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EX-32.1 - EXHIBIT 32.1 - Jacksonville Bancorp, Inc.ex32-1.htm
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EX-31.2 - EXHIBIT 31.2 - Jacksonville Bancorp, Inc.ex31-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 
          OF THE SECURITIES EXCHANGE ACT OF 1934
 
          For the quarterly period ended September 30, 2010
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
 
          OF THE SECURITIES EXCHANGE ACT OF 1934
 
          For the transition period of _________ to _________
 
Commission File Number   001-34821
 
Jacksonville Bancorp, Inc.
(Exact name of registrant as specified in its charter)
 
Maryland
 
36-4670835
(State or other jurisdiction of incorporation)
 
(I.R.S. Employer Identification Number)
 
1211 West Morton Avenue
   
Jacksonville, Illinois
 
62650
(Address of principal executive office)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (217) 245-4111
 
Indicate by check whether issuer (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x  Yes                                o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period the registrant was required to submit and post such filings).
o  Yes                                o  No
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act.
o  Large Accelerated Filer                                                    o  Accelerated Filer
o  Non-Accelerated Filer                                                      x  Smaller Reporting Company
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      
o  Yes                                x  No
 
As of October 31, 2010, there were 1,923,689 shares of the Registrant’s common stock issued and outstanding.
 
 
 

 
 
JACKSONVILLE BANCORP, INC.
 
FORM 10-Q
 
September 30, 2010
TABLE OF CONTENTS
 
     
Page
PART I
FINANCIAL INFORMATION
   
       
Item 1.
Financial Statements
  1
       
 
Condensed Consolidated Balance Sheets
 
1
       
 
Condensed Consolidated Statements of Income
 
2
       
 
Condensed Consolidated Statement of Stockholders’ Equity
 
3
       
 
Condensed Consolidated Statements of Cash Flows
 
4-5
       
 
Notes to the Condensed Consolidated Financial Statements
 
6-18
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
19-36
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
37-38
       
Item 4.T
Controls and Procedures
 
39
       
PART II
OTHER INFORMATION
 
40
       
Item 1.
Legal Proceedings
  40
Item 1.A.
Risk Factors
  40
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  40
Item 3.
Defaults Upon Senior Securities
  40
Item 4.
Removed and Reserved
  40
Item 5.
Other Information
  40
Item 6.
Exhibits
  40
       
 
Signatures
 
41
       
EXHIBITS
     
       
 
Section 302 Certifications
   
 
Section 906 Certification
   
 
 
 

 
 
PART I – FINANCIAL INFORMATION
 
 
 

 
 
JACKSONVILLE BANCORP, INC.
           
Item 1. FINANCIAL STATEMENTS
           
             
CONDENSED CONSOLIDATED BALANCE SHEETS
           
   
September 30,
   
December 31,
 
 
 
2010
   
2009
 
   
(Unaudited)
       
ASSETS
               
                 
Cash and cash equivalents
  $ 14,082,675     $ 15,696,474  
Investment securities - available for sale
    51,561,090       37,196,298  
Mortgage-backed securities - available for sale
    37,392,498       40,984,395  
Federal Home Loan Bank stock
    1,113,800       1,108,606  
Other investment securities
    134,798       149,902  
Loans receivable - net of allowance for loan losses of $2,912,050 and $2,290,001 as of September 30, 2010 and December 31, 2009
    178,302,786       173,683,310  
Loans held for sale - net
    1,231,585       814,074  
Premises and equipment - net
    5,528,358       5,766,858  
Cash surrender value of life insurance
    4,235,574       4,094,663  
Accrued interest receivable
    2,850,269       1,988,394  
Goodwill
    2,726,567       2,726,567  
Capitalized mortgage servicing rights, net of valuation allowance of $253,589 and $156,442 as of September 30, 2010 and December 31, 2009
    707,858       850,313  
Real estate owned
    619,882       382,879  
Deferred income taxes
    740,043       724,139  
Income taxes receivable
    38,607       269,260  
Other assets
    2,554,833       2,410,340  
                 
     Total Assets
  $ 303,821,223     $ 288,846,472  
                 
LIABILITIES AND STOCKHOLDERS EQUITY
               
                 
Deposits
  $ 258,379,649     $ 254,700,223  
Other borrowings
    3,471,282       3,789,453  
Advance payments by borrowers for taxes and insurance
    330,762       508,356  
Accrued interest payable
    566,027       734,903  
Deferred compensation payable
    2,996,564       2,826,227  
Other liabilities
    1,297,746       1,023,890  
     Total liabilities
    267,042,030       263,583,052  
                 
Commitments and contingencies
    -       -  
                 
Preferred stock, $0.01 par value - authorized 10,000,000 shares; none issued and outstanding
    -       -  
Common stock, $0.01 par value - authorized 25,000,000 shares; issued 1,923,689 shares as of September 30, 2010, and 1,987,904 shares as of December 31, 2009
    19,237       19,879  
Additional paid-in-capital
    16,162,888       6,634,591  
Retained earnings
    19,455,217       18,399,506  
Less: Treasury stock of 67,087 shares, at cost, as of December 31, 2009
    -       (486,381 )
Less: Unallocated ESOP shares
    (407,820 )     -  
Accumulated other comprehensive income
    1,549,671       695,825  
                 
     Total stockholders equity
    36,779,193       25,263,420  
                 
     Total Liabilities and Stockholders Equity
  $ 303,821,223     $ 288,846,472  
                 
See accompanying notes to the unaudited condensed consolidated financial statements.
               
 
 
1

 
 
JACKSONVILLE BANCORP, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
 
INTEREST INCOME:
                       
  Loans
  $ 2,804,964     $ 2,904,810     $ 8,159,709     $ 8,785,949  
  Investment securities
    441,250       356,239       1,292,407       1,201,070  
  Mortgage-backed securities
    245,163       386,763       652,790       1,035,715  
  Other
    2,929       1,632       7,494       10,096  
            Total interest income
    3,494,306       3,649,444       10,112,400       11,032,830  
                                 
INTEREST EXPENSE:
                               
  Deposits
    973,323       1,291,381       3,032,258       4,129,030  
  Other borrowings
    3,050       22,841       7,662       97,996  
            Total interest expense
    976,373       1,314,222       3,039,920       4,227,026  
                                 
NET INTEREST INCOME
    2,517,933       2,335,222       7,072,480       6,805,804  
                                 
PROVISION FOR LOAN LOSSES
    375,000       250,000       1,500,000       2,150,000  
                                 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    2,142,933       2,085,222       5,572,480       4,655,804  
                                 
NON-INTEREST INCOME:
                               
  Fiduciary activities
    61,122       32,090       145,940       121,563  
  Commission income
    306,636       169,826       780,634       490,658  
  Service charges on deposit accounts
    277,204       275,273       762,141       615,897  
  Mortgage banking operations, net
    219,529       107,440       345,463       648,079  
  Net realized gains on sales of available-for-sale securities
    80,422       44,625       424,470       437,276  
  Loan servicing fees
    91,502       91,425       276,114       267,068  
  Other
    137,702       151,144       414,198       444,024  
            Total non-interest income
    1,174,117       871,823       3,148,960       3,024,565  
                                 
NON-INTEREST EXPENSE:
                               
  Salaries and employee benefits
    1,518,017       1,378,940       4,297,475       4,104,259  
  Occupancy and equipment
    279,531       264,467       777,418       802,626  
  Data processing
    105,134       95,684       300,044       247,134  
  Professional
    45,165       55,490       124,554       158,875  
  Impairment (recovery) of mortgage servicing rights
    -       -       165,651       (91,269 )
  Postage and office supplies
    71,342       72,327       216,911       216,367  
  Deposit insurance premium
    106,624       116,770       311,456       457,046  
  Other
    360,627       287,028       1,017,740       810,852  
           Total non-interest expense
    2,486,440       2,270,706       7,211,249       6,705,890  
                                 
INCOME BEFORE INCOME TAXES
    830,610       686,339       1,510,191       974,479  
INCOME TAXES
    177,289       149,123       177,889       8,837  
                                 
NET INCOME
  $ 653,321     $ 537,216     $ 1,332,302     $ 965,642  
                                 
NET INCOME PER COMMON SHARE - BASIC
  $ 0.35     $ 0.28     $ 0.70     $ 0.50  
NET INCOME PER COMMON SHARE - DILUTED
  $ 0.35     $ 0.28     $ 0.70     $ 0.50  
                                 
See accompanying notes to the unaudited condensed consolidated financial statements.
                 
 
 
2

 
 
JACKSONVILLE BANCORP, INC.
 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 
                                 
Accumulated
             
         
Additional
                     
Other
   
Total
       
   
Common
   
Paid-in
   
Treasury
   
Retained
   
Unallocated
   
Comprehensive
   
Stockholders
   
Comprehensive
 
(Unaudited)
 
Stock
   
Capital
   
Stock
   
Earnings
   
ESOP
   
Income
   
Equity
   
Income
 
                                                 
BALANCE, DECEMBER 31, 2009
  $ 19,879     $ 6,634,591     $ (486,381 )   $ 18,399,506     $ -     $ 695,825     $ 25,263,420        
                                                               
Net Income
    -       -               1,332,302               -       1,332,302     $ 1,332,302  
Other comprehensive income - change in net unrealized gains on securities available-for-sale, net of taxes of $295,540
    -       -       -       -               573,696       573,696       573,696  
Less: reclassification adjustment for gains included in net income, net of tax of $144,320
    -       -               -               280,150       280,150       280,150  
Comprehensive Income
                                                          $ 2,186,148  
                                                                 
Corporate Reorganization:
                                                               
Merger of Jacksonville Bancorp, MHC
    (10,387 )     799,479                                       789,092          
Treasury stock retired
    (671 )     (485,710 )     486,381                               -          
Exchange of common stock
    12       (1,541 )                                     (1,529 )        
Proceeds from stock offering, net of expenses of $1,177,313
    10,404       9,215,803                                       9,226,207          
                                                                 
Purchase of shares for ESOP
                                    (416,140 )             (416,140 )        
Shares held by ESOP, committed to be released
            266                       8,320               8,586          
Dividends ($0.225 per share)
    -       -       -       (276,591 )     -       -       (276,591 )        
                                                                 
BALANCE, SEPTEMBER 30, 2010
  $ 19,237     $ 16,162,888     $ -     $ 19,455,217     $ (407,820 )   $ 1,549,671     $ 36,779,193          
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
3

 
 
JACKSONVILLE BANCORP, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Nine Months Ended
 
   
September 30,
 
   
2010
   
2009
 
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
  Net income
  $ 1,332,302     $ 965,642  
  Adjustments to reconcile net income to net cash provided by operating activities:
               
      Depreciation, amortization and accretion:
               
        Premises and equipment
    272,952       307,298  
        Amortization of investment premiums and discounts, net
    603,050       570,414  
        Accretion of loan discounts
    (1,932 )     -  
      Net realized gains on sales of available-for-sale securities
    (424,470 )     (437,276 )
      Compensation expense related to stock options
    -       483  
      Provision for loan losses
    1,500,000       2,150,000  
      Mortgage banking operations, net
    (345,463 )     (648,079 )
      Loss (gain) on sale of real estate owned
    14,167       (10,390 )
      Changes in valuation allowance on mortgage servicing asset
    165,651       (91,269 )
      Changes in income taxes payable
    (255,129 )     (592,374 )
      Shares held by ESOP committed to be released
    8,586       -  
      Changes in assets and liabilities
    (834,035 )     63,012  
          Net cash provided by operations before loan sales
    2,035,679       2,277,461  
      Origination of loans for sale to secondary market
    (29,714,297 )     (57,468,221 )
      Proceeds from sales of loans to secondary market
    29,619,053       58,427,891  
          Net cash provided by operating activities
    1,940,435       3,237,131  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
  Purchases of investment and mortgage-backed securities
    (56,098,581 )     (76,317,310 )
  Maturity or call of investment securities available-for-sale
    13,740,000       16,579,916  
  Sale of investment securities available-for-sale
    24,325,429       40,159,947  
  Principal payments on mortgage-backed and investment securities
    8,385,293       11,156,171  
  Proceeds from sale of real estate owned
    303,340       276,107  
  Net (increase) decrease in loans
    (6,679,963 )     1,463,702  
  Additions to premises and equipment
    (34,452 )     (58,153 )
          Net cash used in investing activities
    (16,058,934 )     (6,739,620 )
                 
           
(Continued)
 
 
 
4

 
 
JACKSONVILLE BANCORP, INC.
   
     
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
   
 
   
Nine Months Ended
 
   
September 30,
 
   
2010
   
2009
 
CASH FLOWS FROM FINANCING ACTIVITIES:
           
  Net increase in deposits
  $ 3,679,426     $ 15,545,945  
  Net decrease in other borrowings
    (318,171 )     (11,043,087 )
  Increase in advance payments by borrowers for taxes and insurance
    (177,594 )     (144,714 )
  Purchase of treasury stock
    -       (486,381 )
  Merger of Jacksonville Bancorp, MHC
    789,092       -  
  Cash paid for fractional shares in exchange
    (1,529 )     -  
  Net proceeds from stock offering
    9,226,207       -  
  Purchase of shares for ESOP
    (416,140 )     -  
  Dividends paid - common stock
    (276,591 )     (198,547 )
                 
          Net cash provided by financing activities
    12,504,700       3,673,216  
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (1,613,799 )     170,727  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    15,696,474       7,145,288  
                 
CASH AND CASH EQUIVALENTS, END OF YEAR
  $ 14,082,675     $ 7,316,015  
                 
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
               
  Cash paid during the year for:
               
    Interest on deposits
  $ 3,198,134     $ 4,243,314  
    Interest on other borrowings
    10,662       119,596  
    Income taxes paid
    403,000       559,000  
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:
               
  Real estate acquired in settlement of loans
  $ 637,699     $ 194,666  
  Loans to facilitate sales of real estate owned
    75,280       188,500  
 
See accompanying notes to unaudited condensed consolidated financial statements
 
 
5

 
 
JACKSONVILLE BANCORP, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.
FINANCIAL STATEMENTS
 
The accompanying interim condensed consolidated financial statements include the accounts of Jacksonville Bancorp, Inc. (Federal), the predecessor corporation of Jacksonville Bancorp, Inc. (Maryland), and its wholly-owned subsidiary, Jacksonville Savings Bank (the “Bank”) and its wholly-owned subsidiary, Financial Resources Group, Inc. collectively (the “Company”).  All significant intercompany accounts and transactions have been eliminated.
 
In the opinion of management, the preceding unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of September 30, 2010 and December 31, 2009 and the results of its operations for the three and nine month periods ended September 30, 2010 and 2009.  The results of operations for the three and nine month periods ended September 30, 2010 are not necessarily indicative of the results which may be expected for the entire year.  These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2009 filed as an exhibit to the Company’s Form 10-K filed in March, 2010.  The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP) and to prevailing practices within the industry.
 
On July 14, 2010, Jacksonville Bancorp, MHC, completed its conversion to stock form.  At that date, Jacksonville Bancorp, Inc. (Maryland) became the successor holding company to the Bank.  Financial information presented in this report is derived in part from the consolidated financial statements of Jacksonville Bancorp, Inc. (Maryland) and subsidiaries on and after July 14, 2010, and from consolidated financial statements of our former mid-tier holding company, Jacksonville Bancorp, Inc. (Federal) and subsidiaries prior to July 14, 2010.  See Note 2 – Second Step Conversion.
 
Certain amounts included in the 2009 consolidated statements have been reclassified to conform to the 2010 presentation.
 
2.  
SECOND STEP CONVERSION
 
On July 14, 2010, Jacksonville Bancorp, Inc. completed its conversion from the mutual holding company structure and the related public offering and is now a stock holding company that is fully owned by the public.  As a result of the conversion, the mutual holding company and former mid-tier holding company were merged into Jacksonville Bancorp, Inc. at book value as the entities were under common control.  Jacksonville Savings Bank is 100% owned by the Company and the Company is 100% owned by public stockholders.  The Company sold a total of 1,040,352 shares of common stock, par value $0.01 per share, in the subscription and community offerings, including 41,614 shares to the Jacksonville Savings Bank employee stock ownership plan.  All shares were sold at a price of $10 per share, raising $10.4 million in gross proceeds.  Conversion related expenses of $1.2 million were offset against the gross proceeds, resulting in $9.2 million of net proceeds.  Concurrent with the completion of the offering, shares of Jacksonville Bancorp, Inc., a federal corporation, common stock owned by public stockholders were exchanged for 1.0016 shares of the Company’s common stock.  Cash in lieu of fractional shares will be paid at a rate of $10 per share.  As a result of the offering and the exchange, at September 30, 2010, the Company had 1,923,689 shares outstanding and a market capitalization of $19.2 million.  The shares of common stock sold in the offering and issued in the exchange trade on the NASDAQ Capital market under the symbol “JXSB.”
 
 
6

 
 
3.  
NEW ACCOUNTING PRONOUNCEMENTS
 
In July 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which will require the Company to provide a greater level of disaggregated information about the credit quality of the Company’s loans and the allowance for loan losses.  This ASU will also require the Company to disclose additional information related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring.  The provisions of this ASU are effective for the Company’s reporting period ending December 31, 2010.  As this ASU amends only the disclosure requirements for loans and the allowance for loan losses, the adoption will have no impact on the Company’s statements of condition and income.
 
4.  
EARNINGS PER SHARE
 
Earnings Per Share - Basic earnings per share is determined by dividing net income for the period by the weighted average number of common shares.  Diluted earnings per share considers the potential effects of the exercise of the outstanding stock options under the Company’s stock option plans.
 
The following reflects earnings per share calculations for basic and diluted methods:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
 
                       
Net income available to common shareholders
  $ 653,321     $ 537,216     $ 1,332,302     $ 965,642  
                                 
Basic average shares outstanding
    1,888,953       1,920,817       1,910,079       1,929,418  
                                 
Diluted potential common shares:
                               
  Stock option equivalents
    880       -       2,795       -  
    Diluted average shares outstanding
    1,889,833       1,920,817       1,912,874       1,929,418  
                                 
Basic earnings per share
  $ 0.35     $ 0.28     $ 0.70     $ 0.50  
                                 
Diluted earnings per share
  $ 0.35     $ 0.28     $ 0.70     $ 0.50  
 
Stock options for 4,504 shares of common stock and 33,345 shares of common stock were not considered in computing diluted earnings per share for the three and nine month periods ending September 30, 2010 and 2009, respectively, because they were anti-dilutive.
 
 
7

 
 
5.  
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
 
In connection, with the conversion and related stock offering, the Bank purchased an additional 41,614 shares for its ESOP for the exclusive benefit of eligible employees.  The ESOP borrowed funds from the Company in an amount sufficient to purchase the 41,614 shares (approximately 4% of the common stock issued in the offering).  The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets.  Contributions will be applied to repay interest on the loan first, and the remainder will be applied to principal.  The loan is expected to be repaid over a period of up to 20 years.  Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid.  Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants.  Participants will vest on a pro-rata basis and reach 100% vesting in the accrued benefits under the ESOP after six years.  Vesting is accelerated upon retirement, death, or disability of the participant or a change in control of the Bank.  Forfeitures will be reallocated to remaining plan participants.  Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP.  Since the Bank’s annual contributions are discretionary, benefits payable under the ESOP cannot be estimated.
 
In the event a terminated ESOP participant desires to sell his or her shares of the Company’s stock, the ESOP includes a put option, which is a right to demand that the Company buy any shares of its stock distributed to participants at fair value.
 
The Company is accounting for its ESOP in accordance with ASC Topic 718, “Employers Accounting for Employee Stock Ownership Plans.”  Accordingly, the debt of the ESOP is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet.  Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement.  As shares are committed to be released from the collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations.  Dividends, if any, on unallocated shares are recorded as a reduction of debt and accrued interest.
 
A summary of ESOP shares at September 30, 2010, is shown below.
 
   
September 30, 2010
 
Unearned shares
    40,782  
Shares committed for release
    832  
Allocated shares
    49,398  
     Total ESOP shares
    91,012  
         
Fair value of unearned shares
  $ 404,633  
 
 
8

 
 
6.  
LOAN PORTFOLIO COMPOSITION
 
At September 30, 2010 and December 31, 2009, the composition of the Company’s loan portfolio is shown below.
             
   
September 30, 2010
   
December 31, 2009
 
   
Amount
   
Percent
   
Amount
   
Percent
 
Real estate loans:
                       
  One-to-four family residential
  $ 37,527,019       21.1 %   $ 38,580,967       22.2 %
  Commercial and agricultural
    58,009,811       32.5       56,650,264       32.6  
  Multi-family residential
    4,441,871       2.5       4,343,531       2.5  
     Total real estate loans
    99,978,701       56.1       99,574,762       57.3  
Commercial and agricultural business loans
    41,379,079       23.2       34,393,456       19.8  
Consumer loans:
                               
  Home equity/home improvement
    21,705,655       12.2       28,119,373       16.2  
  Automobile
    6,549,355       3.6       6,117,802       3.5  
  Other
    11,644,322       6.5       7,836,674       4.5  
     Total consumer loans
    39,899,332       22.3       42,073,849       24.2  
        Total loans receivable
    181,257,112       101.6       176,042,067       101.3  
                                 
Less:
                               
  Net deferred loan fees, premiums and discounts
    42,276       -       68,756       -  
  Allowance for loan losses
    2,912,050       1.6       2,290,001       1.3  
        Total loans receivable, net
  $ 178,302,786       100.0 %   $ 173,683,310       100.0 %
 
Activity in the allowance for loan losses was as follows:
 
   
September 30, 2010
   
September 30, 2009
 
       
Balance, beginning of year
  $ 2,290,001     $ 1,934,072  
Provision charged to expense
    1,500,000       2,150,000  
Loans charged off, net of recoveries of $46,605 and $18,905 for September 30, 2010 and 2009
    (877,951 )     (1,368,410 )
Balance, end of period
  $ 2,912,050     $ 2,715,662  
 
 
9

 
 
7.  
INVESTMENTS
 
The amortized cost and approximate fair value of securities, all of which are classified as available-for-sale, are as follows:
                         
         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
       
   
Cost
   
Gains
   
Losses
   
Fair Value
 
September 30, 2010:
                       
  U.S. government and agencies
  $ 13,020,020     $ 187,197     $ -     $ 13,207,217  
  Mortgage-backed securities (government-sponsored enterprises - residential)
    36,809,735       613,791       (31,028 )     37,392,498  
  Municipal bonds
    36,775,846       1,586,149       (8,122 )     38,353,873  
    $ 86,605,601     $ 2,387,137     $ (39,150 )   $ 88,953,588  
                                 
December 31, 2009:
                               
  U.S. government and agencies
  $ 9,036,752     $ 70,820     $ (27,556 )   $ 9,080,016  
  Mortgage-backed securities (government-sponsored enterprises - residential)
    40,428,279       610,634       (54,518 )     40,984,395  
  Municipal bonds
    27,661,381       531,363       (76,462 )     28,116,282  
    $ 77,126,412     $ 1,212,817     $ (158,536 )   $ 78,180,693  
 
The amortized cost and fair value of available-for-sale securities at September 30, 2010, by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
Within one year
  $ 575,259     $ 576,029  
Over one year to five years
    12,120,983       12,368,637  
Over five years to ten years
    20,120,441       20,942,997  
Over ten years
    16,979,183       17,673,427  
      49,795,866       51,561,090  
Mortgage-backed securities (government-sponsored enterprises - residential)
    36,809,735       37,392,498  
    $ 86,605,601     $ 88,953,588  
 
The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $28,483,000 at September 30, 2010 and $31,178,000 at December 31, 2009.
 
The book value of securities sold under agreement to repurchase amounted to $3,471,000 at September 30, 2010 and $3,789,000 at December 31, 2009.
 
Gross gains of $424,000 and $437,000 and gross losses of $0 resulting from sales of available-for-sale securities were realized during the nine months ended September 30, 2010 and 2009, respectively.
 
 
10

 
 
Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost.  Total fair value of these investments at September 30, 2010 was $9,408,000, which is approximately 11% of the Company’s available-for-sale investment portfolio.
 
Management believes the declines in fair value for these securities are temporary.  Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income during the period the other-than-temporary impairment is identified.
 
The following table shows the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at September 30, 2010.
 
   
Less Than Twelve Months
   
Twelve Months or More
   
Total
 
   
Gross
         
Gross
         
Gross
       
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
 
   
Losses
   
Value
   
Losses
   
Value
   
Losses
   
Value
 
                                     
Municipal bonds
  $ (8,122 )   $ 1,299,095     $ -     $ -     $ (8,122 )   $ 1,299,095  
                                                 
Mortgage-backed securities (government sponsored enterprises - residential)
    (31,028 )     8,108,623       -       -       (31,028 )     8,108,623  
                                                 
Total
  $ (39,150 )   $ 9,407,718     $ -     $ -     $ (39,150 )   $ 9,407,718  
 
The unrealized losses on the Company’s investments in municipal bonds, U.S. government and agencies, and mortgage-backed securities were caused by interest rate increases.  The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments.  Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2010.

 
11

 
 
8.  
ACCUMULATED OTHER COMPREHENSIVE INCOME
 
Other comprehensive income components and related taxes were as follows:
 
   
September 30, 2010
   
September 30, 2009
 
Net unrealized gain on securities available-for-sale
  $ 1,718,176     $ 2,078,570  
Less reclassification adjustment for realized gains included in income
    424,470       437,276  
      Other comprehensive income before tax effect
    1,293,706       1,641,294  
Tax expense
    (439,860 )     (558,040 )
      Other comprehensive income
  $ 853,846     $ 1,083,254  
 
The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:
 
   
September 30, 2010
   
September 30, 2009
 
Net unrealized gain on securities available-for-sale
  $ 2,347,987     $ 2,152,521  
Tax effect
    (798,316 )     (731,857 )
        Net-of-tax amount
  $ 1,549,671     $ 1,420,664  
 
9.  
DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES
 
ASC Topic 820, Fair Value Measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value:
 
 
Level 1
Quoted prices in active markets for identical assets or liabilities
 
 
Level 2
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 for substantially the full term of the assets or liabilities
 
 
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
 
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
 
 
12

 
 
 
Available-for-Sale Securities - Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  The Company has no Level 1 securities.  If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.  For those investments, the inputs used by the pricing service to determine fair value may include one, or a combination of, observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data market research publications are classified within Level 2 of the valuation hierarchy.  Level 2 securities include U.S. Government and agencies, mortgage-backed securities (Government-sponsored enterprises – residential) and municipal bonds.  In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.  The Company did not have securities considered Level 3 as of September 30, 2010.
 
The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2010 and December 31, 2009:
             
            September 30, 2010  
         
Fair Value Measurements Using
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
U.S. Government and agencies
  $ 13,207,217     $ -     $ 13,207,217     $ -  
Mortgage-backed securities (Government sponsored enterprises - residential)
    37,392,498       -       37,392,498       -  
Municipal bonds
    38,353,873       -       38,353,873       -  
 
            December 31, 2009  
         
Fair Value Measurements Using
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
U.S. Government and agencies
  $ 9,080,016     $ -     $ 9,080,016     $ -  
Mortgage-backed securities (Government sponsored enterprises - residential)
    40,984,395       -       40,984,395       -  
Municipal bonds
    28,116,282       -       28,116,282       -  
 
 
13

 
 
Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.
 
Impaired Loans (Collateral Dependent) - Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment.  Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.
 
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized.  This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.
 
Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
 
Mortgage Servicing Rights - The fair value used to determine the valuation allowance is estimated using discounted cash flow models.  Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.
 
Foreclosed Assets – Foreclosed assets consist primarily of real estate owned.  Real estate owned acquired through loan foreclosure is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  The adjustment at the time of foreclosure is recorded through the allowance for loan losses.  Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the real estate owned or foreclosed asset could differ from the original estimate and are classified within Level 3 of the fair value hierarchy.  If it is determined the fair value declines subsequent to foreclosure, a valuation allowance is recorded through non-interest expense.  Operating costs associated with the assets after acquisition are also recorded as non-interest expense.  Gains and losses on the disposition of real estate owned and foreclosed assets are netted and posted to non-interest expense.
 
The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2010 and December 31, 2009:
 
            September 30, 2010  
         
Fair Value Measurements Using
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Impaired loans (collateral dependent)
  $ 1,717,302     $ -     $ -     $ 1,717,302  
Mortgage servicing rights
    707,858                       707,858  
Foreclosed assets
    619,882       -       -       619,882  
 
 
14

 
 
 
       
December 31, 2009
Fair Value Measurements Using
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
   
Fair Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Impaired loans (collateral dependent)
  $ 3,154,003     $ -     $ -     $ 3,154,003  
Mortgage servicing rights
    850,313                       850,313  
Foreclosed assets
    382,879       -       -       382,879  
 
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value.
 
Cash and Cash Equivalents and Federal Home Loan Bank Stock - The carrying amount approximates fair value.
 
Other Investments - The carrying amount approximates fair value.
 
Loans Held for Sale - For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.
 
Loans - The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  Loans with similar characteristics were aggregated for purposes of the calculations.  The carrying amount of accrued interest approximates its fair value.
 
Deposits - Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits.  The carrying amount approximates fair value.  The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.
 
Short-term Borrowings, Interest Payable, and Advances from Borrowers for Taxes and Insurance - The carrying amount approximates fair value.
 
Federal Home Loan Bank Advances - Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.  Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market.  If a quoted market price is not available, an expected present value technique is used to estimate fair value.
 
Commitments to Originate Loans, Letters of Credit, and Lines of Credit - The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.
 
 
15

 
 
The following table presents estimated fair values of the Company’s financial instruments at September 30, 2010 and December 31, 2009:
 
   
September 30, 2010
   
December 31, 2009
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
Financial Assets
                       
    Cash and cash equivalents
  $ 14,082,675     $ 14,082,675     $ 15,696,474     $ 15,696,474  
    Available-for-sale securities
    88,953,588       88,953,588       78,180,693       78,180,693  
    Other investments
    134,798       134,798       149,902       149,902  
    Loans, held for sale
    1,231,585       1,231,585       814,074       814,074  
    Loans, net of allowance for loan losses
    178,302,786       177,461,558       173,683,310       171,479,887  
    Federal Home Loan Bank stock
    1,113,800       1,113,800       1,108,606       1,108,606  
    Interest receivable
    2,850,269       2,850,269       1,988,394       1,988,394  
Financial Liabilities
                               
    Deposits
    258,379,649       261,337,765       254,700,223       257,948,804  
    Short-term borrowings
    3,471,282       3,471,282       3,789,453       3,789,453  
    Advances from borrowers for taxes and insurance
    330,762       330,762       508,356       508,356  
    Interest payable
    566,027       566,027       734,903       734,903  
Unrecognized financial instruments (net of contract amount)
                               
    Commitments to originate loans
    -       -       -       -  
    Letters of credit
    -       -       -       -  
    Lines of credit
    -       -       -       -  
 
10.  
FEDERAL HOME LOAN BANK STOCK
 
The Company owns $1,113,800 of Federal Home Loan Bank stock as of September 30, 2010.  The Federal Home Loan Bank of Chicago (FHLB) is operating under a Cease and Desist Order from its regulator, the Federal Housing Finance Board.  The order prohibits capital stock repurchases and redemptions until a time to be determined by the Federal Housing Finance Board.  The FHLB will continue to provide liquidity and funding through advances.  With regard to dividends, the FHLB will continue to assess its dividend capacity each quarter and make appropriate request for approval.  The FHLB did not pay a dividend during 2010 or 2009.  Management performed an analysis and deemed the cost method investment in FHLB stock is ultimately recoverable and therefore not impaired.
 
 
16

 
 
11.  
MORTGAGE SERVICING RIGHTS
 
Activity in the balance of mortgage servicing rights, measured using the amortization method, for the nine month period ending September 30, 2010 and the year ended December 31, 2009 was as follows:
             
   
September 30, 2010
   
December 31, 2009
 
Balance, beginning of year
  $ 850,313     $ 545,494  
Servicing rights capitalized
    158,150       391,746  
Amortization of servicing rights
    (203,458 )     (358,515 )
Change in valuation allowance
    (97,147 )     271,588  
Balance, end of period
  $ 707,858     $ 850,313  
 
Activity in the valuation allowance for mortgage servicing rights for the nine month period ending September 30, 2010 and the year ended December 31, 2009 was as follows:
 
   
September 30, 2010
   
December 31, 2009
 
Balance, beginning of year
  $ 156,442     $ 428,030  
Additions
    165,651       -  
Reductions 
    (68,504 )     (271,588 )
Balance, end of period
  $ 253,589     $ 156,442  
 
12.  
INCOME TAXES
 
A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense for the nine months ended September 30, 2010 and 2009 is shown below.
 
   
September 30, 2010
   
September 30, 2009
 
Computed at the statutory rate (34%)
  $ 513,465     $ 331,323  
Increase (decrease) resulting from
               
  Tax exempt interest
    (312,190 )     (270,715 )
  State income taxes, net
    60,758       31,281  
  Increase in cash surrender value
    (90,402 )     (88,778 )
  Other, net
    6,258       5,726  
                 
Actual tax expense
  $ 177,889     $ 8,837  
 
 
17

 
 
13.  
COMMITMENTS AND CONTINGENCIES
 
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers in the way of commitments to extend credit.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Company evaluates each customers creditworthiness on a case-by-case basis.  Substantially all of the Companys loans are to borrowers located in Cass, Morgan, Macoupin, Montgomery, and surrounding counties in Illinois.
 
 
18

 
 
JACKSONVILLE BANCORP, INC.
 
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of the Company.  The information contained in this section should be read in conjunction with the unaudited consolidated financial statements and accompanying notes thereto.
 
Forward Looking Statements
 
This Form 10-Q contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.”  Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature.  These factors include, but are not limited to, the effect of the current severe disruption in financial markets and the United States government programs introduced to restore stability and liquidity, changes in interest rates, general economic conditions and the weakening state of the United States economy, deposit flows, demand for mortgage and other loans, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing of products and services.
 
Critical Accounting Policies and Use of Significant Estimates
 
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in preparing our financial statements in conformity with accounting principles generally accepted in the United States of America.  Actual results could differ significantly from those estimates under different assumptions and conditions.  Management believes the following discussion addresses our most critical accounting policies and significant estimates, which are those that are most important to the portrayal of our financial condition and results and require management’s most difficult, subjective and complex judgements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
 
Allowance for Loan Losses - The Company believes the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of the consolidated financial statements.  The allowance for loan losses is a material estimate that is particularly susceptible to significant changes in the near term and is established through a provision for loan losses.  The allowance is based upon past loan experience and other factors which, in management’s judgement, deserve current recognition in estimating loan losses.  The evaluation includes a review of all loans on which full collectibility may not be reasonably assured.  Other factors considered by management include the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions and historical losses on each portfolio category.  In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties, which collateralize loans.  Management uses the available information to make such determinations.  If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected.  While we believe we have established our existing allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing the Company’s loan portfolio, will not request an increase in the allowance for loan losses.  Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary if loan quality deteriorates.
 
 
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Other Real Estate Owned - Other real estate owned acquired through loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  The adjustment at the time of foreclosure is recorded through the allowance for loan losses.  Due to the subjective nature of establishing fair value when the asset is acquired, the actual fair value of the other real estate owned could differ from the original estimate.  If it is determined that fair value declines subsequent to foreclosure, the asset is written down through a charge to non-interest expense.  Operating costs associated with the assets after acquisition are also recorded as non-interest expense.  Gains and losses on the disposition of other real estate owned are netted and posted to non-interest expense.
 
Deferred Income Tax Assets/Liabilities – Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income.  Deferred tax assets and liabilities are established for these items as they arise.  From an accounting standpoint, deferred tax assets are reviewed to determine that they are realizable based upon the historical level of our taxable income, estimates of our future taxable income and the reversals of deferred tax liabilities.  In most cases, the realization of the deferred tax asset is based on our future profitability.  If we were to experience net operating losses for tax purposes in a future period, the realization of our deferred tax assets would be evaluated for a potential valuation reserve.
 
Impairment of Goodwill - Goodwill, an intangible asset with an indefinite life, was recorded on our balance sheet in prior periods as a result of acquisition activity.  Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently.
 
Mortgage Servicing Rights - Mortgage servicing rights are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments.  Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise.
 
Fair Value Measurements – The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.  The Company estimates the fair value of financial instruments using a variety of valuation methods.  Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value.  When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value.  When observable market prices do not exist, the Company estimates fair value.  Other factors such as model assumptions and market dislocations can affect estimates of fair value.  Imprecision in estimating these factors can impact the amount of revenue or loss recorded.
 
ASC Topic 820, Fair Value Measurements, establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based upon transparency of inputs to each valuation as of the fair value measurement date.  The three levels are defined as follows:
 
●     
Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets
●     
Level 2 – inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
●     
Level 3 – inputs that are unobservable and significant to the fair value measurement.
 
 
20

 
 
At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured.  From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date.  Transfers into or out of a hierarchy are based upon the fair value at the beginning of the reporting period.
 
The above listing is not intended to be a comprehensive list of all our accounting policies.  In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgement in their application.  There are also areas in which management’s judgement in selecting any available alternative would not produce a materially different result.
 
Federal Deposit Insurance Corporation Insurance Coverage
As with all banks insured by the FDIC, the Company’s depositors are protected against the loss of their insured deposits by the FDIC up to certain amounts.  The FDIC recently made two changes to the rules that broadened the FDIC insurance.  On July 21, 2010, basic FDIC insurance was permanently increased to $250,000 per depositor.  In addition, the FDIC has instituted a Temporary Liquidity Guaranty Program (“TLGP”) which provides full deposit insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount, until December 31, 2013.  The FDIC defines a “non-interest bearing transaction account” as a transaction account on which the insured depository institution pays no interest and does not reserve the right to require advance notice of intended withdrawals.  This coverage is over and above the $250,000 in deposit insurance otherwise provided to a customer.  The Company opted into the TLGP.  The additional cost of this program, assessed on a quarterly basis, is a 10 basis point annualized surcharge on balances in non-interest bearing transaction accounts that exceed $250,000.
 
Recent Developments
On July 14, 2010, Jacksonville Bancorp, Inc. completed its conversion from the mutual holding company structure and the related public offering and is now a stock holding company that is fully owned by the public.  Jacksonville Savings Bank is 100% owned by the Company and the Company is 100% owned by public stockholders.  The Company sold a total of 1,040,352 shares of common stock in the subscription and community offerings, including 41,614 shares to the Jacksonville Savings Bank employee stock ownership plan.  All shares were sold at a price of $10 per share.  Concurrent with the completion of the offering, shares of Jacksonville Bancorp, Inc., a federal corporation, common stock owned by public stockholders were exchanged for 1.0016 shares of the Company’s common stock.  Cash in lieu of fractional shares will be paid at a rate of $10 per share.  As a result of the offering and the exchange, at September 30, 2010, the Company had 1,923,689 shares outstanding and a market capitalization of $19.2 million.  The shares of common stock sold in the offering and issued in the exchange trade on the NASDAQ Capital market under the symbol “JXSB.”
 
New Federal Legislation - Congress has recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies.  The Dodd-Frank Act eliminates the Office of Thrift Supervision and authorizes the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies like the Company, in addition to bank holding companies which it currently regulates.  As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including holding company capital requirements, will apply to savings and loan holding companies like the Company.  These capital requirements are substantially similar to the capital requirements currently applicable to the Bank, as described in “—Liquidity and Capital Resources.”  The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.  Bank holding companies with assets of less than $500 million are exempt from these capital requirements.  Under the Dodd-Frank Act, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets.  We have no outstanding trust preferred securities.  The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
 
 
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The Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws.  The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices.  The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets.  Banks and savings institutions with $10 billion or less in assets will be examined by their bank regulators.  The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.
 
The legislation also broadens the base for Federal Deposit Insurance Corporation insurance assessments.  Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution.  The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.  Lastly, the Dodd-Frank Act requires companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials.  The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.
 
 
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Financial Condition
 
September 30, 2010 Compared to December 31, 2009
 
Total assets increased by $15.0 million, or 5.2%, to $303.8 million at September 30, 2010 from $288.8 million at December 31, 2009.  Net loans increased $4.6 million, or 2.7%, to $178.3 million at September 30, 2010 from $173.7 million at December 31, 2009.  Available-for-sale investment securities increased $14.4 million, or 38.6%, to $51.6 million at September 30, 2010 from $37.2 million at December 31, 2009, primarily due to the reinvestment of funds from deposit growth and payments on mortgage-backed securities.  Mortgage-backed securities decreased $3.6 million, or 8.8%, to $37.4 million at September 30, 2010 from $41.0 million at December 31, 2009.  Cash and cash equivalents decreased $1.6 million to $14.1 million at September 30, 2010 from $15.7 million at December 31, 2009.  Total deposits increased $3.7 million, or 1.4%, to $258.4 million at September 30, 2010, primarily due to an increase in transaction accounts.  Other borrowings, which consisted of overnight repurchase agreements, decreased $318,000 to $3.5 million at September 30, 2010.
 
Stockholders’ equity increased $11.5 million to $36.8 million at September 30, 2010.  The increase in stockholders’ equity reflects the infusion of net proceeds from the completion on July 14, 2010, of the second step conversion of our mutual holding company and stock offering.  The conversion resulted in a net increase of $10.0 million in stockholders’ equity, which was partially offset by the purchase of $416,140 in shares for the Bank’s employee stock ownership plan.  Stockholders’ equity also benefitted from net income of $1.3 million and $854,000 in other comprehensive income, which was partially offset by the payment of $277,000 in dividends.  Other comprehensive income consisted of the increase in net unrealized gains, net of tax, on available-for-sale securities reflecting changes in market prices for securities in our portfolio. Other comprehensive income does not include changes in the fair value of other financial instruments included on the balance sheet.
 
Results of Operations
 
Comparison of Operating Results for the Three Months Ended September 30, 2010 and 2009
 
General:  Net income for the three months ended September 30, 2010 was $653,000, or $0.35 per common share, basic and diluted, compared to net income of $537,000, or $0.28 per common share, basic and diluted, for the three months ended September 30, 2009.  The $116,000 increase in net income was due to increases of $183,000 in net interest income and $302,000 in non-interest income, partially offset by increases of $216,000 in non-interest expense, $125,000 in the provision for loan losses and $28,000 in income taxes.
 
Interest Income:  Total interest income for the three months ended September 30, 2010 decreased $155,000, or 4.3%, to $3.5 million from $3.6 million for the same period of 2009.  The decrease in interest income reflected a $100,000 decrease in interest income on loans and a $141,000 decrease in interest income on mortgage-backed securities, partially offset by a $85,000 increase in interest income on investment securities and a $1,000 increase in other interest-earning assets.
 
Interest income on loans decreased $100,000 to $2.8 million for the third quarter of 2010 from $2.9 million for the third quarter of 2009 reflecting decreases in the average yield on loans and the average balance of loans.  The average yield decreased to 6.25% during the third quarter of 2010 from 6.33% during the third quarter of 2009.  The 8 basis point decrease primarily reflected the impact of the current low interest rate environment.  The average balance of the loan portfolio decreased $4.0 million to $179.6 million for the third quarter of 2010.  The decrease in the average balance of the loan portfolio reflected a decrease in the average balance of residential real estate loans due to higher loan sales to the secondary market during 2009 and 2010.
 
 
23

 
 
Interest income on investment securities increased $85,000 to $441,000 for the third quarter of 2010 from $356,000 for the third quarter of 2009. The increase reflected a $15.3 million increase in the average balance of the investment securities portfolio to $52.2 million during the third quarter of 2010, compared to $36.9 million for the third quarter of 2009.  The increase in the average balance was primarily due to the reinvestment of payments on mortgage-backed securities into U.S. agency and tax-free municipal bonds.  The average yield of investment securities decreased 48 basis points to 3.38% during the third quarter of 2010 from 3.86% during the third quarter of 2009.  The average yield does not reflect the benefit of the higher tax-equivalent yield of our municipal bonds, which results in lower income tax expense.
 
Interest income on mortgage-backed securities decreased $141,000 to $245,000 for the third quarter of 2010, compared to $386,000 for the third quarter of 2009.  The average balance of mortgage-backed securities decreased $13.3 million to $34.7 million during the third quarter of 2010.  The decrease in interest income also reflected a 39 basis point decrease in the average yield of mortgage-backed securities to 2.83% for the third quarter of 2010, compared to 3.22% for the third quarter of 2009.
 
Interest income on other interest-earning assets, which consisted of interest-earning deposit accounts and federal funds sold, increased $1,000 during the third quarter of 2010 primarily due to an increase in the average balance.  The average balance of these accounts increased $5.3 million to $9.9 million for the three months ended September 30, 2010 compared to $4.6 million for the three months ended September 30, 2009. The average yield on other interest-earning assets decreased to 0.12% during the third quarter of 2010 from 0.14% during the third quarter of 2009.
 
Interest Expense:  Total interest expense decreased $338,000, or 25.7%, to $976,000 for the three months ended September 30, 2010 compared to $1.3 million for the three months ended September 30, 2009.  The lower interest expense was due to a $318,000 decrease in the cost of deposits and a $20,000 decrease in the cost of borrowed funds.
 
Interest expense on deposits decreased $318,000 to $973,000 for the three months ended September 30, 2010 compared to $1.3 million for the three months ended September 30, 2009.  The decrease in interest expense on deposits was primarily due to a 51 basis point decrease in the average rate paid to 1.67% during the third quarter of 2010 from 2.18% during the third quarter of 2009.  The decrease reflected low short-term market interest rates which continued during 2010.  The average balance of deposits decreased $3.5 million to $233.4 million for the third quarter of 2010 from $236.9 million during the third quarter of 2009.  The decrease was primarily due to a $7.4 million decrease in the average balance of time deposits.
 
Interest paid on borrowed funds decreased $20,000 to $3,000 for the third quarter of 2010 due to decreases in the average cost and in the average balance of borrowings.  The average rate paid on borrowed funds decreased to 0.41% during the third quarter of 2010 compared to 0.93% during the third quarter of 2009, reflecting the decrease in market rates.  The average balance of borrowed funds also decreased to $3.0 million during the third quarter of 2010 compared to $9.8 million during the same period of 2009.  The decrease was primarily due to the repayment of our FHLB advances which had an average balance of $5.0 million during the third quarter of 2009.  We had no FHLB advances during the third quarter of 2010.
 
Net Interest Income:  As a result of the changes in interest income and interest expense noted above, net interest income increased by $183,000, or 7.8%, to $2.5 million for the three months ended September 30, 2010 from $2.3 million for the three months ended September 30, 2009.  Our interest rate spread increased by 19 basis points to 3.41% during the third quarter of 2010 from 3.22% during the third quarter of 2009.  Our net interest margin increased 23 basis points to 3.65% for the third quarter of 2010 from 3.42% for the third quarter of 2009.  Our net interest income continues to benefit from a steeper than normal yield curve.  Low short-term market interest rates have resulted in our cost of funds decreasing faster than the yield on our loans.
 
 
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Provision for Loan Losses: The provision for loan losses is determined by management as the amount needed to replenish the allowance for loan losses, after net charge-offs have been deducted, to a level considered adequate to absorb inherent losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America.
 
The provision for loan losses totaled $375,000 during the third quarter of 2010, compared to $250,000 during the third quarter of 2009.  The increase in the provision for loan losses reflected management’s decision to maintain the allowance for loan losses at a level deemed adequate after taking into account the higher level of net charge-offs during the quarter.  Net charge-offs increased $125,000 to $123,000 during the third quarter of 2010, compared to a net recovery of $2,000 during the third quarter of 2009.  Provisions for loan losses have been made to bring the allowance for loan losses to a level deemed adequate following management’s evaluation of the repayment capacity and collateral protection afforded by each problem credit.  This review also considered the local economy and the level of bankruptcies and foreclosures in our market area.
 
The following table sets forth information regarding nonperforming assets at the dates indicated.
 
   
September 30, 2010
   
December 31, 2009
 
   
(Dollars in thousands)
 
Non-accruing loans:
           
  One-to-four family residential
  $ 744     $ 484  
  Commercial and agricultural real estate
    1,107       98  
  Multi-family residential
    135       132  
  Commercial and agricultural business
    277       416  
  Home equity/Home improvement
    616       407  
  Automobile
    14       8  
  Other consumer
    5       52  
     Total
  $ 2,898     $ 1,597  
                 
Accruing loans delinquent more than 90 days:
               
  One-to-four family residential
  $ -     $ 349  
  Automobile
    -       3  
  Other consumer
    -       5  
     Total
  $ -     $ 357  
                 
Foreclosed assets:
               
  One-to-four family residential
  $ 367     $ 324  
  Commercial and agricultural real estate
    253       59  
  Automobiles
    44       -  
     Total
  $ 664     $ 383  
                 
Total nonperforming assets
  $ 3,562     $ 2,337  
                 
Total as a percentage of total assets
    1.17 %     0.81 %
 
 
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Nonperforming assets increased $1.3 million to $3.6 million, or 1.17% of total assets, as of September 30, 2010, compared to $2.3 million, or 0.81% of total assets, as of December 31, 2009.  The increase in nonperforming assets was due to a $944,000 increase in nonperforming loans and a $281,000 increase in real estate owned.  Nonperforming loans increased to $2.9 million as of September 30, 2010, from $2.0 million at December 31, 2009.  The increase in nonperforming loans primarily reflected the non-accruing status of two commercial real estate loans totaling $1.0 million.  Both loans are purchased participations in projects impacted by the economy.  The first loan is secured by a mortgage on a new hotel and management believes the loan has been adequately reserved.  The second loan is secured by real estate for development.  We recognized a $719,000 charge-off on this loan during the second quarter of 2010 and believe that we have adequate reserves for the remaining balance.
 
The following table shows the aggregate principal amount of potential problem credits on the Company’s watch list at September 30, 2010 and December 31, 2009.  All non-accruing loans are automatically placed on the watch list.  The decrease in Special Mention credits and the subsequent increase in Substandard credits primarily reflect the downgrade of eight commercial borrowers totaling $3.2 million.
 
   
September 30, 2010
   
December 31, 2009
 
   
(In thousands)
 
Special Mention credits
  $ 3,855     $ 6,489  
Substandard credits
    7,526       4,865  
Total watch list credits
  $ 11,381     $ 11,354  
 
Non-Interest Income:  Non-interest income increased $302,000, or 34.7%, to $1.2 million for the three months ended September 30, 2010 from $872,000 for the same period in 2009.  The increase in non-interest income resulted primarily from increases of $137,000 in commission income, $112,000 in net income from mortgage banking operations, $36,000 in gains on the sale of available-for-sale securities, and $29,000 in income from fiduciary activities.  The increase in commission income and fiduciary activities is due to a continued growth in accounts.  The increase in mortgage banking operations income was due to a higher volume of loan sales, as we sold $18.7 million of loans to the secondary market during the third quarter of 2010, compared to $8.7 million during the same period of 2009.  The increase in loan sales in 2010 reflected a higher level of mortgage originations for sale due to the decline in mortgage interest rates.  The increase in gains on the sale of securities reflected more favorable market conditions as securities totaling $2.0 million and $11.0 million were sold during the third quarters of 2010 and 2009, respectively.
 
Non-Interest Expense:  Total non-interest expense increased $216,000 to $2.5 million for the three months ended September 30, 2010 from $2.3 million for the same period of 2009.  The increase in non-interest expense consisted mainly of increases of $139,000 in compensation and benefits expense, $15,000 in occupancy and equipment expense, and $74,000 in other expense.  The increase in compensation and benefits expense reflect normal cost and benefit increases, as well as increased commissions.  The increase in other expense includes higher advertising expense, service charges, and consulting fees related to the new overdraft privilege program implemented during 2009.
 
Income Taxes:  The provision for income taxes increased $28,000 to $177,000 during the third quarter of 2010 compared to $149,000 for the third quarter of 2009.  The increase in the income tax provision reflected an increase in taxable income due to higher income.
 
 
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Comparison of Operating Results for the Nine Months Ended September 30, 2010 and 2009
 
General:  Net income for the nine months ended September 30, 2010 was $1,332,000, or $0.70 per common share, basic and diluted, compared to net income of $966,000, or $0.50 per common share, basic and diluted, for the nine months ended September 30, 2009.  The $367,000 increase in net income was due to increases of $267,000 increase in net interest income and $124,000 in non-interest income and a decrease of $650,000 in the provision for loan losses, partially offset by increases of $505,000 in non-interest income and $169,000 in income taxes.
 
Interest Income:  Total interest income for the nine months ended September 30, 2010 decreased $920,000, or 8.3%, to $10.1 million from $11.0 million for the same period of 2009.  The decrease in interest income reflected a $626,000 decrease in interest income on loans, a $91,000 increase in interest income on investment securities, a $383,000 decrease in interest income on mortgage-backed securities and a $3,000 decrease in other interest-earning assets.
 
Interest income on loans decreased $626,000 to $8.2 million for the first nine months of 2010 from $8.8 million for the first nine months of 2009 due to decreases in the average yield on loans and the average balance of loans.  The average yield decreased to 6.15% during the first nine months of 2010 from 6.36% during the comparative period of 2009.  The 21 basis point decrease primarily reflected the low interest rate environment.  The average balance of the loan portfolio decreased $7.4 million to $176.9 million for the first nine months of 2010.  The decrease in the average balance of the loan portfolio was partially due to a decrease in the average balance of residential real estate loans due to higher loan sales to the secondary market during 2009.
 
Interest income on investment securities increased $91,000 to $1.3 million for the first nine months of 2010 from $1.2 million for the first nine months of 2009.  The increase reflected a $6.7 million increase in the average balance of the investment securities portfolio to $48.0 million during the first nine months of 2010, compared to $41.3 million for the same period of 2009.  The increase in the average balance was primarily due to the reinvestment of payments on mortgage-backed securities into U.S. agency and tax-free municipal bonds.  The average yield of investment securities decreased to 3.59% during the first nine months of 2010 from 3.88% for the first nine months of 2009.  The average yield does not reflect the benefit of the higher tax-equivalent yield of our municipal bonds, which is reflected in income tax expense.
 
Interest income on mortgage-backed securities decreased $383,000 to $653,000 for the first nine months of 2010, compared to $1.0 million for the first nine months of 2009.  The decrease reflected a 114 basis point decrease in the average yield of mortgage-backed securities to 2.44% for the first nine months of 2010, compared to 3.58% for the first nine months of 2009.  The average yield has been affected by accelerated premium amortization resulting from higher national prepayment speeds on mortgage-backed securities.  The amortization of premiums on mortgage-backed securities, which reduces the average yield, increased $86,000 to $583,000 during first nine months of 2010, compared to $496,000 during the first nine months of 2009.  Interest income was also affected by a $3.0 million decrease in the average balance of mortgage-backed securities to $35.7 million during the same period of 2010.
 
Interest income on other interest-earning assets, which consisted of interest-earning deposit accounts and federal funds sold, decreased $3,000 to $7,000 during the first nine months of 2010 due to a decrease in the average yield and average balance.  The average yield on other interest-earning assets decreased to 0.12% during the first nine months of 2010 from 0.16% during the first nine months of 2009.  The average balance of these accounts increased to $8.4 million for the nine months ended September 30, 2010 from to $8.3 million for the nine months ended September 30, 2009.
 
Interest Expense:  Total interest expense decreased 1.2 million, or 28.1%, to $3.0 million for the nine months ended September 30, 2010 compared to $4.2 million for the nine months ended September 30, 2009.  The lower interest expense was due to a $1.1 million decrease in the cost of deposits and a $90,000 decrease in the cost of borrowed funds.
 
 
27

 
 
Interest expense on deposits decreased $1.1 million to $3.0 million for the nine months ended September 30, 2010 compared to $4.1 million for the nine months ended September 30, 2009.  The decrease in interest expense on deposits was primarily due to a 62 basis point decrease in the average rate paid to 1.73% during the first nine months of 2010 from 2.35% during the first nine months of 2009.  The decrease reflected low short-term market interest rates which continued during 2010.  The average balance of deposits decreased to $233.2 million for the first nine months of 2010, compared to $233.9 million for the first nine months of 2009.
 
Interest paid on borrowed funds decreased $90,000 to $8,000 for the first nine months of 2010 due to decreases in the average cost and in the average balance of borrowings.  The average rate paid on borrowed funds decreased to 0.33% during the first nine months of 2010 compared to 1.14% during the first nine months of 2009, reflecting the decrease in market rates.  The average balance of borrowed funds also decreased to $3.1 million during the first nine months of 2010 compared to $11.4 million during the same period of 2009.  The $8.3 million decrease was primarily due to the repayment of our FHLB advances which had an average balance of $5.8 million during the first nine months of 2009.  We had no FHLB advances during 2010.
 
Net Interest Income:  As a result of the changes in interest income and interest expense noted above, net interest income increased by $267,000, or 3.9%, to $7.1 million for the nine months ended September 30, 2010 from $6.8 million for the nine months ended September 30, 2009.  Our interest rate spread increased by 20 basis points to 3.30% during the first nine months of 2010 from 3.10% during the first nine months of 2009.  Our net interest margin increased 18 basis points to 3.51% for the first nine months of 2010 from 3.33% for the first nine months of 2009.  Our net interest income continues to benefit from a steeper than normal yield curve.  Low short-term market interest rates have resulted in our cost of funds decreasing faster than the yield on our loans.
 
Provision for Loan Losses: The provision for loan losses is determined by management as the amount needed to replenish the allowance for loan losses, after net charge-offs have been deducted, to a level considered adequate to absorb inherent losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America.
 
The following table shows the activity in the allowance for loan losses for the nine months ended September 30, 2010 and 2009.
 
 
28

 
 
   
Nine Months Ended
 
   
September 30, 2010
   
September 30, 2009
 
   
(In thousands)
 
Balance at beginning of period
  $ 2,290     $ 1,934  
Charge-offs:
               
  One-to-four family residential
    98       45  
  Commercial and agricultural real estate
    748       74  
  Commercial and agricultural business
    -       1,203  
  Home equity/home improvement
    70       45  
  Automobile
    2       15  
  Other Consumer
    7       5  
     Total
    925       1,387  
Recoveries:
               
  One-to-four family residential
    21       1  
  Commercial and agricultural real estate
    6       3  
  Home equity/home improvement
    12       3  
  Automobile
    2       5  
  Other Consumer
    6       7  
     Total
    47       19  
Net loan charge-offs
    878       1,368  
Additions charged to operations
    1,500       2,150  
Balance at end of period
  $ 2,912     $ 2,716  
 
The allowance for loan losses increased $622,000 to $2.9 million at September 30, 2010, from $2.3 million at December 31, 2009.  The increase was the result of the provision for loan losses exceeding net charge-offs.  The provision decreased $650,000 to $1.5 million during the first nine months of 2010, compared to $2.2 million during the first nine months of 2009.  Net charge-offs decreased $490,000 to $878,000 during the first nine months of 2010, compared to $1.4 million during the first nine months of 2009.  The higher charge-offs during 2009 reflected a significant charge-off of $1.2 million recognized on one commercial credit during the second quarter of 2009.  The decrease in the provision during 2010 reflects the lower level of charge-offs, a lower level of specific allocations to the allowance, and a decrease in the average balance of the loan portfolio during the nine months ended 2010, compared to the same period of 2009.  While the level of charge-offs decreased during 2010 compared to 2009, the historically higher level of charge-offs for both years have resulted in an increase in our average loss factors.  The higher level of charge-offs was concentrated in our commercial and commercial real estate portfolios, and have contributed to the higher balance of the allowance for loan losses.
 
Non-Interest Income:  Non-interest income increased $124,000, or 4.1%, to $3.1 million for the nine months ended September 30, 2010 from $3.0 million for the same period in 2009.  The increase in non-interest income resulted primarily from increases of $290,000 in commission income and $146,000 in service charges on deposit accounts, partially offset by a decrease of $303,000 in net income from mortgage banking operations.  The increase in commission income reflected improved market conditions and growth in customer accounts.  Service charges on deposits benefitted from the increase in insufficient fund fees related to the overdraft privilege program implemented during the second quarter of 2009.  The decrease in mortgage banking operations income was due to a lower volume of loan sales in 2010, as we sold $29.6 million of loans to the secondary market during the first nine months of 2010, compared to $58.4 million during the same period of 2009.  The decrease in loan sales in 2010 reflected lower mortgage originations for sale in 2010 as compared to 2009.
 
 
29

 
 
Non-Interest Expense:  Total non-interest expense increased $505,000, or 7.5%, to $7.2 million for the nine months ended September 30, 2010 from $6.7 million for the same period of 2009.  The increase in non-interest expense consisted mainly of increases of $257,000 in the impairment of mortgage servicing assets, $193,000 in compensation and benefits, and $53,000 in data processing expense, partially offset by a $146,000 decrease in FDIC deposit insurance premiums.  The increase in the impairment of mortgage servicing rights was due to a $166,000 impairment charge during 2010 reflecting higher prepayment speeds, compared to a $91,000 recovery during 2009.  The increase in compensation and benefits expense resulted from normal salary and benefit cost increases, as well as increased commissions.  Data processing expense has increased due to higher software maintenance costs.  The $146,000 decrease in FDIC insurance premiums reflects the impact of the $140,000 special assessment during the second quarter of 2009, which did not reoccur in 2010.
 
Income Taxes:  The provision for income taxes increased $169,000 to $178,000 during the first nine months of 2010 compared to $9,000 during the same period of 2009.  The increase in the income tax provision reflected an increase in taxable income due to higher income, partially offset by an increase in the benefit of tax-exempt income.
 
Liquidity and Capital Resources
 
The Company’s most liquid assets are cash and cash equivalents.  The levels of these assets are dependent on the Company’s operating, financing, and investing activities.  At September 30, 2010 and December 31, 2009, cash and cash equivalents totaled $14.1 million and $15.7 million, respectively.  The Company’s primary sources of funds include principal and interest repayments on loans (both scheduled payments and prepayments), maturities of investment securities and principal repayments from mortgage-backed securities (both scheduled payments and prepayments).  During the past nine months, the most significant sources of funds have been net proceeds from our recent stock offering, deposits, calls and sales of investment securities, and principal repayments on loans and mortgage-backed securities.  These funds have been used primarily for the origination of new loans and the purchase of U.S. Agency, municipal and mortgage-backed securities.
 
While scheduled loan repayments and proceeds from maturing investment securities and principal repayments on mortgage-backed securities are relatively predictable, deposit flows and prepayments are more influenced by interest rates, general economic conditions, and competition.  The Company attempts to price its deposits to meet asset-liability objectives and stay competitive with local market conditions.
 
Liquidity management is both a short- and long-term responsibility of management.  The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) projected purchases of investment and mortgage-backed securities, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) liquidity of its asset/liability management program.  Excess liquidity is generally invested in interest-earning overnight deposits and other short-term U.S. agency obligations.  If the Company requires funds beyond its ability to generate them internally, it has the ability to borrow funds from the FHLB.  The Company may borrow from the FHLB under a blanket agreement which assigns all investments in FHLB stock as well as qualifying first mortgage loans equal to 150% of the outstanding balance as collateral to secure the amounts borrowed.  This borrowing arrangement is limited to a maximum of 30% of the Company’s total assets or twenty times the balance of FHLB stock held by the Company.  At September 30, 2010, the Company had no outstanding FHLB advances and approximately $22.3 million available to it under the above-mentioned borrowing arrangement.
 
The Company maintains minimum levels of liquid assets as established by the Board of Directors.  The Company’s liquidity ratios at September 30, 2010 and December 31, 2009 were 33.5% and 30.7%, respectively.  This ratio represents the volume of short-term liquid assets as a percentage of net deposits and borrowings due within one year.
 
 
30

 
 
The Company must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments.  The Company anticipates that it will have sufficient funds available to meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed above.  The following table summarizes these commitments at September 30, 2010 and December 31, 2009.
 
   
September 30, 2010
   
December 31, 2009
 
   
(In thousands)
 
Commitments to fund loans
  $ 37,586     $ 36,050  
Standby letters of credit
    453       488  
 
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined).  Management believes that at September 30, 2010, the Company met all its capital adequacy requirements.
 
Under Illinois law, Illinois-chartered savings banks are required to maintain a minimum core capital to total assets ratio of 3%.  The Illinois Commissioner of Savings and Residential Finance (the “Commissioner”) is authorized to require a savings bank to maintain a higher minimum capital level if the Commissioner determines that the savings bank’s financial condition or history, management or earnings prospects are not adequate.  If a savings bank’s core capital ratio falls below the required level, the Commissioner may direct the savings bank to adhere to a specific written plan established by the Commissioner to correct the savings bank’s capital deficiency, as well as a number of other restrictions on the savings bank’s operations, including a prohibition on the declaration of dividends by the savings bank’s board of directors.  At September 30, 2010, the Bank’s core capital ratio was 9.20% of total average assets, which substantially exceeded the required amount.
 
The Bank is also required to maintain regulatory capital requirements imposed by the Federal Deposit Insurance Corporation.  The Bank must have:  (i) Tier 1 Capital to Average Assets of 4.0%, (ii) Tier 1 Capital to Risk-Weighted Assets of 4.0%, and (iii) Total Capital to Risk-Weighted Assets of 8.0%.  At September 30, 2010, minimum requirements and the Banks actual ratios are as follows:
 
   
September 30, 2010
   
December 31, 2009
   
Minimum
 
   
Actual
   
Actual
   
Required
 
Tier 1 Capital to Average Assets
    9.20 %     7.44 %     4.00 %
Tier 1 Capital to Risk-Weighted Assets
    13.04 %     10.70 %     4.00 %
Total Capital to Risk-Weighted Assets
    14.29 %     11.83 %     8.00 %
 
 
31

 
 
Effect of Inflation and Changing Prices
 
The consolidated financial statements and related financial data presented herein have been prepared in accordance with GAAP which require the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time due to inflation.  The impact of inflation is reflected in the increased cost of the Company’s operations.  Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature.  As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation.  Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
 
 
32

 
 
The following table sets forth the average balances and interest rates (costs) on the Company’s assets and liabilities during the periods presented.
 
Consolidated Average Balance Sheet and Interest Rates
 
(Dollars in thousands)
 
   
Three Months Ended September 30,
 
   
2010
   
2009
 
   
Average
               
Average
             
   
Balance
   
Interest
   
Yield/Cost
   
Balance
   
Interest
   
Yield/Cost
 
                                     
Interest-earnings assets:
                                   
  Loans
  $ 179,580     $ 2,805       6.25 %   $ 183,614     $ 2,904       6.33 %
  Investment securities
    52,168       441       3.38 %     36,869       356       3.86 %
  Mortgage-backed securities
    34,703       245       2.83 %     47,973       387       3.22 %
  Other
    9,865       3       0.12 %     4,617       2       0.14 %
      Total interest-earning assets
    276,316       3,494       5.06 %     273,073       3,649       5.35 %
                                                 
Non-interest earnings assets
    21,515                       21,511                  
      Total assets
  $ 297,831                     $ 294,584                  
                                                 
Interest-bearing liabilities:
                                               
  Deposits
  $ 233,433     $ 973       1.67 %   $ 236,951     $ 1,291       2.18 %
  Other borrowings
    3,012       3       0.41 %     9,830       23       0.93 %
      Total interest-bearing liabilities
    236,445       976       1.65 %     246,781       1,314       2.13 %
                                                 
Non-interest bearing liabilities
    29,964                       23,144                  
Stockholders equity
    31,422                       24,659                  
                                                 
      Total liabilities/stockholders equity
  $ 297,831                     $ 294,584                  
                                                 
Net interest income
          $ 2,518                     $ 2,335          
                                                 
Interest rate spread (average yield earned minus average rate paid)
                    3.41 %                     3.22 %
                                                 
Net interest margin (net interest income divided by average interest-earning assets)
                    3.65 %                     3.42 %
 
 
33

 
 
The following table sets forth the changes in rate and changes in volume of the Company’s interest earning assets and liabilities.
 
Analysis of Volume and Rate Changes
 
(In thousands)
 
Three Months Ended September 30,
 
   
2010 Compared to 2009
 
   
Increase(Decrease) Due to
 
   
Rate
   
Volume
   
Net
 
                   
Interest-earnings assets:
                 
  Loans
  $ (37 )   $ (63 )   $ (100 )
  Investment securities
    (49 )     134       85  
  Mortgage-backed securities
    (43 )     (98 )     (141 )
  Other
    -       1       1  
      Total net change in income on interest-earning assets
    (129 )     (26 )     (155 )
                         
Interest-bearing liabilities:
                       
  Deposits
    (299 )     (19 )     (318 )
  Other borrowings
    (9 )     (11 )     (20 )
      Total net change in expense on interest-bearing liabilities
    (308 )     (30 )     (338 )
                         
Net change in net interest income
  $ 179     $ 4     $ 183  
 
 
34

 
 
The following table sets forth the average balances and interest rates (costs) on the Company’s assets and liabilities during the periods presented.
 
Consolidated Average Balance Sheet and Interest Rates
 
(Dollars in thousands)
 
   
Nine Months Ended September 30,
 
   
2010
   
2009
 
   
Average
               
Average
             
   
Balance
   
Interest
   
Yield/Cost
   
Balance
   
Interest
   
Yield/Cost
 
                                     
Interest-earnings assets:
                                   
  Loans
  $ 176,917     $ 8,160       6.15 %   $ 184,310     $ 8,786       6.36 %
  Investment securities
    47,976       1,292       3.59 %     41,303       1,201       3.88 %
  Mortgage-backed securities
    35,657       653       2.44 %     38,619       1,036       3.58 %
  Other
    8,396       7       0.12 %     8,274       10       0.16 %
      Total interest-earning assets
    268,946       10,112       5.01 %     272,506       11,033       5.40 %
                                                 
Non-interest earnings assets
    21,931                       22,872                  
      Total assets
  $ 290,877                     $ 295,378                  
                                                 
Interest-bearing liabilities:
                                               
  Deposits
  $ 233,239     $ 3,032       1.73 %   $ 233,896     $ 4,129       2.35 %
  Other borrowings
    3,056       8       0.33 %     11,420       98       1.14 %
      Total interest-bearing liabilities
    236,295       3,040       1.72 %     245,316       4,227       2.30 %
                                                 
Non-interest bearing liabilities
    26,158                       25,603                  
Stockholders equity
    28,424                       24,459                  
                                                 
      Total liabilities/stockholders equity
  $ 290,877                     $ 295,378                  
                                                 
Net interest income
          $ 7,072                     $ 6,806          
                                                 
Interest rate spread (average yield earned minus average rate paid)
                    3.30 %                     3.10 %
                                                 
Net interest margin (net interest income divided by average interest-earning assets)
                    3.51 %                     3.33 %
 
 
35

 
 
The following table sets forth the changes in rate and changes in volume of the Company’s interest earning assets and liabilities.
 
Analysis of Volume and Rate Changes
 
(In thousands)
 
Nine Months Ended September 30,
 
   
2010 Compared to 2009
 
   
Increase(Decrease) Due to
 
   
Rate
   
Volume
   
Net
 
                   
Interest-earnings assets:
                 
  Loans
  $ (280 )   $ (346 )   $ (626 )
  Investment securities
    (93 )     184       91  
  Mortgage-backed securities
    (309 )     (74 )     (383 )
  Other
    (2 )     -       (2 )
      Total net change in income on interest-earning assets
    (684 )     (236 )     (920 )
                         
Interest-bearing liabilities:
                       
  Deposits
    (1,085 )     (12 )     (1,097 )
  Other borrowings
    (44 )     (46 )     (90 )
      Total net change in expense on interest-bearing liabilities
    (1,129 )     (58 )     (1,187 )
                         
Net change in net interest income
  $ 445     $ (178 )   $ 267  
 
 
36

 
 
JACKSONVILLE BANCORP, INC.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The Company’s policy in recent years has been to reduce its interest rate risk by better matching the maturities of its interest rate sensitive assets and liabilities, selling its long-term fixed-rate residential mortgage loans with terms of 15 years or more to the secondary market, originating adjustable rate loans, balloon loans with terms ranging from three to five years and originating consumer and commercial business loans, which typically are for a shorter duration and at higher rates of interest than one-to-four family loans.  Our portfolio of mortgage-backed securities, including both fixed and variable rates, also provides monthly cash flow.  The remaining investment portfolio has been structured to better match the maturities and rates of its interest-bearing liabilities.  During 2010, the Company has increased its holdings of variable-rate mortgage-backed securities and shorter term U.S. Agency securities in order to help protect the balance sheet from a potential rising rate environment.  With respect to liabilities, the Company has attempted to increase its savings and transaction deposit accounts, which management believes are more resistant to changes in interest rates than certificate accounts.  The Board of Directors appoints the Asset-Liability Management Committee (ALCO), which is responsible for reviewing the Company’s asset and liability policies.  The ALCO meets quarterly to review interest rate risk and trends, as well as liquidity and capital ratio requirements.
 
The Company uses a comprehensive asset/liability software package provided by a third-party vendor to perform interest rate sensitivity analysis for all product categories.  The primary focus of the Company’s analysis is on the effect of interest rate increases and decreases on net interest income.  Management believes that this analysis reflects the potential effects on current earnings of interest rate changes.  Call criteria and prepayment assumptions are taken into consideration for investment securities and loans.  All of the Company’s interest sensitive assets and liabilities are analyzed by product type and repriced based upon current offering rates.  The software performs interest rate sensitivity analysis by performing rate shocks of plus or minus 300 basis points in 100 basis point increments.
 
The following table shows projected results at September 30, 2010 and December 31, 2009 of the impact on net interest income from an immediate change in interest rates, as well as the benchmarks established by the ALCO.  The results are shown as a dollar and percentage change in net interest income over the next twelve months.
 
   
Change in Net Interest Income
   
(Dollars in thousands)
   
September 30, 2010
   
December 31, 2009
 
ALCO
Rate Shock:
 
$ Change
   
% Change
   
$ Change
   
% Change
 
Benchmark
 + 200 basis points
    112       1.03 %     220       2.16 %
 > (20.00)%
 + 100 basis points
    132       1.22 %     184       1.80 %
 > (12.50)%
  - 100 basis points
    (62 )     -0.57 %     (271 )     -2.66 %
 > (12.50)%
  - 200 basis points
    (222 )     -2.05 %     (412 )     -4.05 %
 > (20.00)%
 
 
37

 
 
The foregoing computations are based upon numerous assumptions, including relative levels of market interest rates, prepayments, and deposit mix.  The computed estimates should not be relied upon as a projection of actual results.  Despite the limitations on precision inherent in these computations, management believes that the information provided is reasonably indicative of the effect of changes in interest rate levels on the net earning capacity of the Company’s current mix of interest earning assets and interest bearing liabilities.  Management continues to use the results of these computations, along with the results of its computer model projections, in order to maximize current earnings while positioning the Company to minimize the effect of a prolonged shift in interest rates that would adversely affect future results of operations.
 
At the present time, the most significant market risk affecting the Company is interest rate risk.  Other market risks such as foreign currency exchange risk and commodity price risk do not occur in the normal business of the Company.  The Company also is not currently using trading activities or derivative instruments to control interest rate risk.
 
 
38

 
 
 
JACKSONVILLE BANCORP, INC.
 
ITEM 4.T.  CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13(a)-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Controls
 
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13(a)-15(e) that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
39

 
 
PART II - OTHER INFORMATION
 
Item 1.
Legal Proceedings
   
 
None.
   
Item 1.A.
Risk Factors
   
 
Not applicable to smaller reporting companies.
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
 
On July 14, 2010, the Company completed the offer and sale of its common stock, par value $0.01 per share, pursuant to a registration statement on Form S-1 (SEC File No. 333-165466).  As a result of the offering, the Company received $9.2 million in net proceeds.  The Company incurred total expenses of $1.2 million in connection with the offering.
   
Item 3.
Defaults Upon Senior Securities
   
 
None.
   
Item 4.
Removed and Reserved
   
Item 5.
Other Information
   
 
None.
   
Item 6.
Exhibits
   
 
31.1 - Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
 
31.2 - Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
 
32.1 - Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
40

 
 
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.
Registrant
 
       
Date: 11/03/2010
 
/s/ Richard A. Foss
 
 
 
Richard A. Foss
 
 
 
President and Chief Executive Officer
 
       
    /s/ Diana S. Tone  
    Diana S. Tone  
    Chief Financial Officer  
 
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