Exhibit
13


Report to
Stockholders












Jacksonville
      Bancorp, Inc.
              2007
      Annual Report
















To our
shareholders,





The year
2007 will be remembered for the weakness and volatility of the nation’s housing
market and the start of the subprime mortgage crisis.  The weakness in
the mortgage market and the securities that mortgages were packaged into hurt
the financial condition of some of our country’s largest financial
institutions.  These institutions incurred substantial losses when
they were forced to “write down” the value of their loans and
securities.  Jacksonville Savings Bank, along with most community
banks, managed to avoid the effects of the subprime debacle by never having
participated in it.  Our core business remains loaning money to
credit-worthy borrowers to purchase or refinance residential real estate and to
adhere to conservative underwriting standards.





In 2007,
our local economy was stable, but mixed.  While agriculture and its
related industries were very strong, high gasoline prices and the slowing
national economy had a negative effect on many businesses.  At
Jacksonville Savings, our lending team was able to not only increase our loan
portfolio to a new record high, but they were able to manage delinquencies to
levels below our peer group.





We
achieved solid growth in 2007, with total assets climbing $21.1 million to
$288,488,699 at year end.  Deposits rose by $12.8 million and loans
outstanding increased $21.0 million to end the year at
$175,866,517.  Stockholders’ equity increased by $1.5
million.





During
the year, we welcomed two new officers to your bank.  Mary Fergurson
joined us as Vice President and Trust Officer.  Mary has 20 years of
bank trust officer experience and has already made an impact in growing the
department.





Chris
Royal assumed the role of Vice President and Chief Lending
Officer.  Chris, who has served a combined 29 years with two
Springfield banks, brings valuable lending experience, knowledge and limitless
energy to our loan department.





Our
greatest challenge will be to achieve acceptable results with a shrinking
interest rate spread, which is the difference between what we are paying for
funds (deposits and borrowings) and what we are able to earn (interest on loans
and investments).  Continuing to explore and find new sources of
revenue will be critical.





We are
grateful to our customers for the confidence they have shown in us by choosing
Jacksonville Savings Bank for their financial needs.  Our goal is to
provide our customers with real value in the products and services that we
offer.  We try to achieve this goal through well-trained, professional
staff in each of our markets.  With a strong and experienced
management team and dedicated employees, we are confident that Jacksonville
Savings Bank is well positioned for continued success.





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
            4-18Report
      of Independent Registered Public Accounting Firm
            19Consolidated
      Financial Statements
            20-23Notes
      to Consolidated Financial Statements
            24-54Common
      Stock Information
            55Directors
      and Officers
            56Corporate
      Information
            57Annual
      Meeting
            57









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, 2007,
the MHC owned 52.28% of the outstanding shares of the Company.  At
December 31, 2007, the Company had consolidated assets of $288.5 million,
deposits of $245.7 million and stockholders’ equity of $22.6
million.




The Bank
is a community-oriented savings bank engaged primarily in the business of
attracting retail deposits from the general public in the Bank’s market area and
using such funds together with borrowings and funds from other sources to
originate consumer loans and mortgage loans secured by one- to four-family
residential real estate.  The Bank also originates commercial real
estate loans, multi-family real estate loans, commercial business loans, and
agricultural loans.  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 22
to the Consolidated Financial Statements.




At
      December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003FINANCIAL
      CONDITION DATA
              
              (In
      thousands)Total
      assets
              
              $
              288,489
              
              
              $
              267,372
              
              
              $
              253,946
              
              
              $
              253,330
              
              
              $
              261,816Loans  (1)
              
              
              177,728
              
              
              
              155,264
              
              
              
              142,771
              
              
              
              126,058
              
              
              
              127,585Investment
      securities (2)
              
              
              66,295
              
              
              
              79,978
              
              
              
              80,821
              
              
              
              86,674
              
              
              
              100,914Mortgage-backed
      securities
              
              
              15,415
              
              
              
              8,210
              
              
              
              8,646
              
              
              
              15,171
              
              
              
              7,597Cash
      and cash equivalents
              
              
              12,175
              
              
              
              9,331
              
              
              
              6,681
              
              
              
              10,793
              
              
              
              9,576Deposits
              
              
              245,721
              
              
              
              232,913
              
              
              
              218,370
              
              
              
              225,734
              
              
              
              235,173Other
      borrowings
              
              
              14,936
              
              
              
              9,035
              
              
              
              11,350
              
              
              
              3,447
              
              
              
              2,889Stockholders’
      equity
              
              
              22,618
              
              
              
              21,145
              
              
              
              20,103
              
              
              
              20,683
              
              
              
              20,032Years
      Ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003OPERATING
      DATA
              
              (In
      thousands, except per share data)Interest
      income
              
              $
              15,609
              
              
              $
              13,978
              
              
              $
              12,423
              
              
              $
              12,278
              
              
              $
              12,946Interest
      expense
              
              
              9,056
              
              
              
              7,031
              
              
              
              4,986
              
              
              
              4,588
              
              
              
              5,765Net
      interest income
              
              
              6,553
              
              
              
              6,947
              
              
              
              7,437
              
              
              
              7,690
              
              
              
              7,181Provision
      for loan losses
              
              
              155
              
              
              
              60
              
              
              
              245
              
              
              
              550
              
              
              
              2,075Net
      interest income after provisionfor
      loan losses
              
              
              6,398
              
              
              
              6,887
              
              
              
              7,192
              
              
              
              7,140
              
              
              
              5,106Other
      income
              
              
              2,332
              
              
              
              2,235
              
              
              
              2,174
              
              
              
              2,038
              
              
              
              3,532Other
      expense
              
              
              8,101
              
              
              
              7,893
              
              
              
              8,054
              
              
              
              7,781
              
              
              
              7,296Income
      before income taxes
              
              
              629
              
              
              
              1,229
              
              
              
              1,312
              
              
              
              1,397
              
              
              
              1,342Income
      tax expense
              
              
              10
              
              
              
              334
              
              
              
              412
              
              
              
              521
              
              
              
              501Net
      income
              
              $
              619
              
              
              $
              895
              
              
              $
              900
              
              
              $
              876
              
              
              $
              841Earnings
      per share - basic
              
              $
              0.31
              
              
              $
              0.45
              
              
              $
              0.46
              
              
              $
              0.45
              
              
              $
              0.43Earnings
      per share - diluted
              
              $
              0.31
              
              
              $
              0.45
              
              
              $
              0.45
              
              
              $
              0.44
              
              
              $
              0.43____________(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
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Return
      on average assets (net incomedivided
      by average assets)
              
              
              0.22
              %
              
              
              0.35
              %
              
              
              0.36
              %
              
              
              0.33
              %
              
              
              0.33
              %Return
      on average equity (net incomedivided
      by average equity)
              
              
              2.86
              %
              
              
              4.37
              %
              
              
              4.44
              %
              
              
              4.31
              %
              
              
              4.18
              %Average
      equity to average assets
              
              
              7.79
              %
              
              
              7.90
              %
              
              
              8.03
              %
              
              
              7.77
              %
              
              
              7.82
              %Interest
      rate spread (difference betweenaverage
      yield on interest-earning assetsand
      average cost of interest-bearingliabilities)
              
              
              2.15
              %
              
              
              2.48
              %
              
              
              2.99
              %
              
              
              3.04
              %
              
              
              2.82
              %Net
      interest margin (net interest incomeas
      a percentage of average interest-earning
      assets)
              
              
              2.53
              %
              
              
              2.85
              %
              
              
              3.18
              %
              
              
              3.18
              %
              
              
              3.00
              %Dividend
      pay-out ratio  (1)
              
              
              45.94
              %
              
              
              31.69
              %
              
              
              30.98
              %
              
              
              31.39
              %
              
              
              31.99
              %Noninterest
      expense to average assets
              
              
              2.92
              %
              
              
              3.05
              %
              
              
              3.19
              %
              
              
              2.97
              %
              
              
              2.84
              %Average
      interest-earning assets toaverage
      interest-bearing liabilities
              
              
              110.69
              %
              
              
              112.81
              %
              
              
              109.07
              %
              
              
              107.35
              %
              
              
              107.58
              %Allowance
      for loan losses to gross loansat
      end of period (2)
              
              
              0.98
              %
              
              
              1.19
              %
              
              
              1.28
              %
              
              
              1.48
              %
              
              
              1.69
              %Allowance
      for loan losses tononperforming
      loans
              
              
              161.90
              %
              
              
              137.90
              %
              
              
              156.75
              %
              
              
              95.02
              %
              
              
              66.02
              %Net
      loan charge-offs to averageloans
      during the period
              
              
              0.15
              %
              
              
              0.03
              %
              
              
              0.21
              %
              
              
              0.66
              %
              
              
              1.41
              %Nonperforming
      assets to total assets
              
              
              0.51
              %
              
              
              0.56
              %
              
              
              0.65
              %
              
              
              1.01
              %
              
              
              1.46
              %December
      31,OTHER
      DATA
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Number
      of offices
              
              7
              
              
              7
              
              
              7
              
              
              7
              
              
              7(1)
      Reflects dividends waived by the mutual holding company.(2)
      Gross loans includes loans held for sale




3




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 consumer loans and mortgage loans
secured by one- to four-family residences.  We have also increased our
emphasis on commercial and agricultural lending services.  Our net
income, like other financial institutions, is primarily dependent on net
interest income, which is the difference between the income earned on 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.




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.




4




Critical
Accounting Policies




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, including
the allowance for loan losses, addresses our most critical accounting policies,
which are those that are most important to the portrayal of our financial
condition and results and require management’s most difficult, subjective and
complex judgements, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain.




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




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.






Financial
Condition




Total
assets increased $21.1 million to $288.5 million at December 31, 2007, compared
to $267.4 million at December 31, 2006.  Net loans increased $21.0
million, or 13.6%, during 2007.  Loan growth has predominantly been
provided by residential and commercial real estate loan
originations.  During 2007, we retained a portion of fixed-rate real
estate loans rather than selling them to the secondary market, which contributed
to a $9.8 million, or 24.2%, growth in residential real estate
loans.  Commercial and agricultural real estate loans increased $4.5
million, or 11.4%, and commercial loans increased $3.7 million, or 11.3%, during
2007.  Available for sale investment securities decreased $13.6
million, or 17.3%, and mortgage backed securities increased $7.2 million, or
87.8%, during 2007.  The decrease in investment securities reflects
sales and maturities, which were used to fund loan growth and the increase in
higher-yielding mortgage-backed securities.  Other changes include a
$2.8 million increase in cash and cash equivalents and a $2.8 million increase
in bank-owned life insurance during 2007.




5


Asset
growth was funded by a $12.8 million, or 5.5%, increase in deposits and a $5.9
million, or 65.3%, increase in borrowed funds during 2007.  The
deposit growth reflects an increase of $8.6 million in transaction accounts,
primarily due to the introduction of a new money market savings account during
2006, and $4.2 million in time deposits.  The increase in borrowed
funds reflects $6.0 million in additional advances from the Federal Home Loan
Bank during 2007.





Stockholders’
equity increased $1.5 million to $22.6 million at December 31,
2007.  The increase resulted primarily from net income of $619,000,
partially offset by the payment of $284,000 in dividends, and a $1.1 million
decrease in unrealized losses, net of tax, on available-for-sale
securities.  The change in unrealized gains or losses on securities
classified as available-for-sale is affected by market conditions and,
therefore, can fluctuate daily.  Stockholders’ equity was also
affected by the receipt of $13,000 from the exercise of stock options during
2007.  The $13,000 reflects the $25,000 received from the exercise of
stock options, a $1,000 related tax benefit, and a $2,000 compensation expense
related to options, which was partially offset by the $15,000 cost to acquire
the shares underlying the options in open market purchases.







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 increased 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 $7,000 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.




6




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 $7,000 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.




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 $191,000 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
$191,000 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.  The following table sets forth the composition of our
non-performing assets.





7




12/31/07
              
              
              12/31/06(Dollars
      in Thousands)Non-accruing
      loans:One-to-four
      family residential
              
              $
              310
              
              
              $
              435Commerical
      and agricultural real estate
              
              
              218
              
              
              
              759Commercial
      and agricultural business
              
              
              82
              
              
              
              45Home
      equity/Home improvement
              
              
              89
              
              
              
              100Automobile
              
              
              12
              
              
              
              1Other
      consumer
              
              
              12
              
              
              
              8Total
              
              
              723
              
              
              
              1,348Accruing
      loans delinquent more than 90 days:One-to-four
      family residential
              
              
              203
              
              
              
              -Commercial
      and agricultural real estate
              
              
              156
              
              
              
              -Other
      consumer
              
              
              9
              
              
              
              4Total
              
              
              368
              
              
              
              4Foreclosed
      assets:One-to-four
      family residential
              
              
              115
              
              
              
              37Commercial
      and agricultural real estate
              
              
              249
              
              
              
              115Automobile
              
              
              23
              
              
              
              -Total
              
              
              387
              
              
              
              152Total
      non-performing assets
              
              $
              1,478
              
              
              $
              1,504Total
      non-performing assets as a percentageof
      total assets
              
              
              0.51
              %
              
              
              0.56
              %


The
decrease in commercial and agricultural real estate non-accruing loans reflects
the payoff of a $660,000 non-accruing loan during the second quarter of
2007.  The following table shows the principal amount of potential
problem loans on our watch list at December 31, 2007 and December 31,
2006.  All non-accruing loans are automatically placed on the watch
list.  The increase in watch list loans is primarily due to the
addition of two commercial real estate borrowers with loans totaling $973,000,
which are secured by first mortgages.  Loans totaling $449,000 to one
of these borrowers has been paid off during the first quarter of
2008.





12/31/07
              
              
              12/31/06(In
      thousands)Special
      Mention loans
              
              $
              2,649
              
              
              $
              2,439Substandard
      loans
              
              
              3,338
              
              
              
              2,724Total
      watch list loans
              
              $
              5,987
              
              
              $
              5,163




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.




8




The
allowance is calculated by estimating the exposure on identified problem loan
and portfolio segments and applying loss factors to the remainder of the
portfolio based upon an internal risk grade of such loans or pools of
loans.  Changes in risk grades of both performing and nonperforming
loans affect the amount of the allowance.  Loss factors are based
primarily on historical loss experience over the past five years, and may be
adjusted for other significant conditions that, in management’s judgement,
affect the collectibility of the loan portfolio.





Since the
allowance for loan losses is based upon estimates of probable losses, the amount
actually observed can vary significantly from the estimated
amounts.  The historical loss factors attempt to reduce this variance
by taking into account recent loss experience.  Management evaluates
several other conditions in connection with the allowance, including general
economic and business conditions, credit quality trends, collateral values, loan
volumes and concentrations, seasoning of the portfolio, and regulatory
examination results.  Management believes it uses the best information
available to make such determinations.  If circumstances differ
substantially from the assumptions used in making determinations, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be affected.  While we believe we have established
our existing allowance for loan losses in conformity with accounting principles
generally accepted in the United States, there can be no assurance that
regulators, in reviewing the Bank’s loan portfolio, will not request an increase
in the allowance for loan losses.  Because future events affecting
borrowers and collateral cannot be predicted with certainty, there can be no
assurance that increases to the allowance will not be necessary if loan quality
deteriorates.  Management will continue to monitor the loan portfolio
and assess the adequacy of the allowance at least quarterly.




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.




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.




9




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.




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




General




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




Interest
Income




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





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





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





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





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




10




Interest
Expense




Interest
expense increased to $7.0 million for the year ended December 31, 2006 from $5.0
million for the year ended December 31, 2005.  The $2.0 million
increase in the cost of funds reflects increases of $2.0 million in interest
paid on deposits and $50,000 in interest paid on borrowings.





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





The
$50,000 increase in interest expense on borrowings is due to an increase in the
average cost to 4.53% for 2006 from 3.77% for 2005.  The higher
average cost was partially offset by a decrease of $623,000 in the average
balance of borrowed funds to $9.5 million during 2006.  Advances from
the Federal Home Loan Bank averaged $6.1 million for 2006 compared to $8.0
million for 2005.  The remainder of borrowed funds consists of
securities sold under agreement to repurchase.




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




Non-interest
Income




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




Non-interest
Expense




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




11




Income
Taxes




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





12





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 31,2007
              
              
              2006
              
              
              2005Average
              
              
              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)
              
              $
              165,715
              
              
              $
              11,737
              
              
              
              7.08
              %
              
              $
              149,238
              
              
              $
              10,380
              
              
              
              6.96
              %
              
              $
              137,740
              
              
              $
              8,930
              
              
              
              6.48
              %Investment
      securities (2)
              
              
              79,630
              
              
              
              3,188
              
              
              
              4.00
              %
              
              
              84,251
              
              
              
              3,143
              
              
              
              3.73
              %
              
              
              84,001
              
              
              
              3,023
              
              
              
              3.60
              %Mortgage-backed
      securities
              
              
              12,282
              
              
              
              596
              
              
              
              4.85
              %
              
              
              8,411
              
              
              
              359
              
              
              
              4.27
              %
              
              
              10,514
              
              
              
              413
              
              
              
              3.93
              %Other
              
              
              1,838
              
              
              
              89
              
              
              
              4.83
              %
              
              
              2,114
              
              
              
              96
              
              
              
              4.55
              %
              
              
              1,900
              
              
              
              57
              
              
              
              3.03
              %Total
      interest-earning assets
              
              
              259,465
              
              
              
              15,610
              
              
              
              6.02
              %
              
              
              244,014
              
              
              
              13,978
              
              
              
              5.73
              %
              
              
              234,155
              
              
              
              12,423
              
              
              
              5.31
              %Non-interest-earning
      assets
              
              
              18,169
              
              
              
              
              
              
              
              
              
              
              
              14,848
              
              
              
              
              
              
              
              
              
              
              
              18,175Total
      assets
              
              $
              277,634
              
              
              
              
              
              
              
              
              
              
              $
              258,862
              
              
              
              
              
              
              
              
              
              
              $
              252,330Interest-bearing
      liabilities:Deposits
              
              $
              221,378
              
              
              
              8,434
              
              
              
              3.81
              %
              
              $
              206,777
              
              
              
              6,599
              
              
              
              3.19
              %
              
              $
              204,548
              
              
              
              4,604
              
              
              
              2.25
              %Short-term
      borrowings
              
              
              13,036
              
              
              
              623
              
              
              
              4.78
              %
              
              
              9,519
              
              
              
              432
              
              
              
              4.53
              %
              
              
              10,142
              
              
              
              382
              
              
              
              3.77
              %Total
      interest-bearing liabilities
              
              
              234,414
              
              
              
              9,057
              
              
              
              3.86
              %
              
              
              216,296
              
              
              
              7,031
              
              
              
              3.25
              %
              
              
              214,690
              
              
              
              4,986
              
              
              
              2.32
              %Non-interest-bearing
      liabilities
              
              
              21,586
              
              
              
              
              
              
              
              
              
              
              
              22,105
              
              
              
              
              
              
              
              
              
              
              
              17,374Stockholders'
      equity
              
              
              21,634
              
              
              
              
              
              
              
              
              
              
              
              20,461
              
              
              
              
              
              
              
              
              
              
              
              20,266Total
      liabilities and stockholders' equity
              
              $
              277,634
              
              
              
              
              
              
              
              
              
              
              $
              258,862
              
              
              
              
              
              
              
              
              
              
              $
              252,330Net
      interest income
              
              
              
              
              
              $
              6,553
              
              
              
              
              
              
              
              
              
              
              $
              6,947
              
              
              
              
              
              
              
              
              
              
              $
              7,437Interest
      rate spread (3)
              
              
              
              
              
              
              
              
              
              
              2.15
              %
              
              
              
              
              
              
              
              
              
              
              2.48
              %
              
              
              
              
              
              
              
              
              
              
              2.99
              %Net
      interest margin (4)
              
              
              
              
              
              
              
              
              
              
              2.53
              %
              
              
              
              
              
              
              
              
              
              
              2.85
              %
              
              
              
              
              
              
              
              
              
              
              3.18
              %Ratio
      of average interest-earning assets toaverage
      interest-bearing liabilities110.69
              %
              
              
              
              
              
              
              
              
              
              
              112.81
              %
              
              
              
              
              
              
              
              
              
              
              109.07
              %(1)
      Includes non-accrual loans and loans held for sale, and fees of $93,000
      for 2007, $108,000 for 2006, and $101,000 for 2005.(2)
      Includes FHLB stock and other investments.(3)
      Yield on interest-earning assets less cost of interest-bearing
      liabilities.(4)
      Net interest income divided by average interest-earning
      assets.




13




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.




2007
      Compared to 2006
              
              
              2006
      Compared to 2005Increase
      (Decrease) Due to
              
              
              Increase
      (Decrease) Due toRate
              
              
              Volume
              
              
              Net
              
              
              Rate
              
              
              Volume
              
              
              Net(In
      thousands)Interest-earning
      assets:Loans
              
              $
              193
              
              
              $
              1,164
              
              
              $
              1,357
              
              
              $
              676
              
              
              $
              774
              
              
              $
              1,450Investment
      securities
              
              
              224
              
              
              
              (178
              )
              
              
              46
              
              
              
              111
              
              
              
              9
              
              
              
              120Mortgage-backed
      securities
              
              
              54
              
              
              
              183
              
              
              
              237
              
              
              
              33
              
              
              
              (87
              )
              
              
              (54
              )Other
              
              
              6
              
              
              
              (13
              )
              
              
              (7
              )
              
              
              32
              
              
              
              7
              
              
              
              39Total
      net change in income on interest-earning assets
              
              
              477
              
              
              
              1,156
              
              
              
              1,633
              
              
              
              852
              
              
              
              703
              
              
              
              1,555Interest-bearing
      liabilities:Deposits
              
              
              1,345
              
              
              
              490
              
              
              
              1,835
              
              
              
              1,944
              
              
              
              51
              
              
              
              1,995Other
      borrowings
              
              
              24
              
              
              
              167
              
              
              
              191
              
              
              
              75
              
              
              
              (25
              )
              
              
              50Total
      net change in expense on interest-bearing liabilities
              
              
              1,369
              
              
              
              657
              
              
              
              2,026
              
              
              
              2,019
              
              
              
              26
              
              
              
              2,045Net
      change in net interest income
              
              $
              (892
              )
              
              $
              499
              
              
              $
              (393
              )
              
              $
              (1,167
              )
              
              $
              677
              
              
              $
              (490
              )




14





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.  During 2007, we chose to retain a portion of fixed-rate,
residential real estate loans, which are reflected in our interest rate risk
analyses.  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, 2007 and 2006, 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)12/31/07
              12/31/06
              ALCORate
      Shock
              $
      Change
              %
      Change
              $
      Change
              %
      Change
              Benchmark+300
      basis points
              1
              0.01%
              (845)
              (12.26)%
              >(20.00)%+200
      basis points
              108
              1.62%
              (636)
              (9.23)%
              >(20.00)%+100
      basis points
              224
              3.36%
              (425)
              (6.17)%
              >(12.50)%-100
      basis points
              326
              4.90%
              (69)
              (1.00)%
              >(12.50)%-200
      basis points
              352
              5.29%
              21
              0.31%
              >(20.00)%-300
      basis points
              376
              5.66%
              80
              1.16%
              >(20.00)%




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




15




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






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, 2007 and 2006, cash and cash equivalents
totaled $12.2 million and $9.3 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, 2007 and 2006, the most significant sources of
funds have been deposit growth, investment sales, calls, and principal payments,
and advances from the FHLB.  These funds have been used for new loan
originations.





Our cash
and cash equivalents increased $2.8 million during the year ended December 31,
2007, compared to an increase of $2.6 million during the year ended December 31,
2006.  Net cash provided by operating activities decreased to $497,000
during 2007 from $1.1 million during 2006.  Net cash used by investing
activities increased to $16.1 million during 2007 from the $10.6 million cash
used during 2006.  Cash used to fund net loan originations increased
to $21.6 million during 2007 from the net cash used of $12.7 million during
2006.  The cash used for loan originations during 2007 was funded by
financing activities.  Cash provided by financing activities increased
to $18.5 million during 2007 from the $12.1 million cash provided during
2006.  The increase is primarily due to the net increase in deposits
of $12.8 million and FHLB advances of $6.0 million during 2007.





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





Liquidity
management is both a short- and long-term responsibility of
management.  We adjust our investments in liquid assets based upon
management’s assessment of expected loan demand, projected purchases of
investment and mortgage-backed securities, expected deposit flows, yields
available on interest-bearing deposits, and liquidity of its asset/liability
management program.  Excess liquidity is generally invested in
interest-earning overnight deposits and other short-term U.S. agency
obligations.  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, 2007, we had $4.9 million in outstanding
agreements, which were all overnight agreements.





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, 2007, we had $10.0 million in
outstanding advances and additional borrowing capacity of approximately $12.2
million.





16





We
maintain levels of liquid assets as established by the Board of
Directors.  Our liquidity ratio, adjusted for pledged assets, at
December 31, 2007 and 2006 was 26.1% and 31.0%, respectively.  This
ratio represents the volume of short-term liquid assets as a percentage of net
deposits and borrowings due within one year.





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, 2007 and 2006.




12/31/07
              
              
              12/31/06(In
      thousands)Commitments
      to fund loans
              
              $
              41,587
              
              
              $
              27,347Standby
      letters of credit
              
              
              37
              
              
              
              14





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, 2007, 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, 2007, the Bank’s core capital ratio was
7.02% of total adjusted average assets, which exceeded the required
amount.





As of
December 31, 2007, the Federal Deposit Insurance Corporation ("FDIC")
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action.  To be categorized as adequately
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table below.  The
well-capitalized category requires higher minimum ratios of 5% for the Tier 1
leverage, 6% for the Tier 1 risk-based, and 10% for the total risk-based capital
ratios.  There are no conditions or events since that notification
that management believes have changed the Bank’s category.  The Bank’s
actual capital ratios are presented in the table below:




Minimum
              
              
              12/31/07
              
              
              12/31/06Required
              
              
              Actual
              
              
              ActualTier
      1 Capital to Average Assets
              
              
              4.00
              %
              
              
              7.02
              %
              
              
              7.45
              %Tier
      1 Capital to Risk-Weighted Assets
              
              
              4.00
              %
              
              
              10.38
              %
              
              
              11.25
              %Total
      Capital to Risk-Weighted Assets
              
              
              8.00
              %
              
              
              11.32
              %
              
              
              12.34
              %




17




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.




* * * * * *





18




Report
of Independent Registered Public Accounting Firm








Audit
Committee, Board of Directors, and Stockholders


Jacksonville
Bancorp, Inc.


Jacksonville,
Illinois







We have
audited the accompanying consolidated balance sheets of Jacksonville Bancorp,
Inc. as of December 31, 2007 and 2006, 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, 2007.  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, 2007 and 2006, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31,
2007, in conformity with accounting principles generally accepted in the United
States of America.




/sig/BKD,LLP




Decatur,
Illinois


March 5,
2008




19




Jacksonville
Bancorp, Inc.
 Consolidated
Balance Sheets
 December
31, 2007 and 2006


Assets




2007
            
            
            2006Cash
      and due from banks
            
            $
            7,045,870
            
            
            $
            6,203,655Interest-earning
      demand deposits
            
            
            5,129,594
            
            
            
            3,126,911Cash
      and cash equivalents
            
            
            12,175,464
            
            
            
            9,330,566Available-for-sale
      securities:Investment
      securities
            
            
            64,894,960
            
            
            
            78,491,564Mortgage-backed
      securities
            
            
            15,415,191
            
            
            
            8,210,466Other
      investments
            
            
            291,004
            
            
            
            378,249Loans
      held for sale
            
            
            1,861,415
            
            
            
            425,851Loans,
      net of allowance for loan losses of $1,766,229 and $1,864,497 at December
      31, 2007 and 2006
            
            
            175,866,517
            
            
            
            154,837,699Premises
      and equipment
            
            
            6,268,893
            
            
            
            6,555,761Federal
      Home Loan Bank stock
            
            
            1,108,606
            
            
            
            1,108,606Foreclosed
      assets held for sale, net
            
            
            363,918
            
            
            
            152,058Cash
      surrender value of life insurance
            
            
            3,186,228
            
            
            
            333,562Interest
      receivable
            
            
            2,105,094
            
            
            
            1,943,390Deferred
      income taxes
            
            
            805,067
            
            
            
            1,235,844Mortgage
      servicing rights
            
            
            965,679
            
            
            
            1,039,649Goodwill
            
            
            2,726,567
            
            
            
            2,726,567Core
      deposit intangibles
            
            
            39,862
            
            
            
            119,586Other
      assets
            
            
            414,234
            
            
            
            482,416Total
      assets
            
            $
            288,488,699
            
            
            $
            267,371,834





Liabilities
and Stockholders’ Equity




2007
            
            
            2006LiabilitiesDepositsDemand
            
            $
            18,059,861
            
            
            $
            15,113,121Savings,
      NOW and money market
            
            
            77,327,856
            
            
            
            71,697,709Time
            
            
            150,333,034
            
            
            
            146,102,460Total
      deposits
            
            
            245,720,751
            
            
            
            232,913,290Short-term
      borrowings
            
            
            4,936,034
            
            
            
            5,034,879Federal
      Home Loan Bank advances
            
            
            10,000,000
            
            
            
            4,000,000Deferred
      compensation
            
            
            2,346,422
            
            
            
            2,273,301Advances
      from borrowers for taxes and insurance
            
            
            421,489
            
            
            
            388,713Interest
      payable
            
            
            1,248,346
            
            
            
            1,082,334Other
      liabilities
            
            
            1,197,766
            
            
            
            534,701Total
      liabilities
            
            
            265,870,808
            
            
            
            246,227,218Stockholders’
      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 2007 – 1,986,804 shares; 2006 – 1,985,417
    shares
            
            
            19,868
            
            
            
            19,854Additional
      paid-in capital
            
            
            6,621,359
            
            
            
            6,608,342Retained
      earnings – substantially restricted
            
            
            16,034,800
            
            
            
            15,700,156Accumulated
      other comprehensive loss
            
            
            (58,136
            )
            
            
            (1,183,736
            )Total
      stockholders’ equity
            
            
            22,617,891
            
            
            
            21,144,616Total
      liabilities and stockholders’ equity
            
            $
            288,488,699
            
            
            $
            267,371,834




See
Notes to Consolidated Financial Statements
 20


Jacksonville
Bancorp, Inc.


Consolidated
Statements of Income
 Years
Ended December 31, 2007, 2006 and 2005




2007
            
            
            2006
            
            
            2005Interest
      and Dividend IncomeLoans
            
            $
            11,736,631
            
            
            $
            10,379,986
            
            
            $
            8,930,243SecuritiesTaxable
            
            
            2,794,800
            
            
            
            3,012,577
            
            
            
            2,968,151Tax-exempt
            
            
            393,490
            
            
            
            129,902
            
            
            
            54,174Mortgage-backed
      securities
            
            
            596,094
            
            
            
            359,080
            
            
            
            413,275Other
            
            
            88,692
            
            
            
            96,134
            
            
            
            57,480Total
      interest and dividend income
            
            
            15,609,707
            
            
            
            13,977,679
            
            
            
            12,423,323Interest
      ExpenseDeposits
            
            
            8,433,900
            
            
            
            6,599,442
            
            
            
            4,604,190Short-term
      borrowings
            
            
            189,086
            
            
            
            155,029
            
            
            
            66,444Federal
      Home Loan Bank advances
            
            
            433,419
            
            
            
            276,499
            
            
            
            315,902Total
      interest expense
            
            
            9,056,405
            
            
            
            7,030,970
            
            
            
            4,986,536Net
      Interest Income
            
            
            6,553,302
            
            
            
            6,946,709
            
            
            
            7,436,787Provision
      for Loan Losses
            
            
            155,000
            
            
            
            60,000
            
            
            
            245,000Net
      Interest Income After Provision for Loan Losses
            
            
            6,398,302
            
            
            
            6,886,709
            
            
            
            7,191,787Noninterest
      IncomeFiduciary
      activities
            
            
            104,208
            
            
            
            74,520
            
            
            
            74,694Commission
      income
            
            
            846,280
            
            
            
            782,842
            
            
            
            683,592Service
      charges on deposit accounts
            
            
            947,409
            
            
            
            900,438
            
            
            
            862,558Mortgage
      banking operations, net
            
            
            (5,349
            )
            
            
            73,563
            
            
            
            98,317Net
      realized gains (losses) on sales of available-for-sale
      securities
            
            
            5,318
            
            
            
            (20,817
            )
            
            
            16,708Loan
      servicing fees
            
            
            336,467
            
            
            
            357,544
            
            
            
            363,838Other
            
            
            97,999
            
            
            
            66,738
            
            
            
            73,979Total
      noninterest income
            
            
            2,332,332
            
            
            
            2,234,828
            
            
            
            2,173,686




2007
            
            
            2006
            
            
            2005Noninterest
      ExpenseSalaries
      and employee benefits
            
            $
            5,078,201
            
            
            $
            4,839,560
            
            
            $
            4,702,992Net
      occupancy and equipment expense
            
            
            1,090,596
            
            
            
            1,096,531
            
            
            
            1,277,100Data
      processing fees
            
            
            432,403
            
            
            
            440,368
            
            
            
            405,093Professional
      fees
            
            
            154,536
            
            
            
            175,086
            
            
            
            221,286Marketing
      expense
            
            
            113,499
            
            
            
            123,800
            
            
            
            116,948Postage
      and office supplies
            
            
            288,645
            
            
            
            252,128
            
            
            
            292,407Deposit
      insurance premium
            
            
            27,549
            
            
            
            27,537
            
            
            
            30,416Other
            
            
            916,053
            
            
            
            937,913
            
            
            
            1,007,316Total
      noninterest expense
            
            
            8,101,482
            
            
            
            7,892,923
            
            
            
            8,053,558Income
      Before Income Tax
            
            
            629,152
            
            
            
            1,228,614
            
            
            
            1,311,915Provision
      for Income Taxes
            
            
            10,083
            
            
            
            333,495
            
            
            
            411,948Net
      Income
            
            $
            619,069
            
            
            $
            895,119
            
            
            $
            899,967Basic
      Earnings Per Share
            
            $
            0.31
            
            
            $
            0.45
            
            
            $
            0.46Diluted
      Earnings Per Share
            
            $
            0.31
            
            
            $
            0.45
            
            
            $
            0.45Cash
      Dividends Per Share
            
            $
            0.30
            
            
            $
            0.30
            
            
            $
            0.30




See Notes to
Consolidated Financial Statements
 21
 Jacksonville
Bancorp, Inc.


Consolidated
Statements of Stockholders’ Equity
 Years
Ended December 31, 2007, 2006 and 2005


AccumulatedAdditional
              
              
              
              
              
              OtherCommon
      Stock
              
              
              Paid-in
              
              
              
              
              
              Retained
              
              
              ComprehensiveShares
              
              
              Amount
              
              
              Capital
              
              
              Earnings
              
              
              Loss
              
              
              TotalBalance,
      January 1, 2005
              
              
              1,966,343
              
              
              $
              19,663
              
              
              $
              6,459,138
              
              
              $
              14,467,568
              
              
              $
              (263,385
              )
              
              $
              20,682,984Comprehensive
      incomeNet
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              899,967
              
              
              
              —
              
              
              
              899,967Change
      in unrealized depreciation on available-for-sale securities, net of
      taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (1,216,968
              )
              
              
              (1,216,968
              )Total
      comprehensive income (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (317,001
              )Dividends
      on common stock, $.30 per share
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (278,793
              )
              
              
              —
              
              
              
              (278,793
              )Purchase
      and retirement of stock
              
              
              (3,660
              )
              
              
              (37
              )
              
              
              (57,282
              )
              
              
              —
              
              
              
              —
              
              
              
              (57,319
              )Stock
      options exercised
              
              
              7,533
              
              
              
              76
              
              
              
              69,023
              
              
              
              —
              
              
              
              —
              
              
              
              69,099Tax
      benefit related to stock options exercised
              
              
              —
              
              
              
              —
              
              
              
              3,634
              
              
              
              —
              
              
              
              —
              
              
              
              3,634Balance,
      December 31, 2005
              
              
              1,970,216
              
              
              
              19,702
              
              
              
              6,474,513
              
              
              
              15,088,742
              
              
              
              (1,480,353
              )
              
              
              20,102,604Comprehensive
      incomeNet
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              895,119
              
              
              
              —
              
              
              
              895,119Change
      in unrealized depreciation on available-for-sale securities, net of
      taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              296,617
              
              
              
              296,617Total
      comprehensive income (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,191,736Stock
      option compensation expense
              
              
              —
              
              
              
              —
              
              
              
              4,710
              
              
              
              —
              
              
              
              —
              
              
              
              4,710Dividends
      on common stock, $.30 per share
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (283,705
              )
              
              
              —
              
              
              
              (283,705
              )Purchase
      and retirement of stock
              
              
              (1,292
              )
              
              
              (13
              )
              
              
              (17,906
              )
              
              
              —
              
              
              
              —
              
              
              
              (17,919
              )Stock
      options exercised
              
              
              16,493
              
              
              
              165
              
              
              
              130,428
              
              
              
              —
              
              
              
              —
              
              
              
              130,593Tax
      benefit related to stock options exercised
              
              
              —
              
              
              
              —
              
              
              
              16,597
              
              
              
              —
              
              
              
              —
              
              
              
              16,597Balance,
      December 31, 2006
              
              
              1,985,417
              
              
              
              19,854
              
              
              
              6,608,342
              
              
              
              15,700,156
              
              
              
              (1,183,736
              )
              
              
              21,144,616Comprehensive
      incomeNet
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              619,069
              
              
              
              —
              
              
              
              619,069Change
      in unrealized depreciation on available-for-sale securities, net of
      taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,125,600
              
              
              
              1,125,600Total
      comprehensive income (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,744,669Stock
      option compensation expense
              
              
              —
              
              
              
              —
              
              
              
              2,025
              
              
              
              —
              
              
              
              —
              
              
              
              2,025Dividends
      on common stock, $.30 per share
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (284,425
              )
              
              
              —
              
              
              
              (284,425
              )Purchase
      and retirement of stock
              
              
              (1,213
              )
              
              
              (12
              )
              
              
              (14,982
              )
              
              
              —
              
              
              
              —
              
              
              
              (14,994
              )Stock
      options exercised
              
              
              2,600
              
              
              
              26
              
              
              
              24,599
              
              
              
              —
              
              
              
              —
              
              
              
              24,625Tax
      benefit related to stock options exercised
              
              
              —
              
              
              
              —
              
              
              
              1,375
              
              
              
              —
              
              
              
              —
              
              
              
              1,375Balance,
      December 31, 2007
              
              
              1,986,804
              
              
              $
              19,868
              
              
              $
              6,621,359
              
              
              $
              16,034,800
              
              
              $
              (58,136
              )
              
              $
              22,617,891






See Notes to
Consolidated Financial Statements


22




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




2007
            
            
            2006
            
            
            2005Operating
      ActivitiesNet
      income
            
            $
            619,069
            
            
            $
            895,119
            
            
            $
            899,967Items
      not requiring (providing) cashDepreciation
      and amortization
            
            
            433,601
            
            
            
            455,601
            
            
            
            567,612Provision
      for loan losses
            
            
            155,000
            
            
            
            60,000
            
            
            
            245,000Amortization
      of premiums and discounts on securities
            
            
            (8,657
            )
            
            
            14,903
            
            
            
            148,389Amortization
      of loan purchased premium
            
            
            —
            
            
            
            (39,559
            )
            
            
            (59,340
            )Amortization
      of core deposit intangibles
            
            
            79,724
            
            
            
            79,723
            
            
            
            79,724Deferred
      income taxes
            
            
            (134,000
            )
            
            
            (86,323
            )
            
            
            80,348Net
      realized (gains) losses on available-for-sale securities
            
            
            (5,318
            )
            
            
            20,817
            
            
            
            (16,708
            )Net
      (income) loss on mortgage banking operations
            
            
            5,349
            
            
            
            (73,563
            )
            
            
            (98,317
            )Federal
      Home Loan Bank stock dividend
            
            
            —
            
            
            
            —
            
            
            
            (73,028
            )Increase
      in cash surrender value of life insurance
            
            
            (14,493
            )
            
            
            —
            
            
            
            —(Gains)
      losses on sales of foreclosed assets
            
            
            (33,364
            )
            
            
            13,115
            
            
            
            15,683Stock
      option compensation expense
            
            
            2,025
            
            
            
            4,710
            
            
            
            —Tax
      benefit relating to stock options exercised
            
            
            1,375
            
            
            
            16,597
            
            
            
            3,634Origination
      of loans held for sale
            
            
            (11,568,657
            )
            
            
            (16,394,351
            )
            
            
            (21,370,056
            )Proceeds
      from sales of loans held for sale
            
            
            10,156,400
            
            
            
            16,561,469
            
            
            
            21,268,179Changes
      inInterest
      receivable
            
            
            (161,704
            )
            
            
            (453,641
            )
            
            
            (189,008
            )Other
      assets
            
            
            68,182
            
            
            
            (58,803
            )
            
            
            (36,783
            )Interest
      payable
            
            
            166,012
            
            
            
            281,888
            
            
            
            160,386Other
      liabilities
            
            
            736,186
            
            
            
            (211,222
            )
            
            
            451,412Net
      cash provided by operating activities
            
            
            496,730
            
            
            
            1,086,480
            
            
            
            2,077,094Investing
      ActivitiesPurchases
      of available-for-sale securities
            
            
            (19,753,071
            )
            
            
            (9,550,126
            )
            
            
            (5,943,592
            )Proceeds
      from maturities of available-for-sale securities
            
            
            10,413,335
            
            
            
            5,059,946
            
            
            
            9,979,084Proceeds
      from the sales of available-for-sale and other securities
            
            
            17,523,212
            
            
            
            5,940,395
            
            
            
            6,296,986Proceeds
      from sale of Federal Home Loan Bank stock
            
            
            —
            
            
            
            430,722
            
            
            
            —Net
      change in loans
            
            
            (21,603,784
            )
            
            
            (12,686,783
            )
            
            
            (17,195,370
            )Purchase
      of premises and equipment
            
            
            (146,733
            )
            
            
            (165,240
            )
            
            
            (269,747
            )Proceeds
      from sales of premises and equipment
            
            
            —
            
            
            
            —
            
            
            
            2,100Proceeds
      from the sale of foreclosed assets
            
            
            286,784
            
            
            
            391,631
            
            
            
            623,900Purchase
      of bank-owned life insurance
            
            
            (2,838,173
            )
            
            
            —
            
            
            
            —Net
      cash used in investing activities
            
            
            (16,118,430
            )
            
            
            (10,579,455
            )
            
            
            (6,506,639
            )





2007
            
            
            2006
            
            
            2005Financing
      ActivitiesNet
      increase (decrease) in demand deposits, money market, NOW and savings
      accounts
            
            $
            8,576,887
            
            
            $
            7,254,252
            
            
            $
            (1,247,457
            )Net
      increase (decrease) in certificates of deposit
            
            
            4,230,574
            
            
            
            7,289,264
            
            
            
            (6,117,277
            )Net
      increase (decrease) in short-term borrowings
            
            
            (98,845
            )
            
            
            1,684,811
            
            
            
            (96,638
            )Proceeds
      from Federal Home Loan Bank advances
            
            
            8,000,000
            
            
            
            —
            
            
            
            8,000,000Repayment
      of Federal Home Loan Bank advances
            
            
            (2,000,000
            )
            
            
            (4,000,000
            )
            
            
            —Net
      increase in advances from borrowers for taxes and
insurance
            
            
            32,776
            
            
            
            14,037
            
            
            
            46,232Proceeds
      from stock options exercised
            
            
            24,625
            
            
            
            130,593
            
            
            
            69,099Purchase
      and retirement of common stock
            
            
            (14,994
            )
            
            
            (17,919
            )
            
            
            (57,319
            )Dividends
      paid
            
            
            (284,425
            )
            
            
            (212,704
            )
            
            
            (278,793
            )Net
      cash provided by financing activities
            
            
            18,466,598
            
            
            
            12,142,334
            
            
            
            317,847Increase
      (Decrease) in Cash and Cash Equivalents
            
            
            2,844,898
            
            
            
            2,649,359
            
            
            
            (4,111,698
            )Cash
      and Cash Equivalents, Beginning of Year
            
            
            9,330,566
            
            
            
            6,681,207
            
            
            
            10,792,905Cash
      and Cash Equivalents, End of Year
            
            $
            12,175,464
            
            
            $
            9,330,566
            
            
            $
            6,681,207Supplemental
      Cash Flows InformationInterest
      paid
            
            $
            8,890,393
            
            
            $
            6,749,082
            
            
            $
            4,826,150Income
      taxes paid
            
            $
            137,000
            
            
            $
            548,600
            
            
            $
            206,900Sale
      and financing of foreclosed assets
            
            $
            353,400
            
            
            $
            228,500
            
            
            $
            402,530Real
      estate acquired in settlement of loans
            
            $
            818,680
            
            
            $
            329,287
            
            
            $
            933,183Dividends
      declared not paid
            
            $
            71,105
            
            
            $
            71,001
            
            
            $
            —Loans
      held for sale transferred to loans
            
            $
            45,314
            
            
            $
            —
            
            
            $
            —




See
Notes to Consolidated Financial Statements
 23
  Jacksonville
Bancorp, Inc.


Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006





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.




24




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




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




Use
of Estimates




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




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




Cash
Equivalents




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




Securities




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




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




Other
Investments




Other
investments at December 31, 2007 and 2006 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.




25




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006


Loans




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




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




Allowance
for Loan Losses




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




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




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




26




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




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




Premises
and Equipment




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




Federal
Home Loan Bank Stock




Federal
Home Loan Bank stock 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.




The
Company owns $1,108,606 of Federal Home Loan Bank stock as of December 31,
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 and purchased loans through the MPF
program.  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 the fourth quarter
of 2007, and the stock is considered a non-performing asset as of December 31,
2007.  Management performed an analysis 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.




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.




27




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




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, if any, by
which the capitalized mortgage servicing rights for a stratum exceed their fair
value.




Stock
Options




At
December 31, 2007, the Company has a stock-based employee compensation plan,
which is described more fully in Note 16.  Prior to 2006, the Company
accounted for this plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for
Stock Issued to Employees, and related
Interpretations.  Accordingly, in 2005, no stock-based employee
compensation cost is reflected in net income, as all options granted under this
plan had an exercise price equal to the market value of the underlying common
stock at the grant date.




Effective
January 1, 2006 the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based
Payment.  The Company selected the modified prospective
application.  Accordingly, after January 1, 2006, the Company began
expensing the fair value of stock options granted, modified, repurchased or
cancelled.




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




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




28




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




Income
Taxes




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




Earnings
Per Share




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




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




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 103 trust
accounts with assets totaling approximately $37.0 million at December 31,
2007.




Reclassifications




Certain
reclassifications have been made to the 2006 and 2005 financial statements to
conform to the 2007 financial statement presentation.  These
reclassifications had no effect on net income or stockholders’
equity.






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, 2007, was
$908,000.




29




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




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, 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
            )
            
            $
            80,310,151December
      31, 2006:U.S.
      Treasury
            
            $
            499,969
            
            
            $
            —
            
            
            $
            (906
            )
            
            $
            499,063U.S.
      government agencies
            
            
            74,251,198
            
            
            
            3,921
            
            
            
            (1,538,700
            )
            
            
            72,716,419Mortgage-backed
      securities
            
            
            8,459,588
            
            
            
            —
            
            
            
            (249,122
            )
            
            
            8,210,466State
      and political subdivisions
            
            
            5,269,737
            
            
            
            22,795
            
            
            
            (16,450
            )
            
            
            5,276,082$
            88,480,492
            
            
            $
            26,716
            
            
            $
            (1,805,178
            )
            
            $
            86,702,030





30




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




The
amortized cost and fair value of available-for-sale securities at
December 31, 2007, 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
            
            $
            18,140,194
            
            
            $
            18,066,904One
      to five years
            
            
            28,977,819
            
            
            
            28,942,893Five
      to ten years
            
            
            13,733,699
            
            
            
            13,808,691After
      ten years
            
            
            4,051,600
            
            
            
            4,076,472Mortgage-backed
      securities
            
            
            15,494,925
            
            
            
            15,415,191Totals
            
            $
            80,398,237
            
            
            $
            80,310,151




The
carrying value of securities pledged as collateral, to secure public deposits
and for other purposes, was $51,396,445 at December 31, 2007 and $49,256,362 at
December 31, 2006.




The book
value of securities sold under agreements to repurchase amounted to $4,936,034
and $5,034,879 at December 31, 2007 and 2006, respectively.




Gross
gains of $5,876, $916 and $38,901 and gross losses of $558, $21,733 and $22,193
resulting from sales of available-for-sale securities were realized for 2007,
2006 and 2005, respectively.  The tax provision (benefit) applicable
to these net realized gains (losses) amounted to $1,808, $(7,078) and $6,473,
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, 2007 and 2006, was $52,716,777 and $82,810,176,
which is approximately 66% and 96%, respectively, of the Company’s
available-for-sale investment portfolio.  The declines primarily
resulted from recent increases in market interest rates.




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




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




31




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




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,
2007 and 2006:







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
            )




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





32




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




Note
      4:
            Loans
      and Allowance for Loan Losses




Categories
of loans at December 31, include:




2007
            
            
            2006Commercial
      and agricultural
            
            $
            36,539,160
            
            
            $
            32,836,764Commercial
      and agricultural real estate
            
            
            48,841,129
            
            
            
            45,469,561Residential
      real estate
            
            
            50,459,155
            
            
            
            40,634,450Consumer
            
            
            35,420,600
            
            
            
            32,476,508Other
            
            
            6,402,318
            
            
            
            5,313,450Total
      loans
            
            
            177,662,362
            
            
            
            156,730,733LessNet
      deferred loan fees, premiums and discounts
            
            
            29,616
            
            
            
            28,537Allowance
      for loan losses
            
            
            1,766,229
            
            
            
            1,864,497Net
      loans
            
            $
            175,866,517
            
            
            $
            154,837,699







Activity
in the allowance for loan losses was as follows:




2007
            
            
            2006
            
            
            2005Balance,
      beginning of year
            
            $
            1,864,497
            
            
            $
            1,846,150
            
            
            $
            1,888,073Provision
      charged to expense
            
            
            155,000
            
            
            
            60,000
            
            
            
            245,000Losses
      charged off, net of recoveries of $47,573 for 2007, $176,778 for 2006 and
      $145,655 for 2005
            
            
            (253,268
            )
            
            
            (41,653
            )
            
            
            (286,923
            )Balance,
      end of year
            
            $
            1,766,229
            
            
            $
            1,864,497
            
            
            $
            1,846,150







Impaired
loans totaled $1,071,922, $1,133,320 and $233,453 at December 31, 2007, 2006 and
2005, respectively.  An allowance for loan losses of $10,719, $61,242
and $34,350 relates to impaired loans of $1,071,922, $1,133,320 and $233,453, at
December 31, 2007, 2006 and 2005, respectively.




Interest
of approximately $95,052, $54,426 and $22,000 was recognized on average impaired
loans of $724,103, $773,308 and $465,236 for 2007, 2006 and 2005,
respectively.  Interest of $102,601, $56,811 and $3,452 was recognized
on impaired loans on a cash basis during 2007, 2006 and 2005,
respectively.




33




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




At
December 31, 2007, 2006 and 2005, accruing loans delinquent 90 days or more
totaled $368,011, $4,049 and $21,236, respectively.  Non-accruing
loans at December 31, 2007, 2006 and 2005 were $722,931, $1,348,045 and
$1,156,527, respectively.




Note
      5:
            Premises
      and Equipment




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




2007
            
            
            2006Land
            
            $
            983,276
            
            
            $
            983,276Buildings
      and improvements
            
            
            7,513,876
            
            
            
            7,514,153Equipment
            
            
            4,170,078
            
            
            
            4,497,20312,667,230
            
            
            
            12,944,632Less
      accumulated depreciation
            
            
            (6,398,337
            )
            
            
            (6,438,871
            )Net
      premises and equipment
            
            $
            6,268,893
            
            
            $
            6,555,761




Note
      6:
            Intangible
      Assets




The
carrying basis and accumulated amortization of recognized core deposit
intangible assets at December 31, 2007 and 2006, were:




2007
            
            
            2006Gross
              Carrying
              Amount
            
            
            Accumulated
      Amortization
            
            
            Gross
              Carrying
              Amount
            
            
            Accumulated
      AmortizationCore
      deposit intangibles
            
            $
            637,789
            
            
            $
            (597,927
            )
            
            $
            637,789
            
            
            $
            (518,203
            )







Amortization
expense for the years ended December 31, 2007, 2006 and 2005, was $79,724,
$79,723 and $79,724, respectively.  Estimated amortization expense for
2008 is $39,862 at which point the intangible will be fully
amortized.




34





Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




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 $129,935,669 and $140,091,363 at December 31, 2007 and
2006, respectively.




Custodial
escrow balances maintained in connection with the foregoing loan servicing, and
included in demand deposits on the general ledger, were $288,098 and $291,002 at
December 31, 2007 and 2006, respectively.




The
aggregate fair value of capitalized mortgage servicing rights at December 31,
2007 and 2006 totaled $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:




2007
            
            
            2006Mortgage
      servicing rightsBalance,
      beginning of year
            
            $
            1,039,649
            
            
            $
            1,059,610Servicing
      rights capitalized
            
            
            74,701
            
            
            
            120,375Amortization
      of servicing rights
            
            
            (148,671
            )
            
            
            (140,336
            )Balance,
      end of year
            
            $
            965,679
            
            
            $
            1,039,649






Note
      8:
            Interest-bearing
      Deposits




Interest-bearing
deposits in denominations of $100,000 or more totaled $65,127,764 at
December 31, 2007 and $63,487,924 at December 31, 2006.




At
December 31, 2007, the scheduled maturities of time deposits are as
follows:




2008
            
            $
            118,275,1042009
            
            
            17,884,1352010
            
            
            9,831,2302011
            
            
            2,974,3222012
            
            
            1,328,243Thereafter
            
            
            40,000$
            150,333,034





35




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




Note
      9:
            Short-term
      Borrowings




Short-term
borrowings consist of securities sold under agreements to repurchase totaling
$4,936,034 and $5,034,879 at December 31, 2007 and 2006,
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 2007 and 2006 totaled $5,838,407 and $5,034,879, respectively, and
the monthly average of such agreements totaled $4,664,659 and $3,498,675 for
2007 and 2006, respectively.  The agreements at December 31,
2007, are all overnight agreements.




Note
      10:
            Federal
      Home Loan Bank Advances




The
Federal Home Loan Bank advances are secured by mortgage loans totaling
$51,230,000 at December 31, 2007.  The advances, at interest
rates of 4.47% to 5.15%, are subject to restrictions or penalties in the event
of prepayment.




Aggregate
annual maturities of the advances at December 31, 2007, are:




2008
            
            $
            5,000,0002009
            
            
            5,000,000$
            10,000,000







Note
      11:
            Income
      Taxes




The
provision for income taxes includes these components:




2007
            
            
            2006
            
            
            2005Taxes
      currently payableFederal
            
            $
            144,083
            
            
            $
            419,818
            
            
            $
            331,600State
            
            
            —
            
            
            
            —
            
            
            
            —Deferred
      income taxes
            
            
            (134,000
            )
            
            
            (86,323
            )
            
            
            80,348Income
      tax expense
            
            $
            10,083
            
            
            $
            333,495
            
            
            $
            411,948





36




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




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




2007
            
            
            2006
            
            
            2005Computed
      at the statutory rate (34%)
            
            $
            213,912
            
            
            $
            417,729
            
            
            $
            446,051Increase
      (decrease) resulting fromTax
      exempt interest
            
            
            (110,139
            )
            
            
            (37,662
            )
            
            
            (18,419
            )Graduated
      tax rates
            
            
            (6,292
            )
            
            
            (12,286
            )
            
            
            (13,119
            )State
      income taxes, net
            
            
            (64,575
            )
            
            
            (49,288
            )
            
            
            (28,810
            )Other
            
            
            (22,823
            )
            
            
            15,002
            
            
            
            26,245Actual
      tax expense
            
            $
            10,083
            
            
            $
            333,495
            
            
            $
            411,948




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




2007
            
            
            2006Deferred
      tax assetsAllowance
      for loan losses
            
            $
            553,074
            
            
            $
            590,732Deferred
      compensation
            
            
            899,190
            
            
            
            871,169State
      net operating loss carryforward
            
            
            268,496
            
            
            
            269,646Unrealized
      losses on available-for-sale securities
            
            
            29,949
            
            
            
            594,726Other
            
            
            7,363
            
            
            
            —1,758,072
            
            
            
            2,326,273Deferred
      tax liabilitiesDepreciation
            
            
            358,491
            
            
            
            417,138Federal
      Home Loan Bank stock dividends
            
            
            144,860
            
            
            
            144,809Prepaid
      expenses
            
            
            64,313
            
            
            
            72,760Mortgage
      servicing rights
            
            
            370,065
            
            
            
            398,412Basis
      in acquired assets
            
            
            15,276
            
            
            
            45,827Other
            
            
            —
            
            
            
            11,483953,005
            
            
            
            1,090,429Net
      deferred tax asset
            
            $
            805,067
            
            
            $
            1,235,844





37




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




Retained
earnings at December 31, 2007 and 2006, 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,
2007 and 2006.




Note
      12:
            Other
      Comprehensive Income (Loss)




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




2007
            
            
            2006
            
            
            2005Unrealized
      gains (losses) on available-for-sale securities
            
            $
            1,695,695
            
            
            $
            617,229
            
            
            $
            (1,969,854
            )Less
      reclassification adjustment for realized gains (losses) included in
      income
            
            
            5,318
            
            
            
            (20,817
            )
            
            
            16,708Other
      comprehensive income (loss), before tax effect
            
            
            1,690,377
            
            
            
            638,046
            
            
            
            (1,986,562
            )Tax
      expense (benefit)
            
            
            (564,777
            )
            
            
            (216,936
            )
            
            
            769,594Tax
      expense – change in tax rate from 38.7% to 34% during 2006
            
            
            —
            
            
            
            (124,493
            )
            
            
            —Other
      comprehensive income (loss)
            
            $
            1,125,600
            
            
            $
            296,617
            
            
            $
            (1,216,968
            )






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.




38




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




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, 2007 and 2006, that the Bank meets all
capital adequacy requirements to which it is subject.




As of
December 31, 2007, 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, 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/AAs
      of December 31, 2006Total
      risk-based capital
              (to
      risk-weighted assets)
            
            $
            21,032
            
            
            
            12.34
            %
            
            $
            13,633
            
            
            
            8.0
            %
            
            $
            17,041
            
            
            
            10.0
            %Tier
      I capital
              (to
      risk-weighted assets)
            
            
            19,167
            
            
            
            11.25
            
            
            
            6,817
            
            
            
            4.0
            
            
            
            10,225
            
            
            
            6.0Tier
      I capital
              (to
      average assets)
            
            
            19,167
            
            
            
            7.45
            
            
            
            10,294
            
            
            
            4.0
            
            
            
            12,867
            
            
            
            5.0Tangible
      capital
              (to
      adjusted tangible assets)
            
            
            19,167
            
            
            
            7.45
            
            
            
            3,860
            
            
            
            1.5
            
            
            
            —
            
            
            
            N/A




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




39




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




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
            
            
            311,621$
            2,259,255







Note
      14:
            Related
      Party Transactions




At
December 31, 2007 and 2006, 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, 2007 are summarized as follows:




Balance
      beginning of year
            
            $
            786,348Additions
            
            
            1,899,211Repayments
            
            
            (1,740,990
            )Balance,
      end of year
            
            $
            944,569




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.







40




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




Note
      15:
            Employee
      Benefits




401(k) Plan —The Company
maintain a 401(k) savings plan for eligible employees.  The Company’s
contributions to this plan were $110,749, $105,904 and $97,823 for the years
ended December 31, 2007, 2006 and 2005, respectively.  The plan
invests its assets in deposit accounts at the Company which earned interest at a
rate of 5.00% for the year ended December 31, 2007 and 2006 and 4.25% for the
year ended December 31, 2005.




Deferred Compensation Plan —The Company maintains a deferred compensation plan for certain key
officers and employees.  Contributions are determined annually by the
Company’s Board of Directors.  No contributions to this plan were made
for the years ended December 31, 2007, 2006 or 2005.  Effective in
1996, the Company changed the funding status of the plan and accrued interest at
a variable rate which fluctuates based on Moody’s Corporate Bond Average
Index.  Effective in 2005, the Company froze this plan and no future
contributions will be made.  The amount recorded on the balance sheets
as deferred compensation was $2,346,422 and $2,273,301 as of December 31, 2007
and 2006, respectively.  Compensation expense related to the plan was
$182,506, $155,988 and $173,198 for the years ended December 31, 2007, 2006
and 2005, 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 2007, 2006 or
2005.




At
December 31, 2007, all 39,593 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.






Note
      16:
            Stock
      Options Plan




The
Jacksonville Savings Bank and Jacksonville Bancorp, MHC 1996 Stock Option Plan
was adopted on April 23, 1996 and is administered by the Board of
Directors.  A total of 83,625 shares of common stock were reserved and
awarded under the Plan.  Awards expire ten years after the grant date
and are exercisable at a price of $8.83 per share.  The Jacksonville
Savings Bank 2001 Stock Option Plan was adopted on April 30, 2001 and is
administered by the Stock Benefits Committee.  A total of 87,100
shares of common stock were reserved and awarded under the Plan during
2001.  Awards expire ten years after the grant date and are
exercisable at a price of $10.00 per share.  No shares were granted
during 2007, 2006 or 2005.




41




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 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, 2007, 2006 and 2005, and
changes during the years then ended, is presented below:




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
            
            
            
            4.47
            
            
            $
            48,511Exercisable,
      end of year
            
            
            34,845
            
            
            $
            10.56
            
            
            
            4.42
            
            
            $
            49,424







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.




42




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006


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
            
            
            $
            77,207







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.




2005Shares
            
            
            Weighted-
              Average
              Exercise
      Price
            
            
            Weighted-
              Average
              Remaining
      Contractual
              Term
            
            
            Aggregate
              Intrinsic
      ValueOutstanding,
      beginning of year
            
            
            63,273
            
            
            $
            10.06Granted
            
            
            —
            
            
            
            —Exercised
            
            
            (7,533
            )
            
            
            9.66Forfeited
      or expired
            
            
            (1,100
            )Outstanding,
      end of year
            
            
            54,640
            
            
            $
            10.12
            
            
            
            5.06
            
            
            $
            280,303Exercisable,
      end of year
            
            
            52,361
            
            
            $
            9.95
            
            
            
            4.89
            
            
            $
            277,513




43




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




The total
intrinsic value of options exercised during the years ended December 31, 2007,
2006 and 2005, was $6,786, $70,145 and $34,245, respectively.




As of
December 31, 2007, there was $2,243 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the
Plan.  That cost is expected to be recognized over a weighted-average
period of 2.5 years.  The total fair value of shares vested during the
years ended December 31, 2007, 2006 and 2005, was $1,863, $3,517 and $3,517,
respectively.






Note
      17:
            Earnings
      Per Share




Earnings
per share (EPS) were computed as follows:




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







The
earnings per share calculation for 2007 does not include 5,600 shares that were
antidilutive.




44





Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




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







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




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





45




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




Note
      18:
            Disclosures
      about Fair Value of Financial
Instruments




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




December
      31, 2007
            
            
            December
      31, 2006Carrying
              Amount
            
            
            Fair
      Value
            
            
            Carrying
              Amount
            
            
            Fair
      ValueFinancial
      assetsCash
      and cash equivalents
            
            $
            12,175,464
            
            
            $
            12,175,464
            
            
            $
            9,330,566
            
            
            $
            9,330,566Available-for-sale
      securities
            
            
            80,310,151
            
            
            
            80,310,151
            
            
            
            86,702,030
            
            
            
            86,702,030Other
      investments
            
            
            291,004
            
            
            
            291,004
            
            
            
            378,249
            
            
            
            378,249Loans
      held for sale
            
            
            1,861,415
            
            
            
            1,861,415
            
            
            
            425,851
            
            
            
            425,851Loans,
      net of allowance for loan losses
            
            
            175,866,517
            
            
            
            175,424,820
            
            
            
            154,837,699
            
            
            
            154,330,649Federal
      Home Loan Bank stock
            
            
            1,108,606
            
            
            
            1,108,606
            
            
            
            1,108,606
            
            
            
            1,108,606Interest
      receivable
            
            
            2,105,094
            
            
            
            2,105,094
            
            
            
            1,943,390
            
            
            
            1,943,390Financial
      liabilitiesDeposits
            
            
            245,720,751
            
            
            
            247,151,775
            
            
            
            232,913,290
            
            
            
            234,834,409Short-term
      borrowings
            
            
            4,936,034
            
            
            
            4,936,034
            
            
            
            5,034,879
            
            
            
            5,034,879Federal
      Home Loan Bank advances
            
            
            10,000,000
            
            
            
            10,020,842
            
            
            
            4,000,000
            
            
            
            3,975,157Advances
      from borrowers for taxes and insurance
            
            
            421,489
            
            
            
            421,489
            
            
            
            388,713
            
            
            
            388,713Interest
      payable
            
            
            1,248,346
            
            
            
            1,248,346
            
            
            
            1,082,334
            
            
            
            1,082,334Unrecognized
      financial instruments (net of contract amount)Commitments
      to originate loans
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0Letters
      of credit
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0Lines
      of credit
            
            
            0
            
            
            
            0
            
            
            
            0
            
            
            
            0




46




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




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




Cash
and Cash Equivalents and Federal Home Loan Bank Stock




The
carrying amount approximates fair value.




Securities




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




Other
investments




The
carrying amount approximates fair value.




Loans
Held for Sale




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




Loans




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




Deposits




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




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




The
carrying amount approximates fair value.




47




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




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




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






Note
      19:
            Significant
      Estimates and Concentrations




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






Note
      20:
            Commitments
      and Credit Risk




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




Commitments
to Originate Loans




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




48




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




At
December 31, 2007 and 2006, the Company had outstanding commitments to originate
loans aggregating approximately $12,680,090 and $1,929,000,
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 $9,605,090 and $822,200 at
December 31, 2007 and 2006, 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 $37,000 and
$14,000, at December 31, 2007 and 2006, respectively, with terms of one year or
less.  At December 31, 2007 and 2006, the Company’s deferred revenue
under standby letters of credit agreements was nominal.




Lines
of Credit




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




At
December 31, 2007, the Company had granted unused lines of credit to borrowers
aggregating approximately $23,149,437 and $5,757,627 for commercial lines and
open-end consumer lines, respectively.  At December 31, 2006, unused
lines of credit to borrowers aggregated approximately $15,990,379 for commercial
lines and $9,427,274 for open-end consumer lines.




49




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




Note
      21:
            FDIC
      One-time Assessment Credit




Effective
November 17, 2006, the FDIC implemented a one-time credit of $4.7 billion to
eligible institutions.  The purpose of the credit is to recognize
contributions made by certain institutions to capitalize the Bank Insurance Fund
and Savings Association Insurance Fund, which have now been merged into the
Deposit Insurance Fund.  The Bank is an eligible institution and has
received notice from the FDIC that its share of the credit was $256,000 of which
$145,315 remains as of December 31, 2007.  This amount is not
reflected in the accompanying financial statements as it represents contingent
future credits against future insurance assessment payments.  As such,
the timing and ultimate recoverability of the one-time credit may
change.






Note
      22:
            Quarterly
      Results of Operations (Unaudited)




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




50


Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006





Year
      Ended December 31, 2006Three
      Months EndedDecember
      31
            
            
            September
      30
            
            
            June
      30
            
            
            March
      31Interest
      income
            
            $
            3,649,035
            
            
            $
            3,559,026
            
            
            $
            3,440,894
            
            
            $
            3,328,724Interest
      expense
            
            
            2,031,647
            
            
            
            1,874,044
            
            
            
            1,653,000
            
            
            
            1,472,279Net
      interest income
            
            
            1,617,388
            
            
            
            1,684,982
            
            
            
            1,787,894
            
            
            
            1,856,445Provision
      for loan losses
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            60,000Net
      interest income after provision for loan losses
            
            
            1,617,388
            
            
            
            1,684,982
            
            
            
            1,787,894
            
            
            
            1,796,445Other
      income
            
            
            576,622
            
            
            
            514,619
            
            
            
            586,223
            
            
            
            557,364Other
      expense
            
            
            2,019,900
            
            
            
            2,010,771
            
            
            
            1,962,197
            
            
            
            1,900,055Income
      before income taxes
            
            
            174,110
            
            
            
            188,830
            
            
            
            411,920
            
            
            
            453,754Income
      tax expense
            
            
            62,887
            
            
            
            19,933
            
            
            
            113,131
            
            
            
            137,544Net
      income
            
            $
            111,223
            
            
            $
            168,897
            
            
            $
            298,789
            
            
            $
            316,210Basic
      earnings per share
            
            $
            0.06
            
            
            $
            0.08
            
            
            $
            0.15
            
            
            $
            0.16Diluted
      earnings per share
            
            $
            0.06
            
            
            $
            0.08
            
            
            $
            0.15
            
            
            $
            0.16





51




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




Note
      23:
            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
      31,2007
            
            
            2006AssetsCash
      and due from banks
            
            $
            189,694
            
            
            $
            249,770Investment
      in common stock of subsidiary
            
            
            22,379,835
            
            
            
            20,829,714Other
      assets
            
            
            139,201
            
            
            
            155,731Total
      assets
            
            $
            22,708,730
            
            
            $
            21,235,215LiabilitiesOther
      liabilities
            
            $
            90,839
            
            
            $
            90,599Total
      liabilities
            
            
            90,839
            
            
            
            90,599Stockholders'
      Equity
            
            
            22,617,891
            
            
            
            21,144,616Total
      liabilities and stockholders' equity
            
            $
            22,708,730
            
            
            $
            21,235,215





52




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




Condensed
Statements of Income




Year
      Ending December 31,2007
            
            
            2006
            
            
            2005IncomeDividends
      from subsidiary
            
            $
            284,398
            
            
            $
            283,199
            
            
            $
            528,790Other
      income
            
            
            1,190
            
            
            
            1,557
            
            
            
            582Total
      income
            
            
            285,588
            
            
            
            284,756
            
            
            
            529,372ExpensesOther
      expenses
            
            
            148,306
            
            
            
            179,214
            
            
            
            224,976Total
      expenses
            
            
            148,306
            
            
            
            179,214
            
            
            
            224,976Income
      Before Income Tax and Equity in Undistributed Income of
      Subsidiary
            
            
            137,282
            
            
            
            105,542
            
            
            
            304,396Income
      Tax Benefit
            
            
            (57,265
            )
            
            
            (69,570
            )
            
            
            (87,527
            )Income
      Before Equity in Undistributed Income of Subsidiary
            
            
            194,547
            
            
            
            175,112
            
            
            
            391,923Equity
      in Undistributed Income of Subsidiary
            
            
            424,522
            
            
            
            720,007
            
            
            
            508,044Net
      Income
            
            $
            619,069
            
            
            $
            895,119
            
            
            $
            899,967





53




Jacksonville
Bancorp, Inc.
 Notes
to Consolidated Financial Statements
 December
31, 2007 and 2006




Condensed Statements of Cash Flows




Year
      Ending December 31,2007
            
            
            2006
            
            
            2005Operating
      ActivitiesNet
      income
            
            $
            619,069
            
            
            $
            895,119
            
            
            $
            899,967Items
      not providing cash, net
            
            
            (422,497
            )
            
            
            (715,297
            )
            
            
            (429,580
            )Change
      in other assets and liabilities, net
            
            
            16,771
            
            
            
            (69,198
            )
            
            
            (132,991
            )Net
      cash provided by operating activities
            
            
            213,343
            
            
            
            110,624
            
            
            
            337,396Financing
      ActivitiesDividends
      paid
            
            
            (284,425
            )
            
            
            (212,705
            )
            
            
            (278,793
            )Purchase
      and retirement of treasury stock
            
            
            (14,994
            )
            
            
            (17,919
            )
            
            
            (57,319
            )Exercise
      of stock options
            
            
            26,000
            
            
            
            147,190
            
            
            
            72,733Net
      cash used in financing activities
            
            
            (273,419
            )
            
            
            (83,434
            )
            
            
            (263,379
            )Net
      Change in Cash and Cash Equivalents
            
            
            (60,076
            )
            
            
            27,190
            
            
            
            74,017Cash
      and Cash Equivalents at Beginning of Year
            
            
            249,770
            
            
            
            222,580
            
            
            
            148,563Cash
      and Cash Equivalents at End of Year
            
            $
            189,694
            
            
            $
            249,770
            
            
            $
            222,580





54




Common
Stock Information




Our
common stock is traded on the Nasdaq Capital Market under the symbol
“JXSB”.  As of December 31, 2007, we had approximately 562
stockholders of record, including our mutual holding company parent and brokers,
who held 1,986,804 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, 2007.




Fiscal
      2006
              
              High
              
              
              Low
              
              DividendsFirst
      Quarter
              
              $
              15.12
              
              
              $
              12.50
              
              $.075/per
      shareSecond
      Quarter
              
              $
              13.95
              
              
              $
              12.50
              
              $.075/per
      shareThird
      Quarter
              
              $
              13.55
              
              
              $
              12.00
              
              $.075/per
      shareFourth
      Quarter
              
              $
              13.27
              
              
              $
              11.25
              
              $.075/per
      shareFiscal
      2007First
      Quarter
              
              $
              13.60
              
              
              $
              11.00
              
              $.075/per
      shareSecond
      Quarter
              
              $
              13.25
              
              
              $
              10.66
              
              $.075/per
      shareThird
      Quarter
              
              $
              13.00
              
              
              $
              10.90
              
              $.075/per
      shareFourth
      Quarter
              
              $
              12.59
              
              
              $
              9.25
              
              $.075/per
      share












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




The
Company did not repurchase any Company stock during the fourth quarter of
2007.




55




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 OfficerHarmon
      B. Deal, III
              Investment
      Manager
              Deal
      Partners, L.P.
            Laura
      A. Marks
              Senior
      Vice President – Retail BankingJohn
      L. Eyth
              Certified
      Public Accountant
              Zumbahlen
      Eyth Surratt Foote & Flynn, Ltd.
            John
      D. Eilering
              Vice
      President – Operations / Corporate SecretaryMichael
      R. Goldasich
              Architect
              Goldasich-Audo
      Architects
            Diana
      S. Tone
              Chief
      Financial Officer and Compliance OfficerDean
      H. Hess
              Self-employed
      farmer
            Chris
      A. Royal
              Vice
      President and Chief Lending OfficerEmily
      J. Osburn
              Retired
      radio station managerHarvey
      D. Scott, III
              Orthopedic
      Surgeon
              Orthapaedic
      Center of Illinois






56




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 29, 2008 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.






57