Edgar Filing: JACKSONVILLE BANCORP INC /FL/

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 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 ¨ 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, 1,749,526 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	8

	Item 2.	Management’s Discussion and Analysis of Financial Condition
		and Results of Operations	21

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

	Item 4.	Controls and Procedures	31

PART II—OTHER INFORMATION

	Item 1.	Legal Proceedings	32

	Item 1A.	Risk Factors	32

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

	Item 3.	Defaults Upon Senior Securities	32

	Item 4.	Submission of Matters to a Vote of Security Holders	32

	Item 5.	Other Information	32

	Item 6.	Exhibits	32

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)

	September 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Cash and due from banks	$	5,496		$	8,665
Federal funds sold		-			1,483
Total cash and cash equivalents		5,496			10,148
Securities available-for-sale		23,795			29,684
Securities held-to-maturity		50			50
Loans, net of allowance for loan losses
of $6,455 at 2009 and $4,705 at 2008		389,082			374,993
Premises and equipment, net		3,612			3,940
Bank-owned life insurance (BOLI)		8,871			8,773
Federal Home Loan Bank (FHLB) stock		2,957			1,705
Real estate owned, net		1,245			89
Deferred income taxes		2,043			1,502
Accrued interest receivable		1,946			2,027
Other assets		846			1,088

Total assets	$	439,943		$	433,999

LIABILITIES
Deposits
Noninterest bearing	$	43,641		$	40,851
Money market, NOW and savings deposits		92,098			87,751
Time deposits		185,864			216,942
Total deposits		321,603			345,544
Federal funds purchased		43			-
Federal Reserve borrowing		26,500			26,000
FHLB advances		48,350			20,000
Subordinated debt		14,550			14,550
Accrued expenses and other liabilities		1,937			1,060
Total liabilities		412,983			407,154

SHAREHOLDERS’ EQUITY
Common stock, $.01 par value, 8,000,000 shares authorized,
1,749,526 and 1,748,799 shares issued		17			17
Additional paid–in capital		18,620			18,568
Retained earnings		8,033			8,213
Treasury stock, 672 and 200 shares		(8	)		(2	)
Accumulated other comprehensive income		298			49
Total shareholders’ equity		26,960			26,845

Total liabilities and shareholders’ equity	$	439,943		$	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						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
Interest and dividend income
Loans, including fees	$	5,853		$	6,096		$	16,595		$	18,331
Taxable securities		137			263			517			790
Tax-exempt securities		104			103			311			310
Federal funds sold and other		(13	)		(5	)		(36	)		28
Total interest income		6,081			6,457			17,387			19,459

Interest expense
Deposits	$	1,750		$	2,778		$	6,177		$	8,560
Federal Reserve borrowing		38			—			100			—
FHLB advances		281			405			761			1,237
Subordinated debt		196			223			539			456
Other		1			3			1			6
Total interest expense		2,266			3,409			7,578			10,259

Net interest income		3,815			3,048			9,809			9,200
Provision for loan losses		1,070			665			3,315			2,783

Net interest income after provision for loan losses		2,745			2,383			6,494			6,417

Noninterest income
Service charges on deposit accounts		148			170			455			496
Non-marketable equity security		—			—			(132	)		—
Other income		93			130			288			316
Total noninterest income		241			300			611			812

Noninterest expense
Salaries and employee benefits		1,124			1,141			3,351			3,428
Occupancy and equipment		487			449			1,371			1,338
Regulatory assessment		205			142			811			301
Merger related costs		—			—			—			430
Data processing		241			197			681			595
Other		471			410			1,267			1,385
Total noninterest expense		2,528			2,339			7,481			7,477

Income (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			1,748,183
Dilutive stock options and warrants		488			28,725			—			—
Dilutive shares		1,749,074			1,777,292			1,748,482			1,748,183

Basic 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.

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

Comprehensive 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						88

Common stock issued		618																	—

Share-based compensation expense							82												82

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

Balance at September 30, 2008		1,748,631		$	17	$	18,537		$	8,145		$	(2	)	$	(246	)	$	26,451

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

Comprehensive income:
Net loss										(180	)								(180	)
Change in unrealized gain
(loss) on securities available-
for-sale, net of tax effects																424			424
Net unrealized loss on cash
flow hedge, net of tax
effects																(175	)		(175	)
Total comprehensive income																			69

Purchase of treasury stock		(3,025	)										(33	)					(33	)

Issuance of treasury stock		2,553					—						27						27

Common stock issued		727																	—

Share-based compensation expense							52												52


Balance at September 30, 2009		1,748,854		$	17	$	18,620		$	8,033		$	(8	)	$	298		$	26,960

See accompanying notes to unaudited consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2009			2008
Cash flows from operating activities
Net income (loss)	$	(180	)	$	(36	)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Depreciation and amortization		386			387
Net amortization of deferred loan fees		87			54
Provision for loan losses		3,315			2,783
Premium 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			170
Loss on disposal of assets		10			38
Loss 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			1,960

Cash flows from investing activities
Purchases of securities available-for-sale		(3,076	)		(5,107	)
Proceeds from maturities, calls and paydown		9,699			5,521
of securities available-for-sale
Loan (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	)		1,047
Net cash from (used for) investing activities		(13,393	)		(42,133	)

Cash flows from financing activities
Net change in deposits		(23,941	)		61,923
Net 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		—			7,550
Proceeds from exercise of stock options		—			3
Purchase of treasury stock		(33	)		(62	)
Net cash from financing activities		4,919			41,884

Net change in cash and cash equivalents		(4,652	)		1,711
Cash and cash equivalents at beginning of period		10,148			6,035
Cash and cash equivalents at end of period	$	5,496		$	7,746

See accompanying notes to unaudited consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)

Supplemental disclosures of cash flow information
Cash paid during the period for
Interest	$	7,895	$	10,338
Income taxes		20		795

Supplemental schedule of noncash investing activities
Transfers from loans to real estate owned	$	4,883	$	89

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 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.

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.

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			Fair
	Cost		Gains		Losses			Value
(Dollars in thousands)
September 30, 2009
Available-for sale
U.S. government-sponsored
entities and agencies	$	3,234	$	36	$	(4	)	$	3,266
State and political subdivisions		10,883		390		(3	)		11,270
Mortgage-backed securities –
residential		8,514		328		-			8,842
Collateralized mortgage
obligations - residential		405		12		-			417

Total available-for-sale
securities	$	23,036	$	766	$	(7	)	$	23,795

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

	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
(Dollars in thousands)
December 31, 2008
Available-for sale
U.S. government-sponsored
entities and agencies	$	8,204	$	91	$	(11	)	$	8,284
State and political subdivisions		10,918		122		(262	)		10,778
Mortgage-backed securities –
residential		9,829		197		(59	)		9,967
Collateralized mortgage
obligations - residential		654		2		(1	)		655

Total available-for-sale
securities	$	29,605	$	412	$	(333	)	$	29,684

Total 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, 2009
	Amortized		Fair
	Cost		Value
Maturity
Available-for-sale
Within one year	$	4,458	$	4,489
One to five years		5,315		5,472
Five to ten years		4,344		4,575
Beyond ten years		-		-
Mortgage-backed		8,514		8,842
Collateralized Mortgage Obligations		405		417
Total	$	23,036	$	23,795

Held-to-maturity
Within one year	$	50	$	50

Total	$	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					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
(Dollars in thousands)
September 30, 2009

Available-for-sale
U.S. government-
sponsored entities
and agencies	$	746	$	(4	)	$	-	$	-		$	746	$	(4	)
States and political		248		(2	)		304		(1	)		552		(3	)
Mortgage-backed
securities – residential		-		-			-		-			-		-
Collateralized mortgage
obligations - residential		-		-			-		-			-		-


Total available-for-sale	$	994	$	(6	)	$	304	$	(1	)	$	1,298	$	(7	)

Held-to-maturity
other 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.)

	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
(Dollars in thousands)
December 31, 2008

Available-for-sale
U.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.

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, 2008
	September 30, 2009			December 31, 2008		to September 30, 2009
Real 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