders is
filed as an exhibit to this Form 10-K and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The material identified in Item 15(a)(1) hereof is incorporated herein
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) On October 19, 2004, the Registrant elected to dismiss its outside
accounting firm, McGladrey & Pullen, LLP ("McGladrey & Pullen"), effective
following the completion of its 2004 year end audit. The Company intends to
engage BKD, LLP ("BKD") as its new outside accounting firm. The decision to
change accounting firms was made by the audit committee of the Board of
Directors and ratified by the Board of Directors.
McGladrey & Pullen's report on the consolidated financial statements of
the Registrant for each of the three years in the period ended December 31, 2004
did not contain an adverse opinion or a disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
During the three years ended December 31, 2004 and the interim period through
the date of this report, the Registrant had no disagreements with McGladrey &
Pullen on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure which disagreements, if not resolved
to the satisfaction of McGladrey & Pullen, would have caused it to make
reference to the subject matter of the disagreements in connection with its
report.
None of the reportable events described by Item 304(a)(1)(v) of
Regulation S-K has occurred.
The Registrant has provided McGladrey & Pullen a copy of the disclosure
contained in this Report, which was received by McGladrey & Pullen on the date
of this Report. The Registrant has requested McGladrey & Pullen
28
to furnish the Registrant with a letter in response to Item 304(a) of Regulation
S-K. Such letter is included in this Report as Exhibit 16.1.
(b) BKD was engaged by the Registrant on October 19, 2004 to audit the
consolidated financial statements of the registrant as of and for the year ended
December 31, 2005. During the two years ended December 31, 2003 and the
subsequent interim period through the date of this Report, the Registrant did
not consult with BKD regarding any of the matters set forth in Item
304(a)(2)(ii) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days prior to filing date of this
report, that the Company's disclosure controls and procedures (as defined by the
Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commissions' rules and forms.
There were no significant changes made in our internal controls during
the period covered by this report or, to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of the
foregoing evaluation.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Information concerning the directors and certain officers of the
Company is incorporated by reference hereunder in the Proxy Statement for the
2005 Annual Meeting.
(b) Set forth below is information concerning the Principal Officers
of the Company who are not described in the Proxy Statement.
NAME AGE POSITION HELD WITH THE COMPANY YEARS POSITION HELD
- ---- --- ------------------------------ -------------------
Thomas A. Luber 53 Vice President - Mortgage Banking 12
Steven L. Waltrip 53 Vice President - Mortgage/Consumer Lending 21
Susan L. Harpole 43 Vice President - Mortgage/Consumer Lending 6
Paul W. Miller 50 Vice President - Lending 4
Laura A. Marks 46 Vice President - Retail Banking 3
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to management compensation required under this
item is incorporated by reference hereunder in the Proxy Statement for the 2005
Annual Meeting.
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required under this item is incorporated by reference to the
Proxy Statement for the 2005 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is incorporated by reference to the
Proxy Statement for the 2005 Annual Meeting.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required under this item is incorporated by reference to the
Proxy Statement for the 2005 Annual Meeting.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) FINANCIAL STATEMENTS
The documents filed as a part of this Form 10-K are:
(A) Report of Independent Registered Public Accounting Firm;
(B) Consolidated Balance Sheets - December 31, 2004 and
2003.
(C) Consolidated Statements of Income - years ended December
31, 2004, 2003 and 2002;
(D) Consolidated Statements of Stockholders' Equity - years
ended December 31, 2004, 2003 and 2002
(E) Consolidated Statements of Cash Flows - years ended
December 31, 2004, 2003 and 2002; and
(F) Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(b) EXHIBITS
(1) Federal Charter and Bylaws(1)
(2) Instruments defining the rights of security holders,
including debentures (Not Applicable).
30
(7) Letter re: change in accounting principles (Not Applicable)
(10) Material contracts(1)
(A)(1) Employment Agreement between Jacksonville Savings Bank
and Andrew F. Applebee
(A)(2) Employment Agreement between Jacksonville Savings Bank
and Richard A. Foss
(A)(3) Employment Agreement between Jacksonville Savings Bank
and John C. Williams
(B) Jacksonville Savings Bank 1996 Stock Option Plan(2)
(C) Jacksonville Savings Bank 2001 Stock Option Plan(2)
(13) 2004 Annual Report to Stockholders
(14) Code of Ethics(3)
(16) Letter of McGladrey & Pullen, LLP
(21) Subsidiaries
(23) Consent of McGladrey & Pullen, LLP to incorporate financial
statements into Form S-8.
(31.1) Certification required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(31.2) Certification required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(32.1) Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- -------------------
* Previously filed.
(1) Incorporated by reference to the Company's Current Report 8-A12G filed
with the Securities and Exchange Commission on May 2, 2002.
(2) Incorporated by reference to the Company's registration statement on
Form S-8 filed with the Securities and Exchange Commission on February
2, 2004.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003.
31
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
JACKSONVILLE BANCORP, INC.
Date: March 25, 2005 By: /s/ Richard A. Foss
--------------------------------
Richard A. Foss, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Richard A. Foss By: /s/ Andrew F. Applebee
--------------------------------------- --------------------------------
Richard A. Foss, President, Andrew F. Applebee,
Chief Executive Officer and Director Chairman of the Board
Date: March 25, 2005 Date: March 25, 2005
By: /s/ Diana S. Tone By: /s/ Dean H. Hess
--------------------------------------- --------------------------------
Diana S. Tone Dean H. Hess, Director
Chief Financial Officer
Date: March 25, 2005 Date: March 25, 2005
By: /s/ Roger D. Cannell By: /s/ Emily J. Osburn
--------------------------------------- --------------------------------
Roger D. Cannell, Director Emily J. Osburn, Director
Date: March 25, 2005 Date: March 25, 2005
By: /s/ Harmon B. Deal, III By: /s/ Harvey D. Scott, III
--------------------------------------- --------------------------------
Harmon B. Deal, III, Director Harvey D. Scott III, Director
Date: March 25, 2005 Date: March 25, 2005
By: /s/ Michael R. Goldasich By: /s/ John C. Williams
--------------------------------------- --------------------------------
Michael R. Goldasich, Director John C. Williams, Director,
Senior Vice President and
Trust Officer
Date: March 25, 2005 Date: March 25, 2005
EXHIBIT INDEX
(1) Federal Charter and Bylaws (1)
(10) Material contracts(1)
(A)(1) Employment Agreement between Jacksonville Savings Bank
and Andrew F. Applebee
(A)(2) Employment Agreement between Jacksonville Savings Bank
and Richard A. Foss
(A)(3) Employment Agreement between Jacksonville Savings Bank
and John C. Williams
(2) (B) Jacksonville Savings Bank 1996 Stock Option
Plan(2)
(C) Jacksonville Savings Bank 2001 Stock Option Plan(2)
(13) 2004 Annual Report to Stockholders
(14) Code of Ethics(3)
(16) Letter of McGladrey & Pullen, LLP
(21) Subsidiaries
(23) Consent of McGladrey & Pullen, LLP to incorporate financial
statement into Form S-8.
(31.1) Certification required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(31.2) Certification required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(32.1) Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
- ----------------------
Previously Filed
(1) Incorporated by reference to the Company's Current Report 8-A12G filed
with the Securities and Exchange Commission on May 2, 2002.
(2) Incorporated by reference to the Company's registration statement on
Form S-8 filed with the Securities and Exchange Commission on February
2, 2004.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003.