JACKSONVILLE BANCORP 10-K 2009
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal ended December 31, 2008.
For the transition period from ______________ to ______________.
Commission file number:000-49792
JACKSONVILLE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Registrant's telephone number, including area code: (217) 245-41111
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES o NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES o NO x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 amendment to this Form 10-K.x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2008, as reported by the Nasdaq Capital Market, was approximately $9.6 million.
As of March 1, 2009, there was issued and outstanding 1,920,817 shares of the Registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
TABLE OF CONTENTS
Jacksonville Bancorp, Inc. is a Federal corporation. On May 3, 2002, Jacksonville Savings Bank completed its reorganization into the two-tier form of mutual holding company ownership. At that time each outstanding share of Jacksonville Savings Bank’s common stock was converted into a share of Jacksonville Bancorp’s common stock. Our only significant asset is our investment in Jacksonville Savings Bank. We are majority owned by Jacksonville Bancorp, MHC, a Federally-chartered mutual holding company.
Jacksonville Savings Bank is an Illinois-chartered savings bank headquartered in Jacksonville, Illinois. We conduct our business from our main office and six branches, two of which are located in Jacksonville and one of which is located in each of the following Illinois communities: Virden, Litchfield, Chapin, and Concord. We were originally chartered in 1916 as a state-chartered savings and loan association and converted to a state-chartered savings bank in 1992. We have been a member of the Federal Home Loan Bank System since 1932. Our deposits are insured by the Federal Deposit Insurance Corporation. At December 31, 2008, Jacksonville Bancorp had total assets of $288.3 million, total deposits of $238.2 million, and stockholders’ equity of $24.3 million.
We are a community-oriented savings bank engaged primarily in the business of attracting retail deposits from the general public in our 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, commercial and agricultural real estate loans, and consumer loans. We also originate multi-family real estate loans and commercial and agricultural business loans. Additionally, we invest in United States Government agency securities, bank-qualified, general obligation 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.
Our principal sources of funds are customer deposits, proceeds from the 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. Our principal expenses are interest paid on deposits, employee compensation and benefits and occupancy and equipment expense.
We operate an investment center at our main office. The investment center is operated through Financial Resources Group, Inc., the Bank’s wholly-owned subsidiary. The investment center has not had a material effect on our ability to attract retail deposits, and is not expected to have an impact on attracting deposits.
Our principal executive office is located at 1211 W. Morton, Jacksonville, Illinois, and our telephone number at that address is (217) 245-4111.
Recent Market Developments
In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law. Under the EESA, the U.S. Department of the Treasury was given the authority to, among other things, purchase up to $700 billion of securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.
On October 14, 2008, the Treasury Department announced a Capital Purchase Program under which it would acquire equity investments, usually preferred stock, in banks and thrifts and their holding companies. In conjunction with the purchase of preferred stock, the Treasury Department also received warrants to purchase common stock from participating financial institutions. Participating financial institutions also were required to adopt the Treasury Department’s standards for executive compensation and corporate governance for the period during which the department holds equity issued under the Capital Purchase Program. We have determined that we would not participate in the Capital Purchase Program.
On November 21, 2008, the FDIC adopted a final rule relating to a Temporary Liquidity Guarantee Program, which the FDIC had previously announced as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the Temporary Liquidity Guarantee Program the FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008, and before June 30, 2009 and (ii) provide full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5% interest per annum and certain other accounts held at participating FDIC-insured institutions through December 31, 2009. Coverage under the Temporary Liquidity Guarantee Program was available for the first 30 days without charge. The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to 100 basis points per annum, depending on the initial maturity of the debt. The fee assessment for deposit insurance coverage is 10 basis points per quarter on amounts in covered accounts exceeding $250,000. We have elected to participate in the deposit insurance coverage program.
The American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus or economic recovery package, was signed into law on February 17, 2009, by President Obama. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients until the recipient has repaid the Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient’s appropriate regulatory agency.
Our market area is Morgan, Macoupin and Montgomery Counties, Illinois. Management believes that our offices are located in communities that can generally be characterized as stable residential communities of predominantly one- to four-family residences. Our market for deposits is concentrated in the communities surrounding our main office and six branches. We are the largest independent financial institution headquartered in our primary market area.
The economy of our market area consists primarily of agriculture and related businesses, light industry and state and local government. The largest employers in our primary market area are Pactiv Corporation, Passavant Area Hospital, and the State of Illinois. During 2008, the local economy experienced a downturn, although not as severe as the nationwide recession. While we have seen an increase in unemployment, our local economy benefits from a diverse base of employers. Our market area did not experience significant layoffs or company closings during 2008. However, ACH Food Companies has recently announced the closing of its Jacksonville plant with approximately 200 employees sometime in 2009. We are unable to determine what impact, if any, the closing will have on our financial condition or operations.
General.> Historically, our principal lending activity has been the origination of mortgage loans for the purpose of financing or refinancing one- to four-family residential properties in our local market areas. We also emphasize consumer lending, primarily the origination of home equity loans and loans secured by automobiles. At December 31, 2008, our loans receivable totaled $185.0 million, of which $46.8 million, or 25.6% consisted of one- to four-family residential mortgage loans. The remainder of our loans receivable at such date consisted of commercial and agricultural real estate loans (30.9%), multi-family residential loans (2.5%), commercial and agricultural business loans (19.3%), and consumer loans (22.8%). Of the amount included in consumer loans, $30.0 million, or 16.4% of total loans consisted of home equity and home improvement loans. During the year ended December 31, 2008 the loan portfolio increased to $185.0 million from $177.7 million at December 31, 2007. One-to-four family residential real estate loans decreased $3.7 million (7.2%) and commercial and agricultural real estate loans increased $12.4 million (28.2%) during 2008.
We have made our interest-earning assets more interest rate sensitive by, among other things, originating variable interest rate loans, such as adjustable-rate mortgage loans and balloon loans with terms ranging from three to five years, as well as medium-term consumer loans and commercial business loans. Our ability to originate adjustable-rate mortgage loans is substantially affected by market interest rates.
We originate fixed-rate residential mortgage loans secured by one- to four-family residential properties with terms up to 30 years. We sell a significant portion of our one- to four-family fixed-rate residential mortgage loan originations directly to Freddie Mac. We also sold one- to four-family fixed-rate residential mortgage loan originations to the Federal Home Loan Bank Mortgage Partnership Finance Program until the program was discontinued as of October 31, 2008. During the years ended December 31, 2008 and 2007, we sold $30.1 million and $10.2 million of fixed-rate residential mortgage loans, respectively. Loans are generally sold without recourse and with servicing retained. At December 31, 2008 we were servicing approximately $132.1 million in loans for which it received servicing income of approximately $352,000 for the year ended December 31, 2008. As a result of the weakening economy, we have taken a charge of $428,000 against the value of our mortgage servicing income. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 to our Consolidated Financials Statements.
Analysis of Loan Portfolio
Set forth below are selected data relating to the composition of our loan portfolio, excluding loans held for sale, by type of loan as of the dates indicated.
One- to Four-Family Mortgage Loans>. Our primary lending activity is the origination of one- to four-family, owner-occupied, residential mortgage loans secured by property located in our market area. We generate loans through our marketing efforts, existing customers and referrals, real estate brokers, builders and local businesses. We generally have limited our real estate loan originations to the financing of properties located within our market area. At December 31, 2008, we had $46.8 million, or 25.6% of our net loan portfolio, invested in mortgage loans secured by one- to four-family residences.
We originate for resale to Freddie Mac fixed-rate residential one- to four-family loans with terms of 15 years or more. Our 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. We offer fixed-rate one- to four-family mortgage loans with terms of up to 30 years.
We currently offer adjustable-rate mortgage loans for terms ranging up to 30 years. We generally offer adjustable-rate mortgage loans that adjust every year from the date of origination, with interest rate adjustment limitations up to two hundred basis points per year and with a cap of up to six hundred basis points on interest rate increases over the life of the loan. In a rising interest rate environment, such rate limitations may prevent adjustable-rate mortgage loans from repricing to market interest rates, which would have an adverse effect on net interest income. In the current low interest rate environment the repricing of our adjustable-rate portfolio has resulted in significantly lower interest income from this portion of our loan portfolio. We have used different interest indices for adjustable-rate mortgage loans in the past, and primarily use the one-year Constant Maturity Treasury Index. Adjustable-rate mortgage loans secured by residential one- to four-family real estate totaled $10.2 million, or 21.8% of our total one- to four-family residential real estate loans receivable at December 31, 2008. The origination of fixed-rate mortgage loans versus adjustable-rate mortgage loans is monitored on an ongoing basis and is affected significantly by the level of market interest rates, customer preference, our interest rate gap position and our competitors’ loan products. During 2008, we originated $29.4 million of fixed-rate residential mortgage loans and $9.3 million of adjustable-rate mortgage and balloon loans.
The primary purpose of offering adjustable-rate mortgage loans is to make our loan portfolio more interest rate sensitive. However, as the interest income earned on adjustable-rate mortgage loans varies with prevailing interest rates, such loans do not offer predictable cash flows in the same manner as long-term, fixed-rate loans. Adjustable-rate mortgage loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest rates increase. It is possible, that during periods of rising interest rates, that the risk of delinquencies and defaults on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrower, resulting in increased loan losses.
Our residential first mortgage loans customarily include due-on-sale clauses, which give us 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 our mortgage portfolio during periods of rising interest rates.
When underwriting residential real estate loans, we review and verify 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 fixed-rate real estate loans with loan to value (“LTV”) ratios of between 80% and 95%, we require private mortgage insurance. We require fire and casualty insurance on all properties securing real estate loans. We 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.> We originate commercial and agricultural real estate and multi-family residential real estate loans. At December 31, 2008, $56.5 million, or 30.9%, of our total loan portfolio consisted of commercial and agricultural real estate loans and $4.5 million, or 2.5%, consisted of multi-family real estate loans. During 2008, loan originations secured by commercial and agricultural real estate totaled $29.2 million, as compared to $11.0 million in 2007. Our 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, 2008, our commercial real estate loan portfolio included $1.3 million in loans secured by churches, $28.5 million in loans secured by land, and $26.7 million in loans secured by other commercial properties. At December 31, 2008, our largest commercial and agricultural real estate loan was secured by farmland, had a principal balance of $3.1 million and was performing in accordance with its terms. The maximum LTV ratio for commercial real estate loans we originate is 80%. The largest commercial real estate loan had a principal balance of $3.0 million, all of which was secured by an office and distribution center. At December 31, 2008, the largest multi-family residential real estate loan had a principal balance of $2.3 million and was performing in accordance with its terms.
Our underwriting standards for commercial and agricultural real estate and multi-family residential real estate 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 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. In underwriting a loan, we consider the value of the real estate offered as collateral in relation to the proposed loan amount. Generally, the loan amount cannot be greater than 80% of the value of the real estate. We usually obtain written appraisals from either licensed or certified appraisers on all multi-family, commercial, and agricultural real estate loans. We assess 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>. We originate commercial and agricultural business loans to borrowers located in our market area which are secured by collateral other than real estate or which can be unsecured. We also purchase participations of commercial loans from other lenders, which may be outside our market area. Such business loans are generally secured by equipment and inventory and generally are offered with adjustable rates and various terms of maturity. We 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. We generally obtain personal guarantees from the borrower or a third party as a condition to originating its business loans. Commercial and agricultural business loans totaled $35.4 million, or 19.3%, of our total loan portfolio at December 31, 2008. We have increased our originations of business loans in response to customer demand. During the year ended December 31, 2008, we originated $36.5 million in commercial and agricultural business loans. At that date, our largest commercial business loan was a $5.0 million line of credit with a principal balance of $2.0 million. This loan was performing in accordance with its terms at December 31, 2008.
Our underwriting standards 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. We assess the financial strength of each applicant through the 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. We periodically review business loans following origination. We request financial statements at least annually and review them for substantial deviations or changes that might affect repayment of the loan. Our loan officers 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, 2008, consumer loans totaled $41.8 million, or 22.8%, of our total loan portfolio. The principal types of consumer loans we offer are home equity loans and automobile loans. We generally offer consumer loans on a fixed-rate basis. The largest category of consumer loans in our portfolio consists of home equity loans. At December 31, 2008, home equity and home improvement loans totaled $30.0 million, or 16.4%, of our total loan portfolio. Our 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 we determine based upon market conditions. Such loans may be fully amortized over the life of the loan or have a balloon feature. Generally, the maximum term for home equity loans is 10 years.
The second largest category of consumer loans in our portfolio consists of loans secured by automobiles. At December 31, 2008, consumer loans secured by automobiles totaled $5.8 million, or 3.2%, our total loan portfolio. We offer automobile loans 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. We generally originate automobile loans with an LTV ratio below the greater of 80% of the purchase price or 100% of NADA loan value, although in the case of a new car loan the LTV ratio may be greater or less depending on the borrower’s credit history, debt to income ratio, home ownership and other banking relationships with us.
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 our 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, 2008, consumer loans 90 days or more delinquent, including those for which the accrual of interest has been discontinued, totaled $212,000, or 0.51%, of our total consumer loans.
Our underwriting standards 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. We also consider 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% are 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 $82,000 and are secured by mortgages on residential real estate. No assurance can be given, however, that our 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, 2008 regarding the dollar amount of loans maturing in our 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.
The following table sets forth at December 31, 2008, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2009. At December 31, 2008, fixed-rate loans include $18.5 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, 2009, was $78.7 million and $63.6 million, respectively.
Loan Origination, Solicitation and Processing.> Loan originations are derived from a number of sources such as real estate broker referrals, existing customers, borrowers, builders, attorneys and walk-in customers. Upon receipt of a loan application, a credit report is obtained to verify specific information relating to the applicant’s employment, income, and credit standing. In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent appraiser approved by the Bank. A loan application file is first reviewed by a loan officer in our 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 of Directors has established individual lending authorities for each loan officer by loan type. Loans over an individual officer’s lending limits must be approved by the officers’ loan committee consisting of the chairman of the board, president, chief lending officer and all lending officers, which meets three times a week, and has lending authority up to $500,000 depending on the type of loan. Loans with a principal balance over this limit, up to $1.0 million, must be approved by the directors’ loan committee, which meets weekly and consists of the chairman of the board, president, senior vice president, chief lending officer 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 $1.0 million. The Board of Directors ratifies all loans we originate. Once the loan is approved, the applicant is informed and a closing date is scheduled. We typically fund 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, Purchase and Sale of Loans.> Set forth below is a table showing our loan originations, purchases, sales and repayments for the periods indicated. It is our policy to originate for sale into the secondary market fixed-rate mortgage loans with maturities of 15 years or more and to originate for retention in our portfolio adjustable-rate mortgage loans and loans with balloon payments. Purchases consist of participations in loans originated by other financial institutions. We usually obtain commitments prior to selling fixed-rate mortgage loans. It is our policy to sell fixed-rate mortgage loans as market conditions permit.
Loan Origination and Other Fees. >In addition to interest earned on loans, we may charge loan origination fees. Our ability to charge loan origination fees is influenced by the demand for mortgage loans and competition from other lenders in our market area. In December 1986, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards 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 our portfolio, Statements of Financial Accounting Standards No. 91 requires that we 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. Statements of Financial Accounting Standards No. 91 reduces the amount of revenue recognized by many financial institutions at the time such loans are originated or acquired. Fees deferred under Statements of Financial Accounting Standards No. 91 are recognized into income immediately upon the sale of the related loan. At December 31, 2008, we had $26,000 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, we also receive other fees and service charges that consist primarily of extension fees and late charges. We recognized fees and service charges of $54,000, $93,000 and $108,000 for the years ended December 31, 2008, 2007, and 2006, respectively.
Loan Concentrations.> 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 Jacksonville Savings Bank’s total capital, as defined by regulation. At December 31, 2008, our loans-to-one borrower limit was $5.7 million. At December 31, 2008 we had no lending relationships in excess of our loans-to-one borrower limitation.
Delinquencies and Classified Assets
Our collection procedures provide that when a mortgage loan is either ten days (in the case of adjustable-rate mortgage 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 60 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 10 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, 2008, 2007, and 2006 the percentage of nonperforming loans to net loans receivable were 0.65%, 0.62% and 0.87%, respectively.
At December 31, 2008, 2007, and 2006, the percentage of nonperforming assets to total assets were 0.68%, 0.51%, and 0.56%, respectively. The increase in the level of nonperforming assets primarily reflects the delinquency and foreclosure of loans secured by residential real estate. Management believes the increase can be attributed more to unique borrower circumstances rather than the economy in general, and it does not believe the increase is indicative of a trend in asset quality. The majority of the foreclosed assets have been sold during the first quarter of 2009 without any additional loss. We have an experienced chief lending officer and collections and loan review departments which monitor the loan portfolio and actively seek to prevent any deterioration of asset quality.
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. Mortgages and other consumer loans are placed on nonaccrual status when either principal or interest is 120 days or more past due. 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, 2008, we had $186,000 of loans 90 days or more delinquent that were still accruing interest.
At December 31, 2008, our largest nonperforming loan had a principal balance of $152,000 and was secured by residential real estate. The property is in the process of foreclosure and management believes that sufficient reserves have been established.
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, 2008, we owned $769,000 of property classified as real estate owned.
Delinquent Loans.> The following table sets forth information regarding our delinquent loans and other real estate owned at the dates indicated. As of the dates indicated, we had immaterial restructured loans within the meaning of Statements of Financial Accounting Standards Nos. 15, 114, and 118. At December 31, 2008, loans delinquent 60 to 89 days totaled $592,000, or 0.32% of net loans.
Interest income that would have been recorded under the original terms of loans classified as non-accruing loans totaled approximately $49,000 for the year ended December 31, 2008. Interest income from such loans that was included in net income for the year ended December 31, 2008 totaled $43,000.
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 Jacksonville Savings Bank by the Federal Deposit Insurance Corporation and the Illinois Commissioner of Banks and Real Estate (“Commissioner”), the staff of such agencies reviews our classifications and determine whether such classifications are adequate. Such agencies have, in the past, and may in the future require us to classify certain assets which management has not otherwise classified or require a classification more severe than established by management. At December 31, 2008, our classified assets totaled $2.4 million, all of which were classified as substandard.
Allowance for Loan Losses
Management’s policy is to provide for estimated losses on our loan portfolio based on management’s evaluation of the probable losses that may be incurred. Management regularly reviews our 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 level of the allowance for loan losses is based on ongoing, quarterly assessments of the probable estimated losses in the loan portfolio. Our 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 adequacy of the allowance for loan losses is based upon estimates of probable losses, actual losses 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 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, 2008, 2007, and 2006, we provided $310,000, $155,000 and $60,000, respectively, to the allowance for loan losses. Our allowance for loan losses totaled $1.9 million, $1.8 million and $1.9 million at December 31, 2008, 2007 and 2006, respectively. Although we maintain our 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 we will not be required to make additions to the allowance for loan losses in the future. Future additions to our 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 year indicated and additions to the allowance for loan losses, which have been charged to operations.
Allocation of Allowance for Loan Losses.> The following table sets forth the allocation of allowance for loan losses by loan category at the dates 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.
Our investment portfolio includes available-for-sale investment securities and mortgage backed securities, other investments, and Federal Home Loan Bank stock. The portfolio consists primarily of U. S. government and agency securities, along with mortgage-backed securities (discussed below), interest-earning deposits in other financial institutions, Federal funds sold, municipal bonds and Federal Home Loan Bank stock. Our portfolio of equity investment securities totaled $48,000 at December 31, 2008 consisting of an interest in a local community development corporation and Farmer Mac stock. In addition, our investment portfolio included $30.0 million of local municipal bonds. Federal funds sold totaled $460,000 at December 31, 2008. Our portfolio of U.S. Government and agency Securities totaled $19.8 million at December 31, 2008. Our holdings of Federal Home Loan Bank stock totaled $1.1 million at December 31, 2008. We had $393,000 in interest-earning deposits at December 31, 2008 consisting of deposits in the Federal Home Loan Bank and other correspondent accounts. Total long-term investments at December 31, 2008 were $49.7 million. We expect our short-term and long-term investment portfolio to continue to change based on liquidity needs associated with loan origination activities. During the year ended December 31, 2008, we had no investments that were deemed to be other than temporarily impaired.
Under Federal regulations, we are required 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 our loan originations and other activities. Our liquidity ratio at December 31, 2008 was 24.1%, which was adequate to meet our normal business activities.
Mortgage-Backed Securities.> We also invest in mortgage-backed securities issued or guaranteed by the United States Government or agencies thereof. These securities, which consist primarily of mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, had an amortized cost of $27.4 million, $15.5 million and $8.5 million at December 31, 2008, 2007, and 2006, respectively. At December 31, 2008, all of the mortgage-backed securities in the investment portfolio had fixed-rates of interest. The market value of our mortgage-backed securities portfolio was $27.8 million, $15.4 million and $8.2 million at December 31, 2008, 2007, and 2006, respectively, and the weighted average rate as of December 31, 2008, 2007, and 2006 was 4.95%, 4.85% and 4.27%, respectively.
Set forth below is a table showing our purchases, sales and repayments of mortgage-backed securities for the years indicated.
Investment Securities and Short-Term Investment Portfolio.> The following table sets forth the carrying value of our investment securities portfolio and short-term investments at the dates indicated. At December 31, 2008, the market value of our short-term investment portfolio approximated its cost.
The following table sets forth the maturities and weighted average yields of our securities portfolio, excluding FHLB stock and equity securities, at December 31, 2008.
Sources of Funds
General.> Deposits and borrowings are our major sources of funds for lending and other investment purposes. In addition, we derive 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.> We attract consumer and commercial deposits principally from within our 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 accounts, term certificate accounts and individual retirement accounts. We will accept 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. We regularly evaluate our internal cost of funds, survey rates offered by competing institutions, review our cash flow requirements for lending and liquidity and execute rate changes when deemed appropriate. We do not obtain funds through brokers, nor do we solicit funds outside our market area. We have on occasion offered above market interest rates in order to attract deposits.
The following table sets forth our deposit activities for the years indicated.
Our deposits as of December 31, 2008 were represented by the various types of deposit programs described below:
The following table sets forth the change in dollar amount of savings deposits in the various types of savings accounts we offer between the dates indicated.