UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-K
 
 (Mark
One)
 
 T
                ANNUAL
      REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
 
 For the
fiscal ended December 31, 2008.
 or
 *
                TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For the
transition period from ______________ to ______________.
 
 Commission
file number: 000-49792
 
 
 JACKSONVILLE BANCORP,
INC.
 (Exact
name of registrant as specified in its charter)
 
 Federal
                  33-1002258(State
      or other jurisdiction of
                  (I.R.S.
      Employerincorporation
      or organization)
                  Identification
      Number)
 
 1211 West Morton Avenue, Jacksonville,
      Illinois
                62650(Address
      of principal executive offices)
                (Zip
      Code)
 
 Registrant's
telephone number, including area code:  (217)
245-41111
 
 Securities
registered pursuant to Section 12(b) of the Act:
 
 Title of each class
                Name of each exchange on which
      registeredCommon
      Stock, $0.01 par value
                The
      NASDAQ Stock Market, LLC
 
 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
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 YES x                      NO
o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.x
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
 
 Large
      accelerated filer o
                Accelerated
      filer  oNon-accelerated
      filer  o
                Smaller
      reporting company  x
 (Do not
check if a smaller reporting company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).   YES o     NO
x
  
  The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the last sale price
on June 30, 2008, as reported by the Nasdaq Capital Market, was approximately
$9.6 million.
 
 As of
March 1, 2009, there was issued and outstanding 1,920,817 shares of the
Registrant’s Common Stock.
 
 DOCUMENTS
INCORPORATED BY REFERENCE:
 
 (1)
                Proxy
      Statement for the 2009 Annual Meeting of Stockholders of the Registrant
      (Part III).(2)
                Annual
      Report to Stockholder (Part II and
IV).
 
 
 
 TABLE OF
CONTENTS
 
 ITEM 1.
                Business
                1ITEM 1A.
                Risk Factors
                27ITEM 1B.
                Unresolved Staff Comments
                30ITEM 2.
                Properties
                30ITEM3.
                Legal Proceedings
                30ITEM 4.
                Submission of Matters to a Vote of Security
      Holders
                30ITEM 5.
                Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                31ITEM 6.
                Selected Financial Data
                31ITEM 7.
                Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                31ITEM 7A.
                Quantitative and Qualitative Disclosure about
      Market
                31ITEM 8.
                Financial Statements and Supplementary
    Data
                31ITEM 9.
                Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                31ITEM 9A.
                Controls and Procedures
                31ITEM 9B.
                Other Information
                32ITEM 10.
                Directors, Executive Officers and Corporate
      Governance
                32ITEM 11.
                Executive Compensation
                33ITEM 12.
                Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                33ITEM 13.
                Certain Relationships and Related Transactions and Director
      Independence
                33ITEM 14.
                Principal Accountant Fees and Services
                33ITEM 15.
                Exhibits and Financial Statement
    Schedules
                33
 
 
  PART I
 
 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.
  
  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
$185.0million, of
which $46.8million,
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,
$30.0million, 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 $185.0million from $177.7
million at December 31, 2007. One-to-four family
residential real estate loans decreased $3.7 million (7.2%) andcommercial and
agricultural real estate loans increased$12.4 million (28.2%)
during 2008.
  2
  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
$30.1million and$10.2million
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 $132.1million in loans for which
it received servicing income of approximately $352,000for 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.
  3
 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
                
                
                2004Amount
                
                
                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
                
                
                
                19.5Multi-family
      residential
                
                
                4,518
                
                
                
                2.5
                
                
                
                4,741
                
                
                
                2.7
                
                
                
                5,877
                
                
                
                3.8
                
                
                
                6,010
                
                
                
                4.2
                
                
                
                2,207
                
                
                
                1.8Total
      real estate loans
                
                $
                107,841
                
                
                
                59.0
                
                
                
                99,300
                
                
                
                56.5
                
                
                
                86,104
                
                
                
                55.6
                
                
                
                79,995
                
                
                
                56.2
                
                
                
                68,410
                
                
                
                54.4Commercial
      and agricultural business loans
                
                35,356
                
                
                
                19.3
                
                
                
                36,539
                
                
                
                20.8
                
                
                
                32,837
                
                
                
                21.2
                
                
                
                28,679
                
                
                
                20.2
                
                
                
                26,227
                
                
                
                20.8Consumer
      loans:Home
      equity/home improvement
                
                
                30,002
                
                
                
                16.4
                
                
                
                30,087
                
                
                
                17.1
                
                
                
                27,202
                
                
                
                17.6
                
                
                
                26,382
                
                
                
                18.5
                
                
                
                24,322
                
                
                
                19.3Automobile
                
                
                5,842
                
                
                
                3.2
                
                
                
                5,334
                
                
                
                3.0
                
                
                
                5,275
                
                
                
                3.4
                
                
                
                4,580
                
                
                
                3.2
                
                
                
                4,516
                
                
                
                3.6Other
                
                
                5,950
                
                
                
                3.2
                
                
                
                6,402
                
                
                
                3.6
                
                
                
                5,313
                
                
                
                3.4
                
                
                
                4,657
                
                
                
                3.3
                
                
                
                4,380
                
                
                
                3.5Total
      consumer loans
                
                
                41,794
                
                
                
                22.8
                
                
                
                41,823
                
                
                
                23.7
                
                
                
                37,790
                
                
                
                24.4
                
                
                
                35,619
                
                
                
                25.0
                
                
                
                33,218
                
                
                
                26.4Total
      loans receivable
                
                
                184,991
                
                
                
                101.1
                
                
                
                177,662
                
                
                
                101.0
                
                
                
                156,731
                
                
                
                101.2
                
                
                
                144,293
                
                
                
                101.4
                
                
                
                127,855
                
                
                
                101.6Less: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
                
                
                
                0.1Allowance
      for loan losses
                
                
                1,934
                
                
                
                1.1
                
                
                
                1,766
                
                
                
                1.0
                
                
                
                1,864
                
                
                
                1.2
                
                
                
                1,846
                
                
                
                1.3
                
                
                
                1,888
                
                
                
                1.5Total
      loans receivable, net
                
                $
                182,948
                
                
                
                100.0
                %
                
                $
                175,867
                
                
                
                100.0
                %
                
                $
                154,838
                
                
                
                100.0
                %
                
                $
                142,272
                
                
                
                100.0
                %
                
                $
                125,793
                
                
                
                100.0
                %
 _________________________________
 (1)
                Includes
      a portion of real estate construction
loans.
  4
  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.
  5
  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.
  6
  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.
 
 7
 
 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
                  
                  
                  $
                  46,807Commercial
      and agricultural real estate
                  
                  
                  11,939
                  
                  
                  
                  10,600
                  
                  
                  
                  33,977
                  
                  
                  
                  56,516Multi-family
      residential
                  
                  
                  115
                  
                  
                  
                  560
                  
                  
                  
                  3,843
                  
                  
                  
                  4,518Commercial
      and agricultural business loans
                  
                  
                  17,318
                  
                  
                  
                  13,452
                  
                  
                  
                  4,586
                  
                  
                  
                  35,356Consumer
      loans:Home
      equity/home improvement
                  
                  
                  6,601
                  
                  
                  
                  16,133
                  
                  
                  
                  7,268
                  
                  
                  
                  30,002Automobile
                  
                  
                  488
                  
                  
                  
                  5,354
                  
                  
                  
                  —
                  
                  
                  
                  5,842Other
                  
                  
                  2,411
                  
                  
                  
                  2,300
                  
                  
                  
                  1,239
                  
                  
                  
                  5,950Total
                  
                  $
                  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, 2009Fixed
                  
                  
                  Adjustable
                  
                  
                  Total(In
      Thousands)Real
      estate loans:One-
      to four-family real estate
                  
                  $
                  32,827
                  
                  
                  $
                  10,136
                  
                  
                  $
                  42,963Commercial
      and agricultural real estate
                  
                  
                  8,690
                  
                  
                  
                  35,886
                  
                  
                  
                  44,576Multi-family
      real estate
                  
                  
                  560
                  
                  
                  
                  3,844
                  
                  
                  
                  4,404Commercial
      and agricultural business loans
                  
                  
                  11,619
                  
                  
                  
                  6,419
                  
                  
                  
                  18,038Consumer
      loans
                  
                  
                  24,970
                  
                  
                  
                  7,324
                  
                  
                  
                  32,294Total
      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.
  8
  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
                
                
                $
                129,480Originations:Real
      estate loans:One-
      to four-family residential
                
                
                38,717
                
                
                
                30,104
                
                
                
                25,708
                
                
                
                31,551
                
                
                
                29,599Commercial
      and agricultural
                
                
                29,157
                
                
                
                10,972
                
                
                
                11,790
                
                
                
                16,902
                
                
                
                10,821Multi-family
      residential
                
                
                —
                
                
                
                —
                
                
                
                2,122
                
                
                
                5,731
                
                
                
                290Commercial
      and agricultural business loans
                
                
                36,477
                
                
                
                33,560
                
                
                
                34,004
                
                
                
                23,434
                
                
                
                21,907Consumer
      loans:Home
      equity/home improvement
                
                
                20,133
                
                
                
                19,309
                
                
                
                17,874
                
                
                
                19,021
                
                
                
                15,009Automobile
                
                
                4,188
                
                
                
                3,777
                
                
                
                4,336
                
                
                
                3,697
                
                
                
                2,808Other
                
                
                5,072
                
                
                
                6,360
                
                
                
                4,916
                
                
                
                4,560
                
                
                
                3,805Total
      originations
                
                
                133,744
                
                
                
                104,082
                
                
                
                100,750
                
                
                
                104,896
                
                
                
                84,239Participation
      loans purchased
                
                
                3,729
                
                
                
                6,231
                
                
                
                3,152
                
                
                
                4,634
                
                
                
                1,700Transfer
      of mortgage loans to foreclosed real estate owned
                
                
                667
                
                
                
                819
                
                
                
                329
                
                
                
                933
                
                
                
                999Repayments
                
                
                99,400
                
                
                
                78,407
                
                
                
                74,574
                
                
                
                70,891
                
                
                
                69,634Loan
      sales
                
                
                30,077
                
                
                
                10,156
                
                
                
                16,561
                
                
                
                21,268
                
                
                
                16,931Total
      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
  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.
  10
  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.At 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
                
                
                $
                711Commercial
      and agricultural real estate
                
                
                34
                
                
                
                218
                
                
                
                759
                
                
                
                —
                
                
                
                181Multi-family
      residential real estate
                
                
                152
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Commercial
      and agricultural business
                
                
                48
                
                
                
                82
                
                
                
                45
                
                
                
                290
                
                
                
                57Home
      equity/home improvement
                
                
                318
                
                
                
                89
                
                
                
                100
                
                
                
                222
                
                
                
                652Automobile
                
                
                3
                
                
                
                12
                
                
                
                1
                
                
                
                1
                
                
                
                68Other
      consumer
                
                
                5
                
                
                
                12
                
                
                
                8
                
                
                
                20
                
                
                
                20Total
                
                
                1,005
                
                
                
                723
                
                
                
                1,348
                
                
                
                1,157
                
                
                
                1,689Accruing
      loans delinquent more than 90 days:One-
      to four-family residential
                
                
                163
                
                
                $
                203
                
                
                $
                —
                
                
                $
                2
                
                
                $
                270Commercial
      and agricultural real estate
                
                
                —
                
                
                
                156
                
                
                
                —
                
                
                
                —
                
                
                
                —Commercial
      and agricultural business
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                23Automobile
                
                
                18
                
                
                
                —
                
                
                
                —
                
                
                
                17
                
                
                
                4Other
      consumer
                
                
                5
                
                
                
                9
                
                
                
                4
                
                
                
                2
                
                
                
                1Total
                
                
                186
                
                
                
                368
                
                
                
                4
                
                
                
                21
                
                
                
                298Foreclosed
      assets:One-
      to four-family residential
                
                $
                565
                
                
                $
                115
                
                
                $
                37
                
                
                $
                276
                
                
                $
                426Commercial
      and agricultural real estate
                
                
                204
                
                
                
                249
                
                
                
                115
                
                
                
                180
                
                
                
                139Automobile
                
                
                9
                
                
                
                23
                
                
                
                —
                
                
                
                15
                
                
                
                19Total
                
                
                778
                
                
                
                387
                
                
                
                152
                
                
                
                471
                
                
                
                584Total
      non-performing assets
                
                $
                1,969
                
                
                $
                1,478
                
                
                $
                1,504
                
                
                $
                1,649
                
                
                $
                2,571Total
      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.
 
 11
 
 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.
 
 12
 
 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
                
                
                $
                2,186Charge-offs:One-
      to four-family residential
                
                
                149
                
                
                
                165
                
                
                
                55
                
                
                
                161
                
                
                
                179Commercial
      and agricultural real estate
                
                
                —
                
                
                
                38
                
                
                
                30
                
                
                
                53
                
                
                
                244Commercial
      and agricultural business
                
                
                —
                
                
                
                35
                
                
                
                16
                
                
                
                8
                
                
                
                186Home
      equity/home improvement
                
                
                46
                
                
                
                18
                
                
                
                101
                
                
                
                145
                
                
                
                294Automobile
                
                
                8
                
                
                
                —
                
                
                
                2
                
                
                
                30
                
                
                
                137Other
      consumer
                
                
                3
                
                
                
                45
                
                
                
                14
                
                
                
                36
                
                
                
                33Total
                
                
                206
                
                
                
                301
                
                
                
                218
                
                
                
                433
                
                
                
                1,073Recoveries:One-
      to four-family residential
                
                
                14
                
                
                
                5
                
                
                
                78
                
                
                
                14
                
                
                
                36Commercial
      and agricultural real estate
                
                
                15
                
                
                
                6
                
                
                
                8
                
                
                
                —
                
                
                
                119Commercial
      and agricultural business
                
                
                16
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                12Home
      equity/home improvement
                
                
                4
                
                
                
                3
                
                
                
                34
                
                
                
                98
                
                
                
                14Automobile
                
                
                5
                
                
                
                13
                
                
                
                17
                
                
                
                17
                
                
                
                23Other
      consumer
                
                
                10
                
                
                
                21
                
                
                
                39
                
                
                
                17
                
                
                
                21Total
                
                
                64
                
                
                
                48
                
                
                
                176
                
                
                
                146
                
                
                
                225Net
      loans charge-offs
                
                
                142
                
                
                
                253
                
                
                
                42
                
                
                
                287
                
                
                
                848Additions
      charged to operations
                
                
                310
                
                
                
                155
                
                
                
                60
                
                
                
                245
                
                
                
                550Balance
      at end of year
                
                $
                1,934
                
                
                $
                1,766
                
                
                $
                1,864
                
                
                $
                1,846
                
                
                $
                1,888Total
      loans outstanding
                
                $
                184,991
                
                
                $
                177,662
                
                
                $
                156,731
                
                
                $
                144,293
                
                
                $
                127,855Average
      net loans outstanding
                
                $
                177,963
                
                
                $
                165,715
                
                
                $
                149,238
                
                
                $
                137,740
                
                
                $
                128,279Allowance
      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
                %
  13
  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
                
                
                2006Amount
                
                
                %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
                
                
                
                25.6Multi-family
      residential
                
                
                12
                
                
                
                2.5
                
                
                
                28
                
                
                
                2.7
                
                
                
                37
                
                
                
                3.8Commercial
      and agricultural business
                
                
                304
                
                
                
                19.3
                
                
                
                146
                
                
                
                20.8
                
                
                
                275
                
                
                
                21.2Home
      equity/home improvement
                
                
                301
                
                
                
                16.4
                
                
                
                465
                
                
                
                17.1
                
                
                
                561
                
                
                
                17.6Automobile
                
                
                33
                
                
                
                3.2
                
                
                
                74
                
                
                
                3.0
                
                
                
                96
                
                
                
                3.4Other
      consumer
                
                
                52
                
                
                
                3.2
                
                
                
                112
                
                
                
                3.6
                
                
                
                139
                
                
                
                3.4Unallocated
                
                
                185
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                $
                1,934
                
                
                
                101.1
                %
                
                $
                1,766
                
                
                
                101.00
                %
                
                $
                1,864
                
                
                
                101.2
                %
 
 At
      December 31,2005
                        
                        
                        2004Amount
                        
                        
                        %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
                        
                        
                        
                        19.5Multi-family
      residential
                        
                        
                        40
                        
                        
                        
                        4.2
                        
                        
                        
                        8
                        
                        
                        
                        1.8Commercial
      and agricultural business
                        
                        
                        129
                        
                        
                        
                        20.2
                        
                        
                        
                        71
                        
                        
                        
                        20.8Home
      equity/home improvement
                        
                        
                        785
                        
                        
                        
                        18.5
                        
                        
                        
                        845
                        
                        
                        
                        19.3Automobile
                        
                        
                        110
                        
                        
                        
                        3.2
                        
                        
                        
                        140
                        
                        
                        
                        3.6Other
      consumer
                        
                        
                        135
                        
                        
                        
                        3.3
                        
                        
                        
                        106
                        
                        
                        
                        3.5Total
                        
                        $
                        1,846
                        
                        
                        
                        101.4
                        %
                        
                        $
                        1,888
                        
                        
                        
                        101.6
                        %
 
 14
  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
                
                
                $
                7,597Purchases
                
                
                27,733
                
                
                
                9,386
                
                
                
                1,096
                
                
                
                686
                
                
                
                12,605Sales
                
                
                11,560
                
                
                
                456
                
                
                
                —
                
                
                
                4,556
                
                
                
                1,470Repayments
                
                
                4,254
                
                
                
                1,896
                
                
                
                1,485
                
                
                
                2,351
                
                
                
                3,439Premium
      (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
 
 15
 
 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
                
                
                $
                1,466Municipal
      bonds and equity securities
                
                
                30,045
                
                
                
                15,224
                
                
                
                5,634
                
                
                
                1,199
                
                
                
                2,015U.S.
      Government and agency securities
                
                
                19,834
                
                
                
                49,962
                
                
                
                73,215
                
                
                
                78,083
                
                
                
                83,192Total
      investment securities
                
                $
                50,988
                
                
                $
                66,295
                
                
                $
                79,978
                
                
                $
                80,821
                
                
                $
                86,673Short-term
      investments:Interest-earning
      deposits in other depository institutions
                
                $
                393
                
                
                $
                5,130
                
                
                $
                3,127
                
                
                $
                1,444
                
                
                $
                4,793Federal
      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, 2008Less
      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
                
                
                $
                19,834Municipal
      bonds
                
                
                146
                
                
                
                5,434
                
                
                
                16,357
                
                
                
                8,060
                
                
                
                29,997Total
                
                $
                146
                
                
                $
                11,478
                
                
                $
                29,125
                
                
                $
                9,082
                
                
                $
                49,831Weighted
      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.
  16
 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
                
                
                $
                820,349Withdrawals
                
                
                1,278,592
                
                
                
                1,030,118
                
                
                
                924,401
                
                
                
                891,454
                
                
                
                833,264Net
      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
                
                
                
                3,476Net
      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
                  
                  
                  
                  11.920.86
                  
                  None
                  
                  Money
      market deposit accounts
                  
                  
                  2,500
                  
                  
                  
                  4,433
                  
                  
                  
                  1.862.15
                  
                  None
                  
                  Money
      market savings account
                  
                  
                  2,500
                  
                  
                  
                  22,591
                  
                  
                  
                  9.490.98
                  
                  None
                  
                  Savings
                  
                  
                  50
                  
                  
                  
                  22,724
                  
                  
                  
                  9.54Certificates
      of Deposit3.35
                  
                  Less
      than 1 year
                  
                  Fixed
      term, fixed rate
                  
                  $
                  500
                  
                  
                  $
                  106,480
                  
                  
                  
                  44.713.99
                  
                  1-2
      years
                  
                  Fixed
      term, fixed rate
                  
                  
                  500
                  
                  
                  
                  23,848
                  
                  
                  
                  10.014.12
                  
                  2-3
      years
                  
                  Fixed
      term, fixed rate
                  
                  
                  500
                  
                  
                  
                  6,108
                  
                  
                  
                  2.574.46
                  
                  3-4
      years
                  
                  Fixed
      term, fixed rate
                  
                  
                  500
                  
                  
                  
                  2,220
                  
                  
                  
                  0.934.30
                  
                  Over
      4 years
                  
                  Fixed
      term, fixed rate
                  
                  
                  500
                  
                  
                  
                  1,840
                  
                  
                  
                  0.77$
                  238,151
                  
                  
                  
                  100.00
                  %
  17
 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
                  
                  
                  2005Balance
                  
                  
                  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
                  %
                  
                  $
                  11Noninterest-bearing
      checking
                  
                  
                  19,526
                  
                  
                  
                  8.20
                  
                  
                  
                  1,466
                  
                  
                  
                  18,060
                  
                  
                  
                  7.35
                  
                  
                  
                  2,947
                  
                  
                  
                  15,113
                  
                  
                  
                  6.49
                  
                  
                  
                  599
                  
                  
                  
                  14,514
                  
                  
                  
                  6.65
                  
                  
                  
                  290Interest-bearing
      checking
                  
                  
                  28,381
                  
                  
                  
                  11.92
                  
                  
                  
                  1,097
                  
                  
                  
                  27,284
                  
                  
                  
                  11.10
                  
                  
                  
                  266
                  
                  
                  
                  27,018
                  
                  
                  
                  11.60
                  
                  
                  
                  (238
                  )
                  
                  
                  27,256
                  
                  
                  
                  12.48
                  
                  
                  
                  19Savings
                  
                  
                  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
                  
                  
                  
                  823Total
                  
                  $
                  238,151
                  
                  
                  
                  100.00
                  %
                  
                  $
                  (7,570
                  )
                  
                  $
                  245,721
                  
                  
                  
                  100.00
                  %
                  
                  $
                  12,808
                  
                  
                  $
                  232,913
                  
                  
                  
                  100.00
                  %
                  
                  $
                  14,543
                  
                  
                  $
                  218,370
                  
                  
                  
                  100.00
                  %
                  
                  $
                  (7,364
                  )
 
 18
 
 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
                      
                      $
                      14,6553-6
      months
                      
                      
                      11,1066-12
      months
                      
                      
                      24,146Over
      12 months
                      
                      
                      9,356Total
                      
                      $
                      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 inFederal
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
                
                
                $
                9,000Average
      balance
                
                $
                12,029
                
                
                $
                8,629
                
                
                $
                6,103
                
                
                $
                8,071
                
                
                $
                2,993Other:Maximum
      balance
                
                $
                7,633
                
                
                $
                5,838
                
                
                $
                5,035
                
                
                $
                3,350
                
                
                $
                3,372Average
      balance
                
                $
                6,031
                
                
                $
                4,665
                
                
                $
                3,499
                
                
                $
                2,116
                
                
                $
                2,185
 ____________________________________
 (1)Calculated using the daily weighted average interest
rates.
 
 19
  The
following table summarizes significant contractual obligations and other
commitments at December 31, 2008.
 
 At
      December 31, 2008Less
      than 1
                    year
                
                
                1-3
      years
                
                
                3-5
      years
                
                
                More
      than 5
                    years
                
                
                Total(In
      Thousands)Time
      deposits
                
                $
                106,480
                
                
                $
                29,956
                
                
                $
                4,060
                
                
                $
                
                
                
                $
                140,496FHLB
      advances
                
                
                13,500
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                13,500Other
      borrowings
                
                
                7,633
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                7,633Total
      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.
  20
  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.
  21
  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.
  22
 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.
  23
  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.
  24
  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.
  25
 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.
  26
 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.
  27
  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.
  28
 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.
  29
  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.
 
 NetBook
      ValueYear
                          
                          at
      December 31,Location
                          
                          Occupied
                          
                          2008(In
      Thousands)Main
      Office1211
      West Morton AvenueJacksonville,
      Illinois
                          
                          1994
                          
                          $
                          3,972Branch
      Office211
      West State StreetJacksonville,
      Illinois
                          
                          1961
                          
                          
                          621Branch
      Office903
      South MainJacksonville,
      Illinois
                          
                          1989
                          
                          
                          203Branch
      Office501
      North State StreetLitchfield,
      Illinois
                          
                          1997
                          
                          
                          605Branch
      Office100
      North DyeVirden,
      Illinois
                          
                          1986
                          
                          
                          204Branch
    Office510
      SuperiorChapin,
      Illinois
                          
                          2000
                          
                          
                          471Branch
      Office202
      StateConcord,
      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.
 
 30
  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 planEquity
      compensation plans approved by stockholders
                      34,445
                      10.65
                      3,300Equity
      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.
  31
  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
Officersand
Corporate Governance
  Information concerning our directors
and certain officers is incorporated by reference hereunder in the Proxy
Statement for the 2009 Annual Meeting.
 
 32
 
 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 Transactionsand 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)
                Exhibits3
                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  33
  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 Stockholders14
                Code
      of Ethics(3)21
                Subsidiaries23
                Consent
      of BKD LLP to incorporate financial statements into Registration Statement
      on Form S-831.1
                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).
  34
  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. FossRichard
      A.  Foss, Presidentand
      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. ApplebeeRichard
      A. Foss, President,
                                                        
                                                        
                                                        Andrew
      F. Applebee, Chairman of the BoardChief
      Executive Officer and DirectorDate:
      March 20, 2009
                                                        
                                                        Date:
      March 20, 2009By:
                                                        /s/ Diana S. Tone
                                                        
                                                        By:
                                                        /s/ Dean H. HessDiana
      S. Tone
                                                        
                                                        
                                                        Dean
      H. Hess, DirectorChief
      Financial OfficerDate:
      March 20, 2009
                                                        
                                                        Date:
      March 20, 2009By:
                                                        /s/ John L. Eyth
                                                        
                                                        By:
                                                        /s/ Emily J. OsburnJohn
      L. Eyth, Director
                                                        
                                                        
                                                        Emily
      J. Osburn, DirectorDate:
      March 20, 2009
                                                        
                                                        Date:
      March 20, 2009By:
                                                        /s/ Harmon B. Deal III
                                                        
                                                        By:
                                                        /s/ John C. WilliamsHarmon
      B. Deal, III, Director
                                                        
                                                        
                                                        John
      C. Williams, DirectorSenior
      Vice President and Trust OfficerDate:
      March 20, 2009
                                                        
                                                        Date:
      March 20, 2009
 
 
 By:
                  /s/ John M. BuchananJohn
      M. Buchanan, Director
 
 Date:
March 20, 2009
 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.
      Applebee10.2
                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 Stockholders14
                Code
      of Ethics(3)21
                Subsidiaries23
                Consent
      of BKD LLP to incorporate financial statements into Registration Statement
      on Form S-831.1
                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).