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 endedSeptember 30, 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
October 31, 2010, the latest practicable date, 1,750,437of the Registrant’s
common shares, $.01 par value, were issued and outstanding.














TABLE OF
CONTENTS





PagePART
      I - FINANCIAL INFORMATIONItem
      1.
              Financial
      Statements
              3Consolidated
      Balance Sheets
              3Consolidated
      Statements of Income (Loss)
              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
              21Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              39Item
      4.
              Controls
      and Procedures
              40PART
      II - OTHER INFORMATIONItem
      1.
              Legal
      Proceedings
              41Item 1A.
              Risk
      Factors
              41Item
      6.
              Exhibits
              45SIGNATURES
              46EXHIBIT
      INDEX
              47CERTIFICATIONSCertification
      of Price W. Schwenck under Section 302 of the Sarbanes-Oxley Act of
      2002
              48Certification
      of Valerie A. Kendall under Section 302 of the Sarbanes-Oxley Act of
      2002
              49Certification
      under Section 906 of the Sarbanes-Oxley Act of 2002
              50




2.




JACKSONVILLE
BANCORP, INC.


PART I — FINANCIAL
INFORMATION





Item
1.  Financial Statements





CONSOLIDATED
BALANCE SHEETS


(Dollars
in thousands, except per share amounts)







September 30,
                    
                    
                    December 31,2010
                    
                    
                    2009(Unaudited)ASSETSCash
      and due from banks
                    
                    $
                    4,542
                    
                    
                    $
                    5,647Federal
      funds sold
                    
                    
                    —
                    
                    
                    
                    —Total
      cash and cash equivalents
                    
                    
                    4,542
                    
                    
                    
                    5,647Securities
      available-for-sale
                    
                    
                    22,996
                    
                    
                    
                    22,171Loans,
      net of allowance for loan lossesof
      $8,922at
      2010 and $6,854 at 2009
                    
                    
                    370,498
                    
                    
                    
                    384,133Premises
      and equipment, net
                    
                    
                    3,339
                    
                    
                    
                    3,533Bank-owned
      life insurance (BOLI)
                    
                    
                    9,102
                    
                    
                    
                    8,908Federal
      Home Loan Bank (FHLB) stock
                    
                    
                    2,829
                    
                    
                    
                    3,047Real
      estate owned, net
                    
                    
                    6,299
                    
                    
                    
                    4,011Deferred
      income taxes
                    
                    
                    3,187
                    
                    
                    
                    2,015Prepaid
      regulatory assessments
                    
                    
                    1,982
                    
                    
                    
                    2,599Accrued
      interest receivable
                    
                    
                    1,913
                    
                    
                    
                    1,864Other
      assets
                    
                    
                    1,143
                    
                    
                    
                    883Total
      assets
                    
                    $
                    427,830
                    
                    
                    $
                    438,811LIABILITIESDepositsNoninterest
      bearing
                    
                    $
                    40,444
                    
                    
                    $
                    43,704Money
      market, NOW and savings deposits
                    
                    
                    132,615
                    
                    
                    
                    104,838Time
      deposits
                    
                    
                    188,377
                    
                    
                    
                    222,093Total
      deposits
                    
                    
                    361,436
                    
                    
                    
                    370,635Federal
      funds purchased
                    
                    
                    646
                    
                    
                    
                    227FHLB
      advances
                    
                    
                    24,800
                    
                    
                    
                    25,000Subordinated
      debt
                    
                    
                    14,550
                    
                    
                    
                    14,550Accrued
      expenses and other liabilities
                    
                    
                    1,766
                    
                    
                    
                    1,131Total
      liabilities
                    
                    
                    403,198
                    
                    
                    
                    411,543SHAREHOLDERS’
      EQUITYCommon
      stock, $.01 par value, 8,000,000 shares authorized, 1,750,437and 1,749,526
      shares issued
                    
                    
                    18
                    
                    
                    
                    17Additional
      paid–in capital
                    
                    
                    18,703
                    
                    
                    
                    18,631Retained
      earnings
                    
                    
                    5,956
                    
                    
                    
                    8,287Treasury
      stock, -0- and 283 shares
                    
                    
                    —
                    
                    
                    
                    (3
                    )Accumulated
      other comprehensive income (loss)
                    
                    
                    (45
                    )
                    
                    
                    336Total
      shareholders’ equity
                    
                    
                    24,632
                    
                    
                    
                    27,268Total
      liabilities and shareholders’ equity
                    
                    $
                    427,830
                    
                    
                    $
                    438,811





See
accompanying notes to unaudited consolidated financial
statements.





3.






CONSOLIDATED
STATEMENTS OF INCOME (LOSS)


(Unaudited)


(Dollars
in thousands, except per share amounts)


Three Months Ended
                
                
                Nine Months EndedSeptember 30,
                
                
                September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Interest
      and dividend incomeLoans,
      including fees
                
                $
                5,442
                
                
                $
                5,853
                
                
                $
                16,554
                
                
                $
                16,595Taxable
      securities
                
                
                136
                
                
                
                137
                
                
                
                374
                
                
                
                517Tax-exempt
      securities
                
                
                99
                
                
                
                104
                
                
                
                302
                
                
                
                311Federal
      funds sold and other
                
                
                (11
                )
                
                
                (13
                )
                
                
                (20
                )
                
                
                (36
                )Total
      interest income
                
                
                5,666
                
                
                
                6,081
                
                
                
                17,210
                
                
                
                17,387Interest
      expenseDeposits
                
                
                1,554
                
                
                
                1,750
                
                
                
                5,116
                
                
                
                6,177Federal
      Reserve borrowing
                
                
                —
                
                
                
                38
                
                
                
                1
                
                
                
                100FHLB
      advances
                
                
                174
                
                
                
                281
                
                
                
                671
                
                
                
                761Subordinated
      debt
                
                
                198
                
                
                
                196
                
                
                
                580
                
                
                
                539Other
                
                
                —
                
                
                
                1
                
                
                
                —
                
                
                
                1Total
      interest expense
                
                
                1,926
                
                
                
                2,266
                
                
                
                6,368
                
                
                
                7,578Net
      interest income
                
                
                3,740
                
                
                
                3,815
                
                
                
                10,842
                
                
                
                9,809Provision
      for loan losses
                
                
                799
                
                
                
                1,070
                
                
                
                5,094
                
                
                
                3,315Net
      interest income after provision for loan losses
                
                
                2,941
                
                
                
                2,745
                
                
                
                5,748
                
                
                
                6,494Noninterest
      incomeService
      charges on deposit accounts
                
                
                150
                
                
                
                148
                
                
                
                413
                
                
                
                455Non-marketable
      equity security
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (132
                )Other
      income
                
                
                149
                
                
                
                93
                
                
                
                420
                
                
                
                288Total
      noninterest income
                
                
                299
                
                
                
                241
                
                
                
                833
                
                
                
                611Noninterest
      expenseSalaries
      and employee benefits
                
                
                1,399
                
                
                
                1,124
                
                
                
                3,917
                
                
                
                3,351Occupancy
      and equipment
                
                
                416
                
                
                
                454
                
                
                
                1,234
                
                
                
                1,275Regulatory
      assessment
                
                
                232
                
                
                
                205
                
                
                
                743
                
                
                
                811Data
      processing
                
                
                266
                
                
                
                241
                
                
                
                761
                
                
                
                681Merger
      related costs
                
                
                760
                
                
                
                —
                
                
                
                1,113
                
                
                
                —Advertising
      and business development
                
                
                102
                
                
                
                118
                
                
                
                320
                
                
                
                329Professional
      fees
                
                
                178
                
                
                
                166
                
                
                
                508
                
                
                
                440Telephone
      expense
                
                
                33
                
                
                
                33
                
                
                
                99
                
                
                
                96Other
      real estate owned expense
                
                
                308
                
                
                
                18
                
                
                
                1,152
                
                
                
                68Other
                
                
                171
                
                
                
                169
                
                
                
                547
                
                
                
                430Total
      noninterest expense
                
                
                3,865
                
                
                
                2,528
                
                
                
                10,394
                
                
                
                7,481Income
      (loss) before income taxes
                
                
                (625
                )
                
                
                458
                
                
                
                (3,813
                )
                
                
                (376
                )Income
      tax expense (benefit)
                
                
                (276
                )
                
                
                133
                
                
                
                (1,484
                )
                
                
                (196
                )Net
      income (loss)
                
                
                (349
                )
                
                
                325
                
                
                
                (2,329
                )
                
                
                (180
                )Weighted
      average:Common
      shares
                
                
                1,750,197
                
                
                
                1,748,586
                
                
                
                1,749,496
                
                
                
                1,748,482Dilutive
      stock options and warrants
                
                
                —
                
                
                
                488
                
                
                
                —
                
                
                
                —Dilutive
      shares
                
                
                1,750,197
                
                
                
                1,749,074
                
                
                
                1,749,496
                
                
                
                1,748,482Basic
      earnings (loss) per common share
                
                $
                (.20
                )
                
                $
                .19
                
                
                $
                (1.33
                )
                
                $
                (.10
                )Diluted
      earnings (loss) per common share
                
                $
                (.20
                )
                
                $
                .19
                
                
                $
                (1.33
                )
                
                $
                (.10
                )


See
accompanying notes to unaudited consolidated financial
statements.





4.






CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


(Unaudited)


(Dollars
in thousands)


Common Stock
                            
                            
                            Additional
                            
                            
                            
                            
                            
                            
                            
                            
                            Accumulated OtherOutstanding
                            
                            
                            Paid-In
                            
                            
                            Retained
                            
                            
                            Treasury Stock
                            
                            
                            ComprehensiveShares
                            
                            
                            Amount
                            
                            
                            Capital
                            
                            
                            Earnings
                            
                            
                            Amount
                            
                            
                            Income (loss)
                            
                            
                            TotalBalance
      at January 1, 2009
                            
                            
                            1,748,599
                            
                            
                            $
                            17
                            
                            
                            $
                            18,568
                            
                            
                            $
                            8,213
                            
                            
                            $
                            (2
                            )
                            
                            $
                            49
                            
                            
                            $
                            26,845Comprehensive
      loss:Net  (loss)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (180
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (180
                            )Change
      in unrealized gain (loss) on securities available-for-sale, net of tax
      effects
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            424
                            
                            
                            
                            424Net
      unrealized loss on cash flow hedge, net of tax effects
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (175
                            )
                            
                            
                            (175
                            )Total
      comprehensive income
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            69Purchase
      of treasury stock
                            
                            
                            (3,025
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (33
                            )
                            
                            
                            
                            
                            
                            
                            (33
                            )Issuance
      of treasury stock
                            
                            
                            2,553
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            27
                            
                            
                            
                            
                            
                            
                            
                            27Common
      stock issued
                            
                            
                            727
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            —Share-based
      compensation expense
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            52
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            52Balance
      at September 30, 2009
                            
                            
                            1,748,854
                            
                            
                            $
                            17
                            
                            
                            $
                            18,620
                            
                            
                            $
                            8,033
                            
                            
                            $
                            (8
                            )
                            
                            $
                            298
                            
                            
                            $
                            26,960Balance
      at January 1, 2010
                            
                            
                            1,749,243
                            
                            
                            $
                            17
                            
                            
                            $
                            18,631
                            
                            
                            $
                            8,287
                            
                            
                            $
                            (3
                            )
                            
                            $
                            336
                            
                            
                            $
                            27,268Comprehensive
      income:Net
      (loss)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (2,329
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (2,329
                            )Change
      in unrealized gain (loss) on securities available- for-sale, net of tax
      effects
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            193
                            
                            
                            
                            193Net
      unrealized loss on cashflow
      hedge, net of taxeffects
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (574
                            )
                            
                            
                            (574
                            )Total
      comprehensive (loss)
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (2,710
                            )Purchase
      of treasury stock
                            
                            
                            (1,817
                            )
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (20
                            )
                            
                            
                            
                            
                            
                            
                            (20
                            )Issuance
      of treasury stock
                            
                            
                            2,100
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            (2
                            )
                            
                            
                            23
                            
                            
                            
                            
                            
                            
                            
                            21Common
      stock issued
                            
                            
                            911
                            
                            
                            
                            1
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1Share-based
      compensation expense
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            72
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            72Balance
      at September 30, 2010
                            
                            
                            1,750,437
                            
                            
                            $
                            18
                            
                            
                            $
                            18,703
                            
                            
                            $
                            5,956
                            
                            
                            $
                            —
                            
                            
                            $
                            (45
                            )
                            
                            $
                            24,632





See
accompanying notes to unaudited consolidated financial
statements.





5.






CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(Dollars
in thousands)







Nine Months EndedSeptember 30,2010
                
                
                2009Cash
      flows from operating activitiesNet
      income (loss)
                
                $
                (2,329
                )
                
                $
                (180
                )Adjustments
      to reconcile net income (loss) to net cash from
                  operating
      activities:Depreciation
      and amortization
                
                
                310
                
                
                
                386Net
      amortization (accretion) of deferred loan fees
                
                
                (74
                )
                
                
                87Provision
      for loan losses
                
                
                5,094
                
                
                
                3,315Premium
      amortization, net of accretion
                
                
                (164
                )
                
                
                (54
                )Net
      loss on sale of real estate owned
                
                
                41
                
                
                
                22Loss
      on write-down of real estate owned
                
                
                604
                
                
                
                30Earnings
      on Bank-owned life insurance
                
                
                (194
                )
                
                
                (98
                )Share-based
      compensation
                
                
                94
                
                
                
                79Loss
      on disposal of assets
                
                
                16
                
                
                
                10Loss
      on non-marketable equity investment
                
                
                —
                
                
                
                132Deferred
      income tax
                
                
                (943
                )
                
                
                (691
                )Net
      change in accrued interest receivable and other assets
                
                
                285
                
                
                
                188Net
      change in accrued expenses and other liabilities
                
                
                (269
                )
                
                
                596Net
      cash from operating activities
                
                
                2,471
                
                
                
                3,822Cash
      flows from investing activitiesPurchases
      of securities available-for-sale
                
                
                (7,239
                )
                
                
                (3,076
                )Proceeds
      from maturities, calls and paydown of securities
      available-for-sale
                
                
                6,887
                
                
                
                9,699Loan
      (originations) payments, net
                
                
                5,665
                
                
                
                (22,374
                )Proceeds
      from sale of real estate owned
                
                
                17
                
                
                
                3,675Additions
      to premises and equipment, net
                
                
                (124
                )
                
                
                (65
                )Net
      change in Federal Home Loan Bank stock
                
                
                218
                
                
                
                (1,252
                )Net
      cash from (used for) investing activities
                
                
                5,424
                
                
                
                (13,393
                )Cash
      flows from financing activitiesNet
      change in deposits
                
                
                (9,199
                )
                
                
                (23,941
                )Net
      change in Fed funds purchased
                
                
                419
                
                
                
                43Net
      change from Federal Reserve borrowing
                
                
                —
                
                
                
                500Repayment
      of fixed rate FHLB advances
                
                
                (10,000
                )
                
                
                —Purchase
      of fixed rate FHLB advances
                
                
                —
                
                
                
                5,000Net
      change in overnight FHLB advances
                
                
                9,800
                
                
                
                23,350Purchase
      of treasury stock
                
                
                (20
                )
                
                
                (33
                )Net
      cash from financing activities
                
                
                (9,000
                )
                
                
                4,919Net
      change in cash and cash equivalents
                
                
                (1,105
                )
                
                
                (4,652
                )Cash
      and cash equivalents at beginning of period
                
                
                5,647
                
                
                
                10,148Cash
      and cash equivalents at end of period
                
                $
                4,542
                
                
                $
                5,496




See
accompanying notes to unaudited consolidated financial statements.





6.






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
                
                $
                6,445
                
                
                $
                7,895Income
      taxes
                
                
                —
                
                
                
                20Supplemental
      schedule of noncash investing activitiesTransfers
      from loans to real estate owned
                
                $
                2,950
                
                
                $
                4,883





See
accompanying notes to unaudited consolidated financial statements.




7.






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.





In 2010,
The Jacksonville Bank formed TJB Properties, LLC, a wholly owned subsidiary of
The Jacksonville Bank for the sole purpose of managing property acquired through
foreclosure.  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 subsidiaries,
Fountain Financial, Inc. and TJB Properties, LLC.  The consolidated
entity is referred to as the “Company” and The Jacksonville Bank and its
subsidiaries 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 September 30, 2010 and 2009 is unaudited.  Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.  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.






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
September 30, 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)September
      30, 2010Available-for-saleU.S.
      government-sponsored entities and agencies
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      —State
      and political subdivisions
                      
                      
                      10,345
                      
                      
                      
                      418
                      
                      
                      
                      —
                      
                      
                      
                      10,763Mortgage-backed
      securities – residential
                      
                      
                      6,350
                      
                      
                      
                      364
                      
                      
                      
                      —
                      
                      
                      
                      6,714Collateralized
      mortgage  obligations - residential
                      
                      
                      5,469
                      
                      
                      
                      50
                      
                      
                      
                      —
                      
                      
                      
                      5,519Total
      available-for-sale securities
                      
                      $
                      22,164
                      
                      
                      $
                      832
                      
                      
                      $
                      —
                      
                      
                      $
                      22,996





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.






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.





September 30, 2010Amortized
                  
                  
                  FairCost
                  
                  
                  ValueMaturityAvailable-for-saleWithin
      one year
                  
                  $
                  1,666
                  
                  
                  $
                  1,673One
      to five years
                  
                  
                  6,212
                  
                  
                  
                  6,459Five
      to ten years
                  
                  
                  2,467
                  
                  
                  
                  2,631Beyond
      ten years
                  
                  
                  —
                  
                  
                  
                  —Mortgage-backed
                  
                  
                  6,350
                  
                  
                  
                  6,714Collateralized
      Mortgage Obligations
                  
                  
                  5,469
                  
                  
                  
                  5,519Total
                  
                  $
                  22,164
                  
                  
                  $
                  22,996





There
were no investment securities with unrealized losses at September 30,
2010.  The following table summarizes the investment securities with
unrealized losses at December 31, 2009 by aggregated major security type and
length of time in a continuous unrealized loss position:





Less Than 12 Months
                    
                    
                    12 Months or Longer
                    
                    
                    TotalFair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    Unrealized
                    
                    
                    Fair
                    
                    
                    UnrealizedValue
                    
                    
                    Losses
                    
                    
                    Value
                    
                    
                    Losses
                    
                    
                    Value
                    
                    
                    Losses(Dollars
      in thousands)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
                    )




10.






NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)









NOTE
2 - INVESTMENT SECURITIES (Cont.)




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.




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.




The
Company’s security portfolio consisted of $22,996 of available-for-sale
securities at September 30, 2010 and $22,171 at December 31, 2009.  No
available-for-sale securities were in an unrealized loss position at September
30, 2010 and $3,064 were in an unrealized loss position at December 31,
2009.  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
at December 31, 2009 was attributable to changes in interest rates and
illiquidity, and not credit quality.




The
Company does not have U.S. Agency Securities at an unrealized loss position at
September 30, 2010.  The Company had $987,000 of these securities at
December 31, 2009 in an unrealized loss position.





11.






NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)




NOTE
2 - INVESTMENT SECURITIES (Cont.)




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 at December 31, 2009 was
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.




The
Company does not have state and political securities at an unrealized loss
position at September 30, 2010.  The Company had $2,077 of these
securities at December 31, 2009 in an unrealized loss position.





NOTE
3 – LOAN PORTFOLIO COMPOSITION


The
composition of the Bank’s loan portfolio at September 30, 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, 2009September 30, 2010
                
                
                December 31, 2009
                
                
                to September 30, 2010Real
      estate mortgage loans:Commercial
                
                $
                228,475
                
                
                $
                233,570
                
                
                
                (2.2
                )%Residential
                
                
                93,094
                
                
                
                97,147
                
                
                
                (4.2
                )%Construction
      and land (1)
                
                
                29,906
                
                
                
                32,987
                
                
                
                (9.3
                )%Commercial
      loans
                
                
                25,181
                
                
                
                23,838
                
                
                
                5.6
                %Consumer
      loans
                
                
                3,144
                
                
                
                3,899
                
                
                
                (19.4
                )%Subtotal
                
                
                379,800
                
                
                
                391,441
                
                
                
                (3.0
                )%Less:  Net
      deferred loan fees
                
                
                (380
                )
                
                
                (454
                )
                
                
                (16.3
                )%Total
                
                $
                379,420
                
                
                $
                390,987
                
                
                
                (3.0
                )%





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





12.






NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)









NOTE
4 – ALLOWANCE FOR LOAN LOSSES


Activity
in the allowance for loan losses for the three and nine months ended September
30, 2010 and 2009 follows:





Three Months Ended
                
                
                Nine Months EndedSeptember 30,
                
                
                September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Beginning
      balance
                
                $
                8,248
                
                
                $
                5,663
                
                
                $
                6,854
                
                
                $
                4,705Provisions
      for loan losses charged to expense
                
                
                799
                
                
                
                1,070
                
                
                
                5,094
                
                
                
                3,315Loans
      charged off
                
                
                (135
                )
                
                
                (296
                )
                
                
                (3,097
                )
                
                
                (1,585
                )Recoveries
      of loans previously charged off
                
                
                10
                
                
                
                18
                
                
                
                71
                
                
                
                20Ending
      balance, September 30, 2010
                
                $
                8,922
                
                
                $
                6,455
                
                
                $
                8,922
                
                
                $
                6,455





Impaired
loans were as follows:


September 30,
                
                
                December 31,2010
                
                
                2009Loans
      with no allocated allowance for loan losses
                
                $
                21,015
                
                
                $
                4,036Loans
      with allocated allowance for loan losses
                
                
                13,331
                
                
                
                18,516Total
                
                $
                34,346
                
                
                $
                22,552Amount
      of the allowance for loan losses allocated
                
                $
                2,049
                
                
                $
                786





13.






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
September 30, 2010 and December 31, 2009, advances from the Federal Home Loan
Bank (FHLB) were as follows:


2010
                    
                    
                    2009Overnight
      advances maturing daily at a daily Variable interest rate of .45% at
      September 30, 2010
                    
                    
                    9,800
                    
                    
                    
                    —Convertible
      advances maturing June 8, 2010 with a quarterly call option beginning June
      9, 2008 at a fixed rate of 4.99%
                    
                    
                    —
                    
                    
                    
                    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%
                    
                    
                    —
                    
                    
                    
                    5,000Convertible
      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$
                    24,800
                    
                    
                    $
                    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 $58,822 at September 30, 2010.





The
Company has a “Borrower in Custody” line of credit with the Federal Reserve by
pledging collateral.  The amount of this line at September 30, 2010
was $28,090, 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 $904 on September 30, 2010.





Credit
risk may result from the 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.






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 September 30, 2010 and
December 31, 2009.  Management and the board of directors have
committed to maintain Total Risk-Based Capital at 10% and Tier 1 Capital to
Average Assets at 8% at the Bank.





Actual
                                  
                                  
                                  For Capital
                                    Adequacy
                                    Purposes
                                  
                                  
                                  To Be Well
                                    Capitalized Under
                                    Prompt Corrective
                                    Action ProvisionsAmount
                                  
                                  
                                  Ratio
                                  
                                  
                                  Amount
                                  
                                  
                                  Ratio
                                  
                                  
                                  Amount
                                  
                                  
                                  RatioSeptember
      30, 2010Total
      capital to riskweighted
      assetsConsolidated
                                  
                                  $
                                  42,719
                                  
                                  
                                  
                                  11.22
                                  %
                                  
                                  $
                                  30,457
                                  
                                  
                                  
                                  8.00
                                  %
                                  
                                  
                                  N/A
                                  
                                  
                                  
                                  N/ABank
                                  
                                  
                                  41,240
                                  
                                  
                                  
                                  10.87
                                  %
                                  
                                  
                                  30,362
                                  
                                  
                                  
                                  8.00
                                  %
                                  
                                  $
                                  37,953
                                  
                                  
                                  
                                  10.00
                                  %Tier
      1 (Core) capital to riskweighted
      assetsConsolidated
                                  
                                  
                                  31,585
                                  
                                  
                                  
                                  8.30
                                  %
                                  
                                  
                                  15,228
                                  
                                  
                                  
                                  4.00
                                  %
                                  
                                  
                                  N/A
                                  
                                  
                                  
                                  N/ABank
                                  
                                  
                                  36,444
                                  
                                  
                                  
                                  9.60
                                  %
                                  
                                  
                                  15,181
                                  
                                  
                                  
                                  4.00
                                  %
                                  
                                  
                                  22,772
                                  
                                  
                                  
                                  6.00
                                  %Tier
      1 (Core) capital toaverage
      assetsConsolidated
                                  
                                  
                                  31,585
                                  
                                  
                                  
                                  7.27
                                  %
                                  
                                  
                                  17,389
                                  
                                  
                                  
                                  4.00
                                  %
                                  
                                  
                                  N/A
                                  
                                  
                                  
                                  N/ABank
                                  
                                  
                                  36,444
                                  
                                  
                                  
                                  8.40
                                  %
                                  
                                  
                                  17,357
                                  
                                  
                                  
                                  4.00
                                  %
                                  
                                  
                                  21,696
                                  
                                  
                                  
                                  5.00
                                  %December
      31, 2009Total
      capital to riskweighted
      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 riskweighted
      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 toaverage
      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.






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.  Adjustments are
routinely made in the appraisal process by the appraisers to adjust for
differences between the comparable sales and income data
available.  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.






NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)





NOTE
8 – FAIR VALUE (Cont.)


Fair Value Measurements UsingTotal
                    
                    
                    Quoted Prices in
                      Active Markets for
                      Identical Assets
                      (Level 1)
                    
                    
                    Significant Other
                      Observable
                      Inputs
                      (Level 2)
                    
                    
                    Significant
                      Unobservable
                      Inputs
                      (Level 3)Assets:(Dollars
      in thousands)September
      30, 2010Available-for-saleU.S.
      government-sponsored entities and agencies
                    
                    $
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    —State
      and political subdivisions
                    
                    
                    10,763
                    
                    
                    
                    —
                    
                    
                    
                    10,763
                    
                    
                    
                    —Mortgage-backed
      securities - residential
                    
                    
                    6,714
                    
                    
                    
                    —
                    
                    
                    
                    6,714
                    
                    
                    
                    —Collateralized
      mortgage obligations - residential
                    
                    
                    5,519
                    
                    
                    
                    —
                    
                    
                    
                    5,519
                    
                    
                    
                    —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
      mortgageobligations
      - residential
                    
                    
                    352
                    
                    
                    
                    —
                    
                    
                    
                    352
                    
                    
                    
                    —Derivative
      asset
                    
                    
                    15
                    
                    
                    
                    —
                    
                    
                    
                    15
                    
                    
                    
                    —Liabilities:September
      30, 2010Derivative
      liability
                    
                    $
                    904
                    
                    
                    
                    —
                    
                    
                    $
                    904
                    
                    
                    
                    —December
      31, 2009Derivative
      liability
                    
                    $
                    —
                    
                    
                    
                    —
                    
                    
                    $
                    —
                    
                    
                    
                    —





17.






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:September
      30, 2010Impaired
      loans
                                            
                                            $
                                            4,328
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            4,328OREO
                                            
                                            
                                            6,299
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            6,299December
      31, 2009Impaired
      loans
                                            
                                            $
                                            2,077
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            2,077OREO
                                            
                                            
                                            4,011
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            4,011





Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $4,328 with a valuation
allowance of $1.0 million at September 30, 2010, compared to a carrying
amount of $2,341 with a valuation allowance of $264 at December 31, 2009. 
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
$6,299, which is made up of the outstanding balance of $6,933, net of a
valuation allowance of $634 at September 30, 2010, resulting in a write-down of
$634 for the period ending September 30, 2010.  At December 31, 2009, the
carrying amount of OREO was $4,011, which is made up of the outstanding balance
of $4,041, net of a valuation allowance of $30, resulting in a write-down of $30
for the year ended December 31, 2009.





The
carrying amount and estimated fair values of financial instruments at September
30, 2010 and December 31, 2009 were as follows:


September 30, 2010
                    
                    
                    December 31, 2009Carrying
                    
                    
                    Fair
                    
                    
                    Carrying
                    
                    
                    FairAmount
                    
                    
                    Value
                    
                    
                    Amount
                    
                    
                    ValueFinancial
      assetsCash
      and cash equivalents
                    
                    $
                    4,542
                    
                    
                    $
                    4,542
                    
                    
                    $
                    5,647
                    
                    
                    $
                    5,647Securities
      available-for-sale
                    
                    
                    22,996
                    
                    
                    
                    22,996
                    
                    
                    
                    22,171
                    
                    
                    
                    22,171Loans,
      net
                    
                    
                    370,498
                    
                    
                    
                    373,743
                    
                    
                    
                    384,133
                    
                    
                    
                    387,291Federal
      Home Loan Bank stock
                    
                    
                    2,829
                    
                    
                    
                    n/a
                    
                    
                    
                    3,047
                    
                    
                    
                    n/aNon-marketable
      equity security
                    
                    
                    153
                    
                    
                    
                    n/a
                    
                    
                    
                    153
                    
                    
                    
                    n/aAccrued
      interest receivable
                    
                    
                    1,913
                    
                    
                    
                    1,913
                    
                    
                    
                    1,864
                    
                    
                    
                    1,864Interest
      rate swap
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    15
                    
                    
                    
                    15





18.






NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)









NOTE
8 – FAIR VALUE (Cont.)


September 30, 2010
                  
                  
                  December 31, 2009Carrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairAmount
                  
                  
                  Value
                  
                  
                  Amount
                  
                  
                  ValueFinancial
      liabilitiesDeposits
                  
                  $
                  361,436
                  
                  
                  $
                  363,862
                  
                  
                  $
                  370,635
                  
                  
                  $
                  373,493Federal
      funds purchased
                  
                  
                  646
                  
                  
                  
                  646
                  
                  
                  
                  227
                  
                  
                  
                  227Other
      borrowings
                  
                  
                  24,800
                  
                  
                  
                  25,264
                  
                  
                  
                  25,000
                  
                  
                  
                  25,771Subordinated
      debentures
                  
                  
                  14,550
                  
                  
                  
                  6,527
                  
                  
                  
                  14,550
                  
                  
                  
                  5,708Accrued
      interest payable
                  
                  
                  347
                  
                  
                  
                  347
                  
                  
                  
                  424
                  
                  
                  
                  424Interest
      rate swap
                  
                  
                  904
                  
                  
                  
                  904
                  
                  
                  
                  —
                  
                  
                  
                  —





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.





NOTE
9 – SIGNIFICANT EVENT


On May
10, 2010, Bancorp and Atlantic BancGroup, Inc. (“ABI”) entered into a
merger agreement providing for the merger of ABI into Bancorp.  The merger
agreement also contemplates the consolidation of Oceanside Bank into the
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, ABI shareholders receive 0.2 shares of Bancorp
common stock for each share of ABI common stock.  Additionally, ABI
shareholders were to receive cash of up to approximately $0.65 per share,
subject to the qualifying sale of certain ABI assets.  On June 30,
2010, ABI sold the certain ABI assets to an unaffiliated third
party.  A total of approximately 249,503 shares of Bancorp common
stock is expected to be issued to ABI shareholders.





Under the
terms of the stock purchase agreement, Bancorp would have issued approximately
3.0 million shares of its common stock at a price of $10.00 per
share.  The largest investment is coming from CapGen, which had agreed
to purchase approximately $19.6 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.





On
September 20, 2010, Bancorp, CapGen and the other investors entered into an
amendment to the original stock purchase agreement.  The amendment
increased the amount of capital to be raised by the Company from $30 million to
$35 million and reduced the purchase price per share of the Company’s common
stock from $10.00 to $9.00 per share.  As a result, Bancorp will sell
and issue an aggregate of 3,888,889 shares of its common stock.





19.








NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)







Also on
September 20, 2010, Bancorp and ABI entered into the First Amendment to the
Agreement and Plan of Merger.  Under the amendment, ABI shareholders
will receive $0.67 in cash per share of ABI common stock owned, in addition to
receiving 0.2 shares of Bancorp’s common stock for each share of ABI common
stock.





The
merger is conditioned upon approval by the Federal Reserve Board, the Florida
Office of Financial Regulation, FDIC, ABI'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.  To date, all approvals have been received with
the exception of Bancorp’s shareholders; Bancorp’s Special Meeting of
Shareholders is scheduled for November 9, 2010.





20.




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
subsidiaries, TJB Properties, LLC and 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.  In
2010, the Bank formed TJB Properties, LLC, a wholly owned
subsidiary.  The primary purpose of TJB Properties, LLC is to manage
Other Real Estate Owned (OREO) properties.  Bancorp, the Bank, TJB
Properties, LLC 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.





21.




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, Bancorp and Atlantic BancGroup, Inc. (“ABI”) entered into a
merger agreement providing for the merger of ABI into Bancorp.  The merger
agreement also contemplates the consolidation of Oceanside Bank into the
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, ABI shareholders will receive 0.2 shares of
Bancorp common stock for each share of ABI common
stock.  Additionally, ABI shareholders will receive cash of up to
approximately $0.65 per share, subject to the qualifying sale of certain ABI
assets.  On June 30, 2010, ABI sold the certain ABI assets to an
unaffiliated third party.  A total of approximately 249,503 shares of
Bancorp common stock are expected to be issued to ABI shareholders.





Under the
terms of the stock purchase agreement, Bancorp will issue approximately 3.0
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 $19.6 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.





On
September 20, 2010, Bancorp, CapGen and the other investors entered into an
amendment to the original stock purchase agreement.  The amendment
increased the amount of capital to be raised by the Company from $30 million to
$35 million and reduced the purchase price per share of the Company’s common
stock from $10.00 to $9.00 per share.  As a result, Bancorp will sell
and issue an aggregate of 3,888,889 shares of its common stock.





22.





Also on
September 20, 2010, Bancorp and ABI entered into the First Amendment to the
Agreement and Plan of Merger.  Under the amendment, ABI shareholders
will receive $0.67 in cash per share of ABI common stock owned, in addition to
receiving 0.2 shares of Bancorp’s common stock for each share of ABI common
stock.





The
merger is conditioned upon approval by the Federal Reserve Board, the Florida
Office of Financial Regulation, FDIC, ABI'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.  To date, all approvals have been received with
the exception of Bancorp’s shareholders; Bancorp’s Special Meeting of
Shareholders is scheduled for November 9, 2010.





The
following unaudited combined company pro forma information is based on the
historical financial statements of Bancorp and ABI and has been prepared to
illustrate the effects of the merger.  The unaudited pro forma
condensed consolidated balance sheet as of September 30, 2010 and the unaudited
pro forma condensed consolidated statement of income for the year ended December
31, 2009 and the nine months ended September 30, 2010 give effect to the merger,
accounted for under the purchase method of accounting.  Under the
purchase method of accounting, the assets and liabilities of ABI, as of the
effective date of the merger, will be recorded at their respective fair values
and the excess of the merger consideration over the fair value of ABI’s net
assets will be allocated to goodwill.  The final allocation of the
merger consideration will be determined after the merger is completed and after
the fair values of ABI’s tangible and identifiable intangible assets and
liabilities as of the effective date of the merger are determined.  As
a result, the final adjustments may be materially different from the unaudited
combined company pro forma financial information presented in this
filing.




23.




Combined
Company Pro Forma Financial Information (unaudited)


Condensed
Consolidated Balance Sheet


as of
September 30, 2010





Historical
                  
                  
                  Pro Forma Before
                  
                  
                  Pro Forma Adjustments
                  
                  
                  Pro Forma afterBancorp
                  
                  
                  ABI
                  
                  
                  Adjustments
                  
                  
                  Debit
                  
                  
                  Credit
                  
                  
                  AdjustmentsASSETSCash
      and due from banks
                  
                  $
                  4,542
                  
                  
                  $
                  21,221
                  
                  
                  $
                  25,763
                  
                  
                  $
                  34,813
                  (a)
                  
                  $
                  250
                  (d)
                  
                  $
                  59,489837
                  (e)Federal
      funds sold
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      cash and cash equivalents
                  
                  
                  4,542
                  
                  
                  
                  21,221
                  
                  
                  
                  25,763
                  
                  
                  
                  34,813
                  
                  
                  
                  1,087
                  
                  
                  
                  59,489Securities
      available-for-sale
                  
                  
                  25,825
                  
                  
                  
                  30,530
                  
                  
                  
                  56,355
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  56,355Securities
      held to maturity
                  
                  
                  -
                  
                  
                  
                  14,985
                  
                  
                  
                  14,985
                  
                  
                  
                  -
                  
                  
                  
                  265
                  (f)
                  
                  
                  14,720Loans,
      net of allowance for loan losses
                  
                  
                  370,498
                  
                  
                  
                  181,987
                  
                  
                  
                  552,485
                  
                  
                  
                  -
                  
                  
                  
                  16,946
                  (f)
                  
                  
                  535,539Premises
      and equipment
                  
                  
                  3,339
                  
                  
                  
                  3,217
                  
                  
                  
                  6,556
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,556Bank-owned
      life insurance (BOLI)
                  
                  
                  9,102
                  
                  
                  
                  146
                  
                  
                  
                  9,248
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,248Real
      estate owned
                  
                  
                  6,299
                  
                  
                  
                  3,130
                  
                  
                  
                  9,429
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,429Deferred
      income taxes
                  
                  
                  3,187
                  
                  
                  
                  536
                  
                  
                  
                  3,723
                  
                  
                  
                  -
                  
                  
                  
                  1,487
                  (e)
                  
                  
                  1,954Core
      deposit intangible
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,952
                  (b)
                  
                  
                  -
                  
                  
                  
                  3,952Goodwill
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  7,615
                  (e)
                  
                  
                  -
                  
                  
                  
                  7,897Other
      assets
                  
                  
                  5,038
                  
                  
                  
                  1,515
                  
                  
                  
                  6,553
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  6,553Total
      assets
                  
                  $
                  427,830
                  
                  
                  $
                  257,267
                  
                  
                  $
                  685,097
                  
                  
                  $
                  46,380
                  
                  
                  $
                  19,785
                  
                  
                  $
                  711,692LIABILITIESDepositsNoninterest-bearing
                  
                  $
                  40,444
                  
                  
                  $
                  32,880
                  
                  
                  $
                  73,324
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  73,324MMDA,
      NOW and savings
                  
                  
                  132,615
                  
                  
                  
                  67,944
                  
                  
                  
                  200,559
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  200,559Time
      deposits
                  
                  
                  188,377
                  
                  
                  
                  132,905
                  
                  
                  
                  321,282
                  
                  
                  
                  -
                  
                  
                  
                  1,013
                  (f)
                  
                  $
                  322,295Total
      deposits
                  
                  
                  361,436
                  
                  
                  
                  233,729
                  
                  
                  
                  595,165
                  
                  
                  
                  -
                  
                  
                  
                  1,013
                  
                  
                  
                  596,178Federal
      funds purchased
                  
                  
                  646
                  
                  
                  
                  -
                  
                  
                  
                  646
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  646FHLB
      and other borrowings
                  
                  
                  24,800
                  
                  
                  
                  8,000
                  
                  
                  
                  32,800
                  
                  
                  
                  -
                  
                  
                  
                  166
                  (f)
                  
                  
                  32,966Subordinated
      debt
                  
                  
                  14,550
                  
                  
                  
                  3,093
                  
                  
                  
                  17,643
                  
                  
                  
                  1,619
                  (f)
                  
                  
                  -
                  
                  
                  
                  16,024Other
      liabilities
                  
                  
                  1,766
                  
                  
                  
                  2,421
                  
                  
                  
                  4,187
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,187Total
      liabilities
                  
                  $
                  403,198
                  
                  
                  $
                  247,243
                  
                  
                  $
                  650,441
                  
                  
                  $
                  1,619
                  
                  
                  $
                  1,179
                  
                  
                  $
                  650,001SHAREHOLDERS'
      EQUITYCommon
      Stock
                  
                  
                  18
                  
                  
                  
                  12
                  
                  
                  
                  30
                  
                  
                  
                  12
                  (c)
                  
                  
                  37
                  (a)
                  
                  
                  55Additional
      paid-in capital
                  
                  
                  18,703
                  
                  
                  
                  11,788
                  
                  
                  
                  30,491
                  
                  
                  
                  11,788
                  (c)
                  
                  
                  34,776
                  (a)
                  
                  
                  55,7252,246
                  (e)Retained
      earnings
                  
                  
                  5,956
                  
                  
                  
                  (2,413
                  )
                  
                  
                  3,543
                  
                  
                  
                  -
                  
                  
                  
                  2,413
                  (c)
                  
                  
                  5,956Treasury
      stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Accumulated
      other comprehensive income (loss)
                  
                  
                  (45
                  )
                  
                  
                  637
                  
                  
                  
                  592
                  
                  
                  
                  637
                  (c)
                  
                  
                  -
                  
                  
                  
                  (45
                  )Total
      shareholders' equity
                  
                  
                  24,632
                  
                  
                  
                  10,024
                  
                  
                  
                  34,656
                  
                  
                  
                  12,347
                  
                  
                  
                  39,472
                  
                  
                  
                  61,691Total
      liabilities and shareholders' equity
                  
                  $
                  427,830
                  
                  
                  $
                  257,267
                  
                  
                  $
                  685,097
                  
                  
                  $
                  14,056
                  
                  
                  $
                  40,651
                  
                  
                  $
                  711,692




24.





JACKSONVILLE
BANCORP, INC.


NOTES TO
THE COMBINED COMPANY PRO FORMA FINANCIAL INFORMATION (UNAUDITED)


Condensed
Consolidated Statement of Financial Condition


as of
September 30, 2010





a.
              The
      investors will provide $35 million in new capital through the sale of
      newly issued shares of Bancorp common
stock.





Pro forma
net cash expected as a result of the capital raise:


New
      capital
                              
                              
                              
                              
                              $
                              35,000Professional
      fees
                              
                              
                              300Estimated
      tax benefit
                              
                              
                              113Net
      cost
                              
                              
                              187Net
      cash
                              
                              
                              
                              
                              
                              $
                              34,813


b.
                Estimated
      core deposit intangible asset of ABI’s total deposits, excluding time
      deposits.  Core deposit intangible will be amortized over eight
      years using the double declining balance method as follows (dollars in
      thousands):


Year
      1
                  
                  $
                  988Year
      2
                  
                  
                  741Year
      3
                  
                  
                  556Year
      4
                  
                  
                  334Year
      5
                  
                  
                  334Year
      6
                  
                  
                  333Year
      7
                  
                  
                  333Year
      8
                  
                  
                  3333,952





c.
              Elimination
      of ABI’s stockholders’
equity.





d.
                The
      following are the pro forma costs expected as a result of the merger
      (dollars in thousands):




Severance
      agreements
                  
                  $
                  250Other
      merger costs
                  
                  
                  150400Estimated
      tax benefit
                  
                  $
                  (150
                  )





e.
              The
      following represents the total merger consideration and the amount of
      goodwill resulting from the
merger.





Total
consideration to ABI shareholders (dollars in thousands, except per share
data):


Cash
      consideration to ABI shareholders:Number
      of shares of common stock issued
                      
                      
                      1,247,516Cash
      per share
                      
                      
                      .67Total
      cash consideration
                      
                      $
                      837Stock
      consideration to ABI common shareholders:Number
      of shares of ABI common stock issued and outstanding as of the record
      date
                      
                      
                      1,247,516Exchange
      ratio for Bancorp shares
                      
                      
                      . 20Number
      of Bancorp shares of common stock to be issued
                      
                      
                      249,503Assumed
      fair value of Bancorp common stockAssumed
      fair value of Bancorp common stock pursuant to the Merger
      Agreement
                      
                      $
                      9.00Total
      stock consideration
                      
                      $
                      2,246Total
      merger consideration
                      
                      $
                      3,083Total
      purchase price
                      
                      $
                      3,083




25.


JACKSONVILLE
BANCORP, INC.
 NOTES TO
THE COMBINED COMPANY PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
 Condensed
Consolidated Statement of Financial Condition
 as of
September 30, 2010
 
 Net
      equity of ABI per historical financial statements adjusted
      for:
                    
                    
                    10,024ABI
      transaction costs
                    
                    
                    400Estimated
      tax impact
                    
                    
                    (150
                    )Adjusted
      net equity of ABI
                    
                    
                    9,774Core
      deposit intangible
                    
                    
                    3,952Estimated
      tax impact
                    
                    
                    (1,487
                    )Net
      fair value adjustments
                    
                    
                    (16,771
                    )Pro
      forma net equity acquired
                    
                    
                    (4,532
                    )Total
      Goodwill
                    
                    $
                    7,615
 
 f.
                  The
      estimated fair value of the assets acquired and the liabilities assumed as
      of the balance sheet date are as
follows:
 
 Cash
      and cash equivalents
                    
                    $
                    20,821Securities
      and fed funds sold
                    
                    
                    45,250Loans,
      net
                    
                    
                    165,041Premises
      and equipment
                    
                    
                    3,217Other
      assets
                    
                    
                    7,942Total
      assets acquired
                    
                    
                    242,271Deposits
                    
                    
                    234,742FHLB
                    
                    
                    8,166Subordinated
      debt
                    
                    
                    1,474Other
      liabilities
                    
                    
                    2,421Total
      liabilities assumed
                    
                    
                    246,803Net
      liabilities acquired
                    
                    $
                    (4,532
                    )
 
 g.
                ABI
      currently has a valuation allowance against the majority of its deferred
      tax assets.  The merger does result in an ownership change for
      tax purposes, which could further limit the ability to realize some of its
      deferred tax assets.  As a result, the pro forma adjustments
      include a valuation allowance against any net deferred tax asset arising
      from the purchase and fair value adjustments on the assets and liabilities
      of ABI.  Reversal of the valuation allowance will occur at such
      time it is determined that it is more likely than not that these deferred
      tax assets could be
realized.
  26.
  Combined
Company Pro Forma Financial Information (Unaudited)
 Condensed
Consolidated Statement of Operations
 for the
Year Ending December 31, 2009
 (Dollars
in thousands, except per share data)
 
 Historical
                                                            
                                                            
                                                            Pro Forma
                                                              before
                                                            
                                                            
                                                            Merger Adjustments
                                                            
                                                            
                                                            Pro Forma afterJBI
                                                            
                                                            
                                                            ABI
                                                            
                                                            
                                                            Adjustments
                                                            
                                                            
                                                            Debit
                                                            
                                                            
                                                            Credit
                                                            
                                                            
                                                            AdjustmentsInterest
      and dividend income:Loans,
      including fees
                                                            
                                                            $
                                                            22,190
                                                            
                                                            
                                                            $
                                                            12,354
                                                            
                                                            
                                                            $
                                                            34,544
                                                            
                                                            
                                                            $
                                                            —
                                                            
                                                            
                                                            $
                                                            3,458
                                                            (a)
                                                            
                                                            $
                                                            38,002Taxable
      securities
                                                            
                                                            
                                                            648
                                                            
                                                            
                                                            
                                                            875
                                                            
                                                            
                                                            
                                                            1,523
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            1,523Tax-exempt
      securities
                                                            
                                                            
                                                            414
                                                            
                                                            
                                                            
                                                            665
                                                            
                                                            
                                                            
                                                            1,079
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            1,079Federal
      funds sold and other
                                                            
                                                            
                                                            (48
                                                            )
                                                            
                                                            
                                                            1
                                                            
                                                            
                                                            
                                                            (47
                                                            )
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            (47
                                                            )Total
      interest income
                                                            
                                                            
                                                            23,204
                                                            
                                                            
                                                            
                                                            13,895
                                                            
                                                            
                                                            
                                                            37,099
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            3,458
                                                            
                                                            
                                                            
                                                            40,557Interest
      expense:Deposits
                                                            
                                                            
                                                            7,844
                                                            
                                                            
                                                            
                                                            6,268
                                                            
                                                            
                                                            
                                                            14,112
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            809
                                                            (b)
                                                            
                                                            
                                                            13,303Federal
      Reserve borrowing
                                                            
                                                            
                                                            116
                                                            
                                                            
                                                            
                                                            -
                                                            
                                                            
                                                            
                                                            116
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            116FHLB
      and other borrowings
                                                            
                                                            
                                                            1,034
                                                            
                                                            
                                                            
                                                            347
                                                            
                                                            
                                                            
                                                            1,381
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            150
                                                            (a)
                                                            
                                                            
                                                            1,231Subordinated
      debt
                                                            
                                                            
                                                            734
                                                            
                                                            
                                                            
                                                            185
                                                            
                                                            
                                                            
                                                            919
                                                            
                                                            
                                                            
                                                            65
                                                            (a)
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            984Federal
      funds purchased and repurchase agreements
                                                            
                                                            
                                                            1
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1Total
      interest expense
                                                            
                                                            
                                                            9,729
                                                            
                                                            
                                                            
                                                            6,800
                                                            
                                                            
                                                            
                                                            16,529
                                                            
                                                            
                                                            
                                                            65
                                                            
                                                            
                                                            
                                                            959
                                                            
                                                            
                                                            
                                                            15,635Net
      interest income
                                                            
                                                            
                                                            13,475
                                                            
                                                            
                                                            
                                                            7,095
                                                            
                                                            
                                                            
                                                            20,570
                                                            
                                                            
                                                            
                                                            65
                                                            
                                                            
                                                            
                                                            4,417
                                                            
                                                            
                                                            
                                                            24,922Provision
      for loan losses
                                                            
                                                            
                                                            4,361
                                                            
                                                            
                                                            
                                                            6,268
                                                            
                                                            
                                                            
                                                            10,629
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            10,629Net
      interest income after provision for loan losses
                                                            
                                                            
                                                            9,114
                                                            
                                                            
                                                            
                                                            827
                                                            
                                                            
                                                            
                                                            9,941
                                                            
                                                            
                                                            
                                                            65
                                                            
                                                            
                                                            
                                                            4,417
                                                            
                                                            
                                                            
                                                            14,293Noninterest
      income:Service
      charges on deposit accounts
                                                            
                                                            
                                                            597
                                                            
                                                            
                                                            
                                                            611
                                                            
                                                            
                                                            
                                                            1,208
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1,208Write-off
      of non-marketable equity security
                                                            
                                                            
                                                            (132
                                                            )
                                                            
                                                            
                                                            (179
                                                            )
                                                            
                                                            
                                                            (311
                                                            )
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            (311
                                                            )Other
                                                            
                                                            
                                                            376
                                                            
                                                            
                                                            
                                                            319
                                                            
                                                            
                                                            
                                                            695
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            695Total
      noninterest income
                                                            
                                                            
                                                            841
                                                            
                                                            
                                                            
                                                            751
                                                            
                                                            
                                                            
                                                            1,592
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            1,592Noninterest
      expenses:Salaries
      and employee benefits
                                                            
                                                            
                                                            4,441
                                                            
                                                            
                                                            
                                                            2,846
                                                            
                                                            
                                                            
                                                            7,287
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            7,287Occupancy
      and equipment
                                                            
                                                            
                                                            1,674
                                                            
                                                            
                                                            
                                                            1,029
                                                            
                                                            
                                                            
                                                            2,703
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            2,703Regulatory
      assessment
                                                            
                                                            
                                                            1,020
                                                            
                                                            
                                                            
                                                            1,014
                                                            
                                                            
                                                            
                                                            2,034
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            2,034Data
      processing
                                                            
                                                            
                                                            909
                                                            
                                                            
                                                            
                                                            836
                                                            
                                                            
                                                            
                                                            1,745
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            1,745Professional
      fees
                                                            
                                                            
                                                            551
                                                            
                                                            
                                                            
                                                            766
                                                            
                                                            
                                                            
                                                            1,317
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            1,317Advertising
      and business development
                                                            
                                                            
                                                            603
                                                            
                                                            
                                                            
                                                            95
                                                            
                                                            
                                                            
                                                            698
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            698Amortization
      expense
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            988
                                                            (b)
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            
                                                            988Other
                                                            
                                                            
                                                            785
                                                            
                                                            
                                                            
                                                            1,905
                                                            
                                                            
                                                            
                                                            2,690
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            2,690Total
      noninterest expenses
                                                            
                                                            
                                                            9,983
                                                            
                                                            
                                                            
                                                            8,491
                                                            
                                                            
                                                            
                                                            18,474
                                                            
                                                            
                                                            
                                                            988
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            19,462Income
      before income taxes
                                                            
                                                            
                                                            (28
                                                            )
                                                            
                                                            
                                                            (6,913
                                                            )
                                                            
                                                            
                                                            (6,941
                                                            )
                                                            
                                                            
                                                            1,053
                                                            
                                                            
                                                            
                                                            4,417
                                                            
                                                            
                                                            
                                                            (3,577
                                                            )Income
      tax expense
                                                            
                                                            
                                                            (104
                                                            )
                                                            
                                                            
                                                            327
                                                            
                                                            
                                                            
                                                            223
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            372
                                                            
                                                            
                                                            
                                                            (149
                                                            )Net
      income (loss)
                                                            
                                                            $
                                                            76
                                                            
                                                            
                                                            $
                                                            (7,240
                                                            )
                                                            
                                                            $
                                                            (7,164
                                                            )
                                                            
                                                            $
                                                            1,053
                                                            
                                                            
                                                            
                                                            4,789
                                                            
                                                            
                                                            
                                                            (3,428
                                                            )Other
      comprehensive income (loss)
                                                            
                                                            
                                                            287
                                                            
                                                            
                                                            
                                                            (12
                                                            )
                                                            
                                                            
                                                            275
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            —
                                                            
                                                            
                                                            
                                                            275Comprehensive
      loss
                                                            
                                                            $
                                                            363
                                                            
                                                            
                                                            $
                                                            (7,252
                                                            )
                                                            
                                                            $
                                                            (6,889
                                                            )
                                                            
                                                            $
                                                            1,053
                                                            
                                                            
                                                            $
                                                            4,789
                                                            
                                                            
                                                            $
                                                            (3,153
                                                            )
  27.
  Combined
Company Pro Forma Financial Information (Unaudited)
 Condensed
Consolidated Statement of Operations
 for the
Year Ending December 31, 2009
 
 Earnings
      (loss) per share:BasicWeighted
      average common shares Outstanding
                                                                  
                                                                  
                                                                  1,749
                                                                  
                                                                  
                                                                  
                                                                  1,248
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  5,889Basic
      earnings per common share
                                                                  
                                                                  $
                                                                  0.04
                                                                  
                                                                  
                                                                  $
                                                                  (5.80
                                                                  )
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  (0.54
                                                                  )DilutedWeighted
      average common shares outstanding for basic earnings per common
      shares
                                                                  
                                                                  
                                                                  1,749
                                                                  
                                                                  
                                                                  
                                                                  1,248
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  5,889Add:
      Dilutive effects of assumed exercises of stock options and
      warrants
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  —Average
      shares and dilutive potential common shares
                                                                  
                                                                  
                                                                  1,749
                                                                  
                                                                  
                                                                  
                                                                  1,248
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  5,889Diluted
      earnings per common share
                                                                  
                                                                  $
                                                                  0.04
                                                                  
                                                                  
                                                                  $
                                                                  (5.80
                                                                  )
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  (0.54
                                                                  )
 
 a.
              Accretion
      and amortization of estimate fair value adjustments to loans, deposits and
      other funding on a level yield
basis.
 
 b.
              Represents
      the adjustment to record the amortization of the fair value adjustment on
      acquired core deposits using the double declining balance method amortized
      over eight years.
  28.
  Combined
Company Pro Forma Financial Information (Unaudited)
 Condensed
Consolidated Statement of Income
 as of
September 30, 2010
 (Dollars
in thousands, except per share data)
 
 Historical
                              
                              
                              Pro Forma
                                before
                              
                              
                              Merger Adjustments
                              
                              
                              Pro Forma afterJBI
                              
                              
                              ABI
                              
                              
                              Adjustments
                              
                              
                              Debit
                              
                              
                              Credit
                              
                              
                              AdjustmentsInterest
      and dividend income:Loans,
      including fees
                              
                              $
                              16,554
                              
                              
                              $
                              8,244
                              
                              
                              $
                              24,798
                              
                              
                              $
                              -
                              
                              
                              $
                              2,594
                              (a)
                              
                              $
                              27,392Taxable
      securities
                              
                              
                              374
                              
                              
                              
                              959
                              
                              
                              
                              1,333
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,333Tax-exempt
      securities
                              
                              
                              302
                              
                              
                              
                              481
                              
                              
                              
                              783
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              783Federal
      funds sold and other
                              
                              
                              (20
                              )
                              
                              
                              -
                              
                              
                              
                              (20
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (20
                              )Total
      interest income
                              
                              
                              17,210
                              
                              
                              
                              9,684
                              
                              
                              
                              26,894
                              
                              
                              
                              -
                              
                              
                              
                              2,594
                              
                              
                              
                              29,488Interest
      expense:Deposits
                              
                              
                              5,116
                              
                              
                              
                              2,988
                              
                              
                              
                              8,104
                              
                              
                              
                              -
                              
                              
                              
                              607
                              (b)
                              
                              
                              7,497Federal
      Reserve borrowing
                              
                              
                              1
                              
                              
                              
                              -
                              
                              
                              
                              1
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1FHLB
      advances
                              
                              
                              671
                              
                              
                              
                              262
                              
                              
                              
                              933
                              
                              
                              
                              -
                              
                              
                              
                              113
                              (a)
                              
                              
                              821Subordinated
      debentures
                              
                              
                              580
                              
                              
                              
                              139
                              
                              
                              
                              719
                              
                              
                              
                              49
                              (a)
                              
                              
                              -
                              
                              
                              
                              768Federal
      funds purchased and repurchase agreements
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Total
      interest expense
                              
                              
                              6,368
                              
                              
                              
                              3,389
                              
                              
                              
                              9,757
                              
                              
                              
                              49
                              
                              
                              
                              720
                              
                              
                              
                              9,087Net
      interest income
                              
                              
                              10,842
                              
                              
                              
                              6,295
                              
                              
                              
                              17,137
                              
                              
                              
                              49
                              
                              
                              
                              3,314
                              
                              
                              
                              20,401Provision
      for loan losses
                              
                              
                              5,094
                              
                              
                              
                              1,593
                              
                              
                              
                              6,687
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              6,687Net
      interest income after provision for loan losses
                              
                              
                              5,748
                              
                              
                              
                              4,702
                              
                              
                              
                              10,450
                              
                              
                              
                              49
                              
                              
                              
                              3,314
                              
                              
                              
                              13,714Noninterest
      income:Service
      charges on deposit accounts
                              
                              
                              413
                              
                              
                              
                              340
                              
                              
                              
                              753
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              753Write-off
      of non-marketable equity security
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              -Other
                              
                              
                              420
                              
                              
                              
                              233
                              
                              
                              
                              653
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              653Total
      noninterest income
                              
                              
                              833
                              
                              
                              
                              573
                              
                              
                              
                              1,406
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              1,406Noninterest
      expenses:Salaries
      and employee benefits
                              
                              
                              3,917
                              
                              
                              
                              1,961
                              
                              
                              
                              5,878
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              5,878Occupancy
      and equipment
                              
                              
                              1,234
                              
                              
                              
                              752
                              
                              
                              
                              1,986
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,986Regulatory
      assessment
                              
                              
                              743
                              
                              
                              
                              811
                              
                              
                              
                              1,554
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,554Data
      processing
                              
                              
                              761
                              
                              
                              
                              755
                              
                              
                              
                              1,516
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,516Merger
      related costs
                              
                              
                              1,113
                              
                              
                              
                              -
                              
                              
                              
                              1,113
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,113Advertising
      and business development
                              
                              
                              320
                              
                              
                              
                              18
                              
                              
                              
                              338
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              338Professional
      fees
                              
                              
                              508
                              
                              
                              
                              612
                              
                              
                              
                              1,120
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              1,120Amortization
      expense
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              741
                              (a)
                              
                              
                              
                              
                              
                              
                              741Other
                              
                              
                              1,798
                              
                              
                              
                              789
                              
                              
                              
                              2,587
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              2,587Total
      noninterest expenses
                              
                              
                              10,394
                              
                              
                              
                              5,698
                              
                              
                              
                              16,092
                              
                              
                              
                              741
                              
                              
                              
                              -
                              
                              
                              
                              16,833Income
      before income taxes
                              
                              
                              (3,813
                              )
                              
                              
                              (423
                              )
                              
                              
                              (4,236
                              )
                              
                              
                              790
                              
                              
                              
                              3,314
                              
                              
                              
                              (1,713
                              )Income
      tax expense
                              
                              
                              (1,485
                              )
                              
                              
                              (117
                              )
                              
                              
                              (1,602
                              )
                              
                              
                              -
                              
                              
                              
                              279
                              
                              
                              
                              (1,881
                              )Net
      income (loss)
                              
                              $
                              (2,328
                              )
                              
                              $
                              (306
                              )
                              
                              $
                              (2,634
                              )
                              
                              $
                              790
                              
                              
                              
                              3,593
                              
                              
                              
                              169
  29.
 
 Combined
Company Pro Forma Financial Information (Unaudited)
 Condensed
Consolidated Statement of Income
 as of
September 30, 2010
 
 Earnings
      (loss) per share:BasicWeighted
      average common shares outstanding
                                                                                
                                                                                
                                                                                1,749
                                                                                
                                                                                
                                                                                
                                                                                1,248
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                5,889Basic
      earnings (loss) per common share
                                                                                
                                                                                $
                                                                                (1.33
                                                                                )
                                                                                
                                                                                $
                                                                                (0.25
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                $
                                                                                0.03DilutedWeighted
      average common shares outstanding for basic earnings per common
      shares
                                                                                
                                                                                
                                                                                1,749
                                                                                
                                                                                
                                                                                
                                                                                1,248
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                5,889Add:
      Dilutive effects of assumed exercises of stock options and
      warrants
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                -Average
      shares and dilutive potential common shares
                                                                                
                                                                                
                                                                                1,749
                                                                                
                                                                                
                                                                                
                                                                                1,248
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                5,889Diluted
      earnings (loss) per common share
                                                                                
                                                                                $
                                                                                (1.33
                                                                                )
                                                                                
                                                                                $
                                                                                (0.25
                                                                                )
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                
                                                                                $
                                                                                0.03
 
 a.
              Accretion
      and amortization of estimated fair value adjustments to loans, deposits
      and other funding on a level yield
basis.
 
 b.
              Represents
      the adjustment to record the amortization of the fair value adjustment on
      acquired core deposits using the double declining method amortized over
      eight years.
  30.
  Introduction
 
 On the
following pages, management presents an analysis of the financial condition of
the Company as of September 30, 2010 compared to December 31, 2009, and the
results of operations for the three and nine months ended September 30, 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 September 30, 2010 and December 31, 2009
 
 Total
assets decreased $11.0 million, or 2.5%, from $438.8 million at December 31,
2009 to $427.8 million at September 30, 2010.  During the nine months
ended September 30, 2010, the Company experienced a net loan decrease of $13.6
million, or 3.5%.  Commercial real estate decreased by $5.1 million,
or 2.2%, residential real estate decreased by $4.1 million, or 4.2%,
construction real estate decreased by $3.1 million, or 9.3%, and consumer loans
decreased by $755,000, or 19.4%, offset by a $1.3 million, or 5.6%, increase in
commercial loans.  In addition, the allowance for loan losses
increased by $2.1 million.
 
 Total
cash and cash equivalents decreased $1.1 million from $5.6 million at December
31, 2009 to $4.5 million at September 30, 2010.  Investment
securities available-for-sale increased $825,000 to $23.0 million at September
30, 2010.  During the nine months ended September 30, 2010, we
purchased $2.0 million of U.S. government agency securities and $5.2 million
GNMA CMO securities.  In addition, we received $6.9 million in
proceeds from maturities, calls and principal repayments.
 
 Total
deposits decreased $9.2 million, or 2.5%, from $370.6 million at December 31,
2009 to $361.4 million at September 30, 2010.  During the nine
months ended September 30, 2010, money market, NOW and savings deposits
increased $27.8 million to $132.6 million, time deposits decreased $33.7
million to $188.4 million and noninterest bearing deposits decreased $3.3
million to $40.4 million.  The decrease in time deposits was driven
primarily by a reduction in National and Brokered CD’s of $58.9
million.
 
 Federal
Home Loan Bank advances decreased $200,000 to $24.8 million at September 30,
2010 from $25.0 million at December 31, 2009.  Two $5.0 million
fixed rate advances matured during the first nine months of 2010, offset by an
increase in overnight advances of $9.8 million.
 
 Total
shareholders' equity decreased by $2.6 million from $27.3 million at December
31, 2009 to $24.6 million at September 30, 2010.  The decrease is
mainly attributable to a net loss of $2.3 million and an increase of a net
unrealized loss on cash flow hedge.  At September 30, 2010, the
Company had 8,000,000 authorized shares of $.01 par value common stock, of which
1,750,437 shares were issued and 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 September 30, 2010.
 
 Comparison
of Operating Results for the Nine Months Ended September 30, 2010 and
2009
 
 Net
Income
 
 There was
a net loss for the first nine months of 2010 of $2.3million, compared to a
$180,000 net loss in the first nine months of 2009.  On a diluted per
share basis, the net loss was $1.33 for the nine months ended September 30,
2010, compared to a net loss of $0.10 per diluted share in 2009.  The
net loss for the first nine months of 2010 was driven primarily by additional
provisions for loan losses, merger related costs, write-down of OREO values, and
other related expenses on foreclosed properties.
  31.
 
 Net
Interest Income
 
 Net
interest income, the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities, was $10.8 million for
the nine months ended September 30, 2010, compared to $9.8 million for the
same period in 2009.  Interest income decreased $177,000 when compared
to the first nine months of the prior year.  This was a result of a 15
basis point interest rate decrease on the average earning assets offset by the
average earning asset increase of $7.1 million.  Additionally, the
level of nonaccruing loans increased by $7.1 million since September 30,
2009.
 
 The
average loan balances decreased $1.5 million for the nine months ended September
30, 2010 compared to the same period in the prior year.  The average
yield on interest-earning assets for the first nine months of 2010 was 5.43%,
which was a decrease of 15 basis points, compared to the 5.58% yield earned
during the first nine months of 2009.
 
 The
average cost of interest-bearing liabilities decreased 53 basis points from
2.79% in the first nine months of 2009 to 2.26% in the comparable period in
2010.  The average cost of interest-bearing deposits and all
interest-bearing liabilities reflect the ongoing reduction in interest rates
paid on deposits because of the repricing of deposits in the current environment
coupled with the change in the funding mix for the first nine months of 2010 as
compared to the same period in 2009.
 
 The net
interest margin increased by 27 basis points from 3.15% to 3.42% when comparing
the first nine months of 2010 to the same period last year.  This
increase is mainly the result of the Company 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 reductions in the rates paid on its core deposits.
 
 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.
  32.
 
 NineMonths Ended September 30,2010
                                                      
                                                      
                                                      2009Average
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Average
                                                      
                                                      
                                                      Average
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      AverageBalance
                                                      
                                                      
                                                      Interest
                                                      
                                                      
                                                      Rate
                                                      
                                                      
                                                      Balance
                                                      
                                                      
                                                      Interest
                                                      
                                                      
                                                      Rate(Dollars
      in thousands)Interest-earning
      assets:Loans (1)
                                                      
                                                      $
                                                      386,736
                                                      
                                                      
                                                      $
                                                      16,554
                                                      
                                                      
                                                      
                                                      5.72
                                                      %
                                                      
                                                      $
                                                      388,193
                                                      
                                                      
                                                      $
                                                      16,595
                                                      
                                                      
                                                      
                                                      5.72
                                                      %Securities (2)
                                                      
                                                      
                                                      26,874
                                                      
                                                      
                                                      
                                                      676
                                                      
                                                      
                                                      
                                                      3.36
                                                      
                                                      
                                                      
                                                      27,567
                                                      
                                                      
                                                      
                                                      828
                                                      
                                                      
                                                      
                                                      4.02Other
      interest-earning assets (3)
                                                      
                                                      
                                                      9,847
                                                      
                                                      
                                                      
                                                      (20
                                                      )
                                                      
                                                      
                                                      (.27
                                                      )
                                                      
                                                      
                                                      635
                                                      
                                                      
                                                      
                                                      (36
                                                      )
                                                      
                                                      
                                                      (7.58
                                                      )Total
      interest-earning assets
                                                      
                                                      
                                                      423,457
                                                      
                                                      
                                                      
                                                      17,210
                                                      
                                                      
                                                      
                                                      5.43
                                                      
                                                      
                                                      
                                                      416,395
                                                      
                                                      
                                                      
                                                      17,387
                                                      
                                                      
                                                      
                                                      5.58Noninterest-earning
      assets (4)
                                                      
                                                      
                                                      22,008
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      16,328Total
      assets
                                                      
                                                      $
                                                      445,465
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      432,723Interest-bearing
      liabilities:Savings
      deposits
                                                      
                                                      $
                                                      10,352
                                                      
                                                      
                                                      $
                                                      96
                                                      
                                                      
                                                      
                                                      1.24
                                                      
                                                      
                                                      $
                                                      12,833
                                                      
                                                      
                                                      $
                                                      163
                                                      
                                                      
                                                      
                                                      1.70NOW
      deposits
                                                      
                                                      
                                                      6,138
                                                      
                                                      
                                                      
                                                      9
                                                      
                                                      
                                                      
                                                      .20
                                                      
                                                      
                                                      
                                                      8,083
                                                      
                                                      
                                                      
                                                      15
                                                      
                                                      
                                                      
                                                      .25Money
      market deposits
                                                      
                                                      
                                                      104,440
                                                      
                                                      
                                                      
                                                      1,114
                                                      
                                                      
                                                      
                                                      1.43
                                                      
                                                      
                                                      
                                                      68,294
                                                      
                                                      
                                                      
                                                      786
                                                      
                                                      
                                                      
                                                      1.54Time
      deposits
                                                      
                                                      
                                                      216,849
                                                      
                                                      
                                                      
                                                      3,897
                                                      
                                                      
                                                      
                                                      2.40
                                                      
                                                      
                                                      
                                                      201,676
                                                      
                                                      
                                                      
                                                      5,213
                                                      
                                                      
                                                      
                                                      3.46FHLB
      advances
                                                      
                                                      
                                                      24,013
                                                      
                                                      
                                                      
                                                      671
                                                      
                                                      
                                                      
                                                      3.74
                                                      
                                                      
                                                      
                                                      31,209
                                                      
                                                      
                                                      
                                                      761
                                                      
                                                      
                                                      
                                                      3.26Federal
      Reserve borrowing
                                                      
                                                      
                                                      264
                                                      
                                                      
                                                      
                                                      1
                                                      
                                                      
                                                      
                                                      .51
                                                      
                                                      
                                                      
                                                      26,664
                                                      
                                                      
                                                      
                                                      100
                                                      
                                                      
                                                      
                                                      .50Subordinated
      debt
                                                      
                                                      
                                                      14,550
                                                      
                                                      
                                                      
                                                      580
                                                      
                                                      
                                                      
                                                      5.33
                                                      
                                                      
                                                      
                                                      14,550
                                                      
                                                      
                                                      
                                                      539
                                                      
                                                      
                                                      
                                                      4.95Other
      interest-bearing liabilities (5)
                                                      
                                                      
                                                      69
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      —
                                                      
                                                      
                                                      
                                                      142
                                                      
                                                      
                                                      
                                                      1
                                                      
                                                      
                                                      
                                                      .94Total
      interest-bearing liabilities
                                                      
                                                      
                                                      376,675
                                                      
                                                      
                                                      
                                                      6,368
                                                      
                                                      
                                                      
                                                      2.26
                                                      
                                                      
                                                      
                                                      363,451
                                                      
                                                      
                                                      
                                                      7,578
                                                      
                                                      
                                                      
                                                      2.79Noninterest-bearing
      liabilities
                                                      
                                                      
                                                      42,551
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      42,283Shareholders'
      equity
                                                      
                                                      
                                                      26,239
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      26,989Total
      liabilities andshareholders'
      equity
                                                      
                                                      $
                                                      445,465
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      432,723Net
      interest income
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      10,842
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      $
                                                      9,809Interest rate spread
      (6)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      3.17
                                                      %
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      2.79
                                                      %Net interest margin
      (7)
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      3.42
                                                      %
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      3.15
                                                      %
 
 
 (1)
                Includes
      nonaccrual loans and deferred loan
fees.
 (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.
  33.
  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.
 
 Nine
      Months Ended September 30,2010 Versus 2009 (1)Increase (decrease) due to changes
      in:NetVolume
                    
                    
                    Rate
                    
                    
                    Change(Dollars
      in thousands)Interest
      income:Loans
                    
                    $
                    (62
                    )
                    
                    $
                    21
                    
                    
                    $
                    (41
                    )Securities
                    
                    
                    (20
                    )
                    
                    
                    (132
                    )
                    
                    
                    (152
                    )Other
      interest-earning assets
                    
                    
                    (50
                    )
                    
                    
                    66
                    
                    
                    
                    16Total
      interest income
                    
                    
                    (132
                    )
                    
                    
                    (45
                    )
                    
                    
                    (177
                    )Interest
      expense:Savings
      deposits
                    
                    
                    (28
                    )
                    
                    
                    (39
                    )
                    
                    
                    (67
                    )NOW
      deposits
                    
                    
                    (3
                    )
                    
                    
                    (3
                    )
                    
                    
                    (6
                    )Money
      market deposits
                    
                    
                    389
                    
                    
                    
                    (61
                    )
                    
                    
                    328Time
      deposits
                    
                    
                    369
                    
                    
                    
                    (1,685
                    )
                    
                    
                    (1,316
                    )FHLB
      advances
                    
                    
                    (191
                    )
                    
                    
                    101
                    
                    
                    
                    (90
                    )Federal
      Reserve borrowing
                    
                    
                    (100
                    )
                    
                    
                    1
                    
                    
                    
                    (99
                    )Subordinated
      debt
                    
                    
                    —
                    
                    
                    
                    41
                    
                    
                    
                    41Other
      interest-bearing liabilities
                    
                    
                    (1
                    )
                    
                    
                    —
                    
                    
                    
                    (1
                    )Total
      interest expense
                    
                    
                    435
                    
                    
                    
                    (1,645
                    )
                    
                    
                    (1,210
                    )Increase
      in net interest income
                    
                    $
                    (567
                    )
                    
                    $
                    1,600
                    
                    
                    $
                    1,033
 
 (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.
  34.
  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
September 30, 2010 and December 31, 2009 were as follows:
 
 September 30,
                    
                    
                    December 31,2010
                    
                    
                    2009(Dollars
      in thousands)Nonaccruing
      loans
                    
                    $
                    15,806
                    
                    
                    $
                    8,745Loans
      past due over 90 days still on accrual
                    
                    
                    —
                    
                    
                    
                    —Total
      nonperforming loans
                    
                    
                    15,806
                    
                    
                    
                    8,745Foreclosed
      assets, net
                    
                    
                    6,299
                    
                    
                    
                    4,011Total
      nonperforming assets
                    
                    
                    22,105
                    
                    
                    
                    12,756Troubled
      debt restructuring
                    
                    
                    11,270
                    
                    
                    
                    16,175Total
      nonperforming assets and troubled debt restructuring
                    
                    $
                    33,375
                    
                    
                    $
                    28,931Allowance
      for loan losses
                    
                    $
                    8,922
                    
                    
                    $
                    6,854Nonperforming
      loans and foreclosed assets as a percent of total assets
                    
                    
                    5.17
                    %
                    
                    
                    2.91
                    %Nonperforming
      loans as a percent of gross loans
                    
                    
                    4.17
                    %
                    
                    
                    2.24
                    %Allowance
      for loan losses as a percent of nonperforming loans
                    
                    
                    56.45
                    %
                    
                    
                    78.38
                    %Loans
      past due 30-89 days, still accruing
                    
                    $
                    4,811
                    
                    
                    $
                    5,308Assets
      classified as substandard and doubtful
                    
                    $
                    44,941
                    
                    
                    $
                    44,815
  The
increase in nonperforming assets at September 30, 2010 was principally a result
of an increase in nonaccrual commercial real estate loans. General economic
conditions and the real estate market continue to be challenging in the Bank’s
geographic market.
  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 September 30, 2010, the Company had impaired
loans of $34.3 million, compared to $22.6 million at December 31,
2009.  Of the $34.3 million impaired loans, $15.8 million are
nonperforming loans as reflected above.
 
 The
Company has loan balances of $15.4 million for customers whose loans are
classified as troubled debt restructuring and such loans are included in the
impaired loan balances of $34.3 million at September 30, 2010.  There are
no additional funds committed to customers whose loans are classified as
troubled debt restructuring.  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 $2.0 million allowance for loan losses reserved for
impaired loans, the Company has allocated $1.0 million to customers whose
loan terms have been modified as a troubled debt restructuring.
  35.
 
 Nonperforming
loans increased during the nine-month period ended September 30, 2010 from $8.7
million at December 31, 2009 to $15.8 million at September 30,
2010.  The Company considers all risk elements, including early
indicators of potential problem loans, when determining the appropriateness of
the allowance for loan losses.  The Company’s loans past due 30-89
days decreased to $4.8 million at September 30, 2010 from $5.3 million at
December 31, 2009.
 
 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 $2.0 million during the first nine months of
2010, amounting to $8.9 million at September 30, 2010, as compared to $6.9
million at December 31, 2009.  The allowance represented approximately
2.35% of total loans at September 30, 2010 and 1.75% at December 31,
2009.  During the first nine months of 2010, the Company had
charge-offs of $3.1 million, recoveries of $71,000 and recorded a
$5.1 million provision for loan losses compared to charge-offs of $1.6
million, recoveries of $20,000 and a provision for loan losses of $3.3 million
for the first nine months of 2009.  The larger provision for loan
losses in 2010 was driven primarily by the charge-off of several loans graded as
substandard.  Additionally, the worsening economic conditions, coupled
with the continued softness in the real estate markets, 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 nine months
of 2010.
 
 The
Bank’s 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 $34.3 million as of
September 30, 2010.  As of the same date, $2.0 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 well documented information and is designed to support an allowance that is
adequate to absorb probable 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 may be 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.
 
 It is the
Bank’s policy to obtain updated third party appraisals on all ORE and real
estate collateral on substandard loans on, at least, an annual basis. 
Value adjustments are often made to appraised values on properties wherein the
existing appraisal is approximately one-year old at period end. 
Occasionally, at period end, an updated appraisal has been ordered, but not yet
received, on a property wherein the existing appraisal is approaching one-year
old.  In this circumstance, an adjustment is typically made to the existing
appraised value to reflect the Bank’s best estimate of the change in the value
of the property, based on evidence of changes in real estate market values
derived by the review of current appraisals received by the Bank on similar
properties.  In the current environment, all such adjustments to value are
downward due to the overall reduction in real estate values over the last year
in the Bank’s market area.
  36.
  Real
estate values in the Bank’s market area have experienced deterioration over the
last several quarters, and the expectation is for further deterioration in
certain property types in the immediate future.  On a quarterly basis,
management reviews several factors, including underlying collateral, and will
write down impaired loans to the net realizable value.
 
 In
estimating the overall exposure to loss on impaired loans, the Company has
considered a number of factors, including the borrower’s character, overall
financial condition, resources and payment record, the prospects for support
from any financially responsible guarantors, and the realizable value of any
collateral.  The Company also considers other internal and external
factors when determining the allowance for loan losses.  These factors
include, but are not limited to, changes in national and local economic
conditions, commercial lending staff limitations, impact from lengthy commercial
loan workout and charge-off periods, loan portfolio concentrations and trends in
the loan portfolio.
  Bank
regulators have issued “Joint Guidance on Concentrations in Commercial Real
Estate Lending.”  This document outlines regulators’ concerns
regarding the high level of growth in commercial real estate loans on banks’
balance sheets.  Many banks, especially those in Florida, have seen a
substantial increase in exposure to commercial real estate loans.  The
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 September 30, 2010, the
allowance for loan loss is considered to be appropriate to absorb probable
incurred 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.
 
 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 $833,000 for the nine months ended September 30, 2010, compared to
$611,000 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.  Additionally, the Company recorded a $62,000 windfall to
offset the additional taxes and penalties from the cancellation of one of its
BOLI policies.  A new policy was written which should provide a higher
return.  The earnings from both policies are used to offset the cost
of employee benefits.
 
 Noninterest
expense was $10.4 million for the nine months ended September 30, 2010, compared
to $7.5 million in the same period in 2009.  The increase in
noninterest expense was primarily a result of recording $1.1 million of merger
related expenses, recording a $604,000 write-down of OREO property values, and
recording $548,000 for other related expenses on bank owned
property.
  37.
 
 The
income tax benefit for the nine months ended September 30, 2010 was $1.5
million, compared to an income tax benefit of $196,000 for the nine months ended
September 30, 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.
 
 Comparison
of Operating Results for the Three Months Ended September 30, 2010 and
2009
 
 Net loss
for the third quarter of 2010 was $349,000, or $.20 per diluted share, as
compared to net income of $325,000, or $.19 per diluted share, earned for the
same quarter last year.  During the third quarter of 2010, the Company
recorded a $799,000 provision for loan loss, compared to a $1.1 million
provision for the third quarter of 2009.  The Company recorded $760,000 of
merger related expenses for the recent merger announcement between Bancorp and
ABI.  The Company also recorded $308,000 of Other Real Estate Owned
expenses related to the write down of OREO values and other related expenses on
foreclosed properties.
 
 Net
interest income was $3.7 million for the third quarter of 2010 compared to $3.8
million for the same period in 2009.  Interest income for the quarter
decreased $415,000 when compared to the prior year as a result of an increase in
average earning assets of $10.3 million, offset by a 26 basis point interest
rate decrease on the average earning assets.  Interest expense declined by
$340,000 as a result of reductions in the rates paid on interest bearing
deposits.  The net interest margin improved to 3.61% for the quarter,
compared to 3.59% for the comparable period in 2009.
 
 Capital
 
 The
Company’s capital management policy is designed to build and maintain capital
levels that meet regulatory standards.  Under current regulatory
capital standards, banks are classified as well-capitalized,
adequately-capitalized or undercapitalized.  Under such standards, a
well-capitalized bank is one that has a total risk-based capital ratio equal to
or greater than 10%, a Tier 1 risk-based capital ratio equal to or greater than
6%, and a Tier 1 leverage capital ratio equal to or greater than
5%.  The Bank’s total risk-based capital, Tier 1 risk-based capital
and Tier 1 leverage capital ratios were 10.87%, 9.60% and 8.40%, respectively,
at September 30, 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
nine months of 2010, the Company’s cash and cash equivalent position decreased
by $1.1 million.  The decrease in cash mainly resulted from a decrease
in deposit accounts of approximately $9.2 million from $370.6 million at
December 31, 2009 to $361.4 million at September 30, 2010, offset by
cash from operating activities of $2.5 million of net loan payments of
$5.7 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 September 30, 2010, the Company had $23.0 million in
available-for-sale securities, $7.4 million of which was pledged to the Federal
Reserve Bank for the Borrower in Custody Program.
  38.
 
 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 $98.0 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.
 
 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.
 
 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.
  39.
 
 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.
  (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.
  40.
  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
subsidiaries and/or their directors, officers or affiliates.  In the
ordinary course of business, Bancorp and its subsidiaries 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
 Since the
filing of 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, the following risk factors
have been identified, including those risk factors associated with Jacksonville
Bancorp, Inc.’s (JBI) proposed merger with Atlantic BancGroup, Inc. (“ABI”) (the
“Merger,” see Note 9 to the Consolidated Financial
Statements).
 
 JBI
may have difficulties integrating ABI’s operations into JBI’s operations or may
fail to realize the anticipated benefits of the proposed Merger.
 
 The
proposed Merger involves the integration of two companies that have previously
operated independently of each other. Successful integration of ABI’s operations
will depend primarily on JBI’s ability to consolidate ABI’s operations, systems
and procedures into those of JBI and to eliminate redundancies and costs. JBI
may not be able to integrate the operations without encountering difficulties
related to JBI’s ability to achieve any enhanced earnings or cost savings or
that they may take longer to be realized than expected.
 
 JBI
and ABI will incur significant transaction and Merger-related integration costs
in connection with the Merger.
 
 JBI and
ABI expect to incur significant costs associated with completing the Merger and
integrating the operations of the two companies.  JBI and ABI are
continuing to assess the impact of these costs.  Although JBI and ABI
believe that the elimination of duplicate costs, as well as the realization of
other efficiencies related to the integration of the businesses, will offset
incremental transaction and Merger-related costs over time, this net benefit may
not be achieved in the near term, or at all.
 
 The
loss of key personnel may adversely affect JBI.
 
 JBI’s
success is, and is expected to remain, highly dependent on its senior management
team. JBI relies heavily on its senior management because, as a community bank,
it is its management’s extensive knowledge of, and relationships in, the
community that generate business for JBI. Successful execution of JBI’s growth
strategy will continue to place significant demands on its management and the
loss of any such person’s services may adversely affect its growth and
profitability.  JBI and Jacksonville Bank are primarily dependent upon
the services of Price W. Schwenck, Chief Executive Officer; Gilbert J. Pomar,
III, President; Valerie A. Kendall, Executive Vice President and Chief Financial
Officer; and Scott M. Hall, Executive Vice President and Chief Credit
Officer.  If the services of these individuals were to become
unavailable for any reason, or if JBI was unable to hire highly qualified and
experienced personnel to replace them, JBI’s operating results could be
adversely affected.
  41.
 
 After the
closing of the Merger, JBI expects to integrate ABI’s business into its own. The
integration process and JBI’s ability to successfully conduct ABI’s business
after the Merger will require the experience and expertise of key employees of
Oceanside Bank.  Therefore, the ability to successfully integrate
ABI’s operations with those of JBI, as well as the future success of the
combined company’s operations, will depend, in part, on JBI’s ability to retain
key employees of Oceanside Bank following the Merger.  JBI may not be
able to retain key employees for the time period necessary to complete the
integration process or beyond.  Although JBI does not have any reason
to believe any of these employees will cease to be employed by JBI, the loss of
such employees could adversely affect JBI’s ability to successfully conduct its
business in the markets in which ABI now operates, which could have an adverse
effect on JBI’s financial results and the value of its common
stock.
 
 The
Merger will not be completed unless important conditions are
satisfied.
 
 Specified
conditions set forth in the Merger Agreement must be satisfied or waived to
complete the Merger.  If the conditions are not satisfied or waived,
to the extent permitted by law or stock exchange rules, the Merger will not
occur or will be delayed and each of JBI and ABI may lose some or all of the
intended benefits of the Merger.  The following conditions, in
addition to other customary closing conditions, must be satisfied or waived, if
permissible, before JBI and ABI are obligated to complete the
Merger:
 
 ·
              the
      merger agreement and merger must be approved by the holders of at least
      70% of the outstanding shares of ABI common stock as of the record date of
      the ABI special meeting;
 ·
              all
      required regulatory consents must be
obtained;
 ·
              the
      stock purchase and the amendment and restatement of JBI’s articles of
      incorporation and bylaws are approved by JBI
  shareholders;
 ·
              the
      satisfaction of the conditions to closing in the stock purchase agreement
      and the receipt of notification from the investors they have received all
      funds necessary to complete the stock purchase;
  and
 ·
              the
      absence of any law or order by a court or regulatory authority that
      prohibits, restricts or makes illegal the
  merger.
 
 Sales
of substantial amounts of JBI common stock in the open market by former ABI
shareholders could depress JBI’s stock price.
 
 Other
than shares held by persons who will be affiliates of JBI after the Merger,
shares of JBI common stock that are issued to shareholders of ABI will be freely
tradable without restrictions or further registration under the Securities
Act.  JBI currently expects that it will issue approximately 3.89
million shares of JBI common stock in connection with the Merger and the Stock
Purchase.  If the Merger is completed and if ABI’s shareholders sell
substantial amounts of JBI common stock in the public market following
completion of the Merger, the market price of JBI common stock may
decrease.  These sales might also make it more difficult for JBI to
sell equity or equity-related securities at a time and price that it otherwise
would deem appropriate.
  42.
 
 Current
levels of market volatility have been significant, and negative conditions and
new developments in the financial services industry and the credit markets have
and may continue to adversely affect JBI’s operations, financial performance and
stock price.
 
 The
capital and credit markets have been experiencing volatility and disruption for
more than a year.  The markets have placed downward pressure on stock
prices and the availability of capital, credit and liquidity has been adversely
affected for many issuers, in some cases, without regard to those issuers’
underlying financial condition or performance.  If current levels of
market disruption and volatility continue or worsen, JBI may experience adverse
effects, which may be material, on its ability to maintain or access capital and
credit, and on its business, financial condition (including liquidity) and
results of operations.
 
 Uncertainty
about the economy and its direction with the expectation for little or no
economic growth as well as high unemployment during the next 12-18 months has
adversely affected the financial markets.  Loan portfolio performances
have deteriorated at many financial institutions, including JBI’s, resulting
from, among other factors, a weak economy and a decline in the value of the
collateral supporting loans.  The competition for deposits has
increased significantly due to liquidity concerns.  Stock prices of
bank holding companies, like JBI, have been negatively affected by the recent
and current conditions in the financial markets, as has JBI’s ability, if
needed, to raise capital, compared to prior years.
 
 Recent
legislation and government actions in response to market and economic conditions
may significantly affect JBI’s operations, financial condition, and
earnings.
 
 In
response to this financial crisis affecting the banking system and financial
markets, the United States Congress enacted the Emergency Economic Stabilization
Act of 2008 and the American Recovery and Reinvestment Act of
2009.  Under these and other laws and government actions:
 
 •
              the
      U.S. Department of the Treasury, or “Treasury,” has provided capital to
      financial institutions and adopted programs to facilitate and finance the
      purchase of problem assets and finance asset-backed securities via the
      Troubled Assets Relief Program, or
“TARP”;
 
 •
                the
      FDIC has increased the limits on federal deposit insurance and has also
      provided temporary liquidity guarantee, or “TLG”, of all FDIC-insured
      institutions and their affiliates’ debt, as well as deposits in
      noninterest-bearing transaction deposit accounts;
  and
 
 •
                the
      federal government has undertaken various forms of economic stimulus,
      including assistance to homeowners in restructuring mortgage payments on
      qualifying loans.
 
 TARP and
the TLG are winding down, and the effects of this wind-down cannot be
predicted.  In addition, the federal government is considering various
proposals for a comprehensive overhauling reform of the financial services
industry and markets and coordinating reforms with other
countries.  There can be no assurance that these various initiatives
or any other future legislative or regulatory initiatives will be successful at
improving economic conditions globally, nationally or in JBI’s markets, or that
the measures adopted will not have adverse consequences.
  43.
 
 Changes
in business and economic conditions, in particular in the Florida market in
which JBI operates, could continue to lead to lower revenue, lower asset quality
and lower earnings.
 
 Unlike
larger national or regional banks that are more geographically diversified,
JBI’s business and earnings are closely tied to economic conditions in Northeast
Florida.  The local economy is heavily affected by population inflows,
real estate, tourism and other service-based industries.  Factors that
could affect these local economies include declines in local population growth
and tourism, higher energy costs, higher unemployment rates, reduced consumer or
corporate spending, natural disasters or adverse weather, and the recent
significant deterioration in general economic conditions.  The current
economic recession has been exacerbated by the declines in valuations of
commercial and residential real estate in JBI’s markets after years of
growth.  Unemployment has also been significant and a sustained
economic downturn could further adversely affect the quality of JBI’s assets,
credit losses, and the demand for its products and services, which could lead to
lower revenue and lower earnings.
  JBI
regularly monitors changes in the economy, including population growth, levels
of visitor arrivals and spending, changes in housing prices, and unemployment
rates.  These trends have contributed to an increase in JBI’s
nonperforming loans and reduced asset quality.  If market conditions
remain at current levels or deteriorate, they may lead to additional valuation
adjustments on JBI’s loan portfolios and real estate owned as it continues to
reassess the market value of its collateral supporting loans, the losses
associated with loans, and the net realizable value of other real estate
owned.
 
 Recently
enacted regulatory reform may have a material impact on JBI’s
operations.
 
 On July
21, 2010, President Obama signed into law The Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”).  The Dodd-Frank Act
restructures the regulation of depository institutions and contains various
provisions designed to enhance the regulation of depository institutions and
prevent the recurrence of a financial crisis such as that which occurred in
2008-2009.  Included is the creation of a new federal agency to
administer and enforce consumer and fair lending laws, a function that is now
performed by the depository institution regulators.  The federal
preemption of state laws currently accorded federally chartered depository
institutions will be reduced as well.  The full impact of the
Dodd-Frank Act on JBI’s business and operations will not be known for years
until regulations implementing the statute are written and
adopted.  The Dodd-Frank Act may have a material impact on JBI’s
operations, particularly through increased compliance costs resulting from
possible future consumer and fair lending regulations.
  44.
 
 Item
      6.
              Exhibits
 Exhibit
No. 2.1:    Agreement and Plan of Merger by and between
Jacksonville Bancorp, Inc. and Atlantic BancGroup, Inc. dated as of May 10, 2010
(1)
 
 Exhibit
No. 3.1:     Articles of Incorporation of Jacksonville
Bancorp, Inc. (2)
 
 Exhibit
No. 3.2:     Amended and Restated Bylaws of
Jacksonville Bancorp, Inc., as amended to date (3)
 
 Exhibit
No. 10.1:   Stockholders Agreement by and among Jacksonville
Bancorp, Inc., Atlantic BancGroup, Inc. and each of the directors of Atlantic
BancGroup, Inc. dated as of May 10, 2010 (4)
 
 Exhibit
No. 10.2:   Stock Purchase Agreement by and among Jacksonville
Bancorp, Inc. and the investors named therein dated as of May 10, 2010 (5)
 
 Exhibit
No. 10.3:   Registration Rights Agreement by and among
Jacksonville Bancorp, Inc. and the investors named therein dated as of May 10,
2010 (6)
 
 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 Exhibit 2.1 to Form 8-K filed May 14, 2010, File
      No. 000-30248.
 (2)
                Incorporated
      herein by reference to Appendix A to Form SB-2, filed September 30, 1998,
      Registration No. 333-64815.
 (3)
                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.
 (4)
                Incorporated
      herein by reference to Exhibit 10.1 to Form 8-K filed May 14, 2010, File
      No. 000-30248.
 (5)
                Incorporated
      herein by reference to Exhibit 10.2 to Form 8-K filed May 14, 2010, File
      No. 000-30248.
 (6)
                Incorporated
      herein by reference to Exhibit 10.3 to Form 8-K filed May 14, 2010, File
      No. 000-30248.
  45.
 
 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:  November
      5, 2010
                /s/ Price W. SchwenckPrice
      W. SchwenckChief
      Executive OfficerDate:  November
      5, 2010
                /s/ Valerie A. KendallValerie
      A. KendallExecutive
      Vice Presidentand
      Chief Financial Officer
  46.
  JACKSONVILLE
BANCORP, INC.
 
 EXHIBIT
INDEX
 
 Exhibit
No. 2.1:    Agreement and Plan of Merger by and between
Jacksonville Bancorp, Inc. and Atlantic BancGroup, Inc. dated as of May 10, 2010
(1)
 
 Exhibit
No. 3.1:     Articles of Incorporation of Jacksonville
Bancorp, Inc. (2)
 
 Exhibit
No. 3.2:     Amended and Restated Bylaws of
Jacksonville Bancorp, Inc., as amended to date (3)
 
 Exhibit
No. 10.1:   Stockholders Agreement by and among Jacksonville
Bancorp, Inc., Atlantic BancGroup, Inc. and each of the directors of Atlantic
BancGroup, Inc. dated as of May 10, 2010 (4)
 
 Exhibit
No. 10.2:   Stock Purchase Agreement by and among Jacksonville
Bancorp, Inc. and the investors named therein dated as of May 10, 2010 (5)
 
 Exhibit
No. 10.3:   Registration Rights Agreement by and among
Jacksonville Bancorp, Inc. and the investors named therein dated as of May 10,
2010 (6)
 
 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 Exhibit 2.1 to Form 8-K filed May 14, 2010, File
      No. 000-30248.
 (2)
              Incorporated
      herein by reference to Appendix A to Form SB-2, filed September 30, 1998,
      Registration No. 333-64815.
 (3)
              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.
 (4)
              Incorporated
      herein by reference to Exhibit 10.1 to Form 8-K filed May 14, 2010, File
      No. 000-30248.
 (5)
              Incorporated
      herein by reference to Exhibit 10.2 to Form 8-K filed May 14, 2010, File
      No. 000-30248.
 (6)
              Incorporated
      herein by reference to Exhibit 10.3 to Form 8-K filed May 14, 2010, File
      No. 000-30248.
  47.