Jacksonville Bancorp 10Q 2010 Q2 Quarterly report

		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets	3

	Consolidated Statements of Income (Loss)	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	20

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 6.	Exhibits	36

SIGNATURES		37

EXHIBIT INDEX		38

CERTIFICATIONS
Certification of Price W. Schwenck under Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Valerie A. Kendall under Section 302 of the Sarbanes-Oxley Act of 2002
Certification under Section 906 of the Sarbanes-Oxley Act of 2002

JACKSONVILLE BANCORP, INC.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

	June 30,			December 31,
	2010			2009
	(Unaudited)
ASSETS
Cash and due from banks	$	6,659		$	5,647
Federal funds sold		16,472			—
Total cash and cash equivalents		23,131			5,647
Securities available-for-sale		25,448			22,171
Loans, net of allowance for loan losses of $8,248 at 2010 and $6,854 at 2009		373,885			384,133
Premises and equipment, net		3,406			3,533
Bank-owned life insurance (BOLI)		9,037			8,908
Federal Home Loan Bank (FHLB) stock		3,047			3,047
Real estate owned, net		6,089			4,011
Deferred income taxes		2,729			2,015
Prepaid regulatory assessments		2,159			2,599
Accrued interest receivable		1,978			1,864
Other assets		1,319			883

Total assets	$	452,228		$	438,811

LIABILITIES
Deposits
Noninterest bearing	$	40,843		$	43,704
Money market, NOW and savings deposits		127,317			104,838
Time deposits		223,538			222,093
Total deposits		391,698			370,635
Federal funds purchased		—			227
FHLB advances		20,000			25,000
Subordinated debt		14,550			14,550
Accrued expenses and other liabilities		949			1,131
Total liabilities		427,197			411,543

SHAREHOLDERS’ EQUITY
Common stock, $.01 par value, 8,000,000 shares authorized, 1,750,437 and 1,749,526 shares issued		18			17
Additional paid–in capital		18,678			18,631
Retained earnings		6,306			8,287
Treasury stock, 1,050 and 283 shares		(12	)		(3	)
Accumulated other comprehensive income		41			336
Total shareholders’ equity		25,031			27,268

Total liabilities and shareholders’ equity	$	452,228		$	438,811

See accompanying notes to unaudited consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Interest and dividend income
Loans, including fees	$	5,528		$	5,383		$	11,112		$	10,742
Taxable securities		123			150			238			380
Tax-exempt securities		100			104			203			207
Federal funds sold and other		(2	)		(12	)		(9	)		(23	)
Total interest income		5,749			5,625			11,544			11,306

Interest expense
Deposits		1,788			2,116			3,562			4,427
Federal Reserve borrowing		—			31			1			62
FHLB advances		242			249			497			480
Subordinated debt		192			160			382			343
Total interest expense		2,222			2,556			4,442			5,312

Net interest income		3,527			3,069			7,102			5,994
Provision for loan losses		1,920			1,307			4,295			2,245
Net interest income after provision for loan losses		1,607			1,762			2,807			3,749

Noninterest income
Service charges on deposit accounts		124			147			263			307
Non-marketable equity security		—			—			—			(132	)
Other income		162			77			271			195
Total noninterest income		286			224			534			370

Noninterest expense
Salaries and employee benefits		1,281			1,111			2,518			2,227
Occupancy and equipment		412			405			818			821
Regulatory assessment		251			492			511			606
Data processing		250			232			495			440
Merger related costs		353			—			353			—
Advertising and business development		132			99			218			211
Professional fees		169			125			330			274
Telephone expense		34			32			66			63
Other real estate owned expense		379			37			844			50
Other		182			134			376			261
Total noninterest expense		3,443			2,667			6,529			4,953

Income (loss) before income taxes		(1,550	)		(681	)		(3,188	)		(834	)
Income tax expense (benefit)		(558	)		(285	)		(1,208	)		(329	)
Net income (loss)		(992	)		(396	)		(1,980	)		(505	)

Weighted average:
Common shares		1,749,443			1,748,214			1,749,140			1,748,429
Dilutive stock options and warrants		—			—			—			—
Dilutive shares		1,749,443			1,748,214			1,749,140			1,748,429
Basic earnings (loss) per common share	$	(.57	)	$	(.23	)	$	(1.13	)	$	(.29	)
Diluted earnings (loss) per common share	$	(.57	)	$	(.23	)	$	(1.13	)	$	(.29	)

See accompanying notes to unaudited consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands)

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

Balance at January 1, 2010		1,749,243		$	17	$	18,631		$	8,287		$	(3	)	$	336		$	27,268

Comprehensive income:
Net (loss)										(1,980	)								(1,980	)
Change in unrealized gain (loss) on securities available- for-sale, net of tax effects																88			88
Net unrealized loss on cash flow hedge, net of tax effects																(383	)		(383	)
Total comprehensive (loss)																			(2,275	)

Purchase of treasury stock		(1,817	)										(20	)					(20	)

Issuance of treasury stock		1,050								(1	)		11						10

Common stock issued		911			1														1

Share-based compensation expense							47												47

Balance at June 30, 2010		1,749,387		$	18	$	18,678		$	6,306		$	(12	)	$	41		$	25,031

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,
		2010			2009
Cash flows from operating activities
Net income (loss)		$	(1,980	)	$	(505	)
Adjustments to reconcile net income (loss) to net cash from operating activities:
Depreciation and amortization			211			235
Net amortization (accretion) of deferred loan fees			(58	)		47
Provision for loan losses			4,295			2,245
Premium amortization, net of accretion			(174	)		(22	)
Net loss on sale of real estate owned			41			—
Loss on write-down of real estate owned			486			—
Earnings on Bank-owned life insurance			(129	)		(64	)
Share-based compensation			58			54
Loss on disposal of assets			3			4
Loss on non-marketable equity investment			—			132
Deferred income tax			(537	)		(496	)
Net change in accrued interest receivable and other assets			(134	)		278
Net change in accrued expenses and other liabilities			(780	)		351
Net cash from operating activities			1,302			2,259

Cash flows from investing activities
Purchases of securities available-for-sale			(7,239	)		(2,000	)
Proceeds from maturities, calls and paydown of securities available-for-sale			4,277			9,032
Loan (originations) payments, net			3,389			(12,680	)
Proceeds from sale of real estate owned			17			—
Additions to premises and equipment, net			(78	)		(22	)
Net change in Federal Home Loan Bank stock			—			(886	)
Net cash from (used for) investing activities			366			(6,556	)

Cash flows from financing activities
Net change in deposits			21,063			(23,680	)
Net change in Fed funds purchased			(227	)		—
Net change from Federal Reserve borrowing			—			7,000
Repayment of fixed rate FHLB advances			(5,000	)		—
Purchase of fixed rate FHLB advances			—			5,000
Net change in overnight FHLB advances			—			15,200
Purchase of treasury stock			(20	)		(26	)
Net cash from financing activities			15,816			3,494

Net change in cash and cash equivalents	��		17,484			(803	)
Cash and cash equivalents at beginning of period			5,647			10,148
Cash and cash equivalents at end of period		$	23,131		$	9,345

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	$	4,456	$	5,537
Income taxes		—		15

Supplemental schedule of noncash investing activities
Transfers from loans to real estate owned	$	2,622	$	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.

In 2010, The Jacksonville Bank formed TJB Properties, LLC, a wholly owned subsidiary of The Jacksonville Bank for the sole purpose of managing property acquired through foreclosure. The consolidated financial statements include the accounts of Jacksonville Bancorp, Inc. and its wholly owned subsidiary, The Jacksonville Bank, and The Jacksonville Bank’s wholly owned subsidiaries, Fountain Financial, Inc. and TJB Properties, LLC. The consolidated entity is referred to as the “Company” and The Jacksonville Bank and its subsidiaries are collectively referred to as the “Bank.” The Company’s financial condition and operating results principally reflect those of the Bank. All intercompany balances and amounts have been eliminated. For further information refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 19, 2010.

The accounting and reporting policies of the Company reflect banking industry practice and conform to U.S. generally accepted accounting standards. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts, and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates.

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

Adoption of New Accounting Standards

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

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

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

NOTE 2 - INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale and held-to-maturity investment securities portfolio at June 30, 2010 and December 31, 2009 and the corresponding amounts of unrealized gains and losses therein:

	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
(Dollars in thousands)
June 30, 2010
Available-for sale
U.S. government-sponsored entities and agencies	$	1,985	$	23	$	—		$	2,008
State and political subdivisions		10,349		262		(22	)		10,589
Mortgage-backed securities – residential		6,828		404		-			7,232
Collateralized mortgage obligations - residential		5,621		10		(12	)		5,619

Total available-for-sale securities	$	24,783	$	699	$	(34	)	$	25,448

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

Total available-for-sale securities	$	21,648	$	578	$	(55	)	$	22,171

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

NOTE 2 - INVESTMENT SECURITIES (Cont.)

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

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

The following table summarizes the investment securities with unrealized losses at June 30, 2010 and December 31, 2009 by aggregated major security type and length of time in a continuous unrealized loss position:

	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
(Dollars in thousands)
June 30, 2010

Available-for-sale
U.S. government- sponsored entities and agencies	$	—	$	—		$	—	$	—		$	—	$	—
States and political		1,276		(7	)		540		(15	)		1,816		(22	)
Mortgage-backed securities – residential		—		—			—		—			—		—
Collateralized mortgage obligations - residential		5,381		(12	)		—		—			5,381		(12	)

Total available-for-sale securities	$	6,657	$	(19	)	$	540	$	(15	)	$	7,197	$	(34	)

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, 2009

Available-for-sale
U.S. government- sponsored entities and agencies	$	987	$	(13	)	$	—	$	—		$	987	$	(13	)
States and political		1,789		(25	)		288		(17	)		2,077		(42	)
Mortgage-backed securities – residential		—		—			—		—			—		—
Collateralized mortgage obligations - residential		—		—			—		—			—		—

Total available-for-sale securities	$	2,776	$	(38	)	$	288	$	(17	)	$	3,064	$	(55	)

Other-Than-Temporary-Impairment

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

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

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

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

NOTE 2 - INVESTMENT SECURITIES (Cont.)

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

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

U.S. Agency Securities

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

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

State and Political Securities

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

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

Mortgage-Backed Securities

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

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

NOTE 2 - INVESTMENT SECURITIES (Cont.)

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

NOTE 3 – LOAN PORTFOLIO COMPOSITION

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

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

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

NOTE 4 – ALLOWANCE FOR LOAN LOSSES

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Beginning balance	$	7,618		$	4,942		$	6,854		$	4,705
Provisions for loan losses charged to expense		1,920			1,307			4,295			2,245
Loans charged off		(1,332	)		(587	)		(2,962	)		(1,289	)
Recoveries of loans previously charged off		42			1			61			2
Ending balance, June 30	$	8,248		$	5,663		$	8,248		$	5,663

Impaired loans were as follows:

	June 30,		December 31,
	2010		2009
Loans with no allocated allowance for loan losses	$	5,905	$	4,036
Loans with allocated allowance for loan losses		15,999		18,516
Total	$	21,904	$	22,552

Amount of the allowance for loan losses allocated	$	1,180	$	786

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

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

	2010		2009
Convertible advances maturing June 8, 2010 with a quarterly call option beginning June 9, 2008 at a fixed rate of 4.99%		—		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		5,000

	$	20,000	$	25,000

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

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

NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENT

On July 7, 2009, the Company entered into an interest rate swap transaction with SunTrust Bank to mitigate interest rate risk exposure. Under the terms of the agreement, which relates to the subordinated debt issued to Jacksonville Bancorp, Inc. Statutory Trust III in the amount of $7,550, the Company has agreed to pay a fixed rate of 7.53% for a period of ten years in exchange for the original floating rate contract (90-day LIBOR plus 375 basis points). This derivative instrument is recognized on the balance sheet in other liabilities at its fair value of $598 on June 30, 2010.

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

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

NOTE 7 – CAPITAL ADEQUACY

Federal banking regulators have established certain capital adequacy standards required to be maintained by banks and bank holding companies. The minimum requirements established in the regulations are set forth in the table below, along with the actual ratios for the Company at June 30, 2010 and December 31, 2009. Management and the Board of Directors have committed to maintain Total Risk-Based Capital at 10% and Tier 1 Capital to Average Assets at 8% at the Bank.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2010
Total capital to risk
weighted assets
Consolidated	$	44,206		11.51	%	$	30,737		8.00	%		N/A		N/A
Bank		42,304		11.04	%		30,650		8.00	%	$	38,312		10.00	%

Tier 1 (Core) capital to risk
weighted assets
Consolidated		33,141		8.63	%		15,369		4.00	%		N/A		N/A
Bank		37,472		9.78	%		15,325		4.00	%		22,987		6.00	%

Tier 1 (Core) capital to
average assets
Consolidated		33,141		7.31	%		18,146		4.00	%		N/A		N/A
Bank		37,472		8.27	%		18,130		4.00	%		22,662		5.00	%

December 31, 2009
Total capital to risk
weighted assets
Consolidated	$	46,393		11.87	%	$	31,273		8.00	%		N/A		N/A
Bank		43,307		11.08	%		31,255		8.00	%	$	39,068		10.00	%

Tier 1 (Core) capital to risk
weighted assets
Consolidated		35,909		9.19	%		15,637		4.00	%		N/A		N/A
Bank		38,399		9.83	%		15,627		4.00	%		23,441		6.00	%

Tier 1 (Core) capital to
average assets
Consolidated		35,909		8.18	%		17,570		4.00	%		N/A		N/A
Bank		38,399		8.75	%		17,556		4.00	%		21,945		5.00	%

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

NOTE 8 – FAIR VALUE

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

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

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

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

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

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

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

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

Other Real Estate Owned: Nonrecurring adjustment to certain commercial and residential real estate properties classified as other real estate owned (OREO) is measured at fair value, less costs to sell. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification.

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

NOTE 8 – FAIR VALUE (Cont.)

The following assets and liabilities are measured on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option:

				Fair Value Measurements Using
				Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
(Dollars in thousands) June 30, 2010 Available-for-sale
U.S. government-sponsored entities and agencies		$	2,008		—	$	2,008		—
State and political subdivisions			10,589		—		10,589		—
Mortgage-backed securities - residential			7,232		—		7,232		—
Collateralized mortgage obligations - residential			5,619		—		5,619		—
Derivative asset			—		—		—		—
	��
(Dollars in thousands) December 31, 2009 Available-for-sale
U.S. government-sponsored entities and agencies		$	2,504		—	$	2,504		—
State and political subdivisions			10,963		—		10,963		—
Mortgage-backed securities - residential			8,352		—		8,352		—
Collateralized mortgage obligations - residential			352		—		352		—
Derivative asset			15		—		15		—

Liabilities:
June 30, 2010
Derivative liability		$	598		—	$	598		—

December 31, 2009
Derivative liability		$	—		—	$	—		—

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

			Fair Value Measurements Using
			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
June 30, 2010
Impaired loans	$	988		—		—	$	988
OREO		6,089						6,089

December 31, 2009
Impaired loans	$	2,077		—		—	$	2,077
OREO		4,011						4,011

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1,412 with a valuation allowance of $424 at June 30, 2010, compared to a carrying amount of $2,341 with a valuation allowance of $264 at December 31, 2009. Collateral dependent impaired loans, valued under Level 3, were measured using current appraised values along with information on recent market transactions as well as management’s assumptions about the criteria that market participants would use in pricing the assets.

OREO, which is measured using the collateral values, had a net carrying amount of $6,089, which is made up of the outstanding balance of $6,606, net of a valuation allowance of $517 at June 30, 2010, resulting in a write-down of $486 for the year ending June 30, 2010. At December 31, 2009, the carrying amount of OREO was $4,011, which is made up of the outstanding balance of $4,041, net of a valuation allowance of $30, resulting in a write-down of $30 for the year ended December 31, 2009.

The carrying amount and estimated fair values of financial instruments at June 30, 2010 and December 31, 2009 were as follows:

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

JACKSONVILLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

NOTE 8 – FAIR VALUE (Cont.)

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

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

Carrying amount is the estimated fair value for cash and cash equivalents, interest-bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and deposits that reprice frequently and fully. The methods for determining the fair values for securities were described previously. For loans, fair value is based on discounted cash flows using current market rates applied to the estimated life adjusted for the allowance for loan losses. For fixed rate deposits and variable rate deposits with infrequent repricing, fair value is based on discounted cash flows using current market rates applied to the estimated life. Fair value of debt, including FHLB advances, is based on current rates for similar financing. It was not practicable to determine fair value of FHLB stock and other nonmarketable equity securities due to restrictions placed on transferability. The fair value of off-balance-sheet items is considered nominal.

NOTE 9 – SIGNIFICANT EVENT

On May 10, 2010, Bancorp and Atlantic BancGroup, Inc. (“ABI”) entered into a merger agreement providing for the merger of ABI into Bancorp. The merger agreement also contemplates the consolidation of Oceanside Bank into the Bank. Additionally, Bancorp announced the signing of a stock purchase agreement with four private investors led by CapGen Capital Group IV LP ("CapGen") providing for $30 million in new capital through the sale of newly issued shares of Bancorp common stock subject to completion of the mergers. The transactions have been approved by the Boards of Directors of each company.

Under the terms of the merger agreement, ABI shareholders will receive 0.2 shares of Bancorp common stock for each share of ABI common stock. Additionally, ABI shareholders will receive cash of up to approximately $0.65 per share, subject to the qualifying sale of certain ABI assets. On June 30, 2010, ABI sold the certain ABI assets to an unaffiliated third party. A total of approximately 249,503 shares of Bancorp common stock is expected to be issued to ABI shareholders.

Under the terms of the stock purchase agreement, Bancorp will issue approximately 3 million shares of its common stock at a price of $10.00 per share. The largest investment is coming from CapGen, which has agreed to purchase approximately $19.6 million. John Sullivan of CapGen will become a new director of the combined company pending the closing of the transactions, joining CapGen principal John Rose, who is a current Bancorp director.

The merger is conditioned upon approval by the Federal Reserve Board, the Florida Office of Financial Regulation, FDIC, ABI's shareholders and other customary closing conditions. The sale of the Bancorp common stock and other aspects of the transaction are subject to approval by Bancorp shareholders and to regulatory approvals.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

General

Jacksonville Bancorp, Inc. (“Bancorp”) was incorporated on October 24, 1997 and was organized to conduct the operations of The Jacksonville Bank (together with its subsidiary, Fountain Financial, Inc., the “Bank”). The Bank is a Florida state-chartered commercial bank that opened for business on May 28, 1999, and its deposits are insured by the Federal Deposit Insurance Corporation. The Bank provides a variety of community banking services to businesses and individuals in the greater Jacksonville area of Northeast Florida. During 2000, the Bank formed Fountain Financial, Inc., a wholly owned subsidiary. The primary business activities of Fountain Financial, Inc. consist of referral of our customers to third parties for the sale of insurance products. In 2010, the Bank formed TJB Properties, LLC, a wholly owned subsidiary. The primary purpose of TJB Properties, LLC is to manage Other Real Estate Owned (OREO) properties. Bancorp, the Bank, TJB Properties, LLC and Fountain Financial, Inc. are collectively referred to herein as the “Company.”

Forward Looking Statements

All statements, other than statements of historical facts, included in this Quarterly Report on Form 10-Q regarding our estimates, expectations, beliefs, intentions, projections or strategies for the future, results of operations, financial position, prospects and plans and objectives of management for future operations may be “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995, as amended. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements can be identified by the use of terms and phrases such as “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions (“will,” “may,” “could,” “should,” etc.). Items contemplating or making assumptions about actual or potential future operating results also constitute forward-looking statements. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, including changes in local economic conditions, changes in regulatory requirements, fluctuations in interest rates, demand for products, and competition, and, therefore, actual results could differ materially from those contemplated by the forward-looking statements. In addition, the Company assumes no duty to update forward-looking statements to reflect events or circumstances after the date of such statements.

Business Strategy

Our primary business segment is community banking and consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans, commercial real estate loans, residential mortgage loans and a variety of consumer loans. We also invest in securities backed by the United States government, and agencies thereof, as well as municipal tax-exempt bonds. Our profitability depends primarily on our net interest income, which is the difference between the income we receive from our loan and securities investment portfolios and costs incurred on our deposits, the Federal Home Loan Bank (“FHLB”) advances, Federal Reserve borrowings and other sources of funding. Net interest income is also affected by the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income is generated as the relative amounts of interest-earning assets grow in relation to the relative amounts of interest-bearing liabilities. In addition, the level of noninterest income earned and noninterest expenses incurred also affects profitability. Included in noninterest income are service charges earned on deposit accounts and increases in cash surrender value of Bank Owned Life Insurance (“BOLI”). Included in noninterest expense are costs incurred for salaries and employee benefits, occupancy and equipment expenses, data processing expenses, marketing and advertising expenses, federal deposit insurance premiums and legal, professional fees, and OREO expenses.

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

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

Introduction

On the following pages, management presents an analysis of the financial condition of the Company as of June 30, 2010 compared to December 31, 2009, and the results of operations for the three and six months ended June 30, 2010 compared with the same period in 2009. This discussion is designed to provide a more comprehensive review of the operating results and financial position than could be obtained from an examination of the financial statements alone. This analysis should be read in conjunction with the interim financial statements and related footnotes included herein.

Comparison of Financial Condition at June 30, 2010 and December 31, 2009

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

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

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

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

Total shareholders' equity decreased by $2.2 million from $27.3 million at December 31, 2009 to $25.0 million at June 30, 2010. The decrease is mainly attributable to a net loss of $2.0 million and a $383,000 net unrealized loss on a cash flow hedge derivative. At June 30, 2010, the Company had 8,000,000 authorized shares of $.01 par value common stock, of which 1,750,437 shares were issued and 1,749,387 shares were outstanding. In addition, the Company had 2,000,000 authorized shares of $.01 par value preferred stock, none of which were issued or outstanding at June 30, 2010.

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

Net Income

There was a net loss for the first six months of 2010 of $2.0 million, compared to a $505,000 net loss in the first six months of 2009. On a diluted per share basis, the net loss was $1.13 for the six months ended June 30, 2010, compared to a net loss of $0.29 per diluted share in 2009. The net loss for the first six months of 2010 was driven primarily by additional provisions for loan losses, merger related costs, write-down of OREO values, and other related expenses on foreclosed properties.

Net Interest Income

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

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

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

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

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

	Six Months Ended June 30,
	2010								2009
	Average Balance		Interest			Average Rate			Average Balance		Interest			Average Rate
	Average Balance		Interest			Average Rate			Average Balance		Interest			Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans (1)	$	389,508	$	11,112			5.75	%	$	384,666	$	10,742			5.63	%
Securities (2)		26,339		441			3.38			28,321		587			4.18
Other interest-earning assets (3)		13,731		(9	)		(.13	)		691		(23	)		(6.71	)
Total interest-earning assets		429,578		11,544			5.42			413,678		11,306			5.51
Noninterest-earning assets (4)		21,034								16,430
Total assets	$	450,612							$	430,108

Interest-bearing liabilities:
Savings deposits	$	10,562	$	68			1.30		$	12,789	$	118			1.86
NOW deposits		5,955		6			.20			8,770		12			.28
Money market deposits		99,871		752			1.52			67,102		534			1.60
Time deposits		225,372		2,736			2.45			208,030		3,763			3.65
FHLB advances		24,372		497			4.11			24,819		480			3.90
Federal Reserve borrowing		398		1			.51			24,889		62			.50
Subordinated debt		14,550		382			5.29			14,550		343			4.75
Other interest-bearing liabilities (5)		25		—			—			153		—			—
Total interest-bearing liabilities		381,105		4,442			2.35			361,102		5,312			2.97
Noninterest-bearing liabilities		42,741								41,935
Shareholders' equity		26,766								27,071
Total liabilities and
shareholders' equity	$	450,612							$	430,108

Net interest income			$	7,102							$	5,994

Interest rate spread (6)							3.07	%							2.54	%

Net interest margin (7)							3.33	%							2.92	%

(1) Includes nonaccrual loans and deferred loan fees.

(2) Due to immateriality, the interest income and yields related to certain tax exempt assets have not been adjusted to reflect a fully taxable equivalent yield.

(3) Includes federal funds sold. The negative income is a result of the amortized expense on the subordinated debt.

(4) For presentation purposes, the BOLI acquired by the Bank has been included in noninterest-earning assets.

(5) Includes federal funds purchased.

(6) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(7) Net interest margin is net interest income divided by average interest-earning assets.

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

	Six Months Ended June 30, 2010 Versus 2009 (1)
	Increase (decrease) due to changes in:
	Volume			Rate			Net Change
	(Dollars in thousands)
Interest income:
Loans	$	136		$	234		$	370
Securities		(39	)		(107	)		(146	)
Other interest-earning assets		(30	)		44			14
Total interest income		67			171			238

Interest expense:
Savings deposits		(18	)		(32	)		(50	)
NOW deposits		(3	)		(3	)		(6	)
Money market deposits		248			(30	)		218
Time deposits		293			(1,320	)		(1,027	)
FHLB advances		(9	)		26			17
Federal Reserve borrowing		(62	)		1			(61	)
Subordinated debt		—			39			39
Other interest-bearing liabilities		—			—			—
Total interest expense		449			(1,319	)		(870	)

Decrease in net interest income	$	(382	)	$	1,490		$	1,108

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

Critical Accounting Policies

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

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

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

Asset Quality

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

	June 30, 2010			December 31, 2009
	(Dollars in thousands)

Nonaccruing loans	$	6,435		$	8,745

Loans past due over 90 days still on accrual		—			—
Total nonperforming loans		6,435			8,745
Foreclosed assets, net		6,089			4,011
Total nonperforming assets		12,524			12,756
Troubled debt restructuring		15,417			16,175
Total nonperforming assets and troubled debt restructuring	$	27,941		$	28,931

Allowance for loan losses	$	8,248		$	6,854

Nonperforming loans and foreclosed assets as a percent of total assets		2.77	%		2.91	%
Nonperforming loans as a percent of gross loans		1.68	%		2.24	%
Allowance for loan losses as a percent of nonperforming loans		128.17	%		78.38	%

Loans past due 30-89 days, still accruing	$	8,539		$	5,308
Assets classified as substandard and doubtful	$	37,604		$	44,815

Loans are impaired when it is considered probable that the Company will not collect the outstanding loan principal and interest amounts according to the loan’s contractual terms. At June 30, 2010, the Company had impaired loans of $21.9 million, compared to $22.6 million at December 31, 2009. Of the $21.9 million impaired loans, $6.4 million are nonperforming loans as reflected above.

The Company has loan balances of $15.4 million for customers whose loans are classified as troubled debt restructuring and such loans are included in the impaired loan balances of $21.9 million at June 30, 2010. There are no additional funds committed to customers whose loans are classified as troubled debt restructuring. Each of the loans classified as troubled debt restructuring currently carries a market rate of interest. Most of these loans were modified to suspend principal payments for a period of time less than or equal to one year, and the interest rate was modified from a fixed rate to a floating rate tied to the Prime rate. Of the $1.2 million allowance for loan losses reserved for impaired loans, the Company has allocated $756,000 to customers whose loan terms have been modified in troubled debt restructuring.

While the Company experienced improvement in nonperforming loans during the six-month period ended June 30, 2010, it considers all risk elements, including early indicators of potential problem loans, when determining the appropriateness of the allowance for loan losses. The Company’s loans past due 30-89 days increased to $8.5 million at June 30, 2010 from $5.3 million at December 31, 2009.

The Company critically evaluates all requests for additional funding on classified loans to determine whether the borrower has the capacity and willingness to repay. Any requests of this nature require concurrence by the Loan Committee of the Bank’s Board of Directors.

Allowance and Provision for Loan Losses

The allowance for loan losses grew by $1.4 million during the first six months of 2010, amounting to $8.2 million at June 30, 2010, as compared to $6.9 million at December 31, 2009. The allowance represented approximately 2.16% of total loans at June 30, 2010 and 1.75% at December 31, 2009. During the first six months of 2010, the Company had charge-offs of $3.0 million, recoveries of $61,000 and recorded a $4.3 million provision for loan losses compared to charge-offs of $1.3 million, recoveries of $2,000 and a provision for loan losses of $2.2 million for the first six months of 2009. The larger provision for loan losses in 2010 was driven primarily by the charge-off of several loans graded as substandard. Additionally, the worsening economic conditions, coupled with the continued softness in the residential real estate market and the growing softness in the commercial real estate market, along with the Bank’s concentration in collateral dependent real estate loans, were considered when determining the appropriate level of loan loss reserves in the first six months of 2010.

The Bank’s identification efforts of potential losses in the portfolio are based on a variety of specific factors, including the Company’s own experience as well as industry and economic trends. Impaired loans were $21.9 million as of June 30, 2010; of this amount, $1.2 million was specifically allocated to the allowance for loan losses which is deemed appropriate to absorb probable losses.

The allowance for loan losses is a valuation allowance for credit losses in the loan portfolio. Management has adopted a methodology to properly analyze and determine an adequate loan loss allowance. The analysis is based on well documented information and is designed to support an allowance that is adequate to absorb probable incurred losses in the Company’s loan portfolio. Due to their similarities, the Company has grouped the loan portfolio into three components. The components are residential real estate loans, consumer loans and commercial loans. The Company has created a loan classification system to properly calculate the allowance for loan losses. Loans are evaluated for impairment. If a loan is deemed to be impaired, a portion of the allowance may be allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the sale of the collateral. The Bank’s policy is to obtain updated appraisals for all substandard loans secured by real estate on at least an annual basis. Real estate values in the Bank’s market area have experienced deterioration over the last several quarters, and the expectation is for further deterioration in certain property types in the immediate future. On a quarterly basis, management reviews several factors, including underlying collateral, and will write down impaired loans to the net realizable value.

In estimating the overall exposure to loss on impaired loans, the Company has considered a number of factors, including the borrower’s character, overall financial condition, resources and payment record, the prospects for support from any financially responsible guarantors, and the realizable value of any collateral. The Company also considers other internal and external factors when determining the allowance for loan losses. These factors include, but are not limited to, changes in national and local economic conditions, commercial lending staff limitations, impact from lengthy commercial loan workout and charge-off periods, loan portfolio concentrations and trends in the loan portfolio.

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

Based on the results of the analysis performed by management at June 30, 2010, the allowance for loan loss is considered to be appropriate to absorb probable incurred losses in the portfolio as of that date. As more fully discussed in the “Critical Accounting Policies” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the process for estimating credit losses and determining the allowance for loan losses as of any balance sheet date is subjective in nature and requires material estimates. Actual results could differ significantly from these estimates.

The amount of future charge-offs and provisions for loan losses could be affected by, among other things, economic conditions in Jacksonville, Florida, and the surrounding communities. Such conditions could affect the financial strength of the Company’s borrowers and the value of real estate collateral securing the Company’s mortgage loans.

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

Noninterest Income, Noninterest Expense and Income Taxes

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

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

The income tax benefit for the six months ended June 30, 2010 was $1.2 million, compared to an income tax benefit of $329,000 for the six months ended June 30, 2009. The tax benefit is the result of the benefits derived from tax-free municipal bonds and tax-free income earned on the bank-owned life insurance policies, resulting in a greater percentage of loss being recorded as a benefit.

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

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

Net interest income was $3.5 million for the second quarter of 2010 compared to $3.1 million for the same period in 2009. Interest income for the quarter increased $124,000 when compared to the prior year as a result of an increase in average earning assets of $18.4 million. Interest expense declined by $334,000 as a result of the reduction in short-term rates and utilizing less expensive wholesale funding to support the Company’s earning asset growth. The net interest margin improved to 3.27% for the quarter, compared to 2.97% for the comparable period in 2009.

Capital

The Company’s capital management policy is designed to build and maintain capital levels that meet regulatory standards. Under current regulatory capital standards, banks are classified as well-capitalized, adequately-capitalized or undercapitalized. Under such standards, a well-capitalized bank is one that has a total risk-based capital ratio equal to or greater than 10%, a Tier 1 risk-based capital ratio equal to or greater than 6%, and a Tier 1 leverage capital ratio equal to or greater than 5%. The Bank’s total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage capital ratios were 11.04%, 9.78% and 8.27%, respectively, at June 30, 2010. The Company also maintains capital levels that meet the same regulatory standards. If the capital ratios of Bancorp and the Bank were to fall below levels required under regulatory standards, it is their policy to increase capital in an amount sufficient to meet regulatory requirements within 30 days.

The Company has included in Tier 1 Capital and Total Capital a portion of the trust preferred securities that were issued in June 2004, December 2006 and June 2008.

Cash Flows and Liquidity

Cash Flows. The Company’s primary sources of cash are deposit growth, maturities and amortization of investment securities, FHLB advances, Federal Reserve Bank borrowings and federal funds purchased. The Company uses cash from these and other sources to fund loan growth. Any remaining cash is used primarily to reduce borrowings and to purchase investment securities. During the first six months of 2010, the Company’s cash and cash equivalent position increased by $17.5 million. The increase in cash mainly resulted from an increase in deposit accounts of approximately $21.1 million from $370.1 million at December 31, 2009 to $391.7 million at June 30, 2010, offset by net loan payments of $3.4 million.

Liquidity. The Company has both internal and external sources of near-term liquidity that can be used to fund loan growth and accommodate deposit outflows. The primary internal sources of liquidity are principal and interest payments on loans; proceeds from maturities and monthly payments on the balance of the investment securities portfolio; and its overnight position with federal funds sold. At June 30, 2010, the Company had $25.4 million in available-for-sale securities, $7.3 million of which was pledged to the Federal Reserve Bank for the Borrower in Custody Program.

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

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

Off-Balance Sheet Arrangements. There have been no material changes in the risks related to off-balance sheet arrangements since the Company’s disclosure in its Annual Report on Form 10-K for the year ended December 31, 2009.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk that a financial institution will be adversely impacted by unfavorable changes in market prices. These unfavorable changes could result in a reduction in net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities.

Interest rate risk is the sensitivity of income to variations in interest rates over both short-term and long-term horizons. The primary goal of interest rate risk management is to control this risk within limits approved by the Board of Directors and narrower guidelines approved by the Asset Liability Committee. These limits and guidelines reflect the Bank’s tolerance for interest rate risk. The Bank attempts to control interest rate risk by identifying and quantifying exposures. The Bank quantifies its interest rate risk exposures using sophisticated simulation and valuation models as well as simpler gap analyses performed by a third-party vendor specializing in this activity. There have been no significant changes in the Bank’s primary market risk exposure or how those risks are managed since our disclosures in our Annual Report on Form 10-K for the year ended December 31, 2009.

The Bank’s internal policy on interest rate risk specifies that if interest rates were to shift immediately up or down 200 basis points, estimated net interest income for the next 12 months should change by less than 15%. The most current simulation projects the Bank’s net interest income to be within the parameters of its internal policy and has not changed significantly from our disclosures in our Annual Report on Form 10-K for the year ended December 31, 2009. Such simulation involves numerous assumptions and estimates, which are inherently subjective and are subject to substantial business and economic uncertainties. Accordingly, the actual effects of an interest rate shift under actual future conditions may be expected to vary significantly from those derived from the simulation to the extent that the assumptions used in the simulation differ from actual conditions.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Bancorp maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon management’s evaluation of those controls and procedures as of the end of the fiscal quarter covered by this quarterly report on Form 10-Q, the Chief Executive Officer and the Chief Financial Officer of Bancorp concluded that, subject to the limitations noted below, Bancorp’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(c) under the Exchange Act) are effective to ensure that the information required to be disclosed by Bancorp in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Controls

In the ordinary course of business, Bancorp may routinely modify, upgrade and enhance its internal controls and procedures for financial reporting. In an effort to improve internal control over financial reporting, Bancorp continues to emphasize the importance of identifying areas for improvement and to create and implement new policies and procedures where deficiencies exist. There have not been any changes in Bancorp’s internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Bancorp’s internal control over financial reporting.

Bancorp’s management, including its Chief Executive Officer and its Chief Financial Officer, does not expect that its disclosure controls and internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management’s override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Since the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 19, 2010, the following risk factors have been identified, including those risk factors associated with Jacksonville Bancorp, Inc.’s (JBI) proposed merger with Atlantic BancGroup, Inc. (ABI) (see Note 9 to the Consolidated Financial Statements).

JBI may have difficulties integrating ABI’s operations into JBI’s operations or may fail to realize the anticipated benefits of the proposed Merger.

The proposed Merger involves the integration of two companies that have previously operated independently of each other. Successful integration of ABI’s operations will depend primarily on JBI’s ability to consolidate ABI’s operations, systems and procedures into those of JBI and to eliminate redundancies and costs. JBI may not be able to integrate the operations without encountering difficulties related to JBI’s ability to achieve any enhanced earnings or cost savings or that they may take longer to be realized than expected.

JBI and ABI will incur significant transaction and Merger-related integration costs in connection with the Merger.

JBI and ABI expect to incur significant costs associated with completing the Merger and integrating the operations of the two companies. JBI and ABI are continuing to assess the impact of these costs. Although JBI and ABI believe that the elimination of duplicate costs, as well as the realization of other efficiencies related to the integration of the businesses, will offset incremental transaction and Merger-related costs over time, this net benefit may not be achieved in the near term, or at all.

The loss of key personnel may adversely affect JBI.

JBI’s success is, and is expected to remain, highly dependent on its senior management team. JBI relies heavily on its senior management because, as a community bank, it is its management’s extensive knowledge of, and relationships in, the community that generate business for JBI. Successful execution of JBI’s growth strategy will continue to place significant demands on its management and the loss of any such person’s services may adversely affect its growth and profitability. JBI and Jacksonville Bank are primarily dependent upon the services of Price W. Schwenck, Chief Executive Officer; Gilbert J. Pomar, III, President; Valerie A. Kendall, Executive Vice President and Chief Financial Officer; and Scott M. Hall, Executive Vice President and Chief Credit Officer. If the services of these individuals were to become unavailable for any reason, or if JBI was unable to hire highly qualified and experienced personnel to replace them, JBI’s operating results could be adversely affected.

After the closing of the Merger, JBI expects to integrate ABI’s business into its own. The integration process and JBI’s ability to successfully conduct ABI’s business after the Merger will require the experience and expertise of key employees of Oceanside Bank. Therefore, the ability to successfully integrate ABI’s operations with those of JBI, as well as the future success of the combined company’s operations, will depend, in part, on JBI’s ability to retain key employees of Oceanside Bank following the Merger. JBI may not be able to retain key employees for the time period necessary to complete the integration process or beyond. Although JBI does not have any reason to believe any of these employees will cease to be employed by JBI, the loss of such employees could adversely affect JBI’s ability to successfully conduct its business in the markets in which ABI now operates, which could have an adverse effect on JBI’s financial results and the value of its common stock.

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

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

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

The Merger will not be completed unless important conditions are satisfied.

Specified conditions set forth in the Merger Agreement must be satisfied or waived to complete the Merger. If the conditions are not satisfied or waived, to the extent permitted by law or stock exchange rules, the Merger will not occur or will be delayed and each of JBI and ABI may lose some or all of the intended benefits of the Merger. The following condition, in addition to other customary closing conditions, must be satisfied or waived, if permissible, before JBI and ABI are obligated to complete the Merger:

Sales of substantial amounts of JBI common stock in the open market by former ABI shareholders could depress JBI’s stock price.

Other than shares held by persons who will be affiliates of JBI after the Merger, shares of JBI common stock that are issued to shareholders of ABI will be freely tradable without restrictions or further registration under the Securities Act. JBI currently expects that it will issue approximately 3.25 million shares of JBI common stock in connection with the Merger and the Stock Purchase. If the Merger is completed and if ABI’s shareholders sell substantial amounts of JBI common stock in the public market following completion of the Merger, the market price of JBI common stock may decrease. These sales might also make it more difficult for JBI to sell equity or equity-related securities at a time and price that it otherwise would deem appropriate.

Current levels of market volatility have been significant, and negative conditions and new developments in the financial services industry and the credit markets have and may continue to adversely affect JBI’s operations, financial performance and stock price.

The capital and credit markets have been experiencing volatility and disruption for more than a year. The markets have placed downward pressure on stock prices and the availability of capital, credit and liquidity has been adversely affected for many issuers, in some cases, without regard to those issuers’ underlying financial condition or performance. If current levels of market disruption and volatility continue or worsen, JBI may experience adverse effects, which may be material, on its ability to maintain or access capital and credit, and on its business, financial condition (including liquidity) and results of operations.

Uncertainty about the economy and its direction with the expectation for little or no economic growth as well as high unemployment during the next 12-18 months has adversely affected the financial markets. Loan portfolio performances have deteriorated at many financial institutions, including JBI’s, resulting from, among other factors, a weak economy and a decline in the value of the collateral supporting loans. The competition for deposits has increased significantly due to liquidity concerns. Stock prices of bank holding companies, like JBI, have been negatively affected by the recent and current conditions in the financial markets, as has JBI’s ability, if needed, to raise capital, compared to prior years.

Recent legislation and government actions in response to market and economic conditions may significantly affect JBI’s operations, financial condition, and earnings.

In response to this financial crisis affecting the banking system and financial markets, the United States Congress enacted the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009. Under these and other laws and government actions:

the U.S. Department of the Treasury, or “Treasury,” has provided capital to financial institutions and adopted programs to facilitate and finance the purchase of problem assets and finance asset-backed securities via the Troubled Assets Relief Program, or “TARP”;

the FDIC has temporarily increased the limits on federal deposit insurance and has also provided temporary liquidity guarantee, or “TLG”, of all FDIC-insured institutions and their affiliates’ debt, as well as deposits in noninterest-bearing transaction deposit accounts; and

the federal government has undertaken various forms of economic stimulus, including assistance to homeowners in restructuring mortgage payments on qualifying loans.

TARP and the TLG are winding down, and the effects of this wind-down cannot be predicted. In addition, the federal government is considering various proposals for a comprehensive overhauling reform of the financial services industry and markets and coordinating reforms with other countries. There can be no assurance that these various initiatives or any other future legislative or regulatory initiatives will be successful at improving economic conditions globally, nationally or in JBI’s markets, or that the measures adopted will not have adverse consequences.

Changes in business and economic conditions, in particular in the Florida market in which JBI operates, could continue to lead to lower revenue, lower asset quality and lower earnings.

Unlike larger national or regional banks that are more geographically diversified, JBI’s business and earnings are closely tied to economic conditions in Northeast Florida. The local economy is heavily affected by population inflows, real estate, tourism and other service-based industries. Factors that could affect these local economies include declines in local population growth and tourism, higher energy costs, higher unemployment rates, reduced consumer or corporate spending, natural disasters or adverse weather, and the recent significant deterioration in general economic conditions. The current economic recession has been exacerbated by the declines in valuations of commercial and residential real estate in JBI’s markets after years of growth. Unemployment has also been significant and a sustained economic downturn could further adversely affect the quality of JBI’s assets, credit losses, and the demand for its products and services, which could lead to lower revenue and lower earnings.

JBI regularly monitors changes in the economy, including population growth, levels of visitor arrivals and spending, changes in housing prices, and unemployment rates. These trends have contributed to an increase in JBI’s nonperforming loans and reduced asset quality. If market conditions remain at current levels or deteriorate, they may lead to additional valuation adjustments on JBI’s loan portfolios and real estate owned as it continues to reassess the market value of its collateral supporting loans, the losses associated with loans, and the net realizable value of other real estate owned.

Recently enacted regulatory reform may have a material impact on JBI’s operations.

On July 21, 2010, President Obama signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act restructures the regulation of depository institutions and contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as that which occurred in 2008-2009. Included is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions will be reduced as well. The full impact of the Dodd-Frank Act on JBI’s business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on JBI’s operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

Item 6. Exhibits

Exhibit No. 2.1: Agreement and Plan of Merger by and between Jacksonville Bancorp, Inc. and Atlantic BancGroup, Inc. dated as of May 10, 2010 (1)

Exhibit No. 3.1: Articles of Incorporation of Jacksonville Bancorp, Inc. (2)

Exhibit No. 3.2: Amended and Restated Bylaws of Jacksonville Bancorp, Inc., as amended to date (3)

Exhibit No. 10.1: Stockholders Agreement by and among Jacksonville Bancorp, Inc., Atlantic BancGroup, Inc. and each of the directors of Atlantic BancGroup, Inc. dated as of May 10, 2010 (4)

Exhibit No. 10.2: Stock Purchase Agreement by and among Jacksonville Bancorp, Inc. and the investors named therein dated as of May 10, 2010 (5)

Exhibit No. 10.3: Registration Rights Agreement by and among Jacksonville Bancorp, Inc. and the investors named therein dated as of May 10, 2010 (6)

Exhibit No. 31.1: Certification of principal executive officer required by Rule 13a-14(a)/15d-14(a) of the Exchange Act

Exhibit No. 31.2: Certification of principal financial officer required by Rule 13a-14(a)/15d-14(a) of the Exchange Act

Exhibit No. 32: Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002

(1)	Incorporated herein by reference to Exhibit 2.1 to Form 8-K filed May 14, 2010, File No. 000-30248.

(2)	Incorporated herein by reference to Appendix A to Form SB-2, filed September 30, 1998, Registration No. 333-64815.

(3)	Incorporated herein by reference to Exhibit No. 3.2 to Form 10-K for year ended December 31, 2008, filed March 20, 2009, File No. 000-30248.

(4)	Incorporated herein by reference to Exhibit 10.1 to Form 8-K filed May 14, 2010, File No. 000-30248.

(5)	Incorporated herein by reference to Exhibit 10.2 to Form 8-K filed May 14, 2010, File No. 000-30248.

(6)	Incorporated herein by reference to Exhibit 10.3 to Form 8-K filed May 14, 2010, File No. 000-30248.

JACKSONVILLE BANCORP, INC.

SIGNATURES

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

		JACKSONVILLE BANCORP, INC.

Date: August 13, 2010		/s/ Price W. Schwenck
		Price W. Schwenck
		Chief Executive Officer


Date: August 13, 2010		/s/ Valerie A. Kendall
		Valerie A. Kendall
		Executive Vice President
		and Chief Financial Officer

JACKSONVILLE BANCORP, INC.

EXHIBIT INDEX

Exhibit No. 2.1: Agreement and Plan of Merger by and between Jacksonville Bancorp, Inc. and Atlantic BancGroup, Inc. dated as of May 10, 2010 (1)

Exhibit No. 3.1: Articles of Incorporation of Jacksonville Bancorp, Inc. (2)

Exhibit No. 3.2: Amended and Restated Bylaws of Jacksonville Bancorp, Inc., as amended to date (3)

Exhibit No. 10.1: Stockholders Agreement by and among Jacksonville Bancorp, Inc., Atlantic BancGroup, Inc. and each of the directors of Atlantic BancGroup, Inc. dated as of May 10, 2010 (4)

Exhibit No. 10.2: Stock Purchase Agreement by and among Jacksonville Bancorp, Inc. and the investors named therein dated as of May 10, 2010 (5)

Exhibit No. 10.3: Registration Rights Agreement by and among Jacksonville Bancorp, Inc. and the investors named therein dated as of May 10, 2010 (6)

Exhibit No. 31.1: Certification of principal executive officer required by Rule 13a-14(a)/15d-14(a) of the Exchange Act

Exhibit No. 31.2: Certification of principal financial officer required by Rule 13a-14(a)/15d-14(a) of the Exchange Act

Exhibit No. 32: Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002

(1)	Incorporated herein by reference to Exhibit 2.1 to Form 8-K filed May 14, 2010, File No. 000-30248.

(2)	Incorporated herein by reference to Appendix A to Form SB-2, filed September 30, 1998, Registration No. 333-64815.

(3)	Incorporated herein by reference to Exhibit No. 3.2 to Form 10-K for year ended December 31, 2008, filed March 20, 2009, File No. 000-30248.

(4)	Incorporated herein by reference to Exhibit 10.1 to Form 8-K filed May 14, 2010, File No. 000-30248.

(5)	Incorporated herein by reference to Exhibit 10.2 to Form 8-K filed May 14, 2010, File No. 000-30248.

(6)	Incorporated herein by reference to Exhibit 10.3 to Form 8-K filed May 14, 2010, File No. 000-30248.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Bad

Jacksonville Bancorp (JAXB) Inactive 10-Q2010 Q2 Quarterly report

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