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 ended June 30,
2010




o
            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 xNo o





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 oNo o





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 o
            Accelerated
      filer                   
      oNon-accelerated
      filer   o
            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 oNo x





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









JACKSONVILLE
BANCORP, INC.


TABLE OF
CONTENTS


PagePART
      I—FINANCIAL INFORMATIONItem
      1.
              Financial
      StatementsConsolidated
      Balance Sheets
              3Consolidated
      Statements of Income (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
              20Item
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              30Item
      4.
              Controls
      and Procedures
              31Part
      II—Other InformationItem
      1.
              Legal
      Proceedings
              32Item
      1A.
              Risk
      Factors
              32Item
      6.
              Exhibits
              36SIGNATURES
              37EXHIBIT
      INDEX
              38CERTIFICATIONSCertification
      of Price W. Schwenck under Section 302 of the Sarbanes-Oxley Act of
      2002Certification of Valerie A. Kendall under Section 302 of the
      Sarbanes-Oxley Act of 2002Certification
      under Section 906 of the Sarbanes-Oxley Act of 2002
  2




JACKSONVILLE
BANCORP, INC.


PART I—FINANCIAL
INFORMATION





Item
1.  Financial Statements





CONSOLIDATED
BALANCE SHEETS


(Dollars
in thousands, except per share amounts)





June
      30,
              
              
              December
      31,2010
              
              
              2009(Unaudited)ASSETSCash
      and due from banks
              
              $
              6,659
              
              
              $
              5,647Federal
      funds sold
              
              
              16,472
              
              
              
              —Total
      cash and cash equivalents
              
              
              23,131
              
              
              
              5,647Securities
      available-for-sale
              
              
              25,448
              
              
              
              22,171Loans,
      net of allowance for loan losses of $8,248at 2010 and $6,854
      at 2009
              
              
              373,885
              
              
              
              384,133Premises
      and equipment, net
              
              
              3,406
              
              
              
              3,533Bank-owned
      life insurance (BOLI)
              
              
              9,037
              
              
              
              8,908Federal
      Home Loan Bank (FHLB) stock
              
              
              3,047
              
              
              
              3,047Real
      estate owned, net
              
              
              6,089
              
              
              
              4,011Deferred
      income taxes
              
              
              2,729
              
              
              
              2,015Prepaid
      regulatory assessments
              
              
              2,159
              
              
              
              2,599Accrued
      interest receivable
              
              
              1,978
              
              
              
              1,864Other
      assets
              
              
              1,319
              
              
              
              883Total
      assets
              
              $
              452,228
              
              
              $
              438,811LIABILITIESDepositsNoninterest
      bearing
              
              $
              40,843
              
              
              $
              43,704Money
      market, NOW and savings deposits
              
              
              127,317
              
              
              
              104,838Time
      deposits
              
              
              223,538
              
              
              
              222,093Total
      deposits
              
              
              391,698
              
              
              
              370,635Federal
      funds purchased
              
              
              —
              
              
              
              227FHLB
      advances
              
              
              20,000
              
              
              
              25,000Subordinated
      debt
              
              
              14,550
              
              
              
              14,550Accrued
      expenses and other liabilities
              
              
              949
              
              
              
              1,131Total
      liabilities
              
              
              427,197
              
              
              
              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
              
              
              18,678
              
              
              
              18,631Retained
      earnings
              
              
              6,306
              
              
              
              8,287Treasury
      stock, 1,050 and 283 shares
              
              
              (12
              )
              
              
              (3
              )Accumulated
      other comprehensive income
              
              
              41
              
              
              
              336Total
      shareholders’ equity
              
              
              25,031
              
              
              
              27,268Total
      liabilities and shareholders’ equity
              
              $
              452,228
              
              
              $
              438,811




See
accompanying notes to unaudited consolidated financial statements.
  3


JACKSONVILLE
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF INCOME (LOSS)


(Unaudited)


(Dollars
in thousands, except per share amounts)




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009Interest
      and dividend incomeLoans,
      including fees
              
              $
              5,528
              
              
              $
              5,383
              
              
              $
              11,112
              
              
              $
              10,742Taxable
      securities
              
              
              123
              
              
              
              150
              
              
              
              238
              
              
              
              380Tax-exempt
      securities
              
              
              100
              
              
              
              104
              
              
              
              203
              
              
              
              207Federal
      funds sold and other
              
              
              (2
              )
              
              
              (12
              )
              
              
              (9
              )
              
              
              (23
              )Total
      interest income
              
              
              5,749
              
              
              
              5,625
              
              
              
              11,544
              
              
              
              11,306Interest
      expenseDeposits
              
              
              1,788
              
              
              
              2,116
              
              
              
              3,562
              
              
              
              4,427Federal
      Reserve borrowing
              
              
              —
              
              
              
              31
              
              
              
              1
              
              
              
              62FHLB
      advances
              
              
              242
              
              
              
              249
              
              
              
              497
              
              
              
              480Subordinated
      debt
              
              
              192
              
              
              
              160
              
              
              
              382
              
              
              
              343Total
      interest expense
              
              
              2,222
              
              
              
              2,556
              
              
              
              4,442
              
              
              
              5,312Net
      interest income
              
              
              3,527
              
              
              
              3,069
              
              
              
              7,102
              
              
              
              5,994Provision
      for loan losses
              
              
              1,920
              
              
              
              1,307
              
              
              
              4,295
              
              
              
              2,245Net
      interest income after provision for loan losses
              
              
              1,607
              
              
              
              1,762
              
              
              
              2,807
              
              
              
              3,749Noninterest
      incomeService
      charges on deposit accounts
              
              
              124
              
              
              
              147
              
              
              
              263
              
              
              
              307Non-marketable
      equity security
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (132
              )Other
      income
              
              
              162
              
              
              
              77
              
              
              
              271
              
              
              
              195Total
      noninterest income
              
              
              286
              
              
              
              224
              
              
              
              534
              
              
              
              370Noninterest
      expenseSalaries
      and employee benefits
              
              
              1,281
              
              
              
              1,111
              
              
              
              2,518
              
              
              
              2,227Occupancy
      and equipment
              
              
              412
              
              
              
              405
              
              
              
              818
              
              
              
              821Regulatory
      assessment
              
              
              251
              
              
              
              492
              
              
              
              511
              
              
              
              606Data
      processing
              
              
              250
              
              
              
              232
              
              
              
              495
              
              
              
              440Merger
      related costs
              
              
              353
              
              
              
              —
              
              
              
              353
              
              
              
              —Advertising
      and business development
              
              
              132
              
              
              
              99
              
              
              
              218
              
              
              
              211Professional
      fees
              
              
              169
              
              
              
              125
              
              
              
              330
              
              
              
              274Telephone
      expense
              
              
              34
              
              
              
              32
              
              
              
              66
              
              
              
              63Other
      real estate owned expense
              
              
              379
              
              
              
              37
              
              
              
              844
              
              
              
              50Other
              
              
              182
              
              
              
              134
              
              
              
              376
              
              
              
              261Total
      noninterest expense
              
              
              3,443
              
              
              
              2,667
              
              
              
              6,529
              
              
              
              4,953Income
      (loss) before income taxes
              
              
              (1,550
              )
              
              
              (681
              )
              
              
              (3,188
              )
              
              
              (834
              )Income
      tax expense (benefit)
              
              
              (558
              )
              
              
              (285
              )
              
              
              (1,208
              )
              
              
              (329
              )Net
      income (loss)
              
              
              (992
              )
              
              
              (396
              )
              
              
              (1,980
              )
              
              
              (505
              )Weighted
      average:Common
      shares
              
              
              1,749,443
              
              
              
              1,748,214
              
              
              
              1,749,140
              
              
              
              1,748,429Dilutive
      stock options and warrants
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Dilutive
      shares
              
              
              1,749,443
              
              
              
              1,748,214
              
              
              
              1,749,140
              
              
              
              1,748,429Basic
      earnings (loss) per common share
              
              $
              (.57
              )
              
              $
              (.23
              )
              
              $
              (1.13
              )
              
              $
              (.29
              )Diluted
      earnings (loss) per common share
              
              $
              (.57
              )
              
              $
              (.23
              )
              
              $
              (1.13
              )
              
              $
              (.29
              )




See
accompanying notes to unaudited consolidated financial statements.




4




JACKSONVILLE
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


(Unaudited)


(Dollars
in thousands)


Common
      Stock
              
              
              Additional
              
              
              
              
              
              Treasury
              
              
              Accumulated
      Other ComprehensiveOutstanding
              
              
              Paid-In
              
              
              Retained
              
              
              Stock
              
              
              IncomeShares
              
              
              Amount
              
              
              Capital
              
              
              Earnings
              
              
              Amount
              
              
              (loss)
              
              
              TotalBalance
      at January 1, 2009
              
              
              1,748,599
              
              
              $
              17
              
              
              $
              18,568
              
              
              $
              8,213
              
              
              $
              (2
              )
              
              $
              49
              
              
              $
              26,845Comprehensive
      loss:Net
      (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (505
              )
              
              
              
              
              
              
              
              
              
              
              (505
              )Change
      in unrealized gain (loss) on securities available-for- sale, net of tax
      effects
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              65
              
              
              
              65Total
      comprehensive (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (440
              )Purchase
      of treasury stock
              
              
              (2,353
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (26
              )
              
              
              
              
              
              
              (26
              )Issuance
      of treasury stock
              
              
              1,353
              
              
              
              
              
              
              
              (1
              )
              
              
              
              
              
              
              16
              
              
              
              
              
              
              
              15Share-based
      compensation expense
              
              
              
              
              
              
              
              
              
              
              39
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              39Balance
      at June 30, 2009
              
              
              1,747,599
              
              
              $
              17
              
              
              $
              18,606
              
              
              $
              7,708
              
              
              $
              (12
              )
              
              $
              114
              
              
              $
              26,433Balance
      at January 1, 2010
              
              
              1,749,243
              
              
              $
              17
              
              
              $
              18,631
              
              
              $
              8,287
              
              
              $
              (3
              )
              
              $
              336
              
              
              $
              27,268Comprehensive
      income:Net
      (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,980
              )
              
              
              
              
              
              
              
              
              
              
              (1,980
              )Change
      in unrealized gain (loss) on securities available- for-sale, net of tax
      effects
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              88
              
              
              
              88Net
      unrealized loss on cash flow hedge, net of tax effects
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (383
              )
              
              
              (383
              )Total
      comprehensive (loss)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,275
              )Purchase
      of treasury stock
              
              
              (1,817
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (20
              )
              
              
              
              
              
              
              (20
              )Issuance
      of treasury stock
              
              
              1,050
              
              
              
              
              
              
              
              
              
              
              
              (1
              )
              
              
              11
              
              
              
              
              
              
              
              10Common
      stock issued
              
              
              911
              
              
              
              1
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1Share-based
      compensation expense
              
              
              
              
              
              
              
              
              
              
              47
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              47Balance
      at June 30, 2010
              
              
              1,749,387
              
              
              $
              18
              
              
              $
              18,678
              
              
              $
              6,306
              
              
              $
              (12
              )
              
              $
              41
              
              
              $
              25,031





See
accompanying notes to unaudited consolidated financial statements.
  5
 
  JACKSONVILLE
BANCORP, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(Dollars
in thousands)




Six
      Months EndedJune
      30,2010
                
                
                2009Cash
      flows from operating activitiesNet
      income (loss)
                
                $
                (1,980
                )
                
                $
                (505
                )Adjustments
      to reconcile net income (loss) to net cash from operating
      activities:Depreciation
      and amortization
                
                
                211
                
                
                
                235Net
      amortization (accretion) of deferred loan fees
                
                
                (58
                )
                
                
                47Provision
      for loan losses
                
                
                4,295
                
                
                
                2,245Premium
      amortization, net of accretion
                
                
                (174
                )
                
                
                (22
                )Net
      loss on sale of real estate owned
                
                
                41
                
                
                
                —Loss
      on write-down of real estate owned
                
                
                486
                
                
                
                —Earnings
      on Bank-owned life insurance
                
                
                (129
                )
                
                
                (64
                )Share-based
      compensation
                
                
                58
                
                
                
                54Loss
      on disposal of assets
                
                
                3
                
                
                
                4Loss
      on non-marketable equity investment
                
                
                —
                
                
                
                132Deferred
      income tax
                
                
                (537
                )
                
                
                (496
                )Net
      change in accrued interest receivable and other assets
                
                
                (134
                )
                
                
                278Net
      change in accrued expenses and other liabilities
                
                
                (780
                )
                
                
                351Net
      cash from operating activities
                
                
                1,302
                
                
                
                2,259Cash
      flows from investing activitiesPurchases
      of securities available-for-sale
                
                
                (7,239
                )
                
                
                (2,000
                )Proceeds
      from maturities, calls and paydown of securities
      available-for-sale
                
                
                4,277
                
                
                
                9,032Loan
      (originations) payments, net
                
                
                3,389
                
                
                
                (12,680
                )Proceeds
      from sale of real estate owned
                
                
                17
                
                
                
                —Additions
      to premises and equipment, net
                
                
                (78
                )
                
                
                (22
                )Net
      change in Federal Home Loan Bank stock
                
                
                —
                
                
                
                (886
                )Net
      cash from (used for) investing activities
                
                
                366
                
                
                
                (6,556
                )Cash
      flows from financing activitiesNet
      change in deposits
                
                
                21,063
                
                
                
                (23,680
                )Net
      change in Fed funds purchased
                
                
                (227
                )
                
                
                —Net
      change from Federal Reserve borrowing
                
                
                —
                
                
                
                7,000Repayment
      of fixed rate FHLB advances
                
                
                (5,000
                )
                
                
                —Purchase
      of fixed rate FHLB advances
                
                
                —
                
                
                
                5,000Net
      change in overnight FHLB advances
                
                
                —
                
                
                
                15,200Purchase
      of treasury stock
                
                
                (20
                )
                
                
                (26
                )Net
      cash from financing activities
                
                
                15,816
                
                
                
                3,494Net
      change in cash and cash equivalents
                
                
                17,484
                
                
                
                (803
                )Cash
      and cash equivalents at beginning of period
                
                
                5,647
                
                
                
                10,148Cash
      and cash equivalents at end of period
                
                $
                23,131
                
                
                $
                9,345


See
accompanying notes to unaudited consolidated financial statements.




6




JACKSONVILLE
BANCORP, INC.
  CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


(Dollars
in thousands)





CONSOLIDATED
      STATEMENTS OF CASH FLOWS (Cont.)Supplemental
      disclosures of cash flow informationCash
      paid during the period forInterest
            
            $
            4,456
            
            
            $
            5,537Income
      taxes
            
            
            —
            
            
            
            15Supplemental
      schedule of noncash investing activitiesTransfers
      from loans to real estate owned
            
            $
            2,622
            
            
            $
            564




See
accompanying notes to unaudited consolidated financial
statements.




7




JACKSONVILLE
BANCORP, INC.
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)








NOTE
1 – BASIS OF PRESENTATION




Jacksonville
Bancorp, Inc. is a bank holding company headquartered in Jacksonville,
Florida.  Jacksonville Bancorp, Inc. owns and operates The
Jacksonville Bank, which has a total of five operating branches in Jacksonville,
Florida.





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 June 30, 2010 and 2009 is unaudited; however, such information reflects
all adjustments which are, in the opinion of management, necessary for a fair
statement of results for the interim periods.  The December 31, 2009
consolidated balance sheet was derived from the Company's December 31, 2009
audited consolidated financial statements.





Adoption
of New Accounting Standards




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





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





8




JACKSONVILLE
BANCORP, INC.
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)




NOTE
2 - INVESTMENT SECURITIES




The
following table summarizes the amortized cost and fair value of the
available-for-sale and held-to-maturity investment securities portfolio at June
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)June
      30, 2010Available-for
      saleU.S.
      government-sponsored entities and agencies
            
            $
            1,985
            
            
            $
            23
            
            
            $
            —
            
            
            $
            2,008State
      and political subdivisions
            
            
            10,349
            
            
            
            262
            
            
            
            (22
            )
            
            
            10,589Mortgage-backed
      securities – residential
            
            
            6,828
            
            
            
            404
            
            
            
            -
            
            
            
            7,232Collateralized
      mortgage obligations - residential
            
            
            5,621
            
            
            
            10
            
            
            
            (12
            )
            
            
            5,619Total
      available-for-sale securities
            
            $
            24,783
            
            
            $
            699
            
            
            $
            (34
            )
            
            $
            25,448




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




9


JACKSONVILLE
BANCORP, INC.
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)




NOTE
2 - INVESTMENT SECURITIES (Cont.)




The
amortized cost and fair value of the investment securities portfolio are shown
by expected maturity. Expected maturities may differ from contractual maturities
if borrowers have the right to call or prepay obligations with or without call
or prepayment penalties.




June
      30, 2010Amortized
              
              
              FairCost
              
              
              ValueMaturityAvailable-for-saleWithin
      one year
              
              $
              3,652
              
              
              $
              3,685One
      to five years
              
              
              5,715
              
              
              
              5,832Five
      to ten years
              
              
              2,967
              
              
              
              3,080Beyond
      ten years
              
              
              -
              
              
              
              -Mortgage-backed
              
              
              6,828
              
              
              
              7,232Collateralized
      Mortgage Obligations
              
              
              5,621
              
              
              
              5,619Total
              
              $
              24,783
              
              
              $
              25,448





The
following table summarizes the investment securities with unrealized losses at
June 30, 2010 and 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)June
      30, 2010Available-for-saleU.S.
      government- sponsored entities and agencies
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —States
      and political
              
              
              1,276
              
              
              
              (7
              )
              
              
              540
              
              
              
              (15
              )
              
              
              1,816
              
              
              
              (22
              )Mortgage-backed
      securities – residential
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Collateralized
      mortgage obligations - residential
              
              
              5,381
              
              
              
              (12
              )
              
              
              —
              
              
              
              —
              
              
              
              5,381
              
              
              
              (12
              )Total
      available-for-sale securities
              
              $
              6,657
              
              
              $
              (19
              )
              
              $
              540
              
              
              $
              (15
              )
              
              $
              7,197
              
              
              $
              (34
              )
  10
 JACKSONVILLE
BANCORP, INC.
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)




NOTE
2 - INVESTMENT SECURITIES (Cont.)




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
              )




Other-Than-Temporary-Impairment




Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis and more frequently when economic or market conditions warrant
such an evaluation.




In
determining OTTI for debt securities, management considers many factors,
including:  (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial conditions and near-term
prospects of the issuer, (3) whether the market decline was affected by
macroeconomic conditions, and (4) whether the entity has the intent to sell the
debt security or more likely than not will be required to sell the debt security
before its anticipated recovery.  The assessment of whether an
other-than-temporary decline exists involves a high degree of subjectivity and
judgment and is based on the information available to management at a point in
time.




In order
to determine OTTI for purchased beneficial interests that, on the purchase date,
were rated below AA, the Company compares the present value of the remaining
cash flows as estimated at the preceding evaluation date to the current expected
remaining cash flows.  OTTI is deemed to have occurred if there has been an
adverse change in the remaining expected future cash flows.  It is not
the Bank’s policy to purchase securities rated below AA.




11


JACKSONVILLE
BANCORP, INC.
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)




NOTE
2 - INVESTMENT SECURITIES (Cont.)




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




As of
June 30, 2010, the Company’s security portfolio consisted of $25,448 of
available-for-sale securities, of which $7,197 was in an unrealized loss
position. The unrealized losses are related to the Company’s U.S. Agency, and
State and political securities, as discussed below:




U.S.Agency
Securities




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




Because
the Company does not have the intent to sell these securities, and it is likely
that it will not be required to sell the securities before their anticipated
recovery, the Company does not consider these to be other-than-temporarily
impaired at June 30, 2010.




State and Political
Securities




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




Because
the Company does not have the intent to sell these securities, it is likely that
it will not be required to sell the securities before their anticipated
recovery.  The Company does not have state and political securities at
an unrealized loss position at June 30, 2010.  The Company had
$987,000 of these securities at December 31, 2009.





Mortgage-Backed
Securities





The
mortgage-backed securities portfolio includes collateralized mortgage
obligations with a market value of $5,619 at June 30, 2010.  Of the
$5,619 of collateralized mortgage obligations, $5,381 was in an unrealized loss
position of $12.




12


JACKSONVILLE
BANCORP, INC.
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)
 NOTE
2 - INVESTMENT SECURITIES (Cont.)





Because
the Company does not have the intent to sell these securities, and it is likely
that it will not be required to sell the securities before their anticipated
recovery, the Company does not consider these to be other-than-temporary
impaired at June 30, 2010.





For the
six-month period ended June 30, 2010, there were no credit losses recognized in
earnings.





NOTE
3 – LOAN PORTFOLIO COMPOSITION




The
composition of the Bank’s loan portfolio at June 30, 2010 and December 31, 2009
is presented below along with the change from December 31, 2009.




Total
      Loans
                June
      30,
                2010
              
              
              Total
      Loans
                December
      31,
                2009
              
              
              %
      Increase (Decrease) from
                December
      31,
                2009
      to
                June
      30,
                2010Real
      estate mortgage loans:Commercial
              
              $
              228,989
              
              
              $
              233,570
              
              
              
              (2.0
              )%Residential
              
              
              94,037
              
              
              
              97,147
              
              
              
              (3.2
              )%Construction
      and land (1)
              
              
              31,245
              
              
              
              32,987
              
              
              
              (5.3
              )%Commercial
      loans
              
              
              25,140
              
              
              
              23,838
              
              
              
              5.5
              %Consumer
      loans
              
              
              3,118
              
              
              
              3,899
              
              
              
              (20.0
              )%Subtotal
              
              
              382,529
              
              
              
              391,441
              
              
              
              (2.3
              )%Less:
      Net deferred loan fees
              
              
              (396
              )
              
              
              (454
              )
              
              
              (12.8
              )%Total
              
              $
              382,133
              
              
              $
              390,987
              
              
              
              (2.3
              )%




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





NOTE
4 – ALLOWANCE FOR LOAN LOSSES




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




Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June30,2010
              
              
              2009
              
              
              2010
              
              
              2009Beginning
      balance
              
              $
              7,618
              
              
              $
              4,942
              
              
              $
              6,854
              
              
              $
              4,705Provisions
      for loan losses charged to expense
              
              
              1,920
              
              
              
              1,307
              
              
              
              4,295
              
              
              
              2,245Loans
      charged off
              
              
              (1,332
              )
              
              
              (587
              )
              
              
              (2,962
              )
              
              
              (1,289
              )Recoveries
      of loans previously charged off
              
              
              42
              
              
              
              1
              
              
              
              61
              
              
              
              2Ending
      balance, June 30
              
              $
              8,248
              
              
              $
              5,663
              
              
              $
              8,248
              
              
              $
              5,663
 
 Impaired
loans were as follows:
 
 June
      30,
              
              
              December
      31,2010
              
              
              2009Loans
      with no allocated allowance for loan losses
              
              $
              5,905
              
              
              $
              4,036Loans
      with allocated allowance for loan losses
              
              
              15,999
              
              
              
              18,516Total
              
              $
              21,904
              
              
              $
              22,552Amount
      of the allowance for loan losses allocated
              
              $
              1,180
              
              
              $
              786
 
 13




JACKSONVILLE
BANCORP, INC.
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)





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





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




2010
              
              
              2009Convertible
      advances maturing June 8, 2010 with a quarterly call option beginning June
      9, 2008 at a fixed rate of 4.99%
              
              
              —
              
              
              
              5,000Convertible
      advances maturing June 8, 2012 with a quarterly call option beginning
      September 10, 2007 at a fixed rate of 4.68%
              
              
              5,000
              
              
              
              5,000Convertible
      advances maturing August 13, 2010 with a quarterly call option beginning
      August 13, 2008 at a fixed rate of 4.51%
              
              
              5,000
              
              
              
              5,000Convertible
      advances maturing October 4, 2010 with a quarterly call option beginning
      October 6, 2008 at a fixed rate of 4.15%
              
              
              5,000
              
              
              
              5,000Advances
      maturing May 29, 2012 at a fixed rate of 2.11%
              
              
              5,000
              
              
              
              5,000$
              20,000
              
              
              $
              25,000




Each
advance is payable at its maturity date, with a prepayment penalty for early
termination.  The advances are collateralized by a blanket lien
arrangement of the Company’s first mortgage loans, second mortgage loans and
commercial real estate loans.  Based upon this collateral and the
Company’s holdings of FHLB stock, the Company is eligible to borrow up to a
total of $62,452 at June 30, 2010.





The
Company has a “Borrower in Custody” line of credit with the Federal Reserve by
pledging excess collateral.  The amount of this line at June 30, 2010
was $29,279, 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 $598 on June 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


JACKSONVILLE
BANCORP, INC.
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)




NOTE
7 – CAPITAL ADEQUACY





Federal
banking regulators have established certain capital adequacy standards required
to be maintained by banks and bank holding companies.  The minimum
requirements established in the regulations are set forth in the table below,
along with the actual ratios for the Company at June 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
            
            
            RatioJune
      30, 2010Total
      capital to riskweighted
      assetsConsolidated
            
            $
            44,206
            
            
            
            11.51
            %
            
            $
            30,737
            
            
            
            8.00
            %
            
            
            N/A
            
            
            
            N/ABank
            
            
            42,304
            
            
            
            11.04
            %
            
            
            30,650
            
            
            
            8.00
            %
            
            $
            38,312
            
            
            
            10.00
            %Tier
      1 (Core) capital to riskweighted
      assetsConsolidated
            
            
            33,141
            
            
            
            8.63
            %
            
            
            15,369
            
            
            
            4.00
            %
            
            
            N/A
            
            
            
            N/ABank
            
            
            37,472
            
            
            
            9.78
            %
            
            
            15,325
            
            
            
            4.00
            %
            
            
            22,987
            
            
            
            6.00
            %Tier
      1 (Core) capital toaverage
      assetsConsolidated
            
            
            33,141
            
            
            
            7.31
            %
            
            
            18,146
            
            
            
            4.00
            %
            
            
            N/A
            
            
            
            N/ABank
            
            
            37,472
            
            
            
            8.27
            %
            
            
            18,130
            
            
            
            4.00
            %
            
            
            22,662
            
            
            
            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


JACKSONVILLE
BANCORP, INC.
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)





NOTE
8 – FAIR VALUE




Fair
value is the exchange price that would be received for an asset or paid to
transfer a liability (exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants
on the measurement date.  There are three levels of inputs that may be
used to measure fair value:




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




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




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




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




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




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




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





Other Real Estate
Owned:  Nonrecurring adjustment to certain commercial and
residential real estate properties classified as other real estate owned (OREO)
is measured at fair value, less costs to sell.  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.




16


JACKSONVILLE
BANCORP, INC.
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)




NOTE
8 – FAIR VALUE (Cont.)




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:


Fair Value Measurements
      UsingQuoted
      Prices in Active Markets for Identical Assets
              (Level
      1)
            
            
            Significant
      Other Observable Inputs
              (Level
      2)
            
            
            Significant
      Unobservable
              Inputs
              (Level
      3)Assets:(Dollars
      in thousands)
              June
      30, 2010
              Available-for-saleU.S.
      government-sponsoredentities
      and agencies
            
            $
            2,008
            
            
            
            —
            
            
            $
            2,008
            
            
            
            —State
      and political subdivisions
            
            
            10,589
            
            
            
            —
            
            
            
            10,589
            
            
            
            —Mortgage-backed
      securities - residential
            
            
            7,232
            
            
            
            —
            
            
            
            7,232
            
            
            
            —Collateralized
      mortgageobligations
      - residential
            
            
            5,619
            
            
            
            —
            
            
            
            5,619
            
            
            
            —Derivative
      asset
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —(Dollars
      in thousands)
              December
      31, 2009
              Available-for-saleU.S.
      government-sponsoredentities
      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:June
      30, 2010Derivative
      liability
            
            $
            598
            
            
            
            —
            
            
            $
            598
            
            
            
            —December
      31, 2009Derivative
      liability
            
            $
            —
            
            
            
            —
            
            
            $
            —
            
            
            
            —




17


JACKSONVILLE
BANCORP, INC.
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)


NOTE
      8 – FAIR VALUE (Cont.)Assets
      measured at fair value on a non-recurring basis are summarized
      below:




Fair
      Value Measurements UsingQuoted
      Prices in Active Markets for Identical Assets
                (Level
      1)
              
              
              Significant
      Other Observable Inputs
                (Level
      2)
              
              
              Significant
      Unobservable
                Inputs
                (Level
      3)Assets:June
      30, 2010Impaired
      loans
              
              $
              988
              
              
              
              —
              
              
              
              —
              
              
              $
              988OREO
              
              
              6,089
              
              
              
              
              
              
              
              
              
              
              
              6,089December
      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 $1,412
      with a valuation allowance of $424 at June 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 $6,089, which is made up of the outstanding balance of $6,606, net of a
      valuation allowance of $517 at June 30, 2010, resulting in a write-down of
      $486 for the year ending June 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 June 30,
2010 and December 31, 2009 were as follows:




June
      30, 2010
              
              
              December
      31, 2009Carrying
              
              
              Fair
              
              
              Carrying
              
              
              FairAmount
              
              
              Value
              
              
              Amount
              
              
              ValueFinancial
      assetsCash
      and cash equivalents
              
              $
              23,131
              
              
              $
              23,131
              
              
              $
              5,647
              
              
              $
              5,647Securities
      available-for-sale
              
              
              25,448
              
              
              
              25,448
              
              
              
              22,171
              
              
              
              22,171Loans,
      net
              
              
              373,885
              
              
              
              379,056
              
              
              
              384,133
              
              
              
              387,291Federal
      Home Loan Bank stock
              
              
              3,047
              
              
              
              n/a
              
              
              
              3,047
              
              
              
              n/aIndependent
      Bankers’ Bank Stock
              
              
              153
              
              
              
              n/a
              
              
              
              153
              
              
              
              n/aAccrued
      interest receivable
              
              
              1,978
              
              
              
              1,978
              
              
              
              1,864
              
              
              
              1,864Interest
      rate swap
              
              
              —
              
              
              
              —
              
              
              
              15
              
              
              
              15




18


JACKSONVILLE
BANCORP, INC.
  NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)


NOTE
      8 – FAIR VALUE (Cont.)




June
      30, 2010
              
              
              December
      31, 2009Carrying
              
              
              Fair
              
              
              Carrying
              
              
              FairAmount
              
              
              Value
              
              
              Amount
              
              
              ValueFinancial
      liabilitiesDeposits
              
              $
              391,698
              
              
              $
              393,829
              
              
              $
              370,635
              
              
              $
              373,493Federal
      funds purchased
              
              
              —
              
              
              
              —
              
              
              
              227
              
              
              
              227Other
      borrowings
              
              
              20,000
              
              
              
              20,531
              
              
              
              25,000
              
              
              
              25,771Subordinated
      debentures
              
              
              14,550
              
              
              
              6,066
              
              
              
              14,550
              
              
              
              5,708Accrued
      interest payable
              
              
              410
              
              
              
              410
              
              
              
              424
              
              
              
              424Interest
      rate swap
              
              
              598
              
              
              
              598
              
              
              
              —
              
              
              
              —


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 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 is expected to be issued to ABI shareholders.





Under the
terms of the stock purchase agreement, Bancorp will issue approximately 3
million shares of its common stock at a price of $10.00 per
share.  The largest investment is coming from CapGen, which has agreed
to purchase approximately $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.





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.




19


MANAGEMENT’S
DISCUSSION AND ANALYSIS


OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS





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





General





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




20





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





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





On May
10, 2010, 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 is expected to be issued to ABI shareholders.





Under the
terms of the stock purchase agreement, Bancorp will issue approximately 3
million shares of its common stock at a price of $10.00 per
share.  The largest investment is coming from CapGen, which has agreed
to purchase approximately $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.





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.




21




Introduction





On the
following pages, management presents an analysis of the financial condition of
the Company as of June 30, 2010 compared to December 31, 2009, and the
results of operations for the three and six months ended June 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 June 30, 2010 and December 31, 2009





Total
assets increased $13.4 million, or 3.1%, from $438.8 million at December 31,
2009 to $452.2 million at June 30, 2010.  During the six months ended
June 30, 2010, the Company experienced a net loan decrease of $10.2 million, or
2.7%.  Commercial real estate decreased by $4.6 million, or 2.0%,
residential real estate decreased by $3.1 million, or 3.2%, construction real
estate decreased by $1.7 million, or 5.3%, and consumer loans decreased by
$781,000, or 20%, offset by a $1.3 million, or 5.5%, increase in commercial
loans.  In addition, the allowance for loan losses increased by $1.4
million.





Total
cash and cash equivalents increased $17.5 million from $5.6 million at December
31, 2009 to $23.1 million at June 30, 2010 due to an increase in federal
funds sold of $16.5 million.  Investment securities available-for-sale
increased $3.3 million to $25.4 million at June 30, 2010.  During the
six months ended June 30, 2010, we purchased $2.0 million of U.S.
government agency securities and $5.2 million GNMA CMO securities.  In
addition, we received $4.3 million in proceeds from maturities, calls and
principal repayments.





Total
deposits increased $21.1 million, or 5.7%, from $370.6 million at December 31,
2009 to $391.7 million at June 30, 2010.  During the six months
ended June 30, 2010, money market, NOW and savings deposits increased $22.5
million to $127.3 million, time deposits increased $1.4 million to $223.5
million and noninterest bearing deposits decreased $2.9 million to $40.8
million.





Federal
Home Loan Bank advances decreased $5.0 million to $20.0 million at June 30,
2010.





Total
shareholders' equity decreased by $2.2 million from $27.3 million at December
31, 2009 to $25.0 million at June 30, 2010.  The decrease is
mainly attributable to a net loss of $2.0 million and a $383,000 net unrealized
loss on a cash flow hedge derivative.  At June 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 1,749,387 shares were
outstanding.  In addition, the Company had 2,000,000 authorized shares
of $.01 par value preferred stock, none of which were issued or outstanding at
June 30, 2010.





Comparison
of Operating Results for the Six Months Ended June 30, 2010 and
2009





Net
Income





There was
a net loss for the first six months of 2010 of $2.0 million, compared to a
$505,000 net loss in the first six months of 2009.  On a diluted per
share basis, the net loss was $1.13 for the six months ended June 30, 2010,
compared to a net loss of $0.29 per diluted share in 2009.  The net
loss for the first six 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.




22




Net
Interest Income





Net
interest income, the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities, was $7.1 million for
the six months ended June 30, 2010, compared to $6.0 million for the same
period in 2009.  Interest income increased $238,000 when compared to
the first six months of the prior year.  This was a result of the
average earning asset growth of $15.9 million, offset by a nine basis point
interest rate decrease on the average earning assets.





The
average loan balances increased $4.8 million for the six months ended June 30,
2010 compared to the same period in the prior year.  The average yield
on interest-earning assets for the first six months of 2010 was 5.42%, which was
a decrease of nine basis points, compared to the 5.51% yield earned during the
first six months of 2009.





The
average cost of interest-bearing liabilities decreased 62 basis points from
2.97% in the first six months of 2009 to 2.35% in the comparable period in
2010.  The average cost of interest-bearing deposits and all
interest-bearing liabilities reflect, in part, the change in the funding mix for
the first six months of 2010 as compared to the same period in
2009.





The net
interest margin increased by 41 basis points from 2.92% to 3.33% when comparing
the first six months of 2010 to the same period last year.  This
increase is mainly the result of the Company taking advantage of the lowest
funding sources and focusing on core deposit gathering
initiatives.  The Company closely monitors its liquidity needs in
conjunction with the cost of its funding sources and has taken action to reduce
costs through core deposit gathering initiatives focused on generating lower
cost demand, money market and savings accounts.





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




23




SixMonths Ended June
      30,2010
              
              
              2009Average
                Balance
              
              
              Interest
              
              
              Average
                Rate
              
              
              Average
                Balance
              
              
              Interest
              
              
              Average
                Rate(Dollars
      in thousands)Interest-earning
      assets:Loans
      (1)
              
              $
              389,508
              
              
              $
              11,112
              
              
              
              5.75
              %
              
              $
              384,666
              
              
              $
              10,742
              
              
              
              5.63
              %Securities
      (2)
              
              
              26,339
              
              
              
              441
              
              
              
              3.38
              
              
              
              28,321
              
              
              
              587
              
              
              
              4.18Other
      interest-earning assets (3)
              
              
              13,731
              
              
              
              (9
              )
              
              
              (.13
              )
              
              
              691
              
              
              
              (23
              )
              
              
              (6.71
              )Total
      interest-earning assets
              
              
              429,578
              
              
              
              11,544
              
              
              
              5.42
              
              
              
              413,678
              
              
              
              11,306
              
              
              
              5.51Noninterest-earning
      assets (4)
              
              
              21,034
              
              
              
              
              
              
              
              
              
              
              
              16,430Total
      assets
              
              $
              450,612
              
              
              
              
              
              
              
              
              
              
              $
              430,108Interest-bearing
      liabilities:Savings
      deposits
              
              $
              10,562
              
              
              $
              68
              
              
              
              1.30
              
              
              $
              12,789
              
              
              $
              118
              
              
              
              1.86NOW
      deposits
              
              
              5,955
              
              
              
              6
              
              
              
              .20
              
              
              
              8,770
              
              
              
              12
              
              
              
              .28Money
      market deposits
              
              
              99,871
              
              
              
              752
              
              
              
              1.52
              
              
              
              67,102
              
              
              
              534
              
              
              
              1.60Time
      deposits
              
              
              225,372
              
              
              
              2,736
              
              
              
              2.45
              
              
              
              208,030
              
              
              
              3,763
              
              
              
              3.65FHLB
      advances
              
              
              24,372
              
              
              
              497
              
              
              
              4.11
              
              
              
              24,819
              
              
              
              480
              
              
              
              3.90Federal
      Reserve borrowing
              
              
              398
              
              
              
              1
              
              
              
              .51
              
              
              
              24,889
              
              
              
              62
              
              
              
              .50Subordinated
      debt
              
              
              14,550
              
              
              
              382
              
              
              
              5.29
              
              
              
              14,550
              
              
              
              343
              
              
              
              4.75Other
      interest-bearing liabilities (5)
              
              
              25
              
              
              
              —
              
              
              
              —
              
              
              
              153
              
              
              
              —
              
              
              
              —Total
      interest-bearing liabilities
              
              
              381,105
              
              
              
              4,442
              
              
              
              2.35
              
              
              
              361,102
              
              
              
              5,312
              
              
              
              2.97Noninterest-bearing
      liabilities
              
              
              42,741
              
              
              
              
              
              
              
              
              
              
              
              41,935Shareholders'
      equity
              
              
              26,766
              
              
              
              
              
              
              
              
              
              
              
              27,071Total
      liabilities andshareholders'
      equity
              
              $
              450,612
              
              
              
              
              
              
              
              
              
              
              $
              430,108Net
      interest income
              
              
              
              
              
              $
              7,102
              
              
              
              
              
              
              
              
              
              
              $
              5,994Interest
      rate spread (6)
              
              
              
              
              
              
              
              
              
              
              3.07
              %
              
              
              
              
              
              
              
              
              
              
              2.54
              %Net
      interest margin (7)
              
              
              
              
              
              
              
              
              
              
              3.33
              %
              
              
              
              
              
              
              
              
              
              
              2.92
              %





(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.




Net
interest margin is net interest income divided by average interest-earning
assets.
  24


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




Six
      Months Ended June 30,
                2010
      Versus 2009 (1)Increase
      (decrease) due to changes in:Volume
              
              
              Rate
              
              
              Net
                Change(Dollars
      in thousands)Interest
      income:Loans
              
              $
              136
              
              
              $
              234
              
              
              $
              370Securities
              
              
              (39
              )
              
              
              (107
              )
              
              
              (146
              )Other
      interest-earning assets
              
              
              (30
              )
              
              
              44
              
              
              
              14Total
      interest income
              
              
              67
              
              
              
              171
              
              
              
              238Interest
      expense:Savings
      deposits
              
              
              (18
              )
              
              
              (32
              )
              
              
              (50
              )NOW
      deposits
              
              
              (3
              )
              
              
              (3
              )
              
              
              (6
              )Money
      market deposits
              
              
              248
              
              
              
              (30
              )
              
              
              218Time
      deposits
              
              
              293
              
              
              
              (1,320
              )
              
              
              (1,027
              )FHLB
      advances
              
              
              (9
              )
              
              
              26
              
              
              
              17Federal
      Reserve borrowing
              
              
              (62
              )
              
              
              1
              
              
              
              (61
              )Subordinated
      debt
              
              
              —
              
              
              
              39
              
              
              
              39Other
      interest-bearing liabilities
              
              
              —
              
              
              
              —
              
              
              
              —Total
      interest expense
              
              
              449
              
              
              
              (1,319
              )
              
              
              (870
              )Decrease
      in net interest income
              
              $
              (382
              )
              
              $
              1,490
              
              
              $
              1,108


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





Critical
Accounting Policies





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





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




25




Additional
information with regard to the Company’s methodology and reporting of the
allowance for loan losses is included in the Company’s Annual Report on Form
10-K for the year ended December 31, 2009, as filed with the SEC on March 19,
2010.





Asset
Quality





The
Company has identified certain assets as risk elements.  These assets
include nonaccruing loans, loans that are contractually past due 90 days or more
as to principal or interest payments and still accruing, troubled debt
restructurings, and foreclosed real estate.  Loans are placed on
nonaccrual status when management has concerns regarding the Company’s ability
to collect the outstanding loan principal and interest amounts and typically
when such loans are more than 90 days past due.  These loans present
more than the normal risk that the Company will be unable to eventually collect
or realize their full carrying value.  The Company’s risk elements at
June 30, 2010 and December 31, 2009 were as follows:




June
      30,
                2010
              
              
              December
      31,
                2009(Dollars
      in thousands)Nonaccruing
      loans
              
              $
              6,435
              
              
              $
              8,745Loans
      past due over 90 days still on accrual
              
              
              —
              
              
              
              —Total
      nonperforming loans
              
              
              6,435
              
              
              
              8,745Foreclosed
      assets, net
              
              
              6,089
              
              
              
              4,011Total
      nonperforming assets
              
              
              12,524
              
              
              
              12,756Troubled
      debt restructuring
              
              
              15,417
              
              
              
              16,175Total
      nonperforming assets and troubled debt restructuring
              
              $
              27,941
              
              
              $
              28,931Allowance
      for loan losses
              
              $
              8,248
              
              
              $
              6,854Nonperforming
      loans and foreclosed assets as a percent of total assets
              
              
              2.77
              %
              
              
              2.91
              %Nonperforming
      loans as a percent of gross loans
              
              
              1.68
              %
              
              
              2.24
              %Allowance
      for loan losses as a percent of nonperforming loans
              
              
              128.17
              %
              
              
              78.38
              %Loans
      past due 30-89 days, still accruing
              
              $
              8,539
              
              
              $
              5,308Assets
      classified as substandard and doubtful
              
              $
              37,604
              
              
              $
              44,815
  Loans are
impaired when it is considered probable that the Company will not collect the
outstanding loan principal and interest amounts according to the loan’s
contractual terms.  At June 30, 2010, the Company had impaired loans
of $21.9 million, compared to $22.6 million at December 31, 2009.  Of
the $21.9 million impaired loans, $6.4 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 $21.9 million at June 30, 2010.  There are no
additional funds committed to customers whose loans are classified as troubled
debt restructuring.  Each of the loans classified as troubled debt
restructuring currently carries a market rate of interest.  Most of these
loans were modified to suspend principal payments for a period of time less than
or equal to one year, and the interest rate was modified from a fixed rate to a
floating rate tied to the Prime rate.  Of the $1.2 million allowance for
loan losses reserved for impaired loans, the Company has allocated $756,000 to
customers whose loan terms have been modified in troubled debt
restructuring.




26




While the
Company experienced improvement in nonperforming loans during the six-month
period ended June 30, 2010, it 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 increased to $8.5 million at June 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 $1.4 million during the first six months of
2010, amounting to $8.2 million at June 30, 2010, as compared to $6.9
million at December 31, 2009.  The allowance represented approximately
2.16% of total loans at June 30, 2010 and 1.75% at December 31,
2009.  During the first six months of 2010, the Company had
charge-offs of $3.0 million, recoveries of $61,000 and recorded a
$4.3 million provision for loan losses compared to charge-offs of $1.3
million, recoveries of $2,000 and a provision for loan losses of $2.2 million
for the first six 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 residential real estate market and the
growing softness in the commercial real estate market, along with the Bank’s
concentration in collateral dependent real estate loans, were considered when
determining the appropriate level of loan loss reserves in the first six 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 $21.9 million as of
June 30, 2010; of this amount, $1.2 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.  The Bank’s policy
is to obtain updated appraisals for all substandard loans secured by real estate
on at least an annual basis.  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.




27





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





Based on
the results of the analysis performed by management at June 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 $534,000 for the six months ended June 30, 2010, compared to $370,000
for the comparable 2009 period.  In 2009, the Company experienced a
$132,000 write-off in the stock of Silverton Bank, N.A. due to its May 2009
failure which was offset by a loan referral fee in the amount of
$52,000.





Noninterest
expense was $6.5 million for the six months ended June 30, 2010, compared to
$5.0 million in the same period in 2009.  The increase in noninterest
expense was primarily a result of recording $353,000 of merger related expenses,
recording a $527,000 write-down of OREO property values, and recording $317,000
for other related expenses on bank owned property.





The
income tax benefit for the six months ended June 30, 2010 was $1.2 million,
compared to an income tax benefit of $329,000 for the six months ended June 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 June 30, 2010 and
2009





Net loss
for the second quarter of 2010 was $992,000, or $.57 per diluted share, as
compared to net loss of $396,000, or $.23 per diluted share, earned for the same
quarter last year.  During the second quarter of 2010, the Company recorded
a $1.9 million provision for loan loss, compared to a $1.3 million provision for
the second quarter of 2009.  The Company recorded $353,000 of merger
related expenses for the recent merger announcement between Bancorp and
ABI.  The Company also recorded $379,000 of Other Real Estate Owned
expenses related to the write down of OREO values and other related expenses on
foreclosed properties.




28





Net
interest income was $3.5 million for the second quarter of 2010 compared to $3.1
million for the same period in 2009.  Interest income for the quarter
increased $124,000 when compared to the prior year as a result of an increase in
average earning assets of $18.4 million.  Interest expense declined by
$334,000 as a result of the reduction in short-term rates and utilizing less
expensive wholesale funding to support the Company’s earning asset growth. 
The net interest margin improved to 3.27% for the quarter, compared to 2.97% 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 11.04%, 9.78% and 8.27%, respectively,
at June 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
six months of 2010, the Company’s cash and cash equivalent position increased by
$17.5 million.  The increase in cash mainly resulted from an increase
in deposit accounts of approximately $21.1 million from $370.1 million at
December 31, 2009 to $391.7 million at June 30, 2010, offset by net
loan payments of $3.4 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 June 30, 2010, the Company had $25.4 million in
available-for-sale securities, $7.3 million of which was pledged to the Federal
Reserve Bank for the Borrower in Custody Program.








The
Company’s primary external sources of liquidity are customer deposits and
borrowings from other commercial banks.  The Company’s deposit base
consists of both deposits from businesses and consumers in its local market as
well as national market and brokered certificates of deposit.  The
Company can also borrow overnight federal funds and fixed-rate term products
under credit facilities established with the FHLB, Federal Reserve Discount
Window and other commercial banks.  These lines, in the aggregate
amount of approximately $109.4 million, do not represent legal commitments to
extend credit.





Contractual
Obligations, Commitments and Contingent Liabilities.The Company has
various financial obligations, including contractual obligations and commitments
that may require future cash payments.  Management believes that there
have been no material changes in the Company’s overall level of these financial
obligations since December 31, 2009 and that any changes in the Company’s
obligations which have occurred are routine for the industry.  Further
discussion of the nature of each type of obligation is included in the section
entitled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2009, as filed with the SEC on March 19, 2010, and is
incorporated herein by reference.




29





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.




30





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.




31




PART II - OTHER
INFORMATION





Item
1.           Legal
Proceedings





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





Item
1A. Risk
Factors




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) (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.




32





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 cannot be completed unless regulatory approvals are received and
conditions of those approvals are met.





We cannot
complete the Merger unless JBI receives the necessary regulatory approvals and
we may not receive all regulatory approvals.  We have filed
applications with the Federal Reserve Board and the Florida Office of Financial
Regulation (the “OFR”) seeking approval of the Merger. In addition, the Federal
Reserve Board or the OFR may impose conditions on the completion of the Merger
or require changes in the terms of the Merger.  These conditions or
changes could result in termination of the Merger Agreement, or could have the
effect of delaying completion of the Merger or imposing additional costs or
limiting the possible revenues of the combined company.





Also, in
connection with the Stock Purchase and as a condition precedent to the Stock
Purchase and the Merger, the lead Investor must become a bank holding company by
application to, and approval by, the Federal Reserve Board.  The lead
Investor may be unable to obtain approval by the Federal Reserve Board to be a
bank holding company, which could ultimately result in termination of the Merger
Agreement.





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 condition, in addition
to other customary closing conditions, must be satisfied or waived, if
permissible, before JBI and ABI are obligated to complete 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 3.25
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.




33





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 temporarily 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.




34





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.




35





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.





36





JACKSONVILLE
BANCORP, INC.





SIGNATURES





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




JACKSONVILLE BANCORP,
      INC.Date:
      August 13, 2010
              
              /s/
      Price W. SchwenckPrice
      W. SchwenckChief
      Executive OfficerDate:
      August 13, 2010
              
              /s/
      Valerie A. KendallValerie
      A. KendallExecutive
      Vice Presidentand
      Chief Financial Officer




37




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.




38