UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





(Mark
One)





x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d)
                OF
      THE SECURITIES EXCHANGE ACT OF 1934





For the
quarterly period endedJune
30, 2009





 ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)
                OF
      THE SECURITIES EXCHANGE ACT OF 1934





For the
transition period from __________ to ____________.





Commission
file number  000-30248





JACKSONVILLE BANCORP,
INC.


(Exact
name of registrant as specified in its charter)





Florida
                
                59-3472981(State
      or other jurisdiction of
                
                (I.R.S.
      Employerincorporation
      or organization)
                
                Identification
      No.)





100 North Laura Street,
Suite 1000, Jacksonville, Florida 32202


(Address
of principal executive offices)





(904)
421-3040


(Registrant’s
telephone number)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes           x           No             ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes           x           No             ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.


Large
      accelerated filer
               ̈
              Accelerated
      filer
               ̈Non-accelerated
      filer
               ̈
              Smaller
      reporting company
              x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes             ̈           No           x





As of
August 5, 2009, the latest practicable date, 1,748,799of the Registrant’s
common shares, $.01 par value, were issued and outstanding.










JACKSONVILLE
BANCORP, INC.




TABLE OF
CONTENTS





PagePART
      I—FINANCIAL INFORMATIONItem
      1.
                  Financial
      StatementsConsolidated
      Balance Sheets
                  3Consolidated
      Statements of Income
                  4Consolidated
      Statements of Changes in Shareholders’ Equity
                  5Consolidated
      Statements of Cash Flows
                  6Notes
      to Consolidated Financial Statements
                  7Item
      2.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  18Item
      3.
                  Quantitative
      and Qualitative Disclosures about Market Risk
                  27Item
      4.
                  Controls
      and Procedures
                  28PART
      II—OTHER INFORMATIONItem
      1.
                  Legal
      Proceedings
                  30Item
      1A.
                  Risk
      Factors
                  30Item
      2.
                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                  30Item
      3.
                  Defaults
      Upon Senior Securities
                  30Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  30Item
      5.
                  Other
      Information
                  30Item
      6.
                  Exhibits
                  31SIGNATURES
                  33EXHIBIT
      INDEX
                  34CERTIFICATIONSCertification
      of Gilbert J. Pomar, III under Section 302 of the Sarbanes-Oxley Act of
      2002
                  35Certification
      of Valerie A. Kendall under Section 302 of the Sarbanes-Oxley Act of
      2002
                  36Certification
      under Section 906 of the Sarbanes-Oxley Act of 2002
                  37





2.






PART I—FINANCIAL
INFORMATION





Item
1.  Financial Statements





CONSOLIDATED
BALANCE SHEETS


(Dollars
in thousands, except per share amounts)










June 30,
                
                
                December 31,2009
                
                
                2008(Unaudited)ASSETSCash
      and due from banks
                
                $
                4,182
                
                
                $
                8,665Federal
      funds sold
                
                
                5,163
                
                
                
                1,483Total
      cash and cash equivalents
                
                
                9,345
                
                
                
                10,148Securities
      available for sale
                
                
                22,778
                
                
                
                29,684Securities
      held to maturity
                
                
                50
                
                
                
                50Loans,
      net of allowance for loan losses of $5,663at 2009 and $4,705
      at 2008
                
                
                384,817
                
                
                
                374,993Premises
      and equipment, net
                
                
                3,736
                
                
                
                3,940Bank-owned
      life insurance (BOLI)
                
                
                8,837
                
                
                
                8,773Federal
      Home Loan Bank (FHLB) stock
                
                
                2,591
                
                
                
                1,705Real
      estate owned, net
                
                
                653
                
                
                
                89Deferred
      income taxes
                
                
                1,959
                
                
                
                1,502Accrued
      interest receivable
                
                
                1,758
                
                
                
                2,027Other
      assets
                
                
                934
                
                
                
                1,088Total
      assets
                
                $
                437,458
                
                
                $
                433,999LIABILITIESDepositsNoninterest
      bearing
                
                $
                38,131
                
                
                $
                40,851Money
      market, NOW and savings deposits
                
                
                86,831
                
                
                
                87,751Time
      deposits
                
                
                196,902
                
                
                
                216,942Total
      deposits
                
                
                321,864
                
                
                
                345,544FHLB
      advances
                
                
                40,200
                
                
                
                20,000Federal
      Reserve borrowing
                
                
                33,000
                
                
                
                26,000Subordinated
      debt
                
                
                14,550
                
                
                
                14,550Accrued
      expenses and other liabilities
                
                
                1,411
                
                
                
                1,060Total
      liabilities
                
                
                411,025
                
                
                
                407,154SHAREHOLDERS’
      EQUITYCommon
      stock, $.01 par value, 8,000,000 shares authorized, 1,748,799and 1,748,799
      shares issued
                
                
                17
                
                
                
                17Additional
      paid–in capital
                
                
                18,606
                
                
                
                18,568Retained
      earnings
                
                
                7,708
                
                
                
                8,213Treasury
      stock, 1,200 and 200 shares
                
                
                (12
                )
                
                
                (2
                )Accumulated
      other comprehensive income
                
                
                114
                
                
                
                49Total
      shareholders’ equity
                
                
                26,433
                
                
                
                26,845Total
      liabilities and shareholders’ equity
                
                $
                437,458
                
                
                $
                433,999


See
accompanying notes to unaudited consolidated financial
statements.
 3.


JACKSONVILLE
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF INCOME


(Unaudited)


(Dollars
in thousands, except per share amounts)









Three Months Ended
                
                
                Six Months EndedJune 30,
                
                
                June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Interest
      and dividend incomeLoans,
      including fees
                
                $
                5,383
                
                
                $
                5,846
                
                
                $
                10,742
                
                
                $
                12,235Taxable
      securities
                
                
                150
                
                
                
                252
                
                
                
                380
                
                
                
                527Tax-exempt
      securities
                
                
                104
                
                
                
                104
                
                
                
                207
                
                
                
                207Federal
      funds sold and other
                
                
                (12
                )
                
                
                7
                
                
                
                (23
                )
                
                
                33Total
      interest income
                
                
                5,625
                
                
                
                6,209
                
                
                
                11,306
                
                
                
                13,002Interest
      expenseDeposits
                
                $
                2,116
                
                
                $
                2,780
                
                
                $
                4,427
                
                
                $
                5,782FHLB
      advances
                
                
                249
                
                
                
                394
                
                
                
                480
                
                
                
                832Federal
      Reserve borrowing
                
                
                31
                
                
                
                —
                
                
                
                62
                
                
                
                —Subordinated
      debt
                
                
                160
                
                
                
                106
                
                
                
                343
                
                
                
                233Other
                
                
                —
                
                
                
                2
                
                
                
                —
                
                
                
                3Total
      interest expense
                
                
                2,556
                
                
                
                3,282
                
                
                
                5,312
                
                
                
                6,850Net
      interest income
                
                
                3,069
                
                
                
                2,927
                
                
                
                5,994
                
                
                
                6,152Provision
      for loan losses
                
                
                1,307
                
                
                
                1,755
                
                
                
                2,245
                
                
                
                2,118Net
      interest income after provision for loan losses
                
                
                1,762
                
                
                
                1,172
                
                
                
                3,749
                
                
                
                4,034Noninterest
      incomeService
      charges on deposit accounts
                
                
                147
                
                
                
                158
                
                
                
                307
                
                
                
                326Other
      income
                
                
                77
                
                
                
                102
                
                
                
                63
                
                
                
                186Total
      noninterest income
                
                
                224
                
                
                
                260
                
                
                
                370
                
                
                
                512Noninterest
      expenseSalaries
      and employee benefits
                
                
                1,111
                
                
                
                1,125
                
                
                
                2,227
                
                
                
                2,287Occupancy
      and equipment
                
                
                437
                
                
                
                442
                
                
                
                884
                
                
                
                889Regulatory
      assessment
                
                
                492
                
                
                
                84
                
                
                
                606
                
                
                
                159Merger
      related costs
                
                
                —
                
                
                
                430
                
                
                
                —
                
                
                
                430Data
      processing
                
                
                232
                
                
                
                204
                
                
                
                440
                
                
                
                398Other
                
                
                395
                
                
                
                537
                
                
                
                796
                
                
                
                975Total
      noninterest expense
                
                
                2,667
                
                
                
                2,822
                
                
                
                4,953
                
                
                
                5,138Income
      (loss) before income taxes
                
                
                (681
                )
                
                
                (1,390
                )
                
                
                (834
                )
                
                
                (592
                )Income
      tax expense (benefit)
                
                
                (285
                )
                
                
                (550
                )
                
                
                (329
                )
                
                
                (289
                )Net
      income (loss)
                
                $
                (396
                )
                
                $
                (840
                )
                
                $
                (505
                )
                
                $
                (303
                )Weighted
      average:Common
      shares
                
                
                1,748,214
                
                
                
                1,748,350
                
                
                
                1,748,429
                
                
                
                1,747,989Dilutive
      stock options and warrants
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Dilutive
      shares
                
                
                1,748,214
                
                
                
                1,748,350
                
                
                
                1,748,429
                
                
                
                1,747,989Basic
      earnings (loss) per common share
                
                $
                (.23
                )
                
                $
                (.48
                )
                
                $
                (.29
                )
                
                $
                (.17
                )Diluted
      earnings (loss) per common share
                
                $
                (.23
                )
                
                $
                (.48
                )
                
                $
                (.29
                )
                
                $
                (.17
                )









4.





JACKSONVILLE
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


(Unaudited)


(Dollars in thousands)




Common Stock
                    
                    
                    Additional
                    
                    
                    
                    
                    
                    
                    
                    
                    Accumulated OtherOutstanding
                    
                    
                    Paid-In
                    
                    
                    Retained
                    
                    
                    Treasury Stock
                    
                    
                    ComprehensiveShares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Earnings
                    
                    
                    Amount
                    
                    
                    Income
                    
                    
                    TotalBalance
      at January 1, 2008
                    
                    
                    1,746,331
                    
                    
                    $
                    17
                    
                    
                    $
                    18,459
                    
                    
                    $
                    8,186
                    
                    
                    $
                    (40
                    )
                    
                    $
                    7
                    
                    
                    $
                    26,629Comprehensive
      (loss):Net
      (loss)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (303
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (303
                    )Change
      in unrealized gain on securities available for sale, net of tax
      effects
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (157
                    )
                    
                    
                    (157
                    )Total
      comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (460
                    )Purchase
      of treasury stock
                    
                    
                    (2,224
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (49
                    )
                    
                    
                    
                    
                    
                    
                    (49
                    )Issuance
      of treasury stock
                    
                    
                    3,000
                    
                    
                    
                    
                    
                    
                    
                    22
                    
                    
                    
                    (28
                    )
                    
                    
                    72
                    
                    
                    
                    
                    
                    
                    
                    66Common
      stock issued
                    
                    
                    618
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    —Share-based
      compensation expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    53
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    53Exercise
      of common stock options,including tax benefits
                    
                    
                    200
                    
                    
                    
                    
                    
                    
                    
                    3
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3Balance
      at June 30, 2008
                    
                    
                    1,747,925
                    
                    
                    $
                    17
                    
                    
                    $
                    18,537
                    
                    
                    $
                    7,855
                    
                    
                    $
                    (17
                    )
                    
                    $
                    (150
                    )
                    
                    $
                    26,242Balance
      at January 1, 2009
                    
                    
                    1,748,599
                    
                    
                    $
                    17
                    
                    
                    $
                    18,568
                    
                    
                    $
                    8,213
                    
                    
                    $
                    (2
                    )
                    
                    $
                    49
                    
                    
                    $
                    26,845Comprehensive
      (loss):Net
      (loss)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (505
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (505
                    )Change
      in unrealized gain on securities available for sale, net of tax
      effects
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    65
                    
                    
                    
                    65Total
      comprehensive (loss)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (440
                    )Purchase
      of treasury stock
                    
                    
                    (2,353
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (26
                    )
                    
                    
                    
                    
                    
                    
                    (26
                    )Issuance
      of treasury stock
                    
                    
                    1,353
                    
                    
                    
                    
                    
                    
                    
                    (1
                    )
                    
                    
                    
                    
                    
                    
                    16
                    
                    
                    
                    
                    
                    
                    
                    15Share-based
      compensation expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    39
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    39Balance
      at June 30, 2009
                    
                    
                    1,747,599
                    
                    
                    $
                    17
                    
                    
                    $
                    18,606
                    
                    
                    $
                    7,708
                    
                    
                    $
                    (12
                    )
                    
                    $
                    114
                    
                    
                    $
                    26,433









5.





JACKSONVILLE
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(Dollars
in thousands)










Six Months EndedJune 30,2009
                
                
                2008Cash
      flows from operating activitiesNet
      income (loss)
                
                $
                (505
                )
                
                $
                (303
                )Adjustments
      to reconcile net income (loss) to net cash from operating
      activities:Depreciation
      and amortization
                
                
                235
                
                
                
                263Net
      amortization of deferred loan fees
                
                
                47
                
                
                
                32Provision
      for loan losses
                
                
                2,245
                
                
                
                2,118Premium
      amortization, net of accretion
                
                
                (22
                )
                
                
                (7
                )Earnings
      on Bank Owned Life Insurance
                
                
                (64
                )
                
                
                (102
                )Share-based
      compensation
                
                
                54
                
                
                
                122Loss
      on disposal of assets
                
                
                4
                
                
                
                38Loss
      on equity investment
                
                
                132
                
                
                
                —Deferred
      income tax
                
                
                (496
                )
                
                
                (499
                )Net
      change in accrued interest receivable and other assets
                
                
                278
                
                
                
                69Net
      change in accrued expenses and other liabilities
                
                
                351
                
                
                
                (913
                )Net
      cash from operating activities
                
                
                2,259
                
                
                
                818Cash
      flows from investing activitiesPurchases
      of securities available for sale
                
                
                (2,000
                )
                
                
                (3,000
                )Proceeds
      from maturities, calls and paydown of securities available for
      sale
                
                
                9,032
                
                
                
                4,236Loan
      (originations) payments, net
                
                
                (12,680
                )
                
                
                (32,979
                )Investment
      in Bank Owned Life Insurance
                
                
                —
                
                
                
                (3,500
                )Additions
      to premises and equipment, net
                
                
                (22
                )
                
                
                (69
                )Net
      change in Federal Home Loan Bank stock
                
                
                (886
                )
                
                
                957Net
      cash from investing activities
                
                
                (6,556
                )
                
                
                (34,355
                )Cash
      flows from financing activitiesNet
      change in deposits
                
                
                (23,680
                )
                
                
                43,955Net
      change in overnight FHLB advances
                
                
                15,200
                
                
                
                (9,930
                )Net
      change in Fed funds purchased
                
                
                —
                
                
                
                6,000Proceeds
      from long term FHLB advances
                
                
                5,000
                
                
                
                —Proceeds
      from Federal Reserve borrowing
                
                
                7,000
                
                
                
                —Proceeds
      from issuance of subordinated debt
                
                
                —
                
                
                
                7,550Repayment
      of long term FHLB advance
                
                
                —
                
                
                
                (14,000
                )Purchase
      of treasury stock
                
                
                (26
                )
                
                
                (49
                )Net
      cash from financing activities
                
                
                3,494
                
                
                
                33,526Net
      change in cash and cash equivalents
                
                
                (803
                )
                
                
                (11
                )Cash
      and cash equivalents at beginning of period
                
                
                10,148
                
                
                
                6,035Cash
      and cash equivalents at end of period
                
                $
                9,345
                
                
                $
                6,024Supplemental
      disclosures of cash flow informationCash
      paid during the period forInterest
                
                $
                5,537
                
                
                $
                7,000Income
      taxes
                
                
                15
                
                
                
                795Supplemental
      schedule of noncash investing activitiesTransfers
      from loans to real estate owned
                
                $
                564
                
                
                $
                —








6.




JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)









NOTE
1 – BASIS OF PRESENTATION
 Jacksonville
Bancorp, Inc. is a bank holding company headquartered in Jacksonville,
Florida.  Jacksonville Bancorp, Inc. owns and operates The
Jacksonville Bank, which has a total of five operating branches in Jacksonville,
Florida.
 
 The
consolidated financial statements include the accounts of Jacksonville Bancorp,
Inc. and its wholly owned subsidiary, The Jacksonville Bank, and The
Jacksonville Bank’s wholly owned subsidiary, Fountain Financial,
Inc.  The consolidated entity is referred to as the “Company” and The
Jacksonville Bank and its subsidiary are collectively referred to as the
“Bank.”  The Company’s financial condition and operating results
principally reflect those of the Bank.  All intercompany balances and
amounts have been eliminated.  For further information refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2008, as filed with
the U.S. Securities and Exchange Commission (the “SEC”) on March 20,
2009.
 
 The
accounting and reporting policies of the Company reflect banking industry
practice and conform to U.S. generally accepted accounting
standards.  In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported asset and liability balances and revenue and expense amounts and the
disclosure of contingent assets and liabilities.  Actual results could
differ significantly from those estimates.
 
 The
consolidated financial information included herein as of and for the periods
ended June 30, 2009 and 2008 is unaudited; however, such information reflects
all adjustments which are, in the opinion of management, necessary for a fair
statement of results for the interim periods.  The December 31, 2008
consolidated balance sheet was derived from the Company's December 31, 2008
audited consolidated financial statements.
 
 Adoption
of New Accounting Standards
 
 In
September 2006, the FASB issued Statement No. 157, Fair Value
Measurements.  This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements.  This Statement establishes a fair value hierarchy about the
assumptions used to measure fair value and clarifies assumptions about risk and
the effect of a restriction on the sale or use of an asset.  The standard
is effective for fiscal years beginning after November 15, 2007.  In
February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No.
157.  This FSP delays the effective date of FASB Statement No. 157
for all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years.  In October 2008, the FASB issued Staff Position
(FSP) 157-3 Determining
the Fair Value of a Financial Asset when the Market for that Asset is Not
Active.  This FSP clarifies the application of FASB Statement
No. 157, Fair Value
Measurementsand provides key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active.  The impact of adoption was not material.
  7.


JACKSONVILLE
BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)
  
 In April
2009, the FASB issued Staff Position (FSP) No. 115-2 and No. 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments.  This FSP amends existing
guidance for determining whether impairment is other-than-temporary for debt
securities and requires an entity to assess whether it intends to sell, or it is
more likely than not that it will be required to sell a security in an
unrealized loss position before recovery of its amortized cost
basis.  If either criteria is met, the entire difference between
amortized cost and fair value is recognized in earnings.  For
securities that do not meet the above criteria, the amount of impairment
recognized in earnings is limited to the amount related to credit losses, while
impairment related to other factors is recognized in other comprehensive
income.  Additionally, the FSP expands and increases the frequency of
existing disclosures about other-than-temporary impairment for debt and equity
securities.  This FSP is effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009.  The adoption of this FSP on
April 1, 2009 did not have a material impact on the Company’s results of
operations or financial position.
 
 In April
2009, FASB issued Staff Position (FSP) No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset and Liability Have Significantly
Decreased and Identifying Transactions that are Not
Orderly.  This FSP emphasizes that even if there has been a
significant decrease in the volume and level of activity, the objective of a
fair value measurement remains the same.  Fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants.  This FSP provides factors to
consider when evaluating whether there has been a significant decrease in the
volume and level of activity for an asset or liability in relation to normal
market activity.  In addition, when transactions or quoted prices are
not considered orderly, adjustments to those prices based on the weight of
available information may be needed to determine the appropriate fair
value.  This FSP also requires increased disclosures.  This
FSP is effective for interim and annual reporting periods ending after June 15,
2009, and shall be applied prospectively.  The adoption of this FSP at
June 30, 2009 did not have a material impact on the Company’s results of
operations or financial position.
 
 In April
2009, FASB issued Staff Position (FSP) No. 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments.  This FSP amends FASB Statement No.
107, Disclosures about Fair
Value of Financial Instruments, to require disclosures about fair value
of financial instruments for interim reporting periods that were previously only
required in annual financial statements.  This FSP is effective for
interim reporting period ending after June 15, 2009.  The adoption of
this FSP at June 30, 2009 did not have a material impact on the Company’s
results of operations or financial position as it only required disclosures
which are included in Note 7.
 
 In May
2009, the FASB issued Statement No. 165, Subsequent Events which requires
companies to evaluate events that occurred after the balance sheet date, but
before the financial statements are issued.  Management has evaluated
subsequent events for reporting and disclosure in these financial statements
through August 10, 2009, which is the date that these financial statements were
issued.
  8.
 
 JACKSONVILLE
BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)
  
 NOTE
2 – LOAN PORTFOLIO COMPOSITION
 The
composition of the Bank’s loan portfolio at June 30, 2009 and December 31, 2008
is indicated below along with the change from December 31, 2008.
 
 % Increase
                    (Decrease)
      fromTotal Loans
                  
                  
                  Total Loans
                  
                  
                  December 31, 2008June 30, 2009
                  
                  
                  December 31, 2008
                  
                  
                  to June 30, 2009Real
      estate mortgage loans:Commercial
                  
                  $
                  231,693
                  
                  
                  $
                  224,677
                  
                  
                  
                  3.1
                  %Residential
                  
                  
                  92,826
                  
                  
                  
                  81,152
                  
                  
                  
                  14.4
                  %Construction(1)
                  
                  
                  37,137
                  
                  
                  
                  41,759
                  
                  
                  
                  (11.1
                  )%Commercial
      loans
                  
                  
                  25,502
                  
                  
                  
                  28,445
                  
                  
                  
                  (10.3
                  )%Consumer
      loans
                  
                  
                  3,775
                  
                  
                  
                  4,070
                  
                  
                  
                  (7.2
                  )%Subtotal
                  
                  
                  390,933
                  
                  
                  
                  380,103
                  
                  
                  
                  2.8
                  %Less:  Net
      deferred loan fees
                  
                  
                  (453
                  )
                  
                  
                  (405
                  )
                  
                  
                  11.9
                  %Total
                  
                  $
                  390,480
                  
                  
                  $
                  379,698
                  
                  
                  
                  2.8
                  %
 
 (1)     Includes
construction, land development and other land loans.
 
 NOTE
3 – ALLOWANCE FOR LOAN LOSSES
 Activity
in the allowance for loan losses for the six months ended June 30, 2009 and 2008
follows:
 
 Six Months Ended June 30,2009
                      
                      
                      2008Balance,
      January 1
                      
                      $
                      4,705
                      
                      
                      $
                      3,116Provisions
      for loan losses charged to expense
                      
                      
                      2,245
                      
                      
                      
                      2,118Loans
      charged off
                      
                      
                      (1,289
                      )
                      
                      
                      (1,026
                      )Recoveries
      of loans previously charged off
                      
                      
                      2
                      
                      
                      
                      5Balance,
      June 30
                      
                      $
                      5,663
                      
                      
                      $
                      4,213
 
 Impaired
loans were as follows:
 June 30,
                      
                      
                      December 31,2009
                      
                      
                      2008Loans
      with no allocated allowance for loan losses
                      
                      $
                      13,320
                      
                      
                      $
                      12,931Loans
      with allocated allowance for loan losses
                      
                      
                      2,752
                      
                      
                      
                      4,352Total
                      
                      $
                      16,072
                      
                      
                      $
                      17,283Amount
      of the allowance for loan losses allocated
                      
                      $
                      132
                      
                      
                      $
                      618
 
 9.
 
 JACKSONVILLE
BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)
  
 NOTE
4 - INVESTMENT SECURITIES
  The
following table summarizes the amortized cost and fair value of the
available-for-sale and held-to-maturity investment securities portfolio at June
30, 2009 and the corresponding amounts of unrealized gains and losses
therein:
 
 Amortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    FairCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    Value(Dollars
      in thousands)June
      30, 2009Available-for
      saleU.S.
      government-sponsored entities and agencies
                    
                    $
                    3,234
                    
                    
                    $
                    32
                    
                    
                    $
                    (32
                    )
                    
                    $
                    3,234State
      and political subdivisions
                    
                    
                    10,887
                    
                    
                    
                    105
                    
                    
                    
                    (162
                    )
                    
                    
                    10,830Mortgage-backed
      securities – residential
                    
                    
                    8,014
                    
                    
                    
                    233
                    
                    
                    
                    (2
                    )
                    
                    
                    8,245Collateralized
      mortgage obligations - residential
                    
                    
                    460
                    
                    
                    
                    9
                    
                    
                    
                    -
                    
                    
                    
                    469Total
      available-for-sale securities
                    
                    $
                    22,595
                    
                    
                    $
                    379
                    
                    
                    $
                    (196
                    )
                    
                    $
                    22,778Total
      held-to-maturity securities
                    
                    $
                    50
                    
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    50
  The
amortized cost and fair value of the investment securities portfolio are shown
by expected maturity. Expected maturities may differ from contractual maturities
if borrowers have the right to call or prepay obligations with or without call
or prepayment penalties.
 
 June30,2009Amortized
                        
                        
                        FairCost
                        
                        
                        ValueMaturityAvailable-for-saleWithin
      one year
                        
                        $
                        3,975
                        
                        
                        $
                        3,938One
      to five years
                        
                        
                        5,366
                        
                        
                        
                        5,353Five
      to ten years
                        
                        
                        4,780
                        
                        
                        
                        4,773Beyond
      ten years
                        
                        
                        -
                        
                        
                        
                        -Mortgage-backed
                        
                        
                        8,014
                        
                        
                        
                        8,245Collateralized
      Mortgage Obligations
                        
                        
                        460
                        
                        
                        
                        469Total
                        
                        $
                        22,595
                        
                        
                        $
                        22,778Held-to-maturityOne
      to five years
                        
                        $
                        50
                        
                        
                        $
                        50Total
                        
                        $
                        22,645
                        
                        
                        $
                        22,828
 
 10.




JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)





The
following table summarizes the investment securities with unrealized losses at
June 30, 2009 by aggregated major security type and length of time in a
continuous unrealized loss position:





Less Than 12 Months
                        
                        
                        12 Months or Longer
                        
                        
                        TotalFair
                        
                        
                        Unrealized
                        
                        
                        Fair
                        
                        
                        Unrealized
                        
                        
                        Fair
                        
                        
                        UnrealizedValue
                        
                        
                        Losses
                        
                        
                        Value
                        
                        
                        Losses
                        
                        
                        Value
                        
                        
                        Losses(Dollars
      in thousands)June
      30, 2009Available-for-saleU.S.
      government-sponsored entities   and
agencies
                        
                        $
                        2,718
                        
                        
                        $
                        (32
                        )
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        2,718
                        
                        
                        $
                        (32
                        )States
      and political
                        
                        
                        4,610
                        
                        
                        
                        (120
                        )
                        
                        
                        341
                        
                        
                        
                        (42
                        )
                        
                        
                        4,951
                        
                        
                        
                        (162
                        )Mortgage-backed
      securities – residential
                        
                        
                        375
                        
                        
                        
                        (2
                        )
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        375
                        
                        
                        
                        (2
                        )Collateralized
      mortgage obligations
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      available-for-sale
                        
                        $
                        7,703
                        
                        
                        $
                        (154
                        )
                        
                        $
                        341
                        
                        
                        $
                        (42
                        )
                        
                        $
                        8,044
                        
                        
                        $
                        (196
                        )Held-to-maturityOther
      securities
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Total
      held-to-maturity
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        -




Other-Than-Temporary-Impairment




Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation.  The investment securities portfolio is evaluated for
OTTI by segregating the portfolio into two general segments and applying the
appropriate OTTI model.  Investment securities classified as available for
sale or held-to-maturity are generally evaluated for OTTI under Statement of
Financial Accounting Standards (“SFAS”) No. 115,Accounting for Certain Investments
in Debt and Equity Securities.  However, certain purchased
beneficial interests, including non-agency mortgage-backed securities,
asset-backed securities, and collateralized debt obligations, that had credit
ratings at the time of purchase of below AA are evaluated using the model
outlined in EITF Issue No. 99-20,Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
that Continue to be Held by a Transfer in Securitized Financial
Assets.




In
determining OTTI under the SFAS No. 115 model, management considers many
factors, including: (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the entity has the intent to sell
the debt security or more likely than not will be required to sell the debt
security before its anticipated recovery.  The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in
time.




11.





JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)





The
second segment of the portfolio uses the OTTI guidance provided by EITF 99-20
that is specific to purchased beneficial interests that, on the purchase date,
were rated below AA.  Under the EITF 99-20 model, the Company compares the
present value of the remaining cash flows as estimated at the preceding
evaluation date to the current expected remaining cash flows.  An OTTI is
deemed to have occurred if there has been an adverse change in the remaining
expected future cash flows.  It is not the Bank’s policy to purchase
securities rated below AA.




When OTTI
occurs under either model, the amount of the OTTI recognized in earnings depends
on whether an entity intends to sell the security or it is more likely than not
it will be required to sell the security before recovery of its amortized cost
basis, less any current-period credit loss.  If an entity intends to sell
or it is more likely than not it will be required to sell the security before
recovery of its amortized cost basis, less any current-period credit loss, the
OTTI shall be recognized in earnings equal to the entire difference between the
investment’s amortized cost basis and its fair value at the balance sheet date.
 If an entity does not intend to sell the security and it is not more
likely than not that the entity will be required to sell the security before
recovery of its amortized cost basis less any current-period loss, the OTTI
shall be separated into the amount representing the credit loss and the amount
related to all other factors.  The amount of the total OTTI related to the
credit loss is determined based on the present value of cash flows expected to
be collected and is recognized in earnings.  The amount of the total OTTI
related to other factors is recognized in other comprehensive income, net of
applicable taxes.  The previous amortized cost basis less the OTTI
recognized in earnings becomes the new amortized cost basis of the
investment.




As of
June 30, 2009, the Company’s security portfolio consisted of $22,828, $8,044 of
which were in an unrealized loss position.  The majority of unrealized
losses are related to the Company’s U.S. Agency, and State and political
securities, as discussed below:




U.S. Agency
Securities




All of
the U.S. Agency securities held by the Company were issued by U.S.
government-sponsored entities and agencies.  The decline in fair value
is attributable to changes in interest rates and illiquidity, and not credit
quality.




Because
the Company does not have the intent to sell these securities, and it is likely
that it will not be required to sell the securities before their anticipated
recovery, the Company does not consider these to be other-than-temporarily
impaired at June 30, 2009.




State and Political
Securities




All of
the State and Political Securities (“Municipal Bonds”) were issued by a city or
other local government.  The Municipal Bonds are general obligations
of the issuer and are secured by specified revenues.  The decline in
fair value is primarily attributable to changes in interest rates and the
ratings of the underlying insurers rather than the ability or willingness of the
municipality to repay.




Because
the Company does not have the intent to sell these securities, and it is likely
that it will not be required to sell the securities before their anticipated
recovery, the Company does not consider these to be other-than-temporarily
impaired at June 30, 2009.





For the
three-month period ended June 30, 2009, there were no credit losses recognized
in earnings.


12.




JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)





NOTE
5 – CAPITAL ADEQUACY





Federal
banking regulators have established certain capital adequacy standards required
to be maintained by banks and bank holding companies.  The minimum
requirements established in the regulations are set forth in the table below,
along with the actual ratios for the Company at June 30, 2009 and
December 31, 2008:




Actual
                              
                              
                              For
      Capital
                                Adequacy
                                Purposes
                              
                              
                              To
      Be Well
                                Capitalized
      Under
                                Prompt
      Corrective
                                Action
      ProvisionsAmount
                              
                              
                              Ratio
                              
                              
                              Amount
                              
                              
                              Ratio
                              
                              
                              Amount
                              
                              
                              RatioJune
      30, 2009Total
      capital to risk weighted
      assetsConsolidated
                              
                              $
                              45,732
                              
                              
                              
                              11.78
                              %
                              
                              $
                              31,062
                              
                              
                              
                              8.00
                              %
                              
                              
                              N/A
                              
                              
                              
                              N/ABank
                              
                              
                              41,480
                              
                              
                              
                              10.69
                              %
                              
                              
                              31,055
                              
                              
                              
                              8.00
                              %
                              
                              $
                              38,819
                              
                              
                              
                              10.00
                              %Tier
      1 (Core) capital to risk weighted
      assetsConsolidated
                              
                              
                              35,094
                              
                              
                              
                              9.04
                              %
                              
                              
                              15,531
                              
                              
                              
                              4.00
                              %
                              
                              
                              N/A
                              
                              
                              
                              N/ABank
                              
                              
                              36,618
                              
                              
                              
                              9.43
                              %
                              
                              
                              15,528
                              
                              
                              
                              4.00
                              %
                              
                              
                              23,291
                              
                              
                              
                              6.00
                              %Tier
      1 (Core) capital to average
      assetsConsolidated
                              
                              
                              35,094
                              
                              
                              
                              8.15
                              %
                              
                              
                              17,216
                              
                              
                              
                              4.00
                              %
                              
                              
                              N/A
                              
                              
                              
                              N/ABank
                              
                              
                              36,618
                              
                              
                              
                              8.51
                              %
                              
                              
                              17,217
                              
                              
                              
                              4.00
                              %
                              
                              
                              21,521
                              
                              
                              
                              5.00
                              %December
      31, 2008Total
      capital to risk weighted
      assetsConsolidated
                              
                              $
                              46,051
                              
                              
                              
                              11.93
                              %
                              
                              $
                              30,874
                              
                              
                              
                              8.00
                              %
                              
                              
                              N/A
                              
                              
                              
                              N/ABank
                              
                              
                              40,719
                              
                              
                              
                              10.58
                              %
                              
                              
                              30,795
                              
                              
                              
                              8.00
                              %
                              
                              $
                              38,494
                              
                              
                              
                              10.00
                              %Tier
      1 (Core) capital to risk weighted
      assetsConsolidated
                              
                              
                              35,638
                              
                              
                              
                              9.23
                              %
                              
                              
                              15,437
                              
                              
                              
                              4.00
                              %
                              
                              
                              N/A
                              
                              
                              
                              N/ABank
                              
                              
                              36,014
                              
                              
                              
                              9.36
                              %
                              
                              
                              15,397
                              
                              
                              
                              4.00
                              %
                              
                              
                              23,096
                              
                              
                              
                              6.00
                              %Tier
      1 (Core) capital to average
      assetsConsolidated
                              
                              
                              35,638
                              
                              
                              
                              8.26
                              %
                              
                              
                              17,264
                              
                              
                              
                              4.00
                              %
                              
                              
                              N/A
                              
                              
                              
                              N/ABank
                              
                              
                              36,014
                              
                              
                              
                              8.36
                              %
                              
                              
                              17,228
                              
                              
                              
                              4.00
                              %
                              
                              
                              21,535
                              
                              
                              
                              5.00
                              %


13.




JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)





NOTE
6 – SHORT-TERM BORROWING AND FEDERAL HOME LOAN BANK ADVANCES


At June
30, 2009 and December 31, 2008, advances from the Federal Home Loan Bank (FHLB)
were as follows:




2009
                    
                    
                    2008Overnight
      advances maturing daily at a daily variable interest rate of .43% at June
      30, 2009
                    
                    $
                    15,200
                    
                    
                    $
                    —Convertible
      advances maturing June 8, 2010 with a quarterly call option beginning June
      9, 2008 at a fixed rate of 4.99%
                    
                    
                    5,000
                    
                    
                    
                    5,000Convertible
      advances maturing June 8, 2012 with a quarterly call option beginning
      September 10, 2007 at a fixed rate of 4.68%
                    
                    
                    5,000
                    
                    
                    
                    5,000Convertible
      advances maturing August 13, 2010 with a quarterly call option beginning
      August 13, 2008 at a fixed rate of 4.51%
                    
                    
                    5,000
                    
                    
                    
                    5,000Convertible
      advances maturing October 4, 2010 with a quarterly call option beginning
      October 6, 2008 at a fixed rate of 4.15%
                    
                    
                    5,000
                    
                    
                    
                    5,000Advances
      maturing May 29, 2012 at a fixed rate of 2.11%
                    
                    
                    5,000
                    
                    
                    
                    —$
                    40,200
                    
                    
                    $
                    20,000





Each
advance is payable at its maturity date, with a prepayment penalty for the fixed
rate advances.  The advances are collateralized by a blanket lien
arrangement of the Company’s first mortgage loans, second mortgage loans and
commercial real estate loans.





In 2008,
the Company established a “Borrower in Custody” line of credit with the Federal
Reserve Bank by pledging excess collateral.  The amount of this line
at June 30, 2009 was $33,000, all of which was borrowed on that
date.





NOTE
7 – FAIR VALUE


SFAS
No. 157 defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date.  SFAS No. 157 also establishes
a fair value hierarchy which requires an entity to maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring
fair value.  The standard describes three levels of inputs that may be used
to measure fair values:




Level
1:  Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.


14.




JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)





Level
2:  Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the measurement
date.




Level
3:  Significant unobservable inputs that reflect a company’s own
assumptions about the assumptions that market participants would use in pricing
an asset or liability.




The
Company used the following methods and significant assumptions to estimate the
fair value of each type of financial instrument:




Investment
Securities:  The fair values for investment securities are
determined by quoted market prices, if available (Level 1).  For securities
where quoted prices are not available, fair values are calculated based on
market prices of similar securities (Level 2).  For securities where quoted
prices or market prices of similar securities are not available, fair values are
calculated using discounted cash flows or other market indicators (Level 3).
 Discounted cash flows are calculated using spread to swap and LIBOR curves
that are updated to incorporate loss severities, volatility, credit spread and
optionality.  During times when trading is more liquid, broker quotes
are used (if available) to validate the model.  Rating agency and industry
research reports as well as defaults and deferrals on individual securities are
reviewed and incorporated into the calculations.




Impaired
Loans:  The fair value of impaired loans with specific
allocations of the allowance for loan losses is generally based on recent real
estate appraisals.  These appraisals may utilize a single valuation
approach or a combination of approaches including cost approach, comparable
sales and the income approach.  Adjustments are routinely made in the
appraisal process by the appraisers to adjust for differences between the
comparable sales and income data available.  Such adjustments are
typically significant and result in a Level 3 classification of the inputs for
determining fair value.




Assets
and liabilities measured at fair value under SFAS No. 157 on a recurring
basis, including financial assets and liabilities for which the Company has
elected the fair value option, are summarized below:




Fair Value Measurements
    UsingQuoted
      Prices in
                  Active
      Markets for
                  Identical
      Assets
                  (Level
      1)
                
                
                Significant
      Other
                  Observable
                  Inputs
                  (Level
      2)
                
                
                Significant
                  Unobservable
                  Inputs
                  (Level
      3)Assets:Securities
      available for sale at June 30, 2009
                
                $
                22,778
                
                
                
                —
                
                
                $
                22,778
                
                
                
                —Securities
      available for sale at December 31, 2008
                
                $
                29,684
                
                
                
                —
                
                
                $
                29,684
                
                
                
                —


15.




JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)





Assets
measured at fair value on a non-recurring basis are summarized
below:





Fair Value Measurements UsingQuoted Prices in
                  Active Markets for
                  Identical Assets
                  (Level 1)
                
                
                Significant Other
                  Observable
                  Inputs
                  (Level 2)
                
                
                Significant
                  Unobservable
                  Inputs
                  (Level 3)Assets:Impaired
      Loans at June 30, 2009
                
                $
                2,620
                
                
                
                —
                
                
                
                —
                
                
                $
                2,620Impaired
      loans at December 31, 2008
                
                $
                3,734
                
                
                
                —
                
                
                
                —
                
                
                $
                3,734





Impaired
loans, which are measured for impairment using discounted cash flows or the fair
value of the collateral for collateral dependent loans, had a carrying amount of
$2,752, with a valuation allowance of $132, resulting in an additional provision
for loan loss of $132 for the period.  Additional impaired loans, not
measured using levels of inputs to measure fair value, had a carrying amount of
$13,320.  Collateral dependent impaired loans, valued under Level 3,
were measured using current appraised values along with information on recent
market transactions as well as management’s assumptions about the criteria that
market participants would use in pricing the assets.





In
accordance with FSP FAS 107-1, the carrying amount and estimated fair values of
financial instruments, at June 30, 2009 and December 31, 2008 were as
follows:





June
      30, 2009
                  
                  
                  December
      31, 2008Carrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairAmount
                  
                  
                  Value
                  
                  
                  Amount
                  
                  
                  ValueFinancial
      assetsCash
      and cash equivalents
                  
                  $
                  9,345
                  
                  
                  $
                  9,345
                  
                  
                  $
                  10,148
                  
                  
                  $
                  10,148Securities
      available for sale
                  
                  
                  22,778
                  
                  
                  
                  22,778
                  
                  
                  
                  29,684
                  
                  
                  
                  29,684Securities
      held to maturity
                  
                  
                  50
                  
                  
                  
                  50
                  
                  
                  
                  50
                  
                  
                  
                  50Loans,
      net
                  
                  
                  384,817
                  
                  
                  
                  387,809
                  
                  
                  
                  374,993
                  
                  
                  
                  374,454Federal
      Home Loan Bank stock
                  
                  
                  2,591
                  
                  
                  
                  n/a
                  
                  
                  
                  1,705
                  
                  
                  
                  n/aIndependent
      Bankers’ Bank Stock
                  
                  
                  153
                  
                  
                  
                  n/a
                  
                  
                  
                  285
                  
                  
                  
                  n/aAccrued
      interest receivable
                  
                  
                  1,758
                  
                  
                  
                  1,758
                  
                  
                  
                  2,027
                  
                  
                  
                  2,027Financial
      liabilitiesDeposits
                  
                  $
                  321,864
                  
                  
                  $
                  320,477
                  
                  
                  $
                  345,544
                  
                  
                  $
                  345,100Federal
      funds purchased
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Other
      borrowings
                  
                  
                  73,200
                  
                  
                  
                  74,140
                  
                  
                  
                  46,000
                  
                  
                  
                  47,223Subordinated
      debentures
                  
                  
                  14,550
                  
                  
                  
                  7,805
                  
                  
                  
                  14,550
                  
                  
                  
                  10,613Accrued
      interest payable
                  
                  
                  483
                  
                  
                  
                  483
                  
                  
                  
                  568
                  
                  
                  
                  568





The
methods and assumptions used to estimate fair value are described as
follows:


16.




JACKSONVILLE
BANCORP, INC.




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)





Carrying
amount is the estimated fair value for cash and cash equivalents,
interest-bearing deposits, accrued interest receivable and payable, demand
deposits, short-term debt, and variable rate loans or deposits that reprice
frequently and fully.  The methods for determining the fair values for
securities and impaired loans were described previously.  For fixed
rate loans or deposits, including FHLB advances, and for variable rate loans or
deposits with infrequent repricing or repricing limits, fair value is based on
discounted cash flows using current market rates applied to the estimated
life.  Fair value of loans held for sale is based on market
quotes.  Fair value of debt is based on current rates for similar
financing.  Accrued interest receivable and accrued interest payable
approximate their fair values.  It was not practicable to determine
fair value of FHLB and IBB stock due to restrictions placed on its
transferability.  The fair value of off-balance-sheet items is
considered nominal.





NOTE
8 – SUBSEQUENT EVENT


On July
7, 2009, the Company entered into an interest rate swap transaction with
SunTrust Bank.  Under the terms of the agreement, which relates to the
subordinated debt issued to Jacksonville Bancorp, Inc. Statutory Trust III in
the amount of $7,550, the Company has agreed to pay a fixed rate of 7.53% for a
period of ten years in exchange for the original floating rate contract (90-day
LIBOR plus 375 basis points).  The transaction was entered into to
mitigate interest rate risk exposure caused by fluctuations in interest
rates.


17.




JACKSONVILLE
BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS


OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations





General





Jacksonville
Bancorp, Inc. (“Bancorp”) was incorporated on October 24, 1997 and was organized
to conduct the operations of The Jacksonville Bank (the “Bank”).  The
Bank is a Florida state-chartered commercial bank that opened for business on
May 28, 1999, and its deposits are insured by the Federal Deposit Insurance
Corporation.  The Bank provides a variety of community banking
services to businesses and individuals in the greater Jacksonville area of
Northeast Florida.  During 2000, the Bank formed Fountain Financial,
Inc., a wholly owned subsidiary.  The primary business activities of
Fountain Financial, Inc. consist of referral of our customers to third parties
for the sale of insurance products.  Bancorp, the Bank and Fountain
Financial, Inc. are collectively referred to herein as the
“Company.”





Forward
Looking Statements





All
statements, other than statements of historical facts, included in this
Quarterly Report on Form 10-Q regarding our estimates, expectations, beliefs,
intentions, projections or strategies for the future, results of operations,
financial position, prospects and plans and objectives of management for future
operations may be “forward-looking statements” as defined in the Private
Securities Litigation Reform Act of 1995, as amended.  We have based
these forward-looking statements on our current expectations and projections
about future events and financial trends that we believe may affect our
financial condition, results of operations, business strategy, short-term and
long-term business operations and objectives and financial
needs.  These forward-looking statements can be identified by the use
of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,”
“target,” “estimate,” “expect,” and the like, and/or future-tense or conditional
constructions (“will,” “may,” “could,” “should,” etc.).  Items
contemplating or making assumptions about actual or potential future operating
results also constitute forward-looking statements.  The Company
cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, including changes in local economic
conditions, changes in regulatory requirements, fluctuations in interest rates,
demand for products, and competition, and, therefore, actual results could
differ materially from those contemplated by the forward-looking
statements.  In addition, the Company assumes no duty to update
forward-looking statements to reflect events or circumstances after the date of
such statements.





Business
Strategy





Our
primary business segment is community banking and consists of attracting
deposits from the general public and using such deposits and other sources of
funds to originate commercial business loans, commercial real estate loans,
residential mortgage loans and a variety of consumer loans.  We also
invest in securities backed by the United States Government, and agencies
thereof, as well as municipal tax-exempt bonds.  Our profitability
depends primarily on our net interest income, which is the difference between
the income we receive from our loan and securities investment portfolios and
costs incurred on our deposits, the Federal Home Loan Bank (“FHLB”) advances,
Federal Reserve borrowings and other sources of funding.  Net interest
income is also affected by the relative amounts of interest-earning assets and
interest-bearing liabilities.  Net interest income is generated as the
relative amounts of interest-earning assets grow in relation to the relative
amounts of interest-bearing liabilities.  In addition, the level of
noninterest income earned and noninterest expenses incurred also affects
profitability.  Included in noninterest income are service charges
earned on deposit accounts and increases in cash surrender value of Bank Owned
Life Insurance (“BOLI”).  Included in noninterest expense are costs
incurred for salaries and employee benefits, occupancy and equipment expenses,
data processing expenses, marketing and advertising expenses, federal deposit
insurance premiums and legal and professional fees.




18.





Our goal
is to sustain profitable, controlled growth by focusing on increasing our loan
and deposit market share in the Northeast Florida market by developing new
financial products, services and delivery channels; closely managing yields on
interest-earning assets and rates on interest-bearing liabilities; focusing on
noninterest income opportunities; controlling the growth of noninterest
expenses; and maintaining strong asset quality.   We have
initiated programs to expand our scope of services and achieve these
goals.  The Bank has adopted a philosophy of seeking out and retaining
the best available personnel for positions of responsibility which we believe
will provide us with a competitive edge in the local banking
industry.  The Bank opened its fourth and fifth locations in 2006 in
key areas of Jacksonville, providing additional visibility and access to
businesses and individuals, and resulting in additional loan and deposit
opportunities.





Our
operations are influenced by the local economic conditions and by policies of
financial institution regulatory authorities.  Fluctuations in
interest rates, due to factors such as competing financial institutions as well
as the Federal Reserve’s decisions on changes in interest rates, impact
interest-earning assets and our cost of funds and, thus, our net interest
margin.  In addition, the local economy and real estate market of
Northeast Florida and the demand for our products and loans impacts our
margin.  The local economy and viability of local businesses can also
impact the ability of our customers to make payments on loans, thus impacting
our loan portfolio.  The Company evaluates these factors when valuing
its allowance for loan losses and believes that the local economic conditions
have deteriorated over the last several quarters and that the local real estate
market has softened.  The Company also believes its underwriting
procedures are relatively conservative and, as a result, the Company is not
being any more affected than the overall market in the current economic
downturn.





Introduction





In the
following pages, management presents an analysis of the financial condition of
the Company as of June 30, 2009 compared to December 31, 2008, and the results
of operations for the six months ended June 30, 2009 compared with the same
period in 2008.  This discussion is designed to provide a more
comprehensive review of the operating results and financial position than could
be obtained from an examination of the financial statements
alone.  This analysis should be read in conjunction with the interim
financial statements and related footnotes included herein.





Comparison
of Financial Condition at June 30, 2009 and December 31, 2008





Total
assets increased $3.5 million, or 0.8%, from $434.0 million at December 31, 2008
to $437.5 million at June 30, 2009.  During the six months ended June
30, 2009, the Company experienced net loan growth of $9.8 million, or
2.6%.  The increase in net loans was driven by increases in
residential real estate loans of $11.7 million, or 14.4%, and commercial real
estate loans of $7.0 million, or 3.1%, offset by decreases in construction real
estate loans of $4.6 million, or 11.1%, and commercial loans of $2.9 million, or
10.3%.





Investment
securities available for sale decreased $6.9 million to $22.8 million at June
30, 2009.  During the six months ended June 30, 2009, we purchased
$2.0 million of U.S. government agency securities and received $9.0 million
in proceeds from maturities, calls and principal repayments.





Total
deposits decreased $23.7 million, or 6.9%, from $345.5 million at December 31,
2008 to $321.9 million at June 30, 2009.  During the six months
ended June 30, 2009, time deposits decreased $20.0 million to
$196.9 million, and noninterest bearing deposits decreased by $2.7 million
to $38.1 million.  During the six months ended June 30, 2009, money
market, NOW and savings deposits decreased $920,000 to
$86.8 million.




19.





Federal
Home Loan Bank advances increased $20.2 million from $20.0 million at December
31, 2008 to $40.2 million at June 30, 2009.  Federal Reserve Bank
borrowings increased $7.0 million to $33.0 million at June 30,
2009.  These increases offset the decreases in time deposits discussed
above and were the result of management’s desire to take advantage of the lowest
possible cost of funding sources.





Total
shareholders' equity decreased by $412,000 from $26.8 million at December 31,
2008 to $26.4 million at June 30, 2009.  The decrease is mainly
attributable to a net loss of $505,000 offset by an increase in the value of
available-for-sale securities.  At June 30, 2009, the Company had
8,000,000 authorized shares of $.01 par value common stock, of which 1,748,799
shares were issued and 1,747,599 shares were outstanding.  In
addition, the Company had 2,000,000 authorized shares of $.01 par value
preferred stock, none of which were issued or outstanding at June 30,
2009.




Comparison
of Operating Results for the Six Months Ended June 30, 2009 and
2008





Net
Income





There was
a net loss for the first six months of 2009 of $505,000, compared to a $303,000
net loss in the first six months of 2008.  On a diluted per share
basis, the net loss was $0.29 for the six months ended June 30, 2009, compared
to net loss of $0.17 per diluted share in 2008.  The decrease in net
income was driven primarily by additional provisions for loan losses, lower net
interest margin, an increase in FDIC regulatory assessment and recording an
other-than-temporary-impairment charge.





Net
Interest Income





Net
interest income, the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities, was $6.0 million for
the six months ended June 30, 2009, compared to $6.2 million for the same
period in 2008.  Interest income declined $1.7 million when compared
to the first six months of the prior year.  This was a result of the
reduction in short-term rates by the Federal Reserve in 2008 as well as an
increase in nonperforming assets to $15.2 million.  This was offset by
average earning asset growth of $19.1 million.





When
comparing the first six months of 2009 to the same period last year, the Company
experienced growth in its loan portfolio of 2.8%, compared to 9.3% for the same
period in the previous year, with the most significant impact occurring in
residential and commercial real estate.





Many of
the Bank’s loans are indexed to the prime rate.  The lower level of
the prime rate in the first six months of 2009 compared to the comparative
period in 2008 is reflected in the lower average yield on the loan portfolio due
to lower rates earned on variable rate loans and new loan
production.  The average yield on interest-earning assets for the
first six months of 2009 was 5.51%, which was a decrease of 112 basis points,
compared to the 6.63% yield earned during the first six months of
2008.





The
average cost of interest-bearing liabilities decreased 106 basis points from
4.03% in the first six months of 2008 to 2.97% in the comparable period in
2009.  The average cost of interest-bearing deposits and all
interest-bearing liabilities reflect, in part, the change in the funding mix for
the first six months of 2009 as compared to the same period in
2008.  Interest expense declined by $1.5 million as a result of the
reduction in short-term rates offset by a transition from core deposits into
more expensive time deposits.




20.





The net
interest margin decreased by 22 basis points from 3.14% to 2.92% when comparing
the first six months of 2009 to the same period last year.  This
decrease is mainly the result of a higher level of nonperforming loans and
pressures from highly competitive funding sources, both locally and
nationally.  As of June 30, 2009, the Bank had $14.6 million of loans
on nonaccrual compared to $8.8 million at June 30,
2008.  Furthermore, proceeds from maturity, amortization and
prepayment of loans and securities continue to be invested at current market
rates.  The Company closely monitors its cost of funds and has taken
action to reduce such costs through deposit gathering initiatives focused on
generating lower cost demand, money market and savings accounts.  In
the current more stable rate environment, the margin should continue to improve
as more expensive time deposits reprice at lower rates in comparison to previous
quarters.





Average Balance
Sheet; Interest Rates and Interest Differential.The following table sets
forth the average daily balances for each major category of assets, liabilities
and shareholders’ equity as well as the amounts and average rates earned or paid
on each major category of interest-earning assets and interest-bearing
liabilities.





Six
      Months Ended June 30,2009
                          
                          
                          2008Average
                          
                          
                          
                          
                          
                          Average
                          
                          
                          Average
                          
                          
                          
                          
                          
                          AverageBalance
                          
                          
                          Interest
                          
                          
                          Rate
                          
                          
                          Balance
                          
                          
                          Interest
                          
                          
                          Rate(Dollars
      in thousands)Interest-earning
      assets:Loans
      (1)
                          
                          $
                          384,666
                          
                          
                          $
                          10,742
                          
                          
                          
                          5.63
                          %
                          
                          $
                          360,561
                          
                          
                          $
                          12,235
                          
                          
                          
                          6.82
                          %Securities
      (2)
                          
                          
                          28,321
                          
                          
                          
                          587
                          
                          
                          
                          4.18
                          
                          
                          
                          31,873
                          
                          
                          
                          734
                          
                          
                          
                          4.64Other
      interest-earning assets (3)
                          
                          
                          691
                          
                          
                          
                          (23
                          )
                          
                          
                          (6.71
                          )
                          
                          
                          2,191
                          
                          
                          
                          33
                          
                          
                          
                          3.03Total
      interest-earning assets
                          
                          
                          413,678
                          
                          
                          
                          11,306
                          
                          
                          
                          5.51
                          
                          
                          
                          394,625
                          
                          
                          
                          13,002
                          
                          
                          
                          6.63Noninterest-earning
      assets (4)
                          
                          
                          16,430
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          15,930Total
      assets
                          
                          $
                          430,108
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          410,555Interest-bearing
      liabilities:Savings
      deposits
                          
                          $
                          12,789
                          
                          
                          $
                          118
                          
                          
                          
                          1.86
                          
                          
                          $
                          14,816
                          
                          
                          $
                          234
                          
                          
                          
                          3.18NOW
      deposits
                          
                          
                          8,770
                          
                          
                          
                          12
                          
                          
                          
                          .28
                          
                          
                          
                          7,350
                          
                          
                          
                          7
                          
                          
                          
                          .19Money
      market deposits
                          
                          
                          67,102
                          
                          
                          
                          534
                          
                          
                          
                          1.60
                          
                          
                          
                          90,749
                          
                          
                          
                          1,194
                          
                          
                          
                          2.65Time
      deposits
                          
                          
                          208,030
                          
                          
                          
                          3,763
                          
                          
                          
                          3.65
                          
                          
                          
                          180,645
                          
                          
                          
                          4,347
                          
                          
                          
                          4.84FHLB
      advances
                          
                          
                          24,819
                          
                          
                          
                          480
                          
                          
                          
                          3.90
                          
                          
                          
                          40,508
                          
                          
                          
                          832
                          
                          
                          
                          4.13Federal
      Reserve borrowing
                          
                          
                          24,889
                          
                          
                          
                          62
                          
                          
                          
                          .50
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Subordinated
      debt
                          
                          
                          14,550
                          
                          
                          
                          343
                          
                          
                          
                          4.75
                          
                          
                          
                          7,456
                          
                          
                          
                          233
                          
                          
                          
                          6.28Other
      interest-bearing liabilities (5)
                          
                          
                          153
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          286
                          
                          
                          
                          3
                          
                          
                          
                          2.11Total
      interest-bearing liabilities
                          
                          
                          361,102
                          
                          
                          
                          5,312
                          
                          
                          
                          2.97
                          
                          
                          
                          341,810
                          
                          
                          
                          6,850
                          
                          
                          
                          4.03Noninterest-bearing
      liabilities
                          
                          
                          41,935
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          41,515Shareholders'
      equity
                          
                          
                          27,071
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          27,230Total
      liabilities and shareholders' equity
                          
                          $
                          430,108
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          410,555Net
      interest income
                          
                          
                          
                          
                          
                          $
                          5,994
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          6,152Interest
      rate spread (6)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2.54
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2.60
                          %Net
      interest margin (7)
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2.92
                          %
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3.14
                          %





21.




(1)
              Includes
      nonaccrual loans.


(2)
            Due
      to immateriality, the interest income and yields related to certain tax
      exempt assets have not been adjusted to reflect a fully taxable equivalent
      yield.


(3)
            Includes
      federal funds sold.


(4)
            For
      presentation purposes, the BOLI acquired by the Bank has been included in
      noninterest-earning assets.


(5)
            Includes
      federal funds purchased.


(6)
            Interest
      rate spread represents the difference between the average yield on
      interest-earning assets and the average cost of interest-bearing
      liabilities.


(7)
            Net
      interest margin is net interest income divided by average interest-earning
      assets.





Rate/Volume
Analysis.The following table sets
forth the effect of changes in volumes, changes in rates, and changes in
rate/volume on tax-equivalent interest income, interest expense and net interest
income.





Six
      Months Ended June 30,2009 Versus 2008(1)Increase (decrease) due to changes
      in:NetVolume
                  
                  
                  Rate
                  
                  
                  Change(Dollars
      in thousands)Interest
      income:Loans
                  
                  $
                  778
                  
                  
                  $
                  (2,271
                  )
                  
                  $
                  (1,493
                  )Securities
                  
                  
                  (77
                  )
                  
                  
                  (70
                  )
                  
                  
                  (147
                  )Other
      interest-earning assets
                  
                  
                  (10
                  )
                  
                  
                  (46
                  )
                  
                  
                  (56
                  )Total
      interest income
                  
                  
                  691
                  
                  
                  
                  (2,387
                  )
                  
                  
                  (1,696
                  )Interest
      expense:Savings
      deposits
                  
                  
                  (29
                  )
                  
                  
                  (87
                  )
                  
                  
                  (116
                  )NOW
      deposits
                  
                  
                  2
                  
                  
                  
                  3
                  
                  
                  
                  5Money
      market deposits
                  
                  
                  (262
                  )
                  
                  
                  (398
                  )
                  
                  
                  (660
                  )Time
      deposits
                  
                  
                  597
                  
                  
                  
                  (1,181
                  )
                  
                  
                  (584
                  )FHLB
      advances
                  
                  
                  (306
                  )
                  
                  
                  (46
                  )
                  
                  
                  (352
                  )Federal
      Reserve borrowing
                  
                  
                  62
                  
                  
                  
                  —
                  
                  
                  
                  62Subordinated
      debt
                  
                  
                  178
                  
                  
                  
                  (68
                  )
                  
                  
                  110Other
      interest-bearing liabilities
                  
                  
                  (3
                  )
                  
                  
                  —
                  
                  
                  
                  (3
                  )Total
      interest expense
                  
                  
                  239
                  
                  
                  
                  (1,777
                  )
                  
                  
                  (1,538
                  )Decrease
      in net interest income
                  
                  $
                  452
                  
                  
                  $
                  (610
                  )
                  
                  $
                  (158
                  )







(1)
            The
      change in interest due to both rate and volume has been allocated to the
      volume and rate components in proportion to the relationship of the dollar
      amounts of the absolute change in
each.





Critical
Accounting Policies





A
critical accounting policy is one that is both very important to the portrayal
of the Company’s financial condition and requires management’s most difficult,
subjective or complex judgments.  The circumstances that make these
judgments difficult, subjective or complex have to do with the need to make
estimates about the effect of matters that are inherently
uncertain.  Based on this definition, the Company’s primary critical
accounting policy is the establishment and maintenance of an allowance for loan
losses.




22.




The
allowance for loan loss is established through a provision for loan loss charged
to expense.  Loans are charged against the allowance for loan loss
when management believes that the collectibility of the principal is
unlikely.  The allowance is an amount that management believes is
appropriate to absorb inherent probable and estimable incurred losses on
existing loans that may become uncollectible based on evaluations of the
collectibility of the loans.  The evaluations take into consideration
such objective factors as changes in the nature and volume of the loan portfolio
and historical loss experience.  The evaluation also considers certain
subjective factors such as overall portfolio quality, review of specific problem
loans and current economic conditions that may affect the borrowers’ ability to
pay.  The level of allowance for loan loss is also impacted by
increases and decreases in loans outstanding because either more or less
allowance is required as the amount of the Company’s credit exposure
changes.  To the extent actual loan losses differ materially from
management’s estimate of these subjective factors, loan growth/run-off
accelerates, or the mix of loan types changes, the level of provision for loan
loss, and related allowance can, and will, fluctuate.





Additional
information with regard to the Company’s methodology and reporting of the
allowance for loan losses is included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2008, as filed with the Securities and
Exchange Commission on March 20, 2009.





Asset
Quality





The
Company has identified certain assets as nonperforming.  These assets
include nonaccruing loans, loans that are contractually past due 90 days or more
as to principal or interest payments and still accruing, and foreclosed real
estate.  Loans are placed on nonaccrual status when management has
concerns regarding its ability to collect the outstanding loan principal and
interest amounts and typically when such loans are more than 90 days past
due.  These loans present more than the normal risk that the Company
will be unable to eventually collect or realize their full carrying
value.  The Company’s nonperforming assets at June 30, 2009 and
December 31, 2008 are as follows:





June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008(Dollars
      in thousands)Nonaccruing
      loans
                  
                  $
                  14,560
                  
                  
                  $
                  12,436Loans
      past due over 90 days still on accrual
                  
                  
                  —
                  
                  
                  
                  —Total
      nonperforming loans
                  
                  
                  14,560
                  
                  
                  
                  12,436Foreclosed
      assets, net
                  
                  
                  653
                  
                  
                  
                  89Total
      nonperforming assets
                  
                  $
                  15,213
                  
                  
                  $
                  12,525Allowance
      for loan losses
                  
                  $
                  5,663
                  
                  
                  $
                  4,705Nonperforming
      loans and foreclosed assets as a percent of total assets
                  
                  
                  3.48
                  %
                  
                  
                  2.89
                  %Nonperforming
      loans as a percent of gross loans
                  
                  
                  3.73
                  %
                  
                  
                  3.28
                  %Allowance
      for loan losses as a percent of nonperforming loans
                  
                  
                  38.89
                  %
                  
                  
                  37.83
                  %





Loans are
impaired when it is considered probable that management will not collect the
outstanding loan principal and interest amounts according to the loan’s
contractual terms or realize the full carrying value of the loan.  At
June 30, 2009, the Company had impaired loans of $16.1 million, compared to
$17.3 million at December 31, 2008.  Of the $15.2 million in
nonperforming assets, one relationship in the amount of $2.9 million is
under contract to be sold.  Any estimated losses to sell the property
have been reserved through the allowance for loan and lease loss.




23.




On
January 22, 2009, the Bank foreclosed on a commercial property located in
downtown Jacksonville.  The loan, which was originally made on
February 15, 2005, had ceased accruing interest on May 8, 2008.  On
February 28, 2009, the property was sold for $3.7 million.  A
charge-off in the amount of $368,000 was recorded at the time of foreclosure, of
which the full amount had previously been reserved through the Allowance for
Loan Losses.





On April
6, 2009, the Bank foreclosed on a residential property that was listed as an
impaired loan as of March 31, 2009.  The loan, which was originally
made on January 8, 2002, had ceased accruing interest on February 29,
2008.  On May 4, 2009, the property was sold for
$200,000.





In June
2009, the Bank recorded an in-substance foreclosure in the amount of $594,000 on
a commercial property located in Palm Coast, Florida.  The loan was listed
as impaired as of March 31, 2009 and had ceased accruing interest on April 17,
2009.  A $126,000 charge-off was recorded at the time of
foreclosure.





During
the first six months of 2009, the Bank recorded $41,000 for Other Real Estate
Owned expenses primarily resulting from a $30,000 write down for a property
value decline.  This property has been in the Bank’s possession since
September 2008.





The
Company critically evaluates all requests for additional funding on classified
loans to determine whether the borrower has the capacity and willingness to
repay.  Any requests of this nature require concurrence by the Loan
Committee of the Board of Directors.





Allowance
and Provision for Loan Losses





The
allowance for loan losses grew by $958,000 during the first six months of 2009,
amounting to $5.7 million at June 30, 2009, as compared to $4.7 million at
December 31, 2008.  The allowance represented approximately 1.45% of
total loans at June 30, 2009 and 1.24% at December 31, 2008.  During
the first six months of 2009, the Company had charge-offs of $1.3 million,
recoveries of $2,000 and recorded a $2.2 million provision for loan losses
compared to charge-offs of $1.0 million, recoveries of $5,000 and a provision
for loan losses of $2.1 million for the first six months of 2008.  The
larger provision for loan losses in 2009 was driven primarily by the level of
charge-offs and management’s efforts to identify potential losses inherent in
the portfolio.  The Bank’s increased identification efforts of
potential losses in the portfolio are based on a variety of specific factors,
including the Company’s and peer banks’ experiences as well as industry and
economic trends.  Impaired loans were $16.1 million as of June 30,
2009; of this amount, $132,000 was specifically allocated to the allowance for
loan losses which is deemed appropriate to absorb probable losses.





The
allowance for loan losses is a valuation allowance for credit losses in the loan
portfolio.  Management has adopted a methodology to properly analyze
and determine an adequate loan loss allowance.  The analysis is based
on sound, reliable and well documented information and is designed to support an
allowance that is adequate to absorb all estimated incurred losses in the
Company’s loan portfolio.  Due to their similarities, the Company has
grouped the loan portfolio into three components.  The components are
residential real estate, consumer loans and commercial loans.  The
Company has created a loan classification system to properly calculate the
allowance for loan losses. Commercial and commercial real estate loans are
individually evaluated for impairment.  If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net, at the
present value of estimated future cash flows using the loan’s existing rate or
at the fair value of collateral if repayment is expected solely from the sale of
the collateral.  Large groups of smaller balance homogeneous loans,
such as consumer and residential real estate loans, are collectively evaluated
for impairment and, accordingly, they are not separately identified for
impairment disclosures.


24.


In
estimating the overall exposure to loss on impaired loans, the Company has
considered a number of factors, including the borrower’s character, overall
financial condition, resources and payment record, the prospects for support
from any financially responsible guarantors, and the realizable value of any
collateral.  The Company also considers other internal and external
factors when determining the allowance for loan losses.  These factors
include, but are not limited to, changes in national and local economic
conditions, commercial lending staff limitations, impact from lengthy commercial
loan workout and charge-off periods, loan portfolio concentrations and trends in
the loan portfolio.





Bank
regulators have issued “Joint Guidance on Concentrations in Commercial Real
Estate Lending.”  This document outlines regulators’ concerns
regarding the high level of growth in commercial real estate loans on banks’
balance sheets.  Many banks, especially those in Florida, have seen a
substantial increase in exposure to commercial real estate loans.  The
Company has and will continue to pursue fundamentally sound owner occupied
commercial real estate lending opportunities that fit within its lending
parameters.  The ongoing growth and concentration in this category is
considered when analyzing the adequacy of the loan loss allowance based on
sound, reliable and well documented information.





Based on
the results of the analysis performed by management at June 30, 2009, the
allowance for loan loss is considered to be appropriate to absorb estimated loan
losses in the portfolio as of that date.  As more fully discussed in
the “Critical Accounting Policies” section of this Management’s Discussion and
Analysis of Financial Condition and Results of Operations, the process for
estimating credit losses and determining the allowance for loan losses as of any
balance sheet date is subjective in nature and requires material
estimates.  Actual results could differ significantly from these
estimates.





The
amount of future charge-offs and provisions for loan losses could be affected
by, among other things, economic conditions in Jacksonville, Florida, and the
surrounding communities.  Such conditions could affect the financial
strength of the Company’s borrowers and the value of real estate collateral
securing the Company’s mortgage loans.  Loans secured by real estate
represent approximately 93% of the Company’s total loans outstanding at June 30,
2009.  Economic conditions in Jacksonville have deteriorated over the
last several quarters, resulting in a softening of real estate
values.  Residential real estate values have experienced greater
volatility and have declined in most areas.  Conditions and values
could deteriorate further in the future, and such deterioration could be
substantial.  If this were to occur, some of the Company’s borrowers
may be unable to make the required contractual payments on their loans, and the
Company may be unable to realize the full carrying value of such loans through
foreclosure.  The Company is unable to determine at this time the
effect of such an occurrence on the Company’s financial condition and results of
operations; however, management believes that the Company should not be any more
affected than the overall market.





Future
provisions and charge-offs could also be affected by environmental impairment of
properties securing the Company’s mortgage loans.  Under the Company’s
current policy, an environmental audit is required on practically all
commercial-type properties that are considered for a mortgage
loan.  At the present time, the Company is not aware of any existing
loans in the portfolio where there is environmental pollution existing on the
mortgaged properties that would materially affect the value of the
portfolio.





Noninterest
Income, Noninterest Expense and Income Taxes





Noninterest
income was $370,000 for the six months ended June 30, 2009, compared to $512,000
for the comparable 2008 period.  This decline was principally the
result of recognizing a $132,000 write-off in the stock of Silverton Bank, N.A.
due to its May 2009 failure and a $38,000 reduction in the earnings on the BOLI
policy.  This was offset by a loan referral fee in the amount of
$52,000.




25.




Noninterest
expense was $5.0 million for the six months ended June 30, 2009, compared to
$5.1 million for the same period in 2008.  Increases in data
processing fees and regulatory assessments were offset by a reduction in
compensation expense, directors’ fees and professional fees for the six months
ended June 30, 2009.





The
income tax benefit for the six months ended June 30, 2009 was $329,000, compared
to an income tax benefit of $289,000 for the six months ended June 30,
2008.  The tax benefit is the result of the benefits derived from
tax-free municipal bonds and tax-free income earned on the bank-owned life
insurance policies, resulting in a greater percentage of loss being taxed at the
statutory rates.





Comparison
of Operating Results for the Three Months Ended June 30, 2009 and
2008





Net
income for the second quarter of 2009 was a loss of $396,000, or $.23 per
diluted share, as compared to a net loss of $840,000, or $.48 per diluted share,
earned for the same quarter last year.  During the second quarter of
2009, the Company recorded a $1.3 million provision for loan loss compared to
$1.7 million provision for the second quarter of 2008.  The Company
recorded $492,000 for regulatory assessments in the second quarter of 2009
compared to $84,000 in the second quarter of 2008, which included the FDIC
special assessment on institutions to rebuild the Deposit Insurance Fund in the
amount of $216,000.   The increases were offset by a decrease in
advertising and business development, professional fees and directors’
fees.





Net
interest income remained flat at $3.0 million for the second quarter of 2009 and
2008.  Interest income for the quarter declined $584,000 when compared
to the prior year as a result of the ongoing reduction in short-term rates by
the Federal Reserve offset by average earning asset growth of $19.1
million.  Interest expense declined by $726,000 as a result of the
reduction in short-term rates and utilizing less expensive wholesale funding to
support the Company’s earning asset growth offset by a transition from core
deposits into more expensive time deposits.  The net interest margin
improved to 2.97% for the quarter, compared to 2.93% for the comparable period
in 2008 and 2.87% for the quarter ended March 31, 2009.





Capital





The
Company’s capital management policy is designed to build and maintain capital
levels that meet regulatory standards.  Under current regulatory
capital standards, banks are classified as well-capitalized,
adequately-capitalized or undercapitalized.  Under such standards, a
well-capitalized bank is one that has a total risk-based capital ratio equal to
or greater than 10%, a Tier 1 risk-based capital ratio equal to or greater than
6%, and a Tier 1 leverage capital ratio equal to or greater than
5%.  The Bank’s total risk-based capital, Tier 1 risk-based capital
and Tier 1 leverage capital ratios were 10.69%, 9.43% and 8.51%, respectively,
at June 30, 2009.  The Company also maintains capital levels that meet
the same regulatory standards.  If the capital ratios of Bancorp and
the Bank were to fall below levels required under regulatory standards, it is
their policy to increase capital in an amount sufficient to meet regulatory
requirements within 30 days.





The
Company has included in Tier 1 Capital and Total Capital the trust preferred
securities that were issued in June 2004, December 2006 and June
2008.





Cash
Flows and Liquidity





Cash
Flows.The Company’s primary
sources of cash are deposit growth, maturities and amortization of investment
securities, FHLB advances, Federal Reserve Bank borrowings and federal funds
purchased.  The Company uses cash from these and other sources to fund
loan growth.  Any remaining cash is used primarily to reduce
borrowings and to purchase investment securities.  During the first
six months of 2009, the Company’s cash and cash equivalent position decreased by
$803,000.  The decrease in cash mainly resulted from a decrease in
deposit accounts of approximately $23.7 million from $345.5 million at December
31, 2008 to $321.9 million at June 30, 2009, and net loan originations of
$12.7 million, offsetting proceeds from available-for-sale securities of
$9.0 million and increases in overnight and fixed rate advances from the FHLB
and FRB in the amount of $27.2 million.




26.





Liquidity.The
Company has both internal and external sources of near-term liquidity that can
be used to fund loan growth and accommodate deposit outflows.  The
primary internal sources of liquidity are principal and interest payments on
loans; proceeds from maturities and monthly payments on the balance of the
investment securities portfolio; its overnight position with federal funds sold;
and Federal Reserve borrowing.  At June 30, 2009, the Company had
$22.8 million in available-for-sale securities not subject to pledge
agreements.





The
Company’s primary external sources of liquidity are customer deposits and
borrowings from other commercial banks.  The Company’s deposit base
consists of both deposits from businesses and consumers in its local market as
well as national market and brokered certificates of deposit.  The
Company can also borrow overnight federal funds and fixed-rate term products
under credit facilities established with the FHLB, Federal Reserve Discount
Window and other commercial banks.  These lines, in the aggregate
amount of approximately $112.4 million, do not represent legal commitments to
extend credit.





Contractual
Obligations, Commitments and Contingent Liabilities.The Company has
various financial obligations, including contractual obligations and commitments
that may require future cash payments.  Management believes that there
have been no material changes in the Company’s overall level of these financial
obligations since December 31, 2008 and that any changes in the Company’s
obligations which have occurred are routine for the industry.  Further
discussion of the nature of each type of obligation is included in the section
entitled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008, as filed with the SEC on March 20, 2009, and is
incorporated herein by reference.





Off-Balance Sheet
Arrangements.There have been
no material changes in the risks related to off-balance sheet arrangements since
the Company’s disclosure in its Annual Report on Form 10-K for the year ended
December 31, 2008.





Item
3.  Quantitative and Qualitative Disclosures about Market
Risk





Market
risk is the risk that a financial institution will be adversely impacted by
unfavorable changes in market prices.   These unfavorable changes
could result in a reduction in net interest income, which is the difference
between interest earned on interest-earning assets and interest paid on
interest-bearing liabilities.





Interest
rate risk is the sensitivity of income to variations in interest rates over both
short-term and long-term horizons.  The primary goal of interest rate
risk management is to control this risk within limits approved by the Board of
Directors and narrower guidelines approved by the Asset Liability
Committee.  These limits and guidelines reflect the Bank’s tolerance
for interest rate risk.  The Bank attempts to control interest rate
risk by identifying and quantifying exposures.  The Bank quantifies
its interest rate risk exposures using sophisticated simulation and valuation
models as well as simpler gap analyses performed by a third-party vendor
specializing in this activity.  There have been no significant changes
in the Bank’s primary market risk exposure or how those risks are managed since
our disclosures in our Annual Report on Form 10-K for the year ended December
31, 2008.




27.





The
Bank’s internal policy on interest rate risk specifies that if interest rates
were to shift immediately up or down 200 basis points, estimated net interest
income for the next 12 months should change by less than 15%.  The
most current simulation projects the Bank’s net interest income to be within the
parameters of its internal policy and has not changed significantly from our
disclosures in our Annual Report on Form 10-K for the year ended December
31, 2008.  Such simulation involves numerous assumptions and
estimates, which are inherently subjective and are subject to substantial
business and economic uncertainties.  Accordingly, the actual effects
of an interest rate shift under actual future conditions may be expected to vary
significantly from those derived from the simulation to the extent that the
assumptions used in the simulation differ from actual conditions.





Item
4.  Controls and Procedures




(a)    Evaluation
of Disclosure Controls and Procedures




The
Company maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC.  Based upon management’s evaluation
of those controls and procedures as of the end of the fiscal quarter covered by
this quarterly report on Form 10-Q, the Chief Executive Officer and Chief
Financial Officer of the Company concluded that, subject to the limitations
noted below, the Company’s disclosure controls and procedures (as defined in
Rules 13a-15(e) under the Exchange Act) are effective to ensure that the
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and
forms.




(b)    Changes
in Internal Controls




In the
ordinary course of business, the Company may routinely modify, upgrade and
enhance its internal controls and procedures for financial
reporting.  In an effort to improve internal control over financial
reporting, the Company continues to emphasize the importance of identifying
areas for improvement and to create and implement new policies and procedures
where deficiencies exist.  There have not been any changes in the
Company’s internal controls over financial reporting as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f) during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.




(c)     Limitations
on the Effectiveness of Controls




Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and internal controls will prevent
all error and all fraud.  A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met.  Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs.  Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake.  Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management’s override of the control.




28.




The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate.  Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.




29.




PART II - OTHER INFORMATION





Item
      1.
            Legal
      Proceedings





From time
to time, as a normal incident of the nature and kind of business in which we are
engaged, various claims or charges are asserted against us and/or our directors,
officers or affiliates.  In the ordinary course of business, the
Company and its subsidiary are also subject to regulatory examinations,
information gathering requests, inquiries and investigations.  Other
than ordinary routine litigation incidental to our business, management believes
after consultation with legal counsel that there are no pending legal
proceedings against the Company or the Bank that will, individually or in the
aggregate, have a material adverse effect on the consolidated results of
operations or financial condition of the Company.





Item
      1A.
            Risk
      Factors


There
      have been no material changes from the risk factors disclosed in the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2008,
      as filed with the SEC on March 20,
2009.





Item
      2.
            Unregistered Sales of
      Equity Securities and Use of
Proceeds


None





Item
      3.
            Defaults Upon Senior
      Securities


None





Item
      4.
            Submission of Matters
      to a Vote of Security
Holders


On April
28, 2009, Bancorp held an Annual Meeting of Shareholders of its common stock to
vote on the election of two persons to its Board of Directors.





Both of
the directors up for election at the Annual Meeting were elected to serve a term
of office of three years, expiring at the Annual Meeting in the year
2012.  The following table sets forth the votes for, votes against and
votes withheld with respect to the election of the directors:





Director Nominee
                    
                    Votes For
                    
                    
                    Votes Against
                    
                    
                    Votes WithheldJames
      M. Healey
                    
                    
                    1,493,251
                    
                    
                    
                    13,723
                    
                    
                    
                    32,500John
      C. Kowkabany
                    
                    
                    1,522,687
                    
                    
                    
                    16,286
                    
                    
                    
                    500





Messrs.
      Mills, Pomar, Roller, Rose, Schultz, Schwenck, Spencer and Winfield
      continued their term of office as directors after the 2009 Annual
      Meeting.





Item
      5.
            Other
      Information


On May
13, 2009, the Bank entered into an employment agreement with Valerie A. Kendall,
its Chief Financial Officer (the “Kendall Agreement”), a copy of which is
attached here to as Exhibit 10.1 and is incorporated herein by
reference.  The Kendall Agreement has a rolling one-year term ending
no later than Ms. Kendall’s 65th birthday and contains a six-month
non-competition provision against employment in the financial services industry
or with any person seeking to organize a financial institution in Duval County
or Clay County.  The Kendall Agreement provides for an annual base
salary of $145,000, which will be reviewed by the Bank in good faith on an
annual basis.  Under the Kendall Agreement, Ms. Kendall is also
entitled to receive incentive compensation and bonuses as may be determined from
time to time by the Board of Directors.  The Kendall Agreement also
provides for Ms. Kendall’s participation in bonus plans, stock option plans,
stock ownership plans, profit sharing plans and 401(k) plans made available to
the Bank’s employees and executives.




30.




Under the
Kendall Agreement, if the Bank terminates Ms. Kendall’s employment for a reason
other than for “just cause” (as defined in the Kendall Agreement), or if Ms.
Kendall terminates her employment for “good reason” (as defined), then the Bank
must pay Ms. Kendall an amount equal to her annual base salary, plus any
incentive compensation or bonus which Ms. Kendall would have been entitled to
under the Kendall Agreement.  This amount will be paid in 24 equal
semi-monthly payments.  If Ms. Kendall’s employment is terminated as a
result of a “change in control” (as defined) or a change in control occurs
within 12 months of her involuntary termination or termination for good reason,
then Ms. Kendall is entitled to a severance payment equal to 2.99 times the
highest annual salary and bonus she was paid or entitled to in the two years
preceding termination.  This amount will be paid in full within 10
days of separation from service.   Furthermore, under certain banking
regulatory requirements, or unless Ms. Kendall is terminated for just cause, or
Ms. Kendall terminates her employment for other than good reason, the Bank is
also required to maintain in full force and effect all employee benefit plans in
which Ms. Kendall was participating before termination for the remainder of the
Kendall Agreement, or 12 months, whichever is longer.





Also on
May 13, 2009, the Bank entered into new employment agreements with Gilbert James
Pomar, III, its President and Chief Executive Officer (the “Pomar Agreement”)
and Scott M. Hall, its Senior Loan Officer (the “Hall
Agreement”).  Copies of the Pomar Agreement and Hall Agreement are
attached hereto as Exhibits 10.2and 10.3 and are
incorporated herein by reference.  The new agreements reflect changes
in the tax laws, and replace the previous employment agreements for Messrs.
Pomar and Hall (the “Old Agreements”).  The Pomar Agreement provides
for an annual base salary of $210,000, which will be reviewed by the Bank in
good faith on an annual basis.  The Hall Agreement provides for an
annual base salary of $160,000, which will be reviewed by the Bank in good faith
on an annual basis.  The other material terms of the Pomar Agreement
and the Hall Agreement are the same as each of Messrs. Pomar’s and Hall’s Old
Agreements, which are described in the Company’s filings with the Securities and
Exchange Commission.





Item
      6.
            Exhibits




Exhibit
No. 3.1: Articles
of Incorporation of the Company(1)





Exhibit
No. 3.2: Amended
and Restated Bylaws of the Company, as amended to date(2)





Exhibit
No. 10.1: Employment
Agreement between The Jacksonville Bank and Valerie A.
Kendall





Exhibit
No. 10.2: Employment
Agreement between The Jacksonville Bank and Gilbert James Pomar,
III





Exhibit
No. 10.3 Employment
Agreement between The Jacksonville Bank and Scott M. Hall





Exhibit
No. 31.1: Certification
of principal executive officer required by Rule 13a-14(a)/15d-14(a) of the
Exchange Act




31.





Exhibit
No. 31.2: Certification
of principal financial officer required by Rule 13a-14(a)/15d-14(a) of the
Exchange Act





Exhibit
No. 32: Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes–Oxley Act of 2002









(1)
            Incorporated
      herein by reference to Appendix A to Form SB-2, filed September 30, 1998,
      Registration No. 333-64815.


(2)
            Incorporated
      herein by reference to Exhibit No. 3.2 to Form 10-K for year ended
      December 31, 2008, filed March 20, 2009, File No.
      000-30248.


32.


JACKSONVILLE
BANCORP, INC.





SIGNATURES







Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.





JACKSONVILLE
      BANCORP, INC.Date:  August
      10, 2009
              /s/ Gilbert J. Pomar,
IIIGilbert
      J. Pomar, IIIPresident
      and Chief Executive OfficerDate:  August
      10, 2009
              /s/ Valerie A. KendallValerie
      A. KendallExecutive
      Vice Presidentand
      Chief Financial Officer


33.


JACKSONVILLE
BANCORP, INC.





EXHIBIT
INDEX


Exhibit
No. 3.1: Articles
of Incorporation of the Company(1)





Exhibit
No. 3.2: Amended
and Restated Bylaws of the Company, as amended to date(2)





Exhibit
No. 10.1: Employment
Agreement between The Jacksonville Bank and Valerie A.
Kendall





Exhibit
No. 10.2: Employment
Agreement between The Jacksonville Bank and Gilbert James Pomar,
III





Exhibit
No. 10.3 Employment
Agreement between The Jacksonville Bank and Scott M. Hall





Exhibit
No. 31.1: Certification
of principal executive officer required by Rule 13a-14(a)/15d-14(a) of the
Exchange Act





Exhibit No.
31.2: Certification
of principal financial officer required by Rule 13a-14(a)/15d-14(a) of the
Exchange Act





Exhibit
No. 32: Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes–Oxley Act of 2002










(1)
            Incorporated
      herein by reference to Appendix A to Form SB-2, filed September 30, 1998,
      Registration No. 333-64815.


(2)
            Incorporated
      herein by reference to Exhibit No. 3.2 to Form 10-K for year ended
      December 31, 2008, filed March 20, 2009, File No.
      000-30248.


34.