UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 FORM
10-Q
 
 (Mark
One)
 
 x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d)
                OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
quarterly period endedSeptember
30, 2009
 
  ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)
                OF THE SECURITIES EXCHANGE ACT OF
1934
  For the
transition period from __________ to ____________.
 
 Commission
file number  000-30248
 
 JACKSONVILLE BANCORP,
INC.
 (Exact
name of registrant as specified in its charter)
 
 Florida
                
                59-3472981(State
      or other jurisdiction of
                
                (I.R.S.
      Employerincorporation
      or organization)
                
                Identification
      No.)
 
 100 North Laura Street,
Suite 1000, Jacksonville, Florida 32202
 (Address
of principal executive offices)
 
 (904)
421-3040
 (Registrant’s
telephone number)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 Yes           x           No             ̈
 
 Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 Yes             ̈           No             ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 Large
      accelerated filer
               ̈
              
              Accelerated
      filer
               ̈Non-accelerated
      filer
               ̈
              
              Smaller
      reporting company
              x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes             ̈           No           x
 
 As of
November 5, 2009, the latest practicable date, 1,749,526of the Registrant’s
common shares, $.01 par value, were issued and outstanding.
  
  JACKSONVILLE
BANCORP, INC.
  TABLE OF
CONTENTS
 
 PagePART
      I—FINANCIAL INFORMATIONItem
      1.
                          Financial
      StatementsConsolidated
      Balance Sheets
                          
                          3Consolidated
      Statements of Income
                          
                          4Consolidated
      Statements of Changes in Shareholders’ Equity
                          
                          5Consolidated
      Statements of Cash Flows
                          
                          6Notes
      to Consolidated Financial Statements
                          
                          8Item
      2.
                          Management’s
      Discussion and Analysis of Financial Conditionand
      Results of Operations
                          
                          21Item
      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
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          
                          32Item
      3.
                          Defaults
      Upon Senior Securities
                          
                          32Item
      4.
                          Submission
      of Matters to a Vote of Security Holders
                          
                          32Item
      5.
                          Other
      Information
                          
                          32Item
      6.
                          Exhibits
                          
                          32SIGNATURES
                          
                          
                          33EXHIBIT
      INDEX
                          34CERTIFICATIONSCertification
      of Gilbert J. Pomar, III under Section 302 of the Sarbanes-Oxley Act of
      2002
                          35Certification
      of Valerie A. Kendall under Section 302 of the Sarbanes-Oxley Act of
      2002
                          36Certification
      under Section 906 of the Sarbanes-Oxley Act of 2002
                          37
  2.
  JACKSONVILLE
BANCORP, INC.
 PART I—FINANCIAL
INFORMATION
 
 Item
1.  Financial Statements
 
 CONSOLIDATED
BALANCE SHEETS
 (Dollars
in thousands, except per share amounts)
  
 September 30,
                                      
                                      
                                      December 31,2009
                                      
                                      
                                      2008(Unaudited)ASSETSCash
      and due from banks
                                      
                                      $
                                      5,496
                                      
                                      
                                      $
                                      8,665Federal
      funds sold
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,483Total
      cash and cash equivalents
                                      
                                      
                                      5,496
                                      
                                      
                                      
                                      10,148Securities
      available-for-sale
                                      
                                      
                                      23,795
                                      
                                      
                                      
                                      29,684Securities
      held-to-maturity
                                      
                                      
                                      50
                                      
                                      
                                      
                                      50Loans,
      net of allowance for loan lossesof
      $6,455at
      2009 and $4,705 at 2008
                                      
                                      
                                      389,082
                                      
                                      
                                      
                                      374,993Premises
      and equipment, net
                                      
                                      
                                      3,612
                                      
                                      
                                      
                                      3,940Bank-owned
      life insurance (BOLI)
                                      
                                      
                                      8,871
                                      
                                      
                                      
                                      8,773Federal
      Home Loan Bank (FHLB) stock
                                      
                                      
                                      2,957
                                      
                                      
                                      
                                      1,705Real
      estate owned, net
                                      
                                      
                                      1,245
                                      
                                      
                                      
                                      89Deferred
      income taxes
                                      
                                      
                                      2,043
                                      
                                      
                                      
                                      1,502Accrued
      interest receivable
                                      
                                      
                                      1,946
                                      
                                      
                                      
                                      2,027Other
      assets
                                      
                                      
                                      846
                                      
                                      
                                      
                                      1,088Total
      assets
                                      
                                      $
                                      439,943
                                      
                                      
                                      $
                                      433,999LIABILITIESDepositsNoninterest
      bearing
                                      
                                      $
                                      43,641
                                      
                                      
                                      $
                                      40,851Money
      market, NOW and savings deposits
                                      
                                      
                                      92,098
                                      
                                      
                                      
                                      87,751Time
      deposits
                                      
                                      
                                      185,864
                                      
                                      
                                      
                                      216,942Total
      deposits
                                      
                                      
                                      321,603
                                      
                                      
                                      
                                      345,544Federal
      funds purchased
                                      
                                      
                                      43
                                      
                                      
                                      
                                      -Federal
      Reserve borrowing
                                      
                                      
                                      26,500
                                      
                                      
                                      
                                      26,000FHLB
      advances
                                      
                                      
                                      48,350
                                      
                                      
                                      
                                      20,000Subordinated
      debt
                                      
                                      
                                      14,550
                                      
                                      
                                      
                                      14,550Accrued
      expenses and other liabilities
                                      
                                      
                                      1,937
                                      
                                      
                                      
                                      1,060Total
      liabilities
                                      
                                      
                                      412,983
                                      
                                      
                                      
                                      407,154SHAREHOLDERS’
      EQUITYCommon
      stock, $.01 par value, 8,000,000 shares authorized,1,749,526and 1,748,799
      shares issued
                                      
                                      
                                      17
                                      
                                      
                                      
                                      17Additional
      paid–in capital
                                      
                                      
                                      18,620
                                      
                                      
                                      
                                      18,568Retained
      earnings
                                      
                                      
                                      8,033
                                      
                                      
                                      
                                      8,213Treasury
      stock, 672 and 200 shares
                                      
                                      
                                      (8
                                      )
                                      
                                      
                                      (2
                                      )Accumulated
      other comprehensive income
                                      
                                      
                                      298
                                      
                                      
                                      
                                      49Total
      shareholders’ equity
                                      
                                      
                                      26,960
                                      
                                      
                                      
                                      26,845Total
      liabilities and shareholders’ equity
                                      
                                      $
                                      439,943
                                      
                                      
                                      $
                                      433,999
 
 See
accompanying notes to unaudited consolidated financial
statements.
 3.
 
 JACKSONVILLE
BANCORP, INC.
 CONSOLIDATED
STATEMENTS OF INCOME
 (Unaudited)
 (Dollars
in thousands, except per share amounts)
 
 Three Months Ended
                                          
                                          
                                          Nine Months EndedSeptember 30,
                                          
                                          
                                          September 30,2009
                                          
                                          
                                          2008
                                          
                                          
                                          2009
                                          
                                          
                                          2008Interest
      and dividend incomeLoans,
      including fees
                                          
                                          $
                                          5,853
                                          
                                          
                                          $
                                          6,096
                                          
                                          
                                          $
                                          16,595
                                          
                                          
                                          $
                                          18,331Taxable
      securities
                                          
                                          
                                          137
                                          
                                          
                                          
                                          263
                                          
                                          
                                          
                                          517
                                          
                                          
                                          
                                          790Tax-exempt
      securities
                                          
                                          
                                          104
                                          
                                          
                                          
                                          103
                                          
                                          
                                          
                                          311
                                          
                                          
                                          
                                          310Federal
      funds sold and other
                                          
                                          
                                          (13
                                          )
                                          
                                          
                                          (5
                                          )
                                          
                                          
                                          (36
                                          )
                                          
                                          
                                          28Total
      interest income
                                          
                                          
                                          6,081
                                          
                                          
                                          
                                          6,457
                                          
                                          
                                          
                                          17,387
                                          
                                          
                                          
                                          19,459Interest
      expenseDeposits
                                          
                                          $
                                          1,750
                                          
                                          
                                          $
                                          2,778
                                          
                                          
                                          $
                                          6,177
                                          
                                          
                                          $
                                          8,560Federal
      Reserve borrowing
                                          
                                          
                                          38
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          100
                                          
                                          
                                          
                                          —FHLB
      advances
                                          
                                          
                                          281
                                          
                                          
                                          
                                          405
                                          
                                          
                                          
                                          761
                                          
                                          
                                          
                                          1,237Subordinated
      debt
                                          
                                          
                                          196
                                          
                                          
                                          
                                          223
                                          
                                          
                                          
                                          539
                                          
                                          
                                          
                                          456Other
                                          
                                          
                                          1
                                          
                                          
                                          
                                          3
                                          
                                          
                                          
                                          1
                                          
                                          
                                          
                                          6Total
      interest expense
                                          
                                          
                                          2,266
                                          
                                          
                                          
                                          3,409
                                          
                                          
                                          
                                          7,578
                                          
                                          
                                          
                                          10,259Net
      interest income
                                          
                                          
                                          3,815
                                          
                                          
                                          
                                          3,048
                                          
                                          
                                          
                                          9,809
                                          
                                          
                                          
                                          9,200Provision
      for loan losses
                                          
                                          
                                          1,070
                                          
                                          
                                          
                                          665
                                          
                                          
                                          
                                          3,315
                                          
                                          
                                          
                                          2,783Net
      interest income after provision for loan losses
                                          
                                          
                                          2,745
                                          
                                          
                                          
                                          2,383
                                          
                                          
                                          
                                          6,494
                                          
                                          
                                          
                                          6,417Noninterest
      incomeService
      charges on deposit accounts
                                          
                                          
                                          148
                                          
                                          
                                          
                                          170
                                          
                                          
                                          
                                          455
                                          
                                          
                                          
                                          496Non-marketable
      equity security
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          (132
                                          )
                                          
                                          
                                          —Other
      income
                                          
                                          
                                          93
                                          
                                          
                                          
                                          130
                                          
                                          
                                          
                                          288
                                          
                                          
                                          
                                          316Total
      noninterest income
                                          
                                          
                                          241
                                          
                                          
                                          
                                          300
                                          
                                          
                                          
                                          611
                                          
                                          
                                          
                                          812Noninterest
      expenseSalaries
      and employee benefits
                                          
                                          
                                          1,124
                                          
                                          
                                          
                                          1,141
                                          
                                          
                                          
                                          3,351
                                          
                                          
                                          
                                          3,428Occupancy
      and equipment
                                          
                                          
                                          487
                                          
                                          
                                          
                                          449
                                          
                                          
                                          
                                          1,371
                                          
                                          
                                          
                                          1,338Regulatory
      assessment
                                          
                                          
                                          205
                                          
                                          
                                          
                                          142
                                          
                                          
                                          
                                          811
                                          
                                          
                                          
                                          301Merger
      related costs
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          430Data
      processing
                                          
                                          
                                          241
                                          
                                          
                                          
                                          197
                                          
                                          
                                          
                                          681
                                          
                                          
                                          
                                          595Other
                                          
                                          
                                          471
                                          
                                          
                                          
                                          410
                                          
                                          
                                          
                                          1,267
                                          
                                          
                                          
                                          1,385Total
      noninterest expense
                                          
                                          
                                          2,528
                                          
                                          
                                          
                                          2,339
                                          
                                          
                                          
                                          7,481
                                          
                                          
                                          
                                          7,477Income
      (loss) before income taxes
                                          
                                          
                                          458
                                          
                                          
                                          
                                          344
                                          
                                          
                                          
                                          (376
                                          )
                                          
                                          
                                          (248
                                          )Income
      tax expense (benefit)
                                          
                                          
                                          133
                                          
                                          
                                          
                                          77
                                          
                                          
                                          
                                          (196
                                          )
                                          
                                          
                                          (212
                                          )Net
      income (loss)
                                          
                                          $
                                          325
                                          
                                          
                                          $
                                          267
                                          
                                          
                                          $
                                          (180
                                          )
                                          
                                          $
                                          ( 36
                                          )Weighted
      average:Common
      shares
                                          
                                          
                                          1,748,586
                                          
                                          
                                          
                                          1,748,567
                                          
                                          
                                          
                                          1,748,482
                                          
                                          
                                          
                                          1,748,183Dilutive
      stock options and warrants
                                          
                                          
                                          488
                                          
                                          
                                          
                                          28,725
                                          
                                          
                                          
                                          —
                                          
                                          
                                          
                                          —Dilutive
      shares
                                          
                                          
                                          1,749,074
                                          
                                          
                                          
                                          1,777,292
                                          
                                          
                                          
                                          1,748,482
                                          
                                          
                                          
                                          1,748,183Basic
      earnings (loss) per common share
                                          
                                          $
                                          .19
                                          
                                          
                                          $
                                          .15
                                          
                                          
                                          $
                                          (.10
                                          )
                                          
                                          $
                                          (.02
                                          )Diluted
      earnings (loss) per common share
                                          
                                          $
                                          .19
                                          
                                          
                                          $
                                          .15
                                          
                                          
                                          $
                                          (.10
                                          )
                                          
                                          $
                                          (.02
                                          )
 
 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
                    
                    
                    
                    
                    
                    
                    
                    
                    Accumulated OtherOutstanding
                    
                    
                    Paid-In
                    
                    
                    Retained
                    
                    
                    Treasury Stock
                    
                    
                    ComprehensiveShares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Earnings
                    
                    
                    Amount
                    
                    
                    Income (loss)
                    
                    
                    TotalBalance
      at January 1, 2008
                    
                    
                    1,746,331
                    
                    
                    $
                    17
                    
                    
                    $
                    18,459
                    
                    
                    $
                    8,186
                    
                    
                    $
                    (40
                    )
                    
                    $
                    7
                    
                    
                    $
                    26,629Comprehensive
      loss:Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (36
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (36
                    )Change
      in unrealized gain (loss)on
      securities available-for-sale,
      net of tax effects
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (253
                    )
                    
                    
                    (253
                    )Total
      comprehensive loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (289
                    )Purchase
      of treasury stock
                    
                    
                    (3,018
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (62
                    )
                    
                    
                    
                    
                    
                    
                    (62
                    )Issuance
      of treasury stock
                    
                    
                    4,500
                    
                    
                    
                    
                    
                    
                    
                    (7
                    )
                    
                    
                    (5
                    )
                    
                    
                    100
                    
                    
                    
                    
                    
                    
                    
                    88Common
      stock issued
                    
                    
                    618
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    —Share-based
      compensation expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    82
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    82Exercise
      of common stock options,including
      tax benefits
                    
                    
                    200
                    
                    
                    
                    
                    
                    
                    
                    3
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3Balance
      at September 30, 2008
                    
                    
                    1,748,631
                    
                    
                    $
                    17
                    
                    
                    $
                    18,537
                    
                    
                    $
                    8,145
                    
                    
                    $
                    (2
                    )
                    
                    $
                    (246
                    )
                    
                    $
                    26,451Balance
      at January 1, 2009
                    
                    
                    1,748,599
                    
                    
                    $
                    17
                    
                    
                    $
                    18,568
                    
                    
                    $
                    8,213
                    
                    
                    $
                    (2
                    )
                    
                    $
                    49
                    
                    
                    $
                    26,845Comprehensive
      income:Net
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (180
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (180
                    )Change
      in unrealized gain(loss)
      on securities available-for-sale,
      net of tax effects
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    424
                    
                    
                    
                    424Net
      unrealized loss on cashflow
      hedge, net of taxeffects
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (175
                    )
                    
                    
                    (175
                    )Total
      comprehensive income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    69Purchase
      of treasury stock
                    
                    
                    (3,025
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (33
                    )
                    
                    
                    
                    
                    
                    
                    (33
                    )Issuance
      of treasury stock
                    
                    
                    2,553
                    
                    
                    
                    
                    
                    
                    
                    —
                    
                    
                    
                    
                    
                    
                    
                    27
                    
                    
                    
                    
                    
                    
                    
                    27Common
      stock issued
                    
                    
                    727
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    —Share-based
      compensation expense
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    52
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    52Balance
      at September 30, 2009
                    
                    
                    1,748,854
                    
                    
                    $
                    17
                    
                    
                    $
                    18,620
                    
                    
                    $
                    8,033
                    
                    
                    $
                    (8
                    )
                    
                    $
                    298
                    
                    
                    $
                    26,960
  See
accompanying notes to unaudited consolidated financial
statements.
 5.
 
 JACKSONVILLE
BANCORP, INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 (Dollars
in thousands)
 
 
 
 Nine Months Ended
                          September 30,2009
                        
                        
                        2008Cash
      flows from operating activitiesNet
      income (loss)
                        
                        $
                        (180
                        )
                        
                        $
                        (36
                        )Adjustments
      to reconcile net income (loss) to net cash fromoperating
      activities:Depreciation
      and amortization
                        
                        
                        386
                        
                        
                        
                        387Net
      amortization of deferred loan fees
                        
                        
                        87
                        
                        
                        
                        54Provision
      for loan losses
                        
                        
                        3,315
                        
                        
                        
                        2,783Premium
      amortization, net of accretion
                        
                        
                        (54
                        )
                        
                        
                        (18
                        )Net
      loss on sale of real estate owned
                        
                        
                        22
                        
                        
                        
                        —Loss
      on write-down of real estate owned
                        
                        
                        30
                        
                        
                        
                        —Earnings
      on Bank-owned life insurance
                        
                        
                        (98
                        )
                        
                        
                        (186
                        )Share-based
      compensation
                        
                        
                        79
                        
                        
                        
                        170Loss
      on disposal of assets
                        
                        
                        10
                        
                        
                        
                        38Loss
      on non-marketable equity investment
                        
                        
                        132
                        
                        
                        
                        —Deferred
      income tax
                        
                        
                        (691
                        )
                        
                        
                        (564
                        )Net
      change in accrued interest receivable and other assets
                        
                        
                        188
                        
                        
                        
                        (113
                        )Net
      change in accrued expenses and other liabilities
                        
                        
                        596
                        
                        
                        
                        (555
                        )Net
      cash from operating activities
                        
                        
                        3,822
                        
                        
                        
                        1,960Cash
      flows from investing activitiesPurchases
      of securities available-for-sale
                        
                        
                        (3,076
                        )
                        
                        
                        (5,107
                        )Proceeds
      from maturities, calls and paydown
                        
                        
                        9,699
                        
                        
                        
                        5,521of
      securities available-for-saleLoan
      (originations) payments, net
                        
                        
                        (22,374
                        )
                        
                        
                        (40,005
                        )Investment
      in Bank-owned life insurance
                        
                        
                        —
                        
                        
                        
                        (3,500
                        )Proceeds
      from sale of real estate owned
                        
                        
                        3,675
                        
                        
                        
                        —Additions
      to premises and equipment, net
                        
                        
                        (65
                        )
                        
                        
                        (89
                        )Net
      change in Federal Home Loan Bank stock
                        
                        
                        (1,252
                        )
                        
                        
                        1,047Net
      cash from (used for) investing activities
                        
                        
                        (13,393
                        )
                        
                        
                        (42,133
                        )Cash
      flows from financing activitiesNet
      change in deposits
                        
                        
                        (23,941
                        )
                        
                        
                        61,923Net
      change in Fed funds purchased
                        
                        
                        43
                        
                        
                        
                        —Proceeds
      from Federal Reserve borrowing
                        
                        
                        500
                        
                        
                        
                        —Net
      change in overnight FHLB advances
                        
                        
                        23,350
                        
                        
                        
                        (8,530
                        )Proceeds
      from long-term FHLB advances
                        
                        
                        5,000
                        
                        
                        
                        —Repayment
      of long-term FHLB advances
                        
                        
                        —
                        
                        
                        
                        (19,000
                        )Proceeds
      from issuance of subordinated debt
                        
                        
                        —
                        
                        
                        
                        7,550Proceeds
      from exercise of stock options
                        
                        
                        —
                        
                        
                        
                        3Purchase
      of treasury stock
                        
                        
                        (33
                        )
                        
                        
                        (62
                        )Net
      cash from financing activities
                        
                        
                        4,919
                        
                        
                        
                        41,884Net
      change in cash and cash equivalents
                        
                        
                        (4,652
                        )
                        
                        
                        1,711Cash
      and cash equivalents at beginning of period
                        
                        
                        10,148
                        
                        
                        
                        6,035Cash
      and cash equivalents at end of period
                        
                        $
                        5,496
                        
                        
                        $
                        7,746
 
 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
                  
                  $
                  7,895
                  
                  
                  $
                  10,338Income
      taxes
                  
                  
                  20
                  
                  
                  
                  795Supplemental
      schedule of noncash investing activitiesTransfers
      from loans to real estate owned
                  
                  $
                  4,883
                  
                  
                  $
                  89
 
 See
accompanying notes to unaudited consolidated financial
statements.
 7.
  JACKSONVILLE
BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)


NOTE
1 – BASIS OF PRESENTATION
 Jacksonville
Bancorp, Inc. is a bank holding company headquartered in Jacksonville,
Florida.  Jacksonville Bancorp, Inc. owns and operates The
Jacksonville Bank, which has a total of five operating branches in Jacksonville,
Florida.
 
 The
consolidated financial statements include the accounts of Jacksonville Bancorp,
Inc. and its wholly owned subsidiary, The Jacksonville Bank, and The
Jacksonville Bank’s wholly owned subsidiary, Fountain Financial,
Inc.  The consolidated entity is referred to as the “Company” and The
Jacksonville Bank and its subsidiary are collectively referred to as the
“Bank.”  The Company’s financial condition and operating results
principally reflect those of the Bank.  All intercompany balances and
amounts have been eliminated.  For further information refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2008, as filed with
the U.S. Securities and Exchange Commission (the “SEC”) on March 20,
2009.
 
 The
accounting and reporting policies of the Company reflect banking industry
practice and conform to U.S. generally accepted accounting
standards.  In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported asset and liability balances and revenue and expense amounts and the
disclosure of contingent assets and liabilities.  Actual results could
differ significantly from those estimates.
 
 The
consolidated financial information included herein as of and for the periods
ended September 30, 2009 and 2008 is unaudited; however, such information
reflects all adjustments which are, in the opinion of management, necessary for
a fair statement of results for the interim periods.  The December 31,
2008 consolidated balance sheet was derived from the Company's December 31, 2008
audited consolidated financial statements.
 
 Subsequent
events that occurred after the balance sheet date, but before the financial
statements are issued, were evaluated for reporting and disclosure in these
financial statements through November 9, 2009, which is the date that these
financial statements were issued.
 
 Adoption
of New Accounting Standards
 
 Effective
July 1, 2009, the Financial Accounting Standards Board (“FASB”) issued Statement
of Financial Accounting Standard No. 168 FASB Accounting Standards
Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting
Principle.  This statement eliminated the GAAP hierarchy and the ASC
became the only level of authoritative GAAP.  Conversion to the ASC did not
affect our accounting policies.  Reference to specific accounting standards
has been replaced with reference to the ASC.  Changes to the ASC after
June 30, 2009 are referred to as Accounting Standards Updates
(“ASU”).
 
 In August
2009, the FASB issued ASU No. 2009-05 Fair Value Measurement and
Disclosure(Topic 820) Measuring Liabilities at Fair Value. This ASU
provides guidance when estimating the fair value of a liability.  When a
quoted price in an active market for the identical liability is not available,
fair value should be measured using (a) the quoted price of an identical
liability when traded as an asset; (b) quoted prices for similar
liabilities or similar liabilities when traded as assets; or (c) another
valuation technique consistent with the principles of Topic 820.  ASU No.
2009-05 was effective October 1, 2009 and the adoption of this ASU will not have
an impact on the Company’s results of operations or financial
position.
  8.
  JACKSONVILLE
BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)
  
 NOTE
1 – BASIS OF PRESENTATION (Cont.)
 
 In April
2009, the FASB issued Staff Position (FSP) No. 115-2 and No. 124-2 (FASB ASC
Topic 320-10-65), Recognition
and Presentation of Other-Than-Temporary Impairments.  This FSP
amends existing guidance for determining whether impairment is
other-than-temporary for debt securities and requires an entity to assess
whether it intends to sell, or it is more likely than not that it will be
required to sell a security in an unrealized loss position before recovery of
its amortized cost basis.  If either criteria is met, the entire difference
between amortized cost and fair value is recognized in earnings.  For
securities that do not meet the above criteria, the amount of impairment
recognized in earnings is limited to the amount related to credit losses, while
impairment related to other factors is recognized in other comprehensive
income.  Additionally, the FSP expands and increases the frequency of
existing disclosures about other-than-temporary impairment for debt and equity
securities.  This FSP is effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009.  The adoption of this FSP on April 1, 2009 did
not have a material impact on the Company’s results of operations or financial
position.
 
 In April
2009, FASB issued Staff Position (FSP) No. 157-4 (FASB ASC Topic 820-10-65),
Determining Fair Value When
the Volume and Level of Activity for the Asset and Liability Have Significantly
Decreased and Identifying Transactions that are Not Orderly.  This
FSP emphasizes that even if there has been a significant decrease in the volume
and level of activity, the objective of a fair value measurement remains the
same.  Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants.  This FSP provides factors to consider when evaluating
whether there has been a significant decrease in the volume and level of
activity for an asset or liability in relation to normal market activity. 
In addition, when transactions or quoted prices are not considered orderly,
adjustments to those prices based on the weight of available information may be
needed to determine the appropriate fair value.  This FSP also requires
increased disclosures.  This FSP was effective for interim and annual
reporting periods ending after June 15, 2009.  The adoption of this FSP at
June 30, 2009 did not have a material impact on the Company’s results of
operations or financial position.
 
 In April
2009, FASB issued Staff Position (FSP) No. 107-1 and APB 28-1 (FASB ASC Topic
825-10-65), Interim
Disclosures about Fair Value of Financial Instruments.  This FSP
amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of
financial instruments for interim reporting periods that were previously only
required in annual financial statements.  This FSP was effective for
interim reporting periods ending after June 15, 2009.  The adoption of this
FSP at June 30, 2009 did not have a material impact on the Company’s results of
operations or financial position as it only required disclosures which are
included in Note 7.
  9.
  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
September 30, 2009 and December 31, 2008 and the corresponding amounts of
unrealized gains and losses therein:
 
 Amortized
                                  
                                  
                                  Unrealized
                                  
                                  
                                  Unrealized
                                  
                                  
                                  FairCost
                                  
                                  
                                  Gains
                                  
                                  
                                  Losses
                                  
                                  
                                  Value(Dollars
      in thousands)September
      30, 2009Available-for
      saleU.S.
      government-sponsoredentities
      and agencies
                                  
                                  $
                                  3,234
                                  
                                  
                                  $
                                  36
                                  
                                  
                                  $
                                  (4
                                  )
                                  
                                  $
                                  3,266State
      and political subdivisions
                                  
                                  
                                  10,883
                                  
                                  
                                  
                                  390
                                  
                                  
                                  
                                  (3
                                  )
                                  
                                  
                                  11,270Mortgage-backed
      securities –residential
                                  
                                  
                                  8,514
                                  
                                  
                                  
                                  328
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  8,842Collateralized
      mortgageobligations
      - residential
                                  
                                  
                                  405
                                  
                                  
                                  
                                  12
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  417Total
      available-for-salesecurities
                                  
                                  $
                                  23,036
                                  
                                  
                                  $
                                  766
                                  
                                  
                                  $
                                  (7
                                  )
                                  
                                  $
                                  23,795Total
      held-to-maturity securities
                                  
                                  $
                                  50
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  50
 
 Amortized
                                  
                                  
                                  Unrealized
                                  
                                  
                                  Unrealized
                                  
                                  
                                  FairCost
                                  
                                  
                                  Gains
                                  
                                  
                                  Losses
                                  
                                  
                                  Value(Dollars
      in thousands)December
      31, 2008Available-for
      saleU.S.
      government-sponsoredentities
      and agencies
                                  
                                  $
                                  8,204
                                  
                                  
                                  $
                                  91
                                  
                                  
                                  $
                                  (11
                                  )
                                  
                                  $
                                  8,284State
      and political subdivisions
                                  
                                  
                                  10,918
                                  
                                  
                                  
                                  122
                                  
                                  
                                  
                                  (262
                                  )
                                  
                                  
                                  10,778Mortgage-backed
      securities –residential
                                  
                                  
                                  9,829
                                  
                                  
                                  
                                  197
                                  
                                  
                                  
                                  (59
                                  )
                                  
                                  
                                  9,967Collateralized
      mortgageobligations
      - residential
                                  
                                  
                                  654
                                  
                                  
                                  
                                  2
                                  
                                  
                                  
                                  (1
                                  )
                                  
                                  
                                  655Total
      available-for-salesecurities
                                  
                                  $
                                  29,605
                                  
                                  
                                  $
                                  412
                                  
                                  
                                  $
                                  (333
                                  )
                                  
                                  $
                                  29,684Total
      held-to-maturity securities
                                  
                                  $
                                  50
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  —
                                  
                                  
                                  $
                                  50
  10.
  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.
 
 September 30, 2009Amortized
                    
                    
                    FairCost
                    
                    
                    ValueMaturityAvailable-for-saleWithin
      one year
                    
                    $
                    4,458
                    
                    
                    $
                    4,489One
      to five years
                    
                    
                    5,315
                    
                    
                    
                    5,472Five
      to ten years
                    
                    
                    4,344
                    
                    
                    
                    4,575Beyond
      ten years
                    
                    
                    -
                    
                    
                    
                    -Mortgage-backed
                    
                    
                    8,514
                    
                    
                    
                    8,842Collateralized
      Mortgage Obligations
                    
                    
                    405
                    
                    
                    
                    417Total
                    
                    $
                    23,036
                    
                    
                    $
                    23,795Held-to-maturityWithin
      one year
                    
                    $
                    50
                    
                    
                    $
                    50Total
                    
                    $
                    23,086
                    
                    
                    $
                    23,845
 
 The
following table summarizes the investment securities with unrealized losses at
September 30, 2009 and December 31, 2008 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)September
      30, 2009Available-for-saleU.S.
      government-sponsored
      entitiesand
      agencies
                                        
                                        $
                                        746
                                        
                                        
                                        $
                                        (4
                                        )
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        746
                                        
                                        
                                        $
                                        (4
                                        )States
      and political
                                        
                                        
                                        248
                                        
                                        
                                        
                                        (2
                                        )
                                        
                                        
                                        304
                                        
                                        
                                        
                                        (1
                                        )
                                        
                                        
                                        552
                                        
                                        
                                        
                                        (3
                                        )Mortgage-backedsecurities
      – residential
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Collateralized
      mortgageobligations
      - residential
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Total
      available-for-sale
                                        
                                        $
                                        994
                                        
                                        
                                        $
                                        (6
                                        )
                                        
                                        $
                                        304
                                        
                                        
                                        $
                                        (1
                                        )
                                        
                                        $
                                        1,298
                                        
                                        
                                        $
                                        (7
                                        )Held-to-maturityother
      securities
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -Total
      held-to-maturity
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -




11.






JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)







NOTE
2 - INVESTMENT SECURITIES (Cont.)





LessThan12Months
                  
                  
                  12MonthsorLonger
                  
                  
                  TotalFair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  Unrealized
                  
                  
                  Fair
                  
                  
                  UnrealizedValue
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  Losses
                  
                  
                  Value
                  
                  
                  Losses(Dollars
      in thousands)December
      31, 2008Available-for-saleU.S.
      government- sponsored entities and agencies
                  
                  $
                  739
                  
                  
                  $
                  (11
                  )
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  739
                  
                  
                  $
                  (11
                  )States
      and political
                  
                  
                  5,487
                  
                  
                  
                  (262
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5,487
                  
                  
                  
                  (262
                  )Mortgage-backed
      securities – residential
                  
                  
                  1,903
                  
                  
                  
                  (58
                  )
                  
                  
                  396
                  
                  
                  
                  (1
                  )
                  
                  
                  2,299
                  
                  
                  
                  (59
                  )Collateralized
      mortgage obligations - residential
                  
                  
                  50
                  
                  
                  
                  -
                  
                  
                  
                  327
                  
                  
                  
                  (1
                  )
                  
                  
                  377
                  
                  
                  
                  (1
                  )Total
      available-for-sale
                  
                  $
                  8,179
                  
                  
                  $
                  (331
                  )
                  
                  $
                  723
                  
                  
                  $
                  (2
                  )
                  
                  $
                  8,902
                  
                  
                  $
                  (333
                  )Held-to-maturity
      other securities
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      held-to-maturity
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -




Other-Than-Temporary-Impairment




Management
evaluates securities for other-than-temporary impairment (“OTTI”) at least on a
quarterly basis and more frequently when economic or market conditions warrant
such an evaluation.  The investment securities portfolio is evaluated
for OTTI by segregating the portfolio into two general segments and applying the
appropriate OTTI model.  Investment securities classified as available
for sale or held-to-maturity are generally evaluated for OTTI under Subsequent Measurements of Debt and
Equity Securities Topic of the ASC.However, certain purchased
beneficial interests, including non-agency mortgage-backed securities,
asset-backed securities, and collateralized debt obligations, that had credit
ratings at the time of purchase of below AA, are evaluated using the model
outlined in Subsequent
Measurements in Beneficial Interest in Securitized Financial Assets Topic of the
ASC.




In
determining OTTI under the Subsequent Measurements of Debt and
Equity Securities Topic model, management considers many factors,
including:  (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, (3) whether the market decline was affected by
macroeconomic condition, 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.




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




12.




JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)









NOTE
2 - INVESTMENT SECURITIES (Cont.)




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




As of
September 30, 2009, the Company’s security portfolio consisted of $23,845 of
available-for-sale and held-to-maturity securities, and $1,298 was in an
unrealized loss position.  The majority of unrealized losses are related to
the Company’s U.S. Agency, and State and political securities, as discussed
below:




U.S. Agency
Securities




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




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




State and Political
Securities




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




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





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




13.




JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)










NOTE
3 – LOAN PORTFOLIO COMPOSITION


The
composition of the Bank’s loan portfolio at September 30, 2009 and December 31,
2008 is indicated below along with the change from December 31,
2008.


% Increase (Decrease)Total Loans
                
                
                Total Loans
                
                
                from December 31, 2008September 30, 2009
                
                
                December 31, 2008
                
                
                to September 30, 2009Real
      estate mortgage loans:Commercial
                
                $
                232,692
                
                
                $
                224,677
                
                
                
                3.6%Residential
                
                
                95,349
                
                
                
                81,152
                
                
                
                17.5%Construction(1)
                
                
                40,447
                
                
                
                41,759
                
                
                
                (3.1)%Commercial
      loans
                
                
                23,493
                
                
                
                28,445
                
                
                
                (17.4)%Consumer
      loans
                
                
                4,048
                
                
                
                4,070
                
                
                
                (.5)%Subtotal
                
                
                396,029
                
                
                
                380,103
                
                
                
                4.2%Less:  Net
      deferred loan fees
                
                
                (492
                )
                
                
                (405
                )
                
                
                21.5%Total
                
                $
                395,537
                
                
                $
                379,698
                
                
                
                4.2%





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





NOTE
4 – ALLOWANCE FOR LOAN LOSSES


Activity
in the allowance for loan losses for the nine months ended September 30, 2009
and 2008 follows:





Three Months Ended
                
                
                Nine Months EndedSeptember 30,
                
                
                September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Beginning
      balance
                
                $
                5,663
                
                
                $
                4,214
                
                
                $
                4,705
                
                
                $
                3,116Provisions
      for loan losses charged to expense
                
                
                1,070
                
                
                
                665
                
                
                
                3,315
                
                
                
                2,783Loans
      charged off
                
                
                (296
                )
                
                
                (648
                )
                
                
                (1,586
                )
                
                
                (1,675
                )Recoveries
      of loans previously charged off
                
                
                18
                
                
                
                106
                
                
                
                21
                
                
                
                113Ending
      balance, September 30
                
                $
                6,455
                
                
                $
                4,337
                
                
                $
                6,455
                
                
                $
                4,337





Impaired
loans were as follows:





September 30,
                    
                    
                    December 31,2009
                    
                    
                    2008Loans
      with no allocated allowance for loan losses
                    
                    $
                    2,714
                    
                    
                    $
                    12,931Loans
      with allocated allowance for loan losses
                    
                    
                    18,558
                    
                    
                    
                    4,352Total
                    
                    $
                    21,272
                    
                    
                    $
                    17,283Amount
      of the allowance for loan losses allocated
                    
                    $
                    715
                    
                    
                    $
                    618




14.




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


2009
                    
                    
                    2008Overnight
      advances maturing daily at a daily variable interest rate of .36% at
      September 30, 2009
                    
                    $
                    23,350
                    
                    
                    $
                    —Convertible
      advances maturing June 8, 2010 with a quarterly call option beginning June
      9, 2008 at a fixed rate of 4.99%
                    
                    
                    5,000
                    
                    
                    
                    5,000Convertible
      advances maturing June 8, 2012 with a quarterly call option beginning
      September 10, 2007 at a fixed rate of 4.68%
                    
                    
                    5,000
                    
                    
                    
                    5,000Convertible
      advances maturing August 13, 2010 with a quarterly call option beginning
      August 13, 2008 at a fixed rate of 4.51%
                    
                    
                    5,000
                    
                    
                    
                    5,000Convertible
      advances maturing October 4, 2010 with a quarterly call option beginning
      October 6, 2008 at a fixed rate of 4.15%
                    
                    
                    5,000
                    
                    
                    
                    5,000Advances
      maturing May 29, 2012 at a fixed rate of 2.11%
                    
                    
                    5,000
                    
                    
                    
                    —$
                    48,350
                    
                    
                    $
                    20,000





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





In 2008,
the Company established a “Borrower in Custody” line of credit with the Federal
Reserve Bank by pledging excess collateral.  The amount of this line
at September 30, 2009 was $31,500, of which it had borrowed $26,500 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 $281 on September 30, 2009.





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




15.




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 September 30, 2009 and
December 31, 2008:


Actual
                
                
                For Capital
                  Adequacy
                  Purposes
                
                
                To Be Well
                  Capitalized Under
                  Prompt Corrective
                  Action ProvisionsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioSeptember
      30, 2009Total
      capital to risk weighted assetsConsolidated
                
                $
                46,105
                
                
                
                11.83
                %
                
                $
                31,187
                
                
                
                8.00
                %
                
                
                N/A
                
                
                
                N/ABank
                
                
                42,047
                
                
                
                10.79
                %
                
                
                31,171
                
                
                
                8.00
                %
                
                $
                38,964
                
                
                
                10.00
                %Tier
      1 (Core) capital to risk weighted assetsConsolidated
                
                
                35,551
                
                
                
                9.12
                %
                
                
                15,593
                
                
                
                4.00
                %
                
                
                N/A
                
                
                
                N/ABank
                
                
                37,157
                
                
                
                9.54
                %
                
                
                15,586
                
                
                
                4.00
                %
                
                
                23,378
                
                
                
                6.00
                %Tier
      1 (Core) capital to average assetsConsolidated
                
                
                35,551
                
                
                
                8.12
                %
                
                
                17,517
                
                
                
                4.00
                %
                
                
                N/A
                
                
                
                N/ABank
                
                
                37,157
                
                
                
                8.48
                %
                
                
                17,524
                
                
                
                4.00
                %
                
                
                21,904
                
                
                
                5.00
                %December
      31, 2008Total
      capital to risk weighted assetsConsolidated
                
                $
                46,051
                
                
                
                11.93
                %
                
                $
                30,874
                
                
                
                8.00
                %
                
                
                N/A
                
                
                
                N/ABank
                
                
                40,719
                
                
                
                10.58
                %
                
                
                30,795
                
                
                
                8.00
                %
                
                $
                38,494
                
                
                
                10.00
                %Tier
      1 (Core) capital to risk weighted assetsConsolidated
                
                
                35,638
                
                
                
                9.23
                %
                
                
                15,437
                
                
                
                4.00
                %
                
                
                N/A
                
                
                
                N/ABank
                
                
                36,014
                
                
                
                9.36
                %
                
                
                15,397
                
                
                
                4.00
                %
                
                
                23,096
                
                
                
                6.00
                %Tier
      1 (Core) capital to average assetsConsolidated
                
                
                35,638
                
                
                
                8.26
                %
                
                
                17,264
                
                
                
                4.00
                %
                
                
                N/A
                
                
                
                N/ABank
                
                
                36,014
                
                
                
                8.36
                %
                
                
                17,228
                
                
                
                4.00
                %
                
                
                21,535
                
                
                
                5.00
                %




16.




JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)







NOTE
8 – FAIR VALUE


Fair Value Measurements and
Disclosure Topic of the ASC defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (exit price) in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement
date.  This standard also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value.  The standard describes
three levels of inputs that may be used to measure fair values:




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




Level
2:  Significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities; quoted prices in market 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.




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





Other Real Estate
Owned:  The fair value of other real estate owned 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.  Management may adjust the
appraised value for estimated costs to sell.  Such adjustments are
typically significant and result in a Level 3 classification of the inputs for
determining fair value.





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:




17.




JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amounts)









NOTE
8 – FAIR VALUE (Cont.)


Fair Value Measurements UsingQuoted Prices in
                  Active Markets for
                  Identical Assets
                  (Level 1)
                
                
                Significant Other
                  Observable
                  Inputs
                  (Level 2)
                
                
                Significant
                  Unobservable
                  Inputs
                  (Level 3)Assets:(Dollars
      in thousands)September
      30, 2009Available-for-saleU.S.
      government-sponsored entities and agencies
                
                $
                3,266
                
                
                
                —
                
                
                $
                3,266
                
                
                
                —State
      and political subdivisions
                
                
                11,270
                
                
                
                —
                
                
                
                11,270
                
                
                
                —Mortgage-backed
      securities - residential
                
                
                8,842
                
                
                
                —
                
                
                
                8,842
                
                
                
                —Collateralized
      mortgage obligations – residential
                
                
                417
                
                
                
                —
                
                
                
                417
                
                
                
                —(Dollars
      in thousands)December
      31, 2008Available-for-saleU.S.
      government-sponsored entities and agencies
                
                $
                8,284
                
                
                
                —
                
                
                $
                8,284
                
                
                
                —State
      and political subdivisions
                
                
                10,778
                
                
                
                —
                
                
                
                10,778
                
                
                
                —Mortgage-backed
      securities - residential
                
                
                9,967
                
                
                
                —
                
                
                
                9,967
                
                
                
                —Collateralized
      mortgage obligations - residential
                
                
                655
                
                
                
                —
                
                
                
                655
                
                
                
                —Liabilities:September
      30, 2009Derivative
      liability
                
                $
                281
                
                
                
                —
                
                
                $
                281
                
                
                
                —December
      31, 2008Derivative
      liability
                
                $
                —
                
                
                
                —
                
                
                $
                —
                
                
                
                —




18.




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:September
      30, 2009Impaired
      loans
                  
                  $
                  17,843
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  17,843Other
      real estate owned
                  
                  
                  1,245
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,245December
      31, 2008Impaired
      loans
                  
                  $
                  3,734
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  $
                  3,734Other
      real estate owned
                  
                  
                  89
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  89
 
 Impaired
loans and other real estate owned, which are measured for impairment using
discounted cash flows or the fair value of the collateral for collateral
dependent loans, had a carrying amount of $18,558, with a valuation allowance of
$715.  Other real estate owned, which are measured using the
collateral values, had a carrying amount of $1,275, with a valuation allowance
of $30.  Additional impaired loans, not measured using levels of
inputs to measure fair value, had a carrying amount of
$2,714.  Collateral dependent impaired loans and other real estate
owned, 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.
 
 The
carrying amount and estimated fair values of financial instruments, at September
30, 2009 and December 31, 2008 were as follows:
 September 30, 2009
                    
                    
                    December 31, 2008Carrying
                    
                    
                    Fair
                    
                    
                    Carrying
                    
                    
                    FairAmount
                    
                    
                    Value
                    
                    
                    Amount
                    
                    
                    ValueFinancial
      assetsCash
      and cash equivalents
                    
                    $
                    5,496
                    
                    
                    $
                    5,496
                    
                    
                    $
                    10,148
                    
                    
                    $
                    10,148Securities
      available-for-sale
                    
                    
                    23,795
                    
                    
                    
                    23,795
                    
                    
                    
                    29,684
                    
                    
                    
                    29,684Securities
      held-to-maturity
                    
                    
                    50
                    
                    
                    
                    50
                    
                    
                    
                    50
                    
                    
                    
                    50Loans,
      net
                    
                    
                    389,082
                    
                    
                    
                    392,272
                    
                    
                    
                    374,993
                    
                    
                    
                    374,454Federal
      Home Loan Bank stock
                    
                    
                    2,957
                    
                    
                    
                    n/a
                    
                    
                    
                    1,705
                    
                    
                    
                    n/aIndependent
      Bankers’ Bank Stock
                    
                    
                    153
                    
                    
                    
                    n/a
                    
                    
                    
                    285
                    
                    
                    
                    n/aAccrued
      interest receivable
                    
                    
                    1,946
                    
                    
                    
                    1,946
                    
                    
                    
                    2,027
                    
                    
                    
                    2,027Financial
      liabilitiesDeposits
                    
                    $
                    321,603
                    
                    
                    $
                    321,499
                    
                    
                    $
                    345,544
                    
                    
                    $
                    345,100Federal
      funds purchased
                    
                    
                    43
                    
                    
                    
                    43
                    
                    
                    
                    —
                    
                    
                    
                    —Other
      borrowings
                    
                    
                    74,850
                    
                    
                    
                    75,721
                    
                    
                    
                    46,000
                    
                    
                    
                    47,223Subordinated
      debentures
                    
                    
                    14,550
                    
                    
                    
                    6,360
                    
                    
                    
                    14,550
                    
                    
                    
                    10,613Accrued
      interest payable
                    
                    
                    390
                    
                    
                    
                    390
                    
                    
                    
                    568
                    
                    
                    
                    568Interest
      rate swap
                    
                    
                    281
                    
                    
                    
                    281
                    
                    
                    
                    —
                    
                    
                    
                    —
  19.
  JACKSONVILLE
BANCORP, INC.
 
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)
  
  NOTE
8 – FAIR VALUE (Cont.)
 
 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 variable rate loans or deposits that reprice
frequently and fully.  The methods for determining the fair values for
securities and impaired loans were described previously.  For fixed
rate loans or deposits, including FHLB advances, and for variable rate loans or
deposits with infrequent repricing or repricing limits, fair value is based on
discounted cash flows using current market rates applied to the estimated
life.  Fair value of loans held for sale is based on market
quotes.  Fair value of debt is based on current rates for similar
financing.  Accrued interest receivable and accrued interest payable
approximate their fair values.  It was not practicable to determine
fair value of FHLB and IBB stock due to restrictions placed on its
transferability.  The fair value of off-balance-sheet items is
considered nominal.
  20.
  JACKSONVILLE
BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
  Item
2.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
 General
 
 Jacksonville
Bancorp, Inc. (“Bancorp”) was incorporated on October 24, 1997 and was organized
to conduct the operations of The Jacksonville Bank (the “Bank”).  The
Bank is a Florida state-chartered commercial bank that opened for business on
May 28, 1999, and its deposits are insured by the Federal Deposit Insurance
Corporation.  The Bank provides a variety of community banking
services to businesses and individuals in the greater Jacksonville area of
Northeast Florida.  During 2000, the Bank formed Fountain Financial,
Inc., a wholly owned subsidiary.  The primary business activities of
Fountain Financial, Inc. consist of referral of our customers to third parties
for the sale of insurance products.  Bancorp, the Bank and Fountain
Financial, Inc. are collectively referred to herein as the
“Company.”
 
 Forward
Looking Statements
 
 All
statements, other than statements of historical facts, included in this
Quarterly Report on Form 10-Q regarding our estimates, expectations, beliefs,
intentions, projections or strategies for the future, results of operations,
financial position, prospects and plans and objectives of management for future
operations may be “forward-looking statements” as defined in the Private
Securities Litigation Reform Act of 1995, as amended.  We have based
these forward-looking statements on our current expectations and projections
about future events and financial trends that we believe may affect our
financial condition, results of operations, business strategy, short-term and
long-term business operations and objectives and financial
needs.  These forward-looking statements can be identified by the use
of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,”
“target,” “estimate,” “expect,” and the like, and/or future-tense or conditional
constructions (“will,” “may,” “could,” “should,” etc.).  Items
contemplating or making assumptions about actual or potential future operating
results also constitute forward-looking statements.  The Company
cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, including changes in local economic
conditions, changes in regulatory requirements, fluctuations in interest rates,
demand for products, and competition, and, therefore, actual results could
differ materially from those contemplated by the forward-looking
statements.  In addition, the Company assumes no duty to update
forward-looking statements to reflect events or circumstances after the date of
such statements.
 
 Business
Strategy
 
 Our
primary business segment is community banking and consists of attracting
deposits from the general public and using such deposits and other sources of
funds to originate commercial business loans, commercial real estate loans,
residential mortgage loans and a variety of consumer loans.  We also
invest in securities backed by the United States government, and agencies
thereof, as well as municipal tax-exempt bonds.  Our profitability
depends primarily on our net interest income, which is the difference between
the income we receive from our loan and securities investment portfolios and
costs incurred on our deposits, the Federal Home Loan Bank (“FHLB”) advances,
Federal Reserve borrowings and other sources of funding.  Net interest
income is also affected by the relative amounts of interest-earning assets and
interest-bearing liabilities.  Net interest income is generated as the
relative amounts of interest-earning assets grow in relation to the relative
amounts of interest-bearing liabilities.  In addition, the level of
noninterest income earned and noninterest expenses incurred also affects
profitability.  Included in noninterest income are service charges
earned on deposit accounts and increases in cash surrender value of Bank Owned
Life Insurance (“BOLI”).  Included in noninterest expense are costs
incurred for salaries and employee benefits, occupancy and equipment expenses,
data processing expenses, marketing and advertising expenses, federal deposit
insurance premiums and legal and professional fees.
  21.
 
 Our goal
is to sustain profitable, controlled growth by focusing on increasing our loan
and deposit market share in the Northeast Florida market by developing new
financial products, services and delivery channels; closely managing yields on
interest-earning assets and rates on interest-bearing liabilities; focusing on
noninterest income opportunities; controlling the growth of noninterest
expenses; and maintaining strong asset quality.   We have
initiated programs to expand our scope of services and achieve these
goals.  The Bank has adopted a philosophy of seeking out and retaining
the best available personnel for positions of responsibility which we believe
will provide us with a competitive edge in the local banking
industry.
 
 Our
operations are influenced by the local economic conditions and by policies of
financial institution regulatory authorities.  Fluctuations in
interest rates, due to factors such as competing financial institutions as well
as the Federal Reserve’s decisions on changes in interest rates, impact
interest-earning assets and our cost of funds and, thus, our net interest
margin.  In addition, the local economy and real estate market of
Northeast Florida and the demand for our products and loans impacts our
margin.  The local economy and viability of local businesses can also
impact the ability of our customers to make payments on loans, thus impacting
our loan portfolio.  The Company evaluates these factors when valuing
its allowance for loan losses.  The Company also believes its
underwriting procedures are relatively conservative and, as a result, the
Company is not being any more affected than the overall market in the current
economic downturn.
 
 Introduction
 
 In the
following pages, management presents an analysis of the financial condition of
the Company as of September 30, 2009 compared to December 31, 2008, and the
results of operations for the nine and three months ended September 30,
2009 compared with the same periods in 2008.  This discussion is
designed to provide a more comprehensive review of the operating results and
financial position than could be obtained from an examination of the financial
statements alone.  This analysis should be read in conjunction with
the interim financial statements and related footnotes included
herein.
 
 Comparison
of Financial Condition at September 30, 2009 and December 31, 2008
 
 Total
assets increased $5.9 million, or 1.4%, from $434.0 million at December 31, 2008
to $439.9 million at September 30, 2009.  During the nine months ended
September 30, 2009, the Company experienced net loan growth of $14.1 million, or
3.8%.  The increase in net loans was driven by increases in
residential real estate loans of $14.1 million, or 17.5%, and commercial real
estate loans of $8.0 million, or 3.6%, offset by decreases in construction real
estate loans of $1.3 million, or 3.1%, and commercial loans of $5.0 million, or
17.4%.
 
 Investment
securities available-for-sale decreased $5.9 million to $23.8 million at
September 30, 2009.  During the nine months ended September 30, 2009,
we purchased $2.0 million of U.S. government agency securities and a $1.1
million mortgage-backed security.  In addition, we received
$9.7 million in proceeds from maturities, calls and principal
repayments.
 
 Total
deposits decreased $23.9 million, or 6.9%, from $345.5 million at December 31,
2008 to $321.6 million at September 30, 2009.  During the nine
months ended September 30, 2009, time deposits decreased $31.1 million to
$185.9 million.  During the nine months ended September 30, 2009,
money market, NOW and savings deposits increased $4.3 million to
$92.1 million and noninterest bearing deposits increased $2.8 million
to $43.6 million.
  22.
 
 Federal
Home Loan Bank advances increased $28.4 million from $20.0 million at December
31, 2008 to $48.4 million at September 30, 2009.  Federal Reserve
Bank borrowings increased $500,000 to $26.5 million at September 30,
2009.  These increases offset the decreases in time deposits discussed
above and were the result of management’s desire to take advantage of the lowest
possible cost of funding sources.
 
 Total
shareholders' equity increased by $115,000 from $26.8 million at December 31,
2008 to $27.0 million at September 30, 2009.  The increase is
mainly attributable to a net loss of $180,000 and a $175,000 net unrealized loss
on cash flow hedge derivative, offset by a change in unrealized gain on
securities available-for-sale by $424,000 for the nine months ended September
30, 2009.  At September 30, 2009, the Company had 8,000,000 authorized
shares of $.01 par value common stock, of which 1,749,526 shares were issued and
1,748,854 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 September 30, 2009.
 
 Comparison
of Operating Results for the Nine Months Ended September 30, 2009 and
2008
 
 Net
Income
 
 There was
a net loss for the first nine months of 2009 of $180,000, compared to a $36,000
net loss in the first nine months of 2008.  On a diluted per share
basis, the net loss was $0.10 for the nine months ended September 30, 2009,
compared to net loss of $0.02 per diluted share in 2008.  The net loss
for the first nine months of 2009 was driven primarily by additional provisions
for loan losses, an increase in the FDIC regulatory assessment and recording an
impairment charge on a non-marketable equity security.
 
 Net
Interest Income
 
 Net
interest income, the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities, was $9.8 million for
the nine months ended September 30, 2009, compared to $9.2 million for the
same period in 2008.  Interest income declined $2.1 million when
compared to the first nine months of the prior year.  This was a
result of the reduction in short-term rates by the Federal Reserve in 2008,
offset by average earning asset growth of $15.7 million.
 
 The
Company experienced growth in its loan portfolio of 4.2% during the first nine
months of 2009, compared to loan growth of 11.2% during the first nine months of
2008.  During 2009, the most significant increase of the loan
portfolio was in residential and commercial real estate.
 
 Many of
the Bank’s loans are indexed to the prime rate.  The lower level of
the prime rate in the first nine months of 2009 compared to the comparative
period in 2008 is reflected in the lower average yield on the loan portfolio due
to lower rates earned on variable rate loans and new loan
production.  The average yield on interest-earning assets for the
first nine months of 2009 was 5.58%, which was a decrease of 91 basis points,
compared to the 6.49% yield earned during the first nine months of
2008.
 
 The
average cost of interest-bearing liabilities decreased 115 basis points from
3.94% in the first nine months of 2008 to 2.79% in the comparable period in
2009.  The average cost of interest-bearing deposits and all
interest-bearing liabilities reflect, in part, the change in the funding mix for
the first nine months of 2009 as compared to the same period in
2008.  Interest expense declined by $2.7 million as a result of the
reduction in short-term rates offset by a transition from core deposits into
more expensive time deposits.
 
 The net
interest margin increased by 8 basis points from 3.07% to 3.15% when comparing
the first nine months of 2009 to the same period last year.  This
increase is mainly the result of the Company taking advantage of the lowest
funding sources available through utilization of established lines at the
Federal Home Loan Bank and the Federal Reserve Bank as well as a lower level of
nonperforming loans.  As of September 30, 2009, the Bank had
nonperforming assets of $7.2 million compared to $7.8 million at
September 30, 2008.  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.
  23.
 
 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.
 
 Nine Months Ended September 30,2009
                  
                  
                  2008Average
                  
                  
                  
                  
                  
                  Average
                  
                  
                  Average
                  
                  
                  
                  
                  
                  AverageBalance
                  
                  
                  Interest
                  
                  
                  Rate
                  
                  
                  Balance
                  
                  
                  Interest
                  
                  
                  Rate(Dollars in thousands)Interest-earning
      assets:Loans
      (1)
                  
                  $
                  388,193
                  
                  
                  $
                  16,595
                  
                  
                  
                  5.72
                  %
                  
                  $
                  367,001
                  
                  
                  $
                  18,331
                  
                  
                  
                  6.67
                  %Securities
      (2)
                  
                  
                  27,567
                  
                  
                  
                  828
                  
                  
                  
                  4.02
                  
                  
                  
                  31,919
                  
                  
                  
                  1,100
                  
                  
                  
                  4.60Other
      interest-earning assets (3)
                  
                  
                  635
                  
                  
                  
                  (36
                  )
                  
                  
                  (7.58
                  )
                  
                  
                  1,775
                  
                  
                  
                  28
                  
                  
                  
                  2.11Total
      interest-earning assets
                  
                  
                  416,395
                  
                  
                  
                  17,387
                  
                  
                  
                  5.58
                  
                  
                  
                  400,695
                  
                  
                  
                  19,459
                  
                  
                  
                  6.49Noninterest-earning
      assets (4)
                  
                  
                  16,328
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  16,321Total
      assets
                  
                  $
                  432,723
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  417,016Interest-bearing
      liabilities:Savings
      deposits
                  
                  $
                  12,833
                  
                  
                  $
                  163
                  
                  
                  
                  1.70
                  
                  
                  $
                  14,687
                  
                  
                  $
                  333
                  
                  
                  
                  3.03NOW
      deposits
                  
                  
                  8,083
                  
                  
                  
                  15
                  
                  
                  
                  .25
                  
                  
                  
                  6,826
                  
                  
                  
                  10
                  
                  
                  
                  .20Money
      market deposits
                  
                  
                  68,294
                  
                  
                  
                  786
                  
                  
                  
                  1.54
                  
                  
                  
                  85,641
                  
                  
                  
                  1,639
                  
                  
                  
                  2.56Time
      deposits
                  
                  
                  201,676
                  
                  
                  
                  5,213
                  
                  
                  
                  3.46
                  
                  
                  
                  188,092
                  
                  
                  
                  6,578
                  
                  
                  
                  4.67FHLB
      advances
                  
                  
                  31,209
                  
                  
                  
                  761
                  
                  
                  
                  3.26
                  
                  
                  
                  42,531
                  
                  
                  
                  1,237
                  
                  
                  
                  3.89Federal
      Reserve borrowing
                  
                  
                  26,664
                  
                  
                  
                  100
                  
                  
                  
                  .50
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Subordinated
      debt
                  
                  
                  14,550
                  
                  
                  
                  539
                  
                  
                  
                  4.95
                  
                  
                  
                  9,838
                  
                  
                  
                  456
                  
                  
                  
                  6.19Other
      interest-bearing liabilities (5)
                  
                  
                  142
                  
                  
                  
                  1
                  
                  
                  
                  .94
                  
                  
                  
                  272
                  
                  
                  
                  6
                  
                  
                  
                  2.95Total
      interest-bearing liabilities
                  
                  
                  363,451
                  
                  
                  
                  7,578
                  
                  
                  
                  2.79
                  
                  
                  
                  347,887
                  
                  
                  
                  10,259
                  
                  
                  
                  3.94Noninterest-bearing
      liabilities
                  
                  
                  42,283
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  42,133Shareholders'
      equity
                  
                  
                  26,989
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  26,996Total
      liabilities and shareholders' equity
                  
                  $
                  432,723
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  417,016Net
      interest income
                  
                  
                  
                  
                  
                  $
                  9,809
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  9,200Interest
      rate spread (6)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.79
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.55
                  %Net
      interest margin (7)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.15
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.07
                  %
 
 (1)
              Includes
      nonaccrual loans and deferred loan fees of
$492.
 (2)
              Due
      to immateriality, the interest income and yields related to certain tax
      exempt assets have not been adjusted to reflect a fully taxable equivalent
      yield.
 (3)
              Includes
      federal funds sold.  The negative income is a result of the
      amortized expense on the Subordinated
Debt.
 (4)
              For
      presentation purposes, the BOLI acquired by the Bank has been included in
      noninterest-earning assets.
 (5)
              Includes
      federal funds purchased.
 (6)
              Interest
      rate spread represents the difference between the average yield on
      interest-earning assets and the average cost of interest-bearing
      liabilities.
 (7)
              Net
      interest margin is net interest income divided by average interest-earning
      assets.
  24.
 
 Rate/Volume
Analysis.The following table sets
forth the effect of changes in volumes, changes in rates, and changes in
rate/volume on tax-equivalent interest income, interest expense and net interest
income.
 
 Nine Months Ended September 30,2009 Versus 2008(1)Increase (decrease) due to changes in:NetVolume
                    
                    
                    Rate
                    
                    
                    Change(Dollars in thousands)Interest
      income:Loans
                    
                    $
                    1,015
                    
                    
                    $
                    (2,751
                    )
                    
                    $
                    (1,736
                    )Securities
                    
                    
                    (140
                    )
                    
                    
                    (132
                    )
                    
                    
                    (272
                    )Other
      interest-earning assets
                    
                    
                    (8
                    )
                    
                    
                    (56
                    )
                    
                    
                    (64
                    )Total
      interest income
                    
                    
                    867
                    
                    
                    
                    (2,939
                    )
                    
                    
                    (2,072
                    )Interest
      expense:Savings
      deposits
                    
                    
                    (38
                    )
                    
                    
                    (132
                    )
                    
                    
                    (170
                    )NOW
      deposits
                    
                    
                    2
                    
                    
                    
                    3
                    
                    
                    
                    5Money
      market deposits
                    
                    
                    (287
                    )
                    
                    
                    (566
                    )
                    
                    
                    (853
                    )Time
      deposits
                    
                    
                    448
                    
                    
                    
                    (1,813
                    )
                    
                    
                    (1,365
                    )FHLB
      advances
                    
                    
                    (296
                    )
                    
                    
                    (180
                    )
                    
                    
                    (476
                    )Federal
      Reserve borrowing
                    
                    
                    100
                    
                    
                    
                    —
                    
                    
                    
                    100Subordinated
      debt
                    
                    
                    188
                    
                    
                    
                    (105
                    )
                    
                    
                    83Other
      interest-bearing liabilities
                    
                    
                    (2
                    )
                    
                    
                    (3
                    )
                    
                    
                    (5
                    )Total
      interest expense
                    
                    
                    115
                    
                    
                    
                    (2,796
                    )
                    
                    
                    (2,681
                    )Decrease
      in net interest income
                    
                    $
                    752
                    
                    
                    $
                    (143
                    )
                    
                    $
                    609
 
 (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, 2008, as filed with the Securities and
Exchange Commission on March 20, 2009.
 
 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 its ability to collect
the outstanding loan principal and interest amounts and typically when such
loans are more than 90 days past due.  These loans present more than
the normal risk that the Company will be unable to eventually collect or realize
their full carrying value.  The Company’s risk elements at September
30, 2009 and December 31, 2008 were as follows:
 
 September 30,
                    
                    
                    December
      31,2009
                    
                    
                    2008(Dollars in thousands)Nonaccruing
      loans
                    
                    $
                    5,950
                    
                    
                    $
                    12,436Loans
      past due over 90 days still on accrual
                    
                    
                    —
                    
                    
                    
                    —Total
      nonperforming loans
                    
                    
                    5,950
                    
                    
                    
                    12,436Foreclosed
      assets, net
                    
                    
                    1,245
                    
                    
                    
                    89Total
      nonperforming assets
                    
                    
                    7,195
                    
                    
                    
                    12,525Troubled
      debt restructuring
                    
                    
                    13,589
                    
                    
                    
                    —Total
      nonperforming assets and troubled debt restructuring
                    
                    $
                    20,784
                    
                    
                    $
                    12,525Allowance
      for loan losses
                    
                    $
                    6,455
                    
                    
                    $
                    4,705Nonperforming
      loans and foreclosed assets as a percent of total assets
                    
                    
                    1.64
                    %
                    
                    
                    2.89
                    %Nonperforming
      loans as a percent of gross loans
                    
                    
                    1.50
                    %
                    
                    
                    3.28
                    %Allowance
      for loan losses as a percent of nonperforming loans
                    
                    
                    108.49
                    %
                    
                    
                    37.83
                    %Loans
      past due 30-89 days, still accruing
                    
                    $
                    4,849
                    
                    
                    $
                    1,797Assets
      classified as substandard and doubtful
                    
                    $
                    46,118
                    
                    
                    $
                    28,860
 
 Loans are
impaired when it is considered probable that management will not collect the
outstanding loan principal and interest amounts according to the loan’s
contractual terms or realize the full carrying value of the loan.  At
September 30, 2009, the Company had impaired loans of $21.3 million, compared to
$17.3 million at December 31, 2008.  Of the $21.3 million, $6.0
million are nonperforming loans as reflected above.
 
 While the
Company experienced improvement in nonperforming assets during the quarter, it
considers all risk elements, including early indicators of potential problem
loans, when determining the appropriateness of the allowance for loan
losses.  These early indicators include increases in loan
delinquencies (30-89 days past due) and increases in internal classifications of
loans deemed to be substandard and doubtful.
  26.
  On
January 22, 2009, the Bank foreclosed on a commercial property located in
downtown Jacksonville.  The loan, which was originally made on
February 15, 2005, had ceased accruing interest on May 8, 2008.  On
February 28, 2009, the property was sold for $3.7 million.  A
charge-off in the amount of $368,000 was recorded at the time of foreclosure, of
which the full amount had previously been reserved through the Allowance for
Loan Losses.
 
 On April
6, 2009, the Bank foreclosed on a residential property that was listed as an
impaired loan as of March 31, 2009.  The loan, which was originally
made on January 8, 2002, had ceased accruing interest on February 29,
2008.  On May 4, 2009, the property was sold for
$200,000.
 
 In June
2009, the Bank recorded an in-substance foreclosure in the amount of $594,000 on
a commercial property located in Palm Coast, Florida.  The loan was listed
as impaired as of March 31, 2009 and had ceased accruing interest on April 17,
2009.  A $126,000 charge-off was recorded at the time of
foreclosure.
 
 During
the first nine months of 2009, the Bank recorded $58,000 for Other Real Estate
Owned expenses, which included a $30,000 write down for a property value
decline.  This property has been in the Bank’s possession since September
2008.
 
 The
Company critically evaluates all requests for additional funding on classified
loans to determine whether the borrower has the capacity and willingness to
repay.  Any requests of this nature require concurrence by the Loan
Committee of the Board of Directors.
 
 Allowance
and Provision for Loan Losses
 
 The
allowance for loan losses grew by $1.8 million during the first nine months of
2009, amounting to $6.5 million at September 30, 2009, as compared to $4.7
million at December 31, 2008.  The allowance represented approximately
1.63% of total loans at September 30, 2009 and 1.24% at December 31,
2008.  During the first nine months of 2009, the Company had
charge-offs of $1.6 million, recoveries of $21,000 and recorded a $3.3 million
provision for loan losses compared to charge-offs of $1.7 million, recoveries of
$113,000 and a provision for loan losses of $2.8 million for the first nine
months of 2008.  The larger provision for loan losses in 2009 was
driven primarily by the level of charge offs and the expanded level of impaired
loans identified during the year.  Additionally, the worsening
economic conditions, coupled with the continued softness in the residential real
estate market, 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 nine months of 2009.
 
 The
Bank’s increased identification efforts of potential losses in the portfolio are
based on a variety of specific factors, including the Company’s own experience
as well as industry and economic trends.  Impaired loans were $21.3
million as of September 30, 2009; of this amount, $715,000 was specifically
allocated to the allowance for loan losses which is deemed appropriate to absorb
probable losses.
 
 The
allowance for loan losses is a valuation allowance for credit losses in the loan
portfolio.  Management has adopted a methodology to properly analyze
and determine an adequate loan loss allowance.  The analysis is based
on sound, reliable and well documented information and is designed to support an
allowance that is adequate to absorb all estimated incurred losses in the
Company’s loan portfolio.  Due to their similarities, the Company has
grouped the loan portfolio into three components.  The components are
residential real estate loans, consumer loans and commercial
loans.  The Company has created a loan classification system to
properly calculate the allowance for loan losses.  Loans are evaluated
for impairment.  If a loan is deemed to be impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan’s existing rate or at the fair
value of collateral if repayment is expected solely from the sale of the
collateral.
  27.
  In
estimating the overall exposure to loss on impaired loans, the Company has
considered a number of factors, including the borrower’s character, overall
financial condition, resources and payment record, the prospects for support
from any financially responsible guarantors, and the realizable value of any
collateral.  The Company also considers other internal and external
factors when determining the allowance for loan losses.  These factors
include, but are not limited to, changes in national and local economic
conditions, commercial lending staff limitations, impact from lengthy commercial
loan workout and charge-off periods, loan portfolio concentrations and trends in
the loan portfolio.
 
 Bank
regulators have issued “Joint Guidance on Concentrations in Commercial Real
Estate Lending.”  This document outlines regulators’ concerns
regarding the high level of growth in commercial real estate loans on banks’
balance sheets.  Many banks, especially those in Florida, have seen a
substantial increase in exposure to commercial real estate loans.  The
concentration in this category is considered when analyzing the adequacy of the
loan loss allowance based on sound, reliable and well documented
information.
 
 Based on
the results of the analysis performed by management at September 30, 2009, the
allowance for loan loss is considered to be appropriate to absorb estimated loan
losses in the portfolio as of that date.  As more fully discussed in
the “Critical Accounting Policies” section of this Management’s Discussion and
Analysis of Financial Condition and Results of Operations, the process for
estimating credit losses and determining the allowance for loan losses as of any
balance sheet date is subjective in nature and requires material
estimates.  Actual results could differ significantly from these
estimates.
 
 The
amount of future charge-offs and provisions for loan losses could be affected
by, among other things, economic conditions in Jacksonville, Florida, and the
surrounding communities.  Such conditions could affect the financial
strength of the Company’s borrowers and the value of real estate collateral
securing the Company’s mortgage loans.  Loans secured by real estate
represent approximately 93% of the Company’s total loans outstanding at
September 30, 2009.  Economic conditions in Jacksonville have
deteriorated over the last several quarters, resulting in a softening of real
estate values.  Conditions and values could deteriorate further in the
future, and such deterioration could be substantial.  If this were to
occur, some of the Company’s borrowers may be unable to make the required
contractual payments on their loans, and the Company may be unable to realize
the full carrying value of such loans through foreclosure.  The
Company is unable to determine at this time the effect of such an occurrence on
the Company’s financial condition and results of operations; however, management
believes that the Company should not be any more affected than the overall
market.
 
 Future
provisions and charge-offs could also be affected by environmental impairment of
properties securing the Company’s mortgage loans.  Under the Company’s
current policy, an environmental audit is required on the majority of all
commercial-type properties that are considered for a mortgage
loan.  At the present time, the Company is not aware of any existing
loans in the portfolio where there is environmental pollution existing on the
mortgaged properties that would materially affect the value of the
portfolio.
 
 Noninterest
Income, Noninterest Expense and Income Taxes
 
 Noninterest
income was $611,000 for the nine months ended September 30, 2009, compared to
$812,000 for the comparable 2008 period.  This decline was principally
the result of recognizing a $132,000 write-off in the stock of Silverton Bank,
N.A. due to its May 2009 failure and an $87,000 reduction in the earnings on the
BOLI policy.  This was offset by a loan referral fee in the amount of
$52,000.
 
 Noninterest
expense remained flat at $7.5 million for the nine months ended September 30,
2009, compared to the same period in 2008.  Increases in data
processing fees and regulatory assessments were offset by a reduction in
compensation expense, directors’ fees and professional fees for the nine months
ended September 30, 2009.  During the same period in 2008, the
Company recorded a one-time charge of $430,000 as a result of the termination of
the agreement to acquire Heritage Bancshares, Inc.
  28.
 
 The
income tax benefit for the nine months ended September 30, 2009 was $196,000,
compared to an income tax benefit of $212,000 for the nine months ended
September 30, 2008.  The tax benefit is the result of the benefits
derived from tax-free municipal bonds and tax-free income earned on the
bank-owned life insurance policies, resulting in a greater percentage of loss
being taxed at the statutory rates.
 
 Comparison
of Operating Results for the Three Months Ended September 30, 2009 and
2008
 
 Net
income for the third quarter of 2009 was $325,000, or $.19 per diluted share, as
compared to net income of $267,000, or $.15 per diluted share, earned for the
same quarter last year.  During the third quarter of 2009, the Company
recorded a $1.1 million provision for loan loss, compared to a $665,000
provision for the third quarter of 2008.  The Company recorded
$205,000 for regulatory assessments in the third quarter of 2009, compared to
$142,000 in the third quarter of 2008.  The increases were offset by a
decrease in compensation, advertising and business development.
 
 Net
interest income was $3.8 million for the third quarter of 2009 compared to $3.0
million for the same period in 2008.  Interest income for the quarter
declined $376,000 when compared to the prior year as a result of the ongoing
reduction in short-term rates by the Federal Reserve offset by average earning
asset growth of $9.0 million.  Interest expense declined by $1.1
million 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 3.59% for the quarter,
compared to 2.94% for the comparable period in 2008.
 
 Capital
 
 The
Company’s capital management policy is designed to build and maintain capital
levels that meet regulatory standards.  Under current regulatory
capital standards, banks are classified as well-capitalized,
adequately-capitalized or undercapitalized.  Under such standards, a
well-capitalized bank is one that has a total risk-based capital ratio equal to
or greater than 10%, a Tier 1 risk-based capital ratio equal to or greater than
6%, and a Tier 1 leverage capital ratio equal to or greater than
5%.  The Bank’s total risk-based capital, Tier 1 risk-based capital
and Tier 1 leverage capital ratios were 10.79%, 9.54% and 8.48%, respectively,
at September 30, 2009.  The Company also maintains capital levels that
meet the same regulatory standards.  If the capital ratios of Bancorp
and the Bank were to fall below levels required under regulatory standards, it
is their policy to increase capital in an amount sufficient to meet regulatory
requirements within 30 days.
 
 The
Company has included in Tier 1 Capital and Total Capital the trust preferred
securities that were issued in June 2004, December 2006 and June
2008.
 
 Cash
Flows and Liquidity
 
 Cash
Flows.The Company’s primary
sources of cash are deposit growth, maturities and amortization of investment
securities, FHLB advances, Federal Reserve Bank borrowings and federal funds
purchased.  The Company uses cash from these and other sources to fund
loan growth.  Any remaining cash is used primarily to reduce
borrowings and to purchase investment securities.  During the first
nine months of 2009, the Company’s cash and cash equivalent position decreased
by $4.7 million.  The decrease in cash mainly resulted from a decrease
in deposit accounts of approximately $23.9 million from $345.5 million at
December 31, 2008 to $321.6 million at September 30, 2009, and net loan
originations of $22.4 million, offsetting proceeds from available-for-sale
securities of $9.7 million and increases in overnight long-term advances from
the FHLB and FRB in the amount of $28.9 million.
  29.
 
 Liquidity.The
Company has both internal and external sources of near-term liquidity that can
be used to fund loan growth and accommodate deposit outflows.  The
primary internal sources of liquidity are principal and interest payments on
loans; proceeds from maturities and monthly payments on the balance of the
investment securities portfolio; and its overnight position with federal funds
sold.  At September 30, 2009, the Company had $23.8 million in
available-for-sale securities not subject to pledge agreements.
 
 The
Company’s primary external sources of liquidity are customer deposits and
borrowings from other commercial banks.  The Company’s deposit base
consists of both deposits from businesses and consumers in its local market as
well as national market and brokered certificates of deposit.  The
Company can also borrow overnight federal funds and fixed-rate term products
under credit facilities established with the FHLB, Federal Reserve Discount
Window and other commercial banks.  These lines, in the aggregate
amount of approximately $114.3 million, do not represent legal commitments to
extend credit.
 
 Contractual
Obligations, Commitments and Contingent Liabilities.The Company has
various financial obligations, including contractual obligations and commitments
that may require future cash payments.  Management believes that there
have been no material changes in the Company’s overall level of these financial
obligations since December 31, 2008 and that any changes in the Company’s
obligations which have occurred are routine for the industry.  Further
discussion of the nature of each type of obligation is included in the section
entitled “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2008, as filed with the SEC on March 20, 2009, and is
incorporated herein by reference.
 
 Off-Balance Sheet
Arrangements.There have been
no material changes in the risks related to off-balance sheet arrangements since
the Company’s disclosure in its Annual Report on Form 10-K for the year ended
December 31, 2008.
 
 Item
3.  Quantitative and Qualitative Disclosures about Market
Risk
 
 Market
risk is the risk that a financial institution will be adversely impacted by
unfavorable changes in market prices.   These unfavorable changes
could result in a reduction in net interest income, which is the difference
between interest earned on interest-earning assets and interest paid on
interest-bearing liabilities.
 
 Interest
rate risk is the sensitivity of income to variations in interest rates over both
short-term and long-term horizons.  The primary goal of interest rate
risk management is to control this risk within limits approved by the Board of
Directors and narrower guidelines approved by the Asset Liability
Committee.  These limits and guidelines reflect the Bank’s tolerance
for interest rate risk.  The Bank attempts to control interest rate
risk by identifying and quantifying exposures.  The Bank quantifies
its interest rate risk exposures using sophisticated simulation and valuation
models as well as simpler gap analyses performed by a third-party vendor
specializing in this activity.  There have been no significant changes
in the Bank’s primary market risk exposure or how those risks are managed since
our disclosures in our Annual Report on Form 10-K for the year ended December
31, 2008.
 
 The
Bank’s internal policy on interest rate risk specifies that if interest rates
were to shift immediately up or down 200 basis points, estimated net interest
income for the next 12 months should change by less than 15%.  The
most current simulation projects the Bank’s net interest income to be within the
parameters of its internal policy and has not changed significantly from our
disclosures in our Annual Report on Form 10-K for the year ended December
31, 2008.  Such simulation involves numerous assumptions and
estimates, which are inherently subjective and are subject to substantial
business and economic uncertainties.  Accordingly, the actual effects
of an interest rate shift under actual future conditions may be expected to vary
significantly from those derived from the simulation to the extent that the
assumptions used in the simulation differ from actual
conditions.
  30.
 
 Item
4.  Controls and Procedures
  (a)    Evaluation
of Disclosure Controls and Procedures
  The
Company maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or submits under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC.  Based upon management’s evaluation
of those controls and procedures as of the end of the fiscal quarter covered by
this quarterly report on Form 10-Q, the Chief Executive Officer and Chief
Financial Officer of the Company concluded that, subject to the limitations
noted below, the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) are effective to ensure that the
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and
forms.
  (b)    Changes
in Internal Controls
  In the
ordinary course of business, the Company may routinely modify, upgrade and
enhance its internal controls and procedures for financial
reporting.  In an effort to improve internal control over financial
reporting, the Company continues to emphasize the importance of identifying
areas for improvement and to create and implement new policies and procedures
where deficiencies exist.  There have not been any changes in the
Company’s internal controls over financial reporting as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f) during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
  (c)     Limitations
on the Effectiveness of Controls
  Our
management, including our Chief Executive Officer and Chief Financial Officer,
does not expect that our disclosure controls and internal controls will prevent
all error and all fraud.  A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met.  Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs.  Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of simple error or mistake.  Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management’s override of the control.
  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 we are
engaged, various claims or charges are asserted against us and/or our directors,
officers or affiliates.  In the ordinary course of business, the
Company and its subsidiary are also subject to regulatory examinations,
information gathering requests, inquiries and investigations.  Other
than ordinary routine litigation incidental to our business, management believes
after consultation with legal counsel that there are no pending legal
proceedings against the Company or the Bank that will, individually or in the
aggregate, have a material adverse effect on the consolidated results of
operations or financial condition of the Company.
 
 Item
      1A.
              Risk
      Factors
 There
      have been no material changes from the risk factors disclosed in the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2008,
      as filed with the SEC on March 20,
2009.
 
 Item
      2.
              Unregistered Sales of
      Equity Securities and Use of
Proceeds
 None
 
 Item
      3.
              Defaults Upon Senior
      Securities
 None
 
 Item
      4.
              Submission of Matters
      to a Vote of Security
Holders
 None
 
 Item
      5.
              Other
      Information
 None
 
 Item
      6.
              Exhibits
  Exhibit
No. 3.1:   Articles of Incorporation of the Company (1)
 
 Exhibit
No. 3.2:   Amended and Restated Bylaws of the Company, as amended to
date (2)
 
 Exhibit
No. 31.1:   Certification of principal executive officer required by
Rule 13a-14(a)/15d-14(a) of the Exchange Act
 
 Exhibit
No. 31.2:   Certification of principal financial officer required by
Rule 13a-14(a)/15d-14(a) of the Exchange Act
 
 Exhibit
No. 32:   Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes–Oxley Act of 2002
  
 (1)
              Incorporated
      herein by reference to Appendix A to Form SB-2, filed September 30, 1998,
      Registration No. 333-64815.
 (2)
              Incorporated
      herein by reference to Exhibit No. 3.2 to Form 10-K for year ended
      December 31, 2008, filed March 20, 2009, File No.
      000-30248.
  32.
  JACKSONVILLE
BANCORP, INC.
 
 SIGNATURES
  
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
 
 JACKSONVILLE
      BANCORP, INC.Date:  November
      9, 2009
                /s/ Gilbert J. Pomar,
IIIGilbert
      J. Pomar, IIIPresident
      and Chief Executive OfficerDate:  November
      9, 2009
                /s/ Valerie A. KendallValerie
      A. KendallExecutive
      Vice Presidentand
      Chief Financial Officer
  33.
  JACKSONVILLE
BANCORP, INC.
 
 EXHIBIT
INDEX
  Exhibit
No. 3.1:   Articles of Incorporation of the Company (1)
 
 Exhibit
No. 3.2:   Amended and Restated Bylaws of the Company, as amended to
date (2)
 
 Exhibit
No. 31.1:   Certification of principal executive officer required by
Rule 13a-14(a)/15d-14(a) of the Exchange Act
 
 Exhibit
No. 31.2:   Certification of principal financial officer required by
Rule 13a-14(a)/15d-14(a) of the Exchange Act
 
 Exhibit
No. 32:   Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes–Oxley Act of 2002
 
 (1)
              Incorporated
      herein by reference to Appendix A to Form SB-2, filed September 30, 1998,
      Registration No. 333-64815.
 (2)
              Incorporated
      herein by reference to Exhibit No. 3.2 to Form 10-K for year ended
      December 31, 2008, filed March 20, 2009, File No.
      000-30248.
 
 34.