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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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JACKSONVILLE BANCORP, INC.
-----------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-2632781
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
COMMERCE AND NECHES STREETS
JACKSONVILLE, TEXAS 75766
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(Address) (Zip Code)
Registrant's telephone number, including area code: (903) 586-9861
Securities registered pursuant to Section 12(b) of the Act:
NOT APPLICABLE
Securities registered pursuant to Section 12(g) of the Act
COMMON STOCK (PAR VALUE $.01 PER SHARE)
---------------------------------------
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports
required 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
As of December 12, 1997, the aggregate value of the 2,069,298 shares of Common
Stock of the Registrant issued and outstanding on such date, which excludes
172,221 shares held by all directors and officers of the Registrant as a group
and 202,048 shares held by Jacksonville Bancorp, Inc. Employee stock Ownership
Plan, was approximately $39,058,019. This figure is based on the closing price
of $18 7/8 per share of the Registrant's Common Stock on December 12, 1997.
Number of shares of Common Stock outstanding as of December 12, 1997: 2,443,568
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended September
30, 1997 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders are incorporated into Part III, Items 10 through 13 of this Form
10-K.
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PART I
ITEM 1. BUSINESS.
GENERAL
Jacksonville Bancorp, Inc.'s (the "Company") primary asset is
Jacksonville Savings Bank, SSB ("Jacksonville" or the "Bank"). The business of
Jacksonville consists primarily of attracting deposits from the general public
and using those and other available sources of funds to originate loans secured
by single-family residences located in Cherokee County and surrounding counties
in East Texas. To a lesser extent, Jacksonville also originates construction
loans, land loans and consumer loans. With limited exceptions, Jacksonville
has restricted commercial real estate lending activity to loans secured by real
estate acquired in satisfaction of debts previously contracted or by
improvements thereon. In 1994 Jacksonville established a consumer loan
department to promote development of this type of lending. In addition,
Jacksonville invests in United States government and federal agency securities
and government-guaranteed mortgage-backed securities.
On July 2, 1997, Jacksonville Savings and Loan Association converted
from Texas chartered savings and loan association to Texas chartered savings
bank, changing its name to Jacksonville Savings Bank, SSB. The change did not
affect operations of the Bank but did provide the Bank with additional
flexibility. In addition the change of charter reduced governmental
supervision costs, because the Office of Thrift Supervision would no longer
regulate the institution along with the Texas Savings and Loan Department and
the Federal Deposit Insurance Corporation. The Bank is now regulated by the
Federal Deposit Insurance Corporation and the Texas Savings and Loan
Department. The Company continues to be regulated by the OTS as a savings and
loan holding company.
On July 16, 1997, after receiving appropriate regulatory approvals,
Jacksonville IHC, a Delaware chartered company ("IHC") acquired all the issued
and outstanding stock of Jacksonville Savings Bank, SSB previously held by the
Company. IHC is, and was at the time of the acquisition, a wholly-owned
subsidiary of the Company. The purpose of the transaction was to minimize
certain Texas state taxation expenses imposed on holding companies with Texas
source income. In addition to holding all the issued and outstanding shares of
Jacksonville, IHC's only other business activity was to loan funds to the
Jacksonville's Employee Stock Ownership Plan.
MARKET AREA
Jacksonville's market area consists of Cherokee County and surrounding
counties in East Texas. The labor force of Cherokee County has evolved from
agriculture to manufacturing and service industries. The components of the
area's economic base have consisted of manufacturing, mining, agriculture,
retail and tourism. Jacksonville is the largest city in Cherokee County and
its principal activity is manufacturing. There are 75 manufacturing concerns
in Jacksonville. Industries represented are plastic manufacturing and plastic
injected molding, oil (reflecting the heritage of East Texas as the center of
the Texas oil country), timber, cattle and bedding plant. Slowdowns in the
petroleum industry had a material negative impact on the area's economy in the
early 1980s which was compounded by defense-related cutbacks. However, the
area's
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economy has improved in recent years due to further entrance of business in the
market area and especially in Tyler and Longview. In addition, the area's
economic base has diversified into such fields as health services, research and
technology.
Major companies in Jacksonville's market area include Alligence Health
Care, Inc., Astro Air, Zimmerman & Sons, Trane Corporation, Kelly-Springfield,
Carrier Air Conditioning, Tyler Pipe Industries, Marathon Le Tourneau, Eastman
Kodak, Powell Plant Farm, Texas Department of Corrections, Western Lithography
and Wal-Mart (a distribution center). The market area is also served by the
University of Texas Hospital, Mother Frances Hospital, and Medical Center
Hospital. These hospitals are also a major source of employment for the market
area. Colleges and universities include the University of Texas at Tyler,
Stephen F. Austin University, Tyler Junior College, Texas College, Lon Morris
College, Jacksonville College, and Trinity Valley Junior College. According to
reports from the Bureau of Labor Statistics, as of September 30, 1997, the
unemployment rate in Cherokee County and surrounding counties in East Texas was
estimated to be 4.2% as compared to 4.5% in 1996 and the estimated unemployment
rates for the United States during these periods were 4.7% and 5.0%
respectively.
LENDING ACTIVITIES
GENERAL. At September 30, 1997, Jacksonville's net loan portfolio
totaled $174.0 million representing approximately 74.4% of Jacksonville's
$233.9 million of total assets at that date. The principal lending activity of
Jacksonville is the origination of single-family residential loans. At
September 30, 1997, approximately 99% of Jacksonville's single-family
residential loan portfolio consisted of conventional loans with the remaining
single-family residential loans either insured by the Federal Housing
Administration ("FHA") or partially guaranteed by the Department of Veterans
Affairs ("VA"). At September 30, 1997, Jacksonville's single-family residential
loan portfolio totaled $141.1 million, representing approximately 78.0% of
Jacksonville's total loans, before net items, at that date. Jacksonville held
$9.5 million in commercial real estate loans at that date, representing 5.2% of
total loans, before net items. Of the commercial real estate loans, $3.4
million, or 35.8%, were secured by real estate acquired in satisfaction of
debts previously contracted or by improvements on such properties. Other than
these commercial real estate loans, Jacksonville has not actively pursued the
business of making commercial real estate loans since 1989. The only other
significant areas of lending activity by Jacksonville are construction loans,
land loans and consumer loans which, as of September 30, 1997, represented
$10.8 million, or 5.97%, $3.4 million, or 1.9% and $14.9 million, or 8.2% of
Jacksonville's total loan portfolio, before net items.
As a Texas-chartered savings bank, Jacksonville has general authority
to originate and purchase loans secured by real estate located throughout the
United States. Notwithstanding this nationwide lending authority,
approximately 99% of all of the mortgage loans in Jacksonville's portfolio are
secured by properties located in Cherokee County and surrounding counties in
East Texas, reflecting Jacksonville's emphasis on local lending.
At September 30, 1997, Jacksonville's limit on loans-to-one borrower
was $5.2 million, and its five largest loans or groups of loans-to-one
borrower, including related entities, aggregated $1.3 million, $1.2 million,
$905,000, $782,000, and $770,000. The loan for $1.3 million was to a private
school and the loan for $1.2 million was to a church. The group of loans
totaling
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$905,000 consisted of four loans secured by commercial real estate acquired in
satisfaction of debts previously contracted. The two loans totaling $782,000
were loans secured by multiple income producing single family residences, and
the group of loans totaling $770,000 consisted of four construction loans on
single family residences. All of these loans are secured primarily by
residential and nonresidential real estate located in Cherokee County and
surrounding counties in East Texas.
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of Jacksonville's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
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1997 1996
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AMOUNT % AMOUNT %
------------ --------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
MORTGAGE LOANS:
Single-family residential(1) $141,107 78.0% $132,599 81.4%
Multi-family residential 1,144 .7 1,268 .8
Commercial 9,492 5.2 8,604 5.3
Construction 10,799 5.9 6,996 4.3
Land 3,446 1.9 4,395 2.7
----- --- ------- ----
Total mortgage loans $165,988 91.7 $153,862 94.5%
------- ---- ------- ----
BUSINESS AND CONSUMER LOANS:
Commercial business $ 76 -- $ 219 .1
Consumer loans:
Secured by deposits 2,127 1.2 2,290 1.4
Secured by vehicles 6,537 3.6 2,961 1.8
Personal real estate loans 4,274 2.4 2,686 1.6
Other 1,983 1.1 922 .6
----- --- ------- -----
Total consumer loans 14,921 8.3 8,859 5.4
------ --- ------- -----
Total business and consumer loans $ 14,997 8.3 $ 9,078 5.5
------ --- ------- -----
Total loans 180,985 100.0% 162,940 100.0%
------- ===== ------- =====
Less:
Undisbursed portion of loans in
process $ 5,025 $ 2,956
Unearned discounts 62 89
Net deferred loan origination fees 662 761
Unrealized losses on loans held for
sale -- --
Allowance for loan losses 1,192 1,100
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Net loans $ 174,044 $158,034
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<CAPTION>
SEPTEMBER 30,
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1995 1994 1993
----------------------- ------------------------ --------------------------
AMOUNT % AMOUNT % AMOUNT %
------------- -------- ------------- -------- -------------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
MORTGAGE LOANS:
Single-family residential(1) $117,853 84.1% $109,221(2) 86.7% $112,063 86.7%
Multi-family residential 1,183 .8 735 .6 532 0.4
Commercial 8,167 5.8 8,115 6.4 9,556 7.4
Construction 4,312 3.1 1,668 1.3 1,367 1.1
Land 3,754 2.7 3,156 2.5 2,972 2.3
------- ---- ------- ----- ------- -----
Total mortgage loans $135,269 96.5% $122,895 97.5% $126,490 97.9%
------- ---- ------- ----- ------- -----
BUSINESS AND CONSUMER LOANS:
Commercial business $ 232 .2 $ 198 .2 $ 234 .2
Consumer loans:
Secured by deposits 1,922 1.4 1,972 1.6 1,840 1.4
Secured by vehicles 960 .6 332 .2 93 .1
Personal real estate loans 1,253 .9 514 .4 568 .4
Other 526 .4 137 .1 81 --
----- --- ----- -- ----- -----
Total consumer loans 4,661 3.3 2,955 2.3 2,582 1.9
----- --- ----- --- ----- -----
Total business and consumer loans $4,893 3.5 $ 3,153 2.5 $ 2,816 2.1
----- --- ----- --- ------ -----
Total loans $140,162 100.0% $126,048 100.0% $129,306 100.0%
------- ===== ------- ===== ------- =====
Less:
Undisbursed portion of loans in
process $ 2,230 $ 799 $ 1,052
Unearned discounts 106 121 169
Net deferred loan origination fees 893 937 1,059
Unrealized losses on loans held for
sale -- 58 --
Allowance for loan losses 1,000 1,000 996
------- ------- -------
Net loans $135,933 $123,133 $126,030
======= ======= =======
</TABLE>
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(1) Includes first and second liens on single-family residences.
(2) Includes $1.2 million of loans held for sale.
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CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth
certain information at September 30, 1997, regarding the dollar amount of loans
maturing in Jacksonville's portfolio, based on the contractual terms to
maturity, before giving effect to net items. Demand loans, loans having no
stated schedule of repayments and no stated maturity and overdrafts are
reported as due in one year.
<TABLE>
<CAPTION>
DUE 3-5 DUE 5-10 DUE 10-15
YEARS YEARS YEARS
DUE BEFORE DUE BEFORE DUE BEFORE AFTER AFTER AFTER
9/30/98 9/30/99 9/30/00 9/30/97 9/30/97 9/30/97
------------ ------------ ------------ --------- ---------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Single-family residential(1) $ 214 $ 430 $ 613 $2,746 $13,483 $66,619
Multi-family residential -- -- 9 -- 87 908
Commercial 231 43 6 67 2,600 5,158
Construction 10,799 -- -- -- -- --
Land 63 47 35 180 740 2,250
Commercial business -- 76 -- -- -- --
Consumer 2,717 741 1,654 5,588 2,375 1,750
----- ----- ------ ----- ------ ------
Total $14,024 $1,337 $2,317 $8,581 $19,285 $76,685
====== ===== ===== ===== ====== ======
<CAPTION>
DUE MORE
THAN 15
YEARS
AFTER
9/30/97 TOTAL
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(In Thousands)
<S> <C> <C>
Single-family residential(1) $57,002 $141,107
Multi-family residential 140 1,144
Commercial 1,387 9,492
Construction -- 10,799
Land 131 3,446
Commercial business -- 76
Consumer 96 14,921
----- --------
Total $58,756 $180,985
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</TABLE>
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(1) Includes first and second liens on single-family residences.
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The following table sets forth the dollar amount of all loans, before
net items, due after one year from September 30, 1997, which have fixed
interest rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
FLOATING OR
FIXED RATES ADJUSTABLE-RATES TOTAL
----------------- -------------------- --------------
(In Thousands)
<S> <C> <C> <C>
Single-family residential(1) $64,555 $76,338 $140,893
Multi-family residential 602 542 1,144
Commercial real estate 2,903 6,358 9,261
Construction -- -- --
Land 710 2,673 3,383
Commercial business 76 -- 76
Consumer 12,204 -- 12,204
------ ------ ------
Total $81,050 $85,911 $166,961
====== ====== =======
</TABLE>
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(1) Includes first and second liens on single-family residences.
Scheduled contractual amortization of loans does not reflect the
actual term of Jacksonville's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which give Jacksonville the right to declare a
conventional loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid.
ORIGINATIONS, PURCHASES AND SALES OF LOANS. The lending activities of
Jacksonville are subject to the written, non-discriminatory, loan underwriting
and administration guidelines established by Jacksonville's Board of Directors
and management. Loan originations are obtained from a variety of sources,
including referrals from real estate brokers, developers, builders, existing
customers, newspaper, radio, periodical advertising and walk-in customers.
Loan applications are taken by lending personnel, and the loan department
supervises the obtaining of credit reports, appraisals and other documentation
involved with a loan. Property valuations are generally performed by
independent outside appraisers approved by Jacksonville's Board of Directors.
Except for certain small second mortgage loans of a minimal amount and personal
real estate loans, Jacksonville requires title insurance. Hazard insurance is
also required on all improved secured property and flood insurance is required
on property located in a flood plain.
Jacksonville's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan and the
adequacy of the value of the property that will secure the loan. A loan
application file is first reviewed by Jacksonville's loan department and,
except for loans of $50,000 or less, then is submitted for approval to the Loan
and Executive Committee or Jacksonville's Board of Directors. With the
exception of home improvement, consumer and land loans, the Loan and Executive
Committee is
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responsible for approving all loans in excess of $50,000. Loans of $50,000 and
under may be approved by two loan officers or by a branch manager and one loan
officer. Home improvement, consumer and personal real estate loans over
$50,000 must be approved by two officers. Certain loans, because of their
amount or because they do not meet one or more specified guidelines, must
receive direct approval of the Board of Directors.
Jacksonville originates both fixed- and adjustable-rate residential
real estate loans as market conditions dictate. In the current interest rate
environment, it follows a policy of selling approximately 95% of its loans
secured by first mortgage liens on single-family residences ("residential first
mortgage loans") with fixed rates and terms greater than 15 years to third
parties while retaining all of its variable-rate loans. When loans are sold to
others, except to Federal Home Loan Mortgage Corporation ("FHLMC"), servicing
of the loans is usually released to the buyers. At September 30, 1997, $62.0
million in loans were being serviced for others, primarily the FHLMC. See Note
5 to the Consolidated Financial Statements. While Jacksonville has utilized
various indices to adjust its adjustable-rate mortgages ("ARMs") portfolio,
each index would qualify such loans for securitization under FHLMC guidelines.
Adjustable-rate loans are currently indexed to an index of U.S. Treasury
obligations whose maturity matches the interest adjustment period for the
corresponding loan and have their interest rates readjusted every one to five
years. At September 30, 1997, $64.5 million or 35.7% of Jacksonville's total
loans, before net items, were fixed-rate single-family residential loans, and
$76.3 million or 42.2% of such loans were adjustable-rate single-family
residential mortgage loans. Of these adjustable mortgages, $40.5 million, or
53.1%, have interest rates adjustable in one year, and the remainder adjust at
periods greater than one year up to five years.
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The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
1997 1996 1995
--------------- ------------- --------------
<S> <C> <C> <C>
LOAN ORIGINATIONS:
Single-family residential $42,594 $45,113 $32,307
Multi-family residential -- 658 200
Land 1,876 1,159 969
Commercial 1,079 697 795
Construction 10,126 11,707 6,730
Commercial business -- -- 71
Consumer 11,029 8,862 4,197
------ ------ -----
Total loans originated 66,704 68,196 45,269
Purchases -- -- --
Total loans originated
and purchased 66,704 68,196 45,269
------ ------ ------
SALES AND LOAN PRINCIPAL
REDUCTIONS:
Loans sold 22,311 21,848 13,817
Loan principal
repayments 25,948 23,955 19,374
------ ------ ------
Total loans sold and
principal reductions 48,259 45,803 33,191
Increase (decrease) due
to other items, net(1) (2,435) (292) 722
------ ------ ------
Net increase (decrease)
in loan portfolio $16,010 $22,101 $12,800
====== ====== ======
</TABLE>
- ----------------------
(1) Consists of loan foreclosures, extensions and changes in net items.
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SINGLE-FAMILY RESIDENTIAL LOANS. The primary lending activity of
Jacksonville is the origination of loans secured by first mortgage liens on
single-family residences. Jacksonville also offers second mortgage loans on
such properties. At September 30, 1997, $141.1 million or 78.0% of
Jacksonville's total loan portfolio, before net items, consisted of
single-family residential loans.
The loan-to-value ratio, maturity and other provisions of the
residential first mortgage loans made by Jacksonville generally have reflected
the policy of making less than the maximum loan permissible under applicable
regulations, in accordance with sound lending practices, market conditions and
underwriting standards established by Jacksonville. All residential first
mortgage loans, except those made to facilitate the sale of such dwellings held
as real estate owned, are generally underwritten in conformance with current
guidelines of the FHLMC. Jacksonville's lending policies on residential first
mortgage loans generally limit the maximum loan-to-value ratio to 97% of the
lesser of the appraised value or purchase price of the property and generally
all residential first mortgage loans in excess of an 80% loan-to-value ratio
require private mortgage insurance.
Jacksonville offers fixed-rate residential first mortgage loans with
terms up to 30 years. Such loans are amortized on a monthly basis with
principal and interest due each month and customarily include "due-on-sale"
clauses, which are provisions giving Jacksonville the right to declare a loan
immediately due and payable in the event the borrower sells or otherwise
disposes of the real property subject to the mortgage and the loan is not
repaid. Jacksonville enforces due-on-sale clauses to the extent permitted
under applicable laws. Approximately 99% of Jacksonville's residential first
mortgage loan portfolio consists of conventional loans, with the remaining
loans either insured by the FHA or partially guaranteed by the VA.
Jacksonville is aware that there are inherent risks in originating
fixed-rate residential first mortgage loans for its portfolio, especially
during periods of historically low interest rates, but recognizes the need to
respond to market demand for fixed-rate loans and to generate income from
origination fees for such loans. To address these concerns, in October 1987
Jacksonville began a policy of selling substantially all of the fixed-rate
residential first mortgage loans that it originates to a large mortgage banking
company with operations throughout the United States. While Jacksonville
continues to maintain its loan sales relationship with the mortgage banking
company, a substantial majority of its loan sales since July 1993 have been to
FHLMC with servicing retained by Jacksonville. Since July 1993, Jacksonville
has sold $83.1 million of loans to FHLMC and has retained the servicing on all
of these loans. Since that same date, Jacksonville has sold only $23.4 million
of loans to the mortgage banking company. During fiscal 1997, Jacksonville
sold $21.0 million of loans to FHLMC and $1.3 million to the mortgage banking
company.
During the year ended September 30, 1997, Jacksonville originated
$42.6 million of single-family residential loans of which $38.7 million, or
90.8%, were fixed rate and $3.9 million, or 9.2%, were adjustable rate. Of the
fixed-rate single-family residential loans
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originated during the period, Jacksonville sold $21.0 million, or 49.4%, to
FHLMC. The volume of single-family residential loans originated decreased by
5.5% from $45.1 million during fiscal 1996 as compared to $42.5 million during
fiscal 1997 and the percentage of sales of such originations increased from
48.3% in fiscal 1996 to 52.5% in fiscal 1997. Jacksonville anticipates that it
will continue its policy of selling all or substantially all of its fixed-rate
residential first mortgage loan originations with terms of more than 15 years
as long as interest rates remain at current levels or lower and will reevaluate
this policy if there is a material and prolonged rise in interest rates.
Since November 1980, Jacksonville has been offering adjustable-rate
loans in order to decrease the vulnerability of its operations to changes in
interest rates. Interest rate adjustment periods range from one to five years.
The demand for adjustable-rate loans in Jacksonville's primary market area has
been a function of several factors, including the level of interest rates, the
expectations of changes in the level of interest rates and the difference
between the interest rates offered for fixed-rate loans and adjustable-rate
loans. The relative amount of fixed-rate and adjustable-rate residential loans
that can be originated at any time is largely determined by the demand for each
in a competitive environment. As interest rates have fluctuated since November
1981, the demand for fixed- and adjustable-rate loans has changed as
Jacksonville's customers have preferred adjustable rates in a high interest
rate environment and fixed-rate loans as interest rates lowered. In order to
continue to increase and then to maintain a high percentage of adjustable-rate
residential first mortgage loans, Jacksonville has offered various forms of
adjustable-rate loans combined with a policy of selling fixed-rate loans from
its portfolio. As a result, at September 30, 1997, $76.4 million, or 54.1%, of
the single-family residential loans in Jacksonville's loan portfolio, before
net items, consisted of adjustable-rate loans.
Jacksonville's residential first mortgage adjustable-rate loans are
fully amortizing loans with contractual maturities of up to 30 years. These
loans have interest rates which are scheduled to adjust every one, three or
five years in accordance with designated published indices based upon U.S.
Government securities. Jacksonville currently offers a one, three and five-year
adjustable mortgage with a 2% cap on the rate adjustment per period and a 4% to
6% cap rate adjustment over the life of the loan, depending on its term.
Jacksonville's adjustable-rate residential first mortgage loans are not
convertible by their terms into fixed-rate loans, are not assumable, do not
contain prepayment penalties and do not produce negative amortization.
Due to the generally lower rates of interest prevailing in recent
periods, Jacksonville's ability to originate adjustable-rate residential first
mortgage loans has decreased as consumer preference for fixed-rate loans has
increased. As a result, even as interest rates have fluctuated in recent
years, adjustable rate loans represented 10.7%, 23.0% and 13.6% of
Jacksonville's total originations of single-family residential loans during the
years ended September 30, 1997, 1996 and 1995, respectively.
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Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. Jacksonville believes that these risks, which have not had a
material adverse effect on Jacksonville to date, generally are less than the
risks associated with holding fixed-rate loans in an increasing interest rate
environment.
Jacksonville also makes home improvement loans which amounted to $3.1
million as of September 30, 1997. These loans are secured by either first or
second liens on single-family residences. Second mortgage loans on
single-family residences made by Jacksonville are generally secured by
properties on which Jacksonville holds the first mortgage lien. Under Texas
law, the proceeds of a second mortgage loan must be used for home improvement
purposes or the payment of real estate taxes. Effective January 1, 1998, Texas
law will permit home equity lending.
COMMERCIAL MORTGAGE LOANS. At September 30, 1997, $9.5 million, or
5.2%, of Jacksonville's total loan portfolio, before net items, consisted of
loans secured by existing commercial real estate. Of these commercial mortgage
loans, $3.4 million, or 35.8%, represented loans secured by real estate
acquired in satisfaction of debts previously contracted or by improvements on
such properties. Jacksonville currently originates few commercial mortgage
loans. Commercial mortgage loan originations for the years ended September 30,
1997, 1996 and 1995 were, respectively, $1.08 million, $697,000 and $795,000.
As of September 30, 1997, the commercial mortgage loans in
Jacksonville's portfolio not secured by real estate acquired in satisfaction of
debts previously contracted or improvements thereon totaled $6.1 million.
These loans have terms up to 30 years and have both fixed and adjustable rates.
At September 30, 1997, $4.9 million, or 80.3%, of the commercial mortgage loan
portfolio not secured by real estate acquired in satisfaction of debts
previously contracted consisted of adjustable-rate loans.
The commercial mortgage loans originated since 1989 generally have
interest rates that adjust on a periodic basis in accordance with changes in a
designated index and have terms that range up to 30 years. Because
substantially all commercial mortgage loans originated since 1989 are secured
by properties that were formerly real estate owned and by improvements on such
properties, Jacksonville's REO Disposition Committee has reviewed each loan
with senior management prior to Board of Director approval rather than
establishing general guidelines for its staff. In order to help establish
asking prices for real estate owned, a valuation for each parcel is generally
established on an annual basis. The valuation may take the form of an
appraisal, brokers opinion, letter appraisal, or similar document. Where
appraisals are obtained, they generally are performed by an independent
appraiser designated by Jacksonville and are reviewed by management. In
originating commercial mortgage loans, Jacksonville considers the quality of
the property, the credit of
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the borrower, cash flow of the project, location of the real estate and the
quality of management involved with the property.
As of September 30, 1997, there were two commercial mortgage loans
secured by former real estate owned properties with principal balances,
including funds utilized for improvements by the borrower on such properties,
in excess of $400,000. These loans were performing in accordance with their
terms at September 30, 1997.
Commercial mortgage lending is generally considered to involve a
higher degree of risk than single-family residential lending. Such lending
typically involves large loan balances concentrated in a single borrower or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market or in the
economy generally.
CONSTRUCTION LOANS. At September 30, 1997, construction loans totaled
$10.8 million or 5.9% of the total loan portfolio, before net items.
Jacksonville makes construction loans to individuals for the
construction of their residences. Recently, it expanded its construction
lending activities to include lending to developers for the construction of
single-family residences. Because Jacksonville views construction loans as
involving greater risk than permanent single-family residential loans, it
applies stricter underwriting standards to them. Construction loan
originations decreased during the year ended September 30, 1997 to $10.1
million from $11.7 million during fiscal 1996.
Construction lending is generally limited to Jacksonville's primary
lending area, within 100 miles of Jacksonville's home office or within 25 miles
of each branch office. Construction loans are generally only made to existing
customers and to developers who have a sound financial and operational
reputation in the market area. The loans to individuals are structured to be
converted to permanent loans at the end of the construction phase, which
typically is six months but may be extended for 30- or 60-day periods for good
reason. Construction loans have rates and terms which generally match the
non-construction loans then offered by Jacksonville except that during the
construction phase the borrower normally only pays interest on the loan. Funds
are released periodically pursuant to a construction-completion schedule and
only after an on-site inspection by an employee of Jacksonville. Jacksonville
generally attempts to mitigate the risks associated with construction lending
by, among other things, lending primarily in its market area and using low
loan-to-value ratios in the underwriting process. The maximum loan to value
ratio is 80%. Construction financing also is generally considered to involve a
higher degree of risk of loss than long-term financing on improved,
owner-occupied real estate because of the uncertainties of construction,
including the possibility of costs exceeding the initial estimates.
12
<PAGE> 14
LAND LOANS. As of September 30, 1997, land loans totaled $3.4 million
or 1.9% of the total loan portfolio, before net items. As of the date,
Jacksonville had 141 land loans in its loan portfolio, over 90% of which were
utilized for ranching, agricultural or residential purposes. Jacksonville does
not make land loans for speculative purposes. With limited exceptions,
Jacksonville's underwriting guidelines require land loans to have a
loan-to-land value ratio of 80% and a term of 20 years or less. The average
balance of Jacksonville's land loans, as of September 30, 1997, was
approximately $24,000.
CONSUMER LOANS. At September 30, 1997, consumer loans totaled $14.9
million or 8.3% of the total loan portfolio, before net items, and consisted
primarily of loans secured by deposits, loans secured by vehicles and personal
real estate loans. Loans secured by deposits total $2.1 million at September
30, 1997. A loan secured by a deposit at Jacksonville is structured to have a
term that ends on the same date as the maturity date of the certificate
securing it or if secured by a statement savings account has a one-year term
with a hold on withdrawals that would result in the balance being lower than
the loan balance. Typically these loans require quarterly payments of interest
only. Jacksonville also makes loans to individuals for future homesites and
for additional property adjacent to their existing residence. Although under
Texas law such loans may have a term of up to 20 years, the average term of
Jacksonville's personal real estate loans was substantially less than 20 years
as of September 30, 1997. All of these loans are secured by the purchased
land, but because these loans are typically for $20,000 or less they are not
underwritten in the same manner as the Bank's other mortgage loans.
Jacksonville relies on the general creditworthiness of the borrower and uses
tax valuations or limited appraisals to determine the value of the property.
In most cases a title search is obtained from a title insurance company rather
than a title policy. At September 30, 1997, the Bank had 296 personal real
estate loans with an average balance of $14,000. Jacksonville's vehicle loan
portfolio totalled $6.5 million at September 30, 1997. A substantial majority
of Jacksonville's vehicle loans are for new vehicles but it also offers loans
for used vehicles. The Bank does not purchase vehicle loans from dealers. The
term for vehicle loans is typically six months to five years with monthly
payments of principal and interest. These loans are typically made to
Jacksonville customers of long standing.
MULTI-FAMILY AND COMMERCIAL BUSINESS LOANS. At September 30, 1997,
$1.1 million, or 0.7%, and $76,000, or .1%, of Jacksonville's total loan
portfolio, before net items, consisted of multi-family loans and commercial
business loans, respectively. While Jacksonville has the authority, up to
applicable limitations, to engage in the business of making both multi-family
and commercial business loans, its policy has been to confine its primary
lending activities to other types of lending. Of the ten multi-family loans in
Jacksonville's loan portfolio as of September 30, 1997, the largest loan had a
principal amount of $378,000 which represented 33.0% of the multi-family loan
portfolio. As of September 30, 1997, the commercial business loan portfolio
consisted of six loans, the largest of which was a $76,000 loan to a retail
grocery store secured by its inventory.
13
<PAGE> 15
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on
loans, Jacksonville receives loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the mortgage
loan and are charged to the borrower in connection with the origination of the
loan.
In accordance with SFAS No. 91, which deals with the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
Jacksonville's loan origination fees and certain related direct loan
origination costs are offset, and the resulting net amount is deferred and
amortized as interest income over the contractual life of the related loans as
an adjustment to the yield of such loans, adjusted for estimated prepayments
based on Jacksonville's historical prepayment experience. At September 30,
1997, Jacksonville had $662,000 of loan fees which had been deferred and are
being recognized as income over the estimated maturities of the related loans.
Loan fees received are accounted for substantially in accordance with
FASB Statement No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases." Loan
fees and certain direct loan origination costs are deferred, and the net fee is
recognized as an adjustment to interest income over the contractual life of the
loans. Jacksonville has not deferred direct costs related to short-term loans
for which no origination fees are charged. Management considers this departure
to be immaterial considering the short-term nature of these loans. Commitment
fees and costs relating to commitments whose likelihood of exercise is remote
are recognized over the commitment period on a straight-line basis. If the
commitments subsequently exercised during the commitment period, the remaining
unamortized commitment fee at the time of exercise is recognized over the life
of the loan as an adjustment of yield. See Note 2 to the Consolidated
Financial Statements.
14
<PAGE> 16
ASSET QUALITY
DELINQUENT LOANS. The following table sets forth information
concerning delinquent loans at September 30, 1997, in dollar amount and as a
percentage of Jacksonville's total loan portfolio, before net items. The
amounts presented represent the total outstanding principal balances of the
related loans, rather than the actual payment amounts which are past due.
<TABLE>
<CAPTION>
SINGLE-FAMILY MULTI-FAMILY
RESIDENTIAL RESIDENTIAL COMMERCIAL
---------------------------- ----------------------- ------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
----------- --------------- --------- ------------ ----------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days $2,809 1.55% $ -- --% $143 .08%
60-89 days 349 .19 -- -- 8 --
90 days and over 448 .25 -- -- 154 .09
----- ---- ------ ----- ----- -----
Total delinquent loans $3,606 1.99% $ -- --% $305 .17%
===== ==== ====== ===== === ====
<CAPTION>
CONSTRUCTION LAND CONSUMER
---------------------- ----------------------- ------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
--------- ----------- ---------- ----------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30-59 days $ -- --% $ 2 --% $101 .06%
60-89 days -- --- 197 .11 55 .03
90 days and over -- -- -- -- 42 .02
-- -- --- ---
Total delinquent loans $ -- --% $199 .11% $198 .11%
====== ===== === === === ===
<CAPTION>
TOTAL
------------------------
AMOUNT PERCENTAGE
---------- -------------
(Dollars in Thousands)
<S> <C> <C>
Loans delinquent for:
30-59 days $3,055 1.69%
60-89 days 609 .33
90 days and over 644 .36
----- ---
Total delinquent loans $4,308 2.38%
===== ====
</TABLE>
15
<PAGE> 17
NON-PERFORMING ASSETS. All loans are reviewed on a regular basis and
are placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is deemed insufficient to warrant further
accrual. Jacksonville does not accrue interest on loans past due 90 days or
more except when the estimated value of the collateral and collection efforts
were deemed sufficient to ensure full recovery. Uncollectible interest on
loans that are contractually past due is charged off or an allowance is
established based on management's periodic evaluation. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent cash payments
are received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is restored or until management
accepts a payment that results in a cure of the 90-day delinquency. In such
cases, the loan is returned to accrual status.
REAL ESTATE OWNED. REO is real property acquired by Jacksonville
through foreclosure, deed in lieu of foreclosure, or through an exchange of
foreclosed real estate. It is typically a poor or nonearning asset, and its
acquisition in limited amounts is generally regarded as an unavoidable result
of normal business operations. However, the holding of abnormally large
amounts of REO for extensive periods of time can adversely affect earnings. As
a result of adverse economic conditions that existed in Jacksonville's market
area during the 1980s, Jacksonville, like most financial institutions in its
market area, acquired an inordinately large amount of REO consisting primarily
of commercial real estate and, to a lesser degree, single-family residential
property.
As the economy has improved in its market area in recent years,
Jacksonville has attempted to reduce gradually its outstanding REO each year by
following a policy of prudent management and market monitoring. The details of
this policy are embodied in Jacksonville's Real Estate Owned Policy adopted by
the Board of Directors in September 1990. The primary objectives of the REO
Policy are to: (1) establish procedures for the handling and disposition of
REO; (2) ensure that REO has been properly accounted for on the institution's
books; (3) set forth Jacksonville's philosophy for the management of
repossessed property; (4) provide for the periodic revaluation of real estate
owned; and (5) provide guidelines for the accounting of the sale of REO. These
objectives are monitored by the REO Disposition Committee.
REO is recorded at the lower of unpaid principal balance of the loan
plus acquisition costs or fair value, as determined by an appraisal of the
property obtained at acquisition. Costs relating to development and
improvement of property are capitalized, whereas costs relating to holding the
property are expensed. Valuations are periodically performed by management and
an allowance for losses is established by a charge to operations if the
carrying value of a property exceeds its estimated net realizable value.
Jacksonville develops an asset plan for each parcel of REO that it holds for
more than six months. The plan includes specific marketing strategies, a
consideration of necessary improvements and an estimate of the expected holding
period and asking price. As a result of the general improvement in economic
conditions in Jacksonville's market area and through the
16
<PAGE> 18
implementation of the REO Policy, Jacksonville's REO amounted to $526,000, $1.1
million and $2.1 million as of September 30, 1997, 1996 and 1995 respectively.
Generally, a transfer of REO is recognized by Jacksonville as a sale
for accounting purposes upon consummation of the transaction unless
Jacksonville retains some type of continuing involvement in the property
without a transfer of the risks and rewards of ownership to the buyer or, under
some circumstances, if it has financed the sale of the REO. In the latter
case, in order for a sale to be recognized, a buyer must, among other things,
demonstrate his commitment to the property by making adequate initial and
continuing investments. The percentage of sales price viewed as an adequate
initial investment level varies with the type of loan, but a generally
acceptable percentage of the sales price is between 10% to 25% for commercial
real estate and 5% for a single-family primary residence. REO sales financed
by Jacksonville in which a buyer's initial investment is less than what is
considered an adequate initial investment level under the REO Policy are
carried on Jacksonville's books as REO sold by the deposit method until the
buyer has an adequate level of equity. As of September 30, 1997, Jacksonville
had $438,000 of REO sold by the deposit method.
17
<PAGE> 19
The following table sets forth the amounts and categories of
Jacksonville's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Single-family residential(1) $ 448 $ 465 $ 534 $ 163 $ 399
Multi-family residential -- -- -- -- --
Commercial 154 -- 3 10 4
Construction -- -- -- -- --
Land -- 321 26 420 388
Commercial business -- -- -- -- --
Consumer 42 29 -- 8 6
-- ----- ------ ----- ------
Total non-accruing loans 644 815 563 601 797
Accruing loans 90 days or more
delinquent -- -- -- -- --
---- ----- ------ ------ -----
Total non-performing loans 644 815 563 601 797
---- ----- ------ ------ -----
Real estate owned(2) 526 1,051 2,052 2,549 4,623
----- ----- ------ ----- -----
Total non-performing assets $1,170 $1,866 $2,615 $3,150 $5,420
===== ===== ===== ===== =====
Troubled debt restructurings $ 383 $ 387 $ 391 $ 395 $ 406
===== ===== ===== ===== =====
Total non-performing loans and
troubled debt restructurings
as a percentage of total net loans .59% .76% .70% .81% .95%
=== ==== ==== ==== ====
Total non-performing assets and
troubled debt restructurings as
a percentage of total assets .66% 1.03% 1.51% 1.90% 3.07%
=== ==== ==== ==== ====
</TABLE>
- --------------------------------
(1) Includes first and second liens on single-family residences.
(2) Includes real estate acquired by foreclosure, by deed in lieu of
foreclosure and deemed in-substance foreclosure net of specified
reserves.
18
<PAGE> 20
At September 30, 1997, management was not aware of any additional
loans with possible credit problems which caused it to have doubts as to the
ability of the borrowers to comply with present loan repayment terms and which
in management's view may result in the future inclusion of such items in the
non-performing asset categories.
The interest income that would have been recorded during fiscal 1997,
1996 and 1995 if Jacksonville's non-accruing loans at the end of such periods
had been current in accordance with their terms during such periods were
approximately $63,000, $52,000 and $89,000, respectively. Jacksonville has not
committed to lend additional funds to debtors whose loans have been modified.
See Note 5 to the Consolidated Financial Statements. During the year ended
September 30, 1997, no interest income was actually recorded on any loans after
they were placed on non-accrual status.
CLASSIFIED ASSETS. Federal regulations require that each insured
depositing institution classify its assets on a regular basis. In addition, in
connection with examinations 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. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must
either establish specific allowances for loan losses in the amount of 100% of
the portion of the asset classified loss, or charge-off such amount. General
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. Federal examiners may disagree
with an insured institution's classifications and amounts reserved.
Jacksonville's classified assets at September 30, 1997 consisted of
$60,000 of assets classified as special mention, $1.9 million of assets
classified as substandard, and $0 classified as doubtful or loss. All of the
assets classified special mention were single-family residential loans. Of
assets classified substandard, $434,000, or 22.5%, were non residential real
estate parcels acquired as real estate owned, $743,000, or 38.6%, were
single-family residential loans, $481,000, or 25.0%, were commercial real
estate and land loans, and $183,000 or 9.5%, were single-family residences
acquired as real estate owned.
19
<PAGE> 21
The following table sets forth the Bank's classified assets at the
dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------
1997 1996 1995
----------- -------------- ------------
(In thousands)
<S> <C> <C> <C>
Classification:
Special mention $ 60 $ 20 $ 41
Substandard 1,923 3,213 3,333
Doubtful -- -- --
Loss(1) -- -- --
----- ----- -----
Total classified assets $1,983 $3,233 $3,374
===== ===== =====
</TABLE>
- --------------------
(1) Excludes foreclosed real estate that has been fully reserved.
Allowance for Loan Losses. It is management's policy to maintain an
allowance for estimated losses on loans based upon an assessment of past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay and current economic
conditions. For fiscal 1997 non-performing loans reduced to $644,000 while net
charge-offs for the period increased $18,000. The Company's level of net loans
outstanding increased $16 million which included an increase of 67% in consumer
loans. Overall economic conditions remained stable for the market area and
credit quality for the applicants showed no material change. Upon
consideration of such factors, Jacksonville determined that $110,000 in
provisions for loan losses were appropriate primarily because of the increase
in the loan portfolio. Although management believes that it uses the best
information available to make such determinations, future adjustments to
allowances may be necessary, and net earnings could be significantly affected,
if circumstances differ substantially from the assumptions used in making the
initial determinations. Currently, the allowance for loan losses is formally
reevaluated on a quarterly basis.
At September 30, 1997, Jacksonville's allowance for loan losses
amounted to $1.2 million compared to $1.1 million at September 30, 1996.
20
<PAGE> 22
The following table sets forth an analysis of Jacksonville's allowance
for loan losses during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- ------------------ --------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total net loans outstanding $174,044 $158,034 $135,933 $123,133 $126,030
======= ======= ======= ======= =======
Average loans outstanding $163,569 $145,021 $128,623 $122,051 $127,845
======= ======= ======= ======= =======
Balance at beginning of
period $ 1,100 $ 1,000 $ 1,000 $ 996 $ 810
Charge-offs(1) (18) -- (57) (24) (155)
Recoveries(1) -- -- 32 10 16
------- ------- -------- -------- -------
Net charge-offs (18) 1,000 (25) (14) (139)
Provision for losses on loans 110 100 25 18 325
--- ------- -------- ------- -------
Balance at end of period $ 1,192 $ 1,100 $ 1,000 $ 1,000 $ 996
======= ======= ======== ======= =======
Allowance for loan losses
as a percent of total net
loans outstanding .68% .70% .74% .81% .79%
=== ===== ==== ==== ===
Ratio of net charge-offs to
average loans outstanding .01% --% .02% .01% .11%
=== ===== === ==== ===
</TABLE>
- ---------------------
(1) Charge-offs and recoveries for all periods presented consist
principally of single-family residential loans.
21
<PAGE> 23
The following table presents the allocation of the allowance for loan
losses to the total amount of loans in each category listed at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------- ------------------------
% OF LOANS
% OF LOAN IN EACH % OF LOANS
IN EACH CATEGORY IN EACH
CATEGORY TO CATEGORY
TO TOTAL TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------------- ----------- ------------ ----------- --------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans $1,027 86.2% $1,025 93.2% $ 894 96.5%
Commercial business loans 10 .8 20 1.8 30 .2
Consumer loans 155 13.0 55 5.0 76 3.3
----- ---- ----- ----- ----- -----
Total allowance for loan losses $1,192 100.0% $1,100 100.0% $1,000 100.0%
===== ===== ===== ===== ===== =====
<CAPTION>
SEPTEMBER 30,
----------------------------------------------------
1994 1993
------------------------- -------------------------
% OF LOANS % OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TO
TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS
----------- ------------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans $ 900 97.5% $ 927 97.9%
Commercial business loans 42 .2 -- .2
Consumer loans 58 2.3 69 1.9
----- ----- ----- -----
Total allowance for loan losses $1,000 100.0% $ 996 100.0%
===== ===== ===== =====
</TABLE>
22
<PAGE> 24
MORTGAGE-BACKED SECURITIES
Jacksonville has invested in a portfolio of mortgage-backed securities
which are insured or guaranteed by the FHLMC or the GNMA. Mortgage-backed
securities increase the quality of Jacksonville's assets by virtue of the
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of Jacksonville.
In addition, at September 30, 1997, $16.5 million of Jacksonville's
mortgage-backed securities consist of pools of adjustable-rate mortgages.
Mortgage-backed securities of this type serve to reduce the interest rate risk
associated with changes in interest rates.
The following table sets forth the activity in Jacksonville's
mortgage-backed securities portfolio during the periods indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1997 1996 1995
---------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at
beginning of period $12,107 $ 3,442 $2,995
Purchases 11,372 10,927 1,002
Sales -- -- --
Repayments (2,262) (2,262) (555)
------ ------- ------
Mortgage-backed securities at end
of period $21,217 $12,107 $3,442
====== ====== ======
Weighted average yield
at end of period 6.87% 7.06% 7.33%
==== ==== ====
</TABLE>
At September 30, 1997, Jacksonville's mortgage-backed securities had a
book value and estimated market value of $21.2 million and $21.3 million,
respectively. Of the $21.2 million portfolio, $768,000 was scheduled to mature
in five years or less and $16.4 million was scheduled to mature after ten
years. Due to prepayments of the underlying loans, the actual maturities of
mortgage-backed securities generally are substantially less than the scheduled
maturities.
The $768,000 of mortgage-backed securities which were scheduled to
mature in five years or less at September 30, 1997 qualify for regulatory
liquidity and have fixed interest rates. The remaining $20.4 million of
mortgage-backed securities at such date consisted of $3.9 million of fixed-rate
and $16.5 million of adjustable-rate securities. Of Jacksonville's total
investment in mortgage-backed securities at September 30, 1997, $12.9 million
consisted of FNMA certificates, $1.1 million consisted of GNMA certificates and
$7.2 million consisted of FHLMC certificates. See Note 4 to the Consolidated
Financial Statements for additional information.
23
<PAGE> 25
INVESTMENT ACTIVITIES
Jacksonville's investment securities portfolio is managed in
accordance with a written Investment Policy adopted by the Board of Directors
and administered by the Investment Committee which consists of one outside
Director, the President and the Executive Vice President. The members of the
Investment Committee are: Dr. Joe Tollett, Jerry Chancellor and Bill W.
Taylor. There is no investment limit for investments in U.S. Treasury
obligations and FHLB obligations having maturities of ten years or less and in
other U.S. federal agency or federally sponsored agency obligations, including,
but not limited to FHLMC, FNMA, GNMA and the Student Loan Marketing
Association, municipal obligations rated AAA, AA, A or BBB or issued by a public
housing agency and backed by the full faith and credit of the U.S. government
having maturities of 30 years or less. In addition, there are no investment
limits on bankers acceptances of 12 months or less and federal funds of 360
days or less. Up to $100,000 per bank may be invested in commercial bank
certificates of deposit with maturities up to one year. Other investments must
be approved by the Board of Directors. At September 30, 1997, Jacksonville had
U.S. Treasury notes and U.S. Government agency held-to-maturity securities with
an amortized cost of $22.5 million and an estimated market value of $22.5
million. See note 3 to the Consolidated Financial Statement for further
information. At September 30, 1997, Jacksonville held U.S. government
securities as available-for-sale with an amortized cost of $3.5 million and an
estimated market value of $3.5 million.
24
<PAGE> 26
The following table sets forth Jacksonville's investment securities at
the dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------
1997 1996 1995
-------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Available for sale(1):
Mortgage-backed securities:
FNMA Certificates $ 4,852 $ -- $ --
FHLMC Certificates 6,540 -- --
U.S. agency securities 3,469 7,359 6,408
------ ------ ------
Total available for sale 14,861 7,359 6,408
------ ------ ------
Held to maturity(1):
Mortgage-backed securities:
FNMA Certificates 6,348 7,270 --
FHLMC certificates 2,398 3,553 1,921
GNMA certificates 1,079 1,284 1,521
U.S. Treasury notes 6,492 8,980 12,492
U.S. agency securities 15,969 17,467 24,008
------ ------ ------
Total held to maturity 32,286 38,554 39,942
------ ------ ------
Total investment securities $47,147 $45,913 $46,350
====== ====== ======
</TABLE>
- --------------------
(1) Securities classified as available for sale were carried at fair value
at September 30, 1997, 1996 and 1995. Securities classified as
held-to-maturity were carried at historical cost at all respective
dates.
At September 30, 1997, $10.0 million or 27.0% of investment securities
held by Jacksonville were scheduled to mature in one year or less and had a
weighted average yield of 5.19%. Of the remaining investment securities, $14.9
million was scheduled to mature after one year through five years and 1.0
million was scheduled to mature after six years through ten years.
25
<PAGE> 27
The following table sets forth certain information regarding the
maturities of Jacksonville's investment securities at September 30, 1997.
<TABLE>
<CAPTION>
CONTRACTUALLY MATURING
------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
UNDER 1 AVERAGE 1-5 AVERAGE 6-10 AVERAGE OVER 10 AVERAGE
YEAR RATE YEARS RATE YEARS RATE YEARS RATE
---------- ----------- -------- ---------- ---------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
U.S. Treasury notes
and bills $3,496 5.18% $ 2,996 5.98% $ -- --% $ -- --%
U.S. agency securities 6,005 5.33 9,964 6.25 -- -- -- --
------ ----- ----- -----
Total $9,501 $12,960 $ -- $ -- --
===== ====== ===== =====
AVAILABLE FOR SALE
U.S. Treasury notes -- -- -- -- -- -- -- --
and bills
U.S. agency securities 500 3.65 1,994 6.19 1,000 7.0 -- --
----- ----- ----- -----
Total $ 500 $ 1,994 $1,000 $ --
===== ===== ===== =====
Unrealized loss on
securities available
for sale
Total
<CAPTION>
TOTAL
--------------------
AMOUNT YIELD
--------- ---------
(Dollars in Thousands)
<S> <C> <C>
HELD TO MATURITY
U.S. Treasury notes
and bills $ 6,492 5.50%
U.S. agency securities 15,969 5.70
------
Total $22,461
======
AVAILABLE FOR SALE
U.S. Treasury notes -- --
and bills
U.S. agency securities -- --
Total $ 3,494 6.45
=====
Unrealized loss on
securities available
for sale (25)
-------
Total $25,930
======
</TABLE>
INTEREST-BEARING DEPOSITS
As of September 30, 1997 Jacksonville also had demand deposit accounts
in the FHLB of Dallas of $2.8 million as compared to $2.4 million as of
September 30, 1996. In order to comply with a policy adopted by its Board of
Directors, Jacksonville's deposits in FDIC-insured institutions are limited to
$100,000 per bank in certificates of deposit with a maximum maturity of one
year. As of September 30, 1997, Jacksonville had no certificates of deposit.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of Jacksonville's funds for
lending and other investment purposes. In addition to deposits, Jacksonville
derives funds from loan principal repayments. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer
term basis for general business purposes.
DEPOSITS. Jacksonville's deposits are attracted principally from
within Jacksonville's primary market area through the offering of a broad
selection of deposit instruments, including demand and NOW accounts, money
market accounts, passbook savings accounts, and term certificate accounts.
Included among these deposit products are individual retirement account
certificates of approximately $20.1 million at September 30, 1997.
26
<PAGE> 28
Deposit account terms vary, with the principal differences being the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by Jacksonville on a periodic basis. Determination
of rates and terms are predicated on funds acquisition and liquidity
requirements, rates paid by competitors, growth goals and federal regulations.
Jacksonville does not advertise for deposits outside its local market
area or utilize the services of deposit brokers.
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by Jacksonville at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------------------------------------------------------
1997 1996 1995
---------------------- ------------------------- ----------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------- ----------- --------- --------------- ------------ --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
2.00 - 4.00% -- --% $ 3,973 2.28% $ 14,428 8.30%
4.01 - 6.00% $124,014 64.58 96,387 55.30 82,012 47.17
6.01 - 8.00% 21,431 11.16 31,581 18.11 36,147 20.79
8.01 - 10.00% 146 .08 139 .08 132 .08
------- ----- ------- ------ ------- ------
Total certificate accounts $145,591 75.82% $132,080 75.77% $132,719 76.34%
======= ===== ======= ====== ======= ======
Transaction accounts:
Passbook savings $ 12,202 6.35% $ 11,424 6.55% $ 10,765 6.20%
Money market 15,829 8.24 17,648 10.12 17,930 10.32
Demand and NOW Accounts 18,411 9.59 13,176 7.56 12,397 7.14
------- ----- ------- ------ ------- ------
Total transaction accounts $ 46,442 24.18 $ 42,248 24.23% $ 41,092 23.66%
======= ===== ======= ====== ======= ======
Total deposits $192,033 100.00% $174,328 100.00% $173,811 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
27
<PAGE> 29
The following table sets forth the savings activities of Jacksonville
during the periods indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------------------
1997 1996 1995
----------------- ----------------- ----------------
(In Thousands)
<S> <C> <C> <C>
Net increase (decrease)
before interest credited $11,162 $(4,111) $10,889
Interest credited 6,543 4,628 3,579
------ ------ ------
Net increase (decrease) in deposits $17,705 $ 517 $14,468
====== ====== ======
</TABLE>
The following table shows the interest rate and maturity information
for Jacksonville's certificates of deposit at September 30, 1997.
<TABLE>
<CAPTION>
MATURITY DATE
------------------------------------------------------------------------------------------------
ONE YEAR OVER OVER OVER
INTEREST RATE OR LESS 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
- ------------------ ------------------ ----------------- ---------------- -------------- ----------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
2.00 - 4.00% $ -- $ -- $ -- $ -- $ --
4.01 - 6.00% 114,604 9,396 -- 14 124,014
6.01 - 8.00% 7,203 4,107 10 10,111 21,431
8.01 - 10.00% -- -- -- 146 146
------- ------ ---- ------ -------
$121,807 $13,503 $ 10 $10,271 $145,591
======= ====== ==== ====== =======
</TABLE>
28
<PAGE> 30
The following table sets forth the maturities of Jacksonville's
certificates of deposit having principal amounts of $100,000 or more at
September 30, 1997.
<TABLE>
<CAPTION>
CERTIFICATES OF DEPOSIT MATURING IN
QUARTER ENDING:
--------------------------------------
(In thousands)
<S> <C>
December 31, 1997 $3,149
March 31, 1998 3,995
June 30, 1998 1,553
September 30, 1998 2,870
After September 30, 1998 11,624
-------
Total certificates of deposit
with balances of $100,000
or more $23,191
======
</TABLE>
The following table sets forth the maximum month-end balance and
average balance of Jacksonville's FHLB advances during the periods indicated.
See also, Note 10 to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1997 1996 1995
---------- ---------- -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum balance $5,000 $4,000 $ 7,000
Average balance 2,846 1,098 2,750
Weighted average interest
rate of FHLB advances 5.87% 5.71% 5.52%
</TABLE>
29
<PAGE> 31
The following table sets forth certain information as to
Jacksonville's long-term (terms to maturity in excess of 90 days) and
short-term (terms to maturity of 90 days or less) FHLB advances at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------
1997 1996 1995
------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB long-term advances $2,000 $2,000 $ --
Weighted average interest rate 5.71% 5.71% --%
FHLB short-term advances $ -- $ -- $ --
Weighted average interest rate --% --% --%
</TABLE>
BORROWINGS. While Jacksonville has not frequently borrowed from the
FHLB of Dallas, it may obtain advances from the FHLB of Dallas upon the
security of the common stock it owns in that bank and certain of its
residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending. At September
30, 1997, Jacksonville had $2 million advances from the FHLB of Dallas.
The Company's ESOP also borrowed funds from Jacksonville IHC for the
purchase of shares of the Company's Common Stock issued in connection with the
Conversion. As of September 30, 1997, the outstanding balance of that loan was
$1.4 million.
SUBSIDIARIES. Jacksonville currently owns 100% of the capital stock
of J. S. & L. Corporation ("JS&L") which was established in December 1979.
JS&L is self sufficient due to income from $115,000 in investments, interest
from residential notes receivable and rental income. Its main activity is the
servicing of purchased residential first and second lien notes. The portfolio
includes 32 loans ranging in size from $2,500 to $135,000, most of which were
purchased at a discount. For most of the second lien notes purchased,
Jacksonville holds the first lien note. For the years ended September 30, 1997
and September 30, 1996, JS&L earned $44,000 and $34,800, respectively. JS&L
now makes investments in investments permissible for Jacksonville, rents houses
and office space, and originates and buys first and second liens. JS&L
purchases first and second lien notes pursuant to a written mortgage loan
underwriting policy adopted by JS&L's board of directors. Total investment in
JS&L at September 30, 1997 was $823,000. Total capital of JS&L at September
30, 1997 was $860,000 and, as of that date, JS&L has no outstanding
indebtedness to Jacksonville.
30
<PAGE> 32
EMPLOYEES. Jacksonville and its subsidiary had 76 full-time employees
at September 30, 1997. None of these employees is represented by a collective
bargaining agent, and Jacksonville believes that it enjoys good relations with
its personnel.
REGULATION
Set forth below is a brief description of certain laws and regulations
which relate to the regulation of the Company, IHC and the Bank. The
description does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
THE COMPANY AND IHC
REGULATIONS. The Company and IHC are registered unitary savings and
loan holding companies and are subject to OTS, Federal Deposit Insurance
Corporation ("FDIC") and Department regulation, examination, supervision and
reporting requirements. In addition, because the capital stock of the Company
is registered under Section 12(g) of the Securities Exchange Act of 1934, the
Company is also subject to various reporting and other requirements of the SEC.
As a subsidiary of a savings and loan holding company, the Bank is also subject
to certain Federal and state restrictions in its dealings with the Company and
affiliates thereof.
FEDERAL ACTIVITIES RESTRICTIONS. There are generally no restrictions
on the activities of a savings and loan holding company which holds only one
subsidiary savings bank. However, if the Director of the OTS determines that
there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution (i.e., a
savings association or savings bank), the Director may impose such restrictions
as are deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the
holding company and its affiliates may be imposed on the savings institution.
Notwithstanding the foregoing, if the savings institution subsidiary of such a
holding company fails to meet the Qualified Thrift Lender ("QTL") test, then
such unitary holding company also becomes subject to the activities
restrictions applicable to multiple savings and loan holding companies and,
unless the savings institution requalifies as a QTL within one year thereafter,
must register as, and become subject to the restrictions applicable to, a bank
holding company.
If the Company or IHC were to acquire control of another savings
institution, other than through merger or other business combination with the
Bank, the Company and IHC would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, as set forth below, the activities of the
Company and any
31
<PAGE> 33
of its subsidiaries (other than the Bank or other subsidiary savings
institutions) would thereafter be subject to further restrictions. No multiple
savings and loan holding company or subsidiary thereof which is not a savings
institution may commence or continue beyond a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof any
business activity, other than: (i) furnishing or performing management services
for a subsidiary savings institution; (ii) conducting an insurance agency or
escrow business; (iii) holding, managing, or liquidating assets owned by or
acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies. The activities described in (i) through (vi) above may be engaged
in only after giving the OTS prior notice and being informed that the OTS does
not object to such activities. In addition, the activities described in (vii)
above also must be approved by the Director of the OTS prior to being engaged
in by a multiple savings and loan holding company.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings institution or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
institution, other than a subsidiary savings institution, or of any other
savings and loan holding company.
The Director of the OTS may approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state only if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home
or branch office located in the state of the association to be acquired as of
March 5, 1987; (ii) the acquiror is authorized to acquire control of the
savings institution pursuant to the emergency acquisition provisions of the
FDIA, or (iii) the statutes of the state in which the institution to be
acquired is located specifically permit institutions to be acquired by the
state-chartered institutions or savings and loan holding companies located in
the state where the acquiring entity is located (or by a holding company that
controls such state-chartered savings institutions).
LIMITATIONS ON DIVIDENDS. The Company is a legal entity separate and
distinct from Jacksonville. The Company's principal source of revenue consists
of dividends from Jacksonville. The payment of dividends by Jacksonville is
subject to various regulatory requirements including a requirement, as a result
of the Company's savings and loan holding company status, that Jacksonville
notify the Director not less than 30 days in advance of any proposed
declaration by its directors of a dividend.
32
<PAGE> 34
TEXAS REGULATIONS. Under the Texas Savings Bank Act ("TSBA"), each
registered holding company, such as the Company and IHC, is required to file
reports with the Department as required by the Texas Savings and Loan
Commissioner ("Commissioner") and is subject to such examination as the
Commissioner may prescribe.
REGULATION OF THE BANK
The Bank is required to file reports with the Department and the FDIC
concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions, such as any
merger or acquisition with another institution. The regulatory system to which
the Bank is subject is intended primarily for the protection of the deposit
insurance fund and depositors, not stockholders. The regulatory structure also
provides the Department and the FDIC with substantial discretion in connection
with their supervisory and enforcement functions. The Department and the FDIC
conduct periodic examinations of the Bank in order to assess its compliance
with federal and state regulatory requirements. As a result of such
examinations, the Department and the FDIC may require various corrective
actions.
Virtually every aspect of the Bank's business is subject to numerous
federal and/or state regulatory requirements and restrictions with respect to
such matters as, for example, the nature and amounts of loans and investments
that may be made, the issuance of securities, the amount of reserves that must
be established against deposits, the establishment of branches, mergers,
non-banking activities and other operations. Numerous laws and regulations
also set forth special restrictions and procedural requirements with respect to
the extension of credit, credit practices, the disclosure of credit terms and
discrimination in credit transactions.
The description of statutory provisions and regulations applicable to
savings banks set forth in this Form 10-K does not purport to be a complete
description of such statutes and regulations and their effects on the Bank.
Furthermore, the Bank cannot predict what other new regulatory requirements
might be imposed in the future.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings institution is any company
or entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company
of a savings institution (such as the Company and IHC) and any companies which
are controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in covered transactions with
any one affiliate to an amount equal to 10% of such institution's capital stock
and surplus, and contain an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus and (ii)
require that all such transactions be on terms substantially the same, or at
least as favorable to the institution or subsidiary, as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or
33
<PAGE> 35
otherwise extend credit to an affiliate, except for any affiliate which engages
only in activities which are permissible for bank holding companies, or (ii)
purchase or invest in any stocks, bonds, debentures, notes or similar
obligations of any affiliate, except for affiliates which are subsidiaries of
the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution (a "principal
stockholder"), and certain affiliated interests of each of them, may not
exceed, together with all other outstanding loans to such person and affiliated
interests, the savings institution's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section
22(h) also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for
certain loans. In addition, the aggregate amount of extensions of credit by a
savings institution to all insiders cannot exceed the institution's unimpaired
capital and surplus. Furthermore, Section 22(g) places additional restrictions
on loans to executive officers. At September 30, 1997, the Bank was in
compliance with the above restrictions.
REGULATORY CAPITAL REQUIREMENTS. Federally-insured state-chartered
banks are required to maintain minimum levels of regulatory capital. These
standards generally must be as stringent as the comparable capital requirements
imposed on national banks. The FDIC also is authorized to impose capital
requirements in excess of these standards on individual banks on a case-by-case
basis.
Under current FDIC regulations, the Bank is required to comply with
three separate minimum capital requirements: a "Tier 1 capital ratio" and two
"risk-based" capital requirements. "Tier 1 capital" generally includes common
stockholders' equity (including retained earnings), qualifying noncumulative
perpetual preferred stock and any related surplus, and minority interests in
the equity accounts of fully consolidated subsidiaries, minus intangible
assets, other than properly valued PMSRs up to certain specified limits and
minus net deferred tax assets in excess of certain specified limits.
TIER 1 LEVERAGE CAPITAL RATIO. FDIC regulations establish a minimum
3.0% ratio of Tier 1 capital to total assets for the most highly-rated
state-chartered, FDIC-supervised banks, with an additional cushion of at least
100 to 200 basis points for all other state-chartered, FDIC-supervised banks,
which effectively imposes a minimum Tier 1 capital ratio for such other banks
of between 4.0% to 5.0%. Under FDIC regulations, highly-rated banks are those
that the FDIC determines are not anticipating or experiencing significant
growth and have well diversified risk, including no undue interest rate risk
exposure, excellent asset quality, high liquidity and good earnings. At
September 30, 1997, the required Tier 1 leverage capital ratio for the Bank was
4.0% and its actual Tier 1 leverage capital ratio was 13.66%.
34
<PAGE> 36
RISK-BASED CAPITAL REQUIREMENTS. The risk-based capital requirements
contained in FDIC regulations generally require the Bank to maintain a ratio of
Tier 1 capital to risk-weighted assets of at least 4.00% and a ratio of total
risk-based capital to risk-weighted assets of at least 8.00%. To calculate the
amount of capital required, assets are placed in one of four categories and
given a percentage weight (0%, 20%, 50% or 100%) based on the relative risk of
the category. For example, U.S. Treasury Bills and GNMA securities are placed
in the 0% risk category. FNMA and FHLMC securities are placed in the 20% risk
category, loans secured by one-to-four family residential properties and
certain privately-issued mortgage-backed securities are generally placed in the
50% risk category and commercial and consumer loans and other assets are
generally placed in the 100% risk category. In addition, certain off-balance
sheet items are converted to balance sheet credit equivalent amounts and each
amount is then assigned to one of the four categories.
For purposes of the risk-based capital requirements, "total capital"
means Tier 1 capital plus supplementary or Tier 2 capital, so long as the
amount of supplementary or Tier 2 capital that is used to satisfy the
requirement does not exceed the amount of Tier 1 capital. Supplementary or
Tier 2 capital includes, among other things, so-called permanent capital
instruments (cumulative or other perpetual preferred stock, mandatory
convertible subordinated debt and perpetual subordinated debt), so-called
maturing capital instruments (mandatorily redeemable preferred stock,
intermediate-term preferred stock, mandatory convertible subordinated debt and
subordinated debt), and a certain portion of the allowance for loan losses up
to a maximum of 1.25% of risk-weighted assets.
At September 30, 1997, the Bank's Tier 1 capital to risk-weighted
assets ratio was 25.41%. On the same date, the Bank's total risked-based
capital percentage was 26.37%.
35
<PAGE> 37
The following table sets forth information with respect to each of the
Bank's capital requirements as of the dates shown.
<TABLE>
<CAPTION>
As of September 30,
-------------------
1997
----
Actual Required
------ --------
<S> <C> <C>
Leverage ratio (or tangible 13.66% 4.00%
capital requirement) (1):
Tier 1 capital to total assets
Tier 1 risk-based capital ratio 25.41 4.00
(or core capital
requirement)(1):
Tier 1 risk-based capital to
risk weighted assets
Total risk-based capital ratio: 26.37 8.00
Total risk-based capital risk to
risk weighted assets
</TABLE>
Prior to July 2, 1997 Jacksonville Savings and Loan Association was
regulated by the Office of Thrift Supervision and was subject to capital
requirements as set forth by that regulatory agency. The Association at
September 30, 1996 and 1995 exceeded all minimum capital requirements as set
forth by the Office of Thrift Supervision at those dates.
36
<PAGE> 38
The following table sets forth a reconciliation between the Bank's
stockholders' equity and each of its three regulatory capital requirements at
September 30, 1997.
<TABLE>
<CAPTION>
Tier 1 Total
Tier 1 Risk-based Risk-based
Capital Capital Capital
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Total stockholders' equity for $ 31,716 $ 31,716 $ 31,716
Jacksonville Savings Bank, SSB
Unrealized loss on securities
available-for-sale 14 14 14
Less nonallowable assets:
Deferred Charges (52) (52) (52)
Plus allowances for loan
and lease losses -- -- 1,192
--------------- -------------- --------------
Total regulatory capital 31,678 31,678 32,870
Minimum required capital 9,279 4,986 9,972
--------------- -------------- --------------
Excess regulatory capital $ 22,399 $ 26,692 $ 22,898
=============== ============== ==============
Bank's regulatory capital
percentage (1) 13.66% 25.41% 26.37%
Minimum regulatory capital
required percentage 4.00% 4.00% 8.00%
--------------- -------------- --------------
Bank's regulatory capital
percentage in excess of
requirement 9.66% 21.41% 18.37%
=============== ============== ==============
</TABLE>
- --------------------
(1) Tier 1 capital is computed as a percentage of total adjusted assets of
$232.0 million. Risk-based capital is computed as a percentage of adjusted
risk-weighted assets of $124.6 million.
FDIC INSURANCE PREMIUMS. The deposits of the Bank are insured to the
maximum extent permitted by the SAIF administered by the FDIC, and are backed
by the full faith and credit of the U.S. Government. As the insurer, the FDIC
is authorized to conduct examinations of, and to require reporting by,
FDIC-insured institutions. It also may prohibit any FDIC-insured
37
<PAGE> 39
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings institutions.
The Bank currently pays deposit insurance premiums to the FDIC based
on a risk-based assessment system established by the FDIC for all SAIF-member
institutions. Under applicable regulations, institutions are assigned to one of
three capital groups based solely on the level of an institution's capital -
"well capitalized," "adequately capitalized" and "undercapitalized" - which are
defined in the same manner as the regulations establishing the prompt
corrective action system under Section 38 of the FDIA. These three groups are
then divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications with effective assessments
between .04% for well capitalized, healthy SAIF-member institutions to .27% for
undercapitalized SAIF-member institutions with substantial supervisory
concerns. At September 30, 1997, the Bank was categorized as well capitalized.
On September 30, 1996, amendments to the FDIA were signed into law. The
FDIA and implementing regulations provided that all SAIF-member institutions
would pay a special one time assessment of 65.7 basis points on the SAIF
assessment base as of March 31, 1995 to recapitalize the SAIF, which in the
aggregate, would be sufficient to bring the reserve ratio in the SAIF to 1.25%
of insured deposits. Jacksonville's special assessment amounted to $1.1
million pursuant to the FDIA.
The FDIA provided for FICO debt sharing by banks and thrifts with
proration sharing in the year 2000. Prior to the year 2000, SAIF insured
institutions will pay approximately 6.5 basis points for FICO, while BIF
insured institutions, such as commercial banks, will pay approximately 1.3
basis points. The FICO provisions of the FDIA also prohibit deposit migration
strategies to avoid SAIF premiums. The FDIA also provided for the merger of
the BIF and the SAIF on January 1, 1999, with such merger being conditioned
upon the prior elimination of the federal thrift charter.
Under Section 593 of the Internal Revenue Code, thrift institutions such
as the Bank, which meet certain definitional tests primarily relating to their
assets and the nature of their business, are permitted to establish a tax
reserve for bad debts and to make annual additions thereto, which additions
may, within specified limitations, be deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans" which are
generally loans secured by certain interests in real property, prior to 1996,
could be computed using an amount based on the Bank's actual loss experience
(the "experience method") or a percentage of taxable income, computed without
regard to this deduction, and with additional modifications and reduced by the
amount of any permitted addition to the non-qualifying reserve.
Effective January 1, 1996, the Bank is unable to make additions under
the "percentage" method to its tax bad debt reserve, and is only permitted to
deduct bad debts using the experience
38
<PAGE> 40
method and is additionally be required to recapture (i.e. take into taxable
income) over a six year period, the excess of the balance of its bad debt
reserve as of December 31, 1995 over the balance of such reserve as of December
31, 1987 (if any). Such recapture requirements can be suspended for each of
two successive taxable years beginning January 1, 1996, in which the Bank
originates a minimum amount of certain residential loans based upon the average
of the principal amounts of such loans made by the Bank during its six taxable
years preceding 1996. At September 30, 1997, the Bank had fully recaptured
post-1987 tax bad debt reserves.
REGULATORY CAPITAL REQUIREMENTS. The FDIA requires the Federal banking
agencies to revise their risk-based capital guidelines to, among other things,
take adequate account of interest rate risk. The Federal banking agencies
continue to consider modification of the capital requirements applicable to
banking organizations. In August 1995, the Federal banking agencies amended
their risk-based capital guidelines to provide that the banking agencies will
include in their evaluations of a bank's capital adequacy an assessment of the
bank's exposure to declines in the economic value of the bank's capital due to
changes in interest rates. The agencies also issued a proposed policy
statement that describes the process that the agencies will use to measure and
assess the exposure of a bank's capital to changes in interest rates. The
agencies stated that after they and the banking industry gain sufficient
experience with the measurement process, the agencies would issue proposed
regulations for establishing explicit charges against capital to account for
interest rate risk.
The FDIA also requires the FDIC and the other Federal banking agencies
to revise their risk-based capital standards, with appropriate transition
rules, to ensure that they take into account concentration of credit risk and
the risks of nontraditional activities and to ensure that such standards
reflect the actual performance and expected risk of loss of multifamily
mortgages, of which the Bank had $1.14 million at September 30, 1997. In
December 1995, the FDIC and the other Federal banking agencies promulgated
final amendments to their respective risk-based capital requirements which
would explicitly identify concentration of credit risk and certain risks
arising from nontraditional activities, and the management of such risks as
important factors to consider in assessing an institution's overall capital
adequacy. The FDIC may now require higher minimum capital ratios based on
certain circumstances, including where the institution has significant risks
from concentration of credit or certain risks arising from nontraditional
activities.
The Federal banking agencies have agreed to adopt for regulatory
purposes Statement 115, which, among other things, generally adds a new element
to stockholders' equity under generally accepted accounting principles by
including net unrealized gains and losses on certain securities. In December
1994, the FDIC issued final amendments to its regulatory capital requirements
which would require that the net amount of unrealized losses from
available-for-sale equity securities with readily determinable fair values be
deducted for purposes of calculating the Tier 1 capital ratio. All other net
unrealized holding gains (losses) on available-for-sale securities are excluded
from the definition of Tier 1 capital. At September 30, 1997, the Bank had
$3.5 million of securities available-for-sale with $31,000 of aggregate net
unrealized losses thereon.
39
<PAGE> 41
SAFETY AND SOUNDNESS STANDARDS. Each Federal banking agency is required
to prescribe, for all insured depository institutions and their holding
companies, standards relating to internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
compensation standards would prohibit employment contracts or other
compensatory arrangements that provide excess compensation, fees or benefits or
could lead to material financial loss to the institution. In addition, each
Federal banking agency also is required to adopt for all insured depository
institutions and their holding companies standards that specify (i) a maximum
ratio of classified assets to capital, (ii) minimum earnings sufficient to
absorb losses without impairing capital, (iii) to the extent feasible, a
minimum ratio of market value to book value for publicly-traded shares of the
institution or holding company, and (iv) such other standards relating to asset
quality, earnings and valuation as the agency deems appropriate. On July 10,
1995, the Federal banking agencies, including the FDIC, adopted final rules and
proposed guidelines concerning safety and soundness required to be prescribed
by regulations pursuant to Section 39 of the FDIA. In general, the standards
relate to operational and managerial matters, asset quality and earnings and
compensation. The operational and managerial standards cover internal controls
and information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. Under the asset quality and earnings standards, which were adopted
by the Federal Banking agencies in October 1996, the Bank would be required to
establish and maintain systems to identify problem assets and prevent
deterioration in those assets and evaluate and monitor earnings to ensure that
earnings are sufficient to maintain adequate capital reserves. If an insured
institution fails to meet any of the standards promulgated by the regulators,
then such institution will be required to submit a plan within 30 days to the
FDIC specifying the steps that it will take to correct the deficiency. In the
event that an insured institution fails to submit or fails in any material
respect to implement a compliance plan within the time allowed by the FDIC,
Section 39 of the FDIA provides that the FDIC must order the institution to
correct the deficiency and may restrict asset growth, require the savings
institution to increase its ratio of tangible equity to assets, restrict the
rates of interest that the institution may pay or take any other action that
would better carry out the purpose of prompt corrective action. The Bank
believes that it has been and will continue to be in compliance with each of
the standards as they have been adopted by the FDIC.
Finally, each Federal banking agency is required to prescribe standards
for the employment contracts and other compensation arrangements of executive
officers, employees, directors and principal stockholders of insured depository
institutions that would prohibit compensation and benefits and arrangements
that are excessive or that could lead to a material financial loss for the
institution. In February 1996, the FDIC adopted final regulations regarding
the payment of severance and indemnification to management officials and other
affiliates of insured institutions ("institution affiliated parties" or
"IAPs"). The limitations on severance or "golden parachute" payments apply to
"troubled" institutions which seek to enter into contracts with IAPs. A golden
parachute payment is generally considered to be any payment to an IAP which is
contingent on the termination of that person's employment and is received when
the insured institution is in a troubled condition. The definition of golden
parachute payment does not include payment
40
<PAGE> 42
pursuant to qualified retirement plans, non-qualified bona fide deferred
compensation plans, nondiscriminatory severance pay plans, other types of
common benefit plans, state statutes and death benefits. Certain limited
exceptions to the golden parachute payment prohibition are provided for in
cases involving the hiring of an outside executive, unassisted changes of
control and where the FDIC provides written permission to make such payment.
The limitations on indemnification payments apply to all insured institutions,
their subsidiaries and affiliated holding companies. Generally, this provision
prohibits such entities from indemnifying an IAP for that portion of the costs
sustained with regard to a civil or administrative enforcement action commenced
by any Federal banking agency which results in a final order or settlement
pursuant to which the IAP is assessed a civil monetary penalty, removed from
office, prohibited from participating in the affairs of an insured institution
or required to cease and desist from taking certain affirmative actions.
Nevertheless, institutions or holding companies may purchase commercial
insurance to cover such expenses (except for judgments or penalties) and the
institutions or holding company may advance legal expenses to the IAP if its
board of directors makes certain specific findings and the IAP agrees in
writing to reimburse the institution if it is ultimately determined that the
IAP violated a law, regulation or other fiduciary duty.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state-chartered banks are
limited by Federal law to those that are permissible for national banks. An
insured state bank generally may not acquire or retain any equity investment of
a type, or in an amount, that is not permissible for a national bank. An
insured state bank is not prohibited from, among other things, (i) acquiring or
retaining a majority interest in a subsidiary, (ii) investing as a limited
partner in a partnership the sole purpose of which is direct or indirect
investment in the acquisition, rehabilitation or new construction of a
qualified housing project, provided that such limited partnership investments
may not exceed 2% of the bank's assets, (iii) acquiring up to 10% of the voting
stock of a company that solely provides or reinsures directors' and officers'
liability insurance, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act
("CRA"), as implemented by FDIC regulations, a savings institution has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the FDIC, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. AS OF THE DATE OF ITS MOST RECENT
REGULATORY EXAMINATION, THE BANK WAS RATED "SATISFACTORY" WITH RESPECT TO ITS
CRA COMPLIANCE.
In May 1995, the FDIC and other Federal banking agencies promulgated
final revisions to their regulations concerning the CRA. The revised
regulations generally are intended to provide clearer guidance to financial
institutions on the nature and extent of their obligations under the
41
<PAGE> 43
CRA and the methods by which the obligations will be assessed and enforced.
Among other things, the revised regulations substitute for the current
process-based assessment factors a new evaluation system that would rate
institutions based on their actual performance in meeting community credit
needs. In particular, the revised system will evaluate the degree to which an
institution is performing under tests and standards judged in the context of
information about the institution, its community, its competitors and its peers
with respect to (i) lending, (ii) service delivery systems and (iii) community
development. The revised regulations also specify that an institution's CRA
performance will be considered in an institution's expansion (e.g., branching)
proposals and may be the basis for approving, denying or conditioning the
approval of an application. Management of the Bank currently is unable to
predict the effects of the regulations under the CRA as recently adopted.
QUALIFIED THRIFT LENDER TEST. All savings institutions, including the
Bank, are required to meet a QTL test set forth under Section 10(m) of the Home
Owners Loan Act, as amended, ("HOLA") to avoid certain restrictions on their
operations. Under Section 2303 of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996, a savings institution can comply with the QTL test set
forth in the HOLA and implementing regulations or by qualifying as a domestic
building and loan association as defined in Section 7701(a)(19) of the Code.
The QTL test set forth in HOLA requires that a depository institution must have
at least 65% of its portfolio assets (which consist of total assets less
intangibles, properties used to conduct the savings institution's business and
liquid assets not exceeding 20% of total assets) in qualified thrift
investments on a monthly average basis in nine of every 12 months. Loans and
mortgage-backed securities secured by domestic residential housing, as well as
certain obligations of the FDIC and certain other related entities may be
included in qualifying thrift investments without limit. Certain other
housing-related and non-residential real estate loans and investments,
including loans to develop churches, nursing homes, hospitals and schools, and
consumer loans and investments in subsidiaries engaged in housing-related
activities may also be included. Qualifying assets for the QTL test include
investments related to domestic residential real estate or manufactured
housing, the book value of property used by an institution or its subsidiaries
for the conduct of its business, an amount of residential mortgage loans that
the institution or its subsidiaries sold within 90 days of origination, shares
of stock issued by any FHLB and shares of stock issued by the FHLMC or the
FNMA. The Bank was in compliance with the QTL test as of September 30, 1997,
with 84.8% of its assets invested in qualified thrift investments.
LEGISLATIVE AND REGULATORY PROPOSALS. Proposals to change the laws and
regulations governing the operations and taxation of, and federal insurance
premiums paid by, savings banks and other financial institutions and companies
that control such institutions are frequently raised in Congress, state
legislatures and before the OTS, FDIC and other bank regulatory authorities.
The likelihood of any major changes in the future and the impact such changes
might have on the Bank are impossible to determine. Similarly, proposals to
change the accounting treatment applicable to savings banks and other
depository institutions are frequently raised by the SEC, the FDIC, the IRS and
other appropriate authorities, including, among others, proposals relating to
fair market value accounting for certain classes of assets and liabilities.
The likelihood and
42
<PAGE> 44
impact of any additional future accounting rule changes and the impact such
changes might have on the Bank are impossible to determine.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB of
Dallas, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions and commercial banks. Each FHLB serves
as a source of liquidity for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by its Board of Directors.
As of September 30, 1997, the Bank's advances from the FHLB of Dallas amounted
to $2.0 million or 1.0% of its total liabilities.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Dallas in an amount equal to the greater of 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year or 5% of total advances. At September 30, 1997, the
Bank had $1.8 million in FHLB stock, which was in compliance with this
requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community
investment and low- and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid and could continue to
do so in the future. These contributions also could have an adverse effect on
the value of FHLB stock in the future. For the year ended September 30, 1997,
dividends paid by the FHLB of Dallas to the Bank totaled $105,000.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts) and non-personal time deposits.
At September 30, 1997, the Bank was in compliance with such requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy applicable liquidity requirements.
Because required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce a bank's earning assets. The amount of funds
necessary to satisfy this requirement has not had a material affect on the
Bank's operations.
TEXAS SAVINGS BANK LAW. To qualify as a Texas Savings Bank,
Jacksonville must qualify under and continue to meet the asset test of Section
7701(a)(19), Internal Revenue Code of 1986, relating to domestic savings and
loan associations. A Texas savings bank may make a loan or investment or
engage in an activity permitted under state law for a bank or savings and loan
association or under federal law for a federal savings and loan association,
savings bank, or national bank if the financial institution's principal office
is located in this state. A savings bank may make commercial loans up to 50% of
the savings bank's total assets. A savings bank must
43
<PAGE> 45
maintain in its portfolio not less than 15 percent of the savings bank's
deposits from its local service area in: (1) first and second lien residential
mortgage loans or foreclosed residential mortgage loans originated in the
savings bank's local service area; (2) home improvement loans; (3) interim
residential construction loans; (4) mortgage-backed securities secured by loans
in the savings bank's local service area; and (5) loans for community
reinvestment. The loans to one borrower rules for Texas savings bank may not be
less restrictive than those applicable to savings associations under the
Federal Home Owners Loan Act ("HOLA"). Under the HOLA, unless more stringent
conditions are imposed by the Director of the OTS, savings associations are
subject to the lending limits applicable to national banks, which include a
limitation on loans to any one borrower of 15% of capital. Notwithstanding
that limitation, savings associations generally may make loans to one borrower
not to exceed $500,000, to develop domestic residential housing units, not to
exceed the lesser of $30,000,000 or 30 percent of the savings association's
unimpaired capital and unimpaired surplus. For loans to finance the sale of
real property acquired in satisfaction of debts previously contracted, loans to
any one borrower may not exceed 50 percent of unimpaired capital and surplus.
A Texas savings bank or subsidiary may not invest in an equity security unless
the security qualifies as an investment grade security under rules adopted by
the Texas Commissioner and Finance Commission or the security is an eligible
investment for a federal savings and loan association. Investments in
subsidiaries are generally limited to 10 percent of the savings bank's total
assets. Unless approved in advance by the Commissioner, a Texas savings bank
must maintain an amount equal to at least 10 percent of its average daily
deposits for the most recently completed calendar quarter in liquid investments
specified by statute, including cash, reserve balances, and readily marketable
investments.
44
<PAGE> 46
ITEM 2. PROPERTIES.
At September 30, 1997, Jacksonville conducted its business from its main office
at Commerce & Neches Streets, Jacksonville, Texas, and five full-service
branches in Cherokee County and surrounding counties.
Set forth below is certain information with respect to the office and
other properties of Jacksonville at September 30, 1997.
<TABLE>
<CAPTION>
DESCRIPTION/ LEASED/ NET BOOK VALUE
ADDRESS OWNED OF PROPERTY DEPOSITS
--------------------------------- ----------- ---------------- ------------------
(In Thousands)
<S> <C> <C> <C>
Main Office Owned $486 $75,051
Commerce and Neches Streets
Jacksonville, Texas
Branch Office Owned 718 54,857
1015 North Church Street
Palestine, Texas
Branch Office Owned 70 13,249
107 East Fourth Street
Rusk, Texas
Branch Office Owned 437 14,649
1412 Judson Road
Longview, Texas
Branch Office Owned 466 20,113
617 South Palestine Street
Athens, Texas
Branch Office Owned 1,212 14,114
5620 Old Bullard Road
Tyler, Texas
</TABLE>
- --------------------
In addition to the above offices, Jacksonville owns two other
properties: (1) Lots in Spring Park South Estates No. 3, Jacksonville, Texas;
(2) Lots in Spring Park South Estates No. 2, Jacksonville, Texas (net book
value of both properties: $1.00).
45
<PAGE> 47
ITEM 3. LEGAL PROCEEDINGS.
Jacksonville is involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are believed by management
to be immaterial to the financial condition of Jacksonville.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On October 22, 1996, the Company held a special meeting of stockholders
at which stockholders approved the 1996 Stock Option Plan and the 1996
Management Recognition Plan.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The information required herein is incorporated by reference from page
42 of the Company's 1997 Annual Report to Stockholders, which is included
herein as Exhibit 13 ("Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from pages
5 and 6 of the Company's 1997 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from pages
7 to 11 of the Company's 1997 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The information required herein is incorporated by reference from pages
7 and 8 of the Company's 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from pages
F-1 to F-23 of Company's 1997 Annual Report.
46
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from pages
5 to 10 of the Company's definitive proxy statement, dated January 6, 1998,
("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages
10 to 15 of the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from pages
3 and 4 of the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page
16 of the Company's Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this Report
(1) The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13 attached hereto):
Independent Auditor's Report
Consolidated Statements of Financial Condition at September 30,
1997 and 1996
Consolidated Statements of Earnings for the Years Ended September
30, 1997, 1996 and 1995
47
<PAGE> 49
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996, and 1995
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which
they are required or because the required information is included in the
financial statements and related notes thereto.
48
<PAGE> 50
(3) The following exhibits are filed as part of this Form 10-K and
this list includes the Exhibit Index.
<TABLE>
<CAPTION>
No. Exhibits
------------ ----------------------------------------
<S> <C>
3.1 Articles of Incorporation*
3.2 Bylaws*
4.1 Specimen Common Stock Certificate*
10.1(a) 1994 Stock Incentive Plan**(1)
10.1(b) 1994 Directors' Stock Option Plan**(1)
10.1(c) 1994 Management Recognition Plan***(1)
10.1(d) 1996 Management Recognition Plan***(1)
10.1(e) 1996 Stock Option Plan**(1)
10.1(f) Employee Stock Ownership Plan*(1)
10.1(g) Acquisition Agreement by and among Jacksonville
Bancorp, Inc., Jacksonville IHC, Inc., and
Jacksonville Savings and Loan Association
10.2 1996 Management Recognition Plan*(1)
10.6 Employment Agreement by and among Jacksonville
Bancorp, Inc., Jacksonville Savings and Loan
Association and Jerry M. Chancellor (representative
of a similar agreement entered into with Bill W.
Taylor)*(1)
13 1997 Annual Report to Stockholders specified
portion (p. 1 to 15) of the Registrant's Annual
Report to Stockholders for the year ended September
30, 1997
23 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
*Incorporated herein by reference to the Registrant's Registration
Statement No. 33-81015 on Form S-1.
**Incorporated herein by reference to the Registrant's Registration
Statement No. 333-18031 on Form S-8.
***Incorporated herein by reference to the Registrant's Form 10-K filed
as of December 30, 1996.
(b) Reports on Form 8-K during the quarter ended September 30, 1997:
- --------------------
(1) Management contract or compensatory plan or arrangement.
49
<PAGE> 51
1. On September 11, 1997, the Company filed a current report
on Form 8-K reporting the declaration of a $0.125 per
share dividend.
2. On August 7, 1997, the Company filed a current report on
Form 8-K reporting earnings in the quarter ended June 30,
1997.
3. On July 3, 1997, the Company filed a current report on
Form 8-K reporting the consummation of its conversion to a
Texas chartered savings bank.
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit
Index.
(d) There are no other financial statements and financial statement
schedules which were excluded from Item 8 which are required to be included
herein.
50
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
December 22, 1997 By:/s/ Jerry M. Chancellor
-------------------------------
Jerry M. Chancellor
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Jerry M. Chancellor December 22, 1997
- ---------------------------------------------------
Jerry M. Chancellor, Director and Chief Executive
Officer (Principal Executive Officer)
/s/ W. G. Brown December 22, 1997
- ---------------------------------------------------
W. G. Brown, Chairman
/s/ Charles Broadway December 22, 1997
- ---------------------------------------------------
Charles Broadway, Director
/s/ Ray W. Beall December 22, 1997
- ---------------------------------------------------
Ray W. Beall, Director
51
<PAGE> 53
/s/ Dr. Joe Tollet December 22, 1997
- ---------------------------------------------------
Dr. Joe Tollet, Director
/s/ Bill W. Taylor December 22, 1997
- ---------------------------------------------------
Bill W. Taylor, Director and
Executive Vice President (Principal Financial
and Accounting Officer)
/s/ Robert Brown December 22, 1997
- ---------------------------------------------------
Robert Brown, Director
52
<PAGE> 1
ACQUISITION AGREEMENT
BY AND AMONG
JACKSONVILLE BANCORP, INC.,
JACKSONVILLE IHC, INC.,
AND
JACKSONVILLE SAVINGS AND LOAN ASSOCIATION
<PAGE> 2
ACQUISITION AGREEMENT
ACQUISITION AGREEMENT, dated as of May 6, 1997 ("Agreement"), is by
and among Jacksonville Bancorp, Inc. ("Bancorp"), Jacksonville Savings and Loan
Association, a Texas-chartered savings association, which will be converting to
a Texas-chartered savings bank under the name "Jacksonville Savings Bank, SSB",
whose accounts are and will continue to be insured by the Savings Association
Insurance Fund ("SAIF") administered by the Federal Deposit Insurance
Corporation ("FDIC") (hereinafter referred to as "Jacksonville" whether in its
savings association or savings bank form), and Jacksonville IHC, Inc., a
Delaware-chartered business corporation ("Holding Company"), all of the
aforesaid entities collectively referred to herein as the "Parties" or
individually as a "Party."
WITNESSETH:
WHEREAS, the Boards of Directors of Jacksonville have determined that
it is in the best interests of Jacksonville and their sole stockholder,
Bancorp, for the ownership structure to be reorganized so that all of the
voting common stock is held directly by a Delaware-chartered holding company,
in accordance with the terms and conditions of this Agreement; and
WHEREAS, the acquisition is to be accomplished as follows: the
Holding Company, a Delaware business corporation which is also a subsidiary of
the Bancorp, will become the sole stockholder of Jacksonville through the
contribution by Bancorp of 100% of the voting common stock of Jacksonville to
Holding Company.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, and in accordance with Texas and federal law and
regulations, Bancorp, Jacksonville and the Holding Company hereby agree that,
subject to the conditions hereinafter set forth, Bancorp will contribute to
Holding Company all the outstanding shares of Jacksonville, wherein
Jacksonville will become the wholly-owned subsidiary of the Holding Company.
The terms and conditions of the Acquisition shall be as follows:
1. REGULATORY APPROVALS. (a) The Acquisition shall not
become effective until this Agreement and the transactions contemplated hereby
have received the approval, if required, of the Commissioner of the Texas
Savings and Loan Department (the "Department"), the Federal Deposit Insurance
Corporation (the "FDIC"), the Office of Thrift Supervision (the "OTS"), the
Board of Governors of the Federal Reserve System ("FRB") and all other
regulatory agencies having jurisdiction over the Acquisition, if any.
(b) Bancorp, Jacksonville and the Holding Company shall have
obtained all other consents, permissions and approvals required, appropriate or
deemed necessary, from any other governmental agencies or other third parties
and shall have taken all actions required by law or agreement, by Bancorp,
Jacksonville or the Holding Company, prior to the consummation of the
Agreement.
<PAGE> 3
Acquisition Agreement
Page 2
2. EFFECTIVE DATE. The effective date of the Acquisition
("Effective Date") shall be the date as soon as practicable after the issuance
and/or execution by the Department, the OTS, FDIC, FRB and any other federal or
state regulatory agencies, of all approvals, certificates and documents as may
be required in order to cause Acquisition to become effective.
3. STOCKHOLDER APPROVAL. The prior written consent of Bancorp,
the sole stockholder of Jacksonville and the Holding Company, shall be required
to approve this Agreement.
4. COMMON STOCK OF JACKSONVILLE. All of the issued and
outstanding shares of Jacksonville voting common stock owned by Bancorp
immediately prior to the Acquisition shall be contributed by Bancorp to the
Holding Company, resulting in the Holding Company owning one hundred percent
(100%) of the issued and outstanding voting common stock of Jacksonville.
5. DEPOSITS. All deposit accounts of Jacksonville shall remain
deposits therein without change in their respective terms, interest rates,
maturities, minimum required balances or withdrawal values following the
Acquisition and will continue to issue deposit accounts on the same basis as
immediately prior to the Effective Date. After the Effective Date, all
deposits held by Jacksonville shall continue to be insured by the SAIF.
6. INCOME TAX MATTERS. The parties hereto shall have received an
opinion of counsel or its independent auditors, satisfactory to them in form
and substance, with respect to the federal income tax consequences of the
Agreement and the formation of a holding company, as contemplated herein.
7. ABANDONMENT OF AGREEMENT. (a) This Agreement may be
abandoned by Jacksonville, at any time before the Effective Date in the event
that (a) any action, suit, proceeding or claim has been instituted, made or
threatened relating to this Agreement which shall make consummation of the
Acquisition inadvisable in its opinion; or (b) for any other reason,
consummation of the Acquisition contemplated by this Agreement is inadvisable
in its opinion.
(b) Such abandonment shall be effective by written notice
by Jacksonville to the other Parties. Upon the giving of such notice, this
Agreement shall be terminated and there shall be no liability hereunder or on
account of such termination on the part of Bancorp, Jacksonville or the Holding
Company or the directors, officers, employees, agents, or stockholders of any
of them. In the event of abandonment of the Agreement, Jacksonville shall pay
fees and expenses incurred by itself, Bancorp and Holding Company in connection
with the Agreement and the Acquisition contemplated thereby. Jacksonville
shall promptly furnish a copy of such written notice to the Department, the
FDIC, the OTS, and the FRB.
<PAGE> 4
Acquisition Agreement
Page 3
8. AMENDMENT OF THE AGREEMENT. This Agreement may be amended or
modified at any time by mutual agreement of the Boards of Directors of Bancorp,
Jacksonville and the Holding Company, in any respect, provided that the sole
stockholder subsequently approves of such amendment or modification.
9. GOVERNING LAW. This Agreement is made pursuant to, and shall
be construed and be governed by, the laws of the State of Texas and of the
United States, and the rules and regulations promulgated thereunder, including
without limitation, the rules and regulations of the Department, the FDIC, the
OTS, and the FRB. In the event of a conflict, federal law will apply.
10. ASSIGNMENT. The rights and obligations of the Parties hereto
may not be assigned without the prior written consent of the other Parties.
This Agreement shall be binding upon, and shall insure to the benefit of, the
Parties and their respective successors and permitted assignees.
23. EXECUTION BY INTERIM. Jacksonville and the Holding Company
acknowledge that as of the date hereof, Jacksonville Savings Bank, SSB is in
organization and has not received its Articles of Incorporation from the
Department. Therefore, Jacksonville Savings Bank, SSB does not have the legal
capacity to execute this Agreement as of the date hereof. Bancorp,
Jacksonville and the Holding Company agree to be bound by this Agreement
notwithstanding the lack of execution by Jacksonville Savings Bank, SSB.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.
JACKSONVILLE BANCORP, INC.
By:
--------------------------------
Jerry M. Chancellor, President
Attest:
----------------------------------------
Sandra Thompson, Secretary
<PAGE> 5
Acquisition Agreement
Page 4
JACKSONVILLE SAVINGS AND LOAN
ASSOCIATION
By:
--------------------------------
Jerry M. Chancellor, President
Attest:
----------------------------------------
Sandra Thompson, Secretary
JACKSONVILLE IHC, INC.
By:
--------------------------------
Jerry M. Chancellor, President
Attest:
----------------------------------------
Sandra Thompson, Secretary
<PAGE> 1
JACKSONVILLE BANCORP, INC.
1997 ANNUAL REPORT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
President's Letter to Stockholders
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Average Balances, Net Interest Income and Yields Earned and Rates Paid . . . . . . . . . . . 10
Rate/Volume Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Comparison of Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Liquidity & Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Financial Statements:
Consolidated Statements of Financial Condition . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Stock Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Banking Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Stockholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Transfer Agent/Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Shareholder Requests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
</TABLE>
<PAGE> 3
Dear Stockholder:
We are very pleased to present Jacksonville Bancorp, Inc.'s Annual
Report to Stockholders for the fiscal year ended September 30, 1997.
This past year included three notable corporate accomplishments. We
announced two stock repurchase programs during the year under which we
purchased 231,100 shares at an average price of $14.81 per share. The stock,
which is being held as treasury shares, will be used for general corporate
purposes. Buying back our stock represented an excellent investment for the
Company and was an effective use of the Company's capital. Also during the
year, the Company's operating subsidiary, Jacksonville Savings and Loan
Association, announced the conversion to a State-chartered savings bank,
Jacksonville Savings Bank, SSB, ("JSB"), which reduced the duplication
associated with meeting the regulatory requirements of three regulatory
agencies. In a related matter, the Company entered into an agreement with
Jacksonville I.H.C., Inc., ("IHC") a subsidiary of the Company and a Delaware
corporation whereby the Company transferred its entire interest in JSB to IHC.
As a result of the transfer JSB became a direct subsidiary of IHC and enjoys
greater operating flexibility in a Delaware holding company structure.
Our results of operations in fiscal 1997 reflected another year of
solid performance. Company assets increased $16.0 million, or 7.4% to $233.9
million at September 30, 1997. Loans receivable, net rose by $16.0 million and
totaled $174.0 million or 74.4% of Company assets. In addition the Company
originated and sold a total of $21 million in loans to Federal Home Loan
Mortgage Corporation and retained servicing rights on these loans. The growth
in the loan portfolio is indicative of the strength of our market share in the
East Texas area.
On the deposit side, we posted growth of $17.7 million or 10.2%.
Composite cost of funds decreased from 4.78% in 1996 to 4.73% in 1997.
Net income for the year totaled $3.2 million or $1.30 per share as
compared to $1.6 million or $.64 per share on a comparable basis for the same
period in 1996; however, fiscal 1996 operations were significantly impacted by
a $1.1 million one-time expense to recapitalize the Savings Association
Insurance Fund (SAIF).
Mindful of our stockholders expectations for a competitive return on
their investment, the Company paid dividends for the year totaling $.50 per
share. Shareholder value was further enhanced by the repurchase of the 231,100
shares mentioned earlier. On September 30, 1996, the Company's stock was
trading at $12.75 per share compared to $17.25 per share on September 30, 1997,
which, when combined with the cash dividends paid during fiscal 1997, provided
an impressive 39.22% return.
<PAGE> 4
During the fiscal 1998 the Company looks forward to the opportunities
provided by opening its first in-store branch in the Wal-Mart Supercenter
located at 515 E. Loop 281 in Longview, Texas. We will be providing the state
of the art banking convenience for our customers, both existing and
prospective, through "one-stop" shopping service.
The Board of Directors, Management and Employees of your Company
remain committed to maximizing the value of your investment in Jacksonville
Bancorp, Inc. We thank you for the confidence that you have placed in the
Company and look forward to reporting continued successes in the future.
Sincerely,
/s/ Jerry Chancellor
Jerry Chancellor
President and C.E.O.
<PAGE> 5
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
The following selected consolidated financial and other data of the
Company does not purport to be complete and is qualified in its entirety by
reference to the more detailed financial information contained elsewhere
herein.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
SELECTED FINANCIAL
CONDITION AND OTHER DATA:
<S> <C> <C> <C> <C> <C>
Total assets $233,944 $217,856 $199,251 $187,021 $189,572
Cash and cash equivalents 4,114 5,193 8,051 7,003 7,637
Investment securities 25,931 33,805 42,907 44,892 41,348
Mortgage-backed securities, net 20,678 12,107 3,442 2,995 4,214
Loans receivable, net 174,044 158,034 135,933 123,133 126,030
Foreclosed real estate, net 526 1,051 2,052 2,549 4,623
Deposits 192,033 174,328 173,811 159,343 174,311
Borrowings 2000 2,000 358 4,461 --
Stockholders' equity 33,788 35,431 20,331 18,989 10,873
Full-service offices 5 5 5 4 4
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
SELECTED OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Total interest income $17,172 $15,394 $13,232 $12,895 $14,586
Total interest expense 8,771 8,453 7,127 5,623 6,951
------ ------ ------ ------ ------
Net interest income 8,401 6,941 6,105 7,272 7,635
Provision for losses on loans 110 100 25 18 325
------ ------ ------- ------ ------
Net interest income after
provision for losses on
loans 8,291 6,841 6,080 7,254 7,310
Noninterest income 1,392 1,290 927 970 938
Noninterest expense 5,063 5,846 5,045 4,638 4,564
------ ------ ------ ------ ------
Income before income taxes 4,620 2,284 1,962 3,586 3,684
Income taxes 1,380 704 573 1,184 1,606
------ ------ ------ ------ ------
Net income $ 3,240 $ 1,580 $ 1,389 $ 2,402 $ 2,078
====== ====== ====== ====== ======
Earnings per share(1) $1.30 $ .64 $ .56 $ .43 $--
---- --- --- --- --
Dividends Payout Ratio 34.99% 55.60% 29.47% 19.92% --%
===== ===== ===== ===== ==
</TABLE>
(Continued on following page)
1
<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
SELECTED OPERATING RATIOS(2):
<S> <C> <C> <C> <C> <C>
Return on average assets 1.45% .76% .73% 1.28% 1.09%
Return on average equity 9.35 6.13 7.06 16.57 21.03
Average equity to average 15.54 12.41 10.37 7.73 5.18
assets
Equity to assets at end of 14.44 16.27 10.20 10.15 5.74
period
Interest rate spread(3) 3.32 2.99 3.08 3.95 4.33
Net interest margin(3) 3.94 3.50 3.40 4.12 4.31
Non-performing loans and troubled
debt restructurings to total
loans at end of period(4) .59 .76 .70 .81 .95
Non-performing assets and troubled
debt restructurings to total
assets at end of period(4) .66 1.03 1.51 1.90 3.07
Average interest-earning
assets to average interest-
bearing liabilities 114.95 111.92 107.81 105.28 99.4
Net interest income after
provision for loan losses
to total noninterest expense 163.78 117.01 120.52 156.40 160.16
Noninterest expense to average
total assets 2.27 2.82 2.67 2.47 2.39
</TABLE>
- -----------------------
(1) Earnings per share amounts for prior years have been restated to give
effect to the exchange ratio of 1.41785 in connection with the
Reorganization effective March 29, 1996.
(2) With the exception of end of period ratios, all ratios are based on
average monthly balances during the periods and are annualized where
appropriate.
(3) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate
on interest-bearing liabilities. Net interest margin represents net
interest income as a percentage of average interest-earning assets.
(4) Non-performing loans consist of non-accrual loans and accruing loans
that are contractually past due 90 days or more, non-performing assets
consist of non-performing loans and real estate acquired by
foreclosure, deed in lieu thereof or deemed insubstance foreclosure
and troubled debt restructurings consist of restructured debt in
accordance with Statement of Financial Accounting Standards No. 15.
2
<PAGE> 7
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Jacksonville Bancorp, Inc. (the "Company"), through its wholly-owned
subsidiary, Jacksonville IHC, Inc., ("IHC") and Jacksonville Savings Bank, SSB
("Jacksonville"), wholly owned subsidiary of IHC, is primarily engaged in
attracting deposits from the general public and using those and other available
sources of funds to originate loans secured by single-family residences located
in Cherokee County and surrounding counties in East Texas. To a lesser extent,
Jacksonville also originates construction loans, land loans and consumer loans.
It also has a significant amount of investments in mortgage-backed securities
and United States Government and federal agency obligations.
The profitability of Jacksonville depends primarily on its net
interest income, which is the difference between interest and dividend income
on interest-earning assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on interest-bearing deposits and
borrowings. Jacksonville's net earnings also is dependent, to a lesser extent,
on the level of its noninterest income (including servicing fees and other
fees) and its noninterest expenses, such as compensation and benefits,
occupancy and equipment insurance premiums, and miscellaneous other expenses,
as well as federal income tax expense.
ASSET AND LIABILITY MANAGEMENT
The ability to maximize net interest income is largely dependent upon
the achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate-sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap," provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when
the amount of interest rate-sensitive assets exceeds the amount of interest
rate-sensitive liabilities, and is considered negative when the amount of
interest rate-sensitive liabilities exceeds the amount of interest
rate-sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect.
The lending activities of savings associations have historically
emphasized long-term, fixed-rate loans secured by single-family residences, and
the primary source of funds of such institutions has been deposits. The
deposit accounts of savings associations generally bear interest rates that
reflect market rates and largely mature or are subject to repricing within a
short period of time. This factor, in combination with substantial investments
in long-term, fixed-rate loans, has historically caused the income earned by
savings associations on their loan portfolios to adjust more slowly to changes
in interest rates than their cost of funds.
3
<PAGE> 8
Jacksonville originates both fixed- and variable-rate residential real
estate loans as market conditions dictate. Prior to November 1980,
Jacksonville, like virtually all savings associations, originated only
fixed-rate loans and held them in portfolio until maturity. As a result of the
problems caused by holding fixed-rate loans in a rapidly increasing
interest-rate environment, changes in regulations to allow for variable-rate
loans and consumer demand for such loans during periods of high interest rates,
in the 1980s Jacksonville began to transform its portfolio into loan products
the interest rates of which adjust periodically. As a result, Jacksonville's
loan portfolio, as of September 30, 1997 consisted of 51% of adjustable or
floating rate loans. In order to meet its customers' demand for fixed-rate
loans during periods of lower interest rates, until 1994 Jacksonville followed
a policy of selling to third parties a high percentage of the fixed-rate loans
it originated while retaining its variable-rate loans. The mixture of
originations for sale and originations for portfolio varies depending on the
general mix of interest-earning assets Jacksonville then currently holds in its
portfolio and other factors such as market fees for loan sales and the overall
interest-rate environment. As interest rates declined in late 1991,
Jacksonville originated an increasingly higher percentage of fixed-rate
residential first mortgage loans and continued to sell approximately 90% of
such loans upon origination. Since 1994, it has been Jacksonville's policy to
retain a large portion of its fixed-rate residential first mortgage loans with
terms of 15 years or less.
Notwithstanding the foregoing, however, because Jacksonville's
interest-bearing liabilities which mature or reprice within short periods
substantially exceed its earning assets with similar characteristics, material
and prolonged increases in interest rates generally would adversely affect net
interest income, while material and prolonged decreases in interest rates
generally, but to a lesser extent because of their historically low levels,
would have the opposite effect.
Effective upon the Bank's conversion to Texas chartered savings bank
on July 2, 1997, it no longer was entitled to receive periodic assessments of
its sensitivity to interest rate risk from the Office of Thrift Supervision
through the net portfolio value methodology. While no prediction about the
future movement of interest rates can be made, management does not believe,
based upon the most recently provided OTS report prior to its charter change
and the current interest rate environment, that the Bank faces a substantial
adverse interest rate risk. Management has determined to develop alternative
means to assess its interest rate risk and is in the process of selecting a
methodology for measuring interest rate risk that would be appropriate for the
Bank while meeting regulatory requirements.
CHANGES IN FINANCIAL CONDITION
At September 30, 1997, Jacksonville's assets totaled $233.9 million,
as compared to $217.9 million at September 30, 1996. Total assets increased
$16.0 million, or 7.4%, from September 30, 1996 to September 30, 1997. The
increase in total assets during fiscal 1997 was principally the result of a
$16.0 million or 10.1% increase in loans receivable, net from $158.0 million at
September 30, 1996 to $174.0 million at September 30, 1997. The increase
resulted from an increase in single-family residential loans of $8.5 million or
6.5%, an increase in construction loans, net of $1.7 million or 42.9% and an
increase in consumer loans of $6.1 million or 68.4% during the period. A $4.0
million, or 15.1% decrease in investment securities, held to maturity; a $3.9
million, or 52.9% decrease in investment securities available for sale; and a
$2.3 million, or 18.9% decrease in mortgage-backed securities, held to
maturity, was more than
4
<PAGE> 9
offset by a $11.4 million increase in mortgage-backed securities, available for
sale. These adjustments in Jacksonville's investment and mortgage-backed
securities portfolio were a result of management's decision to use these funds
to invest in loan originations and to purchase adjustable mortgage-backed
securities.
At September 30, 1996, Jacksonville's assets totaled $217.9 million,
as compared to $199.3 million at September 30, 1995. Total assets increased
$18.6 million, or 9.3%, from September 30, 1995 to September 30, 1996 and was
principally funded by the $14.0 million of net proceeds from the Stock
Offering. The increase in total assets during fiscal 1996 was principally the
result of a $22.1 million or 16.3% increase in loans receivable, net from
$135.9 million at September 30, 1995 to $158.0 million at September 30, 1996.
The increase resulted from an increase in single-family residential loans of
$14.7 million or 12.5%, an increase in construction loans of $2.7 million or
62.2% and an increase in consumer loans secured by vehicles of $2.0 million or
208% during the period. A $10.1 million, or 27.5%, decrease in investment
securities held to maturity was partially offset by a $8.7 million increase in
mortgage-backed securities held to maturity. These adjustments in
Jacksonville's investment portfolio are the result of the use of funds from
maturing investments to fund single family residential, construction and
consumer loans.
During the year ended September 30, 1997, total liabilities increased
$17.9 million or 9.8% to $200.0 million. This increase was primarily the
result of an increase in total deposits of $17.7 million, or 10.2%; an increase
in accrued expenses and other liabilities of $832,000, offset by a reduction in
the SAIF special assessment payable of $1.1 million.
During the year ended September 30, 1996, total liabilities increased
$3.6 million or 2.0% to $182.1 million. This increase was primarily the result
of $2 million of Federal Home loan Bank advances and a $1.1 million SAIF
special assessment. Jacksonville had no such advances outstanding as of
September 30, 1995 and the SAIF special assessment was a one-time event. These
increases were partially offset by the repayment of the $358,000 ESOP note.
5
<PAGE> 10
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
- --------------------------------------------------------------------------------
The following table presents for the periods indicated the total
dollar amount of interest from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollar and rates, and the net interest margin.
The table does not reflect any effect of income taxes. All average balances
are based on month-end balances. Management believes that the use of average
monthly balances is representative of its operations.
<TABLE>
<CAPTION>
SEPTEMBER 1997 1996
30, 1997 ---------------------------------- ----------------------------------
Yield/ Average Yield/ Average Yield/
Rate Balance Interest Rate Balance Interest Rate
--------- -------- -------- ---------- -------- -------- ---------
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(4) 8.28% $163,569 $14,094 8.62% $145,021 $12,169 8.39%
Mortgage-backed securities 6.87 16,434 1,135 6.91 9,561 700 7.32
Investment securities 5.84 28,292 1,657 5.86 37,109 2,170 5.85
Other interest-earning assets(2) 5.55 5,041 286 5.68 6,446 355 5.51
------- ----- ------- ------
Total interest-earning assets $213,336 $17,172 8.05% $198,137 $15,394 7.77%
------- ====== ==== ------- ====== ====
Non-interest-earning assets 9,586 9,565
------- -----
Total assets $222,922 $207,702
======= =======
INTEREST-BEARING LIABILITIES:
Transaction accounts 2.55% 43,884 1,140 2.60% 44,661 1,124 2.52%
Time Deposits 5.26 138,863 7,459 5.37 131,401 7,266 5.53
------- ----- ------- -----
Total Deposits 4.84 182,747 8,599 4.71 176,062 8,390 4.77
Borrowings 5.87 2,846 172 6.04 1,098 63 6.49
------- ----- ------- -----
Total interest-bearing liabilities 185,593 8,771 4.73% 177,160 8,453 4.78
------- ------ ==== ------- ===== ====
Non-interest-bearing liabilities 2,688 4,761
------- -----
Total liabilities 188,281 181,921
======= -------
Stockholder's Equity 34,641 25,781
------- ------
Total liabilities and stockholders' equity $222,922 $207,702
======= =======
Net interest income; interest rate spread $ 8,401 3.32% 6,941 2.99%
====== ==== ===== ====
Net interest margin(3) 3.94% 3.50%
==== ====
Average interest-earning assets to average
interest-bearing liabilities 114.95% 111.92%
====== ======
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------
Average Yield/
Balance Interest Rate
INTEREST-EARNING ASSETS: --------- -------- --------
<S> <C> <C> <C>
Loans receivable $128,623 $10,337 8.04%
Mortgage-backed securities 3,106 249 8.02
Investment securities 41,753 2,290 5.48
Other interest-earning assets(2) 6,227 356 5.72
------ ------
Total interest-earning assets $179,709 $13,232 7.36%
------- ====== ======
Non-interest-earning assets 10,074
-------
Total assets $189,783
=======
INTEREST-BEARING LIABILITIES:
Transaction accounts 44,215 1,209 2.73%
Time Deposits 119,514 5,715 4.78
------- -----
Total Deposits 163,729 6,924 4.23
Borrowings 2,956 203 6.87
------- -----
Total interest-bearing liabilities 166,685 7,127 4.28%
------- ----- =======
Non-interest-bearing liabilities 3,414
-------
Total liabilities 170,099
-------
Stockholder's Equity 19,684
-------
Total liabilities and stockholders' equity $189,783
=======
Net interest income; interest rate spread $6,105 3.08%
===== ======
Net interest margin(3) 3.40%
======
Average interest-earning assets to average
interest-bearing liabilities 107.81%
======
</TABLE>
- --------------------
(1) Annualized.
(2) Consists primarily of interest-bearing deposits.
(3) Net interest margin is net interest income divided by average
interest-earning assets.
(4) Includes non-accrual loans which do not significantly impact the
average.
6
<PAGE> 11
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected Jacksonville's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume), and (iii) total change in
rate and volume. The combined effect of changes in both rate and volume has
been allocated proportionately to the change due to rate and the change due to
volume.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------
1997 V. 1996 1996 VS. 1995
--------------------------------------- ----------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
INCREASE INCREASE
RATE VOLUME (DECREASE) RATE VOLUME (DECREASE)
------- ------- ------------ -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans $340 $1,585 $1,925 $ 466 $1,366 $ 1,832
Mortgage-backed securities (37) 472 435 (22) 473 451
Investment securities 3 (516) (513) 147 (267) (120)
Other interest-earning assets 12 (81) (69) (13) 12 (1)
--- ------ ----- ---- ---- -------
Total interest-earning assets $318 $1,460 $1,778 $ 578 $1,584 $ 2,162
=== ===== ===== ==== ===== ======
INTEREST-BEARING LIABILITIES:
Deposits $(104) $313 $209 $922 $544 $1,466
Other Borrowings (5) 114 109 (11) (129) (140)
--- ---- ---- ----- ----- -----
Total interest-bearing liabilities $(109) $ 427 $318 $911 $415 $1,326
===== ==== === === === =====
Increase (decrease) in net interest
income $1,460 $ 836
====== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1995 VS. 1994
---------------------------------------
INCREASE
(DECREASE)
DUE TO TOTAL
INCREASE
RATE VOLUME (DECREASE)
-------- ---------- -----------
<S> <C> <C> <C>
Interest-earning assets:
Loans $(98) $ 526 $ 428
Mortgage-backed securities (29) (32) (61)
Investment securities 14 (218) (204)
Other interest-earning assets 140 34 174
--- ----- -----
Total interest-earning assets $ 27 $ 310 $ 337
=== ===== =====
INTEREST-BEARING LIABILITIES:
Deposits $1,441 $ (134) $1,307
Other Borrowings 3 194 197
----- ----- -----
Total interest-bearing liabilities $1,444 $ 60 $ 1,504
===== ===== =====
Increase (decrease) in net interest
income $(1,167)
=======
</TABLE>
7
<PAGE> 12
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND
1996
GENERAL. Jacksonville had net earnings of $3.2 million for the year
ended September 30, 1997 as compared to $1.6 million for the year ended
September 30, 1996. During fiscal 1997, Jacksonville's net interest income
increased by $1.5 million and its noninterest income increased by $102,000
while the provision for losses on loans increased $10,000. Noninterest expense
decreased by $783,000, primarily as a result of the payment of the SAIF special
assessment of $1.1 million in 1996; offset by an increase of $292,000 in
compensation and benefits.
The $1.6 million increase in net earnings for fiscal 1997 was
primarily the result of an increase in the average balance of interest-earning
assets of $15.2 million or 7.7%. The amount of such assets increased primarily
as a result of use of the increase in deposits to fund loans receivable and
mortgage backed securities. The amount of the increased earnings was enhanced
by generally higher interest rates during the period in which the loans were
originated which resulted in the average yield on Jacksonville's
interest-earning assets increasing by 28 basis points from 7.77% in fiscal 1996
to 8.05% in fiscal 1997. The positive impact on earnings resulting from the
increase in average balance of and average yield on Jacksonville's
interest-earning assets was further enhanced by a 5 basis point decrease in
the average rate paid on interest-bearing liabilities from 4.78% in fiscal 1996
to 4.73% in fiscal 1997. The interest rate spread increased from 2.99% in
fiscal 1996 to 3.32% in 1997.
NET INTEREST INCOME. Net interest income increased by $1.5 million,
or 21.0%, for the year ended September 30, 1997 compared to the year ended
September 30, 1996. This increase was due primarily to a $1.8 million, or
11.6%, increase in total interest income partially offset by a $318,000 or 3.8%
increase total interest expense.
The $1.8 million increase in total interest income was the result of
increases in interest on loans receivable of $1.9 million or 15.8%, and
interest on mortgage-backed securities of $435,000 or 62.1%, offset by a
decrease in interest income of $513,000, or 23.6% from investment securities.
The increase in interest income from loans receivable was due primarily to a
$18.5 million, or 12.8%, increase in the average balance of Jacksonville's loan
portfolio. The increase in interest income from mortgage-backed securities
reflects an increase in average balance from $9.6 million in fiscal 1996 to
$16.4 million in fiscal 1997 partially offset by a decline in average yield
from 7.32% to 6.91% in the respective periods. The decrease in interest income
from investment securities reflects primarily a decrease in average balance
from $37.1 million to $28.3 million, or 23.8%. The decrease in the average
balance of securities reflects a shift in portfolio mix by management of
Jacksonville as funds from maturing investment securities were used to purchase
mortgage-backed securities and to fund new mortgage loans. The average yield
on loans originated and retained by Jacksonville during fiscal 1997 was 8.6%.
8
<PAGE> 13
The $318,000 increase in total interest expense from $8.5 million for
the year ended September 30, 1996, to $8.8 million for the year ended September
30, 1997, was primarily due to an increase in the growth of deposits. The
average rate paid on deposits decreased from 4.77% in fiscal 1996 to 4.71% in
fiscal 1997. The 6 basis point decrease in rates paid on average deposits
resulted from a general decrease in market rates of interest in the area on
longer term certificates of deposit which matured in 1997 and were reinvested
at lower rates.
Jacksonville's net interest rate spread was 3.32% for the year ended
September 30, 1997 as compared to 2.99% in fiscal 1996.
PROVISION FOR LOSSES ON LOANS. Jacksonville's provision for loan
losses was $110,000 for the year ended September 30, 1997 compared to $100,000
for the year ended September 30, 1996. Provisions for losses on loans are
charged to earnings to bring the total allowance to a level deemed appropriate
by management based on historical experience, the volume and type of lending
conducted by Jacksonville, industry standards, the amount of non-performing
assets, general economic conditions, particularly as they relate to
Jacksonville's market area, and other factors related to the collectability of
Jacksonville's loan portfolio. While non-performing loans reduced to $644,000
during fiscal 1997, net charge-offs for the period were up $18,000. The
Company's level of net loans outstanding increased $16.0 million which included
an increase of 68.4% in consumer loans. Overall economic conditions remained
stable for the market area and credit quality for the applicants showed no
material change. Upon consideration of such factors, Jacksonville determined
that $110,000 in provisions for losses on loans were appropriate in 1997,
primarily because of the increase in the loan portfolio. Jacksonville's
allowance for losses amounted to $1.2 million at September 30, 1997 as compared
to $1.1 million at September 30, 1996.
NON-INTEREST INCOME. Noninterest income amounted to $1.4 million for
the year ended September 30, 1997 compared to $1.3 million in fiscal 1996. The
$102,000 increase was due primarily to an increase in fees and deposit service
charges of $41,000 and an increase in income from real estate operations, net,
of $95,000; an increase of $33,000 in other noninterest income partially offset
by a decrease in income from origination of loan servicing of $68,000, as
management lowered its estimate of the value of servicing rights for loans
originated and sold during 1997. The increase in income from fees and deposit
service charges reflects an increase in loan originations and an increase in
service charges on deposits.
NON-INTEREST EXPENSE. Noninterest expense amounted to $5.1 million
for the year ended September 30, 1997 compared to $5.8 million during fiscal
1996. The primary reason for the $784,000, or 13.4% decrease in noninterest
expense during fiscal 1997 was the $1.1 million SAIF special assessment paid in
1996 combined with a reduction in insurance expense of $223,000, partially
offset by increases in compensation and benefits of $292,000; in occupancy and
equipment of $86,000; in provisions for real estate losses of $13,000, and
other noninterest expenses of $118,000. The Bank has actively marketed and
sold foreclosed real estate and the local real estate market has continued to
improve resulting in the
9
<PAGE> 14
reversal of previously established allowance for losses on foreclosed real
estate in 1997 and 1996. The SAIF special assessment resulted from legislation
enacted into law on September 30, 1996 which, among other things recapitalized
the SAIF through the special assessment. Pursuant to regulatory provisions
recently promulgated by the Federal Deposit Insurance Corporation, the
recapitalization resulted in a substantial reduction of deposit insurance
premiums for most SAIF members.
INCOME TAXES. Income tax expense amounted to $1.4 million during the
year ended September 30, 1997, compared to $704,000 in fiscal 1996. The
changes in such amounts primarily reflect differences in gross income levels of
Jacksonville. See Note 11 to Consolidated Financial Statements. During fiscal
1997 the Internal Revenue Service completed its examination of tax years 1994
and 1995 with no substantial change to net income in either year.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1996
AND 1995.
GENERAL. Jacksonville had net earnings of $1.6 million for the year ended
September 30, 1996 as compared to $1.4 million for the year ended September 30,
1995. During fiscal 1996, Jacksonville's net interest income increased by
$836,000 and its noninterest income increased by $362,000 while the provision
for losses on loans increased $75,000. Noninterest expense increased by
$802,000, primarily as a result of the SAIF special assessment. Without the
SAIF special assessment, Jacksonville's net earnings would have been $2.3
million for fiscal 1996, an increase of $700,000 or 44.7% as compared to the
net earnings for fiscal 1996.
The $900,000 increase in net earnings for fiscal 1996, as calculated
without the SAIF special assessment, was primarily the result of an increase in
the average balance of interest-earning assets of $18.4 million or 10.3%. The
amount of such assets increased primarily as a result of the deployment of the
$14.0 million of proceeds from the Stock Offering into loans receivable and
mortgage backed securities . The amount of the increased earnings was enhanced
by generally higher interest rates during the period in which the loans were
originated which resulted in the average yield on Jacksonville's
interest-earning assets increasing by 41 basis points from 7.36% in fiscal 1995
to 7.77% in fiscal 1996. The positive impact on earnings resulting from the
increase in average balance of and average yield on Jacksonville's
interest-earning assets was partially offset by the 50 basis point increase in
the average rate paid on interest-bearing liabilities from 4.28% in fiscal 1995
to 4.78% in fiscal 1996. The increase in average interest-earning assets,
however, more than offset the change in the interest rate spread from 3.08% in
fiscal 1995 to 2.99% in fiscal 1996.
NET INTEREST INCOME. Net interest income increased by $836,000, or
13.7%, for the year ended September 30, 1996 compared to the year ended
September 30, 1995. This increase was due primarily to a $2.2 million, or
16.3%, increase in interest income partially offset by a $1.3 million or 18.6%
increase interest expense.
10
<PAGE> 15
The $2.2 million increase in total interest income was the result of
increases in interest on loans receivable of $1.8 million or 17.7%, and
interest on mortgage-backed securities of $451,000 or 180.9%, offset by a
decrease in interest income of $120,000, or 5.2% from investment securities.
The increase in interest income from loans receivable was due primarily to a
$16.4 million, or 12.7%, increase in the average balance of Jacksonville*s loan
portfolio. The increase in interest income from mortgage-backed securities
reflects an increase in average balance from $3.1 million in fiscal 1995 to
$9.6 million in fiscal 1996 partially offset by a decline in average yield from
8.02% to 7.32% in the respective periods. The decrease in interest income from
investment securities reflects primarily a decrease in average balance from
$41.8 million to $37.1 million, or 11.1%. The decrease in the average balance
of securities reflects a shift in portfolio mix by management of Jacksonville
as funds from maturing investment securities were used to purchase
mortgage-backed securities and to fund new mortgage loans. The average yield
on loans originated and retained by Jacksonville during fiscal 1996 was 8.26%.
The $1.3 million increase in total interest expense from $7.1 million
for the year ended September 30, 1995, to $8.5 million for the year ended
September 30, 1996, was primarily due to an increase in the average rate paid
on deposits from 4.23% in fiscal 1995 to 4.77% in fiscal 1996. The 54 basis
point increase rates paid on deposits resulted from a general increase in
market rates of interest.
As a result of the foregoing, Jacksonville's net interest income
increased by $836,000 or 13.7%, during fiscal 1996 compared to fiscal 1995.
Jacksonville's net interest rate spread was 2.99% for the year ended September
30, 1996 as compared to 3.08% in fiscal 1995.
PROVISION FOR LOSSES ON LOANS. Jacksonville's provision for loan
losses was $100,000 for the year ended September 30, 1996 compared to $25,000
for the year ended September 30, 1995. Provisions for losses on loans are
charged to earnings to bring the total allowance to a level deemed appropriate
by management based on historical experience, the volume and type of lending
conducted by Jacksonville, industry standards, the amount of non-performing
assets, general economic conditions, particularly as they relate to
Jacksonville*s market area, and other factors related to the collectability of
Jacksonville's loan portfolio. Upon consideration of such factors,
Jacksonville determined that $100,000 in provisions for losses on loans were
appropriate in 1996. During fiscal 1996 Jacksonville had no chargeoffs or
recoveries. Jacksonville's allowance for losses amounted to $1.1 million at
September 30, 1996 as compared to $1.0 million at September 30, 1995.
Non-Interest Income. Noninterest income amounted to $1.3 million for
the year ended September 30, 1996 compared to $928,000 in fiscal 1995. The
$362,000 increase was due primarily to $230,000 in income from loan servicing
rights compared to no income from such rights in fiscal 1995, an increase in
fees and deposit service charges of $140,000 and an increase in income from
real estate operations, net, of $9,000, partially offset by a decrease of
$17,000 in other noninterest income. The income from servicing rights is the
result of Jacksonville's adoption of Financial Accounting Standards Board
("FASB") No. 122 which requires the recognition of income from loans sold at
the time of sale. The increase in
11
<PAGE> 16
income from fees and deposit service charges reflects an increase in loan
originations and an increase in service charges on deposits.
NON-INTEREST EXPENSE. Noninterest expense amounted to $5.8 million
for the year ended September 30, 1996 compared to $5.0 million during fiscal
1995. The primary reason for the $802,000, or 15.9% increase in noninterest
expense during fiscal 1996 was the $1.1 million SAIF special assessment which
was partially offset by a $102,000 reversal of a provision for real estate
losses compared to a $16,000 provision in fiscal 1995 and a $173,000 decrease
in other non-interest expenses. The SAIF special assessment resulted from
legislation enacted into law on September 30, 1996 which, among other things
recapitalized the SAIF through the special assessment. Pursuant to regulatory
provisions recently promulgated by the Federal Deposit Insurance Corporation,
the recapitalization will result in a substantial reduction of deposit
insurance premiums for most SAIF members.
INCOME TAXES. Income tax expense amounted to $704,000 during the year
ended September 30, 1996, compared to $573,000 in fiscal 1995. The changes in
such amounts primarily reflect differences in gross income levels of
Jacksonville.
LIQUIDITY AND CAPITAL RESOURCES
Jacksonville is required under applicable state regulations to
maintain specified levels of liquidity in an amount not less than 10% of its
average daily deposits for the most recently completed calendar quarter in cash
and readily marketable investments.
Cash was generated by Jacksonville's operating activities of $3.5 and
$3.1 million during the years ended September 30, 1997 and 1996, respectively,
primarily as a result of net earnings of $3.2 million and $1.6 million,
respectively. The adjustments to reconcile net earnings to net cash provided
by operations during the periods presented consisted primarily of the provision
for losses on loans, depreciation and amortization expense, amortization of
deferred loan origination fees and increases or decreases in other assets and
other liabilities. The primary investing activity of Jacksonville is lending
and purchases of investment and mortgage-backed securities, which is funded
with cash provided from operations and financing activities, as well as
proceeds from amortization and prepayments on existing loans and proceeds from
maturities of investment securities and mortgage-backed securities. During the
year ended September 30, 1997, Jacksonville's investing activities used cash of
$17.3 million principally as a result of net loan originations of $16.1
million; to purchase mortgage backed securities totaling $11.4 million; to
purchase investment securities of $6.0 million partially offset by proceeds on
maturity of investment securities of $14.0 million and principal paydown on MBS
of $2.3 million. During the year ended September 30, 1996, Jacksonville's
investing activities used cash of $21.6 million principally as a result of net
loan originations of $21.8 million; purchases of mortgage-backed securities of
$10.9 million; purchases of investment securities of $14.5 million; partially
offset by net proceeds from maturities of investment securities of $23.4
million; and principal paydowns on mortgage-backed securities of $2.2 million.
During the year ended September 30, 1997, Jacksonville's financing activities
generated cash of $12.7 million as a result of a net increase in deposits
12
<PAGE> 17
of $17.7 million offset by the purchase of Treasury Stock in the amount of $3.4
million; the payment of dividends in the amount of $1.2 million and the
purchase of MRP shares totaling $836,000. Jacksonville's financing activities
generated cash of $15.6 million during the year ended September 30, 1996 as a
result of a $14.0 million net proceeds from the sale of common stock, $2.0
million net proceeds of FHLB advances, offset by dividends of $877,000. For
additional information about cash flows from Jacksonville operating, financing
and investing activities, see the Consolidated Statements of Cash Flows
included in the Consolidated Financial Statements.
At September 30, 1997, Jacksonville had $4.8 million of outstanding
commitments to originate residential real estate loans and no commitments to
purchase investment securities. At the same date, the total amount of
certificates of deposit which are scheduled to mature by September 30, 1998 are
$121.8 million. Jacksonville believes that it has adequate resources to fund
commitments as they arise and that it can adjust the rate on savings
certificates to retain deposits in changing interest rate environments. If
Jacksonville requires funds beyond its internal funding capabilities, advances
from the FHLB of Dallas are available as an additional source of funds.
Jacksonville is required to maintain specified amounts of capital
pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") and regulations promulgated by the FDIC thereunder. The
capital standards generally require the maintenance of regulatory capital
sufficient to meet Tier 1 leveraged capital requirement, a tier 1 risk based
capital requirement and a total risk-based capital requirement. At September
30, 1997, Jacksonville's Tier 1 leveraged capital and Tier 1 risk-based
capital totaled $31.7 million or 13.66% of adjusted total assets and 25.41% of
risk-weighted assets, respectively. These capital levels exceeded the minimum
requirements at that date by approximately $22.4 million and $26.7 million,
respectively. Jacksonville's total risk based capital was $32.9 million at
September 30, 1997 or 26.4% of risk-weighted assets which exceeded the current
requirement of 8% of risk-weighted assets by approximately $22.9 million.
ACCOUNTING REQUIREMENTS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement No. 114, "Accounting by Creditors for Impairment of a Loan," which
was later amended by Statement No. 118, "Accounting by Creditors for Impairment
of Loan--Income Recognition and Disclosures." The Association adopted the new
standards effective October 1, 1995, and the implementation did not have a
material adverse effect on the Association's financial condition or results of
operations.
In March 1995, the FASB issued Statement No. 121 ("SFAS No. 121"),
entitled "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets,
certain identifiable intangibles, and goodwill related to those assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
13
<PAGE> 18
SFAS No. 121 is effective for financial statements for fiscal years beginning
after December 15, 1995. The Association adopted the provisions of SFAS No.
121 effective October 1, 1996 and it did not have a material adverse effect on
financial condition or results of operations.
In May 1995 the FASB issued Statement of Financial Accounting
Standards No. 122 ("SFAS No. 122") entitled "Accounting for Mortgage Servicing
Rights." This statement eliminates the accounting distinction between rights
to service mortgage loans for others that are acquired through loan origination
activities and those acquired through purchase transactions. The provisions of
SFAS No. 122 must be applied prospectively in fiscal years beginning after
December 15, 1995. Jacksonville adopted the provisions of SFAS No. 122,
effective October 1, 1995, and the effect of such change was to increase assets
and net income as reflected in the consolidated financial statements.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost
of all employee stock compensation plans based on the estimated fair value of
the award at the date it is granted. Companies are, however, allowed to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting, which generally does not result in compensation
expense recognition for most plans. Companies that elect to remain with the
existing accounting are required to disclose in a footnote to the financial
statements pro forma net income and, if presented, earnings per share, as if
SFAS No. 123 had been adopted. The accounting requirements of SFAS No. 123 are
effective for transactions entered into in fiscal years that begin after
December 15, 1995; however, companies are required to disclose information for
awards granted in their first fiscal year beginning after December 15, 1994.
The Company has elected to disclose the effect of this standard in the
consolidated financial statements and accordingly the adoption of this standard
in 1997 did not effect consolidated financial position or results of
operations.
IMPACT 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 changes in relative purchasing power over time due
to inflation.
Unlike most industrial companies, virtually all of Jacksonville's
assets and liabilities are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than does the effect of inflation.
14
<PAGE> 19
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Jacksonville Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Jacksonville Bancorp, Inc. and subsidiaries, as of September 30, 1997 and
1996, and the related consolidated statements of earnings, stockholders'
equity, and cash flows for each of the years in the three-year period ended
September 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Jacksonville
Bancorp, Inc. and subsidiaries, as of September 30, 1997 and 1996, and the
results of their operations and cash flows for each of the years in the three
year period ended September 30, 1997, in conformity with generally accepted
accounting principles.
/s/ HENRY & PETERS, P.C.
HENRY & PETERS, P.C.
Tyler, Texas
November 14, 1997
F-1
<PAGE> 20
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------------- -----------------
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 1,336,212 $ 2,777,737
Interest-bearing deposits 2,777,833 2,415,678
Investment securities:
Held-to-maturity, approximate fair market value of
$22,508,860 and $26,378,089, respectively 22,461,957 26,446,748
Available-for-sale, carried at fair value 3,468,900 7,358,750
Mortgage-backed certificates:
Held-to-maturity, approximate fair market value of
$9,936,023 and $12,107,707, respectively 9,824,878 12,107,184
Available-for-sale, carried at fair value 11,392,514 -
Loans receivable, net 174,044,353 158,034,126
Accrued interest receivable 1,952,013 1,633,042
Foreclosed real estate, net 526,234 1,051,033
Premises and equipment, net 3,388,532 3,256,065
Stock in Federal Home Loan Bank of Dallas, at cost 1,844,400 1,739,900
Mortgage servicing rights 437,581 231,541
Deferred tax assets 325,303 360,152
Other assets 163,776 444,088
------------ ------------
Total assets $233,944,486 $217,856,044
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $192,033,298 $174,327,887
Advance from Federal Home Loan Bank 2,000,000 2,000,000
Advances from borrowers for taxes and insurance 3,923,588 3,518,198
SAIF special assessment payable - 1,070,478
Accrued expenses and other liabilities 1,981,724 1,149,898
------------ ------------
Total liabilities 199,938,610 182,066,461
DEFERRED INCOME
Gain on sale of real estate owned 217,672 358,915
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 5,000,000 shares authorized; none issued - -
Common stock, $.01 par value, 25,000,000 shares authorized;
2,674,668 and 2,664,265 shares issued; 2,443,568 and 2,664,265
shares outstanding in 1997 and 1996, respectively 26,747 26,643
Additional paid-in capital 22,471,258 22,297,343
Retained earnings, substantially restricted 16,788,491 14,746,925
Less:
Treasury stock, at cost (231,100 shares) (3,423,528) -
Shares acquired by Employee Stock Ownership Plan (1,378,106) (1,528,219)
Shares acquired by Management Recognition Plan (682,483) (24,375)
Net unrealized loss on investments available-for-sale, net of
income taxes of $7,303 and $45,152, respectively (14,175) (87,649)
------------ ------------
Total stockholders' equity 33,788,204 35,430,668
------------ ------------
Total liabilities and stockholders' equity $233,944,486 $217,856,044
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 21
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- --------------- ---------------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable $14,093,616 $12,169,431 $10,337,486
Mortgage-backed securities 1,134,799 700,215 249,244
Investment securities 1,657,500 2,170,435 2,289,539
Other 286,566 354,197 355,540
----------- ----------- -----------
Total interest income 17,172,481 15,394,278 13,231,809
INTEREST EXPENSE
Deposits 8,599,136 8,390,643 6,924,045
Interest on borrowings 171,913 62,749 202,941
----------- ----------- -----------
Total interest expense 8,771,049 8,453,392 7,126,986
----------- ----------- -----------
Net interest income 8,401,432 6,940,886 6,104,823
PROVISION FOR LOSSES ON LOANS 110,084 100,000 25,197
----------- ----------- -----------
Net interest income after provision for
losses on loans 8,291,348 6,840,886 6,079,626
NONINTEREST INCOME
Fees and deposit service charges 947,783 906,612 767,202
Real estate operations, net 179,718 84,309 75,095
Other 101,604 68,245 85,299
Mortgage servicing rights 162,462 230,491 -
----------- ----------- -----------
Total noninterest income 1,391,567 1,289,657 927,596
NONINTEREST EXPENSE
Compensation and benefits 3,269,947 2,977,991 3,005,431
Occupancy and equipment 529,124 442,633 406,933
Insurance expense 224,658 447,528 433,967
Provisions for real estate losses (88,737) (102,142) 16,136
Other 1,127,519 1,010,016 1,182,539
SAIF special assessment - 1,070,478 -
----------- ----------- -----------
Total noninterest expense 5,062,511 5,846,504 5,045,006
INCOME BEFORE TAXES ON INCOME 4,620,404 2,284,039 1,962,216
TAXES ON INCOME
Current 1,383,880 623,000 556,146
Deferred (3,000) 81,000 17,000
----------- ----------- -----------
Total income tax expense 1,380,880 704,000 573,146
----------- ----------- -----------
Net earnings $ 3,239,524 $ 1,580,039 $ 1,389,070
=========== =========== ===========
Earnings per share $ 1.30 $ .64 $ .56
=========== =========== ===========
Average number of shares outstanding 2,485,535 2,483,708 2,460,765
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 22
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Unvested Unvested
Additional Shares Shares
Common Paid-in Held by Held by
Stock Capital ESOP MRP
--------- ----------- --------- ----------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 $ 26,496 $6,880,380 $(460,683) $(227,500)
ESOP shares released - 10,878 102,374 -
Accrual of management recognition
plan awards - - - 105,625
Dividends declared - - - -
Change in net unrealized loss
on securities available-for-sale - - - -
Shares issued under stock option plan 14 9,986 - -
Net earnings - - - -
--------- ----------- ------------ -----------
BALANCE AT SEPTEMBER 30, 1995 26,510 6,901,244 (358,309) (121,875)
Shares issued under stock option plan 78 54,762 - -
ESOP shares released - 20,480 124,820 -
Accrual of management recognition
plan awards - - - 97,500
Cancellation of shares held by
Jacksonville Federal Mutual
Holding Company (16,128) 16,128 - -
Proceeds from issuance of 1,618,409
shares of Jacksonville Bancorp, Inc.
common stock on March 29, 1996, net
of 140 fractional shares acquired, and
net of offering expense of $863,178 16,183 15,304,729 (1,294,730) -
Return of capital from Jacksonville
Federal Mutual Holding Company - - - -
Change in net unrealized loss on
securities available-for-sale - - - -
Dividends declared - - - -
Net earnings - - - -
--------- ----------- ------------ -----------
BALANCE AT SEPTEMBER 30, 1996 26,643 22,297,343 (1,528,219) (24,375)
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Loss on
Securities Total
Available- Retained Treasury Stockholders'
For-Sale Earnings Stock Equity
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1994 $(194,125) $12,964,133 $ - $18,988,701
ESOP shares released - - - 113,252
Accrual of management recognition
plan awards - - - 105,625
Dividends declared - (409,352) - (409,352)
Change in net unrealized loss
on securities available-for-sale 133,570 - - 133,570
Shares issued under stock option plan - - - 10,000
Net earnings - 1,389,070 - 1,389,070
--------- ----------- ------------ -----------
BALANCE AT SEPTEMBER 30, 1995 (60,555) 13,943,851 - 20,330,866
Shares issued under stock option plan - - - 54,840
ESOP shares released - - - 145,300
Accrual of management recognition
plan awards - - - 97,500
Cancellation of shares held by
Jacksonville Federal Mutual
Holding Company - - - -
Proceeds from issuance of 1,618,409
shares of Jacksonville Bancorp, Inc.
common stock on March 29, 1996, net
of 140 fractional shares acquired, and
net of offering expense of $863,178 - - - 14,026,182
Return of capital from Jacksonville
Federal Mutual Holding Company - 100,000 - 100,000
Change in net unrealized loss on
securities available-for-sale (27,094) - - (27,094)
Dividends declared - (876,965) - (876,965)
Net earnings - 1,580,039 - 1,580,039
--------- ----------- ------------ -----------
BALANCE AT SEPTEMBER 30, 1996 (87,649) 14,746,925 - 35,430,668
</TABLE>
F-4
<PAGE> 23
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
CONTINUED
<TABLE>
<CAPTION>
Unvested Unvested
Additional Shares Shares
Common Paid-in Held by Held by
Stock Capital ESOP MRP
------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996 $26,643 $22,297,343 $(1,528,219) $ (24,375)
Shares issued under stock
option plan 104 73,237 - -
ESOP shares released - 100,678 150,113 -
Purchase of management
recognition plan shares - - - (835,693)
Accrual of management
recognition plan awards - - - 177,585
Change in net unrealized
loss on securities
available-for-sale - - - -
Dividends declared - - - -
Net earnings - - - -
Purchase of Treasury stock - - - -
------- ----------- ----------- ---------
BALANCE AT SEPTEMBER 30, 1997 $26,747 $22,471,258 $(1,378,106) $(682,483)
======= =========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Loss on
Securities Total
Available- Retained Treasury Stockholders'
For-Sale Earnings Stock Equity
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30, 1996 $(87,649) $14,746,925 $ - $35,430,668
Shares issued under stock
option plan - - - 73,341
ESOP shares released - - - 250,791
Purchase of management
recognition plan shares - - - (835,693)
Accrual of management
recognition plan awards - - - 177,585
Change in net unrealized
loss on securities
available-for-sale 73,474 - - 73,474
Dividends declared - (1,197,958) - (1,197,958)
Net earnings - 3,239,524 - 3,239,524
Purchase of Treasury stock - - (3,423,528) (3,423,528)
-------- ----------- ----------- -----------
BALANCE AT SEPTEMBER 30, 1997 $(14,175) $16,788,491 $(3,423,528) $33,788,204
======== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 24
JACKSONVILLE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,239,524 $ 1,580,039 $ 1,389,070
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 212,715 187,119 179,385
Amortization/accretion of securities 37,035 148,300 121,942
Provision for losses (gains) on loans and on real
estate 21,347 (2,142) 41,333
Loans originated for sale (22,311,000) (21,848,000) (13,817,000)
Loans sold 22,311,000 21,848,000 13,817,000
Net loss on sale of other real estate 179,521 162,422 255,948
Accrual of MRP awards 177,585 97,500 105,625
Release of ESOP shares 250,791 85,217 10,878
Change in assets and liabilities:
Decrease (increase) in other assets 280,312 24,709 (111,127)
(Increase) decrease in deferred tax assets (3,000) 57,332 76,955
(Decrease) increase SAIF assessment payable (1,070,478) 1,070,478 -
Increase in accrued expenses and
other liabilities 831,826 163,262 33,717
Decrease in deferred income (141,243) (79,137) (131,534)
Increase in mortgage servicing rights (206,040) (231,541) -
Increase in accrued interest receivable (318,971) (184,694) (73,520)
------------ ------------- ------------
Net cash provided by operating activities 3,490,924 3,078,864 1,898,672
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds on maturity of investment securities 13,955,186 23,409,535 15,542,656
Purchase of investment securities (5,995,546) (14,474,405) (13,474,300)
Net principal originations on loans (16,062,470) (21,825,762) (14,450,731)
Proceeds from sale of foreclosed real estate 376,174 565,545 1,849,871
Purchase of mortgage-backed securities (11,371,963) (10,926,796) (1,001,897)
Principal paydowns on mortgage-backed securities 2,251,044 2,238,744 551,483
Capital expenditures (345,182) (534,461) (463,056)
Purchase of stock in FHLB Dallas (104,500) (103,700) (92,800)
Return of capital from mutual holding company - 100,000 -
------------ ------------- ------------
Net cash used in investing activities (17,297,257) (21,551,300) (11,538,774)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 17,705,411 516,941 14,467,835
Net increase in advance payments by
borrowers for property taxes and insurance 405,390 191,615 620,477
Advances from FHLB 5,000,000 4,000,000 -
Payment of FHLB advance (5,000,000) (2,000,000) (4,000,000)
Proceeds from sale of common stock - 14,026,182 -
Proceeds from exercise of stock options 73,341 54,840 10,000
Payment of ESOP loan - (298,226) -
Purchase of Treasury stock (3,423,528) - -
Purchase of MRP shares (835,693) - -
Dividends paid (1,197,958) (876,965) (409,352)
------------ -------------- ------------
Net cash provided by financing activities 12,726,963 15,614,387 10,688,960
------------ -------------- ------------
Net (decrease) increase in cash
and cash equivalents (1,079,370) (2,858,049) 1,048,858
CASH AND CASH EQUIVALENTS
Beginning of year 5,193,415 8,051,464 7,002,606
------------ -------------- ------------
End of year $ 4,114,045 $ 5,193,415 $ 8,051,464
============ ============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 25
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
NOTE 1 - BASIS OF PRESENTATION AND REORGANIZATION
The accompanying consolidated financial statements include the accounts of
Jacksonville Bancorp, Inc. (Company), and its wholly-owned subsidiary
Jacksonville IHC, Inc. (IHC), and its wholly-owned subsidiary Jacksonville
Savings Bank, SSB (Bank), and its wholly-owned subsidiary JS&L Corporation
(JS&L). The Company, through its principal subsidiary, the Bank, is
primarily engaged in attracting deposits from the general public and using
those and other available sources of funds to originate loans secured by
single-family residences located in the East Texas area. To a lesser extent,
the Bank also originates construction loans, land loans, and consumer loans.
IHC's main activity is holding an intercompany loan receivable from the Bank
in connection with the Bank's employee stock ownership plan. JS&L's main
activity is the servicing of purchased residential mortgage notes receivable.
All significant intercompany transactions and balances are eliminated in
consolidation.
On March 29, 1996, Jacksonville Savings and Loan Association (Association),
and Jacksonville Federal Mutual Holding Company (Mutual Holding Company),
completed a second step conversion (Reorganization). As part of the
Reorganization, Jacksonville Bancorp, was formed as a first-tier wholly-owned
subsidiary of the Association. The Mutual Holding Company was converted to
an interim federal stock savings association and simultaneously merged with
and into the Association. At that point, the Mutual Holding Company ceased
to exist and 1,137,500 shares, or 60.8%, of the outstanding Association's
common stock owned by the Mutual Holding Company was canceled. A second
interim savings and loan association (Interim) which was formed by
Jacksonville Bancorp solely for the Reorganization was then merged with and
into the Association. As a result of the merger of Interim with and into the
Association, the Association became a wholly-owned subsidiary of Jacksonville
Bancorp. Pursuant to an exchange ratio of 1.41785 shares for each share of
the Association common stock, the 737,734 outstanding public shares of the
Association were exchanged for approximately 1,045,996 shares of Jacksonville
Bancorp. The exchange ratio insured that the public stockholders of the
Association maintained a 39.2% ownership interest in Jacksonville Bancorp.
Concurrent with the Reorganization, Jacksonville Bancorp sold 1,618,409
additional shares to members of the Mutual Holding Company, employees of the
Association, and the public at a price of $10.00 per share. Reorganization
and offering costs of approximately $863,000 resulted in net proceeds from
the offering of approximately 14,026,000.
Each depositor of the Association, as of the effective date of the
Conversion, will have upon liquidation of the Association a right to their
pro rata interest in a liquidation account established pursuant to
regulations for the benefit of such depositors. The Association maintains
records to ensure such rights will receive statutory priority as required.
The reorganization was accounted for as a change in corporate form with the
historic basis of accounting for the Association unchanged.
On July 2, 1997, the Association consummated its conversion to a
state-chartered savings bank, Jacksonville Savings Bank, SSB. The main
purpose of the conversion was to reduce the duplication associated with
meeting the regulatory requirements of three regulators. With the conversion
to a state savings bank, the Bank will be regulated by the Texas Savings and
Loan Department and its primary federal regulator, and the insurer of its
deposits will be the FDIC. Prior to the conversion, the Association's
primary federal regulator had been the Office of Thrift Supervision.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Association classifies and accounts for debt and equity securities as
follows:
HELD-TO-MATURITY
Debt and equity securities that management has the positive intent and
ability to hold until maturity are classified as held-to-maturity and are
carried at their remaining unpaid principal balance, net of unamortized
premiums or unaccreted discounts. Premiums are amortized and discounts are
accreted using the level interest yield method over the estimated
remaining term of the underlying security.
F-7
<PAGE> 26
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVESTMENT AND MORTGAGE-BACKED SECURITIES - CONTINUED
AVAILABLE-FOR-SALE
Debt and equity securities that will be held for indefinite periods of
time, including securities that may be sold in response to changes in
market interest or prepayment rates, needs for liquidity and changes in
the availability of and the yield of alternative investments are
classified as available-for-sale. These assets are carried at market
value. Market value is determined using published quotes as of the close
of business. Unrealized gains and losses are excluded from earnings and
reported net of tax as a separate component of retained earnings until
realized.
TRADING SECURITIES
Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at market value, with unrealized gains and losses
included in earnings.
PREMISES AND EQUIPMENT
Land is carried at cost. Building, leasehold improvements, and furniture,
fixtures, and equipment are carried at cost, less accumulated depreciation
and amortization. Buildings and furniture, fixtures and equipment are
depreciated using the straight-line method over the estimated useful lives
of the assets. The cost of leasehold improvements is being amortized using
the straight-line method over the terms of the related leases.
FEDERAL INCOME TAXES
The Company and its subsidiaries plan to file a consolidated Federal income
tax return. The tax provision or benefit is based on income or loss
reported for financial statement purposes, and differs from amounts
currently payable or refundable because certain revenues and expenses are
recognized for financial reporting purposes differently than they are
recognized for tax reporting purposes. The cumulative effects of any
temporary differences are reflected as deferred income taxes using the
liability method (see Note 11).
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses, and net deferred loan origination fees and
discounts. Discounts on loans are recognized over the lives of the loans
using the interest method.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience known, and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value
of any underlying collateral, and current economic conditions. Currently,
the allowance for loan losses is formally reevaluated on a quarterly basis.
In management's opinion there are no material loans, either individually or
in the aggregate, which are impaired as defined by Statement of Financial
Accounting Standards No. 114, as amended by Statement No. 118.
While management uses available information to recognize losses on loans,
further additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies as an
integral part of their examinations, periodically review the allowance for
loan losses.
Uncollectible interest on loans that are contractually past due is
charged-off or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently
recognized only to the extent cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is returned to
accrual status.
F-8
<PAGE> 27
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
LOANS HELD-FOR-SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized by charges to earnings.
LOAN ORIGINATION AND COMMITMENT FEES AND RELATED COSTS
Loan fees received are accounted for substantially in accordance with FASB
Statement No. 91, "Accounting for Nonrefundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases."
Loan fees and certain direct loan origination costs are deferred, and the net
fee is recognized as an adjustment to interest income over the contractual
life of the loans. Commitment fees and costs relating to commitments whose
likelihood of exercise is remote are recognized over the commitment period on
a straight-line basis. If the commitment is subsequently exercised during
the commitment period, the remaining unamortized commitment fee at the time
of exercise is recognized over the life of the loan as an adjustment of
yield.
FORECLOSED REAL ESTATE
Real estate properties acquired through loan foreclosure are initially
recorded at the lower of cost (loan balance) or fair value, less estimated
costs of disposition, at the date of foreclosure. Costs relating to
development and improvement of property are capitalized, whereas costs
relating to holding property are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of a
property exceeds its estimated net realizable value. Currently, all major
foreclosed real estate properties are formally reevaluated on a quarterly
basis to determine the adequacy of the allowance for losses.
Gains on sale of foreclosed real estate are accounted for in accordance with
Statement of Financial Accounting Standards No. 66. When the borrower's
initial cash down payment does not meet the minimum requirements, the gain on
sale is deferred and recorded on the installment basis until such time as
sufficient principal payments are received to meet the minimum down payment
requirements. Losses on sale of foreclosed real estate are recognized at the
date of sale.
ESTIMATES
The preparation of financial consolidated statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management obtains
independent appraisals for significant properties.
MORTGAGE SERVICING RIGHTS
Effective October 1, 1995 with the adoption of Financial Accounting Standards
No. 122 (SFAS No. 122) entitled "Accounting for Mortgage Servicing Rights,"
the cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the estimated fair value of those
rights. Fair values are estimated using discounted cash flows based on
current market interest rates and market data regarding sales of mortgage
servicing rights. The Bank sells predominately single-family first mortgage
loans with simple risk characteristics and uses a single stratum for purposes
of measuring impairment. The amount of impairment recognized is the amount
by which the capitalized mortgage servicing rights exceed their fair value.
F-9
<PAGE> 28
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
EARNINGS PER SHARE
Earnings per share have been calculated by dividing net income by the
weighted average number of shares of common stock outstanding for the year.
The effect of shares issuable under stock options has been accounted for
using the treasury stock method. As discussed in Note 14, the Bank accounts
for shares issued to its Employee Stock Ownership Plans (ESOP) in accordance
with Statement of Position 93-6. As a result, shares controlled by the ESOP
are not considered in the weighted average number of shares of common stock
outstanding until the shares are committed for allocation to an employee's
individual account. All per share amounts and outstanding shares previously
reported for the Bank have been adjusted to reflect the Reorganization using
the exchange ratio of 1.41785 and adjusted for additional shares acquired by
the ESOP. While the number of outstanding shares has been restated for all
periods to reflect the Reorganization, earnings on the proceeds from the
Reorganization are reflected only in the third and fourth quarters of 1996.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based compensation," encourages, but does not require companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
company's stock at the date of the grant over the amount an employee must pay
to acquire the stock.
CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months
or less to be cash equivalents. A summary of cash and cash equivalents
follows:
<TABLE>
<CAPTION>
September 30,
------------------------------------------------
1997 1996 1995
-------------- ------------ -------------
<S> <C> <C> <C>
Cash on hand and in banks $ 1,336,212 $ 2,777,737 $ 2,248,481
Interest bearing deposits 2,777,833 2,415,678 5,802,983
------------ ------------ ------------
Cash and cash equivalents $ 4,114,045 $ 5,193,415 $ 8,051,464
============ ============ ============
Supplemental disclosure:
Cash paid for:
Interest $ 8,776,209 $ 8,439,688 $ 7,103,637
============ ============ ============
Income taxes $ 825,000 $ 500,000 $ 565,000
============ ============ ============
Non-cash operating activities:
Change in deferred taxes on net unrealized
gains and losses on securities
available-for-sale $ (37,850) $ 13,957 $ (64,809)
============ ============ ============
Non-cash investing activities:
Change in net unrealized gains and losses
on securities available-for-sale $ 111,323 $ (41,051) $ 202,379
============ ============ ============
Transfer from loans to real estate acquired
through foreclosure $ 689,000 $ 410,000 $ 958,000
============ ============ ============
Loans made relating to sale of foreclosed
real estate $ 569,805 $ 1,308,536 $ 1,502,600
============ ============ ============
Non-cash financing activities:
Reduction of ESOP obligation recorded
as compensation $ - $ - $ 102,374
============ ============ ============
</TABLE>
F-10
<PAGE> 29
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and estimated market values of investments in debt
securities are as follows as of September 30, 1997:
<TABLE>
<CAPTION>
Available-for-sale
---------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ --------------- -------------- ------------
<S> <C> <C> <C> <C>
U. S. Agency securities $ 3,493,535 $ 6,400 $ 31,035 $ 3,468,900
============ =============== ============== ============
</TABLE>
<TABLE>
<CAPTION>
Held-to-maturity
--------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ -------------- --------------- ------------
<S> <C> <C> <C> <C>
U. S. Treasury notes $ 6,492,139 $ 17,582 $ 6,121 $ 6,503,600
U. S. Agency securities 15,969,818 49,129 13,687 16,005,260
----------- -------------- -------------- -----------
$22,461,957 $ 66,711 $ 19,808 $22,508,860
=========== ============== ============== ===========
</TABLE>
The amortized cost and estimated market values of investments in debt
securities are as follows as of September 30, 1996:
<TABLE>
<CAPTION>
Available-for-sale
----------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
U.S. Agency securities $ 7,491,551 $ - $ 132,801 $ 7,358,750
============ ============= ============= ============
</TABLE>
<TABLE>
<CAPTION>
Held-to-maturity
---------------------------------------------------------------
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
U. S. Treasury notes $ 8,979,850 $ 7,329 $ 44,514 $ 8,942,665
U. S. Agency securities 17,466,898 70,623 102,097 17,435,424
----------- ------------ ------------- -----------
$26,446,748 $ 77,952 $ 146,611 $26,378,089
=========== ============ ============= ===========
</TABLE>
The scheduled maturities of securities at September 30, 1997, were as
follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
securities securities
-------------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 9,501,221 $ 9,485,475 $ 500,000 $ 480,000
Due from one to five years 11,960,736 12,015,885 1,993,603 1,998,900
Due from five to ten years 1,000,000 1,007,500 999,932 990,000
----------- ----------- ------------ ------------
$22,461,957 $22,508,860 $ 3,493,535 $ 3,468,900
=========== =========== ============ ============
</TABLE>
F-11
<PAGE> 30
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 3 - INVESTMENT SECURITIES - CONTINUED
The scheduled maturities of securities at September 30, 1996, were as
follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
securities securities
------------------------------- ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 9,004,738 $ 9,069,918 $ - $ -
Due from one to five years 17,442,010 17,308,171 4,491,775 4,431,250
Due from five to ten years - - 2,999,776 2,927,500
----------- ----------- ------------ ------------
$26,446,748 $26,378,089 $ 7,491,551 $ 7,358,750
=========== =========== ============ ============
</TABLE>
NOTE 4 - MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market values of mortgage-backed securities
are summarized as follows:
<TABLE>
<CAPTION>
Held-to-maturity
---------------------------------------------------------------
Estimated
September 30, Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
----------------------- ------------ -------------- --------------- ------------
<S> <C> <C> <C> <C>
GNMA certificates $ 1,078,879 $ 47,797 $ 9,000 $ 1,117,676
FHLMC certificates 2,397,944 25,736 13,579 2,410,101
FNMA certificates 6,348,055 65,604 5,413 6,408,246
------------- -------------- --------------- -------------
$ 9,824,878 $ 139,137 $ 27,992 $ 9,936,023
============ ============= ============== ============
</TABLE>
<TABLE>
<CAPTION>
Available-for-sale
---------------------------------------------------------------
Estimated
September 30, Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
----------------------- ------------ -------------- --------------- ------------
<S> <C> <C> <C> <C>
GNMA certificates $ - $ - $ - $ -
FHLMC certificates 4,840,229 11,962 354 4,851,837
FNMA certificates 6,549,129 - 8,452 6,540,677
----------- -------------- --------------- -----------
$11,389,358 $ 11,962 $ 8,806 $11,392,514
=========== ============== =============== ===========
</TABLE>
<TABLE>
<CAPTION>
Held-to-maturity
---------------------------------------------------------------
Estimated
September 30, Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
----------------------- ------------ -------------- --------------- ------------
<S> <C> <C> <C> <C>
GNMA certificates $ 1,283,657 $ 41,817 $ 33,256 $ 1,292,218
FHLMC certificates 3,553,077 21,408 37,966 3,536,519
FNMA certificates 7,270,450 9,923 1,403 7,278,970
----------- -------------- -------------- -----------
$12,107,184 $ 73,148 $ 72,625 $12,107,707
=========== ============== ============== ===========
</TABLE>
There were no mortgage-backed securities available-for-sale at September 30,
1996.
F-12
<PAGE> 31
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 4 - MORTGAGE-BACKED SECURITIES - CONTINUED
The scheduled maturities of mortgage-backed securities at September 30, 1997,
were as follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
securities securities
------------------------------ ----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ - $ -
Due from one to five years 767,975 769,643 - -
Due from five to ten years 4,091,899 4,658,611 - -
Due after ten years 4,965,004 4,507,769 11,389,358 11,392,514
------------ ------------ ----------- ------------
$ 9,824,878 $ 9,936,023 $11,389,358 $11,392,514
============ ============ =========== ===========
</TABLE>
The scheduled maturities of mortgage-backed securities as of September 30,
1996, were as follows:
<TABLE>
<CAPTION>
Held-to-maturity Available-for-sale
securities securities
------------------------------ ---------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 881,477 $ 881,477 $ - $ -
Due from one to five years 794,561 794,561 -
Due from five to ten years 2,905,467 2,915,390 - -
Due after ten years 7,525,679 7,516,279 - -
----------- ----------- -------------- -------------
$12,107,184 $12,107,707 $ - $ -
=========== =========== ============== =============
</TABLE>
NOTE 5 - LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Mortgage loans (principally conventional):
Single family residential $141,106,415 $132,599,211
Multi-family residential 1,143,982 1,268,331
Commercial 9,491,964 8,604,174
Construction 10,799,609 6,996,272
Land 3,445,890 4,394,732
------------ ------------
165,987,860 153,862,720
Business and Consumer loans:
Commercial business 76,261 218,984
Consumer:
Secured by deposits 2,126,445 2,289,873
Secured by vehicles 6,537,021 2,961,000
Personal real estate loans 4,274,291 2,685,808
Other 1,983,294 921,535
------------ ------------
14,997,312 9,077,200
------------ ------------
Total loans 180,985,172 162,939,920
Less:
Undisbursed portion of loans in process (5,024,707) (2,956,166)
Unearned discounts (62,338) (89,217)
Net deferred loan-origination fees (661,797) (760,411)
Allowance for loan losses (1,191,977) (1,100,000)
------------ ------------
Net loans $174,044,353 $158,034,126
============ ============
</TABLE>
F-13
<PAGE> 32
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 5 - LOANS RECEIVABLE - CONTINUED
The Bank at September 30, had mortgage loan commitments outstanding
substantially all of which are at rates to be determined at closing (rates
range from 7.25% to 10.00%) as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Variable-rate $ 729,000 $ 586,922
Fixed-rate 4,092,301 4,785,563
---------- ----------
$4,821,301 $5,372,485
========== ==========
</TABLE>
The Bank had committed to sell a substantial portion of fixed-rate loans when
funded.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 1,100,000 $ 1,000,000 $ 1,000,087
Provision charged to income 110,084 100,000 25,197
Charge-offs (18,107) - (56,962)
Recoveries - - 31,678
Balance at end of period $ 1,191,977 $ 1,100,000 $ 1,000,000
============ ============ ============
</TABLE>
At September 30, 1997 and 1996, there were no material loans which were
impaired as defined by FASB Statement No. 114, as amended by FASB Statement
No. 118. However, the Bank did have non-accrual loans, for which FASB
Statement No. 114 does not apply, of $644,000 and $815,000, at September 30,
1997 and 1996, respectively. The Bank is not committed to lend additional
funds to debtors whose loans have been modified.
Loans to officers and directors totaled $354,000 and $361,000 at September
30, 1997 and 1996, respectively.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal
balances of these loans is summarized as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Mortgage loans underlying FHLMC
pass-through securities $62,078,118 $47,171,302 $31,096,293
=========== =========== ===========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $1,419,000 and $1,125,000, at September 30, 1997
and 1996, respectively.
NOTE 6 - REAL ESTATE
An analysis of the activity in the allowance for losses in real estate
acquired in settlement of loans follows:
<TABLE>
<CAPTION>
September 30,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of period $ 1,691,527 $ 2,050,507 $ 2,229,666
Provisions for losses (88,737) (102,142) 16,136
Charge-offs (297,818) (256,838) (195,295)
Recoveries - - -
------------ ------------ ------------
Balance at end of period $ 1,304,972 $ 1,691,527 $ 2,050,507
============ ============ ============
</TABLE>
For regulatory reporting purposes the above amounts are reported as
"specific" reserves and are allocated to specific properties. The Bank
carries its "general valuation allowance" as an allowance for loan losses
(see Note 5).
F-14
<PAGE> 33
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 7 - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
September 30,
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Investment securities $ 384,752 $ 548,638
Mortgage-backed securities 149,218 82,575
Loans receivable 1,418,043 1,001,829
----------- -----------
$1,952,013 $1,633,042
========== ==========
</TABLE>
NOTE 8 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
--------------------------- Estimated
1997 1996 Useful Lives
---------- ---------- -------------
<S> <C> <C> <C>
Land $ 466,718 $ 466,718 -
Building and improvements 3,393,362 3,252,841 5 to 40 years
Furniture, fixtures and equipment 1,978,494 1,773,835 3 to 15 years
---------- ----------
5,838,574 5,493,394
Less accumulated depreciation 2,450,042 2,237,329
---------- ----------
$3,388,532 $3,256,065
========== ==========
</TABLE>
NOTE 9 - DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ----------------------------
Amount Percent Amount Percent
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Transaction accounts:
Demand and NOW $18,411,158 9.60 $13,176,028 7.56
Money market 15,829,107 8.24 17,648,483 10.12
Passbook savings 12,202,513 6.35 11,423,531 6.55
------------ -------- ------------ ---------
46,442,778 24.19 42,248,042 24.23
------------ -------- ------------ ---------
Certificates of deposit:
3% to 4% $ - - $ 3,973,491 2.28
4% to 5% 24,305,496 12.66 46,339,139 26.58
5% to 6% 99,707,956 51.92 50,047,745 28.72
6% to 7% 21,280,985 11.08 31,368,135 17.99
7% to 8% 150,153 .08 212,336 .12
8% to 9% 145,930 .07 138,999 .08
------------ -------- ------------ ---------
145,590,520 75.81 132,079,845 75.77
------------ -------- ------------ ---------
$192,033,298 100.00 $174,327,887 100.00
============ ======== ============ =========
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $23,191,000 and
$17,171,000, at September 30, 1997 and 1996, respectively.
Scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
1997
----------------------------
Term to maturity Amount Percent
------------------ ------------ --------
<S> <C> <C>
Within 12 months $121,806,474 83.66
12 to 24 months 13,502,534 9.27
24 to 36 months 10,000 .01
Greater than 36 months 10,271,512 7.06
------------ --------
$145,590,520 100.00
============ ========
</TABLE>
F-15
<PAGE> 34
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 9 - DEPOSITS - CONTINUED
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Money Market $ 597,484 $ 579,466 $ 642,044
Passbook savings 340,422 338,728 328,008
NOW 201,920 205,815 239,489
Certificates of deposit 7,459,310 7,266,634 5,714,504
---------- ---------- ----------
$8,599,136 $8,390,643 $6,924,045
========== ========== ==========
</TABLE>
The Federal Reserve Board requires all depository institutions to maintain
reserves against their transaction accounts (primarily NOW and Super NOW
checking accounts) and non-personal time deposits. Required reserves must be
maintained in the form of vault cash or a non-interest-bearing account at a
Federal Reserve Bank.
In September 1996, Congress passed legislation to recapitalize the Savings
Association Insurance Fund (SAIF) which insures Bank depositors up to
applicable limits established by the Federal Deposit Insurance Corporation
(FDIC). This recapitalization will result in a substantial reduction in
future insurance premiums (based on current rates) and will put the Bank at
the same premium level as a well capitalized commercial bank. This one time
assessment of $1,070,000 was accrued as a charge to expense in the
accompanying September 30, 1996 statement of earnings.
NOTE 10 - BORROWINGS
During June, 1996, the Bank borrowed $4,000,000 from the Federal Home Loan
Bank of Dallas. The $2,000,000 balance at September 30, 1997, bears interest
at 5.87% and is due June 2003. The note is secured by a pledge of Federal
Home Loan Bank stock.
NOTE 11 - FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. If certain conditions are met in determining taxable income, the
Bank is allowed a special bad-debt deduction, based on a percentage of
taxable income (presently 8%), or on specified experience formulas. This
special bad-debt deduction is repealed for years beginning after January 1,
1997.
The provision for Federal income taxes differs from that computed at the
statutory corporate tax rate as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense $1,570,937 $ 776,573 $ 667,153
Adjustments:
SFAS No. 122 mortgage servicing rights (55,237) (78,367) -
Bad-debt deduction and real estate losses (161,600) (12,200) (101,799)
Other 26,780 17,994 7,792
---------- ---------- ----------
$1,380,880 $ 704,000 $ 573,146
========== ========== ==========
</TABLE>
Deferred taxes are provided for timing differences in the recognition of
income and expense for tax and financial statement purposes. The sources and
effects of these differences are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Deferred loan fees $ 33,529 $ 45,270 $ 14,881
Accrued pension liability (18,192) (15,877) (19,335)
FHLB stock dividends 35,530 35,360 31,552
Deferred compensation 31,883 21,707 -
Deferred loan costs (65,334) - -
Other, net (20,416) (5,460) (10,098)
----------- ----------- -----------
$ (3,000) $ 81,000 $ 17,000
=========== =========== ===========
</TABLE>
F-16
<PAGE> 35
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 11 - FEDERAL INCOME TAXES - CONTINUED
The components of the net deferred tax assets shown in the accompanying
balance sheets at September 30, were comprised of the following:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Deferred income tax assets:
Net unrealized losses on available-for-sale securities $ 8,376 $ 45,162
Deferred loan fees 225,011 258,000
Deferred compensation and other employee benefits 333,872 321,000
Deferred loan costs 65,334 -
------------ -----------
Total deferred income tax assets 632,593 624,162
Deferred income tax liabilities:
FHLB stock dividends 165,618 130,000
Book/tax depreciation difference 141,672 133,000
Other - 1,010
------------ -----------
Total deferred income tax liabilities 307,290 264,010
------------ -----------
Net deferred income tax assets $ 325,303 $ 360,152
============ ===========
</TABLE>
Stockholders' equity at September 30, 1997 and 1996, includes approximately
$3,000,000, for which no deferred Federal income tax liability (approximately
$1,020,000) has been recognized. These amounts represent an allocation of
bad-debt deductions for tax purposes only. Reduction of amounts so allocated
for purposes other than tax bad-debt losses would create income for tax
purposes only, which would be subject to the then-current corporate income
tax rate.
NOTE 12 - STOCKHOLDERS' EQUITY
The Mutual Holding Company had requested and received approval from the
Office of Thrift Supervision to waive receipt of dividends on its shares
through March 31, 1996. Dividends declared by the Association on Mutual
Holding Company shares total $1,365,000 at September 30, 1996. Since the
Mutual Holding Company ceased to exist effective March 29, 1996, this amount
remains restricted for the payment of dividends to Company stockholders.
NOTE 13 - PENSION PLAN, THRIFT PLAN AND DEFERRED COMPENSATION
The Bank has a qualified defined benefit retirement plan covering
substantially all of its employees. The benefits are based on each
employee's years of service and the average of the highest compensation for
sixty consecutive completed calendar months. The benefits are reduced by a
specified percentage of the employee's social security benefit. An employee
becomes fully vested upon completion of five years of qualifying service. It
is the policy of the Bank to fund an amount between the minimum and the
maximum amount that can be deducted for Federal income tax purposes.
The following table sets forth the plan's funded status and amounts
recognized in the Bank's consolidated statements of financial condition at
September 30:
Actuarial present value of benefit obligations:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Accumulated benefit obligation:
Vested $ 946,464 $1,453,490
Nonvested 8,702 122,567
----------- ----------
955,166 1,576,057
Effect of projected future compensation 738,890 579,773
----------- ----------
Projected benefit obligation for service rendered to date 1,694,056 2,155,830
Plan assets at fair value; primarily cash and short-term investments 1,596,085 2,328,220
----------- ----------
Plan assets in excess of (less than) projected benefit obligation $ (97,971) $ 172,390
=========== ==========
</TABLE>
F-17
<PAGE> 36
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 13 - PENSION PLAN, THRIFT PLAN AND DEFERRED COMPENSATION - CONTINUED
The components of computed net pension expense for the years ended
September 30, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 95,691 $ 127,148 $ 118,410
Interest cost on projected benefit obligation 149,291 155,090 148,447
Actual return on plan assets (112,625) (118,323) (119,522)
Net amortization and deferral (50,215) (10,411) (514)
----------- ---------- ----------
Net pension expense $ 82,142 $ 153,504 $ 146,821
=========== ========== ==========
Assumptions used to develop the net periodic
pension cost were:
Discount rate 7.00% 7.00% 6.75%
Expected long-term rate of return on assets 6.50% 6.50% 6.50%
Rate on increase in compensation levels 5.00% 5.00% 5.00%
</TABLE>
The Bank has a defined contribution thrift plan in effect for substantially
all employees. Compensation and benefits expense includes $39,516 in 1997,
$39,508 in 1996, and $39,710 in 1995 for such plan. The thrift plan permits
employee contributions in the amount of 1% to 6% of compensation. The Bank
contributes for each thrift plan participant a matching contribution equal to
50% of the participant's contribution. In addition to the required matching
contributions, the Bank may contribute an additional amount of matching
contributions determined by the Board of Directors at its discretion.
In addition to the aforementioned benefit plans, the Bank has deferred
compensation arrangements with key officers and certain directors. The
deferred compensation is funded through life insurance contracts and calls
for annual payments for a period of ten years. The Bank funds the cost of
the insurance for the officers while the cost of directors' insurance is
funded through a reduction in their normal directors' fees. Vesting occurs
after specified years of service and payments begin upon retirement. Expense
reported in the statement of earnings under these arrangements totaled
approximately $100,000 in 1997, $73,000 in 1996, and $33,000 in 1995. At
September 30, 1997 and 1996, the Bank had recorded a net liability of
$300,000 and $271,000, respectively, related to such arrangements.
NOTE 14 - EMPLOYEE STOCK OWNERSHIP PLAN
The Bank has established an Employee Stock Ownership Plan (ESOP) for
employees age 21 or older who have at least one year of credited service with
the Bank. The ESOP will be funded by the Bank's contributions made in cash
(which primarily will be invested in Company common stock) or common stock.
Benefits may be paid either in shares of common stock or in cash. The Bank
accounts for its ESOP in accordance with the AICPA's Statement of Position
93-6.
During 1994, the ESOP borrowed $511,870 from a local bank and used the
proceeds to purchase 51,187 shares of Association common stock (exchanged for
72,575 shares of Jacksonville Bancorp stock in 1996). The balance of this
note was paid in full in connection with the Reorganization. Also, in
conjunction with the Reorganization, the ESOP acquired an additional 129,473
shares of common stock of the Company.
F-18
<PAGE> 37
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 14 - EMPLOYEE STOCK OWNERSHIP PLAN - CONTINUED
The Bank makes annual contributions to the ESOP equal to the debt service,
less dividends received on the unallocated shares. The ESOP shares have been
pledged as collateral for the loan. As the loan is repaid, shares are
released from collateral and committed for allocation to active employees,
based on the proportion of debt service paid in the year. The shares pledged
as collateral is reported as stock acquired by the ESOP plan in the statement
of financial condition. As shares are released from collateral, the Bank
reports compensation expense equal to the average fair value of the shares
over the period in which the shares were earned. Also, the shares become
outstanding for earnings per share computations. Dividends on allocated
shares are recorded as a reduction of retained earnings, and dividends on
unallocated shares are recorded as a reduction of the loan and accrued
interest. ESOP compensation expense was $263,000, $153,000, and $114,000 for
the years ended September 30, 1997, 1996, and 1995, respectively. At
September 30, 1997 and 1996, 72,374 and 49,226 ESOP shares, respectively,
have been released for allocation, of which 42,331 and 28,792 were allocated
to participants at September 30, 1997 and 1996, respectively. The fair value
of the unreleased shares of 138,297 and 161,445 at September 30, 1997 and
1996, was approximately $2,385,600 and $2,058,000, respectively.
NOTE 15 - MANAGEMENT RECOGNITION PLAN
As part of the initial conversion, the Bank adopted a Management Recognition
Plan (MRP) to enable the Bank to provide officers and employees with a
proprietary interest in the Association as incentive to contribute to its
success.
The Bank contributed $292,500 to the MRP Trust, and the MRP Trust purchased
29,250 shares of common stock (exchanged for 41,472 shares of Jacksonville
Bancorp stock in 1996). The committee appointed by the board of directors on
March 31, 1994, granted all 41,472 shares to 13 officers. The shares granted
are in the form of restricted stock to be earned and payable over a
three-year period at the rate of one-third per year beginning, March 31,
1995.
In October 1996, the Bank adopted a second MRP Trust. The Bank contributed
$835,700 to the MRP Trust, and the MRP Trust purchased 55,028 shares of
common stock. The shares granted are in the form of restricted stock earned
and payable over a five-year period at twenty percent (20%) per year,
beginning on October 22, 1997.
Compensation expense in the amount of the fair market value of the common
stock at the date of the grant to the officer or employee is being recognized
pro rata over the period during which the shares are earned and payable. MRP
expense included in compensation and benefits in the accompanying
consolidated statements of earnings totaled $177,000, $97,500, and $106,000
for the years ended September 30, 1997, 1996, and 1995, respectively.
NOTE 16 - STOCK OPTION PLANS
Certain directors and officers have options to purchase shares of the
Associations' common stock under its 1994 Stock Incentive Plans. The option
price is the fair market value at the date of grant. The options are
exercisable, beginning September 30, 1994, and expire March 31, 2004. Under
the option plans, 73,123 shares were reserved for issuance and, at September
30, 1994, no shares remain available for future grant to directors, officers
and employees on a merit basis. In connection with the formation of the
Company and issuance of additional stock effective March 31, 1996, the shares
under option were converted to Company shares at a ratio of 1.41785 for each
share under option. The option price per share was adjusted according to
$7.05 per share.
On October 22, 1996, stockholders approved the Company's 1996 Stock Incentive
Plans. Under these plans, 161,840 shares were reserved for issuance to
director and officers. All shares were granted and no shares remain
available for future grant. The option price is the fair market value at the
date of grant. The options are exercisable, beginning October 1997, vest 20%
per year, and expire October 22, 2007.
F-19
<PAGE> 38
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 16 - STOCK OPTION PLANS - CONTINUED
A summary of activity in the Company's stock incentive plans follows:
<TABLE>
<CAPTION>
Number Aggregate Weighted Average
of Option Price
Shares Price Per Share
--------- ----------- ---------
<S> <C> <C> <C>
Options outstanding at September 30, 1995 102,260 $ 721,230 $7.05
Options exercised 7,775 54,840 7.05
--------- ------------ ------
Options outstanding at September 30, 1996 94,485 666,390 7.05
Options granted 161,840 2,043,230 12.63
Options exercised 10,403 73,341 7.05
--------- ------------ ------
Options outstanding at September 30, 1997
(excise price of $7.05 to $12.63 per share) 245,922 $2,636,279 $10.70
========= ========== ======
Exercisable at September 30, 1997 84,082 $ 592,778 $ 7.05
========= =========== ======
</TABLE>
The weighted average fair value at date of grant for options granted under
the 1996 Stock Incentive Plans was approximately $4.10 per option. The fair
value of options at date of grant was estimated using a binomial model with
the following assumptions:
<TABLE>
<S> <C>
Expected life (years) 8
Interest rate 6.6%
Volatility 20%
Dividend yield 3%
</TABLE>
Stock-based compensation costs would have reduced net income and earnings per
share on a proforma basis for 1997, by approximately $88,000 and $.04 per
share, respectively, had the fair values at options granted in that year been
recognized as compensation expense on a straight-line basis over the vesting
period of the grant. The proforma effect on net income for 1997 is not
representative of the proforma effect on net income for future years, because
it does not take into effect grants made in prior years.
NOTE 17 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company and subsidiaries have various
outstanding commitments and contingent liabilities that are not reflected in
the accompanying consolidated financial statements. In addition, the Company
and subsidiaries are defendants in certain claims and legal actions arising
in the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material adverse effect on the consolidated financial
position of the Company and subsidiaries.
The Bank is obligated under noncancelable operating leases for computer
equipment. Leases are generally short-term and the remaining commitment at
September 30, 1997, is not significant to the Company's operations or
financial condition.
NOTE 18 - REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
F-20
<PAGE> 39
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 18 - REGULATORY MATTERS - CONTINUED
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of risk-based capital to risk-weighted assets, and of core and
tangible capital to total assets. Management believes that, as of September
30, 1997, the Bank meets all capital adequacy requirements to which it is
subject.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual: Adequacy Purposes: Action Provisions:
----------------------------------------------------------------------------
As of September 30, 1997: Amount Ratio Amount Ratio Amount Ratio
- ------------------------- ----------- ------ ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Risk-based capital
(to risk-weighted assets) $32,870,234 26.37% $9,971,621 8.0% $12,464,526 10.0%
Leverage capital
(to adjusted total assets) $31,678,257 13.66% $9,278,927 4.0% $11,598,658 5.0%
Tier I capital
(to risk-weighted assets) $31,678,257 25.41% $4,985,810 4.0% $7,478,715 6.0%
</TABLE>
NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the financial statements. The
contractual amounts of those instruments reflect the extent of involvement
the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses
the same credit policies in making commitments and conditional obligations as
they do for on-balance-sheet instruments. Unless noted otherwise, the
Company generally requires collateral to support financial instruments with
credit risk.
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 the majority of the
commitments are expected to be funded, the total commitment amounts represent
future expected cash requirements. The Company evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained
if deemed necessary by the Company upon extension of credit is based in part
on management's credit evaluation of the counter-part. Collateral held
varies, but consists principally of residential real estate and deposits.
NOTE 20 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The economy of the Company's market area, East Texas, has in the past been
directly tied to the oil and gas industry. Oil and gas prices have had an
indirect effect on the Bank's business. Although the Bank has a diversified
loan portfolio, a significant portion of its loans are secured by real
estate. Repayment of these loans is in part dependent upon the economic
conditions in the market area. Part of the risk associated with real estate
loans has been mitigated, since much of this group represents loans secured
by residential dwellings that are primarily owner-occupied. Losses on this
type of loan have historically been less than those on speculative and
commercial properties. The Bank's loan policy requires appraisal prior to
funding any real estate loans and outlines the appraisal requirements on
those renewing.
F-21
<PAGE> 40
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 21 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
CASH AND INTEREST-BEARING DEPOSITS
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
For securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
ACCRUED INTEREST
The carrying amounts of accrued interest approximates their fair values.
LOANS RECEIVABLE
For certain homogeneous categories of loans, such as residential mortgages,
fair value is estimated using the quoted market prices for securities backed
by similar loans, adjusted for differences in loan characteristics. The fair
value of other types of loans is estimated by discounting the future cash
flows, using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
BORROWINGS
Rates currently available to the Bank for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
At September 30, 1997 and 1996, the Bank had not issued any standby letters
of credit. Commitments to extend credit totaled $9,905,000 and $5,372,000,
at September 30, 1997 and 1996, respectively, and consisted primarily of
agreements to fund mortgage loans at the prevailing rates based upon
acceptable collateral. Fees charged for these commitments are not
significant to the operations or financial position of the Bank and primarily
represent a recovery of underwriting costs. The Company has not been
required to perform on any financial guarantees during the past two years.
The Company has not incurred any losses on its commitments in the last three
years. The estimated fair values of the Company's financial instruments at
September 30, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and interest-bearing deposits $ 4,114,045 $ 4,114,045 $ 5,193,415 $ 5,193,415
============ ============ ============ ============
Investment securities $ 25,930,857 $ 25,977,760 $ 33,805,498 $ 33,736,839
============ ============ ============ ============
Accrued interest receivable $ 1,952,013 $ 1,952,013 $ 1,633,042 $ 1,633,042
============ ============ ============ ============
Loans and mortgage-backed securities $196,453,722 $171,241,310
Less: Allowance for loan losses 1,191,977 1,100,000
------------ ------------
$195,261,745 $197,461,422 $170,141,310 $172,560,000
============ ============ ============ ============
Financial liabilities:
Deposits $192,033,298 $193,185,498 $174,327,887 $174,138,000
============ ============ ============ ============
Borrowings $ 2,000,000 $ 2,000,000 $ 2,000,000 $ 2,000,000
============ ============ ============ ============
</TABLE>
F-22
<PAGE> 41
JACKSONVILLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
CONTINUED
NOTE 22 - CONDENSED FINANCIAL STATEMENTS OF JACKSONVILLE BANCORP, INC. (PARENT
COMPANY ONLY)
Jacksonville Bancorp, Inc., was organized in December 1995, and began
operations on March 29, 1996, effective with the Reorganization. The
Company's balance sheets as of September 30, and related statements of
earnings, are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
BALANCE SHEET
ASSETS
Cash in Bank $ 788,522 $ 5,776,215
Investment in Bank - 28,438,091
Investment in IHC 33,262,798 1,538,274
Other assets 42,347 11,121
----------- -----------
Total assets $34,093,667 $35,763,701
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 305,464 $ 333,033
Stockholders' equity 33,788,203 35,430,668
----------- -----------
Total liabilities and stockholders' equity $34,093,667 $35,763,701
=========== ===========
STATEMENT OF EARNINGS
General and administrative expenses $ 91,845 $ 32,708
Loss before income taxes and equity in undistributed
earnings of subsidiaries 91,845 32,708
Income tax (benefit) (31,226) (11,121)
----------- -----------
Loss before equity in earnings of subsidiaries 60,619 21,587
Dividends from subsidiaries 374,107 -
Equity in undistributed earnings of subsidiaries 2,926,036 803,529
----------- -----------
Net earnings $ 3,239,524 $ 781,942
=========== ===========
</TABLE>
F-23
<PAGE> 42
STOCK INFORMATION
- --------------------------------------------------------------------------------
Shares of Jacksonville Bancorp, Inc.'s common stock are traded
nationally under the symbol "JXVL" on the NASDAQ National Market System. At
December 20, 1997, the Company had 2,443,568 shares of common stock outstanding
and had 426 stockholders of record.
The following table sets forth the reported high and low sale prices
of a share of the Company's common stock as reported by NASDAQ (the common
stock commenced trading on the NASDAQ National Market System on March 29, 1996)
and cash dividends paid per share of common stock during the periods indicated.
Data prior to that data is given with respect to Jacksonville Savings & Loan
Association.
<TABLE>
<CAPTION>
HIGH LOW DIVIDEND
<S> <C> <C> <C>
Quarter ended December 31, 1994(1) $ 7.40 $ 7.40 $ 0.10
Quarter ended March 31, 1995(1) 7.58 7.14 $ 0.10
Quarter ended June 30, 1995(1) 7.58 7.31 $ 0.10
Quarter ended September 30, 1995(1) 12.69 8.11 $ 0.10
Quarter ended December 31, 1995(1) 11.90 10.57 $ 0.10
Quarter ended March 31, 1996(1) 11.63 10.40 $ 0.10
Quarter ended June 30, 1996 10.88 9.13 $0.125
Quarter ended September 30, 1996 13.13 10.00 $0.125
Quarter ended December 31, 1996 15.00 12.50 0.125
Quarter ended March 31, 1997 15.75 13.94 0.125
Quarter ended June 30, 1997 15.13 13.25 0.125
Quarter ended September 30, 1997 17.25 14.75 0.125
</TABLE>
(1) Amounts previously reported for Jacksonville stock have been restated
to reflect the exchange of 1.41785 shares of the Company stock for
each share of Jacksonville stock during the second quarter of fiscal
1996.
15
<PAGE> 43
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
W. G. BROWN JERRY M. CHANCELLOR
Chairman of the Board of the Company; Retired, Owner Director and President and Chief Executive Officer
of Brown Lumber Industries of the Company
RAY W. BEALL BILL W. TAYLOR
Director of the Company; Retired senior executive Director and Executive Vice President of the Company
for Beall's Department Store
CHARLES BROADWAY DR. JOE TOLLETT
Director of the Company, Retired Chief Executive Director of the Company; Retired Pediatrician
Officer of the Company
ROBERT BROWN
Director of the Company; Manager, Brown Lumber
Industries
</TABLE>
BANKING LOCATIONS
- --------------------------------------------------------------------------------
MAIN OFFICE
Commerce and Neches Streets
Jacksonville, Texas 75766
(903) 586-9861
BRANCH OFFICES
<TABLE>
<S> <C>
1015 North Church Street 617 South Palenstine Street
Palestine, Texas 75801 Athens, Texas 75751
(903) 729-3228 (903) 677-2511
107 East Fourth Street 5620 Old Bullard Road
Rusk, Texas 75785 Tyler, Texas 75703
(903) 683-2287 (903) 534-9144
1412 Judson Road
Longview, Texas 75601
(903) 758-0118
</TABLE>
16
<PAGE> 44
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
Jacksonville Bancorp, Inc. is a Texas-chartered corporation and
savings and loan holding company. Its primary asset, Jacksonville Savings and
Loan Association, is a Texas-chartered stock savings and loan association
which conducts business from its main office in Jacksonville, Texas and five
branch offices in the neighboring communities.
TRANSFER AGENT/REGISTRAR
- --------------------------------------------------------------------------------
Chase Mellon Shareholder Services
451 West 33rd Street
New York, New York 10001
212-273-8000
SHAREHOLDER REQUESTS
- --------------------------------------------------------------------------------
Requests for annual reports, quarterly reports and related stockholder
literature should be directed to Corporate Secretary, Jacksonville Bancorp,
Inc., Commerce and Neches Streets, Jacksonville, Texas 75766.
Shareholders needing assistance with stock records, transfers or lost
certificates, please contact the Company's transfer agent, Mellon Securities
Trust Company.
17
<PAGE> 1
[HENRY & PETERS, P.C. LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Jacksonville Bancorp, Inc.
We consent to the use of our report dated November 14, 1997, on the
consolidated financial statements of Jacksonville Bancorp, Inc. and
subsidiaries as of September 30, 1997 and 1996, and for each of the years in
the three-year period ended September 30, 1997, in Jacksonville Bancorp, Inc.'s
Form 10-K for the year ended September 30, 1997.
/s/ HENRY & PETERS, P.C.
HENRY & PETERS, P.C.
Tyler, Texas
December 22, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 1,336
<INT-BEARING-DEPOSITS> 2,778
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,861
<INVESTMENTS-CARRYING> 32,287
<INVESTMENTS-MARKET> 32,445
<LOANS> 172,852
<ALLOWANCE> 1,192
<TOTAL-ASSETS> 233,944
<DEPOSITS> 192,033
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 6,123
<LONG-TERM> 0
0
0
<COMMON> 27
<OTHER-SE> 33,761
<TOTAL-LIABILITIES-AND-EQUITY> 233,944
<INTEREST-LOAN> 14,093
<INTEREST-INVEST> 2,792
<INTEREST-OTHER> 287
<INTEREST-TOTAL> 17,172
<INTEREST-DEPOSIT> 8,599
<INTEREST-EXPENSE> 8,771
<INTEREST-INCOME-NET> 8,401
<LOAN-LOSSES> 110
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,063
<INCOME-PRETAX> 4,620
<INCOME-PRE-EXTRAORDINARY> 4,620
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,240
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 8.05
<LOANS-NON> 644
<LOANS-PAST> 0
<LOANS-TROUBLED> 383
<LOANS-PROBLEM> 1,983
<ALLOWANCE-OPEN> 1,100
<CHARGE-OFFS> 18
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,192
<ALLOWANCE-DOMESTIC> 1,192
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,192
</TABLE>
