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JACKSONVILLE BANCORP 10-K 2009 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
For the
fiscal ended December 31, 2008.
or
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
PART I
General
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.
Market
Area
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.
Lending
Activities
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.
2
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.
3
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.
_________________________________
4
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.
5
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.
6
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.
7
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.
8
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.
9
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.
10
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.
11
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.
12
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.
13
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.
14
Investment
Activities
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.
15
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.
16
Deposit Activity The following table sets forth our
deposit activities for the years indicated.
Deposit
Portfolio
Our deposits as of December 31, 2008
were represented by the various types of deposit programs described
below:
17
Deposit Flow 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.
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