Edgar Filing: JACKSONVILLE BANCORP INC /FL/

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 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. Employer
incorporation 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 x 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 August 5, 2009, the latest practicable date, 1,748,799 of the Registrant’s common shares, $.01 par value, were issued and outstanding.

JACKSONVILLE BANCORP, INC.

TABLE OF CONTENTS

			Page

PART I—FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated Balance Sheets	3

		Consolidated Statements of Income	4

		Consolidated Statements of Changes in Shareholders’ Equity	5

		Consolidated Statements of Cash Flows	6

		Notes to Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27

	Item 4.	Controls and Procedures	28

PART II—OTHER INFORMATION

	Item 1.	Legal Proceedings	30

	Item 1A.	Risk Factors	30

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

	Item 3.	Defaults Upon Senior Securities	30

	Item 4.	Submission of Matters to a Vote of Security Holders	30

	Item 5.	Other Information	30

	Item 6.	Exhibits	31

SIGNATURES			33

EXHIBIT INDEX			34

CERTIFICATIONS
	Certification of Gilbert J. Pomar, III under Section 302 of the Sarbanes-Oxley Act of 2002		35
	Certification of Valerie A. Kendall under Section 302 of the Sarbanes-Oxley Act of 2002		36
	Certification under Section 906 of the Sarbanes-Oxley Act of 2002		37

JACKSONVILLE BANCORP, INC.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

	June 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Cash and due from banks	$	4,182		$	8,665
Federal funds sold		5,163			1,483
Total cash and cash equivalents		9,345			10,148
Securities available for sale		22,778			29,684
Securities held to maturity		50			50
Loans, net of allowance for loan losses of $5,663 at 2009 and $4,705 at 2008		384,817			374,993
Premises and equipment, net		3,736			3,940
Bank-owned life insurance (BOLI)		8,837			8,773
Federal Home Loan Bank (FHLB) stock		2,591			1,705
Real estate owned, net		653			89
Deferred income taxes		1,959			1,502
Accrued interest receivable		1,758			2,027
Other assets		934			1,088

Total assets	$	437,458		$	433,999

LIABILITIES
Deposits
Noninterest bearing	$	38,131		$	40,851
Money market, NOW and savings deposits		86,831			87,751
Time deposits		196,902			216,942
Total deposits		321,864			345,544
FHLB advances		40,200			20,000
Federal Reserve borrowing		33,000			26,000
Subordinated debt		14,550			14,550
Accrued expenses and other liabilities		1,411			1,060
Total liabilities		411,025			407,154

SHAREHOLDERS’ EQUITY
Common stock, $.01 par value, 8,000,000 shares authorized, 1,748,799 and 1,748,799 shares issued		17			17
Additional paid–in capital		18,606			18,568
Retained earnings		7,708			8,213
Treasury stock, 1,200 and 200 shares		(12	)		(2	)
Accumulated other comprehensive income		114			49
Total shareholders’ equity		26,433			26,845

Total liabilities and shareholders’ equity	$	437,458		$	433,999

See accompanying notes to unaudited consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Interest and dividend income
Loans, including fees	$	5,383		$	5,846		$	10,742		$	12,235
Taxable securities		150			252			380			527
Tax-exempt securities		104			104			207			207
Federal funds sold and other		(12	)		7			(23	)		33
Total interest income		5,625			6,209			11,306			13,002

Interest expense
Deposits	$	2,116		$	2,780		$	4,427		$	5,782
FHLB advances		249			394			480			832
Federal Reserve borrowing		31			—			62			—
Subordinated debt		160			106			343			233
Other		—			2			—			3
Total interest expense		2,556			3,282			5,312			6,850

Net interest income		3,069			2,927			5,994			6,152
Provision for loan losses		1,307			1,755			2,245			2,118

Net interest income after provision for loan losses		1,762			1,172			3,749			4,034

Noninterest income
Service charges on deposit accounts		147			158			307			326
Other income		77			102			63			186
Total noninterest income		224			260			370			512

Noninterest expense
Salaries and employee benefits		1,111			1,125			2,227			2,287
Occupancy and equipment		437			442			884			889
Regulatory assessment		492			84			606			159
Merger related costs		—			430			—			430
Data processing		232			204			440			398
Other		395			537			796			975
Total noninterest expense		2,667			2,822			4,953			5,138

Income (loss) before income taxes		(681	)		(1,390	)		(834	)		(592	)
Income tax expense (benefit)		(285	)		(550	)		(329	)		(289	)
Net income (loss)	$	(396	)	$	(840	)	$	(505	)	$	(303	)

Weighted average:
Common shares		1,748,214			1,748,350			1,748,429			1,747,989
Dilutive stock options and warrants		—			—			—			—
Dilutive shares		1,748,214			1,748,350			1,748,429			1,747,989

Basic earnings (loss) per common share	$	(.23	)	$	(.48	)	$	(.29	)	$	(.17	)
Diluted earnings (loss) per common share	$	(.23	)	$	(.48	)	$	(.29	)	$	(.17	)

See accompanying notes to unaudited consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)

	Common Stock					Additional									Accumulated Other
	Outstanding					Paid-In			Retained			Treasury Stock			Comprehensive
	Shares			Amount		Capital			Earnings			Amount			Income			Total


Balance at January 1, 2008		1,746,331		$	17	$	18,459		$	8,186		$	(40	)	$	7		$	26,629

Comprehensive (loss):
Net (loss)										(303	)								(303	)
Change in unrealized gain on securities available for sale, net of tax effects																(157	)		(157	)
Total comprehensive income																			(460	)

Purchase of treasury stock		(2,224	)										(49	)					(49	)

Issuance of treasury stock		3,000					22			(28	)		72						66

Common stock issued		618																	—

Share-based compensation expense							53												53

Exercise of common stock options,including tax benefits		200					3												3

Balance at June 30, 2008		1,747,925		$	17	$	18,537		$	7,855		$	(17	)	$	(150	)	$	26,242

Balance at January 1, 2009		1,748,599		$	17	$	18,568		$	8,213		$	(2	)	$	49		$	26,845

Comprehensive (loss):
Net (loss)										(505	)								(505	)
Change in unrealized gain on securities available for sale, net of tax effects																65			65
Total comprehensive (loss)																			(440	)

Purchase of treasury stock		(2,353	)										(26	)					(26	)

Issuance of treasury stock		1,353					(1	)					16						15

Share-based compensation expense							39												39

Balance at June 30, 2009		1,747,599		$	17	$	18,606		$	7,708		$	(12	)	$	114		$	26,433

See accompanying notes to unaudited consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Six Months Ended
	June 30,
	2009			2008
Cash flows from operating activities
Net income (loss)	$	(505	)	$	(303	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization		235			263
Net amortization of deferred loan fees		47			32
Provision for loan losses		2,245			2,118
Premium amortization, net of accretion		(22	)		(7	)
Earnings on Bank Owned Life Insurance		(64	)		(102	)
Share-based compensation		54			122
Loss on disposal of assets		4			38
Loss on equity investment		132			—
Deferred income tax		(496	)		(499	)
Net change in accrued interest receivable and other assets		278			69
Net change in accrued expenses and other liabilities		351			(913	)
Net cash from operating activities		2,259			818
Cash flows from investing activities
Purchases of securities available for sale		(2,000	)		(3,000	)
Proceeds from maturities, calls and paydown of securities available for sale		9,032			4,236
Loan (originations) payments, net		(12,680	)		(32,979	)
Investment in Bank Owned Life Insurance		—			(3,500	)
Additions to premises and equipment, net		(22	)		(69	)
Net change in Federal Home Loan Bank stock		(886	)		957
Net cash from investing activities		(6,556	)		(34,355	)
Cash flows from financing activities
Net change in deposits		(23,680	)		43,955
Net change in overnight FHLB advances		15,200			(9,930	)
Net change in Fed funds purchased		—			6,000
Proceeds from long term FHLB advances		5,000			—
Proceeds from Federal Reserve borrowing		7,000			—
Proceeds from issuance of subordinated debt		—			7,550
Repayment of long term FHLB advance		—			(14,000	)
Purchase of treasury stock		(26	)		(49	)
Net cash from financing activities		3,494			33,526

Net change in cash and cash equivalents		(803	)		(11	)
Cash and cash equivalents at beginning of period		10,148			6,035
Cash and cash equivalents at end of period	$	9,345		$	6,024

Supplemental disclosures of cash flow information
Cash paid during the period for
Interest	$	5,537		$	7,000
Income taxes		15			795
Supplemental schedule of noncash investing activities
Transfers from loans to real estate owned	$	564		$	—

See accompanying notes to unaudited consolidated financial statements.

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 June 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.

Adoption of New Accounting Standards

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FASB Statement No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. In October 2008, the FASB issued Staff Position (FSP) 157-3 Determining the Fair Value of a Financial Asset when the Market for that Asset is Not Active. This FSP clarifies the application of FASB Statement No. 157, Fair Value Measurements and provides key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. The impact of adoption was not material.

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

In April 2009, the FASB issued Staff Position (FSP) No. 115-2 and No. 124-2, 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, 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 is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. 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, 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 is effective for interim reporting period 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.

In May 2009, the FASB issued Statement No. 165, Subsequent Events which requires companies to evaluate events that occurred after the balance sheet date, but before the financial statements are issued. Management has evaluated subsequent events for reporting and disclosure in these financial statements through August 10, 2009, which is the date that these financial statements were issued.

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

NOTE 2 – LOAN PORTFOLIO COMPOSITION

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

							% Increase (Decrease) from
	Total Loans			Total Loans			December 31, 2008
	June 30, 2009			December 31, 2008			to June 30, 2009
Real estate mortgage loans:
Commercial	$	231,693		$	224,677			3.1	%
Residential		92,826			81,152			14.4	%
Construction(1)		37,137			41,759			(11.1	)%
Commercial loans		25,502			28,445			(10.3	)%
Consumer loans		3,775			4,070			(7.2	)%
Subtotal		390,933			380,103			2.8	%
Less: Net deferred loan fees		(453	)		(405	)		11.9	%
Total	$	390,480		$	379,698			2.8	%

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

NOTE 3 – ALLOWANCE FOR LOAN LOSSES

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

	Six Months Ended June 30,
	2009			2008

Balance, January 1	$	4,705		$	3,116
Provisions for loan losses charged to expense		2,245			2,118
Loans charged off		(1,289	)		(1,026	)
Recoveries of loans previously charged off		2			5
Balance, June 30	$	5,663		$	4,213

Impaired loans were as follows:

	June 30,		December 31,
	2009		2008
Loans with no allocated allowance for loan losses	$	13,320	$	12,931

Loans with allocated allowance for loan losses		2,752		4,352

Total	$	16,072	$	17,283

Amount of the allowance for loan losses allocated	$	132	$	618

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

NOTE 4 - INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at June 30, 2009 and the corresponding amounts of unrealized gains and losses therein:

	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
(Dollars in thousands)
June 30, 2009
Available-for sale
U.S. government-sponsored entities and agencies	$	3,234	$	32	$	(32	)	$	3,234
State and political subdivisions		10,887		105		(162	)		10,830
Mortgage-backed securities – residential		8,014		233		(2	)		8,245
Collateralized mortgage obligations - residential		460		9		-			469

Total available-for-sale securities	$	22,595	$	379	$	(196	)	$	22,778

Total held-to-maturity securities	$	50	$	—	$	—		$	50

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

	June 30, 2009
	Amortized		Fair
	Cost		Value
Maturity
Available-for-sale
Within one year	$	3,975	$	3,938
One to five years		5,366		5,353
Five to ten years		4,780		4,773
Beyond ten years		-		-
Mortgage-backed		8,014		8,245
Collateralized Mortgage Obligations		460		469
Total	$	22,595	$	22,778

Held-to-maturity
One to five years	$	50	$	50

Total	$	22,645	$	22,828

10.

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

The following table summarizes the investment securities with unrealized losses at June 30, 2009 by aggregated major security type and length of time in a continuous unrealized loss position:

	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
(Dollars in thousands)
June 30, 2009

Available-for-sale
U.S. government-sponsored entities and agencies	$	2,718	$	(32	)	$	-	$	-		$	2,718	$	(32	)
States and political		4,610		(120	)		341		(42	)		4,951		(162	)
Mortgage-backed securities – residential		375		(2	)		-		-			375		(2	)
Collateralized mortgage obligations		-		-			-		-			-		-


Total available-for-sale	$	7,703	$	(154	)	$	341	$	(42	)	$	8,044	$	(196	)

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 Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities. 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 EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets.

In determining OTTI under the SFAS No. 115 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 conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

11.

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

The second segment of the portfolio uses the OTTI guidance provided by EITF 99-20 that is specific to purchased beneficial interests that, on the purchase date, were rated below AA. Under the EITF 99-20 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.

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 June 30, 2009, the Company’s security portfolio consisted of $22,828, $8,044 of which were 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 June 30, 2009.

State and Political Securities

All of the State and Political Securities (“Municipal Bonds”) 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.

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

12.

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

NOTE 5 – CAPITAL ADEQUACY

Federal banking regulators have established certain capital adequacy standards required to be maintained by banks and bank holding companies. The minimum requirements established in the regulations are set forth in the table below, along with the actual ratios for the Company at June 30, 2009 and December 31, 2008:

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2009
Total capital to risk weighted assets
Consolidated	$	45,732		11.78	%	$	31,062		8.00	%		N/A		N/A
Bank		41,480		10.69	%		31,055		8.00	%	$	38,819		10.00	%

Tier 1 (Core) capital to risk weighted assets
Consolidated		35,094		9.04	%		15,531		4.00	%		N/A		N/A
Bank		36,618		9.43	%		15,528		4.00	%		23,291		6.00	%

Tier 1 (Core) capital to average assets
Consolidated		35,094		8.15	%		17,216		4.00	%		N/A		N/A
Bank		36,618		8.51	%		17,217		4.00	%		21,521		5.00	%

December 31, 2008
Total capital to risk weighted assets
Consolidated	$	46,051		11.93	%	$	30,874		8.00	%		N/A		N/A
Bank		40,719		10.58	%		30,795		8.00	%	$	38,494		10.00	%

Tier 1 (Core) capital to risk weighted assets
Consolidated		35,638		9.23	%		15,437		4.00	%		N/A		N/A
Bank		36,014		9.36	%		15,397		4.00	%		23,096		6.00	%

Tier 1 (Core) capital to average assets
Consolidated		35,638		8.26	%		17,264		4.00	%		N/A		N/A
Bank		36,014		8.36	%		17,228		4.00	%		21,535		5.00	%

13.

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

NOTE 6 – SHORT-TERM BORROWING AND FEDERAL HOME LOAN BANK ADVANCES

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

	2009		2008

Overnight advances maturing daily at a daily variable interest rate of .43% at June 30, 2009	$	15,200	$	—

Convertible advances maturing June 8, 2010 with a quarterly call option beginning June 9, 2008 at a fixed rate of 4.99%		5,000		5,000

Convertible advances maturing June 8, 2012 with a quarterly call option beginning September 10, 2007 at a fixed rate of 4.68%		5,000		5,000

Convertible advances maturing August 13, 2010 with a quarterly call option beginning August 13, 2008 at a fixed rate of 4.51%		5,000		5,000

Convertible advances maturing October 4, 2010 with a quarterly call option beginning October 6, 2008 at a fixed rate of 4.15%		5,000		5,000

Advances maturing May 29, 2012 at a fixed rate of 2.11%		5,000		—

	$	40,200	$	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 June 30, 2009 was $33,000, all of which was borrowed on that date.

NOTE 7 – FAIR VALUE

SFAS No. 157 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. SFAS No. 157 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.

14.

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

Level 2: 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 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.

Assets and liabilities measured at fair value under SFAS No. 157 on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Securities available for sale at June 30, 2009	$	22,778		—	$	22,778		—

Securities available for sale at December 31, 2008	$	29,684		—	$	29,684		—

15.

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

Assets measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired Loans at June 30, 2009	$	2,620		—		—	$	2,620
Impaired loans at December 31, 2008	$	3,734		—		—	$	3,734

Impaired loans, which are measured for impairment using discounted cash flows or the fair value of the collateral for collateral dependent loans, had a carrying amount of $2,752, with a valuation allowance of $132, resulting in an additional provision for loan loss of $132 for the period. Additional impaired loans, not measured using levels of inputs to measure fair value, had a carrying amount of $13,320. Collateral dependent impaired loans, valued under Level 3, were measured using current appraised values along with information on recent market transactions as well as management’s assumptions about the criteria that market participants would use in pricing the assets.

In accordance with FSP FAS 107-1, the carrying amount and estimated fair values of financial instruments, at June 30, 2009 and December 31, 2008 were as follows:

	June 30, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Cash and cash equivalents	$	9,345	$	9,345	$	10,148	$	10,148
Securities available for sale		22,778		22,778		29,684		29,684
Securities held to maturity		50		50		50		50
Loans, net		384,817		387,809		374,993		374,454
Federal Home Loan Bank stock		2,591		n/a		1,705		n/a
Independent Bankers’ Bank Stock		153		n/a		285		n/a
Accrued interest receivable		1,758		1,758		2,027		2,027

Financial liabilities
Deposits	$	321,864	$	320,477	$	345,544	$	345,100
Federal funds purchased		—		—		—		—
Other borrowings		73,200		74,140		46,000		47,223
Subordinated debentures		14,550		7,805		14,550		10,613
Accrued interest payable		483		483		568		568

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

16.

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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.

NOTE 8 – SUBSEQUENT EVENT

On July 7, 2009, the Company entered into an interest rate swap transaction with SunTrust Bank. 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). The transaction was entered into to mitigate interest rate risk exposure caused by fluctuations in interest rates.

17.

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.

18.

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. The Bank opened its fourth and fifth locations in 2006 in key areas of Jacksonville, providing additional visibility and access to businesses and individuals, and resulting in additional loan and deposit opportunities.

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 and believes that the local economic conditions have deteriorated over the last several quarters and that the local real estate market has softened. 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 June 30, 2009 compared to December 31, 2008, and the results of operations for the six months ended June 30, 2009 compared with the same period 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 June 30, 2009 and December 31, 2008

Total assets increased $3.5 million, or 0.8%, from $434.0 million at December 31, 2008 to $437.5 million at June 30, 2009. During the six months ended June 30, 2009, the Company experienced net loan growth of $9.8 million, or 2.6%. The increase in net loans was driven by increases in residential real estate loans of $11.7 million, or 14.4%, and commercial real estate loans of $7.0 million, or 3.1%, offset by decreases in construction real estate loans of $4.6 million, or 11.1%, and commercial loans of $2.9 million, or 10.3%.

Investment securities available for sale decreased $6.9 million to $22.8 million at June 30, 2009. During the six months ended June 30, 2009, we purchased $2.0 million of U.S. government agency securities and received $9.0 million in proceeds from maturities, calls and principal repayments.

Total deposits decreased $23.7 million, or 6.9%, from $345.5 million at December 31, 2008 to $321.9 million at June 30, 2009. During the six months ended June 30, 2009, time deposits decreased $20.0 million to $196.9 million, and noninterest bearing deposits decreased by $2.7 million to $38.1 million. During the six months ended June 30, 2009, money market, NOW and savings deposits decreased $920,000 to $86.8 million.

19.

Federal Home Loan Bank advances increased $20.2 million from $20.0 million at December 31, 2008 to $40.2 million at June 30, 2009. Federal Reserve Bank borrowings increased $7.0 million to $33.0 million at June 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 decreased by $412,000 from $26.8 million at December 31, 2008 to $26.4 million at June 30, 2009. The decrease is mainly attributable to a net loss of $505,000 offset by an increase in the value of available-for-sale securities. At June 30, 2009, the Company had 8,000,000 authorized shares of $.01 par value common stock, of which 1,748,799 shares were issued and 1,747,599 shares were outstanding. In addition, the Company had 2,000,000 authorized shares of $.01 par value preferred stock, none of which were issued or outstanding at June 30, 2009.

Comparison of Operating Results for the Six Months Ended June 30, 2009 and 2008

Net Income

There was a net loss for the first six months of 2009 of $505,000, compared to a $303,000 net loss in the first six months of 2008. On a diluted per share basis, the net loss was $0.29 for the six months ended June 30, 2009, compared to net loss of $0.17 per diluted share in 2008. The decrease in net income was driven primarily by additional provisions for loan losses, lower net interest margin, an increase in FDIC regulatory assessment