Exhibit
      13




***Jacksonville
              Bancorp, Inc.****2006
              Annual Report*











To
      Our
      Shareholders:





In
      2006
      Jacksonville Savings marked the completion of ninety years of providing quality
      financial services to Jacksonville and the surrounding area. Our bank was
      originally founded in 1916 as a mutual savings and loan for the purpose of
      encouraging personal savings and providing funds for home financing. Today,
      we
      are a $267 million, full service, publicly-traded financial institution. We
      operate seven facilities that serve communities and customers in Morgan,
      Macoupin, and Montgomery counties. Although we remain our area’s primary
      residential mortgage lender, our loan offerings have expanded to include
      commercial, agricultural, and consumer lending. In addition to traditional
      savings accounts and certificates, we now offer a variety of deposit and
      investment products, as well as trust and brokerage services. Over the last
      ninety years, as Jacksonville Savings has grown and expanded, we think it is
      important to note that we have remained committed to the purpose for which
      we
      were originally founded and the concept of community banking.





The
      bank’s operating results for 2006 included growth in assets, deposits and loans.
      At year end, assets had increased $13.5 million to a record $267.4 million,
      with
      net loans growing 8.8% to $155.3 million. Deposits increased $14.5 million
      to
      $232.9 million. Our continued emphasis on loan quality resulted in a lower
      number of nonperforming assets (0.56% of total assets) and a reduction in
      provision set aside for loan losses which fell to a five year low of $60,000.
      Earnings for the year stood at $895,000.





With
      interest margins already narrow, and expected to shrink further, the banking
      industry has sought to develop sources of non-interest income. Our Trust
      Department and our subsidiary, Financial Resources Group Investment Center,
      both
      experienced solid growth in 2006 and increased their net contribution to our
      bottom line. In 2007 we plan to increase our emphasis in each of these areas,
      including additional staff.





Electronic
      banking is a growing segment of the banking industry and a vital and successful
      area of operations for Jacksonville Savings. As our volume of online
      transactions has increased so too has our need for increased security.
      Protecting the rights and privacy of our customers is one of the cornerstones
      of
      sound banking and an ongoing responsibility that we take very seriously. As
      a
      result, in 2006, we implemented a “multi-factor authentication” program for all
      of our Online Banking customers.





Longtime
      director Roger Cannell retired from our board in 2006. Roger first joined the
      board in 1979 and chaired the audit committee for many years. As a practicing
      certified public accountant, his expertise became invaluable as we converted
      to
      a public company in 1995 and later as we became subject to the Sarbanes-Oxley
      Act of 2002. We appreciate Roger’s many years of service to our company and wish
      him well.





We
      are
      particularly proud of the dedication of our staff. Our employees understand
      that
      bank customers have many choices when it comes to selecting a financial partner,
      and in each of our markets customer loyalty must be earned. Our work each day
      is
      guided by this basic premise.





We
      look
      forward to the challenges and opportunities that will arise in 2007 and to
      a
      future of continued growth and prosperity as a community bank.




Andrew
              F. Applebee
            Richard
              A. FossChairman
            President
              and CEO










*T**ABLE****OF**C**ONTENTS*







**Page**Business
                of the Company
            1Selected
                Consolidated Financial Information
            2-3Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            4-18Report
                of Independent Registered Public Accounting Firm
            19-20Consolidated
                Financial Statements
            21-24Notes
                to Consolidated Financial Statements
            28-59Common
                Stock Information
            60Directors
                and Officers
            62Corporate
                Information
            63Annual
                Meeting
            63










***BUSINESS
      OFTHE
      COMPANY***




Jacksonville
      Bancorp, Inc. (the “Company”) was incorporated under Federal law on May 3, 2002.
      The Company is a savings and loan holding company and its sole business activity
      is the 100% ownership of Jacksonville Savings Bank (the “Bank”). The Bank
      was **** founded
      in 1916 as an Illinois-chartered savings and loan association and converted
      to
      an Illinois-chartered savings bank in 1992. The Bank is headquartered in
      Jacksonville, Illinois and operates six branches in addition to its main office.
      The Bank’s deposits are federally insured by the Federal Deposit Insurance
      Corporation (“FDIC”). The Bank is a member of the Federal Home Loan Bank
      (“FHLB”) System.




On
      April
      20, 1995, the Bank reorganized into the mutual holding company form of
      ownership, pursuant to which the Bank amended its charter from an
      Illinois-chartered mutual savings bank into an Illinois-chartered mutual holding
      company (“MHC”), Jacksonville Bancorp, MHC. As of December 31, 2006, the MHC
      owned 52.32% of the outstanding shares of the Company. At December 31, 2006,
      the
      Company had consolidated assets of $267.4 million, deposits of $232.9 million
      and stockholders’ equity of $21.1 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
      originate consumer loans and mortgage loans secured by one- to four-family
      residential real estate. The Bank also originates commercial real estate loans,
      multi-family real estate loans, commercial business loans, and agricultural
      loans. When possible, the Bank emphasizes the origination of mortgage loans
      with
      adjustable interest rates (“ARM”), as well as fixed-rate balloon loans with
      terms ranging from three to five years, consumer loans, which are primarily
      home
      equity loans secured by second mortgages, commercial business loans, and
      agricultural loans. The Bank also offers trust and investment services. The
      investment center, Berthel Fisher and Company Financial Services, Inc., is
      operated through the Bank’s wholly-owned subsidiary, Financial Resources Group,
      Inc.




-
          1
          -


***S*** ***ELECTED*** ***C*** ***ONSOLIDATED*** ***F*** ***INANCIAL*** ***I*** ***NFORMATION***




The
      following tables set forth certain information concerning the consolidated
      financial position, consolidated data from operations and performance ratios
      of
      the Company at the dates and for the years indicated. Selected quarterly
      financial data for each of the last two years is set forth at Note 23 to the
      Consolidated Financial Statements.




**At
                  December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****FINANCIAL
                  CONDITION DATA**
              
              **(In
                  thousands)**Total
                  assets
              
              $
              267,372
              
              $
              253,946
              
              $
              253,330
              
              $
              261,816
              
              $
              252,504Loans
                  (1)
              
              
              155,264
              
              
              142,771
              
              
              126,058
              
              
              127,585
              
              
              149,200Investment
                  securities (2)
              
              
              79,978
              
              
              80,821
              
              
              86,674
              
              
              100,914
              
              
              74,904Mortgage-backed
                  securities
              
              
              8,210
              
              
              8,646
              
              
              15,171
              
              
              7,597
              
              
              2,822Cash
                  and cash equivalents
              
              
              9,331
              
              
              6,681
              
              
              10,793
              
              
              9,576
              
              
              11,092Deposits
              
              
              232,913
              
              
              218,370
              
              
              225,734
              
              
              235,173
              
              
              225,602Other
                  borrowings
              
              
              9,035
              
              
              11,350
              
              
              3,447
              
              
              2,889
              
              
              2,875Stockholders’
                  equity
              
              
              21,145
              
              
              20,103
              
              
              20,683
              
              
              20,032
              
              
              20,252**Years
                  Ended December 31,****2006**
              
              
              **2005**
              
              
              **2004**
              
              
              **2003**
              
              
              **2002****OPERATING
                  DATA**
              
              **(In
                  thousands, except per share
                  data****)**Interest
                  income
              
              $
              13,978
              
              $
              12,423
              
              $
              12,278
              
              $
              12,946
              
              $
              15,065Interest
                  expense
              
              
              7,031
              
              
              4,986
              
              
              4,588
              
              
              5,765
              
              
              7,351Net
                  interest income
              
              
              6,947
              
              
              7,437
              
              
              7,690
              
              
              7,181
              
              
              7,714Provision
                  for loan losses
              
              
              60
              
              
              245
              
              
              550
              
              
              2,075
              
              
              2,000Net
                  interest income after provisionfor
                  loan losses
              
              
              6,887
              
              
              7,192
              
              
              7,140
              
              
              5,106
              
              
              5,714Other
                  income
              
              
              2,235
              
              
              2,174
              
              
              2,038
              
              
              3,532
              
              
              2,490Other
                  expense
              
              
              7,893
              
              
              8,054
              
              
              7,781
              
              
              7,296
              
              
              6,919Income
                  before income taxes
              
              
              1,229
              
              
              1,312
              
              
              1,397
              
              
              1,342
              
              
              1,285Income
                  tax expense
              
              
              334
              
              
              412
              
              
              521
              
              
              501
              
              
              467Net
                  income
              
              $
              895
              
              $
              900
              
              $
              876
              
              $
              841
              
              $
              818Earnings
                  per share - basic
              
              $
              0.45
              
              $
              0.46
              
              $
              0.45
              
              $
              0.43
              
              $
              0.43Earnings
                  per share - diluted
              
              $
              0.45
              
              $
              0.45
              
              $
              0.44
              
              $
              0.43
              
              $
              0.42







(1)
            Includes
                loans held for sale.


(2)
              Includes
                  investment securities, FHLB stock, and other investments.




(Continued)




2




**At
                or for the Years Ended December 31,****KEY
                OPERATING RATIOS**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**Return
                on average assets (net incomedivided
                by average assets)
            
            
            0.35
            %
            
            0.36
            %
            
            0.33
            %
            
            0.33
            %
            
            0.34
            %Return
                on average equity (net incomedivided
                by average equity)
            
            
            4.37
            %
            
            4.44
            %
            
            4.31
            %
            
            4.18
            %
            
            4.19
            %Average
                equity to average assets
            
            
            7.90
            %
            
            8.03
            %
            
            7.77
            %
            
            7.82
            %
            
            8.04
            %Interest
                rate spread (difference betweenaverage
                yield on interest-earning assetsand
                average cost of interest-bearingliabilities)
            
            
            2.48
            %
            
            2.99
            %
            
            3.04
            %
            
            2.82
            %
            
            3.27
            %Net
                interest margin (net interest incomeas
                a percentage of average interest-earning
                assets)
            
            
            2.85
            %
            
            3.18
            %
            
            3.18
            %
            
            3.00
            %
            
            3.47
            %Dividend
                pay-out ratio (1)
            
            
            31.69
            %
            
            30.98
            %
            
            31.39
            %
            
            31.99
            %
            
            32.03
            %Noninterest
                expense to average assets
            
            
            3.05
            %
            
            3.19
            %
            
            2.97
            %
            
            2.84
            %
            
            2.85
            %Average
                interest-earning assets toaverage
                interest-bearing liabilities
            
            
            112.81
            %
            
            109.07
            %
            
            107.35
            %
            
            107.58
            %
            
            106.04
            %Allowance
                for loan losses to gross loansat
                end of period (2)
            
            
            1.19
            %
            
            1.28
            %
            
            1.48
            %
            
            1.69
            %
            
            1.43
            %Allowance
                for loan losses tononperforming
                loans
            
            
            137.90
            %
            
            156.75
            %
            
            95.02
            %
            
            66.02
            %
            
            53.69
            %Net
                loan charge-offs to averageloans
                during the period
            
            
            0.03
            %
            
            0.21
            %
            
            0.66
            %
            
            1.41
            %
            
            0.68
            %Nonperforming
                assets to total assets
            
            
            0.56
            %
            
            0.65
            %
            
            1.01
            %
            
            1.46
            %
            
            1.72
            %**December
                31,****OTHER
                DATA**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**Number
                of offices
            
            
            7
            
            
            7
            
            
            7
            
            
            7
            
            
            7




(1)
            Reflects
                dividends waived by the mutual holding
                company.


(2)
              Gross
                  loans includes loans held for
                  sale




3




***M*** ***ANAGEMENT’S*** ***D*** ***ISCUSSION*** ****** ***AND*** ***A*** ***NALYSIS
        OF***
 ***F*** ***INANCIAL*** ***C*** ***ONDITION
        AND*** ***R*** ***ESULTS
        OF*** ***O*** ***PERATIONS***




***G*** ***ENERAL***




Management’s
      discussion and analysis of financial condition and results of operations is
      intended to assist in understanding our financial condition and results of
      operations. The information contained in this section should be read in
      conjunction with our consolidated financial statements and the accompanying
      notes.




Certain
      statements in this annual report and throughout Management’s Discussion and
      Analysis of Financial Condition and Results of Operations are “forward looking
      statements” within the meaning of the Private Securities Litigation Reform Act
      of 1995 and involve known and unknown risk, uncertainties and other factors
      that
      may cause the Company’s actual results, performance or achievements to be
      materially different from the results, performance or achievements expressed
      or
      implied by the forward looking statement. Factors that impact such forward
      looking statements include, among others, changes in general economic
      conditions, changes in interest rates and competition. We decline any obligation
      to publicly announce future events or developments that may affect the
      forward-looking statements herein.




***O*** ***PERATING*** ***S*** ***TRATEGY*** ***-
        O*** ***VERVIEW***




Our
      business consists principally of attracting deposits from the general public
      and
      using deposits to purchase and originate consumer loans and mortgage loans
      secured by one- to four-family residences. We also offer commercial and
      agricultural lending services. Our net income, like other financial
      institutions, is primarily dependent on net interest income, which is the
      difference between the income earned on its interest-earning assets, such as
      loans and investments, and the cost of its interest-bearing liabilities,
      primarily deposits and short-term borrowings. However, our net income is also
      affected by provisions for loan losses and other operating income and expenses.
      General economic conditions, particularly changes in market interest rates,
      government legislation, monetary policies, and attendant actions of the
      regulatory authorities are the external influences affecting many of the factors
      of our net income.




Management
      has implemented various strategies designed to enhance its profitability while
      still maintaining our safety and soundness. These strategies include reducing
      its exposure to interest rate risk by selling fixed-rate loans to the secondary
      market and providing other fee-based services to its customers. We recognize
      the
      need to establish and adhere to strict loan underwriting criteria and
      guidelines. We generally limit our investment portfolio to investments in United
      States Government and government sponsored entities securities, mortgage-backed
      securities collateralized by U.S. government sponsored entities, and local
      municipal issues.




It
      is
      management’s intention to remain a retail financial institution dedicated to
      financing home ownership and other consumer needs, and to provide quality
      service to its customers located in Morgan, Macoupin, Montgomery and the
      surrounding counties in Illinois.




4


***C*** ***RITICAL*** ***A*** ***CCOUNTING*** ***P*** ***OLICIES***




In
      the
      ordinary course of business, we have made a number of estimates and assumptions
      relating to the reporting of results of operations and financial condition
      in
      preparing its financial statements in conformity with accounting principles
      generally accepted in the United States of America. Actual results could differ
      significantly from those estimates under different assumptions and conditions.
      Management believes the following discussion, including the allowance for loan
      losses, goodwill, and mortgage servicing rights, addresses our most critical
      accounting policies, which are those that are most important to the portrayal
      of
      our financial condition and results and require management’s most difficult,
      subjective and complex judgements, often as a result of the need to make
      estimates about the effect of matters that are inherently
      uncertain.




Allowance
      for Loan Losses - The
      allowance for loan losses is a material estimate that is particularly
      susceptible to significant changes in the near term and is established through
      a
      provision for loan losses. The allowance is based upon past loan experience
      and
      other factors which, in management’s judgement, deserve current recognition in
      estimating loan losses. The evaluation includes a review of all loans on which
      full collectibility may not be reasonably assured. Other factors considered
      by
      management include the size and character of the loan portfolio, concentrations
      of loans to specific borrowers or industries, existing economic conditions
      and
      historical losses on each portfolio category. In connection with the
      determination of the allowance for loan losses, management obtains independent
      appraisals for significant properties, which collateralize loans. Management
      uses the available information to make such determinations. If circumstances
      differ substantially from the assumptions used in making determinations, future
      adjustments to the allowance for loan losses may be necessary and results of
      operations could be affected. While we believe we have established our existing
      allowance for loan losses in conformity with accounting principles generally
      accepted in the United States of America, there can be no assurance that
      regulators, in reviewing the Bank’s loan portfolio, will not request an increase
      in the allowance for loan losses. Because future events affecting borrowers
      and
      collateral cannot be predicted with certainty, there can be no assurance that
      increases to the allowance will not be necessary if loan quality
      deteriorates.




Goodwill - Costs
      in excess of the estimated fair value of identified net assets acquired through
      purchase transactions are recorded as an asset. This amount was originally
      amortized as an expense on a straight-line basis assuming a life of twenty
      years. Effective January 1, 2002, we ceased amortizing goodwill in accordance
      with newly adopted accounting standards generally accepted in the United States
      of America. We performed an initial impairment assessment as of January 1,
      2002
      and an annual impairment assessment as of September 30, 2006 and 2005. No
      impairment of goodwill was identified as a result of these tests. In making
      these impairment assessments, management must make subjective assumptions
      regarding the fair value of our assets and liabilities. It is possible that
      these judgements may change over time as market conditions or our strategies
      change, and these changes may cause us to record impairment charges to adjust
      the goodwill to its estimated fair value.




Mortgage
      Servicing Rights - We
      recognize as a separate asset the rights to service mortgage loans for others.
      The value of mortgage servicing rights is amortized in relation to the servicing
      revenue expected to be earned. Mortgage servicing rights are periodically
      evaluated for impairment based upon the fair value of those rights. Estimating
      the fair value of the mortgage servicing rights involves judgement, particularly
      of estimated prepayment speeds of the underlying mortgages serviced. Net income
      could be affected if management’s assumptions and estimates differ from actual
      prepayments.




5




The
      above
      listing is not intended to be a comprehensive list of all our accounting
      policies. In many cases, the accounting treatment of a particular transaction
      is
      specifically dictated by accounting principles generally accepted in the United
      States of America, with no need for management’s judgement in their application.
      There are also areas in which management’s judgement in selecting any available
      alternative would not produce a materially different result.




***F*** ***INANCIAL*** ***C*** ***ONDITION***


Total
      assets increased $13.5 million to $267.4 million at December 31, 2006, compared
      to $253.9 million at December 31, 2005. Net loans increased $12.6 million,
      or
      8.8%, during 2006. Loan growth has predominantly consisted of commercial and
      agricultural loan originations. Commercial and agricultural business loans
      increased $4.9 million, or 12.4%, and commercial and agricultural real estate
      loans increased $4.8 million, or 16.8%, during 2006. Other changes include
      a
      $2.6 million increase in cash and cash equivalents and an $832,000 decrease
      in
      available for sale investment and mortgage-backed securities portfolios, which
      reflects calls, sales, and principal payments.





Asset
      growth was funded by a $14.5 million, or 6.7%, increase in deposits, which
      was
      partially offset by a $2.3 million decrease in borrowed funds during 2006.
      Deposit growth reflects the introduction of a new money market savings product
      during the first quarter of 2006. The decrease in borrowed funds is due to
      the
      maturity and repayment of $4.0 million in advances from the Federal Home Loan
      Bank during 2006, partially offset by an increase of $1.7 million in overnight
      repurchase agreements.





Stockholders’
      equity increased $1.0 million to $21.1 million at December 31, 2006. The
      increase resulted primarily from net income of $895,000, partially offset by
      the
      payment of $284,000 in dividends, and a $297,000 decrease in unrealized losses,
      net of tax, on available-for-sale securities. The change in unrealized gains
      or
      losses on securities classified as available-for-sale is affected by market
      conditions and, therefore, can fluctuate daily. Stockholders’ equity also was
      affected by the receipt of $134,000 from the exercise of stock options during
      2006. The $134,000 reflects the $130,000 received from the exercise of stock
      options, a $17,000 related tax benefit, and a $5,000 compensation expense
      related to options, which was partially offset by the $18,000 cost to acquire
      the shares underlying the options in open market purchases.




***COMPARISON
      OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2006 AND
      2005***




***G***ENERAL******




We
      had
      net income for the year ended December 31, 2006, of $895,000, or $0.45 per
      common share, basic and diluted, compared to net income of $900,000 or $0.46
      per
      common share, basic, and $0.45 per share, diluted, for the year ended December
      31, 2005. The $5,000 decrease in net income reflects a decrease of $490,000
      in
      net interest income, partially offset by decreases of $185,000 in the provision
      for loan losses, $161,000 in other expenses, and $78,000 in income taxes and
      an
      increase of $61,000 in other income.





6




***I*** ***NTEREST*** ***I*** ***NCOME***


Interest
      income increased to $14.0 million for the year ended December 31, 2006 from
      $12.4 million for the year ended December 31, 2005. The $1.6 million increase in
      interest income resulted from increased income of $1.4 million on loans,
      $120,000 on investment securities, and $39,000 on other interest-earning assets,
      partially offset by decreased income of $54,000 on mortgage-backed
      securities.





The
      $1.4
      million increase in interest income on loans is partially due to an $11.5
      million increase in the average balance of the loan portfolio to $149.2 million
      during 2006. The growth in the loan portfolio reflects an increased emphasis
      on
      commercial lending and an increase in loan participations with other
      institutions. The average yield of the loan portfolio also increased to 6.96%
      for 2006 from 6.48% for 2005. The increase in the average yield is primarily
      due
      to the rising interest rate environment, reflecting the Federal Reserve’s recent
      increases in short-term interest rates.





The
      $120,000 increase in interest income on investment securities reflects an
      increase in the average yield of the investment portfolio during 2006. The
      average yield increased 13 basis points to 3.73%, which reflects a higher yield
      on reinvested funds. Securities totaling $5.9 million were sold for net losses
      of $21,000 during 2006 in order to reinvest at higher market rates. The average
      balance of the investment portfolio grew $250,000 to $84.3 million during 2006.





Interest
      income on mortgage-backed securities decreased $54,000 during 2006. The average
      balance of these investments decreased $2.1 million to $8.4 million primarily
      due to principal payments. The decrease in the average balance was partially
      offset by an increase in the average yield to 4.27% for 2006 from 3.93% for
      2005.





Interest
      income on other investments, which consist of interest-earning deposit accounts,
      increased $39,000 during 2006. The higher interest income from other investments
      is primarily due to a 152 basis point increase in the average yield, reflecting
      the rising rate environment of 2006. Interest income also benefited from a
      $214,000 increase in the average balance of these investments.




***I***NTEREST
      EXPENSES******




Interest
      expense increased to $7.0 million for the year ended December 31, 2006 from
      $5.0
      million for the year ended December 31, 2005. The $2.0 million increase in
      the
      cost of funds reflects increases of $2.0 million in interest paid on deposits
      and $49,000 in interest paid on borrowings.





The
      increase in the cost of deposits is primarily due to an increase in the average
      rate paid. The average rate paid increased to 3.19% for 2006 from 2.25% for
      2005. The 94 basis point increase reflects rising market interest rates and
      the
      competitive nature of the local markets. The introduction of a new money market
      savings account has contributed to the higher costs. The increase in interest
      expense was also affected by a $2.2 million increase in the average balance
      of
      deposits to $206.8 million for 2006.





The
      $49,000 increase in interest expense on borrowings is due to an increase in
      the
      average cost to 4.53% for 2006 from 3.77% for 2005. The higher average cost
      was
      partially offset by a decrease of $623,000 in the average balance of borrowed
      funds to $9.5 million during 2006. Advances from the Federal Home Loan Bank
      averaged $6.1 million for 2006 compared to $8.0 million for 2005. The remainder
      of borrowed funds consists of securities sold under agreement to
      repurchase.





7




***P*** ***ROVISION
        FOR*** ***L*** ***OAN*** ***L*** ***OSSES***




The
      provision for loan losses is determined by management as the amount needed
      to
      replenish the allowance for loan losses, after net charge-offs have been
      deducted, to a level considered adequate to absorb known and probable losses
      in
      the loan portfolio, in accordance with accounting principles generally accepted
      in the United States of America.





We
      made a
      provision for loan losses of $60,000 for the year ended December 31, 2006,
      compared to $245,000 during 2005. The decrease in the provision during 2006
      reflects a decrease in net charge-offs, a decrease in non-performing assets,
      and
      an improvement in our ratio of non-performing assets to total assets. Net
      charge-offs decreased during 2006 to $42,000 from $287,000 during 2005. The
      allowance for loan losses increased $18,000 to $1.9 million at December 31,
      2006. The provisions in 2006 and 2005 were made to bring the allowance for
      loan
      losses to a level deemed adequate following management’s evaluation of the
      repayment capacity and collateral protection afforded by each problem credit
      identified by management. Set forth below is a table regarding our
      non-performing assets.




**12/31/06**
              
              **12/31/05****(Dollars
                  in Thousands)**Non-accruing
                  loans:One-to-four
                  family residential
              
              $
              435
              
              $
              624Commerical
                  and agricultural real estate
              
              
              759
              
              
              —Commercial
                  and agricultural business
              
              
              45
              
              
              290Home
                  equity/Home improvement
              
              
              100
              
              
              222Automobile
              
              
              1
              
              
              1Other
                  consumer
              
              
              8
              
              
              20Total
              
              
              1,348
              
              
              1,157Accruing
                  loans delinquent more than 90 days:One-to-four
                  family residential
              
              
              —
              
              
              2Automobile
              
              
              —
              
              
              17Other
                  consumer
              
              
              4
              
              
              2Total
              
              
              4
              
              
              21Foreclosed
                  assets:One-to-four
                  family residential
              
              
              37
              
              
              276Commercial
                  and agricultural real estate
              
              
              115
              
              
              180Automobile
              
              
              —
              
              
              15Total
              
              
              152
              
              
              471Total
                  non-performing assets
              
              $
              1,504
              
              $
              1,649Total
                  non-performing assets as a percentageof
                  total assets
              
              
              0.56
              %
              
              0.65
              %


8





As
      indicated in the table above, there was a $759,000 increase in non-accruing
      commercial and agricultural real estate loans. This increase reflects the
      addition of a $659,000 commercial real estate credit, which is both well secured
      and in the process of collection. The following table shows the principal amount
      of potential problem credits on our watch list at December 31, 2006 and December
      31, 2005. All non-accruing loans are automatically placed on the watch list.
      The
      increase in Substandard credits is primarily due to the addition of the
      commercial loan noted above.




**12/31/06**
              
              **12/31/05****(In
                  thousands)**Special
                  Mention credits
              
              $
              2,439
              
              $
              3,065Substandard
                  credits
              
              
              2,724
              
              
              1,930Total
                  watch list credits
              
              $
              5,163
              
              $
              4,995





The
      allowance for loan losses is a material estimate that is susceptible to
      significant changes in the near term and is established through a provision
      for
      loan losses. The allowance is based upon past loan experience and other factors,
      which, in management’s judgement, deserve current recognition in estimating loan
      losses. The balance of the allowance is based on ongoing, quarterly assessments
      of the probable estimated losses in the loan portfolio. The evaluation includes
      a review of all loans on which full collectibility may not be reasonably
      assured. Management uses an internal asset classification system as a means
      of
      reporting problem and potential problem assets. Management maintains a watch
      list of problem credits, which are presented to the Board of Directors at least
      quarterly. This list includes those loans rated as “special mention,”
“substandard,” “doubtful,” and “loss.” Loans rated as “special mention” include
      loans to borrowers displaying a weak and/or leveraged financial condition that
      may also be having difficulty servicing the debt. Loans rated “substandard” are
      assets inadequately protected by the net worth or paying capacity of the obligor
      or of the pledged collateral. We do not have any loans graded as “doubtful” and
      all loans rated as “loss” have been charged off.





The
      allowance is calculated by estimating the exposure on identified problem loan
      and portfolio segments and applying loss factors to the remainder of the
      portfolio based upon 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 judgement, affect the collectibility of the
      loan portfolio.





Since
      the
      allowance for loan losses is based upon estimates of probable losses, the amount
      actually observed 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 it uses the best information available to make such
      determinations. If circumstances differ substantially from the assumptions
      used
      in making determinations, future adjustments to the allowance for loan losses
      may be necessary and results of operations could be affected. While we believe
      we have established our existing allowance for loan losses in conformity with
      accounting principles generally accepted in the United States, there can be
      no
      assurance that regulators, in reviewing the Bank’s loan portfolio, will not
      request an increase in the allowance for loan losses. Because future events
      affecting borrowers and collateral cannot be predicted with certainty, there
      can
      be no assurance that increases to the allowance will not be necessary if loan
      quality deteriorates. Management will continue to monitor the loan portfolio
      and
      assess the adequacy of the allowance at least quarterly.




9




*N**ON-INTEREST**I**NCOME*




Non-interest
      income increased $61,000 during the year ended December 31, 2006, compared
      to
      the year ended December 31, 2005. The increase in non-interest income is
      primarily due to increases of $99,000 in commission income and $38,000 in
      service charges on deposits, partially offset by decreases of $38,000 and
      $25,000 in gains on the sale of securities and loans, respectively. Brokerage
      commissions have increased due to a continued growth in the number of accounts
      and favorable market conditions. Service charges on deposits have increased
      primarily due to deposit growth and an increase in electronic services. The
      decrease in gains on securities sales is due to the $21,000 in securities losses
      recognized during 2006. These securities were sold in order to reinvest into
      higher-yielding investments. The decrease in gains on loan sales is due to
      a
      lower volume of sales to the secondary market, reflecting the rising rate
      environment of 2006.




*N**ON-INTEREST**E**XPENSE*


Non-interest
      expense decreased $161,000 during the year ended December 31, 2006 compared
      to
      the year ended December 31, 2005. The decrease in non-interest expense is
      primarily due to decreases of $163,000 in occupancy and equipment expense,
      $46,000 in professional fees, $40,000 in postage and office supplies, and
      $69,000 in other expense, partially offset by an increase of $137,000 in
      salaries and employee benefits expense. The decrease in occupancy and equipment
      expense reflects a decrease in equipment depreciation and maintenance costs.
      Professional fees benefited from a $72,000 decrease in expenses associated
      with
      Sarbanes-Oxley compliance, partially offset by additional audit fees. The
      decrease in other expense includes a $36,000 decrease in other real estate
      expense, which reflects the reduction in real estate owned properties. The
      increase in salaries and employee benefits is primarily due to annual wage
      increases and an increase in commissions paid during the year.




***I*** ***NCOME*** ***T*** ***AXES***




The
      provision for income taxes decreased $78,000 during 2006 compared to 2005,
      due
      to the $83,000 decrease in taxable income and the effect of state income taxes
      during this same time frame. The effective tax rate equals 27.1% and 31.4%
      for
      the years ended December 31, 2006 and 2005, respectively.




***COMPARISON
      OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2005 AND
      2004***




*GENERAL*




We
      had
      net income for the year ended December 31, 2005, of $900,000, or $0.46 per
      common share, basic, and $0.45 per common share, diluted, compared to net income
      of $876,000 or $0.45 per common share, basic, and $0.44 per share, diluted,
      for
      the year ended December 31, 2004. The $24,000 increase in net income reflects
      decreases of $305,000 in the provision for loan losses and $108,000 in income
      taxes and an increase of $136,000 in other income, partially offset by a
      decrease of $253,000 in net interest income and an increase of $272,000 in
      other
      expense.




***I***NTEREST******I******NCOME******




Interest
      income increased to $12.4 million for the year ended December 31, 2005 from
      $12.3 million for the year ended December 31, 2004. The $145,000 increase in
      2005 resulted from increased income of $537,000 on loans and $26,000 on other
      interest-earning assets, partially offset by decreased income of $262,000 on
      investment securities and $156,000 on mortgage-backed securities.





10


The
      increase in interest income on loans reflects an increase in the average balance
      of loans outstanding to $137.7 million for 2005 compared to $128.3 million
      for
      2004, partially offset by a lower average yield of 6.48% for 2005 from 6.54%
      for
      2004. The $9.4 million increase in the average balance of loans during 2005
      is
      primarily due to an increased emphasis on commercial lending and an increase
      in
      participations with other institutions. The lower average yield was affected
      by
      the competitive environment for commercial loan originations during 2005, which
      were higher than comparable rates on investment securities. In the current
      low
      and flat yield curve environment, the origination of commercial loans provides
      us greater interest income than would be obtained from 1-4 family residential
      loans.





The
      decrease in interest income on investment securities is due to the lower average
      balance of investments, which were $84.0 million for 2005 compared to $96.2
      million for 2004. The $12.2 million decrease in the average balance of
      investment securities reflects proceeds from investment calls, sales, and
      principal payments being reinvested into loan originations during 2005. The
      investment securities portfolio’s average yield increased to 3.60% for 2005 from
      3.42% for 2004.





The
      decrease in income on mortgage-backed securities reflects a lower average
      balance of mortgage-backed securities to $10.5 million for 2005 from $14.7
      million for 2004, primarily due to sales and principal payments. The weighted
      average yield of mortgage-backed securities increased to 3.93% for 2005 from
      3.87% for 2004.





Other
      interest-earning assets consist of federal funds sold and interest-earning
      deposit accounts. The increase in interest income to $57,000 from $31,000 is
      primarily due to an increase in the average yield to 3.03% for 2005 from 1.09%
      for 2004, partially offset by a decrease in the average balance to $1.9 million
      for 2005 from $2.8 million for 2004. The decrease in the average balance
      reflects the reinvestment of these funds in loan originations.




***I***NTEREST
      EXPENSES******




Interest
      expense increased to $5.0 million for the year ended December 31, 2005 from
      $4.6
      million for the year ended December 31, 2004. The increase of $398,000 in the
      cost of funds reflects increases of $97,000 in interest paid on deposits and
      $301,000 in interest paid on borrowings.





The
      higher interest expense on deposits is the net effect of an increase in the
      average cost to 2.25% for 2005 from 2.05% for 2004 and a decrease in the average
      balance to $204.5 million for 2005 from $220.2 million for 2004. The average
      cost of deposits has been affected by the increase in market rates. The decrease
      of $15.7 million in the average balance of deposits reflects withdrawals as
      management has undertaken efforts to control interest costs.





The
      increase in interest expense on short-term borrowings is due to an increase
      in
      the average cost to 3.77% for 2005 from 1.57% for 2004 and an increase in the
      average balance of borrowings to $10.1 million for 2005 from $5.2 million during
      2004. Management has used advances from the Federal Home Loan Bank (FHLB) to
      fund loan growth as deposit volumes have decreased. The average cost of the
      FHLB
      advances was less than the rates required to maintain time deposits of
      comparable periods. The average balance of these advances equaled $8.0 million
      during 2005, compared to $3.0 million during 2004. The remainder of borrowed
      funds consists of securities sold under agreement to repurchase.




*P**ROVISION
        FOR**L**OAN**L**OSSES*




The
      provision for loan losses is determined by management as the amount needed
      to
      replenish the allowance for loan losses, after net charge-offs have been
      deducted, to a level considered adequate to absorb known and probable losses
      in
      the loan portfolio, in accordance with accounting principles generally accepted
      in the United States of America.





11




We
      made a
      provision for loan losses of $245,000 for the year ended December 31, 2005,
      compared to $550,000 during 2004. The decrease in the provision during 2005
      reflects the decrease in nonperforming loans and watch list credits. The
      allowance for loan losses decreased $42,000 to $1.8 million at December 31,
      2005. The decrease in the level of the allowance reflects net charge-offs
      exceeding the provision for loan losses. Net charge-offs decreased during 2005
      to $287,000 from $848,000 during 2004. The provisions in 2005 and 2004 were
      made
      to bring the allowance for loan losses to a level deemed adequate following
      management’s evaluation of the repayment capacity and collateral protection
      afforded by each problem credit identified by management. This review also
      considered the local economy and the level of bankruptcies and foreclosures
      in
      our market area.




**N*ON-INTEREST**I**NCOME***




Non-interest
      income increased $135,000 during the year ended December 31, 2005, compared
      to
      the year ended December 31, 2004. The increase in non-interest income is
      primarily due to increases of $54,000 in gains on the sale of loans, $48,000
      in
      service charges on deposits, and $44,000 in commission income, partially offset
      by a $22,000 decrease in loan servicing fees. The increase in gains on the
      sale
      of loans is primarily due to a decrease in the net amortization of mortgage
      servicing rights during 2005, and our entering the Federal Home Loan Bank
      Mortgage Partnership Finance program during March 2005, which provides the
      bank
      an additional venue to sell fixed-rate residential loan products. The increase
      in service charges on deposits reflects a fee structure implemented during
      the
      second quarter of 2004. Brokerage commissions increased due to a continued
      growth in accounts. Loan servicing fees decreased as the volume of loans
      serviced for the secondary market declined $5.0 million during 2005, primarily
      due to principal repayments.




***N*ON-INTEREST**E**XPENSE****




Non-interest
      expense increased $272,000 during the year ended December 31, 2005 compared
      to
      the year ended December 31, 2004. The increase primarily reflects increases of
      $115,000 in other real estate expense (which is included in other expense),
      $59,000 in data processing expense, $39,000 in salaries and benefits, and
      $34,000 in professional fees, partially offset by a decrease of $45,000 in
      occupancy expense. The increase in real estate owned expense primarily consists
      of a $97,000 decrease in gains on the sale of real estate owned during 2005
      as
      compared to 2004. The increase in data processing expense is due to a software
      conversion requiring the upgrading of telecommunication lines and an increase
      in
      internet banking fees. Salaries and benefits expense has been impacted by
      increased brokerage commissions. The increase in professional fees includes
      $78,000 in additional expenses related to Sarbanes-Oxley compliance efforts,
      which were partially offset by reduced audit fees. Occupancy expense benefited
      from reduced maintenance costs and service contracts during 2005, as compared
      to
      2004.




***I*** ***NCOME*** ***T*** ***AXES***


The
      provision for income taxes decreased $108,000 during 2005 compared to 2004,
      due
      to the $85,000 decrease in taxable income and the effect of state income taxes
      during this same time frame. The effective tax rate equals 31.4% and 37.3%
      for
      the years ended December 31, 2005 and 2004, respectively.





12




***A*** ***VERAGE*** ***Y*** ***IELDS*** ***E*** ***ARNED*** ****** ***AND*** ***R*** ***ATES*** ***P*** ***AID***


Our
      earnings depend largely on the spread between the yield on interest-earning
      assets and the cost of interest-bearing liabilities, as well as the relative
      balance of our interest-earning assets and interest-bearing liability
      portfolios. The following table sets forth, for the years indicated, information
      regarding average balances of assets and liabilities as well as the total dollar
      amounts of interest income from average interest-earning assets and interest
      expense on average interest-bearing liabilities, resultant yields, interest
      rate
      spread, net interest margin, and ratio of average interest-earning assets to
      average interest-bearing liabilities. Average balances for a year have been
      derived utilizing daily balances.




**Years
                  Ended December 31,****2006**
              
              **2005**
              
              **2004****Average****Balance**
              
              **Interest/****Dividends**
              
              **Yield/****Cost**
              
              **Average****Balance**
              
              **Interest/****Dividends**
              
              **Yield/****Cost**
              
              **Average****Balance**
              
              **Interest/****Dividends**
              
              **Yield/****Cost****(Dollars
                  in thousands)**Interest-earning
                  assets:Loans
                  (1)
              
              $
              149,238
              
              $
              10,380
              
              
              6.96
              %
              $
              137,740
              
              $
              8,930
              
              
              6.48
              %
              $
              128,279
              
              $
              8,393
              
              
              6.54
              %Investment
                  securities (2)
              
              
              84,251
              
              
              3,143
              
              
              3.73
              %
              
              84,001
              
              
              3,023
              
              
              3.60
              %
              
              96,174
              
              
              3,285
              
              
              3.42
              %Mortgage-backed
                  securities
              
              
              8,411
              
              
              359
              
              
              4.27
              %
              
              10,514
              
              
              413
              
              
              3.93
              %
              
              14,694
              
              
              569
              
              
              3.87
              %Other
              
              
              2,114
              
              
              96
              
              
              4.55
              %
              
              1,900
              
              
              57
              
              
              3.03
              %
              
              2,808
              
              
              31
              
              
              1.09
              %Total
                  interest-earning assets
              
              
              244,014
              
              
              13,978
              
              
              5.73
              %
              
              234,155
              
              
              12,423
              
              
              5.31
              %
              
              241,955
              
              
              12,278
              
              
              5.07
              %Non-interest-earning
                  assets
              
              
              14,848
              
              
              
              
              
              
              
              
              18,175
              
              
              
              
              
              
              
              
              19,647Total
                  assets
              
              $
              258,862
              
              
              
              
              
              
              
              $
              252,330
              
              
              
              
              
              
              
              $
              261,602Interest-bearing
                  liabilities:Deposits
              
              $
              206,777
              
              
              6,599
              
              
              3.19
              %
              $
              204,548
              
              
              4,604
              
              
              2.25
              %
              $
              220,213
              
              
              4,507
              
              
              2.05
              %Short-term
                  borrowings
              
              
              9,519
              
              
              432
              
              
              4.53
              %
              
              10,142
              
              
              382
              
              
              3.77
              %
              
              5,178
              
              
              81
              
              
              1.57
              %Total
                  interest-bearing liabilities
              
              
              216,296
              
              
              7,031
              
              
              3.25
              %
              
              214,690
              
              
              4,986
              
              
              2.32
              %
              
              225,391
              
              
              4,588
              
              
              2.04
              %Non-interest-bearing
                  liabilities
              
              
              22,105
              
              
              
              
              
              
              
              
              17,374
              
              
              
              
              
              
              
              
              15,876Stockholders’
                  equity
              
              
              20,461
              
              
              
              
              
              
              
              
              20,266
              
              
              
              
              
              
              
              
              20,335Total
                  liabilities and stockholders’ equity
              
              $
              258,862
              
              
              
              
              
              
              
              $
              252,330
              
              
              
              
              
              
              
              $
              261,602Net
                  interest income
              
              
              
              
              $
              6,947
              
              
              
              
              
              
              
              $
              7,437
              
              
              
              
              
              
              
              $
              7,690Interest
                  rate spread (3)
              
              
              
              
              
              
              
              
              2.48
              %
              
              
              
              
              
              
              
              2.99
              %
              
              
              
              
              
              
              
              3.04
              %Net
                  interest margin (4)
              
              
              
              
              
              
              
              
              2.85
              %
              
              
              
              
              
              
              
              3.18
              %
              
              
              
              
              
              
              
              3.18
              %Ratio
                  of average interest-earning assets toaverage
                  interest-bearing liabilities
              
              
              
              
              
              
              
              
              112.81
              %
              
              
              
              
              
              
              
              109.07
              %
              
              
              
              
              
              
              
              107.35
              %
  
 (1)
              Includes
                  non-accrual loans and loans held for sale, and fees of $108,000
                  for 2006,
                  $101,000 for 2005, and $88,000 for
                  2004.
 (2)
              Includes
                  FHLB stock and other investments.
 (3)
              Yield
                  on interest-earning assets less cost of interest-bearing
                  liabilities.
 (4)
              Net
                  interest income divided by average interest-earning
                  assets.




13




***R*** ***ATE*** ***/V*** ***OLUME*** ***A*** ***NALYSIS***




The
      following table sets forth the effects of changing rates and volumes on our
      net
      interest income. Information is provided with respect to (i) effects on interest
      income attributable to changes in rate (changes in rate multiplied by prior
      volume), (ii) effects on interest income attributable to changes in volume
      (changes in volume multiplied by prior rate), and (iii) the net change. For
      purposes of the table, changes attributable to both rate and volume, which
      cannot be segregated, have been allocated proportionately to the change due
      to
      volume and the change due to rate.




**2006
                    Compared to 2005**
                  **Increase
                    (Decrease) Due to**
              
              **2005
                      Compared to 2005**
                    **Increase
                      (Decrease) Due to****Rate**
              
              **Volume**
              
              **Net**
              
              **Rate**
              
              **Volume**
              
              **Net****(In
                  thousands)**Interest-earning
                  assets:Loans
              
              $
              676
              
              $
              774
              
              $
              1,450
              
              $
              (77
              )
              $
              614
              
              $
              537Investment
                  securities
              
              
              111
              
              
              9
              
              
              120
              
              
              169
              
              
              (431
              )
              
              (262
              )Mortgage-backed
                  securities
              
              
              33
              
              
              (87
              )
              
              (54
              )
              
              8
              
              
              (164
              )
              
              (156
              )Other
              
              
              32
              
              
              7
              
              
              39
              
              
              40
              
              
              (14
              )
              
              26Total
                  net change in income on interest-earning assets
              
              
              852
              
              
              703
              
              
              1,555
              
              
              140
              
              
              5
              
              
              145Interest-bearing
                  liabilities:Deposits
              
              
              1,944
              
              
              51
              
              
              1,995
              
              
              432
              
              
              (335
              )
              
              97Other
                  borrowings
              
              
              75
              
              
              (25
              )
              
              50
              
              
              179
              
              
              122
              
              
              301Total
                  net change in expense on interest-bearing liabilities
              
              
              2,019
              
              
              26
              
              
              2,045
              
              
              611
              
              
              (213
              )
              
              398Net
                  change in net interest income
              
              $
              (1,167
              )
              $
              677
              
              $
              (490
              )
              $
              (471
              )
              $
              218
              
              $
              (253
              )


14


***A*** ***SSET*** ****** ***AND*** ***L*** ***IABILITY*** ***M*** ***ANAGEMENT***




Our
      policy in recent years has been to reduce our interest rate risk by better
      matching the maturities of its interest rate sensitive assets and liabilities,
      selling its long-term fixed-rate residential mortgage loans with terms of 15
      years or more to the secondary market, originating adjustable rate loans,
      balloon loans with terms ranging from three to five years and originating
      consumer and commercial business loans, which typically are for a shorter
      duration and at higher rates of interest than one-to-four family loans. The
      investment portfolio has been laddered to better match the interest-bearing
      liabilities. With respect to liabilities, we have attempted to increase our
      savings and transaction deposit accounts, which management believes are more
      resistant to changes in interest rates than certificate accounts. The Board
      of
      Directors appoints the Asset-Liability Management Committee (ALCO), which is
      responsible for reviewing our asset and liability policies. The ALCO meets
      quarterly to review interest rate risk and trends, as well as liquidity and
      capital ratio requirements.




We
      use a
      comprehensive asset/liability software package provided by a third-party vendor
      to perform interest rate sensitivity analysis for all product categories. The
      primary focus of our analysis is on the effect of interest rate increases and
      decreases on net interest income. Management believes that this analysis
      reflects the potential effects on current earnings of interest rate changes.
      Call criteria and prepayment assumptions are taken into consideration for
      investment securities and loans. All of our interest sensitive assets and
      liabilities are analyzed by product type and repriced based upon current
      offering rates. The software performs interest rate sensitivity analysis by
      performing rate shocks of plus or minus 300 basis points in 100 basis point
      increments.




The
      following table shows projected results at December 31, 2006 and 2005, of the
      impact on net interest income from an immediate change in interest rates, as
      well as the benchmarks established by the ALCO. The results are shown as a
      dollar and percentage change in net interest income over the next twelve
      months.




**Change
                  in Net Interest Income****(Dollars
                  in thousands)****12/31/06**
              
              **12/31/05****Rate
                  Shock**
              
              **$
                  Change**
              
              **%
                  Change**
              
              **$
                  Change**
              
              **%
                  Change**
              
              **ALCO**
                    **Benchmark**+300
                  basis points
              
              
              (845
              )
              
              (12.26
              )%
              
              (679
              )
              
              (8.97
              )%
              
              >(20.00
              )%+200
                  basis points
              
              
              (636
              )
              
              (9.23
              )%
              
              (468
              )
              
              (6.18
              )%
              
              >(20.00
              )%+100
                  basis points
              
              
              (425
              )
              
              (6.17
              )%
              
              (282
              )
              
              (3.73
              )%
              
              >(12.50
              )%-100
                  basis points
              
              
              (69
              )
              
              (1.00
              )%
              
              31
              
              
              0.42
              %
              
              >(12.50
              )%-200
                  basis points
              
              
              21
              
              
              0.31
              %
              
              294
              
              
              3.89
              %
              
              >(20.00
              )%-300
                  basis points
              
              
              80
              
              
              1.16
              %
              
              429
              
              
              5.67
              %
              
              >(20.00
              )%




The
      foregoing computations are based upon numerous assumptions, including relative
      levels of market interest rates, prepayments, and deposit mix. The computed
      estimates should not be relied upon as a projection of actual results. Despite
      the limitations on precision inherent in these computations, management believes
      that the information provided is reasonably indicative of the effect of changes
      in interest rate levels on the net earning capacity of our current mix of
      interest earning assets and interest bearing liabilities. Management continues
      to use the results of these computations, along with the results of its computer
      model projections, in order to maximize current earnings while positioning
      us to
      minimize the effect of a prolonged shift in interest rates that would adversely
      affect future results of operations.




15




At
      the
      present time, the most significant market risk affecting us is interest rate
      risk. Other market risks such as foreign currency exchange risk and commodity
      price risk do not occur in our normal business. We also are not currently using
      trading activities or derivative instruments to control interest rate
      risk.




***LIQUIDITYAND
        CAPITAL
        RESOURCES***




Our
      most
      liquid assets are cash and cash equivalents. The levels of these assets are
      dependent on our operating, financing, and investing activities. At December
      31,
      2006 and 2005, cash and cash equivalents totaled $9.3 million and $6.7 million,
      respectively. Our primary sources of funds include customer deposits, proceeds
      from sales of loans, calls and sales of investments, and principal repayments
      from loans and mortgage-backed securities (both scheduled and prepayments).
      During the years ended December 31, 2006 and 2005, the most significant sources
      of funds have been deposit growth, investment calls and principal payments,
      advances from the FHLB, and loan sales to the secondary market. These funds
      have
      been used for new loan originations.





Our
      cash
      and cash equivalents increased $2.6 million during the year ended December
      31,
      2006, compared to a decrease of $4.1 million during the year ended December
      31,
      2005. Net cash provided by operating activities decreased $1.0 million to $1.1
      million during 2006. Net cash used by investing activities increased to $10.6
      million during 2006 from the $6.5 million cash used during 2005. Cash used
      to
      fund net loan originations increased to $12.7 million during 2006 from the
      net
      cash used of $17.2 million during 2005. The cash used for loan originations
      during 2006 was funded by financing activities. Cash provided by financing
      activities increased to $12.1 million during 2006 from the $318,000 cash
      provided during 2005. The increase is primarily due to the net increase in
      deposits of $14.5 million during 2006 compared to the net decrease of $7.4
      million during 2005.





While
      loan sales and principal repayments on mortgage-backed securities are relatively
      predictable, deposit flows and early prepayments are more influenced by interest
      rates, general economic conditions, and competition. We attempt to price our
      deposits to meet asset/liability objectives and stay competitive with local
      market conditions.





Liquidity
      management is both a short- and long-term responsibility of management. We
      adjust our investments in liquid assets based upon management’s assessment of
      expected loan demand, projected purchases of investment and mortgage-backed
      securities, expected deposit flows, yields available on interest-bearing
      deposits, and liquidity of its asset/liability management program. Excess
      liquidity is generally invested in interest-earning overnight deposits and
      other
      short-term U.S. agency obligations. If we require funds beyond our ability
      to
      generate them internally, we have the ability to borrow funds from the FHLB.
      We
      may borrow from the FHLB under a blanket agreement which assigns all investments
      in FHLB stock as well as qualifying first mortgage loans equal to 150% of the
      outstanding balance as collateral to secure the amounts borrowed. This borrowing
      arrangement is limited to the lesser of 30% of our total assets, 75% of the
      balance of qualifying 1-4 family residential loans, or twenty times the balance
      of FHLB stock held by us. At December 31, 2006, we had $4.0 million in
      outstanding advances and additional borrowing capacity of approximately $18.2
      million.





We
      maintain levels of liquid assets as established by the Board of Directors.
      Our
      liquidity ratio, adjusted for pledged assets, at December 31, 2006 and 2005
      was
      31.0% and 34.7%, respectively. This ratio represents the volume of short-term
      liquid assets as a percentage of net deposits and borrowings due within one
      year.




16




We
      must
      also maintain adequate levels of liquidity to ensure the availability of funds
      to satisfy loan commitments. We anticipate that we will have sufficient funds
      available to meet our current commitments principally through the use of current
      liquid assets and through our borrowing capacity discussed above. The following
      table summarizes our outstanding loan commitments at December 31, 2006 and
      2005.


**12/31/06**
              
              **12/31/05****(In
                  thousands)**Commitments
                  to fund loans
              
              $
              27,347
              
              $
              21,576Standby
                  letters of credit
              
              
              14
              
              
              31





Quantitative
      measures established by regulation to ensure capital adequacy require the Bank
      to maintain minimum amounts and ratios (set forth in the table below) of total
      and Tier I capital (as defined in the regulations) to risk-weighted assets
      (as
      defined) and Tier I capital (as defined) to average assets (as defined). At
      December 31, 2006, the Bank meets all capital adequacy requirements to which
      it
      is subject.





Under
      Illinois law, Illinois-chartered savings banks are required to maintain a
      minimum core capital to total assets ratio of 3%. The Director of the Illinois
      Department of Financial and Professional Regulation (the “Director”) is
      authorized to require a savings bank to maintain a higher minimum capital level
      if the Director 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 Director may direct
      the
      savings bank to adhere to a specific written plan established by the Director
      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. At December
      31, 2006, the Bank’s core capital ratio was 7.45% of total adjusted average
      assets, which exceeded the required amount.





As
      of
      December 31, 2006, the Federal Deposit Insurance Corporation (“FDIC”)
      categorized the Bank as well capitalized under the regulatory framework for
      prompt corrective action. To be categorized as adequately capitalized, the
      Bank
      must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
      ratios as set forth in the table below. The well-capitalized category requires
      higher minimum ratios of 5% for the Tier 1 leverage, 6% for the Tier 1
      risk-based, and 10% for the total risk-based capital ratios. There are no
      conditions or events since that notification that management believes have
      changed the Bank’s category. The Bank’s actual capital ratios are presented in
      the table below:




**Minimum****Required**
              
              **12/31/06****Actual**
              
              **12/31/05****Actual**Tier
                  1 Capital to Average Assets
              
              
              4.00
              %
              
              7.45
              %
              
              7.31
              %Tier
                  1 Capital to Risk-Weighted Assets
              
              
              4.00
              %
              
              11.25
              %
              
              11.66
              %Total
                  Capital to Risk-Weighted Assets
              
              
              8.00
              %
              
              12.34
              %
              
              12.83
              %





17




*E**FFECT****OF**I**NFLATION****AND**C**HANGING**P**RICES*




The
      consolidated financial statements and related financial data presented herein
      have been prepared in accordance with accounting principles generally accepted
      in the United States of America, which require the measurement of financial
      position and operating results in terms of historical dollars, without
      considering the change in the relative purchasing power of money over time
      due
      to inflation. The impact of inflation is reflected in our increased cost of
      operations. Unlike most industrial companies, virtually all the assets and
      liabilities of a financial institution are monetary in nature. As a result,
      interest rates generally have a more significant impact on a financial
      institution’s performance than do general levels of inflation. Interest rates do
      not necessarily move in the same direction or to the same extent as the prices
      of goods and services.




*
      * * * *
      *




18







**Report
      of Independent Registered Public Accounting Firm**




Audit
      Committee, Board of Directors, and Stockholders


Jacksonville
      Bancorp, Inc.


Jacksonville,
      Illinois




We
      have
      audited the accompanying consolidated balance sheets of Jacksonville Bancorp,
      Inc. as of December 31, 2006 and 2005, and the related consolidated statements
      of income, stockholders’ equity and cash flows for the years then ended. These
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audit.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Jacksonville Bancorp, Inc.
      as of December 31, 2006 and 2005, and the results of its operations and its
      cash
      flows for the years then ended, in conformity with accounting principles
      generally accepted in the United States of America.




/s/ **BKD,** **LLP**




Decatur,
      Illinois


March
      3,
      2007




19





**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Board of Directors


Jacksonville
      Bancorp, Inc.


Jacksonville,
      Illinois





We
      have
      audited the accompanying consolidated statements of income, stockholders’
equity, and cash flows for the year ended December 31, 2004 of Jacksonville
      Bancorp, Inc. and Subsidiary. These financial statements are the responsibility
      of the Company’s management. Our responsibility is to express an opinion on
      these financial statements based on our audits.





We
      conducted our audits in accordance with standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the results of operations of Jacksonville Bancorp,
      Inc. and its cash flows for the year ended December 31, 2004, in conformity
      with
      U.S. generally accepted accounting principles.









Champaign,
      Illinois


March
      21,
      2007





McGladrey
        & Pullen, LLP is a member firm of RSM International -
 an
        affiliation of separate and independent legal entities.
  20
 
  **Jacksonville
            Bancorp, Inc.**
 **Consolidated
            Balance Sheets**
 **December
            31, 2006 and 2005**


**Assets**




**2006**
            
            **2005**Cash
                and due from banks
            
            $
            6,203,655
            
            $
            5,236,825Interest-earning
                demand deposits
            
            
            3,126,911
            
            
            1,444,382Cash
                and cash equivalents
            
            
            9,330,566
            
            
            6,681,207Available-for-sale
                securities:Investment
                securities
            
            
            78,491,564
            
            
            78,888,107Mortgage-backed
                securities
            
            
            8,210,466
            
            
            8,646,407Other
                investments
            
            
            378,249
            
            
            393,654Loans
                held for sale
            
            
            425,851
            
            
            499,445Loans,
                net of allowance for loan losses of $1,864,497 and $1,846,150 at
                December
                31, 2006 and 2005
            
            
            154,837,699
            
            
            142,272,144Premises
                and equipment
            
            
            6,555,761
            
            
            6,846,122Federal
                Home Loan Bank stock
            
            
            1,108,606
            
            
            1,539,328Foreclosed
                assets held for sale, net
            
            
            152,058
            
            
            456,017Interest
                receivable
            
            
            1,943,390
            
            
            1,489,749Deferred
                income taxes
            
            
            1,235,844
            
            
            1,490,950Mortgage
                servicing rights
            
            
            1,039,649
            
            
            1,059,610Goodwill
            
            
            2,726,567
            
            
            2,726,567Core
                deposit intangibles
            
            
            119,586
            
            
            199,309Other
                assets
            
            
            815,978
            
            
            757,175Total
                assets
            
            $
            267,371,834
            
            $
            253,945,791






21


**Liabilities
      and Stockholders’ Equity**




**2006**
            
            **2005****Liabilities**DepositsDemand
            
            $
            15,113,121
            
            $
            14,514,278Savings,
                NOW and money market
            
            
            71,697,709
            
            
            65,042,300Time
            
            
            146,102,460
            
            
            138,813,196Total
                deposits
            
            
            232,913,290
            
            
            218,369,774Short-term
                borrowings
            
            
            5,034,879
            
            
            3,350,068Federal
                Home Loan Bank advances
            
            
            4,000,000
            
            
            8,000,000Deferred
                compensation
            
            
            2,273,301
            
            
            2,204,095Advances
                from borrowers for taxes and insurance
            
            
            388,713
            
            
            374,676Interest
                payable
            
            
            1,082,334
            
            
            800,446Other
                liabilities
            
            
            534,701
            
            
            744,128Total
                liabilities
            
            
            246,227,218
            
            
            233,843,187**Stockholders’
                Equity**Preferred
                stock, $.01 par value, authorized 10,000,000 shares;none
                issued and outstanding
            
            
            —
            
            
            —Common
                stock, $.01 par value; authorized 20,000,000 shares; issued and
                outstanding 2006 - 1,985,417 shares, 2005 - 1,970,216
                shares
            
            
            19,854
            
            
            19,702Additional
                paid-in capital
            
            
            6,608,342
            
            
            6,474,513Retained
                earnings - substantially restricted
            
            
            15,700,156
            
            
            15,088,742Accumulated
                other comprehensive loss
            
            
            (1,183,736
            )
            
            (1,480,353
            )Total
                stockholders’ equity
            
            
            21,144,616
            
            
            20,102,604Total
                liabilities and stockholders’ equity
            
            $
            267,371,834
            
            $
            253,945,791




22




**Jacksonville
        Bancorp, Inc.**
 **Consolidated
        Statements of Income**
 **Years
        Ended December 31, 2006, 2005 and 2004**




**2006**
            
            **2005**
            
            **2004****Interest
                and Dividend Income**Loans
            
            $
            10,379,986
            
            $
            8,930,243
            
            $
            8,393,339SecuritiesTaxable
            
            
            3,012,577
            
            
            2,968,151
            
            
            3,221,133Tax-exempt
            
            
            129,902
            
            
            54,174
            
            
            63,308Mortgage-backed
                securities
            
            
            359,080
            
            
            413,275
            
            
            569,325Other
            
            
            96,134
            
            
            57,480
            
            
            30,547Total
                interest and dividend income
            
            
            13,977,679
            
            
            12,423,323
            
            
            12,277,652**Interest
                Expense**Deposits
            
            
            6,599,442
            
            
            4,604,190
            
            
            4,506,529Short-term
                borrowings
            
            
            155,029
            
            
            66,444
            
            
            30,640Federal
                Home Loan Bank advances
            
            
            276,499
            
            
            315,902
            
            
            50,426Total
                interest expense
            
            
            7,030,970
            
            
            4,986,536
            
            
            4,587,595**Net
                Interest Income**
            
            
            6,946,709
            
            
            7,436,787
            
            
            7,690,057**Provision
                for Loan Losses**
            
            
            60,000
            
            
            245,000
            
            
            550,000**Net
                Interest Income After Provision for Loan Losses**
            
            
            6,886,709
            
            
            7,191,787
            
            
            7,140,057**Noninterest
                Income**Fiduciary
                activities
            
            
            74,520
            
            
            74,694
            
            
            82,085Commission
                income
            
            
            782,842
            
            
            683,592
            
            
            640,074Service
                charges on deposit accounts
            
            
            900,438
            
            
            862,558
            
            
            814,896Net
                gains on loan sales
            
            
            73,563
            
            
            98,317
            
            
            44,089Net
                realized gains (losses) on sales of available-for-sale
                securities
            
            
            (20,817
            )
            
            16,708
            
            
            28,020Loan
                servicing fees
            
            
            357,544
            
            
            363,838
            
            
            385,859Other
            
            
            66,738
            
            
            73,979
            
            
            43,214Total
                noninterest income
            
            
            2,234,828
            
            
            2,173,686
            
            
            2,038,237






23


**2006**
            
            **2005**
            
            **2004****Noninterest
                Expense**Salaries
                and employee benefits
            
            $
            4,839,560
            
            $
            4,702,992
            
            $
            4,664,390Net
                occupancy and equipment expense
            
            
            1,176,412
            
            
            1,339,069
            
            
            1,383,875Data
                processing fees
            
            
            360,487
            
            
            343,124
            
            
            284,328Professional
                fees
            
            
            175,086
            
            
            221,286
            
            
            186,967Marketing
                expense
            
            
            123,800
            
            
            116,948
            
            
            120,394Postage
                and office supplies
            
            
            252,128
            
            
            292,407
            
            
            265,784Deposit
                insurance premium
            
            
            27,537
            
            
            30,416
            
            
            35,282Other
            
            
            937,913
            
            
            1,007,316
            
            
            840,678Total
                noninterest expense
            
            
            7,892,923
            
            
            8,053,558
            
            
            7,781,698**Income
                Before Income Tax**
            
            
            1,228,614
            
            
            1,311,915
            
            
            1,396,596**Provision
                for Income Taxes**
            
            
            333,495
            
            
            411,948
            
            
            520,746**Net
                Income**
            
            $
            895,119
            
            $
            899,967
            
            $
            875,850**Basic
                Earnings Per Share**
            
            $
            0.45
            
            $
            0.46
            
            $
            0.45**Diluted
                Earnings Per Share**
            
            $
            0.45
            
            $
            0.45
            
            $
            0.44**Cash
                Dividends Per Share**
            
            $
            0.30
            
            $
            0.30
            
            $
            0.30




24




**Jacksonville
        Bancorp, Inc.**
 **Consolidated
        Statements of Stockholders’ Equity**
 **Years
        Ended December 31, 2006, 2005 and 2004**
  **Common
                      Stock******
                  
                  **Additional**
                    **Paid-in**
                  
                  **Retained**
                  
                  **Accumulated
                      Other**
                    **Comprehensive**
                  
                  ********
                  
                  **Shares**
                  
                  **Amount**
                  
                  **Capital**
                  
                  **Earnings**
                  
                  **Loss**
                  
                  **Total****Balance,
                      January 1, 2004**
                  
                  
                  1,942,004
                  
                  $
                  19,420
                  
                  $
                  6,399,321
                  
                  $
                  13,866,849
                  
                  $
                  (253,437
                  )
                  $
                  20,032,153Comprehensive
                      incomeNet
                      income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  875,850
                  
                  
                  —
                  
                  
                  875,850Change
                      in unrealized depreciation on available-for-sale securities,
                      net of
                      taxes
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (9,948
                  )
                  
                  (9,948
                  )Total
                      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  865,902Dividends
                      on common stock, $.30 per share
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (275,131
                  )
                  
                  —
                  
                  
                  (275,131
                  )Purchase
                      and retirement of stock
                  
                  
                  (20,113
                  )
                  
                  (201
                  )
                  
                  (379,563
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (379,764
                  )Stock
                      options exercised
                  
                  
                  44,452
                  
                  
                  444
                  
                  
                  439,380
                  
                  
                  —
                  
                  
                  —
                  
                  
                  439,824**Balance,
                      December 31, 2004**
                  
                  
                  1,966,343
                  
                  
                  19,663
                  
                  
                  6,459,138
                  
                  
                  14,467,568
                  
                  
                  (263,385
                  )
                  
                  20,682,984Comprehensive
                      incomeNet
                      income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  899,967
                  
                  
                  —
                  
                  
                  899,967Change
                      in unrealized depreciation on available-for-sale securities,
                      net of
                      taxes
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,216,968
                  )
                  
                  (1,216,968
                  )Total
                      comprehensive income (loss)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (317,001
                  )Dividends
                      on common stock, $.30 per share
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (278,793
                  )
                  
                  —
                  
                  
                  (278,793
                  )Purchase
                      and retirement of stock
                  
                  
                  (3,660
                  )
                  
                  (37
                  )
                  
                  (57,282
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (57,319
                  )Stock
                      options exercised
                  
                  
                  7,533
                  
                  
                  76
                  
                  
                  69,023
                  
                  
                  —
                  
                  
                  —
                  
                  
                  69,099Tax
                      benefit related to stock options exercised
                  
                  
                  —
                  
                  
                  —
                  
                  
                  3,634
                  
                  
                  —
                  
                  
                  —
                  
                  
                  3,634**Balance,
                      December 31, 2005**
                  
                  
                  1,970,216
                  
                  
                  19,702
                  
                  
                  6,474,513
                  
                  
                  15,088,742
                  
                  
                  (1,480,353
                  )
                  
                  20,102,604Comprehensive
                      incomeNet
                      income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  895,119
                  
                  
                  —
                  
                  
                  895,119Change
                      in unrealized depreciation on available-for-sale securities,
                      net of
                      taxes
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  296,617
                  
                  
                  296,617Total
                      comprehensive income (loss)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,191,736Stock
                      option compensation expense
                  
                  
                  —
                  
                  
                  —
                  
                  
                  4,710
                  
                  
                  —
                  
                  
                  —
                  
                  
                  4,710Dividends
                      on common stock, $.30 per share
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (283,705
                  )
                  
                  —
                  
                  
                  (283,705
                  )Purchase
                      and retirement of stock
                  
                  
                  (1,292
                  )
                  
                  (13
                  )
                  
                  (17,906
                  )
                  
                  —
                  
                  
                  —
                  
                  
                  (17,919
                  )Stock
                      options exercised
                  
                  
                  16,493
                  
                  
                  165
                  
                  
                  130,428
                  
                  
                  —
                  
                  
                  —
                  
                  
                  130,593Tax
                      benefit related to stock options exercised
                  
                  
                  —
                  
                  
                  —
                  
                  
                  16,597
                  
                  
                  —
                  
                  
                  —
                  
                  
                  16,597**Balance,
                      December 31, 2006**
                  
                  
                  1,985,417
                  
                  $
                  19,854
                  
                  $
                  6,608,342
                  
                  $
                  15,700,156
                  
                  $
                  (1,183,736
                  )
                  $
                  21,144,616




25





**Jacksonville
      Bancorp, Inc.**


**Consolidated
      Statements of Cash Flows**


**Years
      Ended December 31, 2006, 2005 and 2004**




**2006**
            
            **2005**
            
            **2004****Operating
                Activities**Net
                income
            
            $
            895,119
            
            $
            899,967
            
            $
            875,850Items
                not requiring (providing) cashDepreciation
                and amortization
            
            
            455,601
            
            
            567,612
            
            
            596,484Provision
                for loan losses
            
            
            60,000
            
            
            245,000
            
            
            550,000Amortization
                of premiums and discounts on securities
            
            
            14,903
            
            
            148,389
            
            
            479,102Amortization
                of loan purchased premium
            
            
            (39,559
            )
            
            (59,340
            )
            
            (59,340
            )Amortization
                of core deposit intangibles
            
            
            79,723
            
            
            79,724
            
            
            79,723Deferred
                income taxes
            
            
            (86,323
            )
            
            80,348
            
            
            55,423Net
                realized (gains) losses on available-for-sale securities
            
            
            20,817
            
            
            (16,708
            )
            
            (28,020
            )Net
                realized gains on sales of loans
            
            
            (73,563
            )
            
            (98,317
            )
            
            (44,089
            )Federal
                Home Loan Bank stock dividend
            
            
            —
            
            
            (73,028
            )
            
            (85,700
            )(Gains)
                losses on sales of foreclosed assets
            
            
            13,115
            
            
            15,683
            
            
            (82,880
            )Stock
                option compensation expense
            
            
            4,710
            
            
            —
            
            
            —Tax
                benefit relating to stock options exercised
            
            
            16,597
            
            
            3,634
            
            
            —Origination
                of loans held for sale
            
            
            (16,394,351
            )
            
            (21,370,056
            )
            
            (16,571,250
            )Proceeds
                from sales of loans held for sale
            
            
            16,561,469
            
            
            21,268,179
            
            
            16,931,024Changes
                inInterest
                receivable
            
            
            (453,641
            )
            
            (189,008
            )
            
            144,399Other
                assets
            
            
            (58,803
            )
            
            (36,783
            )
            
            161,712Interest
                payable
            
            
            281,888
            
            
            160,386
            
            
            (135,906
            )Other
                liabilities
            
            
            (211,222
            )
            
            451,412
            
            
            309,935Net
                cash provided by operating activities
            
            
            1,086,480
            
            
            2,077,094
            
            
            3,176,467**Investing
                Activities**Net
                change in federal funds sold
            
            
            —
            
            
            —
            
            
            500,000Purchases
                of available-for-sale securities
            
            
            (9,550,126
            )
            
            (5,943,592
            )
            
            (42,758,256
            )Proceeds
                from maturities of available-for-sale securities
            
            
            5,059,946
            
            
            9,979,084
            
            
            39,396,184Proceeds
                from the sales of available-for-sale and other securities
            
            
            5,940,395
            
            
            6,296,986
            
            
            9,646,349Proceeds
                from sale of Federal Home Loan Bank stock
            
            
            430,722
            
            
            —
            
            
            —Net
                change in loans
            
            
            (12,686,783
            )
            
            (17,195,370
            )
            
            266,217Purchase
                of premises and equipment
            
            
            (165,240
            )
            
            (269,747
            )
            
            (323,510
            )Proceeds
                from sales of premises and equipment
            
            
            —
            
            
            2,100
            
            
            —Proceeds
                from the sale of foreclosed assets
            
            
            391,631
            
            
            623,900
            
            
            546,262Net
                cash provided by (used in) investing activities
            
            
            (10,579,455
            )
            
            (6,506,639
            )
            
            7,273,246






26




**2006**
            
            **2005**
            
            **2004****Financing
                Activities**Net
                increase (decrease) in demand deposits, money market, NOW and savings
                accounts
            
            $
            7,254,252
            
            $
            (1,247,457
            )
            $
            (498,405
            )Net
                increase (decrease) in certificates of deposit
            
            
            7,289,264
            
            
            (6,117,277
            )
            
            (8,939,819
            )Net
                increase (decrease) in short-term borrowings
            
            
            1,684,811
            
            
            (96,638
            )
            
            557,752Proceeds
                from Federal Home Loan Bank advances
            
            
            —
            
            
            8,000,000
            
            
            —Repayment
                of Federal Home Loan Bank advances
            
            
            (4,000,000
            )
            
            —
            
            
            —Net
                increase (decrease) in advances from borrowers for taxes and
                insurance
            
            
            14,037
            
            
            46,232
            
            
            (69,497
            )Proceeds
                from stock options exercised, including related tax
                benefit
            
            
            130,593
            
            
            69,099
            
            
            439,824Purchase
                and retirement of common stock
            
            
            (17,919
            )
            
            (57,319
            )
            
            (379,764
            )Dividends
                paid
            
            
            (212,704
            )
            
            (278,793
            )
            
            (342,876
            )Net
                cash provided by (used in) financing activities
            
            
            12,142,334
            
            
            317,847
            
            
            (9,232,785
            )**Increase
                (Decrease) in Cash and Cash Equivalents**
            
            
            2,649,359
            
            
            (4,111,698
            )
            
            1,216,928**Cash
                and Cash Equivalents, Beginning of Year**
            
            
            6,681,207
            
            
            10,792,905
            
            
            9,575,977**Cash
                and Cash Equivalents, End of Year**
            
            $
            9,330,566
            
            $
            6,681,207
            
            $
            10,792,905**Supplemental
                Cash Flows Information**Interest
                paid
            
            $
            6,749,082
            
            $
            4,826,150
            
            $
            4,723,501Income
                taxes paid (net of refunds)
            
            $
            548,600
            
            $
            206,900
            
            $
            104,282Sale
                and financing of foreclosed assets
            
            $
            228,500
            
            $
            402,530
            
            $
            469,636Real
                estate acquired in settlement of loans
            
            $
            329,287
            
            $
            933,183
            
            $
            998,708Dividends
                declared not paid
            
            $
            71,001
            
            $
            —
            
            $
            —




27


**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**


Note1:
                  **Nature
                      of Operations and Summary of Significant Accounting
                      Policies**




***Nature
      of Operations***




Jacksonville
      Bancorp, Inc. (the “Company”) was incorporated under Federal law on May 3, 2002.
      The Company is a savings and loan holding company and its sole business activity
      is the 100% ownership of Jacksonville Savings Bank (the “Bank”). As part of our
      reorganization into the two-tier mutual holding company form of ownership,
      the
      shareholder interests in the Bank were converted into interests of the Company.
      The Bank was founded in 1916 as an Illinois-chartered savings and loan
      association and converted to an Illinois-chartered savings bank in 1992. The
      Bank is headquartered in Jacksonville, Illinois and operates six branches in
      addition to its main office. The Bank’s deposits have been federally insured
      since 1945 by the Federal Deposit Insurance Corporation (“FDIC”). The Bank has
      been a member of the Federal Home Loan Bank (“FHLB”) System since
      1932.




On
      April
      20, 1995, the Bank reorganized into the mutual holding company form of
      ownership, pursuant to which the Bank amended its charter from an
      Illinois-chartered mutual savings bank into an Illinois-chartered mutual holding
      company (“MHC”), Jacksonville Bancorp, MHC. On December 28, 2000, Jacksonville
      Bancorp, MHC, converted from an Illinois-chartered mutual holding company to
      a
      federally-chartered mutual holding company.




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
      originate consumer loans and mortgage loans secured by one- to four-family
      residential real estate. The Bank also originates commercial real estate loans,
      multi-family real estate loans, commercial business loans, and agricultural
      loans. When possible, the Bank emphasizes the origination of mortgage loans
      with
      adjustable interest rates (“ARM”), as well as fixed-rate balloon loans with
      terms ranging from three to five years, consumer loans, which are primarily
      home
      equity loans secured by second mortgages, commercial business loans, and
      agricultural loans. The Bank also offers trust and investment services. The
      investment center, Berthel Fisher and Company Financial Services, Inc., is
      operated through the Bank’s wholly-owned subsidiary, Financial Resources Group,
      Inc.




The
      Company is subject to competition from other financial institutions and
      nonfinancial institutions providing financial products. Additionally, the
      Company is subject to the regulations of certain regulatory agencies and
      undergoes periodic examinations by those regulatory agencies.




The
      significant accounting and reporting policies of the Company and its subsidiary
      follow:




***Principles
      of Consolidation and Financial Statement Presentation*** ****




The
      consolidated financial statements include the accounts of the Company, the
      Bank
      and the Bank’s wholly owned subsidiary, Financial Resources Group, Inc.
      Significant intercompany accounts and transactions have been eliminated in
      consolidation. Based on the Company’s approach to decision making, it has
      decided that its business is comprised of a single segment.




28


**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**




The
      consolidated financial statements of the Company have been prepared in
      conformity with accounting principles generally accepted in the United States
      of
      America and conform to predominate practice within the banking
      industry.




***Use
      of Estimates***




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.




Material
      estimates that are particularly susceptible to significant change relate to
      the
      determination of the allowance for loan losses. In connection with the
      determination of the allowance for loan losses, management obtains independent
      appraisals for significant properties.




***Cash
      Equivalents***




The
      Company considers all liquid investments with original maturities of three
      months or less to be cash equivalents.




***Securities***




Available-for-sale
      securities, which include any security for which the Company has no immediate
      plan to sell but which may be sold in the future, are carried at fair value.
      Unrealized gains and losses are recorded, net of related income tax effects,
      in
      other comprehensive income.




Amortization
      of premiums and accretion of discounts are recorded as interest income from
      securities. Realized gains and losses are recorded as net security gains
      (losses). Gains and losses on sales of securities are determined on the
      specific-identification method.




***Other
      Investments***




Other
      investments at December 31, 2006 and 2005 include local municipal bonds and
      equity investments in local community development organizations. The municipal
      bonds mature ratably through the year 2020. These securities have no readily
      ascertainable market value and are carried at cost.




***Loans
      Held for Sale***




Mortgage
      loans originated and intended for sale in the secondary market are carried
      at
      the lower of cost or fair value in the aggregate. Net unrealized losses, if
      any,
      are recognized through a valuation allowance by charges to income.




29




**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**




***Loans***




Loans
      that management has the intent and ability to hold for the foreseeable future
      or
      until maturity or payoffs are reported at their outstanding principal balances
      adjusted for any charge-offs, the allowance for loan losses, any deferred fees
      or costs on originated loans and unamortized premiums or discounts on purchased
      loans. Interest income is reported on the interest method and includes
      amortization of net deferred loan fees and costs over the loan term. Generally,
      loans are placed on non-accrual status at ninety days past due and interest
      is
      considered a loss, unless the loan is well-secured and in the process of
      collection.




Discounts
      and premiums on purchased residential real estate loans are amortized to income
      using the interest method over the remaining period to contractual maturity,
      adjusted for anticipated prepayments. Discounts and premiums on purchased
      consumer loans are recognized over the expected lives of the loans using methods
      that approximate the interest method. The unearned premium on loans purchased
      related to loans acquired from Chapin State Bank in 2000 and was being amortized
      over the estimated lives of loan acquired. This premium was fully amortized
      during 2006.




***Allowance
      for Loan Losses***




The
      allowance for loan losses is established as losses are estimated to have
      occurred through a provision for loan losses charged to income. Loan losses
      are
      charged against the allowance when management believes collectibility of the
      principal is unlikely. Subsequent recoveries, if any, are credited to the
      allowance.




The
      allowance for loan losses is evaluated on a regular basis by management and
      is
      based upon management’s periodic review of the collectibility of the loans in
      light of historical experience, the nature and volume of the loan portfolio,
      adverse situations that may affect the borrower’s ability to repay, estimated
      value of any underlying collateral and prevailing economic conditions. This
      evaluation is inherently subjective as it requires estimates that are
      susceptible to significant revision as more information becomes
      available.




A
      loan is
      considered impaired when, based on current information and events, it is
      probable that the Company will be unable to collect the scheduled payments
      of
      principal or interest when due according to the contractual terms of the loan
      agreement. Factors considered by management in determining impairment include
      payment status, collateral value and the probability of collecting scheduled
      principal and interest payments when due. Loans that experience insignificant
      payment delays and payment shortfalls generally are not classified as impaired.
      Management determines the significance of payment delays and payment shortfalls
      on a case-by-case basis, taking into consideration all of the circumstances
      surrounding the loan and the borrower, including the length of the delay, the
      reasons for the delay, the borrower’s prior payment record and the amount of the
      shortfall in relation to the principal and interest owed. Impairment is measured
      on a loan-by-loan basis for commercial and construction loans by either the
      present value of expected future cash flows discounted at the loan’s effective
      interest rate, the loan’s obtainable market price or the fair value of the
      collateral if the loan is collateral dependent.




30




**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**




Large
      groups of smaller balance homogenous loans are collectively evaluated for
      impairment. Accordingly, the Company does not separately identify individual
      consumer and residential loans.




***Premises
      and Equipment***




Depreciable
      assets are stated at cost less accumulated depreciation. Depreciation is charged
      to expense using the straight-line method over the estimated useful lives of
      the
      assets.




***Federal
      Home Loan Bank Stock***




Federal
      Home Loan Bank stock recorded at cost is a required investment for institutions
      that are members of the Federal Home Loan Bank system. The required investment
      in the common stock is based on a predetermined formula. No ready market exists
      for Federal Home Loan Bank stock and it has no quoted market value. As of
      December 31, 2006, the Bank has approximately $293,306 in excess Federal Home
      Loan Bank stock.




***Foreclosed
      Assets Held for Sale***




Assets
      acquired through, or in lieu of, loan foreclosure are held for sale and are
      initially recorded at fair value at the date of foreclosure, establishing a
      new
      cost basis. Subsequent to foreclosure, valuations are periodically performed
      by
      management and the assets are carried at the lower of carrying amount or fair
      value less cost to sell. Revenue and expenses from operations and changes in
      the
      valuation allowance are included in income or expense from foreclosed
      assets.




***Goodwill***




Goodwill
      is tested annually for impairment. If the implied fair value of goodwill is
      lower than its carrying amount, a goodwill impairment is indicated and goodwill
      is written down to its implied fair value. Subsequent increases in goodwill
      value are not recognized in the financial statements.




***Intangible
      Assets***




Intangible
      assets are being amortized on the straight-line basis over periods up to eight
      years. Such assets are periodically evaluated as to the recoverability of their
      carrying value.




31


**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**


***Mortgage
      Servicing Rights***




Mortgage
      servicing rights on originated loans that have been sold are capitalized by
      allocating the total cost of the mortgage loans between the mortgage servicing
      rights and the loans based on their relative fair values. Capitalized servicing
      rights are amortized in proportion to and over the period of estimated servicing
      revenues. Impairment of mortgage-servicing rights is assessed based on the
      fair
      value of those rights. Fair values are estimated using discounted cash flows
      based on a current market interest rate. For purposes of measuring impairment,
      the rights are stratified based on the predominant risk characteristics of
      the
      underlying loans. The predominant characteristic currently used for
      stratification is type of loan. The amount of impairment recognized is the
      amount, if any, by which the capitalized mortgage servicing rights for a stratum
      exceed their fair value.




***Stock
      Options***




At
      December 31, 2006, the Company has a stock-based employee compensation plan,
      which is described more fully in Note 16. Prior to 2006, the Company accounted
      for this plan under the recognition and measurement principles of APB Opinion
      No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      related Interpretations. Accordingly, in 2005, no stock-based employee
      compensation cost is reflected in net income, as all options granted under
      this
      plan had an exercise price equal to the market value of the underlying common
      stock at the grant date.




Effective
      January 1, 2006 the Company adopted the fair value recognition provisions of
      Statement of Financial Accounting Standards (SFAS) No. 123R, *Share-Based
      Payment* .
      The
      Company selected the modified prospective application. Accordingly, after
      January 1, 2006, the Company began expensing the fair value of stock options
      granted, modified, repurchased or cancelled. The Company recorded compensation
      expense related to stock options in the amount of $4,710 with a related tax
      benefit of $1,836 during 2006.




32




**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**




The
      following table illustrates the effect on net income if the Company had applied
      the fair value recognition provisions of SFAS No. 123R on stock-based
      compensation for the years ended December 31, 2005 and 2004:




**Year
                Ended December 31****(In
                thousands)****2005**
            
            **2004**Net
                income, as reported
            
            $
            900
            
            $
            876Less:
                Total stock-based employee compensation cost determined under the
                fair
                value based method, net of income taxes
            
            
            (4
            )
            
            (4
            )Pro
                forma net income
            
            $
            896
            
            $
            872Earnings
                per share:Basic
                - as reported
            
            $
            0.46
            
            $
            0.45Basic
                - pro forma
            
            $
            0.46
            
            $
            0.45Diluted
                - as reported
            
            $
            0.45
            
            $
            0.44Diluted
                - pro forma
            
            $
            0.45
            
            $
            0.44




***Income
      Taxes***




Deferred
      tax assets and liabilities are recognized for the tax effects of differences
      between the financial statement and tax bases of assets and liabilities. A
      valuation allowance is established to reduce deferred tax assets if it is more
      likely than not that a deferred tax asset will not be realized. The Company
      files consolidated income tax returns with its subsidiary.




***Earnings
      Per Share***




Earnings
      per share have been computed based upon the weighted-average common shares
      outstanding during each year.




Diluted
      earnings per share consider the potential dilutive effects of the exercise
      of
      outstanding stock options under the Company’s stock option plans.




33




**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**




***Trust
      Assets***




Assets
      held in fiduciary or agency capacities are not included in the consolidated
      balance sheets since such items are not assets of the Company. Fees from trust
      activities are recorded as revenue over the period in which the service is
      provided. Fees are a function of the market value of assets managed and
      administered, the volume of transactions, and fees for other services rendered,
      as set forth in the underlying client agreement with the Trust Department.
      This
      revenue recognition involves the use of estimates and assumptions, including
      components that are calculated based on estimated asset valuations and
      transaction volumes. Generally, the actual trust fee is charged to each account
      on a quarterly basis. Any out of pocket expenses or services not typically
      covered by the fee schedule for trust activities are charged directly to the
      trust account on a gross basis as trust revenue is incurred. The Company managed
      or administered 81 trust accounts with assets totaling approximately $30.5
      million at December 31, 2006.




***Reclassifications***




Certain
      reclassifications have been made to the 2005 and 2004 financial statements
      to
      conform to the 2006 financial statement presentation. These reclassifications
      had no effect on net income.




**Note
                2:**
              **Restriction
                  on Cash and Due From
                  Banks**




The
      Company is required to maintain reserve funds in cash and/or on deposit with
      the
      Federal Reserve Bank. The reserve required at December 31, 2006, was
      $929,000.




34




**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**




**Note
                3:**
              **Securities**




The
      amortized cost and approximate fair values of securities, all of which are
      classified as available for sale, are as follows:




**Amortized
                Cost**
            
            **Gross
                Unrealized Gains**
            
            **Gross
                Unrealized Losses**
            
            **Approximate
                Fair Value**December
                31, 2006:U.S.
                Treasury
            
            $
            499,969
            
            $
            —
            
            $
            (906
            )
            $
            499,063U.S.
                government agencies
            
            
            74,251,198
            
            
            3,921
            
            
            (1,538,700
            )
            
            72,716,419Mortgage-backed
                securities
            
            
            8,459,588
            
            
            —
            
            
            (249,122
            )
            
            8,210,466State
                and political subdivisions
            
            
            5,269,737
            
            
            22,795
            
            
            (16,450
            )
            
            5,276,082$
            88,480,492
            
            $
            26,716
            
            $
            (1,805,178
            )
            $
            86,702,030December
                31, 2005:U.S.
                Treasury
            
            $
            499,589
            
            $
            —
            
            $
            (6,542
            )
            $
            493,047U.S.
                government agencies
            
            
            79,759,220
            
            
            —
            
            
            (2,169,198
            )
            
            77,590,022Mortgage-backed
                securities
            
            
            8,873,093
            
            
            —
            
            
            (226,686
            )
            
            8,646,407State
                and political subdivisions
            
            
            819,120
            
            
            376
            
            
            (14,458
            )
            
            805,038$
            89,951,022
            
            $
            376
            
            $
            (2,416,884
            )
            $
            87,534,514





35




**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**




The
      amortized cost and fair value of available-for-sale securities at
      December 31, 2006, by contractual maturity, are shown below. Expected
      maturities will differ from contractual maturities because issuers may have
      the
      right to call or prepay obligations with or without call or prepayment
      penalties.




**Available-for-sale****Amortized**
              **Cost**
            
            **Fair**
              **Value**Within
                one year
            
            $
            7,188,058
            
            $
            7,097,898One
                to five years
            
            
            55,259,022
            
            
            54,019,837Five
                to ten years
            
            
            16,259,338
            
            
            16,067,146After
                ten years
            
            
            1,314,486
            
            
            1,306,683Mortgage-backed
                securities
            
            
            8,459,588
            
            
            8,210,466Totals
            
            $
            88,480,492
            
            $
            86,702,030




The
      carrying value of securities pledged as collateral, to secure public deposits
      and for other purposes, was $49,256,362 at December 31, 2006 and $42,800,863
      at
      December 31, 2005.




The
      book
      value of securities sold under agreements to repurchase amounted to $5,034,879
      and $3,350,068 at December 31, 2006 and 2005, respectively.




Gross
      gains of $916, $38,901 and $35,095 and gross losses of $21,733, $22,193 and
      $7,075 resulting from sales of available-for-sale securities were realized
      for
      2006, 2005 and 2004, respectively. The tax provision (benefit) applicable to
      these net realized gains (losses) amounted to $(7,078), $6,473 and $10,877,
      respectively.




Certain
      investments in debt securities are reported in the financial statements at
      an
      amount less than their historical cost. Total fair value of these investments
      at
      December 31, 2006 and 2005, was $82,810,176 and $86,697,071, which is
      approximately 96% and 99%, respectively, of the Company’s available-for-sale
      investment portfolio. The declines primarily resulted from recent increases
      in
      market interest rates.




Based
      on
      evaluation of available evidence, including recent changes in market interest
      rates, credit rating information and information obtained from regulatory
      filings, management believes the declines in fair value for these securities
      are
      temporary.




Should
      the impairment of any of these securities become other than temporary, the
      cost
      basis of the investment will be reduced and the resulting loss recognized in
      net
      income in the period the other-than-temporary impairment is
      identified.




36




**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**




The
      following table shows the Company’s investments’ gross unrealized losses and
      fair value, aggregated by investment category and length of time that individual
      securities have been in a continuous unrealized loss position at December 31,
      2006 and 2005:




**Less
                than 12 Months**
            
            **12
                Months or More**
            
            **Total****Description
                of**
              **Securities**
            
            **Fair
                Value**
            
            **Unrealized**
              **Losses**
            
            **Fair
                Value**
            
            **Unrealized**
              **Losses**
            
            **Fair
                Value**
            
            **Unrealized**
              **Losses****December
                31, 2006**U.S.
                Treasury
            
            $
            —
            
            $
            —
            
            $
            499,063
            
            $
            (906
            )
            $
            499,063
            
            $
            (906
            )U.S.
                government agencies
            
            
            1,242,483
            
            
            (2,517
            )
            
            69,770,015
            
            
            (1,536,183
            )
            
            71,012,498
            
            
            (1,538,700
            )Mortgage-backed
                securities
            
            
            1,796,514
            
            
            (36,436
            )
            
            6,413,952
            
            
            (212,686
            )
            
            8,210,466
            
            
            (249,122
            )State
                and political subdivisions
            
            
            2,300,431
            
            
            (7,013
            )
            
            787,718
            
            
            (9,437
            )
            
            3,088,149
            
            
            (16,450
            )Total
                temporarily impaired securities
            
            $
            5,339,428
            
            $
            (45,966
            )
            $
            77,470,748
            
            $
            (1,759,212
            )
            $
            82,810,176
            
            $
            (1,805,178
            )




**December
                31, 2005**U.S.
                Treasury
            
            $
            493,047
            
            $
            (6,542
            )
            $
            —
            
            $
            —
            
            $
            493,047
            
            $
            (6,542
            )U.S.
                government agencies
            
            
            24,161,653
            
            
            (505,467
            )
            
            53,428,370
            
            
            (1,663,731
            )
            
            77,590,023
            
            
            (2,169,198
            )Mortgage-backed
                securities
            
            
            4,625,879
            
            
            (130,039
            )
            
            3,203,860
            
            
            (96,647
            )
            
            7,829,739
            
            
            (226,686
            )State
                and political subdivisions
            
            
            400,051
            
            
            (6,902
            )
            
            384,211
            
            
            (7,556
            )
            
            784,262
            
            
            (14,458
            )Total
                temporarily impaired securities
            
            $
            29,680,630
            
            $
            (648,950
            )
            $
            57,016,441
            
            $
            (1,767,934
            )
            $
            86,697,071
            
            $
            (2,416,884
            )




37


**Jacksonville
      Bancorp, Inc.**


**Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**







**Note
                4:**
              **Loans
                  and Allowance for Loan
                  Losses**




Categories
      of loans at December 31, include:




**2006**
            
            **2005**Commercial
                and agricultural
            
            $
            32,836,764
            
            $
            28,678,748Commercial
                and agricultural real estate
            
            
            45,469,561
            
            
            39,869,420Residential
                real estate
            
            
            40,634,450
            
            
            40,125,714Consumer
            
            
            32,476,508
            
            
            30,961,843Other
            
            
            5,313,450
            
            
            4,657,431Total
                loans
            
            
            156,730,733
            
            
            144,293,156LessNet
                deferred loan fees, premiums and discounts
            
            
            28,537
            
            
            135,304Unearned
                premium on purchased loans
            
            
            —
            
            
            39,558Allowance
                for loan losses
            
            
            1,864,497
            
            
            1,846,150Net
                loans
            
            $
            154,837,699
            
            $
            142,272,144




Activity
      in the allowance for loan losses was as follows:




**2006**
            
            **2005**
            
            **2004**Balance,
                beginning of year
            
            $
            1,846,150
            
            $
            1,888,073
            
            $
            2,186,058Provision
                charged to expense
            
            
            60,000
            
            
            245,000
            
            
            550,000Losses
                charged off, net of recoveries of $176,778 for 2006, $145,655 for
                2005,
                and $225,163 for 2004
            
            
            (41,653
            )
            
            (286,923
            )
            
            (847,985
            )Balance,
                end of year
            
            $
            1,864,497
            
            $
            1,846,150
            
            $
            1,888,073




Impaired
      loans totaled $1,133,320, $233,453 and $120,964 at December 31, 2006, 2005
      and
      2004, respectively. An allowance for loan losses of $61,242, $34,350 and $3,200
      relates to impaired loans of $659,382, $233,453 and $120,964, at December 31,
      2006, 2005 and 2004, respectively.




Interest
      of approximately $54,426, $22,000 and $41,000 was recognized on average impaired
      loans of $773,308, $465,236 and $565,000 for 2006, 2005 and 2004, respectively.
      Interest of $56,811, $3,452 and $43,038 was recognized on impaired loans on
      a
      cash basis during 2006, 2005 and 2004, respectively.




38




**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**


At
      December 31, 2006, 2005 and 2004, accruing loans delinquent 90 days or more
      totaled $4,049, $21,236 and $297,688, respectively. Non-accruing loans at
      December 31, 2006, 2005 and 2004 were $1,348,045, $1,156,527 and
      $1,689,303, respectively.




**Note
                5:**
              **Premises
                  and Equipment**




Major
      classifications of premises and equipment, stated at cost, are as
      follows:




**2006**
            
            **2005**Land
            
            $
            983,276
            
            $
            923,276Buildings
                and improvements
            
            
            7,514,153
            
            
            7,467,356Equipment
            
            
            4,497,203
            
            
            4,686,18612,944,632
            
            
            13,076,818Less
                accumulated depreciation
            
            
            (6,438,871
            )
            
            (6,230,696
            )Net
                premises and equipment
            
            $
            6,555,761
            
            $
            6,846,122







**Note
                6:**
              **Intangible
                  Assets**




The
      carrying basis and accumulated amortization of recognized core deposit
      intangible assets at December 31, 2006 and 2005, were:




**2006**
            
            **2005****Gross**
              **Carrying**
              **Amount**
            
            **Accumulated**
              **Amortization**
            
            **Gross**
              **Carrying**
              **Amount**
            
            **Accumulated**
              **Amortization**Core
                deposit intangibles
            
            $
            637,789
            
            $
            (518,203
            )
            $
            637,789
            
            $
            (438,480
            )







Amortization
      expense for the years ended December 31, 2006, 2005 and 2004, was $79,723,
      $79,724 and $79,723, respectively. Estimated amortization expense for each
      of
      the following three years is:




2007
            
            $
            79,7242008
            
            
            39,862




39




**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**




**Note
                7:**
              **Loan
                  Servicing**




Mortgage
      loans serviced for others are not included in the accompanying consolidated
      balance sheets. The unpaid principal balances of mortgage loans serviced for
      others was $140,091,363 and $143,665,406 at December 31, 2006 and 2005,
      respectively.




Custodial
      escrow balances maintained in connection with the foregoing loan servicing,
      and
      included in demand deposits on the general ledger, were approximately $291,002
      and $306,400 at December 31, 2006 and 2005, respectively.




The
      aggregate fair value of capitalized mortgage servicing rights at December 31,
      2006 and 2005 totaled $1,186,160 and $1,144,828,
      respectively .
      Comparable market values and a valuation model that calculates the present
      value
      of future cash flows were used to estimate fair value. For purposes of measuring
      impairment, risk characteristics including product type, investor type, and
      interest rates, were used to stratify the originated mortgage servicing
      rights.




Activity
      in the balance of mortgage servicing rights, measured using the amortization
      method, was as follows:




**2006**
            
            **2005**Mortgage
                servicing rightsBalance,
                beginning of year
            
            $
            1,059,610
            
            $
            1,094,261Servicing
                rights capitalized
            
            
            120,375
            
            
            159,511Amortization
                of servicing rights
            
            
            (140,336
            )
            
            (194,162
            )Balance,
                end of year
            
            $
            1,039,649
            
            $
            1,059,610







**Note
                8:**
              **Interest-bearing
                  Deposits**




Interest-bearing
      deposits in denominations of $100,000 or more totaled $63,487,924 at
      December 31, 2006 and $77,188,303 at December 31, 2005.




At
      December 31, 2006, the scheduled maturities of time deposits are as
      follows:




2007
            
            $
            107,645,1992008
            
            
            22,367,6212009
            
            
            7,482,8292010
            
            
            7,097,4152011
            
            
            1,376,741Thereafter
            
            
            132,655$
            146,102,460




40


**Jacksonville
        Bancorp, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**




**Note
                9:**
              **Short-term
                  Borrowings**




Short-term
      borrowings consist of securities sold under agreements to repurchase totaling
      $5,034,879 and $3,350,068 at December 31, 2006 and 2005, respectively.




Securities
      sold under agreements to repurchase consist of obligations of the Company to
      other parties. The obligations are secured by investments and such collateral
      is
      held by the Company. The maximum amount of outstanding agreements at any month
      end during 2006 and 2005 totaled $5,034,879 and $3,350,068,
      respectively, and the
      monthly average of such agreements totaled $3,498,675 and $2,115,575  for
      2006
      and 2005, respectively .
      The
      agreements at December 31, 2006, are all overnight agreements.




**Note
                10:**
              **Federal
                  Home Loan Bank
                  Advances**




The
      Federal Home Loan Bank advances are secured by mortgage loans and totaled
      $49,690,994 at December 31, 2006. The advances, at an interest rate of
      4.47%, are subject to restrictions or penalties in the event of
      prepayment.




Aggregate
      annual maturities of the advances at December 31, 2006, are:




2007
            
            $
            2,000,0002008
            
            
            2,000,000$
            4,000,000




**Note
                11:**
              **Income
                  Taxes**




The
      provision for income taxes includes these components:




**2006**
            
            **2005**
            
            **2004**Taxes
                currently payableFederal
            
            $
            419,818
            
            $
            331,600
            
            $
            533,463State
            
            
            —
            
            
            —
            
            
            (68,140
            )Deferred
                income taxes
            
            
            (86,323
            )
            
            80,348
            
            
            55,423Income
                tax expense
            
            $
            333,495
            
            $
            411,948
            
            $
            520,746




41




**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**




A
      reconciliation of income tax expense at the statutory rate to the Company’s
      actual income tax expense is shown below:




**2006**
            
            **2005**
            
            **2004**Computed
                at the statutory rate (34%)
            
            $
            417,729
            
            $
            446,051
            
            $
            474,843Increase
                (decrease) resulting fromTax
                exempt interest
            
            
            (37,662
            )
            
            (18,419
            )
            
            (19,489
            )Graduated
                tax rates
            
            
            (12,286
            )
            
            (13,119
            )
            
            (13,966
            )State
                income taxes, net
            
            
            (49,288
            )
            
            (28,810
            )
            
            (43,196
            )Other
            
            
            15,002
            
            
            26,245
            
            
            122,554Actual
                tax expense
            
            $
            333,495
            
            $
            411,948
            
            $
            520,746







The
      tax
      effects of temporary differences related to deferred taxes shown on the balance
      sheets were:




**2006**
            
            **2005**Deferred
                tax assetsAllowance
                for loan losses
            
            $
            590,732
            
            $
            580,252Deferred
                compensation
            
            
            871,169
            
            
            839,657State
                net operating loss carryforward
            
            
            269,646
            
            
            309,515Unrealized
                losses on available-for-sale securities
            
            
            594,726
            
            
            936,155Other
            
            
            —
            
            
            7,5172,326,273
            
            
            2,673,096Deferred
                tax liabilitiesDepreciation
            
            
            417,138
            
            
            451,677Federal
                Home Loan Bank stock dividends
            
            
            144,809
            
            
            200,251Prepaid
                expenses
            
            
            72,760
            
            
            65,871Mortgage
                servicing rights
            
            
            398,412
            
            
            403,662Basis
                in acquired assets
            
            
            45,827
            
            
            60,685Other
            
            
            11,483
            
            
            —1,090,429
            
            
            1,182,146Net
                deferred tax asset
            
            $
            1,235,844
            
            $
            1,490,950







42




**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**




Retained
      earnings at December 31, 2006 and 2005, include approximately $2,600,000, for
      which no deferred federal income tax liability has been recognized. These
      amounts represent an allocation of income to bad debt deductions for tax
      purposes only. Reduction of amounts so allocated for purposes other than tax
      bad
      debt losses or adjustments arising from carryback of net operating losses would
      create income for tax purposes only, which would be subject to the then-current
      corporate income tax rate. The deferred income tax liabilities on the preceding
      amounts that would have been recorded if they were expected to reverse into
      taxable income in the foreseeable future were approximately $1,000,000 at
      December 31, 2006 and 2005.









**Note
                12:**
              **Other
                  Comprehensive Loss**




Other
      comprehensive income (loss) components and related taxes were as
      follows:




**2006**
            
            **2005**
            
            **2004**Unrealized
                gains (losses) on available-for-sale securities
            
            $
            617,229
            
            $
            (1,969,854
            )
            $
            11,776Less
                reclassification adjustment for realized gains (losses) included
                in
                income
            
            
            (20,817
            )
            
            16,708
            
            
            28,020Other
                comprehensive income (loss), before tax effect
            
            
            638,046
            
            
            (1,986,562
            )
            
            (16,244
            )Tax
                expense (benefit)
            
            
            (216,936
            )
            
            769,594
            
            
            6,296Tax
                expense - change in tax rate from 38.7% to 34% during 2006
            
            
            (124,493
            )
            
            —
            
            
            —Other
                comprehensive income (loss)
            
            $
            296,617
            
            $
            (1,216,968
            )
            
            (9,948
            )





**Note
                13:**
              **Regulatory
                  Matters**




The
      Bank
      is subject to various regulatory capital requirements administered by the
      federal banking agencies. Failure to meet minimum capital requirements can
      initiate certain mandatory and possibly additional discretionary actions by
      regulators that, if undertaken, could have a direct material effect on the
      Bank’s financial statements. Under capital adequacy guidelines and the
      regulatory framework for prompt corrective action, the Bank must meet specific
      capital guidelines that involve quantitative measures of the Bank’s assets,
      liabilities and certain off-balance-sheet items as calculated under regulatory
      accounting practices. The Bank’s capital amounts and classification are also
      subject to qualitative judgments by the regulators about components, risk
      weightings and other factors.






43


**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**




Quantitative
      measures established by regulation to ensure capital adequacy require the Bank
      to maintain minimum amounts and ratios (set forth in the table below). As of
      December 31, 2006 and 2005, that the Bank meets all capital adequacy
      requirements to which it is subject.




As
      of
      December 31, 2006, the most recent notification from the FDIC categorized the
      Bank as well capitalized under the regulatory framework for prompt corrective
      action. To be categorized as well capitalized, the Bank must maintain minimum
      total risk-based, Tier I risk-based and Tier I leverage ratios as set forth
      in
      the table. There are no conditions or events since that notification that
      management believes have changed the Bank’s category.




The
      Bank’s actual capital amounts and ratios are also presented in the table.




**Actual**
            
            **For
                Capital**
              **Adequacy
                Purposes**
            
            **To
                Be Well Capitalized**
              **Under
                Prompt Corrective**
              **Action
                Provisions****Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**As
                of December 31, 2006Total
                risk-based capital
              (to
                risk-weighted assets)
            
            $
            21,032
            
            
            12.34
            %
            $
            13,633
            
            
            8.0
            %
            $
            17,041
            
            
            10.0
            %Tier
                I capital
              (to
                risk-weighted assets)
            
            
            19,167
            
            
            11.25
            
            
            6,817
            
            
            4.0
            
            
            10,225
            
            
            6.0Tier
                I capital
              (to
                average assets)
            
            
            19,167
            
            
            7.45
            
            
            10,294
            
            
            4.0
            
            
            12,867
            
            
            5.0Tangible
                capital
              (to
                adjusted tangible assets)
            
            
            19,167
            
            
            7.45
            
            
            3,860
            
            
            1.5
            
            
            —
            
            
            N/AAs
                of December 31, 2005Total
                risk-based capital
              (to
                risk-weighted assets)
            
            $
            20,214
            
            
            12.83
            %
            $
            12,600
            
            
            8.0
            %
            $
            15,750
            
            
            10.0
            %Tier
                I capital
              (to
                risk-weighted assets)
            
            
            18,368
            
            
            11.66
            
            
            6,300
            
            
            4.0
            
            
            9,450
            
            
            6.0Tier
                I capital
              (to
                average assets)
            
            
            18,368
            
            
            7.31
            
            
            10,053
            
            
            4.0
            
            
            12,566
            
            
            5.0Tangible
                capital
              (to
                adjusted tangible assets)
            
            
            18,368
            
            
            7.31
            
            
            3,770
            
            
            1.5
            
            
            —
            
            
            N/A




The
      Bank
      is subject to certain restrictions on the amount of dividends that it may
      declare without prior regulatory approval.




44




**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**


Although
      the Company’s regulators approved the mutual holding company’s waiver of
      dividends, the amounts declared but not paid on the shares owned by the mutual
      holding company are considered a restriction on the Company’s retained earnings.
      The Company’s mutual holding company waived its share of dividends declared by
      the Company as follows:




Year
                ended December 31, 2000
            
            $
            77,905Year
                ended December 31, 2001
            
            
            311,621Year
                ended December 31, 2002
            
            
            311,622Year
                ended December 31, 2003
            
            
            311,621Year
                ended December 31, 2004
            
            
            311,622Year
                ended December 31, 2005
            
            
            311,621Year
                ended December 31, 2006
            
            
            311,621$
            1,947,633




**Note
                14:**
              **Related
                  Party Transactions**




At
      December 31, 2006 and 2005, the Company had loans outstanding to executive
      officers, directors, significant shareholders and their affiliates (related
      parties). Changes in loans to executive officers and directors for the year
      ended December 31, 2006 are summarized as follows:




Balance
                beginning of year
            
            $
            583,501Additions
            
            
            1,358,754Repayments
            
            
            (1,155,907
            )Balance,
                end of year
            
            $
            786,348




In
      management’s opinion, such loans and other extensions of credit and deposits
      were made in the ordinary course of business and were made on substantially
      the
      same terms (including interest rates and collateral) as those prevailing at
      the
      time for comparable transactions with other persons. Further, in management’s
      opinion, these loans did not involve more than normal risk of collectibility
      or
      present other unfavorable features.




**Note
                15:**
              **Employee
                  Benefits**




**401(k)
      Plan —** The
      Company maintain a 401(k) savings plan for eligible employees. The Company’s
      contributions to this plan were $105,904, $97,823 and $91,781 for the years
      ended December 31, 2006, 2005 and 2004, respectively. The plan invests its
      assets in deposit accounts at the Company which earned interest at a rate of
      5.00% for the year ended December 31, 2006, 4.25% for the year ended December
      31, 2005 and 3.5% for the year ended December 31, 2004.


45
 **Jacksonville
            Bancorp, Inc.**
 **Notes
            to Consolidated Financial Statements**
 **December
            31, 2006 and 2005**




**Deferred
      Compensation Plan —** The
      Company maintains a deferred compensation plan for certain key officers and
      employees. Contributions are determined annually by the Company’s Board of
      Directors. No contributions to this plan were made for the years ended December
      31, 2006 or 2005 and a contribution of $26,000 was made for the year ended
      December 31, 2004. Effective in 1996, the Company changed the funding status
      of
      the plan and accrued interest at a variable rate which fluctuates based on
      Moody’s Corporate Bond Average Index. Effective in 2005, the Company froze this
      plan and no future contributions will be made. Compensation expense related
      to
      the plan was $155,988, $173,198 and $174,296 for the years ended
      December 31, 2006, 2005 and 2004, respectively.




**Employee
      Stock Ownership Plan —** The
      ESOP
      is a noncontributory defined contribution plan which covers substantially all
      employees. The Company may contribute to the Plan, at its discretion, an amount
      determined by the Board of Directors. The Company has made no contributions
      in
      2006, 2005 or 2004.




At
      December 31, 2006, all 43,373 shares held by the ESOP had been
      allocated.




**Note
                16:**
              **Stock
                  Options Plan**




The
      Jacksonville Savings Bank and Jacksonville Bancorp, MHC 1996 Stock Option Plan
      was adopted on April 23, 1996 and is administered by the Board of Directors.
      A
      total of 83,625 shares of common stock were reserved and awarded under the
      Plan.
      Awards expire ten years after the grant date and are exercisable at a price
      of
      $8.83 per share. The Jacksonville Savings Bank 2001 Stock Option Plan was
      adopted on April 30, 2001 and is administered by the Stock Benefits Committee.
      A
      total of 87,100 shares of common stock were reserved and awarded under the
      Plan
      during 2001. Awards expire ten years after the grant date and are exercisable
      at
      a price of $10.00 per share. On June 15, 2004, the Company granted 5,600 option
      shares under its 1996 Stock Option Plan. The awards vest over five years with
      credit given for prior service, expire after ten years, and are exercisable
      at a
      price of $14.00 per share.




46


**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**




The
      fair
      value of each option award is estimated on the date of grant using a binomial
      option valuation model that uses the assumptions noted in the following table.
      Expected volatility is based on historical volatility of the Company’s stock and
      other factors. The Company uses historical data to estimate option exercise
      and
      employee termination within the valuation model; separate groups of employees
      that have similar historical exercise behavior are considered separately for
      valuation purposes. The expected term of options granted is derived from the
      output of the option valuation model and represents the period of time that
      options granted are expected to be outstanding; the range given below results
      from certain groups of employees exhibiting different behavior. The risk-free
      rate for periods within the contractual life of the option is based on the
      U.S.
      Treasury yield curve in effect at the time of grant.




**2004**Expected
                volatility
            
            
            32
            %Expected
                dividends
            
            
            3.00
            %Expected
                term (in years)
            
            
            6.2Risk-free
                rate
            
            
            3.96
            %




A
      summary
      of option activity under the Plan as of December 31, 2006, 2005 and 2004, and
      changes during the years then ended, is presented below:




**2006****Shares**
            
            **Weighted-Average
                Exercise Price**
            
            **Weighted-Average
                Remaining Contractual Term**
            
            **Aggregate
                Intrinsic Value**Outstanding,
                beginning of year
            
            
            54,640
            
            $
            10.12Granted
            
            
            —
            
            
            —Exercised
            
            
            (16,493
            )
            
            9.04Forfeited
                or expired
            
            
            (2
            )
            
            8.83Outstanding,
                end of year
            
            
            38,145
            
            $
            10.59
            
            
            5.44
            
            $
            87,969Exercisable,
                end of year
            
            
            36,985
            
            $
            10.48
            
            
            5.36
            
            $
            88,286




47




**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**




The
      aggregate intrinsic value of options outstanding and exercisable at the end
      of
      the year 2006 excludes 5,600 shares that are exercisable at a price of $14.00
      per share and were antidilutive.




**2005****Shares**
            
            **Weighted-Average
                Exercise Price**
            
            **Weighted-Average
                Remaining Contractual Term**
            
            **Aggregate
                Intrinsic Value**Outstanding,
                beginning of year
            
            
            63,273
            
            $
            10.06Granted
            
            
            —
            
            
            —Exercised
            
            
            (7,533
            )
            
            9.66Forfeited
                or expired
            
            
            (1,100
            )Outstanding,
                end of year
            
            
            54,640
            
            $
            10.12
            
            
            5.06
            
            $
            223,259Exercisable,
                end of year
            
            
            52,361
            
            $
            9.95
            
            
            4.89
            
            $
            222,848




**2004****Shares**
            
            **Weighted-Average
                Exercise Price**
            
            **Weighted-Average
                Remaining Contractual Term**
            
            **Aggregate
                Intrinsic Value**Outstanding,
                beginning of year
            
            
            103,225
            
            $
            9.78Granted
            
            
            5,600
            
            
            14.00Exercised
            
            
            (44,452
            )
            
            9.89Forfeited
                or expired
            
            
            (1,100
            )Outstanding,
                end of year
            
            
            63,273
            
            $
            10.06
            
            
            6.02
            
            $
            468,979Exercisable,
                end of year
            
            
            60,313
            
            $
            9.87
            
            
            5.82
            
            $
            458,499




48


**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**




The
      weighted-average grant-date fair value of options granted during 2004 was $3.84.
      The total intrinsic value of options exercised during the years ended December
      31, 2006, 2005 and 2004, was $70,145, $34,245 and $337,035,
      respectively.




As
      of
      December 31, 2006, there was $4,270 of total unrecognized compensation cost
      related to nonvested share-based compensation arrangements granted under the
      Plan. That cost is expected to be recognized over a weighted-average period
      of
      2.5 years. The total fair value of shares vested during the years ended December
      31, 2006, 2005 and 2004, was $14,875, $9,674 and $46,126,
      respectively.




**Note
                17:**
              **Earnings
                  Per Share**




Earnings
      per share (EPS) were computed as follows:




**Year
                Ended December 31, 2006****Income**
            
            **Weighted-Average
                Shares**
            
            **Per
                Share Amount**Net
                income
            
            $
            895,119Basic
                earnings per share
            
            
            
            
            
            1,982,081Income
                available to common stockholders
            
            
            
            
            
            
            
            $
            0.45Effect
                of dilutive securitiesStock
                options
            
            
            —
            
            
            7,572Diluted
                earnings per shareIncome
                available to common stockholders
            
            $
            895,119
            
            
            1,989,653
            
            $
            0.45





49




**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**


The
      earnings per share calculation for 2006 does not include 5,600 shares that
      were
      antidilutive.




**Year
                Ended December 31, 2005****Income**
            
            **Weighted-Average
                Shares**
            
            **Per
                Share Amount**Net
                income
            
            $
            899,967Basic
                earnings per share
            
            
            
            
            
            1,967,575Income
                available to common stockholders
            
            
            
            
            
            
            
            $
            0.46Effect
                of dilutive securitiesStock
                options
            
            
            —
            
            
            14,595Diluted
                earnings per shareIncome
                available to common stockholders
            
            $
            899,967
            
            
            1,982,170
            
            $
            0.45




**Year
                Ended December 31, 2004****Income**
            
            **Weighted-Average
                Shares**
            
            **Per
                Share Amount**Net
                income
            
            $
            875,850Basic
                earnings per share
            
            
            
            
            
            1,954,084Income
                available to common stockholders
            
            
            
            
            
            
            
            $
            0.45Effect
                of dilutive securitiesStock
                options
            
            
            —
            
            
            25,840Diluted
                earnings per shareIncome
                available to common stockholders
            
            $
            875,850
            
            
            1,979,924
            
            $
            0.44




50


**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**


Note18:
              **Disclosures
                  about Fair Value of Financial
                  Instruments**




The
      following table presents estimated fair values of the Company’s financial
      instruments. The fair values of certain of these instruments were calculated
      by
      discounting expected cash flows, which involves significant judgments by
      management and uncertainties. Fair value is the estimated amount at which
      financial assets or liabilities could be exchanged in a current transaction
      between willing parties, other than in a forced or liquidation sale. Because no
      market exists for certain of these financial instruments and because management
      does not intend to sell these financial instruments, the Company does not know
      whether the fair values shown below represent values at which the respective
      financial instruments could be sold individually or in the
      aggregate.




**December
                31, 2006**
            
            **December
                31, 2005****Carrying
                Amount**
            
            **Fair
                Value**
            
            **Carrying
                Amount**
            
            **Fair
                Value**Financial
                assetsCash
                and cash equivalents
            
            $
            9,330,566
            
            $
            9,330,566
            
            $
            6,681,207
            
            $
            6,681,207Available-for-sale
                securities
            
            
            86,702,030
            
            
            86,702,030
            
            
            87,534,514
            
            
            87,534,514Other
                investments
            
            
            378,249
            
            
            378,249
            
            
            393,654
            
            
            393,654Loans
                held for sale
            
            
            425,851
            
            
            425,851
            
            
            499,445
            
            
            499,445Loans,
                net of allowance for loan losses
            
            
            154,837,699
            
            
            154,330,649
            
            
            142,272,144
            
            
            141,691,606Federal
                Home Loan Bank stock
            
            
            1,108,606
            
            
            1,108,606
            
            
            1,539,328
            
            
            1,539,328Interest
                receivable
            
            
            1,943,390
            
            
            1,943,390
            
            
            1,489,749
            
            
            1,489,749Financial
                liabilitiesDeposits
            
            
            232,913,290
            
            
            234,834,409
            
            
            218,369,774
            
            
            220,503,988Short-term
                borrowings
            
            
            5,034,879
            
            
            5,034,879
            
            
            3,350,068
            
            
            3,350,068Federal
                Home Loan Bank advances
            
            
            4,000,000
            
            
            3,975,157
            
            
            8,000,000
            
            
            7,973,716Advances
                from borrowers for taxes and insurance
            
            
            388,713
            
            
            388,713
            
            
            374,676
            
            
            374,676Interest
                payable
            
            
            1,082,334
            
            
            1,082,334
            
            
            800,446
            
            
            800,446Unrecognized
                financial instruments (net of contract amount)Commitments
                to originate loans
            
            
            0
            
            
            0
            
            
            0
            
            
            0Letters
                of credit
            
            
            0
            
            
            0
            
            
            0
            
            
            0Lines
                of credit
            
            
            0
            
            
            0
            
            
            0
            
            
            0




51




**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**


The
      following methods and assumptions were used to estimate the fair value of each
      class of financial instruments.




***Cash
      and Cash Equivalents and Federal Home Loan Bank Stock***




The
      carrying amount approximates fair value.




***Securities***




Fair
      values equal quoted market prices, if available. If quoted market prices are
      not
      available, fair value is estimated based on quoted market prices of similar
      securities.




***Other
      investments***




The
      carrying amount approximates fair value.




***Loans
      Held for Sale***




For
      homogeneous categories of loans, such as mortgage loans held for sale, fair
      value is estimated using the quoted market prices for securities backed by
      similar loans, adjusted for differences in loan characteristics.




***Loans***




The
      fair
      value of loans is estimated by discounting the future cash flows using the
      current rates at which similar loans would be made to borrowers with similar
      credit ratings and for the same remaining maturities. Loans with similar
      characteristics were aggregated for purposes of the calculations. The carrying
      amount of accrued interest approximates its fair value.




***Deposits***




Deposits
      include demand deposits, savings accounts, NOW accounts and certain money market
      deposits. The carrying amount approximates fair value. The fair value of
      fixed-maturity time deposits is estimated using a discounted cash flow
      calculation that applies the rates currently offered for deposits of similar
      remaining maturities.




***Short-term
      Borrowings, Federal Home Loan Bank Advances, Interest Payable and Advances
      From
      Borrowers for Taxes and Insurance***




The
      carrying amount approximates fair value.




52




**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**


***Commitments
      to Originate Loans, Letters of Credit and Lines of
      Credit***




The
      fair
      value of commitments to originate loans is estimated using the fees currently
      charged to enter into similar agreements, taking into account the remaining
      terms of the agreements and the present creditworthiness of the counterparties.
      For fixed-rate loan commitments, fair value also considers the difference
      between current levels of interest rates and the committed rates. The fair
      values of letters of credit and lines of credit are based on fees currently
      charged for similar agreements or on the estimated cost to terminate or
      otherwise settle the obligations with the counterparties at the reporting
      date.




**Note
                19:**
              **Significant
                  Estimates and
                  Concentrations**




Accounting
      principles generally accepted in the United States of America require disclosure
      of certain significant estimates and current vulnerabilities due to certain
      concentrations. Estimates related to the allowance for loan losses are reflected
      in the footnote regarding loans. Current vulnerabilities due to certain
      concentrations of credit risk are discussed in the footnote on commitments
      and
      credit risk.




**Note
                20:**
              **Commitments
                  and Credit Risk**




The
      Company grants agribusiness, commercial and residential loans to customers
      in
      Cass, Morgan, Macoupin, Montgomery and surrounding counties in Illinois. The
      Company’s loans are generally secured by specific items of collateral including
      real property, consumer assets and business assets. Although the Company has
      a
      diversified loan portfolio, a substantial portion of its debtors’ ability to
      honor their contracts is dependent upon economic conditions and the agricultural
      economy in the counties.




***Commitments
      to Originate Loans***




Commitments
      to originate loans are agreements to lend to a customer as long as there is
      no
      violation of any condition established in the contract. Commitments generally
      have fixed expiration dates or other termination clauses and may require payment
      of a fee. Since a portion of the commitments may expire without being drawn
      upon, the total commitment amounts do not necessarily represent future cash
      requirements. Each customer’s creditworthiness is evaluated on a case-by-case
      basis. The amount of collateral obtained, if deemed necessary, is based on
      management’s credit evaluation of the counterparty. Collateral held varies, but
      may include accounts receivable, inventory, property, plant and equipment,
      commercial real estate and residential real estate.




53


**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**




At
      December 31, 2006 and 2005, the Company had outstanding commitments to originate
      loans aggregating approximately $1,929,000 and $2,273,200, respectively. The
      commitments extended over varying periods of time with the majority being
      disbursed within a one-year period. Loan commitments at fixed rates of interest
      amounted to $822,200 and $1,394,210 at December 31, 2006 and 2005, respectively,
      with the remainder at floating market rates.




***Standby
      Letters of Credit***




Standby
      letters of credit are irrevocable conditional commitments issued by the Company
      to guarantee the performance of a customer to a third party. Financial standby
      letters of credit are primarily issued to support public and private borrowing
      arrangements, including commercial paper, bond financing and similar
      transactions. Performance standby letters of credit are issued to guarantee
      performance of certain customers under non-financial contractual obligations.
      The credit risk involved in issuing standby letters of credit is essentially
      the
      same as that involved in extending loans to customers. Should the Company be
      obliged to perform under the standby letters of credit, the Company may seek
      recourse from the customer for reimbursement of amounts paid.




The
      Company had total outstanding standby letters of credit amounting to $14,000
      and
      $30,994, at December 31, 2006 and 2005, respectively, with terms ranging from
      1
      to 5 years. At December 31, 2006 and 2005, the Company’s deferred revenue under
      standby letters of credit agreements was nominal.




***Lines
      of Credit***




Lines
      of
      credit are agreements to lend to a customer as long as there is no violation
      of
      any condition established in the contract. Lines of credit generally have fixed
      expiration dates. Since a portion of the line may expire without being drawn
      upon, the total unused lines do not necessarily represent future cash
      requirements. Each customer’s creditworthiness is evaluated on a case-by-case
      basis. The amount of collateral obtained, if deemed necessary, is based on
      management’s credit evaluation of the counterparty. Collateral held varies but
      may include accounts receivable, inventory, property, plant and equipment,
      commercial real estate and residential real estate. Management uses the same
      credit policies in granting lines of credit as it does for on-balance-sheet
      instruments.




At
      December 31, 2006, the Company had granted unused lines of credit to borrowers
      aggregating approximately $15,990,379 and $9,427,274 for commercial lines and
      open-end consumer lines, respectively. At December 31, 2005, unused lines of
      credit to borrowers aggregated approximately $12,618,377 for commercial lines
      and $6,684,123 for open-end consumer lines.




54
 
  **Jacksonville
          Bancorp, Inc.**
 **Notes
          to Consolidated Financial Statements**
 **December
          31, 2006 and 2005**


**Note
                21:**
              **Future
                  Change in Accounting Principles**




In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issues FASB
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* ,
      which
      provides guidance on the measurement, recognition, and disclosure of tax
      positions taken or expected to be taken in a tax return. This Interpretation
      is
      effective for the first period ending after December 31, 2006. The Company
      is
      currently assessing the impact, if any, the adoption of the Interpretation
      will
      have on its financial statements.




The
      Financial Accounting Standards Board (“FASB”) issued Statement of Financial
      Accounting Standard (“SFAS”) No. 156, *Accounting
      for Servicing of Financial Assets - an amendment of FASB Statement No.
      140* .
      This
      statement permits, but does not include the subsequent measurement of separately
      recognized servicing assets and servicing liabilities at fair value. Adoption
      of
      this Statement is required as of the beginning of the first fiscal year after
      September 15, 2006. The Company is currently assessing the impact, if any,
      that the adoption of the Interpretation will have on its financial
      statements.




**Note
                22:**
              **FDIC
                  One-time Assessment
                  Credit**




Effective
      November 17, 2006, the FDIC implemented a one-time credit of $4.7 billion to
      eligible institutions. The purpose of the credit is to recognize contributions
      made by certain institutions to capitalize the Bank Insurance Fund and Savings
      Association Insurance Fund, which have now been merged into the Deposit
      Insurance Fund. The Bank is an eligible institution and has received notice
      from
      the FDIC that its share of the credit is $256,000. This amount is not reflected
      in the accompanying financial statements as it represents contingent future
      credits against future insurance assessment payments. As such, the timing and
      ultimate recoverability of the one-time credit may change.




55


**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**




**Note
                23:**
              **Quarterly
                  Results of Operations
                  (Unaudited)**




**Year
                Ended December 31, 2006****Three
                Months Ended****December
                31**
            
            **September
                30**
            
            **June
                30**
            
            **March
                31**Interest
                income
            
            $
            3,649,035
            
            $
            3,559,026
            
            $
            3,440,894
            
            $
            3,328,724Interest
                income
            
            
            2,031,647
            
            
            1,874,044
            
            
            1,653,000
            
            
            1,472,279Net
                interest income
            
            
            1,617,388
            
            
            1,684,982
            
            
            1,787,894
            
            
            1,856,445Provision
                for loan losses
            
            
            —
            
            
            —
            
            
            —
            
            
            60,000Net
                interest income after provision for loan losses
            
            
            1,617,388
            
            
            1,684,982
            
            
            1,787,894
            
            
            1,796,445Other
                income
            
            
            576,622
            
            
            514,619
            
            
            586,223
            
            
            557,364Other
                expense
            
            
            2,019,900
            
            
            2,010,771
            
            
            1,962,197
            
            
            1,900,055Income
                before income taxes
            
            
            174,110
            
            
            188,830
            
            
            411,920
            
            
            453,754Income
                tax expense
            
            
            62,877
            
            
            19,933
            
            
            113,131
            
            
            137,544Net
                income
            
            $
            111,233
            
            $
            188,897
            
            $
            298,789
            
            $
            316,120Basic
                earnings per share
            
            $
            0.06
            
            $
            0.08
            
            $
            0.15
            
            $
            0.16Diluted
                earnings per share
            
            $
            0.06
            
            $
            0.08
            
            $
            0.15
            
            $
            0.16




**Year
                Ended December 31, 2005****Three
                Months Ended****December
                31**
            
            **September
                30**
            
            **June
                30**
            
            **March
                31**Interest
                income
            
            $
            3,243,142
            
            $
            3,146,515
            
            $
            3,093,355
            
            $
            2,940,311Interest
                income
            
            
            1,394,906
            
            
            1,309,089
            
            
            1,191,947
            
            
            1,090,594Net
                interest income
            
            
            1,848,236
            
            
            1,837,426
            
            
            1,901,408
            
            
            1,849,717Provision
                for loan losses
            
            
            —
            
            
            35,000
            
            
            105,000
            
            
            105,000Net
                interest income after provision for loan losses
            
            
            1,848,236
            
            
            1,802,426
            
            
            1,796,408
            
            
            1,744,717Other
                income
            
            
            541,146
            
            
            573,433
            
            
            544,742
            
            
            514,365Other
                expense
            
            
            2,117,538
            
            
            1,998,717
            
            
            1,972,856
            
            
            1,964,447Income
                before income taxes
            
            
            271,844
            
            
            377,142
            
            
            368,294
            
            
            294,635Income
                tax expense
            
            
            14,365
            
            
            142,330
            
            
            147,273
            
            
            107,980Net
                income
            
            $
            257,479
            
            $
            234,812
            
            $
            221,021
            
            $
            186,655Basic
                earnings per share
            
            $
            0.14
            
            $
            0.12
            
            $
            0.11
            
            $
            0.09Diluted
                earnings per share
            
            $
            0.13
            
            $
            0.12
            
            $
            0.11
            
            $
            0.09




56




**Jacksonville
        Bancorp, Inc.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2006 and 2005**


**Note
                24:**
              **Condensed
                  Financial Information (Parent Company Only)**




Presented
      below is condensed financial information as to financial position, results
      of
      operations and cash flows of the Company:




**Condense** **d
      Balance Sheets**




**December
                31,****2006**
            
            **2005****Assets**Cash
                and due from banks
            
            $
            249,770
            
            $
            222,580Investment
                in common stock of subsidiary
            
            
            20,829,714
            
            
            19,813,089Other
                assets
            
            
            155,731
            
            
            83,235Total
                assets
            
            $
            21,235,215
            
            $
            20,118,904**Liabilities**Other
                liabilities
            
            $
            90,599
            
            $
            16,300Total
                liabilities
            
            
            90,599
            
            
            16,300**Stockholders’
                Equity**
            
            
            21,144,616
            
            
            20,102,604Total
                liabilities and stockholders’ equity
            
            $
            21,235,215
            
            $
            20,118,904




57




**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**




**Condensed
      State** **ments
      of Income**




**Year
                Ending December 31,****2006**
            
            **2005**
            
            **2004****Income**Dividends
                from subsidiary
            
            $
            283,199
            
            $
            528,790
            
            $
            275,041Other
                income
            
            
            1,557
            
            
            582
            
            
            1,150Total
                income
            
            
            284,756
            
            
            529,372
            
            
            276,191**Expenses**Other
                expenses
            
            
            179,214
            
            
            224,976
            
            
            124,101Total
                expenses
            
            
            179,214
            
            
            224,976
            
            
            124,101**Income
                Before Income Tax and Equity in Undistributed Income of
                Subsidiary**
            
            
            105,542
            
            
            304,396
            
            
            152,090**Income
                Tax Benefit**
            
            
            (69,570
            )
            
            (87,527
            )
            
            (48,177
            )**Income
                Before Equity in Undistributed Income of
                Subsidiary**
            
            
            175,112
            
            
            391,923
            
            
            200,267**Equity
                in Undistributed Income of Subsidiary**
            
            
            720,007
            
            
            508,044
            
            
            675,583**Net
                Income**
            
            $
            895,119
            
            $
            899,967
            
            $
            875,850





58




**Jacksonville
      Bancorp, Inc.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006 and 2005**




**Conde** **nsed
      Statements of Cash Flows**




**Year
                Ending December 31,****2006**
            
            **2005**
            
            **2004****Operating
                Activities**Net
                income
            
            $
            895,119
            
            $
            899,967
            
            $
            875,850Items
                not providing cash, net
            
            
            (715,297
            )
            
            (429,580
            )
            
            (843,384
            )Change
                in other assets and liabilities, net
            
            
            (69,198
            )
            
            (132,991
            )
            
            151,638Net
                cash provided by operating activities
            
            
            110,624
            
            
            337,396
            
            
            184,104**Financing
                Activities**Dividends
                paid
            
            
            (212,705
            )
            
            (278,793
            )
            
            (342,876
            )Purchase
                and retirement of treasury stock
            
            
            (17,919
            )
            
            (57,319
            )
            
            (379,764
            )Exercise
                of stock options
            
            
            147,190
            
            
            72,733
            
            
            439,824Net
                cash used in financing activities
            
            
            (83,434
            )
            
            (263,379
            )
            
            (282,816
            )**Net
                Change in Cash and Cash Equivalents**
            
            
            27,190
            
            
            74,017
            
            
            (98,712
            )**Cash
                and Cash Equivalents at Beginning of Year**
            
            
            222,580
            
            
            148,563
            
            
            247,275**Cash
                and Cash Equivalents at End of Year**
            
            $
            249,770
            
            $
            222,580
            
            $
            148,563




59




***C*** ***OMMON*** ***S*** ***TOCK*** ***I*** ***NFORMATION***


Our
      common stock is traded on the Nasdaq Small Cap Market under the symbol “JXSB”.
      As of December 31, 2006, we had approximately 584 stockholders of record,
      including our mutual holding company parent and brokers, who held 1,985,417
      shares of our outstanding shares of common stock. Our mutual holding company
      parent owns 1,038,738 shares.




The
      following table sets forth market price and dividend information for our common
      stock for the two years in the period ending December 31, 2006.




**Fiscal
                  2005**
              
              **High**
              
              **Low**
              
              **Dividends**First
                  Quarter
              
              $
              17.00
              
              $
              14.75
              
              $.075/per
                  shareSecond
                  Quarter
              
              $
              15.26
              
              $
              11.60
              
              $.075/per
                  shareThird
                  Quarter
              
              $
              13.75
              
              $
              12.00
              
              $.075/per
                  shareFourth
                  Quarter
              
              $
              15.39
              
              $
              12.00
              
              $.075/per
                  share**Fiscal
                  2006**First
                  Quarter
              
              $
              15.12
              
              $
              12.50
              
              $.075/per
                  shareSecond
                  Quarter
              
              $
              13.95
              
              $
              12.50
              
              $.075/per
                  shareThird
                  Quarter
              
              $
              13.55
              
              $
              12.00
              
              $.075/per
                  shareFourth
                  Quarter
              
              $
              13.27
              
              $
              11.25
              
              $.075/per
                  share




For
      a
      discussion of the restrictions on the Company’s ability to pay dividends, see
      Note 13 to the Consolidated Financial Statements.




The
      Company did not repurchase any Company stock during the fourth quarter of
      2006.




Beginning
      with our March 31, 2007 quarterly reports, we intend to begin reporting as
      a
      small business filer under the rules and regulations of the Securities and
      Exchange Commission.




60




***P*** ***ERFORMANCE*** ***G*** ***RAPH***




The
      following is a performance graph comparing (a) the total return on our common
      stock for the period beginning on January 1, 2002, through December 31, 2006,
      (b) the cumulative total return on stocks included in the Nasdaq Composite
      Index
      over the same period, and (c) the cumulative total return of publicly traded
      thrifts or thrift holding companies in the mutual holding company structure
      over
      the same period. The cumulative total return on our common stock was computed
      assuming the reinvestment of cash dividends.




***Jacksonville
        Bancorp, Inc.***







***Period
                  Ending******Index***
              
              **12/31/01**
              
              **12/31/02**
              
              **12/31/03**
              
              **12/31/04**
              
              **12/31/05**
              
              **12/31/06**Jacksonville
                  Bancorp, Inc.
              
              
              100.00
              
              
              101.40
              
              
              161.34
              
              
              165.02
              
              
              151.90
              
              
              131.86NASDAQ
                  Composite
              
              
              100.00
              
              
              68.76
              
              
              103.67
              
              
              113.16
              
              
              115.57
              
              
              127.58SNL
                  Thrift MHCs
              
              
              100.00
              
              
              143.59
              
              
              242.83
              
              
              274.86
              
              
              282.40
              
              
              386.74




61




*D**IRECTORS
        AND**O**FFICERS*





***Directors***
            ***Officers***Andrew
                F. Applebee
              Chairman
                of the Board
            Andrew
                F. Applebee
              Chairman
                of the BoardRichard
                A. Foss
              President
                and Chief Executive Officer
            Richard
                A. Foss
              President
                and Chief Executive OfficerJohn
                C. Williams
              Senior
                Vice President and Trust Officer
            John
                C. Williams
              Senior
                Vice President and Trust OfficerHarmon
                B. Deal, III
              Investment
                Manager
              Deal
                Partners, L.P.
            Laura
                A. Marks
              Senior
                Vice President - Retail BankingJohn
                L. Eyth
              Certified
                Public Accountant
              Zumbahlen
                Eyth Surratt Foote & Flynn, Ltd.
            John
                D. Eilering
              Vice
                President - Operations / Corporate SecretaryMichael
                R. Goldasich
              Architect
              Goldasich-Audo
                Architects
            Diana
                S. Tone
              Chief
                Financial Officer and Compliance OfficerDean
                H. Hess
              Self-employed
                farmer
            Jess
                D. Karns
              Senior
                Loan AdministratorEmily
                J. Osburn
              Retired
                radio station managerHarvey
                D. Scott, III
              Orthopedic
                Surgeon
              Orthapaedic
                Center of Illinois




62


***C*** ***ORPORATE*** ***I*** ***NFORMATION***
  ***Corporate
                    Headquarters***
                ***Transfer
                    Agent***1211
                    West Morton
                Hickory
                    Point Bank & Trust, fsbJacksonville,
                    Illinois 62650
                P.O.
                    Box 2557(217)
                    245-4111
                Decatur,
                    Illinois 62525-2557Website:
                    www.jacksonvillesavings.com
                (217)
                    872-6373E-mail:
                    info@jacksonvillesavings.com***Special
                    Counsel***
                ***Independent
                    Registered Public Accounting Firm***Luse
                    Gorman Pomerenk & Schick, P.C.
                BKD,
                    LLP5335
                    Wisconsin Ave., N.W., Suite 400
                225
                    North Water Street, Suite 400Washington,
                    D.C. 20015
                Decatur,
                    Illinois 62525-1580(202)
                    274-2000
                (217)
                    429-2411




***A*** ***NN****UAL*** *M**EETING*





The
      Annual Meeting of the Stockholders will be held April 24, 2007 at 1:30 p.m.,
      central time, at our main office at 1211 West Morton, Jacksonville, Illinois.




***G*** ***ENERAL*** ***I*** ***NQUIRIES***





A
      copy of
      our Annual Report to the SEC on Form 10-K may be obtained without charge by
      written request of stockholders to Diana Tone or by calling us at (217)
      245-4111. The Form 10-K is also available on our website at
      www.jacksonvillesavings.com. Our Code of Ethics, Nominating and Corporate
      Governance Committee Charter, and Beneficial Ownership reports of our directors
      and executive officers are also available on our website.




*FDIC****D**ISCLAIMER*





This
      Annual Report has not been reviewed or confirmed for accuracy or relevance
      by
      the FDIC.




63