UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transaction period from ________________ to _________________
Commission File Number: 000-49792
FEDERAL 33-1002258
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1211 WEST MORTON AVENUE, JACKSONVILLE, ILLINOIS 62650
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(Address of principal office) (Zip Code)
(217) 245-4111
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(Registrant's Telephone Number including area code)
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Securities Registered Pursuant to Section 12(b) of the Act:
Securities Registered Pursuant to Section 12(g) of the Act:
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X]
As of June 30, 2003, there were 1,940,542 shares issued and outstanding of the Registrant's Common Stock. The aggregate value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average bid and asked prices of the Common Stock as of June 30, 2003 ($15.93) was $14.4 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 2003 (Parts II and IV).
2. Proxy Statement for the 2004 Annual Meeting of Stockholders (Parts I and
III).
PART I
ITEM 1. BUSINESS
GENERAL
Jacksonville Bancorp, Inc. (the "Company") is a Federal corporation. On May 3, 2002, Jacksonville Savings Bank (the "Bank") completed its reorganization into the two-tier form of mutual holding company ownership. At that time each outstanding share of the Bank's common stock was converted into a share of the Company's common stock. The only significant asset of the Company is its investment in the Bank. The Company is majority owned by Jacksonville Bancorp, MHC, a Federal-chartered mutual holding company (the "Mutual Holding Company").
The Bank is an Illinois-chartered savings bank headquartered in Jacksonville, Illinois. The Bank conducts its business from its main office and six branches, two of which are located in Jacksonville, one of which is located in each of the following Illinois communities: Virden, Chapin, Concord and Litchfield. The Bank was originally chartered in 1916 as a state-chartered savings and loan association and converted to a state-chartered savings bank in 1992. The Bank has been a member of the Federal Home Loan Bank System since 1932. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). At December 31, 2003, the Bank had total assets of $261.8 million, total deposits of $235.2 million, and stockholders' equity of $20.0 million.
The Bank is a community-oriented savings bank engaged primarily in the business of attracting retail deposits from the general public in the Bank's market area and using such funds together with borrowings and funds from other sources to primarily originate mortgage loans secured by one- to four-family residential real estate and consumer loans. The Bank also originates commercial and agricultural real estate loans, multi-family real estate loans and commercial and agricultural business loans. Additionally, the Bank invests in United States Government agency securities, local municipal issues, and mortgage-backed securities primarily issued or guaranteed by the United States Government or agencies thereof, and maintains a portion of its assets in liquid investments, such as overnight funds at the Federal Home Loan Bank ("FHLB").
The Bank's principal sources of funds are customer deposits, proceeds from sale of loans, funds received from the repayment and prepayment of loans and mortgage-backed securities, and the sale, call, or maturity of investment securities. Principal sources of income are interest income on residential, commercial and consumer loans, interest on investments, commissions and fees. The Bank's principal expenses are interest paid on deposits, employee compensation and benefits and occupancy and equipment expense.
The Bank operates an investment center at its main office. The investment center is operated through Financial Resources Group, the Bank's wholly-owned subsidiary. The investment center is not anticipated to have a material effect on the ability of the Bank to attract retail deposits.
The Bank's principal executive office is located at 1211 W. Morton, Jacksonville, Illinois, and its telephone number at that address is (217) 245-4111.
MARKET AREA AND COMPETITION
The Bank is a community-oriented savings institution offering a range of retail banking services to residents of its market area. The Bank's market area is Morgan, Macoupin and Montgomery Counties, Illinois. Management believes that its offices are located in communities that can generally be characterized as stable residential communities of predominantly one- to four-family residences. The Bank's market for deposits is concentrated in the communities surrounding its main office and six branches. The Bank is the largest independent financial institution headquartered in its primary market area.
The economy of the Bank's market area consists primarily of agriculture and related businesses, light industry and state and local government. The largest employers in the Bank's primary market area are Pactiv Corporation, Passavant Area Hospital, and the State of Illinois.
The Bank faces significant competition in attracting deposits from commercial banks, other savings institutions and credit unions. The Bank faces additional competition for deposits from short-term money market funds, other corporate and government securities funds and other financial institutions such as brokerage firms and insurance companies. The Bank also faces significant competition in the origination of loans from savings institutions, mortgage banking companies, credit unions, insurance companies and commercial banks.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the Bank has been the origination of mortgage loans for the purpose of financing or refinancing one- to four-family residential properties in the Bank's local market areas. The Bank also emphasizes consumer lending, primarily the origination of home equity loans and loans secured by automobiles. At December 31, 2003, the Bank's loans receivable totaled $129.5 million, of which $40.3 million, or 31.7% consisted of one- to four-family residential mortgage loans. The remainder of the Bank's loans receivable at such date consisted of commercial and agricultural real estate loans (16.8%), multi-family residential loans (1.9%), commercial and agricultural business loans (23.4%), and consumer loans (28.1%). Of the amount included in consumer loans, $23.6 million, or 18.6% of total loans consisted of home equity and home improvement loans. During the year ended December 31, 2003 the loan portfolio decreased to $129.5 million from $145.3 million at December 31, 2002. The decrease reflected, in part, borrowers' paying off their existing consumer debt in connection with the refinancing of their one-to four-family mortgages. To the extent the refinanced mortgage loans were fixed rate loans, they were sold in the secondary market. The $4.0 million (38.3%) decrease in automobile loans was also a result of alternative funding sources available to consumers, such as special financing offered by the automobile manufacturers' captive financing companies.
The Bank has managed to make its interest-earning assets more interest rate sensitive by, among other things, originating variable interest rate loans, such as ARM loans and balloon loans with terms ranging from three to five years, as well as medium-term consumer loans and commercial business loans, and by investing in adjustable-rate mortgage-backed securities. The ability of the Bank to originate ARM loans is substantially affected by market interest rates.
The Bank actively originates fixed-rate residential mortgage loans secured by one- to four-family residential properties with terms up to 30 years. The Bank sells a significant portion of its one- to four-family fixed-rate residential mortgage loan originations directly to Freddie Mac. During the years ended December 31, 2003 and 2002, the Bank sold $107.7 million and $86.1 million of fixed-rate residential mortgage loans, respectively. Loans are generally sold without recourse and with servicing retained. At December 31, 2003 the Bank was servicing approximately $159.5 million in loans for which it received servicing income of approximately $403,000 for the year ended December 31, 2003. The Bank does not purchase whole loans.
ANALYSIS OF LOAN PORTFOLIO
Set forth below are selected data relating to the composition of the Bank's loan portfolio, excluding loans held for sale, by type of loan as of the dates indicated.
AT DECEMBER 31,
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2003 2002 2001
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AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
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(DOLLARS IN THOUSANDS)
Real estate loans:
One-to four-family residential (1). $ 40,304 31.7% $ 43,883 30.7% $ 46,473 29.8%
Commercial and agricultural........ 21,401 16.8 18,421 12.9 18,297 11.7
Multi-family residential........... 2,376 1.9 2,678 1.9 2,566 1.6
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Total real estate loans.......... 64,081 50.4 64,982 45.5 67,336 43.1
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Commercial agricultural business
loans (1)............................ 29,763 23.4 31,502 22.0 30,582 19.6
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Consumer loans:
Home equity/Home improvement....... 23,614 18.6 31,181 21.8 38,590 24.7
Automobile......................... 6,477 5.1 10,491 7.3 12,966 8.3
Other.............................. 5,545 4.4 7,127 5.0 8,255 5.2
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Total consumer loans............. 35,636 28.1 48,799 34.1 59,811 38.2
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Total loans receivable......... 129,480 101.9 145,283 101.6 157,729 100.9
Less:
Unearned discount and deferred loan
fees, net........................ 215 0.2 281 0.2 342 0.2
Allowance for loan losses.......... 2,186 1.7 2,073 1.4 1,107 0.7
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Total loans receivable, net.... $ 127,079 100.0% $ 142,929 100.0% $ 156,280 100.0%
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(Continued)
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2000 1999
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Amount Percent Amount Percent
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Real estate loans:
One-to four-family residential (1). $ 48,418 28.1% $ 41,634 29.4%
Commercial and agricultural........ 18,596 10.8 8,334 5.9
Multi-family residential........... 2,690 1.6 2,150 1.5
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Total real estate loans.......... 69,704 40.5 52,118 36.8
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Commercial agricultural business
loans (1)............................ 31,767 18.4 23,145 16.3
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Consumer loans:
Home equity/Home improvement....... 45,816 26.6 40,965 28.9
Automobile......................... 15,452 9.0 15,631 11.0
Other.............................. 11,056 6.4 10,735 7.6
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Total consumer loans............. 72,324 42.0 67,331 47.5
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Total loans receivable......... 173,795 100.9 142,594 100.6
Less:
Unearned discount and deferred loan
fees, net........................ 408 0.2 62 --
Allowance for loan losses.......... 1,206 0.7 827 0.6
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Total loans receivable, net..... $ 172,181 100.0% $ 141,705 100.0%
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(1) Includes a portion of real estate construction loans.
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ONE- TO FOUR-FAMILY MORTGAGE LOANS. The Bank's primary lending activity is the origination of one- to four-family, owner-occupied, residential mortgage loans secured by property located in the Bank's market area. Loans are generated through the Bank's marketing efforts, its existing customers and referrals, real estate brokers, builders and local businesses. The Bank generally has limited its real estate loan originations to the financing of properties located within its market area. At December 31, 2003, the Bank had $40.3 million, or 31.7% of its net loan portfolio, invested in mortgage loans secured by one- to four-family residences.
The Bank originates for resale to Freddie Mac fixed-rate residential one- to four-family loans with terms of 15 years or more. The Bank's fixed-rate mortgage loans amortize monthly with principal and interest due each month. Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option. The Bank offers fixed-rate one- to four-family mortgage loans with terms of up to 30 years.
The Bank currently offers ARM loans for terms ranging up to 30 years. The Bank generally offers ARM loans that adjust every year from the date of origination, with interest rate adjustment limitations up to two percentage points per year and with a cap of up to six percentage points on total interest rate increases over the life of the loan. In a rising interest rate environment, such rate limitations may prevent ARM loans from repricing to market interest rates, which would have an adverse effect on net interest income. The Bank has used different interest indices for ARM loans in the past, and primarily uses the one-year Constant Maturity Treasury Index. ARM loans secured by residential one- to four-family real estate totaled $7.3 million, or 18.2% of the Bank's total one- to four-family residential real estate loans receivable at December 31, 2003. The origination of fixed-rate mortgage loans versus ARM loans is monitored on an ongoing basis and is affected significantly by the level of market interest rates, customer preference, the Bank's interest rate gap position and loan products offered by the Bank's competitors. Particularly in a relatively low interest rate environment, borrowers have shown a preference for fixed-rate loans over ARM loans. During 2003, the Bank originated $101.2 million of fixed-rate residential mortgage loans and $9.2 million of ARM and balloon loans.
The primary purpose of offering ARM loans is to make the Bank's loan portfolio more interest rate sensitive. However, as the interest income earned on ARM loans varies with prevailing interest rates, such loans do not offer the Bank predictable cash flows as would long-term, fixed-rate loans. ARM loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest rates increase. It is possible, therefore, during periods of rising interest rates, that the risk of delinquencies and defaults on ARM loans may increase due to the upward adjustment of interest costs to the borrower, resulting in increased loan losses.
The Bank's residential first mortgage loans customarily include due-on-sale clauses, which are provisions giving the Bank the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as security for the loan. Due-on-sale clauses are a means of imposing assumption fees and increasing the interest rate on the Bank's mortgage portfolio during periods of rising interest rates.
When underwriting residential real estate loans, the Bank reviews and verifies each loan applicant's income and credit history. Management believes that stability of income and past credit history are integral parts in the underwriting process. Generally, the applicant's total monthly mortgage payment, including all escrow amounts, is limited to 28% of the applicant's total monthly income. In addition, total monthly obligations of the applicant, including mortgage payments, should not generally exceed 38% of total monthly income. Written appraisals are generally required on real estate property offered to secure an applicant's loan. For real estate loans with loan to value ("LTV") ratios of between 80% and 95%, the Bank requires private mortgage insurance. The Bank requires fire and casualty insurance on all properties securing real estate loans. The Bank may require title insurance, or an attorney's title opinion, as circumstances warrant.
COMMERCIAL AND AGRICULTURAL REAL ESTATE AND MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Bank originates commercial and agricultural real estate and multi-family residential real estate loans. At December 31, 2003, $21.4 million, or 16.8%, of the Bank's total loan portfolio consisted of commercial and agricultural real estate loans and $2.4 million, or 1.9%, consisted of multi-family real estate loans. The Bank's commercial and agricultural real estate loans are secured primarily by improved properties such as retail facilities and office buildings, farms, churches and other non-residential buildings. At December 31, 2003, the Bank's commercial real estate loan portfolio included $1.8 million in loans secured by hotels, $794,000 in loans secured by restaurants, $12.1 million in loans secured by land, and $6.7 million in loans secured by other commercial properties. The maximum LTV ratio for commercial real estate loans originated by the Bank is 80%. During the year ended December 31, 2003, the Bank originated $9.2 million in commercial and agricultural real estate loans. The largest commercial real estate loan had a principal balance of $2.5 million, all of which was secured by farmland. At December 31, 2003, the largest multi-family residential real estate loan had a principal balance of $259,000.
The underwriting standards employed by the Bank for commercial and agricultural real estate and multi-family residential real estate loans include a determination on the applicant's credit history and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan. The income approach is primarily utilized to determine whether income generated from the applicant's business or real estate offered as collateral is adequate to repay the loan. The value of the real estate offered as collateral is reviewed by the Bank in relation to the proposed loan amount. Generally, the loan amount cannot be greater than 80% of the value of the real estate. Written appraisals are usually obtained by the Bank from either licensed or certified appraisers on all multi-family, commercial, and agricultural real estate loans. The Bank assesses the creditworthiness of the applicant by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining other public records regarding the applicant.
Loans secured by commercial, agricultural, and multi-family real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the effects of general economic conditions on income producing properties and the successful operation or management of the properties securing the loans. Furthermore, the repayment of loans secured by commercial, agricultural, and multi-family real estate is typically dependent upon the successful operation of the related business and real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired.
COMMERCIAL AND AGRICULTURAL BUSINESS LOANS. The Bank originates commercial and agricultural business loans to borrowers located in its market area which are secured by collateral other than real estate or which can be unsecured. Such business loans are generally secured by equipment and inventory and generally are offered with adjustable rates and various terms of maturity. The Bank will originate unsecured business loans in those instances where the applicant's financial strength and creditworthiness has been established. Commercial and agricultural business loans generally bear higher interest rates than residential loans, but they also may involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower's business. The Bank generally obtains personal guarantees from the borrower or a third party as a condition to originating its business loans. Commercial and agricultural business loans totaled $29.8 million, or 23.4%, of the Bank's total loan portfolio at December 31, 2003. The Bank has increased its level of business loan originations in response to customer demand. During the year ended December 31, 2003, the Bank originated $19.9 million in commercial and agricultural business loans. At that date, the Bank's largest commercial business loan had a principal balance of $833,000, and was secured by aircraft. This loan was performing in accordance with its terms at December 31, 2003.
The underwriting standards used by the Bank for commercial and agricultural business loans include a determination of the applicant's ability to meet existing obligations and payments on the proposed loan from normal cash flows generated in the applicant's business. The financial strength of each applicant also is assessed through review of financial statements and tax returns provided by the applicant. The creditworthiness of an applicant is derived from a review of credit reports as well as a search of public records. Once originated, business loans are reviewed periodically by the Bank. Financial statements are requested at least annually and are reviewed by the Bank for substantial deviations or changes that might affect repayment of the loan. Loan officers of the Bank also
visit the premises of borrowers to observe the business premises, facilities, and personnel and to inspect the pledged collateral. Underwriting standards for business loans are different for each type of loan depending on the financial strength of the applicant and the value of collateral offered as security.
CONSUMER LOANS. As of December 31, 2003, consumer loans totaled $35.6 million, or 28.1%, of the Bank's total loan portfolio. The principal types of consumer loans offered by the Bank are home equity loans and automobile loans. Consumer loans generally are offered on a fixed-rate basis. The largest category of consumer loans in the Bank's portfolio consists of home equity loans. At December 31, 2003, home equity and home improvement loans totaled $23.6 million, or 18.6%, of the Bank's total loan portfolio. The Bank's home equity loans are generally secured by the borrower's principal residence. The maximum amount of a home equity line of credit is generally 95% of the appraised value of a borrower's real estate collateral less the amount of any prior mortgages or related liabilities. Home equity loans are approved with both fixed and adjustable interest rates which are determined by the Bank based upon market conditions. Such loans may be fully amortized over the life of the loan or have a balloon feature. The Bank's home equity loans are generally approved at rates at least 100 basis points higher than rates offered on first mortgage loans. During 2003, the Bank began offering a home equity line of credit at a rate in excess of the prime rate. The maximum term for home equity loans is 10 years.
The second largest category of consumer loans in the Bank's portfolio consists of loans secured by automobiles. At December 31, 2003, consumer loans secured by automobiles totaled $6.5 million, or 5.1%, of the Bank's total loan portfolio. Automobile loans are offered with maturities of up to 60 months for new automobiles. Loans secured by used automobiles will have maximum terms which vary depending upon the age of the automobile. The Bank generally makes automobile loans with a LTV ratio below 90%, although in the case of a new car loan the LTV ratio may be greater or less depending on the borrower's credit history, debt to income ratio, home ownership and other banking relationships with the Bank.
Consumer loans entail greater risks than one- to four-family residential mortgage loans, particularly consumer loans secured by rapidly depreciating assets such as automobiles or loans that are unsecured. In such cases, collateral repossessed after a default may not provide an adequate source of repayment of the outstanding loan balance because of damage, loss or depreciation. Further, consumer loan payments are dependent on the borrower's continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Such events would increase the Bank's risk of loss on unsecured loans. Finally, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default. At December 31, 2003, consumer loans 90 days or more delinquent, including those for which the accrual of interest has been discontinued, totaled $1.3 million, or 3.6%, of the Bank's total consumer loans.
The underwriting standards employed by the Bank for consumer loans include a determination of the applicant's credit history and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan. The stability of the applicant's monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. The Bank also considers the length of employment with the borrower's present employer as well as the amount of time the borrower has lived in the local area. Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount. Of the consumer loans 90 days or more delinquent, over 50% is secured by one-to-four family real estate, upon which a material loss is not expected to be realized. The two largest loans in this category total $240,000 and are secured by first mortgages on residential real estate. No assurance can be given, however, that the Bank's delinquency rate or loss experience on consumer loans will not increase in the future.
LOAN MATURITY SCHEDULE. The following table sets forth certain information at December 31, 2003 regarding the dollar amount of loans maturing in the Bank's portfolio based on their contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdraft loans are reported as due in one year or less.
OVER 1
WITHIN YEAR TO BEYOND
1 YEAR 5 YEARS 5 YEARS TOTAL
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(IN THOUSANDS)
Real estate loans:
One-to four-family real estate............ $ 7,127 $ 16,812 $ 16,365 $ 40,304
Commercial and agricultural real estate... 720 2,578 18,103 21,401
Multi-family residential.................. 245 1,565 566 2,376
Commercial and agricultural business loans.. 12,037 16,438 1,288 29,763
Consumer Loans:
Home equity/Home improvement.............. 7,371 15,953 290 23,614
Automobile................................ 901 5,565 11 6,477
Other..................................... 2,748 2,634 163 5,545
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Total....................................... $ 31,149 $ 61,545 $ 36,786 $ 129,480
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The following table sets forth at December 31, 2003, the dollar amount of all fixed-rate and adjustable-rate loans. At December 31, 2003, fixed-rate loans include $30.2 million in fixed-rate balloon payment loans with original maturities of five years or less. The total dollar amount of fixed-rate loans and adjustable-rate loans due after December 31, 2004, was $76.9 million and $21.4 million, respectively.
FIXED ADJUSTABLE TOTAL
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(IN THOUSANDS)
Real estate loans:
One- to four-family real estate............. $ 33,046 $ 7,258 $ 40,304
Commercial and agricultural real estate..... 10,172 11,229 21,401
Multi-family real estate 1,975 401 2,376
Commercial and agricultural business loans.... 27,331 2,432 29,763
Consumer loans:
Home equity/Home improvement................ 23,520 94 23,614
Automobile.................................. 6,477 -- 6,477
Other....................................... 5,308 237 5,545
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Total......................................... $ 107,829 $ 21,651 $129,480
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LOAN ORIGINATION, SOLICITATION AND PROCESSING. Loan originations are derived from a number of sources such as real estate broker referrals, existing customers, borrowers, builders, attorneys and walk-in customers. Upon receipt of a loan application, a credit report is made to verify specific information relating to the applicant's employment, income, and credit standing. In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent appraiser approved by the Bank. A loan application file is first reviewed by a loan officer in the Bank's loan department who checks applications for accuracy and completeness, and verifies the information provided. The financial resources of the borrower and the borrower's credit history, as well as the collateral securing the loan, are considered an integral part of each risk evaluation prior to approval. The Board has established individual lending authorities for each loan officer by loan type. These limits are based upon length of service at the Bank and the individual loan officer's lending experience. Loans over an individual officer's lending limits must be approved by the officers' loan committee consisting of the chairman of the board, president, senior loan administrator and all lending officers, which meets daily and has lending authority up to $300,000 depending on the type of loan. Loans with a principal balance over this limit, up to $500,000, must be approved by the directors' loan committee, which meets weekly and consists of the chairman of the board, president, senior vice president, senior loan administrator and at least two outside directors, plus all lending officers as non-voting members. The Board of Directors approves all loans with a principal balance over $500,000. The Board of Directors ratifies all loans made by the Bank. Fire and casualty insurance are required at the time the loan is made and throughout the term of the loan. Once the loan is approved, the applicant is informed and a closing date is scheduled. The Bank typically funds its loan commitments within 30 days.
If the loan is approved, the borrower must provide proof of fire and casualty insurance on the property serving as collateral which insurance must be maintained during the full term of the loan; flood insurance is required in certain instances. Title insurance or an attorney's opinion based on a title search of the property is generally required on loans secured by real property.
ORIGINATION AND SALE OF LOANS. Set forth below is a table showing the Bank's loan originations, sales and repayments for the periods indicated. It is the Bank's policy to originate for sale into the secondary market (primarily to Freddie Mac) fixed-rate mortgage loans with maturities of 15 years or more and to originate for retention in its portfolio ARM loans and loans with balloon payments. Currently, the Bank usually obtains commitments prior to selling its fixed-rate mortgage loans. It is the Bank's policy to sell fixed-rate mortgage loans as market conditions permit.
AT DECEMBER 31,
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2003 2002 2001 2000 1999
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(IN THOUSANDS)
Total loans receivable at beginning of period.................. $ 145,283 $ 157,977 $ 173,827 $ 142,635 $ 129,516
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Originations:
Real estate loans:
One- to four-family residential.......................... 110,440 99,480 99,081 22,864 39,035
Commercial and agricultural.............................. 9,154 5,519 2,662 4,575 2,484
Multi-family residential................................. 216 293 552 395 160
Commercial and agricultural.................................. 19,880 22,850 26,627 9,549 6,817
Consumer:
Home equity/Home improvement............................. 12,968 16,536 20,761 22,159 26,262
Automobile............................................... 2,516 5,790 7,826 9,289 12,216
Other.................................................... 5,009 6,309 6,483 9,466 9,479
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Total originations..................................... 160,183 156,777 163,992 78,297 96,453
Participation loans purchased.................................. 2,120 723 1,312 633 618
Transfer of mortgage loans to foreclosed real estate owned..... 1,023 806 1,191 659 563
Repayments..................................................... 69,363 83,326 99,668 32,810 52,905
Loan sales..................................................... 107,720 86,062 80,295 14,269 30,484
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Total loans receivable at end of period................ $ 129,480 $ 145,283 $ 157,977 $ 173,827 $ 142,635
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LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on loans, the Bank may charge loan origination fees. The ability of the Bank to charge loan origination fees is influenced by the demand for mortgage loans and competition from other lenders in the Bank's market area. In December 1986, the FASB issued SFAS No. 91 on the accounting for non-refundable fees and costs associated with originating or acquiring loans. To the extent that loans are originated or acquired for the Bank's portfolio, SFAS No. 91 requires that the Bank defer loan origination fees and costs and amortize such amounts as an adjustment of yield over the life of the loan by use of the level yield method. SFAS No. 91 applies to fiscal years beginning after December 15, 1987. SFAS No. 91 reduces the amount of revenue recognized by many financial institutions at the time such loans are originated or acquired. Fees deferred under SFAS No. 91 are recognized into income immediately upon the sale of the related loan. At December 31, 2003, the Bank had $54,000 of net deferred loan fees. Loan origination fees are volatile sources of income. Such fees vary with the volume and type of loans and commitments made and purchased and with competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, the Bank also receives other fees and service charges that consist primarily of extension fees and late charges. The Bank recognized fees and service charges of $111,000, $142,000 and $151,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
LOAN CONCENTRATION. With certain exceptions, an Illinois-chartered savings bank may not make a loan or exceed credit for secured and unsecured loans for business, commercial, corporate or agricultural purposes to a single borrower in excess of 25% of the savings bank's total capital, as defined by regulation. At December 31, 2003, the Bank's loans-to-one borrower limit was $4.7 million. At December 31, 2003 the Bank had no loans in excess of its loans-to-one borrower limitation.
DELINQUENCIES AND CLASSIFIED ASSETS
The Bank's collection procedures provide that when a mortgage loan is either ten days (in the case of ARM and balloon loans) or 15 days (in the case of fixed-rate loans) past due, a computer-generated late charge notice is sent to the borrower requesting payment plus a late charge. If the mortgage loan remains delinquent, a telephone call is made or a letter is sent to the borrower stressing the importance of reinstating the loan and obtaining reasons for the delinquency. When a loan continues in a delinquent status for 90 days or more, and a repayment schedule has not been made or kept by the borrower, a notice of intent to foreclose upon the underlying property is then sent to the borrower, giving 30 days to cure the delinquency. If not cured, foreclosure proceedings are initiated. Consumer loans receive a ten-day grace period before a late charge is assessed. Collection efforts begin after the grace period expires. At December 31, 2003, 2002 and 2001 the percentage of nonperforming loans to net loans receivable were 2.61%, 2.70% and 2.58%, respectively.
IDENTIFICATION OF LOAN DEFALCATION. During an internal audit of loan operations in 2001, the Bank uncovered loan irregularities at its branch in Virden, Illinois. The irregularities, which included recording fictitious loans, making unauthorized advances on loans, diversion of loan proceeds and payoff checks, and misapplication of funds, were limited to loans originated and serviced at the Banks' Virden branch. The investigation, in which the Bank was assisted by its independent outside auditor, has been completed and the identified losses have been recorded on the Company's financial statements. For the year ended December 31, 2003, the Company recognized a nonrecurring expense associated with the loan irregularities of $9,000, consisting of related legal expenses. In March 2003, the Company received a $563,000 recovery, which represents the negotiated settlement with the Company's insurance carrier.
DELINQUENT LOANS AND NONPERFORMING ASSETS. Loans are reviewed on a regular basis and are placed on nonaccrual status when, in the opinion of management, the collection of additional interest is doubtful. Commercial and home equity loans are placed on nonaccrual status when either principal or interest is 90 days or more past due and management considers the interest uncollectible. Mortgages and other consumer loans are placed on nonaccrual status when either principal or interest is 120 days or more past due and management considers the interest uncollectible. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on management's assessment of the ultimate collectibility of the loan.
Management monitors all past due loans and nonperforming assets. Such loans are placed under close supervision with consideration given to the need for additional allowance for loan loss, and (if appropriate) partial or full charge-off. At December 31, 2003, the Bank had $190,000 of loans 90 days or more delinquent that were still accruing interest.
Real estate acquired through foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until such time as it is sold. When real estate owned is acquired, it is recorded at the lower of the unpaid principal balance of the related loan, or its fair market value, less estimated selling expenses. Any further write-down of real estate owned is charged against earnings. At December 31, 2003, the Bank owned $499,000 of property classified as real estate owned.
DELINQUENT LOANS. The following table sets forth information regarding delinquent loans and other real estate owned by the Bank at the dates indicated. As of the dates indicated, the Bank had immaterial restructured loans within the meaning of SFAS No. 15, 114, and 118.
AT DECEMBER 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Non-accruing loans:
One-to-four family residential............. 1,022 769 805 417 686
Commercial and agricultural real estate.... 224 186 273 -- --
Commercial and agricultural business....... 613 301 24 237 48
Home equity/Home improvement............... 1,101 1,860 971 745 512
Automobile................................. 139 196 181 408 98
Other consumer............................. 22 198 106 121 354
------- ------- ------- ------- -------
Total.................................... 3,121 3,510 2,360 1,928 1,698
------- ------- ------- ------- -------
Accruing loans delinquent more than 90 days:
One-to-four family residential........... 168 64 -- -- --
Commercial and agricultural real estate.. -- 259 1,658 -- --
Automobile............................... 15 -- -- -- --
Other consumer........................... 7 28 9 23 1
------- ------- ------- ------- -------
Total.................................... 190 351 1,667 23 1
------- ------- ------- ------- -------
Foreclosed assets:
One-to-four family residential........... 499 442 945 460 357
Automobile............................... 18 38 60 87 96
------- ------- ------- ------- -------
Total.................................... 517 480 1,005 547 453
------- ------- ------- ------- -------
Total nonperforming assets.................... $ 3,828 $ 4,341 $ 5,032 $ 2,498 $ 2,152
------- ------- ------- ------- -------
Total as a percentage of total assets......... 1.46% 1.72% 2.09% 1.10% 1.27%
------- ------- ------- ------- -------
|
Interest income that would have been recorded under the original terms of loans classified as non-accruing loans totaled approximately $167,000 for the year ended December 31, 2003. Interest income from such loans that was included in net income for the year ended December 31, 2003 totaled $103,000.
CLASSIFIED ASSETS. Federal and state regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examination of insured institutions, Federal examiners have authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: "substandard," "doubtful" and "loss." Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. For assets classified "substandard" and "doubtful," the institution is required to establish general loan loss reserves in accordance with accounting principles generally accepted in the United States of America. Assets classified "loss" must be either completely written off or supported by a 100% specific reserve. The Bank also maintains a category designated "special mention" which is established and maintained for assets not currently requiring classification but having potential weaknesses or risk characteristics that could result in future problems. An institution is required to develop an in-house program to classify its assets, including investments in subsidiaries, on a regular basis and set aside appropriate loss reserves on
the basis of such classification. As part of the periodic exams of the Bank by the FDIC and the Illinois Commissioner of Banks and Real Estate ("Commissioner"), the staff of such agencies reviews the Bank's classifications and determine whether such classifications are adequate. Such agencies have, in the past, and may in the future require the Bank to classify certain assets which management has not otherwise classified or require a classification more severe than established by management. At December 31, 2003, the Bank's classified assets totaled $7.6 million, all of which were classified substandard.
At December 31, 2003, the Bank's largest nonperforming loan had a principal balance of $301,000 and was secured by a first mortgage on commercial property. The Bank has established reserves totaling $25,000 for potential losses associated with this loan. The property securing the loan was sold in January 2004 and the debt was reduced by $268,000. Personal guarantees were obtained from the borrowers to satisfy the deficiency.
Management continues to review its lending procedures in light of the rising trend in delinquencies and loan losses. The Company took several steps during 2003 to further strengthen its collection and underwriting practices. During the first quarter, the Company hired an additional loan collector to help manage the level of delinquencies, bankruptcies and foreclosures. During the third quarter, the Company hired an experienced senior loan administrator. This individual oversees all lending functions of the Company and is assisting in the collection and workout of problem credits, as well as reviewing and further enhancing all lending policies and procedures. In addition, the Company added personnel and expanded its loan review program in order to assess the effectiveness of new policies and procedures. Management will continue to evaluate the Company's underwriting standards and procedures to identify areas that can be further strengthened.
ALLOWANCE FOR LOAN LOSSES
Management's policy is to provide for estimated losses on the Bank's loan portfolio based on management's evaluation of the probable losses that may be incurred. Management regularly reviews the Bank's loan portfolio, including problem loans, to determine whether any loans require classification or the establishment of appropriate reserves or allowances for losses. Such evaluation, which includes a review of all loans of which full collectibility of interest and principal may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral. Other factors considered by management include the size and risk exposure of each segment of the loan portfolio, present indicators such as delinquency rates and the borrower's current financial condition, and the potential for losses in future periods. Management calculates the general allowance for loan losses in part based on past experience. While current year additions to the general loss allowances are charged against earnings, a portion of general loan loss allowances are added back to capital to the extent permitted in computing risk-based capital under Federal and state regulations.
The balance of the allowance for loan losses is based on ongoing, quarterly assessments of the probable estimated losses in the loan portfolio. The Bank's methodology for assessing the appropriateness of the allowance consists of applying several formula methods to identified problem loans and portfolio segments. The allowance is calculated by applying loss factors to outstanding loan balances, based on an internal risk grade of such loans or pools of loans. Changes in risk grades of both performing and nonperforming loans affect the amount of the allowance. Loss factors are based primarily on historical loss experience over the past five years, and may be adjusted for other significant conditions that, in management's judgment, affect the collectibility of the loan portfolio.
Since the allowance for loan losses is based upon estimates of probable losses, the amount actually observed can vary significantly from the estimated amounts. The historical loss factors attempt to reduce this variance by taking into account recent loss experience. Management evaluates several other conditions in connection with the allowance, including general economic and business conditions, credit quality trends, collateral
values, loan volumes and concentrations, seasoning of the portfolio, and regulatory examination results. The formulas used in the analysis were changed in 2002 to reflect the changing composition of the loan portfolio and actual loss history by loan type. Management believes the current balance of the allowance for loan losses is adequate. Management will continue to monitor the loan portfolio and assess the adequacy of the allowance at least quarterly.
For the years ended December 31, 2003, 2002 and 2001, the Bank provided $2.1, $2.0 million and $1.0 million, respectively, to the allowance for loan losses. The Bank's allowance for loan losses totaled $2.2 million, $2.1 million and $1.1 million at December 31, 2003, 2002 and 2001, respectively. Although the Bank maintains its allowance for loan losses at a level which it considers to be adequate to provide for potential losses, there can be no assurance that such losses will not exceed the estimated amounts or that the Bank will not be required to make additions to the allowance for loan losses in the future. Future additions to the Bank's allowance for loan losses and changes in the related ratio of the allowance for loan losses to nonperforming loans are dependent upon the economy, changes in real estate values and interest rates, the view of the regulatory authorities toward adequate loan loss reserve levels, and inflation. Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table summarizes changes in the allowance for loan losses by loan categories for each period and additions to the allowance for loan losses, which have been charged to operations.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of period................... $ 2,073 $ 1,107 $ 1,206 $ 827 $ 801
Charge-offs:
One-to-four family residential................. 365 251 109 39 37
Commercial and agricultural real estate........ 432 55 61 6 --
Commercial and agricultural business........... 153 44 89 10 30
Home equity/home improvement................... 666 395 267 240 80
Automobile..................................... 256 213 296 181 207
Other consumer................................. 182 163 322 140 147
--------- --------- --------- --------- --------
Total....................................... 2,054 1,121 1,144 616 501
Recoveries:
One-to-four family residential................ 5 17 -- 12 8
Commercial and agricultural real estate....... 18 2 -- -- --
Commercial and agricultural business.......... -- 11 -- 10 --
Home equity/Home improvement.................. 5 10 5 1 1
Automobile.................................... 20 26 26 17 22
Other Consumer................................ 44 21 14 34 51
--------- --------- --------- --------- --------
Total....................................... 92 87 45 74 82
Net loans charged-off............................ 1,962 1,034 1,099 542 419
Additions charged to operations.................. 2,075 2,000 1,000 610 445
Additions through acquisitions................... -- -- -- 311 --
--------- --------- --------- --------- --------
Balance at end period............................ $ 2,186 $ 2,073 $ 1,107 $ 1,206 $ 827
========= ========= ========= ========= ========
Total loans outstanding.......................... $ 129,480 $ 145,283 $ 157,729 $ 173,795 $142,594
Average net loans outstanding.................... $ 138,792 $ 152,848 $ 162,230 $ 161,915 $135,048
Allowance for loan losses as a percent
of total loans at end of period................ 1.69% 1.43% 0.70% 0.70% 0.58%
Net loans charged off as a percent
of average net loans outstanding............... 1.41% 0.68% 0.68% 0.34% 0.31%
Ratio of allowance for loan losses to
nonperforming loans............................ 66.02% 53.69% 27.37% 62.55% 48.68%
Ratio of allowance for loan losses to total
nonperforming assets at end of period.......... 57.11% 47.75% 22.00% 48.28% 38.43%
|
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth the allocation of allowance for loan losses by loan category for the periods indicated. The table reflects the allowance for loan losses as a percentage of net loans receivable. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
AT DECEMBER 31,
---------------------------------------------------------------------
2003 2002 2001
--------------------- ---------------------- ----------------------
% OF % OF % OF
LOANS IN LOANS IN LOANS IN
EACH CATEGORY EACH CATEGORY EACH CATEGORY
TO NET TO NET TO NET
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- --------- --------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
One-to-four family residential............... $ 555 31.7% $ 516 30.7% $ 95 $ 29.8%
Commercial and agricultural real estate...... 285 16.8 180 12.9 19 11.7
Multi-family residential..................... 3 1.9 10 1.9 2 1.6
Commercial and agricultural business......... 192 23.4 169 22.0 155 19.6
Home equity/Home improvement................. 817 18.6 653 21.8 429 24.7
Automobile................................... 194 5.1 329 7.3 253 8.3
Other consumer............................... 140 4.4 216 5.0 154 5.2
Unallocated.................................. -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total ................................... $ 2,186 101.9% $ 2,073 101.6% $ 1,107 100.9%
======= ======= ======= ======= ======= =======
(Continued)
---------------------------------------------
2000 1999
--------------------- ---------------------
% OF % OF
LOANS IN LOANS IN
EACH CATEGORY EACH CATEGORY
TO NET TO NET
AMOUNT LOANS AMOUNT LOANS
-------- --------- -------- ---------
$
One-to-four family residential............... 161 28.1% $ 253 29.4%
Commercial and agricultural real estate...... 158 10.8 57 5.9
Multi-family residential..................... 7 1.6 5 1.5
Commercial and agricultural business......... 169 18.4 152 16.3
Home equity/Home improvement................. 187 26.6 103 28.9
Automobile................................... 227 9.0 78 11.0
Other consumer............................... 177 6.4 158 7.6
Unallocated.................................. 120 -- 21 --
Total ................................... $ 1,206 100.9% $ 827 100.6%
======= ======= ======= =======
|
INVESTMENT ACTIVITIES
The Bank's investment portfolio consists primarily of U. S. government and agency securities, along with mortgage-backed securities (discussed below), interest-bearing deposits in other financial institutions, Federal funds sold, Municipal Bonds and FHLB stock. The Bank's portfolio of equity investment securities totaled $48,000 at December 31, 2003 consisting of an interest in a local community development corporation and Farmer Mac Stock. In addition, the Bank's investment portfolio included $1.9 million of local municipal bonds. The Bank had $500,000 in Federal funds sold at December 31, 2003. The Bank's portfolio of U.S. Government and Agency Securities totaled $97.6 million at December 31, 2003. The Bank's holdings of FHLB stock totaled $1.4 million at December 31, 2003. The Bank had $1.8 million of investments in interest-bearing deposits at December 31, 2003 consisting of deposits in the Federal Home Loan Bank and other correspondent accounts. Total long-term investments at December 31, 2003 were $78.9 million. The Bank's short-term and long-term investment portfolio is expected to continue to change based on liquidity needs associated with loan origination activities.
The Bank is required under Federal regulations to maintain a minimum amount of liquid assets that may be invested in specified short-term securities and certain other investments. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as management's projections as to the short-term demand for funds to be used in the Bank's loan origination and other activities. The Bank's liquidity ratio at December 31, 2003 was 43.3%, which was adequate to meet its normal business activities.
MORTGAGE-BACKED SECURITIES. The Bank occasionally invests in mortgage-backed securities issued or guaranteed by the United States Government or agencies thereof. These securities, which consist primarily of mortgage-backed securities issued or guaranteed by GNMA, FNMA, and FHLMC, had an amortized cost of $7.6 million, $2.7 million and $4.1 million at December 31, 2003, 2002 and 2001, respectively. At December 31, 2003, all of the mortgage-backed securities in the investment portfolio had fixed-rates of interest. The market value of the Bank's mortgage-backed securities portfolio was $7.6 million, $2.8 million and $4.3 million at December 31, 2003, 2002 and 2001, respectively, and the weighted average rate as of December 31, 2003, 2002 and 2001 was 3.88%, 6.09% and 7.12%, respectively.
Set forth below is a table showing the Bank's purchases, sales and repayments of mortgage-backed securities for the periods indicated.
AT DECEMBER 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(IN THOUSANDS)
Mortgage-backed securities at beginning of period... $ 2,822 $ 4,264 $ 6,689 $ 7,353 $ 9,974
Purchases........................................... 8,082 -- -- 797 --
Sales............................................... 2,305 60 -- -- --
Repayments.......................................... 910 1,350 2,499 1,472 2,584
Premium amortization................................ (29) -- 2 (3) (8)
Net unrealized gain (loss).......................... (63) (32) 72 14 (29)
-------- -------- -------- -------- --------
Mortgage-backed securities at end of period......... $ 7,597 $ 2,822 $ 4,264 $ 6,689 $ 7,353
======== ======== ======== ======== ========
|
INVESTMENT SECURITIES AND SHORT-TERM INVESTMENT PORTFOLIO. The following table sets forth the carrying value of the Bank's investment securities portfolio and short-term investments at the dates indicated. At December 31, 2003, the market value of the Bank's short-term investment portfolio approximated its cost.
AT DECEMBER 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- --------
(IN THOUSANDS)
Investment securities:
FHLB stock.................................... $ 1,381 $ 1,279 $ 1,215 $ 1,135 $ 920
Equity securities and municipal bonds......... 1,955 779 2,160 1,641 120
U.S. Government and Agency Securities......... 97,578 72,846 42,984 18,519 490
Corporate Bonds............................... -- -- -- -- 299
--------- --------- --------- --------- --------
Total investment securities.......... $ 100,914 $ 74,904 $ 46,359 $ 21,295 $ 1,829
========= ========= ========= ========= ========
Short-term investments:
Interest-bearing deposits in other depository
institutions................................ $ 1,842 $ 3,865 $ 6,506 $ 2,853 $ 4,768
Federal funds sold............................ 500 800 1,010 4,967 --
--------- --------- --------- --------- --------
Total short-term investments............ $ 2,342 $ 4,665 $ 7,516 $ 7,820 $ 4,768
========= ========= ========= ========= ========
|
The following table sets forth the maturities and weighted average yields of the Bank's securities portfolio, excluding FHLB stock and equity securities, at December 31, 2003.
CARRYING VALUE AT DECEMBER 31, 2003
---------------------------------------------------------------
TOTAL
LESS THAN 1 TO 5 5 TO 10 OVER INVESTMENT
1 YEAR YEARS YEARS 10 YEARS SECURITIES
---------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
U.S. Government............................... $ 20,301 $ 40,573 $ 34,735 $ 1,969 $ 97,578
Municipal bonds............................... 321 659 345 582 1,907
--------- --------- --------- --------- --------
Total..................................... $ 20,622 $ 41,232 $ 35,080 $ 2,551 $ 99,485
========= ========= ========= ========= ========
Weighted average yield.......................... 2.58% 3.11% 3.77% 4.40% 3.27%
|
SOURCES OF FUNDS
GENERAL. Deposits and borrowings are the major sources of funds for lending and other investment purposes. In addition, the Bank derives funds from the repayment and prepayment of loans and mortgage-backed securities, operations, sales of loans into the secondary market, and the sale, call, or maturity of investment securities. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. Other sources of funds include advances from the FHLB. For further information see "--Borrowings." Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer term basis for general business purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally from within the Bank's market areas through the offering of a broad selection of deposit instruments including interest-bearing checking accounts, noninterest-bearing checking accounts, savings accounts, money market demand accounts, term certificate accounts and individual retirement accounts. The Bank accepts deposits of $100,000 or more and may offer negotiated interest rates on such deposits. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. The Bank regularly evaluates its internal cost of funds, surveys rates offered by competing institutions, reviews the Bank's cash flow requirements for lending and liquidity and executes rate changes when deemed appropriate. The Bank does not obtain funds through brokers, nor does it solicit funds outside its market area. The Bank has on occasion offered above market interest rates in order to attract deposits.
DEPOSIT ACTIVITY
The following table sets forth the deposit activities of the Bank for the periods indicated.
AT DECEMBER 31,
-------------------------------------------------------------
2003 2002 2001 2000(1) 1999
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Deposits......................................... $ 895,755 $1,067,912 $ 838,886 $ 611,070 $ 443,376
Withdrawals...................................... 890,499 1,064,640 827,381 557,631 456,508
---------- ---------- ---------- ---------- ----------
Net increase (decrease) before interest credited. 5,256 3,272 11,505 53,439 (13,132)
Interest credited................................ 4,315 5,431 7,595 5,170 4,474
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in deposits........... $ 9,571 $ 8,703 $ 19,100 $ 58,609 $ (8,658)
========== ========== ========== ========== ==========
|
DEPOSIT PORTFOLIO
Deposits in the Bank as of December 31, 2003 were represented by the various types of deposit programs described below:
WEIGHTED PERCENTAGE
AVERAGE MINIMUM OF TOTAL
INTEREST RATE MINIMUM TERM DEMAND ACCOUNTS AMOUNT BALANCES DEPOSITS
------------- ------------ --------------- ------ -------- --------
(IN THOUSANDS)
0.00% None Noninterest-bearing checking $ 50 $ 12,851 5.46%
0.49 None Interest-bearing checking 50 28,079 11.94
0.94 None Money market deposit accounts 2,500 9,694 4.12
0.65 None Savings 50 30,679 13.05
CERTIFICATES OF DEPOSIT
-----------------------
2.68 Less than 1 year Fixed term, fixed rate $ 500 $112,579 47.87
3.80 1-2 years Fixed term, fixed rate 500 25,231 10.73
3.57 2-3 years Fixed term, fixed rate 500 7,860 3.34
4.25 3-4 years Fixed term, fixed rate 500 3,859 1.64
3.93 Over 4 years Fixed term, fixed rate 500 4,341 1.85
-------- ------
$235,173 100.00%
======== ======
|
DEPOSIT FLOW
The following table sets forth the change in dollar amount of savings deposits in the various types of savings accounts offered by the Bank between the dates indicated.
AT DECEMBER 31,
----------------------------------------------------------------
2003 2002
------------------------------- -------------------------------
BALANCE PERCENT CHANGE BALANCE PERCENT CHANGE
---------- -------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Club accounts.................. $ 220 0.09% $ 6 $ 214 0.10% $ 12
Noninterest-bearing checking... 12,851 5.46 (678) 13,529 6.00 2,466
Interest-bearing checking...... 28,079 11.94 4,037 24,042 10.66 456
Passbooks...................... 30,459 12.96 4,458 26,001 11.52 826
Money market deposit accounts.. 9,694 4.12 (958) 10,652 4.72 2,999
Certificates of deposit that
mature:
within 12 months............. 112,579 47.87 2,907 109,672 48.61 4,113
within 12-36 months.......... 33,091 14.07 (3,327) 36,418 16.14 (1,185)
beyond 36 months............. 8,200 3.49 3,126 5,074 2.25 (984)
---------- -------- ------- --------- -------- -------
Total...................... $ 235,173 100.00% $ 9,571 $ 225,602 100.00% $ 8,703
========== ======== ======= ========= ======== =======
(Continued)
----------------------------------------------------------------
2001 2000
------------------------------- -------------------------------
BALANCE PERCENT CHANGE BALANCE PERCENT CHANGE
---------- -------- --------- --------- --------- ---------
Club accounts.................. $ 202 0.09% $ (12) $ 214 0.11% $ 17
Noninterest-bearing checking... 11,063 5.10 1,561 9,502 4.81 4,182
Interest-bearing checking...... 23,586 10.87 938 22,648 11.45 6,904
Passbooks...................... 25,175 11.61 2,741 22,434 11.34 (819)
Money market deposit accounts.. 7,653 3.53 (411) 8,064 4.08 1,861
Certificates of deposit that
mature:
within 12 months............. 105,559 48.67 12,390 93,169 47.10 31,080
within 12-36 months.......... 37,603 17.34 3,402 34,201 17.29 10,080
beyond 36 months............. 6,058 2.79 (1,509) 7,567 3.82 5,304
---------- -------- ------- -------- -------- --------
Total...................... $ 216,899 100.00% $19,100 $197,799 100.00% $ 58,609
========== ======== ======= ======== ======== ========
|
TIME DEPOSITS BY RATES
The following table sets forth the certificates of deposit of the Bank classified by rates as of the dates indicated:
AT DECEMBER 31,
2003 2002 2001 2000 1999
--------- --------- --------- --------- --------
(IN THOUSANDS)
Rate
----
1.99% or less.................................. $ 33,579 $ 3,757 $ -- $ -- $ --
2.00-3.99%..................................... 87,935 83,674 40,338 52 49
4.00-5.99%..................................... 22,201 41,164 63,363 57,379 70,312
6.00-7.99%..................................... 7,983 20,407 43,011 75,440 17,123
8.00 and greater............................... 2,172 2,162 2,508 2,066 989
--------- --------- --------- --------- --------
$ 153,870 $ 151,164 $ 149,220 $ 134,937 $ 88,473
========= ========= ========= ========= ========
|
The following table sets forth the amount and maturities of certificates of deposit at December 31, 2003.
AMOUNT DUE
-----------------------------------------------------------------------------
OVER 2 OVER 3
LESS THAN OVER 1 YEAR YEARS TO 3 YEARS TO 4 OVER 4
ONE YEAR TO 2 YEARS YEARS YEARS YEARS TOTAL
---------- ------------ ------------ ------------ ----------- -----------
(Dollars in Thousands)
1.99% or less.................... $ 31,009 $ 2,015 $ 550 $ 5 $ -- $ 33,579
2.00-3.99%....................... 65,655 14,312 4,217 1,455 2,296 87,935
4.00-5.99%....................... 10,583 4,532 2,666 2,393 2,027 22,201
6.00-7.99%....................... 4,985 2,547 427 6 18 7,983
8.00 and greater................. 347 1,825 -- -- -- 2,172
Weighted average balance......... 2.68% 3.80% 3.57% 4.25% 3.93% 2.98%
|
LARGE CERTIFICATES OF DEPOSIT. The following table indicates the balances of certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2003.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
(IN THOUSANDS)
Less than 3 months........................ $ 22,274
3-6 months................................ 14,853
6-12 months............................... 12,788
Over 12 months............................ 7,094
--------
Total................................... $ 57,009
========
|
BORROWINGS
Deposits are the primary source of funds for the Bank's lending and investment activities. If the need arises, the Bank may rely upon advances from the FHLB to supplement its supply of available funds and to fund deposit withdrawals. Advances from the FHLB are typically secured by the Bank's one- to four-family residential mortgage loans, United States Government and agency securities and mortgage-backed securities. The FHLB functions as a central reserve bank providing credit for the Bank and other member savings associations and financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to
apply for advances on the security of such stock and certain of its home mortgages, provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of a member institution's stockholders' equity or on the FHLB's assessment of the institution's creditworthiness. At December 31, 2003, the Bank had no FHLB advances outstanding.
Our borrowings consist of securities sold under agreements to repurchase which are swept daily from commercial deposit accounts. The Company may be required to provide additional collateral based on the fair value of the underlying securities.
The following table sets forth certain information regarding borrowings by the Bank for the dates indicated.
AT DECEMBER 31,
-------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Weighted average rate paid on:(1)
FHLB advances.................................. 1.30% --% 6.80% 6.52% 5.8%
Other borrowings............................... 1.16% 1.81% 1.51% 5.30% 9.0%
FHLB advances:
Maximum balance................................ $ 7,500 $ -- $ 5,000 $14,000 $ 8,000
Average balance................................ $ 1,243 $ -- $ 795 $ 7,877 $ 1,723
Other:
Maximum balance............................... $ 3,845 $ 4,364 $ 1,560 $ 896 $ --
Average balance............................... $ 2,192 $ 2,097 $ 849 $ 106 $ 17
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TRUST SERVICES
Since its acquisition of Chapin State Bank, the Bank has offered personal trust services. As of December 31, 2003, the Bank's trust department was managing $26.4 million in trust assets. Assets managed by the trust department grew $11.3 million during 2003. Trust fees collected in 2003 totaled $259,000, which represented an increase of $224,000 from 2002. The increase in fees is due to both asset growth and additional trust work performed during 2003. Management does not expect the level of trust fee income from the trust department to continue at the same level as experienced in 2003.
SUBSIDIARY ACTIVITIES
The Bank has one wholly owned subsidiary, Financial Resources Group, Inc. ("Financial Resources"), an Illinois corporation. Financial Resources is engaged in the business of originating commercial business loans and, to a lesser extent, commercial real estate loans, one- to four-family loans, pursuant to Veteran's Administration ("VA") and Federal Housing Administration ("FHA") guidelines, and multi-family loans. In addition, Financial Resources operates an investment center engaged in the business of buying and selling stocks, bonds, annuities and mutual funds for its customers' accounts. At December 31, 2003, the Bank had $1.8 million in equity and retained earnings in Financial Resources. For the year ended December 31, 2003, Financial Resources had net income of $147,000.
COMPETITION
The Bank encounters significant competition both in attracting deposits and in originating real estate and other loans. Its most direct competition for deposits has come historically from commercial banks, other savings banks, savings associations and credit unions in its market area, and the Bank expects continued strong competition
from such financial institutions in the foreseeable future. The Bank competes for savings by offering depositors a high level of personal service and expertise together with a wide range of financial services.
The competition for real estate and other loans comes principally from commercial banks, mortgage banking companies and other savings banks and savings associations. This competition for loans has increased substantially in recent years as a result of the large number of institutions competing in the Bank's market areas as well as the increased efforts by commercial banks to expand mortgage loan originations.
The Bank competes for loans primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers and home builders. Factors that affect competition include general and local economic conditions, current interest rate levels and the volatility of the mortgage markets.
The Bank's market areas consist of Morgan, Macoupin, and Montgomery Counties, Illinois. The Bank's market areas have a number of financial institutions, however, the Bank is the largest independent financial institution headquartered in Jacksonville.
REGULATION AND SUPERVISION
GENERAL. Jacksonville Bancorp, Inc. and Jacksonville Bancorp, MHC are nondiversified mutual savings and loan holding companies within the meaning of the Home Owners' Loan Act. As such they are registered with the Office of Thrift Supervision and are subject to regulation by the Office of Thrift Supervision. The Bank is an Illinois-chartered savings bank subject to extensive regulation by the Illinois Commissioner of Banks and Real Estate (the "Commissioner") and the FDIC. Its deposit accounts are insured up to applicable limits by the FDIC. The Bank must file reports with the Commissioner and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers or acquisitions with other depository institutions. There are periodic examinations of the Bank by the Commissioner and the FDIC to review the Bank's compliance with various regulatory requirements. The Bank is also subject to certain reserve requirements established by the Board of Governors of the Federal Reserve (the "FRB"). This regulation and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection of the FDIC and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Commissioner, the FDIC, or Congress could have a material impact on the operations of the Bank. Certain of the regulatory requirements applicable to the Bank are referred to below or elsewhere herein.
CAPITAL MAINTENANCE. Under FDIC regulations, the Bank must maintain minimum levels of capital. The regulations establish a minimum leverage capital requirement of not less than 3% core capital to total assets for banks in the strongest financial and managerial condition, with the highest supervisory rating of the federal regulators for banks. For all other banks, the minimum leverage capital requirement is between 4% and 5% of total assets. Core capital is composed of the sum of common stockholders' equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets (other than qualifying mortgage servicing rights and qualifying supervisory intangible core deposits), identified losses, investments in certain subsidiaries, and unrealized gains (losses) on investment securities.
The FDIC also requires that savings banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital (which is defined as core capital and supplementary capital) to risk weighted assets of 8.0%. In determining the amount of risk-weighted assets, all assets, including certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the federal regulators believe are inherent in the type of asset. The components of core capital are equivalent to those discussed earlier under the 3% leverage requirement. The components of supplementary capital currently include cumulative perpetual preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and allowance for loan and lease losses. Allowance for loan and lease losses includible in
supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital.
Set forth below is a summary of the Bank's compliance with its capital requirements as of December 31, 2003. At December 31, 2003, the Bank exceeded its applicable capital requirements.
AT DECEMBER 31, 2003
------------------------
PERCENT OF
AMOUNT ASSETS
----------- -----------
(DOLLARS IN THOUSANDS)
Tier 1(Core) Capital to Total Adjusted Assets (Leverage Ratio)
Actual level................................................... $ 17,024 6.54%
Required level................................................. 10,420 4.00
--------- ---------
Excess......................................................... $ 6,604 2.54%
========= =========
Tier 1 Capital to Risk-Weighted Assets:
Actual level................................................... $ 17,024 11.88%
Required level................................................. 5,733 4.00
--------- ---------
Excess......................................................... $ 11,291 7.88%
========= =========
Total Capital to Risk-Weighted Assets:
Actual level................................................... $ 18,821 13.13%
Required level................................................. 11,466 8.00
--------- ---------
Excess......................................................... $ 7,355 5.13%
========= =========
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ILLINOIS SAVINGS BANK REGULATION. As an Illinois-chartered savings bank, the Bank is subject to regulation and supervision by the Commissioner. The Commissioner's regulation of the Bank covers, among other things, the Bank's internal organization (i.e., charter, bylaws, capital requirements, transactions with directors and officers, and composition of the board of directors), as well as supervision of permissible activities and mergers and acquisitions. The Bank is required to file periodic reports with, and is subject to periodic examinations at least once within every 12-month period by the Commissioner. The lending and investment authority of the Bank is prescribed by Illinois law and regulations, as well as applicable Federal laws and regulations, and the Bank is prohibited from engaging in any activities not permitted by such laws and regulations.
Under Illinois law, savings banks are required to maintain a minimum core capital to total assets ratio of 3%. The Commissioner is authorized to require a savings bank to maintain a higher minimum capital level if the Commissioner determines that the savings bank's financial condition or history, management or earnings prospects are not adequate. If a savings bank's core capital ratio falls below the required level, the Commissioner may direct the savings bank to adhere to a specific written plan established by the Commissioner to correct the savings bank's capital deficiency, as well as a number of other restrictions on the savings bank's operations, including a prohibition on the declaration of dividends by the savings bank's board of directors.
Under Illinois law, a savings bank may make both secured and unsecured loans. However, loans for business, corporate, commercial or agricultural purposes, whether secured or unsecured, may not in the aggregate exceed 15% of a savings bank's total assets unless authorized by the Commissioner. With the prior written consent of the Commissioner, savings banks may also engage in real estate development activities, provided that the total investment in any one project may not exceed 15% of total capital, and the total investment in all projects may not exceed 50% of total capital. The total loans and extensions of credit outstanding at one time, both direct and indirect, by a savings bank to any borrower may not exceed 25% of the savings bank's total capital. At December 31, 2003, the Bank did not have any loans-to-one borrower which exceeded this limitation.
Illinois-chartered savings banks generally have all lending, investment and other powers which are possessed by federal savings banks based in Illinois. Recent federal and state legislative developments have reduced distinctions between commercial banks and savings institutions in Illinois with respect to lending and investment authority. As federal law has expanded the authority of federally chartered savings institutions to engage in
activities previously reserved for commercial banks, Illinois legislation and regulations ("parity legislation") have given Illinois-chartered savings institutions, such as the Bank, the powers of federally chartered savings institutions.
The board of directors of a savings bank may declare dividends on its
capital stock based upon the savings bank's annualized net profits except (1)
dividends may not be declared if the bank fails to meet its capital
requirements, (2) dividends are limited to 100% of net income in that year and
(3) if total capital is less than 6% of total assets, dividends are limited to
50% of net income without prior approval of the Illinois Commissioner of Banks
and Real Estate.
An Illinois-chartered savings bank may not make a loan to a person owning 10% or more of its stock, an affiliated person, an agent or an attorney of the savings bank, either individually or as an agent or partner of another, except under the rules of the Commissioner and regulations of the FDIC. This restriction does not apply, however, to loans made (i) on the security of single-family residential property used by the borrower as his or her residence, and (ii) to a non-profit, religious, charitable or fraternal organization or a corporation in which the savings bank has been authorized to invest by the Commissioner. Furthermore, a savings bank may not purchase, lease or acquire a site for an office building or an interest in real estate from an officer, director, employee or the holder of more than 10% of the savings bank's stock or certain affiliated persons as set forth in Illinois law, unless the prior written approval of the Commissioner is obtained.
Illinois law provides that any depository institution may merge into a savings bank operating under the Illinois Savings Bank Act. The Board of Directors of each merging institution must approve a plan of merger by resolution adopted by majority vote of all members of the respective boards. After such approval, the plan of merger must be submitted to the Commissioner for approval. The Commissioner may make an examination of the affairs of each merging institution (and their affiliates). The Commissioner shall not approve a merger agreement unless he finds that, among other things, (i) the resulting institution meets all requirements of the SBA; (ii) the merger agreement is fair to all persons affected; and (iii) the resulting institution will be operated in a safe and sound manner. If approved by the Commissioner, the plan of merger must be submitted to stockholders of the depository institution for approval, and may be required to be submitted to members if a mutual savings bank is one of the constituent entities. A two-thirds affirmative vote is required for approval of the plan of merger.
COMMUNITY REINVESTMENT ACT
FEDERAL REGULATION. Under the Community Reinvestment Act ("CRA"), as implemented by FDIC regulations, a savings institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of a savings institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution.
GRAMM-LEACH-BLILEY FINANCIAL SERVICES MODERNIZATION ACT OF 1999
In November 1999, the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the "Gramm-Leach-Bliley Act") became law. The Gramm-Leach-Bliley Act established a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. To the extent the Gramm-Leach-Bliley Act permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Bank currently offers and that can aggressively compete in the markets the Bank currently serves.
THE USA PATRIOT ACT
In response to the events of September 11th, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Financial institutions such as the Bank, have had a federal anti-money laundering obligation for years. Accordingly, the Bank does not believe the USA PATRIOT Act will have a material impact on its operations.
SARBANES-OXLEY ACT OF 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), which implemented legislative reforms intended to address corporate and accounting fraud. In addition to the establishment of a new accounting oversight board that enforces auditing, quality control and independence standards, Sarbanes-Oxley places certain restrictions on the scope of services that may be provided by accounting firms to their public company audit clients. Any non-audit services being provided to a public company audit client requires preapproval by the company's audit committee. In addition, Sarbanes-Oxley makes certain changes to the requirements for audit partner rotation after a period of time. Sarbanes-Oxley requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the Securities and Exchange Commission, subject to civil and criminal penalties if they knowingly or willingly violate this certification requirement. The Company's Chief Executive Officer and Chief Financial Officer have signed certifications to this Form 10-K as required by Sarbanes-Oxley. In addition, under Sarbanes-Oxley, counsel is required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate executives who violate federal securities laws; the period during which certain types of suits can be brought against a company or its officers is extended; and bonuses issued to top executives prior to restatement of a company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from trading the company's securities during retirement plan "blackout" periods, and loans to company executives (other than loans by financial institutions permitted by federal rules and regulations) are restricted. In addition, a provision directs that civil penalties levied by the Securities and Exchange Commission as a result of any judicial or administrative action under Sarbanes-Oxley be deposited to a fund for the benefit of harmed investors. The Federal Accounts for Investor Restitution provision also requires the Securities and Exchange Commission to develop methods of improving collection rates. The legislation accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers must also provide information for most changes in ownership in a company's securities within two business days of the change.
Sarbanes-Oxley increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the company's "registered public accounting firm." Audit Committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one member of the committee is a "financial expert" (as such term is defined by the Securities and Exchange Commission) and if not, why not. Under Sarbanes-Oxley, a company's registered public accounting firm is prohibited from performing statutorily mandated audit services for a company if such company's chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions had been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. Sarbanes-Oxley also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent accountant engaged in the audit of the company's financial statements for the purpose of rendering the financial statements materially misleading. Sarbanes-Oxley also requires the Securities and Exchange Commission to prescribe rules requiring inclusion of any internal control report and assessment by management in the annual report to shareholders. Sarbanes-Oxley requires
the company's registered public accounting firm that issues the audit report to attest to and report on management's assessment of the company's internal controls.
Compliance with the Sarbanes-Oxley Act has not had a material impact on our results of operations or financial condition.
HOLDING COMPANY REGULATION
PERMITTED ACTIVITIES. Pursuant to Section 10(o) of the Home Owners' Loan
Act and Office of Thrift Supervision regulations and policy, a mutual holding
company and a federally chartered mid-tier holding company such as Jacksonville
Bancorp, Inc. may engage in the following activities: (i) investing in the stock
of a savings association; (ii) acquiring a mutual association through the merger
of such association into a savings association subsidiary of such holding
company or an interim savings association subsidiary of such holding company;
(iii) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association; (iv) investing in a corporation, the
capital stock of which is available for purchase by a savings association under
federal law or under the law of any state where the subsidiary savings
association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of such company; (viii) acting as
trustee under deeds of trust; (ix) any other activity (A) that the Federal
Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the
Director, by regulation, prohibits or limits any such activity for savings and
loan holding companies; or (B) in which multiple savings and loan holding
companies were authorized (by regulation) to directly engage on March 5, 1987;
(x) any activity permissible for financial holding companies under Section 4(k)
of the Bank Holding Company Act, including securities and insurance
underwriting; and (xi) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
savings and loan holding company is approved by the Director of the Office of
Thrift Supervision. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (xi) above, and has a period of two years to
cease any nonconforming activities and divest of any nonconforming investments.
The Home Owners' Loan Act prohibits a savings and loan holding company, including Jacksonville Bancorp, Inc. and Jacksonville Bancorp, MHC, directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company thereof, without prior written approval of the Office of Thrift Supervision. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary savings institution, a nonsubsidiary holding company, or a nonsubsidiary company engaged in activities other than those permitted by the Home Owners' Loan Act; or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.
The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
WAIVERS OF DIVIDENDS BY JACKSONVILLE BANCORP, MHC. Office of Thrift Supervision regulations require Jacksonville Bancorp, MHC to notify the Office of Thrift Supervision of any proposed waiver of its receipt of dividends from Jacksonville Bancorp, Inc. The Office of Thrift Supervision reviews dividend waiver notices on a case-by-case basis, and, in general, does not object to any such waiver if: (i) the mutual holding company's board of directors determines that such waiver is consistent with such directors' fiduciary duties to the mutual holding company's members; (ii) for as long as the savings association subsidiary is controlled by the mutual holding company,
the dollar amount of dividends waived by the mutual holding company are considered as a restriction on the retained earnings of the savings association, which restriction, if material, is disclosed in the public financial statements of the savings association as a note to the financial statements; (iii) the amount of any dividend waived by the mutual holding company is available for declaration as a dividend solely to the mutual holding company, and, in accordance with SFAS 5, where the savings association determines that the payment of such dividend to the mutual holding company is probable, an appropriate dollar amount is recorded as a liability; and (iv) the amount of any waived dividend is considered as having been paid by the savings association in evaluating any proposed dividend under Office of Thrift Supervision capital distribution regulations.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. For federal income tax purposes, the Company files a federal income tax return based upon a tax year ended December 31. Because the Mutual Holding Company owns less than 80% of the outstanding Common Stock of the Company it is not permitted to file a consolidated federal income tax return with the Company. Since the Mutual Holding Company has no assets other than the stock of the Company and $1.3 million in cash, it will have no material federal income tax liability.
The Mutual Holding Company and the Company are subject to the rules of federal income taxation generally applicable to corporations under the Internal Revenue Code. Most corporations are not allowed to make tax deductible additions to bad debt reserves under the Code. However, banks are allowed to compute a tax deductible bad debt reserve based on their historical loss experience. Historically, banks were also allowed to compute tax bad debt reserves using a percentage of taxable income. The tax law was changed in 1987 and 1996 so that now the Company is allowed to maintain a tax deductible bad debt reserve at the greater of the amount computed using the experience method or the amount of the bad debt reserve at December 31, 1987 (base year). The Company has taken advantage of this tax benefit in computing its tax deductible bad debt reserve and maintains a tax bad debt reserve equal to the tax bad debt reserve at the base year.
Deferred income taxes arise from the recognition of certain items of income and expense for tax purposes in years different from those in which they are recognized in the consolidated financial statements.
The Bank was last audited by the Internal Revenue Service for the tax years ended December 31, 1998. As a result of adjustments made during the audit, the Bank received a refund of $8,000 for 1998. For additional information regarding taxation, see Note 9 of Notes to Consolidated Financial Statements.
ILLINOIS TAXATION. The State of Illinois imposes a tax on the Illinois taxable income of corporations, including savings banks, at the rate of 7.30%. Illinois taxable income is generally similar to federal taxable income except that interest from state and municipal obligations is taxable and no deduction is allowed for state income taxes. However, a deduction is allowed for certain U.S. Government and agency obligations. The Bank's state income tax returns for the tax years ended December 31, 1991, 1990 and 1989, have been audited by the Illinois tax authorities and did not have to be amended as a result of such audit.
PERSONNEL
As of December 31, 2003, the Bank and its subsidiary had a total of 100 full-time and 25 part-time employees. None of the Bank's employees is represented by a collective bargaining group. Management believes that its relationship with the Bank's employees is good.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
The Company's Annual Report on Form 10-K is available on its website at www.Jacksonvillesavings.com.
ITEM 2. PROPERTIES
The Bank conducts its business through its main office and two branch offices located in Jacksonville, and branch offices located in Virden, Litchfield, Chapin, and Concord, Illinois. The following table sets forth certain information concerning the main office and each branch office of the Bank at December 31, 2003. At December 31, 2003, the Bank's premises and equipment had an aggregate net book value of approximately $7.4 million. The Bank completed an expansion of its main office during the fourth quarter of 2003, at a cost of $2.5 million. The Bank believes that its branch facilities are adequate to meet the present and immediately foreseeable needs of the Bank and the Holding Company. All facilities are owned.
NET
BOOK VALUE
YEAR AT DECEMBER 31,
LOCATION OCCUPIED 2003
-------------------- ---------------- -------------------
(IN THOUSANDS)
Main Office
1211 West Morton Avenue
Jacksonville, Illinois 1994 $ 4,961
Branch Office
211 West State Street
Jacksonville, Illinois 1961 690
Branch Office
903 South Main
Jacksonville, Illinois 1989 238
Branch Office
501 North State Street
Litchfield, Illinois 1997 624
Branch Office
100 North Dye
Virden, Illinois 1986 253
Branch Office
510 Superior
Chapin, Illinois 2000 615
Branch Office
202 State
Concord, Illinois 2000 38
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ITEM 3. LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Company is periodically involved incident to the Company's business. In the opinion of management after consultation with legal counsel, such claims and lawsuits in the aggregate are immaterial to the Company and/or Bank's financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The "Stockholder Information" section of the Company's annual report to stockholders for the fiscal year ended December 31, 2003 (the "2003 Annual Report to Stockholders") is filed as an exhibit to this Form 10-K and is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Selected Consolidated Financial Information" section of the 2003 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the 2003 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
The "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the 2003 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The material identified in Item 15(a)(1) hereof is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days prior to filing date of this report, that the Company's disclosure controls and procedures (as defined by the Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions' rules and forms.
There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of the foregoing evaluation.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) Information concerning the directors and certain officers of the Company is incorporated by reference hereunder in the Proxy Statement for the 2004 Annual Meeting.
(b) Set forth below is information concerning the Principal Officers of the Company who are not described in the Proxy Statement.
NAME AGE POSITION HELD WITH THE COMPANY YEARS POSITION HELD ---- --- ------------------------------ ------------------- Steven L. Waltrip 52 Vice President - Mortgage/Consumer Lending 20 Thomas A. Luber 52 Vice President - Mortgage Banking 11 Susan L. Harpole 42 Vice President - Mortgage/Consumer Lending 5 Paul W. Miller 49 Vice President - Lending 3 Laura A. Marks 45 Vice President - Retail Banking 2 |
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to management compensation required under this item is incorporated by reference hereunder in the Proxy Statement for the 2004 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information required under this item is incorporated by reference to the Proxy Statement for the 2004 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is incorporated by reference to the Proxy Statement for the 2004 Annual Meeting.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required under this item is incorporated by reference to the Proxy Statement for the 2004 Annual Meeting.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The documents filed as a part of this Form 10-K are:
(A) Independent Auditors' Report;
(B) Consolidated Balance Sheets - December 31, 2003 and 2002.
(C) Consolidated Statements of Income - years ended December 31, 2003, 2002 and 2001;
(D) Consolidated Statements of Stockholders' Equity - years ended December 31, 2003, 2002 and 2001
(E) Consolidated Statements of Cash Flows - years ended December 31, 2003, 2002 and 2001; and
(F) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K
On October 15, 2003, the Company filed a current report on Form 8-K, Item 12. Results of Operations and Financial Condition, in which it announced its September 30, 2003 financial results.
(c) Exhibits
(1) Federal Charter and Bylaws(1)
(2) Instruments defining the rights of security holders, including debentures (Not Applicable).
(7) Letter re: change in accounting principles (Not Applicable)
(10) Material contracts
(A)(1) Employment Agreement between Jacksonville
Savings Bank and Andrew F. Applebee
(A)(2) Employment Agreement between Jacksonville
Savings Bank and Richard A. Foss
(A)(3) Employment Agreement between Jacksonville
Savings Bank and John C. Williams
(B) Jacksonville Savings Bank 1996 Stock Option
Plan(2)
(C) Jacksonville Savings Bank 2001 Stock Option
Plan(2)
(13) 2003 Annual Report to Stockholders
(14) Code of Ethics
(21) Subsidiaries
(23) Consent of McGladrey & Pullen, LLP to incorporate
financial statements into Form S-8.
(31.1) Certification required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(31.2) Certification required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(32.1) Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
------------------------
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* Previously filed.
(1) Incorporated by reference to the Company's Current Report 8-A12G filed
with the Securities and Exchange Commission on May 2, 2002.
(2) Incorporated by reference to the Company's registration statement on
Form S-8 filed with the Securities and Exchange Commission on February
2, 2004.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Jacksonville Bancorp, Inc.
Date: March 24, 2004 By: /s/ Richard A. Foss
--------------------------------
Richard A. Foss, President
and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: /s/ Richard A. Foss By: /s/ Andrew F. Applebee
--------------------------------------- --------------------------------
Richard A. Foss, President, Andrew F. Applebee,
Chief Executive Officer and Director Chairman of the Board
Date: March 24, 2004 Date: March 24, 2004
By: /s/ Diana S. Tone By: /s/ Dean H. Hess
--------------------------------------- --------------------------------
Diana S. Tone Dean H. Hess, Director
Chief Financial Officer
Date: March 24, 2004 Date: March 24, 2004
By: /s/ Roger D. Cannell By: /s/ Emily J. Osburn
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Roger D. Cannell, Director Emily J. Osburn, Director
Date: March 24, 2004 Date: March 24, 2004
By: /s/ Harmon B. Deal, III By: /s/ Harvey D. Scott, III
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Harmon B. Deal, III, Director Harvey D. Scott III, Director
Date: March 24, 2004 Date: March 24, 2004
By: /s/ Michael R. Goldasich By: /s/ John C. Williams
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Michael R. Goldasich, Director John C. Williams, Director,
Senior Vice President and
Trust Officer
Date: March 24, 2004 Date: March 24, 2004
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EXHIBIT INDEX
(1) Federal Charter and Bylaws (1)
(10) Material contracts
(A)(1) Employment Agreement between Jacksonville Savings Bank and
Andrew F. Applebee
(A)(2) Employment Agreement between Jacksonville Savings Bank and
Richard A. Foss
(A)(3) Employment Agreement between Jacksonville Savings Bank and John
C. Williams
(B) Jacksonville Savings Bank 1996 Stock Option Plan(2)
(C) Jacksonville Savings Bank 2001 Stock Option Plan(2)
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(13) 2003 Annual Report to Stockholders
(14) Code of Ethics
(21) Subsidiaries
(23) Consent of McGladrey & Pullen, LLP to incorporate financial
statement into Form S-8.
(31.1) Certification required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(31.2) Certification required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
(32.1) Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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Previously Filed
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(1) Incorporated by reference to the Company's Current Report 8-A12G filed
with the Securities and Exchange Commission on May 2, 2002.
(2) Incorporated by reference to the Company's registration statement on
Form S-8 filed with the Securities and Exchange Commission on February
2, 2004.
Exhibit 10(A)(1)
JACKSONVILLE SAVINGS BANK
EMPLOYMENT AGREEMENT
This Agreement is made effective as of the 16th day of March 2004, by and between Jacksonville Savings Bank (the "Bank"), an Illinois chartered savings institution, with its principal administrative office at 1211 West Morton Avenue, Jacksonville, Illinois 62650-2000 and Andrew F. Applebee ("Executive"). Any reference to "Company" herein shall mean Jacksonville Bancorp, Inc. or any successor thereto.
WHEREAS, Executive has been employed by the Bank since 1976 and is presently serving as its Chairman of the Board; and
WHEREAS, the Bank wishes to retain the services of Executive as an employee of the Bank for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to serve as Chairman of the Board of the Bank. During said period, Executive also agrees to serve, if elected, as an officer and director of any subsidiary or affiliate of the Bank. Failure to reappoint Executive as Chairman of the Board without the consent of Executive during the term of this Agreement shall constitute a breach of this Agreement.
2. TERMS AND DUTIES
(a) The period of Executive's employment under this Agreement shall begin
as of the date first above written and shall continue for a period of thirty-six
(36) full calendar months thereafter. Commencing on the first anniversary date
of this Agreement, and continuing at each anniversary date thereafter, the
Agreement shall renew for an additional year such that the remaining term shall
be three (3) years unless written notice is provided to Executive at least ten
(10) days and not more than thirty (30) days prior to any such anniversary date,
that his employment shall cease at the end of twenty-four (24) months following
such anniversary date. Prior to each notice period for non-renewal, the
disinterested members of the Board of Directors of the Bank ("Board") will
conduct a comprehensive performance evaluation and review of Executive for
purposes of determining whether to extend the Agreement, and the results thereof
shall be included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Bank; provided, however, that, with the approval of the Board, as evidenced by a resolution of such Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in such Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement. Nothing in this Section shall be construed as preventing Executive from serving from time to time on boards, committees, or holding positions of non-profit or governmental organizations, including religious and civic groups, without the need for Board approval.
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Section 2(b). The Bank shall pay Executive as compensation a salary of not less than $97,320 per year ("Base Salary"). Such Base Salary shall be payable biweekly. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually; the first such review will be made no later than January
31 of each year during the term of this Agreement and shall be effective from the first day of said month through the end of the calendar year. Such review shall be conducted by a Committee designated by the Board, and the Board may increase, but not decrease, Executive's Base Salary (any increase in Base Salary shall become the "Base Salary" for purposes of this Agreement). In addition to the Base Salary provided in this Section 3(a), the Bank shall provide Executive at no cost to Executive with all such other benefits as are provided uniformly to permanent full-time employees of the Bank.
(b) The Bank will provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, and the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive will be entitled to participate in or receive benefits under any employee benefit plans including but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plans, medical coverage or any other employee benefit plan or arrangement made available by the Bank in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Executive will be entitled to incentive compensation and bonuses as provided in any plan of the Bank in which Executive is eligible to participate. Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Bank shall pay or reimburse Executive for all reasonable travel
and other reasonable expenses incurred by Executive performing his obligations
under this Agreement and may provide such additional compensation in such form
and such amounts as the Board may from time to time determine.
(d) Compensation and reimbursement to be paid pursuant to paragraphs (a),
(b) and (c) of this Section 3 shall be paid by the Bank and the Company,
respectively on a pro rata basis based upon the amount of service Executive
devotes to the Bank and Company, respectively.
(e) In addition to the foregoing, Executive shall be entitled to receive fees for serving as a director of the Bank in the same amount and on the same terms as fees are paid to other directors of the Bank.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
The provisions of this Section shall in all respects be subject to the terms and conditions stated in Sections 8 and 15.
(a) The provisions of this Section shall apply upon the occurrence of an Event of Termination (as herein defined) during Executive's term of employment under this Agreement. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Bank or the Company of Executive's full-time employment hereunder for any reason other than, (A) Disability or Retirement as defined in Section 6 below, (B) a Change in Control, as defined in Section 5(a) hereof, or (C) Termination for Cause as defined in Section 7 hereof; or (ii) Executive's resignation from the Bank's employ, upon any (A) failure to elect or reelect or to appoint or reappoint Executive as Chairman of the Board, (B) material change in Executive's function, duties, or responsibilities, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1, above, (C) a relocation of Executive's principal place of employment by more than 30 miles from its location at the effective date of this Agreement, or a material reduction in the benefits and perquisites to Executive from those being provided as of the effective date of this Agreement, (D) liquidation or dissolution of the Bank or Company other than liquidations or dissolutions that are caused by reorganizations that do not affect the status of Executive, or (E) any other breach of this Agreement by the Bank. Upon the occurrence of any event described in clauses (ii)(A), (B), (C), (D) or (E), above, Executive shall have the right to elect to terminate his employment under this Agreement by resignation upon sixty (60) days prior written notice given within a reasonable period of time not to exceed four calendar months after the initial event giving rise to said right to elect. Notwithstanding the preceding sentence, in the event of a continuing breach of this Agreement by the Bank, Executive, after giving due notice within the
prescribed time frame of an initial event specified above, shall not waive any of his rights solely under this Agreement and this Section 4 by virtue of the fact that Executive has submitted his resignation but has remained in the employment of the Bank and is engaged in good faith discussions to resolve any occurrence of an event described in clauses (A), (B), (C), (D) and (E) above.
(b) Upon the occurrence of an Event of Termination, on the Date of Termination, as defined in Section 8, the Bank shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of the payments due for the remaining term of the Agreement or three (3) times the average of the three preceding years' Base Salary, including bonuses and any other cash compensation paid to Executive during such years, and the amount of any benefits received pursuant to any employee benefit plans on behalf of Executive, maintained by the Bank during such years; provided, however, that if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Bank is in capital compliance, and provided further, that in no event shall total severance compensation from all sources exceed three times the Executive's Base Salary for the immediately preceding year. At the election of the Executive, which election is to be made on an annual basis during the month of January, and which election is irrevocable for the year in which made and upon the occurrence of an Event of Termination, such payments shall be made in a lump sum or paid monthly during the remaining term of the Agreement following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining term of the Agreement. Such payments shall not be reduced in the event the Executive obtains other employment following termination of employment.
(c) Notwithstanding the provisions of Sections 4(a) and (b), and in the
event that there has not been a Change in Control as defined in Section 5(a),
upon the voluntary termination by the Executive upon giving sixty days notice to
the Bank (which shall not be deemed to constitute an "Event of Termination" as
defined herein), the Bank, at the discretion of the Board of Directors, shall
pay Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a severance payment in an
amount to be determined by the Board of Directors at the time of such voluntary
termination by the Executive. Such severance payment shall not exceed three (3)
times the average of the three preceding years' Base Salary, including bonuses
and any other cash compensation paid to the Executive during such years, and the
amount of any benefits received pursuant to any employee benefit plans, on
behalf of the Executive, maintained by the Bank during such years; provided,
however, that if the Bank is not in compliance with its minimum capital
requirements or if such payments would cause the Bank's capital to be reduced
below its minimum capital requirements, such payments shall be deferred until
such time as the Bank is in capital compliance, and provided further, that in no
event shall total severance compensation from all sources exceed three times the
Executive's Base Salary for the immediately preceding year. At the election of
the Executive, which election is to be made on an annual basis during the month
of January, and which election is irrevocable for the year in which made and
upon the voluntary termination of the Executive in accordance with this Section
4(c), any payments shall be made in a lump sum or paid monthly during the
remaining term of the agreement following the Executive's termination. In the
event that no election is made, any payment to the Executive will be made on a
monthly basis during the remaining term of the Agreement. Such payments shall
not be reduced in the event the Executive obtains other employment following
termination of employment.
(d) Upon the occurrence of an Event of Termination, the Bank will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank for Executive prior to his termination, provided that such benefits shall not be provided in the event they should constitute an unsafe or unsound banking practice relating to executive compensation and employment contracts pursuant to applicable regulations, as is now or hereafter in effect. Such coverage shall cease upon the expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL
(a) No benefit shall be payable under this Section 5 unless there shall have been a Change in Control of the Bank or Company, as set forth below. For purposes of this Agreement, a "Change in Control" of the Bank or Company shall mean an event of a nature that (i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"), or (ii) results in a Change in Control of the Bank or the Company within the meaning of the Home Owners' Loan Act, as amended and applicable rules and regulations promulgated thereunder as in effect at the time of the Change in Control; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly, of securities of the Company representing 25% or more of the Company's outstanding securities except for any securities purchased by the Bank's employee stock ownership plan or trust; (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof; (c) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or Company or similar transaction in which the Bank or the Company is not the surviving institution occurs; (d) a proxy statement soliciting proxies from stockholders of the Company, by someone other than the then current Board of Directors of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or similar transaction with one or more corporations as a result of which the outstanding shares of the common stock of the Company are exchanged for or converted into cash or property or securities not issued by the Company; or (e) a tender offer is made for 25% or more of the voting securities of the Company and the shareholders owning beneficially or of record 25% or more of the outstanding securities of the Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror.
Notwithstanding the foregoing, a "Change in Control" of the Bank or the Company shall not be deemed to have occurred in connection with the conversion of Jacksonville Bancorp, MHC to stock form.
For these purposes, "Incumbent Board" means, in the case of the Company, the Board of Directors of the Company, respectively, on the date hereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least threequarters of the directors comprising the Incumbent Board, or whose nomination for election by members or stockholders was approved by the same nominating committee serving under an Incumbent Board, shall be considered as though he were a member of the Incumbent Board.
(b) If any of the events described in Section 5(a) hereof constituting a Change in Control have occurred, Executive shall be entitled to the benefits provided in paragraphs (c), (d), (e), (f), (g) and (h) of this Section 5 upon his subsequent termination of employment at any time during the term of this Agreement, regardless of whether such termination results from (i) his resignation or (ii) his dismissal upon the Change in Control.
(c) Upon the occurrence of a Change in Control followed by the Executive's termination of employment, the Bank shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of the payments due for the remaining term of the Agreement or 2.99 times the average of the five preceding years' Base Salary, including bonuses and any other cash compensation paid to the Executive during such years, and the amount of any contributions made to any employee benefit plans, on behalf of the Executive, maintained by the Bank during such years. Such payment shall be made by the Bank on the Date of Termination. At the election of the Executive, which election shall be made on an annual basis during the month of January, and which election is irrevocable for the year in which made and upon the occurrence of a Change in Control, such payment may be made in a lump sum or paid in equal monthly installments during the thirty-six (36) months following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining term of the Agreement.
(d) Upon the occurrence of a Change in Control followed by the Executive's termination of employment, the Bank will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank for Executive prior to his severance. Such coverage and payments shall cease upon the expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, Executive will be entitled to any benefits granted to him pursuant to any Stock Option Plan of the Bank or Holding Company.
(f) Upon the occurrence of a Change in Control the Executive will be entitled to any benefits awarded to him under the Bank's Recognition and Retention Plan or any restricted stock plan in effect.
(g) Notwithstanding the preceding paragraphs of this Section 5, in the event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits")
would be deemed to include an "excess parachute payment" under
Section 280G of the Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to the total amount of payments permissible under Section 280G of the Code or any successor thereto, then the Termination Benefits to be paid to Executive shall be so reduced so as to be a Non-Triggering Amount. The Executive, in his sole discretion, shall determine which benefit or benefits shall be reduced.
(h) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability.
(i) Any payments made to Executive pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. ss. 1818(k) and any applicable regulations promulgated thereunder.
(j) The Executive shall not be entitled to any payments pursuant to this
Section 5 if the Bank is not in compliance with its minimum capital requirements
or if such payments would cause the Bank's capital to be reduced below its
minimum capital requirements, such payments shall be deferred until such times
as the Bank is in capital compliance.
(k) Notwithstanding the foregoing, if after the application of subparagraph (g) above, it is determined that the Executive received an excess parachute payment despite the reduction in the Executive's Termination Benefits, the excess of such Termination Benefits paid to the Executive over 2.99 times the Executive's "base amount", as defined in Section 280G of the Code, shall be treated as a loan to the Executive and the Executive shall be required to repay such amount to the Bank or the Company, or the successor of the Bank or the Company, within ten years of the date of such determination, with interest at the prime rate, as set forth from time to time in The Wall Street Journal.
6. TERMINATION UPON RETIREMENT OR DISABILITY
Termination by the Bank of the Executive based on "Retirement" shall mean termination in accordance with the Bank's retirement policy or in accordance with any retirement arrangement established with Executive's consent with respect to him. Upon termination of Executive upon Retirement, Executive shall be entitled to all benefits under any retirement plan of the Bank and other plans to which Executive is a party.
Termination by the Bank of Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Bank or, if no such plan applies, which would qualify the Executive for disability benefits under the federal social security system. In the event Executive is unable to perform his duties under this Agreement on a full-time basis for a period of six (6) consecutive months by reason of Disability, the Bank may terminate this Agreement, provided that the Bank shall continue to be obligated to pay Executive his Base Salary, including bonuses and any other cash compensation paid to Executive during such period for the remaining term of this Agreement, or one (1) year, whichever is the longer period of time, and provided further that any amounts actually paid to Executive pursuant to any disability insurance or other similar such program which the Bank has provided or may provide on behalf of its employees or pursuant to any workman's or social security disability program shall reduce the compensation to be paid to Executive pursuant to this paragraph.
In the event of Executive's death during the term of this Agreement, his estate, legal representatives or named beneficiaries (as directed by Executive in writing) shall be paid Executive's Base Salary at the rate in effect at the time of Executive's death for a period of one (1) year from the date of Executive's death, and the Bank will continue to provide medical, dental, family and other benefits normally provided for Executive's family for one (1) year after Executive's death.
7. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. In determining incompetence, the acts or omissions shall be measured against standards generally prevailing in the savings institutions industry. For purposes of this paragraph, no act or failure to act on the part of Executive shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Bank. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any stock options granted to Executive under any stock option plan of the Bank, the Company or any subsidiary or affiliate thereof, shall not be exercisable upon Executive's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and shall be null and void subsequent to Executive's Termination for Cause, unless such Termination for Cause is found to be wrongful or such dispute is otherwise decided in Executive's favor, as set forth in Section 8(c) hereof.
8. NOTICE
(a) Any purported termination by the Bank or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, except upon the occurrence of a Change in Control and voluntary termination by the Executive in which case the Date of Termination shall be the date specified in the Notice, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank will continue to pay Executive his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary) and continue Executive as a participant in all compensation, benefit and insurance plans in which he was participating when the notice of dispute was given, until the dispute is finally resolved in accordance with this Agreement, provided such dispute is resolved within nine months after the Date of Termination specified in the Notice or Termination; notwithstanding the foregoing no compensation or benefits shall be paid to Executive in the event the Executive is Terminated for Cause. In the event that such Termination for Cause is found to have been wrongful or such dispute is otherwise decided in Executive's favor, the Executive shall be entitled to receive all compensation and benefits
which accrued for up to a period of nine months after the Termination for Cause.
If such dispute is not resolved within such nine-month period, the Bank shall
not be obligated, upon final resolution of such dispute, to pay Executive
compensation and other payments accruing more than nine months from the Date of
the Termination specified in the Notice of Termination. Amounts paid under this
Section are in addition to all other amounts due under this Agreement and shall
not be offset against or reduce any other amounts due under this Agreement.
9. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with paragraph (b) of this Section 9 during the term of this Agreement and for one (1) full year after the expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party.
10. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4(c) hereof, Executive agrees not to compete with the Bank and/or the
Company for a period of one (1) year following such termination in any city,
town or county in which the Bank and/or the Company has an office or has filed
an application for regulatory approval to establish an office, determined as of
the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Bank and/or the Company. The parties hereto,
recognizing that irreparable injury will result to the Bank and/or the Company,
its business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Bank and/or
the Company will be entitled, in addition to any other remedies and damages
available, to an injunction to restrain the violation hereof by Executive,
Executive's partners, agents, servants, employers, employees and all persons
acting for or with Executive. Nothing herein will be construed as prohibiting
the Bank and/or the Company from pursuing any other remedies available to the
Bank and/or the Company for such breach or threatened breach, including the
recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank, and Executive may disclose any information regarding the Bank or the Company which is otherwise publicly available. In the event of a breach or threatened breach by the Executive of the Provisions of this Section 10, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive.
11. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement.
13. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived.
15. REQUIRED PROVISIONS
Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Company are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. ss. 1828(k), and the regulations promulgated thereunder in 12 C.F.R. Part 359.
16. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.
18. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Illinois, but only to the extent not superseded by federal law.
19. ARBITRATION
Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, provided that the dispute or interpretation has been settled by Executive and the Bank or resolved in the Executive's favor.
21. INDEMNIFICATION
The Bank shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, or in lieu thereof, shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements- (such settlements must be approved by the Board of Directors of the Bank). If such action, suit or proceeding is brought against Executive in his capacity as an officer or director of the Bank, however, such indemnification shall not extend to matters as to which Executive is finally adjudged to be liable for willful misconduct in the performance of his duties. No Indemnification shall be paid that would violate 12 U.S.C. ss. 1828(K) or any regulations promulgated thereunder.
22. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place.
SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed and their seals to be affixed hereunto by its duly authorized officer, and Executive has signed this Agreement, on the day and date first above written.
ATTEST: JACKSONVILLE SAVINGS BANK
/s/ Diana S. Tone By: /s/ Richard A. Foss
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President
|
[SEAL]
WITNESS: EXECUTIVE
/s/ Stacy L. Shade By: /s/ Andrew F. Applebee
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Andrew F. Applebee
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Exhibit 10(A)(2)
JACKSONVILLE SAVINGS BANK
EMPLOYMENT AGREEMENT
This Agreement is made effective as of the 16th day of March 2004, by and between Jacksonville Savings Bank (the "Bank"), an Illinois chartered savings institution, with its principal administrative office at 1211 West Morton Avenue, Jacksonville, Illinois 62650-2000 and Richard A. Foss ("Executive"). Any reference to "Company" herein shall mean Jacksonville Bancorp, Inc. or any successor thereto.
WHEREAS, Executive has been employed by the Bank since 1986 and is presently its President and Chief Executive Officer; and
WHEREAS, the Bank wishes to retain the services of Executive as an employee of the Bank for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to serve as President and Chief Executive Officer of the Bank. During said period, Executive also agrees to serve, if elected, as an officer and director of any subsidiary or affiliate of the Bank. Failure to reelect Executive as President and Chief Executive Officer without the consent of the Executive during the term of this Agreement shall constitute a breach of this Agreement.
2. TERMS AND DUTIES
(a) The period of Executive's employment under this Agreement shall begin
as of the date first above written and shall continue for a period of thirty-six
(36) full calendar months thereafter. Commencing on the first anniversary date
of this Agreement, and continuing at each anniversary date thereafter, the
Agreement shall renew for an additional year such that the remaining term shall
be three (3) years unless written notice is provided to Executive at least ten
(10) days and not more than thirty (30) days prior to any such anniversary date,
that his employment shall cease at the end of twenty-four (24) months following
such anniversary date. Prior to each notice period for non-renewal, the
disinterested members of the Board of Directors of the Bank ("Board") will
conduct a comprehensive performance evaluation and review of the Executive for
purposes of determining whether to extend the Agreement, and the results thereof
shall be included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Bank; provided, however, that, with the approval of the Board, as evidenced by a resolution of such Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in such Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement. Nothing in this Section shall be construed as preventing the Executive from serving from time to time on boards, committees, or holding positions of non-profit or governmental organizations, including religious and civic groups, without the need for Board approval.
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Section 2(b). The Bank shall pay Executive as compensation a salary of not less than $124,200 per year ("Base Salary"). Such Base Salary shall be payable biweekly. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the first such review will be made no later than January 31 of each year during the term of this Agreement and shall be effective from the first day of said month through the end of the calendar year. Such review shall be conducted by a Committee designated by the Board, and the Board may increase, but not decrease, Executive's Base Salary (any increase in Base Salary shall become the "Base Salary" for purposes of this Agreement). In addition to the Base Salary provided in this Section 3(a), the Bank shall provide Executive at no cost to Executive with all such other benefits as are provided uniformly to permanent full-time employees of the Bank.
(b) The Bank will provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, and the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive will be entitled to participate in or receive benefits under any employee benefit plans including but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plans, medical coverage or any other employee benefit plan or arrangement made available by the Bank in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Executive will be entitled to incentive compensation and bonuses as provided in any plan of the Bank in which Executive is eligible to participate. Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Bank shall pay or reimburse Executive for all reasonable travel
and other reasonable expenses incurred by Executive performing his obligations
under this Agreement and may provide such additional compensation in such form
and such amounts as the Board may from time to time determine.
(d) Compensation and reimbursement to be paid pursuant to paragraphs (a),
(b) and (c) of this Section 3 shall be paid by the Bank and the Company,
respectively on a pro rata basis based upon the amount of service the Executive
devotes to the Bank and Company, respectively.
(e) In addition to the foregoing, Executive shall be entitled to receive fees for serving as a director of the Bank in the same amount and on the same terms as fees are paid to other directors of the Bank.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
The provisions of this Section shall in all respects be subject to the terms and conditions stated in Sections 8 and 15.
(a) The provisions of this Section shall apply upon the occurrence of an
Event of Termination (as herein defined) during the Executive's term of
employment under this Agreement. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank or the Company of Executive's full-time employment
hereunder for any reason other than, (A) Disability or Retirement as defined in
Section 6 below, (B) a Change in Control, as defined in Section 5(a) hereof, or
(C) Termination for Cause as defined in Section 7 hereof; or (ii) Executive's
resignation from the Bank's employ, upon any (A) failure to elect or reelect or
to appoint or reappoint Executive as President and Chief Executive Officer, (B)
material change in Executive's function, duties, or responsibilities, which
change would cause Executive's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above, (C) a relocation of Executive's principal place of employment
by more than 30 miles from its location at the effective date of this Agreement,
or a material reduction in the benefits and perquisites to the Executive from
those being provided as of the effective date of this Agreement, (D) liquidation
or dissolution of the Bank or Company other than liquidations or dissolutions
that are caused by reorganizations that do not affect the status of Executive,
or (E) any other breach of this Agreement by the Bank. Upon the occurrence of
any event described in clauses (ii)(A), (B), (C), (D) or (E), above, Executive
shall have the right to elect to terminate his employment under this Agreement
by resignation upon sixty (60) days prior written notice given within a
reasonable period of time not to exceed four calendar months after the initial
event giving rise to said right to elect. Notwithstanding the preceding
sentence, in
the event of a continuing breach of this Agreement by the Bank, the Executive, after giving due notice within the prescribed time frame of an initial event specified above, shall not waive any of his rights solely under this Agreement and this Section 4 by virtue of the fact that Executive has submitted his resignation but has remained in the employment of the Bank and is engaged in good faith discussions to resolve any occurrence of an event described in clauses (A), (B), (C), (D) and (E) above.
(b) Upon the occurrence of an Event of Termination, on the Date of Termination, as defined in Section 8, the Bank shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of the payments due for the remaining term of the Agreement or three (3) times the average of the three preceding years' Base Salary, including bonuses and any other cash compensation paid to the Executive during such years, and the amount of any benefits received pursuant to any employee benefit plans on behalf of the Executive, maintained by the Bank during such years; provided, however, that if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Bank is in capital compliance, and provided further, that in no event shall total severance compensation from all sources exceed three times the Executive's Base Salary for the immediately preceding year. At the election of the Executive, which election is to be made on an annual basis during the month of January, and which election is irrevocable for the year in which made and upon the occurrence of an Event of Termination, such payments shall be made in a lump sum or paid monthly during the remaining term of the Agreement following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining term of the Agreement. Such payments shall not be reduced in the event the Executive obtains other employment following termination of employment.
(c) Notwithstanding the provisions of Sections 4(a) and (b), and in the
event that there has not been a Change in Control as defined in Section 5(a),
upon the voluntary termination by the Executive upon giving sixty days notice to
the Bank (which shall not be deemed to constitute an "Event of Termination" as
defined herein), the Bank, at the discretion of the Board of Directors, shall
pay Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a severance payment in an
amount to be determined by the Board of Directors at the time of such voluntary
termination by the Executive. Such severance payment shall not exceed three (3)
times the average of the three preceding years' Base Salary, including bonuses
and any other cash compensation paid to the Executive during such years, and the
amount of any benefits received pursuant to any employee benefit plans, on
behalf of the Executive, maintained by the Bank during such years; provided,
however, that if the Bank is not in compliance with its minimum capital
requirements or if such payments would cause the Bank's capital to be reduced
below its minimum capital requirements, such payments shall be deferred until
such time as the Bank is in capital compliance, and provided further, that in no
event shall total severance compensation from all sources exceed three times the
Executive's Base Salary for the immediately preceding year. At the election of
the Executive, which election is to be made on an annual basis during the month
of January, and which election is irrevocable for the year in which made and
upon the voluntary termination of the Executive in accordance with this Section
4(c), any payments shall be made in a lump sum or paid monthly during the
remaining term of the agreement following the Executive's termination. In the
event that no election is made, any payment to the Executive will be made on a
monthly basis during the remaining term of the Agreement. Such payments shall
not be reduced in the event the Executive obtains other employment following
termination of employment.
(d) Upon the occurrence of an Event of Termination, the Bank will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank for Executive prior to his termination, provided that such benefits shall not be provided in the event they should constitute an unsafe or unsound banking practice relating to executive compensation and employment contracts pursuant to applicable regulations, as is now or hereafter in effect. Such coverage shall cease upon the expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL
(a) No benefit shall be payable under this Section 5 unless there shall have been a Change in Control of the Bank or Company, as set forth below. For purposes of this Agreement, a "Change in Control" of the Bank or Company shall mean an event of a nature that (i) would be required to be reported in response to Item 1(a) of the
current report on Form 8-K, as in effect on the date hereof, pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or (ii)
results in a Change in Control of the Bank or the Company within the meaning of
the Home Owners' Loan Act, as amended and applicable rules and regulations
promulgated thereunder as in effect at the time of the Change in Control; or
(iii) without limitation such a Change in Control shall be deemed to have
occurred at such time as (a) any "person" (as the term is used in Sections 13(d)
and 14(d) of the Exchange Act) is or becomes a "beneficial owner" (as defined in
Rule 13d-3 of the Exchange Act) directly or indirectly, of securities of the
Company representing 25% or more of the Company's outstanding securities except
for any securities purchased by the Bank's employee stock ownership plan or
trust; (b) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof; (c) a plan of reorganization, merger, consolidation, sale of all or
substantially all the assets of the Bank or Company or similar transaction in
which the Bank or the Company is not the surviving institution occurs; (d) a
proxy statement soliciting proxies from stockholders of the Company, by someone
other than the then current Board of Directors of the Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Company or similar transaction with one or more corporations as a result of
which the outstanding shares of the common stock of the Company are exchanged
for or converted into cash or property or securities not issued by the Company;
or (e) a tender offer is made for 25% or more of the voting securities of the
Company and the shareholders owning beneficially or of record 25% or more of the
outstanding securities of the Company have tendered or offered to sell their
shares pursuant to such tender offer and such tendered shares have been accepted
by the tender offeror.
Notwithstanding, the foregoing, a "Change in Control" of the Bank or the Company shall not be deemed to have occurred in connection with the conversion of Jacksonville Bancorp, MHC to stock form.
For these purposes, "Incumbent Board" means, in the case of the Company, the Board of Directors of the Company, respectively, on the date hereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least threequarters of the directors comprising the Incumbent Board, or whose nomination for election by members or stockholders was approved by the same nominating committee serving under an Incumbent Board, shall be considered as though he were a member of the Incumbent Board.
(b) If any of the events described in Section 5(a) hereof constituting a Change in Control have occurred, Executive shall be entitled to the benefits provided in paragraphs (c), (d), (e), (f), (g) and (h) of this Section 5 upon his subsequent termination of employment at any time during the term of this Agreement, regardless of whether such termination results from (i) his resignation or (ii) his dismissal upon the Change in Control.
(c) Upon the occurrence of a Change in Control followed by the Executive's termination of employment, the Bank shall pay Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of the payments due for the remaining term of the Agreement or 2.99 times the average of the five preceding years' Base Salary, including bonuses and any other cash compensation paid to the Executive during such years, and the amount of any contributions made to any employee benefit plans, on behalf of the Executive, maintained by the Bank during such years. Such payment shall be made by the Bank on the Date of Termination. At the election of the Executive, which election shall be made on an annual basis during the month of January, and which election is irrevocable for the year in which made and upon the occurrence of a Change in Control, such payment may be made in a lump sum or paid in equal monthly installments during the thirty-six (36) months following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a monthly basis during the remaining term of the Agreement.
(d) Upon the occurrence of a Change in Control followed by the Executive's termination of employment, the Bank will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank for Executive prior to his severance. Such coverage and payments shall cease upon the expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, Executive will be entitled to any benefits granted to him pursuant to any Stock Option Plan of the Bank or Holding Company.
(f) Upon the occurrence of a Change in Control the Executive will be entitled to any benefits awarded to him under the Bank's Recognition and Retention Plan or any restricted stock plan in effect.
(g) Notwithstanding the preceding paragraphs of this Section 5, in the event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits")
would be deemed to include an "excess parachute payment" under
Section 280G of the Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to the total amount of payments permissible under Section 280G of the Code or any successor thereto, then the Termination Benefits to be paid to Executive shall be so reduced so as to be a Non-Triggering Amount. The Executive, in his sole discretion, shall determine which benefit or benefits shall be reduced. (h) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability.
(i) Any payments made to Executive pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. ss. 1818(k) and any applicable regulations promulgated thereunder.
(j) The Executive shall not be entitled to any payments pursuant to this
Section 5 if the Bank is not in compliance with its minimum capital requirements
or if such payments would cause the Bank's capital to be reduced below its
minimum capital requirements, such payments shall be deferred until such times
as the Bank is in capital compliance.
(k) Notwithstanding the foregoing, if after the application of subparagraph (g) above, it is determined that the Executive received an excess parachute payment despite the reduction in the Executive's Termination Benefits, the excess of such Termination Benefits paid to the Executive over 2.99 times the Executive's "base amount", as defined in Section 280G of the Code, shall be treated as a loan to the Executive and the Executive shall be required to repay such amount to the Bank or the Company, or the successor of the Bank or the Company, within ten years of the date of such determination, with interest at the prime rate, as set forth from time to time in The Wall Street Journal.
6. TERMINATION UPON RETIREMENT OR DISABILITY
Termination by the Bank of the Executive based on "Retirement" shall mean termination in accordance with the Bank's retirement policy or in accordance with any retirement arrangement established with Executive's consent with respect to him. Upon termination of Executive upon Retirement, Executive shall be entitled to all benefits under any retirement plan of the Bank and other plans to which Executive is a party.
Termination by the Bank of Executive's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies the Executive for disability benefits under the applicable long-term disability plan maintained by the Bank or, if no such plan applies, which would qualify the Executive for disability benefits under the federal social security system. In the event Executive is unable to perform his duties under this Agreement on a full-time basis for a period of six (6) consecutive months by reason of Disability, the Bank may terminate this Agreement, provided that the Bank shall continue to be obligated to pay Executive his Base Salary, including bonuses and any other cash compensation paid to Executive during such period for the remaining term of this Agreement, or one (1) year, whichever is the longer period of time, and provided further that any amounts actually paid to Executive pursuant to any disability insurance or other similar such program which the Bank has provided or may provide on behalf of its employees or pursuant to any workman's or social security disability program shall reduce the compensation to be paid to Executive pursuant to this paragraph.
In the event of Executive's death during the term of this Agreement, his estate, legal representatives or named beneficiaries (as directed by Executive in writing) shall be paid Executive's Base Salary at the rate in effect at the time of Executive's death for a period of one (1) year from the date of Executive's death, and the Bank will continue to provide medical, dental, family and other benefits normally provided for Executive's family for one (1) year after Executive's death.
7. TERMINATION FOR CAUSE
The term "Termination for Cause' shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. In determining incompetence, the acts or omissions shall be measured against standards generally prevailing in the savings institutions industry. For purposes of this paragraph, no act or failure to act on the part of Executive shall be considered "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Bank. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any stock options granted to Executive under any stock option plan of the Bank, the Company or any subsidiary or affiliate thereof, shall not be exercisable upon Executive's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and shall be null and void subsequent to Executive's Termination for Cause, unless such Termination for Cause is found to be wrongful or such dispute is otherwise decided in Executive's favor, as set forth in Section 8(c) hereof.
8. NOTICE
(a) Any purported termination by the Bank or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, except upon the occurrence of a Change in Control and voluntary termination by the Executive in which case the Date of Termination shall be the date specified in the Notice, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank will continue to pay Executive his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary) and continue Executive as a participant in all compensation, benefit and insurance plans in which he was participating when the notice of dispute was given, until the dispute is finally resolved in accordance with this Agreement, provided such dispute is resolved within nine months after the Date of Termination specified in the Notice or Termination; notwithstanding the foregoing no compensation or benefits shall be paid to Executive in the event the Executive is Terminated for Cause. In the event that such Termination for Cause is found to have been wrongful or such dispute is otherwise decided in Executive's favor, the Executive shall be entitled to receive all compensation and benefits
which accrued for up to a period of nine months after the Termination for Cause.
If such dispute is not resolved within such nine-month period, the Bank shall
not be obligated, upon final resolution of such dispute, to pay Executive
compensation and other payments accruing more than nine months from the Date of
the Termination specified in the Notice of Termination. Amounts paid under this
Section are in addition to all other amounts due under this Agreement and shall
not be offset against or reduce any other amounts due under this Agreement.
9. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with paragraph (b) of this Section 9 during the term of this Agreement and for one (1) full year after the expiration or termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party.
10. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4(c) hereof, Executive agrees not to compete with the Bank and/or the
Company for a period of one (1) year following such termination in any city,
town or county in which the Bank and/or the Company has an office or has filed
an application for regulatory approval to establish an office, determined as of
the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Bank and/or the Company. The parties hereto,
recognizing that irreparable injury will result to the Bank and/or the Company,
its business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Bank and/or
the Company will be entitled, in addition to any other remedies and damages
available, to an injunction to restrain the violation hereof by Executive,
Executive's partners, agents, servants, employers, employees and all persons
acting for or with Executive. Nothing herein will be construed as prohibiting
the Bank and/or the Company from pursuing any other remedies available to the
Bank and/or the Company for such breach or threatened breach, including the
recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank, and Executive may disclose any information regarding the Bank or the Company which is otherwise publicly available. In the event of a breach or threatened breach by the Executive of the Provisions of this Section 10, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive.
11. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement.
13. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived.
15. REQUIRED PROVISIONS
(a) Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Company are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. ss. 1828(k), and the regulations promulgated thereunder- in 12 C.F.R.
Part 359.
16. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.
18. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Illinois, but only to the extent not superseded by federal law.
19. ARBITRATION
Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled
to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, provided that the dispute or interpretation has been settled by Executive and the Bank or resolved in the Executive's favor.
21. INDEMNIFICATION
The Bank shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, or in lieu thereof, shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements (such settlements must be approved by the Board of Directors of the Bank). If such action, suit or proceeding is brought against Executive in his capacity as an officer or director of the Bank, however, such indemnification shall not extend to matters as to which Executive is finally adjudged to be liable for willful misconduct in the performance of his duties. No Indemnification shall be paid that would violate 12 U.S.C. ss. 1828(K) or any regulations promulgated thereunder.
22. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place.
SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed and their seals to be affixed hereunto by its duly authorized officer, and Executive has signed this Agreement, on the day and date first above written.
ATTEST: JACKSONVILLE SAVINGS BANK
/s/ Diana S. Tone By: /s/ Andrew F. Applebee
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Chairman of the Board
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[SEAL]
WITNESS: EXECUTIVE
/s/ Stacy L. Shade By: /s/ Richard A. Foss
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Richard A. Foss
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Exhibit 10(A)(3)
JACKSONVILLE SAVINGS BANK
EMPLOYMENT AGREEMENT
This Agreement is made effective as of the 13th day of January, 2004, by and between Jacksonville Savings Bank (the "Bank"), an Illinois chartered savings institution, with its principal administrative office at 1211 West Morton Avenue, Jacksonville, Illinois 62650-2000 and John Williams ("Mr. Williams"). Any reference to "Company" herein shall mean Jacksonville Bancorp, Inc. or any successor thereto.
WHEREAS, Mr. Williams has been employed by the Bank as Senior Vice President since July 2000; and
WHEREAS, the Bank wishes to retain the services of Mr. Williams as an employee of the Bank for the period provided in this Agreement; and
WHEREAS, Mr. Williams is willing to serve in the employ of the Bank on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Mr. Williams agrees to serve as Senior Vice President of the Bank. During said period, Mr. Williams shall be considered a senior officer of the Bank and shall attend regular monthly board meetings of the Bank. Failure to reelect Mr. Williams as Senior Vice President without the consent of Mr. Williams during the term of this Agreement shall constitute a breach of this Agreement.
2. TERMS AND DUTIES
(a) The period of Mr. Williams's employment under this Agreement shall begin as of the date first above written and shall continue for a period of twelve (12) full calendar months thereafter. Commencing on the first anniversary date of this Agreement, and continuing at each anniversary date thereafter, the Agreement shall renew for an additional year such that the remaining term shall be twelve (12) full calendar months; provided, however, if written notice of nonrenewal is provided to Mr. Williams at least ten (10) days and not more than thirty (30) days prior to any anniversary date, the employment of Mr. Williams hereunder shall cease at the end of twelve (12) months following such anniversary date.
(b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, Mr. Williams shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Bank; provided, however, that, with the approval of the Board, as evidenced by a resolution of such Board, from time to time, Mr. Williams may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, companies or organizations, which, in such Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Mr. Williams's duties pursuant to this Agreement. Nothing in this Section shall be construed as preventing Mr. Williams from serving from time to time on boards, committees, or holding positions of non-profit or governmental organizations, including religious and civic groups, without the need for Board approval.
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Section 2(b). The Bank shall pay Mr. Williams as compensation a salary of not less than $89,160 per year ("Base Salary"). Such Base Salary shall be payable biweekly. During the period of this Agreement, Mr. Williams's Base Salary shall be reviewed at least annually. Such review shall be conducted by a Committee designated by the Board, and the Board may increase Mr. Williams's Base Salary. Any such increase in Base Salary shall be consistent with increases awarded to other senior officers of the Bank. In addition to the Base Salary
provided in this Section 3(a), the Bank shall provide Mr. Williams at no cost to Mr. Williams with all such other benefits as are provided uniformly to permanent full-time employees of the Bank.
(b) In addition to Mr. Williams's Base Salary, Mr. Williams will be entitled to participate in or receive benefits under any employee benefit plans including but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plans, medical coverage or any other employee benefit plan or arrangement made available by the Bank in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Mr. Williams will be eligible for incentive compensation and bonuses as provided in any plan of the Bank in which Mr. Williams is eligible to participate. Nothing paid to Mr. Williams under any such plan or arrangement will be deemed to be in lieu of other compensation to which Mr. Williams is entitled under this Agreement.
(c) Mr. Williams shall also be entitled to regular director's fees if Mr. Williams serves as a director on the Bank's Board of Directors.
(d) Compensation and reimbursement to be paid pursuant to paragraphs (a),
(b) and (c) of this Section 3 shall be paid by the Bank and the Company,
respectively on a pro rata basis based upon the amount of service Mr. Williams
devotes to the Bank and Company, respectively.
4. PAYMENTS TO MR. WILLIAMS UPON AN EVENT OF TERMINATION
The provisions of this Section shall in all respects be subject to the terms and conditions stated in Sections 8 and 15.
(a) The provisions of this Section shall apply upon the occurrence of an
Event of Termination (as herein defined) during Mr. Williams's term of
employment under this Agreement. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank or the Company of Mr. Williams's full-time employment
hereunder for any reason other than, (A) Disability or Retirement as defined in
Section 6 below, (B) a Change in Control, as defined in Section 5(a) hereof, or
(C) Termination for Cause as defined in Section 7 hereof; or (ii) Mr. Williams's
resignation from the Bank's employ, upon any (A) failure to elect or reelect or
to appoint or reappoint Mr. Williams as Senior Vice President, (B) material
change in Mr. Williams's function, duties, or responsibilities, which change
would cause Mr. Williams's position to become one of lesser responsibility,
importance, or scope from the position and attributes thereof described in
Section 1, above, (C) liquidation or dissolution of the Bank or Company other
than liquidations or dissolutions that are caused by reorganizations that do not
affect the status of Mr. Williams, or (D) breach of this Agreement by the Bank.
Upon the occurrence of any event described in clauses (ii)(A), (B), (C) or (D),
above, Mr. Williams shall have the right to elect to terminate his employment
under this Agreement without prejudice to his rights under this Agreement, by
resignation upon sixty (60) days prior written notice given within a reasonable
period of time not to exceed four calendar months after the initial event giving
rise to said right to elect. Notwithstanding the preceding sentence, in the
event of a continuing breach of this Agreement by the Bank, Mr. Williams, after
giving due notice within the prescribed time frame of an initial event specified
above, shall not waive any of his rights solely under this Agreement and this
Section 4 by virtue of the fact that Mr. Williams has submitted his resignation
but has remained in the employment of the Bank and is engaged in good faith
discussions to resolve any occurrence of an event described in clauses (A), (B),
(C) or (D) above.
(b) Upon the occurrence of an Event of Termination, on the Date of Termination, as defined in Section 8, the Bank shall pay Mr. Williams, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of the payments due for the remaining term of the Agreement or one (1) times Mr. Williams's Base Salary for the immediately preceding twelve (12) months, including bonuses and any other cash compensation paid to Mr. Williams during such period, and the amount of any benefits received pursuant to any employee benefit plans on behalf of Mr. Williams, maintained by the Bank during such period; PROVIDED, HOWEVER, that if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Bank is in capital compliance, and provided further, that in no event shall total severance compensation from all sources exceed three
times Mr. Williams's Base Salary for the immediately preceding year. At the election of Mr. Williams, which election is to be made on an annual basis during the month of January, and which election is irrevocable for the year in which made and upon the occurrence of an Event of Termination, such payments shall be made in a lump sum or paid monthly during the remaining term of the Agreement or twelve (12) months, whichever is longer, following Mr. Williams's termination. In the event that no election is made, payment to Mr. Williams will be made on a monthly basis during the remaining term of the Agreement or twelve (12) months, whichever is longer. Such payments shall not be reduced in the event Mr. Williams obtains other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to be continued life, medical and disability coverage substantially identical to the coverage maintained by the Bank for Mr. Williams prior to his termination, provided that such benefits shall not be provided in the event they should constitute an unsafe or unsound banking practice relating to executive compensation and employment contracts pursuant to applicable regulations, as is now or hereafter in effect. Such coverage shall cease upon the expiration of the remaining term of this Agreement.
5. CHANGE IN CONTROL
(a) No benefit shall be payable under this Section 5 unless there shall have been a Change in Control of the Bank or Company, as set forth below. For purposes of this Agreement, a "Change in Control" of the Bank or Company (a) shall mean an event of a nature that would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"), or results in a Change in Control of the Bank or the Company within the meaning of the Home Owners Loan Act, as amended and applicable rules and regulations promulgated thereunder as in effect at the time of the Change in Control; or (b) without limitation shall be deemed to have occurred at such time as (i) any "person" (as the term is used in Section 13(d) and 14(d) of the Exchange Act) other than the Company is or becomes a "beneficial owner" (as defined in Rule 13-d under the Exchange Act) directly or indirectly, of securities of the Bank representing 25 % or more of the Bank's outstanding securities ordinarily having the right to vote at the election of directors except for any securities of the Bank received by the Company in connection with the Reorganization and any securities purchased by the Bank's employee stock ownership plan and trust shall not be counted in determining whether such plan is the beneficial owner of more than 25 % of the Bank's securities, (ii) a proxy statement soliciting proxies from stockholders of the Bank, by someone other than the current management of the Bank, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company of the Bank or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan or transaction are exchanged or converted into cash or property or securities not issued by the Bank or the Company, or (iii) a tender offer is made for 25 or more of the voting securities of the Bank and the shareholders owning beneficially or of record 25 % or more of the outstanding securities of the Bank have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror.
Notwithstanding, the foregoing, a "Change in Control" of the Bank or the Company shall not be deemed to have occurred in connection with the conversion of Jacksonville Bancorp, MHC to stock form.
For these purposes, "Incumbent Board" means, in the case of the Company or the Bank, the Board of Directors of the Company or the Bank, respectively, on the date hereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by members or stockholders was approved by the same nominating committee serving under an Incumbent Board, shall be considered as though he were a member of the Incumbent Board.
(b) If any of the events described in Section 5(a) hereof constituting a Change in Control have occurred, Mr. Williams shall be entitled to the benefits provided in paragraphs (c), (d), (e), (1), (g) and (h) of this Section 5 upon his subsequent termination of employment at any time during the term of this Agreement, regardless of whether such termination results from (i) his resignation or (ii) his dismissal upon the Change in Control.
(c) Upon the occurrence of a Change in Control followed by Mr. Williams's termination of employment, the Bank shall pay Mr. Williams, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a sum equal to the greater of the payments due for the remaining term of the Agreement or one (1) times Mr. Williams's Base Salary for the immediately preceding twelve (12) months, including bonuses and any other cash compensation paid to Mr. Williams during such period, and the amount of any contributions made to any employee benefit plans, on behalf of Mr. Williams, maintained by the Bank during such years. Such payment shall be made by the Bank on the Date of Termination. At the election of Mr. Williams, which election shall be made on an annual basis during the month of January, and which election is irrevocable for the year in which made and upon the occurrence of a Change in Control, such payment may be made in a lump sum or paid in equal monthly installments during the remaining term of the Agreement or twelve (12) months, whichever is longer, following Mr. Williams's termination. In the event that no election is made, payment to Mr. Williams will be made on a monthly basis during the remaining term of the Agreement.
(d) Upon the occurrence of a Change in Control followed by Mr. Williams's termination of employment, the Bank will cause to be continued life, medical, dental and disability coverage substantially identical to the coverage maintained by the Bank for Mr. Williams prior to his severance. Such coverage and payments shall cease upon the expiration of the remaining term of the Agreement or twelve (12) months, whichever is longer.
(e) Upon the occurrence of a Change in Control, Mr. Williams will be entitled to any benefits granted to his pursuant to any Stock Option Plan of the Bank or Company.
(f) Upon the occurrence of a Change in Control, Mr. Williams will be entitled to any benefits awarded to him under the Bank's Recognition and Retention Plan or any restricted stock plan in effect. (g) Notwithstanding the preceding paragraphs of this Section 5, in the event that:
(i) the aggregate payments or benefits to be made or afforded to Mr. Williams under said paragraphs (the "Termination Benefits") would be deemed to include an "excess parachute payment" under Section 280G of the Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to the total amount of payments permissible under Section 280G of the Code or any successor thereto,
then the Termination Benefits to be paid to Mr. Williams shall be so reduced so as to be a Non-Triggering Amount.
(h) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Mr. Williams during any period during which Mr. Williams is incapable of performing his duties hereunder by reason of temporary disability.
(i) Any payments made to Mr. Williams pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. ss. 1818(k) and any applicable regulations promulgated thereunder.
(j) Mr. Williams shall not be entitled to any payments pursuant to this
Section 5 if the Bank is not in compliance with its minimum capital requirements
or if such payments would cause the Bank's capital to be reduced below its
minimum capital requirements, such payments shall be deferred until such times
as the Bank is in capital compliance and provided further, that in no event
shall total severance compensation from all sources exceed three times Mr.
Williams's Base Salary for the immediately preceding year.
6. TERMINATION UPON RETIREMENT OR DISABILITY
Termination by the Bank of Mr. Williams based on "Retirement" shall mean termination in accordance with the Bank's retirement policy or in accordance with any retirement arrangement established with Mr. Williams's consent with respect to him. Upon termination of Mr. Williams upon Retirement, Mr. Williams shall be entitled to all benefits under any retirement plan of the Bank and other plans to which Mr. Williams is a party.
Termination by the Bank of Mr. Williams's employment based on "Disability" shall mean termination because of any physical or mental impairment which qualifies Mr. Williams for disability benefits under the applicable long-term disability plan maintained by the Bank or, if no such plan applies, which would qualify Mr. Williams for disability benefits under the federal social security system.
7. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of Mr. Williams's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. In determining incompetence, the acts or omissions shall be measured against standards generally prevailing in the savings institutions industry. For purposes of this paragraph, no act or failure to act on the part of Mr. Williams shall be considered "willful" unless done, or omitted to be done, by Mr. Williams not in good faith and without reasonable belief that Mr. Williams's action or omission was in the best interest of the Bank. Notwithstanding the foregoing, Mr. Williams shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than three-fourths of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Mr. Williams and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Mr. Williams was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. Mr. Williams shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any stock options granted to Mr. Williams under any stock option plan of the Bank, the Company or any subsidiary or affiliate thereof, shall become null and void effective upon Mr. Williams's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and shall not be exercisable by Mr. Williams at any time subsequent to such Termination for Cause.
8. NOTICE
(a) Any purported termination by the Bank or by Mr. Williams shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Mr. Williams's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the case of a Termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, except upon the occurrence of a Change in Control and voluntary termination by Mr. Williams in which case the Date of Termination shall be the date specified in the Notice, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal having expired and no appeal having been perfected) and provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank will continue to pay Mr. Williams his full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, Base Salary) and continue Mr. Williams as a participant in all compensation, benefit and insurance plans in which he was participating when the notice of dispute was given, until the dispute is finally resolved in accordance with this Agreement, provided such dispute is resolved within nine months after the Date of Termination specified in the Notice or Termination; notwithstanding the foregoing no compensation or benefits shall be paid to Mr. Williams in the event Mr. Williams is Terminated for Cause. In the event that such Termination for Cause is found to have been wrongful or such dispute is otherwise decided in Mr. Williams's favor, Mr. Williams shall be entitled to receive all compensation and benefits which accrued but were unpaid following the Termination for Cause. Amounts paid
under this Section are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement.
9. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Mr. Williams under this Agreement shall be subject to Mr. Williams's compliance with paragraph (b) of this Section 9 during the term of this Agreement and for one (1) full year after the expiration or termination hereof.
(b) Mr. Williams shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party.
10. NON-COMPETITION
(a) Upon any termination of Mr. Williams's employment hereunder pursuant to Section 4(a) hereof, Mr. Williams agrees not to compete with the Bank and/or the Company for a period of one (1) year following such termination in any city, town or county in which the Bank and/or the Company has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board. Mr. Williams agrees that during such period and within said cities, towns and counties, Mr. Williams shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Bank and/or the Company. The parties hereto, recognizing that irreparable injury will result to the Bank and/or the Company, its business and property in the event of Mr. Williams's breach of this Subsection 10(a) agree that in the event of any such breach by Mr. Williams, the Bank and/or the Company will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Mr. Williams, Mr. Williams's partners, agents, servants, employers, employees and all persons acting for or with Mr. Williams. Nothing herein will be construed as prohibiting the Bank and/or the Company from pursuing any other remedies available to the Bank and/or the Company for such breach or threatened breach, including the recovery of damages from Mr. Williams.
(b) Mr. Williams recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Mr. Williams will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever. Notwithstanding the foregoing, Mr. Williams may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank, and Mr. Williams may disclose any information regarding the Bank or the Company which is otherwise publicly available. In the event of a breach or threatened breach by Mr. Williams of the provisions of this Section 10, the Bank will be entitled to an injunction restraining Mr. Williams from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Mr. Williams.
11. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Mr. Williams and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Mr. Williams.
13. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of, Mr. Williams and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived.
15. REQUIRED PROVISIONS
Notwithstanding anything herein contained to the contrary, any payments to
the Executive by the Company are subject to and conditioned upon their
compliance with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1828(k), and the regulations promulgated thereunder in 12 C.F.R. Part
359.
16. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.
18. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Illinois, but only to the extent not superseded by federal law.
19. ARBITRATION
Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Mr. Williams shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Mr. Williams pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, provided that the dispute or interpretation has been settled by Mr. Williams and the Bank or resolved in Mr. Williams's favor.
21. INDEMNIFICATION
The Bank shall provide Mr. Williams (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, or in lieu thereof, shall indemnify Mr. Williams (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by his in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements (such settlements must be approved by the Board of Directors of the Bank). If such action, suit or proceeding is brought against Mr. Williams in his capacity as an officer or director of the Bank, however, such indemnification shall not extend to matters as to which Mr. Williams is finally adjudged to be liable for willful misconduct in the performance of his duties. No Indemnification shall be paid that would violate 12 U.S.C. 1828(K) or any regulations promulgated thereunder.
22. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place.
SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed and their seals to be affixed hereunto by its duly authorized officer, and Mr. Williams has signed this Agreement, effective as of the day and date first above written.
ATTEST: JACKSONVILLE SAVINGS BANK
/s/ Richard A. Foss By: /s/ Andrew F. Applebee
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Chairman of the Board
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WITNESS:
/s/ Richard A. Foss By: /s/ John Williams
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John Williams
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Exhibit 13 Report to Stockholders
To Our Shareholders:
The U.S. economy began a long awaited recovery in 2003. The turnaround, which had been predicted for many months, was triggered by several key events; the easing of major hostilities in Iraq, interest rates and inflation falling to near record lows, and the economic stimulus created by one of the largest tax cuts in history. Reaction by business, consumers, and the market to Congress' passage of The Growth Tax Reconciliation Act of 2003 was immediate and positive. Clear signs of economic recovery began to appear in the third and fourth quarters. By yearend, GNP had risen significantly, there was a measurable decline in unemployment, and the Dow Jones Industrial Average, reflecting growing investor confidence, had rallied from 8,607 to 10,453.
For Jacksonville Savings 2003 was a busy and productive year. Among the bank's noteworthy accomplishments: continued growth in most operating areas, the introduction of an important new deposit service, a major expansion of bank facilities, and the implementation of two far reaching federal policies.
Bank operating highlights included: growth in total assets of $9.3million to $261.8 million and growth in total deposits of $9.6 million to $235.2 million, both new highs. Loan originations, including residential, consumer, business and agricultural loans, exceeded $160 million for the first time. A record $108 million of loans were sold to Freddie Mac in the secondary market which increased loans serviced for others to a new high of $160 million. Assets under management by both the Trust Department and Financial Resources Group Inc., the bank's wholly owned investment center subsidiary, finished the year at record levels. Membership in Prime Time, the bank's checking club for customers 50 years and older, surpassed 2000 and the number of online banking users reached a record 2200.
In March the bank rolled out its Check Imaging program to overwhelming customer approval. The conversion, which created cost and operating efficiencies for the bank, was practically seamless thanks to the fine work of the staffs in the data processing, bookkeeping, and marketing departments. The primary advantage of imaged statements to the customer is that it provides the same sense of security as traditional returned checks, but in a more convenient and organized format and without the clutter of loose items. In addition, when combined with online banking, Check Imaging enables the customer to view cleared checks 24 hours a day.
In October, after three years of planning and twelve months of construction, the bank celebrated the grand opening of a 13,500 square foot expansion of its 1211 W. Morton headquarters facility. The two story addition which features the same contemporary design as the original building, houses the bank's new Lending Center on the main floor, and a community room that will seat 200 on the lower level.
Throughout the year, the bank's Compliance and Audit Committees, and the staff in customer service, audit, and operations departments worked diligently to implement two new federal policies. A Customer Identification Program, required under The Patriot Act and intended to aid the government in identifying terrorists or terrorist assets and support groups, and The Sarbanes Oxley Act, which represents a comprehensive set of review and reporting rules designed to protect against corporate and insider wrongdoing, were both successfully initiated.
The hallmark of a community bank is investing in the community. At Jacksonville Savings, we believe this responsibility goes beyond the decision of how financial assets are deployed. Our directors, officers, and staff have a long tradition of supporting with their time and talents, a wide range of area volunteer and not-for-profit organizations. Whether it is the Regional Economic Development Corp., The Chamber of Commerce, the United Way, The Cancer Society Relay for Life, The American Heart Walk, our Business School Partnerships, the 4-H, or any one of many other worthwhile community events and activities, we are proud of the leadership role played by so many of the Jacksonville Savings Bank family, as we strive to make the communities we serve a better place to live.
Andrew F. Applebee Richard A. Foss Chairman of the Board President and CEO
TABLE OF CONTENTS
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PAGE
Business of the Company 1
Selected Consolidated Financial Information 2-3
Management's Discussion and Analysis of Financial Condition and Results of Operations 4-20
Independent Auditors' Report 21
Consolidated Financial Statements 22-27
Notes to Consolidated Financial Statements 28-51
Common Stock Information 52
Directors and Officers 53
Corporate Information 54
Annual Meeting 54
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BUSINESS OF THE COMPANY
Jacksonville Bancorp, Inc. (the "Company") was incorporated under Federal law on May 3, 2002. The Company is a savings and loan holding company and its sole business activity is the 100% ownership of Jacksonville Savings Bank (the "Bank"). As part of our reorganization into the two-tier mutual holding company form of ownership, the shareholder interests in the Bank were converted into interests of the Company.
The Bank was founded in 1916 as an Illinois-chartered savings and loan association and converted to an Illinois-chartered savings bank in 1992. The Bank is headquartered in Jacksonville, Illinois and operates six branches in addition to its main office. The Bank's deposits have been federally insured since 1945 by the Federal Deposit Insurance Corporation ("FDIC"). The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1932. At December 31, 2003, the Company had consolidated total assets of $261.8 million, total deposits of $235.2 million and stockholders' equity of $20.0 million.
On April 20, 1995, the Bank reorganized into the mutual holding company form of ownership, pursuant to which the Bank amended its charter from an Illinois-chartered mutual savings bank into an Illinois-chartered mutual holding company ("MHC"), Jacksonville Bancorp, MHC. On December 28, 2000, Jacksonville Bancorp, MHC, converted from an Illinois-chartered mutual holding company to a federally-chartered mutual holding company. As of December 31, 2003, the MHC owned 53.49% of the outstanding shares of the Company.
The Bank is a community-oriented savings bank engaged primarily in the business of attracting retail deposits from the general public in the Bank's market area and using such funds together with borrowings and funds from other sources to originate consumer loans and mortgage loans secured by one- to four-family residential real estate. The Bank also originates commercial real estate loans, multi-family real estate loans, commercial business loans, and agricultural loans. When possible, the Bank emphasizes the origination of mortgage loans with adjustable interest rates ("ARM"), as well as fixed-rate balloon loans with terms ranging from three to five years, consumer loans, which are primarily home equity loans secured by second mortgages, commercial business loans, and agricultural loans. The Bank also offers trust and investment services. The investment center, Berthel Fisher and Company Financial Services, Inc., is operated through the Bank's wholly-owned subsidiary, Financial Resources Group, Inc.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth certain information concerning the consolidated financial position, consolidated data from operations and performance ratios of the Company at the dates and for the years indicated. Selected quarterly financial data for each of the last two fiscal years is set forth at Note 14 to the Consolidated Financial Statements.
AT DECEMBER 31,
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2003 2002 2001 2000 1999
FINANCIAL CONDITION DATA (In thousands)
Total assets $ 261,816 $ 252,504 $ 241,301 $ 227,915 $ 169,232
Loans (1) 127,585 149,200 161,082 172,379 142,818
Investment securities (2) 100,914 74,904 46,360 21,295 1,829
Mortgage-backed securities 7,597 2,822 4,264 6,689 7,353
Cash and cash equivalents 9,576 11,092 13,397 9,476 9,896
Deposits 235,173 225,602 216,899 197,799 139,190
Other borrowings 2,889 2,875 1,395 5,786 8,000
Stockholders' equity 20,032 20,252 19,164 20,637 19,173
YEARS ENDED DECEMBER 31,
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2003 2002 2001 2000 1999
OPERATING DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income $ 12,946 $ 15,065 $ 17,526 $ 15,599 $ 12,820
Interest expense 5,765 7,351 9,569 8,176 6,269
-------- -------- -------- -------- --------
Net interest income 7,181 7,714 7,957 7,423 6,551
Provision for loan losses 2,075 2,000 1,000 610 445
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 5,106 5,714 6,957 6,813 6,106
Other income 3,532 2,490 2,010 1,424 1,284
Other expense (3) 7,296 6,919 11,282 5,793 5,176
-------- -------- -------- -------- --------
Income (loss) before income taxes 1,342 1,285 (2,315) 2,444 2,214
Income tax expense (benefit) 501 467 (1,299) 826 854
-------- -------- -------- -------- --------
Net income (loss) $ 841 $ 818 $ (1,016) $ 1,618 $ 1,360
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Earnings per common share - basic $ 0.43 $ 0.43 $ (0.53) $ 0.85 $ 0.72
======== ======== ======== ======== ========
Earnings per common share - diluted $ 0.43 $ 0.42 $ (0.53) $ 0.85 $ 0.71
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(1) Includes loans held for sale.
(2) Includes FHLB stock, other equity investments, corporate bonds, municipal bonds, and certain securities backed by the U.S. Government or its agencies.
(3) Includes losses due to loan defalcation of $9,000 in 2003, $62,000 in 2002 and $4,458,000 in 2001.
(Continued)
AT OR FOR THE YEARS ENDED DECEMBER 31,
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KEY OPERATING RATIOS 2003 2002 2001 2000 1999
Return on average assets (net income
(loss) divided by average assets) 0.33 % 0.34 % (0.44)% 0.82 % 0.82 %
Return on average equity (net income
(loss) divided by average equity) 4.18 % 4.19 % (4.92)% 8.11 % 7.25 %
Average equity to average assets 7.82 % 8.04 % 8.98 % 10.15 % 11.27 %
Interest rate spread (difference between
average yield on interest-earning assets
and average cost of interest-bearing
liabilities) 2.82 % 3.27 % 3.67 % 3.54 % 3.81 %
Net interest margin (net interest income
as a percentage of average interest-
earning assets) 3.00 % 3.47 % 3.87 % 4.02 % 4.24 %
Dividend pay-out ratio (1) 31.99 % 32.03 % (25.69)% 30.59 % 42.13 %
Noninterest expense to average assets 2.84 % 2.85 % 4.91 % 2.95 % 3.06 %
Average interest-earning assets to
average interest-bearing liabilities 107.58 % 106.04 % 104.40 % 110.87 % 110.55 %
Allowance for loan losses to gross loans
at end of period 1.69 % 1.43 % 0.70 % 0.70 % 0.58 %
Allowance for loan losses to
nonperforming loans 66.02 % 53.69 % 27.37 % 62.55 % 48.68 %
Net loan charge-offs to average
loans during the period 1.41 % 0.68 % 0.68 % 0.34 % 0.31 %
Nonperforming assets to total assets 1.46 % 1.72 % 2.09 % 1.10 % 1.27 %
DECEMBER 31,
OTHER DATA -----------------------------------------------------------------
2003 2002 2001 2000 1999
Number of offices 7 7 7 7 5
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(1) Excludes dividends waived by the mutual holding company during 2003, 2002, 2001, and 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the consolidated financial statements and accompanying notes thereto.
Certain statements in this annual report and throughout Management's Discussion and Analysis of Financial Condition and Results of Operations are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve known and unknown risk, uncertainties and other factors that may cause the Company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward looking statement. Factors that impact such forward looking statements include, among others, changes in general economic conditions, changes in interest rates and competition. The Company declines any obligation to publicly announce future events or developments that may affect the forward-looking statements herein.
OPERATING STRATEGY - OVERVIEW
The business of the Company consists principally of attracting deposits from the general public and using deposits to purchase and originate consumer loans and mortgage loans secured by one- to four-family residences. The Company also offers commercial and agricultural lending services. The Company's net income, like other financial institutions, is primarily dependent on net interest income, which is the difference between the income earned on its interest-earning assets, such as loans and investments, and the cost of its interest-bearing liabilities, primarily deposits. However, the Company's net income is also affected by provisions for loan losses and other operating income and expenses. General economic conditions, particularly changes in market interest rates, government legislation, monetary policies, and attendant actions of the regulatory authorities are the external influences affecting many of the factors of the Company's net income.
Management has implemented various strategies designed to enhance its profitability while still maintaining the Company's safety and soundness. These strategies include reducing its exposure to interest rate risk by selling fixed-rate loans to Freddie Mac and providing other fee-based services to its customers. The Company recognizes the need to establish and adhere to strict loan underwriting criteria and guidelines. In this regard, during 2002, the Company hired an outside consultant to assist management in identifying weaknesses in loan underwriting procedures and implementing remedial measures. During 2003, the Company hired an experienced senior loan administrator to oversee all lending functions of the Company. The Company generally limits its investment portfolio to investments in United States Government and Agency securities, mortgage-backed securities collateralized by U.S. Government Agencies, and local municipal issues.
It is management's intention to remain a retail financial institution dedicated to financing home ownership and other consumer needs, and to provide quality service to its customers located in Morgan, Macoupin, Montgomery and the surrounding counties in Illinois.
CRITICAL ACCOUNTING POLICIES
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results 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 the following discussion, including the allowance for loan losses, goodwill, and mortgage servicing rights, addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results and require 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.
ALLOWANCE FOR LOAN LOSSES - 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 evaluation includes a review of all loans on which full collectibility may not be reasonably assured. Other factors considered by management include the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions and historical losses on each portfolio category. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties, which collateralize loans. 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 of America, 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.
GOODWILL - Costs in excess of the estimated fair value of identified net assets acquired through purchase transactions are recorded as an asset by the Company. This amount was originally amortized as an expense on a straight-line basis assuming a life of twenty years. Effective January 1, 2002, the Company ceased amortizing goodwill in accordance with newly adopted accounting standards generally accepted in the United States of America. The Company performed an initial impairment assessment as of January 1, 2002 and an annual impairment assessment as of September 30, 2002 and 2003. No impairment of goodwill was identified as a result of these tests. In making these impairment assessments, management must make subjective assumptions regarding the fair value of the Company's assets and liabilities. It is possible that these judgements may change over time as market conditions or Company strategies change, and these changes may cause the Company to record impairment charges to adjust the goodwill to its estimated fair value.
MORTGAGE SERVICING RIGHTS - The Company recognizes as a separate asset the rights to service mortgage loans for others. The value of mortgage servicing rights is amortized in relation to the servicing revenue expected to be earned. Mortgage servicing rights are periodically evaluated for impairment based upon the fair value of those rights. Estimating the fair value of the mortgage servicing rights involves judgement, particularly of estimated prepayment speeds of the underlying mortgages serviced. Net income could be affected if management's assumptions and estimates differ from actual prepayments.
The above listing is not intended to be a comprehensive list of all the Company's accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management's judgement in their application. There are also areas in which management's judgement in selecting any available alternative would not produce a materially different result.
FINANCIAL CONDITION
Total assets increased to $261.8 million at December 31, 2003, compared to $252.5 million at December 31, 2002. The increase of $9.3 million, or 3.7%, is primarily due to a $30.8 million, or 39.6%, increase in investment and mortgage-backed securities and a $1.8 million increase in premises and equipment, partially offset by a $1.5 million decrease in cash and cash equivalents and a $21.6 million decrease in total loans receivable and loans held for sale. The increase in premises is due to a $2.5 million expansion of the main office, which was completed during the fourth quarter of 2003.
The growth in investment securities reflects the investment of funds provided by loan sales and a $9.6 million, or 4.2%, increase in deposits. Declining market rates of interest created an extraordinary volume of loan originations during 2003. The Company originated over $160 million in loans during 2003, of which approximately $108 million were sold to Freddie Mac in the secondary market. Consumer loans as part of our loan portfolio have declined as borrowers have consolidated their debt into fixed-rate mortgages that the Bank has sold to the secondary market. The Company's loan portfolio declined by approximately $15.8 million during the year ended December 31, 2003.
Total deposits increased $9.6 million, or 4.2%, to $235.2 million at December 31, 2003. Deposit growth was not limited to any particular segment or product, but rather reflected a general growth in deposits. Management believes that deposit growth was also affected by investors seeking stable investment alternatives.
Stockholders' equity decreased $220,000 to $20.0 million at December 31, 2003. The decrease reflects the payment of $269,000 in dividends and a decrease of $817,000 in unrealized gains on available-for-sale securities, partially offset by net income of $841,000 and $25,000 received from the exercise of stock options. The $25,000 reflects the $367,000 received from the exercise of stock options net of the $342,000 purchase and retirement of treasury stock related to the options. The change in unrealized gains on securities is driven by market conditions and, therefore, can fluctuate daily.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
GENERAL
The Company reported net income for the year ended December 31, 2003, of $841,000, or $0.43 per common share, basic and diluted, compared to net income of $818,000 or $0.43 per common share, basic, and $0.42 per common share, diluted, for the year ended December 31, 2002. Net income increased $23,000 due to an increase of $1.0 million in other income, partially offset by a decrease of $533,000 in net interest income and increases of $377,000 in other expenses, $75,000 in the provision for loan losses, and $35,000 in income taxes.
INTEREST INCOME
Interest income decreased to $12.9 million for the year ended December 31, 2003 from $15.1 million for the year ended December 31, 2002. The decrease in 2003 of $2.2 million resulted from decreased income of $2.2 million on loans, $104,000 on mortgage-backed securities, and $83,000 on other interest-earning assets, partially offset by an increase of $224,000 on income from investment securities.
The decrease in interest income on loans was primarily due to a lower weighted average yield of 6.93% for 2003 from 7.70% for 2002, as well as a decrease in the average balance of loans outstanding to $138.8 million for 2003 compared to $152.8 million for 2002. The decrease in the average yield is due to the low interest rate environment during 2003, which also resulted in continued refinancing activity. Fixed rate loans that were originated in 2003 were sold into the secondary market resulting in a decrease in the average balance of loans during 2003. The decrease in the average yield also reflects the continuing decrease in market rates of interest during 2003.
The increase in interest income on investment securities is due to the higher average balance of investments, which were $91.6 million for 2003 compared to $56.5 million for 2002. The average balance of investment securities reflects the investment of additional cash generated from loan sales during 2003. The increase in the average balance was partially offset by a decrease in the portfolio's average yield to 3.45% for 2003 from 5.20% for 2002. The decrease in the average yield reflects the investment of these funds during the current low interest rate environment. Investment purchases totalled $126.6 million during 2003, partially due to the reinvestment of funds from calls of investment securities of $72.3 million and sales of investment securities of $26.4 million. These investment securities, a portion of which was due to be called, were sold to realize gains. Approximately 99% of the investment portfolio is classified as available for sale. The average life of the investment portfolio is 3.24 years.
The decrease in income on mortgage-backed securities is due to the decline in the average balance of mortgage-backed securities during 2003 to $2.6 million from $3.4 million in 2002, and the decline in the weighted average yield to 3.88% for 2003 from 6.09% for 2002. The sale of $2.3 million in mortgage-backed securities during 2003 contributed to the decline in the average balance and average yield of these investments.
Other interest-earning assets consist of federal funds sold and interest-bearing deposit accounts. The decrease in interest income is due to decreases in both the weighted average yield to 1.05% for 2003 from 1.54% for 2002 and the average balance to $6.2 million for 2003 from $9.6 million for 2002. The decrease in the average balance of these investments is due to management's decision to reinvest most of these funds into the investment portfolio at higher yields.
INTEREST EXPENSE
Interest expense decreased to $5.8 million for the year ended December 31, 2003 from $7.4 million for the year ended December 31, 2002. The decrease of $1.6 million in the cost of funds resulted from a $1.6 million decrease in interest paid on deposits. Interest on short-term borrowings increased by $4,000.
The lower interest expense on deposits is attributable to a decrease in the weighted average yield on deposits to 2.62% for 2003 from 3.52% for 2002. The lower weighted average yield was offset by an increase in the average balance of deposits to $218.6 million for 2003 from $207.6 million for 2002, due to normal deposit growth. The decreased cost of funds reflects the lower market rates of interest during 2003.
The increase in interest expense on short-term borrowings is due to an increase in the average balance of borrowings to $3.8 million for 2003 from $2.1 million during 2002, partially offset by the weighted average yield declining to 1.10% for 2003 from 1.81% for 2002. The increase in the average balance is due to the borrowing of $7.5 million from the Federal Home Loan Bank during September 2003. Management has maintained lower cash balances in order to improve earnings, and has used short-term advances to fund short-term cash needs. All advances were repaid during December 2003. The remainder of borrowed funds, which averaged $2.2 million for 2003, consist of securities sold under agreement to repurchase.
PROVISION FOR LOAN LOSSES
The provision for loan losses is determined by management as the amount needed to replenish the allowance for loan losses, after net charge-offs have been deducted, to a level considered adequate to absorb known and probable losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America.
The Company recorded an increase of $75,000 in provision for loan losses to $2,075,000 for the year ended December 31, 2003. The allowance for loan losses increased to $2.2 million at December 31, 2003 from $2.1 million at December 31, 2002. The increase is the result of the provision for loan losses exceeding the net charge-offs. Net charge-offs increased during 2003 to $1.9 million from $1.0 million during 2002. The provisions in 2003 and 2002 were made to bring the allowance for loan losses to a level deemed adequate following management's evaluation of the repayment capacity and collateral protection afforded by each problem credit identified by management. This review also considered the current economic downturn in the local economy, which has resulted in increased bankruptcies and foreclosures in the Company's market area and which have further contributed to the recent increases in delinquencies and charge-offs. Set forth below is a table regarding the Bank's nonperforming assets.
12/31/03 12/31/02
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(Dollars in Thousands)
Non-accruing loans:
One-to-four family residential 1,022 769
Commerical and agricultural real estate 224 186
Commercial and agricultural business 613 301
Home equity/Home improvement 1,101 1,860
Automobile 139 196
Other consumer 22 198
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Total 3,121 3,510
========= =========
Accruing loans delinquent more than 90 days:
One-to-four family residential 168 64
Commerical and agricultural real estate - 259
Automobile 15 -
Other consumer 7 28
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Total 190 351
========= =========
Foreclosed assets:
One-to-four family residential 499 442
Automobile 18 38
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Total 517 480
========= =========
Total nonperforming assets $ 3,828 $ 4,341
========= =========
Total as a percentage of total assets 1.46% 1.72%
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The following table shows the aggregate principal amount of potential problem credits on the Company's watch list at December 31, 2003 and December 31, 2002. All nonaccrual loans are automatically placed on the watch list.
12/31/03 12/31/02
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(Dollars in thousands)
Special Mention credits $ 6,087 $ 4,084
Substandard credits 7,555 4,298
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Total watch list credits $ 13,642 $ 8,382
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During the fourth quarter of 2002, with the help of an outside consultant, the Company revised its lending policies and procedures in order to strengthen underwriting practices. The Company also hired an additional loan collector during the first quarter of 2003 to help manage the level of delinquencies, bankruptcies, and foreclosures. In order to address the rising trend in delinquencies and loan losses and prevent any further deterioration in asset quality, the Company hired an experienced senior loan administrator during the third quarter of 2003. This individual oversees all lending functions of the Company and is assisting in the collection and workout of problem credits, as well as reviewing and further enhancing all lending policies and procedures. The recent policy changes, including a more stringent review of outstanding credits, has contributed to the increase in the volume of watch list credits.
The allowance for loan losses is a material estimate that is 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 reasonably assured. Management uses an internal asset classification system as a means of reporting problem and potential problem assets. Management maintains a watch list of problem credits, which are presented to the Board of Directors at least quarterly. This list includes those loans rated as "special mention," "substandard," "doubtful," and "loss." Loans rated as "special mention" include loans to borrowers displaying a weak and/or leveraged financial condition that may also be having difficulty servicing the debt. Loans rated "substandard" are assets inadequately protected by the net worth or paying capacity of the obligor or of the pledged collateral. The Company does not have any loans graded as "doubtful" and all loans rated as "loss" have been charged off.
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.
NON-INTEREST INCOME
Non-interest income increased $1.0 million during the year ended December 31, 2003, compared to the year ended December 31, 2002. The increase is comprised of a $563,000 insurance recovery received during the first quarter of 2003. This amount represents the negotiated settlement with the Company's insurance carrier regarding a loan defalcation discovered during 2001. The remainder of the increase in non-interest income is primarily due to increased gains of $197,000 from the sale of loans to the secondary market and increased trust income of $224,000 during 2003. During 2003, the Company sold $107.7 million in fixed-rate, first lien mortgage loans in the secondary market compared to $86.1 million sold during 2002. The increased volume is the result of mortgage rates decreasing to the lowest levels recorded in recent periods. The increase in trust income results from additional trust work performed during 2003; this level of trust fees is not expected to continue after 2003.
NON-INTEREST EXPENSE
Non-interest expense increased $377,000 during the year ended December 31, 2003 compared to the year ended December 31, 2002. The increase is mostly due to increases of $257,000 in salaries and benefits, $193,000 in occupancy expense, and $62,000 in data processing expense, partially offset by a decrease of $175,000 in real estate owned expense. The increase in salaries and benefits is primarily due to increased insurance costs and the hiring of additional personnel in the lending department. The Company had full-time equivalent employees of 118 and 109 at December 31, 2003 and 2002, respectively. The increases in data processing and occupancy expense are mostly due to additional costs related to the offering of check imaging services beginning in February 2003 and the $2.5 million expansion of the main office. In addition, $27,000 of depreciation expense for the expansion was recorded during the fourth quarter of 2003, when construction was completed.
INCOME TAXES
The provision for income taxes increased $35,000 during 2003 compared to 2002, due to the $57,000 increase in income before income taxes during this same time frame. The marginal tax rate equals 37.3% and 36.3% for the years ended December 31, 2003 and 2002, respectively.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
GENERAL
The Company reported net income of $818,000 for the year ended December 31, 2002, compared to a net loss of $1,016,000 for the year ended December 31, 2001. Net income in 2002 reflects a decrease in operating expenses during 2002 compared to 2001, in particular, a $4.5 million nonrecurring expense in 2001 related to loan defalcations. Other income increased $480,000, net interest income decreased $243,000, the provision for loan losses increased $1.0 million, other expenses increased $33,000, and income tax expense was $467,000 compared to a tax benefit of $1.3 million in 2001.
INTEREST INCOME
Interest income decreased to $15.1 million for the year ended December 31, 2002 from $17.5 million for the year ended December 31, 2001. The decrease in 2002 of $2.4 million resulted from decreased income of $2.8 million on loans, $221,000 on other interest-earning assets, and $175,000 on mortgage-backed securities, partially offset by an increase of $768,000 on income from investment securities.
The decrease in interest income on loans was primarily due to a lower weighted average yield of 7.70% for 2002 from 9.00% for 2001, as well as a decrease in the average balance of loans outstanding to $152.8 million for 2002 compared to $162.2 million for 2001. The decrease in the weighted average yield is due to the declining interest rate environment experienced during 2002, which also resulted in increased refinancing activity. This activity contributed to the decreased average balance of loans as a large volume of consumer loans were consolidated, secured with residential real estate, and sold into the secondary market.
The increase in interest income on investment securities is due to the higher average balance of investments, which totalled $56.5 million for 2002 compared to $28.3 million for 2001. The higher average balance is due to the additional cash generated from loan sales during 2002. The weighted average yield on investments decreased to 5.20% for 2002 from the 7.66% for 2001. At the time of the acquisition of Chapin State Bank in 2000, many of the acquired investments were carrying unrealized losses, which are being amortized over the life of the investments according to purchase accounting rules. As market rates declined during 2001, many of these investments were called resulting in gains and losses from securities transactions. These adjustments resulted in an additional $268,000 in interest income for the year ended December 31, 2001. Without this adjustment, the weighted average yield on investments for 2001 would have equaled 6.71%.
The decreased income on mortgage-backed securities is primarily due to the decline in the average balance of mortgage-backed securities during 2002 to $3.4 million from $5.4 million in 2001. The decreased balance is due to accelerated principal repayments on the mortgage-backed securities, which have been reinvested into U.S. Agency securities. The decline in the weighted average yield to 6.09% for 2002 from 7.12% for 2001 also contributed to the decreased income.
Other interest-earning assets consist of federal funds sold and interest-bearing deposit accounts. The decrease in interest income is primarily the result of a decrease in the weighted average yield to 1.54% for 2002 from 3.90% for 2001. The average balances of the FHLB deposit account and federal funds sold increased to $9.6 million for 2002 from $9.5 million for 2001.
INTEREST EXPENSE
Interest expense decreased to $7.4 million for the year ended December 31, 2002 from the $9.6 million for the year ended December 31, 2001. The decrease of $2.2 million in the cost of funds resulted from a $2.2 million decrease in interest paid on deposits combined with a $41,000 decrease in interest on short-term borrowings.
The lower interest expense on deposits is attributable to a decrease in the weighted average yield on deposits to 3.52% for 2002 from 4.87% for 2001. The lower weighted average yield was offset by an increase in the average balance of deposits to $207.6 million for 2002 from $194.7 million for 2001.
The decreased interest expense on short-term borrowings is due to the weighted average yield declining to 1.81% for 2002 from 3.91% for 2001. The average balance of borrowings remained fairly stable at $2.1 million for 2002 from $2.0 million for 2001. Borrowings consist of commercial cash management accounts, which are swept daily into overnight repurchase agreements, secured by U.S. Government Agency securities. The Company repaid all outstanding advances with the FHLB, totaling $5.0 million, on February 28, 2001. The Company did not borrow any additional funds from the FHLB during 2001 or 2002.
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 known and probable losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America.
The Company recorded $2.0 million in provision for loan losses during the year ended December 31, 2002, compared to $1.0 million for the year ended December 31, 2001. The allowance for loan losses increased to $2.1 million at December 31, 2002, from $1.1 million at December 31, 2001. The increase is due to the $2.0 million provision for loan losses exceeding net charge-offs of $1.0 million. Net charge-offs decreased $65,000 during 2002 from $1.1 million during 2001. At December 31, 2002, approximately 32% of the Company's loan portfolio consisted of residential real estate loans plus an additional 21% consisted of home equity loans. Commercial and agricultural loans accounted for approximately 34% and consumer loans comprised the remaining 13% of the loan portfolio. In 2002, approximately 24% of the net charge-offs were attributed to residential real estate loans, 37% to home equity loans, 8% to commercial loans and 31% to consumer loans. Nonperforming loans decreased to $3.9 million, or 2.7% of net loans, at December 31, 2002 from $4.0 million, or 2.6% of net loans, at December 31, 2001.
NON-INTEREST INCOME
Non-interest income increased $480,000 to $2.5 million for the year ended December 31, 2002 from $2.0 million for the year ended December 31, 2001. The increase is primarily due to increases of $216,000 in gains on sale of securities and $101,000 in gains on sale of loans. Other income also increased as a result of an $86,000 increase in commission income from brokerage activities. The Company increased its brokerage activity following the hiring of an additional, experienced investment broker as of January 1, 2002.
Gains on the sale of securities increased to $303,000 during 2002 from $87,000 during 2001. Securities totalling $20.1 million and $9.3 million, a portion of which were due to be called, were sold during 2002 and 2001, respectively, in order to realize gains. The increase in gains on sale of loans is due to the increased volume of loan sales to Freddie Mac, which also resulted in a $50,000 increase in loan servicing fees for 2002 compared to 2001. During 2002, the Company sold $86.1 million in fixed-rate, first lien mortgage loans in the secondary market compared to $80.3 million sold during 2001. The increased volume is the result of mortgage rates decreasing to the lowest levels recorded in recent periods.
NON-INTEREST EXPENSE
Non-interest expense decreased $4.4 million during the year ended December 31, 2002, primarily due to the nonrecurring expense due to loan irregularities of $4.5 million during 2001. The remainder of the higher non-interest expense is concentrated in increased salaries and benefit expenses of $174,000 offset by reduced amortization of intangible assets of $147,000. The Company did not record any amortization expense for goodwill during the year ended December 31, 2002, compared to $147,000 expensed during 2001.
INCOME TAXES
The provision for income taxes increased $1.8 million to $467,000 during the year ended December 31, 2002, compared to a tax benefit of $1.3 million for the year ended December 31, 2001. The increase is primarily attributed to the net profit before tax of $1.3 million during 2002 compared to the net operating loss before taxes of $2.3 million for 2001.
AVERAGE YIELDS EARNED AND RATES PAID
The earnings of the Company depend largely on the spread between the yield on interest-earning assets and the cost of
interest-bearing liabilities, as well as the relative size of the Company's interest-earning assets and interest-bearing liability
portfolios. The following table sets forth, for the years indicated, information regarding average balances of assets and
liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on
average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin, and ratio of average
interest-earning assets to average interest-bearing liabilities. Average balances for a year have been derived utilizing daily
balances.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
2003 2002 2001
---------------------------- ----------------------------- ----------------------------
INTEREST INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE DIVIDENDS COST BALANCE DIVIDENDS COST BALANCE DIVIDENDS COST
----------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans (1) $138,792 $ 9,618 6.93% $152,848 $ 11,773 7.70% $162,230 $ 14,606 9.00%
Investment securities 91,643 3,161 3.45% 56,532 2,937 5.20% 28,326 2,169 7.66%
Mortgage-backed securities 2,637 102 3.88% 3,392 207 6.09% 5,356 382 7.12%
Other 6,201 65 1.05% 9,612 148 1.54% 9,459 369 3.90%
-------- ------- -------- -------- -------- --------
Total interest-earning assets 239,273 12,946 5.41% 222,384 15,065 6.77% 205,371 17,526 8.53%
------- -------- --------
Non-interest-earning assets 18,040 20,428 24,587
-------- -------- --------
Total assets $257,313 $242,812 $229,958
======== ======== ========
Interest-bearing liabilities:
Deposits $218,622 5,724 2.62% $207,629 7,313 3.52% $194,704 9,490 4.87%
Short-term borrowings 3,801 41 1.10% 2,097 38 1.81% 2,014 79 3.91%
-------- ------- -------- ------- -------- --------
Total interest-bearing liabilities 222,423 5,765 2.59% 209,726 7,351 3.51% 196,718 9,569 4.86%
------- -------- --------
Non-interest-bearing liabilities 14,771 13,559 12,592
Stockholders' equity 20,119 19,527 20,648
-------- ------- --------
Total liabilities and
stockholders' equity $257,313 $242,812 $229,958
======== ======== ========
Net interest income $ 7,181 $ 7,714 $ 7,957
======= ======== =======
Interest rate spread (2) 2.82% 3.27% 3.67%
===== ===== =====
Net interest margin (3) 3.00% 3.47% 3.87%
===== ===== =====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 107.58% 104.40% 110.87%
======= ======= =======
-------------------------------------------------------------------------------------
(1) Includes non-accrual loans and loans held for sale, and fees of $111,000 for 2003, $142,000 for 2002, and $151,000 for 2001.
(2) Yield on interest-earning assets less cost of interest-bearing liabilities.
(3) Net interest income divided by average interest-earning assets.
|
RATE/VOLUME ANALYSIS
The following table sets forth the effects of changing rates and volumes on net interest income of the Company. Information is provided with respect to (i) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume), (ii) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate), and (iii) the net change. For purposes of the table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
2003 COMPARED TO 2002
INCREASE (DECREASE) DUE TO
-----------------------------------------
RATE VOLUME NET
-----------------------------------------
(IN THOUSANDS)
Interest-earning assets:
Loans $(1,124) $(1,031) $(2,155)
Investment securities (1,202) 1,426 224
Mortgage-backed securities (65) (40) (105)
Other (40) (43) (83)
------- ------- -------
Total net change in income on interest-earning assets (2,431) 312 (2,119)
------- ------- -------
Interest-bearing liabilities:
Deposits (1,959) 370 (1,589)
Other borrowings (19) 22 3
------- ------- -------
Total net change in expense on interest-bearing liabilities (1,978) 392 (1,586)
------- ------- -------
Net change in net interest income $ (453) $ (80) $ (533)
======= ======= =======
(CONTINUED)
2002 COMPARED TO 2001
INCREASE (DECREASE) DUE TO
-----------------------------------------
RATE VOLUME NET
-----------------------------------------
(IN THOUSANDS)
Interest-earning assets:
Loans $(2,023) $ (810) $(2,833)
Investment securities (867) 1,635 768
Mortgage-backed securities (50) (125) (175)
Other (227) 6 (221)
------- ------- -------
Total net change in income on interest-earning assets (3,167) 706 (2,461)
------- ------- -------
Interest-bearing liabilities:
Deposits (2,774) 597 (2,177)
Other borrowings (44) 3 (41)
------- ------- -------
Total net change in expense on interest-bearing liabilities (2,818) 600 (2,218)
------- ------- -------
Net change in net interest income $ (349) $ 106 $ (243)
======= ======= =======
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ASSET AND LIABILITY MANAGEMENT
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.
During 2002, the Company began using 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 December 31, 2003 of the impact on net interest income from an immediate change in interest rates, as well as the benchmarks established by the ALCO. The results are shown as a dollar and percentage change in net interest income over the next twelve months.
-------------------- ----------------------------------------------------
CHANGE IN NET INTEREST INCOME
(000's omitted)
-------------------- ----------------------------------------------------
RATE SHOCK $ CHANGE % CHANGE ALCO BENCHMARK
-------------------- --------------- -------------- ---------------------
+300 basis points 126 1.73% >(20.00)%
-------------------- --------------- -------------- ---------------------
+200 basis points 240 3.30% >(20.00)%
-------------------- --------------- -------------- ---------------------
+100 basis points 358 4.90% >(12.50)%
-------------------- --------------- -------------- ---------------------
-100 basis points 529 7.25% >(12.50)%
-------------------- --------------- -------------- ---------------------
-200 basis points 543 7.44% >(20.00)%
-------------------- --------------- -------------- ---------------------
-300 basis points 543 7.44% >(20.00)%
-------------------- --------------- -------------- ---------------------
|
The foregoing computations are based upon numerous assumptions, including relative levels of market interest rates, prepayments, and deposit mix. The computed estimates should not be relied upon as a projection of actual results. Despite the limitations on precision inherent in these computations, management believes that the information provided is reasonably indicative of the effect of changes in interest rate levels on the net earning capacity of the Company's current mix of interest earning assets and interest bearing liabilities. Management continues to use the results of these computations, along with the results of its computer model projections, in order to maximize current earnings while positioning the Company to minimize the effect of a prolonged shift in interest rates that would adversely affect future results of operations.
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.
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 December 31, 2003 and 2002, cash and cash equivalents totaled $9.6 million and $11.1 million, respectively. The Company's primary sources of funds include customer deposits, proceeds from sales of loans, calls and sales of investments, and principal repayments from loans and mortgage-backed securities (both scheduled and prepayments). During the years ended December 31, 2003 and 2002, the most significant sources of funds have been deposit growth, loan sales to the secondary market, and advances from FHLB. These funds have been used to fund new loan originations and the purchase of investment securities.
The Company's cash and cash equivalents decreased $1.5 million during the year ended December 31, 2003, compared to a decrease of $2.3 million during the year ended December 31, 2002. Net cash provided by operating activities before loan originations and sales decreased $252,000 to $3.2 million during 2003. Net cash provided by loan originations and sales to Freddie Mac increased to $6.5 million during 2003 from the cash used of $963,000 during 2002. Net cash used in investing activities increased to $20.5 million during 2003 from $14.9 million during 2002. Cash used to purchase investment and mortgage-backed securities increased to $134.7 million during 2003 from $99.8 million during 2002. The cash used for investment purchases was partially funded by an increase in calls, maturities, and sales of investment and mortgage-backed securities of $101.3 million during 2003 from $72.2 million during 2002. Net cash provided by financing activities decreased to $9.3 million during 2003 from $10.0 million during 2002. The decrease is primarily due to the net increases in deposits of $9.6 million during 2003 compared to $8.7 million during 2002.
While loan sales 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 expected loan demand, projected purchases of investment and mortgage-backed securities, expected deposit flows, yields available on interest-bearing deposits, and 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 the lesser of 30% of the Company's total assets or twenty times the balance of FHLB stock held by the Company. At December 31, 2003, the Company had borrowing capacity of approximately $27.6 million and no outstanding advances.
The Company maintains levels of liquid assets as established by the Board of Directors. The Company's liquidity ratio, adjusted for pledged assets, at December 31, 2003 and 2002 was 43.3% and 34.8%, 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 does not have any outstanding borrowings. The only long-term obligation that could affect liquidity is the maturity of time deposits, the detail of which can be found in Note 7 to the Consolidated Financial Statements. 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 the outstanding loan commitments at December 31, 2003 and 2002.
12/31/03 12/31/02
-------- --------
(In thousands)
Commitments to fund loans - own portfolio $ 15,695 $ 15,672
Commitments to fund loans for sale to Freddie Mac 369 6,155
Standby letters of credit 410 226
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The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was signed into law on December 19, 1991. Regulations implementing the prompt corrective action provisions of FDICIA became effective on December 19, 1992. In addition to the prompt corrective action requirements, FDICIA includes significant changes to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning internal controls, accounting and operations.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier I capital (as defined) to average assets (as defined). Management believes, at December 31, 2003, that the Bank meets all capital adequacy requirements to which it is subject.
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 Banks and Real Estate (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 December 31, 2003, the Bank's core capital ratio was 6.54% of total adjusted average assets, which exceeded the required amount.
As of December 31, 2003, the Federal Deposit Insurance Corporation ("FDIC") categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. The well-capitalized category requires higher minimum ratios of 5% for the Tier 1 leverage, 6% for the Tier 1 risk-based, and 10% for the total risk-based capital ratios. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios are also presented in the table below:
MINIMUM
REQUIRED ACTUAL
Tier 1 Capital to Average Assets 4.00 % 6.54 %
Tier 1 Capital to Risk-Weighted Assets 4.00 % 11.88 %
Total Capital to Risk-Weighted Assets 8.00 % 13.13 %
|
Future capital levels should benefit from the decision of Jacksonville Bancorp, MHC, to waive its right to receive dividends on the class of Company stock it holds, subject to regulatory non-objection.
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 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.
* * * * * *
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Jacksonville Bancorp, Inc.
Jacksonville, Illinois
We have audited the accompanying consolidated balance sheets of Jacksonville Bancorp, Inc. and Subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jacksonville Bancorp, Inc. and Subsidiary as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Champaign, Illinois
January 23, 2004
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JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
ASSETS 2003 2002
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 9,575,977 $ 11,091,626
Federal funds sold 500,000 800,000
Investment securities, available-for-sale 98,940,872 72,922,995
Mortgage-backed securities available-for-sale 7,597,265 2,822,119
Federal Home Loan Bank stock 1,380,600 1,279,200
Other investments 592,355 701,765
Loans - net of allowance for loan losses of 2003 $2,186,058; 2002 $2,073,095 127,079,036 142,928,599
Loans held for sale 506,300 6,271,435
Premises and equipment - net 7,419,061 5,668,211
Accrued interest receivable 1,445,140 1,719,477
Goodwill 2,726,567 2,726,567
Core deposit intangible 358,756 438,480
Capitalized mortgage servicing rights 1,168,246 1,077,318
Real estate owned 499,257 442,048
Income taxes receivable 386,509 222,241
Other assets 1,639,722 1,391,812
--------------------------------------
TOTAL ASSETS $ 261,815,663 $ 252,503,893
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest bearing $ 12,850,729 $ 13,528,850
Interest bearing 222,322,003 212,073,647
Short-term borrowings 2,888,954 2,874,707
Advance payments by borrowers for taxes and insurance 397,941 442,439
Accrued interest payable 775,966 995,263
Deferred compensation 2,021,008 1,924,718
Other liabilities 526,909 411,858
--------------------------------------
TOTAL LIABILITIES 241,783,510 232,251,482
======================================
Commitments and Contingencies (Note 12)
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 1,942,004 shares and 1,921,304 shares at December 31, 2003
and 2002, respectively 19,420 19,213
Additional paid-in capital 6,399,321 6,374,463
Retained earnings - substantially restricted 13,866,849 13,294,959
Accumulated other comprehensive income (loss) (253,437) 563,776
--------------------------------------
TOTAL STOCKHOLDERS' EQUITY 20,032,153 20,252,411
--------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 261,815,663 $ 252,503,893
======================================
See Notes to Consolidated Financial Statements.
|
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans $ 9,618,443 $ 11,773,212 $ 14,606,530
Mortgage-backed securities 102,272 206,663 381,629
Investment securities:
Taxable 3,117,183 2,840,470 2,075,549
Nontaxable 43,514 96,638 93,733
Other 64,887 148,344 369,158
------------------------------------------------------------
TOTAL INTEREST INCOME 12,946,299 15,065,327 17,526,599
------------------------------------------------------------
Interest expense:
Deposits 5,723,776 7,313,183 9,490,440
Short term borrowings 41,669 37,982 78,692
------------------------------------------------------------
TOTAL INTEREST EXPENSE 5,765,445 7,351,165 9,569,132
------------------------------------------------------------
NET INTEREST INCOME 7,180,854 7,714,162 7,957,467
Provision for loan losses 2,075,000 2,000,000 1,000,000
------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,105,854 5,714,162 6,957,467
------------------------------------------------------------
Other income:
Service charges on deposit accounts 668,750 714,390 676,865
Loan servicing fees 402,515 361,050 310,957
Commission income 410,145 394,760 308,542
Net gains on sales of loans 829,362 632,301 531,059
Gain on sale of securities 319,103 303,423 87,569
Trust income 259,021 34,925 31,515
Recovery from insurance company 562,500 - -
Other 80,908 48,866 63,408
------------------------------------------------------------
TOTAL OTHER INCOME 3,532,304 2,489,715 2,009,915
------------------------------------------------------------
Other expenses:
Salaries and employee benefits 4,200,388 3,943,657 3,769,523
Occupancy and equipment expense 1,256,706 1,063,791 1,130,622
Data processing expense 278,024 216,073 187,307
Legal and accounting expense 120,613 94,769 100,046
Real estate owned expense 36,697 211,281 184,528
Advertising expense 129,536 151,108 137,399
Amortization of intangible assets 79,724 79,723 227,106
Loss due to loan defalcation 9,361 62,348 4,458,452
Other 1,184,733 1,096,152 1,087,299
------------------------------------------------------------
TOTAL OTHER EXPENSES 7,295,782 6,918,902 11,282,282
------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE (BENEFIT) 1,342,376 1,284,975 (2,314,900)
Income tax expense (benefit) 501,346 466,652 (1,298,579)
------------------------------------------------------------
NET INCOME (LOSS) $ 841,030 $ 818,323 $ (1,016,321)
============================================================
Net income (loss) per common share - basic $ 0.43 $ 0.43 $ (0.53)
============================================================
Net income (loss) per common share - diluted $ 0.43 $ 0.42 $ (0.53)
============================================================
|
See Notes to Consolidated Financial Statements.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
---------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
---------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 19,093 $ 6,268,623 $ 14,016,209 $ 333,279 $ 20,637,204
Comprehensive income (loss):
Net (loss) - - (1,016,321) - (1,016,321)
Other comprehensive
income - change in net
unrealized gains on
securities available-
for-sale, net of income
taxes of $(153,734) - - - (253,816) (253,816)
Less: Reclassification
adjustment for gains
included in net
income, net of tax
of $29,773 - - - 57,796 57,796
-----------------
Comprehensive income
(loss) (1,212,341)
-----------------
Dividends on common
stock ($.30 per share) - - (261,177) - (261,177)
---------------------------------------------------------------------------------------
Balance, December 31, 2001 19,093 6,268,623 12,738,711 137,259 19,163,686
Comprehensive income
Net income - - 818,323 - 818,323
Other comprehensive
income - change in net
unrealized gains on
securities available-
for-sale, net of income
taxes of $387,269 - - - 612,394 612,394
Less: Reclassification
adjustment for gains
included in net
income, net of tax
of $(117,546) - - - (185,877) (185,877)
-----------------
Comprehensive income 1,244,840
-----------------
Exercise of stock options 120 105,840 - - 105,960
Dividends on common
stock ($.30 per share) - - (262,075) - (262,075)
---------------------------------------------------------------------------------------
Balance, December 31, 2002 19,213 6,374,463 13,294,959 563,776 20,252,411
---------------------------------------------------------------------------------------
|
(Continued)
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
---------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
---------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 19,213 $ 6,374,463 $ 13,294,959 $ 563,776 $ 20,252,411
Comprehensive income
Net income - - 841,030 - 841,030
Other comprehensive
income (loss) - change in
net unrealized gains
(losses) on securities
available-for-sale,
net of income taxes
of $(640,414) - - - (1,012,695) (1,012,695)
Less: Reclassification
adjustment for gains
included in net
income, net of tax
of $123,621 - - - 195,482 195,482
-----------------
Comprehensive income 23,817
-----------------
Exercise of stock options 410 366,170 - - 366,580
Purchase and retirement of
treasury stock (203) (341,312) - - (341,515)
Dividends on common
stock ($0.30 per share) - - (269,140) - (269,140)
---------------------------------------------------------------------------------------
Balance, December 31, 2003 $ 19,420 $ 6,399,321 $ 13,866,849 $ (253,437) $ 20,032,153
=======================================================================================
|
See Notes to Consolidated Financial Statements.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net income (loss) $ 841,030 $ 818,323 $ (1,016,321)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, amortization and accretion:
Premises and equipment 469,278 457,960 579,755
Loan fees, security discounts and premiums - net 628,665 394 (463,358)
Intangible assets 79,724 79,723 227,106
Provision for loan losses 2,075,000 2,000,000 1,000,000
Deferred income taxes 450,000 (500,000) (192,850)
FHLB stock dividend (101,400) (64,100) (80,100)
Gain on sale of securities (319,103) (303,423) (87,569)
Net gains on sales of loans (829,362) (632,301) (531,059)
(Gain) loss on sale of real estate owned (77,055) 71,491 33,771
Write down on real estate owned 81,749 125,804 76,537
Loss due to loan defalcation 9,361 62,348 4,016,452
Change in other assets and liabilities (89,915) 1,354,214 (1,212,581)
------------------------------------------------------------
NET CASH PROVIDED BY OPERATIONS BEFORE
LOAN ORIGINATIONS AND SALES 3,217,972 3,470,433 2,349,783
Originations of loans held for sale (101,216,763) (87,024,862) (84,548,592)
Proceeds from sales of loans held for sale 107,720,332 86,061,502 80,295,237
------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 9,721,541 2,507,073 (1,903,572)
------------------------------------------------------------
Cash Flows from Investing Activities
Change in federal funds sold, net 300,000 210,000 3,957,000
Purchases of investment and mortgage-
backed securities (134,699,165) (99,755,746) (56,071,030)
Proceeds from calls and maturities of
investment securities 72,275,175 52,090,200 21,637,568
Proceeds from sales of investment and mortgage-
backed securities 28,986,883 20,130,901 9,274,500
Principal payments received on mortgage-backed
securities 909,924 1,350,142 2,499,381
Principal payments received on investment securities
and other investments 140,260 88,939 279,097
Loan payments, net 13,012,816 10,729,396 9,750,423
Proceeds from sales of real estate owned 759,585 985,131 595,294
Additions to premises and equipment (2,220,128) (683,496) (527,113)
------------------------------------------------------------
NET CASH (USED IN) INVESTING ACTIVITIES (20,534,650) (14,854,533) (8,604,880)
------------------------------------------------------------
|
(Continued)
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Net increase in deposits $ 9,570,235 $ 8,703,726 $ 19,100,271
Proceeds from other borrowings 7,514,247 1,479,252 -
Repayment of advances from Federal Home Loan
Bank of Chicago and other borrowings (7,500,000) - (4,390,645)
Increase (decrease) in advance payments by
borrowers for taxes and insurance (44,498) 14,321 (18,970)
Purchase and retirement of treasury stock (341,515) - -
Exercise of stock options 366,580 105,960 -
Dividends paid (267,589) (261,175) (261,175)
------------------------------------------------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 9,297,460 10,042,084 14,429,481
------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,515,649) (2,305,376) 3,921,029
Cash and cash equivalents:
Beginning of year 11,091,626 13,397,002 9,475,973
------------------------------------------------------------
End of year $ 9,575,977 $ 11,091,626 $ 13,397,002
============================================================
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for:
Interest on deposits $ 5,945,173 $ 7,569,596 $ 9,620,410
Interest on other borrowings 39,569 37,982 108,745
Income taxes (refunds) 215,613 (361,510) 625,553
Supplemental Schedule of Noncash Investing and
Financing Activities
Real estate acquired in settlement of loans 1,022,690 806,145 1,191,115
Loans to facilitate sales of real estate owned 201,202 127,035 429,491
Dividends declared not paid 67,745 66,194 65,294
|
See Notes to Consolidated Financial Statements.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - On April 20, 1995, the Bank reorganized into the mutual holding company form of ownership, and accordingly the Bank reorganized by amending its charter from a mutual savings bank into a mutual holding company ("MHC"). The MHC is named Jacksonville Bancorp, MHC. A principal part of the reorganization into the MHC ("Reorganization") was the incorporation of an Illinois-chartered capital stock savings bank ("Jacksonville Savings Bank"), which is a majority-owned subsidiary of the MHC at all times so long as the MHC remains in existence.
On May 3, 2002, Jacksonville Savings Bank and Jacksonville Bancorp, M.H.C., the mutual holding company parent, reorganized into the two-tier mutual holding company form of ownership by establishing a mid-tier, federally-chartered stock holding company, Jacksonville Bancorp, Inc. (the "Company"). All outstanding shares of Jacksonville Savings Bank common stock were converted on a one for one basis into shares of Jacksonville Bancorp, Inc. common stock in the reorganization. Jacksonville Bancorp, Inc. now owns 100% of the outstanding shares of Jacksonville Savings Bank.
Jacksonville Savings Bank and subsidiary (the "Bank") is a community-oriented savings bank that provides traditional financial services through the operation of six branches within Morgan, Macoupin and Montgomery Counties, Illinois.
The Company is subject to competition from other financial institutions and nonfinancial institutions providing financial products. Additionally, the Company is subject to the regulations of certain regulatory agencies and undergoes periodic examinations by those regulatory agencies.
The significant accounting and reporting policies of the Company and its subsidiary follow:
BASIS OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION - The consolidated financial statements include the accounts of the Company, the Bank and the Bank's wholly owned subsidiary, Financial Resources Group, Inc. Significant intercompany accounts and transactions have been eliminated in consolidation. Based on the Company's approach to decision making, it has decided that its business is comprised of a single segment.
The consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America and conform to predominate practice within the banking industry.
In preparing the consolidated financial statements, Company management is required to make estimates and assumptions which significantly affect the amounts reported in the consolidated financial statements. Significant estimates which are particularly susceptible to change in a short period of time include the market value of investment and mortgage-backed securities, the determination of the allowance for losses on loans, the valuation of mortgage servicing rights and valuation of real estate and other properties acquired in connection with foreclosures or in satisfaction of amounts due from borrowers on loans. Actual results could differ from those estimates.
COMPREHENSIVE INCOME - Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes the net change in unrealized gains and losses on securities available for sale, net of reclassification adjustments and tax effect and is also recognized as a separate component of stockholders' equity.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash equivalents include cash and amounts due from depository institutions and interest-bearing deposits in other depository institutions. Cash flows from loans, deposits and advance payments by borrowers for taxes and insurance are reported net.
INVESTMENT AND MORTGAGE-BACKED SECURITIES - The Company classifies investment securities and mortgage-backed securities as "available for sale" at the time of purchase. Securities classified as available-for-sale are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available-for-sale are carried at fair value. The difference between fair value and cost, adjusted for amortization of premium and accretion of discounts, results in an unrealized gain or loss. Unrealized gains or losses are reported as accumulated other comprehensive income, net of the related deferred tax effect. Gains or losses on the sale of securities are determined on the basis of the specific security sold and are included in earnings. Premiums and discounts are recognized in interest income using the interest method over their contractual lives.
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 consider (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.
FEDERAL HOME LOAN BANK STOCK - The Bank, as a member of the Federal Home Loan Bank of Chicago (the "FHLB"), is required to maintain an investment in common stock of the FHLB in an amount equal to 1% of its outstanding home loans. No ready market exists for the FHLB stock, and it has no quoted market value. For disclosure purposes, such stock is assumed to have a market value which is equal to cost. Dividends received on such stock are reflected as interest income in the consolidated statements of income.
OTHER INVESTMENTS - Other investments at December 31, 2003 and 2002 include local municipal bonds and equity investments in local community development organizations. The municipal bonds mature ratably through the year 2005. These securities have no readily ascertainable market value and are carried at cost.
LOANS - Loans are stated at the principal amounts outstanding less the allowance for loan losses and net deferred loan origination fees and discounts. Discounts on consumer loans are recognized over the lives of the loans using the interest method. Loan origination fees, net of certain direct loan origination costs are deferred and amortized to interest income over the contractual lives of the loans using the level yield method. The unearned premium on loans purchased relates to loans acquired from Chapin State Bank in 2000 and is being amortized over the estimated lives of loans acquired.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
Interest on loans is accrued based upon the principal amounts outstanding. The Company's policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, there is reasonable doubt as to the timely collectibility of interest or principal or generally when a loan becomes contractually past due ninety days or more with respect to principal or interest. Accrued interest on nonaccrual loans is reversed and offset against interest income in the period the loan is deemed uncollectible. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collectibility of interest or principal.
The Company considers a loan to be impaired when management believes it is probable that it will be unable to collect all principal and interest due according to the contractual terms of the loan. If a loan is impaired, the Company records a loss valuation equal to the excess of the loan's carrying value over the present value of the estimated future cash flows discounted at the loan's effective rate, based on the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. One-to-four family residential loans and consumer loans are collectively evaluated for impairment. Loans on residential properties with greater than four units and loans on construction and development and commercial properties are evaluated for impairment on a loan-by-loan basis.
LOANS HELD FOR SALE - Loans held for sale are those loans the Company has committed to sell within 30 days. Loans held for sale are carried at the lower of cost or fair value. All loans held for sale are fixed rate loans and generally are sold with the servicing retained. The estimated fair value of loans held for sale that are covered by investor commitments are based on commitment prices. The estimated fair value of loans held for sale that are not covered by investor commitments are based on quoted market prices. Gains or losses on loan sales are recognized at the time of sale and are determined based on the relative fair value of the loans sold and the servicing asset. Loan origination fees, net of certain direct loan origination costs, are deferred until the sale of the loan.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established through a provision for loan losses charged to operating expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrowers' ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, various regulatory agencies periodically review the allowance for loan losses. These agencies may require the Company to make additions to the allowance for loan losses based on their judgments of collectibility based on information available to them at the time of their examination.
REAL ESTATE OWNED - Real estate acquired through foreclosure or deed in lieu of foreclosure represents specific assets to which the Company has acquired legal title in satisfaction of indebtedness. Such real estate is recorded at the property's fair value at the date of foreclosure (cost). Initial valuation adjustments, if any, are charged against the allowance for loan losses. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value. Subsequent declines in estimated fair value are charged to expense when incurred. Revenues and expenses related to holding and operating these properties are included in operations.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost, less accumulated depreciation. Depreciation charged to operations is primarily computed utilizing the straight-line method over the estimated useful lives of the related assets. Estimated lives are 39 years for buildings and improvements, 5 years for office equipment/computers and 7 years for furniture and fixtures. Management periodically reviews the carrying value of its long-lived assets to determine if an impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life. In making such determination, management evaluates the performance, on an undiscounted basis, of the underlying operations or assets which give rise to such amount.
INCOME TAXES - Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets are also recognized for operating loss and tax credit carryforwards. Management periodically evaluates whether it is more likely than not that the deferred tax assets will be realized. At December 31, 2003 and 2002, the Company does not believe a valuation allowance is necessary.
GOODWILL -Costs in excess of the estimated fair value of identifiable net assets acquired for transactions accounted for as purchases are recorded as an asset by the Company. This amount was originally amortized into expense on a straight-line basis assuming a life of twenty years. Effective January 1, 2002, the Company ceased amortization in accordance with newly adopted accounting standards generally accepted in the United States of America. The Company performed an initial impairment assessment as of January 1, 2002 and an annual impairment assessment as of September 30, 2003 and 2002.
CORE DEPOSIT INTANGIBLE - The core deposit intangible was established in the allocation of purchase price to the fair value of identifiable net assets acquired. The core deposit intangible is amortized on a straight-line basis over the estimated period benefited up to eight years. In addition, the core deposit intangible is reviewed for possible impairment when events or changed circumstances may effect the underlying basis of the net assets.
MORTGAGE SERVICING RIGHTS - The Company generally retains the right to service mortgage loans sold to others. The cost allocated to the mortgage servicing rights retained has been recognized as a separate asset and is being amortized in proportion to and over the period of estimated net servicing income.
Mortgage servicing rights are periodically evaluated for impairment based on the fair value of those rights. Fair values are estimated using discounted cash flows based on current market rates of interest. For purposes of measuring impairment, the rights must be stratified by one or more predominant risk characteristics of the underlying loans. The Company stratifies its capitalized mortgage servicing rights based on the interest rate and loan type, date of origination and term of the underlying loans. The amount of impairment recognized is the amount, if any, by which the amortized cost of the rights for each stratum exceed their fair value.
The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
STOCK-BASED EMPLOYEE COMPENSATION - The Company has two stock-based employee compensation plans which have been in existence for all periods presented, and which are more fully described in Note 11. 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. The following table illustrates the effect on the net income (loss) (in thousands) and earnings (loss) per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based employee compensation.
The options vested 20% upon adoption of the Plan with the remaining shares vesting over a four-year period beginning on the adoption date. The fair value of the options granted under the 1996 Plan was determined to be $4.43 per share, using the Black Scholes pricing model. The fair value calculation was made with estimated values for the risk free rate of 6.4%, volatility rate of 22.5% and average lives of 9.3 years. Management elected to allow all options granted in 2001 to vest immediately at grant date. The fair value of the options granted under the 2001 Plan was determined to be $2.24 per share, using the Black Scholes pricing model. The fair value calculation was made with estimated values for the risk free rate of 5.7%, volatility rate of 15% and average lives of 10 years.
2003 2002 2001
---------------------------------------------------------
(in thousands, except per share data)
Net income (loss), as reported $ 841 $ 818 $ (1,016)
Deduct total stock-based compensation expense
determined under the fair value method for all
awards, net of related tax effects - - (129)
---------------------------------------------------------
Pro forma net income (loss) $ 841 $ 818 $ (1,145)
=========================================================
Earnings (loss) per share:
Basic:
As reported $ 0.43 $ 0.43 $ (0.53)
Pro forma 0.43 0.43 (0.60)
Diluted:
As reported $ 0.43 $ 0.42 $ (0.53)
Pro forma 0.43 0.42 (0.60)
|
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
EARNINGS PER SHARE - Basic earnings per share for the years ended December 31, 2003, 2002 and 2001 are determined by dividing net income for the year by the weighted average number of common shares.
Diluted earnings per share considers the potential dilutive effects of the exercise of the outstanding stock options under the Company's stock option plan.
The following reflects earnings per share calculations for basic and diluted methods:
December 31,
----------------------------------------------------
2003 2002 2001
----------------------------------------------------
Net income (loss) available to common
shareholders $ 841,030 $ 818,323 $ (1,016,321)
====================================================
Basic potential common shares:
Weighted average shares outstanding 1,936,283 1,912,362 1,909,304
Diluted potential common shares:
Stock option equivalents 38,932 25,009 11,548
----------------------------------------------------
Diluted average shares outstanding 1,975,215 1,937,371 1,920,852
----------------------------------------------------
Basic earnings (loss) per share $ 0.43 $ 0.43 $ (0.53)
====================================================
Diluted earnings (loss) per share $ 0.43 $ 0.42 $ (0.53)
====================================================
|
RECLASSIFICATIONS - Certain amounts included in the 2002 and 2001 consolidated financial statements have been reclassified to conform to the 2003 presentation with no effect on previously reported net income or stockholders' equity.
NOTE 2. ADOPTION OF STATEMENT 142
On January 1, 2002, the Company implemented Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Under the provisions of SFAS 142, goodwill is no longer subject to amortization over its estimated useful life, but instead will be subject to at least annual assessments for impairment by applying a fair value based test. SFAS 142 also requires that an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer's intent to do so.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
Goodwill and intangible asset disclosures are as follows (in thousands):
As of December 31, 2003
----------------------------------
Gross Carrying Accumulated
Amount Amortization
----------------------------------
AMORTIZED INTANGIBLE ASSETS:
Core deposit intangibles $ 637,789 $ (279,033)
AGGREGATE AMORTIZATION EXPENSE:
For the year ended December 31, 2003 $ 79,724
ESTIMATED AMORTIZATION EXPENSE:
For the year ended December 31, 2004 $ 79,724
For the year ended December 31, 2005 $ 79,724
For the year ended December 31, 2006 $ 79,724
For the year ended December 31, 2007 $ 79,724
For the year ended December 31, 2008 $ 39,860
December 31,
---------------------------------------
2003 2002 2001
---------------------------------------
Reported net income (loss) $ 841,030 $ 818,323 $(1,016,321)
Add goodwill amortization, net of tax - - 90,286
---------------------------------------
Adjusted net income (loss) $ 841,030 $ 818,323 $ (926,035)
=======================================
Basic earnings (loss) per share:
Reported net income (loss) $ 0.43 $ 0.43 $ (0.53)
Goodwill amortization, net of tax - - 0.05
---------------------------------------
Adjusted net income (loss) $ 0.43 $ 0.43 $ (0.48)
=======================================
Diluted earnings (loss) per share:
Reported net income (loss) $ 0.43 $ 0.42 $ (0.53)
Goodwill amortization, net of tax - - 0.05
---------------------------------------
Adjusted net income (loss) $ 0.43 $ 0.42 $ (0.48)
=======================================
|
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
NOTE 3. INVESTMENT AND MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of investment and mortgage-backed securities available for sale at December 31, 2003 and 2002 are as follows:
2003
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
State and political organizations $ 1,356,674 $ 7,551 $ 977 $ 1,363,248
U.S. government and agency securities 98,017,683 272,134 712,193 97,577,624
-----------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 99,374,357 279,685 713,170 98,940,872
Mortgage-backed securities 7,577,486 29,518 9,739 7,597,265
-----------------------------------------------------------------
TOTAL 106,951,843 $ 309,203 $ 722,909 $106,538,137
=================================================================
2002
-----------------------------------------------------------------
State and political organizations $ 73,400 $ 3,571 $ - $ 76,971
U.S. government and agency securities 72,011,963 844,884 10,823 72,846,024
-----------------------------------------------------------------
TOTAL INVESTMENT SECURITIES 72,085,363 848,455 10,823 72,922,995
Mortgage-backed securities 2,739,451 83,425 757 2,822,119
-----------------------------------------------------------------
TOTAL 74,824,814 $ 931,880 $ 11,580 $ 75,745,114
=================================================================
|
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
Unrealized losses on investment securities have not been in a continuous loss position for more than 12 consecutive months. The unrealized losses are generally due to changes in interest rates and, as such, are considered to be temporary, by the Company.
Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, stated maturities are not disclosed. The amortized cost and fair value at December 31, 2003, by contractual maturity, are shown below.
Amortized Fair
Cost Value
--------------------------------------
One year or less $ 1,258,193 $ 1,260,278
One year through five years 43,276,735 43,111,893
Five years through ten years 52,582,391 52,340,359
More than ten years 2,257,038 2,228,342
Mortgage-backed securities 7,577,486 7,597,265
--------------------------------------
$ 106,951,843 $ 106,538,137
======================================
|
Investment and mortgage-backed securities with a carrying value of approximately $40,269,000 and $35,113,000 were pledged to secure public deposits, trust deposits, and repurchase agreements at December 31, 2003 and 2002, respectively.
For the years ended December 31, 2003, 2002 and 2001, proceeds from sales of securities available for sale amounted to $28,986,883, $20,130,901 and $9,274,500, respectively. Gross realized gains amounted to $333,821, $316,459 and $87,569, respectively. Gross realized losses amounted to $14,718 and $13,036 in 2003 and 2002, respectively. The tax provision applicable to these net realized gains amounted to $123,621, $117,546 and $29,773, respectively.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
NOTE 4. LOANS
Loans at December 31, 2003 and 2002 are summarized as follows:
2003 2002
--------------------------------------
Real estate loans:
One-to-four family residential $ 40,304,233 $ 43,882,757
Commercial and agricultural 21,401,320 18,421,271
Multifamily residential 2,375,494 2,677,869
Commercial and agricultural business loans 29,762,807 31,502,420
Consumer loans:
Home equity/home improvement 23,614,392 31,181,077
Automobile 6,477,377 10,490,944
Other 5,544,946 7,127,268
--------------------------------------
TOTAL 129,480,569 145,283,606
Less:
Deferred loans fees - net 54,547 66,470
Unearned premium on purchased loans 160,928 215,442
Allowance for loan losses 2,186,058 2,073,095
--------------------------------------
TOTAL $ 127,079,036 $ 142,928,599
======================================
|
The Company has granted loans to officers and directors. At December 31, 2003, all loans to officers and directors were current with respect to principal and interest. Changes in loans to officers and directors for the year ended December 31, 2003 are summarized as follows:
Balance beginning of year $ 803,084
Additions 425,000
Repayments (692,086)
-----------------
Balance, end of year $ 535,998
=================
|
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
Activity in the allowance for loan losses for the years ended December 31, 2003, 2002 and 2001 is as follows:
2003 2002 2001
-----------------------------------------------
Balance, beginning of year $ 2,073,095 $ 1,106,647 $ 1,205,567
Provision charged to expense 2,075,000 2,000,000 1,000,000
Charge-offs (2,053,861) (1,120,632) (1,143,499)
Recoveries 91,824 87,080 44,579
-----------------------------------------------
Balance, end of year $ 2,186,058 $ 2,073,095 $ 1,106,647
===============================================
|
The accrual of interest on any loan is discontinued when in the opinion of management there is reasonable doubt as to the collectibility of interest and principal, but generally when the loan reaches 90 or 120 days past due.
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 reasonably assured. Management uses an internal asset classification system as a means of reporting problem and potential problem assets. Monitored loans include loans to borrowers displaying a weak and/or leveraged financial condition that may also be having difficulty servicing the debt.
Information about impaired loans and non-accrual loans as of and for the years ended December 31, 2003, 2002 and 2001 is as follows:
2003 2002 2001
-----------------------------------------------------
Impaired loans with a valuation allowance $ 987,000 $ 503,000 $ -
Impaired loans without a valuation allowance - - 2,330,000
-----------------------------------------------------
TOTAL IMPAIRED LOANS $ 987,000 $ 503,000 $ 2,330,000
=====================================================
Related allowance for loan losses $ 87,000 $ 185,000 $ -
Non-accrual loans $ 3,121,000 $ 3,510,000 $ 2,360,000
Loans past due ninety days or more and
still accruing $ 190,000 $ 351,000 $ 1,685,000
Average monthly balance of impaired loans
(based on month-end balances) $ 967,000 $ 1,755,000 $ 2,330,000
Interest income recognized on impaired loans $ 39,000 $ - $ -
Interest income recognized on a cash basis on
impaired loans $ 20,000 $ - $ -
Interest income that would have been recorded
under the original terms of loans on non-accrual $ 167,000 $ 193,000 $ 129,000
Other loans being monitored by management $ 7,555,000 $ 4,298,000 $ 3,764,000
Allowance for loan losses associated with
monitored loans $ 1,515,000 $ 1,379,000 $ -
|
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
NOTE 5. LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and foreclosure processing. Loan servicing income is recorded on the accrual basis and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees and is net of amortization of capitalized mortgage servicing rights. Loans held for sale are those loans originated with the intention to sell. Investor commitments cover a portion of these balances; however, the remaining portion of the balance of loans held for sale is recorded at the lower of cost or market. The unpaid principal balances of these loans at December 31 are summarized as follows:
December 31,
----------------------------------
2003 2002
----------------------------------
Mortgage loans serviced for Freddie Mac $ 159,542,000 $ 150,393,000
Loans held for sale 506,000 6,271,435
|
Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in deposits, were approximately $313,000 and $295,000 at December 31, 2003 and 2002, respectively.
A summary of the changes in the balance of mortgage servicing rights in 2003 and 2002 is as follows:
December 31,
----------------------------------
2003 2002
----------------------------------
(in thousands)
Balance, beginning $ 1,077,318 $ 951,375
Servicing assets recognized during the year 808,000 645,000
Amortization of servicing assets (717,072) (519,057)
----------------------------------
Balance, ending $ 1,168,246 $ 1,077,318
==================================
|
The Company also originates certain fixed rate loans for sale to correspondent lenders on a servicing retained basis. Activity on sales of fixed rate mortgages is as follows:
2003 2002 2001
---------------------------------------------------------
Loans originated $ 101,216,763 $ 87,024,862 $ 84,548,592
=========================================================
Gross gains $ 990,637 $ 753,496 $ 651,910
Gross losses (161,275) (121,195) (120,851)
---------------------------------------------------------
Net gain $ 829,362 $ 632,301 $ 531,059
=========================================================
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JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2003 and 2002 are summarized as follows:
2003 2002
--------------------------------------
Land $ 923,276 $ 923,276
Construction in progress 2,522,161 493,533
Office buildings and improvements 5,284,132 5,340,520
Furniture and equipment 3,767,053 3,550,454
--------------------------------------
12,496,622 10,307,783
Less accumulated depreciation (5,077,561) (4,639,572)
--------------------------------------
TOTAL $ 7,419,061 $ 5,668,211
======================================
|
The Company completed the renovation of the main facility in December 2003. However, they are awaiting the results of a formal study before allocating costs to building or furniture and equipment.
NOTE 7. DEPOSITS
The aggregate amount of jumbo certificates of deposit with a minimum denomination of $100,000 was approximately $57,009,000 and $53,017,000 at December 31, 2003 and 2002, respectively.
At December 31, 2003, the scheduled maturities of certificates of deposit were as follows:
Maturing in: Amount
----------------------------------------------------------------------------
2004 $ 112,579,225
2005 25,230,887
2006 7,860,290
2007 3,859,261
2008 4,192,809
Thereafter 147,818
-------------------
TOTAL $ 153,870,290
===================
|
NOTE 8. SHORT-TERM BORROWINGS
Short-term borrowings consist of:
December 31,
------------------------------
2003 2002
------------------------------
Securities sold under agreements to repurchase $ 2,888,954 $ 2,874,707
==============================
|
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities.
NOTE 9. INCOME TAXES
Retained earnings at December 31, 2003 and 2002 include approximately $2,579,000 of the tax allowance for loan losses which accumulated prior to 1988, for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $999,000, at December 31, 2003 and 2002.
Income tax expense (benefit) for the years ended December 31, 2003, 2002 and 2001 are summarized as follows:
Years Ended December 31,
--------------------------------------------------
2003 2002 2001
--------------------------------------------------
Current:
Federal $ 80,129 $ 919,874 $ (852,179)
State (28,783) 46,778 (253,550)
--------------------------------------------------
TOTAL CURRENT 51,346 966,652 (1,105,729)
Deferred 450,000 (500,000) (192,850)
--------------------------------------------------
TOTAL $ 501,346 $ 466,652 $(1,298,579)
==================================================
|
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
Income tax expense (benefit) differs from that computed at the maximum Federal statutory rate of 35% as follows:
Years Ended December 31,
--------------------------------------------------
2003 2002 2001
--------------------------------------------------
Amount Amount Amount
--------------------------------------------------
Tax (benefit) at Federal tax rate $ 469,832 $ 449,741 $ (810,215)
Increase (decrease) resulting from:
State tax (benefit), net of Federal tax benefit (18,709) 30,405 (164,808)
Income taxed at lower rates (13,424) (12,850) 23,149
Tax exempt interest, net (13,932) (33,823) (29,263)
Other, net 77,579 33,179 (317,442)
--------------------------------------------------
TOTAL $ 501,346 $ 466,652 $(1,298,579)
==================================================
|
The components of the deferred tax assets and liabilities at December 31, 2003 and 2002, which are included in other assets on the balance sheet, are as follows:
December 31,
--------------------------------
2003 2002
--------------------------------
Deferred tax assets:
Allowance for loan losses $ 723,205 $ 677,990
Deferred compensation 784,515 745,636
Loss due to loan defalcation - 470,691
State net operating loss carryforward 277,564 207,253
Securities available for sale 160,269 -
Other 68,688 33,528
--------------------------------
TOTAL DEFERRED TAX ASSETS 2,014,241 2,135,098
--------------------------------
Deferred tax liabilities:
Premises and equipment 462,075 387,012
FHLB stock dividends 142,225 102,563
Securities available-for-sale - 356,524
Mortgage servicing rights 453,490 417,353
Basis in acquired assets 105,615 87,604
--------------------------------
TOTAL DEFERRED TAX LIABILITIES 1,163,405 1,351,056
--------------------------------
NET DEFERRED TAX ASSET $ 850,836 $ 784,042
================================
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JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
NOTE 10. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier I capital (as defined) to average assets (as defined). Management believes, at December 31, 2003, that the Bank meets all capital adequacy requirements to which it is subject.
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 Banks and Real Estate (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 December 31, 2003, the Bank's core capital ratio was 6.54% of total adjusted average assets, which exceeded the required amount.
As of December 31, 2003, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
The Bank's actual capital amounts and ratios are also presented in the table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------
December 31, 2003:
Total Capital (to Risk
Weighted Assets) $ 18,821 13.13% $ 11,466 8.0% $ 14,332 10.0%
Tier I Capital (to Risk
Weighted Assets) $ 17,024 11.88% $ 5,733 4.0% $ 8,599 6.0%
Tier I Capital (to
Average Assets) $ 17,024 6.54% $ 10,420 4.0% $ 13,025 5.0%
December 31, 2002:
Total Capital (to Risk
Weighted Assets) $ 18,268 11.67% $ 12,528 8.0% $ 15,660 10.0%
Tier I Capital (to Risk
Weighted Assets) $ 16,310 10.42% $ 6,264 4.0% $ 9,396 6.0%
Tier I Capital (to
Average Assets) $ 16,310 6.66% $ 9,789 4.0% $ 12,237 5.0%
|
Regulations limit the amount of dividends and other capital distributions that may be paid by a financial institution without prior approval of its primary regulator. Accordingly, the Bank can make, without prior regulatory approval, distributions during the calendar year up to 100% of their retained net income for the calendar year to date plus retained net income for the previous two calendar years (less any dividends previously paid).
Because of the net loss recorded during the year ended December 31, 2001, the Bank does not have retained earnings available for dividends. However, they have applied for, and been granted, permission to pay dividends through the third quarter of 2004.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
Although the Company's regulators approved the mutual holding company's waiver of dividends, the amounts declared but not paid on the shares owned by the mutual holding company are considered a restriction on the Company's retained earnings. The Company's mutual holding company waived its share of dividends declared by the Company as follows:
Year ended December 31, 2000 $ 77,905
Year ended December 31, 2001 311,621
Year ended December 31, 2002 311,621
Year ended December 31, 2003 311,621
-------------------
$ 1,012,768
===================
|
NOTE 11. EMPLOYEE BENEFITS
401(K) PLAN - The Company maintains a 401(k) savings plan for eligible employees. The Company's contributions to this plan were $96,514, $122,641 and $122,259 for the years ended December 31, 2003, 2002 and 2001, respectively. The plan invests its assets in deposit accounts at the Company which earned interest at a rate of 6.5% for the years ended December 31, 2003, 2002 and 2001.
DEFERRED COMPENSATION PLAN - The Company maintains a deferred compensation plan for certain key officers and employees. Contributions are determined annually by the Company's Board of Directors. Contributions to this plan were $26,000, $85,643 and $57,315 for the years ended December 31, 2003, 2002 and 2001, respectively. Effective in 1996, the Company changed the funding status of the plan and accrued interest at a variable rate which fluctuates based on Moody's Corporate Bond Average Index.
EMPLOYEE STOCK OWNERSHIP PLAN - The ESOP is a noncontributory defined contribution plan which covers substantially all employees. The Company may contribute to the Plan, at its discretion, an amount determined by the Board of Directors.
At December 31, 2003, all 57,681 shares held by the ESOP had been allocated.
MANAGEMENT RECOGNITION AND RETENTION PLAN - The Management Recognition and Retention Plan ("MRRP") was adopted on April 23, 1996. The MRRP is administered by the Board of Directors of the Company. Collectively, the Board reserved 33,450 shares of the Company's common stock for award pursuant to the MRRP, all of which have been awarded as of the adoption date at the stock's market value ($8.83 per share). The shares vested 20% upon adoption of the plan with the remaining shares vesting over a four-year period beginning on the adoption date.
STOCK OPTION PLAN - The Jacksonville Savings Bank and Jacksonville Bancorp, M.H.C. 1996 Stock Option Plan was adopted on April 23, 1996 and is administered by the Board of Directors. A total of 83,625 shares of common stock were reserved and awarded under the Plan. Awards expire ten years after the grant date and are exercisable at a price of $8.83 per share. The Jacksonville Savings Bank 2001 Stock Option Plan was adopted on April 30, 2001 and is administered by the Stock Benefits Committee. A total of 87,100 shares of common stock were reserved and awarded under the Plan during 2001. Awards expire ten years after the grant date and are exercisable at a price of $10.00 per share.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
A summary of the status of the Company's Stock Option Plans for the three-year period ended December 31, 2003 follows:
2003 2002 2001
------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------------------------------------------------------------------
Options:
Outstanding at beginning
of year 151,863 $ 9.50 163,863 $ 9.45 76,763 $ 8.83
Granted - - - - 87,100 10.00
Exercised (41,025) 8.94 (12,000) 8.83 - -
Forfeited - - - - - -
--------------- --------------- ---------------
Outstanding at end of year 110,838 9.71 151,863 9.50 163,863 9.45
=============== =============== ===============
Options exercisable at
year-end 110,838 151,863 163,863
=============== =============== ===============
Weighted-average fair
value of options granted
during the year N/A N/A $ 2.24
============= ============= =============
|
NOTE 12. 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.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
At December 31, 2003 and 2002, the following financial instruments were outstanding:
December 31,
--------------------------------
2003 2002
--------------------------------
Commitment to originate loans:
Fixed-rate $ 15,803,000 $ 21,827,000
Variable-rate $ 261,000 $ -
Range of rates:
Fixed-rate 4.0 - 9.5% 4.2 - 10.5%
Variable-rate 5.0% -
Commitments to sell fixed rate loans, funded and unfunded
(included above) $ 369,000 $ 6,155,000
Standby letters of credit $ 410,000 $ 225,500
|
Substantially all of the Company's loans are to borrowers located in Cass, Morgan, Macoupin, Montgomery, and surrounding counties in Illinois.
The Company does not engage in the use of interest rate swaps, futures or option contracts.
The Bank's exposure to credit loss, in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit, is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank holds collateral, which may include accounts receivables, inventory, property and equipment, income producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded, the Bank would be entitled to seek recovery from the customer. At December 31, 2003 and 2002, no amounts have been recorded as liabilities for the Bank's potential obligations under these guarantees.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments has been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
Approximate carrying values and estimated fair values at December 31, 2003 and 2002 is summarized as follows:
2003 2002
--------------------------------------------------------------
Approximate Estimated Approximate Estimated
Carrying Fair Carrying Fair
Value Value Value Value
--------------------------------------------------------------
Assets:
Cash and cash equivalents $ 9,576,000 $ 9,576,000 $ 11,092,000 $ 11,092,000
Federal funds sold 500,000 500,000 800,000 800,000
Investment securities, available for sale 100,914,000 100,914,000 74,904,000 74,904,000
Mortgage-backed securities, available for sale 7,597,000 7,597,000 2,822,000 2,822,000
Loans:
Loans held for sale 506,000 506,000 6,271,000 6,271,000
Loans receivable 127,079,000 128,189,000 142,929,000 143,470,000
Accrued interest receivable 1,445,000 1,445,000 1,719,000 1,719,000
Liabilities:
Transaction accounts 50,624,000 50,398,000 48,222,000 48,222,000
Savings accounts 30,679,000 30,905,000 26,215,000 26,215,000
Certificates of deposit 153,870,000 157,815,000 151,164,000 155,633,000
Short-tem borrowings 2,889,000 2,889,000 2,875,000 2,875,000
Accrued interest payable 776,000 776,000 995,000 995,000
|
The carrying value of cash and cash equivalents, federal funds sold, accrued interest receivable and accrued interest payable, transaction accounts, savings and other borrowings are considered reasonable estimates of those instruments' fair values.
The fair value of investment securities and mortgage-backed securities is based on quoted market prices and prices obtained from independent pricing services. FHLB stock and other investments, included in investment securities, for which current market values are not readily available are believed to have carrying values which approximate market values. The fair value of loans and certificates of deposit, are estimated based on present values using published rates currently available that are applicable to each category of such financial instrument.
No adjustment was made to the interest rates for changes in credit of performing loans for there are no known credit concerns. Management segregates loans in appropriate risk categories. Management believes that the risk factor embedded in the interest rates along with the general reserves applicable to the performing loan portfolio results in a fair valuation of such loans.
The Company does not have unrecognized financial instruments, other than those discussed in Note 12, which are subject to fair value disclosure. The difference between the fair value and the face value for the instruments disclosed in Note 12 was not considered material.
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2003 and 2002. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.
JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
NOTE 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Year Ended December 31, 2003
-------------------------------------------------------------------
Three Months Ended
December 31 September 30 June 30 March 31
-------------------------------------------------------------------
Interest income $ 3,148,892 $ 3,108,535 $ 3,240,723 $ 3,448,149
Interest expense 1,341,977 1,428,569 1,472,766 1,522,133
-------------------------------------------------------------------
NET INTEREST INCOME 1,806,915 1,679,966 1,767,957 1,926,016
Provision for losses on loans 250,000 300,000 825,000 700,000
-------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,556,915 1,379,966 942,957 1,226,016
Other income 561,895 664,371 1,082,122 1,223,916
Other expense 1,929,295 1,819,959 1,772,608 1,773,920
-------------------------------------------------------------------
INCOME BEFORE
INCOME TAXES 189,515 224,378 252,471 676,012
Income taxes 67,717 82,245 86,773 264,611
-------------------------------------------------------------------
NET INCOME $ 121,798 $ 142,133 $ 165,698 $ 411,401
===================================================================
Basic earnings per share $ 0.06 $ 0.07 $ 0.09 $ 0.21
===================================================================
Diluted earnings per share $ 0.06 $ 0.07 $ 0.08 $ 0.21
===================================================================
Year Ended December 31, 2002
-------------------------------------------------------------------
Three Months Ended
December 31 September 30 June 30 March 31
-------------------------------------------------------------------
Interest income $ 3,585,378 $ 3,779,448 $ 3,869,165 $ 3,831,336
Interest expense 1,692,347 1,819,651 1,866,197 1,972,970
-------------------------------------------------------------------
NET INTEREST INCOME 1,893,031 1,959,797 2,002,968 1,858,366
Provision for losses on loans 325,000 1,300,000 225,000 150,000
-------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,568,031 659,797 1,777,968 1,708,366
Other income 704,354 761,073 527,065 497,223
Other expense 1,708,631 1,767,170 1,749,737 1,693,364
-------------------------------------------------------------------
INCOME (LOSS) BEFORE
INCOME TAXES 563,754 (346,300) 555,296 512,225
Income taxes 216,944 (138,487) 199,278 188,917
-------------------------------------------------------------------
NET INCOME (LOSS) $ 346,810 $ (207,813) $ 356,018 $ 323,308
===================================================================
Basic earnings (loss) per share $ 0.18 $ (0.11) $ 0.19 $ 0.17
===================================================================
Diluted earnings (loss) per share $ 0.18 $ (0.11) $ 0.18 $ 0.17
===================================================================
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JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
NOTE 15. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
December 31,
---------------------------------
STATEMENTS OF FINANCIAL CONDITION 2003 2002
---------------------------------
Assets:
Cash and cash equivalents $ 247,275 $ 278,997
Accrued dividend receivable 67,745 -
Equity in net assets of Jacksonville Savings Bank 19,856,362 20,039,608
---------------------------------
$ 20,171,382 $ 20,318,605
=================================
Liabilities and stockholders' equity:
Other liabilities $ 139,229 $ 66,194
Common stock 19,420 19,213
Additional paid-in capital 6,399,321 6,374,463
Retained earnings 13,866,849 13,294,959
Accumulated other comprehensive income (loss) (253,437) 563,776
---------------------------------
$ 20,171,382 $ 20,318,605
=================================
Years Ended
December 31,
---------------------------------
STATEMENTS OF INCOME 2003 2002
---------------------------------
Interest from subsidiary $ 759 $ -
Dividends from subsidiary 267,802 380,587
---------------------------------
OPERATING INCOME 268,561 380,587
---------------------------------
Equity in undistributed earnings of Jacksonville Savings Bank 633,967 449,404
---------------------------------
TOTAL OTHER INCOME 633,967 449,404
---------------------------------
Other expenses 99,907 11,668
---------------------------------
INCOME BEFORE INCOME TAX BENEFIT 802,621 818,323
Income tax benefit 38,409 -
---------------------------------
NET INCOME $ 841,030 $ 818,323
=================================
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JACKSONVILLE BANCORP, INC. AND SUBSIDIARY
Years Ended
December 31,
---------------------------------
STATEMENTS OF CASH FLOWS 2003 2002
---------------------------------
Operating activities:
Net income $ 841,030 $ 818,323
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of
Jacksonville Savings Bank (633,967) (449,404)
Other 3,739 65,293
---------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 210,802 434,212
---------------------------------
Financing activities:
Dividends paid (267,589) (261,175)
Purchase and retirement of treasury stock (341,515) --
Exercise of stock options 366,580 105,960
---------------------------------
NET CASH USED IN
FINANCING ACTIVITIES (242,524) (155,215)
---------------------------------
Increase (decrease) in cash and cash equivalents (31,722) 278,997
Cash and cash equivalents:
Beginning of period 278,997 --
---------------------------------
End of period $ 247,275 $ 278,997
=================================
|
NOTE 16. LOSS DUE TO LOAN DEFALCATION
During an internal audit of loan operations, the Company uncovered loan irregularities at its branch in Virden, Illinois. The irregularities, which included recording fictitious loans, making unauthorized advances on loans, diversion of loan proceeds and payoff checks, and misapplication of funds, are limited to loans originated and serviced at the Company's Virden branch. The investigation has been completed and the identified losses have been recorded on the Company's financial statements. While management believes that all significant losses have been identified, there can be no assurance that additional losses will not be recognized; however, management does not believe that any such amount would be material. As of December 31, 2001, the Company recognized a nonrecurring expense associated with the loan irregularities of approximately $4,458,000, consisting of identified losses of $4,016,000 and $442,000 in related legal and audit expenses. The Company incurred additional losses related to the irregularities of $9,361 and $62,348 for the years ended December 31, 2003 and 2002, respectively. During March 2003, the Company received a $562,500 recovery, representing the negotiated settlement with the Company's insurance carrier.
COMMON STOCK INFORMATION
The Common Stock of Jacksonville Bancorp, Inc. is traded on the Nasdaq Small Cap Market under the symbol "JXSB". As of December 31, 2003 there were approximately 622 stockholders of record, including the Company's mutual holding company parent and brokers, which held 1,942,004 shares of the Company's outstanding shares of Common Stock. The Company's Mutual Holding Company Parent owns 1,038,738 shares.
The following table sets forth market price and dividend information for the Company's Common Stock for the two years in the period ending December 31, 2003.
FISCAL 2002 HIGH LOW DIVIDENDS First Quarter $ 11.50 $ 10.27 $.075/per share Second Quarter $ 14.26 $ 11.00 $.075/per share Third Quarter $ 13.00 $ 10.25 $.075/per share Fourth Quarter $ 10.86 $ 10.20 $.075/per share FISCAL 2003 First Quarter $ 13.00 $ 10.78 $.075/per share Second Quarter $ 16.95 $ 12.00 $.075/per share Third Quarter $ 16.75 $ 14.80 $.075/per share Fourth Quarter $ 17.00 $ 15.65 $.075/per share |
For a discussion of the restrictions on the Company's ability to pay dividends, see Note 10 to the Consolidated Financial Statements.
The Company did not repurchase any Company stock during the fourth quarter of 2003.
DIRECTORS AND OFFICERS
DIRECTORS OFFICERS
Andrew F. Applebee Andrew F. Applebee
Chairman of the Board Chairman of the Board
Richard A. Foss Richard A. Foss
President and Chief Executive Officer President and Chief Executive Officer
John C. Williams John C. Williams
Senior Vice President and Trust Officer Senior Vice President and Trust Officer
Roger D. Cannell John D. Eilering
Certified Public Accountant Vice President - Operations and Corporate Secretary
Cannell & Sheehan, Ltd
Harmon B. Deal, III Diana S. Tone
Investment Manager Chief Financial Officer and Compliance Officer
Deal Partners, L.P.
Michael R. Goldasich Jess D. Karns
Architect Senior Loan Administrator
Goldasich-Audo Architects
Dean H. Hess Steven L. Waltrip
Self-employed farmer Vice President - Mortgage/Consumer Lending
Emily J. Osburn Thomas A. Luber
Retired radio station manager Vice President - Mortgage Banking
Harvey D. Scott, III Susan L. Harpole
Orthopedic Surgeon Vice President - Mortgage/Consumer Lending
Orthapaedic Center of Illinois
Paul W. Miller
Vice President - Lending
Laura A. Marks
Vice President - Retail Banking
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CORPORATE INFORMATION
Corporate Headquarters Transfer Agent 1211 West Morton First Bankers Trust Company, N.A. Jacksonville, Illinois 62650 2321 Kochs Lane (217) 245-4111 Quincy, Illinois 62301 Website: WWW.JACKSONVILLESAVINGS.COM (217) 228-8000 E-mail: info@jacksonvillesavings.com Special Counsel Independent Auditors Luse Gorman Pomerenk & Schick, P.C. McGladrey & Pullen, LLP 5335 Wisconsin Ave., N.W. 1806 Fox Drive Suite 400 Champaign, Illinois 61820 Washington, D.C. 20015 (217) 352-9100 (202) 274-2000 |
ANNUAL MEETING
The Annual Meeting of the Stockholders will be held April 27, 2004 at 1:30 p.m., central time, at the Company's main office at 1211 West Morton, Jacksonville, Illinois.
GENERAL INQUIRIES
A copy of the Company's Annual Report to the SEC on Form 10-K may be obtained without charge by written request of stockholders to Diana Tone or by calling the Company at (217) 245-4111. The Form 10-K is also available on the Company's website at www.jacksonvillesavings.com. The Company's Code of Ethics, Nominating and Corporate Governance Committee Charter, and Beneficial Ownership reports of our directors and executive officers are also available on the Company's website.
FDIC DISCLAIMER
This Annual Report has not been reviewed or confirmed for accuracy or relevance by the FDIC.
Exhibit 14 Code of Ethics
CODE OF ETHICS
FOR CHIEF EXECUTIVE OFFICER AND SENIOR FINANCIAL OFFICERS
OF JACKSONVILLE BANCORP, INC.
It is the policy of Jacksonville Bancorp, Inc. that the Chairman of the Board, Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO"), and Senior Vice President, of Jacksonville Bancorp, Inc. (hereinafter referred to as the "Company") adhere to and advocate the following principles governing their professional and ethical conduct in the fulfillment of their responsibilities:
1. Act with honesty and integrity, avoiding actual or apparent conflicts between his or her personal, private interests and the interests of the Company, including receiving improper personal benefits as a result of his or her position
2. Perform responsibilities with a view to causing periodic reports and other documents filed with the SEC to contain information which is accurate, complete, fair and understandable.
3. Comply with laws of federal, state, and local governments applicable to the Company, and the rules and regulations of private and public regulatory agencies having jurisdiction over the Company.
4. Act in good faith, responsibly, with due care, and diligence, without misrepresenting or omitting material facts or allowing independent judgment to be compromised.
5. Respect the confidentiality of information acquired in the course of the performance of his or her responsibilities except when authorized or otherwise legally obligated to disclose. Do not use confidential information acquired in the course of the performance of his or her responsibilities for personal advantage.
6. Proactively promote ethical behavior among subordinates and peers.
7. Use corporate assets and resources employed or entrusted in a responsible manner.
8. Do not use corporate information, corporate assets, corporate opportunities or one's position with the Company for personal gain. Do not compete directly or indirectly with the Company.
9. Comply in all respects with the Company's Code of Business Ethics and Conduct, the Company's Policy on Insider Trading, Fraud reporting Policy and this Code of Ethics.
10. Advance the Company's legitimate interests when the opportunity arises.
It is also the Policy of Jacksonville Bancorp, Inc. that the Chairman, CEO, CFO and Senior Vice President of the Company acknowledge and certify to the foregoing annually and file a copy of such certification with the Audit Committee of the Board.
The Audit Committee shall have the power to monitor, make determinations, and recommend action to the Board with respect to violations of this Policy.
JACKSONVILLE BANCORP, INC.
CODE OF ETHICS
FOR DIRECTORS AND OFFICERS
I. POLICY
It is the Company's policy to conduct its business and operations according to the standards and guidelines of ethical business conduct stated in this Code of Ethics and all applicable laws and regulations.
II. APPLICABILITY
Each of the Company's directors and officers (collectively, "Insiders") have a responsibility to deal ethically and honestly in all aspects of the Company's business including the ethical handling of actual or apparent conflicts of interest (as defined below) and to comply fully with all laws, regulations and Company policies. Each Insider is expected to assume responsibility for applying these standards of ethical conduct and for acquainting himself/herself with the various laws, regulations and Company policies applicable to his or her assigned duties. When in doubt, Insiders have the affirmative responsibility to seek clarification from their supervisor, or, if necessary, from legal counsel or members of the Board.
III. ADMINISTRATION AND ENFORCEMENT
BOARD OF DIRECTORS. The Board of Directors of the Company (the "Board") is responsible for approval and oversight of the Company's Code of Ethics (this "Code"). The Board has responsibility for: implementing and administrating this Code, reviewing and assessing at least annually the effectiveness of this Code and updating and amending this Code. The Chief Executive Officer of the Company and the Compliance Officer are charged with the responsibility of reviewing changes in laws applicable to the Company with the Company's General Counsel and recommending changes in this Code to the Board for its consideration and approval. Accordingly, the Board may adopt supplements to and revisions of this Code from time to time.
COMPLIANCE OFFICER. To assist the Board in administering this Code on a regular basis and to provide guidance in situations where Insiders may have questions concerning the right course of action to take, the Board shall appoint a Compliance Officer to provide guidance on implementing this Code and to work with the Officers of the Company to ensure compliance with this Code. It is the responsibility of the Chief Executive Officer, with assistance from the Compliance Officer, to ensure that this Code has been read and understood by all Insiders. The Compliance Officer will meet as necessary with the Officers of the Company and the Board to implement this Code, but will report to the Board no less than every year barring extraordinary circumstances.
CERTIFICATION STATEMENTS AND CANDOR. All Insiders are required to certify at least once each year, by the last day of January (or such other date as may be selected by the Board), that they have read and understand the current version of this Code. Likewise all new Insiders are required to certify that they have read and understand the current version of this Code within thirty days of becoming an Insider. All executed certification statements will be maintained in the personnel file of each Insider. No later than the meeting of the Board of Directors held in conjunction with the annual meeting of shareholders in each year the Compliance Officer shall report to the full Board noting any Insiders who have not executed a current certification statement. All information disclosed in the certification statements shall be treated on a confidential basis, except to the extent reasonably necessary to protect the Company's interests or comply with legal or regulatory requirements.
THIS CODE OF ETHICS IS INTENDED TO CREATE AN OPPORTUNITY FOR INSIDERS TO EXPRESS CONCERNS RELATING TO CORPORATE ACCOUNTABILITY, ALLEGED VIOLATIONS OF COMPANY POLICY, FEDERAL AND STATE STATUTES AND ALLEGATIONS OF CORPORATE MISDEEDS. THERE WILL BE NO DISCRIMINATION OR RETALIATION AGAINST ANY INSIDER WHO REPORTS SUCH VIOLATIONS OR ALLEGATIONS IN GOOD FAITH.
WAIVERS. This Code is intended to apply equally to all Insiders. Accordingly, any waiver of the standards set forth in this Code by executive officers or directors may be made only by the Board and must be disclosed to shareholders within 2 business days by either filing an SEC Form 8-K or the posting notice on the Company's website continuously for 12 months (provided the Company has disclosed to the SEC in its most recent annual report that amendments to and waivers of the Code will be disclosed on the Company's website).
IV. ACCURACY IN REPORTING
CORPORATE RECORDS. Each Insider has a responsibility to ensure that all Company documents and reports for which the Insider is responsible are prepared and maintained properly and are free of any false, misleading, incomplete or otherwise improper information. Insiders are prohibited from defrauding, misleading, manipulating or coercing any employees or directors of the Company or any advisors to the Company, including outside counsel or auditors.
FINANCIAL STATEMENTS. Whenever an Insider is responsible for the preparation or review of the Company's financial statements, the Insider shall ensure that the financial statements are prepared in accordance with generally accepted accounting principles as currently in force.
ERRORS OR MISLEADING STATEMENTS. If an Insider ever becomes aware of an error or potential misstatement in any company documents including financial statements or other documents filed with the SEC, the Insider must contact immediately the Insider's supervisor and the Compliance Officer and report the error or potential misstatement.
AUDITS. All Insiders shall cooperate fully with any audits of the Company's financial statements or other corporate documents whether conducted internally or by a third party.
V. CONFLICTS OF INTEREST
A. IN GENERAL.
For purposes of this Code, a "conflict of interest" shall be deemed to exist where any Insider or an affiliate of an Insider has any personal or financial interest, direct or indirect, in any Company action, failure to act, decision not to act or method of action, in connection with any transaction relating to the Company's internal or external operations. As used herein, the term "affiliate of an Insider" means as to a specific Insider, his or her Immediate Family Members and any company, partnership, limited liability company, trust or other entity that is directly or indirectly controlled by that Insider or by any Immediate Family Member of that Insider. For purposes of the previous sentence "Immediate Family Member" includes the spouse (or life partner) and children of an Insider and any relative (by blood or marriage) of that Insider or spouse (or life partner) residing in the same household as such Insider.
Examples of conflicts of interest that would affect Insiders and the Company's internal or external operations or conduct may include, but are not limited to:
1. loans which will directly or indirectly benefit directors or officers or members of their immediate family or their related interests;
2. loans to competitors of directors or officers or their related interests;
3. the restructuring, modification or renewal of loans where such restructuring, modification or renewal will directly or indirectly benefit directors or officers or their related interests;
4. the determination of the Company to enter or not enter into a contract or other business arrangement for the delivery of goods or the performance of services with a director or officer or their related interests and;
5. the availability of a business opportunity for the Company where an Insider or their related interest might compete for or otherwise seek this same opportunity.
LOANS MADE TO DIRECTORS AND OFFICERS IN ACCORDANCE WITH COMPANY POLICY AND CONSISTENT WITH APPLICABLE REGULATORY REQUIREMENTS WILL NOT IN AND OF ITSELF RESULT IN A CONFLICT OF INTEREST.
APPEARANCE OF CONFLICT OF INTEREST. The term "conflict of interest" shall also include an appearance of a conflict of interest. An appearance of a conflict of interest shall arise where the facts and circumstances do not give rise to a full conflict of interest, but are so similar in nature that they may create doubt as to the impartiality or loyalty of an Insider in connection with the transaction where the appearance arises. Examples of appearances of a conflict of interest include, but are not limited to:
1. a loan by the Company to the brother-in-law of an Insider may not provide a direct or indirect benefit to that Insider or his/her immediate family and therefore an actual conflict of interest does not exist. The existence of the relationship itself does, however, create the appearance of such a conflict and thus would require the director or officer to recuse him/herself from any decision-making process relating to the transaction.
2. an Insider who assumes responsibility for analyzing and recommending approval of a loan to a director, a major shareholder or an employee of another financial institution with which the Insider has a personal loan or an ongoing financial relationship may not present a direct conflict of interest. The existence of the relationship itself does, however, create the appearance of a conflict and thus requires that the Insider recuse himself/herself from any decision-making process relating to the loan and abstain from any further action thereon. Also, the Insider should make full disclosure of the appearance of a conflict prior to the Company's approval of such a loan.
B. RECUSAL AND RECORDATION
DISCLOSURE AND RECUSAL. Whenever an Insider has a conflict of interest in connection with an internal or external operation or other conduct of the Company, the Insider shall make a full disclosure of the nature of the conflict of interest, recuse himself/herself from the decision-making process and abstain from any further action thereon.
RECORDATION. Whenever an Insider has declared a conflict of interest in connection with a transaction, such declaration and the Insider's recusal and abstention from the decision-making process shall be reported to the Compliance Officer. The Compliance Officer shall report the conflict of interest to the Board and shall ensure that the conflict of interest is recorded in the Board meeting minutes.
C. CORPORATE OPPORTUNITIES
GENERAL PROHIBITION. Insiders and affiliate of Insiders must not compete with the Company, profit or otherwise take advantage from inside information or take business opportunities which are within the line of business conducted by the Company or within a line of business that the Company might reasonably be expected to enter in the future. NOTWITHSTANDING THE FOREGOING, THIS GENERAL PROHIBITION SHALL NOT BE APPLICABLE TO BUSINESS OPPORTUNITIES OUTSIDE THE COMPANY'S IMMEDIATE OR CONTIGUOUS MARKET AREA OR BUSINESS OPPORTUNITIES NOT SET FORTH IN THE COMPANY'S MOST RECENT BUSINESS PLAN. IN EVALUATING WHETHER A BUSINESS OPPORTUNITY REPRESENTS A CORPORATE OPPORTUNITY OF THE COMPANY, A DIRECTOR OR OFFICER MAY RELY ON THE COMPANY'S MOST CURRENT BUSINESS PLAN.
DISCLOSURE. In the event that an Insider or an affiliate of an Insider is presented with or otherwise becomes aware of a corporate opportunity which is within the line of business conducted by the Company or a line of business that the Company might be expected to enter in the future, the director or officer shall fully disclose both the details of the opportunity and his/her interest in the opportunity to the Insider's supervisor and the Compliance Officer. Thereafter the Insider shall abstain from discussion and voting on any approval or disapproval thereof.
Where it is unclear whether a business opportunity would present a corporate opportunity to the Company based upon a review of the business plan disclosure should be made to the entire board of directors.
RECORDATION. A decision by the Board approving or disapproving an Insider's dealings with a corporate opportunity presented to it by an Insider shall be recorded in the minutes of the Board and shall reflect the nature of the opportunity and all members who take action or abstain from taking action on its consideration.
FURTHER ACTION. If, after full disclosure, the Board elects not to take a corporate opportunity presented to it, to the extent it does not otherwise present a conflict of interest with his/her position, or the Board does not rule otherwise, the Insider who presented the matter to the Board is free to pursue the opportunity.
CONSTRUCTIVE TRUST. In the event an Insider usurps a corporate opportunity without making full disclosure and receiving approval by the Board pursuant to the requirements of this Code, the profits or proceeds arising from such opportunity shall be subject to a constructive trust of which the Company shall be the beneficiary. Thereafter, upon demand by the Company, the proceeds or profits, if any, shall be distributed to the Company.
D. INSIDER TRANSACTIONS
DISCLOSURE. Insiders shall disclose all conflicts of interest they may have with regard to any contract or other business arrangement to be entered into by the Company. Contracts or other business arrangements between the Company and an Insider or between the Company and an affiliate of an Insider, shall be presented by the Compliance Officer to the Board for approval only after full disclosure of the conflict of interest by the Insider who shall thereafter recuse himself/herself from the decision making process and abstain from voting on the matter.
RECORDATION. A decision by the Board approving or disapproving a contract or other business arrangement with an Insider or affiliate of an Insider or where an Insider otherwise has a financial interest, shall be recorded in the minutes of the Board which shall reflect the nature of the contract or other arrangement and all members who take action or abstain from taking action on its consideration.
TERMS. Any contract or business arrangement entered into by the Company with an Insider or affiliate of an Insider shall be on such terms and conditions and at such costs as would be reasonable under the facts and circumstances if entered into with an unrelated third party.
COMPLIANCE WITH LAW. All contracts or other business arrangements with any Insider or affiliates of Insiders in which the Insiders have a personal or financial interest, shall comply with any applicable statutes, rules or regulation.
PAYMENT OF FEES. In paying any management or other fees to Insiders, the following criteria should be taken into consideration.
1. Management fees and other fees paid by the Company shall have a direct relationship to and be based solely upon the fair market value of the goods received or services rendered.
2. Fees shall be paid only for goods which meet the legitimate needs of the Company and which are actually rendered.
3. Fees shall take into consideration the qualifications of the individual(s) providing services.
4. Reasonable fees may be based upon cost, cost plus a reasonable profit or current fair market value of the services rendered and may take reasonable overhead costs into consideration.
5. No prepayment of fees for services shall be made.
COMPETITIVE BIDS. When a contract or other business arrangement for the provision of services or delivery of goods to the Company is considered, the Company should make every reasonable attempt to obtain competitive
bids for such contract or arrangement. In the event an Insider has a personal or business interest in the contract or other arrangement, he or she shall recuse himself from any discussion of the competitive bid process and shall not have access to any documents relating to the decision-making process or the bids themselves.
DOCUMENTATION FOR COMPETITIVE BIDS. All performance of any contract or other business arrangement shall be documented and the documents shall be retained by the Company for a reasonable period of time. Such documentation shall include but not be limited to: the bids; evidence of payment; documents reflecting the actual delivery of goods or performance of services contracted for; and documents evidencing the review of the performance of the contract or other business arrangements by the appropriate officer(s) or the Board.
E. ACCEPTANCE OF GIFTS AND OTHER GRATUITIES
GENERAL. Insiders are prohibited from (a) soliciting for themselves or a third party (other than the Company) anything of value from anyone in return for any business, service or confidential information of the Company; or (b) accepting anything of value (other than salary, wages, fees or other usual compensation) from anyone in connection with the business of the Company, either prior to or after a transaction.
EXCEPTIONS. Exceptions to the general prohibition regarding acceptance of things of value in connection with the Company's business may include the acceptance of:
1. gifts, gratuities, amenities or favors based on obvious family or personal relationships (such as those with the parents, children or spouse of a Company official) where the circumstances make it clear that it is those relationships rather than the business of the Company, which are the motivating factors;
2. meals, refreshments entertainment, accommodations or travel arrangements, all of reasonable value, during the course of a meeting or other occasion, the purpose of which is to hold bona fide business discussions or to foster better business relations, provided that the expense would be paid for by the Company as a reasonable business expense, if not paid for by another party;
3. loans from other banks or financial institutions on customary terms to finance proper and usual activities of the directors or officers or employees, except where prohibited by law;
4. advertising or promotional material of reasonable value, such as pens, pencils, note pads, key chains, calendars and similar items;
5. discounts or rebates on merchandise or services that do not exceed those available to other customers;
6. gifts of a value (not to exceed $100.00) that are related to commonly recognized events or occasions, such as a promotion, new job, wedding, retirement, Christmas or bat or bar mitzvah; or
7. civic, charitable, educational, religious organizational awards for recognition service and accomplishment.
NOTIFICATION AND APPROVAL. In the event an Insider is offered anything of value from anyone in return for any business, service or confidential information of the Company and the item of value is not clearly subject to the exceptions described above, the Insider should report it immediately to his or her supervisor or to the Compliance Officer.
VI. TRADE SECRETS
Each Insider hereby acknowledges that the term "confidential information, trade secrets, and property" and all variations of that term used herein, includes without limitation, current and prospective client and customer lists, information with respect to client and customer accounts, requirements and practices, sales methods and ideas, employee lists and employment data, documents, books, records, data, materials, supplies, contract forms and other
information relating to the Company, its employees, and its products, services, and operations, regardless of whether similar to the foregoing, and regardless of whether conceived by the Insider.
UNAUTHORIZED USE PROHIBITED. Each Insider agrees that he/she shall not, at any time (i) during the term of his/her tenure or employment or (ii) after the termination thereof, disclose, use, or threaten to use, other than in the performance of their duties for the Company, any confidential information, trade secrets, or property of the Company, regardless of whether acquired or conceived by the Insider. Insider hereby acknowledges that such confidential information, trade secrets, and property are secret, confidential, and unique, that they constitute the exclusive property of the Company, that such confidential information, trade secrets and property will be made known to the Insider in confidence in connection with their professional duties, and that any use of such confidential information, trade secrets or property by him/her other than for the sole benefit of the Company would be wrongful and would cause irreparable harm.
SOLICITATION OF CLIENTS. Without limiting the generality of the preceding two paragraphs, but rather to implement their provisions, each Insider agrees that, during the 12-month period commencing with the date of termination of the Insider's tenure and/or employment, he/she will not, without the prior express written consent of the Company in each instance, directly or indirectly, for the Insider alone or for any affiliate of an Insider, call upon, solicit, or cause to be solicited any person or organization that was a client of the Company within the 12-month period ending on the effective date of his/her termination of association or employment, if the business in which the Insider is engaged in any way involves products or services directly competitive with those sold, supplied or performed by the Company at the time of termination of the Insider's association with the Company.
ASSOCIATION WITH OTHERS POSSESSING CONFIDENTIAL INFORMATION. Each Insider further agrees that, during the 12-month period commencing with the date of termination of their employment/association with the Company, they will not, without the prior express written consent of the Company, directly or indirectly, employ, offer to employ, be employed with, or otherwise participate in business with any person who is or had been a director, officer, or employee of, or consultant to, the Company in any capacity at any time within the 12-month period ending on the date that Insider's employment or association with the Company was terminated, if such other person possesses knowledge of the confidential information of the Company that may be used in connection with such business or employment.
RETURN OF CONFIDENTIAL DOCUMENTS. Upon termination of the Insider's association or employment with the Company, he/she agrees to deliver promptly to the Company all books, records, samples, business plans, manuals, blank forms, documents, letters, notes, notebooks, reports, data and all copies of the foregoing and all other confidential information, trade secrets and property of the Company, including, without limitation, all documents that, in whole or in part, contain any trade secrets or confidential information of the Company that are in his/her possession or under his/her control, and the Insider shall not retain any such materials or copies thereof without the prior express written consent of the Company.
VII. REPORTING ILLEGAL OR UNETHICAL BEHAVIOR
The Company strives to maintain sound and ethical business practices and holds all Insiders to high ethical standards. In order to maintain these standards, Insiders have an affirmative obligation to report to the Insider's supervisor, if appropriate, or the Compliance Officer a violation of any laws, regulations or provisions of this Code by any Insider. If an Insider is ever uncertain of the best course of action in a specific situation, Insiders should seek immediately clarification and help from their supervisor or the Compliance Officer.
The Company will not tolerate any attempt by anyone to retaliate against an Insider who, while acting in good faith pursuant to this Code, reports illegal or unethical behavior by any employee, director, officer or third party advisor to the Company. Thus, no Insider may be discharged, demoted, suspended, or in any manner threatened, harassed or discriminated against for providing information about violations of the law or this Code, or assisting in the investigation of a violation of the law or this Code, or participating in bringing or bringing a lawsuit.
VIII. BREACHES OF ETHICAL BEHAVIOR
If any Insider breaches any of the provisions of this Code, such breach shall be reported to the Insider's supervisor, the Compliance Officer, the chief executive officer and the Board. The Compliance Officer and the Board shall review, or designate a committee to review, the facts and circumstances of the breach of this Code and shall determine the appropriate remedy including immediate termination for cause of the Insider who breached this Code.
Exhibit 21
Jacksonville Savings Bank 100% owned by Jacksonville Bancorp, Inc.
Financial Resources Group, Inc. 100% ownership by Jacksonville Savings Bank
Exhibit 23
CONSENT OF INDEPENDENT AUDITOR'S
We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-112420) of our report dated January 23, 2004, with respect to the consolidated financial statements of Jacksonville Bancorp, Inc. incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 2003.
/s/ McGladrey & Pullen
Champaign, Illinois
March 29, 2004
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Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard A. Foss, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Jacksonville Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) [intentionally omitted]
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annul report) that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
March 24, 2004 /s/ Richard A. Foss
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Date Richard A. Foss
President and Chief Executive Officer
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Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Diana S. Tone, Chief Financial Officer and Compliance Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Jacksonville Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) [intentionally omitted]
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annul report) that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
March 24, 2004 /s/ Diana S. Tone
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Date Diana S. Tone
Chief Financial Officer and Compliance Officer
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Jacksonville Bancorp, Inc. ("Company")
on Form 10-K for the period ending December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Richard
A. Foss, President and Chief Executive Officer and I, Diana Tone, Chief
Financial Officer and Compliance Officer of the Company certify pursuant to 18
U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002:
(1) the Report fully complies with the requirements of Sections 13(a) of the Securities Exchange Act of 1934; and
(2) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations.
March 24, 2004 /s/ Richard A. Foss
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Date Richard A. Foss
President and Chief Executive Officer
March 24, 2004 /s/ Diana S. Tone
-------------- ------------------------------------------------
Date Diana S. Tone
Chief Financial Officer and Compliance Officer
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