UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006
-------------
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.
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(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
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (217) 245-4111
Indicate by check whether issuer (1) has filed all reports required to be filed
by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
[ ] Large Accelerated Filer [ ] Accelerated Filer [X] Non-Accelerated Filer
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
As of July 31, 2006, there were 1,985,317 shares (*) of the Registrant's common
stock issued and outstanding.
(*) As of July 31, 2006, 1,038,738 shares were owned by Jacksonville Bancorp,
M.H.C., the Company's mutual holding company parent.
JACKSONVILLE BANCORP, INC.
FORM 10-Q
JUNE 30, 2006
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 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24-25
Item 4. Controls and Procedures 26
PART II OTHER INFORMATION 27
Item 1. Legal Proceedings
Item 2. Changes in Securities and Stock Purchases
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
Signatures 28
EXHIBITS
Section 302 Certifications
Section 906 Certification
PART I - FINANCIAL INFORMATION
JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------------------------------------------------
June 30, December 31,
ASSETS 2006 2005
------------ ------------
(Unaudited)
Cash and cash equivalents $ 8,001,458 $ 6,681,207
Investment securities - available-for-sale 79,012,229 78,888,107
Mortgage-backed securities - available-for-sale 7,717,349 8,646,407
Federal Home Loan Bank stock 1,244,170 1,539,328
Other investments 369,804 393,654
Loans receivable - net of allowance for loan losses of $1,909,604 and $1,846,150 as of
June 30, 2006 and December 31, 2005 145,693,599 142,272,144
Loans held for sale 403,833 499,445
Premises and equipment - net 6,755,118 6,846,122
Accrued interest receivable 1,725,835 1,489,749
Goodwill 2,726,567 2,726,567
Core deposit intangible 159,447 199,309
Capitalized mortgage servicing rights 1,060,622 1,059,610
Real estate owned 313,658 456,017
Other assets 2,842,714 2,248,125
------------ ------------
Total Assets $ 258,026,403 $ 253,945,791
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 223,400,147 $ 218,369,774
Other borrowings 10,000,328 11,350,068
Advance payments by borrowers for taxes and insurance 763,072 374,676
Accrued interest payable 863,399 800,446
Deferred compensation plan 2,230,025 2,204,095
Income taxes payable 44,620 107,782
Other liabilities 865,933 636,346
------------ ------------
Total liabilities 238,167,524 233,843,187
------------ ------------
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, 1,985,317 shares and 1,970,216 shares as of
June 30, 2006 and December 31, 2005, respectively 19,853 19,702
Additional paid-in capital 6,606,210 6,474,513
Retained earnings - substantially restricted 15,562,030 15,088,742
Accumulated other comprehensive loss (2,329,214) (1,480,353)
------------ ------------
Total stockholders' equity 19,858,879 20,102,604
------------ ------------
Total Liabilities and Stockholders' Equity $ 258,026,403 $ 253,945,791
============ ============
See accompanying notes to the condensed consolidated financial statements.
1
JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2006 2005 2006 2005
(Unaudited) (Unaudited)
INTEREST INCOME:
Loans $2,556,530 $2,212,607 $5,026,626 $4,262,563
Investment securities 774,100 760,874 1,526,182 1,520,015
Mortgage-backed securities 94,544 110,203 184,177 224,870
Other 15,720 9,671 32,633 26,217
---------- ---------- ---------- ----------
Total interest income 3,440,894 3,093,355 6,769,618 6,033,665
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 1,532,375 1,112,603 2,892,996 2,190,849
Other borrowings 120,625 79,344 232,283 91,692
---------- ---------- ---------- ----------
Total interest expense 1,653,000 1,191,947 3,125,279 2,282,541
---------- ---------- ---------- ----------
NET INTEREST INCOME 1,787,894 1,901,408 3,644,339 3,751,124
PROVISION FOR LOAN LOSSES - 105,000 60,000 210,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,787,894 1,796,408 3,584,339 3,541,124
---------- ---------- ---------- ----------
OTHER INCOME:
Service charges on deposit accounts 217,924 211,350 430,640 395,202
Commission income 219,956 191,207 419,970 363,658
Loan servicing fees 89,209 90,998 179,483 183,784
Gains on sales of loans 28,893 27,650 46,827 30,140
Gains on sales of securities - 309 - 15,760
Other 30,241 23,228 66,667 70,564
---------- ---------- ---------- ----------
Total other income 586,223 544,742 1,143,587 1,059,108
---------- ---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits 1,200,669 1,138,282 2,397,883 2,300,719
Occupancy and equipment expense 287,366 319,575 560,874 649,791
Data processing expense 94,820 85,394 180,018 158,070
Legal and accounting expense 47,515 56,937 78,722 109,480
Postage expense 36,927 35,259 75,143 77,615
Real estate owned expense 31,675 74,764 37,425 93,009
Advertising expense 28,892 20,339 58,079 50,556
Other 234,333 242,306 474,109 498,063
---------- ---------- ---------- ----------
Total other expenses 1,962,197 1,972,856 3,862,253 3,937,303
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 411,920 368,294 865,673 662,929
INCOME TAXES 113,131 147,273 250,675 255,253
---------- ---------- ---------- ----------
NET INCOME $ 298,789 $ 221,021 $ 614,998 $ 407,676
========== ========== ========== ==========
NET INCOME PER COMMON SHARE, BASIC $ 0.15 $ 0.11 $ 0.31 $ 0.21
========== ========== ========== ==========
NET INCOME PER COMMON SHARE, DILUTED $ 0.15 $ 0.11 $ 0.31 $ 0.21
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements
2
JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Loss
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2005 $ 19,702 $ 6,474,513 $ 15,088,742 $ (1,480,353
Net Income - - 614,998 -
Other comprehensive loss - change in
net unrealized losses on securities available
for sale, net of tax benefit of $536,808 - - - (848,861
Comprehensive Loss
Exercise of stock options 164 129,429 - -
Tax benefit related to stock options exercised 18,433
Purchase and retirement of common stock (13) (17,907) - -
Compensation expense for stock options 1,742 1,742
Dividends on common stock ($0.15 per share) - - (141,710) -
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2006 $ 19,853 $ 6,606,210 $ 15,562,030 $ (2,329,214
============ ============ ============ ============
TABLE CONTINUED
JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------
Total
Stockholders' Comprehensive
Equity Loss
------------ ---------------
BALANCE, DECEMBER 31, 2005 $ 20,102,604
Net Income 614,998 $ 614,998
Other comprehensive loss - change in
net unrealized losses on securities available
for sale, net of tax benefit of $536,808 (848,861) (848,861)
------------
Comprehensive Loss $ (233,863)
============
Exercise of stock options 129,593
Tax benefit related to stock options exercised 18,433
Purchase and retirement of common stock (17,920)
Compensation expense for stock options
Dividends on common stock ($0.15 per share) (141,710)
------------
BALANCE, JUNE 30, 2006 $ 19,858,879
============
See accompanying notes to condensed consolidated financial statements.
3
JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
------------------------------
2006 2005
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 614,998 $ 407,676
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation, amortization and accretion:
Premises and equipment 233,707 298,036
Accretion of loan fees and discounts, net (29,670) (29,670)
Amortization of investment premiums and discounts, net 6,717 104,010
Amortization of intangible assets 39,862 39,862
Compensation expense related to stock options 1,742 -
Provision for loan losses 60,000 210,000
Gains on sales of loans (46,827) (30,140)
Losses on sale of real estate owned 13,536 46,250
Gains on sales of securities - (15,760)
Stock dividends on FHLB stock - (40,100)
Changes in income taxes payable (63,162) 297,353
Changes in other assets and liabilities 24,511 525,299
------------ ------------
Net cash provided by operations before loan sales 855,414 1,812,816
Origination of loans for sale to secondary market (8,191,764) (9,860,106)
Proceeds from sales of loans to secondary market 8,333,190 9,266,863
------------ ------------
Net cash provided by operating activities 996,840 1,219,573
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment and mortgage-backed securities (2,776,353) (5,843,591)
Maturity or call of investment securities available-for-sale 1,500,000 5,799,747
Proceeds from sale of investment and mortgage-backed securities 295,159 5,610,675
Principal payments on mortgage-backed and investment securities 712,845 1,367,054
Proceeds from sale of other real estate owned 135,110 286,898
Increase in loans, net (3,458,072) (11,428,609)
Additions to premises and equipment (142,703) (140,240)
------------ ------------
Net cash used in investing activities (3,734,014) (4,348,066)
------------ ------------
(Continued)
4
JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
------------------------------
2006 2005
(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 5,030,373 $(10,309,266)
Net increase (decrease) in other borrowings (1,349,740) 8,538,223
Increase in advance payments by borrowers for taxes and insurance 388,396 372,815
Exercise of stock options, including tax benefit 148,026 16,978
Purchase and retirement of common stock (17,920) (16,970)
Dividends paid - common stock (141,710) (139,244)
------------ ------------
Net cash provided by (used in) financing activities 4,057,425 (1,537,464)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,320,251 (4,665,957)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,681,207 10,792,905
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,001,458 $ 6,126,948
============ ============
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits $ 2,821,201 $ 2,227,877
Interest on other borrowings 241,125 63,692
Income taxes paid (received) 390,000 (42,100)
NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans $ 185,287 $ 686,693
Loans to facilitate sales of real estate owned 179,000 242,800
See accompanying notes to condensed consolidated financial statements
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. (the "Company") and
its wholly-owned subsidiary, Jacksonville Savings Bank (the "Bank") and
its wholly-owned subsidiary, Financial Resources Group (the
"Subsidiary"). All significant intercompany accounts and transactions
have been eliminated.
In the opinion of management, the preceding unaudited financial
statements contain all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial condition
of the Company as of June 30, 2006 and December 31, 2005 and the
results of operations for the three and six month periods ended June
30, 2006 and 2005. The results of operations for the three and six
month periods ended June 30, 2006 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, 2005 filed as an exhibit to the Company's 10-K filed in
March 2006. The accounting and reporting policies of the Company and
its subsidiary conform to accounting principles generally accepted in
the United States of America and to the prevailing practices within the
banking industry.
Certain amounts included in the 2005 consolidated statements have been
reclassified to conform to the 2006 presentation, with no effect on net
income or stockholders' equity.
2. NEWLY ADOPTED AND NEW ACCOUNTING PRONOUNCEMENT
Newly Adopted Accounting Pronouncement - 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 expired after ten years on April 23, 2006, and
were 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. On June 15, 2004, the Company granted 5,600 options under its
1996 Stock Option Plan, for which all other options have expired. The
awards vest over five years with credit given for prior service, expire
after ten years, and are exercisable at a price of $14.00 per share.
Prior to January 1, 2006, the Company accounted for the Plans under the
recognition and measurement provisions of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations,
as permitted by FASB Statement No. 123, Accounting for Stock-Based
Compensation. No stock option compensation cost was recognized in the
Statement of Income as all options granted had an exercise price equal
to market value of the underlying common stock on the grant date.
In December 2004, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123 (revised 2004), "Share-Based Payment" ("SFAS
No. 123R"), which requires the cost resulting from stock options be
measured at fair value and recognized in earnings. This Statement
replaces Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123") and supersedes Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," ("APB No. 25") which
permitted the recognition of compensation expense using the intrinsic
value method.
6
Effective January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS No. 123(R), using the modified
prospective application method. Under this method, the Statement
applies to new awards and to awards modified, repurchased, or cancelled
after the effective date. Additionally, compensation cost for a portion
of awards for which requisite services has not been rendered that are
outstanding as of the effective date shall be recognized as the
requisite service is rendered or after the effective date. As a result
of this adoption, the Company's income before income taxes and net
income for the three months ended June 30, 2006, includes stock option
compensation cost of $876 and $826, respectively, which represented no
change in basic or diluted earnings per share for the period. The
Company's income before income taxes and net income for the six months
ended June 30, 2006, includes stock option compensation cost of $1,742
and $1,642, respectively, which represented no change in basic or
diluted earnings per share for the period. The adoption of this
statement did not have a material effect on the financial statements.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 on stock-based employee compensation for the
three and six months ended June 30, 2005.
3 Months Ended 6 Months Ended
June 30, 2005 June 30, 2005
-------------------------------
Net income, as reported $ 221,021 $ 407,676
Less value of options vested, net of tax effect (826) (1,642)
----------- -----------
Pro-forma net income $ 220,195 $ 406,034
=========== ===========
Earnings per share:
Basic: As reported $ 0.11 $ 0.21
Pro-forma $ 0.11 $ 0.21
Diluted: As reported $ 0.11 $ 0.21
Pro-forma $ 0.11 $ 0.20
New Accounting Pronouncement
----------------------------
In March 2006, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 156 ("SFAS No. 156"),
Accounting for Servicing of Financial Assets, an amendment of FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, which requires that all
separately recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable and permits the
entities to elect either fair value measurement with changes in fair
value reflected in earnings or the amortization and impairment
requirements of Statement 140 for subsequent measurement. The
subsequent measurement of separately recognized servicing assets and
servicing liabilities at fair value eliminates the necessity for
entities that manage the risks inherent in servicing assets and
servicing liabilities with derivatives to qualify for hedge accounting
treatment and eliminates the characterization of declines in fair value
as impairments or direct write-downs. Statement No. 156 is effective as
of the beginning of an entity's first fiscal year that begins after
September 15, 2006. Earlier adoption is permitted as of the beginning
of an entity's fiscal year, provided the entity has not yet issued
financial statements, including interim financial statements for any
period of that fiscal year. The Company plans to adopt this statement
on January 1, 2007 and is in the process of assessing the impact, if
any, of the adoption of this statement on the financial results.
7
3. EARNINGS PER SHARE
Earnings Per Share - Basic earnings per share is determined by dividing
net income for the period by the weighted average number of common
shares outstanding. Diluted earnings per share considers the potential
effects of the exercise of the outstanding stock options under the
Company's Stock Option Plans.
The following reflects earnings per share calculations for the basic
and diluted methods:
3 Months Ended 6 Months Ended
June 30, June 30,
------------------------- --------------------------
2006 2005 2006 2005
Net income available to common shareholders $ 298,789 $ 221,021 $ 614,998 $ 407,676
========== ========== ========== ==========
Basic potential common shares:
Weighted average shares outstanding 1,984,893 1,967,027 1,978,759 1,966,995
Diluted potential common shares:
Stock option equivalents 7,975 15,186 8,481 18,298
---------- ---------- ---------- ----------
Diluted average shares outstanding 1,992,868 1,982,213 1,987,240 1,985,293
========== ========== ========== ==========
Basic earnings per share $ 0.15 $ 0.11 $ 0.31 $ 0.21
========== ========== ========== ==========
Diluted earnings per share $ 0.15 $ 0.11 $ 0.31 $ 0.21
========== ========== ========== ==========
4. LOAN PORTFOLIO COMPOSITION
At June 30, 2006 and December 31, 2005, the composition of the
Company's loan portfolio was as follows:
8
June 30, 2006 December 31, 2005
-------------------- --------------------
Amount Percent Amount Percent
(Dollars in Thousands)
Real estate loans:
One-to-four family residential $ 38,920 26.7 $ 40,126 28.2
Commercial and agricultural 36,085 24.4 33,859 23.8
Multi-family residential 7,718 5.3 6,010 4.2
-------- ------- -------- -------
Total real estate loans 82,723 57.0 79,995 56.2
Commercial agricultural business loans 28,127 20.0 28,679 20.2
Consumer loans:
Home equity/home improvement 26,792 17.8 26,382 18.5
Automobile 4,926 3.3 4,580 3.2
Other 5,284 3.3 4,657 3.3
-------- ------- -------- -------
Total consumer loans 37,002 24.4 35,619 25.0
-------- ------- -------- -------
Total loans receivable 147,852 101.3 144,293 101.4
Less:
Unearned discount and deferred loan fees, net 248 - 175 0.1
Allowance for loan losses 1,910 1.3 1,846 1.3
-------- ------- -------- -------
Total loans receivable, net $145,694 100.0 $142,272 100.0
======== ======= ======== =======
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 June 30, 2006.
Less Than Twelve Months Over Twelve Months Total
----------------------- ------------------- -------------------
Gross Gross Gross
Unrealized Fair Unrealized Fair Unrealized Fair
Losses Value Losses Value Losses Value
--------------------- ------------------- --------------------
(In thousands)
State and political
organizations $ 51 $ 2,725 $ 19 $ 609 $ 70 $ 3,334
U.S. government
and agencies 308 7,699 2,969 67,791 3,277 75,490
--------------------- ------------------- -------------------
Subtotal 359 10,424 2,988 68,400 3,347 78,824
Mortgage-backed
securities 116 1,871 342 5,847 458 7,718
--------------------- ------------------- -------------------
Total $ 475 $12,295 $ 3,330 $74,247 $ 3,805 $86,542
===================== =================== ===================
9
On June 29, 2005, the Financial Accounting Standards Board ("FASB")
rescinded portions of the proposed FASB Staff Position (FSP) EITF Issue
03-1, "The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments." The portions of the proposal which
were nullified related to the guidance on the determination of whether
an investment is other-than-temporarily impaired as set forth in
paragraphs 10-18 of Issue 03-1. The Company continues to follow the
provisions of FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities, in regard to such
determination of impairment.
6. COMMITMENTS AND CONTINGENCIES
From time to time, 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.
10
JACKSONVILLE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial condition and
results of the Company. The information contained in this section should be read
in conjunction with the unaudited consolidated financial statements and
accompanying notes thereto.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain "forward-looking statements" which may be
identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated," and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors that could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage and other loans,
real estate values, and competition; changes in accounting principles, policies,
or guidelines; changes in legislation or regulation; and other economic,
competitive, governmental, regulatory, and technological factors affecting our
operations, pricing of products and services.
NEW ACCOUNTING STANDARDS ADOPTED DURING FIRST QUARTER 2006
The Company has two stock option plans, the 2001 Stock Option Plan and a reissue
of the 1996 Stock Option Plan (the "Plans"), which provide for the granting of
stock awards to employees (including officers and directors).
Prior to January 1, 2006, the Company accounted for the Plans under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, as permitted by FASB
Statement No. 123, Accounting for Stock-Based Compensation. No stock option
compensation cost was recognized in the Statement of Income as all options
granted had an exercise price equal to market value of the underlying common
stock on the grant date.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123(R), using the modified prospective application
method. Under this method, the Statement applies to new awards and to awards
modified, repurchased or cancelled after the effective date. Additionally,
compensation cost for a portion of awards for which requisite services has not
been rendered that are outstanding as of the effective date shall be recognized
as the requisite service is rendered or after the effective date. As a result of
this adoption, the Company's income before income taxes and net income for the
three months ended June 30, 2006 includes stock option compensation cost of $876
and $826, respectively, which represented no change in basic or diluted earnings
per share for the period. The Company's income before income taxes and net
income for the six months ended June 30, 2006 includes stock option compensation
cost of $1,742 and $1,642, respectively, which represented no change in basic or
diluted earnings per share for the period. As of June 30, 2006, there was
approximately $3,700 of total unrecognized compensation cost related to
nonvested options under the Plans. That cost is expected to be recognized over a
weighted average period of less than three years.
11
FINANCIAL CONDITION
June 30, 2006 Compared to December 31, 2005
Total assets increased $4.1 million to $258.0 million at June 30, 2006 from
$253.9 million at December 31, 2005. The asset growth was primarily comprised of
a $3.4 million increase in loans and a $1.3 million increase in cash and cash
equivalents during the first six months of 2006. Net loans increased to $145.7
million at June 30, 2006. The loan growth and the increase in cash and cash
equivalents were funded by a $5.0 million increase in total deposits. Total
deposits increased to $223.4 million at June 30, 2006 from $218.4 million at
December 31, 2005. The introduction of a new money market savings account during
the first quarter of 2006 contributed to a majority of the volume increase.
Other borrowings decreased $1.3 million due to the repayment of a $2.0 million
advance from the Federal Home Loan Bank that matured during the first quarter of
2006, which was partially offset by an increase in overnight repurchase
agreements. The repayment was partially funded by a $900,000 decrease in
mortgage-backed securities, as a result of principal payments.
Stockholders' equity decreased $244,000 to $19.9 million at June 30, 2006. The
decrease resulted from an $849,000 increase in unrealized losses, net of tax, on
available-for-sale securities. The change in unrealized gains or losses on
securities classified as available-for-sale is affected by market conditions,
which can fluctuate daily. Stockholder's equity also benefited from net income
of $615,000 and the receipt of $132,000 from the exercise of stock options
during the first six months of 2006, partially offset by dividend payments of
$142,000 to stockholders. The receipt of $132,000 reflects $130,000 received
from the exercise of stock options, an $18,000 related tax benefit, and a $2,000
compensation expense related to options, which was partially offset by an
$18,000 cost to acquire the shares underlying the options in open market
purchases.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Three Months Ended June 30, 2006 and
2005
General: The Company reported net income for the three months ended June 30,
2006, of $299,000, or $0.15 per share of common stock, basic and diluted,
compared to net income of $221,000, or $0.11 per share of common stock, basic
and diluted, for the three months ended June 30, 2005. The increase of $78,000
in net income is due to a decline of $105,000 in the provision for loan losses,
a $42,000 increase in other income, a decrease of $11,000 in other expenses, and
a $34,000 decrease in income taxes. These changes were partially offset by a
decrease of $114,000 in net interest income.
Interest Income: Total interest income for the three months ended June 30, 2006
increased $347,000 from the same period of 2005. The increase in interest income
is primarily due to a $344,000 increase in the interest income generated from
loans, a $13,000 increase in interest income from investments, and a $6,000
increase in other interest income, partially offset by a $16,000 decrease in the
interest income from mortgage-backed securities.
The increase of $344,000 in interest income on loans is due to both an increase
in the average yield and average volume of the loan portfolio. The average yield
on the loan portfolio for the three months ended June 30, 2006 was 6.92%
compared to an average yield of 6.42% during the same period of 2005. The 50
basis point increase in the average yield is primarily due to the rising
interest rate environment, reflecting the Federal Reserve's recent increases in
short-term interest rates. The average volume of the loan portfolio grew $9.9
million from June 30, 2005 to the same period in 2006. This growth reflects an
increased emphasis on commercial lending and an increase in participations with
other institutions.
12
Interest income on investments increased $13,000 for the three months ended June
30, 2006 compared to the same period in 2005. This increase is due to a 15 basis
point increase in the average yield on investments, which reflects a higher
yield on reinvested funds. The increase was partially offset by a $2.1 million
decrease in the average volume of the investment portfolio due to maturities and
principal payments.
Interest income on mortgage-backed securities decreased $16,000 primarily due to
a $2.4 million decrease in the average volume. The average volume decreased from
$10.8 million during the three months ended June 30, 2005 to $8.3 million for
the same period of 2006, due to principal payments against the securities. The
decrease in average volume was partially offset by a 45 basis point increase in
the average yield on mortgage-backed securities.
The $6,000 increase in interest on other investments is primarily due to a 199
basis point increase in the average yield. The increase in the average yield on
these investments, consisting primarily of interest earning deposit accounts,
reflects the rising interest rate environment of 2005 to 2006. The increase in
income was partially offset by a $174,000 decrease in the average volume of
these deposits for the three months ended June 30, 2006 compared to the same
period in 2005.
Interest Expense: Total interest expense for the three months ended June 30,
2006 increased $461,000 compared to the three months ended June 30, 2005. The
increase in interest expense was due to both a $419,000 increase in the cost of
deposits and a $42,000 increase in the cost of borrowed funds.
The $419,000 increase in the cost of deposits was due to an increase in the
average rate. The average rate increased to 3.08% during the three months ended
June 30, 2006 from 2.17% during the three months ended June 30, 2005. The 91
basis point increase reflects rising market rates and the competitive nature of
the local markets. The introduction of the money market savings account has also
contributed to higher costs. The rate increase was partially offset by a $6.4
million decrease in the average volume of deposits during the three months ended
June 30, 2006 compared to the same period in 2005.
Interest expense on borrowed funds increased $42,000 during the three months
ended June 30, 2006 from same period in 2005. Interest expense increased due to
both an increase in the average cost and the average volume of borrowed funds.
The average rate increased 135 basis points to 4.54% during the three months
ended June 30, 2006 compared to the three months ended June 30, 2005. The
increase in average rate reflects rising market rates. The average volume of
borrowed funds increased $673,000 to $10.6 million for the three months ended
June 30, 2006 compared to the same period in 2005. The increase in average
volume reflects an increase in the average volume of overnight repurchase
agreements.
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 allowance for loan losses increased to $1.9 million at June 30, 2006 from
$1.8 million at December 31, 2005. The increase is the result of net recoveries
and the provision for loan losses. Net recoveries increased to $21,000 during
the second quarter of 2006 compared to net charge-offs of $158,000 during the
second quarter of 2005. The provision for loan losses decreased to no expense
allocation for the three months ended June 30, 2006 from $105,000 for the
comparable period in 2005. The decrease in the provision during 2006 reflects
net recoveries and the decrease in nonperforming loans. Refer to the following
table regarding nonperforming assets.
13
June 30, December 31,
2006 2005
---------- ----------
(Dollars in thousands)
Non-accruing loans:
One-to-four family residential $ 70 $ 624
Commercial and agricultural business 232 290
Home equity/Home improvement 158 222
Automobile - 1
Other consumer 9 20
---------- ----------
Total $ 469 $1,157
========== ==========
Accruing loans delinquent more than 90 days:
One-to-four family residential $ 115 $ 2
Automobile 1 17
Other consumer 2 2
---------- ----------
Total $ 118 $ 21
========== =========
Foreclosed assets:
One-to-four family residential $ 313 $ 276
Commercial and agricultural real estate - 180
Automobile 15 15
---------- ----------
Total $ 328 $ 471
========== ==========
Total nonperforming assets $ 915 $ 1,649
========== ==========
Total as a percentage of total assets 0.35% 0.65%
========== ==========
As indicated in the table above, there was a decrease of $554,000 in one-to-four
family residential non-accruing loans. A portion of this decrease reflects
payoffs totaling $223,000. The remaining decrease reflects both the collection
and restructuring of several non-accruing notes. The following table shows the
aggregate principal amount of potential problem credits on the Company's watch
list at June 30, 2006 and December 31, 2005. All non-accruing loans are
automatically placed on the watch list.
June 30, December 31,
2006 2005
(In thousands)
Special Mention credits $ 1,527 $ 3,065
Substandard credits 3,299 1,930
-------- ----------
Total watch list credits $ 4,826 $ 4,995
======== ==========
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of operations and financial condition
in preparing its financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
significantly from those estimates under different assumptions and conditions.
The Company believes that critical accounting policies, which include the
allowance for loan losses, are those most important to the portrayal of the
Company's financial condition and results and requires management's most
difficult, subjective and complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
14
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 actual loss amount 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 June 30, 2006
increased $42,000 from the same period in 2005. The increase in other income
reflects increases of $29,000 in commission income and $7,000 in service charges
on deposit accounts. Brokerage commissions are largely dependent upon pension
account rollovers and account volumes, both of which can fluctuate based upon
market conditions and customer preferences.
Other Expenses: Total other expenses for the three months ended June 30, 2006
decreased $11,000 from the same period in 2005. The decrease in other expenses
reflects decreases of $43,000 in real estate owned expenses and $32,000 in
occupancy and equipment expenses, partially offset by an increase in salaries
and benefits expenses of $62,000. The decrease in real estate owned expense
reflects fewer real estate owned properties and a decrease in the amount of
losses from the sale of real estate owned. The decrease in occupancy and
equipment expense reflects a reduction in depreciation and maintenance costs.
Salaries and benefits expense has been impacted by increased brokerage
commissions.
Income Taxes: The provision for income taxes decreased $34,000 during the three
months ended June 30, 2006, compared to the three months ended June 30, 2005.
The provision reflects an increase in taxable income, offset by the effect of
state income tax benefits.
Comparison of Operating Results for the Six Months Ended June 30, 2006 and 2005
General: The Company reported net income for the six months ended June 30, 2006,
of $615,000, or $0.31 per share, basic and diluted, compared to net income of
$408,000, or $0.21 per share, basic and diluted, for
15
the six months ended June 30, 2005. Net income increased $207,000 during the six
months ended June 30, 2006 compared to the same period of 2005, due to a
$150,000 decrease in the provision for loan losses, an increase of $84,000 in
other income, a $75,000 decrease in other expenses, and a $5,000 decrease in
income taxes. These changes were partially offset by a decrease in net interest
income of $107,000.
Interest Income: Total interest income increased $735,000 during the six months
ended June 30, 2006, compared to the same period in 2005. The increase in
interest income was due to a $763,000 increase in interest income on loans, a
$6,000 increase in income on investments, and a $7,000 increase in other
interest income. These increases were partially offset by a $41,000 decrease in
interest income on mortgage-backed securities.
Interest income on loans increased to $5.0 million for the six months ended June
30, 2006 from $4.3 million for the six months ended June 30, 2005. The increase
in interest income on loans was due to both an increase in the average yield and
the average volume of the loan portfolio. The average yield on the loan
portfolio increased to 6.83% for the six months ended June 30, 2006 from 6.34%
for the six months ended June 30, 2005. The 49 basis point increase in the
average yield reflects increases in market interest rates. The average volume of
the loan portfolio increased $12.6 million for the six months ended June 30,
2006 compared to the same period in 2005. The increase in the average volume of
the loan portfolio reflects an increase in commercial lending, as well as an
increase in the number of participated loans with other institutions.
The increase in investment income was due primarily to an increase in the
average yield on the investment portfolio. The average yield on investments
increased 16 basis points, which reflects a general increase in market rates.
The average yield increased to 3.70% for the six months ended June 30, 2006 from
3.54% for the six months ended June 30, 2005. The increase in the average yield
was partially offset by a $3.3 million decrease in the average volume of the
investments. The decrease in the average volume of investments was due to both
principal payments and maturities.
The $41,000 decrease in interest income on mortgage-backed securities was due
primarily to a decrease in the average volume of these securities. The average
volume of mortgage-backed securities decreased $3.0 million for the six months
ended June 30, 2006 compared to the same period in 2005. The decrease in the
average volume was due primarily to principal payments. The decrease in interest
income was partially offset by a 41 basis point increase in the average yield on
mortgage-backed securities.
Other interest income increased $7,000 due to an increase in the average rate on
other interest earning deposits. The average rate increased 139 basis points for
the six months ended June 30, 2006 compared to the same period in 2005. The
increase in the average yield was partially offset by a decrease in the average
volume of interest bearing deposits. The average volume decreased to $1.7
million from $2.1 million for the six months ended June 30, 2006 and the same
period in 2005, respectively.
Interest Expense: Total interest expense increased $842,000 for the six months
ended June 30, 2006 compared to the same period in 2005. The increase in
interest expense was due to a $702,000 increase in the cost of deposits and a
$140,000 increase in the cost of borrowed funds.
Interest expense on deposits increased from $2.2 million during the six months
ended June 30, 2005 to $2.9 million during the six months ended June 30, 2006.
The increase was primarily due to a 77 basis point increase in the average rate
on deposits. The average rate increased to 2.87% for the six months ended June
30, 2006 from 2.10% for the same period in 2005. The increased cost of deposits
was due to both an increase in market rates and the introduction of a higher
yielding money market savings product during the first quarter of 2006. The
increase in the average rate was partially offset by a $6.4 million decrease in
the average volume of deposits.
16
The cost of borrowed funds increased $140,000 due to increases in both the
average rate and the average volume of borrowed funds. The average rate on
borrowed funds increased 136 basis points, which reflects the increase in short
term market rates. The average volume of borrowed funds increased to $10.5
million for the six months ended June 30, 2006 from $6.0 million for the six
months ended June 30, 2005. The average balance of borrowed funds consisted of
$7.3 million of advances from the Federal Home Loan Bank and $3.2 million in
overnight repurchase agreements during the first six months of 2006.
Provision for Loan Losses: The provision for loan losses is determined by
management as the amount needed to replenish the allowance for loan losses,
after net charge-offs have been deducted, to a level considered adequate to
absorb probable losses in the loan portfolio, in accordance with accounting
principles generally accepted in the United States of America.
6 Months Ended
June 30, June 30,
2006 2005
------- -------
(In thousands)
Balance at beginning of period $ 1,846 $ 1,888
Charge-offs:
One-to-four family residential 55 157
Commercial and agricultural real estate - 47
Commercial and agricultural business 16 8
Home equity/home improvement 20 87
Automobile 1 24
Other Consumer 5 19
------- -------
Total 97 342
------- -------
Recoveries:
One-to-four family residential 73 2
Commercial and agricultural real estate 8 -
Home equity/home improvement 2 9
Automobile 6 13
Other Consumer 12 12
------- -------
Total 101 36
------- -------
Net loan charge-offs (recoveries) (4) 306
Additions charged to operations 60 210
------- -------
Balance at end of period $ 1,910 $ 1,792
======= =======
The provision for loan losses decreased $150,000 to $60,000 during the six
months ended June 30, 2006 compared to the same six months in 2005. The
allowance for loan losses increased to $1.9 million at June 30, 2006 from $1.8
million at December 31, 2005. The increase is partially due to an increase in
one-to-four family residential recoveries. Net recoveries were $4,000 during the
first six months of 2006 compared to net charge-offs of $306,000 during the
first six months of 2005. The decrease in the provision during 2006 reflects net
recoveries and decreases in nonperforming loans and watch list credits.
Other Income: Total other income increased $84,000 for the six months ended June
30, 2006 compared to the same time period in 2005. The increase in other income
is primarily due to a $56,000 increase in commission income, a $35,000 increase
in service charge income, and a $17,000 increase in gains on the sale of loans.
The increase in gains on the sale of loans was partially offset by a $16,000
decrease in gains on the sale of securities. Brokerage commissions are largely
dependent upon pension account rollovers and account volumes, both of which can
fluctuate based upon market conditions and customer preferences.
17
Other Expenses: Total other expenses decreased $75,000 during the six months
ended June 30, 2006 compared to the six months ended June 30, 2005. Changes for
the six months ended June 30, 2006 from the comparative period in 2005 include
decreases of $89,000 in occupancy and equipment expense, $56,000 in real estate
owned expense, and $31,000 in legal and accounting expense. These decreases were
partially offset by an increase of $97,000 in salaries and benefits expense. The
decrease in occupancy and equipment expense is primarily due to a decrease in
depreciation and maintenance costs. The decrease in real estate owned expense
reflects fewer real estate owned properties and a decrease in the amount of
losses from the sale of real estate owned. The decrease in legal and accounting
expense is due primarily to a decrease in the expense incurred by Sarbanes-Oxley
legislation compliance. The increase in salaries and benefits expense is
primarily due to the increase in brokerage commissions and regular cost
increases.
Income Taxes: The provision for income taxes decreased $5,000 during the six
months ended June 30, 2006, compared to the six months ended June 30, 2005. The
provision reflects an increase in taxable income, offset by the effect of state
income tax benefits.
Liquidity and Capital Resources: The Company's most liquid assets are cash and
cash equivalents. The levels of these assets are dependent on the Company's
operating, financing, and investing activities. At June 30, 2006 and December
31, 2005, cash and cash equivalents totalled $8.0 million and $6.7 million,
respectively. The Company's primary sources of funds include principal and
interest repayments on loans (both scheduled and prepayments), maturities and
calls of investment securities and principal repayments from mortgage-backed
securities (both scheduled and prepayments). During the past twelve months, the
most significant sources of funds have been deposit growth, investment calls and
principal payments, advances from the FHLB, and loan sales to the secondary
market. These funds have been used 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-term and long-term responsibility of
management. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) projected purchases of
investment and mortgage-backed securities, (iii) expected deposit flows, (iv)
yields available on interest-bearing deposits, and (v) liquidity of its
asset-liability management program. Excess liquidity is generally invested in
interest-earning overnight deposits and other short-term U.S. Agency
obligations. If the Company requires funds beyond its ability to generate them
internally, it has the ability to borrow funds from the FHLB. The Company may
borrow from the FHLB under a blanket agreement which assigns all investments in
FHLB stock as well as qualifying first mortgage loans equal to 150% of the
outstanding balance as collateral to secure the amounts borrowed. This borrowing
arrangement is limited to a maximum of 30% of the Company's total assets or
twenty times the balance of FHLB stock held by the Company. At June 30, 2006,
the Company had outstanding advances of $6.0 million. In addition, the Company
had approximately $18.9 million available to it under the FHLB borrowing
arrangement.
The Company maintains minimum levels of liquid assets as established by the
Board of Directors. The Company's liquidity ratios at June 30, 2006 and December
31, 2005 were 33.4% and 34.7%, respectively. These ratios represent the volume
of short-term liquid assets as a percentage of net deposits and borrowings due
within one year.
The Company must also maintain adequate levels of liquidity to ensure the
availability of funds to satisfy loan commitments. The Company anticipates that
it will have sufficient funds available to meet its current
18
commitments principally through the use of current liquid assets and through its
borrowing capacity discussed above. The following table summarizes these
commitments at June 30, 2006 and December 31, 2005.
June 30, 2006 December 31, 2005
------------- -----------------
(Dollars in thousands)
Commitments to fund loans $ 24,424 $ 21,576
Standby letters of credit 28 31
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and Tier 1 capital (as
defined) to average assets (as defined). Management believes, at June 30, 2006,
that the Bank meets all its capital adequacy requirements.
Under Illinois law, Illinois-chartered savings banks are required to maintain a
minimum core capital to total assets ratio of 3%. The Illinois Commissioner of
Savings and Residential Finance (the Commissioner) is authorized to require a
savings bank to maintain a higher minimum capital level if the Commissioner
determines that the savings bank's financial condition or history, management or
earnings prospects are not adequate. If a savings bank's core capital ratio
falls below the required level, the Commissioner may direct the savings bank to
adhere to a specific written plan established by the Commissioner to correct the
savings bank's capital deficiency, as well as a number of other restrictions on
the savings bank's operations, including a prohibition on the declaration of
dividends by the savings bank's board of directors. At June 30, 2006, the Bank's
core capital ratio was 7.40% of total average assets, which exceeded the
required amount.
The Bank is also required to maintain regulatory capital requirements imposed by
the Federal Deposit Insurance Corporation. The Bank's actual ratios at June 30,
2006 and the required minimums to be considered adequately capitalized are shown
in the table below. In order to be considered well-capitalized, the Bank must
maintain: (i) Tier 1 Capital to Average Assets of 5.0%, (ii) Tier 1 Capital to
Risk-Weighted Assets of 6.0%, and (iii) Total Capital to Risk-Weighted Assets of
10.0%.
June 30, 2006 December 31, 2005 Minimum
Actual Actual Required
------ ------ --------
Tier 1 Capital to Average Assets 7.40% 7.31% 4.00%
Tier 1 Capital to Risk-Weighted Assets 11.63% 11.66% 4.00%
Total Capital to Risk-Weighted Assets 12.80% 12.83% 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, 2006.
Effect of Inflation and Changing Prices: The consolidated financial statements
and related financial data presented herein have been prepared in accordance
with accounting principles generally accepted in the United States of America,
which require the measurement of financial position and operating results in
terms of historical dollars, without considering the change in relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in increased cost of the Company's operations. Unlike most industrial
companies, virtually all the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates generally have a more
significant impact on a financial institution's performance than
19
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.
The following table sets forth the average balances and interest rates (costs)
on the Company's assets and liabilities during the periods presented.
Consolidated Average Balance Sheet and Interest Rates
(Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30,
--------------------------------------------------------------------------------
2006 2005
------------------------------------------ ------------------------------------
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------ -----------------------------------
Interest-earnings assets:
Loans $147,776 $ 2,556 6.92% $137,874 $ 2,212 6.42%
Investment securities 83,405 774 3.71% 85,530 761 3.56%
Mortgage-backed securities 8,345 94 4.53% 10,793 110 4.08%
Other 1,425 16 4.41% 1,599 10 2.42%
-------- -------- -------- --------
Total interest-earning assets 240,951 3,440 5.71% 235,796 3,093 5.25%
Non-interest earnings assets 17,818 16,056
-------- --------
Total assets $258,769 $251,852
======== ========
Interest-bearing liabilities:
Deposits $199,099 $ 1,532 3.08% $205,471 $ 1,113 2.17%
Other borrowings 10,617 121 4.54% 9,944 79 3.19%
-------- -------- -------- --------
Total interest-bearing liabilities 209,716 1,653 3.15% 215,415 1,192 2.21%
Non-interest bearing liabilities 29,236 16,285
Stockholders' equity 19,817 20,152
-------- --------
Total liabilities/stockholders' equity $258,769 $251,852
======== ========
Net interest income $ 1,787 $ 1,901
======== ========
Interest rate spread (average yield earned
minus average rate paid) 2.56% 3.03%
==== ====
Net interest margin (net interest income
divided by average interest-earning assets) 2.97% 3.23%
==== ====
20
The following table sets forth the changes in rate and changes in volume of the
Company's interest earning assets and liabilities.
Analysis of Volume and Rate Changes
(In thousands)
-------------------------------------------------------------------------------
Three Months Ended June 30,
-------------------------------------------------------------------------------
2006 Compared to 2005
Increase(Decrease) Due to
-----------------------------------
Rate Volume Net
-----------------------------------
Interest-earnings assets:
Loans $ 179 $ 165 $ 344
Investment securities 32 (19) 13
Mortgage-backed securities 11 (27) (16)
Other 7 (1) 6
----- ----- -----
Total net change in income on
interest-earning assets 229 118 347
----- ----- -----
Interest-bearing liabilities:
Deposits 455 (36) 419
Other borrowings 35 7 42
----- ----- -----
Total net change in expense on
interest-bearing liabilities 490 (29) 461
----- ----- -----
Net change in net interest income $(261) $ 147 $(114)
===== ===== =====
21
The following table sets forth the average balances and interest rates (costs)
on the Company's assets and liabilities during the periods presented.
Consolidated Average Balance Sheet and Interest Rates
(Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
--------------------------------------------------------------------------------
2006 2005
------------------------------------------ ------------------------------------
Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------------------------------------ -----------------------------------
Interest-earnings assets:
Loans $ 147,126 $ 5,026 6.83% $ 134,486 $ 4,263 6.34%
Investment securities 82,522 1,526 3.70% 85,766 1,520 3.54%
Mortgage-backed securities 8,519 184 4.32% 11,514 225 3.91%
Other 1,682 33 3.88% 2,105 26 2.49%
--------- -------- --------- --------
Total interest-earning assets 239,849 6,769 5.64% 233,871 6,034 5.16%
Non-interest earnings assets 17,781 16,886
--------- ---------
Total assets $ 257,630 $ 250,757
========= =========
Interest-bearing liabilities:
Deposits $ 201,761 $ 2,893 2.87% $ 208,181 $ 2,191 2.10%
Other borrowings 10,518 232 4.42 5,995 92 3.06%
--------- -------- --------- --------
Total interest-bearing liabilities 212,279 3,125 2.94% 214,176 2,283 2.13%
Non-interest bearing liabilities 25,477 16,252
Stockholders' equity 19,874 20,329
--------- ---------
Total liabilities/stockholders' equity $ 257,630 $ 250,757
========= =========
Net interest income $ 3,644 $ 3,751
======== ========
Interest rate spread (average yield earned
minus average rate paid) 2.70% 3.03%
===== =====
Net interest margin (net interest income
divided by average interest-earning assets) 3.04% 3.21%
===== =====
22
The following table sets forth the changes in rate and changes in volume of the
Company's interest earning assets and liabilities.
Analysis of Volume and Rate Changes
(In thousands)
--------------------------------------------------------------------------------
Six Months Ended June 30,
--------------------------------------------------------------------------------
2006 Compared to 2005
Increase(Decrease) Due to
-------------------------------------
Rate Volume Net
-------------------------------------
Interest-earnings assets:
Loans $ 346 $ 417 $ 763
Investment securities 65 (59) 6
Mortgage-backed securities 22 (63) (41)
Other 13 (6) 7
----- ----- -----
Total net change in income on
interest-earning assets 446 289 735
----- ----- -----
Interest-bearing liabilities:
Deposits 772 (70) 702
Other borrowings 52 88 140
----- ----- -----
Total net change in expense on
interest-bearing liabilities 824 18 842
----- ----- -----
Net change in net interest income $ (378) $ 271 $ (107)
====== ====== ======
23
JACKSONVILLE BANCORP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------
The Company's policy in recent years has been to reduce its interest rate risk
by better matching the maturities of its interest rate sensitive assets and
liabilities, selling its long-term fixed-rate residential mortgage loans with
terms of 15 years or more to Freddie Mac, originating adjustable rate loans,
balloon loans with terms ranging from three to five years and originating
consumer and commercial business loans, which typically are for a shorter
duration and at higher rates of interest than one-to-four family loans. The
Company also maintains a portfolio of mortgage-backed securities, which provides
monthly cash flow. The remaining investment portfolio has been laddered to
better match the interest-bearing liabilities. With respect to liabilities, the
Company has attempted to increase its savings and transaction deposit accounts,
which management believes are more resistant to changes in interest rates than
certificate accounts. The Board of Directors appoints the Asset-Liability
Management Committee (ALCO), which is responsible for reviewing the Company's
asset and liability policies. The ALCO meets quarterly to review interest rate
risk and trends, as well as liquidity and capital ratio requirements.
The Company uses a comprehensive asset/liability software package provided by a
third-party vendor to perform interest rate sensitivity analysis for all product
categories. The primary focus of the Company's analysis is on the effect of
interest rate increases and decreases on net interest income. Management
believes that this analysis reflects the potential effects on current earnings
of interest rate changes. Call criteria and prepayment assumptions are taken
into consideration for investment securities and loans. All of the Company's
interest sensitive assets and liabilities are analyzed by product type and
repriced based upon current offering rates. The software performs interest rate
sensitivity analysis by performing rate shocks of plus or minus 300 basis points
in 100 basis point increments.
The following table shows projected results at June 30, 2006 and December 31,
2005 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)
----------------------------------------------------------------------------
June 30, 2006 December 31, 2005 ALCO
-------------------------------------------------------------
Rate Shock: $ Change % Change $ Change % Change Benchmark
----------------------------------------------------------------------------
+ 200 basis points (1,074) -14.86% (468) -6.18% > (20.00)%
+ 100 basis points (899) -12.44% (282) -3.73% > (12.50)%
- 100 basis points (294) -4.06% 31 0.42% > (12.50)%
- 200 basis points 67 0.93% 294 3.89% > (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.
24
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.
25
JACKSONVILLE BANCORP, INC.
CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days prior to filing date of this
report, that the Company's disclosure controls and procedures (as defined by the
Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's 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.
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities and Stock Purchases
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Company's annual meeting of stockholders held on April
25, 2006, the following matters were submitted to a vote:
1. The election of the following persons as directors for a
three-year term:
Name Votes For Votes Withheld
---- --------- --------------
John L. Eyth 1,828,877 691
Richard A. Foss 1,828,914 654
Michael R. Goldasich 1,828,277 1,291
2. The ratification of the appointment of BKD, LLP as
auditors for the Company for the year ended December 31,
2006.
Votes For Against Abstain
--------- ------- -------
1,826,546 772 2,250
Item 5. Other Information
-----------------
None.
Item 6. Exhibits
--------
31.1 - Certification of the Chief Executive Officer Pursuant
to Rule 13a-15(e)/15d-15(e)
31.2 - Certification of the Chief Financial Officer Pursuant
to Rule 13a-15(e)/15d-15(e)
32.1 - Certification of the Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2003
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
JACKSONVILLE BANCORP, INC.
Registrant
Date: 08/02/2006 /s/ Richard A. Foss
---------- --------------------------
Richard A. Foss
President and Chief Executive
Officer
/s/ Diana S. Tone
--------------------------
Diana S. Tone
Chief Financial Officer
28