UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period of _________ to _________ Commission File Number 000-49792 --------- Jacksonville Bancorp, Inc. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Federal 33-1002258 -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation) Identification Number) 1211 West Morton Avenue Jacksonville, Illinois 62650 -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (217) 245-4111 Indicate by check mark whether issuer (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). [ ] Yes [X] No As of April 30, 2005, there were 1,967,027 shares (*) of the Registrant's common stock issued and outstanding. (*) As of April 30, 2005, 1,038,738 shares were owned by Jacksonville Bancorp, M.H.C., the Company's mutual holding company parent. JACKSONVILLE BANCORP, INC. FORM 10-Q MARCH 31, 2005 TABLE OF CONTENTS -------------------------------------------------------------------------------- PAGE PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 1 Condensed Consolidated Statements of Income 2 Condensed Consolidated Statement of Stockholders' Equity 3 Condensed Consolidated Statements of Cash Flows 4-5 Notes to the Condensed Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 Item 4. Controls and Procedures 19 PART II OTHER INFORMATION 20 Item 1. Legal Proceedings Item 2. Changes in Securities, Use of Proceeds, and Issuer Purchases Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Signatures 21 EXHIBITS Section 302 Certifications Section 906 Certification PART I - FINANCIAL INFORMATION JACKSONVILLE BANCORP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ---------------------------------------------------------------------------------------------------------------------- MARCH 31, DECEMBER 31, ASSETS 2005 2004 ---- ---- (Unaudited) Cash and cash equivalents $ 6,551,282 $ 10,792,905 Investment securities - available-for-sale 84,130,018 84,625,323 Mortgage-backed securities - available-for-sale 10,804,383 15,171,342 Federal Home Loan Bank stock 1,486,400 1,466,300 Other investments 400,164 582,224 Loans receivable - net of allowance for loan loss of $1,844,990 and $1,888,073 as of March 31, 2005 and December 31, 2004 133,556,019 125,793,087 Loans held for sale 688,394 264,600 Premises and equipment - net 7,064,624 7,146,087 Accrued interest receivable 1,522,631 1,300,741 Goodwill 2,726,567 2,726,567 Core deposit intangible 259,102 279,033 Capitalized mortgage servicing rights 1,073,534 1,094,261 Real estate owned 697,688 564,947 Income taxes receivable - 25,468 Other assets 2,299,562 1,496,628 -------------- ------------- TOTAL ASSETS $ 253,260,368 $ 253,329,513 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits $ 223,899,928 $ 225,734,508 Other borrowings 5,355,922 3,446,706 Advance payments by borrowers for taxes and insurance 528,761 328,444 Accrued interest payable 645,536 640,060 Deferred compensation plan 2,122,231 2,120,620 Income taxes payable 144,613 - Other liabilities 946,993 376,191 -------------- ------------- Total liabilities 233,643,984 232,646,529 -------------- ------------- Commitments and Contingencies Stockholders' equity Preferred stock, $0.01 par value - authorized 10,000,000 shares; none issued and outstanding - - Common stock, $0.01 par value - authorized 20,000,000 shares; issued and outstanding, 1,967,027 shares and 1,966,343 shares as of March 31, 2005 and December 31, 2004, respectively 19,670 19,663 Additional paid-in capital 6,459,139 6,459,138 Retained earnings - substantially restricted 14,584,601 14,467,568 Accumulated other comprehensive loss (1,447,026) (263,385) -------------- ------------- Total stockholders' equity 19,616,384 20,682,984 -------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 253,260,368 $ 253,329,513 ============== ============= See accompanying notes to the condensed consolidated financial statements. 1 JACKSONVILLE BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME ---------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, ------------------------------- 2005 2004 (Unaudited) INTEREST INCOME: Loans 2,049,957 2,127,600 Investment securities 759,141 857,176 Mortgage-backed securities 114,667 90,531 Other 16,546 6,982 -------------- ------------- Total interest income 2,940,311 3,082,289 -------------- ------------- INTEREST EXPENSE: Deposits 1,078,246 1,144,037 Other borrowings 12,348 8,403 -------------- ------------- Total interest expense 1,090,594 1,152,440 -------------- ------------- NET INTEREST INCOME 1,849,717 1,929,849 PROVISION FOR LOAN LOSSES 105,000 150,000 -------------- ------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,744,717 1,779,849 -------------- ------------- OTHER INCOME: Service charges on deposit accounts 183,852 171,992 Commission income 172,451 203,236 Loan servicing fees 92,786 99,457 Gains on sales of loans 2,490 6,968 Gains on sales of securities 15,451 23,699 Trust income 24,332 16,530 Other 23,003 1,514 -------------- ------------- Total other income 514,365 523,396 -------------- ------------- OTHER EXPENSES: Salaries and employee benefits 1,162,437 1,189,866 Occupancy and equipment expense 330,216 330,924 Data processing expense 72,676 66,397 Stationary and supplies 34,990 29,869 Legal and accounting expense 52,543 46,326 Postage expense 42,356 39,634 Other 269,229 306,080 -------------- ------------- Total other expenses 1,964,447 2,009,096 -------------- ------------- INCOME BEFORE INCOME TAXES 294,635 294,149 INCOME TAXES 107,980 108,837 -------------- ------------- NET INCOME $ 186,655 $ 185,312 ============== ============= NET INCOME PER COMMON SHARE - BASIC $ 0.09 $ 0.10 ============== ============= NET INCOME PER COMMON SHARE - DILUTED $ 0.09 $ 0.09 ============== ============= See accompanying notes to the condensed consolidated financial statements. 2 JACKSONVILLE BANCORP, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ------------------------------------------------------------------------------------------------------------------------------------ ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS' COMPREHENSIVE STOCK CAPITAL EARNINGS LOSS EQUITY LOSS (Unaudited) BALANCE, DECEMBER 31, 2004 $ 19,663 $ 6,459,138 $ 14,467,568 $ (263,385) $ 20,682,984 Net income - - 186,655 - 186,655 $ 186,655 Other comprehensive loss - change in net unrealized gains and losses on securities available-for-sale, net of income taxes of $(745,047) - - - (1,174,188) (1,174,188) (1,174,188) Less: Reclassification adjustment for gains included in net income, net of tax of $5,998 - - - 9,453 9,453 9,453 ------------ Comprehensive Loss - - - - - $ (996,986) ============ Exercise of stock options 17 16,961 - - 16,978 Purchase and retirement of treasury stock (10) (16,960) - - (16,970) Dividends ($.075 per share) - - (69,622) - (69,622) --------- ----------- ------------ ----------- ------------ BALANCE, MARCH 31, 2005 $ 19,670 $ 6,459,139 $ 14,584,601 $(1,447,026) $ 19,616,384 ========= =========== ============ =========== ============ See accompanying notes to the condensed consolidated financial statements. 3 JACKSONVILLE BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ---------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, ------------------------------- 2005 2004 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 186,655 $ 185,312 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion: Premises and equipment 149,440 157,545 Accretion of loan fees and discounts, net (14,835) (14,835) Amortization of investment premiums and discounts, net 61,693 138,742 Amortization of intangible assets 19,931 19,931 Provision for loan losses 105,000 150,000 Gains on sales of loans (2,490) (6,968) Gains on sales of securities (15,451) (23,699) Stock dividends on FHLB stock (20,100) (22,400) Changes in income taxes receivable 170,081 108,838 Changes in other assets and liabilities 304,761 87,545 -------------- ------------- Net cash provided by operations before loan sales 944,685 780,011 Origination of loans for sale to Freddie Mac (4,348,261) (3,773,736) Proceeds from sales of loans to Freddie Mac 3,947,684 3,259,521 -------------- ------------- Net cash provided by operating activities 544,108 265,796 -------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Changes in federal funds sold, net - 500,000 Purchases of investment and mortgage-backed securities available for sale (AFS) (5,673,591) (28,724,401) Maturity or call of investment securities AFS 3,249,747 18,044,086 Proceeds from sale of investment and mortgage-backed securities AFS 4,727,812 8,728,674 Principal payments on mortgage-backed and investment securities AFS 761,958 461,883 Proceeds from sale of other real estate owned 75,078 63,040 (Increase) decrease in loans, net (8,064,097) (20,760) Purchases of premises and equipment (67,977) (60,887) -------------- ------------- Net cash used in investing activities (4,991,070) (1,008,365) -------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits (1,834,580) 2,833,634 Net increase (decrease) in other borrowings 1,909,216 (957,398) Increase in advance payments by borrowers for taxes and insurance 200,317 168,707 Exercise of stock options 16,978 139,905 Purchase and retirement of treasury stock (16,970) (81,885) Dividends paid - common stock (69,622) (68,479) -------------- ------------- Net cash provided by financing activities 205,339 2,034,484 -------------- ------------- (Continued) 4 JACKSONVILLE BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ---------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, ------------------------------- 2005 2004 (Unaudited) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (4,241,623) $ 1,291,915 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,792,905 9,575,977 -------------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,551,282 $ 10,867,892 ============== ============= ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest on deposits $ 1,073,769 $ 1,195,220 Interest on other borrowings 11,349 8,503 Income taxes paid, net of refunds (62,100) - NONCASH INVESTING AND FINANCING ACTIVITIES: Real estate acquired in settlement of loans 326,000 222,295 Loans to facilitate sales of real estate owned 115,000 95,500 See accompanying notes to the condensed consolidated financial statements. (Concluded) 5 JACKSONVILLE BANCORP, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 1. FINANCIAL STATEMENTS The accompanying interim condensed consolidated financial statements include the accounts of Jacksonville Bancorp, Inc. and its wholly-owned subsidiary, Jacksonville Savings Bank (the "Bank") and its wholly-owned subsidiary, Financial Resources Group, Inc. collectively (the "Company"). All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the preceding unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of March 31, 2005 and December 31, 2004 and the results of its operations for the three month periods ended March 31, 2005 and 2004. The results of operations for the three month period ended March 31, 2005 are not necessarily indicative of the results which may be expected for the entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2004 filed as an exhibit to the Company's Form 10-K filed in March, 2005. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP) and to prevailing practices within the industry. Certain amounts included in the 2004 consolidated statements have been reclassified to conform to the 2005 presentation. 2. EARNINGS PER SHARE EARNINGS PER SHARE - Basic earnings per share is determined by dividing net income for the period by the weighted average number of common shares. Diluted earnings per share considers the potential effects of the exercise of the outstanding stock options under the Company's Stock Option Plans. The following reflects earnings per share calculations for basic and diluted methods: MARCH 31, --------- 2005 2004 ---- ---- Net income available to common stockholders $ 186,655 $ 185,312 Basic average shares outstanding 1,966,962 1,947,941 Dilutive potential common shares: Stock option equivalents 22,323 46,568 ---------- ---------- Diluted average shares outstanding 1,989,285 1,994,509 ---------- ---------- Basic earnings per share $ 0.09 $ 0.10 ========== ========== Diluted earnings per share $ 0.09 $ 0.09 ========== ========== 6 3. STOCK OPTION PLANS The Company's 1996 Stock Option Plan was adopted on April 23, 1996 with a total of 83,625 shares of common stock reserved and awarded. Awards vested 20% per year and expire after ten years and are exercisable at a price of $8.83 per share. The Company's 2001 Stock Option Plan was adopted on April 30, 2001 with a total of 87,100 shares reserved and awarded. Awards granted in 2001 vested immediately and expire after ten years and are exercisable at a price of $10 per share. As permitted under accounting principles generally accepted in the United States of America, grants of options under the plans are accounted for under the recognition and measurement principles of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations. Because options granted under the plans had an exercise price equal to market value of the underlying common stock on the date of grant, no stock-based employee compensation cost is included in determining net income. Options were granted during the second quarter of 2004 and all previous grants were fully vested prior to 2004; consequently, there was no pro-forma compensation expense for the three months ended March 31, 2004. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, on stock-based employee compensation for stock options granted in 2004. 3 Months Ended March 31, 2005 -------------- Net income, as reported $ 186,655 Less value of options vested, net of tax effects (866) -------------- Pro-forma net income $ 185,789 Earnings per share: Basic: As reported $ 0.09 Pro-forma $ 0.09 Diluted: As reported $ 0.09 Pro-forma $ 0.09 In December 2004, the Financial Accounting Standards Board ("FASB") published FASB Statement No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)" or the "Statement"). FAS 123(R) requires that the compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based upon fair value of the equity or liability instruments issued. FAS 123(R) permits entities to use any option-pricing model that meets the fair value objective in the Statement. (Modifications of share-based payments will be treated as replacement awards with the cost of the incremental value recorded in the financial statements. The Statement is effective at the beginning of the first quarter of 2006. As of the effective date, the Company will apply the Statement using a modified version of prospective application. Under that transition method, compensation cost is recognized for (1) all awards granted after the required effective date and to awards modified, cancelled, or repurchased after that date and 2) the portion of 7 prior awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated for pro-forma disclosures under SFAS 123. The impact of this Statement on the Company in 2005 and beyond will depend upon various factors, including compensation strategies. The pro-forma compensation costs presented and in prior filings for the Company have been calculated using a Black-Scholes option pricing model and may not indicative of amounts which should be expected in future periods. 4. LOAN PORTFOLIO COMPOSITION At March 31, 2005 and December 31, 2004, the composition of the Company's loan portfolio was as follows: March 31, 2005 December 31, 2004 -------------- ----------------- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in Thousands) Real estate loans: One-to-four family residential $ 42,069 31.5% $ 41,616 33.1% Commercial and agricultural 25,788 19.3% 24,588 19.5% Multi-family residential 3,550 2.7% 2,207 1.8% ---------- ------ ---------- ------ Total real estate loans 71,407 53.5% 68,411 54.4% Commercial agricultural business loans 29,578 22.1% 26,227 20.8% ---------- ------ ---------- ------ Consumer loans: Home equity/home improvement 25,872 19.4% 24,322 19.3% Automobile 4,557 3.4% 4,515 3.6% Other 4,184 3.1% 4,380 3.5% ---------- ------ ---------- ------ Total consumer loans 34,613 25.9% 33,217 26.4% ---------- ------ ---------- ------ Total loans receivable 135,598 101.5% 127,855 101.6% Less: Unearned discount and deferred loan fees, net 197 0.1% 174 0.1% Allowance for loan losses 1,845 1.4% 1,888 1.5% ---------- ------ ---------- ------ Total loans receivable, net $ 133,556 100.0% $ 125,793 100.0% ========== ====== ========== ====== 8 5. INVESTMENT LOSSES Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The following table shows the gross unrealized losses over and under twelve months at March 31, 2005. Less Than Twelve Months Over Twelve Months Total ---------------------------- ---------------------------- ---------------------------- Gross Gross Gross Unrealized Fair Unrealized Fair Unrealized Fair Losses Value Losses Value Losses Value ---------------------------- ---------------------------- ---------------------------- State and political organizations $ 15,557 $ 719,312 $ - $ - $ 15,557 $ 719,312 U.S. government and agencies 1,967,696 77,874,842 142,987 3,360,049 2,110,683 81,234,891 ---------------------------- ---------------------------- ---------------------------- SUBTOTAL 1,983,253 78,594,154 142,987 3,360,049 2,126,240 81,954,203 Mortgage-backed securities 237,394 9,925,193 - - 237,394 9,925,193 ---------------------------- ---------------------------- ---------------------------- TOTAL $2,220,647 $ 88,519,347 $ 142,987 $ 3,360,049 $ 2,363,634 $ 91,879,396 ---------------------------- ---------------------------- ---------------------------- 6. COMMITMENTS AND CONTINGENCIES The Company is a defendant in legal actions arising from normal business activities. Management, after consultation with legal counsel, believes that the resolution of these actions will not have any material adverse effect on the Company's consolidated financial statements. The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers in the way of commitments to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. Substantially all of the Company's loans are to borrowers located in Cass, Morgan, Macoupin, Montgomery, and surrounding counties in Illinois. 9 JACKSONVILLE BANCORP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -------------------------------------------------------------------------------- Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of the Company. The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and accompanying notes thereto. FORWARD LOOKING STATEMENTS This Form 10-Q contains certain "forward-looking statements" which may be identified by the use of words such as "believe," "expect," "anticipate," "should," "planned," "estimated," and "potential." Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, general and local economic conditions, changes in interest rates, deposit flows, demand for mortgage and other loans, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing of products and services. FINANCIAL CONDITION MARCH 31, 2005 COMPARED TO DECEMBER 31, 2004 Total assets remained stable at $253.3 million at March 31, 2005 and December 31, 2004. Net loans grew $7.8 million to $133.6 million during this same time frame. The loan growth was funded by a $4.2 million decrease in cash and cash equivalents and a $5.0 million decrease in the investment and mortgage-backed securities portfolios. Total deposits decreased $1.8 million during the first quarter of 2005 to $223.9 million, which was offset by an increase of $1.9 million in other borrowings. The increase in other borrowings is the result of $3.5 million in FHLB advances partially offset by a decrease of $1.6 million in overnight repurchase agreements. Stockholders' equity decreased $1.1 million to $19.6 million at March 31, 2005. The decrease resulted from net income of $187,000, offset by the payment of $70,000 in dividends and a $1.2 million increase in unrealized losses, net of tax, on available-for-sale securities. The change in unrealized gains (losses) on securities is driven by market conditions and, therefore, can fluctuate daily. RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 GENERAL: Net income for the three months ended March 31, 2005 was $187,000, or $0.09 per common share, basic and diluted. Net income totalled $185,000, or $0.10 per common share, basic, and $0.09 per common share, diluted, for the three months ended March 31, 2004. The increase of $2,000 in net income is primarily due to decreases in the provision for loan losses of $45,000, other expenses of $45,000, and income taxes of $1,000, partially offset by decreases in net interest income of $80,000 and other income of $9,000. The decrease in earnings per share reflects option exercises. 10 INTEREST INCOME: Total interest income for the three months ended March 31, 2005 decreased $142,000 from the same period of 2004. The decrease in interest income is the net result of decreases in interest income on loans of $78,000 and investment securities of $98,000, partially offset by increases of $24,000 in mortgage-backed securities and $10,000 in other investments. The decrease in interest income on loans is primarily due to a decrease in the average yield of the loan portfolio to 6.26% at March 31, 2005 from 6.62% at March 31, 2004. The decrease in the average yield was partially offset by an increase in the average balance of $2.4 million during the first quarter of 2005 compared to the same period of 2004. Interest income on investment securities decreased $98,000 for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. The decrease in interest income on investment securities reflects the decreased average balance of the investment portfolio to $86.0 million during the first quarter of 2005 compared to the average of $101.3 million during the first quarter of 2004. The decrease in the average balance is due to funds received from investment calls being reinvested into the loan portfolio. The weighted average yield increased during this same time frame to 3.53% from 3.38% for the three months ended March 31, 2005 and 2004, respectively. Interest income on mortgage-backed securities increased $24,000 during the first quarter of 2005 compared to the same quarter in 2004. The increase reflects a growth in the average balance of mortgage-backed securities to $12.2 million from $9.6 million for the first three months of 2005 and 2004, respectively, partially offset by a slight decrease in the weighted average yield to 3.75% at March 31, 2005 from 3.77% at March 31, 2004. Interest income on other investments, which include federal funds sold and interest earning deposit accounts, increased $10,000 during the three months ended March 31, 2005 as compared to the same period in 2004. The average balance of these investments equalled $2.6 million and $3.4 million for the three months ended March 31, 2005 and 2004, respectively. The increase in interest income on other investments is primarily due to an increase in the weighted average yield on these investments to 2.53% for the first quarter of 2005 from 0.81% for the first quarter of 2004, reflecting the rising interest rate environment of 2004 and 2005. INTEREST EXPENSE: Total interest expense for the three months ended March 31, 2005 decreased $62,000 compared to the three months ended March 31, 2004. The lower interest expense was due to a decrease of $66,000 in the cost of deposits, offset by a $4,000 increase in interest expense on borrowed funds. The average balance of deposits decreased to $210.9 million for the first quarter of 2005 from $224.0 million during the first quarter of 2004. The decrease of $13.1 million in the average balance of deposits reflects deposits withdrawn as management has undertaken efforts to control interest costs. The weighted average cost of deposits increased slightly to 2.05% from 2.04% during the first three months of 2005 and 2004, respectively. Interest paid on borrowed funds increased $4,000 primarily due to an increase in the average cost to 2.42% from 1.09% during the first three months of 2005 compared to the same period in 2004. The average balance of borrowed funds decreased $1.0 million during the comparative periods. PROVISION FOR LOAN LOSSES: The provision for loan losses is determined by management as the amount needed to replenish the allowance for loan losses, after net charge-offs have been deducted, to a level considered adequate to absorb inherent losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America. The following table shows the activity in the allowance for loan losses for the three months ended March 31, 2005 and 2004. 11 March 31, 2005 March 31, 2004 -------------- -------------- (In thousands) Balance at beginning of period $ 1,888 $ 2,186 Charge-offs: One-to-four family residential 77 46 Commercial and agricultural real estate - 116 Commercial and agricultural business 3 - Home equity/home improvement 48 72 Automobile 21 49 Other Consumer 19 5 -------------- -------------- Total 168 288 Recoveries: One-to-four family residential - 1 Commercial and agricultural real estate - 118 Commercial and agricultural business - 12 Home equity/home improvement 1 1 Automobile 9 10 Other Consumer 10 6 -------------- -------------- Total 20 148 -------------- -------------- Net loans charged off 148 140 Additions charged to operations 105 150 -------------- -------------- Balance at end of period $ 1,845 $ 2,196 ============== ============== The allowance for loan losses decreased to $1,845,000 at March 31, 2005 from $1,888,000 at December 31, 2004. The decrease is the result of net charge-offs exceeding the provision for loan losses. Net charge-offs increased to $148,000 during the first quarter of 2005 compared to net charge-offs of $140,000 during the first quarter of 2004. The provision for loan losses decreased to $105,000 for the first quarter of 2005 compared to $150,000 for the first quarter of 2004. Provisions for loan losses have been made to bring the allowance for loan losses to a level deemed adequate following management's evaluation of the repayment capacity and collateral protection afforded by each problem credit identified by management. The decrease in the provision during 2005 reflects the decrease in nonperforming loans and watch list credits. This review also considered the local economy and the level of bankruptcies and foreclosures in the Company's market area. Refer to the following table regarding nonperforming assets. 12 March 31, 2005 December 31, 2004 -------------- ----------------- (In thousands) Non-accruing loans: One-to-four family residential $ 555 $ 711 Commerical and agricultural real estate 186 181 Commercial and agricultural business 98 57 Home equity/Home improvement 505 652 Automobile 44 68 Other consumer - 20 -------------- ----------------- Total $ 1,388 $ 1,689 ============== ================= Accruing loans delinquent more than 90 days: One-to-four family residential $ - $ 270 Commercial and agricultural business - 23 Automobile - 4 Other consumer 1 1 -------------- ----------------- Total $ 1 $ 298 ============== ================= Foreclosed assets: One-to-four family residential $ 559 $ 426 Commercial and agricultural real estate 139 139 Automobile 18 19 -------------- ----------------- Total $ 716 $ 584 ============== ================= Total nonperforming assets $ 2,105 $ 2,571 ============== ================= Total as a percentage of total assets 0.83% 1.01% ============== ================= The following table shows the aggregate principal amount of potential problem credits on the Company's watch list at March 31, 2005 and December 31, 2004. All nonaccrual loans are automatically placed on the watch list. March 31, 2005 December 31, 2004 -------------- ----------------- (In thousands) Special Mention credits $ 3,668 $ 5,308 Substandard credits 2,678 3,484 -------------- ----------------- Total watch list credits $ 6,346 $ 8,792 ============== ================= The decrease in the level of nonperforming assets and watch list credits reflects the actions taken by management over the past several years. During 2003, the Company hired an experienced senior loan administrator and increased staffing in the collections and loan review departments, in order to address problems in the loan portfolio and prevent any further deterioration of asset quality. The Company, under the guidance of the senior loan administrator, continues to review and refine lending policies and underwriting and collection procedures. In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of operations and financial condition in preparing its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results 13 could differ significantly from those estimates under different assumptions and conditions. The Company believes that critical accounting policies, which include the allowance for loan losses, are those most important to the portrayal of the Company's financial condition and results and requires management's most difficult, subjective and complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The allowance for loan losses is a material estimate that is particularly susceptible to significant changes in the near term and is established through a provision for loan losses. The allowance is based upon past loan experience and other factors which, in management's judgement, deserve current recognition in estimating loan losses. The balance of the allowance is based on ongoing, quarterly assessments of the probable estimated losses in the loan portfolio. The evaluation includes a review of all loans on which full collectibility may not be reasonable assured. The Company's methodology for assessing the appropriateness of the allowance consists of applying several formula methods to identified problem loan and portfolio segments. The allowance is calculated by estimating the exposure on identified problem loan and portfolio segments and applying loss factors to the remainder of the portfolio based upon an internal risk grade of such loans or pools of loans. Changes in risk grades of both performing and nonperforming loans affect the amount of the allowance. Loss factors are based primarily on historical loss experience over the past five years, and may be adjusted for other significant conditions that, in management's judgement, affect the collectibility of the loan portfolio. Since the allowance for loan losses is based upon estimates of probable losses, the amount actually observed can vary significantly from the estimated amounts. The historical loss factors attempt to reduce this variance by taking into account recent loss experience. Management evaluates several other conditions in connection with the allowance, including general economic and business conditions, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the portfolio, and regulatory examination results. Management believes it uses the best information available to make such determinations. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. While the Company believes it has established its existing allowance for loan losses in conformity with accounting principles generally accepted in the United States, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request an increase in the allowance for loan losses. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary if loan quality deteriorates. Management will continue to monitor the loan portfolio and assess the adequacy of the allowance at least quarterly. OTHER INCOME: Total other income for the three months ended March 31, 2005 decreased $9,000 from the comparable period in 2004. The decrease in other income is attributable to a decrease of $31,000 in brokerage commissions, partially offset by increases of $12,000 in service charges on deposits and $8,000 in trust fees. Brokerage commissions are largely dependent upon pension account rollovers and the volume of new funds invested which can fluctuate based upon market conditions and customer preferences. The increase in service charges on deposits relates to the implementation of a new fee schedule during the second quarter of 2004. OTHER EXPENSE: Total other expense for the three months ended March 31, 2005 decreased $45,000 from the same period of 2004. The decrease in other expense is mainly comprised of decreases of $27,000 in salaries and benefits and $10,000 in real estate owned expense. The decrease in salaries and benefits is primarily due to reduced vacation accruals during 2005. INCOME TAXES: The provision for income taxes decreased $1,000 to $108,000 for the three months ended March 31, 2005 and 2004. The marginal tax rate was 37% for both periods. 14 LIQUIDITY AND CAPITAL RESOURCES The Company's most liquid assets are cash and cash equivalents. The levels of these assets are dependent on the Company's operating, financing, and investing activities. At March 31, 2005 and December 31, 2004, cash and cash equivalents totaled $6.6 million and $10.8 million, respectively. The Company's primary sources of funds include principal and interest repayments on loans (both scheduled and prepayments), maturities of investment securities and principal repayments from mortgage-backed securities (both scheduled and prepayments). During the past three months, the most significant sources of funds have been loan sales to the secondary market and the call of investment securities. These funds have been used primarily for new loan originations. While scheduled loan repayments and proceeds from maturing investment securities and principal repayments on mortgage-backed securities are relatively predictable, deposit flows and early prepayments are more influenced by interest rates, general economic conditions, and competition. The Company attempts to price its deposits to meet asset-liability objectives and stay competitive with local market conditions. Liquidity management is both a short- and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) projected purchases of investment and mortgage-backed securities, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) liquidity of its asset/liability management program. Excess liquidity is generally invested in interest-earning overnight deposits and other short-term U.S. agency obligations. If the Company requires funds beyond its ability to generate them internally, it has the ability to borrow funds from the FHLB. The Company may borrow from the FHLB under a blanket agreement which assigns all investments in FHLB stock as well as qualifying first mortgage loans equal to 150% of the outstanding balance as collateral to secure the amounts borrowed. This borrowing arrangement is limited to a maximum of 30% of the Company's total assets or twenty times the balance of FHLB stock held by the Company. At March 31, 2005, the Company had $3.5 million in outstanding advances and approximately $21.2 million remaining available to it under the above-mentioned borrowing arrangement. The Company maintains minimum levels of liquid assets as established by the Board of Directors. The Company's liquidity ratios at March 31, 2005 and December 31, 2004 were 38.2% and 42.4%, respectively. This ratio represents the volume of short-term liquid assets as a percentage of net deposits and borrowings due within one year. The Company must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments. The Company anticipates that it will have sufficient funds available to meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed above. The following table summarizes these commitments at March 31, 2005 and December 31, 2004. March 31, 2005 December 31, 2004 -------------- ----------------- (In thousands) Commitments to fund loans - own portfolio $ 22,284 $ 22,742 Commitments for loan sales -secondary market 1,132 576 Standby letters of credit 473 473 Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as 15 defined). Management believes, at March 31, 2005, that the Company meets all its capital adequacy requirements. Under Illinois law, Illinois-chartered savings banks are required to maintain a minimum core capital to total assets ratio of 3%. The Illinois Commissioner of Savings and Residential Finance (the "Commissioner") is authorized to require a savings bank to maintain a higher minimum capital level if the Commissioner determines that the savings bank's financial condition or history, management or earnings prospects are not adequate. If a savings bank's core capital ratio falls below the required level, the Commissioner may direct the savings bank to adhere to a specific written plan established by the Commissioner to correct the savings bank's capital deficiency, as well as a number of other restrictions on the savings bank's operations, including a prohibition on the declaration of dividends by the savings bank's board of directors. At March 31, 2005, the Bank's core capital ratio was 7.27% of total average assets, which substantially exceeded the required amount. The Bank is also required to maintain regulatory capital requirements imposed by the Federal Deposit Insurance Corporation. The Bank must have: (i) Tier 1 Capital to Average Assets of 4.0%, (ii) Tier 1 Capital to Risk-Weighted Assets of 4.0%, and (iii) Total Capital to Risk-Weighted Assets of 8.0%. At March 31, 2005, minimum requirements and the Bank's actual ratios are as follows: MARCH 31, 2005 DECEMBER 31, 2004 MINIMUM ACTUAL ACTUAL REQUIRED Tier 1 Capital to Average Assets 7.27 % 7.06 % 4.00 % Tier 1 Capital to Risk-Weighted Assets 12.06 % 12.77 % 4.00 % Total Capital to Risk-Weighted Assets 13.30 % 14.02 % 8.00 % Future capital levels should benefit from the decision of the Company's parent company, Jacksonville Bancorp, MHC, to waive its right to receive dividends. The mutual holding company has received approval from its primary regulator, the Office of Thrift Supervision, for such waivers through the quarter ended September 30, 2005. EFFECT OF INFLATION AND CHANGING PRICES The consolidated financial statements and related financial data presented herein have been prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 16 CONSOLIDATED AVERAGE BALANCE SHEET AND INTEREST RATES (Dollars in thousands) ------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31 --------------------------------------------------------------------------- 2005 2004 ----------------------------------- ----------------------------------- AVERAGE AVERAGE BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST ----------------------------------- ----------------------------------- Interest-earnings assets: Loans $ 130,998 $ 2,050 6.26% $ 128,570 $ 2,128 6.62% Investment securities 86,001 759 3.53% 101,330 857 3.38% Mortgage-backed securities 12,236 115 3.75% 9,597 91 3.77% Other 2,611 16 2.53% 3,434 7 0.81% --------- -------- --------- -------- Total interest-earning assets 231,846 2,940 5.07% 242,931 3,083 5.08% Non-interest earnings assets 17,816 19,726 --------- --------- Total assets $ 249,662 $ 262,657 ========= ========= Interest-bearing liabilities: Deposits $ 210,890 $ 1,078 2.05% $ 223,993 $ 1,144 2.04% Short-term borrowings 2,045 12 2.42% 3,086 8 1.09% --------- -------- --------- -------- Total interest-bearing liabilities 212,935 1,090 2.05% 227,079 1,152 2.03% Non-interest bearing liabilities 16,329 15,440 Stockholders' equity 20,398 20,138 --------- --------- Total liabilities/stockholders' equity $ 249,662 $ 262,657 ========= ========= Net interest income $ 1,850 $ 1,930 ======== ======== Interest rate spread (average yield earned minus average rate paid) 3.02% 3.05% ===== ===== Net interest margin (net interest income divided by average interest-earning assets) 3.19% 3.18% ===== ===== ANALYSIS OF VOLUME AND RATE CHANGES (In thousands) --------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31 --------------------------------------------------------------------------------- 2005 Compared to 2004 Increase(Decrease) Due to ---------------------------------- Rate Volume Net ---------------------------------- Interest-earnings assets: Loans $ (117) $ 39 $ (78) Investment securities 36 (134) $ (98) Mortgage-backed securities (1) 25 $ 24 Other 12 (2) $ 10 ---------- ---------- ---------- Total net change in income on interest-earning assets (70) (72) (142) ---------- ---------- ---------- Interest-bearing liabilities: Deposits 1 (67) $ (66) Other borrowings 8 (4) $ 4 ---------- ---------- ---------- Total net change in expense on interest-bearing liabilities 9 (71) (62) ---------- ---------- ---------- Net change in net interest income $ (79) $ (1) $ (80) ========== ========== ========== 17 JACKSONVILLE BANCORP, INC. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -------------------------------------------------------------------------------- The Company's policy in recent years has been to reduce its interest rate risk by better matching the maturities of its interest rate sensitive assets and liabilities, selling its long-term fixed-rate residential mortgage loans with terms of 15 years or more to Freddie Mac, originating adjustable rate loans, balloon loans with terms ranging from three to five years and originating consumer and commercial business loans, which typically are for a shorter duration and at higher rates of interest than one-to-four family loans. The investment portfolio has been laddered to better match the interest-bearing liabilities. With respect to liabilities, the Company has attempted to increase its savings and transaction deposit accounts, which management believes are more resistant to changes in interest rates than certificate accounts. The Board of Directors appoints the Asset-Liability Management Committee (ALCO), which is responsible for reviewing the Company's asset and liability policies. The ALCO meets quarterly to review interest rate risk and trends, as well as liquidity and capital ratio requirements. The Company uses a comprehensive asset/liability software package provided by a third-party vendor to perform interest rate sensitivity analysis for all product categories. The primary focus of the Company's analysis is on the effect of interest rate increases and decreases on net interest income. Management believes that this analysis reflects the potential effects on current earnings of interest rate changes. Call criteria and prepayment assumptions are taken into consideration for investment securities and loans. All of the Company's interest sensitive assets and liabilities are analyzed by product type and repriced based upon current offering rates. The software performs interest rate sensitivity analysis by performing rate shocks of plus or minus 300 basis points in 100 basis point increments. The following table shows projected results at March 31, 2005 and December 31, 2004 of the impact on net interest income from an immediate change in interest rates, as well as the benchmarks established by the ALCO. The results are shown as a dollar and percentage change in net interest income over the next twelve months. CHANGE IN NET INTEREST INCOME (Dollars in thousands) ------------------------------------------------------------------ MARCH 31, 2005 DECEMBER 31, 2004 --------------------------------------------------- ALCO Rate Shock: $ Change % Change $ Change % Change Benchmark ------------------------------------------------------------------ + 200 basis points (152) -2.09% (20) -0.27% > (20.00)% + 100 basis points 13 0.18% 110 1.46% > (12.50)% - 100 basis points 289 3.97% 304 4.02% > (12.50)% - 200 basis points 350 4.81% 317 0.00% > (20.00)% The foregoing computations are based upon numerous assumptions, including relative levels of market interest rates, prepayments, and deposit mix. The computed estimates should not be relied upon as a projection of actual results. Despite the limitations on precision inherent in these computations, management believes that the information provided is reasonably indicative of the effect of changes in interest rate levels on the net earning capacity of the Company's current mix of interest earning assets and interest bearing liabilities. Management continues to use the results of these computations, along with the results of its computer model projections, in order to maximize current earnings while positioning the Company to minimize the effect of a prolonged shift in interest rates that would adversely affect future results of operations. At the present time, the most significant market risk affecting the Company is interest rate risk. Other market risks such as foreign currency exchange risk and commodity price risk do not occur in the normal business of the Company. The Company also is not currently using trading activities or derivative instruments to control interest rate risk. 18 JACKSONVILLE BANCORP, INC. CONTROLS AND PROCEDURES -------------------------------------------------------------------------------- EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days prior to filing date of this report, that the Company's disclosure controls and procedures (as defined by the Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions' rules and forms. CHANGES IN INTERNAL CONTROLS There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of the foregoing evaluation. 19 PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES None. Item 3. DEFAULTS UPON SENIOR SECURITIES None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Item 5. OTHER INFORMATION None. Item 6. EXHIBITS 31.1 - Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) 31.2 - Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) 32.1 - Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JACKSONVILLE BANCORP, INC. Registrant Date: May 10, 2005 /s/ Richard A. Foss ---------------- ---------------------------------------- Richard A. Foss President and Chief Executive Officer /s/ Diana S. Tone ---------------------------------------- Diana S. Tone Chief Financial Officer 21 EXHIBITS