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 endedMarch
31,
2010
 
  ̈
                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             ̈           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 May
5, 2010 the latest practicable date, 1,750,437 of 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
                    8Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    20Item
      3.
                    Quantitative
      and Qualitative Disclosures about Market Risk
                    30Item
      4.
                    Controls
      and Procedures
                    30PART
      II—OTHER INFORMATIONItem
      1.
                    Legal
      Proceedings
                    32Item
      1A.
                    Risk
      Factors
                    32Item
      6.
                    Exhibits
                    32SIGNATURES
                    33EXHIBIT
      INDEX
                    34CERTIFICATIONSCertification
      of Price W. Schwenck 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.


JACKSONVILLE
BANCORP, INC.


PART I—FINANCIAL
INFORMATION





Item
1.  Financial Statements





CONSOLIDATED
BALANCE SHEETS


(Dollars
in thousands, except per share amounts)










March 31,
                
                
                December 31,2010
                
                
                2009(Unaudited)ASSETSCash
      and due from banks
                
                $
                6,335
                
                
                $
                5,647Federal
      funds sold
                
                
                12,882
                
                
                
                —Total
      cash and cash equivalents
                
                
                19,217
                
                
                
                5,647Securities
      available-for-sale
                
                
                23,313
                
                
                
                22,171Loans,
      net of allowance for loan lossesof $7,618at 2010 and $6,854
      at 2009
                
                
                382,983
                
                
                
                384,133Premises
      and equipment, net
                
                
                3,444
                
                
                
                3,533Bank-owned
      life insurance (BOLI)
                
                
                8,934
                
                
                
                8,908Federal
      Home Loan Bank (FHLB) stock
                
                
                3,047
                
                
                
                3,047Real
      estate owned, net
                
                
                3,676
                
                
                
                4,011Deferred
      income taxes
                
                
                2,330
                
                
                
                2,015Prepaid
      regulatory assessments
                
                
                2,393
                
                
                
                2,599Accrued
      interest receivable
                
                
                1,896
                
                
                
                1,864Other
      assets
                
                
                1,142
                
                
                
                883Total
      assets
                
                $
                452,375
                
                
                $
                438,811LIABILITIESDepositsNoninterest
      bearing
                
                $
                44,165
                
                
                $
                43,704Money
      market, NOW and savings deposits
                
                
                115,109
                
                
                
                104,838Time
      deposits
                
                
                226,670
                
                
                
                222,093Total
      deposits
                
                
                385,944
                
                
                
                370,635Federal
      funds purchased
                
                
                —
                
                
                
                227FHLB
      advances
                
                
                25,000
                
                
                
                25,000Subordinated
      debt
                
                
                14,550
                
                
                
                14,550Accrued
      expenses and other liabilities
                
                
                670
                
                
                
                1,131Total
      liabilities
                
                
                426,164
                
                
                
                411,543SHAREHOLDERS’
      EQUITYCommon
      stock, $.01 par value, 8,000,000 shares authorized, 1,749,526and 1,749,526
      shares issued
                
                
                17
                
                
                
                17Additional
      paid–in capital
                
                
                18,654
                
                
                
                18,631Retained
      earnings
                
                
                7,299
                
                
                
                8,287Treasury
      stock, 843 and 283 shares
                
                
                (9
                )
                
                
                (3
                )Accumulated
      other comprehensive income
                
                
                250
                
                
                
                336Total
      shareholders’ equity
                
                
                26,211
                
                
                
                27,268Total
      liabilities and shareholders’ equity
                
                $
                452,375
                
                
                $
                438,811





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 EndedMarch 31,2010
                
                
                2009Interest
      and dividend incomeLoans,
      including fees
                
                $
                5,584
                
                
                $
                5,359Taxable
      securities
                
                
                115
                
                
                
                230Tax-exempt
      securities
                
                
                103
                
                
                
                103Federal
      funds sold and other
                
                
                (7
                )
                
                
                (11
                )Total
      interest income
                
                
                5,795
                
                
                
                5,681Interest
      expenseDeposits
                
                $
                1,774
                
                
                $
                2,311Federal
      Reserve borrowing
                
                
                1
                
                
                
                31FHLB
      advances
                
                
                255
                
                
                
                231Subordinated
      debt
                
                
                190
                
                
                
                183Total
      interest expense
                
                
                2,220
                
                
                
                2,756Net
      interest income
                
                
                3,575
                
                
                
                2,925Provision
      for loan losses
                
                
                2,375
                
                
                
                938Net
      interest income after provision for loan losses
                
                
                1,200
                
                
                
                1,987Noninterest
      incomeService
      charges on deposit accounts
                
                
                139
                
                
                
                160Non-marketable
      equity security
                
                
                —
                
                
                
                (132
                )Other
      income
                
                
                109
                
                
                
                118Total
      noninterest income
                
                
                248
                
                
                
                146Noninterest
      expenseSalaries
      and employee benefits
                
                
                1,237
                
                
                
                1,116Occupancy
      and equipment
                
                
                406
                
                
                
                416Regulatory
      assessment
                
                
                260
                
                
                
                114Data
      processing
                
                
                245
                
                
                
                208Advertising
      and business development
                
                
                86
                
                
                
                112Professional
      fees
                
                
                161
                
                
                
                149Telephone
      expense
                
                
                32
                
                
                
                31Other
      real estate owned expense
                
                
                464
                
                
                
                13Other
                
                
                195
                
                
                
                127Total
      noninterest expense
                
                
                3,086
                
                
                
                2,286Income
      (loss) before income taxes
                
                
                (1,638
                )
                
                
                (153
                )Income
      tax expense (benefit)
                
                
                (650
                )
                
                
                ( 44
                )Net
      income (loss)
                
                $
                (988
                )
                
                $
                (109
                )Weighted
      average:Common
      shares
                
                
                1,748,832
                
                
                
                1,748,647Dilutive
      stock options and warrants
                
                
                —
                
                
                
                —Dilutive
      shares
                
                
                1,748,832
                
                
                
                1,748,647Basic
      earnings (loss) per common share
                
                $
                (.56
                )
                
                $
                (.06
                )Diluted
      earnings (loss) per common share
                
                $
                (.56
                )
                
                $
                (.06
                )




See
accompanying notes to unaudited consolidated financial
statements.


4.





JACKSONVILLE
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


(Unaudited)


(Dollars
in thousands)





CommonStock
                                  
                                  
                                  Additional
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  AccumulatedOtherOutstanding
                                  
                                  
                                  Paid-In
                                  
                                  
                                  Retained
                                  
                                  
                                  TreasuryStock
                                  
                                  
                                  ComprehensiveShares
                                  
                                  
                                  Amount
                                  
                                  
                                  Capital
                                  
                                  
                                  Earnings
                                  
                                  
                                  Amount
                                  
                                  
                                  Income (loss)
                                  
                                  
                                  TotalBalance
      at January 1, 2009
                                  
                                  
                                  1,748,599
                                  
                                  
                                  $
                                  17
                                  
                                  
                                  $
                                  18,568
                                  
                                  
                                  $
                                  8,213
                                  
                                  
                                  $
                                  (2
                                  )
                                  
                                  $
                                  49
                                  
                                  
                                  $
                                  26,845Comprehensive
      loss:Net
      (loss)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (109
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (109
                                  )Change
      in unrealized gain (loss)on
      securities available-for-sale, net of tax effects
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  90
                                  
                                  
                                  
                                  90Total
      comprehensive (loss)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (19
                                  )Purchase
      of treasury stock
                                  
                                  
                                  (1,153
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (14
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (14
                                  )Issuance
      of treasury stock
                                  
                                  
                                  1,353
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  16
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  15Share-based
      compensation expense
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  28
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  28Balance
      at March 31, 2009
                                  
                                  
                                  1,748,799
                                  
                                  
                                  $
                                  17
                                  
                                  
                                  $
                                  18,595
                                  
                                  
                                  $
                                  8,104
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  139
                                  
                                  
                                  $
                                  26,855Balance
      at January 1, 2010
                                  
                                  
                                  1,749,243
                                  
                                  
                                  $
                                  17
                                  
                                  
                                  $
                                  18,631
                                  
                                  
                                  $
                                  8,287
                                  
                                  
                                  $
                                  (3
                                  )
                                  
                                  $
                                  336
                                  
                                  
                                  $
                                  27,268Comprehensive
      income:Net
      (loss)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (988
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (988
                                  )Change
      in unrealized gain (loss) on securities available- for-sale, net of tax
      effects
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (10
                                  )
                                  
                                  
                                  (10
                                  )Net
      unrealized loss on cash flow hedge, net of tax effects
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (76
                                  )
                                  
                                  
                                  (76
                                  )Total
      comprehensive (loss)
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (1,074
                                  )Purchase
      of treasury stock
                                  
                                  
                                  (560
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  (6
                                  )
                                  
                                  
                                  
                                  
                                  
                                  
                                  (6
                                  )Share-based
      compensation expense
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  23
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  23Balance
      at March 31, 2010
                                  
                                  
                                  1,748,683
                                  
                                  
                                  $
                                  17
                                  
                                  
                                  $
                                  18,654
                                  
                                  
                                  $
                                  7,299
                                  
                                  
                                  $
                                  (9
                                  )
                                  
                                  $
                                  250
                                  
                                  
                                  $
                                  26,211


See
accompanying notes to unaudited consolidated financial
statements.


5.


JACKSONVILLE
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(Dollars
in thousands)







Three Months EndedMarch 31,2010
                
                
                2009Cash
      flows from operating activitiesNet
      income (loss)
                
                $
                (988
                )
                
                $
                (109
                )Adjustments
      to reconcile net income (loss) to net cash from operating
      activities:Depreciation
      and amortization
                
                
                104
                
                
                
                123Net
      amortization of deferred loan fees
                
                
                (25
                )
                
                
                44Provision
      for loan losses
                
                
                2,375
                
                
                
                938Premium
      amortization, net of accretion
                
                
                9
                
                
                
                (24
                )Net
      loss on sale of real estate owned
                
                
                —
                
                
                
                22Loss
      on write-down of real estate owned
                
                
                335
                
                
                
                —Earnings
      on Bank-owned life insurance
                
                
                (26
                )
                
                
                (28
                )Share-based
      compensation
                
                
                23
                
                
                
                43Loss
      on disposal of assets
                
                
                —
                
                
                
                4Loss
      on non-marketable equity investment
                
                
                —
                
                
                
                132Deferred
      income tax
                
                
                (264
                )
                
                
                (155
                )Net
      change in accrued interest receivable and other assets
                
                
                (104
                )
                
                
                (194
                )Net
      change in accrued expenses and other liabilities
                
                
                (567
                )
                
                
                16Net
      cash from operating activities
                
                
                872
                
                
                
                812Cash
      flows from investing activitiesPurchases
      of securities available-for-sale
                
                
                (2,000
                )
                
                
                —Proceeds
      from maturities, calls and paydown of securities
      available-for-sale
                
                
                833
                
                
                
                3,277Loan
      (originations) payments, net
                
                
                (1,200
                )
                
                
                (8,183
                )Proceeds
      from sale of real estate owned
                
                
                —
                
                
                
                3,417Additions
      to premises and equipment, net
                
                
                (11
                )
                
                
                (19
                )Net
      change in Federal Home Loan Bank stock
                
                
                —
                
                
                
                (553
                )Net
      cash from (used for) investing activities
                
                
                (2,378
                )
                
                
                (2,061
                )Cash
      flows from financing activitiesNet
      change in deposits
                
                
                15,309
                
                
                
                (1,038
                )Net
      change in Fed funds purchased
                
                
                (227
                )
                
                
                —Proceeds
      from Federal Reserve borrowing
                
                
                —
                
                
                
                (1,000
                )Purchase
      of treasury stock
                
                
                (6
                )
                
                
                (14
                )Net
      cash from financing activities
                
                
                15,076
                
                
                
                (2,052
                )Net
      change in cash and cash equivalents
                
                
                13,570
                
                
                
                (3,301
                )Cash
      and cash equivalents at beginning of period
                
                
                5,647
                
                
                
                10,148Cash
      and cash equivalents at end of period
                
                $
                19,217
                
                
                $
                6,847




See
accompanying notes to unaudited consolidated financial
statements.


6.


JACKSONVILLE
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(Dollars
in thousands)




CONSOLIDATED
STATEMENTS OF CASH FLOWS (Cont.)





Supplemental
      disclosures of cash flow informationCash
      paid during the period forInterest
                
                $
                2,217
                
                
                $
                2,964Income
      taxes
                
                
                —
                
                
                
                —Supplemental
      schedule of noncash investing activitiesTransfers
      from loans to real estate owned
                
                $
                —
                
                
                $
                3,439


See
accompanying notes to unaudited consolidated financial statements.


7.


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, 2009, as filed with
the U.S. Securities and Exchange Commission (the “SEC”) on March 19,
2010.





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 March 31, 2010 and 2009 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, 2009
consolidated balance sheet was derived from the Company's December 31, 2009
audited consolidated financial statements.





Adoption
of New Accounting Standards


In June
2009, the FASB amended guidance for Accounting for Transfers of
Financial Assetswhich eliminates the concept of a qualifying special
purpose entity, introduces participating interests concept in circumstances in
which a portion of a financial asset has been transferred, changes the
requirements for derecognizing financial assets, and requires additional
disclosures for transfers of financial assets.  This guidance is effective
as of the beginning of a company’s first fiscal year that begins after
November 15, 2009, and for subsequent interim and annual reporting periods.
 The disclosure requirements must be applied to transfers that occurred
before and after its effective date.  The adoption did not have a material
impact on the Company’s results of operations or financial
position.





In June
2009, the FASB issued new guidance to improve financial reporting for companies
involved with variable interest entities by providing more relevant and reliable
information to users of financial statements.  This guidance was effective
as of January 1, 2010.  The adoption did not have a material impact on the
Company’s financial statements.


8.


JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)









NOTE
2 - 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 March
31, 2010 and December 31, 2009 and the corresponding amounts of unrealized
gains and losses therein:





Amortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Value(Dollars
      in thousands)March
      31, 2010Available-for
      saleU.S.
      government-sponsored entities and agencies
                  
                  $
                  4,483
                  
                  
                  $
                  26
                  
                  
                  $
                  (28
                  )
                  
                  $
                  4,481State
      and political subdivisions
                  
                  
                  10,773
                  
                  
                  
                  233
                  
                  
                  
                  (44
                  )
                  
                  
                  10,962Mortgage-backed
      securities – residential
                  
                  
                  7,277
                  
                  
                  
                  311
                  
                  
                  
                  -
                  
                  
                  
                  7,588Collateralized
      mortgage obligations - residential
                  
                  
                  273
                  
                  
                  
                  9
                  
                  
                  
                  -
                  
                  
                  
                  282Total
      available-for-sale securities
                  
                  $
                  22,806
                  
                  
                  $
                  579
                  
                  
                  $
                  (72
                  )
                  
                  $
                  23,313





Amortized
                  
                  
                  Unrealized
                  
                  
                  Unrealized
                  
                  
                  FairCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Value(Dollars
      in thousands)December
      31, 2009Available-for
      saleU.S.
      government-sponsored entities and agencies
                  
                  $
                  2,485
                  
                  
                  $
                  32
                  
                  
                  $
                  (13
                  )
                  
                  $
                  2,504State
      and political subdivisions
                  
                  
                  10,777
                  
                  
                  
                  228
                  
                  
                  
                  (42
                  )
                  
                  
                  10,963Mortgage-backed
      securities – residential
                  
                  
                  8,044
                  
                  
                  
                  308
                  
                  
                  
                  —
                  
                  
                  
                  8,352Collateralized
      mortgage obligations - residential
                  
                  
                  342
                  
                  
                  
                  10
                  
                  
                  
                  —
                  
                  
                  
                  352Total
      available-for-sale securities
                  
                  $
                  21,648
                  
                  
                  $
                  578
                  
                  
                  $
                  (55
                  )
                  
                  $
                  22,171


9.


JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)







NOTE
2 - INVESTMENT SECURITIES (Cont.)




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.





March31,2010Amortized
                  
                  
                  FairCost
                  
                  
                  ValueMaturityAvailable-for-saleWithin
      one year
                  
                  $
                  6,571
                  
                  
                  $
                  6,565One
      to five years
                  
                  
                  5,187
                  
                  
                  
                  5,266Five
      to ten years
                  
                  
                  3,498
                  
                  
                  
                  3,612Beyond
      ten years
                  
                  
                  -
                  
                  
                  
                  -Mortgage-backed
                  
                  
                  7,277
                  
                  
                  
                  7,588Collateralized
      Mortgage Obligations
                  
                  
                  273
                  
                  
                  
                  282Total
                  
                  $
                  22,806
                  
                  
                  $
                  23,313





The
following table summarizes the investment securities with unrealized losses at
March 31, 2010 and December 31, 2009 by aggregated major security type and
length of time in a continuous unrealized loss position:





LessThan12Months
                    
                    
                    12MonthsorLonger
                    
                    
                    TotalFair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    UnrealizedValue
                    
                    
                    Losses
                    
                    
                    Value
                    
                    
                    Losses
                    
                    
                    Value
                    
                    
                    Losses(Dollars
      in thousands)March
      31, 2010Available-for-saleU.S.
      government-sponsored entities and agencies
                    
                    $
                    2,970
                    
                    
                    $
                    (28
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    2,970
                    
                    
                    $
                    (28
                    )States
      and political
                    
                    
                    1,701
                    
                    
                    
                    (18
                    )
                    
                    
                    529
                    
                    
                    
                    (26
                    )
                    
                    
                    2,230
                    
                    
                    
                    (44
                    )Mortgage-backed securities
      – residential
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Collateralized
      mortgage obligations - residential
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Total
      available-for-sale securities
                    
                    $
                    4,671
                    
                    
                    $
                    (46
                    )
                    
                    $
                    529
                    
                    
                    $
                    (26
                    )
                    
                    $
                    5,200
                    
                    
                    $
                    (72
                    )


10.


JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)





NOTE
2 - INVESTMENT SECURITIES (Cont.)





LessThan12Months
                    
                    
                    12MonthsorLonger
                    
                    
                    TotalFair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    UnrealizedValue
                    
                    
                    Losses
                    
                    
                    Value
                    
                    
                    Losses
                    
                    
                    Value
                    
                    
                    Losses(Dollars
      in thousands)December
      31, 2009Available-for-saleU.S.
      government-sponsored entities and agencies
                    
                    $
                    987
                    
                    
                    $
                    (13
                    )
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    987
                    
                    
                    $
                    (13
                    )States
      and political
                    
                    
                    1,789
                    
                    
                    
                    (25
                    )
                    
                    
                    288
                    
                    
                    
                    (17
                    )
                    
                    
                    2,077
                    
                    
                    
                    (42
                    )Mortgage-backed securities
      – residential
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Collateralized
      mortgage obligations - residential
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
      available-for-sale securities
                    
                    $
                    2,776
                    
                    
                    $
                    (38
                    )
                    
                    $
                    288
                    
                    
                    $
                    (17
                    )
                    
                    $
                    3,064
                    
                    
                    $
                    (55
                    )




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.




In
determining OTTI for debt securities, 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 conditions 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.




In order
to determine OTTI for purchased beneficial interests that, on the purchase date,
were rated below AA, 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.  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.


11.


JACKSONVILLE
BANCORP, INC.




NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)







NOTE
2 - INVESTMENT SECURITIES (Cont.)




When OTTI
occurs for either debt securities or purchased beneficial interests that, on the
purchase date, were rated below AA, 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
March 31, 2010, the Company’s security portfolio consisted of $23,313 of
available-for-sale securities, of which $5,200 was in an unrealized loss
position.  The 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 March 31, 2010.




State and Political
Securities




All of
the State and Political Securities (“Municipal Bonds”) held by the Company 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 March 31, 2010.





For the
three-month period ended March 31, 2010, 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
3 – LOAN PORTFOLIO COMPOSITION


The
composition of the Bank’s loan portfolio at March 31, 2010 and December 31, 2009
is presented below along with the change from December 31, 2009.


% Increase(Decrease)Total Loans
                  
                  
                  Total Loans
                  
                  
                  from December 31,2009March 31, 2010
                  
                  
                  December 31, 2009
                  
                  
                  to March 31, 2010Real
      estate mortgage loans:Commercial
                  
                  $
                  230,655
                  
                  
                  $
                  233,570
                  
                  
                  
                  (1.2
                  )%Residential
                  
                  
                  97,260
                  
                  
                  
                  97,147
                  
                  
                  
                  0.1
                  %Construction
      and land (1)
                  
                  
                  34,208
                  
                  
                  
                  32,987
                  
                  
                  
                  3.7
                  %Commercial
      loans
                  
                  
                  24,927
                  
                  
                  
                  23,838
                  
                  
                  
                  4.6
                  %Consumer
      loans
                  
                  
                  3,980
                  
                  
                  
                  3,899
                  
                  
                  
                  2.1
                  %Subtotal
                  
                  
                  391,030
                  
                  
                  
                  391,441
                  
                  
                  
                  (0.1
                  )%Less:  Net
      deferred loan fees
                  
                  
                  (429
                  )
                  
                  
                  (454
                  )
                  
                  
                  (5.5
                  )%Total
                  
                  $
                  390,601
                  
                  
                  $
                  390,987
                  
                  
                  
                  (0.1
                  )%





(1)  Includes
construction, land development and other land loans.





NOTE
4 – ALLOWANCE FOR LOAN LOSSES


Activity
in the allowance for loan losses for the nine months ended March 31, 2010 and
2009 follows:





Three Months EndedMarch 31,2010
                  
                  
                  2009Beginning
      balance
                  
                  $
                  6,854
                  
                  
                  $
                  4,705Provisions
      for loan losses charged to expense
                  
                  
                  2,375
                  
                  
                  
                  938Loans
      charged off
                  
                  
                  (1,630
                  )
                  
                  
                  (702
                  )Recoveries
      of loans previously charged off
                  
                  
                  19
                  
                  
                  
                  1Ending
      balance, March 31
                  
                  $
                  7,618
                  
                  
                  $
                  4,942





Impaired
loans were as follows:


March 31,
                  
                  
                  December 31,2010
                  
                  
                  2009Loans
      with no allocated allowance for loan losses
                  
                  $
                  5,549
                  
                  
                  $
                  4,036Loans
      with allocated allowance for loan losses
                  
                  
                  16,140
                  
                  
                  
                  18,516Total
                  
                  $
                  21,689
                  
                  
                  $
                  22,552Amount
      of the allowance for loan losses allocated
                  
                  $
                  1,010
                  
                  
                  $
                  786


13.


JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)








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





At March
31, 2010 and December 31, 2009, advances from the Federal Home Loan Bank (FHLB)
were as follows:





2010
                  
                  
                  2009Convertible
      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
                  
                  
                  
                  5,000$
                  25,000
                  
                  
                  $
                  25,000





Each
advance is payable at its maturity date, with a prepayment penalty for early
termination.  The advances are collateralized by a blanket lien
arrangement of the Company’s first mortgage loans, second mortgage loans and
commercial real estate loans.  Based upon this collateral and the
Company’s holdings of FHLB stock, the Company is eligible to borrow up to a
total of $66,900 at March 31, 2010.





The
Company has a “Borrower in Custody” line of credit with the Federal Reserve by
pledging excess collateral.  The amount of this line at March 31, 2010
was $31,600, all of which was available on that date.





NOTE
6 – DERIVATIVE FINANCIAL INSTRUMENT


On July
7, 2009, the Company entered into an interest rate swap transaction with
SunTrust Bank to mitigate interest rate risk exposure. 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). 
This derivative instrument is recognized on the balance sheet in other
liabilities at its fair value of $106 on March 31, 2010.





Credit
risk may result from inability of the counterparties to meet the terms of their
contracts.  The Company’s exposure is limited to the replacement value of
the contracts rather than the notional amount.


14.


JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)








NOTE
7 – 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 March 31, 2010 and
December 31, 2009:





Actual
                  
                  
                  For Capital
                    Adequacy
                    Purposes
                  
                  
                  To Be Well
                    Capitalized Under
                    Prompt Corrective
                    Action ProvisionsAmount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  RatioMarch
      31, 2010Total
      capital to risk weighted assetsConsolidated
                  
                  $
                  45,425
                  
                  
                  
                  11.63
                  %
                  
                  $
                  31,235
                  
                  
                  
                  8.00
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ABank
                  
                  
                  43,106
                  
                  
                  
                  11.06
                  %
                  
                  
                  31,193
                  
                  
                  
                  8.00
                  %
                  
                  $
                  38,992
                  
                  
                  
                  10.00
                  %Tier
      1 (Core) capital to risk weighted assetsConsolidated
                  
                  
                  34,615
                  
                  
                  
                  8.87
                  %
                  
                  
                  15,618
                  
                  
                  
                  4.00
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ABank
                  
                  
                  38,197
                  
                  
                  
                  9.80
                  %
                  
                  
                  15,597
                  
                  
                  
                  4.00
                  %
                  
                  
                  23,395
                  
                  
                  
                  6.00
                  %Tier
      1 (Core) capital to average assetsConsolidated
                  
                  
                  34,615
                  
                  
                  
                  7.72
                  %
                  
                  
                  17,931
                  
                  
                  
                  4.00
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ABank
                  
                  
                  38,197
                  
                  
                  
                  8.52
                  %
                  
                  
                  17,928
                  
                  
                  
                  4.00
                  %
                  
                  
                  22,410
                  
                  
                  
                  5.00
                  %December
      31, 2009Total
      capital to risk weighted assetsConsolidated
                  
                  $
                  46,393
                  
                  
                  
                  11.87
                  %
                  
                  $
                  31,273
                  
                  
                  
                  8.00
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ABank
                  
                  
                  43,307
                  
                  
                  
                  11.08
                  %
                  
                  
                  31,255
                  
                  
                  
                  8.00
                  %
                  
                  $
                  39,068
                  
                  
                  
                  10.00
                  %Tier
      1 (Core) capital to risk weighted assetsConsolidated
                  
                  
                  35,909
                  
                  
                  
                  9.19
                  %
                  
                  
                  15,637
                  
                  
                  
                  4.00
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ABank
                  
                  
                  38,399
                  
                  
                  
                  9.83
                  %
                  
                  
                  15,627
                  
                  
                  
                  4.00
                  %
                  
                  
                  23,441
                  
                  
                  
                  6.00
                  %Tier
      1 (Core) capital to average assetsConsolidated
                  
                  
                  35,909
                  
                  
                  
                  8.18
                  %
                  
                  
                  17,570
                  
                  
                  
                  4.00
                  %
                  
                  
                  N/A
                  
                  
                  
                  N/ABank
                  
                  
                  38,399
                  
                  
                  
                  8.75
                  %
                  
                  
                  17,556
                  
                  
                  
                  4.00
                  %
                  
                  
                  21,945
                  
                  
                  
                  5.00
                  %


15.


JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)








NOTE
8 – FAIR VALUE


Fair
value is 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.  There are three levels of inputs that may be
used to measure fair value:




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.




Level
2:  Significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated
by observable market data.




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.




Derivatives:  The
fair value of the derivatives is based on valuation models using observable
market data as of the measurement date (Level 2).




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 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.





Other Real Estate
Owned:  Nonrecurring adjustment to certain commercial and
residential real estate properties classified as other real estate owned (OREO)
is measured at fair value, less costs to sell.  Fair values are
generally based on third party appraisals of the property, resulting in a Level
3 classification.





The
following assets and liabilities are measured on a recurring basis, including
financial assets and liabilities for which the Company has elected the fair
value option:


16.


JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS




(Unaudited)


(Dollars
in thousands, except per share amounts)









NOTE
8 – FAIR VALUE (Cont.)


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:(Dollars
      in thousands)March
      31, 2010Available-for-saleU.S.
      government-sponsored entities and agencies
                
                $
                4,481
                
                
                
                —
                
                
                $
                4,481
                
                
                
                —State
      and political subdivisions
                
                
                10,962
                
                
                
                —
                
                
                
                10,962
                
                
                
                —Mortgage-backed
      securities - residential
                
                
                7,588
                
                
                
                —
                
                
                
                7,588
                
                
                
                —Collateralized
      mortgage obligations - residential
                
                
                282
                
                
                
                —
                
                
                
                282
                
                
                
                —Derivative
      asset
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —(Dollars
      in thousands)December
      31, 2009Available-for-saleU.S.
      government-sponsored entities and agencies
                
                $
                2,504
                
                
                
                —
                
                
                $
                2,504
                
                
                
                —State
      and political subdivisions
                
                
                10,963
                
                
                
                —
                
                
                
                10,963
                
                
                
                —Mortgage-backed
      securities - residential
                
                
                8,352
                
                
                
                —
                
                
                
                8,352
                
                
                
                —Collateralized
      mortgage obligations - residential
                
                
                352
                
                
                
                —
                
                
                
                352
                
                
                
                —Derivative
      asset
                
                
                15
                
                
                
                —
                
                
                
                15
                
                
                
                —Liabilities:March
      31, 2010Derivative
      liability
                
                $
                106
                
                
                
                —
                
                
                $
                106
                
                
                
                —December
      31, 2009Derivative
      liability
                
                $
                —
                
                
                
                —
                
                
                $
                —
                
                
                
                —


17.


JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)








NOTE
8 – FAIR VALUE (Cont.)


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:March
      31, 2010Impaired
      loans
                  
                  $
                  4,438
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  4,438OREO
                  
                  
                  3,676
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,676December
      31, 2009Impaired
      loans
                  
                  $
                  2,077
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  2,077OREO
                  
                  
                  4,011
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,011





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
$4,959, with a valuation allowance of $521.  Additional impaired loans, not
measured using levels of inputs to measure fair value, had a carrying amount of
$2,677.  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.





OREO,
which is measured using the collateral values, had a net carrying amount of
$3,676, which is made up of the outstanding balance of $4,041, net of a
valuation allowance of $365 at March 31, 2010, resulting in a write-down of $335
for the year ending March 31, 2010.





The
carrying amount and estimated fair values of financial instruments at March 31,
2010 and December 31, 2009 were as follows:


March 31, 2010
                  
                  
                  December 31, 2009Carrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairAmount
                  
                  
                  Value
                  
                  
                  Amount
                  
                  
                  ValueFinancial
      assetsCash
      and cash equivalents
                  
                  $
                  19,217
                  
                  
                  $
                  19,217
                  
                  
                  $
                  5,647
                  
                  
                  $
                  5,647Securities
      available-for-sale
                  
                  
                  23,313
                  
                  
                  
                  23,313
                  
                  
                  
                  22,171
                  
                  
                  
                  22,171Loans,
      net
                  
                  
                  382,983
                  
                  
                  
                  388,733
                  
                  
                  
                  384,133
                  
                  
                  
                  387,291Federal
      Home Loan Bank stock
                  
                  
                  3,047
                  
                  
                  
                  n/a
                  
                  
                  
                  3,047
                  
                  
                  
                  n/aIndependent
      Bankers’ Bank Stock
                  
                  
                  153
                  
                  
                  
                  n/a
                  
                  
                  
                  153
                  
                  
                  
                  n/aAccrued
      interest receivable
                  
                  
                  1,896
                  
                  
                  
                  1,896
                  
                  
                  
                  1,864
                  
                  
                  
                  1,864Interest
      rate swap
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  15
                  
                  
                  
                  15


18.


JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)








NOTE
8 – FAIR VALUE (Cont.)





March 31, 2010
                  
                  
                  December 31, 2009Carrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairAmount
                  
                  
                  Value
                  
                  
                  Amount
                  
                  
                  ValueFinancial
      liabilitiesDeposits
                  
                  $
                  385,944
                  
                  
                  $
                  388,733
                  
                  
                  $
                  370,635
                  
                  
                  $
                  373,493Federal
      funds purchased
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  227
                  
                  
                  
                  227Other
      borrowings
                  
                  
                  25,000
                  
                  
                  
                  25,667
                  
                  
                  
                  25,000
                  
                  
                  
                  25,771Subordinated
      debentures
                  
                  
                  14,550
                  
                  
                  
                  6,500
                  
                  
                  
                  14,550
                  
                  
                  
                  5,708Accrued
      interest payable
                  
                  
                  427
                  
                  
                  
                  427
                  
                  
                  
                  424
                  
                  
                  
                  424Interest
      rate swap
                  
                  
                  106
                  
                  
                  
                  106
                  
                  
                  
                  —
                  
                  
                  
                  —





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





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 deposits that reprice frequently and
fully.  The methods for determining the fair values for securities
were described previously.  For loans, fair value is based on
discounted cash flows using current market rates applied to the estimated life
adjusted for the allowance for loan losses.  For fixed rate
deposits and variable rate deposits with infrequent repricing, fair
value is based on discounted cash flows using current market rates applied to
the estimated life.  Fair value
of debt, including FHLB advances, is based on current rates
for similar financing.  It was not practicable to determine
fair value of FHLB stock and other
nonmarketable equity securities due to restrictions placed on
transferability.  The fair value of off-balance-sheet items is
considered nominal.


19.


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 (together with its
subsidiary, Fountain Financial, Inc., 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, professional fees, and OREO
expenses.


20.





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.





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.  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.





On May
10, 2010, Jacksonville Bancorp, Inc. and Atlantic BancGroup, Inc. (“ATBC”) entered into a
merger agreement providing for the merger of Atlantic BancGroup, Inc. into
Jacksonville Bancorp.  The merger agreement also contemplates the
consolidation of Oceanside Bank into The Jacksonville
Bank.  Additionally, Bancorp announced the signing of a stock purchase
agreement with four private investors led by CapGen Capital Group IV LP
("CapGen") providing for $30 million in new capital through the sale of newly
issued shares of Bancorp common stock subject to completion of the
mergers.  The transactions have been approved by the Boards of
Directors of each company.





Under the
terms of the merger agreement, ATBC shareholders will receive 0.2 shares of
Bancorp common stock for each share of ATBC common
stock.  Additionally, ATBC shareholders may receive cash of up to
approximately $0.65 per share, subject to the qualifying sale of certain ATBC
assets.  A total of approximately 250,000 shares of Bancorp common
stock is expected to be issued to ATBC shareholders.





Under the
terms of the stock purchase agreement, Bancorp will issue approximately 3
million shares of its common stock at a price of $10.00 per
share.  The largest investment is coming from CapGen, which has agreed
to purchase approximately $20 million.  John Sullivan of CapGen will
become a new director of the combined company pending the closing of the
transactions, joining CapGen principal John Rose, who is a current Bancorp
director.





The
merger is conditioned upon approval by the Federal Reserve Board, the Florida
Office of Financial Regulation, ATBC's shareholders and other customary closing
conditions.  The sale of the Bancorp common stock and other aspects of the
transaction are subject to approval by Bancorp shareholders and to regulatory
approvals.


21.


Introduction





In the
following pages, management presents an analysis of the financial condition of
the Company as of March 31, 2010 compared to December 31, 2009, and the results
of operations for the three months ended March 31, 2010 compared with the same
period in 2009.  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 March 31, 2010 and December 31, 2009





Total
assets increased $13.6 million, or 3.1%, from $438.8 million at December 31,
2009 to $452.4 million at March 31, 2010.  During the three months
ended March 31, 2010, the Company experienced a net loan decrease of $1.2
million, or 0.3%.  Increases in construction real estate loans of $1.2
million, or 3.7%, and commercial loans of $1.1 million, or 4.6%, were offset by
a decrease in commercial real estate loans of $2.9 million, or
1.2%.  In addition, the allowance for loan loss increased by
$764,000.





Total
cash and cash equivalents increased $13.6 million from $5.6 million at December
31, 2009 to $19.2 million at March 31, 2010 due to an increase in federal
funds sold of $12.9 million.  Investment securities available-for-sale
increased $1.1 million to $23.3 million at March 31, 2010.  During the
three months ended March 31, 2010, we purchased $2.0 million of U.S. government
agency securities.  In addition, we received $833,000 in proceeds from
maturities, calls and principal repayments.





Total
deposits increased $15.3 million, or 4.1%, from $370.6 million at December 31,
2009 to $385.9 million at March 31, 2010.  During the three
months ended March 31, 2010, money market, NOW and savings deposits increased
$10.3 million to $115.1 million, time deposits increased $4.6 million to
$226.7 million and noninterest bearing deposits increased $461,000 to $44.1
million.





Federal
Home Loan Bank advances were $25.0 million at December 31, 2009 and at March 31,
2010.





Total
shareholders' equity decreased by $1.1 million from $27.3 million at December
31, 2009 to $26.2 million at March 31, 2010.  The decrease is
mainly attributable to a net loss of $988,800 and a $76,000 net unrealized loss
on cash flow hedge derivative.  At March 31, 2010, the Company had
8,000,000 authorized shares of $.01 par value common stock, of which 1,749,526
shares were issued and 1,748,683 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 March 31,
2010.




Comparison
of Operating Results for the Three Months Ended March 31, 2010 and
2009





Net
Income





There was
a net loss for the first three months of 2010 of $988,000, compared to a
$109,000 net loss in the first three months of 2009.  On a diluted per
share basis, the net loss was $0.56 for the three months ended March 31, 2010,
compared to net loss of $0.06 per diluted share in 2009.  The net loss
for the first three months of 2010 was driven primarily by additional provisions
for loan losses, an increase in the FDIC regulatory assessment, write-down of
OREO values, and other related expenses on foreclosed
properties.


22.


Net
Interest Income





Net
interest income, the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities, was $3.6 million for
the three months ended March 31, 2010, compared to $2.9 million for the
same period in 2009.  Interest income increased $114,000 when compared
to the first three months of the prior year.  This was a result of the
average earning asset growth of $13.3 million, offset by a 7 basis point
interest rate decrease on the average earning assets.





The
average loan balances increased $9.0 million for the three months ended March
31, 2010 compared to the same period in the prior year.  The average
yield on interest-earning assets for the first three months of 2010 was 5.51%,
which was a decrease of 7 basis points, compared to the 5.58% yield earned
during the first three months of 2009.





The
average cost of interest-bearing liabilities decreased 72 basis points from
3.11% in the first three months of 2009 to 2.39% in the comparable period in
2010.  The average cost of interest-bearing deposits and all
interest-bearing liabilities reflect, in part, the change in the funding mix for
the first three months of 2010 as compared to the same period in
2009.





The net
interest margin increased by 53 basis points from 2.87% to 3.40% when comparing
the first three months of 2010 to the same period last year.  This
increase is mainly the result of the Company taking advantage of the lowest
funding sources and focusing on core deposit gathering
initiatives.  The Company closely monitors its liquidity needs in
conjunction with the cost of its funding sources and has taken action to reduce
costs through core deposit gathering initiatives focused on generating lower
cost demand, money market and savings accounts.





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.


23.




Three Months Ended March 31,2010
                  
                  
                  2009Average
                  
                  
                  
                  
                  
                  Average
                  
                  
                  Average
                  
                  
                  
                  
                  
                  AverageBalance
                  
                  
                  Interest
                  
                  
                  Rate
                  
                  
                  Balance
                  
                  
                  Interest
                  
                  
                  Rate(Dollars
      in thousands)Interest-earning
      assets:Loans (1)
                  
                  $
                  391,073
                  
                  
                  $
                  5,584
                  
                  
                  
                  5.79
                  %
                  
                  $
                  382,071
                  
                  
                  $
                  5,359
                  
                  
                  
                  5.69
                  %Securities (2)
                  
                  
                  25,340
                  
                  
                  
                  218
                  
                  
                  
                  3.49
                  
                  
                  
                  30,344
                  
                  
                  
                  333
                  
                  
                  
                  4.45Other
      interest-earning assets (3)
                  
                  
                  10,037
                  
                  
                  
                  (7
                  )
                  
                  
                  (.28
                  )
                  
                  
                  696
                  
                  
                  
                  (11
                  )
                  
                  
                  (6.41
                  )Total
      interest-earning assets
                  
                  
                  426,450
                  
                  
                  
                  5,795
                  
                  
                  
                  5.51
                  
                  
                  
                  413,111
                  
                  
                  
                  5,681
                  
                  
                  
                  5.58Noninterest-earning
      assets (4)
                  
                  
                  21,416
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  16,824Total
      assets
                  
                  $
                  447,866
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  429,935Interest-bearing
      liabilities:Savings
      deposits
                  
                  $
                  11,058
                  
                  
                  $
                  36
                  
                  
                  
                  1.32
                  
                  
                  $
                  13,052
                  
                  
                  $
                  65
                  
                  
                  
                  2.02NOW
      deposits
                  
                  
                  5,878
                  
                  
                  
                  3
                  
                  
                  
                  .21
                  
                  
                  
                  9,900
                  
                  
                  
                  7
                  
                  
                  
                  .29Money
      market deposits
                  
                  
                  94,308
                  
                  
                  
                  368
                  
                  
                  
                  1.58
                  
                  
                  
                  65,727
                  
                  
                  
                  275
                  
                  
                  
                  1.70Time
      deposits
                  
                  
                  225,751
                  
                  
                  
                  1,367
                  
                  
                  
                  2.46
                  
                  
                  
                  209,212
                  
                  
                  
                  1,964
                  
                  
                  
                  3.81FHLB
      advances
                  
                  
                  25,000
                  
                  
                  
                  255
                  
                  
                  
                  4.14
                  
                  
                  
                  21,800
                  
                  
                  
                  231
                  
                  
                  
                  4.30Federal
      Reserve borrowing
                  
                  
                  800
                  
                  
                  
                  1
                  
                  
                  
                  .51
                  
                  
                  
                  25,461
                  
                  
                  
                  31
                  
                  
                  
                  .49Subordinated
      debt
                  
                  
                  14,550
                  
                  
                  
                  190
                  
                  
                  
                  5.30
                  
                  
                  
                  14,550
                  
                  
                  
                  183
                  
                  
                  
                  5.10Other
      interest-bearing liabilities (5)
                  
                  
                  50
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  144
                  
                  
                  
                  —
                  
                  
                  
                  —Total
      interest-bearing liabilities
                  
                  
                  377,395
                  
                  
                  
                  2,220
                  
                  
                  
                  2.39
                  
                  
                  
                  359,846
                  
                  
                  
                  2,756
                  
                  
                  
                  3.11Noninterest-bearing
      liabilities
                  
                  
                  43,105
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  42,986Shareholders'
      equity
                  
                  
                  27,366
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  27,103Total
      liabilities and shareholders' equity
                  
                  $
                  447,866
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  429,935Net
      interest income
                  
                  
                  
                  
                  
                  $
                  3,575
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  2,925Interest rate spread
      (6)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.12
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.47
                  %Net interest margin
      (7)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.40
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.87
                  %







(1)
            Includes
      nonaccrual loans and deferred loan fees of
$124.


(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.  The negative income is a result of the
      amortized expense on the subordinated
debt.


(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.


24.


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.





Three Months Ended March 31,2010 Versus 2009(1)Increase (decrease) due to changes in:NetVolume
                    
                    
                    Rate
                    
                    
                    Change(Dollars
      in thousands)Interest
      income:Loans
                    
                    $
                    128
                    
                    
                    $
                    97
                    
                    
                    $
                    225Securities
                    
                    
                    (50
                    )
                    
                    
                    (65
                    )
                    
                    
                    (115
                    )Other
      interest-earning assets
                    
                    
                    (16
                    )
                    
                    
                    20
                    
                    
                    
                    4Total
      interest income
                    
                    
                    62
                    
                    
                    
                    52
                    
                    
                    
                    114Interest
      expense:Savings
      deposits
                    
                    
                    (9
                    )
                    
                    
                    (20
                    )
                    
                    
                    (29
                    )NOW
      deposits
                    
                    
                    (2
                    )
                    
                    
                    (2
                    )
                    
                    
                    (4
                    )Money
      market deposits
                    
                    
                    113
                    
                    
                    
                    (20
                    )
                    
                    
                    93Time
      deposits
                    
                    
                    145
                    
                    
                    
                    (742
                    )
                    
                    
                    (597
                    )FHLB
      advances
                    
                    
                    33
                    
                    
                    
                    (9
                    )
                    
                    
                    24Federal
      Reserve borrowing
                    
                    
                    (31
                    )
                    
                    
                    1
                    
                    
                    
                    (30
                    )Subordinated
      debt
                    
                    
                    —
                    
                    
                    
                    7
                    
                    
                    
                    7Other
      interest-bearing liabilities
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
      interest expense
                    
                    
                    249
                    
                    
                    
                    (785
                    )
                    
                    
                    (536
                    )Decrease
      in net interest income
                    
                    $
                    (187
                    )
                    
                    $
                    837
                    
                    
                    $
                    650





(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.





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.


25.





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, 2009, as filed with the SEC on March 19,
2010.





Asset
Quality





The
Company has identified certain assets as risk elements.  These assets
include nonaccruing loans, loans that are contractually past due 90 days or more
as to principal or interest payments and still accruing, troubled debt
restructurings, and foreclosed real estate.  Loans are placed on
nonaccrual status when management has concerns regarding the Company’s 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 risk elements at
March 31, 2010 and December 31, 2009 were as follows:





March 31,
                      
                      
                      December 31,2010
                      
                      
                      2009(Dollars in thousands)Nonaccruing
      loans
                      
                      $
                      7,403
                      
                      
                      $
                      8,745Loans
      past due over 90 days still on accrual
                      
                      
                      —
                      
                      
                      
                      —Total
      nonperforming loans
                      
                      
                      7,403
                      
                      
                      
                      8,745Foreclosed
      assets, net
                      
                      
                      3,676
                      
                      
                      
                      4,011Total
      nonperforming assets
                      
                      
                      11,079
                      
                      
                      
                      12,756Troubled
      debt restructuring
                      
                      
                      17,026
                      
                      
                      
                      14,840Total
      nonperforming assets and troubled debt restructuring
                      
                      $
                      28,105
                      
                      
                      $
                      27,596Allowance
      for loan losses
                      
                      $
                      7,618
                      
                      
                      $
                      6,854Nonperforming
      loans and foreclosed assets as a percent of total assets
                      
                      
                      2.45
                      %
                      
                      
                      2.91
                      %Nonperforming
      loans as a percent of gross loans
                      
                      
                      1.90
                      %
                      
                      
                      2.24
                      %Allowance
      for loan losses as a percent of nonperforming loans
                      
                      
                      102.90
                      %
                      
                      
                      78.38
                      %Loans
      past due 30-89 days, still accruing
                      
                      $
                      4,396
                      
                      
                      $
                      5,308Assets
      classified as substandard and doubtful
                      
                      $
                      42,918
                      
                      
                      $
                      44,815





Loans are
impaired when it is considered probable that the Company will not collect the
outstanding loan principal and interest amounts according to the loan’s
contractual terms.  At March 31, 2010, the Company had impaired loans
of $21.7 million, compared to $22.6 million at December 31, 2009.  Of
the $21.7 million impaired loans, $7.4 million are nonperforming loans as
reflected above.





The
Company has loan balances of $17.0 million for customers whose loans are
classified as troubled debt restructuring and such loans are included in the
impaired loan balances of $21.7 million at March 31, 2010.  There are no
additional funds committed to customers whose loans are classified as troubled
debt restructuring.  Each of the loans classified as troubled debt
restructuring currently carries a market rate of interest, floating tied to the
Prime rate.  Most of these loans were modified to suspend principal
payments for a period of time less than or equal to one year, and the interest
rate was modified from a fixed rate to a floating rate tied to the Prime
rate.  Of the $1.0 million allowance for loan losses reserved for impaired
loans, the Company has allocated $612,000 to customers whose loan terms have
been modified in troubled debt restructuring.


26.





While the
Company experienced improvement in nonperforming assets during the first
quarter, it considers all risk elements, including early indicators of potential
problem loans, when determining the appropriateness of the allowance for loan
losses.  The Company had an improvement in loans past due 30-89 days
from $5.3 million at December 31, 2009 to $4.4 million at March 31,
2010.





During
the first three months of 2010, the Bank recorded $464,000 for OREO expenses,
which included a $335,000 write down for property value declines, and $129,000
for other related expenses on foreclosed property.





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 Bank’s Board of Directors.





Allowance
and Provision for Loan Losses





The
allowance for loan losses grew by $764,000 during the first three months of
2010, amounting to $7.6 million at March 31, 2010, as compared to $6.9
million at December 31, 2009.  The allowance represented approximately
1.95% of total loans at March 31, 2010 and 1.75% at December 31,
2009.  During the first three months of 2010, the Company had
charge-offs of $1.6 million, recoveries of $19,000 and recorded a $2.4 million
provision for loan losses compared to charge-offs of $702,000, recoveries of
$1,000 and a provision for loan losses of $938,000 for the first three months of
2009.  The larger provision for loan losses in 2010 was driven
primarily by the charge off of one large substandard graded loan and two
substandard loans that were charged down to the net realizable value of the
collateral based on an updated appraisal.  Additionally, the worsening
economic conditions, coupled with the continued softness in the residential real
estate market and the growing softness in the commercial real estate market,
along with the Bank’s concentration in collateral dependent real estate loans,
were considered when determining the appropriate level of loan loss reserves in
the first three months of 2010.





The
Bank’s increased identification efforts of potential losses in the portfolio are
based on a variety of specific factors, including the Company’s own experience
as well as industry and economic trends.  Impaired loans were $21.7
million as of March 31, 2010; of this amount, $1.0 million 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 loans, consumer loans and commercial
loans.  The Company has created a loan classification system to
properly calculate the allowance for loan losses.  Loans are evaluated
for impairment.  If a loan is deemed to be 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.





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.


27.





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
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 March 31, 2010, 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 March
31, 2010.  Economic conditions in Jacksonville have deteriorated over
the last several quarters, resulting in a softening of real estate
values.  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 the majority of 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 $248,000 for the three months ended March 31, 2010, compared to
$146,000 for the comparable 2009 period.  In 2009, the Company
experienced a $132,000 write-off in the stock of Silverton Bank, N.A. due to its
May 2009 failure which was offset by a loan referral fee in the amount of
$52,000.





Noninterest
expense was $3.1 million for the three months ended March 31, 2010, compared to
$2.3 million in the same period in 2009.  The increase in noninterest
expense was primarily a result of recording an additional $146,000 of regulatory
assessments in 2010, recording a $335,000 write-down of OREO property values,
and recording $129,000 for other related expenses on bank owned
property.





The
income tax benefit for the three months ended March 31, 2010 was $650,000,
compared to an income tax benefit of $44,000 for the three months ended March
31, 2009.  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 recorded as
a benefit.


28.


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 11.05%, 9.80% and 8.52%, respectively,
at March 31, 2010.  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 a portion of 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
three months of 2010, the Company’s cash and cash equivalent position increased
by $13.6 million.  The increase in cash mainly resulted from an
increase in deposit accounts of approximately $15.3 million from $370.1 million
at December 31, 2009 to $385.9 million at March 31, 2010, offset by net
loan originations of $1.2 million.





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; and its overnight position with federal funds
sold.  At March 31, 2010, the Company had $23.3 million in
available-for-sale securities, $7.3 million of which was pledged to the Federal
Reserve Bank for the Borrower in Custody Program.





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 $108.1 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, 2009 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, 2009, as filed with the SEC on March 19, 2010, 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, 2009.


29.





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, 2009.





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, 2009.  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




Bancorp
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 the
Chief Financial Officer of Bancorp concluded that, subject to the limitations
noted below, Bancorp’s disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(c) under the Exchange Act) are effective to ensure that the
information required to be disclosed by Bancorp 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, Bancorp may routinely modify, upgrade and enhance
its internal controls and procedures for financial reporting.  In an
effort to improve internal control over financial reporting, Bancorp 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 Bancorp’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, Bancorp’s
internal control over financial reporting.


30.




(c)    Limitations
on the Effectiveness of Controls




Bancorp’s
management, including its Chief Executive Officer and its Chief
Financial Officer, does not expect that its 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.




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.


31.




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 the
Company is engaged, various claims or charges are asserted against Bancorp, its
subsidiary and/or their directors, officers or affiliates.  In the
ordinary course of business, Bancorp and its subsidiary are also subject to
regulatory examinations, information gathering requests, inquiries and
investigations.  Other than ordinary routine litigation incidental to
the Company’s business, management believes after consultation with legal
counsel that there are no pending legal proceedings against Bancorp 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
Bancorp.





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, 2009,
      as filed with the SEC on March 19,
2010.





Item
6.      Exhibits


Exhibit
No. 3.1:        Articles of Incorporation of
Jacksonville Bancorp, Inc. (1)





Exhibit
No. 3.2:        Amended and Restated Bylaws
of Jacksonville Bancorp, Inc., as amended to date (2)





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.


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:  May
      14, 2010
              /s/ Price W. SchwenckPrice
      W. SchwenckChief
      Executive OfficerDate:  May
      14, 2010
              /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
Jacksonville Bancorp, Inc. (1)





Exhibit
No. 3.2:        Amended and Restated Bylaws
of Jacksonville Bancorp, Inc., as amended to date (2)





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.