**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**





x
            Annual
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934





For
      the
      Fiscal Year Ended December 31, 2006




**OR**




o
            Transition
                Report Pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934





For
      the
      transition period from _______________ to ______________________





**Commission
      File No. 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




**(217)
                  245-4111**(Registrant’s
                  telephone number)




Securities
                  Registered Pursuant to Section 12(b) of the Act:
              **Common
                  Stock, par value $.01 per share**(Title
                  of Class)


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 oNO 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 twelve months (or for such shorter period that the Registrant was
      required to file such reports) and (2) has been subject to such requirements
      for
      the past 90 days. YES xNO o .





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of Registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. x.





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
      Accelerated Filer o   Accelerated
      Filer o   Non-Accelerated
      Filer
x





As
      of
      February 28, 2007, there were issued and outstanding 1,985,417 shares of the
      Registrant’s Common Stock.





Indicate
      by check mark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). YES oNO 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, 2006, as reported by the Nasdaq Capital Market, was approximately
      $12.5 million.





**DOCUMENTS
      INCORPORATED BY REFERENCE**




(1)
            Proxy
                Statement for the 2007 Annual Meeting of Stockholders of the Registrant
                (Part III).  (2)
            Annual Report to Stockholders (Parts
              II and
              IV).









TABLE
      OF
      CONTENTS




**ITEM
                1.**
            ****
            **Business**
            ****
            1**Item
                1A.**
            ****
            **Risk
                Factors**
            ****
            27**Item
                1B.**
            ****
            **Unresolved
                Staff Comments**
            ****
            29**ITEM
                2.**
            ****
            **Properties**
            ****
            29**ITEM
                3.**
            ****
            **Legal
                Proceedings**
            ****
            30**ITEM
                4.**
            ****
            **Submission
                of Matters to a Vote of Security
                Holders**
            ****
            30**ITEM
                5.**
            ****
            **Market
                for Registrant’s Common Equity, Related Stockholder
                Matters and Issuer Purchases of Equity
                Securities**
            ****
            30**ITEM
                6.**
            ****
            **Selected
                Financial Data**
            ****
            30**ITEM
                7.**
            ****
            **Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations**
            ****
            30**ITEM
                7A.**
            ****
            **Quantitative
                and Qualitative Disclosure about
                Market**
            ****
            31**ITEM
                8.**
            ****
            **Financial
                Statements and Supplementary
                Data**
            ****
            31**ITEM
                9.**
            ****
            **Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure**
            ****
            31**ITEM
                9A.**
            ****
            **Controls
                and Procedures**
            ****
            31**ITEM
                9B.**
            ****
            **Other
                Information**
            ****
            31**ITEM
                10.**
            ****
            **Directors
                and Executive Officers of the
                Company**
            ****
            31**ITEM
                11.**
            ****
            **Executive
                Compensation**
            ****
            31**ITEM
                12.**
            ****
            **Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters**
            ****
            32**ITEM
                13.**
            ****
            **Certain
                Relationships and Related
                Transactions**
            ****
            32**ITEM
                14.**
            ****
            **Principal
                Accountant Fees and
                Services**
            ****
            32**ITEM
                15.**
            ****
            **Exhibits
                and Financial Statement
                Schedules**
            
            32








**PART
      I**





**ITEM
      1.**  **Business**




**General**




Jacksonville
      Bancorp, Inc. (the “Company”) is a Federal corporation. On May 3, 2002,
      Jacksonville Savings Bank (the “Bank”) completed its reorganization into the
      two-tier form of mutual holding company ownership. At that time each outstanding
      share of the Bank’s common stock was converted into a share of the Company’s
      common stock. The only significant asset of the Company is its investment in
      the
      Bank. The Company is majority owned by Jacksonville Bancorp, MHC, a
      Federal-chartered mutual holding company (the “Mutual Holding Company”).




The
      Bank
      is an Illinois-chartered savings bank headquartered in Jacksonville, Illinois.
      The Bank conducts its business from its 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, Chapin, Concord and Litchfield. The
      Bank
      was originally chartered in 1916 as a state-chartered savings and loan
      association and converted to a state-chartered savings bank in 1992. The Bank
      has been a member of the Federal Home Loan Bank System since 1932. The Bank’s
      deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). At
      December 31, 2006, the Bank had total assets of $267.3 million, total deposits
      of $233.2 million, and stockholders’ equity of $20.8 million.




The
      Bank
      is a community-oriented savings bank engaged primarily in the business of
      attracting retail deposits from the general public in the Bank’s 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 and consumer loans. The Bank also originates commercial and
      agricultural real estate loans, multi-family real estate loans and commercial
      and agricultural business loans. Additionally, the Bank invests in United States
      Government agency securities, local 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 (“FHLB”).





The
      Bank’s principal sources of funds are customer deposits, proceeds from 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.
      The Bank’s principal expenses are interest paid on deposits, employee
      compensation and benefits and occupancy and equipment expense.





The
      Bank
      operates an investment center at its main office. The investment center is
      operated through Financial Resources Group, Inc., the Bank’s wholly-owned
      subsidiary. The investment center is not anticipated to have a material effect
      on the ability of the Bank to attract retail deposits.




The
      Bank’s principal executive office is located at 1211 W. Morton, Jacksonville,
      Illinois, and its telephone number at that address is (217)
      245-4111.





The
      Company intends to begin reporting as a small business filer under the rules
      and
      regulations of the Securities and Exchange Commission beginning with its March
      31, 2007 quarterly report.








**Market
      Area and Competition**





The
      Bank
      is a community-oriented savings institution offering a range of retail banking
      services to residents of its market area. The Bank’s market area is Morgan,
      Macoupin and Montgomery Counties, Illinois. Management believes that its offices
      are located in communities that can generally be characterized as stable
      residential communities of predominantly one- to four-family residences. The
      Bank’s market for deposits is concentrated in the communities surrounding its
      main office and six branches. The Bank is the largest independent financial
      institution headquartered in its primary market area.





The
      economy of the Bank’s market area consists primarily of agriculture and related
      businesses, light industry and state and local government. The largest employers
      in the Bank’s primary market area are Pactiv Corporation, Passavant Area
      Hospital, and the State of Illinois.





The
      Bank
      faces significant competition in attracting deposits from commercial banks,
      other savings institutions and credit unions. The Bank faces additional
      competition for deposits from short-term money market funds, other corporate
      and
      government securities funds and other financial institutions such as brokerage
      firms and insurance companies. The Bank also faces significant competition
      in
      the origination of loans from savings institutions, mortgage banking companies,
      credit unions, insurance companies and commercial banks.





**Lending
      Activities**





**General.** Historically, the principal lending activity of the Bank has been the
      origination of mortgage loans for the purpose of financing or refinancing one-
      to four-family residential properties in the Bank’s local market areas. The Bank
      also emphasizes consumer lending, primarily the origination of home equity
      loans
      and loans secured by automobiles. At December 31, 2006, the Bank’s loans
      receivable totaled $156.7  million,
      of which $40.6  million,
      or 26.2% consisted of one- to four-family residential mortgage loans. The
      remainder of the Bank’s loans receivable at such date consisted of commercial
      and agricultural real estate loans (25.6%), multi-family residential loans
      (3.8%), commercial and agricultural business loans (21.2%), and consumer loans
      (24.4%). Of the amount included in consumer loans, $27.2  million,
      or 17.6% of total loans consisted of home equity and home improvement loans.
      During the year ended December 31, 2006 the loan portfolio increased to
      $156.7  million
      from $144.3 million at December 31, 2005. **** Commercial
      and agricultural real estate loans increased **** $5.7
      million (16.9%) during 2006.




The
      Bank
      has managed to make its interest-earning assets more interest rate sensitive
      by,
      among other things, originating variable interest rate loans, such as ARM loans
      and balloon loans with terms ranging from three to five years, as well as
      medium-term consumer loans and commercial business loans. The ability of the
      Bank to originate ARM loans is substantially affected by market interest rates.





The
      Bank
      originates fixed-rate residential mortgage loans secured by one- to four-family
      residential properties with terms up to 30 years. The Bank sells a significant
      portion of its one- to four-family fixed-rate residential mortgage loan
      originations directly to Freddie Mac. The Bank also sells one-to four-family
      fixed-rate residential mortgage loan originations to the Federal Home Loan
      Bank
      Mortgage Partnership Finance Program. During the years ended December 31, 2006
      and 2005, the Bank sold $16.6 million
      and $21.3  million
      of fixed-rate residential mortgage loans, respectively. Loans are generally
      sold
      without recourse and with servicing retained. At December 31, 2006 the Bank
      was
      servicing approximately $140.1  million
      in loans for which it received servicing income of approximately
      $358,000  for
      the
      year ended December 31, 2006. The Bank does not purchase whole
      loans.




2


**Analysis
      of Loan Portfolio**





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





**At
                December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent**
            
            **Amount**
            
            **Percent****(Dollars
                in Thousands)**Real
                estate loans:One-to
                four-family residential(1)
            
            $
            40,635
            
            
            26.2
            %
            $
            40,126
            
            
            28.2
            %
            $
            41,616
            
            
            33.1
            %
            $
            40,304
            
            
            31.7
            %
            $
            43,883
            
            
            30.7
            %Commercial
                and agricultural(1)
            
            
            39,592
            
            
            25.6
            
            
            33,859
            
            
            23.8
            
            
            24,587
            
            
            19.5
            
            
            21,401
            
            
            16.8
            
            
            18,421
            
            
            12.9Multi-family
                residential
            
            
            5,877
            
            
            3.8
            
            
            6,010
            
            
            4.2
            
            
            2,207
            
            
            1.8
            
            
            2,376
            
            
            1.9
            
            
            2,678
            
            
            1.9Total
                real estate loans
            
            
            86,104
            
            
            55.6
            
            
            79,995
            
            
            56.2
            
            
            68,410
            
            
            54.4
            
            
            64,081
            
            
            50.4
            
            
            64,982
            
            
            45.5Commercial
                agricultural business loans
            
            
            32,837
            
            
            21.2
            
            
            28,679
            
            
            20.2
            
            
            26,227
            
            
            20.8
            
            
            29,763
            
            
            23.4
            
            
            31,502
            
            
            22.0Consumer
                loans:Home
                equity/Home improvement
            
            
            27,202
            
            
            17.6
            
            
            26,382
            
            
            18.5
            
            
            24,322
            
            
            19.3
            
            
            23,614
            
            
            18.6
            
            
            31,181
            
            
            21.8Automobile
            
            
            5,275
            
            
            3.4
            
            
            4,580
            
            
            3.2
            
            
            4,516
            
            
            3.6
            
            
            6,477
            
            
            5.1
            
            
            10,491
            
            
            7.3Other
            
            
            5,313
            
            
            3.4
            
            
            4,657
            
            
            3.3
            
            
            4,380
            
            
            3.5
            
            
            5,545
            
            
            4.4
            
            
            7,127
            
            
            5.0Total
                consumer loans
            
            
            37,790
            
            
            24.4
            
            
            35,619
            
            
            25.0
            
            
            33,218
            
            
            26.4
            
            
            35,636
            
            
            28.1
            
            
            48,799
            
            
            34.1Total
                loans receivable
            
            
            156,731
            
            
            101.2
            
            
            144,293
            
            
            101.4
            
            
            127,855
            
            
            101.6
            
            
            129,480
            
            
            101.9
            
            
            145,283
            
            
            101.6Less:Unearned
                premium on purchased loans,unearned
                discount and deferred loanfees,
                net
            
            
            29
            
            
            0.0
            
            
            175
            
            
            0.1
            
            
            174
            
            
            0.1
            
            
            215
            
            
            0.2
            
            
            281
            
            
            0.2Allowance
                for loan losses
            
            
            1,864
            
            
            1.2
            
            
            1,846
            
            
            1.3
            
            
            1,888
            
            
            1.5
            
            
            2,186
            
            
            1.7
            
            
            2,073
            
            
            1.4Total
                loans receivable, net
            
            $
            154,838
            
            
            100.0
            %
            $
            142,272
            
            
            100.0
            %
            $
            125,793
            
            
            100.0
            %
            $
            127,079
            
            
            100.0
            %
            $
            142,929
            
            
            100.0
            %







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




3


**One-
      to Four-Family Mortgage Loans** .
      The
      Bank’s primary lending activity is the origination of one- to four-family,
      owner-occupied, residential mortgage loans secured by property located in the
      Bank’s market area. Loans are generated through the Bank’s marketing efforts,
      its existing customers and referrals, real estate brokers, builders and local
      businesses. The Bank generally has limited its real estate loan originations
      to
      the financing of properties located within its market area. At December 31,
      2006, the Bank had $40.6 million, or 26.2% of its net loan portfolio, invested
      in mortgage loans secured by one- to four-family residences.





The
      Bank
      originates for resale to Freddie Mac and FHLB fixed-rate residential one- to
      four-family loans with terms of 15 years or more. The Bank’s 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. The Bank offers fixed-rate one- to four-family mortgage loans
      with
      terms of up to 30 years.





The
      Bank
      currently offers ARM loans for terms ranging up to 30 years. The Bank generally
      offers ARM loans that adjust every year from the date of origination, with
      interest rate adjustment limitations up to two percentage points per year and
      with a cap of up to six percentage points on interest rate increases over the
      life of the loan. In a rising interest rate environment, such rate limitations
      may prevent ARM loans from repricing to market interest rates, which would
      have
      an adverse effect on net interest income. The Bank has used different interest
      indices for ARM loans in the past, and primarily uses the one-year Constant
      Maturity Treasury Index. ARM loans secured by residential one- to four-family
      real estate totaled $9.7 million, or 24.0% of the Bank’s total one- to
      four-family residential real estate loans receivable at December 31, 2006.
      The
      origination of fixed-rate mortgage loans versus ARM loans is monitored on an
      ongoing basis and is affected significantly by the level of market interest
      rates, customer preference, the Bank’s interest rate gap position and loan
      products offered by the Bank’s competitors. Borrowers have shown in recent years
      a preference for fixed-rate loans over ARM loans. During 2006, the Bank
      originated $16.4 million of fixed-rate residential mortgage loans and $9.3
      million of ARM and balloon loans.





The
      primary purpose of offering ARM loans is to make the Bank’s loan portfolio more
      interest rate sensitive. However, as the interest income earned on ARM loans
      varies with prevailing interest rates, such loans do not offer the Bank
      predictable cash flows in the same manner as long-term, fixed-rate loans. ARM
      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 ARM loans may increase due to the upward adjustment of interest
      costs to the borrower, resulting in increased loan losses.





The
      Bank’s residential first mortgage loans customarily include due-on-sale clauses,
      which are provisions giving the Bank 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 the Bank’s mortgage portfolio during periods of rising
      interest rates.





When
      underwriting residential real estate loans, the Bank reviews and verifies 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%, the Bank requires private mortgage insurance.
      The
      Bank requires fire and casualty insurance on all properties securing real estate
      loans. The Bank may require title insurance, or an attorney’s title opinion, as
      circumstances warrant.




4


**Commercial
      and Agricultural Real Estate and Multi-Family Residential Real Estate
      Loans.** The Bank
      originates commercial and agricultural real estate and multi-family residential
      real estate loans. At December 31, 2006, $39.6 million, or 25.6%, of the Bank’s
      total loan portfolio consisted of commercial and agricultural real estate loans
      and $5.9 million, or 3.8%, consisted of multi-family real estate loans. During
      2006, the Bank originated $2.1 million in loans secured by multi-family
      properties, compared with $5.7 million in originations during 2005. During
      2006,
      loan originations secured by commercial and agricultural real estate totaled
      $11.8 million, as compared to $16.9 million in 2005. The Bank’s 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, 2006, the Bank’s commercial real
      estate loan portfolio included $732,000 in loans secured by churches, $24.8
      million in loans secured by land, and $14.1 million in loans secured by other
      commercial properties. The maximum LTV ratio for commercial real estate loans
      originated by the Bank is 80%. The largest commercial real estate loan had
      a
      principal balance of $3.1 million, all of which was secured by farmland. At
      December 31, 2006, the largest multi-family residential real estate loan had
      a
      principal balance of $2.0 million.





The
      underwriting standards employed by the Bank for commercial and agricultural
      real
      estate and multi-family residential real estate loans include a determination
      on
      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.
      The
      value of the real estate offered as collateral is reviewed by the Bank in
      relation to the proposed loan amount. Generally, the loan amount cannot be
      greater than 80% of the value of the real estate. Written appraisals are usually
      obtained by the Bank from either licensed or certified appraisers on all
      multi-family, commercial, and agricultural real estate loans. The Bank assesses
      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** .
      The
      Bank originates commercial and agricultural business loans to borrowers located
      in its market area which are secured by collateral other than real estate or
      which can be unsecured. Such business loans are generally secured by equipment
      and inventory and generally are offered with adjustable rates and various terms
      of maturity. The Bank 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. The Bank generally obtains personal
      guarantees from the borrower or a third party as a condition to originating
      its
      business loans. Commercial and agricultural business loans totaled $32.8
      million, or 21.2%, of the Bank’s total loan portfolio at December 31, 2006. The
      Bank has increased its originations of business loans in response to customer
      demand. During the year ended December 31, 2006, the Bank originated $34.0
      million in commercial and agricultural business loans. At that date, the Bank’s
      largest commercial business loan was a $5.0 million line of credit with a
      principal balance of $3.0 million. This loan was performing in accordance with
      its terms at December 31, 2006.





The
      underwriting standards used by the Bank 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. The financial strength of each applicant also is
      assessed through 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. Once originated, business
      loans are reviewed periodically by the Bank. Financial statements are requested
      at least annually and are reviewed by the Bank for substantial deviations or
      changes that might affect repayment of the loan. Loan officers of the Bank
      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.





5


**Consumer
      Loans.** As of
      December 31, 2006, consumer loans totaled $37.8 million, or 24.4%, of the Bank’s
      total loan portfolio. The principal types of consumer loans offered by the
      Bank
      are home equity loans and automobile loans. Consumer loans generally are offered
      on a fixed-rate basis. The largest category of consumer loans in the Bank’s
      portfolio consists of home equity loans. At December 31, 2006, home equity
      and
      home improvement loans totaled $27.2 million, or 17.6%, of the Bank’s total loan
      portfolio. The Bank’s 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 are determined
      by
      the Bank 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 the Bank’s portfolio consists of
      loans secured by automobiles. At December 31, 2006, consumer loans secured
      by
      automobiles totaled $5.3 million, or 3.4%, of the Bank’s total loan portfolio.
      Automobile loans are offered 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. The Bank generally makes
      automobile loans with a 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 the
      Bank.





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 the Bank’s
      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, 2006, consumer loans 90 days or more delinquent, including
      those
      for which the accrual of interest has been discontinued, totaled $113,000,
      or
      0.30%, of the Bank’s total consumer loans.





The
      underwriting standards employed by the Bank 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. The Bank also considers 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 $72,000 and are
      secured by mortgages on residential real estate. No assurance can be given,
      however, that the Bank’s delinquency rate or loss experience on consumer loans
      will not increase in the future.





6


**Loan
      Maturity Schedule.** The
      following table sets forth certain information at December 31, 2006 regarding
      the dollar amount of loans maturing in the Bank’s 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
            
            $
            5,989
            
            $
            13,465
            
            $
            21,181
            
            $
            40,635Commercial
                and agricultural real estate
            
            
            2,816
            
            
            4,059
            
            
            32,717
            
            
            39,592Multi-family
                residential
            
            
            1,176
            
            
            1,030
            
            
            3,671
            
            
            5,877Commercial
                and agricultural business loans
            
            
            17,881
            
            
            11,985
            
            
            2,971
            
            
            32,837Consumer
                Loans:Home
                equity/Home improvement
            
            
            7,847
            
            
            14,027
            
            
            5,328
            
            
            27,202Automobile
            
            
            551
            
            
            4,610
            
            
            114
            
            
            5,275Other
            
            
            2,601
            
            
            2,178
            
            
            534
            
            
            5,313Total
            
            $
            38,861
            
            $
            51,354
            
            $
            66,516
            
            $
            156,731





The
      following table sets forth at December 31, 2006, the dollar amount of all
      fixed-rate and adjustable-rate loans. At December 31, 2006, fixed-rate loans
      include $20.1 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, 2007, was $78.2 million and
      $38.5 million, respectively.




**Fixed**
            
            **Adjustable**
            
            **Total****(In
                Thousands)**Real
                estate loans:One-
                to four-family real estate
            
            $
            30,892
            
            $
            9,743
            
            $
            40,635Commercial
                and agricultural real estate
            
            
            13,705
            
            
            25,887
            
            
            39,592Multi-family
                real estate
            
            
            2,283
            
            
            3,594
            
            
            5,877Commercial
                and agricultural business loans
            
            
            21,936
            
            
            10,901
            
            
            32,837Consumer
                loans:Home
                equity/Home improvement
            
            
            22,828
            
            
            4,374
            
            
            27,202Automobile
            
            
            5,250
            
            
            25
            
            
            5,275Other
            
            
            4,700
            
            
            613
            
            
            5,313Total
            
            $
            101,594
            
            $
            55,137
            
            $
            156,731





**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 the Bank’s 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 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, senior loan administrator 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
      $750,000, must be approved by the directors’ loan committee, which meets weekly
      and consists of the chairman of the board, president, senior vice president,
      senior loan administrator 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 $750,000. The Board of Directors ratifies all loans
      made
      by the Bank. Once the loan is approved, the applicant is informed and a closing
      date is scheduled. The Bank typically funds its 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.





7


**Origination,
      Purchase and Sale of Loans.** Set
      forth below is a table showing the Bank’s loan originations, purchases, sales
      and repayments for the periods indicated. It is the Bank’s 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 its portfolio ARM loans
      and
      loans with balloon payments. Purchases consist of participations in loans
      originated by other financial institutions. Currently, the Bank usually obtains
      commitments prior to selling its fixed-rate mortgage loans. It is the Bank’s
      policy to sell fixed-rate mortgage loans as market conditions permit.




**At
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(In
                  Thousands)**Total
                  loans receivable at beginning of period
              
              $
              144,293
              
              $
              127,855
              
              $
              129,480
              
              $
              145,283
              
              $
              157,977Originations:Real
                  estate loans:One-
                  to four-family residential
              
              
              25,708
              
              
              31,551
              
              
              29,599
              
              
              110,440
              
              
              99,480Commercial
                  and agricultural
              
              
              11,790
              
              
              16,902
              
              
              10,821
              
              
              9,154
              
              
              5,519Multi-family
                  residential
              
              
              2,122
              
              
              5,731
              
              
              290
              
              
              216
              
              
              293Commercial
                  and agricultural
              
              
              34,004
              
              
              23,434
              
              
              21,907
              
              
              19,880
              
              
              22,850Consumer:Home
                  equity/Home improvement
              
              
              17,874
              
              
              19,021
              
              
              15,009
              
              
              12,968
              
              
              16,536Automobile
              
              
              4,336
              
              
              3,697
              
              
              2,808
              
              
              2,516
              
              
              5,790Other
              
              
              4,916
              
              
              4,560
              
              
              3,805
              
              
              5,009
              
              
              6,309Total
                  originations
              
              
              100,750
              
              
              104,896
              
              
              84,239
              
              
              160,183
              
              
              156,777Participation
                  loans purchased
              
              
              3,152
              
              
              4,634
              
              
              1,700
              
              
              2,120
              
              
              723Transfer
                  of mortgage loans to foreclosed real estate owned
              
              
              329
              
              
              933
              
              
              999
              
              
              1,023
              
              
              806Repayments
              
              
              74,574
              
              
              70,891
              
              
              69,634
              
              
              69,363
              
              
              83,326Loan
                  sales
              
              
              16,561
              
              
              21,268
              
              
              16,931
              
              
              107,720
              
              
              86,062Total
                  loans receivable at end of period
              
              $
              156,731
              
              $
              144,293
              
              $
              127,855
              
              $
              129,480
              
              $
              145,283





**Loan
      Origination and Other Fees.** In
      addition to interest earned on loans, the Bank may charge loan origination
      fees.
      The ability of the Bank to charge loan origination fees is influenced by the
      demand for mortgage loans and competition from other lenders in the Bank’s
      market area. In December 1986, the FASB issued SFAS 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 the Bank’s portfolio, SFAS
      No. 91 requires that the Bank 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. SFAS No. 91 applies to fiscal years beginning after December
      15, 1987. SFAS No. 91 reduces the amount of revenue recognized by many financial
      institutions at the time such loans are originated or acquired. Fees deferred
      under SFAS No. 91 are recognized into income immediately upon the sale of the
      related loan. At December 31, 2006, the Bank had $27,000 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, the Bank also receives other fees and service
      charges that consist primarily of extension fees and late charges. The Bank
      recognized fees and service charges of $108,000, $101,000 and $88,000 for the
      years ended December 31, 2006, 2005 and 2004, respectively.





**Loan
      Concentration.** 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
      savings bank’s total capital, as defined by regulation. At December 31, 2006,
      the Bank’s loans-to-one borrower limit was $5.3 million. At December 31, 2006
      the Bank had no loans in excess of its loans-to-one borrower limitation.




8




**Delinquencies
      and Classified Assets**





The
      Bank’s collection procedures provide that when a mortgage loan is either ten
      days (in the case of ARM 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, 2006, 2005 and 2004 the percentage of nonperforming loans to net
      loans receivable were 0.87%, 0.83% and 1.58%, respectively.





**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, 2006, the Bank had $4,000 of loans 90 days or more delinquent
      that
      were still accruing interest.





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, 2006, the Bank owned $152,000 of property classified as real estate
      owned.




9




**Delinquent
      Loans.** The
      following table sets forth information regarding delinquent loans and other
      real
      estate owned by the Bank at the dates indicated. As of the dates indicated,
      the
      Bank had immaterial restructured loans within the meaning of SFAS No. 15, 114,
      and 118.





**At
                December 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(Dollars
                in Thousands)**Non-accruing
                loans:One-
                to four-family residential
            
            $
            435
            
            $
            624
            
            $
            711
            
            $
            1,022
            
            $
            769Commercial
                and agricultural real estate
            
            
            759
            
            
            —
            
            
            181
            
            
            224
            
            
            186Commercial
                and agricultural business
            
            
            45
            
            
            290
            
            
            57
            
            
            613
            
            
            301Home
                equity/Home improvement
            
            
            100
            
            
            222
            
            
            652
            
            
            1,101
            
            
            1,860Automobile
            
            
            1
            
            
            1
            
            
            68
            
            
            139
            
            
            196Other
                Consumer
            
            
            8
            
            
            20
            
            
            20
            
            
            22
            
            
            198Total
            
            
            1,348
            
            
            1,157
            
            
            1,689
            
            
            3,121
            
            
            3,510Accruing
                loans delinquent more than 90 days:One-
                to four-family residential
            
            $
            
            
            $
            2
            
            $
            270
            
            $
            168
            
            $
            64Commercial
                and agricultural real estate
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            259Commercial
                and agricultural business
            
            
            —
            
            
            —
            
            
            23
            
            
            —
            
            
            —Automobile
            
            
            —
            
            
            17
            
            
            4
            
            
            15
            
            
            —Other
                Consumer
            
            
            4
            
            
            2
            
            
            1
            
            
            7
            
            
            28Total
            
            
            4
            
            
            21
            
            
            298
            
            
            190
            
            
            351Foreclosed
                assets:One-
                to four-family residential
            
            $
            37
            
            $
            276
            
            $
            426
            
            $
            499
            
            $
            442Commercial
                and agricultural real estate
            
            
            115
            
            
            180
            
            
            139
            
            
            —
            
            
            —Automobile
            
            
            —
            
            
            15
            
            
            19
            
            
            18
            
            
            38Total
            
            
            152
            
            
            471
            
            
            584
            
            
            517
            
            
            480Total
                non-performing assets
            
            $
            1,504
            
            $
            1,649
            
            $
            2,571
            
            $
            3,828
            
            $
            4,341Total
                as a percentage of total assets
            
            
            0.56
            %
            
            0.65
            %
            
            1.01
            %
            
            1.46
            %
            
            1.72
            %







Loans
      delinquent 60 to 89 days at December 31, 2006 totaled $477,000, or 0.31% of
      net
      loans.





Interest
      income that would have been recorded under the original terms of loans
      classified as non-accruing loans totaled approximately $56,000 for the year
      ended December 31, 2006. Interest income from such loans that was included
      in
      net income for the year ended December 31, 2006 totaled $10,000.





**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
      the Bank by the FDIC and the Illinois Commissioner of Banks and Real Estate
      (“Commissioner”), the staff of such agencies reviews the Bank’s classifications
      and determine whether such classifications are adequate. Such agencies have,
      in
      the past, and may in the future require the Bank to classify certain assets
      which management has not otherwise classified or require a classification more
      severe than established by management. At December 31, 2006, the Bank’s
      classified assets totaled $2.7 million, all of which were classified
      substandard.





10


At
      December 31, 2006, the Bank’s largest nonperforming loan had a principal balance
      of $659,000 and was secured by a first mortgage on commercial property. The
      property is currently listed for sale and is in the process of foreclosure.
      The
      Bank does not anticipate any loss on the loan.





The
      decrease in the level of nonperforming assets and watch list credits reflects
      the actions taken by management over the past several years. The Company has
      an
      experienced senior loan administrator and collections and loan review
      departments which monitor the loan portfolio and actively seek to prevent any
      deterioration of asset quality.





**Allowance
      for Loan Losses**





Management’s
      policy is to provide for estimated losses on the Bank’s loan portfolio based on
      management’s evaluation of the probable losses that may be incurred. Management
      regularly reviews the Bank’s 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. The Bank’s 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, 2006, 2005 and 2004, the Bank provided
      $60,000 , $245,000
      and $550,000, respectively, to the allowance for loan losses. The Bank’s
      allowance for loan losses totaled $1.9 million, $1.8
      million and $1.9 million at December 31, 2006, 2005 and 2004, respectively.
      Although the Bank maintains its 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 the
      Bank will not be required to make additions to the allowance for loan losses
      in
      the future. Future additions to the Bank’s 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.





11


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





**December
                31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****(Dollars
                in thousands)**Balance
                at beginning of period
            
            $
            1,846
            
            $
            1,888
            
            $
            2,186
            
            $
            2,073
            
            $
            1,107Charge-offs:One-
                to four-family
                residential
            
            
            55
            
            
            161
            
            
            179
            
            
            365
            
            
            251Commercial
                and agricultural real
                estate
            
            
            30
            
            
            53
            
            
            244
            
            
            432
            
            
            55Commercial
                and agricultural
                business
            
            
            16
            
            
            8
            
            
            186
            
            
            153
            
            
            44Home
                equity/Home
                improvement
            
            
            101
            
            
            145
            
            
            294
            
            
            666
            
            
            395Automobile
            
            
            2
            
            
            30
            
            
            137
            
            
            256
            
            
            213Other
                Consumer
            
            
            14
            
            
            36
            
            
            33
            
            
            182
            
            
            163Total
            
            
            218
            
            
            433
            
            
            1,073
            
            
            2,054
            
            
            1,121Recoveries:One-
                to four-family
                residential
            
            
            78
            
            
            14
            
            
            36
            
            
            5
            
            
            17Commercial
                and agricultural real
                estate
            
            
            8
            
            
            —
            
            
            119
            
            
            18
            
            
            2Commercial
                and agricultural
                business
            
            
            —
            
            
            —
            
            
            12
            
            
            —
            
            
            11Home
                equity/Home
                improvement
            
            
            34
            
            
            98
            
            
            14
            
            
            5
            
            
            10Automobile
            
            
            17
            
            
            17
            
            
            23
            
            
            20
            
            
            26Other
                Consumer
            
            
            39
            
            
            17
            
            
            21
            
            
            44
            
            
            21Total
            
            
            176
            
            
            146
            
            
            225
            
            
            92
            
            
            87Net
                loans charge-offs
            
            
            42
            
            
            287
            
            
            848
            
            
            1,962
            
            
            1,034Additions
                charged to operations
            
            
            60
            
            
            245
            
            
            550
            
            
            2,075
            
            
            2,000Balance
                at end of period
            
            $
            1,864
            
            $
            1,846
            
            $
            1,888
            
            $
            2,186
            
            $
            2,073Total
                loans outstanding
            
            $
            156,731
            
            $
            144,293
            
            $
            127,855
            
            $
            129,480
            
            $
            145,283Average
                net loans outstanding
            
            $
            149,238
            
            $
            137,740
            
            $
            128,279
            
            $
            138,792
            
            $
            152,848Allowance
                for loan losses as a percentage of total loans at end of
                period
            
            
            1.19
            %
            
            1.28
            %
            
            1.48
            %
            
            1.69
            %
            
            1.43
            %Net
                loans charged off as a percent of average net loans
                outstanding
            
            
            0.03
            %
            
            0.21
            %
            
            0.66
            %
            
            1.41
            %
            
            0.68
            %Ratio
                of allowance for loan losses to nonperforming loans
            
            
            137.90
            %
            
            156.71
            %
            
            95.02
            %
            
            66.02
            %
            
            53.69
            %Ratio
                of allowance for loan losses to total nonperforming assets at end
                of
                period
            
            
            123.94
            %
            
            111.95
            %
            
            73.43
            %
            
            57.11
            %
            
            47.75
            %





12





**Allocation
      of Allowance for Loan Losses.** The
      following table sets forth the allocation of allowance for loan losses by loan
      category for the periods 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,****2006**
            
            **2005**
            
            **2004****Amount**
            
            %**of Loans in Each Category to Net Loans**
            
            **Amount**
            
            %**of Loans in Each Category to Net Loans**
            
            **Amount**
            
            %**of Loans in Each Category to Net Loans****(Dollars
                in Thousands)**One-
                to four-family
                residential
            
            $
            512
            
            
            26.2
            %
            $
            448
            
            
            28.2
            %
            $
            520
            
            
            33.1
            %Commercial
                and agricultural real
                estate
            
            
            244
            
            
            25.6
            
            
            199
            
            
            23.8
            
            
            198
            
            
            19.5Multi-family
                residential
            
            
            37
            
            
            3.8
            
            
            40
            
            
            4.2
            
            
            8
            
            
            1.8Commercial
                and agricultural
                business
            
            
            275
            
            
            21.2
            
            
            129
            
            
            20.2
            
            
            71
            
            
            20.8Home
                equity/Home
                improvement
            
            
            561
            
            
            17.6
            
            
            785
            
            
            18.5
            
            
            845
            
            
            19.3Automobile
            
            
            96
            
            
            3.4
            
            
            110
            
            
            3.2
            
            
            140
            
            
            3.6Other
                Consumer
            
            
            139
            
            
            3.4
            
            
            135
            
            
            3.3
            
            
            106
            
            
            3.5Total
            
            $
            1,864
            
            
            101.2
            %
            $
            1,846
            
            
            101.4
            %
            $
            1,888
            
            
            101.6
            %





**At
                December 31,****2003**
            
            **2002****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
            
            $
            555
            
            
            31.7
            %
            $
            516
            
            
            30.7
            %Commercial
                and agricultural real
                estate
            
            
            285
            
            
            16.8
            
            
            180
            
            
            12.9Multi-family
                residential
            
            
            3
            
            
            1.9
            
            
            10
            
            
            1.9Commercial
                and agricultural
                business
            
            
            192
            
            
            23.4
            
            
            169
            
            
            22.0Home
                equity/Home
                improvement
            
            
            817
            
            
            18.6
            
            
            653
            
            
            21.8Automobile
            
            
            194
            
            
            5.1
            
            
            329
            
            
            7.3Other
                Consumer
            
            
            140
            
            
            4.4
            
            
            216
            
            
            5.0Total
            
            $
            2,186
            
            
            101.9
            %
            $
            2,073
            
            
            101.6
            %





13




**Investment
      Activities**




The
      Bank’s investment portfolio includes available-for-sale investment securities
      and mortgage backed securities, other investments, and FHLB 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 FHLB stock.
      The
      Bank’s portfolio of equity investment securities totaled $48,000 at December 31,
      2006 consisting of an interest in a local community development corporation
      and
      Farmer Mac stock. In addition, the Bank’s investment portfolio included $5.6
      million of local municipal bonds. The Bank had no Federal funds sold at December
      31, 2006. The Bank’s portfolio of U.S. Government and Agency Securities totaled
      $73.2 million at December 31, 2006. The Bank’s holdings of FHLB stock totaled
      $1.1 million at December 31, 2006. The Bank had $3.1 million in interest-earning
      deposits at December 31, 2006 consisting of deposits in the Federal Home Loan
      Bank and other correspondent accounts. Total long-term investments at December
      31, 2006 were $71.7 million. The Bank’s short-term and long-term investment
      portfolio is expected to continue to change based on liquidity needs associated
      with loan origination activities.





The
      Bank
      is required under Federal regulations 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 the Bank’s loan origination and other activities. The Bank’s liquidity
      ratio at December 31, 2006 was 30.99%, which was adequate to meet its normal
      business activities.





**Mortgage-Backed
      Securities.** The Bank
      occasionally invests 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 $8.5 million, $8.9 million and $15.2
      million at December 31, 2006, 2005 and 2004, respectively. At December 31,
      2006,
      all of the mortgage-backed securities in the investment portfolio had
      fixed-rates of interest. The market value of the Bank’s mortgage-backed
      securities portfolio was $8.2 million, $8.6 million and $15.2 million at
      December 31, 2006, 2005 and 2004, respectively, and the weighted average rate
      as
      of December 31, 2006, 2005 and 2004 was 4.27%, 3.93% and 3.87%,
      respectively.





Set
      forth
      below is a table showing the Bank’s purchases, sales and repayments of
      mortgage-backed securities for the periods indicated.




**At
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(In
                  Thousands)**Mortgage-backed
                  securities at beginning of period
              
              $
              8,646
              
              $
              15,171
              
              $
              7,597
              
              $
              2,822
              
              $
              4,264Purchases
              
              
              1,096
              
              
              686
              
              
              12,605
              
              
              8,082
              
              
              —Sales
              
              
              —
              
              
              4,556
              
              
              1,470
              
              
              2,305
              
              
              60Repayments
              
              
              1,485
              
              
              2,351
              
              
              3,439
              
              
              910
              
              
              1,350Premium
                  amortization
              
              
              (25
              )
              
              (66
              )
              
              (113
              )
              
              (29
              )
              
              —Net
                  unrealized gain (loss)
              
              
              (22
              )
              
              (238
              )
              
              (9
              )
              
              (63
              )
              
              (32
              )Mortgage-backed
                  securities at end of period
              
              $
              8,210
              
              $
              8,646
              
              $
              15,171
              
              $
              7,597
              
              $
              2,822




14




**Investment
      Securities and Short-Term Investment Portfolio.** The
      following table sets forth the carrying value of the Bank’s investment
      securities portfolio and short-term investments at the dates indicated. At
      December 31, 2006, the market value of the Bank’s short-term investment
      portfolio approximated its cost.




**At
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(In
                  Thousands)**Investment
                  securities:FHLB
                  stock
              
              $
              1,109
              
              $
              1,539
              
              $
              1,466
              
              $
              1,381
              
              $
              1,279Equity
                  securities and municipal bonds
              
              
              5,654
              
              
              1,199
              
              
              2,015
              
              
              1,955
              
              
              779U.S.
                  Government and agency securities
              
              
              73,215
              
              
              78,083
              
              
              83,192
              
              
              97,578
              
              
              72,846Total
                  investment securities
              
              $
              79,978
              
              $
              80,821
              
              $
              86,673
              
              $
              100,914
              
              $
              74,904Short-term
                  investments:Interest-bearing
                  deposits in other depository institutions
              
              $
              3,127
              
              $
              1,444
              
              $
              4,793
              
              $
              1,842
              
              $
              3,865Federal
                  funds sold
              
              
              —
              
              
              —
              
              
              —
              
              
              500
              
              
              800Total
                  short-term investments
              
              $
              3,127
              
              $
              1,444
              
              $
              4,793
              
              $
              2,342
              
              $
              4,665




The
      following table sets forth the maturities and weighted average yields of the
      Bank’s securities portfolio, excluding FHLB stock and equity securities, at
      December 31, 2006.




**Carrying
                  Value at December 31, 2006****Less
                  than**
                **1
                  Year**
              
              **1
                  to 5**
                **Years**
              
              **5
                  to 10**
                **Years**
              
              **Over
                  10 years**
              
              **Total**
                **Investment**
                **Securities****(Dollars
                  In Thousands)**Securities
                  available-for-sale:U.S.
                  Government
              
              $
              6,714
              
              $
              53,181
              
              $
              12,835
              
              $
              485
              
              $
              73,215Municipal
                  bonds
              
              
              388
              
              
              910
              
              
              3,296
              
              
              1,013
              
              
              5,607Total
              
              $
              7,102
              
              $
              54,091
              
              $
              16,131
              
              $
              1,498
              
              $
              78,822Weighted
                  average yield
              
              
              2.92
              %
              
              3.54
              %
              
              4.65
              %
              
              4.01
              %
              
              3.72
              %




15


**Sources
      of Funds**





**General.** Deposits
      and borrowings are the major sources of funds for lending and other investment
      purposes. In addition, the Bank derives 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.** Consumer
      and commercial deposits are attracted principally from within the Bank’s 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 demand accounts, term certificate accounts and
      individual retirement accounts. The Bank 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. The Bank
      regularly evaluates its internal cost of funds, surveys rates offered by
      competing institutions, reviews the Bank’s cash flow requirements for lending
      and liquidity and executes rate changes when deemed appropriate. The Bank does
      not obtain funds through brokers, nor does it solicit funds outside its market
      area. The Bank has on occasion offered above market interest rates in order
      to
      attract deposits.





**Deposit
      Activity**





The
      following table sets forth the deposit activities of the Bank for the periods
      indicated.




**At
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(In
                  Thousands)**Deposits
              
              $
              934,581
              
              $
              880,758
              
              $
              820,349
              
              $
              895,755
              
              $
              1,067,912Withdrawals
              
              
              924,401
              
              
              891,454
              
              
              833,264
              
              
              890,499
              
              
              1,064,640Net
                  increase (decrease) before interest credited
              
              
              10,180
              
              
              (10,696
              )
              
              (12,915
              )
              
              5,256
              
              
              3,272Interest
                  credited
              
              
              4,364
              
              
              3,332
              
              
              3,476
              
              
              4,315
              
              
              5,431Net
                  increase (decrease) in deposits
              
              $
              14,544
              
              $
              (7,364
              )
              $
              (9,439
              )
              $
              9,571
              
              $
              8,703





16





**Deposit
      Portfolio**





Deposits
      in the Bank as of December 31, 2006 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
              
              $
              15,113
              
              
              6.49
              %1.12
              
              
              None
              
              
              Interest-bearing
                  checking
              
              
              50
              
              
              27,018
              
              
              11.601.36
              
              
              None
              
              
              Money
                  market deposit accounts
              
              
              2,500
              
              
              5,265
              
              
              2.264.83
              
              
              None
              
              
              Money
                  market savings account
              
              
              2,500
              
              
              16,840
              
              
              7.231.02
              
              
              None
              
              
              Savings
              
              
              50
              
              
              22,575
              
              
              9.69**Certificates
                  of Deposit**4.57
              
              
              Less
                  than 1 year
              
              
              Fixed
                  term, fixed rate
              
              $
              500
              
              
              107,645
              
              
              46.224.45
              
              
              1-2
                  years
              
              
              Fixed
                  term, fixed rate
              
              
              500
              
              
              22,368
              
              
              9.604.42
              
              
              2-3
                  years
              
              
              Fixed
                  term, fixed rate
              
              
              500
              
              
              7,483
              
              
              3.214.91
              
              
              3-4
                  years
              
              
              Fixed
                  term, fixed rate
              
              
              500
              
              
              7,097
              
              
              3.055.08
              
              
              Over
                  4 years
              
              
              Fixed
                  term, fixed rate
              
              
              500
              
              
              1,509
              
              
              0.65$
              232,913
              
              
              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 offered by the Bank between the dates
      indicated.




At
                  December 31,**2006**
              
              **2005**
              
              **2004**
              
              **2003****Balance**
              
              **Percent**
              
              **Change**
              
              **Balance**
              
              **Percent**
              
              **Change**
              
              **Balance**
              
              **Percent**
              
              **Change**
              
              **Balance**
              
              **Percent**
              
              **Change****(Dollars
                  in Thousands)**Club
                  accounts
              
              $
              146
              
              
              0.06
              %
              $
              9
              
              $
              137
              
              
              0.06
              %
              $
              11
              
              $
              126
              
              
              0.06
              %
              $
              (94
              )
              $
              220
              
              
              0.09
              %
              $
              6Noninterest-bearing
                  checking
              
              
              15,113
              
              
              6.49
              
              
              599
              
              
              14,514
              
              
              6.65
              
              
              290
              
              
              14,224
              
              
              6.30
              
              
              1,373
              
              
              12,851
              
              
              5.46
              
              
              (678
              )Interest-bearing
                  checking
              
              
              27,018
              
              
              11.60
              
              
              (238
              )
              
              27,256
              
              
              12.48
              
              
              19
              
              
              27,237
              
              
              12.10
              
              
              (842
              )
              
              28,079
              
              
              11.94
              
              
              4,037Savings
              
              
              22,429
              
              
              9.63
              
              
              (6,441
              )
              
              28,870
              
              
              13.29
              
              
              (960
              )
              
              29,967
              
              
              13.27
              
              
              (492
              )
              
              30,459
              
              
              12.96
              
              
              4,458Money
                  market deposit accounts
              
              
              5,265
              
              
              2.26
              
              
              (3,515
              )
              
              8,780
              
              
              4.02
              
              
              (470
              )
              
              9,250
              
              
              4.09
              
              
              (444
              )
              
              9,694
              
              
              4.12
              
              
              (958
              )Money
                  market savings accounts
              
              
              16,840
              
              
              7.23
              
              
              16,840
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Certificates
                  of deposit that mature:within
                  12 months
              
              
              107,645
              
              
              46.22
              
              
              7,777
              
              
              99,868
              
              
              45.67
              
              
              (6,499
              )
              
              106,230
              
              
              47.05
              
              
              (6,349
              )
              
              112,579
              
              
              47.87
              
              
              2,907within
                  12-36 months
              
              
              29,851
              
              
              12.82
              
              
              2,119
              
              
              27,732
              
              
              12.70
              
              
              (578
              )
              
              28,310
              
              
              12.53
              
              
              (4,781
              )
              
              33,091
              
              
              14.07
              
              
              (3,327
              )beyond
                  36 months
              
              
              8,606
              
              
              3.69
              
              
              (2,607
              )
              
              11,213
              
              
              5.13
              
              
              823
              
              
              10,390
              
              
              4.60
              
              
              2,190
              
              
              8,200
              
              
              3.49
              
              
              3,126Total
              
              $
              232,913
              
              
              100.00
              %
              $
              14,543
              
              $
              218,370
              
              
              100.00
              %
              $
              (7,364
              )
              $
              225,734
              
              
              100.00
              %
              $
              (9,439
              )
              $
              235,173
              
              
              100.00
              %
              $
              9,571




18




**Time
      Deposits by Rates**





The
      following table sets forth the certificates of deposit of the Bank classified
      by
      rates as of the dates indicated:




**At
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(In
                  Thousands)**Rate1.99%
                  or less
              
              $
              425
              
              $
              13,044
              
              $
              39,500
              
              $
              33,579
              
              $
              3,7572.00-3.99%
              
              
              31,685
              
              
              73,868
              
              
              82,670
              
              
              87,935
              
              
              83,6744.00-5.99%
              
              
              113,909
              
              
              51,479
              
              
              17,803
              
              
              22,201
              
              
              41,1646.00-7.99%
              
              
              83
              
              
              422
              
              
              3,102
              
              
              7,983
              
              
              20,4078.00
                  and greater
              
              
              —
              
              
              —
              
              
              1,855
              
              
              2,172
              
              
              2,162$
              146,102
              
              $
              138,813
              
              $
              144,930
              
              $
              153,870
              
              $
              151,164




The
      following table sets forth the amount and maturities of certificates of deposit
      at December 31, 2006.





**Amount
                Due**Rate
            
            **Less
                Than One Year**
            
            **Over
                1 Year to 2 Years**
            
            **Over
                2 Years to 3 Years**
            
            **Over
                3 Years to 4 Years**
            
            **Over
                4 Years**
            
            **Total****(Dollars
                in Thousands)**1.99%
                or less
            
            $
            325
            
            $
            —
            
            $
            100
            
            $
            —
            
            $
            —
            
            $
            4252.00-3.99%
            
            
            22,129
            
            
            7,214
            
            
            2,071
            
            
            271
            
            
            —
            
            
            31,6854.00-5.99%
            
            
            85,191
            
            
            15,147
            
            
            5,236
            
            
            6,826
            
            
            1,509
            
            
            113,9096.00-and
                greater
            
            
            —
            
            
            7
            
            
            76
            
            
            —
            
            
            —
            
            
            83Weighted
                average rate
            
            
            4.57
            %
            
            4.45
            %
            
            4.42
            %
            
            4.91
            %
            
            5.08
            %
            
            4.58
            %




**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, 2006.




**Maturity
                  Period**
              
              **Certificates**
                **of
                  Deposit****(In
                  Thousands)**Less
                  than 3 months
              
              $
              18,1443-6
                  months
              
              
              12,3246-12
                  months
              
              
              16,233Over
                  12 months
              
              
              14,461Total
              
              $
              61,162




19




**Borrowings**





Deposits
      are the primary source of funds for the Bank’s lending and investment
      activities. If the need arises, the Bank may rely upon advances from the FHLB
      to
      supplement its supply of available funds and to fund deposit withdrawals.
      Advances from the FHLB are typically secured by the Bank’s one- to four-family
      residential mortgage loans, United States Government and agency securities
      and
      mortgage-backed securities. The FHLB functions as a central reserve bank
      providing credit for the Bank and other member savings associations and
      financial institutions. As a member, the Bank is required to own capital stock
      in the FHLB and is authorized to apply for advances on the security of such
      stock and certain of its 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
      FHLB’s assessment of the institution’s creditworthiness. At December 31, 2006,
      the Bank had $4.0 million in **** FHLB
      advances outstanding.





Other
      borrowings consist of securities sold under agreements to repurchase which
      are
      swept daily from commercial deposit accounts. The Company may be required to
      provide additional collateral based on the fair value of the underlying
      securities.





The
      following table sets forth certain information regarding borrowings by the
      Bank
      for the dates indicated.




**At
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(Dollars
                  in Thousands)**Weighted
                  average rate paid on:(1)FHLB
                  advances
              
              
              4.53
              %
              
              3.91
              %
              
              1.68
              %
              
              1.30
              %
              
              —
              %Other
                  borrowings
              
              
              4.55
              %
              
              3.14
              %
              
              1.40
              %
              
              1.16
              %
              
              1.81
              %FHLB
                  advances:Maximum
                  balance
              
              $
              10,000
              
              $
              15,500
              
              $
              9,000
              
              $
              7,500
              
              $
              —Average
                  balance
              
              $
              6,103
              
              $
              8,071
              
              $
              2,993
              
              $
              1,243
              
              $
              —Other:Maximum
                  balance
              
              $
              5,035
              
              $
              3,350
              
              $
              3,372
              
              $
              3,845
              
              $
              4,364Average
                  balance
              
              $
              3,499
              
              $
              2,116
              
              $
              2,185
              
              $
              2,192
              
              $
              2,097





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




The
      following table summarizes significant contractual obligations and other
      commitments at December 31, 2006.




**At
                    December 31, 2006****Less
                    than**
                  **1
                    year**
                
                **1-3
                    years**
                
                **3-5
                    years**
                
                **More
                    than**
                  **5
                    years**
                
                **Total****(In
                    Thousands)**Time
                    deposits
                
                $
                107,645
                
                $
                29,851
                
                $
                8,606
                
                $
                —
                
                $
                146,102FHLB
                    advances
                
                
                2,000
                
                
                2,000
                
                
                —
                
                
                —
                
                
                4,000Other
                    borrowings
                
                
                5,035
                
                
                —
                
                
                —
                
                
                —
                
                
                5,035Total
                    investment securities
                
                $
                114,680
                
                $
                31,851
                
                $
                8,606
                
                $
                —
                
                $
                155,137


20




**Trust
      Services**





The
      Bank
      operates a full-service trust department. As of December 31, 2006, the Bank’s
      trust department was managing $30.5 million in trust assets. Trust fees
      collected in 2006 and 2005 totaled $75,000, respectively.





**Subsidiary
      Activities**





The
      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, to a lesser extent,
      commercial real estate loans, one- to four-family loans, pursuant to Veteran’s
      Administration (“VA”) and Federal Housing Administration (“FHA”) guidelines, and
      multi-family 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, 2006, the Bank had
      $2.5 million in equity and retained earnings in Financial Resources. For the
      year ended December 31, 2006, Financial Resources had net income of
      $278,000.




21


**Competition**





The
      Bank
      encounters significant competition both in attracting deposits and in
      originating real estate and other loans. Its most direct competition for
      deposits has come historically from commercial banks, other savings banks,
      savings associations and credit unions in its market area, and the Bank expects
      continued strong competition from such financial institutions in the foreseeable
      future. The Bank competes 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 the Bank’s
      market areas as well as the increased efforts by commercial banks to expand
      mortgage loan originations.





The
      Bank
      competes 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.





The
      Bank’s market areas consist of Morgan, Macoupin, and Montgomery Counties,
      Illinois. The Bank’s market areas have a number of financial institutions,
      however, the Bank is the largest independent financial institution headquartered
      in Jacksonville.





**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. The Bank is an
      Illinois-chartered savings bank subject to extensive regulation by the Illinois
      Commissioner of Banks and Real Estate (the “Commissioner”) and the FDIC. Its
      deposit accounts are insured up to applicable limits by the FDIC. The Bank
      must
      file reports with the Commissioner and the FDIC 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 FDIC to review the Bank’s compliance with various
      regulatory requirements. The 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 FDIC 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 FDIC, or Congress could have a material impact on the
      operations of the Bank. Certain of the regulatory requirements applicable to
      the
      Bank are referred to below or elsewhere herein.





**Capital
      Maintenance.** Under
      FDIC regulations, the 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
      FDIC
      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,
      2006, the Bank exceeded its applicable capital requirements.





22


**Illinois
      Savings Bank Regulation.** As an
      Illinois-chartered savings bank, the Bank is subject to regulation and
      supervision by the Commissioner. The Commissioner’s regulation of the Bank
      covers, among other things, the Bank’s internal organization ( *i.e.* ,
      charter, bylaws, capital requirements, transactions with directors and officers,
      and composition of the board of directors), as well as supervision of
      permissible activities and mergers and acquisitions. The 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 the Bank is prescribed by Illinois law and regulations,
      as well as applicable Federal laws and regulations, and the Bank is prohibited
      from engaging in any activities not permitted by such laws and
      regulations.





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,
      2006, the 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 FDIC. 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.





23


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.





**Deposit
      Insurance**





Deposit
      accounts in the Bank are insured by the FDIC 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. The Bank’s deposits, therefore, are subject
      to FDIC insurance assessments.





On
      February 15, 2006, federal legislation to reform federal deposit insurance
      was
      enacted. This new legislation required, among other things, that the FDIC adopt
      regulations increasing the maximum amount of federal deposit insurance coverage
      per separately insured depositor beginning in 2010 (with a cost of living
      adjustment to become effective in five years) and modifying the deposit fund’s
      reserve ratio for a range between 1.15% and 1.50% of estimated insured
      deposits.





On
      November 2, 2006, the FDIC adopted final regulations establishing a risk-based
      assessment system that will enable the FDIC to more closely tie each financial
      institution’s premiums to the risk it poses to the deposit insurance fund. Under
      the new risk-based assessment system, which becomes effective in the beginning
      of 2007, the FDIC will evaluate the risk of each financial institution based
      on
      three primary sources of information: (1) its supervisory rating, (2) its
      financial ratios, and (3) its long-term debt issuer rating, if the institution
      has one. The new rates for nearly all of the financial institution industry
      will
      vary between five and seven cents for every $100 of domestic deposits. At the
      same time, the FDIC also adopted final regulations designating the reserve
      ratio
      for the deposit insurance fund during 2007 at 1.25% of estimated insured
      deposits.





Effective
      March 31, 2006, the FDIC merged the Bank Insurance Fund and the Savings
      Association Insurance Fund into a single insurance fund called the Deposit
      Insurance Fund. The merger of the two separate insurance funds did not affect
      the authority of the Financing Corporation, a mix-ownership government
      corporation, to impose and collect, with approval of the FDIC, assessments
      for
      anticipated payments, insurance costs and custodial fees on bonds issued by
      the
      Financing Corporation in the 1980s to recapitalize the Federal Savings and
      Loan
      Insurance Corporation. The bonds issued by the Financing Corporation are due
      to
      mature in 2017 through 2019. For the quarter ended December 31, 2006, the
      Financing Corporation assessment was equal to 1.24 basis points for each $100
      in
      domestic deposits maintained at an institution.





**Community
      Reinvestment Act**





**Federal
      Regulation** .
      Under
      the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, a
      savings institution has a continuing and affirmative obligation consistent
      with
      its safe and sound operation to help meet the credit needs of its entire
      community, including low and moderate income neighborhoods. The CRA does not
      establish specific lending requirements or programs for financial institutions
      nor does it limit an institution’s discretion to develop the types of products
      and services that it believes are best suited to its particular community,
      consistent with the CRA. The CRA requires the FDIC, in connection with its
      examination of a savings institution, to assess the institution’s record of
      meeting the credit needs of its community and to take such record into account
      in its evaluation of certain applications by such institution.





24


**The
      USA PATRIOT Act**





The
      USA
      PATRIOT Act, which was signed into law on October 26, 2001, gave the federal
      government new powers to address terrorist threats through enhanced domestic
      security measures, expanded surveillance powers, increased information sharing
      and broadened anti-money laundering requirements. The USA PATRIOT Act has no
      material impact on the Bank’s operations.





**Sarbanes-Oxley
      Act of 2002**





On
      July
      30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002
      (“Sarbanes-Oxley”), which implemented legislative reforms intended to address
      corporate and accounting fraud. In addition to the establishment of a new
      accounting oversight board that enforces auditing, quality control and
      independence standards, Sarbanes-Oxley places certain restrictions on the scope
      of services that may be provided by accounting firms to their public company
      audit clients. Any non-audit services being provided to a public company audit
      client requires preapproval by the company’s audit committee. In addition,
      Sarbanes-Oxley makes certain changes to the requirements for audit partner
      rotation after a period of time. Sarbanes-Oxley requires chief executive
      officers and chief financial officers, or their equivalent, to certify to the
      accuracy of periodic reports filed with the Securities and Exchange Commission,
      subject to civil and criminal penalties if they knowingly or willingly violate
      this certification requirement. The Company’s Chief Executive Officer and Chief
      Financial Officer have signed certifications to this Form 10-K as required
      by
      Sarbanes-Oxley. In addition, under Sarbanes-Oxley, counsel is required to report
      evidence of a material violation of the securities laws or a breach of fiduciary
      duty by a company to its chief executive officer or its chief legal officer,
      and, if such officer does not appropriately respond, to report such evidence
      to
      the audit committee or other similar committee of the board of directors or
      the
      board itself.





Under
      Sarbanes-Oxley, longer prison terms will apply to corporate executives who
      violate federal securities laws; the period during which certain types of suits
      can be brought against a company or its officers is extended; and bonuses issued
      to top executives prior to restatement of a company’s financial statements are
      now subject to disgorgement if such restatement was due to corporate misconduct.
      Executives are also prohibited from trading the company’s securities during
      retirement plan “blackout” periods, and loans to company executives (other than
      loans by financial institutions permitted by federal rules and regulations)
      are
      restricted. In addition, a provision directs that civil penalties levied by
      the
      Securities and Exchange Commission as a result of any judicial or administrative
      action under Sarbanes-Oxley be deposited to a fund for the benefit of harmed
      investors. The Federal Accounts for Investor Restitution provision also requires
      the Securities and Exchange Commission to develop methods of improving
      collection rates. The legislation accelerates the time frame for disclosures
      by
      public companies, as they must immediately disclose any material changes in
      their financial condition or operations. Directors and executive officers must
      also provide information for most changes in ownership in a company’s securities
      within two business days of the change.





Sarbanes-Oxley
      increases the oversight of, and codifies certain requirements relating to audit
      committees of public companies and how they interact with the company’s
“registered public accounting firm.” Audit Committee members must be independent
      and are absolutely barred from accepting consulting, advisory or other
      compensatory fees from the issuer. In addition, companies must disclose whether
      at least one member of the committee is a “financial expert” (as such term is
      defined by the Securities and Exchange Commission) and if not, why not. Under
      Sarbanes-Oxley, a company’s registered public accounting firm is prohibited from
      performing statutorily mandated audit services for a company if such company’s
      chief executive officer, chief financial officer, comptroller, chief accounting
      officer or any person serving in equivalent positions had been employed by
      such
      firm and participated in the audit of such company during the one-year period
      preceding the audit initiation date. Sarbanes-Oxley also prohibits any officer
      or director of a company or any other person acting under their direction from
      taking any action to fraudulently influence, coerce, manipulate or mislead
      any
      independent accountant engaged in the audit of the company’s financial
      statements for the purpose of rendering the financial statements materially
      misleading. Sarbanes-Oxley also requires the Securities and Exchange Commission
      to prescribe rules requiring inclusion of any internal control report and
      assessment by management in the annual report to shareholders. Sarbanes-Oxley
      requires the company’s registered public accounting firm that issues the audit
      report to attest to and report on management’s assessment of the company’s
      internal controls.





25


Compliance
      with the Sarbanes-Oxley Act has not had a material impact on the Company’s
      results of operations or financial condition.





**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.





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.




26


**FEDERAL
      AND STATE TAXATION**





**Federal
      Taxation.** For
      federal income tax purposes, the Company files a federal income tax return
      based
      upon a tax year ended December 31. Because the Mutual Holding Company owns
      less
      than 80% of the outstanding Common Stock of the Company it is not permitted
      to
      file a consolidated federal income tax return with the Company. Since the Mutual
      Holding Company has no assets other than the stock of the Company and $1.0
      million in cash, and a $186,000 investment in the local Bankers’ Bancorp, Inc.,
      it will have no material federal income tax liability.





The
      Mutual Holding Company and the Company 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 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 the Company 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). The Company 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.





The
      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. The Bank’s state income tax returns for the tax years ended
      December 31, 1991, 1990 and 1989, have been audited by the Illinois tax
      authorities and did not have to be amended as a result of such audit.





**Personnel**





As
      of
      December 31, 2006, the Bank and its subsidiary had a total of 101 full-time
      and
      20 part-time employees. None of the Bank’s employees is represented by a
      collective bargaining group. Management believes that its relationship with
      the
      Bank’s employees is good.





**Availability
      of Annual Report on Form 10-K**





The
      Company’s Annual Report on Form
      10-K is available on its website at www.Jacksonvillesavings.com.





**Item
      1A.**  **Risk
      Factors**




**Changing
      Interest Rates May Cause Net Earnings to Decline.**





As
      market
      interest rates rise, the Bank 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 the Bank’s loans will be less should the Bank
      choose to sell such loans in the secondary market. Since as a general matter
      the
      Bank’s interest-bearing liabilities reprice or mature more quickly than the
      Bank’s interest-earning assets, an increase in interest rates generally would
      result in a decrease in the Bank’s average interest rate spread and net interest
      income.





27


**If
      the Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses,
      the
      Bank’s 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. The Bank may experience significant loan losses, which could
      have
      a material adverse effect on the Bank’s 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 the Bank’s
      loans.





In
      determining the amount of the allowance for loan losses, management reviews
      delinquent loans for potential impairments in their carrying value.
      Additionally, the Bank applies 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 the
      Bank uses 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, the Bank may need
      to
      significantly increase the provision for losses on loans, particularly if one
      or
      more of the Bank’s larger loans or credit relationships becomes delinquent or if
      the Bank expands non-residential, lending. In addition, federal and state
      regulators periodically review the Bank’s 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 the Bank’s Loans Decreases.**





The
      Bank’s 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 the Bank has 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 the
      Bank’s borrowers to make timely repayments of their loans, which would have an
      adverse impact on earnings.




**Public
      Shareholders Do Not Exercise Voting Control Over Jacksonville Bancorp,
      Inc.**





A
      majority of the voting stock of Jacksonville Bancorp, Inc. will be owned by
      Jacksonville Bancorp, MHC. Jacksonville Bancorp, MHC will be 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 the Bank’s Market Area May Limit the Bank’s 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 the
      Bank and may offer certain services that the Bank does not or cannot provide.
      The Bank’s profitability depends upon the continued ability to successfully
      compete.





28


**We
      Operate in a Highly Regulated Environment and May be Adversely Affected by
      Changes in Laws and Regulations.**





We
      are
      subject to extensive regulation, supervision and examination by the Office
      of
      Thrift Supervision, our chartering authority, and by the Federal Deposit
      Insurance Corporation, as insurer of deposits and by the State of Illinois.
      As
      federally chartered holding companies, Jacksonville Bancorp, Inc. and
      Jacksonville Bancorp, MHC also will be subject to regulation and oversight
      by
      the Office of Thrift Supervision. Such regulation and supervision govern the
      activities in which an institution and its holding companies may engage and
      are
      intended primarily for the protection of the insurance fund and depositors.
      Regulatory authorities have extensive discretion in connection with their
      supervisory and enforcement activities, including the imposition of restrictions
      on the operation of an institution, the classification of assets by the
      institution and the adequacy of an institution’s allowance for loan losses. Any
      change in such regulation and oversight, whether in the form of regulatory
      policy, regulations, or legislation, including changes in the regulations
      governing mutual holding companies, could have a material impact on Jacksonville
      Savings Bank, Jacksonville Bancorp, Inc., and our operations.





**Item
      1B.**  **Unresolved
      Staff Comments**




Not
      applicable.





**ITEM
      2.**  **Properties**




The
      Bank
      conducts its business through its 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 of the Bank at December 31, 2006. At
      December 31, 2006, the Bank’s premises and equipment had an aggregate net book
      value of approximately $6.6 million. The Bank believes that its branch
      facilities are adequate to meet the present and immediately foreseeable needs
      of
      the Bank and the Company. All facilities are owned.




**Location**
              
              **Year**
                **Occupied**
              
              **Net**
                **Book
                  Value**
                **at
                  December 31,**
                **2006****(In
                  Thousands)**Main
                  Office
                1211
                  West Morton AvenueJacksonville,
                  Illinois
              
              
              1994
              
              $
              4,322Branch
                  Office211
                  West State StreetJacksonville,
                  Illinois
              
              
              1961
              
              
              662Branch
                  Office903
                  South MainJacksonville,
                  Illinois
              
              
              1989
              
              
              195Branch
                  Office501
                  North State StreetLitchfield,
                  Illinois
              
              
              1997
              
              
              598Branch
                  Office100
                  North DyeVirden,
                  Illinois
              
              
              1986
              
              
              241Branch
                  Office510
                  SuperiorChapin,
                  Illinois
              
              
              2000
              
              
              505Branch
                  Office202
                  StateConcord,
                  Illinois
              
              
              2000
              
              
              33




29


**ITEM
      3.**  **Legal
      Proceedings**




There
      are
      various claims and lawsuits in which the Company is periodically involved
      incident to the Company’s business. In the opinion of management after
      consultation with legal counsel, such claims and lawsuits in the aggregate
      are
      immaterial to the Company and/or Bank’s financial condition and results of
      operations.





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




None.





**PART
      II**





**ITEM
      5.**  **Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
      of Equity Securities**




The
      “Stockholder Information” section of the Company’s annual report to stockholders
      for the fiscal year ended December 31, 2006 (the “2006 Annual Report to
      Stockholders”) is filed as an exhibit to this Form 10-K and is incorporated
      herein by reference. No shares of common stock were purchased by the Company
      during the fourth quarter of 2006.





Set
      forth
      below is information as of December 31, 2006 regarding equity compensation
      plans. The plans that have been approved by the stockholders of the Company
      are
      the 1996 Stock Option Plan and 2001 Stock Option Plan. The Company did not
      have
      any equity compensation plans that were not approved by its
      stockholders.




**Plan**
              
              **Number
                  of securities to be issued upon exercise of outstanding options
                  and
                  rights**
              
              **Weighted
                  average**
                **exercise
                  price**
              
              **Number
                  of securities remaining available for issuance under
                  plan**Equity
                  compensation plans approved by stockholders
              
              
              38,145
              
              $
              10.59
              
              
              3,300Equity
                  compensation plans not approved by stockholders
              
              
              —
              
              
              —
              
              
              —Total
              
              
              38,145
              
              $
              10.59
              
              
              3,300




**ITEM
      6.**  **Selected
      Financial Data**




The
      “Selected Consolidated Financial Information” section of the 2006 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 2005 Annual Report to Stockholders is filed as an
      exhibit to this Form 10-K and is incorporated herein by reference.





30


**ITEM
      7A.** **Quantitative
      and Qualitative Disclosure about Market**




The
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” section of the 2006 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**




The
      Company’s Chief Executive Officer and Chief Financial Officer have concluded,
      based on their evaluation within 90 days prior to filing date of this report,
      that the Company’s 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.





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
      and Executive Officers of the Company**




Information
      concerning the directors and certain officers of the Company is incorporated
      by
      reference hereunder in the Proxy Statement for the 2007 Annual
      Meeting.




**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 2007 Annual
      Meeting.





31


**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 2007 Annual Meeting.





**ITEM
      13.** **Certain
      Relationships and Related Transactions**




Information
      required under this item is incorporated by reference to the Proxy Statement
      for
      the 2007 Annual Meeting.





**ITEM
      14.** **Principal
      Accountant Fees and Services**




Information
      required under this item is incorporated by reference to the Proxy Statement
      for
      the 2007 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, 2006 and
                2005;





(C)
            Consolidated
                Statements of Income - years ended December 31, 2006, 2005 and
                2004;





(D)
            Consolidated
                Statements of Stockholders’ Equity - years ended December 31, 2006, 2005
                and 2004;





(E)
            Consolidated
                Statements of Cash Flows - years ended December 31, 2006, 2005 and
                2004;
                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.





(b)
            Exhibits





(1)
            Federal
                Charter and Bylaws(1)





(2)
            Instruments
                defining the rights of security holders, including debentures (Not
                Applicable).




32




(7)
            Letter
                re: change in accounting principles (Not Applicable)  (10)
            Material contracts(1)





(A)(1)
            Employment Agreement between Jacksonville Savings
              Bank
              and Andrew F. Applebee  (A)(2)
            Employment Agreement between Jacksonville Savings
              Bank
              and Richard A. Foss  (A)(3)
            Employment Agreement between Jacksonville Savings
              Bank
              and John C. Williams  (B)
            Jacksonville
                Savings Bank 1996 Stock Option Plan(2)


(C)
            Jacksonville
                Savings Bank 2001 Stock Option Plan(2)


(D)
            Amendments
                to the Jacksonville Savings Bank Stock Option Plans(3)




(13)
            2006
                Annual Report to Stockholders  (14)
            Code of Ethics(4)




(16)
            Letter
                of McGladrey & Pullen, LLP(5)





(21)
            Subsidiaries  (23)
            Consent of BKD LLP to incorporate financial statements
              into Form S-8 and Consent of McGladrey & Pullen,
              LLP.  (31.1)
            Certification required pursuant to Section 302 of
              the
              Sarbanes-Oxley Act of 2002.  (31.2)
            Certification required pursuant to Section 302 of
              the
              Sarbanes-Oxley Act of 2002.  (32.1)
            Certification of Chief Executive Officer and Chief
              Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
              of
              2002.







*
      Previously filed.




(1)
              Incorporated
                  by reference to the Company’s Current Report 8-A12G filed with the
                  Securities and ExchangeCommission
                  on May 2, 2002.




(2)
            Incorporated
                by reference to the Company’s registration statement on Form S-8 filed
                with the Securities andExchange
                Commission on February 2, 2004.




(3)
            Incorporated
                by reference to the Company’s Annual Report on Form 10-K for the year
                ended December 31,2005.




(4)
            Incorporated
                by reference to the Company’s Annual Report on Form 10-K for the year
                ended December 31,2003.




(5)
            Incorporated
                by reference to the Company’s Annual Report on Form 10-K for the year
                ended December 31,2004.





33


**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
                21, 2007
              By:
              /s/ Richard
                A. FossRichard A. Foss, President
                and Chief Executive
                  Officer





Pursuant
      to the requirements of the Securities Exchange of 1934, this report has been
      signed below by the following persons on behalf of the Registrant and in the
      capacities and on the dates indicated.





By:
            /s/ Richard
              A. Foss
            
            By:
            /s/ Andrew
              F.
              ApplebeeRichard
                A. Foss, President,
              Chief
                  Executive Officer and Director
            
            
            Andrew
                F. Applebee, Chairman of the BoardDate: March 21, 2007
            
            Date:
              March 21,
              2007






By:
              /s/ Diana
                S.
                Tone
              
              By:
              /s/ Dean
                H.
                HessDiana
                    S. Tone
                  Chief
                    Financial Officer
              
              
              Dean
                H. Hess, DirectorDate: March 21, 2007
              
              Date:
                March 21,
                2007






By:
                /s/ John
                  L.
                  Eyth
                
                By:
                /s/ Emily
                  J.
                  OsburnJohn
                      L. Eyth, Director
                
                
                Emily
                  J. Osburn, DirectorDate: March 21, 2007
                
                Date:
                  March 21,
                  2007
   By:
                  /s/ Harmon
                    B.
                    Deal, III
                  
                  By:
                  /s/ Harvey
                    D.
                    Scott, IIIHarmon
                      B. Deal, III, Director
                  
                  
                  Harvey
                    D. Scott III, DirectorDate: March 21, 2007
                  
                  Date:
                    March 21,
                    2007


By:
                  /s/ Michael
                    R. Goldasich
                  
                  By:
                  /s/ John
                    C.
                    WilliamsMichael
                    R. Goldasich, Director
                  
                  
                  John C. Williams, Director,
                    Senior Vice President and Trust
                      OfficerDate: March 21, 2007
                  
                  Date:
                    March 21,
                    2007





**EXHIBIT
      INDEX**





(1)
            Federal
                Charter and Bylaws(1)





(10)
            Material
                contracts(1)




(A)(1)
              Employment Agreement between Jacksonville Savings
                Bank
                and Andrew F. Applebee  (A)(2)
              Employment Agreement between Jacksonville Savings
                Bank
                and Richard A. Foss  (A)(3)
              Employment Agreement between Jacksonville Savings
                Bank
                and John C. Williams  (B)
              Jacksonville
                  Savings Bank 1996 Stock Option Plan(2)
 (C)
              Jacksonville
                  Savings Bank 2001 Stock Option Plan(2)
 (D)
              Amendments
                  to the Jacksonville Savings Bank Stock Option Plans(3)





(13)
            2006
                Annual Report to Stockholders





(14)
            Code
                of Ethics(4)





(16)
            
            Letter
                of McGladrey & Pullen, LLP(5)





(21)
            Subsidiaries




(23)
            Consent of BKD LLP and McGladrey & Pullen, LLP to
              incorporate financial statement into Form S-8.  (31.1)
            Certification required pursuant to Section 302 of
              the
              Sarbanes-Oxley Act of 2002.  (31.2)
            Certification required pursuant to Section 302 of
              the
              Sarbanes-Oxley Act of 2002.  (32.1)
            Certification of Chief Executive Officer and Chief
              Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
              of
              2002.


Previously
        filed
  (1)
                Incorporated
                    by reference to the Company’s Current Report 8-A12G filed with the
                    Securities and ExchangeCommission
                    on May 2, 2002.
  (2)
              Incorporated
                  by reference to the Company’s registration statement on Form S-8 filed
                  with the Securities andExchange
                  Commission on February 2, 2004.
  (3)
              Incorporated
                  by reference to the Company’s Annual Report on Form 10-K for the year
                  ended December 31,2005.
  (4)
              Incorporated
                  by reference to the Company’s Annual Report on Form 10-K for the year
                  ended December 31,2003.
  (5)
              Incorporated
                  by reference to the Company’s Annual Report on Form 10-K for the year
                  ended December 31,2004.