ITEM 1. Business
Jacksonville Bancorp, Inc.
Jacksonville Bancorp, Inc. (or the “Company”)
is a Maryland corporation. On July 14, 2010, Jacksonville Bancorp, Inc. completed its conversion from the mutual holding company
structure and the related public offering and is now a stock holding company that is fully owned by the public. Jacksonville Savings
Bank (or the “Bank”) is 100% owned by the Company and the Company is 100% owned by public stockholders. On June 28,
2013, Jacksonville Savings Bank terminated its election to be regulated as a savings and loan holding company pursuant to Section
10(l) of the Home Owners Loan Act. On this same date, Jacksonville Bancorp, Inc. became a bank holding company.
The Company’s only significant asset
is its investment in Jacksonville Savings Bank. At December 31, 2016, Jacksonville Bancorp, Inc. had consolidated assets of $319.3
million, total deposits of $258.7 million, and stockholders’ equity of $46.2 million.
Jacksonville Savings Bank
Jacksonville Savings Bank is an Illinois-chartered
savings bank headquartered in Jacksonville, Illinois. We conduct our business from our main office and five branches, two of which
are located in Jacksonville and one of which is located in each of the following Illinois communities: Virden, Litchfield, and
Chapin. We were originally chartered in 1916 as an Illinois-chartered mutual savings and loan association and converted to a mutual
savings bank in 1992. In 1995, Jacksonville Savings Bank converted to an Illinois chartered stock savings bank and reorganized
from the mutual to the mutual holding company form of organization. We have been a member of the Federal Home Loan Bank System
since 1932. Our deposits are insured by the Federal Deposit Insurance Corporation.
We are a community-oriented savings bank
engaged primarily in the business of attracting retail deposits from the general public in our market area and using such funds,
together with borrowings and funds from other sources, to originate mortgage loans secured by one- to four-family residential real
estate, commercial and agricultural real estate and home equity loans. We also originate commercial and agricultural business loans
and consumer loans. Additionally, we invest in United States Government agency securities, bank-qualified, general obligation municipal
issues, and mortgage-backed securities issued or guaranteed by the United States Government or enterprises thereof. We maintain
a portion of our assets in liquid investments, such as overnight funds at the Federal Home Loan Bank.
Our principal sources of funds are customer
deposits, proceeds from the sale of loans, short-term borrowings, funds received from the repayment and prepayment of loans and
mortgage-backed securities, and the sale, call, or maturity of investment securities. Principal sources of income are interest
income on loans and investments, sales of loans and securities, service charges, commissions, card interchange income and other
fees. Our principal expenses are interest paid on deposits, employee compensation and benefits, occupancy and equipment expense,
and data processing and telecommunications expense.
We operate an investment center at our main
office. The investment center is operated through Financial Resources Group, Inc., Jacksonville Savings Bank’s wholly-owned
subsidiary.
Our principal executive office is located at 1211 W. Morton,
Jacksonville, Illinois, and our telephone number at that address is (217) 245-4111. Our website address is
www.jacksonvillesavings.com
.
Information on this website is not and should not be considered to be a part of this Annual Report.
Market Area
Our market area is Morgan, Macoupin, Montgomery
and Cass counties, Illinois. Our offices are located in communities that can generally be characterized as stable to low growth
residential communities of predominantly one- to four-family residences. Our market for deposits is concentrated in the communities
surrounding our main office and five branch offices. We are the largest independent financial institution headquartered in Morgan
County.
The economy of our market area consists
primarily of agriculture and related businesses, light industry and state and local government. The largest employers in our market
area are Reynolds, Passavant Area Hospital, and the State of Illinois. As of December 2016, unemployment rates in our market area
were: 5.1% in Morgan County, 5.9% in Cass County, 5.7% in Macoupin County, and 7.3% in Montgomery County. This compared with unemployment
rates of 5.6% in Illinois and 4.5% in the United States as a whole.
Competition
We encounter significant competition both
in attracting deposits and in originating real estate and other loans. Our most direct competition for deposits historically has
come from commercial banks, other savings banks, savings associations and credit unions in our market area, and we expect continued
strong competition from such financial institutions in the foreseeable future. We compete for deposits by offering depositors a
high level of personal service and expertise together with a wide range of financial services. Our deposit sources are primarily
concentrated in the communities surrounding our banking offices located in Morgan, Macoupin and Montgomery counties, Illinois.
As of June 30, 2016, our FDIC-insured deposit market share in the counties we serve was 10.3%, which ranked us as the second largest
deposit holder out of 30 bank and thrift institutions with offices in Morgan, Macoupin, or Montgomery Counties, Illinois. Such
data does not reflect deposits held by credit unions.
The competition for real estate and other
loans comes principally from commercial banks, mortgage banking companies, government sponsored entities and other savings banks
and savings associations. This competition for loans has increased substantially in recent years as a result of the large number
of institutions competing in our market areas as well as the increased efforts by commercial banks to increase mortgage loan originations.
We compete for loans primarily through the
interest rates and loan fees we charge and the efficiency and quality of services we provide to borrowers and home builders. Factors
that affect competition include general and local economic conditions, current interest rate levels and the volatility of the mortgage
markets.
Lending Activities
General.
Historically, our
principal lending activity has been the origination of mortgage loans secured by one- to four-family residential properties in
our local market area. Over the past several years, we have increased our emphasis on originating loans secured by commercial and
agricultural real estate. We also originate commercial and agricultural business loans secured by collateral other than real estate
as well as unsecured commercial and agricultural business loans. We also originate home equity and consumer loans. At December
31, 2016, our loans receivable totaled $187.5 million, of which $45.3 million, or 24.6%, consisted of one- to four-family residential
mortgage loans. The remainder of our loans receivable at December 31, 2016 consisted of commercial real estate loans totaling $41.5
million, or 22.5% of net loans, agricultural real estate loans totaling $38.3 million, or 20.7% of net loans, commercial business
loans totaling $21.6 million, or 11.7% of net loans, agricultural business loans totaling $14.7 million, or 7.9% of net loans,
consumer loans totaling $14.5 million, or 7.9% of net loans, and home equity loans totaling $11.6 million, or 6.3% of net loans.
We have made our interest-earning assets
more interest rate sensitive by, among other things, originating variable interest rate loans, such as adjustable-rate mortgage
loans and balloon loans with terms ranging from three to five years, as well as medium-term consumer loans and commercial business
loans. Our ability to originate adjustable-rate mortgage loans is substantially affected by market interest rates.
We originate fixed-rate residential mortgage
loans secured by one- to four-family residential properties with terms up to 30 years. We sell a significant portion of our one-
to four-family fixed-rate residential mortgage loan originations with terms of generally 15 years or greater directly to the secondary
market. During the years ended December 31, 2016 and 2015, we sold $20.7 million and $16.8 million of fixed-rate residential mortgage
loans, respectively. Loans are generally sold without recourse and with servicing retained.
At December 31, 2016, we were servicing
$130.5 million in loans for which we received servicing income of $333,000 for the year ended December 31, 2016. Servicing fee
income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal
and are recorded as income when earned as loan servicing fees in noninterest income. The amortization of mortgage servicing rights
is netted from the gains on sale of loans, both cash gains as well as the capitalized gains, and is included in mortgage banking
operations, net, in noninterest income.
Loan Portfolio Composition.
Set forth below are selected data relating to the composition of our loan portfolio, by type of loan as of the dates indicated,
excluding loans held for sale of $503,000, $539,000, $236,000, $262,000 and $712,000 for the years ended December 31, 2016, 2015,
2014, 2013 and 2012, respectively.
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At
December 31,
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2016
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2015
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2014
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2013
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2012
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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Amount
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Percent
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(Dollars in Thousands)
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Real estate loans:
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One-
to four-family residential
(1)
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$
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45,311
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24.6
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%
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$
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47,395
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24.6
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%
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$
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44,561
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24.2
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%
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$
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44,286
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24.5
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%
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$
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41,386
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23.8
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%
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Commercial
(2)
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41,477
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22.5
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40,382
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20.9
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40,475
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21.9
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38,921
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21.5
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30,973
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17.8
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Agricultural
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38,272
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20.7
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41,223
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21.3
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40,119
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21.7
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35,006
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19.4
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37,392
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21.5
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Home
equity
(3)
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11,606
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6.3
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11,692
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6.1
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11,283
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6.1
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11,729
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6.5
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12,734
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7.4
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Total
real estate loans
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136,666
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74.1
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140,692
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72.9
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136,438
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73.9
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129,942
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71.9
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122,485
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70.5
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Commercial
business loans
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21,618
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11.7
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25,453
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13.2
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26,814
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14.5
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29,947
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16.6
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29,046
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16.7
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Agricultural
business loans
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14,650
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7.9
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16,103
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8.3
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11,845
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6.4
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10,560
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5.9
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10,983
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6.3
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Consumer
loans
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14,543
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7.9
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13,741
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7.1
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12,587
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6.8
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13,606
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7.5
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14,572
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8.4
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Total
loans receivable
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187,477
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101.6
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195,989
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101.5
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187,684
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101.6
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184,055
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101.9
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177,086
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101.9
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Less:
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Unearned
premium on purchased loans, unearned discount and deferred loan fees, net
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22
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—
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29
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—
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9
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—
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9
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—
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(6
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)
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—
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Allowance
for loan losses
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3,007
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1.6
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2,920
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1.5
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2,956
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1.6
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3,406
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1.9
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3,339
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1.9
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Total
loans receivable, net
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$
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184,448
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100.0
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%
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$
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193,040
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100.0
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%
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$
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184,719
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100.0
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%
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$
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180,640
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100.0
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%
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$
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173,753
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100.0
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%
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(1)
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Includes one- to four-family real estate construction loans of $1.3 million, $1.3 million, $1.2 million, $328,000 and $1.9
million for the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
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(2)
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Includes commercial real estate construction loans of $9.6 million, $4.7 million, $3.3 million, $4.7 million and $495,000 for
the years ended December 31, 2016, 2015, 2014, 2013 and 2012, respectively.
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(3)
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Includes real estate construction loans of $80,000, $80,000, $140,000, $0, and $40,000 for the years ended December 31, 2016,
2015, 2014, 2013 and 2012, respectively.
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One- to Four-Family Mortgage Loans
.
Historically our primary lending origination activity has been one- to four-family, owner-occupied, residential mortgage loans
secured by property located in our market area. We generate loans through our marketing efforts, existing customers and referrals,
real estate brokers, builders and local businesses. We generally limit our one- to four-family loan originations to the financing
of loans secured by properties located within our market area. At December 31, 2016, $45.3 million, or 24.6% of our net loan portfolio,
was invested in mortgage loans secured by one- to four-family residences.
Our fixed-rate one- to four-family residential
mortgage loans are generally conforming loans, underwritten according to secondary market guidelines. We generally originate both
fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits established by the Federal Housing
Finance Agency, which is currently $417,000 for single-family homes. At December 31, 2016, we had two one- to four-family residential
mortgage loans with principal balances in excess of $417,000, commonly referred to as jumbo loans.
We originate for resale to the secondary
market fixed-rate one- to four-family residential mortgage loans with terms of 15 years or more. Our fixed-rate mortgage loans
amortize monthly with principal and interest due each month. Residential real estate loans often remain outstanding for significantly
shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option. We offer fixed-rate
one- to four-family residential mortgage loans with terms of up to 30 years without prepayment penalty.
We currently offer adjustable-rate mortgage
loans for terms ranging up to 30 years. We generally offer adjustable-rate mortgage loans that adjust between one and five years
on the anniversary date of origination. Interest rate adjustments are up to two hundred basis points per year, with a cap of up
to six hundred basis points on interest rate increases over the life of the loan. In a rising interest rate environment, such rate
limitations may prevent adjustable-rate mortgage loans from repricing to market interest rates, which would have an adverse effect
on our net interest income. In the low interest rate environment that has existed over the past few years, our adjustable-rate
portfolio has repriced downward resulting in lower interest income from this portion of our loan portfolio. We have used different
interest indices for adjustable-rate mortgage loans in the past such as the average yield on U.S. Treasury securities, adjusted
to a constant maturity of either one-year, three-years or five-years. Adjustable-rate mortgage loans secured by one- to four-family
residential real estate totaled $18.3 million, or 40.4% of our total one- to four-family residential real estate loans receivable
at December 31, 2016. The origination of fixed-rate mortgage loans versus adjustable-rate mortgage loans is monitored on an ongoing
basis and is affected significantly by the level of market interest rates, customer preference, our interest rate risk position
and our competitors’ loan products. During 2016, we originated $27.3 million of fixed-rate residential mortgage loans, most
of which were subsequently sold in the secondary market, and $3.0 million of adjustable-rate mortgage loans which were held in
our portfolio.
Adjustable-rate mortgage loans make our
loan portfolio more interest rate sensitive and provide an alternative for those borrowers who meet our underwriting criteria,
but are unable to qualify for a fixed-rate mortgage. However, as the interest income earned on adjustable-rate mortgage loans varies
with prevailing interest rates, such loans do not offer predictable cash flows in the same manner as long-term, fixed-rate loans.
Adjustable-rate mortgage loans carry increased credit risk associated with potentially higher monthly payments by borrowers as
general market interest rates increase. It is possible that during periods of rising interest rates that the risk of delinquencies
and defaults on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrower, resulting
in increased loan losses.
Our residential first mortgage loans customarily
include due-on-sale clauses, which give us the right to declare a loan immediately due and payable in the event, among other things,
that the borrower sells or otherwise disposes of the underlying real property serving as collateral for the loan. Due-on-sale clauses
are a means of imposing assumption fees and increasing the interest rate on our mortgage portfolio during periods of rising interest
rates.
When underwriting residential real estate
loans, we review and verify each loan applicant’s income and credit history. Management believes that stability of income
and past credit history are integral parts in the underwriting process. Generally, the applicant’s total monthly mortgage
payment, including all escrow amounts, is limited to 30% of the applicant’s total monthly income. In addition, total monthly
obligations of the applicant, including mortgage payments, should not generally exceed 43% of total monthly income. Written appraisals
are generally required on real estate property offered to secure an applicant’s loan. For one- to four-family real estate
loans with loan to value ratios of over 80%, we generally require private mortgage insurance. We require fire and casualty insurance
on all properties securing real estate loans. We may require title insurance, or an attorney’s title opinion, as circumstances
warrant.
We do not offer an
“interest only” mortgage loan product on one- to four-family residential properties (where the borrower pays interest
for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative
amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the
loan, resulting in an increased principal balance during the life of the loan. We do not offer a “subprime loan” program
(loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous
charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high
debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation).
Commercial Real Estate Loans.
We originate and purchase commercial real estate loans. At December 31, 2016, $41.5 million, or 22.5%, of our net loan portfolio
consisted of commercial real estate loans. During 2016, loan originations secured by commercial real estate totaled $14.5 million
as compared to $7.8 million in 2015. Our commercial real estate loans are secured primarily by improved properties such as multi-family
residential properties, retail facilities and office buildings, hotels, restaurants, and other non-residential buildings. At December
31, 2016, our commercial real estate loan portfolio included $7.5 million in loans secured by multi-family residential properties,
$4.0 million in loans secured by restaurants, $4.2 million in loans secured by hotels, and $25.8 million in loans secured by other
commercial properties. The maximum loan-to-value ratio for commercial real estate loans we originate is generally 80%. Our commercial
real estate loans are generally written up to terms of five years with adjustable interest rates. The rates are generally
tied to the prime rate and generally have a specified floor. Many of our fixed-rate commercial real estate loans are not fully
amortizing and therefore require a “balloon” payment at maturity. We have $893,000 of interest only commercial real
estate loans at December 31, 2016. We purchase from time to time commercial real estate loan participations primarily from outside
our market area where we are not the lead lender. All participation loans are approved following a review to ensure that the loan
satisfies our underwriting standards. At December 31, 2016, commercial real estate loan participations totaled $8.2 million, or
19.7% of the commercial real estate loan portfolio consisting primarily of loan participations outside of our market area which
totaled $7.4 million, or 17.9% of the commercial real estate loan portfolio. At December 31, 2016, we had no loan participations
delinquent 60 days or more.
At December 31, 2016, our largest commercial
real estate loan was secured by a hotel with a principal balance of $3.1 million and was performing in accordance with its terms.
At December 31, 2016, our largest commercial real estate loan participation was secured by a manufacturing facility with a principal
balance of $1.4 million and was performing in accordance with its terms.
Our underwriting standards for commercial
real estate include a determination of the applicant’s credit history and an assessment of the applicant’s ability
to meet existing obligations and payments on the proposed loan. The income approach is primarily utilized to determine whether
income generated from the applicant’s business or real estate offered as collateral is adequate to repay the loan. We emphasize
the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum
ratio of 120%). In underwriting a loan, we consider the value of the real estate offered as collateral in relation to the proposed
loan amount. Generally, the loan amount cannot be greater than 80% of the value of the real estate. We usually obtain written appraisals
from either licensed or certified appraisers on all commercial real estate loans in excess of $250,000. We assess the creditworthiness
of the applicant by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining other
public records regarding the applicant.
Loans secured by commercial real estate
generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances.
This increased credit risk is a result of several factors, including the effects of general economic conditions on income producing
properties and the successful operation or management of the properties securing the loans. Furthermore, the repayment of loans
secured by commercial real estate is typically dependent upon the successful operation of the related business and real estate
property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.
Agricultural Real Estate Loans.
We originate and purchase agricultural real estate loans. At December 31, 2016, $38.3 million, or 20.7% of our net loan portfolio,
consisted of agricultural real estate loans. During 2016, loan originations secured by agricultural real estate totaled $4.2 million,
as compared to $8.7 million in 2015. The maximum loan-to-value ratio for agricultural real estate loans we originate is generally
75%. Our agricultural real estate loans are generally written up to terms of thirty years with adjustable interest rates.
The rates are generally tied to the average yield on U.S. Treasury securities, adjusted to a constant maturity of either one-year,
three-years, or five-years and generally have a specified floor. Many of our fixed-rate agricultural real estate loans are not
fully amortizing and therefore require a “balloon” payment at maturity. We purchase from time to time agricultural
real estate loan participations primarily from other local institutions within our market area. All participation loans are approved
following a review to ensure that the loan satisfies our underwriting standards. At December 31, 2016, agricultural real estate
loan participations totaled $3.2 million, or 8.3% of the agricultural real estate loan portfolio. At December 31, 2016, we had
no agricultural real estate loan participations delinquent 60 days or more. At December 31, 2016, our largest agricultural real
estate loan was secured by farmland, had a principal balance of $5.0 million and was performing in accordance with its terms.
Our underwriting standards for agricultural
real estate include a determination of the applicant’s credit history and an assessment of the applicant’s ability
to meet existing obligations and payments on the proposed loan. The income approach is primarily utilized to determine whether
income generated from the applicant’s farm operation or real estate offered as collateral is adequate to repay the loan.
We emphasize the ratio of the property’s projected cash flow to the loan’s debt service requirement (generally requiring
a minimum ratio of 120%). In underwriting a loan, we consider the value of the real estate offered as collateral in relation to
the proposed loan amount. Generally, the loan amount cannot be greater than 75% of the value of the real estate. We usually obtain
written appraisals from either licensed or certified appraisers on all agricultural real estate loans in excess of $250,000. We
assess the creditworthiness of the applicant by reviewing a credit report, financial statements and tax returns of the applicant,
as well as obtaining other public records regarding the applicant.
Loans secured by agricultural real estate
generally involve a greater degree of credit risk and carry larger loan balances than one- to four-family residential mortgage
loans. This increased credit risk is a result of several factors, including the effects of general economic and market conditions
on farm operations and the successful operation or management of the properties securing the loans. The repayment of loans secured
by agricultural estate is typically dependent upon the successful operation of the farm and real estate property. If the cash flow
is reduced, the borrower’s ability to repay the loan may be impaired.
Home Equity Loans.
At December
31, 2016, home equity loans totaled $11.6 million, or 6.3%, of our net loan portfolio. Our home equity loans and lines of credit
are generally secured by the borrower’s principal residence. The maximum amount of a home equity loan or line of credit is
generally 95% of the appraised value of a borrower’s real estate collateral less the amount of any prior mortgages or related
liabilities. Home equity loans and lines of credit are approved with both fixed and adjustable interest rates which we determine
based upon market conditions. Such loans may be fully amortized over the life of the loan or have a balloon feature. Generally,
the maximum term for home equity loans is 10 years.
Our underwriting standards for home equity
loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet
existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined
by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. We also
consider the length of employment with the borrower’s present employer as well as the amount of time the borrower has lived
in the local area. Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes
a comparison of the value of the collateral in relation to the proposed loan amount. At December 31, 2016, we had no home equity
loans 90 days or more delinquent. No assurance can be given, however, that our delinquency rate or loss experience on home equity
loans will not increase in the future.
Home equity loans entail greater risks than
one- to four-family residential mortgage loans, which are secured by first lien mortgages. In such cases, collateral repossessed
after a default may not provide an adequate source of repayment of the outstanding loan balance because of damage or depreciation
in the value of the property or loss of equity to the first lien position. Further, home equity loan payments are dependent on
the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce,
illness or personal bankruptcy. Finally, the application of various Federal and state laws, including Federal and state bankruptcy
and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default.
Commercial Business Loans
.
We originate commercial business loans to borrowers located in our market area which are secured by collateral other than real
estate or which can be unsecured. We also purchase participations of commercial business loans from other lenders, which may be
made to borrowers outside our market area. Commercial business loans totaled $21.6 million, or 11.7% of our net loan portfolio
at December 31, 2016. At December 31, 2016, commercial business loan participations totaled $651,000, or 3.0% of the commercial
business loan portfolio. All of the commercial business loan participations were outside of our market area. Commercial business
loans are generally secured by equipment and inventory and generally are offered with adjustable rates tied to the prime rate or
the average yield on U.S. Treasury securities, adjusted to a constant maturity of either one-year, three-years or five-years and
various terms of maturity generally from three years to five years. On a limited basis, we will originate unsecured business loans
in those instances where the applicant’s financial strength and creditworthiness has been established. Commercial business
loans generally bear higher interest rates than residential loans, but they also may involve a higher risk of default since their
repayment is generally dependent on the successful operation of the borrower’s business. We generally obtain personal guarantees
from the borrower or a third party as a condition to originating business loans. During the year ended December 31, 2016, we originated
$14.9 million in commercial business loans. At that date, our largest commercial business loan was a $5.0 million line of credit.
This loan was performing in accordance with its terms at December 31, 2016.
Our underwriting standards for commercial
business loans include a determination of the applicant’s ability to meet existing obligations and payments on the proposed
loan from normal cash flows generated in the applicant’s business. We assess the financial strength of each applicant through
the review of financial statements and tax returns provided by the applicant. The creditworthiness of an applicant is derived from
a review of credit reports as well as a search of public records. We periodically review business loans following origination.
We request financial statements at least annually and review them for substantial deviations or changes that might affect repayment
of the loan. Our loan officers may also visit the premises of borrowers to observe the business premises, facilities, and personnel
and to inspect the pledged collateral. Underwriting standards for business loans are different for each type of loan depending
on the financial strength of the applicant and the value of collateral offered as security.
Agricultural Business Loans
.
We originate agricultural business loans to borrowers located in our market area which are secured by collateral other than real
estate or which can be unsecured. Agricultural business loans totaled $14.7 million, or 7.9% of our net loan portfolio at December
31, 2016. Agricultural business loans are generally secured by equipment and blanket security agreements on all farm assets. These
loans are generally offered with fixed rates with terms up to five years. Agricultural business loans generally bear lower interest
rates than residential loans due to competitive market pressures. While the repayment of our agricultural business loans is generally
dependent on the successful operation of the farm operation, we have experienced a good history of low default rates. We generally
obtain personal guarantees from the borrower as a condition to originating agricultural business loans. During the year ended December
31, 2016, we originated $15.4 million in agricultural business loans. At December 31, 2016, our largest agricultural business loan
was a line of credit of $850,000. This loan was performing in accordance with its terms at December 31, 2016.
Our underwriting standards for agricultural
business loans include a determination of the applicant’s ability to meet existing obligations and payments on the proposed
loan from normal cash flows generated in the applicant’s business. We assess the financial strength of each applicant through
the review of financial statements, pro-forma cash flow statements, and tax returns provided by the applicant. The creditworthiness
of an applicant is derived from a review of credit reports as well as a search of public records. We request financial statements
at least annually and review them for substantial deviations or changes that might affect repayment of the loan. Our loan officers
may also visit the premises of borrowers to observe the operation, facilities, equipment, and personnel and to inspect the pledged
collateral. Underwriting standards for agricultural business loans are different for each type of loan depending on the financial
strength of the applicant and the value of collateral offered as security.
Consumer Loans.
As of December
31, 2016, consumer loans totaled $14.5 million, or 7.9%, of our net loan portfolio. The principal types of consumer loans we offer
are automobile loans, loans secured by deposit accounts, unsecured loans and mobile home loans. We generally offer consumer loans
on a fixed-rate basis.
At December 31, 2016, consumer loans secured
by automobiles totaled $6.9 million, or 3.8% of our net loan portfolio. We generally offer automobile loans with maturities of
up to 60 months for new automobiles. Loans secured by used automobiles will have maximum terms which vary depending upon the age
of the automobile. We generally originate automobile loans with a loan-to-value ratio below the greater of 80% of the purchase
price or 100% of NADA loan value, although the loan-to-value ratio may be greater or less depending on the borrower’s credit
history, debt to income ratio, home ownership and other banking relationships with us.
Our underwriting standards for consumer
loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet
existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined
by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. We also
consider the length of employment with the borrower’s present employer as well as the amount of time the borrower has lived
in the local area. Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes
a comparison of the value of the collateral in relation to the proposed loan amount. Consumer loans 90 days or more delinquent
at December 31, 2016 totaled $72,000, or 0.5% of total consumer loans. No assurance can be given, however, that our delinquency
rate or loss experience on consumer loans will not increase in the future.
Consumer loans entail greater risks than
one- to four-family residential mortgage loans, particularly consumer loans secured by rapidly depreciating assets such as automobiles
or loans that are unsecured. In such cases, collateral repossessed after a default may not provide an adequate source of repayment
of the outstanding loan balance because of damage, loss or depreciation. Further, consumer loan payments are dependent on the borrower’s
continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy. Such events would increase our risk of loss on unsecured loans. Finally, the application of various Federal and state
laws, including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in
the event of a default.
Loan Portfolio Maturities and Yields.
The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2016. Demand loans, loans
having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
|
|
One- to Four-Family Real
Estate
|
|
|
Commercial Real Estate
|
|
|
Agricultural Real Estate
|
|
|
Home Equity
|
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in Thousands)
|
|
Due During the Years
Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
5,121
|
|
|
|
5.60
|
%
|
|
$
|
4,617
|
|
|
|
5.07
|
%
|
|
$
|
351
|
|
|
|
4.14
|
%
|
|
$
|
1,252
|
|
|
|
5.77
|
%
|
2018
|
|
|
3,645
|
|
|
|
4.78
|
|
|
|
7,946
|
|
|
|
4.70
|
|
|
|
75
|
|
|
|
4.95
|
|
|
|
1,057
|
|
|
|
5.94
|
|
2019
|
|
|
2,606
|
|
|
|
5.68
|
|
|
|
8,741
|
|
|
|
4.43
|
|
|
|
350
|
|
|
|
3.61
|
|
|
|
920
|
|
|
|
6.52
|
|
2020 to 2021
|
|
|
2,460
|
|
|
|
5.33
|
|
|
|
9,184
|
|
|
|
4.67
|
|
|
|
363
|
|
|
|
5.36
|
|
|
|
1,163
|
|
|
|
6.42
|
|
2022 to 2026
|
|
|
3,412
|
|
|
|
5.23
|
|
|
|
4,396
|
|
|
|
4.94
|
|
|
|
2,221
|
|
|
|
4.48
|
|
|
|
4,980
|
|
|
|
4.84
|
|
2027 to 2031
|
|
|
9,544
|
|
|
|
4.27
|
|
|
|
3,739
|
|
|
|
4.76
|
|
|
|
4,479
|
|
|
|
4.34
|
|
|
|
1,445
|
|
|
|
5.42
|
|
2032 and beyond
|
|
|
18,523
|
|
|
|
4.98
|
|
|
|
2,854
|
|
|
|
4.80
|
|
|
|
30,433
|
|
|
|
4.98
|
|
|
|
789
|
|
|
|
5.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,311
|
|
|
|
4.96
|
%
|
|
$
|
41,477
|
|
|
|
4.65
|
%
|
|
$
|
38,272
|
|
|
|
4.86
|
%
|
|
$
|
11,606
|
|
|
|
5.45
|
%
|
|
|
Commercial Business
|
|
|
Agricultural Business
|
|
|
Consumer
|
|
|
Total
|
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in Thousands)
|
|
Due During the Years
Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
6,792
|
|
|
|
4.36
|
%
|
|
$
|
10,112
|
|
|
|
3.96
|
%
|
|
$
|
1,915
|
|
|
|
6.53
|
%
|
|
$
|
30,160
|
|
|
|
4.75
|
%
|
2018
|
|
|
4,547
|
|
|
|
4.52
|
|
|
|
1,948
|
|
|
|
4.05
|
|
|
|
1,844
|
|
|
|
7.26
|
|
|
|
21,062
|
|
|
|
4.89
|
|
2019
|
|
|
1,193
|
|
|
|
4.60
|
|
|
|
382
|
|
|
|
4.46
|
|
|
|
2,419
|
|
|
|
6.68
|
|
|
|
16,611
|
|
|
|
5.02
|
|
2020 to 2021
|
|
|
4,484
|
|
|
|
4.39
|
|
|
|
1,581
|
|
|
|
4.67
|
|
|
|
5,197
|
|
|
|
4.85
|
|
|
|
24,432
|
|
|
|
4.82
|
|
2022 to 2026
|
|
|
3,762
|
|
|
|
4.00
|
|
|
|
627
|
|
|
|
4.64
|
|
|
|
1,288
|
|
|
|
6.14
|
|
|
|
20,686
|
|
|
|
4.81
|
|
2027 to 2031
|
|
|
840
|
|
|
|
2.40
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,100
|
|
|
|
7.94
|
|
|
|
21,147
|
|
|
|
4.57
|
|
2032 and beyond
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
780
|
|
|
|
8.80
|
|
|
|
53,379
|
|
|
|
4.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,618
|
|
|
|
4.27
|
%
|
|
$
|
14,650
|
|
|
|
4.09
|
%
|
|
$
|
14,543
|
|
|
|
6.24
|
%
|
|
$
|
187,477
|
|
|
|
4.74
|
%
|
The following table sets forth at December
31, 2016, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2017. At December 31, 2016, fixed-rate
loans include $8.0 million in fixed-rate balloon payment loans with original maturities of five years or less. The total dollar
amount of fixed-rate loans and adjustable-rate loans due after December 31, 2017, was $76.1 million and $81.2 million, respectively.
|
|
Due after December 31, 2017
|
|
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
|
|
(In Thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
21,934
|
|
|
$
|
18,256
|
|
|
$
|
40,190
|
|
Commercial
|
|
|
23,916
|
|
|
|
12,944
|
|
|
|
36,860
|
|
Agricultural
|
|
|
1,691
|
|
|
|
36,230
|
|
|
|
37,921
|
|
Home equity
|
|
|
2,926
|
|
|
|
7,428
|
|
|
|
10,354
|
|
Commercial business loans
|
|
|
8,748
|
|
|
|
6,078
|
|
|
|
14,826
|
|
Agricultural business loans
|
|
|
4,538
|
|
|
|
—
|
|
|
|
4,538
|
|
Consumer
|
|
|
12,343
|
|
|
|
285
|
|
|
|
12,628
|
|
Total loans
|
|
$
|
76,096
|
|
|
$
|
81,221
|
|
|
$
|
157,317
|
|
Loan Origination, Solicitation and
Processing.
Loan originations are derived from a number of sources such as real estate broker referrals, existing customers,
builders, attorneys and walk-in customers. Upon receipt of a loan application, a credit report is obtained to verify specific information
relating to the applicant’s employment, income, and credit standing. In the case of a real estate loan, an appraisal of the
real estate intended to secure the proposed loan is undertaken by an independent appraiser approved by us. A loan application file
is first reviewed by a loan officer in our loan department who checks applications for accuracy and completeness, and verifies
the information provided. The financial resources of the borrower and the borrower’s credit history, as well as the collateral
securing the loan, are considered an integral part of each risk evaluation prior to approval. All residential real estate loans
are then verified by our loan risk management department prior to closing. The board of directors has established individual lending
authorities for each loan officer by loan type. Loans over an individual officer’s lending limits must be approved by the
officers’ loan committee consisting of the chairman of the board, president, chief lending officer and all lending officers,
which meets three times a week, and has lending authority up to $750,000 depending on the type of loan. Loans to borrowers with
an aggregate principal balance over this limit, up to $1.0 million, must be approved by the directors’ loan committee, which
meets weekly and consists of the chairman of the board, president, senior vice president, chief lending officer and at least two
outside directors, plus all lending officers as non-voting members. The board of directors approves all loans to borrowers with
an aggregate principal balance over $1.0 million. The board of directors ratifies all loans we originate. Once the loan is approved,
the applicant is informed and a closing date is scheduled. We typically fund loan commitments within 45 days.
If the loan is approved, the borrower must
provide proof of fire and casualty insurance on the property serving as collateral which insurance must be maintained during the
full term of the loan; flood insurance is required in certain instances. Title insurance is generally required on loans secured
by real property.
Origination, Purchase and Sale of
Loans.
Set forth below is a table showing our loan originations, purchases, sales and repayments for the years indicated.
It is our policy to originate for sale into the secondary market fixed-rate mortgage loans with maturities of 15 years or more
and to originate for retention in our portfolio adjustable-rate mortgage loans and loans with balloon payments. Purchased loans
consist of participations in commercial real estate, agricultural real estate, and commercial business loans originated by other
financial institutions. We usually obtain commitments prior to selling fixed-rate mortgage loans.
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
(In Thousands)
|
|
|
|
|
|
Total loans receivable at beginning of year
|
|
$
|
195,989
|
|
|
$
|
187,684
|
|
|
$
|
184,055
|
|
|
$
|
177,086
|
|
|
$
|
174,201
|
|
Originations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
30,268
|
|
|
|
32,225
|
|
|
|
23,848
|
|
|
|
39,825
|
|
|
|
68,471
|
|
Commercial
|
|
|
14,510
|
|
|
|
7,841
|
|
|
|
15,510
|
|
|
|
11,071
|
|
|
|
2,823
|
|
Agricultural
|
|
|
4,213
|
|
|
|
8,714
|
|
|
|
6,698
|
|
|
|
4,585
|
|
|
|
11,480
|
|
Home equity
|
|
|
4,929
|
|
|
|
4,881
|
|
|
|
3,236
|
|
|
|
3,598
|
|
|
|
3,243
|
|
Commercial business loans
|
|
|
14,908
|
|
|
|
13,977
|
|
|
|
19,508
|
|
|
|
19,397
|
|
|
|
20,920
|
|
Agricultural business loans
|
|
|
15,370
|
|
|
|
12,161
|
|
|
|
11,542
|
|
|
|
10,008
|
|
|
|
12,091
|
|
Consumer loans
|
|
|
9,958
|
|
|
|
9,536
|
|
|
|
7,255
|
|
|
|
9,239
|
|
|
|
8,375
|
|
Total originations
|
|
|
94,156
|
|
|
|
89,335
|
|
|
|
87,597
|
|
|
|
97,723
|
|
|
|
127,403
|
|
Participation loans purchased
|
|
|
2,157
|
|
|
|
2,609
|
|
|
|
2,678
|
|
|
|
3,878
|
|
|
|
6,093
|
|
Transfer of mortgage loans to foreclosed real estate owned
|
|
|
114
|
|
|
|
380
|
|
|
|
374
|
|
|
|
129
|
|
|
|
262
|
|
Repayments
|
|
|
84,036
|
|
|
|
66,413
|
|
|
|
73,728
|
|
|
|
70,043
|
|
|
|
77,672
|
|
Loan sales to secondary market
|
|
|
20,675
|
|
|
|
16,846
|
|
|
|
12,544
|
|
|
|
24,460
|
|
|
|
52,677
|
|
Total loans receivable at end of year
|
|
$
|
187,477
|
|
|
$
|
195,989
|
|
|
$
|
187,684
|
|
|
$
|
184,055
|
|
|
$
|
177,086
|
|
Loan Origination and Other Fees.
In
addition to interest earned on loans, we may charge loan origination fees. Our ability to charge loan origination fees is influenced
by the demand for mortgage loans and competition from other lenders in our market area. To the extent that loans are originated
or acquired for our portfolio, accounting standards require that we defer loan origination fees and costs and amortize such amounts
as an adjustment of yield over the life of the loan by use of the level yield method. Fees deferred are recognized into income
immediately upon the sale of the related loan. At December 31, 2016, we had $212,000 of deferred loan fees. Loan origination fees
are a volatile source of income. Such fees vary with the volume and type of loans and commitments made and purchased and with competitive
conditions in the mortgage markets, which in turn respond to the demand and availability of money.
In addition
to loan origination fees, we also receive other fees that consist primarily of extension fees and late charges. We recognized fees
of $93,000
,
$104,000 and $92,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
Loan Concentrations.
With
certain exceptions, an Illinois-chartered savings bank may not make a loan or exceed credit for secured and unsecured loans for
business, commercial, corporate or agricultural purposes to a single borrower in excess of 25% of the Bank’s total capital,
as defined by regulation. At December 31, 2016, our loans-to-one borrower limit was $10.6 million. At December 31, 2016 we had
no lending relationships in excess of our loans-to-one borrower limitation. At December 31, 2016, we had 27 borrowers with outstanding
borrowings in excess of $1.0 million totaling in the aggregate $73.4 million or 39.2% of our total loan portfolio.
Delinquencies and Classified Assets
Our collection procedures provide that when
a mortgage loan is either ten days (in the case of adjustable-rate mortgage and balloon loans) or 15 days (in the case of fixed-rate
loans) past due, a computer-generated late charge notice is sent to the borrower requesting payment and assessing a late charge.
If the mortgage loan remains delinquent, a telephone call is made or a letter is sent to the borrower stressing the importance
of reinstating the loan and obtaining reasons for the delinquency. We also send a 30 day notice pursuant to Illinois law if a borrower’s
primary residence is the collateral at issue. When a loan continues in a delinquent status for 90 days or more, and a repayment
schedule has not been made or kept by the borrower, a notice of intent to foreclose upon the underlying property is then sent to
the borrower, giving 10 days to cure the delinquency. If not cured, foreclosure proceedings are initiated after the loan is 120
days past due. Consumer loans receive a ten-day grace period before a late charge is assessed. Collection efforts begin after the
grace period expires. At December 31, 2016, 2015 and 2014, the percentage of non-performing loans to total loans receivable were
0.82%, 1.03% and 1.21%, respectively. At December 31, 2016, 2015 and 2014, the percentage of non-performing assets to total assets
was 0.48%, 0.76% and 0.78%, respectively.
Nonperforming Assets and Delinquent
Loans.
Loans are reviewed on a regular basis and are placed on nonaccrual status when, in the opinion of management, the
collection of additional interest is doubtful. The accrual of interest on loans is discontinued at the time the loan is 90 days
past due unless the loan is well secured and in the process of collection. Interest accrued and unpaid at the time a loan is placed
on nonaccrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance
or recorded as interest income, depending on management’s assessment of the ultimate collectability of the loan.
Management monitors all past due loans and
nonperforming assets. Such loans are placed under close supervision with consideration given to the need for additions to the allowance
for loan losses and (if appropriate) partial or full charge-off. At December 31, 2016, we had no loans 90 days or more delinquent
that were still accruing interest. Nonperforming assets decreased by $822,000 to $1.5 million at December 31, 2016 as compared
to December 31, 2015. The decrease in the level of nonperforming assets primarily reflected decreases of $491,000 in nonperforming
loans and $331,000 in foreclosed assets. The decrease in nonperforming loans primarily reflected the improvement in credits totaling
$346,000 which were paying as agreed and removed from nonaccrual status during 2016.
Real estate acquired through foreclosure
or by deed-in-lieu of foreclosure is classified as real estate owned until such time as it is sold. When real estate owned is acquired,
it is recorded at the lower of the unpaid principal balance of the related loan, or its fair market value, less estimated selling
expenses. Any further write-down of real estate owned is charged against earnings. At December 31, 2016, we owned no property classified
as real estate owned.
Nonperforming Assets.
The
table below sets forth the amounts and categories of our non-performing assets at the dates indicated. At December 31, 2016, 2015,
2014, 2013 and 2012, we had troubled debt restructurings (loans for which a portion of interest or principal has been forgiven
and loans modified at interest rates materially less than current market rates) of $2.5 million, $2.6 million, $2.3 million, $2.6
million and $2.2 million, respectively.
|
|
At December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
(Dollars in Thousands)
|
|
Nonaccrual loans:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
590
|
|
|
$
|
911
|
|
|
$
|
995
|
|
|
$
|
1,339
|
|
|
$
|
1,203
|
|
Commercial
|
|
|
709
|
|
|
|
840
|
|
|
|
932
|
|
|
|
208
|
|
|
|
560
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
123
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
50
|
|
|
|
119
|
|
|
|
121
|
|
|
|
134
|
|
|
|
277
|
|
Commercial business loans
|
|
|
17
|
|
|
|
9
|
|
|
|
22
|
|
|
|
38
|
|
|
|
52
|
|
Agricultural business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
164
|
|
|
|
142
|
|
|
|
71
|
|
|
|
63
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
1,530
|
|
|
|
2,021
|
|
|
|
2,264
|
|
|
|
1,782
|
|
|
|
2,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans delinquent 90 days or greater and still accruing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans delinquent 90 days or greater and still accruing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
1,530
|
|
|
|
2,021
|
|
|
|
2,264
|
|
|
|
1,782
|
|
|
|
2,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned and foreclosed assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
—
|
|
|
|
217
|
|
|
|
40
|
|
|
|
133
|
|
|
|
—
|
|
Commercial
|
|
|
—
|
|
|
|
114
|
|
|
|
137
|
|
|
|
149
|
|
|
|
137
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate owned and foreclosed assets
|
|
|
—
|
|
|
|
331
|
|
|
|
177
|
|
|
|
284
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
1,530
|
|
|
$
|
2,352
|
|
|
$
|
2,441
|
|
|
$
|
2,066
|
|
|
$
|
2,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans
|
|
|
0.82
|
%
|
|
|
1.03
|
%
|
|
|
1.21
|
%
|
|
|
0.97
|
%
|
|
|
1.25
|
%
|
Nonperforming assets to total
assets
|
|
|
0.48
|
%
|
|
|
0.76
|
%
|
|
|
0.78
|
%
|
|
|
0.65
|
%
|
|
|
0.73
|
%
|
|
(1)
|
Includes nonaccrual troubled debt restructurings of $958,000, $1.3 million, $1.1 million, $412,000 and $361,000 for the years
ended December 31, 2016, 2015, 2014, 2013, and 2012, respectively.
|
For the year ended
December 31, 2016, gross interest income that would have been recorded had our nonaccrual loans and troubled debt restructurings
been current in accordance with their original terms was $85,000. We did not recognize any interest income on such loans for the
year ended December 31, 2016.
At December 31, 2016, we had no loans that
were not currently classified as nonaccrual, 90 days past due or troubled debt restructurings where known information about possible
credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and that may result in disclosure as nonaccrual, 90 days past due or troubled debt restructurings.
The following table sets forth certain information
with respect to our loan portfolio delinquencies at the dates indicated.
|
|
Loans Delinquent For
|
|
|
|
|
|
|
60-89 Days
|
|
|
90 Days and Over
|
|
|
Total
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
3
|
|
|
|
136
|
|
|
|
14
|
|
|
|
545
|
|
|
|
17
|
|
|
|
681
|
|
Commercial
|
|
|
1
|
|
|
|
16
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
16
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial business loans
|
|
|
2
|
|
|
|
42
|
|
|
|
1
|
|
|
|
13
|
|
|
|
3
|
|
|
|
55
|
|
Agricultural business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
4
|
|
|
|
18
|
|
|
|
9
|
|
|
|
72
|
|
|
|
13
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
10
|
|
|
$
|
212
|
|
|
|
24
|
|
|
$
|
630
|
|
|
|
34
|
|
|
$
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
4
|
|
|
|
78
|
|
|
|
9
|
|
|
|
623
|
|
|
|
13
|
|
|
|
701
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
767
|
|
|
|
1
|
|
|
|
767
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
3
|
|
|
|
66
|
|
|
|
3
|
|
|
|
69
|
|
|
|
6
|
|
|
|
135
|
|
Commercial business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
3
|
|
|
|
6
|
|
|
|
2
|
|
|
|
6
|
|
|
|
5
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
10
|
|
|
$
|
150
|
|
|
|
15
|
|
|
$
|
1,465
|
|
|
|
25
|
|
|
$
|
1,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
5
|
|
|
|
287
|
|
|
|
9
|
|
|
|
613
|
|
|
|
14
|
|
|
|
900
|
|
Commercial
|
|
|
1
|
|
|
|
794
|
|
|
|
3
|
|
|
|
39
|
|
|
|
4
|
|
|
|
833
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
123
|
|
|
|
1
|
|
|
|
123
|
|
Home equity
|
|
|
2
|
|
|
|
12
|
|
|
|
5
|
|
|
|
58
|
|
|
|
7
|
|
|
|
70
|
|
Commercial business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
3
|
|
|
|
5
|
|
|
|
6
|
|
|
|
17
|
|
|
|
9
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
11
|
|
|
$
|
1,098
|
|
|
|
24
|
|
|
$
|
850
|
|
|
|
35
|
|
|
$
|
1,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
2
|
|
|
$
|
96
|
|
|
|
12
|
|
|
$
|
807
|
|
|
|
14
|
|
|
$
|
903
|
|
Commercial
|
|
|
2
|
|
|
|
68
|
|
|
|
2
|
|
|
|
78
|
|
|
|
4
|
|
|
|
146
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
3
|
|
|
|
48
|
|
|
|
4
|
|
|
|
55
|
|
|
|
7
|
|
|
|
103
|
|
Commercial business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
5
|
|
|
|
26
|
|
|
|
2
|
|
|
|
10
|
|
|
|
7
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
12
|
|
|
$
|
238
|
|
|
|
20
|
|
|
$
|
950
|
|
|
|
32
|
|
|
$
|
1,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
5
|
|
|
$
|
213
|
|
|
|
15
|
|
|
$
|
985
|
|
|
|
20
|
|
|
$
|
1,198
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
280
|
|
|
|
4
|
|
|
|
280
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
4
|
|
|
|
71
|
|
|
|
6
|
|
|
|
136
|
|
|
|
10
|
|
|
|
207
|
|
Commercial business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural business loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer loans
|
|
|
2
|
|
|
|
64
|
|
|
|
4
|
|
|
|
34
|
|
|
|
6
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
11
|
|
|
$
|
348
|
|
|
|
29
|
|
|
$
|
1,435
|
|
|
|
40
|
|
|
$
|
1,783
|
|
Classified Assets.
Federal
and state regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection
with examination of insured institutions, Federal examiners have authority to identify problem assets and, if appropriate, classify
them. There are three categories for classified assets: “substandard,” “doubtful” and “loss.”
Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An asset classified loss is considered uncollectible
and of such little value that continuance as an asset of the institution is not warranted. For assets classified “substandard”
and “doubtful,” the institution is required to establish general loan loss reserves in accordance with accounting principles
generally accepted in the United States of America. Assets classified “loss” must be either completely written off
or supported by a 100% specific reserve. We also maintain a category designated “special mention” which is established
and maintained for assets not considered classified but having potential weaknesses or risk characteristics that could result in
future problems. An institution is required to develop an in-house program to classify its assets, including investments in subsidiaries,
on a regular basis and set aside appropriate loss reserves on the basis of such classification. As part of the periodic exams of
Jacksonville Savings Bank by the Federal Deposit Insurance Corporation and the Illinois Department of Financial and Professional
Regulation, the staff of such agencies reviews our classifications and determine whether such classifications are adequate. Such
agencies have, in the past, and may in the future require us to classify certain assets which management has not otherwise classified
or require a classification more severe than established by management. At December 31, 2016, our classified assets totaled $5.2
million, all of which were classified as substandard.
The total amount of classified and special
mention loans decreased $1.1 million, or 13.0%, to $7.7 million at December 31, 2016 from $8.8 million at December 31, 2015. The
decrease in classified and special mention loans during 2016 was due to a decrease of $1.4 million in special mention loans, partially
offset by an increase of $209,000 in substandard loans. The decrease in special mention loans reflects $1.5 million in principal
reductions, partially offset by $274,000 in additional loans listed as special mention during 2016. The increase in substandard
loans was primarily related to $1.2 million in additional loans classified as substandard, partially offset by $669,000 in principal
reductions during 2016.
The following table shows the principal
amount of special mention and classified loans at December 31, 2016 and December 31, 2015.
|
|
12/31/16
|
|
|
12/31/15
|
|
|
|
(In Thousands)
|
|
Special Mention loans
|
|
$
|
2,431
|
|
|
$
|
3,781
|
|
Substandard loans
|
|
|
5,229
|
|
|
|
5,020
|
|
Total Special Mention and Substandard loans
|
|
$
|
7,660
|
|
|
$
|
8,801
|
|
Allowance for Loan Losses
The allowance for loan losses is maintained
at a level that, in management’s judgment, is adequate to cover probable credit losses inherent in the loan portfolio at
the balance sheet date. The allowance for loan losses is established as losses are estimated to have occurred through a provision
for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated
on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light
of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s
ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and
general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified
as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan.
A loan is considered impaired when, based
on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior
payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan
basis for commercial and agricultural loans by either the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral
dependent.
Groups of loans with similar risk characteristics
are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends,
conditions and other relevant factors that affect repayment of the loans. Accordingly, we do not separately identify individual
consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due
to financial difficulties of the borrower.
The general component covers non-classified
loans and is based on historical charge-off experience and expected loss given our internal risk rating process. The loan portfolio
is stratified into homogeneous groups of loans that possess similar loss characteristics and an appropriate loss ratio adjusted
for other qualitative factors is applied to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio.
The other qualitative factors considered by management include, but are not limited to, the following:
|
·
|
changes in lending policies and procedures, including underwriting standards and collection practices;
|
|
·
|
changes in national and local economic and business conditions and developments, including the
condition of various market segments;
|
|
·
|
changes in the nature and volume of the loan portfolio;
|
|
·
|
changes in the experience, ability and depth of management and the lending staff;
|
|
·
|
changes in the trend of the volume and severity of the past due, nonaccrual, and classified loans;
|
|
·
|
changes in the quality of our loan review system and the degree of oversight by the board of directors;
|
|
·
|
the existence of any concentrations of credit, and changes in the level of such concentrations;
and
|
|
·
|
the effect of external factors, such as competition and legal and regulatory requirements on the level of estimated credit
losses in our current portfolio.
|
Commercial and agricultural real estate
loans generally have higher credit risks compared to one- to four-family residential mortgage loans, as they typically involve
larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, payment experience on loans
secured by income-producing properties typically depend on the successful operation of the related real estate project and this
may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.
Commercial and agricultural business loans
involve a greater risk of default than one- to four-residential mortgage loans of like duration since their repayment generally
depends on the successful operation of the borrower’s business and the sufficiency of collateral if any. The repayment of
agricultural loans can be greatly affected by weather conditions and commodity prices.
The allowance for loan losses increased
$88,000, or 3.0%, to $3.0 million at December 31, 2016 from $2.9 million at December 31, 2015. The increase in the allowance was
the result of the provision for loan losses exceeding net charge-offs. Net charge-offs decreased $144,000 to $32,000 during 2016
from $177,000 during 2015. We recorded a provision for loan losses of $120,000 during 2016.
Nonperforming assets decreased $822,000
to $1.5 million at December 31, 2016, compared to December 31, 2015. The decrease in nonperforming assets was due to decreases
of $491,000 in non-performing loans and $331,000 in foreclosed assets held at December 31, 2016 as compared to at December 31,
2015. The allowance for loan losses to nonperforming loans increased to 196.56% at December 31, 2016 as compared to 144.45% at
December 31, 2015.
Although we maintain our allowance for loan
losses at a level which we consider to be adequate to provide for potential losses, there can be no assurance that such losses
will not exceed the estimated amounts or that we will not be required to make additions to the allowance for loan losses in the
future. Future additions to our allowance for loan losses and changes in the related ratio of the allowance for loan losses to
nonperforming loans are dependent upon the economy, changes in real estate values and interest rates, the view of the regulatory
authorities toward adequate loan loss reserve levels, and inflation. Management will continue to review the entire loan portfolio
to determine the extent, if any, to which additional loan loss provisions may be deemed necessary.
Analysis of the Allowance for Loan
Losses.
The following table summarizes changes in the allowance for loan losses by loan categories for each year indicated
and additions to the allowance for loan losses, which have been charged to operations.
|
|
For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
2,919
|
|
|
$
|
2,956
|
|
|
$
|
3,406
|
|
|
$
|
3,339
|
|
|
$
|
3,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
38
|
|
|
|
199
|
|
|
|
100
|
|
|
|
162
|
|
|
|
82
|
|
Commercial real estate
|
|
|
—
|
|
|
|
28
|
|
|
|
288
|
|
|
|
—
|
|
|
|
357
|
|
Agricultural real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
—
|
|
|
|
14
|
|
|
|
5
|
|
|
|
63
|
|
|
|
80
|
|
Commercial business
|
|
|
—
|
|
|
|
—
|
|
|
|
285
|
|
|
|
—
|
|
|
|
—
|
|
Agricultural business
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
44
|
|
|
|
53
|
|
|
|
26
|
|
|
|
67
|
|
|
|
67
|
|
Total charge-offs
|
|
|
82
|
|
|
|
294
|
|
|
|
704
|
|
|
|
292
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
26
|
|
|
|
40
|
|
|
|
2
|
|
|
|
16
|
|
|
|
27
|
|
Commercial real estate
|
|
|
15
|
|
|
|
60
|
|
|
|
5
|
|
|
|
136
|
|
|
|
89
|
|
Agricultural real estate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home equity
|
|
|
2
|
|
|
|
11
|
|
|
|
3
|
|
|
|
15
|
|
|
|
14
|
|
Commercial business
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7
|
|
|
|
3
|
|
Agricultural business
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
7
|
|
|
|
6
|
|
|
|
4
|
|
|
|
15
|
|
|
|
6
|
|
Total recoveries
|
|
|
50
|
|
|
|
117
|
|
|
|
14
|
|
|
|
189
|
|
|
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charge-offs
|
|
|
32
|
|
|
|
177
|
|
|
|
690
|
|
|
|
103
|
|
|
|
447
|
|
Additions charged to operations
|
|
|
120
|
|
|
|
140
|
|
|
|
240
|
|
|
|
170
|
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
3,007
|
|
|
$
|
2,919
|
|
|
$
|
2,956
|
|
|
$
|
3,406
|
|
|
$
|
3,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans outstanding
|
|
$
|
187,477
|
|
|
$
|
195,989
|
|
|
$
|
187,684
|
|
|
$
|
184,055
|
|
|
$
|
177,086
|
|
Average net loans outstanding
|
|
$
|
191,877
|
|
|
$
|
189,667
|
|
|
$
|
180,936
|
|
|
$
|
174,685
|
|
|
$
|
173,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percentage of total loans at end of year
|
|
|
1.60
|
%
|
|
|
1.49
|
%
|
|
|
1.57
|
%
|
|
|
1.85
|
%
|
|
|
1.89
|
%
|
Net loans charged off as a percent of average net loans outstanding
|
|
|
0.02
|
%
|
|
|
0.09
|
%
|
|
|
0.38
|
%
|
|
|
0.06
|
%
|
|
|
0.26
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
196.56
|
%
|
|
|
144.45
|
%
|
|
|
130.57
|
%
|
|
|
191.14
|
%
|
|
|
150.85
|
%
|
Allowance for loan losses to total nonperforming assets at end of year
|
|
|
196.56
|
%
|
|
|
124.13
|
%
|
|
|
121.10
|
%
|
|
|
164.90
|
%
|
|
|
142.05
|
%
|
Allocation of Allowance for Loan Losses.
The following table sets forth the allocation of allowance for loan losses by loan category at the dates indicated. The table reflects
the allowance for loan losses as a percentage of total loans receivable. Management believes that the allowance can be allocated
by category only on an approximate basis. The allocation of the allowance by category is not necessarily indicative of future losses
and does not restrict the use of the allowance to absorb losses in any category.
|
|
At December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Amount
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
Amount
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
Amount
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
832
|
|
|
|
24.2
|
%
|
|
$
|
830
|
|
|
|
24.2
|
%
|
|
$
|
999
|
|
|
|
23.7
|
%
|
Commercial real estate
|
|
|
1,045
|
|
|
|
22.1
|
|
|
|
918
|
|
|
|
20.6
|
|
|
|
855
|
|
|
|
21.6
|
|
Agricultural real estate
|
|
|
191
|
|
|
|
20.4
|
|
|
|
202
|
|
|
|
21.0
|
|
|
|
196
|
|
|
|
21.4
|
|
Home equity
|
|
|
174
|
|
|
|
6.2
|
|
|
|
149
|
|
|
|
6.0
|
|
|
|
206
|
|
|
|
6.0
|
|
Commercial business
|
|
|
301
|
|
|
|
11.5
|
|
|
|
387
|
|
|
|
13.0
|
|
|
|
422
|
|
|
|
14.3
|
|
Agricultural business
|
|
|
167
|
|
|
|
7.8
|
|
|
|
163
|
|
|
|
8.2
|
|
|
|
58
|
|
|
|
6.3
|
|
Consumer
|
|
|
183
|
|
|
|
7.8
|
|
|
|
169
|
|
|
|
7.0
|
|
|
|
167
|
|
|
|
6.7
|
|
Unallocated
|
|
|
114
|
|
|
|
—
|
|
|
|
101
|
|
|
|
—
|
|
|
|
53
|
|
|
|
—
|
|
Total
|
|
$
|
3,007
|
|
|
|
100
|
%
|
|
$
|
2,919
|
|
|
|
100
|
%
|
|
$
|
2,956
|
|
|
|
100
|
%
|
|
|
At December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Amount
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
Amount
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
856
|
|
|
|
24.1
|
%
|
|
$
|
741
|
|
|
|
23.4
|
%
|
Commercial real estate
|
|
|
746
|
|
|
|
21.1
|
|
|
|
829
|
|
|
|
17.5
|
|
Agricultural real estate
|
|
|
175
|
|
|
|
19.0
|
|
|
|
150
|
|
|
|
21.1
|
|
Home equity
|
|
|
202
|
|
|
|
6.4
|
|
|
|
329
|
|
|
|
7.2
|
|
Commercial business
|
|
|
1,034
|
|
|
|
16.3
|
|
|
|
934
|
|
|
|
16.4
|
|
Agricultural business
|
|
|
53
|
|
|
|
5.7
|
|
|
|
44
|
|
|
|
6.2
|
|
Consumer
|
|
|
185
|
|
|
|
7.4
|
|
|
|
151
|
|
|
|
8.2
|
|
Unallocated
|
|
|
155
|
|
|
|
—
|
|
|
|
161
|
|
|
|
—
|
|
Total
|
|
$
|
3,406
|
|
|
|
100
|
%
|
|
$
|
3,339
|
|
|
|
100
|
%
|
Investment Activities
General.
The asset/liability
management committee, consisting of our Chairman of the Board, President, Senior Vice President and Investment Officer, Vice President
of Operations, Chief Financial Officer, and at least two outside directors from the board, has primary responsibility for establishing
our investment policy and overseeing its implementation, subject to oversight by our entire board of directors. Authority to make
investments under approved guidelines is delegated to the Senior Vice President and Investment Officer. The committee meets at
least quarterly. All investment transactions are reported to the board of directors for ratification quarterly.
The investment policy is reviewed at least
annually by the full board of directors. This policy dictates that investment decisions be made based on providing liquidity, meeting
pledging requirements, generating a reasonable rate of return, minimizing our tax liability through the purchase of municipal securities,
minimizing exposure to credit risk and ensuring consistency with our interest rate risk management strategy. During the prolonged
period of low interest rates and weak loan demand, our investment activities are a more pronounced part of our operations.
Our current investment policy permits us
to invest in U.S. treasuries, federal agency securities, mortgage-backed securities, investment grade corporate bonds, municipal
bonds, short-term instruments, and other securities. Investments in municipal bonds will be correlated with Jacksonville Savings
Bank’s current level of taxable income, the need for tax-exempt income, and investment in the community. The investment policy
also permits investments in certificates of deposit, securities purchased under an agreement to resell, bankers acceptances, commercial
paper and federal funds.
Our current investment
policy generally does not permit investment in stripped mortgage-backed securities, short sales, derivatives, or in other high-risk
securities. Federal and Illinois state law generally limit our investment activities to those permissible for a national bank.
The accounting rules require that, at the
time of purchase, we designate a security as held to maturity, available-for-sale, or trading, depending on our ability and intent.
Securities available for sale are reported at fair value, while securities held to maturity are reported at amortized cost. We
only maintain a securities available-for-sale portfolio.
The portfolio consists primarily of mortgage-backed
securities, municipal bonds and U.S. government and agency securities all of which are classified as available for sale. Mortgage-backed
securities totaled $44.4 million at December 31, 2016. General obligation municipal bonds, most of which have been issued within
the States of Illinois and Missouri totaled $42.4 million at December 31, 2016. Our portfolio of U.S. Government and agency securities
totaled $13.3 million at December 31, 2016. We expect the composition of our investment portfolio to continue to change based on
liquidity needs associated with loan origination activities. During the year ended December 31, 2016, we had no investment securities
that were deemed to be other than temporarily impaired.
Under Federal regulations, we are required
to maintain a minimum amount of liquid assets that may be invested in specified short-term securities and certain other investments.
Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management’s
judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level
of yield that will be available in the future, as well as management’s projections as to the short-term demand for funds
to be used in our loan originations and other activities.
Mortgage-Backed Securities.
We invest in mortgage-backed securities insured or guaranteed by the United States Government or government sponsored enterprises.
These securities, which consist of mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, had an amortized
cost of $45.5 million, $23.1 million and $41.2 million at December 31, 2016, 2015 and 2014, respectively. The fair value of our
mortgage-backed securities portfolio was $44.4 million, $23.2 million and $41.4 million at December 31, 2016, 2015 and 2014, respectively,
and the weighted average rate as of December 31, 2016, 2015 and 2014 was 2.43%, 2.30% and 2.33%, respectively. At December 31,
2016, $44.4 million of the mortgage-backed securities in the investment portfolio had fixed rates of interest.
Mortgage-backed securities are created
by pooling mortgages and issuing a security with an interest rate that is less than the interest rate on the underlying mortgages.
Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages,
although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities
pool and resell the participation interests in the form of securities to investors such as Jacksonville Savings Bank. Some securities
pools are guaranteed as to payment of principal and interest to investors. Mortgage-backed securities generally yield less than
the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. However, mortgage-backed
securities are more liquid than individual mortgage loans since there is an active trading market for such securities. In addition,
mortgage-backed securities may be used to collateralize our specific liabilities and obligations. Finally, mortgage-backed securities
are assigned lower risk-weightings for purposes of calculating our risk-based capital level.
Investments in mortgage-backed securities
involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which
may require adjustments to the amortization of any premium or acceleration of any discount relating to such interests, thereby
affecting the net yield on our securities. We periodically review current prepayment speeds to determine whether prepayment estimates
require modification that could cause amortization or accretion adjustments.
Municipal Bonds.
At December
31, 2016, we held municipal bonds with a fair value of $42.4 million. All of our municipal bonds are general obligation bonds
with full taxing authority and ratings (when available) of A or above. Nearly all of our municipal bonds are issued by local municipalities
or school districts located in Illinois or Missouri.
U.S. Government and Agency Securities.
At December 31, 2016, we held U.S. Government and agency securities with a fair value of $13.3 million. These securities
have an average expected life of 8.4 years. While these securities generally provide lower yields than other investments such as
mortgage-backed securities, our current investment strategy is to maintain investments in such instruments to the extent appropriate
for liquidity purposes, as collateral for borrowings, and for prepayment protection.
Investment Securities Portfolio.
The
following table sets forth the composition of our investment securities portfolio at the dates indicated. Investment securities
do not include Federal Home Loan Bank of Chicago stock of $364,000. All of such securities were classified as available for sale.
|
|
At December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
Amortized
Cost
|
|
|
Fair Value
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
$
|
26,283
|
|
|
$
|
25,735
|
|
|
$
|
16,367
|
|
|
$
|
16,453
|
|
|
$
|
24,023
|
|
|
$
|
24,241
|
|
Freddie Mac
|
|
|
19,174
|
|
|
|
18,678
|
|
|
|
6,368
|
|
|
|
6,397
|
|
|
|
12,492
|
|
|
|
12,491
|
|
Ginnie Mae
|
|
|
—
|
|
|
|
—
|
|
|
|
332
|
|
|
|
328
|
|
|
|
4,682
|
|
|
|
4,688
|
|
Total mortgage-backed securities
|
|
|
45,457
|
|
|
|
44,413
|
|
|
|
23,067
|
|
|
|
23,178
|
|
|
|
41,197
|
|
|
|
41,420
|
|
U.S. government and agencies
|
|
|
13,986
|
|
|
|
13,333
|
|
|
|
15,980
|
|
|
|
15,939
|
|
|
|
10,032
|
|
|
|
9,958
|
|
Municipal bonds
|
|
|
42,501
|
|
|
|
42,415
|
|
|
|
47,229
|
|
|
|
48,356
|
|
|
|
44,378
|
|
|
|
45,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
101,944
|
|
|
$
|
100,161
|
|
|
$
|
86,276
|
|
|
$
|
87,473
|
|
|
$
|
95,607
|
|
|
$
|
96,685
|
|
Portfolio Maturities and Yields.
The
composition and maturities of the investment securities portfolio at December 31, 2016 are summarized in the following table. Maturities
are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.
All of such securities were classified as available for sale.
|
|
One
Year or Less
|
|
|
More
than One Year
through Five Years
|
|
|
More
than Five Years
through Ten Years
|
|
|
More
than Ten Years
|
|
|
Total
Securities
|
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
Weighted
Average
Yield
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
26,283
|
|
|
|
2.28
|
%
|
|
$
|
26,283
|
|
|
$
|
25,735
|
|
|
|
2.28
|
%
|
Freddie Mac
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,174
|
|
|
|
2.54
|
|
|
|
19,174
|
|
|
|
18,678
|
|
|
|
2.54
|
|
Ginnie
Mae
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total mortgage-backed
securities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,457
|
|
|
|
2.43
|
|
|
|
45,457
|
|
|
|
44,413
|
|
|
|
2.43
|
|
U.S. government and agencies
|
|
|
—
|
|
|
|
—
|
|
|
|
2,027
|
|
|
|
1.79
|
|
|
|
6,594
|
|
|
|
2.05
|
|
|
|
5,365
|
|
|
|
2.32
|
|
|
|
13,986
|
|
|
|
13,333
|
|
|
|
2.12
|
|
Municipal bonds
(1)
|
|
|
1,037
|
|
|
|
2.83
|
|
|
|
7,174
|
|
|
|
3.31
|
|
|
|
20,704
|
|
|
|
3.11
|
|
|
|
13,586
|
|
|
|
3.03
|
|
|
|
42,501
|
|
|
|
42,415
|
|
|
|
3.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,037
|
|
|
|
2.83
|
%
|
|
$
|
9,201
|
|
|
|
2.98
|
%
|
|
$
|
27,298
|
|
|
|
2.86
|
%
|
|
$
|
64,408
|
|
|
|
2.54
|
%
|
|
$
|
101,944
|
|
|
$
|
100,161
|
|
|
|
2.67
|
%
|
|
(1)
|
We used an assumed 34% tax rate in computing tax equivalent adjustments. The tax equivalent yield of municipal bonds was 4.29%
for maturities of one year or less, 5.02% for maturities of more than one year through five years, 4.71% for maturities for more
than five years through ten years, 4.59% for maturities of more than 10 years and 4.71% for the total municipal bonds securities
portfolio at December 31, 2016. The tax equivalent adjustments to interest income of municipal bonds was $15,000 for maturities
of one year or less, $123,000 for maturities of more than one year through five years, $331,000 for maturities for more than five
years through ten years, $212,000 for maturities of more than 10 years and $680,000 for the total municipal bonds securities portfolio
for the year ended December 31, 2016.
|
Sources of Funds
General.
Deposits and borrowings
are our major sources of funds for lending and other investment purposes. In addition, we derive funds from the repayment and prepayment
of loans and mortgage-backed securities, operations, sales of loans into the secondary market, and the sale, call, or maturity
of investment securities. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest rates and market conditions. Other sources of funds
include advances from the Federal Home Loan Bank. For further information see “—Borrowings.” Borrowings may be
used on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer term basis
for general business purposes.
Deposits.
We attract consumer
and commercial deposits principally from within our market areas through the offering of a broad selection of deposit instruments
including interest-bearing checking accounts, noninterest-bearing checking accounts, savings accounts, money market accounts, term
certificate accounts and individual retirement accounts. We will accept deposits of $100,000 or more and may offer negotiated interest
rates on such deposits. At December 31, 2016, we had deposits of $100,000 or more from public entities that totaled $26.8 million.
Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the
interest rate, among other factors. We regularly evaluate our internal cost of funds, survey rates offered by competing institutions,
review our cash flow requirements for lending and liquidity and execute rate changes when deemed appropriate. We do not obtain
funds through brokers, nor do we solicit funds outside our market area.
The following tables set forth the distribution of our average
deposit accounts, by account type, for the years indicated.
|
|
For
the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Average
Balance
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
Average
Balance
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
Average
Balance
|
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing checking
|
|
$
|
29,592
|
|
|
|
11.8
|
%
|
|
|
—
|
%
|
|
$
|
29,414
|
|
|
|
12.3
|
%
|
|
|
—
|
%
|
|
$
|
27,315
|
|
|
|
11.0
|
%
|
|
|
—
|
%
|
Interest-bearing checking
|
|
|
55,610
|
|
|
|
22.3
|
|
|
|
0.30
|
|
|
|
39,270
|
|
|
|
16.5
|
|
|
|
0.14
|
|
|
|
38,080
|
|
|
|
15.3
|
|
|
|
0.14
|
|
Savings accounts
|
|
|
43,265
|
|
|
|
17.3
|
|
|
|
0.20
|
|
|
|
39,954
|
|
|
|
16.8
|
|
|
|
0.20
|
|
|
|
37,323
|
|
|
|
15.0
|
|
|
|
0.21
|
|
Money market deposits
|
|
|
7,628
|
|
|
|
3.1
|
|
|
|
0.15
|
|
|
|
7,957
|
|
|
|
3.3
|
|
|
|
0.15
|
|
|
|
8,026
|
|
|
|
3.2
|
|
|
|
0.15
|
|
Money market savings
|
|
|
34,741
|
|
|
|
13.9
|
|
|
|
0.29
|
|
|
|
34,947
|
|
|
|
14.7
|
|
|
|
0.29
|
|
|
|
35,408
|
|
|
|
14.2
|
|
|
|
0.31
|
|
Certificates of deposit
|
|
|
78,988
|
|
|
|
31.6
|
|
|
|
0.83
|
|
|
|
86,614
|
|
|
|
36.4
|
|
|
|
0.98
|
|
|
|
102,890
|
|
|
|
41.3
|
|
|
|
1.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
249,824
|
|
|
|
100.00
|
%
|
|
|
0.41
|
%
|
|
$
|
238,156
|
|
|
|
100.00
|
%
|
|
|
0.46
|
%
|
|
$
|
249,042
|
|
|
|
100.00
|
%
|
|
|
0.58
|
%
|
The following table
sets forth certificates of deposit classified by interest rate as of the dates indicated.
|
|
At December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1.00%
|
|
$
|
43,212
|
|
|
$
|
47,140
|
|
|
$
|
53,255
|
|
1.00% to 1.99%
|
|
|
34,771
|
|
|
|
24,093
|
|
|
|
21,607
|
|
2.00% to 2.99%
|
|
|
2,204
|
|
|
|
7,821
|
|
|
|
13,324
|
|
3.00% to 3.99%
|
|
|
—
|
|
|
|
—
|
|
|
|
6,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
80,187
|
|
|
$
|
79,054
|
|
|
$
|
94,600
|
|
The
following table sets forth, by interest rate ranges and scheduled maturity, information concerning our certificates of deposit
at December 31, 2016.
|
|
At December 31, 2016
|
|
|
|
Period to Maturity
|
|
|
|
Less Than or
Equal to
One Year
|
|
|
More Than
One to
Two Years
|
|
|
More Than
Two to
Three Years
|
|
|
More Than
Three Years
|
|
|
Total
|
|
|
Percent of
Total
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Range:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1.00%
|
|
$
|
31,820
|
|
|
$
|
9,725
|
|
|
$
|
1,489
|
|
|
$
|
178
|
|
|
$
|
43,212
|
|
|
|
53.9
|
%
|
1.00% to 1.99%
|
|
|
13,304
|
|
|
|
5,136
|
|
|
|
6,084
|
|
|
|
10,247
|
|
|
|
34,771
|
|
|
|
43.4
|
|
2.00% to 2.99%
|
|
|
2,195
|
|
|
|
9
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,204
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,319
|
|
|
$
|
14,870
|
|
|
$
|
7,573
|
|
|
$
|
10,425
|
|
|
$
|
80,187
|
|
|
|
100.0
|
%
|
As of December 31, 2016, the aggregate amount
of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $33.0 million, of which $5.0
million were deposits from public entities. The following table set forth the maturity of those certificates as of December 31,
2016.
|
|
At December 31, 2016
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
Three months or less
|
|
$
|
10,089
|
|
Over three months through six months
|
|
|
4,777
|
|
Over six months through one year
|
|
|
4,371
|
|
Over one year to three years
|
|
|
9,116
|
|
Over three years
|
|
|
4,620
|
|
|
|
|
|
|
Total
|
|
$
|
32,973
|
|
Borrowings
.
Deposits
are our primary source of funds for lending and investment activities. If the need arises, we may rely upon advances from the Federal
Home Loan Bank to supplement our supply of available funds and to fund deposit withdrawals. We typically secure advances from the
Federal Home Loan Bank with mortgage loans, and small business and small farm loans. The Federal Home Loan Bank functions as a
central reserve bank providing credit for us and other member savings associations and financial institutions. As a member, we
are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such
stock and certain of our loans, provided certain standards related to creditworthiness have been met. Advances are made pursuant
to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of a member institution’s stockholders’
equity or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. At December 31, 2016, we
had no Federal Home Loan Bank advances outstanding.
Other borrowings consist of securities sold
under agreements to repurchase which are swept daily from commercial deposit accounts. We may be required to provide additional
collateral based on the fair value of the underlying securities.
Our borrowings consist of advances from
the Federal Home Loan Bank of Chicago and funds borrowed under repurchase agreements. At December 31, 2016, we had access to Federal
Home Loan Bank advances of up to $68.7 million. The following table sets forth information concerning balances and interest rates
on our Federal Home Loan Bank advances at or for the years indicated.
|
|
At or For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
—
|
|
|
$
|
8,500
|
|
|
$
|
5,000
|
|
Average balance during year
|
|
$
|
1,348
|
|
|
$
|
7,877
|
|
|
$
|
4,803
|
|
Maximum outstanding at any month end
|
|
$
|
9,000
|
|
|
$
|
14,200
|
|
|
$
|
12,000
|
|
Weighted average interest rate at end of year
|
|
|
—
|
|
|
|
0.16
|
%
|
|
|
0.33
|
%
|
Average interest rate during year
|
|
|
0.30
|
%
|
|
|
0.24
|
%
|
|
|
0.20
|
%
|
The following table sets forth information
concerning balances and interest rates on our repurchase agreements at or for the years indicated.
|
|
At or For the Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
7,135
|
|
|
$
|
6,632
|
|
|
$
|
8,822
|
|
Average balance during year
|
|
$
|
5,247
|
|
|
$
|
6,009
|
|
|
$
|
5,996
|
|
Maximum outstanding at any month end
|
|
$
|
7,343
|
|
|
$
|
9,549
|
|
|
$
|
9,484
|
|
Weighted average interest rate at end of year
|
|
|
0.51
|
%
|
|
|
0.23
|
%
|
|
|
0.07
|
%
|
Average interest rate during year
|
|
|
0.35
|
%
|
|
|
0.12
|
%
|
|
|
0.08
|
%
|
Trust Services
We operate a full-service trust department
which is primarily engaged in asset management. Investment securities and farm real estate comprise most of the $99.3 million of
assets administered in 131 accounts as of December 31, 2016. We also provide institutional trust services for regional bond issuers.
Trust fees collected in 2016 and 2015 totaled $329,000 and $289,000, respectively.
Subsidiary Activities
Jacksonville Savings Bank has one wholly
owned subsidiary, Financial Resources Group, Inc. (“Financial Resources”), an Illinois corporation. Financial Resources
operates an investment center engaged in the business of buying and selling stocks, bonds, annuities and mutual funds for its customers’
accounts. In addition, Financial Resources has historically engaged in the business of originating commercial business loans and
commercial real estate loans. For the years ended December 31, 2016 and 2015, Financial Resources had gross revenues of $1.2 million
and $1.4 million, respectively.
REGULATION AND SUPERVISION [Update]
General
Jacksonville Bancorp, Inc. is a bank holding
company within the meaning of the Bank Holding Company Act of 1956, as amended. As such, it is registered with, subject to examination
and supervision by and otherwise required to comply with the rules and, regulations of, the Federal Reserve Board. Jacksonville
Bancorp, Inc., was previously regulated as a savings and loan holding company. However, in June 2013, Jacksonville Savings Bank
revoked its previous election to have Jacksonville, Bancorp, Inc. regulated as a savings and loan holding company. As a result,
Jacksonville Bancorp, Inc. is now regulated as a bank holding company.
Jacksonville Savings Bank is an Illinois-chartered
savings bank subject to extensive regulation by the Illinois Department of Financial and Professional Regulation and the Federal
Deposit Insurance Corporation. Jacksonville Savings Bank’s deposit accounts are insured up to applicable limits by the Federal
Deposit Insurance Corporation. Jacksonville Savings Bank must file reports with the Illinois Department of Financial and Professional
Regulation and the Federal Deposit Insurance Corporation concerning its activities and financial condition, in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers or acquisitions with other depository institutions.
There are periodic examinations of the Bank by the Illinois Department of Financial and Professional Regulation and the Federal
Deposit Insurance Corporation to review Jacksonville Savings Bank’s compliance with various regulatory requirements. Jacksonville
Savings Bank is also subject to certain reserve requirements established by the Federal Reserve Board. This regulation and supervision
establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection
of the Federal Deposit Insurance Corporation and depositors. The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such
regulation, whether by the Illinois Department of Financial and Professional Regulation, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or Congress could have a material impact on the operations of Jacksonville Savings Bank.
Set forth below is a brief description of
material regulatory requirements that are or will be applicable to Jacksonville Bancorp, Inc. and Jacksonville Savings Bank. The
description is limited to certain material aspects of the statutes and regulations addressed, is not intended to be a complete
description of such statutes and regulations and their effects on Jacksonville Bancorp, Inc. and Jacksonville Savings Bank and
is qualified in its entirety by reference to the actual statutes and regulations involved.
Federal Legislation
The Dodd-Frank Wall Street Reform and Consumer
Protection Act (“Dodd-Frank Act”) was enacted in 2010. The Dodd-Frank Act has significantly changed the bank regulatory
structure and is affecting the lending, investment, trading and operating activities of depository institutions and their holding
companies.
The Dodd-Frank Act created a new Consumer
Financial Protection Bureau with expansive powers to supervise and enforce consumer protection laws. The Consumer Financial Protection
Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions,
including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection
Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.
Banks and savings institutions with $10 billion or less in assets, such as Jacksonville Savings Bank, will continue to be examined
for compliance with these laws by their applicable federal bank regulators. The legislation gave state attorneys general the ability
to enforce applicable federal consumer protection laws and weakened federal preemption of state laws as to federal saving banks
in certain respects.
The Dodd-Frank Act also broadened the base
for Federal Deposit Insurance Corporation assessments for deposit insurance, permanently increased the maximum amount of deposit
insurance to $250,000 per depositor. The Dodd-Frank Act also provided for originators of certain securitized loans to retain a
percentage of the risk for transferred credits, directed the Federal Reserve Board to regulate pricing of certain debit card interchange
fees, repealed restrictions on paying interest on checking accounts and contained a number of reforms related to mortgage origination.
The Dodd-Frank Act increased shareholder influence over boards of directors by requiring companies to give shareholders a non-binding
vote on executive compensation and so-called “golden parachute” payments.
The Dodd-Frank Act also required the Consumer
Financial Protection Bureau to issue regulations requiring lenders to make a reasonable, good faith determination as to the ability
of a prospective borrower to repay a residential mortgage loan. The “Ability to Repay” final rule, effective January
1, 2014, established a “qualified mortgage” safe harbor from liability for loans which have terms and features which
are deemed to make the loan less risky.
Many of the provisions of the Dodd-Frank
Act are subject to delayed effective dates and/or require the issuance of implementing regulations. Their impact on operations
cannot yet fully be assessed. However, it is likely that the Dodd-Frank Act will increase regulatory burden, compliance costs and
interest expense for Jacksonville Bancorp, Inc. and Jacksonville Savings Bank.
Illinois Savings Bank Regulation
As an Illinois-chartered savings bank, Jacksonville
Savings Bank is subject to regulation and supervision by the Illinois Department of Financial and Professional Regulation. The
Illinois Department of Financial and Professional Regulation’s regulation of Jacksonville Savings Bank covers, among other
things, Jacksonville Savings Bank’s internal organization (
i.e.
, charter, bylaws, capital requirements, transactions
with directors and officers, and composition of the board of directors), as well as supervision of permissible activities and mergers
and acquisitions. The lending and investment authority of Jacksonville Savings Bank is prescribed by Illinois law and regulations,
as well as applicable Federal laws and regulations, and Jacksonville Savings Bank is prohibited from engaging in any activities
not permitted by such laws and regulations. Jacksonville Savings Bank is required to file reports with, and is subject to periodic
examinations by the Illinois Department of Financial and Professional Regulation. The Illinois Department of Financial and Professional
Regulation also maintains extensive enforcement power to assure compliance with law and regulations and correct unsafe practices,
including cease and desist orders, civil penalties and removal of directors and officers. The Illinois Department of Financial
and Professional Regulation also may appoint a receiver or conservator for a savings bank under certain circumstances.
Under Illinois law, savings banks are required
to maintain a minimum total capital to total assets ratio of 3%. The Illinois Department of Financial and Professional Regulation
is authorized to require a savings bank to maintain a higher minimum capital level if the Illinois Department of Financial and
Professional Regulation determines that the savings bank’s financial condition or history, management or earnings prospects
are not adequate. If a savings bank’s total capital ratio falls below the required level, the Illinois Department of Financial
and Professional Regulation may direct the savings bank to adhere to a specific written plan established by the Illinois Department
of Financial and Professional Regulation to correct the savings bank’s capital deficiency, as well as a number of other restrictions
on the savings bank’s operations, including a prohibition on the declaration of dividends by the savings bank’s board
of directors.
Under Illinois law, a savings bank may make
both secured and unsecured loans. However, loans for business, corporate, commercial or agricultural purposes, whether secured
or unsecured, may not in the aggregate exceed 15% of a savings bank’s total assets unless authorized by the Illinois Department
of Financial and Professional Regulation. With the prior written consent of the Illinois Department of Financial and Professional
Regulation, savings banks may also engage in real estate development activities, provided that the total investment in any one
project may not exceed 15% of total capital, and the total investment in all projects may not exceed 50% of total capital. The
investment authority of state chartered banks is also constrained by federal law, as is explained later. The total loans and extensions
of credit outstanding at one time, both direct and indirect, by a savings bank to any borrower may not exceed 25% of the savings
bank’s total capital. At December 31, 2016, Jacksonville Savings Bank did not have any loans-to-one borrower which exceeded
these limitations.
Illinois-chartered savings banks generally
have all lending, investment and other powers which are possessed by federal savings banks based in Illinois. Recent federal and
state legislative developments have reduced distinctions between commercial banks and savings institutions in Illinois with respect
to lending and investment authority. As federal law has expanded the authority of federally chartered savings institutions to engage
in activities previously reserved for commercial banks, Illinois legislation and regulations (“parity legislation”)
have given Illinois-chartered savings banks, such as Jacksonville Savings Bank, the powers of federally chartered savings institutions.
The board of directors of a savings bank
may declare dividends on its capital stock based upon the savings bank’s annualized net profits except (1) dividends may
not be declared if the bank fails to meet its capital requirements, (2) dividends are limited to 100% of net income in that year
and (3) if total capital is less than 6% of total assets, dividends are limited to 50% of net income without prior approval of
the Illinois Department of Financial and Professional Regulation.
Branching and Interstate Banking.
The establishment of branches by Jacksonville Savings Bank is subject to approval of the Illinois Department of Financial
and Professional Regulation and Federal Deposit Insurance Corporation and geographic limits established by state laws. The Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”), as amended, facilitates the interstate
expansion and consolidation of banking organizations by permitting, among other things, (i) bank holding companies that are adequately
capitalized and managed to acquire banks located in states outside their home state regardless of whether such acquisitions are
authorized under the law of the host state, (ii) the interstate merger of banks, and (iii) banks to establish new branches
on an interstate basis.
Investment Activities.
Under
federal law, all state-chartered banks and savings banks, and their subsidiaries, generally limited to activities as principal
and equity investments of the type and in the amount authorized are national banks. There are certain exceptions. For example,
the Federal Deposit Insurance Corporation is authorized to permit institutions to engage in state-authorized activities or investments
not permitted for national banks (other than non-subsidiary equity investments) for institutions that meet all applicable capital
requirements if it is determined that such activities or investments do not pose a significant risk to the deposit insurance fund.
Federal law and Federal Deposit Insurance Corporation regulations impose certain quantitative and qualitative restrictions on such
activities and on a bank’s dealings with a subsidiary that engages in specified activities.
Transactions with Related Parties.
A savings bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the
Federal Reserve Act and Regulation W promulgated by the Board of Governors of the Federal Reserve System. An affiliate is generally
a company that controls, is controlled by, or is under common control with an insured depository institution such as Jacksonville
Savings Bank. Jacksonville Bancorp, Inc. is an affiliate of Jacksonville Savings Bank. In general, transactions between an insured
depository institution and its affiliates are subject to certain quantitative and collateral requirements. In addition, applicable
regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible
for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions
with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that
are as favorable to the institution as comparable transactions with non-affiliates. Applicable regulators require savings banks
to maintain detailed records of all transactions with affiliates.
Jacksonville Savings Bank’s authority
to extend credit to its directors, executive officers and 10% or greater stockholders, as well as to entities controlled by such
persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated
by the Board of Governors of the Federal Reserve System. Among other things, these provisions require that extensions of credit
to insiders:
|
(i)
|
be made on terms that are substantially the same as, and
follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated
persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and
|
|
(ii)
|
not exceed certain limitations on the amount of credit
extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Jacksonville Savings
Bank’s capital.
|
In addition, extensions of credit in excess
of certain limits must be approved in advance by Jacksonville Savings Bank’s board of directors. Extensions of credit to
executive officers of Jacksonville Savings Bank are subject to additional restrictions based on the type of loan.
Capital Maintenance.
The federal banking agencies, including the FDIC, have adopted new regulations that implement the Basel III regulatory capital
reforms and changes required by the Dodd-Frank Act.
Effective January 1, 2015 (with some changes
transitioned into full effectiveness over two to four years), Jacksonville Savings Bank became subject to new capital requirements
adopted by the FDIC. These new requirements created a new required ratio for common equity Tier 1 ("CETI") capital, increased
the leverage and Tier 1 capital ratios, changed the risk weight of certain assets for purposes of the risk-based capital ratios,
created an additional capital conservation buffer over the required capital ratios and changed what qualifies as capital for purposes
of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer
will limit the ability of Jacksonville Savings Bank to pay dividends or pay discretionary bonuses. The Company is exempt from consolidated
capital requirements as those requirements do not apply to certain small bank holding companies with assets under $1 billion.
Under the new capital regulations, the minimum
capital ratios are: (1) CETI capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted
assets: (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio of 4.0%. CETI generally consists of
common stock and retained earnings, subject to applicable regulatory adjustments and deductions.
There are a number of changes in what constitutes
regulatory capital, some of which are subject to transition periods. These changes include the phasing-out of certain instruments
as qualifying capital. Jacksonville Savings Bank does not use any of these instruments. Under the new requirements for total capital,
Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain
deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CETI will be deducted from capital.
Jacksonville Savings Bank has elected to permanently opt-out of the inclusion of accumulated other comprehensive income in its
capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on our regulatory
capital levels.
The new requirements also include changes
in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (increased
from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential
mortgage loans that are 90 days past due or otherwise in non-accrual status; a 20% (increased from 0%) credit conversion factor
for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a
250% risk weight (increased from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased
risk weights (0% to 600%) for equity exposures.
In addition to the minimum CETI, Tier 1
and total capital ratios, Jacksonville Savings Bank will have to maintain a capital conservation buffer consisting of additional
CETI capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying
dividends or paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions.
This new capital conservation buffer requirement will be phased in beginning in January 2016 and in 2017 is 1.25% of risk-weighted
assets and increasing each year until fully implemented in January 2019.
Prompt Corrective Regulatory Action.
The Federal Deposit Insurance Corporation Improvement Act requires, among other things, that federal bank regulatory authorities
take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For these
purposes, the statute establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.
The Federal Deposit Insurance Corporation
may order savings banks which have insufficient capital to take corrective actions. For example, a savings bank that is categorized
as “undercapitalized” would be subject to growth limitations, dividend restrictions and would be required to submit
a capital restoration plan for regulator approval. A holding company that controls such a savings bank must guarantee that the
savings bank complies with the restoration plan subject to certain limits. A “significantly undercapitalized” savings
bank would be subject to additional restrictions. Savings banks deemed by the Federal Deposit Insurance Corporation to be “critically
undercapitalized” would be subject to the appointment of a receiver or conservator within certain time frames.
The previously mentioned final regulatory
capital rule that increases regulatory capital requirements adjusted the prompt corrective action categories accordingly effective
January 1, 2015. Under the revised requirements, an institution must meet the following in order to be classified as “well
capitalized”: (1) a common equity Tier 1 risk-based ratio of 6.5% (new standard); (2) a Tier 1 risk-based capital ratio of
8% (increased from 6%); (3) a total risk-based ratio of 10% (unchanged) and (4) a Tier 1 leverage ratio of 5% (unchanged).
At December 31, 2016, Jacksonville Savings
Bank is “well capitalized” under the prompt corrective action rules.
Insurance of Deposit Accounts.
Jacksonville
Savings Bank is a member of the Deposit Insurance Fund, which is administered by the Federal Deposit Insurance Corporation. Deposit
accounts in Jacksonville Savings Bank are insured up to a maximum of $250,000 for each separately insured depositor.
The Dodd-Frank Act increased the minimum
target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must
seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed
to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC,
which has exercised that discretion by establishing a long range fund ratio of 2%.
The FDIC charges insured
depository institutions premiums to maintain the Deposit Insurance Fund. Under the FDIC’s risk-based assessment system, insured
institutions were assigned a risk category based on supervisory evaluations, regulatory capital levels and certain other factors.
An institution’s rate depended upon the category to which it is assigned, and certain adjustments specified by FDIC regulations.
Institutions deemed less risky pay lower FDIC assessments. The Dodd-Frank Act required the FDIC to revise its procedures to base
its assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC finalized
a rule, effective April 1, 2011, that set the assessment range at 2.5 to 45 basis points of total assets less tangible equity.
Effective July 1, 2016,
the FDIC adopted changes that eliminated the risk categories. Assessments for most institutions are now based on financial measures
and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. In conjunction
with the Deposit Insurance Fund reserve ratio achieving 1.5%, the assessment range (inclusive of possible adjustments) was reduced
for most banks and savings associations to 1.5 basis points to 30 basis points.
The FDIC has authority to increase insurance
assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results
of operations of Jacksonville Savings Bank. Future insurance assessment rates cannot be predicted.
Insurance of deposits may be terminated
by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, rule order or regulatory condition imposed in writing.
We do not know of any practice, condition or violation that might lead to termination of deposit insurance.
In addition to the FDIC assessments, the
Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for
anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal
Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended
December 31, 2016, the annualized FICO assessment was equal to 0.56 of a basis point of total assets less tangible capital.
Enforcement
The Federal Deposit Insurance Corporation
has primary federal enforcement responsibility over state savings banks. The Federal Deposit Insurance Corporation has authority
to bring enforcement actions against such institutions and their “institution-related parties,” including officers,
directors, certain shareholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or directors of the institution or receivership or conservatorship
in certain circumstances. Potential civil money penalties cover a wide range of violations and actions, and range up to $25,000
per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day.
Community Reinvestment Act.
Under the Community Reinvestment Act (“CRA”), as implemented by Federal Deposit Insurance Corporation 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
Federal Deposit Insurance Corporation, 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.
Federal Home Loan Bank System.
Jacksonville Savings Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.
The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities
involved in home mortgage lending. As a member of the Federal Home Loan Bank of Chicago, Jacksonville Savings Bank is required
to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2016, Jacksonville Savings Bank
was in compliance with this requirement.
Federal Reserve System
Federal Reserve Board
regulations require savings banks to maintain interest-earning reserves against their transaction accounts, such as negotiable
order of withdrawal and regular checking accounts. At December 31, 2016, Jacksonville Savings Bank was in compliance with these
reserve requirements.
Other Regulations
Interest and other charges collected or
contracted for by Jacksonville Savings Bank are subject to state usury laws and federal laws concerning interest rates. Jacksonville
Savings Bank’s operations are also subject to federal and state laws applicable to credit transactions, such as the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials
to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending
credit;
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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
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Illinois High Risk Home Loan Act, which protects borrowers who enter into high risk home loans;
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Illinois Predatory Lending Database Program, which helps provide counseling for homebuyers in connection with certain loans;
and
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rules and regulations of the various federal and state agencies charged with the responsibility of implementing such laws.
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The operations of Jacksonville
Savings Bank also are subject to the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial records;
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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from
deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic
banking services;
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Check Clearing for the 21
st
Century Act (also known as “Check 21”), which gives “substitute checks,”
such as digital check images and copies made from that image, the same legal standing as the original paper check;
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The USA PATRIOT Act, which requires savings banks operating to, among other things, establish broadened anti-money laundering
compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required
compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under
the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
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The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions
with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial
products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide
such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated
third parties.
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Holding Company Regulation
In June 2013, Jacksonville Bancorp, Inc.
changed its status from that of a savings and loan holding company to that of a bank holding company through Jacksonville Savings
Bank’s revocation of a previously-made election. By so doing, the previously applicable requirement that Jacksonville Savings
Bank comply with the “Qualified Thrift Lender Test,” which limited commercial lending, was eliminated.
Jacksonville Bancorp, Inc. is subject to
examination, regulation, and periodic reporting as a bank holding company under the Bank Holding Company Act of 1956, as amended.
Jacksonville Bancorp, Inc. will be required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially
all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval would be required for the Jacksonville
Bancorp, Inc. to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if,
after such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank
or bank holding company. In addition to the approval of the Federal Reserve Board, prior approval may also be necessary from other
agencies having supervisory jurisdiction over the bank to be acquired before any bank acquisition can be completed.
A bank holding company is generally prohibited
from engaging in non-banking activities, or acquiring direct or indirect control of more than 5% of the voting securities of any
company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal
Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of
the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking are: (i) making
or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting
as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations
or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association whose direct
and indirect activities are limited to those permitted for bank holding companies.
The Gramm-Leach-Bliley Act of 1999 authorized
a bank holding company that meets specified conditions, including being “well capitalized” and “well managed,”
to opt to become a “financial holding company” and thereby engage in a broader array of financial activities than previously
permitted. Such activities can include insurance underwriting and investment banking. The Company has not elected to become a financial
holding company.
The Dodd-Frank Act required the Federal
Reserve Board to promulgate consolidated capital requirements for bank and savings and loan holding companies that are no less
stringent, both quantitatively and in terms of components of capital, than those applicable to their subsidiary depository institutions.
Instruments such as cumulative preferred stock and trust-preferred securities, which are currently includable as Tier 1 capital,
by bank holding companies within certain limits are no longer includable as Tier 1 capital, subject to certain grandfathering.
The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act’s directives
as to holding company capital requirements.
In December 2014, legislation was passed
by Congress that requires the Federal Reserve Board to revise its “Small Bank Holding Company Policy Statement” to
exempt bank and savings and loan holding companies of less than $1.0 billion of consolidated assets from the consolidated capital
requirements, provided that such companies meet certain other conditions such as not engaging in significant nonbanking activities.
Regulations adopting this amendment were effective May 15, 2015. Consequently, bank holding companies of under $1 billion in consolidated
assets such as the Company remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve Board determines
otherwise in particular cases.
A bank holding company is generally required
to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board
may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice,
or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement
with, the Federal Reserve Board. There is an exception to this approval requirement for well-capitalized bank holding companies
that meet certain other conditions.
The Federal Reserve Board’s policies
also require that a bank holding company serve as a source of financial strength to its subsidiary banks by standing ready to use
available resources to provide adequate capital funds to those banks during periods of financial stress or adversity and by maintaining
the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where
necessary. The Dodd-Frank Act codified the source of strength doctrine.
The Federal Reserve Board has issued a policy
statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general,
the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention
by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition.
Regulatory guidance provides for prior regulatory consultation with respect to dividends in certain circumstances such as where
the company’s net income for the past four quarters, net of dividends’ previously paid over that period, is insufficient
to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital
needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank
becomes undercapitalized. The policy statement also provides for regulatory consultation prior to a holding company redeeming or
repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing
common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such
equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These
regulatory policies could affect the ability of Jacksonville Bancorp, Inc. to pay dividends, repurchase shares of its stock or
otherwise engage in capital distributions.
The status of Jacksonville Bancorp, Inc.
as a registered bank holding company under the Bank Holding Company Act does not exempt it from certain federal and state laws
and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities
laws.
Change in Control Regulations
Under the Change in Bank Control Act, no
person may acquire control of a bank holding company such as Jacksonville Bancorp, Inc. unless the Federal Reserve Board has been
given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration
certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.
Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of
any class of voting stock, control in any manner of the election of a majority of the company’s directors, or a determination
by the regulator that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over,
the management or policies of the institution. Acquisition of more than 10% of any class of a bank holding company’s voting
stock constitutes a rebuttable presumption of control under the regulations under certain circumstances including where, is the
case with Jacksonville Bancorp, Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses,
among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of
corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer will be required
to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the
Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify
that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over
financial reporting; they have made certain disclosures to our auditors and the audit committee of the board of directors about
our internal control over financial reporting; and they have included information in our quarterly and annual reports about their
evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could
materially affect internal control over financial reporting.
TAXATION
Federal Taxation
General
.
Jacksonville
Bancorp, Inc. and Jacksonville Savings Bank are subject to federal income taxation in the same general manner as other corporations,
with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent
federal income tax matters and is not a comprehensive description of the tax rules applicable to Jacksonville Bancorp, Inc. or
Jacksonville Savings Bank.
Method of Accounting
.
For federal income tax purposes, Jacksonville Bancorp, Inc. currently reports its income and expenses on the accrual method
of accounting and uses a tax year ending December 31 for filing its federal and state income tax returns.
Bad Debt Reserves
.
Historically,
Jacksonville Savings Bank has been subject to special provisions in the tax law regarding allowable tax bad debt deductions and
related reserves. Tax law changes were enacted in 1996, pursuant to the Small Business Protection Act of 1996 (the “1996
Act”), that repealed the percentage of taxable income method by qualifying savings institutions to determine deductions for
bad debts. This change was effective for taxable years beginning after 1995 and required the recapture of “applicable excess
reserves” of a savings institution, of which Jacksonville Savings Bank is, into taxable income over a six year period. The
applicable excess reserve is generally the excess of its bad debt reserves as of the close of its last taxable year beginning before
January 1, 1996 over the balance of such reserves as of the close of its last taxable year beginning before January 1, 1988.
Currently, Jacksonville Savings Bank utilizes
the experience method to account for bad debt deductions for income tax purposes as defined in Internal Revenue Code Section 585.
Under this method, the annual deduction is the amount necessary to increase the balance of the reserve at the close of the taxable
year to the greater of the amount which bears the same ratio to loans outstanding at the close of the taxable year as the total
net charge offs sustained during the current and preceding five taxable years bear to the sum of the loans outstanding at the close
of those six years or the lower of (i) the balance in the reserve account at the close of the base year, (the last taxable year
beginning before 1988), or (ii) if the amount of outstanding loans at the close of the taxable year is less than the amount of
outstanding loans at the close of the base year, the amount which bears the same ratio to outstanding loans at the close of the
taxable year as the balance of the reserve at the close of the base year bears to the amount of outstanding loans at the close
of the base year.
Taxable Distributions and Recapture
.
Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if
Jacksonville Savings Bank failed to meet certain thrift asset and definitional tests.
At December 31, 2016, Jacksonville Savings
Bank’s total federal pre-base year reserve was approximately $2.6 million. However, under current law, base-year reserves
remain subject to recapture if Jacksonville Savings Bank makes certain non-dividend distributions, repurchases any of its stock,
pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.
Alternative Minimum Tax
.
The Internal Revenue Code of 1986, as amended (the “Code”), imposes an alternative minimum tax (“AMT”)
at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income”
or “AMTI”). The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the
regular income tax. Net operating losses can offset no more than 90% of AMTI. Certain payments of AMT may be used as credits against
regular tax liabilities in future years.
Net Operating Loss Carryovers.
Generally, a financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding
20 taxable years. At December 31, 2016, Jacksonville Bancorp, Inc. had no federal or Illinois tax loss carryforward.
Corporate Dividends-Received Deduction
.
Jacksonville Bancorp, Inc. may exclude from its federal taxable income 100% of dividends received from Jacksonville Savings
Bank as a wholly owned subsidiary. The corporate dividends received deduction is 80% when the dividend is received from a corporation
having at least 20% of its stock owned by the recipient corporation. A 70% dividends-received deduction is available for dividends
received from corporations owning less than 20% by the recipient corporation.
State Taxation
The State of Illinois
imposes a tax on the Illinois taxable income of corporations, including savings banks, at the rate of 7.75%.
Illinois taxable income
is generally similar to federal taxable income except that interest from state and municipal obligations is taxable and no deduction
is allowed for state income taxes. However, a deduction is allowed for certain U.S. Government and agency obligations. Jacksonville
Savings Bank’s state income tax returns have not been audited by Illinois tax authorities during the past five years. As
a Maryland business corporation, Jacksonville Bancorp, Inc. is required to file annual returns and pay annual fees to the State
of Maryland.
Personnel
As of December 31, 2016, Jacksonville Savings
Bank and its subsidiary had a total of 85 full-time and 15 part-time employees. None of Jacksonville Savings Bank’s employees
is represented by a collective bargaining group. Management believes that it has good working relations with its employees.
Availability of Annual Report on Form 10-K
Our Annual Report on Form 10-K is available
on our website at
www.Jacksonvillesavings.com
. Information on the website is not incorporated into, and is not otherwise
considered a part of, this Annual Report on Form 10-K.
ITEM
1A. Risk Factors
In addition to risk disclosed elsewhere
in this Annual Report, the following are risks associated with our business and operations.
Non-residential loans increase our exposure to credit risks.
Over the last several years, we have increased
our non-residential lending in order to improve the average yield of our interest-earning assets and reduce the average maturity
of our loan portfolio. At December 31, 2016, our portfolio of agricultural real estate loans totaled $38.3 million, or 20.7% of
our total loans, compared to $37.4 million, or 21.5% of our total loans at December 31, 2012. At December 31, 2016, our portfolio
of commercial real estate loans totaled $41.5 million, or 22.5% of our total loans, compared to $31.0 million, or 17.8% of our
total loans at December 31, 2012. Our portfolio of agricultural business loans totaled $14.7 million, or 7.9% of our total loans
at December 31, 2016, compared to $11.0 million, or 6.3% of our total loans at December 31, 2012. Our portfolio of commercial business
loans totaled $21.6 million, or 11.7% of our total loans at December 31, 2016, compared to $29.0 million, or 16.7% of our total
loans at December 31, 2012. These business loans are typically secured by equipment or inventory. It is difficult to assess the
future performance of our non-residential loan portfolio due to the recent origination or purchase of many of these loans. These
loans may have delinquency or charge-off rates above our historical experience, which could adversely affect our future performance.
These loans generally have more risk than
one- to four-family residential mortgage loans. Because the repayment of commercial and agricultural real estate loans and commercial
and agricultural business loans depends on the successful management and operation of the borrower’s properties or related
businesses, repayment of these loans can be affected by adverse conditions in the real estate market or the local economy. Loans
secured by agricultural real estate and agricultural businesses which rely on the successful operation of a farm can be adversely
affected by fluctuations in crop prices and changes in weather conditions. These developments may result in smaller harvests and
less income for farmers which may adversely impact such borrower’s ability to repay a loan. Many of our borrowers also have
more than one commercial and agricultural real estate loan or commercial and agricultural business loan outstanding with us. Consequently,
an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss
compared to an adverse development with respect to a one- to four-family residential mortgage loan. Finally, if we foreclose on
a commercial and agricultural real estate or commercial loan, our holding period for the collateral, if any, typically is longer
than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral. Because
we plan to continue to increase our originations of commercial and agricultural real estate and commercial loans, it may be necessary
to increase the level of our allowance for loan losses because of the increased risk characteristics associated with these types
of loans. Any such increase to our allowance for loan losses would adversely affect our earnings.
Our loan portfolio has significant concentrations among a
small number of borrowers and, as a result, we could be adversely affected by difficulties experienced by a small number of borrowers.
As a result of large loan concentrations
among a relatively small number of borrowers, we could incur significant losses if these borrowers are unable to repay their loans.
At December 31, 2016, we had 27 borrowers with aggregate loan balances of $73.4 million, which represented 39.2% of our total loan
portfolio at that date. These loans are primarily commercial and agricultural real estate loans and commercial and agricultural
business loans, including purchased loan participations. Aggregate loan balances to these borrowers ranged from $1.1 million to
$10.0 million for our largest borrower. While we seek to control our risk and minimize losses on these large loan concentrations,
if one or more of our large borrowers were to default on their loans we could incur significant losses.
A portion of our loan portfolio consists
of loan participations secured by properties outside our market area. Loan participations may have a higher risk of loss than
loans we originate because we are not the lead lender and we have limited control over credit monitoring.
We
occasionally purchase commercial real estate and commercial business loan participations secured by properties outside our market
area in which we are not the lead lender. We have purchased loan participations secured by properties in diverse geographic areas
such as in Minnesota, Tennessee, North Dakota, Michigan, and Iowa. These participations are secured by various types of collateral
such as assisted living facilities, hotels, and apartment and condominium developments. Loan participations may have a higher
risk of loss than loans we originate because we rely on the lead lender to monitor the performance of the loan. Moreover, our
decision regarding the classification of a loan participation and loan loss provisions associated with a loan participation are
made in part based upon information provided by the lead lender. A lead lender also may not monitor a participation loan in the
same manner as we would for loans that we originate. At December 31, 2016, our loan participations totaled $12.0 million, or 6.4%
of our loan portfolio. At December 31, 2016, commercial real estate loan participations outside our market area totaled $7.4 million,
or 17.9% of the commercial real estate loan portfolio, and commercial business loan participations outside our market area totaled
$476,000, or 2.2% of the commercial business loan portfolio. At December 31, 2016, no loan participations were delinquent 60 days
or more. If our underwriting of these participation loans is not sufficient, our non-performing loans may increase and our earnings
may decrease.
If the allowance for loan losses is not sufficient to cover
actual loan losses, our earnings could decrease.
Our customers may not repay their loans
according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any
remaining loan balance. We may experience significant loan losses, which may have a material adverse effect on our operating results.
We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers
and the value of the real estate and other assets serving as collateral for the repayment of loans. If our assumptions are incorrect,
the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions
to the allowance. Additions to the allowance would decrease our net income. At December 31, 2016, our allowance for loan losses
was $3.0 million, or 1.60% of total loans and 196.56% of non-performing loans, compared to $2.9 million, or 1.49% of total loans
and 144.45% of non-performing loans, at December 31, 2015.
In determining the amount of the allowance
for loan losses, management reviews delinquent loans for potential impairments in our carrying value. Additionally, we apply a
factor to the loan portfolio principally based on historical loss experience applied to the composition of the loan portfolio and
integrated with management’s perception of risk in the economy. Since we use assumptions regarding individual loans and the
economy, the current allowance for loan losses may not be sufficient to cover actual loan losses, and increases in the allowance
may be necessary. Consequently, we may need to significantly increase the provision for losses on loans, particularly if one or
more of our larger loans or credit relationships becomes delinquent or if we expand non-residential lending such as commercial
and agricultural real estate loans. As we continue to increase our originations of such loans, increased provisions for loan losses
may be necessary, which would decrease our earnings.
Bank regulators periodically review our
allowance for loan losses and may require an increase to the provision for loan losses or further loan charge-offs. Any increase
in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect
on our financial condition and results of operations.
If our non-performing assets increase, our earnings will
suffer.
At December 31, 2016, our non-performing
assets (which consist of non-accrual loans, loans 90 days or more delinquent, and foreclosed real estate assets) totaled $1.5 million,
which is a decrease of $822,000 from our non-performing assets at December 31, 2015. Our non-performing assets adversely affect
our net income in various ways. We do not record interest income on non-accrual loans or real estate owned. We must reserve for
probable losses which results in additional provisions for loan losses. As circumstances warrant, we must write down the value
of properties in our other real estate owned portfolio to reflect changing market values. Additionally, we have legal fees associated
with the resolution of problem assets as well as additional costs such as taxes, insurance and maintenance related to our other
real estate owned. The resolution of non-performing assets also requires the active involvement of management, which can adversely
affect the amount of time we devote to the income-producing activities of Jacksonville Savings Bank. If our estimate of the allowance
for loan losses is inadequate, we will have to increase the allowance accordingly.
We could experience impairment losses on the value of our
mortgage servicing rights.
A significant aspect of our business is
the origination of one- to four-family residential mortgage loans for sale on a servicing retained basis. The fees we receive for
servicing such loans are referred to as mortgage servicing rights. At December 31, 2016, the unpaid principal balance of mortgage
loans serviced for others was $130.5 million. Mortgage servicing rights fair values are sensitive to movements in interest rates
as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which
can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage
interest rates rise. If the fair value of our mortgage servicing rights is less than the carrying value of such rights, we may
be required to recognize an impairment loss. Such impairment can occur due to changes in interest rates, loan performance or prepayment
of the underlying mortgage. We did not recognize any impairment during 2016.
Changes in interest rates could adversely affect our financial
condition and results of operations.
Our financial condition and results of operations
are significantly affected by changes in interest rates. Our results of operations depend substantially on our net interest income,
which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the
interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. Because our interest-bearing liabilities
generally reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would tend to
result in a decrease in net interest income.
Changes in interest rates may also affect
the average life of loans and mortgage-related securities. Increases in interest rates may decrease loan demand and make it more
difficult for borrowers to repay adjustable rate loans. Also, increases in interest rates may extend the life of fixed-rate assets,
which would restrict our ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates
of deposit early so long as the early withdrawal penalty is less than the interest they could receive from higher interest rates.
Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance
to reduce their borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable
to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities.
Changes in interest rates also affect the
current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes
in interest rates. At December 31, 2016, the fair value of our portfolio of investment securities and mortgage-backed securities
totaled $100.2 million. Gross unrealized losses on these securities totaled $2.4 million at December 31, 2016.
Any rise in market interest rates may result
in increased payments for borrowers who have adjustable rate mortgage loans, thereby increasing the possibility of default.
If we are unable to borrow funds, we may not be able to meet
the cash flow requirements of our depositors, creditors, and borrowers, or the operating cash needed to fund corporate expansion
and other corporate activities.
Liquidity is the ability to meet cash flow
needs on a timely basis at a reasonable cost. Our liquidity is used to make loans and to repay deposit liabilities as they become
due or are demanded by customers. Liquidity policies and procedures are established by the board, with operating limits set based
upon the ratio of loans to deposits and percentage of assets funded with non-core or wholesale funding. We regularly monitor our
overall liquidity position to ensure various alternative strategies exist to cover unanticipated events that could affect liquidity.
We also establish policies and monitor guidelines to diversify our wholesale funding sources to avoid concentrations in any one
market source. Wholesale funding sources include federal funds purchased, securities sold under repurchase agreements, non-core
deposits, and debt. Jacksonville Savings Bank is a member of the Federal Home Loan Bank of Chicago, which provides funding through
advances to members that are collateralized with mortgage-related assets.
We maintain a portfolio of available-for-sale
securities that can be used as a secondary source of liquidity. There are other sources of liquidity available to us should they
be needed. These sources include the sale of loans, the ability to acquire national market, non-core deposits, issuance of additional
collateralized borrowings such as Federal Home Loan Bank advances and federal funds purchased, and the issuance of preferred or
common securities.
If our stock price is less than our book value, we will continue
to evaluate our goodwill balances for impairment quarterly, and if the values of our businesses have declined, we could recognize
an impairment charge for our goodwill.
During 2016, management reviewed goodwill
for impairment on a quarterly basis. Management’s analysis concluded that our goodwill was not impaired as of December 31,
2016. It is possible that the assumptions and conclusions regarding the valuation of our business could change adversely, which
could result in the recognition of impairment for our goodwill, which could have a material adverse effect on our financial condition
and results of operations.
Our business may be adversely affected by a decline in the
national and local economies.
Our operations are significantly affected
by national and local economic conditions. Substantially all of our loans, excluding purchased loan participations, are to businesses
and individuals in Cass, Morgan, Macoupin and Montgomery Counties, Illinois and surrounding communities. All of our branches and
most of our deposit customers are also located in these counties. A decline in the economy both nationally and in our market area
could have a material adverse effect on our business, financial condition, results of operations and prospects. In particular,
if these counties have experienced declines in real estate values, increased foreclosures and higher unemployment rates.
A deterioration in economic conditions in
our market area could result in the following consequences, any of which could have a material adverse effect on our business,
financial condition and results of operations:
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demand for our products and services may decline;
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loan delinquencies, problem assets and foreclosures may increase;
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collateral for our loans may continue to decline in value; and
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the amount of our low-cost or non-interest bearing deposits may decrease.
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Strong competition may limit growth and profitability.
Competition in the banking and financial
services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions,
finance companies, government sponsored entities, mutual funds, insurance companies, and brokerage and investment banking firms
operating locally and elsewhere. Many of these competitors (whether regional or national institutions) have substantially greater
resources and lending limits than we have and may offer certain services that we do not or cannot provide. Our profitability depends
upon our ability to successfully compete in our market areas.
We operate in a highly regulated environment and we may be
adversely affected by changes in laws and regulations.
We are subject to extensive regulation,
supervision and examination by the Illinois Department of Financial and Professional Regulation, the Federal Reserve Board and
the Federal Deposit Insurance Corporation. Such regulators govern the activities in which we may engage, primarily for the protection
of depositors and the Deposit Insurance Fund. These regulatory authorities have extensive discretion in connection with their supervisory
and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine
the adequacy of a bank’s allowance for loan losses and determine the level of deposit insurance premiums assessed. Any change
in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit
insurance premiums, could have a material impact on our operations. Because our business is highly regulated, the laws and applicable
regulations are subject to frequent change. Any new laws, rules and regulations could make compliance more difficult or expensive
or otherwise adversely affect our business, financial condition or prospects.
Changes in laws and regulations and the cost of regulatory
compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.
Jacksonville Savings Bank and Jacksonville
Bancorp, Inc. are subject to extensive regulation, supervision and examination by the Illinois Department of Financial and Professional
Regulation, the Federal Deposit Insurance Corporation and the Federal Reserve Board. Such regulation and supervision governs
the activities in which an institution and its holding company may engage and are intended primarily for the protection of federal
deposit insurance funds and the depositors and borrowers of Jacksonville Savings Bank, rather than for our stockholders.
Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions
on our operations, the classification of our assets and determination of the level of our allowance for loan losses. These
regulations, along with existing tax, accounting, securities, insurance and monetary laws, rules, standards, policies, and interpretations
control the methods by which financial institutions conduct business, implement strategic initiatives and tax compliance, and govern
financial reporting and disclosures. Any change in such regulation and oversight, whether in the form of regulatory policy,
regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting
standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent
accounting firms. These changes could materially impact, potentially even retroactively, how we report our financial condition
and results of operations, as could our interpretation of those changes.
The Dodd-Frank Act has significantly changed
the bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions
and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing
rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies have been given significant
discretion in drafting the implementing rules and regulations, many of which are not in final form. Consequently, the full
impact of the Dodd-Frank Act may not be known for years.
The Dodd-Frank Act created a new Consumer
Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection
Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions,
including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial
Protection Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with
$10 billion or less in assets continue to be examined for compliance with the consumer laws by their primary bank regulators.
The Dodd-Frank Act also weakened the federal preemption rules that have been applicable for national banks and federal savings
associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
The full impact of the Dodd-Frank Act on
our business will not be known until all regulations implementing the statute are implemented. As a result, we cannot at
this time predict the extent to which the Dodd-Frank Act will impact our business, operations or financial condition. However,
compliance with the Dodd-Frank Act and its implementing regulations and policies has already resulted in changes to our business
and operations, as well as additional costs, and diverted management’s time from other business activities, which adversely
affects our financial condition and results of operations.
System failure or breaches of our network security could
subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure
we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment
against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from
security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure
that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations.
Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted
through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing
and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend
to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance
that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of
cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers
use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect
on our financial condition and results of operations.
We have become subject to more stringent
capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us
from paying dividends or repurchasing shares.
Effective January 1,
2015, the FDIC implemented a new rule that substantially amended the regulatory risk-based capital rules applicable to Jacksonville
Savings Bank. The new rule implemented the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank
Act.
The rule includes new
minimum risk-based capital and leverage ratios, and revised the definition of what constitutes “capital” for purposes
of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%;
(ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged
from prior rules); and (iv) a Tier 1 leverage ratio of 4%. The new rule also establishes a “capital conservation buffer”
of 2.5% above the new regulatory minimum capital ratios, and results in the following minimum ratios: (i) a common equity
Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio
of 10.5%. The new capital conservation buffer requirement will be phased in beginning in January 2016 and in 2017 is 1.25% of risk-weighted
assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying
dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount.
These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.
The application of more
stringent capital requirements for Jacksonville Savings Bank could, among other things, result in lower returns on equity, require
the raising of additional capital, and result in regulatory actions such as the inability to pay dividends or repurchase shares
if we were to be unable to comply with such requirements.
Income from secondary mortgage market operations
is volatile, and we may incur losses with respect to our secondary mortgage market operations that could negatively affect our
earnings.
A key component of our strategy
is to sell in the secondary market the longer term, conforming fixed-rate residential mortgage loans that we originate, earning
non-interest income in the form of gains on sale. When interest rates rise, the demand for mortgage loans tend to fall and may
reduce the number of loans we can originate for sale. Weak or deteriorating economic conditions also tend to reduce loan demand.
Although we sell, and intend to continue selling, most loans in the secondary market with limited or no recourse, we are required,
and will continue to be required, to give customary representations and warranties to the buyers relating to compliance with applicable
law. If we breach those representations and warranties, the buyers will be able to require us to repurchase the loans and we may
incur a loss on the repurchase.
Our stock price may be volatile due to limited
trading volume.
Our common stock is traded
on the NASDAQ Capital Market. However, the average daily trading volume in Jacksonville Bancorp, Inc.’s common stock has
been relatively small, averaging less than 1,000 shares per day during 2016. As a result, trades involving a relatively small
number of shares may have a significant effect on the market price of the common stock, and it may be difficult for investors to
acquire or dispose of large blocks of stock without significantly affecting the market price.
A decrease in the corporate federal tax
rate may impair our deferred tax assets.
A decrease to the corporate
federal income tax rate may impair the Company’s deferred tax assets (“DTAs”). At December 31, 2016, the
Company’s net DTAs were approximately $2.7 million. While a decline in the corporate tax rate may lower the Company’s
tax provision expense, it may also significantly impair the value of the Company’s DTAs in the year the rate decrease is
enacted. Such impairment could have a material adverse effect on the Company’s financial condition and results of operations.