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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period of _________ to _________
Commission File Number 000-49792
---------
Jacksonville Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Federal 33-1002258
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
1211 West Morton Avenue
Jacksonville, Illinois 62650
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (217) 245-4111
Indicate by check mark whether issuer (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
[ ] Yes [X] No
As of April 30, 2005, there were 1,967,027 shares (*) of the Registrant's common
stock issued and outstanding.
(*) As of April 30, 2005, 1,038,738 shares were owned by Jacksonville Bancorp,
M.H.C., the Company's mutual holding company parent.
JACKSONVILLE BANCORP, INC.
FORM 10-Q
MARCH 31, 2005
TABLE OF CONTENTS
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PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statement of Stockholders' Equity 3
Condensed Consolidated Statements of Cash Flows 4-5
Notes to the Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 19
PART II OTHER INFORMATION 20
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 21
EXHIBITS
Section 302 Certifications
Section 906 Certification
PART I - FINANCIAL INFORMATION
JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
ASSETS 2005 2004
---- ----
(Unaudited)
Cash and cash equivalents $ 6,551,282 $ 10,792,905
Investment securities - available-for-sale 84,130,018 84,625,323
Mortgage-backed securities - available-for-sale 10,804,383 15,171,342
Federal Home Loan Bank stock 1,486,400 1,466,300
Other investments 400,164 582,224
Loans receivable - net of allowance for loan loss of $1,844,990 and $1,888,073 as of
March 31, 2005 and December 31, 2004 133,556,019 125,793,087
Loans held for sale 688,394 264,600
Premises and equipment - net 7,064,624 7,146,087
Accrued interest receivable 1,522,631 1,300,741
Goodwill 2,726,567 2,726,567
Core deposit intangible 259,102 279,033
Capitalized mortgage servicing rights 1,073,534 1,094,261
Real estate owned 697,688 564,947
Income taxes receivable - 25,468
Other assets 2,299,562 1,496,628
-------------- -------------
TOTAL ASSETS $ 253,260,368 $ 253,329,513
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 223,899,928 $ 225,734,508
Other borrowings 5,355,922 3,446,706
Advance payments by borrowers for taxes and insurance 528,761 328,444
Accrued interest payable 645,536 640,060
Deferred compensation plan 2,122,231 2,120,620
Income taxes payable 144,613 -
Other liabilities 946,993 376,191
-------------- -------------
Total liabilities 233,643,984 232,646,529
-------------- -------------
Commitments and Contingencies
Stockholders' equity
Preferred stock, $0.01 par value - authorized 10,000,000 shares;
none issued and outstanding - -
Common stock, $0.01 par value - authorized 20,000,000 shares; issued and
outstanding, 1,967,027 shares and 1,966,343 shares as of
March 31, 2005 and December 31, 2004, respectively 19,670 19,663
Additional paid-in capital 6,459,139 6,459,138
Retained earnings - substantially restricted 14,584,601 14,467,568
Accumulated other comprehensive loss (1,447,026) (263,385)
-------------- -------------
Total stockholders' equity 19,616,384 20,682,984
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 253,260,368 $ 253,329,513
============== =============
See accompanying notes to the condensed consolidated financial statements.
1
JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2005 2004
(Unaudited)
INTEREST INCOME:
Loans 2,049,957 2,127,600
Investment securities 759,141 857,176
Mortgage-backed securities 114,667 90,531
Other 16,546 6,982
-------------- -------------
Total interest income 2,940,311 3,082,289
-------------- -------------
INTEREST EXPENSE:
Deposits 1,078,246 1,144,037
Other borrowings 12,348 8,403
-------------- -------------
Total interest expense 1,090,594 1,152,440
-------------- -------------
NET INTEREST INCOME 1,849,717 1,929,849
PROVISION FOR LOAN LOSSES 105,000 150,000
-------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,744,717 1,779,849
-------------- -------------
OTHER INCOME:
Service charges on deposit accounts 183,852 171,992
Commission income 172,451 203,236
Loan servicing fees 92,786 99,457
Gains on sales of loans 2,490 6,968
Gains on sales of securities 15,451 23,699
Trust income 24,332 16,530
Other 23,003 1,514
-------------- -------------
Total other income 514,365 523,396
-------------- -------------
OTHER EXPENSES:
Salaries and employee benefits 1,162,437 1,189,866
Occupancy and equipment expense 330,216 330,924
Data processing expense 72,676 66,397
Stationary and supplies 34,990 29,869
Legal and accounting expense 52,543 46,326
Postage expense 42,356 39,634
Other 269,229 306,080
-------------- -------------
Total other expenses 1,964,447 2,009,096
-------------- -------------
INCOME BEFORE INCOME TAXES 294,635 294,149
INCOME TAXES 107,980 108,837
-------------- -------------
NET INCOME $ 186,655 $ 185,312
============== =============
NET INCOME PER COMMON SHARE - BASIC $ 0.09 $ 0.10
============== =============
NET INCOME PER COMMON SHARE - DILUTED $ 0.09 $ 0.09
============== =============
See accompanying notes to the condensed consolidated financial statements.
2
JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE
STOCK CAPITAL EARNINGS LOSS EQUITY LOSS
(Unaudited)
BALANCE, DECEMBER 31, 2004 $ 19,663 $ 6,459,138 $ 14,467,568 $ (263,385) $ 20,682,984
Net income - - 186,655 - 186,655 $ 186,655
Other comprehensive loss - change
in net unrealized gains and
losses on securities
available-for-sale, net of
income taxes of $(745,047) - - - (1,174,188) (1,174,188) (1,174,188)
Less: Reclassification adjustment
for gains included in net income,
net of tax of $5,998 - - - 9,453 9,453 9,453
------------
Comprehensive Loss - - - - - $ (996,986)
============
Exercise of stock options 17 16,961 - - 16,978
Purchase and retirement of treasury
stock (10) (16,960) - - (16,970)
Dividends ($.075 per share) - - (69,622) - (69,622)
--------- ----------- ------------ ----------- ------------
BALANCE, MARCH 31, 2005 $ 19,670 $ 6,459,139 $ 14,584,601 $(1,447,026) $ 19,616,384
========= =========== ============ =========== ============
See accompanying notes to the condensed consolidated financial statements.
3
JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2005 2004
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 186,655 $ 185,312
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion:
Premises and equipment 149,440 157,545
Accretion of loan fees and discounts, net (14,835) (14,835)
Amortization of investment premiums and discounts, net 61,693 138,742
Amortization of intangible assets 19,931 19,931
Provision for loan losses 105,000 150,000
Gains on sales of loans (2,490) (6,968)
Gains on sales of securities (15,451) (23,699)
Stock dividends on FHLB stock (20,100) (22,400)
Changes in income taxes receivable 170,081 108,838
Changes in other assets and liabilities 304,761 87,545
-------------- -------------
Net cash provided by operations before loan sales 944,685 780,011
Origination of loans for sale to Freddie Mac (4,348,261) (3,773,736)
Proceeds from sales of loans to Freddie Mac 3,947,684 3,259,521
-------------- -------------
Net cash provided by operating activities 544,108 265,796
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Changes in federal funds sold, net - 500,000
Purchases of investment and mortgage-backed securities available for sale (AFS) (5,673,591) (28,724,401)
Maturity or call of investment securities AFS 3,249,747 18,044,086
Proceeds from sale of investment and mortgage-backed securities AFS 4,727,812 8,728,674
Principal payments on mortgage-backed and investment securities AFS 761,958 461,883
Proceeds from sale of other real estate owned 75,078 63,040
(Increase) decrease in loans, net (8,064,097) (20,760)
Purchases of premises and equipment (67,977) (60,887)
-------------- -------------
Net cash used in investing activities (4,991,070) (1,008,365)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (1,834,580) 2,833,634
Net increase (decrease) in other borrowings 1,909,216 (957,398)
Increase in advance payments by borrowers for taxes and insurance 200,317 168,707
Exercise of stock options 16,978 139,905
Purchase and retirement of treasury stock (16,970) (81,885)
Dividends paid - common stock (69,622) (68,479)
-------------- -------------
Net cash provided by financing activities 205,339 2,034,484
-------------- -------------
(Continued)
4
JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2005 2004
(Unaudited)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (4,241,623) $ 1,291,915
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,792,905 9,575,977
-------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,551,282 $ 10,867,892
============== =============
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits $ 1,073,769 $ 1,195,220
Interest on other borrowings 11,349 8,503
Income taxes paid, net of refunds (62,100) -
NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans 326,000 222,295
Loans to facilitate sales of real estate owned 115,000 95,500
See accompanying notes to the condensed consolidated financial statements. (Concluded)
5
JACKSONVILLE BANCORP, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. FINANCIAL STATEMENTS
The accompanying interim condensed consolidated financial statements
include the accounts of Jacksonville Bancorp, Inc. and its wholly-owned
subsidiary, Jacksonville Savings Bank (the "Bank") and its wholly-owned
subsidiary, Financial Resources Group, Inc. collectively (the
"Company"). All significant intercompany accounts and transactions have
been eliminated.
In the opinion of management, the preceding unaudited consolidated
financial statements contain all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the financial
condition of the Company as of March 31, 2005 and December 31, 2004 and
the results of its operations for the three month periods ended March
31, 2005 and 2004. The results of operations for the three month period
ended March 31, 2005 are not necessarily indicative of the results which
may be expected for the entire year. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements of the Company for the year ended December 31, 2004 filed as
an exhibit to the Company's Form 10-K filed in March, 2005. The
accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America (GAAP) and
to prevailing practices within the industry.
Certain amounts included in the 2004 consolidated statements have been
reclassified to conform to the 2005 presentation.
2. EARNINGS PER SHARE
EARNINGS PER SHARE - Basic earnings per share is determined by dividing
net income for the period by the weighted average number of common
shares. Diluted earnings per share considers the potential effects of
the exercise of the outstanding stock options under the Company's Stock
Option Plans.
The following reflects earnings per share calculations for basic and
diluted methods:
MARCH 31,
---------
2005 2004
---- ----
Net income available to common stockholders $ 186,655 $ 185,312
Basic average shares outstanding 1,966,962 1,947,941
Dilutive potential common shares:
Stock option equivalents 22,323 46,568
---------- ----------
Diluted average shares outstanding 1,989,285 1,994,509
---------- ----------
Basic earnings per share $ 0.09 $ 0.10
========== ==========
Diluted earnings per share $ 0.09 $ 0.09
========== ==========
6
3. STOCK OPTION PLANS
The Company's 1996 Stock Option Plan was adopted on April 23, 1996 with
a total of 83,625 shares of common stock reserved and awarded. Awards
vested 20% per year and expire after ten years and are exercisable at a
price of $8.83 per share. The Company's 2001 Stock Option Plan was
adopted on April 30, 2001 with a total of 87,100 shares reserved and
awarded. Awards granted in 2001 vested immediately and expire after ten
years and are exercisable at a price of $10 per share.
As permitted under accounting principles generally accepted in the
United States of America, grants of options under the plans are
accounted for under the recognition and measurement principles of APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
Interpretations. Because options granted under the plans had an exercise
price equal to market value of the underlying common stock on the date
of grant, no stock-based employee compensation cost is included in
determining net income.
Options were granted during the second quarter of 2004 and all previous
grants were fully vested prior to 2004; consequently, there was no
pro-forma compensation expense for the three months ended March 31,
2004. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, on stock-based employee compensation for stock options
granted in 2004.
3 Months Ended
March 31, 2005
--------------
Net income, as reported $ 186,655
Less value of options vested, net of tax effects (866)
--------------
Pro-forma net income $ 185,789
Earnings per share:
Basic: As reported $ 0.09
Pro-forma $ 0.09
Diluted: As reported $ 0.09
Pro-forma $ 0.09
In December 2004, the Financial Accounting Standards Board ("FASB")
published FASB Statement No. 123 (revised 2004), Share-Based Payment
("FAS 123(R)" or the "Statement"). FAS 123(R) requires that the
compensation cost relating to share-based payment transactions,
including grants of employee stock options, be recognized in financial
statements. That cost will be measured based upon fair value of the
equity or liability instruments issued. FAS 123(R) permits entities to
use any option-pricing model that meets the fair value objective in the
Statement. (Modifications of share-based payments will be treated as
replacement awards with the cost of the incremental value recorded in
the financial statements.
The Statement is effective at the beginning of the first quarter of
2006. As of the effective date, the Company will apply the Statement
using a modified version of prospective application. Under that
transition method, compensation cost is recognized for (1) all awards
granted after the required effective date and to awards modified,
cancelled, or repurchased after that date and 2) the portion of
7
prior awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated for
pro-forma disclosures under SFAS 123.
The impact of this Statement on the Company in 2005 and beyond will
depend upon various factors, including compensation strategies. The
pro-forma compensation costs presented and in prior filings for the
Company have been calculated using a Black-Scholes option pricing model
and may not indicative of amounts which should be expected in future
periods.
4. LOAN PORTFOLIO COMPOSITION
At March 31, 2005 and December 31, 2004, the composition of the
Company's loan portfolio was as follows:
March 31, 2005 December 31, 2004
-------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
One-to-four family residential $ 42,069 31.5% $ 41,616 33.1%
Commercial and agricultural 25,788 19.3% 24,588 19.5%
Multi-family residential 3,550 2.7% 2,207 1.8%
---------- ------ ---------- ------
Total real estate loans 71,407 53.5% 68,411 54.4%
Commercial agricultural business loans 29,578 22.1% 26,227 20.8%
---------- ------ ---------- ------
Consumer loans:
Home equity/home improvement 25,872 19.4% 24,322 19.3%
Automobile 4,557 3.4% 4,515 3.6%
Other 4,184 3.1% 4,380 3.5%
---------- ------ ---------- ------
Total consumer loans 34,613 25.9% 33,217 26.4%
---------- ------ ---------- ------
Total loans receivable 135,598 101.5% 127,855 101.6%
Less:
Unearned discount and deferred loan fees, net 197 0.1% 174 0.1%
Allowance for loan losses 1,845 1.4% 1,888 1.5%
---------- ------ ---------- ------
Total loans receivable, net $ 133,556 100.0% $ 125,793 100.0%
========== ====== ========== ======
8
5. INVESTMENT LOSSES
Declines in the fair value of available-for-sale securities below their
cost that are deemed to be other than temporary are reflected in
earnings as realized losses. In estimating other-than-temporary
impairment losses, management considers (1) the length of time and the
extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the
intent and ability of the Company to retain its investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in
fair value. The following table shows the gross unrealized losses over
and under twelve months at March 31, 2005.
Less Than Twelve Months Over Twelve Months Total
---------------------------- ---------------------------- ----------------------------
Gross Gross Gross
Unrealized Fair Unrealized Fair Unrealized Fair
Losses Value Losses Value Losses Value
---------------------------- ---------------------------- ----------------------------
State and political
organizations $ 15,557 $ 719,312 $ - $ - $ 15,557 $ 719,312
U.S. government
and agencies 1,967,696 77,874,842 142,987 3,360,049 2,110,683 81,234,891
---------------------------- ---------------------------- ----------------------------
SUBTOTAL 1,983,253 78,594,154 142,987 3,360,049 2,126,240 81,954,203
Mortgage-backed
securities 237,394 9,925,193 - - 237,394 9,925,193
---------------------------- ---------------------------- ----------------------------
TOTAL $2,220,647 $ 88,519,347 $ 142,987 $ 3,360,049 $ 2,363,634 $ 91,879,396
---------------------------- ---------------------------- ----------------------------
6. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in legal actions arising from normal business
activities. Management, after consultation with legal counsel, believes
that the resolution of these actions will not have any material adverse
effect on the Company's consolidated financial statements.
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers in the way of commitments to extend credit. Commitments to
extend credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and
may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates
each customer's creditworthiness on a case-by-case basis. Substantially
all of the Company's loans are to borrowers located in Cass, Morgan,
Macoupin, Montgomery, and surrounding counties in Illinois.
9
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of the Company. The information contained in this section should be read
in conjunction with the unaudited consolidated financial statements and
accompanying notes thereto.
FORWARD LOOKING STATEMENTS
This Form 10-Q contains certain "forward-looking statements" which may be
identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated," and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors that could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage and other loans,
real estate values, and competition; changes in accounting principles, policies,
or guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing of products and services.
FINANCIAL CONDITION
MARCH 31, 2005 COMPARED TO DECEMBER 31, 2004
Total assets remained stable at $253.3 million at March 31, 2005 and December
31, 2004. Net loans grew $7.8 million to $133.6 million during this same time
frame. The loan growth was funded by a $4.2 million decrease in cash and cash
equivalents and a $5.0 million decrease in the investment and mortgage-backed
securities portfolios. Total deposits decreased $1.8 million during the first
quarter of 2005 to $223.9 million, which was offset by an increase of $1.9
million in other borrowings. The increase in other borrowings is the result of
$3.5 million in FHLB advances partially offset by a decrease of $1.6 million in
overnight repurchase agreements.
Stockholders' equity decreased $1.1 million to $19.6 million at March 31, 2005.
The decrease resulted from net income of $187,000, offset by the payment of
$70,000 in dividends and a $1.2 million increase in unrealized losses, net of
tax, on available-for-sale securities. The change in unrealized gains (losses)
on securities is driven by market conditions and, therefore, can fluctuate
daily.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND
2004
GENERAL: Net income for the three months ended March 31, 2005 was $187,000, or
$0.09 per common share, basic and diluted. Net income totalled $185,000, or
$0.10 per common share, basic, and $0.09 per common share, diluted, for the
three months ended March 31, 2004. The increase of $2,000 in net income is
primarily due to decreases in the provision for loan losses of $45,000, other
expenses of $45,000, and income taxes of $1,000, partially offset by decreases
in net interest income of $80,000 and other income of $9,000. The decrease in
earnings per share reflects option exercises.
10
INTEREST INCOME: Total interest income for the three months ended March 31, 2005
decreased $142,000 from the same period of 2004. The decrease in interest income
is the net result of decreases in interest income on loans of $78,000 and
investment securities of $98,000, partially offset by increases of $24,000 in
mortgage-backed securities and $10,000 in other investments. The decrease in
interest income on loans is primarily due to a decrease in the average yield of
the loan portfolio to 6.26% at March 31, 2005 from 6.62% at March 31, 2004. The
decrease in the average yield was partially offset by an increase in the average
balance of $2.4 million during the first quarter of 2005 compared to the same
period of 2004.
Interest income on investment securities decreased $98,000 for the three months
ended March 31, 2005 compared to the three months ended March 31, 2004. The
decrease in interest income on investment securities reflects the decreased
average balance of the investment portfolio to $86.0 million during the first
quarter of 2005 compared to the average of $101.3 million during the first
quarter of 2004. The decrease in the average balance is due to funds received
from investment calls being reinvested into the loan portfolio. The weighted
average yield increased during this same time frame to 3.53% from 3.38% for the
three months ended March 31, 2005 and 2004, respectively.
Interest income on mortgage-backed securities increased $24,000 during the first
quarter of 2005 compared to the same quarter in 2004. The increase reflects a
growth in the average balance of mortgage-backed securities to $12.2 million
from $9.6 million for the first three months of 2005 and 2004, respectively,
partially offset by a slight decrease in the weighted average yield to 3.75% at
March 31, 2005 from 3.77% at March 31, 2004.
Interest income on other investments, which include federal funds sold and
interest earning deposit accounts, increased $10,000 during the three months
ended March 31, 2005 as compared to the same period in 2004. The average balance
of these investments equalled $2.6 million and $3.4 million for the three months
ended March 31, 2005 and 2004, respectively. The increase in interest income on
other investments is primarily due to an increase in the weighted average yield
on these investments to 2.53% for the first quarter of 2005 from 0.81% for the
first quarter of 2004, reflecting the rising interest rate environment of 2004
and 2005.
INTEREST EXPENSE: Total interest expense for the three months ended March 31,
2005 decreased $62,000 compared to the three months ended March 31, 2004. The
lower interest expense was due to a decrease of $66,000 in the cost of deposits,
offset by a $4,000 increase in interest expense on borrowed funds. The average
balance of deposits decreased to $210.9 million for the first quarter of 2005
from $224.0 million during the first quarter of 2004. The decrease of $13.1
million in the average balance of deposits reflects deposits withdrawn as
management has undertaken efforts to control interest costs. The weighted
average cost of deposits increased slightly to 2.05% from 2.04% during the first
three months of 2005 and 2004, respectively.
Interest paid on borrowed funds increased $4,000 primarily due to an increase in
the average cost to 2.42% from 1.09% during the first three months of 2005
compared to the same period in 2004. The average balance of borrowed funds
decreased $1.0 million during the comparative periods.
PROVISION FOR LOAN LOSSES: The provision for loan losses is determined by
management as the amount needed to replenish the allowance for loan losses,
after net charge-offs have been deducted, to a level considered adequate to
absorb inherent losses in the loan portfolio, in accordance with accounting
principles generally accepted in the United States of America. The following
table shows the activity in the allowance for loan losses for the three months
ended March 31, 2005 and 2004.
11
March 31, 2005 March 31, 2004
-------------- --------------
(In thousands)
Balance at beginning of period $ 1,888 $ 2,186
Charge-offs:
One-to-four family residential 77 46
Commercial and agricultural real estate - 116
Commercial and agricultural business 3 -
Home equity/home improvement 48 72
Automobile 21 49
Other Consumer 19 5
-------------- --------------
Total 168 288
Recoveries:
One-to-four family residential - 1
Commercial and agricultural real estate - 118
Commercial and agricultural business - 12
Home equity/home improvement 1 1
Automobile 9 10
Other Consumer 10 6
-------------- --------------
Total 20 148
-------------- --------------
Net loans charged off 148 140
Additions charged to operations 105 150
-------------- --------------
Balance at end of period $ 1,845 $ 2,196
============== ==============
The allowance for loan losses decreased to $1,845,000 at March 31, 2005 from
$1,888,000 at December 31, 2004. The decrease is the result of net charge-offs
exceeding the provision for loan losses. Net charge-offs increased to $148,000
during the first quarter of 2005 compared to net charge-offs of $140,000 during
the first quarter of 2004. The provision for loan losses decreased to $105,000
for the first quarter of 2005 compared to $150,000 for the first quarter of
2004. Provisions for loan losses have been made to bring the allowance for loan
losses to a level deemed adequate following management's evaluation of the
repayment capacity and collateral protection afforded by each problem credit
identified by management. The decrease in the provision during 2005 reflects the
decrease in nonperforming loans and watch list credits. This review also
considered the local economy and the level of bankruptcies and foreclosures in
the Company's market area. Refer to the following table regarding nonperforming
assets.
12
March 31, 2005 December 31, 2004
-------------- -----------------
(In thousands)
Non-accruing loans:
One-to-four family residential $ 555 $ 711
Commerical and agricultural real estate 186 181
Commercial and agricultural business 98 57
Home equity/Home improvement 505 652
Automobile 44 68
Other consumer - 20
-------------- -----------------
Total $ 1,388 $ 1,689
============== =================
Accruing loans delinquent more than 90 days:
One-to-four family residential $ - $ 270
Commercial and agricultural business - 23
Automobile - 4
Other consumer 1 1
-------------- -----------------
Total $ 1 $ 298
============== =================
Foreclosed assets:
One-to-four family residential $ 559 $ 426
Commercial and agricultural real estate 139 139
Automobile 18 19
-------------- -----------------
Total $ 716 $ 584
============== =================
Total nonperforming assets $ 2,105 $ 2,571
============== =================
Total as a percentage of total assets 0.83% 1.01%
============== =================
The following table shows the aggregate principal amount of potential problem
credits on the Company's watch list at March 31, 2005 and December 31, 2004. All
nonaccrual loans are automatically placed on the watch list.
March 31, 2005 December 31, 2004
-------------- -----------------
(In thousands)
Special Mention credits $ 3,668 $ 5,308
Substandard credits 2,678 3,484
-------------- -----------------
Total watch list credits $ 6,346 $ 8,792
============== =================
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 refine lending policies and underwriting and collection
procedures.
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of operations and financial condition
in preparing its financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results
13
could differ significantly from those estimates under different assumptions and
conditions. The Company believes that critical accounting policies, which
include the allowance for loan losses, are those most important to the portrayal
of the Company's financial condition and results and requires management's most
difficult, subjective and complex judgements, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
The allowance for loan losses is a material estimate that is particularly
susceptible to significant changes in the near term and is established through a
provision for loan losses. The allowance is based upon past loan experience and
other factors which, in management's judgement, deserve current recognition in
estimating loan losses. The balance of the allowance is based on ongoing,
quarterly assessments of the probable estimated losses in the loan portfolio.
The evaluation includes a review of all loans on which full collectibility may
not be reasonable assured. The Company's methodology for assessing the
appropriateness of the allowance consists of applying several formula methods to
identified problem loan and portfolio segments. The allowance is calculated by
estimating the exposure on identified problem loan and portfolio segments and
applying loss factors to the remainder of the portfolio based upon an internal
risk grade of such loans or pools of loans. Changes in risk grades of both
performing and nonperforming loans affect the amount of the allowance. Loss
factors are based primarily on historical loss experience over the past five
years, and may be adjusted for other significant conditions that, in
management's judgement, affect the collectibility of the loan portfolio.
Since the allowance for loan losses is based upon estimates of probable losses,
the amount actually observed can vary significantly from the estimated amounts.
The historical loss factors attempt to reduce this variance by taking into
account recent loss experience. Management evaluates several other conditions in
connection with the allowance, including general economic and business
conditions, credit quality trends, collateral values, loan volumes and
concentrations, seasoning of the portfolio, and regulatory examination results.
Management believes it uses the best information available to make such
determinations. If circumstances differ substantially from the assumptions used
in making determinations, future adjustments to the allowance for loan losses
may be necessary and results of operations could be affected. While the Company
believes it has established its existing allowance for loan losses in conformity
with accounting principles generally accepted in the United States, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio, will not
request an increase in the allowance for loan losses. Because future events
affecting borrowers and collateral cannot be predicted with certainty, there can
be no assurance that increases to the allowance will not be necessary if loan
quality deteriorates. Management will continue to monitor the loan portfolio and
assess the adequacy of the allowance at least quarterly.
OTHER INCOME: Total other income for the three months ended March 31, 2005
decreased $9,000 from the comparable period in 2004. The decrease in other
income is attributable to a decrease of $31,000 in brokerage commissions,
partially offset by increases of $12,000 in service charges on deposits and
$8,000 in trust fees. Brokerage commissions are largely dependent upon pension
account rollovers and the volume of new funds invested which can fluctuate based
upon market conditions and customer preferences. The increase in service charges
on deposits relates to the implementation of a new fee schedule during the
second quarter of 2004.
OTHER EXPENSE: Total other expense for the three months ended March 31, 2005
decreased $45,000 from the same period of 2004. The decrease in other expense is
mainly comprised of decreases of $27,000 in salaries and benefits and $10,000 in
real estate owned expense. The decrease in salaries and benefits is primarily
due to reduced vacation accruals during 2005.
INCOME TAXES: The provision for income taxes decreased $1,000 to $108,000 for
the three months ended March 31, 2005 and 2004. The marginal tax rate was 37%
for both periods.
14
LIQUIDITY AND CAPITAL RESOURCES
The Company's most liquid assets are cash and cash equivalents. The levels of
these assets are dependent on the Company's operating, financing, and investing
activities. At March 31, 2005 and December 31, 2004, cash and cash equivalents
totaled $6.6 million and $10.8 million, respectively. The Company's primary
sources of funds include principal and interest repayments on loans (both
scheduled and prepayments), maturities of investment securities and principal
repayments from mortgage-backed securities (both scheduled and prepayments).
During the past three months, the most significant sources of funds have been
loan sales to the secondary market and the call of investment securities. These
funds have been used primarily for new loan originations.
While scheduled loan repayments and proceeds from maturing investment securities
and principal repayments on mortgage-backed securities are relatively
predictable, deposit flows and early prepayments are more influenced by interest
rates, general economic conditions, and competition. The Company attempts to
price its deposits to meet asset-liability objectives and stay competitive with
local market conditions.
Liquidity management is both a short- and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected purchases of
investment and mortgage-backed securities, (iii) expected deposit flows, (iv)
yields available on interest-bearing deposits, and (v) liquidity of its
asset/liability management program. Excess liquidity is generally invested in
interest-earning overnight deposits and other short-term U.S. agency
obligations. If the Company requires funds beyond its ability to generate them
internally, it has the ability to borrow funds from the FHLB. The Company may
borrow from the FHLB under a blanket agreement which assigns all investments in
FHLB stock as well as qualifying first mortgage loans equal to 150% of the
outstanding balance as collateral to secure the amounts borrowed. This borrowing
arrangement is limited to a maximum of 30% of the Company's total assets or
twenty times the balance of FHLB stock held by the Company. At March 31, 2005,
the Company had $3.5 million in outstanding advances and approximately $21.2
million remaining available to it under the above-mentioned borrowing
arrangement.
The Company maintains minimum levels of liquid assets as established by the
Board of Directors. The Company's liquidity ratios at March 31, 2005 and
December 31, 2004 were 38.2% and 42.4%, respectively. This ratio represents the
volume of short-term liquid assets as a percentage of net deposits and
borrowings due within one year.
The Company must also maintain adequate levels of liquidity to ensure the
availability of funds to satisfy loan commitments. The Company anticipates that
it will have sufficient funds available to meet its current commitments
principally through the use of current liquid assets and through its borrowing
capacity discussed above. The following table summarizes these commitments at
March 31, 2005 and December 31, 2004.
March 31, 2005 December 31, 2004
-------------- -----------------
(In thousands)
Commitments to fund loans - own portfolio $ 22,284 $ 22,742
Commitments for loan sales -secondary market 1,132 576
Standby letters of credit 473 473
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and Tier 1 capital (as defined) to average
assets (as
15
defined). Management believes, at March 31, 2005, that the Company meets all its
capital adequacy requirements.
Under Illinois law, Illinois-chartered savings banks are required to maintain a
minimum core capital to total assets ratio of 3%. The Illinois Commissioner of
Savings and Residential Finance (the "Commissioner") is authorized to require a
savings bank to maintain a higher minimum capital level if the Commissioner
determines that the savings bank's financial condition or history, management or
earnings prospects are not adequate. If a savings bank's core capital ratio
falls below the required level, the Commissioner may direct the savings bank to
adhere to a specific written plan established by the Commissioner to correct the
savings bank's capital deficiency, as well as a number of other restrictions on
the savings bank's operations, including a prohibition on the declaration of
dividends by the savings bank's board of directors. At March 31, 2005, the
Bank's core capital ratio was 7.27% of total average assets, which substantially
exceeded the required amount.
The Bank is also required to maintain regulatory capital requirements imposed by
the Federal Deposit Insurance Corporation. The Bank must have: (i) Tier 1
Capital to Average Assets of 4.0%, (ii) Tier 1 Capital to Risk-Weighted Assets
of 4.0%, and (iii) Total Capital to Risk-Weighted Assets of 8.0%. At March 31,
2005, minimum requirements and the Bank's actual ratios are as follows:
MARCH 31, 2005 DECEMBER 31, 2004 MINIMUM
ACTUAL ACTUAL REQUIRED
Tier 1 Capital to Average Assets 7.27 % 7.06 % 4.00 %
Tier 1 Capital to Risk-Weighted Assets 12.06 % 12.77 % 4.00 %
Total Capital to Risk-Weighted Assets 13.30 % 14.02 % 8.00 %
Future capital levels should benefit from the decision of the Company's parent
company, Jacksonville Bancorp, MHC, to waive its right to receive dividends. The
mutual holding company has received approval from its primary regulator, the
Office of Thrift Supervision, for such waivers through the quarter ended
September 30, 2005.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with GAAP which require the measurement
of financial position and operating results in terms of historical dollars,
without considering the change in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike most industrial companies, virtually
all the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant impact on
a financial institution's performance than do general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
16
CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31
---------------------------------------------------------------------------
2005 2004
----------------------------------- -----------------------------------
AVERAGE AVERAGE
BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST
----------------------------------- -----------------------------------
Interest-earnings assets:
Loans $ 130,998 $ 2,050 6.26% $ 128,570 $ 2,128 6.62%
Investment securities 86,001 759 3.53% 101,330 857 3.38%
Mortgage-backed securities 12,236 115 3.75% 9,597 91 3.77%
Other 2,611 16 2.53% 3,434 7 0.81%
--------- -------- --------- --------
Total interest-earning assets 231,846 2,940 5.07% 242,931 3,083 5.08%
Non-interest earnings assets 17,816 19,726
--------- ---------
Total assets $ 249,662 $ 262,657
========= =========
Interest-bearing liabilities:
Deposits $ 210,890 $ 1,078 2.05% $ 223,993 $ 1,144 2.04%
Short-term borrowings 2,045 12 2.42% 3,086 8 1.09%
--------- -------- --------- --------
Total interest-bearing liabilities 212,935 1,090 2.05% 227,079 1,152 2.03%
Non-interest bearing liabilities 16,329 15,440
Stockholders' equity 20,398 20,138
--------- ---------
Total liabilities/stockholders' equity $ 249,662 $ 262,657
========= =========
Net interest income $ 1,850 $ 1,930
======== ========
Interest rate spread (average yield earned
minus average rate paid) 3.02% 3.05%
===== =====
Net interest margin (net interest income
divided by average interest-earning assets) 3.19% 3.18%
===== =====
ANALYSIS OF VOLUME AND RATE CHANGES
(In thousands)
---------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31
---------------------------------------------------------------------------------
2005 Compared to 2004
Increase(Decrease) Due to
----------------------------------
Rate Volume Net
----------------------------------
Interest-earnings assets:
Loans $ (117) $ 39 $ (78)
Investment securities 36 (134) $ (98)
Mortgage-backed securities (1) 25 $ 24
Other 12 (2) $ 10
---------- ---------- ----------
Total net change in income on
interest-earning assets (70) (72) (142)
---------- ---------- ----------
Interest-bearing liabilities:
Deposits 1 (67) $ (66)
Other borrowings 8 (4) $ 4
---------- ---------- ----------
Total net change in expense on
interest-bearing liabilities 9 (71) (62)
---------- ---------- ----------
Net change in net interest income $ (79) $ (1) $ (80)
========== ========== ==========
17
JACKSONVILLE BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Company's policy in recent years has been to reduce its interest rate risk
by better matching the maturities of its interest rate sensitive assets and
liabilities, selling its long-term fixed-rate residential mortgage loans with
terms of 15 years or more to Freddie Mac, originating adjustable rate loans,
balloon loans with terms ranging from three to five years and originating
consumer and commercial business loans, which typically are for a shorter
duration and at higher rates of interest than one-to-four family loans. The
investment portfolio has been laddered to better match the interest-bearing
liabilities. With respect to liabilities, the Company has attempted to increase
its savings and transaction deposit accounts, which management believes are more
resistant to changes in interest rates than certificate accounts. The Board of
Directors appoints the Asset-Liability Management Committee (ALCO), which is
responsible for reviewing the Company's asset and liability policies. The ALCO
meets quarterly to review interest rate risk and trends, as well as liquidity
and capital ratio requirements.
The Company uses a comprehensive asset/liability software package provided by a
third-party vendor to perform interest rate sensitivity analysis for all product
categories. The primary focus of the Company's analysis is on the effect of
interest rate increases and decreases on net interest income. Management
believes that this analysis reflects the potential effects on current earnings
of interest rate changes. Call criteria and prepayment assumptions are taken
into consideration for investment securities and loans. All of the Company's
interest sensitive assets and liabilities are analyzed by product type and
repriced based upon current offering rates. The software performs interest rate
sensitivity analysis by performing rate shocks of plus or minus 300 basis points
in 100 basis point increments.
The following table shows projected results at March 31, 2005 and December 31,
2004 of the impact on net interest income from an immediate change in interest
rates, as well as the benchmarks established by the ALCO. The results are shown
as a dollar and percentage change in net interest income over the next twelve
months.
CHANGE IN NET INTEREST INCOME
(Dollars in thousands)
------------------------------------------------------------------
MARCH 31, 2005 DECEMBER 31, 2004
--------------------------------------------------- ALCO
Rate Shock: $ Change % Change $ Change % Change Benchmark
------------------------------------------------------------------
+ 200 basis points (152) -2.09% (20) -0.27% > (20.00)%
+ 100 basis points 13 0.18% 110 1.46% > (12.50)%
- 100 basis points 289 3.97% 304 4.02% > (12.50)%
- 200 basis points 350 4.81% 317 0.00% > (20.00)%
The foregoing computations are based upon numerous assumptions, including
relative levels of market interest rates, prepayments, and deposit mix. The
computed estimates should not be relied upon as a projection of actual results.
Despite the limitations on precision inherent in these computations, management
believes that the information provided is reasonably indicative of the effect of
changes in interest rate levels on the net earning capacity of the Company's
current mix of interest earning assets and interest bearing liabilities.
Management continues to use the results of these computations, along with the
results of its computer model projections, in order to maximize current earnings
while positioning the Company to minimize the effect of a prolonged shift in
interest rates that would adversely affect future results of operations.
At the present time, the most significant market risk affecting the Company is
interest rate risk. Other market risks such as foreign currency exchange risk
and commodity price risk do not occur in the normal business of the Company. The
Company also is not currently using trading activities or derivative instruments
to control interest rate risk.
18
JACKSONVILLE BANCORP, INC.
CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days prior to filing date of this
report, that the Company's disclosure controls and procedures (as defined by the
Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commissions' rules and forms.
CHANGES IN INTERNAL CONTROLS
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of the foregoing
evaluation.
19
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS
31.1 - Certification of the Chief Executive Officer Pursuant
to Rule 13a-14(a)/15d-14(a)
31.2 - Certification of the Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a)
32.1 - Certification of the Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JACKSONVILLE BANCORP, INC.
Registrant
Date: May 10, 2005 /s/ Richard A. Foss
---------------- ----------------------------------------
Richard A. Foss
President and Chief Executive Officer
/s/ Diana S. Tone
----------------------------------------
Diana S. Tone
Chief Financial Officer
21
EXHIBITS