**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 Washington,
D.C. 20549
 
 **FORM
10-QSB**
 
 (Mark
One)
 
 x
    QUARTERLY
      REPORT UNDER SECTION 13 OR 15 (d)OF
      THE SECURITIES EXCHANGE ACT OF 1934
 
 For the
quarterly period ended March
31, 2005
 
 o
    TRANSITION
      REPORT UNDER SECTION 13 OR 15(d)OF
      THE EXCHANGE ACT
  For the
transition period from __________ to ____________.
 
 Commission
file number 000-30248
 
 **JACKSONVILLE
      BANCORP, INC.**(Exact name of small business issuer as
      specified in its charter)
   Florida
    
    
    
    59-3472981(State or other jurisdiction
      of
    
    
    
    (IRS Employerincorporation or
    organization)
    
    
    
    Identification
No.)


100 North Laura Street, Suite 1000,
      Jacksonville, Florida 32202(Address of principal executive
      offices)(904) 421-3040(Issuer’s telephone
number)
  Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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 o
 
 As of May
9, 2005, the latest practicable date, 1,708,827 of the
issuer’s common shares, $.01 par value, were issued and
outstanding.
 
 Transitional
Small Business Disclosure Format (Check one):
  Yes  o No x
 JACKSONVILLE
BANCORP, INC.
 INDEX
 PagePART
      I -
    FINANCIAL
      INFORMATIONItem
      1.
    Consolidated
      Financial Statements (Unaudited)Consolidated
      Balance Sheets
    3Consolidated
      Statements of Income
    4Consolidated
      Statements of Changes in Shareholders’ Equity
    5Consolidated
      Statements of Cash Flows
    6Notes
      to Consolidated Financial Statements
    7-8Item
      2.
    Management’s
      Discussion and Analysis orPlan
      of Operation
    9-16Item
      3.
    Controls
      and Procedures
    16PART
      II -OTHER
      INFORMATIONItem
      1.
    Legal
      Proceedings
    17Item
      2.
    Unregistered
      Sales of Equity Securities and Use of Proceeds
    17Item
      3.
    Defaults
      Upon Senior Securities
    17Item
      4.
    Submission
      of Matters to a Vote of Security Holders
    17Item
      5.
    Other
      Information
    17Item
      6.
    Exhibits
    17SIGNATURES
    18CERTIFICATIONS
    19-21
  2
  JACKSONVILLE BANCORP, INC.  CONSOLIDATED
BALANCE SHEETS
 (Unaudited)
 (Dollars
in thousands, except per share amounts)
 March 31,
    
    December
      31,2005
    
    2004ASSETSCash
      and due from banks
    
    $
    3,612
    
    $
    4,715Federal
      funds sold
    
    
    3,683
    
    
    2,020Total
      cash and cash equivalents
    
    
    7,295
    
    
    6,735Securities
      available for sale
    
    
    24,313
    
    
    23,125Securities
      held to maturity
    
    
    50
    
    
    50Loans,
      net of allowance for loan losses
    
    
    192,903
    
    
    188,137Premises
      and equipment, net
    
    
    3,994
    
    
    3,985Federal
      Home Loan Bank stock
    
    
    492
    
    
    353Accrued
      interest receivable and other assets
    
    
    1,450
    
    
    1,359Total
      assets
    
    $
    230,497
    
    $
    223,744LIABILITIESDeposits
    
    $
    208,181
    
    $
    201,188Accrued
      expenses and other liabilities
    
    
    372
    
    
    752Subordinated
      debt
    
    
    4,000
    
    
    4,000Total
      liabilities
    
    
    212,553
    
    
    205,940SHAREHOLDERS'
      EQUITYPreferred
      stock, $.01 par value, 2,000,000 shares authorized,none
      outstanding
    
    
    --
    
    
    --Common
      stock, $.01 par value, 8,000,000 shares authorized,1,707,666
      and 1,708,366 shares issued
    
    
    17
    
    
    17Additional
      paid-in capital
    
    
    17,355
    
    
    17,381Retained
      earnings
    
    
    913
    
    
    546Accumulated
      other comprehensive income (loss)
    
    
    (341
    )
    
    (140
    )Total
      shareholders' equity
    
    
    17,944
    
    
    17,804Total
      liabilities and shareholders' equity
    
    $
    230,497
    
    $
    223,744
 See
accompanying notes to consolidated financial statements.
  3




JACKSONVILLE BANCORP, INC.


CONSOLIDATED
STATEMENTS OF INCOME


(Unaudited)


(Dollars
in thousands, except per share amounts)










Three
      Months Ended
      March
      31,2005
    
    2004Interest
      and dividend incomeLoans,
      including fees
    
    $
    3,100
    
    $
    2,197Securities
    
    
    250
    
    
    222Other
    
    
    6
    
    
    14Total
      interest income
    
    
    3,356
    
    
    2,433Interest
      expenseDeposits
    
    
    1,187
    
    
    849Other
    
    
    125
    
    
    2Total
      interest expense
    
    
    1,312
    
    
    851Net
      interest income
    
    
    2,044
    
    
    1,582Provision
      for loan losses
    
    
    64
    
    
    127Net
      interest income after provision for loan losses
    
    
    1,980
    
    
    1,455Noninterest
      incomeService
      charges on deposit accounts
    
    
    165
    
    
    155Gain
      on sale of foreclosed assets
    
    
    --
    
    
    20Other
      income
    
    
    58
    
    
    42Total
      noninterest income
    
    
    223
    
    
    217Noninterest
      expenseSalaries
      and employee benefits
    
    
    854
    
    
    530Occupancy
      and equipment
    
    
    185
    
    
    164Other
    
    
    565
    
    
    372Total
      noninterest expense
    
    
    1,604
    
    
    1,066Income
      before income taxes
    
    
    599
    
    
    606Income
      tax expense
    
    
    232
    
    
    223Net
      income
    
    $
    367
    
    $
    383Weighted
      average:Common
      shares
    
    
    1,708,109
    
    
    1,469,523Dilutive
      stock options and warrants
    
    
    84,969
    
    
    116,7301,793,078
    
    
    1,586,253Basic
      earnings per common share
    
    $
    .21
    
    $
    .26Diluted
      earnings per common share
    
    $
    .20
    
    $
    .24




See
accompanying notes to consolidated financial statements.
 
 4
 
  JACKSONVILLE BANCORP, INC.  CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 (Unaudited)
 (Dollars
in thousands)
 Retained
    
    AccumulatedAdditional
    
    Earnings
    
    OtherCommon
      Stock
    
    Paid-In
    
    (Accumulated
    
    ComprehensiveShares
    
    Amount
    
    Capital
    
    Deficit)
    
    Income
      (Loss)
    
    Total
 Balance
      at January 1, 2004
    
    
    1,467,166
    
    $
    15
    
    $
    14,230
    
    $
    (789
    )
    $
    (49
    )
    $
    13,407Comprehensive
      income:Net
      income
    
    
    
    
    
    
    
    
    
    
    
    383
    
    
    
    
    
    383Change
      in unrealized gain (loss)on
      securities available forsale,
      net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79
    
    
    79Total
      comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    462Exercise
      of commonstock
      warrants
    
    
    11,450
    
    
    
    
    
    148
    
    
    
    
    
    
    
    
    148Balance
      at March 31, 2004
    
    
    1,478,616
    
    $
    15
    
    $
    14,378
    
    $
    (406
    )
    $
    30
    
    $
    14,017Balance
      at January 1, 2005
    
    
    1,708,366
    
    $
    17
    
    $
    17,381
    
    $
    546
    
    $
    (140
    )
    $
    17,804Comprehensive
      income:Net
      income
    
    
    
    
    
    
    
    
    
    
    
    367
    
    
    
    
    
    367Change
      in unrealized gainon
      securities available forsale,
      net of tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (201
    )
    
    (201
    )Total
      comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    166Repurchase
      of common stock
    
    
    (1,500
    )
    
    
    
    
    (40
    )
    
    
    
    
    
    
    
    (40
    )Exercise
      of commonstock
      options, includingtax
      benefits
    
    
    800
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    14Balance
      at March 31, 2005
    
    
    1,707,666
    
    $
    17
    
    $
    17,355
    
    $
    913
    
    $
    (341
    )
    $
    17,944
  See
accompanying notes to consolidated financial statements.
 
 5


JACKSONVILLE BANCORP, INC.  CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 (Dollars
in thousands)


Three
      Months Ended
      March
      31,2005
    
    2004Cash
      flows from operating activitiesNet
      income
    
    $
    367
    
    $
    383Adjustments
      to reconcile net income to net cash from operatingactivities:Depreciation
      and amortization
    
    
    91
    
    
    73Net
      amortization of deferred loan costs
    
    
    18
    
    
    (13
    )Provision
      for loan losses
    
    
    64
    
    
    127Deferred
      income taxes
    
    
    504
    
    
    223Discount
      accretion, net of amortization
    
    
    94
    
    
    1Gain
      on sale of foreclosed assets
    
    
    --
    
    
    (20
    )Net
      change in accrued interest receivable and other assets
    
    
    (595
    )
    
    (2
    )Net
      change in accrued expenses and other liabilities
    
    
    (386
    )
    
    (145
    )Net
      cash from operating activities
    
    
    157
    
    
    627Cash
      flows from investing activitiesPurchases
      of securities available for sale
    
    
    (3,354
    )
    
    --Proceeds
      from maturities of securities available for sale
    
    
    1,871
    
    
    2,897Net
      change in loans
    
    
    (4,848
    )
    
    (9,844
    )Premises
      and equipment expenditures, net
    
    
    (100
    )
    
    (7
    )Proceeds
      from sale of foreclosed assets
    
    
    --
    
    
    415Purchases
      of Federal Home Loan Bank stock
    
    
    (139
    )
    
    (109
    )Net
      cash from investing activities
    
    
    (6,570
    )
    
    (6,648
    )Cash
      flows from financing activitiesNet
      change in deposits
    
    
    7,005
    
    
    13,305Net
      change in federal funds purchased
    
    
    --
    
    
    (4,296
    )Repurchase
      of common stock
    
    
    (40
    )
    
    --Proceeds
      from exercise of stock options
    
    
    8
    
    
    --Proceeds
      from exercise of common stock warrants
    
    
    --
    
    
    148Net
      cash from financing activities
    
    
    6,973
    
    
    9,157Net
      change in cash and cash equivalents
    
    
    560
    
    
    3,136Cash
      and cash equivalents at beginning of period
    
    
    6,735
    
    
    3,894Cash
      and cash equivalents at end of period
    
    $
    7,295
    
    $
    7,030Supplemental
      disclosures of cash flow informationCash
      paid during the period forInterest
    
    $
    1,301
    
    $
    834Income
      taxes
    
    
    286
    
    
    --
  See accompanying notes to consolidated financial
statements.
   6


JACKSONVILLE
BANCORP, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)


(Dollars
in thousands, except per share amount)







**NOTE
1 - BASIS OF PRESENTATION**
 
 The
consolidated financial statements include the accounts of Jacksonville Bancorp,
Inc. and its wholly owned subsidiary, The Jacksonville Bank, and the Bank’s
wholly owned subsidiary, Fountain Financial, Inc. The consolidated entity is
referred to as the “Company” and the Bank and its subsidiaries are collectively
referred to as the “Bank.” The Company’s financial condition and operating
results principally reflect those of the Bank. All intercompany balances and
amounts have been eliminated. For further information refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2004.
 
 The
accounting and reporting policies of the Company reflect banking industry
practice and conform to generally accepted accounting principles in the United
States of America. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported asset and liability balances and revenue and expense amounts and the
disclosure of contingent assets and liabilities. Actual results could differ
significantly from those estimates.
 
 The
consolidated financial information included herein as of and for the periods
ended March 31, 2005 and 2004 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, 2004 consolidated
balance sheet was derived from the Company's December 31, 2004 audited
consolidated financial statements.
 
 **NOTE
2 - STOCK-BASED COMPENSATION**
 
 Total
stock options exercised during the three months ended March 31, 2005 were 800.
No options were granted or expired/forfeited during the period. As of March 31,
2005, 196,857 options were outstanding.
 
 Employee
compensation expense under stock options is reported using the intrinsic value
method. No stock-based compensation cost is reflected in net income, as all
options granted had an exercise price equal to or greater than the market price
of the underlying common stock at date of grant. The following table illustrates
the effect on net income and earnings per share if expense was measured using
the fair value recognition provisions of FASB Statement No. 123, *Accounting
for Stock-Based Compensation.*
  
 Three
      Months Ended
      March
      31,2005
    
    
    2004Net
      income as reported
    
    $
    367
    
    $
    383Deduct:
      Stock-based compensation expensedetermined
      under fair value based method
    
    
    29
    
    
    18Pro
      forma net income
    
    $
    338
    
    $
    365Basic
      earnings per share as reported
    
    $
    .21
    
    $
    .26Pro
      forma basic earnings per share
    
    
    .20
    
    
    .25Diluted
      earnings per share as reported
    
    $
    .20
    
    $
    .24Pro
      forma diluted earnings per share
    
    
    .19
    
    
    .23
   7


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


**NOTE
3 - 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 at March 31, 2005 and March 31, 2004:





AdequatelyCapitalized
    
    March 31, 2005
    
    December 31, 2004Requirement
    
    Actual
    
    ActualTier
      1 Capital (toAverage
      Assets)Consolidated
    >4%
    
    9.67%
    
    12.15%Bank
    >4%
    
    8.23%
    
    10.11%Tier
      1 Capital (to RiskWeighted
      Assets)Consolidated
    >4%
    
    11.00%
    
    11.21%Bank
    >4%
    
    9.36%
    
    9.17%Total
      Capital (to RiskWeighted
      Assets)Consolidated
    >8%
    
    11.94%
    
    10.09%Bank
    >8%
    
    10.31%
    
    8.24%


Management
believes, as of March 31, 2005, that the Company and the Bank met all capital
requirements to which they are subject.




8
 
 JACKSONVILLE
BANCORP, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 (Dollars
in thousands, except per share amount)


****


**Introduction**





In the
following pages, management presents an analysis of the financial condition of
Jacksonville Bancorp, Inc. as of March 31, 2005 compared to December 31, 2004,
and the results of operations for the three months ended March 31, 2005 compared
with the same period in 2004. 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.




**Overview**





Total
assets at March 31, 2005 were $230.5 million compared to $223.7 million at
December 31, 2004, an increase of $6.8 million, or 3.0%. The increase in total
assets was primarily attributable to an increase in net loans receivable of $4.8
million, or 2.6%. The increase in loans was funded by the deposit growth
experienced by the Company during the period. The increase in net loans
receivable consisted primarily of an increase in residential real estate loans
of $6.0 million, or 12.9%. The commercial real estate portfolio remained
relatively flat primarily due to a large payoff at the end of the
quarter.





Total
deposits were $208.2 million at March 31, 2005 compared to $201.2 million at
December 31, 2004, an increase of $7.0 million, or 3.5%. During this period, the
Company experienced an increase in money market, NOW and savings accounts of
$8.3 million. The certificate of deposit portfolio as a percent of total
deposits declined to 37.3% at March 31, 2005 from 39.3% at December 31,
2004. **** Almost
all certificates of deposit held by the Company mature in less than five years
with the majority maturing in the next year.





For the
three months ended March 31, 2005, the Company earned 20 cents per share on a
fully diluted basis. This compares to diluted earnings of 24 cents per share in
the prior year, resulting in a decrease in diluted earnings for the three-month
period of 4 cents. The majority of the decrease in earnings per share compared
to the prior year was due to an increase in shares outstanding as the result of
the exercise of 224,050 stock warrants between the quarters ended March 31, 2004
and March 31, 2005. Outside of this, overall earnings remained relatively flat
over the prior year due to an increase of $538,000 in overhead expense partially
offset by growth of $462,000 in net interest income.





9


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








**Net
Interest Income**





***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 stockholders’ equity as well as the amounts and average
rates earned or paid on each major category of interest-earning assets and
interest-bearing liabilities.





Three
      Months Ended March 31,2005
    
    2004Average
    
    
    
    Average
    
    Average
    
    
    
    AverageBalance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate(Dollars
      in thousands)Interest-earning
      assets:Loans
      (1)
    
    $
    195,635
    
    $
    3,100
    
    
    6.43
    %
    $
    153,863
    
    $
    2,197
    
    
    5.74
    %Securities
    
    
    24,794
    
    
    242
    
    
    3.96
    
    
    15,616
    
    
    222
    
    
    5.72Other
      interest-earning assets (2)
    
    
    1,633
    
    
    14
    
    
    3.48
    
    
    5,844
    
    
    14
    
    
    .96Total
      interest-earning assets
    
    
    222,062
    
    
    3,356
    
    
    6.13
    
    
    175,323
    
    
    2,433
    
    
    5.58Noninterest-earning
      assets
    
    
    8,000
    
    
    
    
    
    
    
    
    8,256Total
      assets
    
    $
    230,062
    
    
    
    
    
    
    
    $
    183,579Interest-bearing
      liabilities:Savings
      and NOW deposits
    
    $
    23,872
    
    $
    62
    
    
    1.05
    
    $
    21,797
    
    $
    44
    
    
    .81Money
      market deposits
    
    
    70,899
    
    
    575
    
    
    3.29
    
    
    11,519
    
    
    44
    
    
    1.54Time
      deposits
    
    
    73,159
    
    
    549
    
    
    3.04
    
    
    117,320
    
    
    761
    
    
    2.61Other
      borrowings
    
    
    14,333
    
    
    126
    
    
    3.57
    
    
    424
    
    
    2
    
    
    1.90Total
      interest-bearing liabilities
    
    
    182,263
    
    
    1,312
    
    
    2.92
    
    
    151,060
    
    
    851
    
    
    2.27Noninterest-bearing
      liabilities
    
    
    29,892
    
    
    
    
    
    
    
    
    18,864Stockholders'
      equity
    
    
    17,907
    
    
    
    
    
    
    
    
    13,655Total
      liabilities andstockholders'
      equity
    
    $
    230,062
    
    
    
    
    
    
    
    $
    183,579Net
      interest income
    
    
    
    
    $
    2,044
    
    
    
    
    
    
    
    $
    1,582Interest
      rate spread (3)
    
    
    
    
    
    
    
    
    3.21
    %
    
    
    
    
    
    
    
    3.31
    %Net
      interest margin (4)
    
    
    
    
    
    
    
    
    3.73
    %
    
    
    
    
    
    
    
    3.63
    %


1)
    Includes
      nonaccrual loans.
 2)
    Includes federal funds
sold.
 3)
    Interest rate spread represents the difference
      between the average yield on interest-earning assets and the average cost
      of interest-bearing liabilities.
 4)
    Net interest margin is net interest income
      divided by average interest-earning assets.








10


JACKSONVILLE
BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS










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


Three Months Ended March
    31,2005
      Versus 2004Increase (decrease) due to changes
      in:NetVolume
    
    Rate
    
    Change(Dollars in thousands)Interest
      income:Loans,
      gross
    
    $
    643
    
    $
    260
    
    $
    903Securities
    
    
    104
    
    
    (84
    )
    
    20Other
      interest-earning assets
    
    
    (16
    )
    
    16
    
    
    --Total
      interest income
    
    
    731
    
    
    192
    
    
    923Interest
      expense:Savings
      and NOW deposits
    
    
    4
    
    
    14
    
    
    18Money
      market deposits
    
    
    436
    
    
    95
    
    
    531Time
      deposits
    
    
    (318
    )
    
    106
    
    
    (212
    )Other
      borrowings
    
    
    121
    
    
    3
    
    
    124Total
      interest expense
    
    
    243
    
    
    218
    
    
    461Increase
      (decrease) in net interest income
    
    $
    488
    
    $
    (26
    )
    $
    462


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.





Net
interest income increased by $462,000, or 29.2%, from $1,582,000 for the first
three months of 2004 to $2,044,000 for the current three-month period. As can be
seen from the above rate/volume analysis, the increase is primarily comprised of
a positive volume variance of $488,000 and a negative rate variance of $26,000.





***Volume
Variance.*** When
comparing the first three months of 2005 to the same period last year, the
Company experienced substantial growth in its core deposit products, with the
largest increase occurring in money market deposit accounts. Core loan products
also continued to grow, with the most significant growth occurring in commercial
real estate and residential real estate loans. The aggregate positive impact of
the shift in deposit mix from time deposits to core deposits coupled with loan
growth largely comprise the positive volume variance of $488,000 and more than
offset the negative impact of the downtrend in net interest margin discussed in
the “Rate Variance” section that follows.





***Rate
Variance.*** The
competitive aspects of attracting and retaining core funding is the primary
reason for the negative rate variance of $26,000. In addition to the competitive
aspects, management’s strategy to reduce dependency on time deposits has kept
the negative rate variance to a minimum of $26,000 in the current rising rate
environment.








11
 
 JACKSONVILLE
BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS





Net
interest margin increased by 10 basis points when comparing the first three
months of 2005 to the same period last year. When applied to average total
interest-earning assets of approximately $222.1 million for the first three
months of 2005, the increase in net interest margin results in an increase in
net interest income of approximately $462,000. The increase in net interest
margin occurred primarily due to an increase in the yield on earning assets
offset somewhat by an increase in net funding costs. An increase in both the
average rate earned and funding costs was the result of seven increases, or a
total of 175 basis points, in the prime rate from March 31, 2004 to March 31,
2005. Average core deposit growth of $72 million, or 140%, over the first
quarter of 2004 has lessened the Company’s dependence on the national CD market
which contributed favorably to our risk profile. Variable rate loans adjusted to
increasing rates, and proceeds from the maturity, amortization and prepayment of
loans and securities continued to be reinvested at higher rates, mitigating the
rising cost of core funding.





Management
believes that available yields will continue to rise in 2005 and that the
increase in interest rates will have a positive impact on net interest margin.








**Application
of Critical Accounting Policies**





The
accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted within the United States of America and
conform to general practices within the banking industry. Accounting and
reporting policies for the allowance for loan losses are deemed critical since
they involve the use of estimates and require significant management judgments.
Losses on loans result from a broad range of causes from borrower specific
problems, to industry issues, to the impact of the economic environment. The
identification of these factors that lead to default or non-performance under a
borrower loan agreement and the estimation of loss in these situations are very
subjective. In addition, a dramatic change in the performance of one or a small
number of borrowers can have a significant impact on the estimate of losses.
Management has implemented a process that has been applied consistently to
systematically consider the many variables that impact the estimation of the
allowance for loan losses.





Additional
information with regard to the Company’s methodology and reporting of the
allowance for loan losses is included in the 2004 Annual Report and Form
10-KSB.




12




JACKSONVILLE
BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








**Asset
Quality**





The
Company has identified certain assets as nonperforming. These assets include
nonaccruing loans, loans that are contractually past due 90 days or more as to
principal or interest payments and still accruing, and foreclosed real estate.
These assets present more than the normal risk that the Company will be unable
to eventually collect or realize their full carrying value. The Company’s
nonperforming assets at March 31, 2005 and December 31, 2004 are as
follows:


March 31,
    
    December 31,2005
    
    2004(Dollars in thousands)Nonaccruing
      loans
    
    $
    529
    
    $
    654Loans
      past due over 90 days still on accrual
    
    
    --
    
    
    --Total
      nonperforming loans
    
    
    529
    
    
    654Foreclosed
      assets, net
    
    
    --
    
    
    --Total
      nonperforming assets
    
    $
    529
    
    $
    654Allowance
      for loan losses
    
    $
    1,907
    
    $
    1,843Nonperforming
      assets as a percent of total assets
    
    
    .23
    %
    
    .29
    %Nonperforming
      loans as a percent of gross loans
    
    
    .27
    %
    
    .34
    %Allowance
      for loan losses as a percent of nonperforming loans
    
    
    360.68
    %
    
    281.80
    %


**Allowance
and Provision for Loan Losses**





The
allowance for loan losses grew by $64,000 during the first quarter of 2005,
amounting to $1,907,000, as compared to $1,843,000 at December 31, 2004. The
allowance represented approximately .98% and .97% of total loans at both dates,
respectively. During the first quarter of 2005, the Company had no loan
charge-offs, no recoveries and recorded a $64,000 provision for loan losses
compared to charge-offs of $23,000, no recoveries and a provision for loan
losses of $127,000 for the first quarter of 2004.





The
allowance for loan losses is an amount that management currently believes will
be adequate to absorb estimated probable losses in the Company’s loan portfolio.
In determining the allowance for loan losses, there is not an exact amount but
rather a range for what constitutes an appropriate allowance. As more fully
discussed in the “Application of Critical Accounting Policies” section of this
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.








13
 
  JACKSONVILLE
BANCORP, INC.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
 FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 The
amount of future chargeoffs and provisions for loan losses will 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 do affect the value of real estate collateral
securing the Company’s mortgage loans. Loans secured by real estate represent
approximately 88% of the Company’s total loans outstanding at March 31, 2005. In
recent years, economic conditions in Jacksonville and the surrounding
communities have been good and real estate values have continued to grow.
However, such conditions and values could deteriorate 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. However, management believes that the Company’s
underwriting policies are relatively conservative and, as a result, the Company
should not be any more affected than the overall market.





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





**Noninterest
Income, Noninterest Expense, and Income Taxes**





Noninterest
income was $223,000 for the three months ended March 31, 2005, compared to
$217,000 for the 2004 period. Service charges on deposit accounts totaled
$165,000 in 2005, up from $155,000 in 2004, due to an increase in the average
number of deposit accounts. In addition, the Company recognized no gains on the
sale of foreclosed assets in the first quarter of 2005, while $20,000 was
recognized in the first quarter of 2004.





Noninterest
expense increased to $1,604,000 for the three months ended March 31, 2005, from
$1,066,000 for the three months ended March 31, 2004. Salaries and employee
benefits was the largest noninterest expense, increasing from $530,000 during
the three months ended March 31, 2004, to $854,000 for the 2005 period. Between
March 31, 2004 and March 31, 2005, the Company made significant investments to
position itself for the future. Total full-time employees increased by seven
during the period, including the addition of a risk manager, human resources
manager, residential mortgage solicitor and lockbox sales officer. In addition,
the Company built out and relocated its main office and headquarters to a new
location in the heart of downtown Jacksonville. The Company has also incurred
additional costs to ensure compliance with the Sarbanes-Oxley Act of 2002, in
particular with Section 404 of the Act.





Income
taxes for the three months ended March 31, 2005 were $232,000 (an effective rate
of 38.16%) compared to income taxes of $223,000 for the three months ended March
31, 2004 (an effective tax rate of 36.80%).








14


JACKSONVILLE
BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS











**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 Company’s total risk-based
capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios were
11.86%, 10.92% and 9.69%, respectively, at March 31, 2005.





The
Company has included the $4.0 million of trust preferred securities that were
issued in June 2004 in their Tier 1 Capital and Tier 2 Capital. Inclusion of the
trust preferred securities has increased the Company’s total risk-based capital,
Tier 1 risk-based capital and Tier 1 leverage capital ratios by 196 basis
points, 196 basis points and 174 basis points, respectively, at March 31,
2005.





Total
stockholders' equity increased by $140,000, or .79%, from $17,804,000 at
December 31, 2004 to $17,944,000 at March 31, 2005. The increase is attributable
to net income of $367,000 and proceeds from exercises of stock options of
$14,000, partially offset by the repurchase of 1,500 shares of common stock in
the amount of $40,000 and an increase in unrealized losses on securities
available for sale of $201,000.


**Cash
Flows and Liquidity**





***Cash
Flows*** . The
Company’s primary sources of cash are deposit growth, maturities and
amortization of investment securities, operations, and federal funds purchased.
The Company uses cash from these and other sources to first fund loan growth.
Any remaining cash is used primarily to purchase investment securities. During
the first quarter of 2005, the Company increased its cash and cash equivalent
position by $560,000.





***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 its overnight position in federal funds sold;
maturities and monthly payments on the balance of the investment securities
portfolio and the loan portfolio; and investment securities designated as
available-for-sale. At March 31, 2005, the Company had $27,996,000 in federal
funds sold and 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 core deposits from businesses and consumers in its local market area and
brokered deposits. The Company can also borrow overnight federal funds and
fixed-rate term products under lines established with the Federal Home Loan Bank
and other commercial banks. These lines in the aggregate amount of approximately
$63.0 million at March 31, 2005 do not represent legal commitments to
extend credit on the part of the other banks.








15


JACKSONVILLE
BANCORP, INC.


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF


FINANCIAL
CONDITION AND RESULTS OF OPERATIONS








**Forward
Looking Statements**





“Management's
Discussion and Analysis of Financial Condition and Results of Operations” and
“Quantitative and Qualitative Disclosures about Market Risk” contain various
forward-looking statements with respect to financial performance and business
matters. Such statements are generally contained in sentences including the
words “expect” or “could” or “should” or “would” or “believe”. The


Company
cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, 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.








**Item
3. 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 is recorded,
      processed, summarized and reported within the time periods specified in
      the rules and forms of the Securities and Exchange Commission. Based upon
      their evaluation of those controls and procedures performed as of the end
      of the period covered by this report, the Chief Executive and principal
      financial officer of the Company concluded that the Company’s disclosure
      controls and procedures were adequate.





b.
    *Changes
      in internal controls.*The Company made no changes in its internal control over financial
      reporting during its most recent quarter that has materially affected the
      Company’s internal control over financial reporting.










16
 
 JACKSONVILLE
BANCORP, INC.
 PART II -
OTHER INFORMATION





Item
      1.
    Legal
      Proceedings


None





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


None





Item
      3.
    Defaults
      on 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 Bylaws of the Company
(2)
 Exhibit No. 10
    Lease Agreement
 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 from the Exhibits to Form SB-2, Registration Statement
      and amendments thereto, as effective on September 30, 1998, Registration
      No. 333-64815.


(2)
    Incorporated
      herein by reference from the Exhibits to Form 10-QSB for the quarter ended
      June 30, 2002, filed August 14, 2002.







17


JACKSONVILLE BANCORP, INC.


SIGNATURES





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














Date:
      May 16, 2005
    
    /s/ Gilbert J. Pomar, IIIGilbert J. Pomar, IIIPresident and Chief Executive
      OfficerDate:
      May 16, 2005
    
    /s/ Valerie A. KendallValerie A. KendallExecutive
      Vice Presidentand
      Chief Financial Officer








18