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JACKSONVILLE BANCORP, INC.

(Exact name of registrant as specified in its charter)

Federal	33-1002258
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES  o                       NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES  o                       NO x

ITEM 1.       Business

 

General

Jacksonville Bancorp, Inc. is a Federal corporation.  On May 3, 2002, Jacksonville Savings Bank completed its reorganization into the two-tier form of mutual holding company ownership.  At that time each outstanding share of Jacksonville Savings Bank’s common stock was converted into a share of Jacksonville Bancorp’s common stock.  Our only significant asset is our investment in Jacksonville Savings Bank.  We are majority owned by Jacksonville Bancorp, MHC, a Federally-chartered mutual holding company.

Jacksonville Savings Bank is an Illinois-chartered savings bank headquartered in Jacksonville, Illinois.  We conduct our business from our main office and six branches, two of which are located in Jacksonville and one of which is located in each of the following Illinois communities: Virden, Litchfield, Chapin, and Concord.  We were originally chartered in 1916 as a state-chartered savings and loan association and converted to a state-chartered savings bank in 1992.  We have been a member of the Federal Home Loan Bank System since 1932.  Our deposits are insured by the Federal Deposit Insurance Corporation.  At December 31, 2008, Jacksonville Bancorp had total assets of $288.3 million, total deposits of $238.2 million, and stockholders’ equity of $24.3 million.

We are a community-oriented savings bank engaged primarily in the business of attracting retail deposits from the general public in our market area and using such funds together with borrowings and funds from other sources to primarily originate mortgage loans secured by one- to four-family residential real estate, commercial and agricultural real estate loans, and consumer loans.  We also originate multi-family real estate loans and commercial and agricultural business loans.  Additionally, we invest in United States Government agency securities, bank-qualified, general obligation municipal issues, and mortgage-backed securities primarily issued or guaranteed by the United States Government or agencies thereof, and maintains a portion of its assets in liquid investments, such as overnight funds at the Federal Home Loan Bank.

Our principal sources of funds are customer deposits, proceeds from the sale of loans, funds received from the repayment and prepayment of loans and mortgage-backed securities, and the sale, call, or maturity of investment securities.  Principal sources of income are interest income on residential, commercial and consumer loans, interest on investments, commissions and fees.  Our principal expenses are interest paid on deposits, employee compensation and benefits and occupancy and equipment expense.

We operate an investment center at our main office.  The investment center is operated through Financial Resources Group, Inc., the Bank’s wholly-owned subsidiary.  The investment center has not had a material effect on our ability to attract retail deposits, and is not expected to have an impact on attracting deposits.

Our principal executive office is located at 1211 W. Morton, Jacksonville, Illinois, and our telephone number at that address is (217) 245-4111.

Recent Market Developments

 

In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, on October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the “EESA”) was signed into law.  Under the EESA, the U.S. Department of the Treasury was given the authority to, among other things, purchase up to $700 billion of securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.

 

On October 14, 2008, the Treasury Department announced a Capital Purchase Program under which it would acquire equity investments, usually preferred stock, in banks and thrifts and their holding companies.  In conjunction with the purchase of preferred stock, the Treasury Department also received warrants to purchase common stock from participating financial institutions.  Participating financial institutions also were required to adopt the Treasury Department’s standards for executive compensation and corporate governance for the period during which the department holds equity issued under the Capital Purchase Program.  We have determined that we would not participate in the Capital Purchase Program.

 

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On November 21, 2008, the FDIC adopted a final rule relating to a Temporary Liquidity Guarantee Program, which the FDIC had previously announced as an initiative to counter the system-wide crisis in the nation’s financial sector.  Under the Temporary Liquidity Guarantee Program the FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008, and before June 30, 2009 and (ii) provide full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5% interest per annum and certain other accounts held at participating FDIC-insured institutions through December 31, 2009.  Coverage under the Temporary Liquidity Guarantee Program was available for the first 30 days without charge.  The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to 100 basis points per annum, depending on the initial maturity of the debt.  The fee assessment for deposit insurance coverage is 10 basis points per quarter on amounts in covered accounts exceeding $250,000.  We have elected to participate in the deposit insurance coverage program.

 

The American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as the economic stimulus or economic recovery package, was signed into law on February 17, 2009, by President Obama.  ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs.  In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients until the recipient has repaid the Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient’s appropriate regulatory agency.

 

Market Area

Our market area is Morgan, Macoupin and Montgomery Counties, Illinois.  Management believes that our offices are located in communities that can generally be characterized as stable residential communities of predominantly one- to four-family residences.  Our market for deposits is concentrated in the communities surrounding our main office and six branches.  We are the largest independent financial institution headquartered in our primary market area.

The economy of our market area consists primarily of agriculture and related businesses, light industry and state and local government.  The largest employers in our primary market area are Pactiv Corporation, Passavant Area Hospital, and the State of Illinois.  During 2008, the local economy experienced a downturn, although not as severe as the nationwide recession.  While we have seen an increase in unemployment, our local economy benefits from a diverse base of employers.  Our market area did not experience significant layoffs or company closings during 2008.  However, ACH Food Companies has recently announced the closing of its Jacksonville plant with approximately 200 employees sometime in 2009.  We are unable to determine what impact, if any, the closing will have on our financial condition or operations.

Lending Activities

General.   Historically, our principal lending activity has been the origination of mortgage loans for the purpose of financing or refinancing one- to four-family residential properties in our local market areas.  We also emphasize consumer lending, primarily the origination of home equity loans and loans secured by automobiles.  At December 31, 2008, our loans receivable totaled $185.0   million, of which $46.8   million, or 25.6% consisted of one- to four-family residential mortgage loans.  The remainder of our loans receivable at such date consisted of commercial and agricultural real estate loans (30.9%), multi-family residential loans (2.5%), commercial and agricultural business loans (19.3%), and consumer loans (22.8%).  Of the amount included in consumer loans, $30.0   million, or 16.4% of total loans consisted of home equity and home improvement loans.  During the year ended December 31, 2008 the loan portfolio increased to $185.0   million from $177.7 million at December 31, 2007.   One-to-four family residential real estate loans decreased $3.7 million (7.2%) and   commercial and agricultural real estate loans increased   $12.4 million (28.2%) during 2008.

 

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We have made our interest-earning assets more interest rate sensitive by, among other things, originating variable interest rate loans, such as adjustable-rate mortgage loans and balloon loans with terms ranging from three to five years, as well as medium-term consumer loans and commercial business loans.  Our ability to originate adjustable-rate mortgage loans is substantially affected by market interest rates.

We originate fixed-rate residential mortgage loans secured by one- to four-family residential properties with terms up to 30 years.  We sell a significant portion of our one- to four-family fixed-rate residential mortgage loan originations directly to Freddie Mac.  We also sold one- to four-family fixed-rate residential mortgage loan originations to the Federal Home Loan Bank Mortgage Partnership Finance Program until the program was discontinued as of October 31, 2008.  During the years ended December 31, 2008 and 2007, we sold $30.1 million and $10.2   million of fixed-rate residential mortgage loans, respectively.  Loans are generally sold without recourse and with servicing retained.  At December 31, 2008 we were servicing approximately $132.1   million in loans for which it received servicing income of approximately $352,000   for the year ended December 31, 2008.  As a result of the weakening economy, we have taken a charge of $428,000 against the value of our mortgage servicing income. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 7 to our Consolidated Financials Statements.

 

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Analysis of Loan Portfolio

Set forth below are selected data relating to the composition of our loan portfolio, excluding loans held for sale, by type of loan as of the dates indicated.

		At December 31,
		2008								2007								2006								2005								2004
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
		(Dollars in Thousands)
Real estate loans:
One- to four-family residential (1)		$	46,807				25.6	%		$	50,459				28.7	%		$	40,635				26.2	%		$	40,126				28.2	%		$	41,616				33.1	%
Commercial and agricultural (1)			56,516				30.9				44,100				25.1				39,592				25.6				33,859				23.8				24,587				19.5
Multi-family residential			4,518				2.5				4,741				2.7				5,877				3.8				6,010				4.2				2,207				1.8
Total real estate loans		$	107,841				59.0				99,300				56.5				86,104				55.6				79,995				56.2				68,410				54.4
Commercial and agricultural business loans			35,356				19.3				36,539				20.8				32,837				21.2				28,679				20.2				26,227				20.8
Consumer loans:
Home equity/home improvement			30,002				16.4				30,087				17.1				27,202				17.6				26,382				18.5				24,322				19.3
Automobile			5,842				3.2				5,334				3.0				5,275				3.4				4,580				3.2				4,516				3.6
Other			5,950				3.2				6,402				3.6				5,313				3.4				4,657				3.3				4,380				3.5
Total consumer loans			41,794				22.8				41,823				23.7				37,790				24.4				35,619				25.0				33,218				26.4
Total loans receivable			184,991				101.1				177,662				101.0				156,731				101.2				144,293				101.4				127,855				101.6
Less:
Unearned premium on purchased loans, unearned discount and deferred loan fees, net			109				0.0				29				0.0				29				0.0				175				0.1				174				0.1
Allowance for loan losses			1,934				1.1				1,766				1.0				1,864				1.2				1,846				1.3				1,888				1.5
Total loans receivable, net		$	182,948				100.0	%		$	175,867				100.0	%		$	154,838				100.0	%		$	142,272				100.0	%		$	125,793				100.0	%

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(1)	Includes a portion of real estate construction loans.

 

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One- to Four-Family Mortgage Loans .  Our primary lending activity is the origination of one- to four-family, owner-occupied, residential mortgage loans secured by property located in our market area.  We generate loans through our marketing efforts, existing customers and referrals, real estate brokers, builders and local businesses.  We generally have limited our real estate loan originations to the financing of properties located within our market area.  At December 31, 2008, we had $46.8 million, or 25.6% of our net loan portfolio, invested in mortgage loans secured by one- to four-family residences.

We originate for resale to Freddie Mac fixed-rate residential one- to four-family loans with terms of 15 years or more.  Our fixed-rate mortgage loans amortize monthly with principal and interest due each month.  Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option.  We offer fixed-rate one- to four-family mortgage loans with terms of up to 30 years.

We currently offer adjustable-rate mortgage loans for terms ranging up to 30 years.  We generally offer adjustable-rate mortgage loans that adjust every year from the date of origination, with interest rate adjustment limitations up to two hundred basis points per year and with a cap of up to six hundred basis points on interest rate increases over the life of the loan.  In a rising interest rate environment, such rate limitations may prevent adjustable-rate mortgage loans from repricing to market interest rates, which would have an adverse effect on net interest income.  In the current low interest rate environment the repricing of our adjustable-rate portfolio has resulted in significantly lower interest income from this portion of our loan portfolio.  We have used different interest indices for adjustable-rate mortgage loans in the past, and primarily use the one-year Constant Maturity Treasury Index.  Adjustable-rate mortgage loans secured by residential one- to four-family real estate totaled $10.2 million, or 21.8% of our total one- to four-family residential real estate loans receivable at December 31, 2008.  The origination of fixed-rate mortgage loans versus adjustable-rate mortgage loans is monitored on an ongoing basis and is affected significantly by the level of market interest rates, customer preference, our interest rate gap position and our competitors’ loan products.  During 2008, we originated $29.4 million of fixed-rate residential mortgage loans and $9.3 million of adjustable-rate mortgage and balloon loans.

The primary purpose of offering adjustable-rate mortgage loans is to make our loan portfolio more interest rate sensitive.  However, as the interest income earned on adjustable-rate mortgage loans varies with prevailing interest rates, such loans do not offer predictable cash flows in the same manner as long-term, fixed-rate loans.  Adjustable-rate mortgage loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest rates increase.  It is possible, that during periods of rising interest rates, that the risk of delinquencies and defaults on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrower, resulting in increased loan losses.

Our residential first mortgage loans customarily include due-on-sale clauses, which give us the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as security for the loan.  Due-on-sale clauses are a means of imposing assumption fees and increasing the interest rate on our mortgage portfolio during periods of rising interest rates.

When underwriting residential real estate loans, we review and verify each loan applicant’s income and credit history.  Management believes that stability of income and past credit history are integral parts in the underwriting process.  Generally, the applicant’s total monthly mortgage payment, including all escrow amounts, is limited to 28% of the applicant’s total monthly income.  In addition, total monthly obligations of the applicant, including mortgage payments, should not generally exceed 38% of total monthly income.  Written appraisals are generally required on real estate property offered to secure an applicant’s loan.  For fixed-rate real estate loans with loan to value (“LTV”) ratios of between 80% and 95%, we require private mortgage insurance.  We require fire and casualty insurance on all properties securing real estate loans.  We may require title insurance, or an attorney’s title opinion, as circumstances warrant.

 

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Commercial and Agricultural Real Estate and Multi-Family Residential Real Estate Loans.   We originate commercial and agricultural real estate and multi-family residential real estate loans.  At December 31, 2008, $56.5 million, or 30.9%, of our total loan portfolio consisted of commercial and agricultural real estate loans and $4.5 million, or 2.5%, consisted of multi-family real estate loans.  During 2008, loan originations secured by commercial and agricultural real estate totaled $29.2 million, as compared to $11.0 million in 2007.  Our commercial and agricultural real estate loans are secured primarily by improved properties such as retail facilities and office buildings, farms, churches and other non-residential buildings.  At December 31, 2008, our commercial real estate loan portfolio included $1.3 million in loans secured by churches, $28.5 million in loans secured by land, and $26.7 million in loans secured by other commercial properties.  At December 31, 2008, our largest commercial and agricultural real estate loan was secured by farmland, had a principal balance of $3.1 million and was performing in accordance with its terms.  The maximum LTV ratio for commercial real estate loans we originate is 80%.  The largest commercial real estate loan had a principal balance of $3.0 million, all of which was secured by an office and distribution center.  At December 31, 2008, the largest multi-family residential real estate loan had a principal balance of $2.3 million and was performing in accordance with its terms.

Our underwriting standards for commercial and agricultural real estate and multi-family residential real estate loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.  The income approach is primarily utilized to determine whether income generated from the applicant’s business or real estate offered as collateral is adequate to repay the loan.  In underwriting a loan, we consider the value of the real estate offered as collateral in relation to the proposed loan amount.  Generally, the loan amount cannot be greater than 80% of the value of the real estate.  We usually obtain written appraisals from either licensed or certified appraisers on all multi-family, commercial, and agricultural real estate loans.  We assess the creditworthiness of the applicant by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining other public records regarding the applicant.

Loans secured by commercial, agricultural, and multi-family real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances.  This increased credit risk is a result of several factors, including the effects of general economic conditions on income producing properties and the successful operation or management of the properties securing the loans.  Furthermore, the repayment of loans secured by commercial, agricultural, and multi-family real estate is typically dependent upon the successful operation of the related business and real estate property.  If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

Commercial and Agricultural Business Loans .  We originate commercial and agricultural business loans to borrowers located in our market area which are secured by collateral other than real estate or which can be unsecured.  We also purchase participations of commercial loans from other lenders, which may be outside our market area.  Such business loans are generally secured by equipment and inventory and generally are offered with adjustable rates and various terms of maturity.  We will originate unsecured business loans in those instances where the applicant’s financial strength and creditworthiness has been established.  Commercial and agricultural business loans generally bear higher interest rates than residential loans, but they also may involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower’s business.  We generally obtain personal guarantees from the borrower or a third party as a condition to originating its business loans.  Commercial and agricultural business loans totaled $35.4 million, or 19.3%, of our total loan portfolio at December 31, 2008.  We have increased our originations of business loans in response to customer demand.  During the year ended December 31, 2008, we originated $36.5 million in commercial and agricultural business loans.  At that date, our largest commercial business loan was a $5.0 million line of credit with a principal balance of $2.0 million.  This loan was performing in accordance with its terms at December 31, 2008.

Our underwriting standards for commercial and agricultural business loans include a determination of the applicant’s ability to meet existing obligations and payments on the proposed loan from normal cash flows generated in the applicant’s business.  We assess the financial strength of each applicant through the review of financial statements and tax returns provided by the applicant.  The creditworthiness of an applicant is derived from a review of credit reports as well as a search of public records.  We periodically review business loans following origination. We request financial statements at least annually and review them for substantial deviations or changes that might affect repayment of the loan.  Our loan officers also visit the premises of borrowers to observe the business premises, facilities, and personnel and to inspect the pledged collateral.  Underwriting standards for business loans are different for each type of loan depending on the financial strength of the applicant and the value of collateral offered as security.

 

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Consumer Loans.   As of December 31, 2008, consumer loans totaled $41.8 million, or 22.8%, of our total loan portfolio.  The principal types of consumer loans we offer are home equity loans and automobile loans.  We generally offer consumer loans on a fixed-rate basis.  The largest category of consumer loans in our portfolio consists of home equity loans.  At December 31, 2008, home equity and home improvement loans totaled $30.0 million, or 16.4%, of our total loan portfolio.  Our home equity loans are generally secured by the borrower’s principal residence.  The maximum amount of a home equity line of credit is generally 95% of the appraised value of a borrower’s real estate collateral less the amount of any prior mortgages or related liabilities.  Home equity loans are approved with both fixed and adjustable interest rates which we determine based upon market conditions.  Such loans may be fully amortized over the life of the loan or have a balloon feature.  Generally, the maximum term for home equity loans is 10 years.

The second largest category of consumer loans in our portfolio consists of loans secured by automobiles.  At December 31, 2008, consumer loans secured by automobiles totaled $5.8 million, or 3.2%, our total loan portfolio.  We offer automobile loans with maturities of up to 60 months for new automobiles.  Loans secured by used automobiles will have maximum terms which vary depending upon the age of the automobile.  We generally originate automobile loans with an LTV ratio below the greater of 80% of the purchase price or 100% of NADA loan value, although in the case of a new car loan the LTV ratio may be greater or less depending on the borrower’s credit history, debt to income ratio, home ownership and other banking relationships with us.

Consumer loans entail greater risks than one- to four-family residential mortgage loans, particularly consumer loans secured by rapidly depreciating assets such as automobiles or loans that are unsecured.  In such cases, collateral repossessed after a default may not provide an adequate source of repayment of the outstanding loan balance because of damage, loss or depreciation.  Further, consumer loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Such events would increase our risk of loss on unsecured loans.  Finally, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default.  At December 31, 2008, consumer loans 90 days or more delinquent, including those for which the accrual of interest has been discontinued, totaled $212,000, or 0.51%, of our total consumer loans.

Our underwriting standards for consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.  The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income.  We also consider the length of employment with the borrower’s present employer as well as the amount of time the borrower has lived in the local area.  Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.  Of the consumer loans 90 days or more delinquent, over 50% are secured by one- to four-family real estate, upon which a material loss is not expected to be realized.  The two largest loans in this category total $82,000 and are secured by mortgages on residential real estate.  No assurance can be given, however, that our delinquency rate or loss experience on consumer loans will not increase in the future.

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Loan Maturity Schedule.   The following table sets forth certain information at December 31, 2008 regarding the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity.  Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdraft loans are reported as due in one year or less.

		Within 1 Year				Over 1 Year to 5 Years				Beyond 5 Years				Total
		(In Thousands)
Real estate loans:
One- to four-family real estate		$	3,844			$	13,887			$	29,076			$	46,807
Commercial and agricultural real estate			11,939				10,600				33,977				56,516
Multi-family residential			115				560				3,843				4,518
Commercial and agricultural business loans			17,318				13,452				4,586				35,356
Consumer loans:
Home equity/home improvement			6,601				16,133				7,268				30,002
Automobile			488				5,354				—				5,842
Other			2,411				2,300				1,239				5,950
Total		$	42,716			$	62,286			$	79,989			$	184,991

The following table sets forth at December 31, 2008, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2009.  At December 31, 2008, fixed-rate loans include $18.5 million in fixed-rate balloon payment loans with original maturities of five years or less.  The total dollar amount of fixed-rate loans and adjustable-rate loans due after December 31, 2009, was $78.7 million and $63.6 million, respectively.

		Due after December 31, 2009
		Fixed				Adjustable				Total
		(In Thousands)
Real estate loans:
One- to four-family real estate		$	32,827			$	10,136			$	42,963
Commercial and agricultural real estate			8,690				35,886				44,576
Multi-family real estate			560				3,844				4,404
Commercial and agricultural business loans			11,619				6,419				18,038
Consumer loans			24,970				7,324				32,294
Total loans		$	78,666			$	63,609			$	142,275

Loan Origination, Solicitation and Processing.   Loan originations are derived from a number of sources such as real estate broker referrals, existing customers, borrowers, builders, attorneys and walk-in customers.  Upon receipt of a loan application, a credit report is obtained to verify specific information relating to the applicant’s employment, income, and credit standing.  In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent appraiser approved by the Bank.  A loan application file is first reviewed by a loan officer in our loan department who checks applications for accuracy and completeness, and verifies the information provided.  The financial resources of the borrower and the borrower’s credit history, as well as the collateral securing the loan, are considered an integral part of each risk evaluation prior to approval.  The Board of Directors has established individual lending authorities for each loan officer by loan type.  Loans over an individual officer’s lending limits must be approved by the officers’ loan committee consisting of the chairman of the board, president, chief lending officer and all lending officers, which meets three times a week, and has lending authority up to $500,000 depending on the type of loan.  Loans with a principal balance over this limit, up to $1.0 million, must be approved by the directors’ loan committee, which meets weekly and consists of the chairman of the board, president, senior vice president, chief lending officer and at least two outside directors, plus all lending officers as non-voting members.  The Board of Directors approves all loans with a principal balance over $1.0 million.  The Board of Directors ratifies all loans we originate.  Once the loan is approved, the applicant is informed and a closing date is scheduled.  We typically fund loan commitments within 30 days.

If the loan is approved, the borrower must provide proof of fire and casualty insurance on the property serving as collateral which insurance must be maintained during the full term of the loan; flood insurance is required in certain instances.  Title insurance or an attorney’s opinion based on a title search of the property is generally required on loans secured by real property.

 

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Origination, Purchase and Sale of Loans.   Set forth below is a table showing our loan originations, purchases, sales and repayments for the periods indicated.  It is our policy to originate for sale into the secondary market fixed-rate mortgage loans with maturities of 15 years or more and to originate for retention in our portfolio adjustable-rate mortgage loans and loans with balloon payments.  Purchases consist of participations in loans originated by other financial institutions.  We usually obtain commitments prior to selling fixed-rate mortgage loans.  It is our policy to sell fixed-rate mortgage loans as market conditions permit.

		For the Years Ended December 31,
		2008				2007				2006				2005				2004
		(In Thousands)
Total loans receivable at beginning of year		$	177,662			$	156,731			$	144,293			$	127,855			$	129,480
Originations:
Real estate loans:
One- to four-family residential			38,717				30,104				25,708				31,551				29,599
Commercial and agricultural			29,157				10,972				11,790				16,902				10,821
Multi-family residential			—				—				2,122				5,731				290
Commercial and agricultural business loans			36,477				33,560				34,004				23,434				21,907
Consumer loans:
Home equity/home improvement			20,133				19,309				17,874				19,021				15,009
Automobile			4,188				3,777				4,336				3,697				2,808
Other			5,072				6,360				4,916				4,560				3,805
Total originations			133,744				104,082				100,750				104,896				84,239
Participation loans purchased			3,729				6,231				3,152				4,634				1,700
Transfer of mortgage loans to foreclosed real estate owned			667				819				329				933				999
Repayments			99,400				78,407				74,574				70,891				69,634
Loan sales			30,077				10,156				16,561				21,268				16,931
Total loans receivable at end of year		$	184,991			$	177,662			$	156,731			$	144,293			$	127,855

Loan Origination and Other Fees.   In addition to interest earned on loans, we may charge loan origination fees.  Our ability to charge loan origination fees is influenced by the demand for mortgage loans and competition from other lenders in our market area.  In December 1986, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 91 on the accounting for non-refundable fees and costs associated with originating or acquiring loans.  To the extent that loans are originated or acquired for our portfolio, Statements of Financial Accounting Standards No. 91 requires that we defer loan origination fees and costs and amortize such amounts as an adjustment of yield over the life of the loan by use of the level yield method.  Statements of Financial Accounting Standards No. 91 reduces the amount of revenue recognized by many financial institutions at the time such loans are originated or acquired.  Fees deferred under Statements of Financial Accounting Standards No. 91 are recognized into income immediately upon the sale of the related loan.  At December 31, 2008, we had $26,000 of net deferred loan fees.  Loan origination fees are volatile sources of income.  Such fees vary with the volume and type of loans and commitments made and purchased and with competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money.

In addition to loan origination fees, we also receive other fees and service charges that consist primarily of extension fees and late charges.  We recognized fees and service charges of $54,000, $93,000 and $108,000 for the years ended December 31, 2008, 2007, and 2006, respectively.

Loan Concentrations.   With certain exceptions, an Illinois-chartered savings bank may not make a loan or exceed credit for secured and unsecured loans for business, commercial, corporate or agricultural purposes to a single borrower in excess of 25% of the Jacksonville Savings Bank’s total capital, as defined by regulation.  At December 31, 2008, our loans-to-one borrower limit was $5.7 million.  At December 31, 2008 we had no lending relationships in excess of our loans-to-one borrower limitation.

 

9

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Delinquencies and Classified Assets

Our collection procedures provide that when a mortgage loan is either ten days (in the case of adjustable-rate mortgage and balloon loans) or 15 days (in the case of fixed-rate loans) past due, a computer-generated late charge notice is sent to the borrower requesting payment plus a late charge. If the mortgage loan remains delinquent, a telephone call is made or a letter is sent to the borrower stressing the importance of reinstating the loan and obtaining reasons for the delinquency.  When a loan continues in a delinquent status for 60 days or more, and a repayment schedule has not been made or kept by the borrower, a notice of intent to foreclose upon the underlying property is then sent to the borrower, giving 10 days to cure the delinquency.  If not cured, foreclosure proceedings are initiated.  Consumer loans receive a ten-day grace period before a late charge is assessed.  Collection efforts begin after the grace period expires.  At December 31, 2008, 2007, and 2006 the percentage of nonperforming loans to net loans receivable were 0.65%, 0.62% and 0.87%, respectively.  

At December 31, 2008, 2007, and 2006, the percentage of nonperforming assets to total assets were 0.68%, 0.51%, and 0.56%, respectively.  The increase in the level of nonperforming assets primarily reflects the delinquency and foreclosure of loans secured by residential real estate.  Management believes the increase can be attributed more to unique borrower circumstances rather than the economy in general, and it does not believe the increase is indicative of a trend in asset quality.  The majority of the foreclosed assets have been sold during the first quarter of 2009 without any additional loss.  We have an experienced chief lending officer and collections and loan review departments which monitor the loan portfolio and actively seek to prevent any deterioration of asset quality.

Delinquent Loans and Nonperforming Assets.   Loans are reviewed on a regular basis and are placed on nonaccrual status when, in the opinion of management, the collection of additional interest is doubtful.  Commercial and home equity loans are placed on nonaccrual status when either principal or interest is 90 days or more past due.  Mortgages and other consumer loans are placed on nonaccrual status when either principal or interest is 120 days or more past due.  Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income.  Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectibility of the loan.

Management monitors all past due loans and nonperforming assets.  Such loans are placed under close supervision with consideration given to the need for additional allowance for loan loss, and (if appropriate) partial or full charge-off.  At December 31, 2008, we had $186,000 of loans 90 days or more delinquent that were still accruing interest.

At December 31, 2008, our largest nonperforming loan had a principal balance of $152,000 and was secured by residential real estate.  The property is in the process of foreclosure and management believes that sufficient reserves have been established.

Real estate acquired through foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until such time as it is sold.  When real estate owned is acquired, it is recorded at the lower of the unpaid principal balance of the related loan, or its fair market value, less estimated selling expenses.  Any further write-down of real estate owned is charged against earnings.  At December 31, 2008, we owned $769,000 of property classified as real estate owned.

 

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Delinquent Loans.    The following table sets forth information regarding our delinquent loans and other real estate owned at the dates indicated.  As of the dates indicated, we had immaterial restructured loans within the meaning of Statements of Financial Accounting Standards Nos. 15, 114, and 118.   A t December 31, 2008, loans delinquent 60 to 89 days totaled $592,000, or 0.32% of net loans.

		At December 31,
		2008				2007				2006				2005				2004
		(Dollars in Thousands)
Non-accruing loans:
One- to four-family residential		$	445			$	310			$	435			$	624			$	711
Commercial and agricultural real estate			34				218				759				—				181
Multi-family residential real estate			152				-				-				-				-
Commercial and agricultural business			48				82				45				290				57
Home equity/home improvement			318				89				100				222				652
Automobile			3				12				1				1				68
Other consumer			5				12				8				20				20
Total			1,005				723				1,348				1,157				1,689
Accruing loans delinquent more than 90 days:
One- to four-family residential			163			$	203			$	—			$	2			$	270
Commercial and agricultural real estate			—				156				—				—				—
Commercial and agricultural business			—				—				—				—				23
Automobile			18				—				—				17				4
Other consumer			5				9				4				2				1
Total			186				368				4				21				298
Foreclosed assets:
One- to four-family residential		$	565			$	115			$	37			$	276			$	426
Commercial and agricultural real estate			204				249				115				180				139
Automobile			9				23				—				15				19
Total			778				387				152				471				584
Total non-performing assets		$	1,969			$	1,478			$	1,504			$	1,649			$	2,571
Total as a percentage of total assets			0.68	%			0.51	%			0.56	%			0.65	%			1.01	%

Interest income that would have been recorded under the original terms of loans classified as non-accruing loans totaled approximately $49,000 for the year ended December 31, 2008.  Interest income from such loans that was included in net income for the year ended December 31, 2008 totaled $43,000.

Classified Assets.   Federal and state regulations require that each insured savings institution classify its assets on a regular basis.  In addition, in connection with examination of insured institutions, Federal examiners have authority to identify problem assets and, if appropriate, classify them.  There are three classifications for problem assets:  “substandard,” “doubtful” and “loss.”  Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  For assets classified “substandard” and “doubtful,” the institution is required to establish general loan loss reserves in accordance with accounting principles generally accepted in the United States of America.  Assets classified “loss” must be either completely written off or supported by a 100% specific reserve.  The Bank also maintains a category designated “special mention” which is established and maintained for assets not currently requiring classification but having potential weaknesses or risk characteristics that could result in future problems.  An institution is required to develop an in-house program to classify its assets, including investments in subsidiaries, on a regular basis and set aside appropriate loss reserves on the basis of such classification.  As part of the periodic exams of Jacksonville Savings Bank by the Federal Deposit Insurance Corporation and the Illinois Commissioner of Banks and Real Estate (“Commissioner”), the staff of such agencies reviews our classifications and determine whether such classifications are adequate.  Such agencies have, in the past, and may in the future require us to classify certain assets which management has not otherwise classified or require a classification more severe than established by management.  At December 31, 2008, our classified assets totaled $2.4 million, all of which were classified as substandard.

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Allowance for Loan Losses

Management’s policy is to provide for estimated losses on our loan portfolio based on management’s evaluation of the probable losses that may be incurred.  Management regularly reviews our loan portfolio, including problem loans, to determine whether any loans require classification or the establishment of appropriate reserves or allowances for losses.  Such evaluation, which includes a review of all loans of which full collectibility of interest and principal may not be reasonably assured, considers, among other matters, the estimated net realizable value of the underlying collateral.  Other factors considered by management include the size and risk exposure of each segment of the loan portfolio, present indicators such as delinquency rates and the borrower’s current financial condition, and the potential for losses in future periods.  Management calculates the general allowance for loan losses in part based on past experience.  While current year additions to the general loss allowances are charged against earnings, a portion of general loan loss allowances are added back to capital to the extent permitted in computing risk-based capital under Federal and state regulations.

The level of the allowance for loan losses is based on ongoing, quarterly assessments of the probable estimated losses in the loan portfolio.  Our methodology for assessing the appropriateness of the allowance consists of applying several formula methods to identified problem loans and portfolio segments.  The allowance is calculated by applying loss factors to outstanding loan balances, based on an internal risk grade of such loans or pools of loans.  Changes in risk grades of both performing and nonperforming loans affect the amount of the allowance.  Loss factors are based primarily on historical loss experience over the past five years, and may be adjusted for other significant conditions that, in management’s judgment, affect the collectibility of the loan portfolio.

Since the adequacy of the allowance for loan losses is based upon estimates of probable losses, actual losses can vary significantly from the estimated amounts.  The historical loss factors attempt to reduce this variance by taking into account recent loss experience.  Management evaluates several other conditions in connection with the allowance, including general economic and business conditions, credit quality trends, collateral values, loan volumes and concentrations, seasoning of the portfolio, and regulatory examination results.  Management believes the current balance of the allowance for loan losses is adequate.  Management will continue to monitor the loan portfolio and assess the adequacy of the allowance at least quarterly.

For the years ended December 31, 2008, 2007, and 2006, we provided $310,000, $155,000 and $60,000, respectively, to the allowance for loan losses.  Our allowance for loan losses totaled $1.9 million, $1.8 million and $1.9 million at December 31, 2008, 2007 and 2006, respectively.  Although we maintain our allowance for loan losses at a level which it considers to be adequate to provide for potential losses, there can be no assurance that such losses will not exceed the estimated amounts or that we will not be required to make additions to the allowance for loan losses in the future.  Future additions to our allowance for loan losses and changes in the related ratio of the allowance for loan losses to nonperforming loans are dependent upon the economy, changes in real estate values and interest rates, the view of the regulatory authorities toward adequate loan loss reserve levels, and inflation.  Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary.

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Analysis of the Allowance for Loan Losses.   The following table summarizes changes in the allowance for loan losses by loan categories for each year indicated and additions to the allowance for loan losses, which have been charged to operations.

		For the Years Ended December 31,
		2008				2007				2006				2005				2004
		(Dollars in thousands)
Balance at beginning of year		$	1,766			$	1,864			$	1,846			$	1,888			$	2,186
Charge-offs:
One- to four-family residential			149				165				55				161				179
Commercial and agricultural real estate			—				38				30				53				244
Commercial and agricultural business			—				35				16				8				186
Home equity/home improvement			46				18				101				145				294
Automobile			8				—				2				30				137
Other consumer			3				45				14				36				33
Total			206				301				218				433				1,073
Recoveries:
One- to four-family residential			14				5				78				14				36
Commercial and agricultural real estate			15				6				8				—				119
Commercial and agricultural business			16				—				—				—				12
Home equity/home improvement			4				3				34				98				14
Automobile			5				13				17				17				23
Other consumer			10				21				39				17				21
Total			64				48				176				146				225
Net loans charge-offs			142				253				42				287				848
Additions charged to operations			310				155				60				245				550
Balance at end of year		$	1,934			$	1,766			$	1,864			$	1,846			$	1,888
Total loans outstanding		$	184,991			$	177,662			$	156,731			$	144,293			$	127,855
Average net loans outstanding		$	177,963			$	165,715			$	149,238			$	137,740			$	128,279
Allowance for loan losses as a percentage of total loans at end of year			1.05	%			0.99	%			1.19	%			1.28	%			1.48	%
Net loans charged off as a percent of average net loans outstanding			0.08	%			0.15	%			0.03	%			0.21	%			0.66	%
Ratio of allowance for loan losses to nonperforming loans			162.38	%			161.90	%			137.90	%			156.71	%			95.02	%
Ratio of allowance for loan losses to total nonperforming assets at end of period			98.22	%			119.49	%			123.94	%			111.95	%			73.43	%

 

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Allocation of Allowance for Loan Losses.   The following table sets forth the allocation of allowance for loan losses by loan category at the dates indicated. The table reflects the allowance for loan losses as a percentage of net loans receivable.  Management believes that the allowance can be allocated by category only on an approximate basis.  The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

		At December 31,
		2008								2007								2006
		Amount				% of Loans in Each Category to Net Loans				Amount				% of Loans in Each Category to Net Loans				Amount				% of Loans in Each Category to Net Loans
		(Dollars in Thousands)
One- to four-family residential		$	510				25.6	%		$	595				28.7	%		$	512				26.2	%
Commercial and agricultural real estate			537				30.9				346				25.1				244				25.6
Multi-family residential			12				2.5				28				2.7				37				3.8
Commercial and agricultural business			304				19.3				146				20.8				275				21.2
Home equity/home improvement			301				16.4				465				17.1				561				17.6
Automobile			33				3.2				74				3.0				96				3.4
Other consumer			52				3.2				112				3.6				139				3.4
Unallocated			185				—				—				—				—				—
Total		$	1,934				101.1	%		$	1,766				101.00	%		$	1,864				101.2	%

		At December 31,
		2005								2004
		Amount				% of Loans in Each Category to Net Loans				Amount				% of Loans in Each Category to Net Loans
		(Dollars in Thousands)
One- to four-family residential		$	448				28.2	%		$	520				33.1	%
Commercial and agricultural real estate			199				23.8				198				19.5
Multi-family residential			40				4.2				8				1.8
Commercial and agricultural business			129				20.2				71				20.8
Home equity/home improvement			785				18.5				845				19.3
Automobile			110				3.2				140				3.6
Other consumer			135				3.3				106				3.5
Total		$	1,846				101.4	%		$	1,888				101.6	%

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Investment Activities

Our investment portfolio includes available-for-sale investment securities and mortgage backed securities, other investments, and Federal Home Loan Bank stock.  The portfolio consists primarily of U. S. government and agency securities, along with mortgage-backed securities (discussed below), interest-earning deposits in other financial institutions, Federal funds sold, municipal bonds and Federal Home Loan Bank stock.  Our portfolio of equity investment securities totaled $48,000 at December 31, 2008 consisting of an interest in a local community development corporation and Farmer Mac stock.  In addition, our investment portfolio included $30.0 million of local municipal bonds.  Federal funds sold totaled $460,000 at December 31, 2008.  Our portfolio of U.S. Government and agency Securities totaled $19.8 million at December 31, 2008.  Our holdings of Federal Home Loan Bank stock totaled $1.1 million at December 31, 2008.  We had $393,000 in interest-earning deposits at December 31, 2008 consisting of deposits in the Federal Home Loan Bank and other correspondent accounts.  Total long-term investments at December 31, 2008 were $49.7 million.  We expect our short-term and long-term investment portfolio to continue to change based on liquidity needs associated with loan origination activities.  During the year ended December 31, 2008, we had no investments that were deemed to be other than temporarily impaired.

Under Federal regulations, we are required to maintain a minimum amount of liquid assets that may be invested in specified short-term securities and certain other investments.  Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management’s judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as management’s projections as to the short-term demand for funds to be used in our loan originations and other activities.  Our liquidity ratio at December 31, 2008 was 24.1%, which was adequate to meet our normal business activities.

Mortgage-Backed Securities.   We also invest in mortgage-backed securities issued or guaranteed by the United States Government or agencies thereof.  These securities, which consist primarily of mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, had an amortized cost of $27.4 million, $15.5 million and $8.5 million at December 31, 2008, 2007, and 2006, respectively.  At December 31, 2008, all of the mortgage-backed securities in the investment portfolio had fixed-rates of interest.  The market value of our mortgage-backed securities portfolio was $27.8 million, $15.4 million and $8.2 million at December 31, 2008, 2007, and 2006, respectively, and the weighted average rate as of December 31, 2008, 2007, and 2006 was 4.95%, 4.85% and 4.27%, respectively.

Set forth below is a table showing our purchases, sales and repayments of mortgage-backed securities for the years indicated.

		For the Years Ended December 31,
		2008				2007				2006				2005				2004
		(In Thousands)
Mortgage-backed securities at beginning of year		$	15,415			$	8,210			$	8,646			$	15,171			$	7,597
Purchases			27,733				9,386				1,096				686				12,605
Sales			11,560				456				—				4,556				1,470
Repayments			4,254				1,896				1,485				2,351				3,439
Premium (amortization) accretion			(29	)			2				(25	)			(66	)			(113	)
Net unrealized gain (loss)			490				169				(22	)			(238	)			(9	)
Mortgage-backed securities at end of year		$	27,795			$	15,415			$	8,210			$	8,646			$	15,171

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Investment Securities and Short-Term Investment Portfolio.   The following table sets forth the carrying value of our investment securities portfolio and short-term investments at the dates indicated.  At December 31, 2008, the market value of our short-term investment portfolio approximated its cost.

		At December 31,
		2008				2007				2006				2005				2004
		(In Thousands)
Investment securities:
FHLB stock		$	1,109			$	1,109			$	1,109			$	1,539			$	1,466
Municipal bonds and equity securities			30,045				15,224				5,634				1,199				2,015
U.S. Government and agency securities			19,834				49,962				73,215				78,083				83,192
Total investment securities		$	50,988			$	66,295			$	79,978			$	80,821			$	86,673
Short-term investments:
Interest-earning deposits in other depository institutions		$	393			$	5,130			$	3,127			$	1,444			$	4,793
Federal funds sold			460				—				—				—				—
Total short-term investments		$	853			$	5,130			$	3,127			$	1,444			$	4,793

The following table sets forth the maturities and weighted average yields of our securities portfolio, excluding FHLB stock and equity securities, at December 31, 2008.

 

		Carrying Value at December 31, 2008
		Less than 1 Year				1 to 5 Years				5 to 10 Years				Over 10 Years				Total Investment Securities
		(Dollars in Thousands)
Securities available-for-sale:
U.S. Government and agency securities		$	—			$	6,044			$	12,768			$	1,022			$	19,834
Municipal bonds			146				5,434				16,357				8,060				29,997
Total		$	146			$	11,478			$	29,125			$	9,082			$	49,831
Weighted average yield			4.25	%			3.85	%			4.34	%			4.44	%			4.25	%

Sources of Funds

General.   Deposits and borrowings are our major sources of funds for lending and other investment purposes.  In addition, we derive funds from the repayment and prepayment of loans and mortgage-backed securities, operations, sales of loans into the secondary market, and the sale, call, or maturity of investment securities.  Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions.  Other sources of funds include advances from the FHLB.  For further information see “—Borrowings.”  Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer term basis for general business purposes.

Deposits.   We attract consumer and commercial deposits principally from within our market areas through the offering of a broad selection of deposit instruments including interest-bearing checking accounts, noninterest-bearing checking accounts, savings accounts, money market accounts, term certificate accounts and individual retirement accounts.  We will accept deposits of $100,000 or more and may offer negotiated interest rates on such deposits.  Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.  We regularly evaluate our internal cost of funds, survey rates offered by competing institutions, review our cash flow requirements for lending and liquidity and execute rate changes when deemed appropriate.  We do not obtain funds through brokers, nor do we solicit funds outside our market area.  We have on occasion offered above market interest rates in order to attract deposits.

 

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Deposit Activity

The following table sets forth our deposit activities for the years indicated.

		For the Years Ended December 31,
		2008				2007				2006				2005				2004
		(In Thousands)
Deposits		$	1,264,153			$	1,037,465			$	934,581			$	880,758			$	820,349
Withdrawals			1,278,592				1,030,118				924,401				891,454				833,264
Net increase (decrease) before interest credited			(14,439	)			7,347				10,180				(10,696	)			(12,915	)
Interest credited			6,869				5,461				4,364				3,332				3,476
Net increase (decrease) in deposits		$	(7,570	)		$	12,808			$	14,544			$	(7,364	)		$	(9,439	)

Deposit Portfolio

Our deposits as of December 31, 2008 were represented by the various types of deposit programs described below:

Weighted Average Interest Rate		Minimum Term		Demand Accounts		Minimum Amount				Balances				Percentage of Total Deposits
						(In Thousands)
0.00%		None		Noninterest-bearing checking		$	50			$	19,526				8.20	%
0.35		None		Interest-bearing checking			50				28,381				11.92
0.86		None		Money market deposit accounts			2,500				4,433				1.86
2.15		None		Money market savings account			2,500				22,591				9.49
0.98		None		Savings			50				22,724				9.54
				Certificates of Deposit
3.35		Less than 1 year		Fixed term, fixed rate		$	500			$	106,480				44.71
3.99		1-2 years		Fixed term, fixed rate			500				23,848				10.01
4.12		2-3 years		Fixed term, fixed rate			500				6,108				2.57
4.46		3-4 years		Fixed term, fixed rate			500				2,220				0.93
4.30		Over 4 years		Fixed term, fixed rate			500				1,840				0.77
										$	238,151				100.00	%

 

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Deposit Flow

The following table sets forth the change in dollar amount of savings deposits in the various types of savings accounts we offer between the dates indicated.

		At December 31,
		2008												2007												2006												2005
		Balance				Percent				Change				Balance				Percent				Change				Balance				Percent				Change				Balance				Percent				Change
		(Dollars in Thousands)
Club accounts		$	121				0.05	%		$	(12	)		$	133				0.05	%		$	(13	)		$	146				0.06	%		$	9			$	137				0.06	%		$	11
Noninterest-bearing checking			19,526				8.20				1,466				18,060				7.35				2,947				15,113				6.49				599				14,514				6.65				290
Interest-bearing checking			28,381				11.92				1,097				27,284				11.10				266				27,018				11.60				(238	)			27,256				12.48				19
Savings			22,603				9.49				1,702				20,901				8.51				(1,528	)			22,429				9.63				(6,441	)			28,870				13.29				(960	)
Money market deposit accounts			4,433				1.86				(18	)			4,451				1.81				(814	)			5,265				2.26				(3,515	)			8,780				4.02				(470	)
Money market savings accounts			22,591				9.49				(1,968	)			24,559				10.00				7,719				16,840				7.23				16,840				—				—				—
Certificates of deposit that mature:
Within 12 months			106,480				44.71				(11,795	)			118,275				48.13				10,630				107,645				46.22				7,777				99,868				45.67				(6,499	)
Within 12-36 months			29,956				12.58				2,241				27,715				11.28				(2,136	)			29,851				12.82				2,119				27,732				12.70				(578	)
Beyond 36 months			4,060				1.70				(283	)			4,343				1.77				(4,263	)			8,606				3.69				(2,607	)			11,213				5.13				823
Total		$	238,151				100.00	%		$	(7,570	)		$	245,721				100.00	%		$	12,808			$	232,913				100.00	%		$	14,543			$	218,370				100.00	%		$	(7,364	)

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Large Certificates of Deposit.   The following table indicates the balances of certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 2008.

 

Maturity Period		Certificates of Deposit
		(In Thousands)
Less than 3 months		$	14,655
3-6 months			11,106
6-12 months			24,146
Over 12 months			9,356
Total		$	59,263

Borrowings

Deposits are our primary source of funds for lending and investment activities.  If the need arises, the Bank may rely upon advances from the Federal Home Loan Bank to supplement its supply of available funds and to fund deposit withdrawals.  We typically secure advances from the Federal Home Loan Bank with one- to four-family residential mortgage loans, United States Government and agency securities and mortgage-backed securities.  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 home mortgages, 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, 2008, we had $13.5 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.

The following table sets forth certain information regarding our borrowings for the years indicated.

		For the Years Ended December 31,
		2008				2007				2006				2005				2004
		(In Thousands)
Weighted average rate paid on: (1)
FHLB advances			3.91	%			5.02	%			4.53	%			3.91	%			1.68	%
Other borrowings			1.29	%			4.26	%			4.55	%			3.14	%			1.40	%
FHLB advances:
Maximum balance		$	21,000			$	18,000			$	10,000			$	15,500			$	9,000
Average balance		$	12,029			$	8,629			$	6,103			$	8,071			$	2,993
Other:
Maximum balance		$	7,633			$	5,838			$	5,035			$	3,350			$	3,372
Average balance		$	6,031			$	4,665			$	3,499			$	2,116			$	2,185

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(1)  Calculated using the daily weighted average interest rates.

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The following table summarizes significant contractual obligations and other commitments at December 31, 2008.

		At December 31, 2008
		Less than 1 year				1-3 years				3-5 years				More than 5 years				Total
		(In Thousands)
Time deposits		$	106,480			$	29,956			$	4,060			$				$	140,496
FHLB advances			13,500				—				—				—				13,500
Other borrowings			7,633				—				—				—				7,633
Total contractual obligations		$	127,613			$	29,956			$	4,060			$	—			$	161,629

Trust Services

We operate a full-service trust department.  As of December 31, 2008, our trust department was managing $48.9 million in trust assets.  Trust fees collected in 2008 and 2007 totaled $221,000 and $104,000, respectively.  The increase in fees is due to both asset growth and additional trust work performed during 2008.

Subsidiary Activities

Jacksonville Savings Bank has one wholly owned subsidiary, Financial Resources Group, Inc. (“Financial Resources”), an Illinois corporation.  Financial Resources is engaged in the business of originating commercial business loans and commercial real estate loans.  In addition, Financial Resources operates an investment center engaged in the business of buying and selling stocks, bonds, annuities and mutual funds for its customers’ accounts.  At December 31, 2008, we had $3.2 million in equity and retained earnings in Financial Resources.  For the year ended December 31, 2008, Financial Resources had net income of $365,000.

Competition

We encounter significant competition both in attracting deposits and in originating real estate and other loans.  Our most direct competition for deposits has come historically 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 savings by offering depositors a high level of personal service and expertise together with a wide range of financial services.

The competition for real estate and other loans comes principally from commercial banks, mortgage banking companies 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 expand mortgage loan originations.

We compete for loans primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides 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.

Our market areas consist of Morgan, Macoupin, and Montgomery Counties, Illinois.  Our market areas have a number of financial institutions, however, we are the largest independent financial institution headquartered in Jacksonville.

 

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REGULATION AND SUPERVISION

General.   Jacksonville Bancorp, Inc. and Jacksonville Bancorp, MHC are nondiversified savings and loan holding companies within the meaning of the Home Owners’ Loan Act.  As such, they are registered with the Office of Thrift Supervision and are subject to regulation by the Office of Thrift Supervision.  Jacksonville Savings Bank is an Illinois-chartered savings bank subject to extensive regulation by the Illinois Commissioner of Banks and Real Estate (the “Commissioner”) 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 Commissioner 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 Commissioner 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 Board of Governors of the Federal Reserve (the “FRB”).  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 Commissioner, the Federal Deposit Insurance Corporation, or Congress could have a material impact on the operations of Jacksonville Savings Bank.  Certain of the regulatory requirements applicable to Jacksonville Savings Bank are referred to below or elsewhere herein.

Capital Maintenance.   Under Federal Deposit Insurance Corporation regulations, Jacksonville Savings Bank must maintain minimum levels of capital.  The regulations establish a minimum leverage capital requirement of not less than 3% core capital to total assets for banks in the strongest financial and managerial condition, with the highest supervisory rating of the federal regulators for banks.  For all other banks, the minimum leverage capital requirement is between 4% and 5% of total assets.  Core capital is composed of the sum of common stockholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets (other than qualifying mortgage servicing rights and qualifying supervisory intangible core deposits), identified losses, investments in certain subsidiaries, and unrealized gains (losses) on investment securities.

The Federal Deposit Insurance Corporation also requires that savings banks meet a risk-based capital standard.  The risk-based capital standard requires the maintenance of total capital (which is defined as core capital and supplementary capital) to risk weighted assets of 8.0%.  In determining the amount of risk-weighted assets, all assets, including certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the federal regulators believe are inherent in the type of asset.  The components of core capital are equivalent to those discussed earlier under the 3% leverage requirement.  The components of supplementary capital currently include cumulative perpetual preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and allowance for loan and lease losses.  Allowance for loan and lease losses includible in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.  Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital.  At December 31, 2008, the Bank exceeded its applicable capital requirements.

Illinois Savings Bank Regulation.   As an Illinois-chartered savings bank, Jacksonville Savings Bank is subject to regulation and supervision by the Commissioner.  The Commissioner’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.  Jacksonville Savings Bank is required to file periodic reports with, and is subject to periodic examinations at least once within every 18-month period by the Commissioner.  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.

 

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Under Illinois law, savings banks are required to maintain a minimum core capital to total assets ratio of 3%.  The Commissioner is authorized to require a savings bank to maintain a higher minimum capital level if the Commissioner determines that the savings bank’s financial condition or history, management or earnings prospects are not adequate.  If a savings bank’s core capital ratio falls below the required level, the Commissioner may direct the savings bank to adhere to a specific written plan established by the Commissioner to correct the savings bank’s capital deficiency, as well as a number of other restrictions on the savings bank’s operations, including a prohibition on the declaration of dividends by the savings bank’s board of directors.

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 Commissioner.  With the prior written consent of the Commissioner, 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 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, 2008, 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 institutions, such as the 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 Commissioner of Banks and Real Estate.

An Illinois-chartered savings bank may not make a loan to a person owning 10% or more of its stock, an affiliated person, an agent or an attorney of the savings bank, either individually or as an agent or partner of another, except under the rules of the Commissioner and regulations of the Federal Deposit Insurance Corporation.  This restriction does not apply, however, to loans made (i) on the security of single-family residential property used by the borrower as his or her residence, and (ii) to a non-profit, religious, charitable or fraternal organization or a corporation in which the savings bank has been authorized to invest by the Commissioner.  Furthermore, a savings bank may not purchase, lease or acquire a site for an office building or an interest in real estate from an officer, director, employee or the holder of more than 10% of the savings bank’s stock or certain affiliated persons as set forth in Illinois law, unless the prior written approval of the Commissioner is obtained.

Illinois law provides that any depository institution may merge into a savings bank operating under the Illinois Savings Bank Act.  The Board of Directors of each merging institution must approve a plan of merger by resolution adopted by majority vote of all members of the respective boards.  After such approval, the plan of merger must be submitted to the Commissioner for approval.  The Commissioner may make an examination of the affairs of each merging institution (and their affiliates).  The Commissioner shall not approve a merger agreement unless he finds that, among other things, (i) the resulting institution meets all requirements of the Illinois Savings Bank Act; (ii) the merger agreement is fair to all persons affected; and (iii) the resulting institution will be operated in a safe and sound manner.  If approved by the Commissioner, the plan of merger must be submitted to stockholders of the depository institution for approval, and may be required to be submitted to members if a mutual savings bank is one of the constituent entities.  A two-thirds affirmative vote is required for approval of the plan of merger.

 

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Insurance of Deposit Accounts

Our deposit accounts are insured by the Federal Deposit Insurance Corporation, generally up to a maximum of $100,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts.  However, pursuant to its statutory authority, the Board of the Federal Deposit Insurance Corporation recently increased the deposit insurance available on deposit accounts to $250,000 effective until December 31, 2009.  Our deposits are subject to Federal Deposit Insurance Corporation deposit insurance assessments. The Federal Deposit Insurance Corporation has adopted a risk-based system for determining deposit insurance assessments.

The Federal Deposit Insurance Corporation imposes an assessment against institutions for deposit insurance.  This assessment is based on the risk category of the institution and ranges from 5 to 43 basis points of the institution’s deposits.  On October 16, 2008, the Federal Deposit Insurance Corporation published a proposed rule that would raise the current deposit insurance assessment rates uniformly for all institutions by 7 basis points (to a range from 12 to 50 basis points) for the first quarter of 2009.  Effective April 1, 2009, the rulemaking proposes to alter the way in which the FDIC’s risk based assessment system differentiates for risk and sets new deposit insurance rates.

Under the proposed rule, the Federal Deposit Insurance Corporation would first establish an institution’s initial base assessment rate.  This initial base assessment rate would range, depending on the risk category of the institution, from 10 to 45 basis points.  The Federal Deposit Insurance Corporation would then adjust the initial base assessment (higher or lower) to obtain the total base assessment rate.  The adjustments to the initial base assessment rate would be based upon an institution’s levels of unsecured debt, secured liabilities, and brokered deposits.  The total base assessment rate would range from 8 to 77.5 basis points of the institution’s deposits.

On December 22, 2008, the FDIC published a final rule raising the current deposit insurance assessment rates uniformly for all institutions by 7 basis points (to a range from 12 to 50 basis points) for the first quarter of 2009. However, the FDIC approved an extension of the comment period on the parts of the proposed rulemaking that would become effective on April 1, 2009. The FDIC expects to issue a second final rule early in 2009, to be effective April 1, 2009, to change the way that the FDIC’s assessment system differentiates for risk and to set new assessment rates beginning with the second quarter of 2009.

 

On February 27, 2009, the FDIC adopted a final rule modifying the risk-based assessment system and setting initial base assessment rates beginning April 1, 2009, at 12 to 45 basis points.  Due to extraordinary circumstances, they also extended the period of the restoration plan to seven years.  On this same date, the FDIC  adopted an interim rule with request for comments imposing an emergency 20 basis point special assessment on June 30, 2009, which will be collected on September 30, 2009, and allowing the FDIC’s Board to impose possible additional special assessments of up to 10 basis points thereafter to maintain public confidence in the Deposit Insurance Fund.  The FDIC has indicated that it would reduce the level of the special assessment to 10 basis points if Congress approves legislation to expand the FDIC’s borrowing capacity.

 

Insurance of deposits may be terminated by the FDIC upon a finding that an 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 condition imposed by the FDIC. We do not know of any practice, condition or violation that might lead to termination of deposit insurance.

 

In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation.  The bonds issued by the FICO are due to mature in 2017 through 2019.  For the quarter ended September 30, 2008, the annualized FICO assessment was equal to 1.12 basis points for each $100 in domestic deposits maintained at an institution.

 

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In October 2008, the FDIC announced the Temporary Liquidity Guarantee Program, under which any participating depository institution would be able to provide full deposit insurance coverage for non-interest bearing transaction accounts, regardless of the dollar amount.  Under the program, effective November 14, 2008, insured depository institutions that have not opted out of the FDIC Temporary Liquidity Guarantee Program will be subject to a 0.10% surcharge applied to non-interest bearing transaction deposit account balances in excess of $250,000, which surcharge will be added to the institution’s existing risk-based deposit insurance assessments.  We have chosen to participate in the FDIC Temporary Liquidity Guaranty Program.

 

Community Reinvestment Act

Federal Regulation .  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.

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.  We will be subject to further reporting and audit requirements beginning with the year ending December 31, 2009 under the requirements of the Sarbanes-Oxley Act.  We have prepared policies, procedures and systems designed to ensure compliance with these regulations.

Holding Company Regulation

Permitted Activities .  Pursuant to Section 10(o) of the Home Owners’ Loan Act and Office of Thrift Supervision regulations and policy, a mutual holding company and a federally chartered mid-tier holding company such as Jacksonville Bancorp, Inc. may engage in the following activities: (i) investing in the stock of a savings association; (ii) acquiring a mutual association through the merger of such association into a savings association subsidiary of such holding company or an interim savings association subsidiary of such holding company; (iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association; (iv) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (v) furnishing or performing management services for a savings association subsidiary of such company; (vi) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (vii) holding or managing properties used or occupied by a savings association subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; (x) any activity permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act, including securities and insurance underwriting; and (xi) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Director of the Office of Thrift Supervision.  If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed in (i) through (xi) above, and has a period of two years to cease any nonconforming activities and divest of any nonconforming investments.

 

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The Home Owners’ Loan Act prohibits a savings and loan holding company, including Jacksonville Bancorp, Inc. and Jacksonville Bancorp, MHC, directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company thereof, without prior written approval of the Office of Thrift Supervision.  It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary savings institution, a nonsubsidiary holding company, or a nonsubsidiary company engaged in activities other than those permitted by the Home Owners’ Loan Act; or acquiring or retaining control of an institution that is not federally insured.  In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.

The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions.  The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

FEDERAL AND STATE TAXATION

Federal Taxation.   For federal income tax purposes, Jacksonville Bancorp files a federal income tax return based upon a tax year ended December 31.  Because Jacksonville Bancorp, MHC owns less than 80% of the outstanding Common Stock of Jacksonville Bancorp, it is not permitted to file a consolidated federal income tax return with Jacksonville Bancorp.  Since at December 31, 2008, Jacksonville Bancorp, MHC has no assets other than the stock of Jacksonville Bancorp and $857,000 in cash, and a $186,000 investment in the local Bankers’ Bank, it will have no material federal income tax liability.

Jacksonville Bancorp, MHC and Jacksonville Bancorp are subject to the rules of federal income taxation generally applicable to corporations under the Internal Revenue Code.  Most corporations are not allowed to make tax deductible additions to bad debt reserves under the Internal Revenue Code.  However, banks are allowed to compute a tax deductible bad debt reserve based on their historical loss experience.  Historically, banks were also allowed to compute tax bad debt reserves using a percentage of taxable income.  The tax law was changed in 1987 and 1996 so that now Jacksonville Bancorp is allowed to maintain a tax deductible bad debt reserve at the greater of the amount computed using the experience method or the amount of the bad debt reserve at December 31, 1987 (base year).  Jacksonville Bancorp has taken advantage of this tax benefit in computing its tax deductible bad debt reserve and maintains a tax bad debt reserve equal to the tax bad debt reserve at the base year.

Deferred income taxes arise from the recognition of certain items of income and expense for tax purposes in years different from those in which they are recognized in the consolidated financial statements.

Jacksonville Savings Bank has not been audited by the Internal Revenue Service for the last five years.  For additional information regarding taxation, see Note 11 of Notes to Consolidated Financial Statements.

Illinois Taxation.   The State of Illinois imposes a tax on the Illinois taxable income of corporations, including savings banks, at the rate of 7.30%.  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.

 

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Personnel

As of December 31, 2008, Jacksonville Savings Bank and its subsidiary had a total of 97 full-time and 15 part-time employees.  None of Jacksonville Savings Bank’s employees is represented by a collective bargaining group.  Management believes that it has good working relations with its employees.

Availability of Annual Report on Form 10-K

Our Annual Report on Form 10-K is available on our website at www.Jacksonvillesavings.com .  Information on the website is not incorporated into, and is not otherwise considered a part of, this Annual Report on Form 10-K.

 

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ITEM 1A.       Risk Factors

 

In addition to risk disclosed elsewhere in this Annual Report, the following are risks associated with our business and operations.

Our Non-Interest Expense Will Increase As A Result Of Increases In FDIC Insurance Premiums

The Federal Deposit Insurance Corporation (“FDIC”) imposes an assessment against institutions for deposit insurance.  This assessment is based on the risk category of the institution and currently ranges from 5 to 43 basis points of the institution’s deposits.  Federal law requires that the designated reserve ratio for the deposit insurance fund be established by the FDIC at 1.15% to 1.50% of estimated insured deposits.  If this reserve ratio drops below 1.15% or the FDIC expects that it to do so within six months, the FDIC must, within 90 days, establish and implement a plan to restore the designated reserve ratio to 1.15% of estimated insured deposits within five years (absent extraordinary circumstances).

Recent bank failures coupled with deteriorating economic conditions have significantly reduced the deposit insurance fund’s reserve ratio.  As of June 30, 2008, the designated reserve ratio was 1.01% of estimated insured deposits at March 31, 2008.  As a result of this reduced reserve ratio, on October 16, 2008, the FDIC published a proposed rule that would restore the reserve ratios to its required level.  The proposed rule would raise the current deposit insurance assessment rates uniformly for all institutions by 7 basis points (to a range from 12 to 50 basis points) for the first quarter of 2009.  On December 22, 2008, the FDIC published a final rule adopting this proposed rate for the first quarter of 2009.

On February 27, 2009, the FDIC adopted a final rule modifying the risk-based assessment system and setting initial base assessment rates beginning April 1, 2009, at 12 to 45 basis points.  The FDIC would then adjust the initial base assessment (higher or lower) to obtain the total base assessment rate.  The adjustments to the initial base assessment rate would be based upon an institution’s levels of unsecured debt, secured liabilities, and brokered deposits.  The total base assessment rate would range from 7 to 77.5 basis points of the institution’s deposits.  In addition, the FDIC adopted an interim rule with request for comments imposing an emergency 20 basis point special assessment on June 30, 2009, which will be collected on September 30, 2009, and allowing the FDIC’s Board to impose possible additional special assessments of up to 10 basis points thereafter to maintain public confidence in the Deposit Insurance Fund.  The FDIC has indicated that it would reduce the level of the special assessment to 10 basis points if Congress approves legislation to expand the FDIC’s borrowing capacity.

 

In addition, the Emergency Economic Stabilization Act of 2008 (EESA) temporarily increased the limit on FDIC insurance coverage for deposits to $250,000 through December 31, 2009, and the FDIC took action to provide coverage for newly-issued senior unsecured debt and non-interest bearing transaction accounts in excess of the $250,000 limit, for which institutions will be assessed additional premiums.

These actions will significantly increase our non-interest expense in 2009 and in future years as long as the increased premiums are in place.

Changing Interest Rates May Cause Net Earnings to Decline

As market interest rates rise, we will have competitive pressures to increase the rates that are paid on deposits, which may result in a decrease in net interest income.  Furthermore, the value of our loans will be less should we choose to sell such loans in the secondary market.  Since as a general matter our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would result in a decrease in our average interest rate spread and net interest income.

If the Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease

Loan customers may not repay their loans according to their terms, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance.  We may experience significant loan losses, which could have a material adverse effect on our operating results.  Management makes various assumptions and judgments about the collectibility 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 our loans.

 

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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.  In addition, federal and state regulators periodically review our allowance for loan losses and may require an increase to the provision for loan losses or recognize loan charge-offs.

If Economic Conditions Deteriorate, Earnings Could be Adversely Impacted as Borrowers’ Ability to Repay Loans Declines and the Value of the Collateral Securing Our Loans Decreases

Our financial results may be adversely affected by changes in prevailing economic conditions, including decreases in real estate values, changes in interest rates which may cause a decrease in interest rate spreads, adverse employment conditions, the monetary and fiscal policies of the federal government and other significant external events.  Since we have a significant amount of loans secured by real estate, decreases in real estate values could adversely affect the value of property used as collateral.  Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on earnings.

If the Company Were Unable to Borrow Funds Through Access to Capital Markets, 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.  The liquidity of the Company 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.  The Company regularly monitors our overall liquidity position to ensure various alternative strategies exist to cover unanticipated events that could affect liquidity.  The Company also establishes policies and monitors 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.  The 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 FHLB advances and federal funds purchased, and the issuance of preferred or common securities.  The Bank can also borrow from the Federal Reserve’s discount window.

If Our Stock Price Declines From Levels at December 31, 2008, We Will Evaluate Our Goodwill Balances for Impairment, and If the Values of Our Businesses Have Declined, We Could Recognize an Impairment Charge for Our Goodwill

We performed an annual goodwill assessment as of September 30, 2008, and an updated assessment as of December 31, 2008.  Based upon on our analyses, we concluded that the fair value of capital exceeded the fair value of our assets and liabilities and, therefore, goodwill was not considered impaired at any of those dates.  It is possible that our 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 effect on our financial position and future results of operations.

 

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We Could Experience Further Impairment Losses on the Value Related to Our Mortgage Servicing Rights

Mortgage servicing rights fair values are very 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.  At December 31, 2008, we recognized an impairment loss related to our mortgage servicing rights of $428,000.

Public Shareholders Do Not Exercise Voting Control Over Us

A majority of our voting stock is owned by Jacksonville Bancorp, MHC.  Jacksonville Bancorp, MHC is controlled by its board of directors, who consist of those persons who are members of the board of directors of Jacksonville Bancorp, Inc. and Jacksonville Savings Bank.  Jacksonville Bancorp, MHC elects all members of the board of directors of Jacksonville Bancorp, Inc., and, as a general matter, controls the outcome of all matters presented to the stockholders of Jacksonville Bancorp, Inc. for resolution by vote, except for matters that require a vote greater than a majority vote.  Consequently, Jacksonville Bancorp, MHC, acting through its board of directors, is able to control the business and operations of Jacksonville Bancorp, Inc. and may be able to prevent any challenge to the ownership or control of Jacksonville Bancorp, Inc. by stockholders other than Jacksonville Bancorp, MHC.  There is no assurance that Jacksonville Bancorp, MHC will not take actions that the public stockholders believe are against their interests.

Strong Competition Within Our Market Area May Limit Our 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, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we do and may offer certain services that we do not or cannot provide.  Our profitability depends upon the continued ability to compete successfully.

 

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ITEM 1B.       Unresolved Staff Comments

 

Not applicable.

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, Chapin, and Concord, Illinois.  The following table sets forth certain information concerning the main office and each branch office at December 31, 2008.  At December 31, 2008, our premises and equipment had an aggregate net book value of approximately $6.1 million.  We believe that our branch facilities are adequate to meet the present and immediately foreseeable needs.  All facilities are owned.

				Net
				Book Value
		Year		at December 31,
Location		Occupied		2008
				(In Thousands)
Main Office
1211 West Morton Avenue
Jacksonville, Illinois		1994		$	3,972
Branch Office
211 West State Street
Jacksonville, Illinois		1961			621
Branch Office
903 South Main
Jacksonville, Illinois		1989			203
Branch Office
501 North State Street
Litchfield, Illinois		1997			605
Branch Office
100 North Dye
Virden, Illinois		1986			204
Branch Office
510 Superior
Chapin, Illinois		2000			471
Branch Office
202 State
Concord, Illinois		2000			31

 

ITEM 3.       Legal Proceedings

 

There are various claims and lawsuits in which we are periodically involved incident to our business.  In the opinion of management after consultation with legal counsel, such claims and lawsuits in the aggregate are immaterial to our financial condition and results of operations.

ITEM 4.       Submission of Matters to a Vote of Security Holders

 

None.

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PART II

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, 2008 (the “2008 Annual Report to Stockholders”) is filed as an exhibit to this Form 10-K and is incorporated herein by reference.  We did not purchase any shares of our common stock during the fourth quarter of 2008.

Set forth below is information as of December 31, 2008 regarding equity compensation plans. The plans that have been approved by the stockholders are the 1996 Stock Option Plan and 2001 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.

 

Plan	Number of securities to be issued upon exercise of outstanding options and rights	Weighted average exercise price	Number of securities remaining available for issuance under plan
Equity compensation plans approved by stockholders	34,445	10.65	3,300
Equity compensation plans not approved by stockholders	-	-	-
Total	34,445	10.65	3,300

ITEM 6.       Selected Financial Data

 

The “Selected Consolidated Financial Information” section of the 2008 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.

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 2008 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.

ITEM 7A.         Quantitative and Qualitative Disclosure about Market

 

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2008 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.

ITEM 8.       Financial Statements and Supplementary Data

 

The material identified in Item 15(a)(1) hereof is incorporated herein by reference.

ITEM 9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

ITEM 9A.         Controls and Procedures

 

(a)      Evaluation of disclosure controls and procedures.

 

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Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days prior to filing date of this report, that our disclosure controls and procedures (as defined by the Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions’ rules and forms.

(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, 2008, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on that assessment, management concludes that, as of December 31, 2008, the Company’s internal control over financial reporting is effective.

(c)      Changes in internal controls.

There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of the foregoing evaluation.

ITEM 9B.          Other Information

 

None.

PART III

ITEM 10.          Directors, Executive Officers and Corporate Governance

 

Information concerning our directors and certain officers is incorporated by reference hereunder in the Proxy Statement for the 2009 Annual Meeting.

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ITEM 11.     Executive Compensation

 

Information with respect to management compensation required under this item is incorporated by reference hereunder in the Proxy Statement for the 2009 Annual Meeting.

ITEM 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

Information required under this item is incorporated by reference to the Proxy Statement for the 2009 Annual Meeting.

ITEM 13.     Certain Relationships and Related Transactions and Director Independence

 

Information required under this item is incorporated by reference to the Proxy Statement for the 2009 Annual Meeting.

ITEM 14.     Principal Accountant Fees and Services

 

Information required under this item is incorporated by reference to the Proxy Statement for the 2009 Annual Meeting.

PART IV

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, 2008 and 2007;
	(C)	Consolidated Statements of Income - years ended December 31, 2008, 2007 and 2006;
	(D)	Consolidated Statements of Stockholders’ Equity - years ended December 31, 2008, 2007 and 2006;
	(E)	Consolidated Statements of Cash Flows - years ended December 31, 2008, 2007 and 2006; and
	(F)	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
	3	Federal Charter and Bylaws (1)
	4	Stock Certificate of Jacksonville Bancorp, Inc. (1)
	10.1	Employment Agreement between Jacksonville Savings Bank and Andrew F. Applebee

 

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	10.2	Employment Agreement between Jacksonville Savings Bank and Richard A. Foss (1)
	10.3	Employment Agreement between Jacksonville Savings Bank and John C. Williams (1)
	10.4	Jacksonville Savings Bank 1996 Stock Option Plan (2)
	10.5	Jacksonville Savings Bank 2001 Stock Option Plan (2)
	10.6	Amendments to the Jacksonville Savings Bank Stock Option Plans (1)
	13	2008 Annual Report to Stockholders
	14	Code of Ethics (3)
	21	Subsidiaries
	23	Consent of BKD LLP to incorporate financial statements into Registration Statement 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.

___________________

(1)	Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2008 (File No. 000-49792).
(2)	Incorporated by reference to the registration statement on Form S-8 filed with the Securities and Exchange Commission on February 2, 2004 (File No. 333-112420).
(3)	Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-49792).

 

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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 20, 2009	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.

By:	/s/ Richard A. Foss		By:	/s/ Andrew F. Applebee
	Richard A. Foss, President,			Andrew F. Applebee, Chairman of the Board
	Chief Executive Officer and Director
Date: March 20, 2009			Date: March 20, 2009
By:	/s/ Diana S. Tone		By:	/s/ Dean H. Hess
	Diana S. Tone			Dean H. Hess, Director
	Chief Financial Officer
Date: March 20, 2009			Date: March 20, 2009
By:	/s/ John L. Eyth		By:	/s/ Emily J. Osburn
	John L. Eyth, Director			Emily J. Osburn, Director
Date: March 20, 2009			Date: March 20, 2009
By:	/s/ Harmon B. Deal III		By:	/s/ John C. Williams
	Harmon B. Deal, III, Director			John C. Williams, Director
				Senior Vice President and Trust Officer
Date: March 20, 2009			Date: March 20, 2009

By:	/s/ John M. Buchanan
	John M. Buchanan, Director

Date: March 20, 2009

 

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EXHIBIT INDEX

 

3	Federal Charter and Bylaws (1)
4	Stock Certificate of Jacksonville Bancorp, Inc. (1)
10.1	Employment Agreement between Jacksonville Savings Bank and Andrew F. Applebee
10.2	Employment Agreement between Jacksonville Savings Bank and Richard A. Foss (1)
10.3	Employment Agreement between Jacksonville Savings Bank and John C. Williams (1)
10.4	Jacksonville Savings Bank 1996 Stock Option Plan (2)
10.5	Jacksonville Savings Bank 2001 Stock Option Plan (2)
10.6	Amendments to the Jacksonville Savings Bank Stock Option Plans (1)
13	2008 Annual Report to Stockholders
14	Code of Ethics (3)
21	Subsidiaries
23	Consent of BKD LLP to incorporate financial statements into Registration Statement 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.

___________________

(1)	Incorporated by reference to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2008 (File No. 000-49792).
(2)	Incorporated by reference to the registration statement on Form S-8 filed with the Securities and Exchange Commission on February 2, 2004 (File No. 333-112420).
(3)	Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-49792).