Jacksonville
      Bancorp, Inc.
                          2008
      Annual
Report
 
 
 
 
 
 
 
 
 To our
shareholders,
 
 One year
ago, in our shareholder letter, we mentioned the weakness and volatility of our
nation’s housing market and the emergence of the subprime lending
crisis.  Unfortunately, the depth of that crisis was more severe than
anyone anticipated.  Consequently, the economy has gone into
recession, national unemployment has increased and some of our most storied
companies have either failed or have required government assistance to
survive.
 
 Locally,
the effects of the recession have been less severe.  We have neither
totally escaped the effects of this economic slowdown nor suffered to the same
extent as some geographic regions.  While a few of our manufacturing
and service businesses have been adversely affected, the agriculture industry
has performed relatively well.  Given the national economic
environment, we are gratified to report 2008 was a year of solid performance for
Jacksonville Savings Bank.
 
 We, along
with many financial institutions, benefited from lower short-term interest rates
reducing our cost of funds.  In addition, we were able to grow our
loan portfolio while maintaining favorable asset quality.  The result
of our efforts was a significant improvement in our interest rate spread and
overall profitability.  At year-end, loans outstanding increased to
$184.3 million, deposits were at $238.2 million and stockholders’ equity
increased by $1.6 million to $24.3 million.
 
 In a
major undertaking, we converted to a new core data processing system in
September 2008.  While no transition of this magnitude occurs as
smoothly as desired, our conversion team of staff members excelled in the
planning, employee training and implementation of the new system.  The
result is an operating environment that is faster and more efficient for our
staff which translates into better service for our customers.
 
 Our
efforts to increase non-interest income resulted in our trust department and our
investment subsidiary, Financial Resources Group, Inc., increasing their
customer bases and contributing substantial revenue to the
company.  Non-interest income plays an increasingly important role in
our earnings and we will continue to emphasize developing these
areas.
 
 2009 will
be a challenging year for the banking industry.  The banking system
works because of the trust and confidence of its depositors.  There
are over 8,300 financial institutions nationally and most of us did not
participate in subprime loan programs.  Credit default swaps,
collateralized debt obligations and other exotic investments won’t be found in
our investment portfolios.  We are community banks, not the banks that
you hear about on the nightly news or whose executives testify before
Congress.  For the most part, we operate in smaller geographic areas
and are conservatively run.  But we don’t get the press.
 
 While no
community or bank is likely to escape completely unscathed from today’s severe
recession, at Jacksonville Savings Bank we are privileged to have the continued
trust and confidence of our customers.  With that trust and confidence
in place, we are well-positioned for 2009 and beyond.  As always, your
support is deeply appreciated.
 
 Sincerely,
 
 
 Andrew
      F. Applebee
                Richard
      A. FossChairman
      of the Board
                President
      and CEO
 
 
  Table
of Contents
 PageBusiness
      of the Company
                                  1Selected
      Consolidated Financial Information
                                  2-3Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                  4-22Report
      of Independent Registered Public Accounting Firm
                                  23Consolidated
      Financial Statements
                                  24-31Notes
      to Consolidated Financial Statements
                                  32-67Common
      Stock Information
                                  68Directors
      and Officers
                                  69Corporate
      Information
                                  70Annual
      Meeting
                                  70
 
 
  Business
of the 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 wasfounded 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, 2008,
the MHC owned 52.25% of the outstanding shares of the Company.  At
December 31, 2008, the Company had consolidated assets of $288.3 million,
deposits of $238.2 million and stockholders’ equity of $24.3
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 mortgage loans secured by one-to-four family residential real estate,
commercial real estate loans, and consumer loans.  The Bank also
originates agricultural loans, commercial business loans, and multi-family real
estate 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
 
 Selected
Consolidated Financial Information
  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 21
to the Consolidated Financial Statements.
  At
      December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004FINANCIAL
      CONDITION DATA
                  
                  (In
      thousands)Total
      assets
                  
                  $
                  288,275
                  
                  
                  $
                  288,489
                  
                  
                  $
                  267,372
                  
                  
                  $
                  253,946
                  
                  
                  $
                  253,330Loans  (1)
                  
                  
                  184,337
                  
                  
                  
                  177,728
                  
                  
                  
                  155,264
                  
                  
                  
                  142,771
                  
                  
                  
                  126,058Investment
      securities (2)
                  
                  
                  50,988
                  
                  
                  
                  66,295
                  
                  
                  
                  79,978
                  
                  
                  
                  80,821
                  
                  
                  
                  86,674Mortgage-backed
      securities
                  
                  
                  27,795
                  
                  
                  
                  15,415
                  
                  
                  
                  8,210
                  
                  
                  
                  8,646
                  
                  
                  
                  15,171Cash
      and cash equivalents
                  
                  
                  7,145
                  
                  
                  
                  12,175
                  
                  
                  
                  9,331
                  
                  
                  
                  6,681
                  
                  
                  
                  10,793Deposits
                  
                  
                  238,151
                  
                  
                  
                  245,721
                  
                  
                  
                  232,913
                  
                  
                  
                  218,370
                  
                  
                  
                  225,734Other
      borrowings
                  
                  
                  21,133
                  
                  
                  
                  14,936
                  
                  
                  
                  9,035
                  
                  
                  
                  11,350
                  
                  
                  
                  3,447Stockholders’
      equity
                  
                  
                  24,259
                  
                  
                  
                  22,618
                  
                  
                  
                  21,145
                  
                  
                  
                  20,103
                  
                  
                  
                  20,683Years
      Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004OPERATING
      DATA
                  
                  (In
      thousands, except per share data)Interest
      income
                  
                  $
                  15,908
                  
                  
                  $
                  15,609
                  
                  
                  $
                  13,978
                  
                  
                  $
                  12,423
                  
                  
                  $
                  12,278Interest
      expense
                  
                  
                  7,716
                  
                  
                  
                  9,056
                  
                  
                  
                  7,031
                  
                  
                  
                  4,986
                  
                  
                  
                  4,588Net
      interest income
                  
                  
                  8,192
                  
                  
                  
                  6,553
                  
                  
                  
                  6,947
                  
                  
                  
                  7,437
                  
                  
                  
                  7,690Provision
      for loan losses
                  
                  
                  310
                  
                  
                  
                  155
                  
                  
                  
                  60
                  
                  
                  
                  245
                  
                  
                  
                  550Net
      interest income after provisionfor
      loan losses
                  
                  
                  7,882
                  
                  
                  
                  6,398
                  
                  
                  
                  6,887
                  
                  
                  
                  7,192
                  
                  
                  
                  7,140Other
      income
                  
                  
                  2,959
                  
                  
                  
                  2,332
                  
                  
                  
                  2,235
                  
                  
                  
                  2,174
                  
                  
                  
                  2,038Other
      expense
                  
                  
                  9,019
                  
                  
                  
                  8,101
                  
                  
                  
                  7,893
                  
                  
                  
                  8,054
                  
                  
                  
                  7,781Income
      before income taxes
                  
                  
                  1,822
                  
                  
                  
                  629
                  
                  
                  
                  1,229
                  
                  
                  
                  1,312
                  
                  
                  
                  1,397Income
      tax expense
                  
                  
                  304
                  
                  
                  
                  10
                  
                  
                  
                  334
                  
                  
                  
                  412
                  
                  
                  
                  521Net
      income
                  
                  $
                  1,518
                  
                  
                  $
                  619
                  
                  
                  $
                  895
                  
                  
                  $
                  900
                  
                  
                  $
                  876Earnings
      per share - basic
                  
                  $
                  0.76
                  
                  
                  $
                  0.31
                  
                  
                  $
                  0.45
                  
                  
                  $
                  0.46
                  
                  
                  $
                  0.45Earnings
      per share - diluted
                  
                  $
                  0.76
                  
                  
                  $
                  0.31
                  
                  
                  $
                  0.45
                  
                  
                  $
                  0.45
                  
                  
                  $
                  0.44____________(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
                                
                                2008
                                
                                
                                2007
                                
                                
                                2006
                                
                                
                                2005
                                
                                
                                2004Return
      on average assets (net incomedivided
      by average assets)
                                
                                
                                0.52
                                %
                                
                                
                                0.22
                                %
                                
                                
                                0.35
                                %
                                
                                
                                0.36
                                %
                                
                                
                                0.33
                                %Return
      on average equity (net incomedivided
      by average equity)
                                
                                
                                6.59
                                %
                                
                                
                                2.86
                                %
                                
                                
                                4.37
                                %
                                
                                
                                4.44
                                %
                                
                                
                                4.31
                                %Average
      equity to average assets
                                
                                
                                7.85
                                %
                                
                                
                                7.79
                                %
                                
                                
                                7.90
                                %
                                
                                
                                8.03
                                %
                                
                                
                                7.77
                                %Interest
      rate spread (difference betweenaverage
      yield on interest-earning assetsand
      average cost of interest-bearingliabilities)
                                
                                
                                2.70
                                %
                                
                                
                                2.15
                                %
                                
                                
                                2.48
                                %
                                
                                
                                2.99
                                %
                                
                                
                                3.04
                                %Net
      interest margin (net interest incomeas
      a percentage of average interest-earning
      assets)
                                
                                
                                3.01
                                %
                                
                                
                                2.53
                                %
                                
                                
                                2.85
                                %
                                
                                
                                3.18
                                %
                                
                                
                                3.18
                                %Dividend
      pay-out ratio  (1)
                                
                                
                                18.75
                                %
                                
                                
                                45.94
                                %
                                
                                
                                31.69
                                %
                                
                                
                                30.98
                                %
                                
                                
                                31.39
                                %Noninterest
      expense to average assets
                                
                                
                                2.93
                                %
                                
                                
                                2.92
                                %
                                
                                
                                3.05
                                %
                                
                                
                                3.19
                                %
                                
                                
                                2.97
                                %Average
      interest-earning assets toaverage
      interest-bearing liabilities
                                
                                
                                110.66
                                %
                                
                                
                                110.69
                                %
                                
                                
                                112.81
                                %
                                
                                
                                109.07
                                %
                                
                                
                                107.35
                                %Allowance
      for loan losses to gross loansat
      end of period (2)
                                
                                
                                1.04
                                %
                                
                                
                                0.98
                                %
                                
                                
                                1.19
                                %
                                
                                
                                1.28
                                %
                                
                                
                                1.48
                                %Allowance
      for loan losses tononperforming
      loans
                                
                                
                                162.47
                                %
                                
                                
                                161.90
                                %
                                
                                
                                137.90
                                %
                                
                                
                                156.75
                                %
                                
                                
                                95.02
                                %Net
      loan charge-offs to averageloans
      during the period
                                
                                
                                0.08
                                %
                                
                                
                                0.15
                                %
                                
                                
                                0.03
                                %
                                
                                
                                0.21
                                %
                                
                                
                                0.66
                                %Nonperforming
      assets to total assets
                                
                                
                                0.68
                                %
                                
                                
                                0.51
                                %
                                
                                
                                0.56
                                %
                                
                                
                                0.65
                                %
                                
                                
                                1.01
                                %December
      31,OTHER
      DATA
                                
                                2008
                                
                                
                                2007
                                
                                
                                2006
                                
                                
                                2005
                                
                                
                                2004Number
      of offices
                                
                                
                                7
                                
                                
                                
                                7
                                
                                
                                
                                7
                                
                                
                                
                                7
                                
                                
                                
                                7(1)
      Reflects the impact of dividends waived by the mutual holding
      company.(2)
      Gross loans includes loans held for sale.
  3
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 
  General
  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.
  Operating
Strategy - Overview
  Our
business consists principally of attracting deposits from the general public and
using deposits to purchase and originate mortgage loans secured by one-to-four
family residences, commercial and agricultural loans, and consumer
loans.  Our net income, like other financial institutions, is
primarily dependent on net interest income, which is the difference between the
income earned on our interest-earning assets, such as loans and investments, and
the cost of our 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 our exposure to interest rate risk by selling fixed-rate loans to the
secondary market and providing other fee-based services to our
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 bank-qualified, general obligation municipal
issues.
  During
2008, we have seen a decline in the national economy.  While the
effects have not been as dramatic locally, our industry has been
affected.  The Federal Home Loan Bank discontinued its Mortgage
Partnership Program as of October 31, 2008; however, we continue to sell loans
to Freddie Mac.  Our originations of fixed-rate residential loans for
sale to the secondary market increased during 2008.  Current market
conditions and decreased market rates have resulted in an impairment of our
mortgage servicing rights asset as of December 31, 2008.  We are not
involved in the origination of subprime mortgage products, so we have not
experienced any such losses in our loan portfolio.  Our investment
portfolio has not been impacted by the current mortgage crisis, as the
mortgage-backed securities held by the Company have all been issued by U.S.
government agencies and sponsored entities.  Our local real estate
market did not realize the significant growth in market values over the past
decade as experienced nationally in larger metropolitan areas.  We
have therefore not seen a material decline in housing prices.  While
our level of nonperforming assets increased during 2008, we attribute the
increase more to unique borrower circumstances, rather than the economy in
general.  We continue to service our existing borrowers and originate
new loans to credit worthy borrowers in an effort to meet the credit needs of
our community.
  4
  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 our customers in Morgan, Macoupin, Montgomery and the surrounding
counties in Illinois.
  Critical
Accounting Policies and Use of Significant Estimates
  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 our 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 addresses
our most critical accounting policies and significant estimates, 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 Company believes the allowance for loan losses is the critical accounting
policy that requires the most significant judgments and assumptions used in the
preparation of the consolidated financial statements.  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.
  Other Real Estate Owned -
Other real estate owned acquired through loan foreclosures are initially
recorded at fair value less costs to sell when acquired, establishing a new cost
basis.  The adjustment at the time of foreclosure is recorded through
the allowance for loan losses.  Due to the subjective nature of
establishing fair value when the asset is acquired, the actual fair value of the
other real estate owned could differ from the original estimate.  If
it is determined that fair value declines subsequent to foreclosure, the asset
is written down through a charge to non-interest expense.  Operating
costs associated with the assets after acquisition are also recorded as
non-interest expense.  Gains and losses on the disposition of other
real estate owned are netted and posted to non-interest expense.
  Deferred Income Tax
Assets/Liabilities – Our net deferred income tax asset arises from
differences in the dates that items of income and expense enter into our
reported income and taxable income.  Deferred tax assets and
liabilities are established for these items as they arise.  From an
accounting standpoint, deferred tax assets are reviewed to determine that they
are realizable based upon the historical level of our taxable income, estimates
of our future taxable income and the reversals of deferred tax
liabilities.  In most cases, the realization of the deferred tax asset
is based on our future profitability.  If we were to experience net
operating losses for tax purposes in a future period, the realization of our
deferred tax assets would be evaluated for a potential valuation
reserve.
  5
  Impairment of Goodwill -Goodwill, an intangible asset with an indefinite life, was recorded on
our balance sheet in prior periods as a result of acquisition
activity.  Goodwill is evaluated for impairment annually, unless there
are factors present that indicate a potential impairment, in which case, the
goodwill impairment test is performed more frequently.
  Mortgage Servicing Rights -
Mortgage servicing rights are very sensitive to movements in interest rates as
expected future net servicing income depends on the projected outstanding
principal balances of the underlying loans, which can be greatly reduced by
prepayments.  Prepayments usually increase when mortgage interest
rates decline and decrease when mortgage interest rates rise.
  Fair Value Measurements – The
fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale.  The Company estimates the
fair value of financial instruments using a variety of valuation
methods.  Where financial instruments are actively traded and have
quoted market prices, quoted market prices are used for fair
value.  When the financial instruments are not actively traded, other
observable market inputs, such as quoted prices of securities with similar
characteristics, may be used, if available, to determine fair
value.  When observable market prices do not exist, the Company
estimates fair value.  Other factors such as model assumptions and
market dislocations can affect estimates of fair value.  Imprecision
in estimating these factors can impact the amount of revenue or loss
recorded.
  FASB
Statement No. 157, Fair Value Measurements, establishes a framework for
measuring the fair value of financial instruments that considers the attributes
specific to particular assets or liabilities and establishes a three-level
hierarchy for determining fair value based upon transparency of inputs to each
valuation as of the fair value measurement date.  The three levels are
defined as follows:
  ●
                Level
      1 – quoted prices (unadjusted) for identical assets or liabilities in
      active markets●
                Level
      2 – inputs include quoted prices for similar assets and liabilities in
      active markets, quoted prices of identical or similar assets or
      liabilities in markets that are not active, and inputs that are observable
      for the asset or liability, either directly or indirectly, for
      substantially the full term of the financial
instrument.●
                Level
      3 – inputs that are unobservable and significant to the fair value
      measurement.
 
 At the
end of each quarter, the Company assesses the valuation hierarchy for each asset
or liability measured.  From time to time, assets or liabilities may
be transferred within hierarchy levels due to changes in availability of
observable market inputs to measure fair value at the measurement
date.  Transfers into or out of a hierarchy are based upon the fair
value at the beginning of the reporting period.  A more detailed
description of the fair values measured at each level of the fair value
hierarchy can be found in Note 18 – Disclosures about Fair Value of Assets and
Liabilities.
  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.
  6
  Recent
Accounting Pronouncements
  Statement of Financial Accounting No.
141R (“FAS 141R”), “Business
Combinations” -
In December 2007, the FASB issued FAS 141R, which establishes principles for how
an acquirer recognizes and measures the identifiable assets acquired,
liabilities assumed, and any noncontrolling interest in the acquiree; recognizes
and measures goodwill acquired in the business combination or a gain from a
bargain purchase; and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination.  FAS 141R became effective for acquisitions in
fiscal years beginning after December 15, 2008.  The Company does not
expect the implementation of FAS 141R to have a material impact on its
consolidated financial statements.
  Statement of Financial Accounting No.
157 (“FAS 157”), “Fair Value
Measurements” –
This Statement establishes a common definition for fair value to be applied to
GAAP guidance requiring use of fair value, establishes a framework for measuring
fair value, and expands disclosure about such fair value
measurements.  FAS 157 became effective for fiscal years beginning
after November 15, 2007.  The Company adopted FAS 157 effective
January 1, 2008.  The application of FAS 157 did not have a material
impact on the Company’s consolidated financial statements.
  In
October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position No. 157-3 (“FSP 157-3”), “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active.”  FSP
157-3 clarifies the application of FAS 157 in a market that is not active and
provides an example to illustrate key considerations in determining fair value
of financial assets when the market for that financial asset is not
active.  FSP 157-3 applies to financial assets within the scope of
accounting pronouncements that require or permit fair value measurements in
accordance with FAS 157. FSP 157-3 was effective upon issuance and included
prior periods for which financial statements had not been issued. The
application of FSP 157-3 did not have a material impact on the Company’s
consolidated financial statements.
  Statement of Financial Accounting No.
159 (“FAS 159”), “The Fair Value
Option for Financial Assets and Financial Liabilities – including an amendment
of FASB Statement No. 115”- In February 2007, the FASB
issued FAS 159.  This Statement permits entities to choose to measure
many financial instruments and certain other items at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected will be reported in earnings.  The objective
is to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions.  This Statement is expected to expand the use of fair
value measurement, which is consistent with the FASB’s long-term measurement
objectives for accounting for financial instruments.  FAS 159 became
effective for fiscal years beginning after November 15, 2007.  The
Company has not elected the fair value option for any financial assets or
liabilities as of December 31, 2008.
  Statement of Financial Accounting No.
160 (“FAS 160”), “Noncontrolling
Interests in Consolidated Financial Statements – an amendment of ARB No.
51” - The FASB
issued FAS 160 in December 2007.  The Statement requires that a
noncontrolling interest in a subsidiary be reported separately within equity and
the amount of consolidated net income specifically attributable to the
noncontrolling interest be identified in the consolidated financial
statements.  It also calls for consistency in the manner of reporting
changes in the parent’s ownership interest and requires fair value measurement
of any noncontrolling equity investment retained in
deconsolidation.  FAS 160 became effective for fiscal years beginning
after December 15, 2008.  The Company does not expect the
implementation of FAS 160 to have a material impact on its consolidated
financial statements.
  7
  Statement of Financial Accounting No.
161 (“FAS 161”), “Disclosures about
Derivative Instruments and Hedging Activities – an amendment of FASB Statement
No. 133.” – In
March 2008, the FASB issued FAS 161.  This Statement requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures about credit-risk related contingent
features in derivative agreements.  FAS 161 became effective for
fiscal years beginning after November 15, 2008.  The Company does not
expect the implementation of FAS 161 to have a material impact on its
consolidated financial statements.
  Statement of Financial Accounting No.
162 (“FAS 162”), “The Hierarchy of
Generally Accepted Accounting Principles” - The FASB issued FAS 162 in
May 2008.  This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy).  This Statement became
effective on November 15, 2008.  The application of FAS 162 did not
have a material impact on the Company’s consolidated financial
statements.
  FASB Staff Position (“FSP”) FAS 140-4
and FIN 46(R)-8, “Disclosures by
Public Entities (Enterprises) About Transfers of Financial Assets and Interests
in Variable Interest Entities” – In December 2008, the FASB
issued this FSP to amend disclosure guidance in FAS 140 and FIN 46 (revised
December 2003).  The FSP requires public entities to provide
additional disclosures about transfers of financial assets and their involvement
with variable interest entities.  The FSP became effective December
31, 2008.  The application of this FSP did not have a material impact
on the Company’s consolidated financial statements.
  FSP EITF 99-20-1, “Amendments to the
Impairment and Interest Income Measurement Guidance of EITF Issue
99-20” – In
January 2009, the FASB issued FSP EITF 99-20-1 to amend the impairment guidance
in EITF Issue No. 99-20 in order to achieve more consistent determination of
whether an other-than-temporary impairment (‘OTTI”) has
occurred.  Prior to this FSP, the impairment model in EITF 99-20 was
different from FASB Statement No. 115 (“FAS 115”), “Accounting for Certain Investments
in Debt and Equity Securities.”  This FSP amended EITF 99-20 to
more closely align the OTTI guidance therein to the guidance in FAS
115.  Retrospective application to a prior interim or annual period is
prohibited.  The Company does not expect the implementation of this
FSP to have a material impact on its consolidated financial
statements.
  Federal
Deposit Insurance Corporation Insurance Coverage
  As with
all banks insured by the FDIC, the Company’s depositors are protected against
the loss of their insured deposits by the FDIC.  The FDIC recently
made two changes to the rules that broadened the FDIC insurance.  On
October 3, 2008, the FDIC temporarily increased basic FDIC insurance coverage
from $100,000 to $250,000 per depositor until December 31,
2009.  Congress is expected to make the $250,000 limit
permanent.  In addition, on October 14, 2008, the FDIC instituted a
Temporary Liquidity Guaranty Program (“TLGP”) which provides full deposit
insurance coverage for non-interest bearing transaction deposit accounts,
regardless of dollar amount.  The FDIC defines a “non-interest bearing
transaction account” as a transaction account on which the insured depository
institution pays no interest and does not reserve the right to require advance
notice of intended withdrawals.  This coverage is over and above the
$250,000 in deposit insurance otherwise provided to a customer.
  The
Company opted into the TLGP.  The additional cost of this program,
assessed on a quarterly basis, is a 10 basis point annualized surcharge on
balances in non-interest bearing transaction accounts that exceed
$250,000.  The Company does not believe this amount will have a
material effect on its consolidated financial statements.
  8
  Financial
Condition
  Total
assets were $288.3 million at December 31, 2008, compared to $288.5 million at
December 31, 2007.  Net loans increased $7.1 million, or 4.0%, to
$182.9 million as of December 31, 2008.  The loan growth is due to an
increase of $12.2 million in commercial and agricultural real estate, partially
offset by a decrease of $3.7 million in one-to-four family real estate loans at
December 31, 2008.  However, during 2008, approximately $30.1 million
of one-to-four family residential real estate loans were originated and sold to
the secondary market.  The growth in loans was funded by a decrease of
$5.0 million in cash and cash equivalents and a decrease in investment
securities.  Available for sale investment securities decreased $15.3
million, or 23.5%, primarily due to $46.6 million in calls and $10.6 million in
sales of U.S. agency bonds, partially offset by purchases of $25.3 million of
U.S. agency bonds and $16.5 million of tax-free municipal bonds.  The
remaining funds were invested in higher-yielding mortgage-backed securities,
which increased $12.4 million, or 80.3%, during 2008.
 
 At
December 31, 2008, the Company owned $1.1 million of Federal Home Loan Bank
stock.  Management reviews this investment, in light of the Federal
Home Loan Bank’s performance, for impairment quarterly.  At this time,
management deemed that the stock investment is not impaired.  The
Company also holds $2.7 million in goodwill associated with a prior
acquisition.  Management reviews this intangible asset for impairment
at least annually.  Given the current market conditions and the fact
that our stock was trading below our book value, we performed an updated
analysis as of December 31, 2008.  This analysis, which considered
recent market data for bank and thrift transactions, resulted in management’s
conclusion that no impairment be taken in 2008.
 
 At
December 31, 2008, the Company held $974,000 in mortgage servicing
rights.  Our mortgage servicing rights asset represents approximately
74 basis points of the $132.1 million in loans serviced for the secondary
market.  We obtain an independent valuation of the servicing asset at
least annually.  Our updated valuation as of December 31, 2008, showed
a significantly reduced value of approximately 41 basis points due to current
market conditions and decreased market rates of interest.  Applying
the updated values to our current portfolio resulted in an impairment charge of
$428,000 to establish a valuation allowance.  This impairment charge
is potentially recoverable in future periods should the value of the mortgage
servicing rights increase.
 
 Total
deposits decreased $7.6 million, or 3.1%, to $238.2 million as of December 31,
2008, primarily due to a decrease of $9.8 million in time
deposits.  The decrease in deposits was offset by an increase of $6.2
million in borrowed funds.  The Company determined that in the low,
short-term interest rate environment of 2008, that borrowed funds were a stable,
lower cost source of funds than time deposits.  The increase in
borrowed funds consists of $3.5 million in advances from the Federal Home Loan
Bank and $2.7 million in overnight repurchase agreements.
 
 Stockholders’
equity increased $1.6 million to $24.3 million at December 31,
2008.  The increase resulted primarily from net income of $1,518,000,
partially offset by the payment of $285,000 in dividends, and a $396,000
increase in unrealized gains, 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 was also
affected by the receipt of $13,000 from the exercise of stock options during
2008.  The $13,000 reflects $11,000 received from the exercise of
stock options and a $2,000 compensation expense related to options.
 
 9
  COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
  General
  We had
net income for the year ended December 31, 2008, of $1,518,000, or $0.76 per
common share, basic and diluted, compared to net income of $619,000 or $0.31 per
common share, basic and diluted, for the year ended December 31,
2007.  The $899,000 increase in net income reflects increases of $1.6
million in net interest income (primarily reflecting decreases in our interest
expense) and $627,000 in non-interest income, partially offset by increases of
$918,000 in non-interest expense, $155,000 in provision for loan losses, and
$294,000 in income taxes.  Our operations have benefited from the
steepening of the yield curve, which occurred as the Federal Reserve
aggressively lowered short-term rates during 2008.  Our deposits have
repriced downward faster than our loans, which have yields tied to longer-term
rates.
 
 Interest
Income
  Interest
income increased to $15.9 million for the year ended December 31, 2008 from
$15.6 million for the year ended December 31, 2007.  The $299,000
increase in interest income resulted from increased income of $290,000 on loans,
$984,000 on mortgage-backed securities, and $142,000 on other interest-earning
assets, partially offset by decreased income of $1.1 million on investment
securities.
 
 The
$290,000 increase in interest income on loans is primarily due to a $12.2
million increase in the average balance of the loan portfolio to $178.0 million
during 2008.  The growth in the loan portfolio reflects an increase in
commercial real estate lending, which is mostly due to the origination of two
large loans to local, well-established businesses expanding their operations, as
well as advances on previously approved commitments.  The average
yield of the loan portfolio decreased 32 basis points to 6.76% for 2008 from
7.08% for 2007.
 
 The $1.1
million decrease in interest income on investment securities is primarily due to
a $26.2 million decrease in the average balance of investment
securities.  The average yield of investment securities also decreased
12 basis points to 3.88% during 2008.  The average balance of
investment securities decreased reflecting calls on U.S. agency
securities.  The reinvestment of these funds resulted in an increase
of $16.4 million in the average balance of municipal securities during
2008.  The municipal securities are exempt from federal income taxes
and will result in higher interest income on a tax equivalent
basis.
 
 Interest
income on mortgage-backed securities increased $984,000 during
2008.  The average balance of mortgage-backed securities increased
$19.6 million to $31.9 million during this same time frame.  Funds
from investment securities sales and calls were partially reinvested into
higher-yielding mortgage-backed securities.  Interest income on
mortgage-backed securities also benefited from an increase in the average yield
to 4.95% for 2008 from 4.85% for 2007.
 
 Interest
income from other interest-earning assets, consisting of interest-earning
deposit accounts and federal funds sold, increased $142,000 during
2008.  The higher interest income from other interest-earning assets
is primarily due to a $7.5 million increase in the average balance, partially
offset by a 236 basis point decrease in the average yield, reflecting the
decreasing interest rate environment during 2008.
  Interest
Expense
  Interest
expense decreased to $7.7 million for the year ended December 31, 2008 from $9.0
million for the year ended December 31, 2007.  The $1.3 million
decrease in the cost of funds reflects decreases of $1.3 million in interest on
deposits and $75,000 in interest on borrowings.
  10
 The
decrease in the cost of deposits is primarily due to a decrease in the average
rate paid, which decreased to 3.14% for 2008 from 3.81% for 2007.  The
67 basis point decrease reflects the decrease in short-term market interest
rates during 2008.  The decrease in interest expense was partially
offset by an increase of $6.9 million in the average balance of deposits to
$228.3 million for 2008.  The increase in the average balance during
this period reflects growth of $4.3 million in lower-cost transaction accounts
and $2.6 million in time deposit accounts.
 
 The
$75,000 decrease in interest expense on borrowings is mostly due to a 174 basis
point decrease in the average cost of borrowed funds to 3.04% during
2008.  The decreased cost was partially offset by a higher average
balance of borrowed funds of $18.0 million compared to $13.0 million during 2008
and 2007, respectively.  The higher balance of borrowed funds is
mostly due to an increase in advances from the Federal Home Loan Bank, which
averaged $12.0 million during 2008 and $8.6 million during 2007.  The
remainder of borrowed funds consists of securities sold under agreements to
repurchase.
  Provision
for Loan Losses
  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 $310,000 for the year ended December 31, 2008,
compared to $155,000 during 2007.  The increase in the provision
during 2008 reflects an increase in the average balance of the loan portfolio,
primarily commercial real estate which generally has a higher risk of loss than
one-to-four family real estate loans, and an increase in watch list
credits.  Net charge-offs decreased during 2008 to $142,000 from
$253,000 during 2007.  The allowance for loan losses increased
$168,000 to $1.9 million at December 31, 2008.  The provisions in 2008
and 2007 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.  The review also considered the local economy and the
level of bankruptcies and foreclosures in the Company’s market
area.  The following table sets forth the composition of our
non-performing assets.
 
 11
 
 12/31/08
                    
                    
                    12/31/07(Dollars
      in Thousands)Non-accruing
      loans:One-to-four
      family residential
                    
                    $
                    445
                    
                    
                    $
                    310Commerical
      and agricultural real estate
                    
                    
                    34
                    
                    
                    
                    218Multifamily
      residential
                    
                    
                    152
                    
                    
                    
                    -Commercial
      and agricultural business
                    
                    
                    48
                    
                    
                    
                    82Home
      equity/Home improvement
                    
                    
                    318
                    
                    
                    
                    89Automobile
                    
                    
                    3
                    
                    
                    
                    12Other
      consumer
                    
                    
                    5
                    
                    
                    
                    12Total
                    
                    
                    1,005
                    
                    
                    
                    723Accruing
      loans delinquent more than 90 days:One-to-four
      family residential
                    
                    
                    163
                    
                    
                    
                    203Commercial
      and agricultural real estate
                    
                    
                    -
                    
                    
                    
                    156Automobile
                    
                    
                    18
                    
                    
                    
                    -Other
      consumer
                    
                    
                    5
                    
                    
                    
                    9Total
                    
                    
                    186
                    
                    
                    
                    368Foreclosed
      assets:One-to-four
      family residential
                    
                    
                    565
                    
                    
                    
                    115Commercial
      and agricultural real estate
                    
                    
                    204
                    
                    
                    
                    249Automobile
                    
                    
                    9
                    
                    
                    
                    23Total
                    
                    
                    778
                    
                    
                    
                    387Total
      non-performing assets
                    
                    $
                    1,969
                    
                    
                    $
                    1,478Total
      non-performing assets to total assets
                    
                    
                    0.68
                    %
                    
                    
                    0.51
                    %
  The
increase in non-accruing one-to-four family residential and home equity loans
reflects the delinquency of several smaller credits, which are in the process of
collection or foreclosure.  Commercial and agricultural real estate
non-accruing loans decreased during 2008 due to the payoff of three non-accruing
loans totaling $195,000.  The increase in one-to-four family
residential foreclosed assets is primarily due to the recent repossession of two
properties totaling $413,000, on which no loss is expected.
 
 The
following table shows the principal amount of potential problem loans on our
watch list at December 31, 2008 and December 31, 2007.  All
non-accruing loans are automatically placed on the watch list.  The
increase in Special Mention credits reflects the addition of four large
commercial and commercial real estate borrowers, each of which is current and
well secured.  Management does not believe the increase in
non-performing assets and watch list credits is indicative of a trend in asset
quality.
 
 12/31/08
                    
                    
                    12/31/07(In
      thousands)Special
      Mention loans
                    
                    $
                    7,369
                    
                    
                    $
                    2,649Substandard
      loans
                    
                    
                    2,388
                    
                    
                    
                    3,338Total
      watch list loans
                    
                    $
                    9,757
                    
                    
                    $
                    5,987
 12
  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.
  Non-interest
Income
  Non-interest
income increased $627,000 during the year ended December 31, 2008, compared to
the year ended December 31, 2007.  The increase in non-interest income
is primarily due to increases of $201,000 in net income from mortgage banking
operations, $175,000 in commission income, $150,000 in earnings on cash
surrender value of bank-owned life insurance policies, and $116,000 in trust
income.  The increase in net income from mortgage banking operations
reflects a higher volume of loan sales of $30.1 million to the secondary market
during 2008, compared to sales of $10.2 million during 2007.  The
increase in brokerage commissions and trust income reflect a continued growth in
the number of customer accounts.  The higher earnings on cash
surrender value reflect the purchase of $3.4 million in bank-owned life
insurance, which was purchased to fund new benefit plans, during the past
fifteen months.
  Non-interest
Expense
  Non-interest
expense increased $918,000 during the year ended December 31, 2008 compared to
the year ended December 31, 2007.  The increase in non-interest
expense primarily reflects increases of $447,000 in salaries and employee
benefits and $59,000 in other real estate expense, as well as a $428,000
impairment charge on mortgage servicing rights during 2008.  The
increase in salaries and benefits expense reflects annual wage and cost
increases and higher commissions, as well as expenses associated with new
benefit plans.  The increase in other real estate expense is mostly
attributed to $51,000 in write-downs on properties held during
2008.
 
 Our
non-interest expense also included a $19,000, or 70.4%, increase in deposit
insurance premiums for the year ended December 31, 2008. During 2009, our
non-interest expense will be affected by higher deposit insurance premium
assessments from the FDIC.  Based upon the final rules approved by the
FDIC on February 27, 2009, we expect our assessments to increase by
approximately $300,000.  In addition, a proposed 20 basis point
special assessment, if implemented, would result in an additional deposit
insurance premium assessment of approximately $480,000.  The FDIC has
indicated that it would reduce the level of the special assessment to 10 basis
points, or approximately $240,000, if Congress approves legislation to expand
the FDIC’s borrowing capacity.
  13
  Income
Taxes
  The
provision for income taxes increased $294,000 during 2008 compared to
2007.  The provision reflects an increase in taxable income due to
higher income, net of an increase in the benefit of tax-exempt investment
securities.
  COMPARISON
OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
  General
  We had
net income for the year ended December 31, 2007, of $619,000, or $0.31 per
common share, basic and diluted, compared to net income of $895,000 or $0.45 per
common share, basic and diluted, for the year ended December 31,
2006.  The $276,000 decrease in net income reflects a decrease of
$393,000 in net interest income and increases of $209,000 in other expense and
$95,000 in provision for loan losses, partially offset by an increase of $98,000
in other income and a decrease of $323,000 in income taxes.
  Interest
Income
  Interest
income increased to $15.6 million for the year ended December 31, 2007 from
$14.0 million for the year ended December 31, 2006.  The $1.6 million
increase in interest income resulted from higher interest income of $1.4 million
on loans, $237,000 on mortgage-backed securities, and $46,000 on investment
securities, partially offset by decreased income of $8,000 on other
interest-earning assets.
 
 The $1.4
million increase in interest income on loans is primarily due to a $16.5 million
increase in the average balance of the loan portfolio to $165.7 million during
2007.  The growth in the loan portfolio reflects an increased emphasis
on commercial lending and an increase in residential real estate
loans.  In order to increase interest income, we retained a portion of
fixed-rate residential real estate loans in our portfolio, rather than selling
them to the secondary market.  The average yield of the loan portfolio
also increased to 7.08% for 2007 from 6.96% for 2006.
 
 The
$46,000 increase in interest income on investment securities is primarily due to
a 27 basis point increase in the average yield of the investment portfolio to
4.00% during 2007.  The higher average yield reflects a general
increase in market rates and an increase in higher-yielding municipal
securities.  The increase in the average yield was partially offset by
a $4.6 million decrease in the average balance of investment securities to $79.6
million during 2007.  While the average balance of investment
securities decreased, the average balance of the municipal securities portion of
the portfolio increased $7.0 million during 2007.  The municipal
securities are exempt from federal income taxes and will result in higher
interest income on a tax equivalent basis.
 
 Interest
income on mortgage-backed securities increased $237,000 during
2007.  The average balance of these investments increased $3.9 million
to $12.3 million during this same time frame.  Funds from investment
securities sales and maturities were reinvested into higher-yielding
mortgage-backed securities.  Interest income on mortgage-backed
securities also benefited from a 58 basis point increase in the average yield to
4.85% for 2007.
 
 Interest
income on other investments, which consist of interest-earning deposit accounts,
decreased $8,000 during 2007.  The lower interest income from other
investments is primarily due to a $276,000 decrease in the average balance,
partially offset by a 28 basis point increase in the average yield, reflecting
the rising rate environment of 2007.
  14
  Interest
Expense
  Interest
expense increased to $9.0 million for the year ended December 31, 2007 from $7.0
million for the year ended December 31, 2006.  The $2.0 million
increase in the cost of funds reflects increases of $1.8 million in interest on
deposits and $190,000 in interest on borrowings.
 
 The
increase in the cost of deposits is primarily due to an increase in the average
rate paid, which increased to 3.81% for 2007 from 3.19% for 2006.  The
62 basis point increase reflects the increase in short-term market interest
rates during 2007 and 2006 and the competitive nature of the local
markets.  The increase in interest expense was also affected by a
$14.6 million increase in the average balance of deposits to $221.4 million for
2007.  The increase in the average balance and average cost during
this period reflects growth in higher-cost money market deposit and time deposit
accounts.
 
 The
$190,000 increase in interest expense on borrowings is due to a higher average
balance of borrowed funds of $13.0 million compared to $9.5 million during 2007
and 2006, respectively.  The higher balance of borrowed funds is
mostly due to an increase in advances from the Federal Home Loan Bank, which
averaged $8.6 million during 2007 and $6.1 million during 2006.  The
remainder of borrowed funds consists of securities sold under agreements to
repurchase.  In addition, the average cost of borrowings increased to
4.78% during 2007 from 4.53% during 2006.
  Provision
for Loan Losses
  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 $155,000 for the year ended December 31, 2007,
compared to $60,000 during 2006.  The increase in the provision during
2007 reflects an increase in net charge-offs and an increase in the volume of
the loan portfolio.  Net charge-offs increased during 2007 to $253,000
from $42,000 during 2006.  The allowance for loan losses decreased
$98,000 to $1.8 million at December 31, 2007.  The provisions in 2007
and 2006 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.
  Non-interest
Income
  Non-interest
income increased $98,000 during the year ended December 31, 2007, compared to
the year ended December 31, 2006.  The increase in non-interest income
is primarily due to increases of $63,000 in commission income, $47,000 in
service charges on deposits, and $30,000 in trust income, partially offset by a
decrease of $79,000 in net income from mortgage banking
operations.  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
increase in trust income is primarily due to a $6.5 million growth in trust
accounts.  The decrease in net income from mortgage banking operations
is due to a reduction in loan sales and an increase in the amortization of
mortgage servicing rights.  Loan sales have decreased as we chose to
retain a portion of fixed-rate real estate loans in our portfolio during
2007.  This decrease in sales, as well as regular payments, has
decreased the balance of loans serviced for the secondary market and resulted in
a higher amortization expense.
  15
  Non-interest
Expense
  Non-interest
expense increased $209,000 during the year ended December 31, 2007 compared to
the year ended December 31, 2006.  The increase in non-interest
expense is primarily due to increases of $239,000 in salaries and employee
benefits and $37,000 in postage and office supplies, partially offset by a
decrease of $22,000 in other expense.  The decrease in other expense
includes a $46,000 decrease in other real estate expense, which reflects higher
gains on the sale of other real estate properties.  The increase in
salaries and benefits expense reflects annual wage and cost increases, higher
commissions, and additional staffing.  In order to grow the trust
department and fee income, we hired an additional, experienced trust officer
during the first quarter of 2007.
  Income
Taxes
  The
provision for income taxes decreased $323,000 during 2007 compared to 2006, due
to a decrease in taxable income.  Our tax position has benefited from
an increase in tax-exempt, municipal securities and the effect of state income
tax benefits during this same time frame.
 
 16
 
 Average
Yields Earned and Rates Paid
  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 31,2008
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2007
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2006Average
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Interest/
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Yield/
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Average
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Interest/
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Yield/
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Average
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Interest/
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Yield/Balance
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Dividends
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Cost
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Balance
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Dividends
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Cost
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Balance
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Dividends
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                Cost(Dollars
      in thousands)Interest-earning
      assets:Loans  (1)
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                177,963
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                12,026
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                6.76
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                165,715
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                11,736
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                7.08
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                149,238
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                10,379
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                6.96
                                                                                                                                                %Investment
      securities (2)
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                53,392
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2,072
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.88
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                79,630
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3,189
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                4.00
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                84,251
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3,143
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.73
                                                                                                                                                %Mortgage-backed
      securities
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                31,921
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                1,580
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                4.95
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                12,282
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                596
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                4.85
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                8,411
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                359
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                4.27
                                                                                                                                                %Other
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                9,313
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                230
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.47
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                1,838
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                88
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                4.83
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2,114
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                96
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                4.55
                                                                                                                                                %Total
      interest-earning assets
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                272,589
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                15,908
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                5.84
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                259,465
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                15,609
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                6.02
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                244,014
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                13,977
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                5.73
                                                                                                                                                %Non-interest-earning
      assets
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                20,642
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                18,169
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                14,848Total
      assets
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                293,231
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                277,634
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                258,862Interest-bearing
      liabilities:Deposits
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                228,282
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                7,169
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.14
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                221,378
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                8,434
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.81
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                206,777
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                6,599
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.19
                                                                                                                                                %Short-term
      borrowings
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                18,046
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                547
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.04
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                13,036
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                622
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                4.78
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                9,519
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                432
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                4.53
                                                                                                                                                %Total
      interest-bearing liabilities
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                246,328
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                7,716
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.13
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                234,414
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                9,056
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.86
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                216,296
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                7,031
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.25
                                                                                                                                                %Non-interest-bearing
      liabilities
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                23,881
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                21,586
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                22,105Stockholders'
      equity
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                23,022
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                21,634
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                20,461Total
      liabilities and stockholders' equity
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                293,231
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                277,634
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                258,862Net
      interest income
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                8,192
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                6,553
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                6,946Interest
      rate spread (3)
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.70
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.15
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.48
                                                                                                                                                %Net
      interest margin (4)
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                3.01
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.53
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                2.85
                                                                                                                                                %Ratio
      of average interest-earning assets toaverage
      interest-bearing liabilities
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                110.66
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                110.69
                                                                                                                                                %
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                112.81
                                                                                                                                                %
 (1)
      Includes non-accrual loans and loans held for sale, and fees of $54,000
      for 2008, $93,000 for 2007, and $108,000 for 2006.(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.
  17
  Rate/Volume
Analysis
  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.
  2008
      Compared to 2007
                                                  
                                                  
                                                  2007
      Compared to 2006Increase
      (Decrease) Due to
                                                  
                                                  
                                                  Increase
      (Decrease) Due toRate
                                                  
                                                  
                                                  Volume
                                                  
                                                  
                                                  Net
                                                  
                                                  
                                                  Rate
                                                  
                                                  
                                                  Volume
                                                  
                                                  
                                                  Net(In
      thousands)Interest-earning
      assets:Loans
                                                  
                                                  $
                                                  (553
                                                  )
                                                  
                                                  $
                                                  843
                                                  
                                                  
                                                  $
                                                  290
                                                  
                                                  
                                                  $
                                                  193
                                                  
                                                  
                                                  $
                                                  1,164
                                                  
                                                  
                                                  $
                                                  1,357Investment
      securities
                                                  
                                                  
                                                  (96
                                                  )
                                                  
                                                  
                                                  (1,021
                                                  )
                                                  
                                                  
                                                  (1,117
                                                  )
                                                  
                                                  
                                                  224
                                                  
                                                  
                                                  
                                                  (178
                                                  )
                                                  
                                                  
                                                  46Mortgage-backed
      securities
                                                  
                                                  
                                                  12
                                                  
                                                  
                                                  
                                                  972
                                                  
                                                  
                                                  
                                                  984
                                                  
                                                  
                                                  
                                                  54
                                                  
                                                  
                                                  
                                                  183
                                                  
                                                  
                                                  
                                                  237Other
                                                  
                                                  
                                                  (62
                                                  )
                                                  
                                                  
                                                  204
                                                  
                                                  
                                                  
                                                  142
                                                  
                                                  
                                                  
                                                  6
                                                  
                                                  
                                                  
                                                  (14
                                                  )
                                                  
                                                  
                                                  (8
                                                  )Total
      net change in income on interest-earning assets
                                                  
                                                  
                                                  (699
                                                  )
                                                  
                                                  
                                                  998
                                                  
                                                  
                                                  
                                                  299
                                                  
                                                  
                                                  
                                                  477
                                                  
                                                  
                                                  
                                                  1,155
                                                  
                                                  
                                                  
                                                  1,632Interest-bearing
      liabilities:Deposits
                                                  
                                                  
                                                  (1,521
                                                  )
                                                  
                                                  
                                                  256
                                                  
                                                  
                                                  
                                                  (1,265
                                                  )
                                                  
                                                  
                                                  1,345
                                                  
                                                  
                                                  
                                                  490
                                                  
                                                  
                                                  
                                                  1,835Other
      borrowings
                                                  
                                                  
                                                  (270
                                                  )
                                                  
                                                  
                                                  195
                                                  
                                                  
                                                  
                                                  (75
                                                  )
                                                  
                                                  
                                                  24
                                                  
                                                  
                                                  
                                                  166
                                                  
                                                  
                                                  
                                                  190Total
      net change in expense on interest-bearing liabilities
                                                  
                                                  
                                                  (1,791
                                                  )
                                                  
                                                  
                                                  451
                                                  
                                                  
                                                  
                                                  (1,340
                                                  )
                                                  
                                                  
                                                  1,369
                                                  
                                                  
                                                  
                                                  656
                                                  
                                                  
                                                  
                                                  2,025Net
      change in net interest income
                                                  
                                                  $
                                                  1,092
                                                  
                                                  
                                                  $
                                                  547
                                                  
                                                  
                                                  $
                                                  1,639
                                                  
                                                  
                                                  $
                                                  (892
                                                  )
                                                  
                                                  $
                                                  499
                                                  
                                                  
                                                  $
                                                  (393
                                                  )
  18
 
 Asset
and Liability Management
  Our
policy in recent years has been to reduce our interest rate risk by better
matching the maturities of our interest rate sensitive assets and liabilities,
selling our 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.  We also maintain a portfolio of mortgage-backed securities,
which provides monthly cash flow.  The remaining 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, 2008 and 2007, 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)12/31/08
                                                                                              
                                                                                              
                                                                                              12/31/07
                                                                                              
                                                                                              
                                                                                              ALCORate
      Shock
                                                                                              
                                                                                              $
      Change
                                                                                              
                                                                                              
                                                                                              %
      Change
                                                                                              
                                                                                              
                                                                                              $
      Change
                                                                                              
                                                                                              
                                                                                              %
      Change
                                                                                              
                                                                                              
                                                                                              Benchmark+300
      basis points
                                                                                              
                                                                                              
                                                                                              (143
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -1.46
                                                                                              %
                                                                                              
                                                                                              
                                                                                              1
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.01
                                                                                              %
                                                                                              
                                                                                              >(20.00)%+200
      basis points
                                                                                              
                                                                                              
                                                                                              (68
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -0.69
                                                                                              %
                                                                                              
                                                                                              
                                                                                              108
                                                                                              
                                                                                              
                                                                                              
                                                                                              1.62
                                                                                              %
                                                                                              
                                                                                              >(20.00)%+100
      basis points
                                                                                              
                                                                                              
                                                                                              33
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.34
                                                                                              %
                                                                                              
                                                                                              
                                                                                              224
                                                                                              
                                                                                              
                                                                                              
                                                                                              3.36
                                                                                              %
                                                                                              
                                                                                              >(12.50)%-100
      basis points
                                                                                              
                                                                                              
                                                                                              95
                                                                                              
                                                                                              
                                                                                              
                                                                                              0.97
                                                                                              %
                                                                                              
                                                                                              
                                                                                              326
                                                                                              
                                                                                              
                                                                                              
                                                                                              4.90
                                                                                              %
                                                                                              
                                                                                              >(12.50)%-200
      basis points
                                                                                              
                                                                                              
                                                                                              (12
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -0.12
                                                                                              %
                                                                                              
                                                                                              
                                                                                              352
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.29
                                                                                              %
                                                                                              
                                                                                              >(20.00)%-300
      basis points
                                                                                              
                                                                                              
                                                                                              (205
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -2.10
                                                                                              %
                                                                                              
                                                                                              
                                                                                              376
                                                                                              
                                                                                              
                                                                                              
                                                                                              5.66
                                                                                              %
                                                                                              
                                                                                              >(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.
  19
  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.
  Liquidity
and 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, 2008 and 2007, cash and cash equivalents
totaled $7.1 million and $12.2 million, respectively.  Our primary
sources of funds include customer deposits, proceeds from sales of loans,
maturities and sales of investments, and principal repayments from loans and
mortgage-backed securities (both scheduled and prepayments).  During
the years ended December 31, 2008 and 2007, the most significant sources of
funds have been investment calls, sales, and principal payments, and advances
from the FHLB.  These funds have been used for new loan
originations.
 
 Our cash
and cash equivalents decreased $5.0 million during the year ended December 31,
2008, compared to an increase of $2.8 million during the year ended December 31,
2007.  Net cash provided by operating activities increased to $1.6
million during 2008 from $497,000 during 2007.  Net cash used by
investing activities decreased to $5.0 million during 2008 from the $16.1
million cash used during 2007.  Cash used to fund net loan
originations decreased to $7.9 million during 2008 from the net cash used of
$21.6 million during 2007.  Cash used in financing activities
increased to $1.6 million during 2008 from the $18.5 million in cash provided
during 2007.  The increase is primarily due to the decrease in
deposits of $7.6 million partially offset by the increase in FHLB advances of
$3.5 million during 2008.
 
 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, federal funds sold, and other short-term
U.S. agency obligations.  We use securities sold under agreement to
repurchase as an additional funding source.  The agreements represent
our obligations to third parties and are secured by investments which we pledge
as collateral.  At December 31, 2008, we had $7.6 million in
outstanding agreements, which were for overnight funding.
 
 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, 2008, we had $13.5 million in
outstanding advances and additional borrowing capacity of approximately $8.7
million.
 
 We
maintain levels of liquid assets as established by the Board of
Directors.  Our liquidity ratio, adjusted for pledged assets, at
December 31, 2008 and 2007 was 24.1% and 26.1%, respectively.  This
ratio represents the volume of short-term liquid assets as a percentage of net
deposits and borrowings due within one year.
  20
  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, 2008 and 2007.  The commitments listed
below include loans committed for sale to the secondary market of $12.4 million
and $2.1 million as of December 31, 2008 and 2007, respectively.
 
 12/31/08
                    
                    
                    12/31/07(In
      thousands)Commitments
      to fund loans
                    
                    $
                    50,723
                    
                    
                    $
                    41,587Standby
      letters of credit
                    
                    
                    774
                    
                    
                    
                    37
 
 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, 2008, 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, 2008, the Bank’s core capital ratio was
7.30% of total adjusted average assets, which exceeded the required ratio of
4.00%.
 
 As of
December 31, 2008, 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 at December 31, 2008 and 2007 are presented in the table
below:
  Minimum
                    
                    
                    12/31/08
                    
                    
                    12/31/07Required
                    
                    
                    Actual
                    
                    
                    ActualTier
      1 Capital to Average Assets
                    
                    
                    4.00
                    %
                    
                    
                    7.30
                    %
                    
                    
                    7.02
                    %Tier
      1 Capital to Risk-Weighted Assets
                    
                    
                    4.00
                    %
                    
                    
                    10.02
                    %
                    
                    
                    10.38
                    %Total
      Capital to Risk-Weighted Assets
                    
                    
                    8.00
                    %
                    
                    
                    10.94
                    %
                    
                    
                    11.32
                    %
  21
 
 Effect
of Inflation and Changing Prices
  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.
  * * * * * *
 
 22
  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, 2008 and 2007, and the related consolidated statements
of income, stockholders’ equity and cash flows for each of the years in the
three-year period ended December 31, 2008.  The Company’s management
is responsible for these financial statements.  Our responsibility is
to express an opinion on these financial statements based on our
audits.
  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.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits include
consideration of internal control over financial reporting as a basis for
designing auditing procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  Our audits also include examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and 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, 2008 and 2007, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31,
2008, in conformity with accounting principles generally accepted in the United
States of America.
  As
discussed in Note 18, in 2008 the Company changed its method of accounting for
fair value measurements in accordance with Statement of Financial Accounting
Standards No. 157.
  /sig/BKD,LLP
  Decatur,
Illinois
 March 11,
2009
  23
 
 Jacksonville
Bancorp, Inc.
 Consolidated
Balance Sheets
 December
31, 2008 and 2007
 Assets
  2008
                      
                      
                      2007Cash
      and due from banks
                      
                      $
                      6,292,590
                      
                      
                      $
                      7,045,870Federal
      funds sold
                      
                      
                      460,194
                      
                      
                      
                      —Interest-earning
      demand deposits
                      
                      
                      392,504
                      
                      
                      
                      5,129,594Cash
      and cash equivalents
                      
                      
                      7,145,288
                      
                      
                      
                      12,175,464Available-for-sale
      securities:Investment
      securities
                      
                      
                      49,638,933
                      
                      
                      
                      64,894,960Mortgage-backed
      securities
                      
                      
                      27,795,119
                      
                      
                      
                      15,415,191Other
      investments
                      
                      
                      240,321
                      
                      
                      
                      291,004Loans
      held for sale
                      
                      
                      1,388,284
                      
                      
                      
                      1,861,415Loans,
      net of allowance for loan losses of $1,934,072 and $1,766,229 at December
      31, 2008 and 2007
                      
                      
                      182,948,292
                      
                      
                      
                      175,866,517Premises
      and equipment
                      
                      
                      6,106,746
                      
                      
                      
                      6,268,893Federal
      Home Loan Bank stock
                      
                      
                      1,108,606
                      
                      
                      
                      1,108,606Foreclosed
      assets held for sale, net
                      
                      
                      769,467
                      
                      
                      
                      363,918Cash
      surrender value of life insurance
                      
                      
                      3,907,339
                      
                      
                      
                      3,186,228Interest
      receivable
                      
                      
                      2,344,502
                      
                      
                      
                      2,105,094Deferred
      income taxes
                      
                      
                      891,731
                      
                      
                      
                      805,067Mortgage
      servicing rights, net of valuation allowance of $428,030 as of December
      31, 2008
                      
                      
                      545,494
                      
                      
                      
                      965,679Goodwill
                      
                      
                      2,726,567
                      
                      
                      
                      2,726,567Core
      deposit intangibles
                      
                      
                      —
                      
                      
                      
                      39,862Other
      assets
                      
                      
                      718,645
                      
                      
                      
                      414,234Total
      assets
                      
                      $
                      288,275,334
                      
                      
                      $
                      288,488,699
 
 24
  Liabilities
and Stockholders’ Equity
  2008
                      
                      
                      2007LiabilitiesDepositsDemand
                      
                      $
                      19,526,137
                      
                      
                      $
                      18,059,861Savings,
      NOW and money market
                      
                      
                      78,129,554
                      
                      
                      
                      77,327,856Time
                      
                      
                      140,495,537
                      
                      
                      
                      150,333,034Total
      deposits
                      
                      
                      238,151,228
                      
                      
                      
                      245,720,751Short-term
      borrowings
                      
                      
                      7,633,079
                      
                      
                      
                      4,936,034Federal
      Home Loan Bank advances
                      
                      
                      13,500,000
                      
                      
                      
                      10,000,000Deferred
      compensation
                      
                      
                      2,576,290
                      
                      
                      
                      2,346,422Advances
      from borrowers for taxes and insurance
                      
                      
                      445,077
                      
                      
                      
                      421,489Interest
      payable
                      
                      
                      925,661
                      
                      
                      
                      1,248,346Other
      liabilities
                      
                      
                      784,559
                      
                      
                      
                      1,197,766Total
      liabilities
                      
                      
                      264,015,894
                      
                      
                      
                      265,870,808Stockholders’
      EquityPreferred
      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 2008 – 1,987,904 shares; 2007 – 1,986,804
    shares
                      
                      
                      19,879
                      
                      
                      
                      19,868Additional
      paid-in capital
                      
                      
                      6,634,108
                      
                      
                      
                      6,621,359Retained
      earnings – substantially restricted
                      
                      
                      17,268,043
                      
                      
                      
                      16,034,800Accumulated
      other comprehensive income (loss)
                      
                      
                      337,410
                      
                      
                      
                      (58,136
                      )Total
      stockholders’ equity
                      
                      
                      24,259,440
                      
                      
                      
                      22,617,891Total
      liabilities and stockholders’ equity
                      
                      $
                      288,275,334
                      
                      
                      $
                      288,488,699
 
 25
  Jacksonville
Bancorp, Inc.
 Consolidated
Statements of Income
 Years
Ended December 31, 2008, 2007 and 2006
  2008
                          
                          
                          2007
                          
                          
                          2006Interest
      and Dividend IncomeLoans
                          
                          $
                          12,026,500
                          
                          
                          $
                          11,736,631
                          
                          
                          $
                          10,379,986SecuritiesTaxable
                          
                          
                          1,094,248
                          
                          
                          
                          2,794,800
                          
                          
                          
                          3,012,577Tax-exempt
                          
                          
                          977,332
                          
                          
                          
                          393,490
                          
                          
                          
                          129,902Mortgage-backed
      securities
                          
                          
                          1,579,923
                          
                          
                          
                          596,094
                          
                          
                          
                          359,080Other
                          
                          
                          230,333
                          
                          
                          
                          88,692
                          
                          
                          
                          96,134Total
      interest and dividend income
                          
                          
                          15,908,336
                          
                          
                          
                          15,609,707
                          
                          
                          
                          13,977,679Interest
      ExpenseDeposits
                          
                          
                          7,168,601
                          
                          
                          
                          8,433,900
                          
                          
                          
                          6,599,442Short-term
      borrowings
                          
                          
                          78,045
                          
                          
                          
                          189,086
                          
                          
                          
                          155,029Federal
      Home Loan Bank advances
                          
                          
                          469,771
                          
                          
                          
                          433,419
                          
                          
                          
                          276,499Total
      interest expense
                          
                          
                          7,716,417
                          
                          
                          
                          9,056,405
                          
                          
                          
                          7,030,970Net
      Interest Income
                          
                          
                          8,191,919
                          
                          
                          
                          6,553,302
                          
                          
                          
                          6,946,709Provision
      for Loan Losses
                          
                          
                          310,000
                          
                          
                          
                          155,000
                          
                          
                          
                          60,000Net
      Interest Income After Provision for Loan Losses
                          
                          
                          7,881,919
                          
                          
                          
                          6,398,302
                          
                          
                          
                          6,886,709Noninterest
      IncomeFiduciary
      activities
                          
                          
                          220,542
                          
                          
                          
                          104,208
                          
                          
                          
                          74,520Commission
      income
                          
                          
                          1,021,228
                          
                          
                          
                          846,280
                          
                          
                          
                          782,842Service
      charges on deposit accounts
                          
                          
                          889,687
                          
                          
                          
                          947,409
                          
                          
                          
                          900,438Mortgage
      banking operations, net
                          
                          
                          195,743
                          
                          
                          
                          (5,349
                          )
                          
                          
                          73,563Net
      realized gains (losses) on sales of available-for-sale
      securities
                          
                          
                          33,324
                          
                          
                          
                          5,318
                          
                          
                          
                          (20,817
                          )Loan
      servicing fees
                          
                          
                          352,477
                          
                          
                          
                          336,467
                          
                          
                          
                          357,544Increase
      in cash surrender value of life insurance
                          
                          
                          162,827
                          
                          
                          
                          13,314
                          
                          
                          
                          14,024Other
                          
                          
                          83,461
                          
                          
                          
                          84,685
                          
                          
                          
                          52,714Total
      noninterest income
                          
                          
                          2,959,289
                          
                          
                          
                          2,332,332
                          
                          
                          
                          2,234,828
  See
Notes to Consolidated Financial Statements
 26
  2008
                        
                        
                        2007
                        
                        
                        2006Noninterest
      ExpenseSalaries
      and employee benefits
                        
                        $
                        5,525,628
                        
                        
                        $
                        5,078,201
                        
                        
                        $
                        4,839,560Net
      occupancy and equipment expense
                        
                        
                        1,101,671
                        
                        
                        
                        1,090,596
                        
                        
                        
                        1,096,531Data
      processing fees
                        
                        
                        427,838
                        
                        
                        
                        432,403
                        
                        
                        
                        440,368Professional
      fees
                        
                        
                        179,517
                        
                        
                        
                        154,536
                        
                        
                        
                        175,086Marketing
      expense
                        
                        
                        124,321
                        
                        
                        
                        113,499
                        
                        
                        
                        123,800Postage
      and office supplies
                        
                        
                        310,119
                        
                        
                        
                        288,645
                        
                        
                        
                        252,128Deposit
      insurance premium
                        
                        
                        46,943
                        
                        
                        
                        27,549
                        
                        
                        
                        27,537Impairment
      on mortgage servicing rights asset
                        
                        
                        428,030
                        
                        
                        
                        —
                        
                        
                        
                        —Other
                        
                        
                        875,036
                        
                        
                        
                        916,053
                        
                        
                        
                        937,913Total
      noninterest expense
                        
                        
                        9,019,103
                        
                        
                        
                        8,101,482
                        
                        
                        
                        7,892,923Income
      Before Income Tax
                        
                        
                        1,822,105
                        
                        
                        
                        629,152
                        
                        
                        
                        1,228,614Provision
      for Income Taxes
                        
                        
                        304,183
                        
                        
                        
                        10,083
                        
                        
                        
                        333,495Net
      Income
                        
                        $
                        1,517,922
                        
                        
                        $
                        619,069
                        
                        
                        $
                        895,119Basic
      Earnings Per Share
                        
                        $
                        0.76
                        
                        
                        $
                        0.31
                        
                        
                        $
                        0.45Diluted
      Earnings Per Share
                        
                        $
                        0.76
                        
                        
                        $
                        0.31
                        
                        
                        $
                        0.45Cash
      Dividends Per Share
                        
                        $
                        0.30
                        
                        
                        $
                        0.30
                        
                        
                        $
                        0.30
 
 27
  Jacksonville
Bancorp, Inc.
 Consolidated
Statements of Stockholders’ Equity
 Years
Ended December 31, 2008, 2007 and 2006
  AdditionalCommon
      Stock
                        
                        
                        Paid-inShares
                        
                        
                        Amount
                        
                        
                        CapitalBalance,
      January 1, 2006
                        
                        
                        1,970,216
                        
                        
                        $
                        19,702
                        
                        
                        $
                        6,474,513Comprehensive
      incomeNet
      income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Change
      in unrealized depreciation on available-for-sale securities, net of
      taxes
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Total
      comprehensive income (loss)Stock
      option compensation expense
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        4,710Dividends
      on common stock, $.30 per share
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Purchase
      and retirement of stock
                        
                        
                        (1,292
                        )
                        
                        
                        (13
                        )
                        
                        
                        (17,906
                        )Stock
      options exercised
                        
                        
                        16,493
                        
                        
                        
                        165
                        
                        
                        
                        130,428Tax
      benefit related to stock options exercised
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        16,597Balance,
      December 31, 2006
                        
                        
                        1,985,417
                        
                        
                        
                        19,854
                        
                        
                        
                        6,608,342Comprehensive
      incomeNet
      income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Change
      in unrealized depreciation on available-for-sale securities, net of
      taxes
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Total
      comprehensive income (loss)Stock
      option compensation expense
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        2,025Dividends
      on common stock, $.30 per share
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Purchase
      and retirement of stock
                        
                        
                        (1,213
                        )
                        
                        
                        (12
                        )
                        
                        
                        (14,982
                        )Stock
      options exercised
                        
                        
                        2,600
                        
                        
                        
                        26
                        
                        
                        
                        24,599Tax
      benefit related to stock options exercised
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,375Balance,
      December 31, 2007
                        
                        
                        1,986,804
                        
                        
                        
                        19,868
                        
                        
                        
                        6,621,359Comprehensive
      incomeNet
      income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Change
      in unrealized appreciation on available-for-sale securities, net of
      taxes
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Total
      comprehensive income (loss)Stock
      option compensation expense
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,760Dividends
      on common stock, $.30 per share
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Stock
      options exercised
                        
                        
                        1,100
                        
                        
                        
                        11
                        
                        
                        
                        10,989Balance,
      December 31, 2008
                        
                        
                        1,987,904
                        
                        
                        $
                        19,879
                        
                        
                        $
                        6,634,108
  See
Notes to Consolidated Financial Statements
 28
  AccumulatedOtherRetained
                            
                            
                            ComprehensiveEarnings
                            
                            
                            Income
      (Loss)
                            
                            
                            Total15,088,742
                            
                            
                            
                            (1,480,353
                            )
                            
                            
                            20,102,604895,119
                            
                            
                            
                            —
                            
                            
                            
                            895,119—
                            
                            
                            
                            296,617
                            
                            
                            
                            296,6171,191,736—
                            
                            
                            
                            —
                            
                            
                            
                            4,710(283,705
                            )
                            
                            
                            —
                            
                            
                            
                            (283,705
                            )—
                            
                            
                            
                            —
                            
                            
                            
                            (17,919
                            )—
                            
                            
                            
                            —
                            
                            
                            
                            130,593—
                            
                            
                            
                            —
                            
                            
                            
                            16,59715,700,156
                            
                            
                            
                            (1,183,736
                            )
                            
                            
                            21,144,616619,069
                            
                            
                            
                            —
                            
                            
                            
                            619,069—
                            
                            
                            
                            1,125,600
                            
                            
                            
                            1,125,6001,744,669—
                            
                            
                            
                            —
                            
                            
                            
                            2,025(284,425
                            )
                            
                            
                            —
                            
                            
                            
                            (284,425
                            )—
                            
                            
                            
                            —
                            
                            
                            
                            (14,994
                            )—
                            
                            
                            
                            —
                            
                            
                            
                            24,625—
                            
                            
                            
                            —
                            
                            
                            
                            1,37516,034,800
                            
                            
                            
                            (58,136
                            )
                            
                            
                            22,617,8911,517,922
                            
                            
                            
                            —
                            
                            
                            
                            1,517,922—
                            
                            
                            
                            395,546
                            
                            
                            
                            395,5461,913,468—
                            
                            
                            
                            —
                            
                            
                            
                            1,760(284,679
                            )
                            
                            
                            —
                            
                            
                            
                            (284,679
                            )—
                            
                            
                            
                            —
                            
                            
                            
                            11,000$
                            17,268,043
                            
                            
                            $
                            337,410
                            
                            
                            $
                            24,259,440
 
 29
  Jacksonville
Bancorp, Inc.
 Consolidated
Statements of Cash Flows
 Years
Ended December 31, 2008, 2007 and 2006
  2008
                        
                        
                        2007
                        
                        
                        2006Operating
      ActivitiesNet
      income
                        
                        $
                        1,517,922
                        
                        
                        $
                        619,069
                        
                        
                        $
                        895,119Items
      not requiring (providing) cashDepreciation
      and amortization
                        
                        
                        431,697
                        
                        
                        
                        433,601
                        
                        
                        
                        455,601Provision
      for loan losses
                        
                        
                        310,000
                        
                        
                        
                        155,000
                        
                        
                        
                        60,000Amortization
      of premiums and discounts on securities
                        
                        
                        83,720
                        
                        
                        
                        (8,657
                        )
                        
                        
                        14,903Amortization
      of loan purchased premium
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (39,559
                        )Amortization
      of core deposit intangibles
                        
                        
                        39,862
                        
                        
                        
                        79,724
                        
                        
                        
                        79,723Deferred
      income taxes
                        
                        
                        (290,430
                        )
                        
                        
                        (134,000
                        )
                        
                        
                        (86,323
                        )Net
      realized (gains) losses on available-for-sale securities
                        
                        
                        (33,324
                        )
                        
                        
                        (5,318
                        )
                        
                        
                        20,817Net
      (income) loss on mortgage banking operations
                        
                        
                        (195,743
                        )
                        
                        
                        5,349
                        
                        
                        
                        (73,563
                        )Impairment
      of mortgage servicing rights asset
                        
                        
                        428,030
                        
                        
                        
                        —
                        
                        
                        
                        —Increase
      in cash surrender value of life insurance
                        
                        
                        (171,476
                        )
                        
                        
                        (14,493
                        )
                        
                        
                        (22,672
                        )(Gains)
      losses on sales of foreclosed assets
                        
                        
                        (18,242
                        )
                        
                        
                        (33,364
                        )
                        
                        
                        13,115Gain
      on sale of premises and equipment
                        
                        
                        (6,517
                        )
                        
                        
                        —
                        
                        
                        
                        —Stock
      option compensation expense
                        
                        
                        1,760
                        
                        
                        
                        2,025
                        
                        
                        
                        4,710Tax
      benefit relating to stock options exercised
                        
                        
                        —
                        
                        
                        
                        1,375
                        
                        
                        
                        16,597Changes
      inInterest
      receivable
                        
                        
                        (239,408
                        )
                        
                        
                        (161,704
                        )
                        
                        
                        (453,641
                        )Other
      assets
                        
                        
                        (354,574
                        )
                        
                        
                        68,182
                        
                        
                        
                        (36,131
                        )Interest
      payable
                        
                        
                        (322,685
                        )
                        
                        
                        166,012
                        
                        
                        
                        281,888Other
      liabilities
                        
                        
                        (212,431
                        )
                        
                        
                        736,186
                        
                        
                        
                        (211,222
                        )Origination
      of loans held for sale
                        
                        
                        (29,415,840
                        )
                        
                        
                        (11,568,657
                        )
                        
                        
                        (16,394,351
                        )Proceeds
      from sales of loans held for sale
                        
                        
                        30,076,869
                        
                        
                        
                        10,156,400
                        
                        
                        
                        16,561,469Net
      cash provided by operating activities
                        
                        
                        1,629,190
                        
                        
                        
                        496,730
                        
                        
                        
                        1,086,480Investing
      ActivitiesPurchases
      of available-for-sale securities
                        
                        
                        (69,456,634
                        )
                        
                        
                        (19,753,071
                        )
                        
                        
                        (9,550,126
                        )Proceeds
      from maturities of available-for-sale securities
                        
                        
                        50,922,663
                        
                        
                        
                        10,413,335
                        
                        
                        
                        5,059,946Proceeds
      from the sales of available-for-sale and other securities
                        
                        
                        22,009,669
                        
                        
                        
                        17,523,212
                        
                        
                        
                        5,940,395Proceeds
      from sale of Federal Home Loan Bank stock
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        430,722Net
      change in loans
                        
                        
                        (7,901,707
                        )
                        
                        
                        (21,603,784
                        )
                        
                        
                        (12,686,783
                        )Purchase
      of premises and equipment
                        
                        
                        (295,828
                        )
                        
                        
                        (146,733
                        )
                        
                        
                        (165,240
                        )Proceeds
      from sales of premises and equipment
                        
                        
                        32,795
                        
                        
                        
                        —
                        
                        
                        
                        —Proceeds
      from the sale of foreclosed assets
                        
                        
                        201,880
                        
                        
                        
                        286,784
                        
                        
                        
                        391,631Purchase
      of bank-owned life insurance
                        
                        
                        (549,635
                        )
                        
                        
                        (2,838,173
                        )
                        
                        
                        —Net
      cash used in investing activities
                        
                        
                        (5,036,797
                        )
                        
                        
                        (16,118,430
                        )
                        
                        
                        (10,579,455
                        )
  See Notes to Consolidated Financial
Statements
 30
  2008
                        
                        
                        2007
                        
                        
                        2006Financing
      ActivitiesNet
      increase in demand deposits, money market, NOW and savings
      accounts
                        
                        $
                        2,267,974
                        
                        
                        $
                        8,576,887
                        
                        
                        $
                        7,254,252Net
      increase (decrease) in certificates of deposit
                        
                        
                        (9,837,497
                        )
                        
                        
                        4,230,574
                        
                        
                        
                        7,289,264Net
      increase (decrease) in short-term borrowings
                        
                        
                        2,697,045
                        
                        
                        
                        (98,845
                        )
                        
                        
                        1,684,811Proceeds
      from Federal Home Loan Bank advances
                        
                        
                        8,500,000
                        
                        
                        
                        8,000,000
                        
                        
                        
                        —Repayment
      of Federal Home Loan Bank advances
                        
                        
                        (5,000,000
                        )
                        
                        
                        (2,000,000
                        )
                        
                        
                        (4,000,000
                        )Net
      increase in advances from borrowers for taxes and
insurance
                        
                        
                        23,588
                        
                        
                        
                        32,776
                        
                        
                        
                        14,037Proceeds
      from stock options exercised
                        
                        
                        11,000
                        
                        
                        
                        24,625
                        
                        
                        
                        130,593Purchase
      and retirement of common stock
                        
                        
                        —
                        
                        
                        
                        (14,994
                        )
                        
                        
                        (17,919
                        )Dividends
      paid
                        
                        
                        (284,679
                        )
                        
                        
                        (284,425
                        )
                        
                        
                        (212,704
                        )Net
      cash provided by (used in) financing activities
                        
                        
                        (1,622,569
                        )
                        
                        
                        18,466,598
                        
                        
                        
                        12,142,334Increase
      (Decrease) in Cash and Cash Equivalents
                        
                        
                        (5,030,176
                        )
                        
                        
                        2,844,898
                        
                        
                        
                        2,649,359Cash
      and Cash Equivalents, Beginning of Year
                        
                        
                        12,175,464
                        
                        
                        
                        9,330,566
                        
                        
                        
                        6,681,207Cash
      and Cash Equivalents, End of Year
                        
                        $
                        7,145,288
                        
                        
                        $
                        12,175,464
                        
                        
                        $
                        9,330,566Supplemental
      Cash Flows InformationInterest
      paid
                        
                        $
                        8,039,102
                        
                        
                        $
                        8,890,393
                        
                        
                        $
                        6,749,082Income
      taxes paid
                        
                        $
                        551,600
                        
                        
                        $
                        137,000
                        
                        
                        $
                        548,600Sale
      and financing of foreclosed assets
                        
                        $
                        156,890
                        
                        
                        $
                        353,400
                        
                        
                        $
                        228,500Real
      estate acquired in settlement of loans
                        
                        $
                        666,822
                        
                        
                        $
                        818,680
                        
                        
                        $
                        329,287Dividends
      declared not paid
                        
                        $
                        71,113
                        
                        
                        $
                        71,105
                        
                        
                        $
                        71,001Loans
      held for sale transferred to loans
                        
                        $
                        —
                        
                        
                        $
                        45,314
                        
                        
                        $
                        —
 
 31
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
 Note
      1:
                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.
  32
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  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, Federal Home Loan Bank stock
impairment, valuation of foreclosed assets held for sale, goodwill impairment,
and the valuation of mortgage servicing rights.  In connection with
the determination of the allowance for loan losses and valuation of foreclosed
assets held for sale, management obtained independent appraisals for significant
properties.  In connection with the determination of Federal Home Loan
Bank stock impairment, management performed an analysis based on the Federal
Home Loan Bank’s current activities.  Management performed an analysis
to evaluate goodwill impairment based on current market data provided by an
investment banker.  The Company obtained a third-party valuation to
perform the impairment analysis of the mortgage servicing rights
asset.
  Fair
Value Measurements
  The fair
value of a financial instrument is defined as the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale.  The Company estimates the fair value
of a financial instrument using a variety of valuation methods.  Where
financial instrument are actively traded and have quoted market prices, quoted
market prices are used for fair value.  When the financial instruments
are not actively traded, other observable market inputs, such as quoted prices
of securities with similar characteristics, may be used, if available, to
determine fair value.  When the observable market prices do not exist,
the Company estimates fair value.  The Company’s valuation methods
consider factors such as liquidity and concentration concerns.  Other
factors such as model assumptions, market dislocations, and unexpected
correlations can affect estimates of fair value.  Imprecision in
estimating these factors can impact the amount of revenue or loss
recorded.
  33
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  FASB
Statement No. 157, Fair Value
Measurements, establishes a framework for measuring the fair value of
financial instruments that considers the attributes specific to particular
assets or liabilities and establishes a three-level hierarchy for determining
fair value based on the transparency of inputs to each valuation as of the fair
value measurement date.  The three levels are defined as
follows:
  Level
      1
                    Quoted
      prices (unadjusted) for identical assets or liabilities in active
      markets.Level
      2
                    Inputs
      include quoted prices for similar assets and liabilities in active
      markets, quoted prices of identical or similar assets or liabilities in
      markets that are not active, and inputs that are observable for the asset
      or liability, either directly or indirectly, for substantially the full
      term of the financial instruments.Level
      3
                    Inputs
      that are unobservable and significant to the fair value
      measurement.
  At the
end of each quarter, the Company assesses the valuation hierarchy for each asset
or liability measured.  From time to time, assets or liabilities may
be transferred within hierarchy levels due to changes in availability of
observable market inputs to measure fair value at the measurement
date.  Transfers into or out of hierarchy levels are based upon the
fair value at the beginning of the reporting period.
  Cash
Equivalents
  The
Company considers all liquid investments with original maturities of three
months or less to be cash equivalents.  At December 31, 2008 and 2007,
cash equivalents consisted primarily of federal funds sold and interest-earning
demand deposits.
  The
financial institutions holding the Company’s cash accounts is participating in
the FDIC’s Transaction Account Guarantee Program.  Under that program,
through December 31, 2009, all noninterest-bearing transaction accounts are
fully guaranteed by the FDIC for the entire amount in the account.
  Effective
October 3, 2008, the FDIC’s insurance limits increased to
$250,000.  The increase in federally insured limits is currently set
to expire December 31, 2009, at which time deposit insurance limits will be
reduced to $100,000.  At December 31, 2008, the Company’s
interest-bearing cash accounts did not exceed federally insured
limits.
  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.
  34
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  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, 2008 and 2007 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.
  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.
  35
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
 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.
  Groups of
loans with similar risk characteristics, including individually evaluated loans
not determined to be impaired, are collectively evaluated for impairment based
on the group’s historical loss experience adjusted for changes in trends,
conditions and other relevant factors that affect repayment of the
loans.  Accordingly, the Company does not separately identify
individual consumer and residential loans for impairment
measurements.
  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 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.
  36
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
 The
Company owns $1,108,606 of Federal Home Loan Bank stock as of December 31, 2008
and 2007.  During the third quarter of 2007, the Federal Home Loan
Bank of Chicago (FHLB) received a Cease and Desist Order from their regulator,
the Federal Housing Finance Board.  The order prohibits capital stock
repurchases and redemptions until a time to be determined by the Federal Housing
Finance Board.  The FHLB will continue to provide liquidity and
funding through advances.  With regard to dividends, the FHLB will
continue to assess their dividend capacity each quarter and make appropriate
request for approval.  The FHLB did not pay a dividend during 2008,
and the stock is considered a non-performing asset as of December 31, 2008 and
2007.  Management performed an analysis as of December 31, 2008 and
deemed the investment in FHLB stock was not impaired.
  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.  The goodwill was not deemed impaired as of December 31,
2008 or 2007.
  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.
  Mortgage
Servicing Rights
  Mortgage
servicing rights on originated loans that have been sold are initially recorded
at fair value.  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 by which the
capitalized mortgage servicing rights for a stratum exceed their fair
value.
  37
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  Stock
Options
  At
December 31, 2008 and 2007, the Company has a stock-based employee compensation
plan, which is described more fully in Note 16.  The Company accounts
for this plan under the recognition and measurement principles of Statement of
Financial Accounting Standards (SFAS) No. 123R, Share-Based
Payment.
  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, if any, 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.  Anti-dilutive options are excluded from the
calculation.
  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 106 and 103 trust
accounts with assets totaling approximately $48.9 million and $37.0 million at
December 31, 2008 and 2007, respectively
  Reclassifications
  Certain
reclassifications have been made to the 2007 and 2006 financial statements to
conform to the 2008 financial statement presentation.  These
reclassifications had no effect on net income or stockholders’
equity.
  38
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  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, 2008 and
2007, was $1,054,000 and $908,000, respectively.
  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
      ValueDecember
      31, 2008:U.S.
      government agencies
                                
                                $
                                19,472,065
                                
                                
                                $
                                361,545
                                
                                
                                $
                                —
                                
                                
                                $
                                19,833,610Mortgage-backed
      securities
                                
                                
                                27,384,188
                                
                                
                                
                                410,931
                                
                                
                                
                                —
                                
                                
                                
                                27,795,119State
      and political subdivisions
                                
                                
                                30,066,572
                                
                                
                                
                                283,150
                                
                                
                                
                                (544,399
                                )
                                
                                
                                29,805,323$
                                76,922,825
                                
                                
                                $
                                1,055,626
                                
                                
                                $
                                (544,399
                                )
                                
                                $
                                77,434,052December
      31, 2007:U.S.
      government agencies
                                
                                $
                                50,107,356
                                
                                
                                $
                                4,611
                                
                                
                                $
                                (150,312
                                )
                                
                                $
                                49,961,655Mortgage-backed
      securities
                                
                                
                                15,494,925
                                
                                
                                
                                35,989
                                
                                
                                
                                (115,723
                                )
                                
                                
                                15,415,191State
      and political subdivisions
                                
                                
                                14,795,956
                                
                                
                                
                                142,875
                                
                                
                                
                                (5,526
                                )
                                
                                
                                14,933,305$
                                80,398,237
                                
                                
                                $
                                183,475
                                
                                
                                $
                                (271,561
                                )
                                
                                $
                                80,310,151
  39
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  The
amortized cost and fair value of available-for-sale securities at
December 31, 2008, 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-saleAmortized
                          Cost
                        
                        
                        Fair
                          ValueWithin
      one year
                        
                        $
                        80,000
                        
                        
                        $
                        80,009One
      to five years
                        
                        
                        11,320,276
                        
                        
                        
                        11,477,786Five
      to ten years
                        
                        
                        28,787,960
                        
                        
                        
                        29,101,904After
      ten years
                        
                        
                        9,350,401
                        
                        
                        
                        8,979,234Mortgage-backed
      securities
                        
                        
                        27,384,188
                        
                        
                        
                        27,795,119Totals
                        
                        $
                        76,922,825
                        
                        
                        $
                        77,434,052
  The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes, was $43,048,336 at December 31, 2008 and $51,396,445 at
December 31, 2007.
  The book
value of securities sold under agreements to repurchase amounted to $7,633,079
and $4,936,034 at December 31, 2008 and 2007, respectively.
  Gross
gains of $48,226, $5,876, and $916 and gross losses of $14,902, $558, and
$21,733 resulting from sales of available-for-sale securities were realized for
2008, 2007 and 2006, respectively.  The tax provision (benefit)
applicable to these net realized gains (losses) amounted to $11,330, $1,808, and
$(7,078), 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, 2008 and 2007, was $13,971,751 and $52,716,777,
which is approximately 18% and 66%, respectively, of the Company’s
available-for-sale investment portfolio.  The declines primarily
resulted from recent changes 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.  There was no other-than-temporary impairment recorded
during 2008, 2007, or 2006.
  40
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  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,
2008 and 2007:
  
 Less
      than 12 Months
                                      
                                      
                                      12
      Months or More
                                      
                                      
                                      TotalDescription
      of
                                        Securities
                                      
                                      Fair
      Value
                                      
                                      
                                      Unrealized
                                        Losses
                                      
                                      
                                      Fair
      Value
                                      
                                      
                                      Unrealized
                                        Losses
                                      
                                      
                                      Fair
      Value
                                      
                                      
                                      Unrealized
                                        LossesDecember
      31, 2008U.S.
      government agencies
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —Mortgage-backed
      securities
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —State
      and political subdivisions
                                      
                                      
                                      13,971,751
                                      
                                      
                                      
                                      (544,399
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      13,971,751
                                      
                                      
                                      
                                      (544,399
                                      )Total
      temporarily impaired securities
                                      
                                      $
                                      13,971,751
                                      
                                      
                                      $
                                      (544,399
                                      )
                                      
                                      $ __—
                                      
                                      
                                      $__—
                                      
                                      
                                      $
                                      13,971,751
                                      
                                      
                                      $
                                      (544,399
                                      )
 
  Less
      than 12 Months
                                      
                                      
                                      12
      Months or More
                                      
                                      
                                      TotalDescription
      of
                                        Securities
                                      
                                      Fair
      Value
                                      
                                      
                                      Unrealized
                                        Losses
                                      
                                      
                                      Fair
      Value
                                      
                                      
                                      Unrealized
                                        Losses
                                      
                                      
                                      Fair
      Value
                                      
                                      
                                      Unrealized
                                        LossesDecember
      31, 2007U.S.
      government agencies
                                      
                                      $
                                      1,245,905
                                      
                                      
                                      $
                                      (280
                                      )
                                      
                                      $
                                      42,973,499
                                      
                                      
                                      $
                                      (150,032
                                      )
                                      
                                      $
                                      44,219,404
                                      
                                      
                                      $
                                      (150,312
                                      )Mortgage-backed
      securities
                                      
                                      
                                      910,049
                                      
                                      
                                      
                                      (2,954
                                      )
                                      
                                      
                                      6,014,125
                                      
                                      
                                      
                                      (112,769
                                      )
                                      
                                      
                                      6,924,174
                                      
                                      
                                      
                                      (115,723
                                      )State
      and political subdivisions
                                      
                                      
                                      1,258,503
                                      
                                      
                                      
                                      (4,593
                                      )
                                      
                                      
                                      314,696
                                      
                                      
                                      
                                      (933
                                      )
                                      
                                      
                                      1,573,199
                                      
                                      
                                      
                                      (5,526
                                      )Total
      temporarily impaired securities
                                      
                                      $
                                      3,414,457
                                      
                                      
                                      $
                                      (7,827
                                      )
                                      
                                      $
                                      49,302,320
                                      
                                      
                                      $
                                      (263,734
                                      )
                                      
                                      $
                                      52,716,777
                                      
                                      
                                      $
                                      (271,561
                                      )
 
 41
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  Note
      4:
                Loans
      and Allowance for Loan Losses
  Categories
of loans at December 31, include:
  2008
                      
                      
                      2007Commercial
      and agricultural
                      
                      $
                      35,356,098
                      
                      
                      $
                      36,539,160Commercial
      and agricultural real estate
                      
                      
                      61,034,538
                      
                      
                      
                      48,841,129Residential
      real estate
                      
                      
                      46,806,391
                      
                      
                      
                      50,459,155Consumer
                      
                      
                      35,843,434
                      
                      
                      
                      35,420,600Other
                      
                      
                      5,950,390
                      
                      
                      
                      6,402,318Total
      loans
                      
                      
                      184,990,851
                      
                      
                      
                      177,662,362LessNet
      deferred loan fees, premiums and discounts
                      
                      
                      108,487
                      
                      
                      
                      29,616Allowance
      for loan losses
                      
                      
                      1,934,072
                      
                      
                      
                      1,766,229Net
      loans
                      
                      $
                      182,948,292
                      
                      
                      $
                      175,866,517
  Activity
in the allowance for loan losses was as follows:
  2008
                          
                          
                          2007
                          
                          
                          2006Balance,
      beginning of year
                          
                          $
                          1,766,229
                          
                          
                          $
                          1,864,497
                          
                          
                          $
                          1,846,150Provision
      charged to expense
                          
                          
                          310,000
                          
                          
                          
                          155,000
                          
                          
                          
                          60,000Losses
      charged off, net of recoveries of $64,025 for 2008, $47,573 for 2007, and
      $176,778 for 2006
                          
                          
                          (142,157
                          )
                          
                          
                          (253,268
                          )
                          
                          
                          (41,653
                          )Balance,
      end of year
                          
                          $
                          1,934,072
                          
                          
                          $
                          1,766,229
                          
                          
                          $
                          1,864,497
 
  Impaired
loans totaled $1,354,148, $1,071,922, and $1,133,320 at December 31, 2008, 2007
and 2006, respectively.  An allowance for loan losses of $174,905,
$10,719, and $61,242 relates to impaired loans of $1,147,702, $1,071,922, and
$1,133,320, at December 31, 2008, 2007 and 2006, respectively.  At
December 31, 2008, impaired loans of 206,446 had no related allowance for loan
losses.
  Interest
of approximately $114,520, $95,052, and $54,426 was recognized on average
impaired loans of $489,211, $724,103, and $773,308 for 2008, 2007 and 2006,
respectively.  Interest of $96,459, $102,601, and $56,811 was
recognized on impaired loans on a cash basis during 2008, 2007 and 2006,
respectively.
  42
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  At
December 31, 2008, 2007 and 2006, accruing loans delinquent 90 days or more
totaled $185,502, $368,011, and $4,049, respectively.  Non-accruing
loans at December 31, 2008, 2007 and 2006 were $1,004,881, $722,931, and
$1,348,045, respectively.
  Note
      5:
              Premises
      and Equipment
  Major
classifications of premises and equipment, stated at cost, are as
follows:
  2008
                      
                      
                      2007Land
                      
                      $
                      983,276
                      
                      
                      $
                      983,276Buildings
      and improvements
                      
                      
                      7,522,011
                      
                      
                      
                      7,513,876Equipment
                      
                      
                      4,401,113
                      
                      
                      
                      4,170,07812,906,400
                      
                      
                      
                      12,667,230Less
      accumulated depreciation
                      
                      
                      (6,799,654
                      )
                      
                      
                      (6,398,337
                      )Net
      premises and equipment
                      
                      $
                      6,106,746
                      
                      
                      $
                      6,268,893
  Note
      6:
                Intangible
      Assets
 The
carrying basis and accumulated amortization of recognized core deposit
intangible assets at December 31, 2008 and 2007 were:
  2008
                              
                              
                              2007Gross
                                Carrying
                                Amount
                              
                              
                              Accumulated
      Amortization
                              
                              
                              Gross
                                Carrying
                                Amount
                              
                              
                              Accumulated
      AmortizationCore
      deposit intangibles
                              
                              $
                              637,789
                              
                              
                              $
                              (637,789
                              )
                              
                              $
                              637,789
                              
                              
                              $
                              (597,927
                              )
  Amortization
expense for the years ended December 31, 2008, 2007 and 2006, was $39,862,
$79,724, and $79,723, respectively.  The intangible was fully
amortized during 2008.
  43
 
 Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  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 $132,100,020 and $129,935,669 at December 31, 2008 and
2007, respectively.
  Custodial
escrow balances maintained in connection with the foregoing loan servicing, and
included in demand deposits on the general ledger, were $303,797 and $288,098 at
December 31, 2008 and 2007, respectively.
  The
aggregate fair value of capitalized mortgage servicing rights at December 31,
2008, 2007 and 2006 totaled $545,494, $1,040,899 and $1,186,160,
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:
  2008
                      
                      
                      2007Mortgage
      servicing rightsBalance,
      beginning of year
                      
                      $
                      965,679
                      
                      
                      $
                      1,039,649Servicing
      rights capitalized
                      
                      
                      204,248
                      
                      
                      
                      74,701Amortization
      of servicing rights
                      
                      
                      (196,403
                      )
                      
                      
                      (148,671
                      )Valuation
      allowance
                      
                      
                      (428,030
                      )
                      
                      
                      —Balance,
      end of year
                      
                      $
                      545,494
                      
                      
                      $
                      965,679
  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 valuation allowance was as
follows:
  2008
                      
                      
                      2007Balance,
      beginning of year
                      
                      $
                      —
                      
                      
                      $
                      —Additions
                      
                      
                      428,030
                      
                      
                      
                      —Balance,
      end of year
                      
                      $
                      428,030
                      
                      
                      $
                      —
 
 44
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
 Note
      8:
                Interest-bearing
      Deposits
 Time
deposits in denominations of $100,000 or more totaled $59,263,188 at December
31, 2008 and $65,127,764 at December 31, 2007.
  At
December 31, 2008, the scheduled maturities of time deposits are as
follows:
  2009
                      
                      $
                      106,479,8802010
                      
                      
                      23,847,7652011
                      
                      
                      6,107,5032012
                      
                      
                      2,220,0242013
                      
                      
                      1,840,365Thereafter
                      
                      
                      —$
                      140,495,537
  Note
      9:
                Short-term
      Borrowings
 Short-term
borrowings consist of securities sold under agreements to repurchase totaling
$7,633,079 and $4,936,034 at December 31, 2008 and 2007,
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 2008 and 2007 totaled $7,633,079 and $5,838,407, respectively, and
the monthly average of such agreements totaled $6,031,389 and $4,664,659 for
2008 and 2007, respectively.  The agreements at December 31,
2008, are all overnight agreements.
  Note
      10:
                Federal
      Home Loan Bank Advances
 The
Federal Home Loan Bank advances total $13,500,000 and $10,000,000 as of December
31, 2008 and 2007, respectively.  The advances are secured by mortgage
loans totaling $44,039,000 at December 31, 2008.  The advances,
at interest rates of 0.52% to 5.09%, are subject to restrictions or penalties in
the event of prepayment.  The Federal Home Loan Bank advances mature
in 2009.
  45
 
 Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  Note
      11:
                Income
      Taxes
 The
provision for income taxes includes these components:
  2008
                          
                          
                          2007
                          
                          
                          2006Taxes
      currently payableFederal
                          
                          $
                          594,613
                          
                          
                          $
                          144,083
                          
                          
                          $
                          419,818State
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Deferred
      income taxes
                          
                          
                          (290,430
                          )
                          
                          
                          (134,000
                          )
                          
                          
                          (86,323
                          )Income
      tax expense
                          
                          $
                          304,183
                          
                          
                          $
                          10,083
                          
                          
                          $
                          333,495
  A
reconciliation of income tax expense at the statutory rate to the Company’s
actual income tax expense is shown below:
  2008
                          
                          
                          2007
                          
                          
                          2006Computed
      at the statutory rate (34%)
                          
                          $
                          619,515
                          
                          
                          $
                          213,912
                          
                          
                          $
                          417,729Increase
      (decrease) resulting fromTax
      exempt interest
                          
                          
                          (283,936
                          )
                          
                          
                          (110,139
                          )
                          
                          
                          (37,662
                          )Graduated
      tax rates
                          
                          
                          (18,221
                          )
                          
                          
                          (6,292
                          )
                          
                          
                          (12,286
                          )State
      income taxes, net
                          
                          
                          58,144
                          
                          
                          
                          (64,575
                          )
                          
                          
                          (49,288
                          )Other
                          
                          
                          (71,319
                          )
                          
                          
                          (22,823
                          )
                          
                          
                          15,002Actual
      tax expense
                          
                          $
                          304,183
                          
                          
                          $
                          10,083
                          
                          
                          $
                          333,495
  46
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  The tax
effects of temporary differences related to deferred taxes shown on the balance
sheets were:
  2008
                      
                      
                      2007Deferred
      tax assetsAllowance
      for loan losses
                      
                      $
                      625,389
                      
                      
                      $
                      553,074Deferred
      compensation
                      
                      
                      1,000,064
                      
                      
                      
                      899,190State
      net operating loss carryforward
                      
                      
                      220,325
                      
                      
                      
                      268,496Unrealized
      losses on available-for-sale securities
                      
                      
                      —
                      
                      
                      
                      29,949Other
                      
                      
                      —
                      
                      
                      
                      7,3631,845,778
                      
                      
                      
                      1,758,072Deferred
      tax liabilitiesUnrealized
      gains on available-for-sale securities
                      
                      
                      173,817
                      
                      
                      
                      —Depreciation
                      
                      
                      337,862
                      
                      
                      
                      358,491Federal
      Home Loan Bank stock dividends
                      
                      
                      146,736
                      
                      
                      
                      144,860Prepaid
      expenses
                      
                      
                      46,695
                      
                      
                      
                      64,313Mortgage
      servicing rights
                      
                      
                      211,750
                      
                      
                      
                      370,065Basis
      in acquired assets
                      
                      
                      —
                      
                      
                      
                      15,276Other
                      
                      
                      37,187
                      
                      
                      
                      —954,047
                      
                      
                      
                      953,005Net
      deferred tax asset
                      
                      $
                      891,731
                      
                      
                      $
                      805,067
  Retained
earnings at December 31, 2008 and 2007, 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,
2008 and 2007.
  47
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  Note
      12:
                Other
      Comprehensive Income (Loss)
 Other
comprehensive income (loss) components and related taxes were as
follows:
  2008
                          
                          
                          2007
                          
                          
                          2006Unrealized
      gains on available-for-sale securities
                          
                          $
                          632,636
                          
                          
                          $
                          1,695,695
                          
                          
                          $
                          617,229Less
      reclassification adjustment for realized gains (losses) included in
      income
                          
                          
                          33,324
                          
                          
                          
                          5,318
                          
                          
                          
                          (20,817
                          )Other
      comprehensive income, before tax effect
                          
                          
                          599,312
                          
                          
                          
                          1,690,377
                          
                          
                          
                          638,046Tax
      expense (benefit)
                          
                          
                          203,766
                          
                          
                          
                          (564,777
                          )
                          
                          
                          (216,936
                          )Tax
      expense – change in tax rate from 38.7% to 34% during 2006
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (124,493
                          )Other
      comprehensive income
                          
                          $
                          395,546
                          
                          
                          $
                          1,125,600
                          
                          
                          $
                          296,617
  The
components of accumulated other comprehensive income (loss), included in
stockholders’ equity, are as follows:
  2008
                          
                          
                          2007
                          
                          
                          2006Net
      unrealized gain (loss) on securities available-for-sale
                          
                          $
                          511,227
                          
                          
                          $
                          (88,085
                          )
                          
                          $
                          (1,778,462
                          )Tax
      effect
                          
                          
                          (173,817
                          )
                          
                          
                          29,949
                          
                          
                          
                          594,726Net-of-tax
      amount
                          
                          $
                          337,410
                          
                          
                          $
                          (58,136
                          )
                          
                          $
                          (1,183,736
                          )
  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.
  48
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  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, 2008 and 2007, that the Bank meets all
capital adequacy requirements to which it is subject.
  As of
December 31, 2008, 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
      ProvisionsAmount
                                      
                                      
                                      Ratio
                                      
                                      
                                      Amount
                                      
                                      
                                      Ratio
                                      
                                      
                                      Amount
                                      
                                      
                                      RatioAs
      of December 31, 2008Total
      risk-based capital
                                        (to
      risk-weighted assets)
                                      
                                      $
                                      22,816
                                      
                                      
                                      
                                      10.94
                                      %
                                      
                                      $
                                      16,677
                                      
                                      
                                      
                                      8.0
                                      %
                                      
                                      $
                                      20,846
                                      
                                      
                                      
                                      10.0
                                      %Tier
      I capital
                                        (to
      risk-weighted assets)
                                      
                                      
                                      20,882
                                      
                                      
                                      
                                      10.02
                                      
                                      
                                      
                                      8,338
                                      
                                      
                                      
                                      4.0
                                      
                                      
                                      
                                      12,508
                                      
                                      
                                      
                                      6.0Tier
      I capital
                                        (to
      average assets)
                                      
                                      
                                      20,882
                                      
                                      
                                      
                                      7.30
                                      
                                      
                                      
                                      11,436
                                      
                                      
                                      
                                      4.0
                                      
                                      
                                      
                                      14,295
                                      
                                      
                                      
                                      5.0Tangible
      capital
                                        (to
      adjusted tangible assets)
                                      
                                      
                                      20,882
                                      
                                      
                                      
                                      7.30
                                      
                                      
                                      
                                      4,289
                                      
                                      
                                      
                                      1.5
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      N/AAs
      of December 31, 2007Total
      risk-based capital
                                        (to
      risk-weighted assets)
                                      
                                      $
                                      21,438
                                      
                                      
                                      
                                      11.32
                                      %
                                      
                                      $
                                      15,155
                                      
                                      
                                      
                                      8.0
                                      %
                                      
                                      $
                                      18,943
                                      
                                      
                                      
                                      10.0
                                      %Tier
      I capital
                                        (to
      risk-weighted assets)
                                      
                                      
                                      19,672
                                      
                                      
                                      
                                      10.38
                                      
                                      
                                      
                                      7,577
                                      
                                      
                                      
                                      4.0
                                      
                                      
                                      
                                      11,366
                                      
                                      
                                      
                                      6.0Tier
      I capital
                                        (to
      average assets)
                                      
                                      
                                      19,672
                                      
                                      
                                      
                                      7.02
                                      
                                      
                                      
                                      11,205
                                      
                                      
                                      
                                      4.0
                                      
                                      
                                      
                                      14,006
                                      
                                      
                                      
                                      5.0Tangible
      capital
                                        (to
      adjusted tangible assets)
                                      
                                      
                                      19,672
                                      
                                      
                                      
                                      7.02
                                      
                                      
                                      
                                      4,202
                                      
                                      
                                      
                                      1.5
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      N/A
  The Bank
is subject to certain restrictions on the amount of dividends that it may
declare without prior regulatory approval.
  49
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  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
                  
                  
                  311,622Year
      ended December 31, 2007
                  
                  
                  311,621Year
      ended December 31, 2008
                  
                  
                  311,622$
                  2,570,877
  Note
      14:
                Related
      Party Transactions
 At
December 31, 2008 and 2007, 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, 2008 are summarized as follows:
  Balance
      beginning of year
                  
                  $
                  944,569Additions
                  
                  
                  2,402,371Repayments
                  
                  
                  (2,311,845
                  )Change
      in related parties
                  
                  
                  (55,319
                  )Balance,
      end of year
                  
                  $
                  979,776
  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.
  50
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  Note
      15:
                Employee
      Benefits
  401(k) Plan —The Company
maintains a 401(k) savings plan for eligible employees.  The Company’s
contributions to this plan were $140,087, $110,749, and $105,904 for the years
ended December 31, 2008, 2007 and 2006, respectively.  The plan
invests its assets in deposit accounts at the Company which earned interest at a
rate of 4.00% to 4.5% for the year ended December 31, 2008 and 5.00% for the
year ended December 31, 2007 and 2006.
  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.  Effective in 2005, the Company froze
this plan and no contributions to this plan were made for the years ended
December 31, 2008, 2007 or 2006. The plan accrues interest at a variable rate
which fluctuates based on Moody’s Corporate Bond Average Index.  The
amount recorded on the balance sheets as deferred compensation was $2,091,900
and $2,026,990 as of December 31, 2008 and 2007,
respectively.  Compensation expense related to the plan was $167,079,
$158,025 and $133,383 for the years ended December 31, 2008, 2007 and 2006,
respectively.
  The
Company has also entered into deferred compensation agreements with certain key
officers and employees.  The agreements provide for monthly payments
at retirement or death.  The charge to expense for this plan reflects
the accrual using the principal and interest method over the vesting period of
the present value of benefits due each participant on the full eligibility date
using a 6 to 8% discount rate.  The amount recorded on the balance
sheets as deferred compensation was $484,390 and $319,432 as of December 31,
2008 and 2007, respectively.  Compensation expense related to the
plans was $164,956, $24,481, and $22,605 for the years ended December 31,
2008, 2007 and 2006, 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 2008, 2007 or
2006.
  At
December 31, 2008 and 2007, all 38,128 shares held by the ESOP had been
allocated.
  In the
event a terminated Plan participant desires to sell his or her shares of the
Company’s stock, the Company’s stock includes a put option, which is a right to
demand that the Company buy any shares of its stock distributed to participants
at fair market value.
  51
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  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.  In 2004, 5000
shares related to this plan were reissued.  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.  No shares were granted
during 2008, 2007 or 2006.
  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.
  A summary
of option activity under the Plan as of December 31, 2008, 2007 and 2006, and
changes during the years then ended, is presented below:
  2008Shares
                              
                              
                              Weighted-Average
                                Exercise
      Price
                              
                              
                              Weighted-Average
      Remaining Contractual Term
                              
                              
                              Aggregate
      Intrinsic ValueOutstanding,
      beginning of year
                              
                              
                              35,545
                              
                              
                              $
                              10.63Granted
                              
                              
                              —
                              
                              
                              
                              —Exercised
                              
                              
                              (1,100
                              )
                              
                              
                              10.00Forfeited
      or expired
                              
                              
                              —
                              
                              
                              
                              —Outstanding,
      end of year
                              
                              
                              34,445
                              
                              
                              $
                              10.65
                              
                              
                              
                              3.15
                              
                              
                              $
                              0Exercisable,
      end of year
                              
                              
                              34,205
                              
                              
                              $
                              10.63
                              
                              
                              
                              3.30
                              
                              
                              $
                              0
  52
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
 The
aggregate intrinsic value of options outstanding and exercisable at the end of
the year 2008 excludes 28,845 and 5,600 shares that are exercisable at prices of
$10.00 and $14.00 per share and were antidilutive.
  2007Shares
                              
                              
                              Weighted-
                                Average
                                Exercise
      Price
                              
                              
                              Weighted-
                                Average
                                Remaining
                                Contractual
                                Term
                              
                              
                              Aggregate
                                Intrinsic
      ValueOutstanding,
      beginning of year
                              
                              
                              38,145
                              
                              
                              $
                              10.59Granted
                              
                              
                              —
                              
                              
                              
                              —Exercised
                              
                              
                              2,600
                              
                              
                              
                              10.00Forfeited
      or expired
                              
                              
                              —
                              
                              
                              
                              —Outstanding,
      end of year
                              
                              
                              35,545
                              
                              
                              $
                              10.63
                              
                              
                              
                              4.17
                              
                              
                              $
                              48,511Exercisable,
      end of year
                              
                              
                              34,845
                              
                              
                              $
                              10.56
                              
                              
                              
                              4.17
                              
                              
                              $
                              50,607
  53
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  The
aggregate intrinsic value of options outstanding and exercisable at the end of
the year 2007 excludes 5,600 shares that are exercisable at a price of $14.00
per share and were antidilutive.
  2006Shares
                              
                              
                              Weighted-
                                Average
                                Exercise
      Price
                              
                              
                              Weighted-
                                Average
                                Remaining
                                Contractual
                                Term
                              
                              
                              Aggregate
                                Intrinsic
      ValueOutstanding,
      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
                              
                              
                              $
                              76,481Exercisable,
      end of year
                              
                              
                              36,985
                              
                              
                              $
                              10.48
                              
                              
                              
                              5.36
                              
                              
                              $
                              80,061
 
  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.
  The total
intrinsic value of options exercised during the years ended December 31, 2008,
2007 and 2006, was $0, $6,786, and $70,145, respectively.
  As of
December 31, 2008, there was $483 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 0.5 years.  The total fair value of shares vested during the
years ended December 31, 2008, 2007 and 2006, was $1,863, $1,863, and $3,517,
respectively.
  54
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  Note
      17:
                Earnings
      Per Share
 Earnings
per share (EPS) were computed as follows:
  Year
      Ended December 31, 2008Income
                          
                          
                          Weighted-
                            Average
                            Shares
                          
                          
                          Per
      Share
                            AmountNet
      income
                          
                          $
                          1,517,922Basic
      earnings per share
                          
                          
                          
                          
                          
                          
                          1,987,712Income
      available to common stockholders
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          .76Effect
      of dilutive securitiesStock
      options
                          
                          
                          —
                          
                          
                          
                          —Diluted
      earnings per shareIncome
      available to common stockholders
                          
                          $
                          1,517,922
                          
                          
                          
                          1,987,712
                          
                          
                          $
                          .76
  The
earnings per share calculation for 2008 does not include 34,445 shares that were
antidilutive.
  Year
      Ended December 31, 2007Income
                            
                            
                            Weighted-
                              Average
                              Shares
                            
                            
                            Per
      Share
                              AmountNet
      income
                            
                            $
                            619,069Basic
      earnings per share
                            
                            
                            
                            
                            
                            
                            1,986,556Income
      available to common stockholders
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            0.31Effect
      of dilutive securitiesStock
      options
                            
                            
                            —
                            
                            
                            
                            5,788Diluted
      earnings per shareIncome
      available to common stockholders
                            
                            $
                            619,069
                            
                            
                            
                            1,992,344
                            
                            
                            $
                            0.31
  55
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  The
earnings per share calculation for 2007 does not include 5,600 shares that were
antidilutive.
  Year
      Ended December 31, 2006Income
                          
                          
                          Weighted-
                            Average
                            Shares
                          
                          
                          Per
      Share
                            AmountNet
      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
  Note
      18:
                Disclosures
      about Fair Value of Assets and
Liabilities
 Effective
January 1, 2008, the Bank adopted Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements (FAS 157).  FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.  FAS 157 has been applied prospectively
as of the beginning of the year.
  FAS 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at
the measurement date.  FAS 157 also establishes a fair value
hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair
value.  The standard describes three levels of inputs that may be used
to measure fair value:
  Level
      1
                    Quoted
      prices in active markets for identical assets or
    liabilitiesLevel
      2
                    Observable
      inputs other than Level 1 prices, such as quoted prices for similar assets
      or liabilities; quoted prices in markets that are not active; or other
      inputs that are observable or can be corroborated by observable market
      data for substantially the full term of the assets or
      liabilitiesLevel
      3
                    Unobservable
      inputs that are supported by little or no market activity and that are
      significant to the fair value of the assets or
  liabilities
  56
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  Following
is a description of the valuation methodologies used for assets and liabilities
measured at fair value on a recurring basis and recognized in the accompanying
balance sheets, as well as the general classification of such assets and
liabilities pursuant to the valuation hierarchy.
  Available-for-sale
Securities
  Where
quoted market prices are available in an active market, securities are
classified within Level 1 of the valuation hierarchy.  The
Company has no Level 1 securities.  If quoted market prices are not
available, then fair values are estimated by using pricing models, quoted prices
of securities with similar characteristics or discounted cash
flows.  Level 2 securities include U.S. government agencies,
mortgage-backed securities and municipal securities.  In certain cases
where Level 1 or Level 2 inputs are not available, securities are
classified within Level 3 of the hierarchy.  The Company did not
have securities considered Level 3 as of December 31, 2008.
  The
following table presents the fair value measurements of assets and liabilities
recognized in the accompanying balance sheets measured at fair value on a
recurring basis and the level within the FAS 157 fair value hierarchy in which
the fair value measurements fall at December 31, 2008:
  Fair
      Value Measurements UsingFair
      Value
                              
                              
                              Quoted
      Price
                                in
      Active
                                Markets
      for
                                Identical
                                Assets
                                (Level
      1)
                              
                              
                              Significant
                                Other
                                Observable
                                Inputs
                                (Level
      2)
                              
                              
                              Significant
                                Unobservable
                                Inputs
                                (Level
      3)Available-for-sale
      securities
                              
                              $
                              77,434,052
                              
                              
                              $
                              —
                              
                              
                              $
                              77,434,052
                              
                              
                              $
                              —
  Following
is a description of the valuation methodologies used for assets and liabilities
measured at fair value on a nonrecurring basis and recognized in the
accompanying balance sheets, as well as the general classification of such
assets and liabilities pursuant to the valuation hierarchy.
  Impaired
Loans
  Loans for
which it is probable that the Company will not collect all principal and
interest due according to contractual terms are measured for impairment in
accordance with the provisions of Financial Accounting Standard No. 114 (FAS
114), Accounting by Creditors
for Impairment of a Loan.  Allowable methods for estimating
fair value include using the fair value of the collateral for collateral
dependent loans or, where a loan is determined not to be collateral dependent,
using the discounted cash flow method.
  57
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  If the
impaired loan is identified as collateral dependent, then the fair value method
of measuring the amount of impairment is utilized.  This method
requires obtaining a current independent appraisal of the collateral and
applying a discount factor to the value.
  If the
impaired loan is determined not to be collateral dependent, then the discounted
cash flow method is used.  This method requires the impaired loan to
be recorded at the present value of expected future cash flows discounted at the
loan’s effective interest rate.  The effective interest rate of a loan
is the contractual interest rate adjusted for any net deferred loan fees or
costs, premiums or discount existing at origination or acquisition of the
loan.
  Impaired
loans are classified within Level 3 of the fair value hierarchy.
  Mortgage
Servicing Rights
  The fair
value used to determine the valuation allowance is estimated using discounted
cash flow models.  Due to the nature of the valuation inputs, mortgage
servicing rights are classified within Level 3 of the hierarchy.
  The
following table presents the fair value measurement of assets and liabilities
measured at fair value on a nonrecurring basis and the level within the FAS 157
fair value hierarchy in which the fair value measurements fall at December 31,
2008:
  Fair
      Value Measurements UsingFair
      Value
                              
                              
                              Quoted
      Prices
                                in
      Active
                                Markets
      for
                                Identical
                                Assets
                                (Level
      1)
                              
                              
                              Significant
                                Other
                                Observable
                                Inputs
                                (Level
      2)
                              
                              
                              Significant
                                Unobservable
                                Inputs
                                (Level
      3)Impaired
      loans
                              
                              $
                              972,797
                              
                              
                              $
                              —
                              
                              
                              $
                              —
                              
                              
                              $
                              972,797Mortgage
      servicing rights
                              
                              
                              545,494
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              545,494
  The
following methods were used to estimate the fair value of all other financial
instruments recognized in the accompanying balance sheets at amounts other than
fair value.
  Cash
and Cash Equivalents and Federal Home Loan Bank Stock
  The
carrying amount approximates fair value.
  58
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  Securities
  Fair
values equal quoted market prices, if available.  If quoted market
prices are not available, fair value is estimated base don 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.
  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.
  59
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  The
following table presents estimated fair values of the Company’s financial
instruments in accordance with FAS 107 not previously disclosed at December 31,
2008 and 2007.
  December
      31, 2008
                              
                              
                              December
      31, 2007Carrying
                                Amount
                              
                              
                              Fair
      Value
                              
                              
                              Carrying
                                Amount
                              
                              
                              Fair
      ValueFinancial
      assetsCash
      and cash equivalents
                              
                              $
                              7,145,288
                              
                              
                              $
                              7,145,288
                              
                              
                              $
                              12,175,464
                              
                              
                              $
                              12,175,464Available-for-sale
      securities
                              
                              
                              77,434,052
                              
                              
                              
                              77,434,052
                              
                              
                              
                              80,310,151
                              
                              
                              
                              80,310,151Other
      investments
                              
                              
                              240,321
                              
                              
                              
                              240,321
                              
                              
                              
                              291,004
                              
                              
                              
                              291,004Loans
      held for sale
                              
                              
                              1,388,284
                              
                              
                              
                              1,388,284
                              
                              
                              
                              1,861,415
                              
                              
                              
                              1,861,415Loans,
      net of allowance for loan losses
                              
                              
                              182,948,292
                              
                              
                              
                              181,308,061
                              
                              
                              
                              175,866,517
                              
                              
                              
                              175,424,820Federal
      Home Loan Bank stock
                              
                              
                              1,108,606
                              
                              
                              
                              1,108,606
                              
                              
                              
                              1,108,606
                              
                              
                              
                              1,108,606Interest
      receivable
                              
                              
                              2,344,502
                              
                              
                              
                              2,344,502
                              
                              
                              
                              2,105,094
                              
                              
                              
                              2,105,094Financial
      liabilitiesDeposits
                              
                              
                              238,151,228
                              
                              
                              
                              240,721,801
                              
                              
                              
                              245,720,751
                              
                              
                              
                              247,151,775Short-term
      borrowings
                              
                              
                              7,633,079
                              
                              
                              
                              7,633,079
                              
                              
                              
                              4,936,034
                              
                              
                              
                              4,936,034Federal
      Home Loan Bank advances
                              
                              
                              13,500,000
                              
                              
                              
                              13,593,469
                              
                              
                              
                              10,000,000
                              
                              
                              
                              10,020,842Advances
      from borrowers for taxes and insurance
                              
                              
                              445,077
                              
                              
                              
                              445,077
                              
                              
                              
                              421,489
                              
                              
                              
                              421,489Interest
      payable
                              
                              
                              925,661
                              
                              
                              
                              925,661
                              
                              
                              
                              1,248,346
                              
                              
                              
                              1,248,346Unrecognized
      financial instruments (net of contract amount)Commitments
      to originate loans
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Letters
      of credit
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —Lines
      of credit
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
  60
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  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.  Estimates related to the
goodwill and Federal Home Loan Bank stock impairments and foreclosed assets held
for sale are described in Note 1.  Other significant estimates and
concentrations not discussed in those footnotes include:
  Current
Economic Conditions
  The
current economic environment presents financial institutions with unprecedented
circumstances and challenges which in some cases have resulted in large declines
in the fair values of investments and other assets, constraints on liquidity and
significant credit quality problems, including severe volatility in the
valuation of real estate and other collateral supporting loans.  The
financial statements have been prepared using values and information currently
available to the Company.
  Given the
volatility of current economic conditions, the values of assets and liabilities
recorded in the financial statements could change rapidly, resulting in material
future adjustments in asset values, the allowance for loan losses, capital that
could negatively impact the Company’s ability to meet regulatory capital
requirements and maintain sufficient liquidity.
  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.
  61
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  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.
  At
December 31, 2008 and 2007, the Company had outstanding commitments to originate
loans aggregating approximately $15,869,326 and $12,680,090,
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 $14,869,326 and $9,605,090 at
December 31, 2008 and 2007, 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 $773,700
and $37,000 at December 31, 2008 and 2007, respectively, with terms of one year
or less.  At December 31, 2008 and 2007, the Company’s deferred
revenue under standby letters of credit agreements was nominal.
  62
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  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, 2008, the Company had granted unused lines of credit to borrowers
aggregating approximately $23,531,125 and $11,322,483 for commercial lines and
open-end consumer lines, respectively.  At December 31, 2007, unused
lines of credit to borrowers aggregated approximately $23,149,437 for commercial
lines and $5,757,627 for open-end consumer lines.
  Note
      21:
                Quarterly
      Results of Operations
(Unaudited)
  Year
      Ended December 31, 2008Three
      Months EndedDecember
      31
                              
                              
                              September
      30
                              
                              
                              June
      30
                              
                              
                              March
      31Interest
      income
                              
                              $
                              3,946,895
                              
                              
                              $
                              3,972,057
                              
                              
                              $
                              3,933,463
                              
                              
                              $
                              4,055,921Interest
      expense
                              
                              
                              1,615,858
                              
                              
                              
                              1,856,923
                              
                              
                              
                              2,023,898
                              
                              
                              
                              2,219,738Net
      interest income
                              
                              
                              2,331,037
                              
                              
                              
                              2,115,134
                              
                              
                              
                              1,909,565
                              
                              
                              
                              1,836,183Provision
      for loan losses
                              
                              
                              145,000
                              
                              
                              
                              105,000
                              
                              
                              
                              30,000
                              
                              
                              
                              30,000Net
      interest income after provision for loan losses
                              
                              
                              2,186,037
                              
                              
                              
                              2,010,134
                              
                              
                              
                              1,879,565
                              
                              
                              
                              1,806,183Other
      income
                              
                              
                              662,604
                              
                              
                              
                              797,098
                              
                              
                              
                              752,178
                              
                              
                              
                              747,409Other
      expense
                              
                              
                              2,657,479
                              
                              
                              
                              2,158,834
                              
                              
                              
                              2,113,006
                              
                              
                              
                              2,089,784Income
      before income taxes
                              
                              
                              191,162
                              
                              
                              
                              648,398
                              
                              
                              
                              518,737
                              
                              
                              
                              463,808Income
      tax expense (benefit)
                              
                              
                              (40,813
                              )
                              
                              
                              149,601
                              
                              
                              
                              94,956
                              
                              
                              
                              100,439Net
      income
                              
                              $
                              231,975
                              
                              
                              $
                              498,797
                              
                              
                              $
                              423,781
                              
                              
                              $
                              363,369Basic
      earnings per share
                              
                              $
                              0.12
                              
                              
                              $
                              0.25
                              
                              
                              $
                              0.21
                              
                              
                              $
                              0.18Diluted
      earnings per share
                              
                              $
                              0.12
                              
                              
                              $
                              0.25
                              
                              
                              $
                              0.21
                              
                              
                              $
                              0.18
 
 63
 Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  Year
      Ended December 31, 2007Three
      Months EndedDecember
      31
                              
                              
                              September
      30
                              
                              
                              June
      30
                              
                              
                              March
      31Interest
      income
                              
                              $
                              4,046,172
                              
                              
                              $
                              4,018,989
                              
                              
                              $
                              3,854,638
                              
                              
                              $
                              3,689,908Interest
      expense
                              
                              
                              2,315,675
                              
                              
                              
                              2,380,648
                              
                              
                              
                              2,230,790
                              
                              
                              
                              2,129,292Net
      interest income
                              
                              
                              1,730,497
                              
                              
                              
                              1,638,341
                              
                              
                              
                              1,623,848
                              
                              
                              
                              1,560,616Provision
      for loan losses
                              
                              
                              105,000
                              
                              
                              
                              20,000
                              
                              
                              
                              —
                              
                              
                              
                              30,000Net
      interest income after provision for loan losses
                              
                              
                              1,625,497
                              
                              
                              
                              1,618,341
                              
                              
                              
                              1,623,848
                              
                              
                              
                              1,530,616Other
      income
                              
                              
                              601,797
                              
                              
                              
                              567,868
                              
                              
                              
                              625,453
                              
                              
                              
                              537,214Other
      expense
                              
                              
                              2,076,067
                              
                              
                              
                              2,030,431
                              
                              
                              
                              2,013,755
                              
                              
                              
                              1,981,229Income
      before income taxes
                              
                              
                              151,227
                              
                              
                              
                              155,778
                              
                              
                              
                              235,546
                              
                              
                              
                              86,601Income
      tax expense (benefit)
                              
                              
                              (23,826
                              )
                              
                              
                              18,042
                              
                              
                              
                              33,223
                              
                              
                              
                              (17,356
                              )Net
      income
                              
                              $
                              175,053
                              
                              
                              $
                              137,736
                              
                              
                              $
                              202,323
                              
                              
                              $
                              103,957Basic
      earnings per share
                              
                              $
                              0.09
                              
                              
                              $
                              0.07
                              
                              
                              $
                              0.10
                              
                              
                              $
                              0.05Diluted
      earnings per share
                              
                              $
                              0.09
                              
                              
                              $
                              0.07
                              
                              
                              $
                              0.10
                              
                              
                              $
                              0.05
 
 64
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  Note
      22:
                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:
  Condensed Balance Sheets
  December
      31,2008
                      
                      
                      2007AssetsCash
      and due from banks
                      
                      $
                      203,417
                      
                      
                      $
                      189,694Investment
      in common stock of subsidiary
                      
                      
                      24,000,219
                      
                      
                      
                      22,379,835Other
      assets
                      
                      
                      149,388
                      
                      
                      
                      139,201Total
      assets
                      
                      $
                      24,353,024
                      
                      
                      $
                      22,708,730LiabilitiesOther
      liabilities
                      
                      $
                      93,584
                      
                      
                      $
                      90,839Total
      liabilities
                      
                      
                      93,584
                      
                      
                      
                      90,839Stockholders'
      Equity
                      
                      
                      24,259,440
                      
                      
                      
                      22,617,891Total
      liabilities and stockholders' equity
                      
                      $
                      24,353,024
                      
                      
                      $
                      22,708,730
 
 65
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  Condensed
Statements of Income
  Year
      Ending December 31,2008
                          
                          
                          2007
                          
                          
                          2006IncomeDividends
      from subsidiary
                          
                          $
                          384,749
                          
                          
                          $
                          284,398
                          
                          
                          $
                          283,199Other
      income
                          
                          
                          854
                          
                          
                          
                          1,190
                          
                          
                          
                          1,557Total
      income
                          
                          
                          385,603
                          
                          
                          
                          285,588
                          
                          
                          
                          284,756ExpensesOther
      expenses
                          
                          
                          151,222
                          
                          
                          
                          148,306
                          
                          
                          
                          179,214Total
      expenses
                          
                          
                          151,222
                          
                          
                          
                          148,306
                          
                          
                          
                          179,214Income
      Before Income Tax and Equity in Undistributed Income of
      Subsidiary
                          
                          
                          234,381
                          
                          
                          
                          137,282
                          
                          
                          
                          105,542Income
      Tax Benefit
                          
                          
                          (58,702
                          )
                          
                          
                          (57,265
                          )
                          
                          
                          (69,570
                          )Income
      Before Equity in Undistributed Income of Subsidiary
                          
                          
                          293,083
                          
                          
                          
                          194,547
                          
                          
                          
                          175,112Equity
      in Undistributed Income of Subsidiary
                          
                          
                          1,224,839
                          
                          
                          
                          424,522
                          
                          
                          
                          720,007Net
      Income
                          
                          $
                          1,517,922
                          
                          
                          $
                          619,069
                          
                          
                          $
                          895,119
 
 66
  Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2008 and 2007
  Condensed Statements of Cash Flows
  Year
      Ending December 31,2008
                          
                          
                          2007
                          
                          
                          2006Operating
      ActivitiesNet
      income
                          
                          $
                          1,517,922
                          
                          
                          $
                          619,069
                          
                          
                          $
                          895,119Items
      not providing cash, net
                          
                          
                          (1,223,081
                          )
                          
                          
                          (422,497
                          )
                          
                          
                          (715,297
                          )Change
      in other assets and liabilities, net
                          
                          
                          (7,439
                          )
                          
                          
                          16,771
                          
                          
                          
                          (69,199
                          )Net
      cash provided by operating activities
                          
                          
                          287,402
                          
                          
                          
                          213,343
                          
                          
                          
                          110,623Financing
      ActivitiesDividends
      paid
                          
                          
                          (284,679
                          )
                          
                          
                          (284,425
                          )
                          
                          
                          (212,704
                          )Purchase
      and retirement of common stock
                          
                          
                          —
                          
                          
                          
                          (14,994
                          )
                          
                          
                          (17,919
                          )Exercise
      of stock options
                          
                          
                          11,000
                          
                          
                          
                          26,000
                          
                          
                          
                          147,190Net
      cash used in financing activities
                          
                          
                          (273,679
                          )
                          
                          
                          (273,419
                          )
                          
                          
                          (83,433
                          )Net
      Change in Cash and Cash Equivalents
                          
                          
                          13,723
                          
                          
                          
                          (60,076
                          )
                          
                          
                          27,190Cash
      and Cash Equivalents at Beginning of Year
                          
                          
                          189,694
                          
                          
                          
                          249,770
                          
                          
                          
                          222,580Cash
      and Cash Equivalents at End of Year
                          
                          $
                          203,417
                          
                          
                          $
                          189,694
                          
                          
                          $
                          249,770
 
 67
  Common
Stock Information
  Our
common stock is traded on the Nasdaq Capital Market under the symbol
“JXSB”.  As of December 31, 2008, we had approximately 549
stockholders of record, including our mutual holding company parent and brokers,
who held 1,987,904 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, 2008.
  Fiscal
      2007
                                                                
                                                                High
                                                                
                                                                
                                                                Low
                                                                
                                                                
                                                                DividendsFirst
      Quarter
                                                                
                                                                $13.70
                                                                
                                                                
                                                                $12.07
                                                                
                                                                
                                                                $.075/per
      shareSecond
      Quarter
                                                                
                                                                $13.66
                                                                
                                                                
                                                                $11.18
                                                                
                                                                
                                                                $.075/per
      shareThird
      Quarter
                                                                
                                                                $13.50
                                                                
                                                                
                                                                $11.18
                                                                
                                                                
                                                                $.075/per
      shareFourth
      Quarter
                                                                
                                                                $13.38
                                                                
                                                                
                                                                $10.21
                                                                
                                                                
                                                                $.075/per
      shareFiscal
      2008First
      Quarter
                                                                
                                                                $13.25
                                                                
                                                                
                                                                $9.00
                                                                
                                                                
                                                                $.075/per
      shareSecond
      Quarter
                                                                
                                                                $12.60
                                                                
                                                                
                                                                $10.15
                                                                
                                                                
                                                                $.075/per
      shareThird
      Quarter
                                                                
                                                                $10.15
                                                                
                                                                
                                                                $9.03
                                                                
                                                                
                                                                $.075/per
      shareFourth
      Quarter
                                                                
                                                                $10.00
                                                                
                                                                
                                                                $7.80
                                                                
                                                                
                                                                $.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
2008.
  68
  Directors
and Officers
  
 Directors
                                    OfficersAndrew
      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 OfficerJohn
      M. Buchanan
                                      Certified
      Funeral Service Practitioner
                                      Buchanan
      & Cody Funeral Home and Crematory, Inc.
                                    John
      D. Eilering
                                      Vice
      President – Operations / Corporate SecretaryHarmon
      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.
                                    Chris
      A. Royal
                                      Vice
      President and Chief Lending OfficerDean
      H. Hess
                                      Self-employed
      farmer
                                    Diana
      S. Tone
                                      Chief
      Financial Officer and Compliance OfficerEmily
      J. Osburn
                                      Retired
      radio station manager
  69
  Corporate
Information
 
 Corporate
      Headquarters
                Transfer
      Agent1211
      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.comSpecial
      Counsel
                Independent
      Registered Public Accounting FirmLuse
      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
 
 Annual
Meeting
 
 The
Annual Meeting of the Stockholders will be held April 28, 2009 at 1:30 p.m.,
central time, at our main office at 1211 West Morton, Jacksonville,
Illinois.
  General
Inquiries
 
 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
Disclaimer
 
 This
Annual Report has not been reviewed or confirmed for accuracy or relevance by
the FDIC.
   70