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.
On January 18, 2018, the Company announced the signing of a merger agreement under which CNB Bank Shares, Inc. will acquire the Company in an all-cash transaction for total consideration valued at approximately $61.6 million. Subject to the satisfaction or waiver of the closing conditions contained in the merger agreement, including the approval of the merger agreement by the Company’s stockholders and the receipt of required regulatory approvals, CNB Bank Shares and the Company expect that the merger will be completed during the second quarter of 2018. However, it is possible that factors outside the control of both companies, including whether or when the required regulatory approvals will be received, could result in the merger being completed at a different time or not at all.
The Company’s only significant asset is its investment in Jacksonville Savings Bank. At December 31, 2017, Jacksonville Bancorp, Inc. had consolidated assets of $325.0 million, total deposits of $252.7 million, and stockholders’ equity of $48.8 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 up to applicable limits 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 2017, unemployment rates in our market area were: 4.0% in Morgan County, 4.7% in Cass County, 4.7% in Macoupin County, and 5.4% in Montgomery County. This compared with unemployment rates of 4.7% in Illinois and 3.9% 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, 2017, our FDIC-insured deposit market share in the counties we serve was 11.0%, which ranked us as the second largest deposit holder out of 28 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, 2017, our loans receivable totaled $189.4 million, of which $45.8 million, or 24.6%, consisted of one- to four-family residential mortgage loans. The remainder of our loans receivable at December 31, 2017 consisted of commercial real estate loans totaling $37.3 million, or 20.0% of net loans, agricultural real estate loans totaling $40.1 million, or 21.5% of net loans, commercial business loans totaling $26.9 million, or 14.4% of net loans, agricultural business loans totaling $13.4 million, or 7.2% of net loans, consumer loans totaling $15.8 million, or 8.4% of net loans, and home equity loans totaling $10.1 million, or 5.4% 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, 2017 and 2016, we sold $18.8 million and $20.7 million of fixed-rate residential mortgage loans, respectively. Loans are generally sold without recourse and with servicing retained.
At December 31, 2017, we were servicing $128.0 million in loans for which we received servicing income of $337,000 for the year ended December 31, 2017. 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 $179,000, $503,000, $539,000, $236,000 and $262,000 for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively.
(1)Includes one- to four-family real estate construction loans of $522,000, $1.3 million, $1.3 million, $1.2 million and $328,000 for the years ended December 31, 2017, 2016, 2015, 2014 and 	2013, respectively.
(2)Includes commercial real estate construction loans of $11.9 million, $9.6 million, $4.7 million, $3.3 million and $4.7 million for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, 	respectively.
(3)Includes real estate construction loans of $163,000, $80,000, $80,000, $140,000 and $0 for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively.
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, 2017, $45.8 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 $424,100 for single-family homes. At December 31, 2017, we had three one- to four-family residential mortgage loans with principal balances in excess of $424,100, 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 $22.9 million, or 49.9% of our total one- to four-family residential real estate loans receivable at December 31, 2017. 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 2017, we originated $25.1 million of fixed-rate residential mortgage loans, most of which were subsequently sold in the secondary market, and $7.8 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, 2017, $37.3 million, or 20.0%, of our net loan portfolio consisted of commercial real estate loans. During 2017, loan originations secured by commercial real estate totaled $7.4 million as compared to $14.5 million in 2016. 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, 2017, our commercial real estate loan portfolio included $5.6 million in loans secured by multi-family residential properties, $11.9 million in loans secured by restaurants, $2.8 million in loans secured by hotels, $2.8 million secured by shopping centers, and $14.2 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 no interest only commercial real estate loans at December 31, 2017. 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, 2017, commercial real estate loan participations totaled $9.5 million, or 25.4% of the commercial real estate loan portfolio consisting primarily of loan participations outside of our market area which totaled $8.8 million, or 23.5% of the commercial real estate loan portfolio. At December 31, 2017, we had $139,000 in loan participations delinquent 60 days or more.
At December 31, 2017, our largest commercial real estate loan was secured by a transfer and recycling facility with a principal balance of $1.9 million and was performing in accordance with its terms. At December 31, 2017, our largest commercial real estate loan participation was secured by multiple shopping centers with a principal balance of $1.5 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, 2017, $40.1 million, or 21.5% of our net loan portfolio, consisted of agricultural real estate loans. During 2017, loan originations secured by agricultural real estate totaled $14.4 million, as compared to $4.2 million in 2016. The maximum loan-to-value ratio for agricultural real estate loans we originate is generally 80%. 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, 2017, agricultural real estate loan participations totaled $3.1 million, or 7.6% of the agricultural real estate loan portfolio. At December 31, 2017, we had no agricultural real estate loan participations delinquent 60 days or more. At December 31, 2017, our largest agricultural real estate loan was secured by farmland, had a principal balance of $4.9 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 80% 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, 2017, home equity loans totaled $10.1 million, or 5.4%, 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, 2017, 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 $26.9 million, or 14.4% of our net loan portfolio at December 31, 2017. At December 31, 2017, commercial business loan participations totaled $1.3 million, or 4.9% 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, 2017, we originated $18.3 million in commercial business loans. At that date, our largest commercial business loan was a $6.0 million line of credit. This loan was performing in accordance with its terms at December 31, 2017.
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 $13.4 million, or 7.2% of our net loan portfolio at December 31, 2017. 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, 2017, we originated $14.8 million in agricultural business loans. At December 31, 2017, our largest agricultural business loan was a line of credit of $1.6 million. This loan was performing in accordance with its terms at December 31, 2017.
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, 2017, consumer loans totaled $15.8 million, or 8.4%, 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, 2017, consumer loans secured by automobiles totaled $8.2 million, or 4.3% 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, 2017 totaled $11,000, or 0.1% 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, 2017. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
The following table sets forth at December 31, 2017, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2018. At December 31, 2017, fixed-rate loans include $6.7 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, 2018, was $66.7 million and $86.0 million, respectively.
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.
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, 2017, we had $214,000 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 $83,000, $93,000 and $104,000 for the years ended December 31, 2017, 2016 and 2015, 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, 2017, our loans-to-one borrower limit was $11.0 million. At December 31, 2017 we had no lending relationships in excess of our loans-to-one borrower limitation. At December 31, 2017, we had 29 borrowers with outstanding borrowings in excess of $1.0 million totaling in the aggregate $76.4 million or 40.3% 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, 2017, 2016 and 2015, the percentage of non-performing loans to total loans receivable were 0.93%, 0.82% and 1.03%, respectively. At December 31, 2017, 2016 and 2015, the percentage of non-performing assets to total assets was 0.55%, 0.48% and 0.76%, 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, 2017, we had no loans 90 days or more delinquent that were still accruing interest. Nonperforming assets increased by $243,000 to $1.8 million at December 31, 2017 as compared to December 31, 2016. The increase in the level of nonperforming assets primarily reflected increases of $222,000 in nonperforming loans and $21,000 in foreclosed assets. The increase in nonperforming loans primarily reflected the nonaccrual status of two loans totaling $392,000 secured by commercial real estate properties, both of which are listed for sale.
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, 2017, we owned $10,500 of 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, 2017, 2016, 2015, 2014 and 2013, 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 $2.4 million, $2.5 million, $2.6 million, $2.3 million and $2.6 million, respectively.
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(1)Includes nonaccrual troubled debt restructurings of $1.0 million, $958,000, $1.3 million, $1.1 million and $412,000 for the years ended December 31, 2017, 2016, 2015, 2014, and 2013, respectively.
For the year ended December 31, 2017, 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, 2017.
At December 31, 2017, 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.
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, 2017, our classified loans totaled $5.9 million, all of which were classified as substandard.
The total amount of classified and special mention loans decreased $410,000, or 5.4%, to $7.3 million at December 31, 2017 from $7.7 million at December 31, 2016. The decrease in classified and special mention loans during 2017 was due to a decrease of $1.1 million in special mention loans, partially offset by an increase of $661,000 in substandard loans. The decrease in special mention loans reflects $999,000 in loans downgraded to substandard and $386,000 in principal reductions, partially offset by $316,000 in additional loans listed as special mention during 2017. The increase in substandard loans was primarily related to the $999,000 in downgraded loans and $893,000 in additional loans classified as substandard, partially offset by $367,000 in charge-offs, $357,000 in principal reductions and $233,000 of loans transferred to real estate owned during 2017.
The following table shows the principal amount of special mention and classified loans at December 31, 2017 and December 31, 2016.
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 decreased $128,000, or 4.3%, to $2.9 million at December 31, 2017 from $3.0 million at December 31, 2016. The decrease in the allowance was the result of a credit in the provision for loan losses, and net recoveries. Net charge-offs decreased $84,000 to a net recovery of $52,000 during 2017 from $32,000 in net charge-offs during 2016. We recorded a negative provision for loan losses of $180,000 during 2017.
Nonperforming assets increased $243,000 to $1.8 million at December 31, 2017, compared to December 31, 2016. The increase in nonperforming assets was due to increases of $222,000 in non-performing loans and $21,000 in foreclosed assets held at December 31, 2017 as compared to at December 31, 2016. The allowance for loan losses to nonperforming loans decreased to 164.29% at December 31, 2017 as compared to 196.56% at December 31, 2016.
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.
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.
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 $55.2 million at December 31, 2017. General obligation municipal bonds, all of which have been issued within the State of Illinois totaled $45.3 million at December 31, 2017. Our portfolio of U.S. government and agency securities totaled $10.9 million at December 31, 2017. 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, 2017, 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 $56.0 million, $45.5 million and $23.1 million at December 31, 2017, 2016 and 2015, respectively. The fair value of our mortgage-backed securities portfolio was $55.2 million, $44.4 million and $23.2 million at December 31, 2017, 2016 and 2015, respectively, and the weighted average rate as of December 31, 2017, 2016 and 2015 was 2.55%, 2.43% and 2.30%, respectively. At December 31, 2017, $55.2 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, 2017, we held municipal bonds with a fair value of $45.3 million. All of our municipal bonds are general obligation bonds with full taxing authority and ratings (when available) of A or above. All of our municipal bonds are issued by local municipalities or school districts located in Illinois.
U.S. Government and Agency Securities. At December 31, 2017, we held U.S. government and agency securities with a fair value of $10.9 million. These securities have an average expected life of 8.5 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 $491,000. All of such securities were classified as available for sale.
Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2017 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.
(1)We used an assumed 34.0% tax rate in computing tax equivalent adjustments. The tax equivalent yield of municipal bonds was 4.12% for maturities of one year or less, 4.69% for maturities of more than one year through five years, 4.84% for maturities for more than five years through ten years, 4.75% for maturities of more than 10 years and 4.76% for the total municipal bonds securities portfolio at December 31, 2017. The tax equivalent adjustments to interest income of municipal bonds was $13,000for maturities of one year or less, $67,000for maturities of more than one year through five years, $275,000 for maturities for more than five years through ten years, $373,000 for maturities of more than 10 years and $728,000 for the total municipal bonds securities portfolio for the year ended December 31, 2017.
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, 2017, we had deposits of $100,000 or more from public entities that totaled $30.4 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.
The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.
The following table sets forth, by interest rate ranges and scheduled maturity, information concerning our certificates of deposit at December 31, 2017.
As of December 31, 2017, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $29.7 million, of which $5.8 million were deposits from public entities. The following table set forth the maturity of those certificates as of December 31, 2017.
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, 2017, we had $10.9 million in 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, 2017, we had access to Federal Home Loan Bank advances of up to $65.2 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.
The following table sets forth information concerning balances and interest rates on our repurchase agreements at or for the years indicated.
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 $111.5 million of assets administered in 142 accounts as of December 31, 2017. We also provide institutional trust services for regional bond issuers. Trust fees collected in 2017 and 2016 totaled $359,000 and $329,000, 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, 2017 and 2016, Financial Resources had gross revenues of $1.3 million and $1.2 million, respectively.
REGULATION AND SUPERVISION
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.
The Dodd-Frank Act
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.
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, 2017, 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 2018 is 1.875% 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, 2017, 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 began to mature in 2017 and will continue to mature through 2019. For the quarter ended December 31, 2017, the annualized FICO assessment was equal to 0.46 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, 2017, 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, 2017, 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:
·Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
·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;
·Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
·Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
·Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
·Truth in Savings Act;
·Illinois High Risk Home Loan Act, which protects borrowers who enter into high risk home loans;
·Illinois Predatory Lending Database Program, which helps provide counseling for homebuyers in connection with certain loans; and
·rules and regulations of the various federal and state agencies charged with the responsibility of implementing such laws.
The operations of Jacksonville Savings Bank also are subject to the:
·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;
·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;
·Check Clearing for the 21st 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;
·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
·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.
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, 2017, 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. Under the Tax Cuts and Jobs Act, which was signed into law in December 2017, AMT will no longer be imposed, commencing in 2018.
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, 2017, 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 9.50% effective July 1, 2017.
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, 2017, Jacksonville Savings Bank and its subsidiary had a total of 83 full-time and 14 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.
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, 2017, our portfolio of agricultural real estate loans totaled $40.1 million, or 21.5% of our total loans, compared to $35.0 million, or 19.4% of our total loans at December 31, 2013. At December 31, 2017, our portfolio of commercial real estate loans totaled $37.3 million, or 20.0% of our total loans, compared to $38.9 million, or 21.5% of our total loans at December 31, 2013. Our portfolio of agricultural business loans totaled $13.4 million, or 7.2% of our total loans at December 31, 2017, compared to $10.6 million, or 5.9% of our total loans at December 31, 2013. Our portfolio of commercial business loans totaled $26.9 million, or 14.4% of our total loans at December 31, 2017, compared to $29.9 million, or 16.6% of our total loans at December 31, 2013. 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, 2017, we had 29 borrowers with aggregate loan balances of $76.4 million, which represented 40.3% 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 $1.0 million to $9.0 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, Missouri, 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, 2017, our loan participations totaled $13.8 million, or 7.3% of our loan portfolio. At December 31, 2017, commercial real estate loan participations outside our market area totaled $8.8 million, or 23.5% of the commercial real estate loan portfolio, and commercial business loan participations outside our market area totaled $224,000, or 0.83% of the commercial business loan portfolio. At December 31, 2017, 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, 2017, our allowance for loan losses was $2.9 million, or 1.52% of total loans and 164.29% of non-performing loans, compared to $3.0 million, or 1.60% of total loans and 196.56% of non-performing loans, at December 31, 2016.
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, 2017, our non-performing assets (which consist of non-accrual loans, loans 90 days or more delinquent, and foreclosed assets) totaled $1.8 million, which is an increase of $243,000 from our non-performing assets at December 31, 2016. 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, 2017, the unpaid principal balance of mortgage loans serviced for others was $128.0 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 2017.
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, 2017, the fair value of our portfolio of investment securities and mortgage-backed securities totaled $111.4 million. Gross unrealized losses on these securities totaled $1.6 million at December 31, 2017.
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 2017, management reviewed goodwill for impairment on a quarterly basis. Management’s analysis concluded that our goodwill was not impaired as of December 31, 2017. 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:
·demand for our products and services may decline;
·loan delinquencies, problem assets and foreclosures may increase;
·collateral for our loans may continue to decline in value; and
·the amount of our low-cost or non-interest bearing deposits may decrease.
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 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.
Compliance with the Dodd-Frank Act and its implementing regulations and policies has resulted in changes to our business and operations, and has increased and may continue to increase our compliance costs.
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 2018 is 1.875% 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 2017. 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.
The termination fee and the restrictions on third party proposals set forth in the merger agreement may discourage others from trying to acquire us.
Until the completion of the merger, with some exceptions, we are prohibited from soliciting, initiating, encouraging or participating in any discussion of any inquiries or proposals that may lead to an acquisition proposal, such as a merger or other business combination transaction, with any person other than CNB Bank Shares, Inc. In addition, we have agreed to pay to CNB Bank Shares, Inc. in certain circumstances a termination fee equal to $2.25 million and up to $400,000 in merger-related expenses. These provisions could discourage other companies from trying to acquire us even though those other companies might be willing to offer greater value to our stockholders than CNB Bank Shares, Inc. has offered in the merger. Similarly, such a competing company might propose a price lower than it might otherwise have been willing to offer because of the potential added expense of the termination fee that may become payable to CNB Bank Shares, Inc. in certain circumstances under the merger agreement.
If the merger is not completed, we will have incurred significant expenses without realizing the expected benefits of the merger and could be subject to additional risks.
Prior to completion of the merger, we will incur or have incurred substantial expenses in connection with the completion of the transactions contemplated by the merger agreement. If the merger is not completed, we would have to recognize these expenses without receiving the merger consideration. In addition, if the merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees. The market price of our common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the merger will be consummated. We also could be subject to litigation related to any failure to complete the merger or to proceedings commenced by CNB Bank Shares, Inc. against us seeking damages or to compel us to perform our obligations under the merger agreement. These factors and similar risks could have an adverse effect on the results of operations, business and stock prices of Jackosnville Bancorp, Inc.
We will be subject to business uncertainties and contractual restrictions while the merger is pending.
Uncertainty about the effect of the merger on employees, customers, suppliers and vendors may have an adverse effect on our business, financial condition and results of operations. These uncertainties may impair our ability to retain and motivate key personnel pending the consummation of the merger, as such personnel may experience uncertainty about their future roles following the consummation of the merger. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with CNB Bank Shares, Inc. our business could be harmed. Additionally, these uncertainties could cause customers (including depositors and borrowers), suppliers, vendors and others who deal with us to seek to change existing business relationships with us or fail to extend an existing relationship with us. In addition, competitors may target our existing customers by highlighting potential uncertainties and integration difficulties that may result from the merger.
The pursuit of the merger and the preparation for the integration may place a burden on our management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could have a material adverse effect on our business, financial condition and results of operations.
In addition, in the merger agreement we have agreed to operate our business in the ordinary course prior to closing, and are restricted from taking certain actions without CNB Bank Shares, Inc.’s consent while the merger is pending. These restrictions may, among other matters, prevent us from pursuing otherwise attractive business opportunities, selling assets, incurring indebtedness, engaging in significant capital expenditures in excess of certain limits set forth in the merger agreement, entering into other transactions or making other changes to our business prior to consummation of the merger or termination of the merger agreement. These restrictions could have a material adverse effect on our business, financial condition and results of operations.
Our stockholders will not be entitled to dissenters’ or appraisal rights in the merger.
Dissenters’ or appraisal rights are statutory rights that, if applicable under law, enable stockholders to dissent from an extraordinary transaction, such as a merger, and to demand that the corporation pay the fair value for their shares as determined by a court in a judicial proceeding instead of receiving the consideration offered to stockholders in connection with the extraordinary transaction. Under the Maryland law, holders of our common stock do not have the right to dissent from the merger agreement and seek an appraisal in connection with the merger.
Litigation may be filed against the board of directors of CNB Bank Shares, Inc. and/or Jacksonville Bancorp, Inc. that could prevent or delay the completion of the merger or result in the payment of damages following completion of the merger.
In connection with the merger, it is possible that our stockholders may file putative class action lawsuits against the boards of directors of CNB Bank Shares, Inc. and/or Jacksonville Bancorp, Inc. Among other remedies, these stockholders could seek to enjoin the merger. The outcome of any such litigation would be uncertain. If a dismissal is not granted or a settlement is not reached, such potential lawsuits could prevent or delay completion of the merger and result in substantial costs to CNB Bank Shares, Inc. and Jacksonville Bancorp, Inc., including any costs associated with indemnification obligations of CNB Bank Shares, Inc. and/or Jacksonville Bancorp, Inc.
ITEM 1B.
ITEM 1B.Unresolved Staff Comments
Not applicable.
ITEM 2.
ITEM 2.Properties
We conduct our business through our main office and two branch offices located in Jacksonville, and branch offices located in Virden, Litchfield, and Chapin, Illinois. The following table sets forth certain information concerning the main office and each branch office at December 31, 2017. At December 31, 2017, our premises and equipment had an aggregate net book value of approximately $4.3 million. We believe that our branch facilities are adequate to meet the present and immediately foreseeable needs. All facilities are owned.
(1) Transaction facilities only.
ITEM 3.
ITEM 3.Legal Proceedings
At December 31, 2017, we were not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which management believes are immaterial to our financial condition, our results of operations and our cash flows.
ITEM 4.
ITEM 4.Mine Safety Disclosures.
None.
PART II
ITEM 5.
ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The “Stockholder Information” section of our annual report to stockholders for the fiscal year ended December 31, 2017 (the “2017 Annual Report to Stockholders”) is filed as an exhibit to this Form 10-K and is incorporated herein by reference.
During the fourth quarter of 2017, the Company repurchased shares of its common stock as follows:
(1)On October 16, 2013, the Company announced the adoption of a stock repurchase program under which the Company could repurchase up to 92,018 shares of its common stock, or approximately 5% of the then current outstanding shares. The program provided for repurchases through open market or private transactions, through block trades, and pursuant to any trading plan adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The Company has completed the purchase of 73,260 shares permitted under the program.
Set forth below is information as of December 31, 2017 regarding equity compensation plans. The plan that has been approved by the stockholders is the 2012 Stock Option Plan. Other than our Employee Stock Ownership Plan, we do not have any equity compensation plans that were not approved by our stockholders.
ITEM 6.
ITEM 6.Selected Financial Data
The “Selected Consolidated Financial Information” section of the 2017 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.
ITEM 7.
ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2017 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.
ITEM 7A.
ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk
The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2017 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.
ITEM 8.
ITEM 8.Financial Statements and Supplementary Data
The “Consolidated Financial Statements” section of the 2017 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.
ITEM 9.
ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
ITEM 9A.Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures (as defined by the Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.
(b) Management’s Report on Internal Control over Financial Reporting
The management of Jacksonville Bancorp, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even an effective system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on that assessment, management concludes that, as of December 31, 2017, the Company’s internal control over financial reporting is effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in the annual report.
(c) Changes in internal controls.
There were no significant changes made in our internal control over financial reporting during the quarter ended December 31, 2017 that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
ITEM 9B.
ITEM 9B.Other Information
None.
PART III
ITEM 10.
ITEM 10.Directors, Executive Officers and Corporate Governance
The table below sets forth certain information regarding the composition of the Board of Directors, including the terms of office of Board members. Except as indicated herein, there are no arrangements or understandings between any director and any other person pursuant to which the director was elected. Messrs. Foss and Williams have pledged 8,593 and 26,950 shares of common stock, respectively, as collateral for a loan.
(*)Less than 1%.
(1)The mailing address for each person listed is 1211 West Morton Avenue, Jacksonville, Illinois.
(2)Includes initial appointment to the Board of Directors of our mutual predecessor.
(3)Shares of common stock are held directly unless indicated otherwise.
(4)Mr. Williams has sole voting and investment power over 5,650 shares and shared voting and investment power over 35,936 shares of common stock, including 565 shares of common stock pursuant to our ESOP.
(5)Mr. Deal has sole voting and investment power over 42,817 shares and shared voting and investment power over 14,967 shares of common stock.
(6)Mr. Eyth has shared voting and investment power over 8,865 shares of common stock and sole voting power over 1,527 shares, including options to purchase 600 shares of common stock.
(7)Mr. Foss has shared voting and investment power over 66,081 shares and sole voting and investment power over 19,072 shares, including 4,966 shares of common stock pursuant to our ESOP and options to purchase 7,200 shares of common stock.
(8)Mr. Buchanan has sole voting and investment power over 6,852 shares.
(9)Mr. Applebee has shared voting and investment power over 73,746 shares and sole voting power over 7,500 shares, including 4,000 shares of common stock pursuant to our ESOP and options to purchase 3,000 shares of common stock.
(10)Ms. Davidsmeyer has sole voting power over 1,500 shares of common stock, including options to purchase 900 shares of common stock.
The principal occupation during the past five years of each of our current directors and executive officers is set forth below. All directors and executive officers have held their present positions for five years unless otherwise stated. With the exception of Messrs. Applebee, Foss and Williams, the Board of Directors has determined that each of our directors qualifies as an “independent” director under the Nasdaq Stock Market Rules.
John C. Williams is a Senior Vice President and Trust Officer for us. Prior to the merger of Chapin State Bank with us, he was the Chairman of the Board, President and Trust Officer of Chapin State Bank and had been employed by such bank since 1972. He currently serves as the treasurer of Tri-County Community Development Corporation and is a member of several community organizations. Mr. Williams’ knowledge of the Bank’s community and local economy make him a valuable member of the board.
Harmon B. Deal, III has been an investment advisor representative registered with L.A. Burton & Associates since June 2010. Prior to that time, he was the President of Deal & Co., Inc., which was the general partner of Deal Partners, L.P., an investment partnership, located in Jacksonville, Illinois since 1997. Prior to that time, he was a partner and principal in Rowe, Henry and Deal Investment Securities from 1986 to 1996. He holds a bachelor’s degree in general business and has served in many local community organizations. His investment knowledge and community involvement led to his appointment to the board in 2003.
John L. Eyth is a retired certified public accountant. Prior to his retirement, he had been a principal in the accounting firm of Zumbahlen, Eyth, Surratt, Foote, & Flynn, Ltd., located in Jacksonville, Illinois, since 1980. He holds a bachelor’s degree in accountancy and economics. He has been a member of several professional organizations and community groups. His accounting experience qualifies him to serve as our “audit committee financial expert” and to serve as chairman of our Audit Committee, which led to his appointment to the board in 2005.
Richard A. Foss has been our President and Chief Executive Officer since 2001. From 1994 until 2001 he served as our President and Chief Operating Officer. From 1992 until his appointment as President, Mr. Foss was our Executive Vice President. Mr. Foss has been employed with us since 1986 when he was named Vice President. In addition, Mr. Foss is also President of Financial Resources Group, Inc., our wholly owned subsidiary. He is the past chairman of the Illinois League of Financial Institutions and has been active in local economic development groups.
John M. Buchanan is a certified funeral service practitioner. He is the president of Buchanan & Cody Funeral Home and Crematory, Inc., located in Jacksonville, Illinois. He holds a bachelor’s degree in business and economics. He is a member of the public schools foundation and has served in many local community organizations. His experience as a small business owner and community knowledge led to his appointment to the board in 2009.
Andrew F. Applebee was elected Chairman of the Board of Directors in January 1994. In addition, Mr. Applebee acted as our Chief Executive Officer until January 2001. Prior thereto, Mr. Applebee was our President. Mr. Applebee has been employed by us since 1976. Mr. Applebee is active in community and civic organizations.
Peggy S. Davidsmeyer is a retired administrator who recently served as Administrator of Knollwood Retirement Village, a supported living facility, from 2011 until 2015. Prior to this time, she was the Center Director for the Jacksonville Developmental Center, a state operated developmental center, at which she had been employed since 1982. She holds a bachelor’s degree in music therapy and a master’s degree in health services administration. She also holds a nursing home administrator’s license. She currently serves on the boards of the local YMCA and West Central Mass Transit and has served in many local community organizations, including past president of the Jacksonville Area Chamber of Commerce. Her administrative experience and community knowledge led to her appointment to the board in 2012.
Executive Officers who are not Directors
Chris A. Royal (age 62) has been employed by us since March 2007 as Chief Lending Officer. He was appointed as an Executive Vice President in January 2017. From 2003 to 2007, Mr. Royal was employed as a Middle Market Lending and Relationship Manager at JPMorgan Chase Bank, N.A., Springfield, Illinois. Prior to this time, he spent 25 years with National City Bank, Springfield, Illinois in lending and retail banking. Mr. Royal currently owns 5,628 shares of common stock, including options to purchase 2,000 shares of common stock and 879 shares of common stock pursuant to our ESOP.
Diana S. Tone (age 49) has been the Chief Financial Officer for us since July 2002. She was appointed as an Executive Vice President in January 2017. She also served as the Compliance Officer from 2000 to 2012. Prior to this time, she spent ten years with the Federal Deposit Insurance Corporation as a federal bank examiner. Ms. Tone owns 15,019 shares of common stock, including options to purchase 4,526 shares of common stock and 914 shares of common stock pursuant to our ESOP.
John D. Eilering (age 55) has been Vice President of Operations for us since July 2000. He has also served as the Corporate Secretary and Human Resources Officer since July 2002. From 1998 to 2000, he served as an Assistant Vice President of Information Systems. He has been employed with Jacksonville Savings Bank since 1987. Mr. Eilering owns 16,834 shares of common stock, including options to purchase 1,652 shares of common stock and 4,531 shares of common stock pursuant to our ESOP.
Laura A. Marks (age 59) has been the Senior Vice President of Retail Banking since January 2005. She has also served as Marketing Officer since February 2000. Prior to this time, she spent 20 years in retail banking, human resources, and marketing with another financial institution. Ms. Marks currently owns 15,738 shares of common stock, including 637 shares of common stock pursuant to our ESOP.
Section 16(a) Beneficial Ownership Reporting Compliance
Our common stock is registered with the SEC pursuant to Section 12(b) of the Securities Exchange Act of 1934. Our officers and directors and beneficial owners of greater than 10% of our common stock are required to file reports on Forms 3, 4 and 5 with the SEC disclosing beneficial ownership and changes in beneficial ownership of our common stock. SEC rules require disclosure in our Proxy Statement or Annual Report on Form 10-K of the failure of an officer, director or 10% beneficial owner of our common stock to file a Form 3, 4 or 5 on a timely basis. Based on our review of ownership reports, we believe that none of our officers or directors failed to timely file such ownership reports for the fiscal year ended December 31, 2017.
Code of Ethics
We have adopted a Code of Ethics that is applicable to all of its directors and officers. The Code of Ethics has been filed with the SEC and is available at our website at www.jacksonvillesavings.com. Amendments to and waivers from the Code of Ethics will also be disclosed on our website.
Audit Committee
Our Board of Directors has adopted a written charter for the Committee, which is available on our website at www.jacksonvillesavings.com. Our Audit Committee consists of Directors Eyth, Buchanan, and Davidsmeyer. Each member of the Audit Committee is “independent” as defined in the listing standards for Nasdaq-listed companies and under Rule 10A-3 of the Securities Exchange Act of 1934. Each member of the Audit Committee is able to read and understand financial statements, and no member of the Audit Committee has participated in the preparation of our financial statements or Jacksonville Savings Bank’s, or Jacksonville Savings Bank’s subsidiaries’, financial statements during the past three years. Director Eyth is deemed by us to be an “audit committee financial expert.” Director Eyth has an understanding of generally accepted accounting principles (GAAP) and has the ability and experience to prepare, audit, evaluate and analyze financial statements which present the breadth and level of complexity of issues that we reasonably expect to be raised by our financial statements. Director Eyth has acquired these attributes through experience as a certified public accountant and partner in a public accounting firm.
The Audit Committee reviews, approves and oversees all of our related-party transactions, which would be required to be disclosed under applicable Exchange Act rules. The Audit Committee meets as needed in order to examine and approve the audit report prepared by our independent registered public accounting firm and to conduct such other business as is necessary. During 2016, the Audit Committee met four times.
ITEM 11.
ITEM 11.Executive Compensation
Summary Compensation Table. The following table shows the compensation of Richard A. Foss, our principal executive officer, and the two highest compensated executive officers, other than the principal executive officer, who received total compensation that exceeded $100,000 during the year ended December 31, 2017 for services to us or any of our subsidiaries. These individuals are sometimes referred to in this proxy statement as the “Named Executive Officers.”
(1)There were no options granted during 2017 or 2016.
(2)Amounts reported for Mr. Foss include non-qualified deferred compensation above-market earnings (as determined under applicable SEC rules) of $16,346 for 2017 and $18,833 for 2016 under the Jacksonville Savings Bank Long-Term Deferred Compensation Plan. The remaining amounts reported are attributable to the change in the actuarial present value of the named executive officer’s accumulated benefit under the Jacksonville Savings Bank Salary Continuation Plans 1 and 2.
(3)Amounts reported reflect the amount paid or reimbursed to the applicable named executive officer for various perquisites or benefits. A break-down of the various elements of compensation in the “All Other Compensation” column for 2017 is set forth in the table immediately below.
(a)For the year ended December 31, 2017, no named executive officer received perquisites or personal benefits that, in the aggregate, were greater than or equal to $10,000.
(b)Represents the cost of family-portion of the group health insurance coverage provided to the named executive officer.
(c)Represents the contribution made by Jacksonville Savings Bank to the named executive officer’s 401(k) Plan account for the plan year.
(d)Represents the aggregate number of shares allocated to the named executive officer’s ESOP account for the plan year, the value of which is determined based on a $32.02 fair market value of Jacksonville Bancorp, Inc.’s common stock as of December 31, 2017.
(e)Represents imputed income recognized by named executive officer as a result of his or her participation in the Jacksonville Savings Bank Supplemental Life Insurance Plan.
Employment Agreements
Jacksonville Savings Bank has entered into separate amended and restated employment agreements with Andrew F. Applebee, the Chairman of the Board, and Mr. Foss, who is also a member of the Board of Directors (referred to below as the “executives” or “executive”) on March 17, 2009 and September 2, 2008, respectively. The employment agreements were amended and restated in order to comply with Section 409A of the Internal Revenue Code. The employment agreements ensure that Jacksonville Savings Bank maintains a stable and competent management base. The continued success of Jacksonville Savings Bank depends on the skill and competence of the Chairman of the Board, and the President and Chief Executive Officer.
Each employment agreement provides for a three-year term. Commencing on the anniversary date and continuing each anniversary date thereafter, the Board of Directors may extend each employment agreement for an additional year unless written notice of nonrenewal is given by the Board of Directors after conducting a performance evaluation of the executive. The current base salary under the employment agreement is $241,300 for Mr. Foss. Mr. Applebee and the Board of Directors have agreed that Mr. Applebee will not have a base salary for 2018. Each executive’s base salary will be reviewed annually. In addition to the base salary, each executive will receive all benefits provided to permanent full-time employees of Jacksonville Savings Bank, including among other things, participation in stock benefit plans and other fringe benefits applicable to executive personnel, and will be entitled to receive directors fees while serving on the Board of Directors.
Each executive will be entitled to severance payments and benefits in the event of his termination of employment under specified circumstances, including his (A) termination of employment for reasons other than cause, disability, or retirement, or (B) in the event the executive resigns during the term of his agreement for any of the following reasons:
(1)the failure to elect or reelect or appoint or reappoint the executive to his current position with Jacksonville Bancorp, Inc. and Jacksonville Savings Bank, or for Mr. Applebee, the failure to elect or reelect the executive as the Chairman of the Board;
(2)a material change in the executive’s duties that are in effect as of the effective date of the agreement that would cause the executive’s position to become one of lesser responsibility or importance or a material reduction in the benefits and perquisites being provided to the executive;
(3)a relocation of the executive’s principal place of employment by more than 30 miles from his current location;
(4)liquidation or dissolution of Jacksonville Bancorp, Inc. or Jacksonville Savings Bank other than liquidations or dissolutions that are caused by reorganizations that do not affect the status of the executive; or
(5)any breach of the employment agreement.
In the event of the executive’s involuntary termination or resignation from employment following the occurrence of one of the circumstances identified above, the executive will be entitled to receive a cash lump sum payment within 30 days after his termination date (but a six month delay may apply if the executive is a “specified employee” as defined in Section 409A of the Internal Revenue Code) in an amount equal to the greater of (i) the payments due under the remaining term of the executive’s employment agreement or (ii) three times the average of the three preceding years’ base salary, including bonuses and other cash compensation paid to executive, and also the amount of any benefits received by the executive pursuant to any employee benefits plan maintained by Jacksonville Savings Bank. Each executive will also be entitled to continuation of life insurance and non-taxable medical and dental coverage during the remaining term of the agreement. In the event the executive resigns without the occurrence of one of the circumstances identified above, the Board of Directors may choose to pay the executive a discretionary severance payment not to exceed the amounts described above.
In the event of the executive’s termination of employment, whether voluntary or involuntary, following a change in control of Jacksonville Savings Bank or Jacksonville Bancorp, Inc. during the term of the agreement, the executive will be entitled to receive a cash lump sum payment within 30 days after his termination date (but a six month delay may apply if the executive is a “specified employee” as defined in Section 409A of the Internal Revenue Code) in an amount equal to the greater of (i) the payments due under the remaining term of the employment agreement or (ii) 2.99 times his average annual compensation received over the five years preceding his termination date, which includes base salary, bonuses and any other compensation paid to the executive, and also the benefits received or accrued under any employee benefits plan maintained by Jacksonville Savings Bank In addition, Jacksonville Savings Bank would also continue each executive’s life insurance and non-taxable medical and dental coverage for the remaining term of his employment agreement. In the event any severance payments or benefits provided to the executive constitutes an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code, the severance payments or benefits under each employment agreement will be reduced accordingly to avoid penalties.
The employment agreements provide that for a period of one year following termination, other than following a change in control, each executive agrees not to compete with Jacksonville Savings Bank in any city, town or county in which it maintains an office or has filed an application to establish an office.
In addition, on September 2, 2008, Jacksonville Savings Bank entered into an amended and restated employment agreement with John Williams, a Senior Vice President of Jacksonville Savings Bank, who is also a member of the Board of Directors. The employment agreement was amended and restated in order to comply with Section 409A of the Internal Revenue Code. The term of the employment agreement is for one year and extends automatically for an additional year unless notice of nonrenewal is provided to the executive. The executive’s current base salary under the employment agreement is $114,225. In addition to the base salary, the executive will receive all benefits provided to permanent full-time employees of Jacksonville Savings Bank, including among other things, participation in stock benefit plans and other fringe benefits applicable to executive personnel, and will be entitled to receive directors fees while serving on the Board of Directors.
The executive will be entitled to severance payments and benefits in the event of his termination of employment under specified circumstances, including his (A) termination of employment for reasons other than cause, disability, or retirement; (B) termination of employment, whether voluntary or involuntary, following a change in control of Jacksonville Bancorp, Inc. or Jacksonville Savings Bank; or (C) in the event the executive resigns during the term of his agreement for any of the following reasons:
(1)the failure to elect or reelect or appoint or reappoint the executive to his current position with Jacksonville Savings Bank;
(2)a material change in the executive’s duties that are in effect as of the effective date of the agreement that would cause the executive’s position to become one of lesser responsibility or importance;
(3)liquidation or dissolution of Jacksonville Bancorp, Inc. or Jacksonville Savings Bank other than liquidations or dissolutions that are caused by reorganizations that do not affect the status of the executive; or
(4)any breach of the employment agreement.
In the event of the executive’s termination as a result of one of the specified circumstances identified above, the executive will be entitled to receive a cash lump sum payment within 30 days after his termination date (but a six month delay may apply if the executive is a “specified employee” as defined in Section 409A of the Internal Revenue Code) in an amount equal to the greater of: (i) the payments due under the remaining term of his employment agreement, or (ii) one times his base salary earned during the preceding 12 months, including bonuses and any other cash compensation paid during such period, and also any benefits received or accrued by the executive under any employee benefit plan maintained by Jacksonville Savings Bank. The executive will also be entitled to continuation of life insurance and non-taxable medical and dental coverage during the remaining term of the agreement. In the event any severance payments or benefits provided to the executive constitutes an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code, the severance payments or benefits under each employment agreement will be reduced accordingly to avoid penalties.
The employment agreement provides that for a period of one year following termination, other than following a change in control, the executive agrees not to compete with Jacksonville Savings Bank in any city, town or county in which it maintains an office or has filed an application to establish an office.
Change in Control Agreements
Jacksonville Savings Bank entered into a change in control agreement with Diana Tone, Executive Vice President and Chief Financial Officer on August 18, 2010 and with Chris A. Royal, Executive Vice President and Chief Lending Officer on August 16, 2017. Commencing on the anniversary date of the effective date of each agreement and continuing each anniversary date thereafter, the board of directors may extend each agreement for an additional year such that remaining term of the agreements will always be for two years unless written notice of nonrenewal is given by the board of directors after conducting a performance evaluation of the executive.
In the event of a change in control of Jacksonville Bancorp, Inc. or Jacksonville Savings Bank, followed by the executive's voluntary termination for “good reason” or involuntary termination, other than for cause, the executive will be entitled to the severance payments and benefits set forth below. “Good reason” is defined as follows:
(1)the failure to elect or reelect or appoint or reappoint the executive to his/her current position with Jacksonville Bancorp, Inc. and Jacksonville Savings Bank,
(2)a material change in the executive’s position to become one of lesser responsibility or importance than the position the executive held immediately prior to the change in control, or a material reduction in the benefits and perquisites provided to the executive from those being provided immediately prior to the change in control;
(3)a relocation of the executive’s principal place of employment by more than 30 miles from his/her current location,
(4)liquidation or dissolution of Jacksonville Bancorp, Inc. or Jacksonville Savings Bank other than liquidations or dissolutions that are caused by reorganizations that do not affect the status of the executive; or
(5)any breach of the agreement by Jacksonville Savings Bank.
In the event of a change in control followed by the executive's involuntary termination other than for cause or resignation from employment for “good reason” during the remaining term of the agreement, he/she will be entitled to a severance payment equal to two times the sum of: (i) the average annual base salary, bonus and any other cash compensation earned by the executive during the two years immediately prior to the year in which his/her date of termination occurs; and (ii) the average amount of benefits received by his/her pursuant to the employee benefit plans maintained by Jacksonville Savings Bank during the two years immediately prior to the year in which his/her date of termination occurs. In addition, the executive will be entitled to receive continued life insurance coverage and non-taxable medical and dental insurance coverage for two years following his/her date of termination. Any cash severance payment will be made in a lump sum within 30 days following the executive's date of termination. The agreement provides that in the event the severance payments and the benefits would include an “excess parachute payment” as defined under Section 280G of the Internal Revenue Code, the severance payments or benefits under the change in control agreement will be reduced accordingly to avoid penalties.
Benefit Plans
Stock Option Plan. At our 2012 annual meeting, we adopted, and our stockholders approved, the Jacksonville Bancorp Inc. 2012 Stock Option Plan (“Stock Option Plan”), which authorized the Compensation Committee to issue grants of stock option awards for up to 104,035 shares of common stock to employees and outside directors, subject to individual limits. A stock option award gives the recipient the right to purchase shares of common stock of Jacksonville Bancorp, Inc. at a specified price for a specified period of time. Awards may be granted as either incentive or non-statutory stock options. Incentive stock options have certain tax advantages for recipients and must comply with Section 422 of the Internal Revenue Code. Only employees are eligible to receive incentive stock options. Stock options are generally granted at fair market value on the date of grant and are intended, to the extent permissible under applicable law, to be incentive stock options. Shares of common stock purchased upon exercise of a stock option must be paid for in full at the time of exercise either: (i) in cash; (ii) with Jacksonville Bancorp, Inc. common stock owned by the recipient; (iii) by net-settled shares; (iv) by broker-assisted cashless exercise; or (v) by other means acceptable to the Committee. Grants become vested in accordance with the vesting schedule determined by the Compensation Committee. In general, awards become fully vested upon death, disability, retirement or involuntary termination (other than for cause) following a change in control (as defined in the plan). In general, the Board of Directors may amend or terminate the Stock Option Plan or any award, except that consent of the affected individual is required if the amendment adversely impairs his or her rights under an outstanding award. However, the Board may not amend the Stock Option Plan without approval of stockholders to materially increase the number of shares that may be issued under the Plan, materially increase the benefits accruing to a participant, or materially modify the requirements for participation in the Plan. The term of the Stock Option Plan is ten years.
Outstanding Equity Awards at Year End. The following table sets forth information with respect to outstanding equity awards as of December 31, 2017 for the Named Executive Officers.
(1)The options vest 20% per year over a five year period, commencing on April 24, 2013 and vest on each anniversary date thereafter.
Option awards set forth in the tables above were granted pursuant to the Jacksonville Bancorp Inc. 2012 Stock Option Plan. All of the awards vest at a rate of 20% per year beginning one year from the date of grant. The long vesting period is intended to ensure that the grants are viewed as long-term incentive compensation. Awards become fully vested upon death, disability, retirement or involuntary termination of service (other than for cause) following change in control (as defined in the plan). Stock option grants are intended to be incentive stock options to the extent permissible under applicable law. Stock options are generally exercisable for three months after termination of employment and for one year following death or disability.
Supplemental Life Insurance Plan. Effective January 1, 2008, Jacksonville Savings Bank adopted the Supplemental Life Insurance Plan for the benefit of certain officers who have been selected to participate in the plan. The plan provides for a lump sum payment of $100,000 to the participant’s beneficiary in the event of his or her death while employed with Jacksonville Savings Bank. If the participant dies after his or her termination of employment with Jacksonville Savings Bank, the participant’s beneficiary will not be entitled to any benefits under the plan. The plan is funded by the purchase of single-premium bank-owned life insurance policies. Messrs. Applebee, Foss, Williams and Royal and Ms. Tone are participants in the plan.
Salary Continuation Plans. On September 2, 2008, Jacksonville Savings Bank adopted the Salary Continuation Plan 1 and the Salary Continuation Plan 2 for a select group of management and highly compensated employees, as determined by the board of directors, which were each amended on April 24, 2012. The plans provide supplemental retirement benefits to a participant if he or she retires at age 65 or later, or dies while still employed with Jacksonville Savings Bank prior to attaining age 65, in an amount equal to the annual normal retirement benefit specified in the participant’s individual participation agreement. Upon termination of employment on or after attaining age 55 with 5 years of service but prior to attaining age 65, the participant will be paid an annual early retirement benefit equal to his or her accrued benefit as of the last day of the month preceding termination. Under the plan, the participant will be 100% vested in his or her annual early retirement benefit. If the participant terminates employment due to disability, the participant will be entitled to his or her accrued benefit as of the date of termination. In the event of a change in control followed by the participant’s termination of employment prior to attaining age 65, the participant will be entitled to the change in control benefit equal to the full annual normal retirement benefit, provided, however that such benefit is limited so that it will not constitute an “excess parachute payment” subject to excise taxes under Section 280G of the Internal Revenue Code. All benefits under the plan will be paid in equal monthly installments for ten years. Messrs. Applebee, Foss, Williams and Royal are participants in the Salary Continuation Plan 1, and are eligible to receive a normal retirement benefit of $30,000, $40,000, $30,000, and $35,000, respectively, payable for 10 years. Ms. Tone is a participant in the Salary Continuation Plan 2, and is eligible to receive a normal retirement benefit of $35,000 payable for 10 years.
Long-Term Deferred Compensation Plan. Effective January 1, 1996, Jacksonville Savings Bank adopted the Long-Term Deferred Compensation Plan for a select group of management and highly compensated employees, as determined by the Board of Directors. The plan was frozen, effective December 31, 2004, such that no contributions were made to the plan thereafter. The plan allowed for a participant to elect deferring a portion of his or her base salary and bonus payable during the year into the plan. In addition, Jacksonville Savings Bank made a mandatory annual contribution on behalf of each participant in an amount equal to the contribution amount specified in the participant’s individual participation agreement, and also reserved the right to make an additional discretionary contribution on behalf of each participant. All amounts contributed to the plan are credited to a bookkeeping account established on behalf of each participant and, unless the participant elects an alternative investment option available under the plan, earn interest on a monthly basis at a rate equal to one percentage point greater than the annual yield of Moody’s Average Corporate Bond Yield Index for the preceding calendar month as published by Moody’s Investor Service, Inc. The participant’s account balance is payable following the earlier of the participant’s termination of employment, death, or disability in a lump sum or annual installments over a period not to exceed 15 years. Messrs. Applebee, Foss, and Williams are participants in the Long-Term Deferred Compensation Plan.
Deferred Compensation Agreements. Mr. Williams entered into a deferred compensation agreement and the director’s compensation agreement with Chapin State Bank on August 3, 1987 and July 1, 1982, respectively. The agreements were assumed by Jacksonville Bancorp, Inc. in connection with the acquisition of Chapin State Bank on July 3, 2000. Mr. Williams is entitled to receive a retirement benefit of $117,316 and $108,360, respectively, under each agreement. The retirement benefits under the agreements commenced upon Mr. Williams’ 65th birthday which occurred in 2013. As a result, Mr. Williams is currently receiving a monthly benefit of $1,881 under his agreements, with 65 remaining installment payments to be made as of December 31, 2017. Mr. Williams’ retirement benefits under the agreements have been funded by bank-owned life insurance policies.
Tax-Qualified Benefit Plans
401(k) Plan. Jacksonville Savings Bank maintains the Jacksonville Savings Bank 401(k) Profit Sharing Plan and Trust (the “401(k) Plan”), a tax-qualified defined contribution retirement plan, for all employees who have satisfied the 401(k) Plan’s eligibility requirements. All eligible employees can begin participation in the 401(k) plan on the first entry date that coincides with or next follows the date the employee attains age 21 and has one year of service. A participant may contribute up to 100% of his or her compensation to the 401(k) Plan, on a pre-tax basis, subject to the limitations imposed by the Internal Revenue Code. For 2017, the salary deferral contribution limit was $18,000, provided, however that a participant over age 50 may contribute an additional $6,000 to the 401(k) Plan. In addition to salary deferral contributions, Jacksonville Savings Bank will make matching contributions equal to a certain percentage (determined annually) of the participant’s salary deferral contributions for the plan year, and may also provide a discretionary employer contribution. A participant is always 100% vested in his or her salary deferral contributions and employer matching contributions. All other employer discretionary contributions vest at a rate of 20% per year, starting upon completion of two years of credited service, and will be fully vested upon completion of six years of credited service. However, a participant will immediately become 100% vested in any discretionary employer contributions received upon the participant’s death, disability, or attainment of age 65 while employed with Jacksonville Savings Bank. Generally, unless the participant elects otherwise, the participant’s benefit under the 401(k) Plan will be payable in the form of a lump sum payment by no later than the last day of the plan year immediately following the participant’s date of termination.
Each participant has an individual account under the 401(k) Plan and may direct the investment of his or her account among a variety of investment options or vehicles available, which includes investing in the common stock of Jacksonville Bancorp, Inc.
Employee Stock Ownership Plan. Jacksonville Savings Bank maintains the Jacksonville Savings Bank Employee Stock Ownership Plan (the “ESOP”). Employees who are at least 21 years old with at least one year of service are eligible to participate in the plan. The plan had borrowed funds from us and used those funds to purchase 41,614 shares of common stock for the plan in connection with our 2010 stock offering at a price of $10.00 per share. The loan has been, and will continue to be, repaid principally through Jacksonville Savings Bank’s contribution to the plan and dividends payable on the common stock held by the plan over the 20-year term of the loan. The interest rate for the loan is an adjustable-rate equal to the prime rate, as published in The Wall Street Journal, as of the first business day of each calendar year during the term of the loan.
The trustee holds the shares purchased by the plan in an unallocated suspense account, and shares are released to the participants’ accounts as the loan is repaid. Shares released from the unallocated suspense account are allocated to each eligible participant’s plan account based on the ratio of each participant’s compensation to the total compensation of all eligible participants. Under the terms of the plan, shares that are allocated to employees will be voted by the plan trustee based on directions received by the participant. Unallocated shares will be voted by the plan trustee in the same proportion as allocated shares pursuant to directions received by the employees, subject to the fulfillment of the trustee’s fiduciary responsibilities. Vested benefits are payable generally upon the participants’ termination of employment, and are paid in the form of common stock, or to the extent participants’ accounts contain cash, benefits will be paid in cash.
Review of Risk Related to Compensation Policies and Procedures. The Compensation Committee of the Board of Directors is responsible for the oversight of employee compensation policies and procedures, including the determination of whether any material risk is imposed on us from our compensation policies and procedures. The Compensation Committee has reviewed our compensation policies and procedures, including those related to the payment of commissions and bonuses, and believes that any risks arising from our compensation policies and practices for our employees are not reasonably likely to have a material adverse effect on us.
Directors’ Compensation.
Directors’ Summary Compensation Table. Set forth below is summary compensation for each of our directors for the fiscal year ended December 31, 2017. Director compensation paid to directors who also are named executive officers is reflected above in the “Executive Compensation - Summary Compensation Table.”
(1)Mr. Hess passed away on February 5, 2018.
(2)At December 31, 2017, total options outstanding included 3,000 for Mr. Applebee, 600 for Mr. Eyth, and 900 for Ms. Davidsmeyer.
(3)Amounts reported include non-qualified deferred compensation above-market earnings of $25,628 and $663 for Messrs. Applebee and Williams, respectively, under the Jacksonville Savings Bank Long-Term Deferred Compensation Plan.
(4)Amounts reported reflect the amount paid or reimbursed to the applicable named executive officer for various perquisites or benefits. A break-down of the various elements of compensation in this column is set forth in the table immediately below.
____________________
(a)Earned for services rendered as an employee of Jacksonville Savings Bank.
(b)Represents the cost of family-portion of the group health insurance coverage provided to Mr. Applebee.
(c)For the year ended December 31, 2017, no director received perquisites or personal benefits that, in the aggregate, were greater than or equal to $10,000.
(d)Represents the contribution made by Jacksonville Savings Bank to the employee director’s 401(k) Plan account for the plan year.
(e)Represents the aggregate number of shares allocated to the director’s ESOP account for the plan year, the value of which is determined based on a $32.02 fair market value of Jacksonville Bancorp, Inc.’s common stock as of December 31, 2017.
(f)Represents imputed income recognized by the director as a result of his participation in the Jacksonville Savings Bank Supplemental Life Insurance Plan.
Cash Compensation. Members of the Board of Directors each received $14,300 during the year ended December 31, 2017. Certain directors also received fees for attending committee meetings and board meetings of Financial Resources Group, Inc. Outside directors are paid $50 per committee meeting attended and directors of Financial Resources Group, Inc. are paid a monthly fee of $125. We paid a total of $128,950 in directors’ fees for the year ended December 31, 2017.
Deferred Compensation Agreements. Mr. Hess entered into a deferred compensation agreement and the director’s compensation agreement with Chapin State Bank on August 3, 1987 and July 1, 1982, respectively. The agreements were assumed by Jacksonville Bancorp, Inc. in connection with the acquisition of Chapin State Bank on July 3, 2000. Mr. Hess is entitled to receive a retirement benefit of $95,400 and $105,492, respectively, under each agreement. The retirement benefits under the agreements commenced upon Mr. Hess’ 65th birthday which occurred in 2012. As a result of Mr. Hess’ death, his beneficiaries will continue to receive a retirement benefit of $1,674 pursuant to the agreements for 55 months. Mr. Hess’ retirement benefits under the agreements have been funded by bank-owned life insurance policies.
Stock Option Plan. The directors are eligible to participate in the Stock Option Plan. Please see a description of the plan set forth under “Executive Compensation - Benefit Plans.”
Other Compensation Arrangements. Please see the description of the employment agreements with Messrs. Applebee and Williams set forth above under the “Executive Compensation - Employment Agreements” for further details. Messrs. Applebee and Williams are also participants in the Salary Continuation Plan 1, the Long-Term Deferred Compensation Plan, the ESOP and 401(k) Plan. Please see the descriptions of each plan set forth above under the “Executive Compensation - Benefit Plans” and “Executive Compensation - Tax-Qualified Benefit Plans” for further details.
Amendments to Benefit Plans in Connection with Pending Merger with CNB Bank Shares, Inc.
On January 18, 2018, in connection with the signing of the merger agreement with CNB Bank Shares, Inc., Jacksonville Savings Bank entered into individual amendments to the existing change in control agreements with Mr. Royal and Ms. Tone, which the amendments will be effective upon the completion of the acquisition of the Company by CNB Bank Shares, Inc. The amendments: (1) extend the term of the agreements for twenty-four months from the closing of the acquisition; and (2) provide that a change in control payment would be triggered if executives resign because there is either any reduction in their base salary following the closing of the acquisition, or CNB Bank & Trust, N.A fails to appoint them to certain executive positions immediately following the closing of the bank merger, which is Market President for Mr. Royal and Chief Financial Officer for Ms. Tone.
Additionally, on January 18, 2018, Jacksonville Savings Bank adopted amendments to the: (1) Amended and Restated Jacksonville Savings Bank Salary Continuation Plan 1; (2) Amended and Restated Jacksonville Savings Bank Salary Continuation Plan 2; (3) Jacksonville Savings Bank 1996 Long-Term Deferred Compensation Plan; (4) Deferred Income Agreement with Mr. Williams; (5) Deferred Compensation Agreement with Mr. Williams; (6) Deferred Income Agreement with Mr. Hess; and (7) Deferred Compensation Agreement with Mr. Hess (collectively, the “Deferred Compensation Arrangements”), which the amendments will be effective upon the completion of the acquisition. The amendments provide that the CNB Bank & Trust, N.A. shall assume and continue the Deferred Compensation Arrangements such that: (1) the benefits and earnings thereunder will continue to accrue in the normal course; and (2) the timing and manner of all benefit payments will not be accelerated without participant consent.
Finally, under the terms of the merger agreement, outstanding and unexercised stock options to purchase shares of Company common stock granted under the 2012 Stock Option Plan, whether or not vested, will be cancelled at closing in exchange for the right to receive a cash payment equal to the excess of the merger consideration of $33.70 over the exercise price per option multiplied by the number of stock options held, less applicable taxes required to be withheld.
ITEM 12.
ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Persons and groups who beneficially own in excess of five percent of the common stock are required to file certain reports with the Securities and Exchange Commission regarding such ownership. The following table sets forth, as of March 1, 2018, the shares of common stock beneficially owned by executive officers and directors as a group and persons who were the beneficial owners of more than five percent of our outstanding shares of common stock. Information regarding the common stock ownership of each director and executive officer individually is set forth above under Item 10. This information is based solely upon information supplied to us and the filings required pursuant to the Securities Exchange Act of 1934.
(1)In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a person is deemed to be the beneficial owner for purposes of this table, of any shares of common stock if he has shared voting or investment power with respect to such security, or has a right to acquire beneficial ownership at any time within 60 days from the Record Date. As used herein, “voting power” is the power to vote or direct the voting of shares and “investment power” is the power to dispose or direct the disposition of shares. Includes all shares held directly as well as by spouses and minor children, in trust and other indirect ownership, over which shares the named individuals effectively exercise sole or shared voting and investment power.
(2)Based upon a Schedule 13F-HR filed on January 26, 2018 with the Securities and Exchange Commission, Stilwell Value, LLC, claimed voting and investment power over 154,200 shares.
(3)On a Schedule 13G filed with the Securities and Exchange Commission on February 16, 2018, Chicago Capital Management, LLC reported shared dispositive and voting power with respect to 90,735 shares of our common stock; and Steven R. Gerbel reported shared dispositive and voting power with respect to 90,735 shares of our common stock.
ITEM 13.
ITEM 13.Certain Relationships and Related Transactions and Director Independence
Transactions With Certain Related Persons.
We intend that all transactions between us and our executive officers, directors, holders of 10% or more of the shares of any class of its common stock and affiliates thereof, will contain terms consistent with the provisions of federal and state regulation, which governs loans to directors and executive officers and will be approved by a majority of our independent outside directors not having any interest in the transaction. At December 31, 2017, we had loans with an aggregate balance of $2.9 million outstanding to our executive officers and directors. In addition, we had loans with an aggregate balance of $3.2 million to related parties of our executive officers and directors. All such loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not related to the lender, and did not involve more than the normal risk of collectibility or present other unfavorable features.
There were no transactions or series of transactions since the beginning of our last fiscal year or any currently proposed transaction where we were or are a participant and the amount involved exceeds $120,000, and in which any related person had or will have a direct or indirect material interest.
Section 402 of the Sarbanes-Oxley Act of 2002 generally prohibits an issuer from: (1) extending or maintaining credit; (2) arranging for the extension of credit; or (3) renewing an extension of credit in the form of a personal loan for an officer or director. There are several exceptions to this general prohibition, one of which is applicable to us. Sarbanes-Oxley does not apply to loans made by a depository institution that is insured by the FDIC and is subject to the insider lending restrictions of the Federal Reserve Act. All loans to our directors and officers are made in conformity with the Federal Reserve Act and applicable regulations.
Board Structure
Nasdaq Stock Market Rules require (a) that we have a majority of independent directors on the Board, (b) any compensation committee and nominating committee to be composed solely of independent directors, (c) the compensation of executive officers being determined by a majority of the independent directors or a compensation committee composed solely of independent directors, and (d) the election or recommendation of director nominees for the Board’s selection, either by a majority of the independent directors or a nominating committee composed solely of independent directors.
Affirmative Determinations Regarding Director Independence and Other Matters
Based on information supplied to it by the directors, the Board of Directors has determined each of the following directors to be an “independent director” as such term is defined in the Nasdaq Marketplace Rules:
Directors Deal, Eyth, Buchanan and Davidsmeyer
There were no transactions that the Board of Directors needed to review that are not required to be reported under “-Transactions With Certain Related Persons,” above that would bear in the determination of the independence of the directors listed above.
ITEM 14.
ITEM 14.Principal Accountant Fees and Services
Audit Fees. During the past two years, the fees billed for professional services rendered by BKD, LLP for the audit of our annual financial statements and for the review of our Form 10-K, annual report and Form 10-Q were $78,900 for 2017 and $80,200 for 2016.
Audit-related fees. During the past two years, fees for professional services by BKD, LLP that were not directly related to the preparation of the audit were $8,000 for 2017 and $21,500 for 2016. Such fees related to the audit of our 401(k) plan and annual trust procedures in 2017 and 2016.
Tax Fees. During the past two fiscal years, the fees billed for professional services by BKD, LLP for tax services were $12,600 for 2017 and $16,200 for 2016.
All Other Fees. There were no aggregate fees billed for professional services rendered to us by BKD, LLP for services other than those listed above for 2017 and 2016.
The Audit Committee considered whether the provision of non-audit services was compatible with maintaining the independence of its independent registered public accounting firm. The Audit Committee concluded that performing such services in 2017 and 2016 did not affect the independent registered public accounting firms’ independence in performing their function as auditors for us.
Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Firm
The Audit Committee’s policy is to pre-approve all audit and non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to particular service or category of services and is generally subject to a specific budget. The independent registered public accounting firm and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date.
PART IV
ITEM 15.
ITEM 15.Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The documents filed as a part of this Form 10-K are:
(A) Report of Independent Registered Public Accounting Firm;
(B)Consolidated Balance Sheets - December 31, 2017 and 2016;
(C)Consolidated Statements of Income - years ended December 31, 2017 and 2016;
(D)Consolidated Statements of Comprehensive Income - years ended December 31, 2017 and 2016;
(E)Consolidated Statements of Stockholders’ Equity - years ended December 31, 2017 and 2016;
(F)Consolidated Statements of Cash Flows - years ended December 31, 2017 and 2016; and
(G) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.
(a)(3) Exhibits
2.1 Agreement and Plan of Merger among CNB Bank Shares, Inc., Jacksonville Bancorp, Inc. and CNB Acquisition, Inc., dated as of January 17, 2018(28)
3.1 Articles of Incorporation(1)
3.2 Bylaws(2)
Stock Certificate of Jacksonville Bancorp, Inc.(3)
10.1 Employment Agreement between Jacksonville Savings Bank and Andrew F. Applebee(4)
10.2 Employment Agreement between Jacksonville Savings Bank and Richard A. Foss(5)
10.3 Employment Agreement between Jacksonville Savings Bank and John Williams(6)
10.4 Change in Control Agreement between Jacksonville Savings Bank and Diana S. Tone(7)
10.5 Amendments to the Jacksonville Savings Bank and Jacksonville Bancorp, MHC Stock Option Plans(8)
10.6 Jacksonville Savings Bank Supplemental Life Insurance Plan(9)
10.7 Amended and Restated Jacksonville Savings Bank Salary Continuation Plan 1(10)
10.8 Jacksonville Savings Bank Long-Term Deferred Compensation Plan, as amended(11)
10.9 Deferred Compensation Agreement between Chapin State Bank and John C. Williams(12)
10.10 Director’s Compensation Agreement between Chapin State Bank and John C. Williams(13)
10.11 Deferred Compensation Agreement between Chapin State Bank and Dean H. Hess(14)
10.12 Director’s Compensation Agreement between Chapin State Bank and Dean H. Hess(15)
10.13 Jacksonville Bancorp 2012 Stock Option Plan(16)
10.14 Change in Control Agreement between Jacksonville Savings Bank and Chris A. Royal(17)
10.15 First Amendment of Jacksonville Savings Bank Two-Year Change in Control Agreement with Chris Royal(18)
10.16 First Amendment of Jacksonville Savings Bank Two-Year Change in Control Agreement with Diana S. Tone(19)
10.17 Amendment No. 1 to the Amended and Restated Jacksonville Savings Bank Salary Continuation Plan 1(20)
10.18 Amendment No. 1 to the Amended and Restated Jacksonville Savings Bank Salary Continuation Plan 2(21)
10.19 Amendment No. 2 to the Jacksonville Savings Bank Long-Term Deferred Compensation Plan(22)
10.20 Amendment No. 1 to the Deferred Income Agreement with John C. Williams(23)
10.21 Amendment No. 1 to the Deferred Compensation Agreement with John C. Williams(24)
10.22 Amendment No. 1 to the Deferred Income Agreement with Dean H. Hess(25)
10.23 Amendment No. 1 to the Deferred Compensation Agreement with Dean H. Hess(26)
2017 Annual Report to Stockholders
Code of Ethics(27)
Subsidiaries
Consent of BKD LLP to incorporate financial statements into Registration Statements on Form S-8
31.1 Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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(1)Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(2)Incorporated by reference to Exhibit 3.2 to the Form 8-K filed with the Securities and Exchange Commission on February 22, 2017 (File No. 001-34821).
(3)Incorporated by reference to Exhibit 4 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(4)Incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2009 (File No. 000-49792).
(5)Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2008 (File No. 000-49792).
(6)Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2008 (File No. 000-49792).
(7)Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on April 30, 2010 (File No. 333-165466).
(8)Incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(9)Incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(10)Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2012 (File No. 001-34821).
(11)Incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(12)Incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(13)Incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(14)Incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(15)Incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(16)Incorporated by reference to Exhibit 10 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on February 20, 2013 (File No. 333-186754).
(17)Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 17, 2017 (File No. 001-34821).
(18)Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(19)Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(20)Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(21)Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(22)Incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(23)Incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(24)Incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(25)Incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(26)Incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(27)Incorporated by reference to Exhibit 14 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2004 (File No. 000-49792).
(28)Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
ITEM 16.Form 10-K Summary
None.
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Jacksonville Bancorp, Inc.
Date: March 7, 2018 By: /s/ Richard A. Foss
Richard A. Foss, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
2.1 Agreement and Plan of Merger among CNB Bank Shares, Inc., Jacksonville Bancorp, Inc. and CNB Acquisition, Inc., dated as of January 18, 2018(28)
3.1 Articles of Incorporation(1)
3.2 Bylaws(2)
Stock Certificate of Jacksonville Bancorp, Inc.(3)
10.1 Employment Agreement between Jacksonville Savings Bank and Andrew F. Applebee(4)
10.2 Employment Agreement between Jacksonville Savings Bank and Richard A. Foss(5)
10.3 Employment Agreement between Jacksonville Savings Bank and John Williams(6)
10.4 Change in Control Agreement between Jacksonville Savings Bank and Diana S. Tone(7)
10.5 Amendments to the Jacksonville Savings Bank and Jacksonville Bancorp, MHC Stock Option Plans(8)
10.6 Jacksonville Savings Bank Supplemental Life Insurance Plan(9)
10.7 Amended and Restated Jacksonville Savings Bank Salary Continuation Plan 1(10)
10.8 Jacksonville Savings Bank Long-Term Deferred Compensation Plan, as amended(11)
10.9 Deferred Compensation Agreement between Chapin State Bank and John C. Williams(12)
10.10 Director’s Compensation Agreement between Chapin State Bank and John C. Williams(13)
10.11 Deferred Compensation Agreement between Chapin State Bank and Dean H. Hess(14)
10.12 Director’s Compensation Agreement between Chapin State Bank and Dean H. Hess(15)
10.13 Jacksonville Bancorp 2012 Stock Option Plan(16)
10.14 Change in Control Agreement between Jacksonville Savings Bank and Chris A. Royal(17)
10.15 First Amendment of Jacksonville Savings Bank Two-Year Change in Control Agreement with Chris Royal(18)
10.16 First Amendment of Jacksonville Savings Bank Two-Year Change in Control Agreement with Diana S. Tone(19)
10.17 Amendment No. 1 to the Amended and Restated Jacksonville Savings Bank Salary Continuation Plan 1(20)
10.18 Amendment No. 1 to the Amended and Restated Jacksonville Savings Bank Salary Continuation Plan 2(21)
10.19 Amendment No. 2 to the Jacksonville Savings Bank Long-Term Deferred Compensation Plan(22)
10.20 Amendment No. 1 to the Deferred Income Agreement with John C. Williams(23)
10.21 Amendment No. 1 to the Deferred Compensation Agreement with John C. Williams(24)
10.22 Amendment No. 1 to the Deferred Income Agreement with Dean H. Hess(25)
10.23 Amendment No. 1 to the Deferred Compensation Agreement with Dean H. Hess(26)
2017 Annual Report to Stockholders
Code of Ethics(27)
Subsidiaries
Consent of BKD LLP to incorporate financial statements into Registration Statements on Form S-8
31.1 Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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(1)Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(2)Incorporated by reference to Exhibit 3.2 to the Form 8-K filed with the Securities and Exchange Commission on February 22, 2017 (File No. 001-34821).
(3)Incorporated by reference to Exhibit 4 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(4)Incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2009 (File No. 000-49792).
(5)Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2008 (File No. 000-49792).
(6)Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2008 (File No. 000-49792).
(7)Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on April 30, 2010 (File No. 333-165466).
(8)Incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(9)Incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(10)Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on April 26, 2012 (File No. 001-34821).
(11)Incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(12)Incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(13)Incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(14)Incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(15)Incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).
(16)Incorporated by reference to Exhibit 10 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on February 20, 2013 (File No. 333-186754).
(17)Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on August 17, 2017 (File No. 001-34821).
(18)Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(19)Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(20)Incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(21)Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(22)Incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(23)Incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(24)Incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(25)Incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(26)Incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).
(27)Incorporated by reference to Exhibit 14 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2004 (File No. 000-49792).
(28)Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018 (File No. 001-34821).