10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2010.

or

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

For the transition period from ______________ to ______________.

Commission file number: 001-34821

	JACKSONVILLE BANCORP, INC.
(Exact name of registrant as specified in its charter)

Maryland	36-4670835
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

1211 West Morton Avenue, Jacksonville, Illinois	62650
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:  (217) 245-4111

Securities registered pursuant to Section 12(b) of the Act:

	Title of each class	Name of each exchange on which registered
Common Stock, $0.01 par value		The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

                                                                                                                                                                                                      YES o               NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

                                                                                                                                                                                                      YES o               NO x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

                                                                                                                                                                                                      YES x               NO o

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 that the Registrant was required to submit and post such files).

                                                                                                                                                                                                      YES o               NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                                                                                                            x

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o                                                                Accelerated filer  o

Non-accelerated filer  o                                                                Smaller reporting company  x

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).                  YES o               NO x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2010, as reported by the Nasdaq Capital Market, was approximately $0.

As of March 1, 2011, there was issued and outstanding 1,924,955 shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE:

(1) Proxy Statement for the 2011 Annual Meeting of Stockholders of the Registrant (Part III).

               (2) Annual Report to Stockholders (Parts II and IV).

TABLE OF CONTENTS
ITEM 1.	Business	2
ITEM 1A.	Risk Factors	39
ITEM 1B.	Unresolved Staff Comments	45
ITEM 2.	Properties	46
ITEM 3.	Legal Proceedings	46
ITEM 4.	Reserved	46
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	46
ITEM 6.	Selected Financial Data	47
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47
ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk	47
ITEM 8.	Financial Statements and Supplementary Data	47
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	47
ITEM 9A.	Controls and Procedures	47
ITEM 9B.	Other Information	48
ITEM 10.	Directors, Executive Officers and Corporate Governance	48
ITEM 11.	Executive Compensation	48
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	49
ITEM 13.	Certain Relationships and Related Transactions and Director Independence	49
ITEM 14.	Principal Accountant Fees and Services	49
ITEM 15.	Exhibits and Financial Statement Schedules	49

PART I

ITEM 1.                   Business

Jacksonville Bancorp, Inc.

Jacksonville Bancorp, Inc. (or the “Company”) is a Maryland corporation.  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.  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 $10.00 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.  

The Company’s only significant asset is our investment in Jacksonville Savings Bank.  At December 31, 2010, Jacksonville Bancorp, Inc. had consolidated assets of $301.5 million, total deposits of $256.4 million, and stockholders’ equity of $35.7 million.

Jacksonville Savings Bank

Jacksonville Savings Bank is an Illinois-chartered savings bank headquartered in Jacksonville, Illinois.  We conduct our business from our main office and six branches, two of which are located in Jacksonville and one of which is located in each of the following Illinois communities: Virden, Litchfield, Chapin, and Concord.  We were originally chartered in 1916 as an Illinois-chartered mutual savings and loan association and converted to a mutual savings bank in 1992.  In 1995, Jacksonville Savings Bank converted to an Illinois chartered stock savings bank and reorganized from the mutual to the mutual holding company form of organization.  We have been a member of the Federal Home Loan Bank System since 1932.  Our deposits are insured by the Federal Deposit Insurance Corporation.

We are a community-oriented savings bank engaged primarily in the business of attracting retail deposits from the general public in our market area and using such funds, together with borrowings and funds from other sources, to originate mortgage loans secured by one- to four-family residential real estate, commercial and agricultural real estate and consumer loans. We also originate commercial and agricultural business loans and multi-family real estate loans.  Additionally, we invest in United States Government agency securities, bank-qualified, general obligation municipal issues, and mortgage-backed securities issued or guaranteed by the United States Government or agencies thereof.  We maintain a portion of our assets in liquid investments, such as overnight funds at the Federal Home Loan Bank.

Our principal sources of funds are customer deposits, proceeds from the sale of loans, funds received from the repayment and prepayment of loans and mortgage-backed securities, and the sale, call, or maturity of investment securities.  Principal sources of income are interest income on loans and investments, sales of loans and securities, service charges, commissions, loan servicing fees and other fees.  Our principal expenses are interest paid on deposits, employee compensation and benefits, occupancy and equipment expense and Federal Deposit Insurance Corporation insurance premiums.

We operate an investment center at our main office.  The investment center is operated through Financial Resources Group, Inc., Jacksonville Savings Bank’s wholly-owned subsidiary.

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Our principal executive office is located at 1211 W. Morton, Jacksonville, Illinois, and our telephone number at that address is (217) 245-4111. Our website address is www.jacksonvillesavings.com.  Information on this website is not and should not be considered to be a part of this Annual Report.

Market Area

Our market area is Morgan, Macoupin, Montgomery and Cass counties, Illinois.  Our offices are located in communities that can generally be characterized as stable to low growth residential communities of predominantly one- to four-family residences.  Our market for deposits is concentrated in the communities surrounding our main office and six branch offices.  We are the largest independent financial institution headquartered in our market area.

The economy of our market area consists primarily of agriculture and related businesses, light industry and state and local government.  The largest employers in our market area are Pactiv Corporation, Passavant Area Hospital, and the State of Illinois.  During 2008 and continuing into 2010, the local economy experienced a downturn, although not as severe as the nationwide recession. As of December 2010, unemployment rates in our market area were: 7.1% in Cass County, 9.7% in Macoupin County, 12.9% in Montgomery County and 8.1% in Morgan County. This compared with unemployment rates of 9.3% in Illinois and 9.4 % in the United States as a whole.  While increased layoffs have resulted in higher unemployment levels, we have not seen a significant impact on our business.

Competition

We encounter significant competition both in attracting deposits and in originating real estate and other loans.  Our most direct competition for deposits historically has come from commercial banks, other savings banks, savings associations and credit unions in our market area, and we expect continued strong competition from such financial institutions in the foreseeable future.  We compete for deposits by offering depositors a high level of personal service and expertise together with a wide range of financial services. Our deposit sources are primarily concentrated in the communities surrounding our banking offices located in Morgan, Macoupin and Montgomery counties, Illinois.  As of June 30, 2010, our FDIC-insured deposit market share in the counties we serve (out of 32 bank and thrift institutions with offices in Morgan, Macoupin and Montgomery Counties, Illinois) was 11.0%. Such data does not reflect deposits held by credit unions.

The competition for real estate and other loans comes principally from commercial banks, mortgage banking companies, government sponsored entities and other savings banks and savings associations.  This competition for loans has increased substantially in recent years as a result of the large number of institutions competing in our market areas as well as the increased efforts by commercial banks to increase mortgage loan originations.

We compete for loans primarily through the interest rates and loan fees we charge and the efficiency and quality of services we provide to borrowers and home builders.  Factors that affect competition include general and local economic conditions, current interest rate levels and the volatility of the mortgage markets.

Lending Activities

General.  Historically, our principal lending activity has been the origination of mortgage loans secured by one- to four-family residential properties in our local market area.  Over the past several years, we have increased our emphasis on originating loans secured by commercial and agricultural real estate. We also originate commercial and agricultural business loans secured by collateral other than real estate as well as unsecured commercial and agricultural business loans.  We also originate consumer loans, primarily home equity loans and loans secured by automobiles. At December 31, 2010, our loans receivable totaled $179.5 million, of which $37.2 million, or 21.1%, consisted of one- to four-family residential mortgage loans.  One- to four-family residential mortgage loans decreased $1.4 million, or 3.5%, during 2010 primarily due to the refinancing of loans in our portfolio which were subsequently sold in the secondary mortgage market.  The remainder of our loans receivable at December 31, 2010 consisted of commercial and agricultural real estate loans totaling $69.1 million, or 39.2% of total loans, consumer loans totaling $37.7 million, or 21.4% of total loans, commercial and agricultural business loans totaling $31.0 million, or 17.6% of total loans, and multi-family residential loans totaling $4.4 million, or 2.4% of total loans.  Of the amount included in consumer loans, $19.5 million, or 11.1% of total loans consisted of home equity and home improvement loans, and $6.2 million, or 3.5% of total loans, consisted of automobile loans.

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We have made our interest-earning assets more interest rate sensitive by, among other things, originating variable interest rate loans, such as adjustable-rate mortgage loans and balloon loans with terms ranging from three to five years, as well as medium-term consumer loans and commercial business loans.  Our ability to originate adjustable-rate mortgage loans is substantially affected by market interest rates.

We originate fixed-rate residential mortgage loans secured by one- to four-family residential properties with terms up to 30 years.  We sell a significant portion of our one- to four-family fixed-rate residential mortgage loan originations directly to Freddie Mac.  During the years ended December 31, 2010 and 2009, we sold $47.4 million and $66.7 million of fixed-rate residential mortgage loans, respectively.  Loans are generally sold without recourse and with servicing retained.

At December 31, 2010, we were servicing $149.6 million in loans for which we received servicing income of $370,000 for the year ended December 31, 2010. Servicing fee income is recorded for fees earned for servicing loans.  The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned as loan servicing fees in non-interest income.  The amortization of mortgage servicing rights is netted from the gains on sale of loans, both cash gains as well as the capitalized gains, and is included in mortgage banking operations, net, in non-interest income. As a result of the low interest rate environment in 2008, we recognized an impairment of $428,000 against the value of our mortgage servicing income. Subsequently, as long term interest rates began to rise, we were able to recognize a partial recovery of $123,000 during 2009.  Due to the changes in long-term rates during 2010, we recognized an additional impairment charge of $101,000 during 2010.

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Loan Portfolio Composition.Set forth below are selected data relating to the composition of our loan portfolio, by type of loan as of the dates indicated, excluding loans held for sale of $280,000, $814,000, $1.4 million, $1.9 million and $426,000 for the years ended December 31, 2010, 2009, 2008, 2007 and 2006, respectively.

	At December 31,
	2010					2009					2008					2007					2006
	Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in Thousands)
Real estate loans:
One- to four-family residential (1)	$	37,227		21.1	%	$	38,581		22.2	%	$	46,807		25.6	%	$	50,459		28.7	%	$	40,635		26.2	%
Commercial and agricultural (2)		69,147		39.2			56,650		32.6			56,516		30.9			44,100		25.1			39,592		25.6
Multi-family residential		4,378		2.4			4,344		2.5			4,518		2.5			4,741		2.7			5,877		3.8
Total real estate loans		110,752		62.7			99,575		57.3			107,841		59.0			99,300		56.5			86,104		55.6
Commercial and agricultural business loans		30,987		17.6			34,393		19.8			35,356		19.3			36,539		20.8			32,837		21.2
Consumer loans:
Home equity/home improvement (3)		19,526		11.1			28,119		16.2			30,002		16.4			30,087		17.1			27,202		17.6
Automobile		6,213		3.5			6,118		3.5			5,842		3.2			5,334		3.0			5,275		3.4
Other		11,977		6.8			7,837		4.5			5,950		3.2			6,402		3.6			5,313		3.4
Total consumer loans		37,716		21.4			42,074		24.2			41,794		22.8			41,823		23.7			37,790		24.4
Total loans receivable		179,455		101.7			176,042		101.3			184,991		101.1			177,662		101.0			156,731		101.2
Less:
Unearned premium on purchased loans, unearned discount and deferred loan fees, net		49		—			69		—			109		—			29		—			29		—
Allowance for loan losses		2,964		1.7			2,290		1.3			1,934		1.1			1,766		1.0			1,864		1.2
Total loans receivable, net	$	176,442		100.0	%	$	173,683		100.0	%	$	182,948		100.0	%	$	175,867		100.0	%	$	154,838		100.0	%

(1) Includes one- to four-family real estate construction loans of $503,000, $54,000, $596,000, $352,000 and $183,000for the years ended December 31, 2010, 2009, 2008, 2007 and 2006, respectively.

(2) Includes commercial and agricultural real estate construction loans of $2.1 million, $4.2 million, $2.5 million, $472,000 and $0for the years ended December 31, 2010, 2009, 2008, 2007 and 2006, respectively.

(3) Includes real estate construction loans of $453,000, $3.6 million, $1.1 million, $1.4 million and $370,000for the years ended December 31, 2010, 2009, 2008, 2007 and 2006, respectively.

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One- to Four-Family Mortgage Loans.  Historically our primary lending origination activity has been one- to four-family, owner-occupied, residential mortgage loans secured by property located in our market area.  We generate loans through our marketing efforts, existing customers and referrals, real estate brokers, builders and local businesses.  We generally limit our one- to four-family loan originations to the financing of loans secured by properties located within our market area.  At December 31, 2010, $37.2 million, or 21.1% of our net loan portfolio, was invested in mortgage loans secured by one- to four-family residences.

Our fixed-rate one- to four-family residential mortgage loans are generally conforming loans, underwritten according to Freddie Mac guidelines. We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits established by the Federal Housing Finance Agency for Freddie Mac, which is currently $417,000 for single-family homes. At December 31, 2010, we had no one- to four-family residential mortgage loans with principal balances in excess of $417,000, commonly referred to as jumbo loans.

We originate for resale to Freddie Mac fixed-rate one- to four-family residential mortgage loans with terms of 15 years or more.  Our fixed-rate mortgage loans amortize monthly with principal and interest due each month.  Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option.  We offer fixed-rate one- to four-family residential mortgage loans with terms of up to 30 years without prepayment penalty.

We currently offer adjustable-rate mortgage loans for terms ranging up to 30 years.  We generally offer adjustable-rate mortgage loans that adjust between one and five years on the anniversary date of origination.  Interest rate adjustments are up to two hundred basis points per year, with a cap of up to six hundred basis points on interest rate increases over the life of the loan.  In a rising interest rate environment, such rate limitations may prevent adjustable-rate mortgage loans from repricing to market interest rates, which would have an adverse effect on our net interest income.  In the low interest rate environment that has existed over the past two years, our adjustable-rate portfolio has repriced downward resulting in lower interest income from this portion of our loan portfolio.  We have used different interest indices for adjustable-rate mortgage loans in the past such as the average yield on U.S. Treasury securities, adjusted to a constant maturity of either one-year, three-years or five-years.  Adjustable-rate mortgage loans secured by one- to four-family residential real estate totaled $10.0 million, or 26.9% of our total one- to four-family residential real estate loans receivable at December 31, 2010.  The origination of fixed-rate mortgage loans versus adjustable-rate mortgage loans is monitored on an ongoing basis and is affected significantly by the level of market interest rates, customer preference, our interest rate risk position and our competitors’ loan products.  During 2010, we originated $46.4 million of fixed-rate residential mortgage loans which were all subsequently sold in the secondary mortgage market and $7.7 million of adjustable-rate mortgage and balloon loans which were held in our portfolio.

Adjustable-rate mortgage loans make our loan portfolio more interest rate sensitive and provides an alternative for those borrowers who meet our underwriting criteria, but are unable to qualify for a fixed-rate mortgage.  However, as the interest income earned on adjustable-rate mortgage loans varies with prevailing interest rates, such loans do not offer predictable cash flows in the same manner as long-term, fixed-rate loans.  Adjustable-rate mortgage loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest rates increase.  It is possible that during periods of rising interest rates that the risk of delinquencies and defaults on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrower, resulting in increased loan losses.

Our residential first mortgage loans customarily include due-on-sale clauses, which give us the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as collateral for the loan.  Due-on-sale clauses are a means of imposing assumption fees and increasing the interest rate on our mortgage portfolio during periods of rising interest rates.

When underwriting residential real estate loans, we review and verify each loan applicant’s income and credit history.  Management believes that stability of income and past credit history are integral parts in the underwriting process.  Generally, the applicant’s total monthly mortgage payment, including all escrow amounts, is limited to 28% of the applicant’s total monthly income.  In addition, total monthly obligations of the applicant, including mortgage payments, should not generally exceed 38% of total monthly income.  Written appraisals are generally required on real estate property offered to secure an applicant’s loan.  For one- to four-family real estate loans with loan to value ratios of over 80%, we require private mortgage insurance. We require fire and casualty insurance on all properties securing real estate loans.  We may require title insurance, or an attorney’s title opinion, as circumstances warrant.

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We do not offer an “interest only” mortgage loan product on one- to four-family residential properties (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan.  We do not offer a “subprime loan” program (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation).

Commercial and Agricultural Real Estate and Multi-Family Residential Real Estate Loans.  We originate and purchase commercial and agricultural real estate and multi-family residential real estate loans.  At December 31, 2010, $69.1 million, or 39.2%, of our total loan portfolio consisted of commercial and agricultural real estate loans and $4.4 million, or 2.4%, consisted of multi-family real estate loans.  During 2010, loan originations secured by commercial and agricultural real estate totaled $25.1 million, as compared to $9.2 million in 2009. In 2010, commercial and agricultural real estate loan originations were greater than our historical levels. The increase in originations in 2010 was due to greater demand in our market area whereby we could make more loans to borrowers who were already known to us.  Our commercial and agricultural real estate loans are secured primarily by improved properties such as farms, retail facilities and office buildings, churches and other non-residential buildings.  At December 31, 2010, our commercial and agricultural real estate loan portfolio included $28.2 million in loans secured by farmland and $40.9 million in loans secured by other commercial properties.  The maximum loan-to-value ratio for commercial and agricultural real estate loans we originate is generally 80%. Our commercial and agricultural real estate loans are generally written up to terms of five years with adjustable interest rates.  The rates are generally tied to the prime rate and generally have a specified floor. Many of our adjustable-rate commercial real estate loans are not fully amortizing and therefore require a “balloon” payment at maturity. We have $3.6 million of interest only commercial and agricultural real estate loans. We purchase from time to time commercial real estate loan participations primarily from outside our market area where we are not the lead lender. All participation loans are approved following a review to ensure that the loan satisfies our underwriting standards. At December 31, 2010, commercial real estate loan participations totaled $9.6 million, or 13.9% of the commercial and agricultural real estate loan portfolio consisting primarily of loan participations outside of our market area which totaled $8.6 million, or 12.4% of the commercial and agricultural real estate loan portfolio. At December 31, 2010, loan participations delinquent 60 days or more included one loan with a balance of $498,000.

At December 31, 2010, our largest agricultural real estate loan was secured by farmland, had a principal balance of $3.1 million and was performing in accordance with its terms.  At the same date, the largest commercial real estate loan was secured by a retail and office complex with a principal balance of $1.8 million and was performing in accordance with its terms. At December 31, 2010, the largest multi-family residential real estate loan was secured by an apartment building with a principal balance of $2.1 million and was performing in accordance with its terms. At December 31, 2010, our largest commercial real estate loan participation was secured by condominiums with a principal balance of $1.8 million and was performing in accordance with its terms.

Our underwriting standards for commercial and agricultural real estate and multi-family residential real estate loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.  The income approach is primarily utilized to determine whether income generated from the applicant’s business or real estate offered as collateral is adequate to repay the loan. We emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%).  In underwriting a loan, we consider the value of the real estate offered as collateral in relation to the proposed loan amount.  Generally, the loan amount cannot be greater than 80% of the value of the real estate.  We usually obtain written appraisals from either licensed or certified appraisers on all multi-family, commercial, and agricultural real estate loans in excess of $250,000.  We assess the creditworthiness of the applicant by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining other public records regarding the applicant.

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Loans secured by commercial, agricultural, and multi-family real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances.  This increased credit risk is a result of several factors, including the effects of general economic conditions on income producing properties and the successful operation or management of the properties securing the loans.  Furthermore, the repayment of loans secured by commercial, agricultural, and multi-family real estate is typically dependent upon the successful operation of the related business and real estate property.  If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

Commercial and Agricultural Business Loans.  We originate commercial and agricultural business loans to borrowers located in our market area which are secured by collateral other than real estate or which can be unsecured.  We also purchase participations of commercial business loans from other lenders, which may be made to borrowers outside our market area. Commercial and agricultural business loans totaled $31.0 million, or 17.6%, of our total loan portfolio at December 31, 2010. At December 31, 2010, commercial business loan participations totaled $3.1 million, or 9.9% of the commercial and agricultural business loan portfolio.  Of this amount, commercial business loan participations outside of our market area represented $1.4 million, or 4.5% of the commercial and agricultural business loan portfolio.  Commercial and agricultural business loans are generally secured by equipment and inventory and generally are offered with adjustable rates tied to the prime rate or the average yield on U.S. Treasury securities, adjusted to a constant maturity of either one-year, three-years or five-years and various terms of maturity generally from three years to five years.  On a limited basis, we will originate unsecured business loans in those instances where the applicant’s financial strength and creditworthiness has been established.  Commercial and agricultural business loans generally bear higher interest rates than residential loans, but they also may involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower’s business.  We generally obtain personal guarantees from the borrower or a third party as a condition to originating its business loans.  During the year ended December 31, 2010, we originated $26.6 million in commercial and agricultural business loans.  At that date, our largest commercial business loan was a $5.0 million line of credit with a principal balance of $3.0 million. This loan was performing in accordance with its terms at December 31, 2010.At December 31, 2010, our largest agricultural business loan was a line of credit of $4.5 million with a principal balance of $1.2 million.  This loan was performing in accordance with its terms at December 31, 2010.

Our underwriting standards for commercial and agricultural business loans include a determination of the applicant’s ability to meet existing obligations and payments on the proposed loan from normal cash flows generated in the applicant’s business.  We assess the financial strength of each applicant through the review of financial statements and tax returns provided by the applicant.  The creditworthiness of an applicant is derived from a review of credit reports as well as a search of public records.  We periodically review business loans following origination. We request financial statements at least annually and review them for substantial deviations or changes that might affect repayment of the loan.  Our loan officers also visit the premises of borrowers to observe the business premises, facilities, and personnel and to inspect the pledged collateral.  Underwriting standards for business loans are different for each type of loan depending on the financial strength of the applicant and the value of collateral offered as security.

Consumer Loans.As of December 31, 2010, consumer loans totaled $37.7 million, or 21.4%, of our total loan portfolio.  The principal types of consumer loans we offer are home equity loans and lines of credit and automobile loans. We also originate loans secured by deposit accounts, unsecured loans and mobile home loans.  We generally offer consumer loans on a fixed-rate basis.  At December 31, 2010, home equity and home improvement loans totaled $19.5 million, or 11.1%, of our total loan portfolio. Our home equity loans and lines of credit are generally secured by the borrower’s principal residence.  The maximum amount of a home equity loan or line of credit is generally 95% of the appraised value of a borrower’s real estate collateral less the amount of any prior mortgages or related liabilities.  Home equity loans and lines of credit are approved with both fixed and adjustable interest rates which we determine based upon market conditions.  Such loans may be fully amortized over the life of the loan or have a balloon feature.  Generally, the maximum term for home equity loans is 10 years.

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At December 31, 2010, consumer loans secured by automobiles totaled $6.2 million, or 3.5% of our total loan portfolio.  We offer automobile loans with maturities of up to 60 months for new automobiles.  Loans secured by used automobiles will have maximum terms which vary depending upon the age of the automobile.  We generally originate automobile loans with a loan-to-value ratio below the greater of 80% of the purchase price or 100% of NADA loan value, although in the case of a new car loan the loan-to-value ratio may be greater or less depending on the borrower’s credit history, debt to income ratio, home ownership and other banking relationships with us.

Our underwriting standards for consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.  The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income.  We also consider the length of employment with the borrower’s present employer as well as the amount of time the borrower has lived in the local area.  Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.  Of the consumer loans 90 days or more delinquent at December 31, 2010, 96.7% are home equity loans or lines of credit.  The largest loan in this category at December 31, 2010 had a principal balance of $49,000 and was secured by a residential mortgage.  No assurance can be given, however, that our delinquency rate or loss experience on consumer loans will not increase in the future.

Consumer loans entail greater risks than one- to four-family residential mortgage loans, particularly consumer loans secured by rapidly depreciating assets such as automobiles or loans that are unsecured.  In such cases, collateral repossessed after a default may not provide an adequate source of repayment of the outstanding loan balance because of damage, loss or depreciation.  Further, consumer loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Such events would increase our risk of loss on unsecured loans.  Finally, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default.  At December 31, 2010, consumer loans 90 days or more delinquent, including those for which the accrual of interest has been discontinued, totaled $285,000, or 0.8%, of our total consumer loans.

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Loan Portfolio Maturities and Yields.  The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2010.  Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.

	One- to Four-Family Real Estate					Commercial and Agricultural Real Estate					Multi-Family Real Estate					Commercial and Agricultural Business
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in Thousands)
Due During the Years Ending December 31,
2011	$	5,121		7.17	%	$	8,957		5.63	%	$	193		7.50	%	$	13,689		5.28	%
2012		3,593		7.28			4,473		6.13			146		6.50			4,004		4.85
2013		4,855		6.76			7,067		5.86			—		—			4,566		5.82
2014 to 2015		2,801		6.93			6,638		5.61			108		6.39			6,002		5.81
2016 to 2020		3,265		5.79			5,385		5.65			71		7.04			1,307		5.97
2021 to 2025		3,517		6.24			9,541		5.35			146		5.25			530		5.35
2026 and beyond		14,075		6.14			27,086		5.58			3,714		5.75			889		7.12
Total	$	37,227		6.51	%	$	69,147		5.63	%	$	4,378		5.87	%	$	30,987		5.49	%

	Home Equity/Home Improvement					Automobile					Other Consumer					Total
	Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate			Amount		Weighted Average Rate
	(Dollars in Thousands)
Due During the Years Ending December 31,
2011	$	3,913		6.98	%	$	415		8.05	%	$	4,032		6.05	%	$	36,320		5.96	%
2012		2,557		7.40			836		8.02			776		7.91			16,385		6.41
2013		3,085		6.80			1,665		7.64			948		7.67			22,186		6.39
2014 to 2015		3,903		6.91			3,163		7.37			1,137		7.61			23,752		6.36
2016 to 2020		4,612		6.69			134		6.75			962		7.43			15,736		6.12
2021 to 20245		916		6.96			—		—			1,569		8.23			16,219		5.91
2026 and beyond		540		6.98			—		—			2,553		8.90			48,857		5.96
Total	$	19,526		6.92	%	$	6,213		7.56	%	$	11,977		7.45	%	$	179,455		6.12	%

The following table sets forth at December 31, 2010, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2011.  At December 31, 2010, fixed-rate loans include $11.9 million in fixed-rate balloon payment loans with original maturities of five years or less.  The total dollar amount of fixed-rate loans and adjustable-rate loans due after December 31, 2011, was $74.2 million and $68.9 million, respectively.

	Due after December 31, 2011
	Fixed		Adjustable		Total
	(In Thousands)
Real estate loans:
One- to four-family residential	$	22,124	$	9,982	$	32,106
Commercial and agricultural		16,810		43,380		60,190
Multi-family residential		254		3,931		4,185
Commercial and agricultural business loans		11,967		5,331		17,298
Consumer loans
Home equity/home improvement		9,899		5,714		15,613
Automobile		5,798		—		5,798
Other		7,353		592		7,945
Total loans	$	74,205	$	68,930	$	143,135

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Loan Origination, Solicitation and Processing.  Loan originations are derived from a number of sources such as real estate broker referrals, existing customers, builders, attorneys and walk-in customers.  Upon receipt of a loan application, a credit report is obtained to verify specific information relating to the applicant’s employment, income, and credit standing.  In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent appraiser approved by us.  A loan application file is first reviewed by a loan officer in our loan department who checks applications for accuracy and completeness, and verifies the information provided.  The financial resources of the borrower and the borrower’s credit history, as well as the collateral securing the loan, are considered an integral part of each risk evaluation prior to approval.  The board of directors has established individual lending authorities for each loan officer by loan type.  Loans over an individual officer’s lending limits must be approved by the officers’ loan committee consisting of the chairman of the board, president, chief lending officer and all lending officers, which meets three times a week, and has lending authority up to $500,000 depending on the type of loan.  Loans with a principal balance over this limit, up to $1.0 million, must be approved by the directors’ loan committee, which meets weekly and consists of the chairman of the board, president, senior vice president, chief lending officer and at least two outside directors, plus all lending officers as non-voting members.  The board of directors approves all loans with a principal balance over $1.0 million.  The board of directors ratifies all loans we originate.  Once the loan is approved, the applicant is informed and a closing date is scheduled.  We typically fund loan commitments within 30 days.

If the loan is approved, the borrower must provide proof of fire and casualty insurance on the property serving as collateral which insurance must be maintained during the full term of the loan; flood insurance is required in certain instances.  Title insurance or an attorney’s opinion based on a title search of the property is generally required on loans secured by real property.

Origination, Purchase and Sale of Loans.  Set forth below is a table showing our loan originations, purchases, sales and repayments for the years indicated.  It is our policy to originate for sale into the secondary market fixed-rate mortgage loans with maturities of 15 years or more and to originate for retention in our portfolio adjustable-rate mortgage loans and loans with balloon payments.  Purchased loans consist of participations in commercial real estate and commercial business loans originated by other financial institutions.  We usually obtain commitments prior to selling fixed-rate mortgage loans.

	For the Years Ended December 31,
	2010		2009		2008		2007		2006
	(In Thousands)
Total loans receivable at beginning of year	$	176,042	$	184,991	$	177,662	$	156,731	$	144,293
Originations:
Real estate loans:
One- to four-family residential		54,052		72,109		38,717		30,104		25,708
Commercial and agricultural		25,140		9,163		23,038		8,897		10,808
Multi-family residential		360		—		—		—		1,862
Commercial and agricultural business loans		26,621		27,295		31,027		29,404		31,510
Consumer loans:
Home equity/home improvement		5,073		11,698		20,133		19,309		17,874
Automobile		4,303		4,017		4,188		3,777		4,336
Other		12,052		7,206		5,072		6,360		4,916
Total originations		127,601		131,488		122,175		97,851		97,014
Participation loans purchased		4,328		2,113		11,569		6,231		3,736
Transfer of mortgage loans to foreclosed real estate owned		670		308		667		819		329
Repayments		80,471		75,542		95,671		72,176		71,422
Loan sales to secondary market		47,375		66,700		30,077		10,156		16,561
Total loans receivable at end of year	$	179,455	$	176,042	$	184,991	$	177,662	$	156,731

Loan Origination and Other Fees.  In addition to interest earned on loans, we may charge loan origination fees.  Our ability to charge loan origination fees is influenced by the demand for mortgage loans and competition from other lenders in our market area.  To the extent that loans are originated or acquired for our portfolio, accounting standards require that we defer loan origination fees and costs and amortize such amounts as an adjustment of yield over the life of the loan by use of the level yield method.  Fees deferred are recognized into income immediately upon the sale of the related loan.  At December 31, 2010, we had $166,000 of deferred loan fees.  Loan origination fees are a volatile source of income.  Such fees vary with the volume and type of loans and commitments made and purchased and with competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money.

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In addition to loan origination fees, we also receive other fees that consist primarily of extension fees and late charges.  We recognized fees of $93,000, $110,000 and $54,000 for the years ended December 31, 2010, 2009, and 2008, respectively.

Loan Concentrations.With certain exceptions, an Illinois-chartered savings bank may not make a loan or exceed credit for secured and unsecured loans for business, commercial, corporate or agricultural purposes to a single borrower in excess of 25% of the Jacksonville Savings Bank’s total capital, as defined by regulation.  At December 31, 2010, our loans-to-one borrower limit was $7.6 million.  At December 31, 2010 we had no lending relationships in excess of our loans-to-one borrower limitation.  At December 31, 2010, we had 22 loans in excess of $1.0 million totaling in the aggregate $44.6 million or 24.8% of our total loan portfolio.

Delinquencies and Classified Assets

Our collection procedures provide that when a mortgage loan is either ten days (in the case of adjustable-rate mortgage and balloon loans) or 15 days (in the case of fixed-rate loans) past due, a computer-generated late charge notice is sent to the borrower requesting payment and assessing a late charge. If the mortgage loan remains delinquent, a telephone call is made or a letter is sent to the borrower stressing the importance of reinstating the loan and obtaining reasons for the delinquency. We also send a 30 day notice pursuant to Illinois law if a borrower’s primary residence is the collateral at issue.  When a loan continues in a delinquent status for 60 days or more, and a repayment schedule has not been made or kept by the borrower, a notice of intent to foreclose upon the underlying property is then sent to the borrower, giving 10 days to cure the delinquency.  If not cured, foreclosure proceedings are initiated.  Consumer loans receive a ten-day grace period before a late charge is assessed.  Collection efforts begin after the grace period expires.  At December 31, 2010, 2009, and 2008 the percentage of non-performing loans to total loans receivable were 1.75%, 1.11% and 0.64%, respectively. At December 31, 2010, 2009, and 2008, the percentage of non-performing assets to total assets was 1.19%, 0.81% and 0.68%, respectively.

Non-performing Assets and Delinquent Loans.  Loans are reviewed on a regular basis and are placed on nonaccrual status when, in the opinion of management, the collection of additional interest is doubtful.  The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan is well secured and in the process of collection. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income.  Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of the loan.

Management monitors all past due loans and non-performing assets.  Such loans are placed under close supervision with consideration given to the need for additions to the allowance for loan losses and (if appropriate) partial or full charge-off.  At December 31, 2010, we had no loans 90 days or more delinquent that were still accruing interest. Non-performing assets increased by $1.3 million to $3.6 million at December 31, 2010 as compared to $2.3 million at December 31, 2009.  The increase in the level of non-performing assets primarily reflected the nonperforming status of two impaired commercial borrowers totaling $1.0 million as of December 31, 2010.

The first borrower has a loan secured by a real estate development project.  The loan had an outstanding principal balance of $1.5 million at December 31, 2009.  Construction of the property had been delayed due to the declining real estate market during 2009.  During 2010, the loan matured and became delinquent.  We recognized a charge-off of $719,000 during 2010.  We also received principal reductions of approximately $282,000 from the borrower and their new guarantor, which reduced the outstanding principal balance to $514,000 at December 31, 2010.  The borrower is current on all payments but the loan remained in  nonaccrual status as of December 31, 2010.  We have provided an additional $143,000 to the allowance for loan losses, after the charge-off noted above, for any further potential loss on this loan.

The second borrower has a loan with an outstanding principal balance of $498,000 at December 31, 2010.  The loan is secured by a newly constructed hotel.  Occupancy has been below projections and the loan is currently over 90 days delinquent.  The borrower did not made any principal reductions nor have we recognized any charge-offs on this loan during 2010.  The hotel is being operated by an independent third party.  Subsequent to year-end, we transferred the loan to other real estate at its net realizable value.

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Management believes the increase in non-performing assets can be partially attributed to unique borrower circumstances as well as the economy in general. We have an experienced chief lending officer and collections and loan review departments which monitor the loan portfolio and actively seek to prevent any deterioration of asset quality.

Real estate acquired through foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until such time as it is sold.  When real estate owned is acquired, it is recorded at the lower of the unpaid principal balance of the related loan, or its fair market value, less estimated selling expenses.  Any further write-down of real estate owned is charged against earnings.  At December 31, 2010, we owned $460,000 of property classified as real estate owned.

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Non-Performing Assets.  The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.  At December 31, 2010, 2009, 2008, 2007 and 2006, we had troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans modified at interest rates materially less than current market rates) of $1.2 million, $1.3 million, $435,000, $323,000 and $273,000, respectively.

	At December 31,
	2010			2009			2008			2007			2006
	(Dollars in Thousands)
Non-accrual loans:
Real estate loans:
One- to four-family residential	$	1,019		$	484		$	445		$	310		$	435
Commercial and agricultural		1,249			98			34			218			100
Multi-family residential		110			132			152			—			—
Commercial and agricultural business loans		85			416			48			82			704
Consumer loans:
Home equity/home improvement		566			407			318			89			100
Automobile		8			8			3			12			1
Other		98			52			5			12			8
Total non-accrual loans		3,135			1,597			1,005			723			1,348
Loans delinquent 90 days or greater and still accruing:
Real estate loans:
One- to four-family residential		—			349			163			203			—
Commercial and agricultural		—			—			—			156			—
Multi-family residential		—			—			—			—			—
Commercial and agricultural business loans		—			—			—			—			—
Consumer loans:
Home equity/home improvement		—			—			—			—			—
Automobile		—			3			18			—			—
Other		—			5			5			9			4
Total loans delinquent 90 days or greater and still accruing		—			357			186			368			4
Total non-performing loans		3,135			1,954			1,191			1,091			1,352
Other real estate owned and foreclosed assets:
Real estate loans:
One- to four-family residential		207			324			565			115			37
Commercial and agricultural		253			59			204			249			115
Multi-family residential		—			—			—			—			—
Commercial and agricultural business loans		—			—			—			—			—
Consumer loans:
Home equity/home improvement		—			—			—			—			—
Automobile		—			—			9			23			—
Other		—			—			—			—			—
Total  other real estate owned and foreclosed assets		460			383			778			387			152
Total non-performing assets	$	3,595		$	2,337		$	1,969		$	1,478		$	1,504
Ratios:
Non-performing loans to total loans		1.75	%		1.11	%		0.64	%		0.61	%		0.86	%
Non-performing assets to total assets		1.19	%		0.81	%		0.68	%		0.51	%		0.56	%

For the year ended December 31, 2010, gross interest income that would have been recorded had our non-accruing loans and troubled debt restructurings been current in accordance with their original terms was $196,000.  Interest income recognized on such loans for the year ended December 31, 2010 was $0.

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At December 31, 2010, we had no loans that were not currently classified as nonaccrual, 90 days past due or troubled debt restructurings but where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure as nonaccrual, 90 days past due or troubled debt restructurings.

The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.

	Loans Delinquent For
	60-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount
	(Dollars in Thousands)
At December 31, 2010
Real estate loans:
One- to four-family residential		4	$	162		15	$	847		19	$	1,009
Commercial and agricultural		2		146		2		521		4		667
Multi-family residential		—		—		—		—		—		—
Commercial and agricultural business loans		—		—		—		—		—		—
Consumer loans:
Home equity/home improvement		2		10		9		275		11		285
Automobile		1		2		2		4		3		6
Other		5		75		2		5		7		80
Total loans		14	$	395		30	$	1,652		44	$	2,047
At December 31, 2009
Real estate loans:
One- to four-family residential		6	$	214		12	$	744		18	$	958
Commercial and agricultural		2		543		1		20		3		563
Multi-family residential		—		—		1		132		1		132
Commercial and agricultural business loans		1		14		2		84		3		98
Consumer loans:
Home equity/home improvement		3		42		10		194		13		236
Automobile		2		7		1		3		3		10
Other		4		1		8		32		12		33
Total loans		18	$	821		35	$	1,209		53	$	2,030
At December 31, 2008
Real estate loans:
One- to four-family residential		4	$	436		15	$	695		19	$	1,131
Commercial and agricultural		—		—		—		—		—		—
Multi-family residential		—		—		—		—		—		—
Commercial and agricultural business loans		—		—		—		—		—		—
Consumer loans:
Home equity/home improvement		7		102		9		188		16		290
Automobile		5		22		5		18		10		40
Other		9		32		7		6		16		38
Total loans		25	$	592		36	$	907		61	$	1,499
At December 31, 2007
Real estate loans:
One- to four-family residential		1	$	79		12	$	610		13	$	689
Commercial and agricultural		—		—		1		102		1		102
Multi-family residential		—		—		—		—		—		—
Commercial and agricultural business loans		—		—		2		115		2		115
Consumer loans:
Home equity/home improvement		5		76		4		78		9		154
Automobile		4		21		3		15		7		36
Other		3		23		4		6		7		29

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	Loans Delinquent For
	60-89 Days				90 Days and Over				Total
	Number		Amount		Number		Amount		Number		Amount
	(Dollars in Thousands)
Total loans		13	$	199		26	$	926		39	$	1,125
At December 31, 2006
Real estate loans:
One- to four-family residential		9	$	323		6	$	270		15	$	593
Commercial and agricultural		—		—		2		145		2		145
Multi-family residential		—		—		—		—		—		—
Commercial and agricultural business loans		—		—		1		659		1		659
Consumer loans:
Home equity/home improvement		7		146		5		191		12		337
Automobile		2		1		1		1		3		2
Other		2		7		2		7		4		14
Total loans		20	$	477		17	$	1,273		37	$	1,750

Classified Assets.  Federal and state regulations require that each insured savings institution classify its assets on a regular basis.  In addition, in connection with examination of insured institutions, Federal examiners have authority to identify problem assets and, if appropriate, classify them.  There are three categories for classified assets:  “substandard,” “doubtful” and “loss.”  Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  For assets classified “substandard” and “doubtful,” the institution is required to establish general loan loss reserves in accordance with accounting principles generally accepted in the United States of America.  Assets classified “loss” must be either completely written off or supported by a 100% specific reserve.  We also maintain a category designated “special mention” which is established and maintained for assets not considered classified but having potential weaknesses or risk characteristics that could result in future problems.  An institution is required to develop an in-house program to classify its assets, including investments in subsidiaries, on a regular basis and set aside appropriate loss reserves on the basis of such classification.  As part of the periodic exams of Jacksonville Savings Bank by the Federal Deposit Insurance Corporation and the Illinois Department of Financial and Professional Regulation, the staff of such agencies reviews our classifications and determine whether such classifications are adequate.  Such agencies have, in the past, and may in the future require us to classify certain assets which management has not otherwise classified or require a classification more severe than established by management.  At December 31, 2010, our classified assets totaled $7.0 million, all of which were classified as substandard.

The total amount of classified and special mention assets decreased $436,000, or 3.8%, to $10.9 million at December 31, 2010 from $11.4 million at December 31, 2009.  The decrease in classified and special mention assets during 2010 was primarily due to a decrease of $2.5 million in special mention loans, partially offset by an increase of $2.1 million in substandard  loans.  The decrease in special mention loans was primarily due to $4.1 million in loans that were downgraded to a substandard rating and $612,000 in principal reductions on these loans, partially offset by $2.4 million in additional loans rated as special mention during 2010.  The $2.1 million increase in substandard loans was primarily related to the downgrade of $4.1 million of loans from the special mention rating and $913,000 of additional loans rated as substandard during 2010, partially offset by charge-offs of $1.1 million and principal reductions of $821,000.

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The following table shows the principal amount of  special mention and classified loans at December 31, 2010 and December 31, 2009.

	12/31/10		12/31/09
	(In Thousands)
Special Mention loans	$	3,943	$	6,489
Substandard loans		6,975		4,865
Total Special Mention and Substandard loans	$	10,918	$	11,354

Allowance for Loan Losses

The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to cover probable credit losses inherent in the loan portfolio at the balance sheet date.  The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components.  The allocated component relates to loans that are classified as impaired.  For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and agricultural loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.  Accordingly, we do not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The general component covers non-classified loans and is based on historical charge-off experience and expected loss given our internal risk rating process.  The loan portfolio is stratified into homogeneous groups of loans that possess similar loss characteristics and an appropriate loss ratio adjusted for other qualitative factors is applied to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio.  The other qualitative factors considered by management include, but are not limited to, the following:

● changes in lending policies and procedures, including underwriting standards and collection practices;

● changes in national and local economic and business conditions and developments, including the condition of various market segments;

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● changes in the nature and volume of the loan portfolio;

● changes in the experience, ability and depth of management and the lending staff;

● changes in the trend of the volume and severity of the past due, nonaccrual, and classified loans;

● changes in the quality of our loan review system and the degree of oversight by the board of directors;

● the existence of any concentrations of credit, and changes in the level of such concentrations; and

● the effect of external factors, such as competition and legal and regulatory requirements on the level of estimated credit losses in our current portfolio.

Commercial and agricultural real estate loans generally have higher credit risks compared to one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers.  In addition, payment experience on loans secured by income-producing properties typically depend on the successful operation of the related real estate project and this may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.

Commercial and agricultural business loans involve a greater risk of default than one- to four-residential mortgage loans of like duration since their repayment generally depends on the successful operation of the borrower’s business and the sufficiency of collateral if any.  The repayment of agricultural loans can be greatly affected by weather conditions and commodity prices.

The allowance for loan losses increased $674,000, or 29.4%, to $3.0 million at December 31, 2010 from $2.3 million at December 31, 2009. The increase in the allowance was the result of the provision for loan losses exceeding net charge-offs.  Net charge-offs decreased $1.2 million to $1.0 million during 2010 from $2.2 million during 2009.  The volume of charge-offs during 2010 was adversely affected by a $719,000 charge-off on one commercial borrower.  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 real estate and commercial loan portfolios, and have contributed to the higher balance in the allowance for loan losses.

The increase in the allowance for loan losses was also due to an increase in non-performing assets.  Non-performing assets increased $1.3 million to $3.6 million at December 31, 2010, compared to $2.3 million at December 31, 2009.  The increase in non-performing assets was due to an increase of $1.1 million in non-performing loans and an increase of $77,000 in foreclosed assets held at December 31, 2010 as compared to at December 31, 2009.  The allowance for loan losses to non-performing loans decreased to 94.56% at December 31, 2010 as compared to 117.20% at December 31, 2009. This decrease was primarily due to lower specific provisions associated with the non-performing loans at December 31, 2010 due to the nature of the collateral coverage.

Although we maintain our allowance for loan losses at a level which we consider to be adequate to provide for potential losses, there can be no assurance that such losses will not exceed the estimated amounts or that we will not be required to make additions to the allowance for loan losses in the future.  Future additions to our allowance for loan losses and changes in the related ratio of the allowance for loan losses to non-performing loans are dependent upon the economy, changes in real estate values and interest rates, the view of the regulatory authorities toward adequate loan loss reserve levels, and inflation.  Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary.

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Analysis of the Allowance for Loan Losses.  The following table summarizes changes in the allowance for loan losses by loan categories for each year indicated and additions to the allowance for loan losses, which have been charged to operations.  There were no charge-offs in multi-family residential real estate during the years presented.

	For the Years Ended December 31,
	2010			2009			2008			2007			2006
	(Dollars in Thousands)
Balance at beginning of year	$	2,290		$	1,934		$	1,766		$	1,864		$	1,846
Charge-offs:
One- to four-family residential		99			147			149			165			55
Commercial and agricultural real estate		787			112			—			38			30
Commercial and agricultural business		144			1,883			—			35			16
Home equity/home improvement		88			58			46			18			101
Automobile		4			20			8			—			2
Other consumer		7			23			3			45			14
Total charge-offs		1,129			2,243			206			301			218
Recoveries:
One- to four-family residential		21			1			14			5			78
Commercial and agricultural real estate		25			4			15			6			8
Commercial and agricultural business		6			—			16			—			—
Home equity/home improvement		13			4			4			3			34
Automobile		7			7			5			13			17
Other consumer		6			8			10			21			39
Total  recoveries		78			24			64			48			176
Net loans charge-offs		1,051			2,219			142			253			42
Additions charged to operations		1,725			2,575			310			155			60
Balance at end of year	$	2,964		$	2,290		$	1,934		$	1,766		$	1,864
Total loans outstanding	$	179,455		$	176,042		$	184,991		$	177,662		$	156,731
Average net loans outstanding	$	177,840		$	182,813		$	177,963		$	165,715		$	149,238
Allowance for loan losses as a percentage of total loans at end of year		1.65	%		1.29	%		1.05	%		0.99	%		1.19	%
Net loans charged off as a percent of average net loans outstanding		0.59	%		1.21	%		0.08	%		0.15	%		0.03	%
Allowance for loan losses to non-performing loans		94.56	%		117.20	%		162.47	%		161.90	%		137.90	%
Allowance for loan losses to total non-performing assets at end of year		82.46	%		97.99	%		98.22	%		119.49	%		123.94	%

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Allocation of Allowance for Loan Losses.  The following table sets forth the allocation of allowance for loan losses by loan category at the dates indicated. The table reflects the allowance for loan losses as a percentage of total loans receivable.  Management believes that the allowance can be allocated by category only on an approximate basis.  The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

	At December 31,
	2010					2009					2008
	Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans
	(Dollars in Thousands)
One- to four-family residential	$	561		20.7	%	$	392		21.9	%	$	510		25.3	%
Commercial and agricultural real estate		1,232		38.5			739		32.2			537		30.6
Multi-family residential		55		2.4			73		2.5			12		2.4
Commercial and agricultural business		531		17.3			653		19.5			304		19.1
Home equity/home improvement		300		10.9			249		16.0			301		16.2
Automobile		36		3.5			26		3.5			33		3.2
Other consumer		128		6.7			62		4.4			52		3.2
Unallocated		121		—			96		—			185		—
Total	$	2,964		100	%	$	2,290		100	%	$	1,934		100	%

	At December 31,
	2007					2006
	Amount		Percent of Loans in Each Category to Total Loans			Amount		Percent of Loans in Each Category to Total Loans
	(Dollars in Thousands)
One- to four-family residential	$	595		28.4	%	$	512		25.9	%
Commercial and agricultural real estate		346		24.8			244		25.3
Multi-family residential		28		2.7			37		3.7
Commercial and agricultural business		146		20.6			275		21.0
Home equity/home improvement		465		16.9			561		17.3
Automobile		74		3.0			96		3.4
Other consumer		112		3.6			139		3.4
Total		1,766		100	%	$	1,864		100	%

Investment Activities

General.The asset/liability management committee, consisting of our Chairman of the Board, President, Senior Vice President, Vice President of Operations, Chief Financial Officer, and two outside directors from the board, has primary responsibility for establishing our investment policy and overseeing its implementation, subject to oversight by our entire board of directors.  Authority to make investments under approved guidelines is delegated to the Senior Vice President. The committee meets at least quarterly.  All investment transactions are reported to the board of directors for ratification quarterly.

The investment policy is reviewed at least annually by the full board of directors.  This policy dictates that investment decisions be made based on providing liquidity, meeting pledging requirements, generating a reasonable rate of return, minimizing our tax liability through the purchase of municipal securities, minimizing exposure to credit risk and ensuring consistency with our interest rate risk management strategy.

Our current investment policy permits us to invest in U.S. treasuries, federal agency securities, mortgage-backed securities, investment grade corporate bonds, municipal bonds, short-term instruments, and other securities.  Investments in municipal bonds will be correlated with Jacksonville Savings Bank’s current level of taxable income, the need for tax-exempt income, and investment in the community.  The investment policy also permits investments in certificates of deposit, securities purchased under an agreement to resell, bankers acceptances, commercial paper and federal funds.

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Our current investment policy generally does not permit investment in stripped mortgage-backed securities, short sales, derivatives, or in other high-risk securities. Federal and Illinois state law generally limit our investment activities to those permissible for a national bank.

The accounting rules require that, at the time of purchase, we designate a security as held to maturity, available-for-sale, or trading, depending on our ability and intent.  Securities available for sale are reported at fair value, while securities held to maturity are reported at amortized cost. We only maintain a securities available-for-sale portfolio.

The portfolio consists primarily of mortgage-backed securities, municipal bonds and U.S. government and agency securities all of which are classified as available for sale. Mortgage-backed securities totaled $42.0 million at December 31, 2010.  General obligation municipal bonds, most of which have been issued within the States of Illinois and Missouri totaled $40.3 million at December 31, 2010. Our portfolio of U.S. Government and agency securities totaled $12.5 million at December 31, 2010.  We expect the composition of our investment portfolio to continue to change based on liquidity needs associated with loan origination activities.  During the year ended December 31, 2010, we had no investment securities that were deemed to be other than temporarily impaired.

Under Federal regulations, we are required to maintain a minimum amount of liquid assets that may be invested in specified short-term securities and certain other investments.  Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management’s judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as management’s projections as to the short-term demand for funds to be used in our loan originations and other activities.

Mortgage-Backed Securities.  We invest in mortgage-backed securities insured or guaranteed by the United States Government or government sponsored enterprises.  These securities, which consist of mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac, had an amortized cost of $42.0 million, $40.4 million and $27.4 million at December 31, 2010, 2009, and 2008, respectively.  The fair value of our mortgage-backed securities portfolio was $42.0 million, $41.0 million and $27.8 million at December 31, 2010, 2009, and 2008, respectively, and the weighted average rate as of December 31, 2010, 2009, and 2008 was 3.46%, 4.21% and 4.95%, respectively. At December 31, 2010, $30.4 million of the mortgage-backed securities in the investment portfolio had fixed rates of interest and $11.6 million had variable rates of interest.

Mortgage-backed securities are created by pooling mortgages and issuing a security with an interest rate that is less than the interest rate on the underlying mortgages.  Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages.  The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Jacksonville Savings Bank.  Some securities pools are guaranteed as to payment of principal and interest to investors.  Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements.  However, mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities.  In addition, mortgage-backed securities may be used to collateralize our specific liabilities and obligations.  Finally, mortgage-backed securities are assigned lower risk-weightings for purposes of calculating our risk-based capital level.

Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or acceleration of any discount relating to such interests, thereby affecting the net yield on our securities.  We periodically review current prepayment speeds to determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.

Municipal Bonds. At December 31, 2010, we held municipal bonds with a fair value of $40.3 million. All of our municipal bonds are general obligation bonds with full taxing authority and ratings (when available) of A or above. Nearly all of our municipal bonds are issued in Illinois or Missouri.

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U.S. Government and Agency Securities.  At December 31, 2010, we held U.S. Government and agency securities with a fair value of $12.5 million. These securities have an average expected life of 1.4 years. While these securities generally provide lower yields than other investments such as mortgage-backed securities, our current investment strategy is to maintain investments in such instruments to the extent appropriate for liquidity purposes, as collateral for borrowings, and for prepayment protection.

Investment Securities Portfolio.  The following table sets forth the composition of our investment securities portfolio at the dates indicated. Investment securities do not include Federal Home Loan Bank of Chicago stock of $1.1 million. All of such securities were classified as available for sale.

	At December 31,
	2010				2009				2008
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In Thousands)
Mortgage-backed securities:
Fannie Mae	$	14,908	$	14,694	$	10,646	$	10,855	$	14,422	$	14,654
Freddie Mac		7,380		7,396		6,938		7,096		6,085		6,192
Ginnie Mae		19,691		19,905		22,844		23,034		6,877		6,949
Total mortgage-backed securities		41,979		41,995		40,428		40,985		27,384		27,795
U.S. government and agencies		12,531		12,549		9,037		9,080		19,472		19,834
Municipal bonds		40,585		40,323		27,661		28,116		30,067		29,805
Total	$	95,095	$	94,867	$	77,126	$	78,181	$	76,923	$	77,434

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Portfolio Maturities and Yields.  The composition and maturities of the investment securities portfolio at December 31, 2010 are summarized in the following table.  Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. All of such securities were classified as available for sale.

	One Year or Less					More than One Year through Five Years					More than Five Years through Ten Years					More than Ten Years					Total Securities
	Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Weighted Average Yield			Amortized Cost		Fair Value		Weighted Average Yield
	(Dollars in Thousands)
Mortgage-backed securities:
Fannie Mae	$	—		—	%	$	—		—	%	$	—		—	%	$	14,908		3.64	%	$	14,908	$	14,694		3.64	%
FreddieMac		—		—			—		—			—		—			7,380		3.63			7,380		7,396		3.63
Ginnie Mae		—		—			—		—			—		—			19,691		3.26			19,691		19,905		3.26
Total mortgage-backed securities		—		—			—		—			—		—			41,979		3.46			41,979		41,995		3.46
U.S. government and agencies		—		—			8,475		2.42			2,511		2.81			1,545		2.99			12,531		12,549		2.57
Municipal bonds(1)		92		2.24			5,133		2.88			19,670		3.56			15,690		4.15			40,585		40,323		3.70
Total	$	92		2.24	%	$	13,608		2.60	%	$	22,181		3.48	%	$	59,214		3.63	%	$	95,095	$	94,867		3.45	%

(1) We used an assumed 34% tax rate in computing tax equivalent adjustments. The tax equivalent yield of municipal bonds was 3.40% for maturities of one year or less, 4.27% for maturities of more than one year through five years, 5.32% for maturities for more than five years through ten years, 6.10% for maturities of more than 10 years and 5.49% for the total municipal bonds securities portfolio at December 31, 2010. The tax equivalent adjustments to interest income of municipal bonds was $1,000 for maturities of one year or less, $71,000 for maturities of more than one year through five years, $346,000 for maturities for more than five years through ten years, $306,000 for maturities of more than 10 years and $724,000 for the total municipal bonds securities portfolio for the year ended December 31, 2010.

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Sources of Funds

General.  Deposits and borrowings are our major sources of funds for lending and other investment purposes.  In addition, we derive funds from the repayment and prepayment of loans and mortgage-backed securities, operations, sales of loans into the secondary market, and the sale, call, or maturity of investment securities.  Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions.  Other sources of funds include advances from the Federal Home Loan Bank.  For further information see “—Borrowings.”  Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer term basis for general business purposes.

Deposits.  We attract consumer and commercial deposits principally from within our market areas through the offering of a broad selection of deposit instruments including interest-bearing checking accounts, noninterest-bearing checking accounts, savings accounts, money market accounts, term certificate accounts and individual retirement accounts.  We will accept deposits of $100,000 or more and may offer negotiated interest rates on such deposits. At December 31, 2010, we had deposits of $100,000 or more from public entities that totaled $24.8 million.  Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors.  We regularly evaluate our internal cost of funds, survey rates offered by competing institutions, review our cash flow requirements for lending and liquidity and execute rate changes when deemed appropriate.  We do not obtain funds through brokers, nor do we solicit funds outside our market area.

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The following tables set forth the distribution of our average deposit accounts, by account type, for the years indicated.

	For the Years Ended December 31,
	2010								2009								2008
	Average Balance		Percent			Weighted Average Rate			Average Balance		Percent			Weighted Average Rate			Average Balance		Percent			Weighted Average Rate
	(Dollars in Thousands)
Deposit type:
Non-interest bearing checking	$	21,769		8.5	%		—	%	$	19,791		7.8	%		—	%	$	18,479		7.5	%		—	%
Interest-bearing checking		31,164		12.2			0.32	%		29,009		11.4			0.32	%		28,572		11.6			0.70	%
Savings accounts		26,686		10.4			0.66	%		24,849		9.8			0.88	%		22,677		9.2			0.99	%
Money market deposits		5,431		2.1			0.79	%		4,616		1.8			0.86	%		4,700		1.9			1.06	%
Money market savings		27,058		10.5			0.95	%		26,750		10.5			1.41	%		24,442		9.9			2.39	%
Certificates of deposit		144,362		56.3			2.33	%		149,124		58.7			3.08	%		147,891		59.9			4.13	%
Total deposits	$	256,470		100.00	%		1.54	%	$	254,139		100.00	%		2.09	%	$	246,761		100.00	%		2.90	%

The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.

	At December 31,
	2010		2009		2008
	(In Thousands)
Interest Rate:
Less than 2.00%	$	99,136	$	51,683	$	1,006
2.00% to 2.99%		21,161		40,734		36,001
3.00% to 3.99%		19,486		37,674		67,714
4.00% to 4.99%		2,858		6,677		17,269
5.00% to 5.99%		2,638		8,852		18,420
6.00% to 6.99%		—		—		86
Total	$	145,279	$	145,620	$	140,496

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The following table sets forth, by interest rate ranges and scheduled maturity, information concerning our certificates of deposit at December 31, 2010.

	At December 31, 2010
	Period to Maturity
	Less Than or Equal to One Year		More Than One to Two Years		More Than Two to Three Years		More Than Three Years		Total		Percent of Total
					(Dollars in Thousands)
Interest Rate Range:
Less than 2.00%	$	76,790	$	21,198	$	1,016	$	132	$	99,136		68.2	%
2.00% to 2.99%		9,075		2,648		1,741		7,697		21,161		14.6
3.00% to 3.99%		5,412		1,817		981		11,276		19,486		13.4
4.00% to 4.99%		1,586		965		307		—		2,858		2.0
5.00% to 5.99%		1,646		547		445		—		2,638		1.8
Total	$	94,509	$	27,175	$	4,490	$	19,105	$	145,279		100.00	%

As of December 31, 2010, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $59.9 million, of which $16.0 million were deposits from public entities.  The following table set forth the maturity of those certificates as of December 31, 2010.

	At December 31, 2010
	(In Thousands)
Three months or less	$	11,944
Over three months through six months		11,408
Over six months through one year		15,953
Over one year to three years		8,798
Over three years		11,811
Total	$	59,914

Borrowings. Deposits are our primary source of funds for lending and investment activities.  If the need arises, we may rely upon advances from the Federal Home Loan Bank to supplement our supply of available funds and to fund deposit withdrawals.  We typically secure advances from the Federal Home Loan Bank with one- to four-family residential mortgage loans, United States Government and agency securities and mortgage-backed securities.  The Federal Home Loan Bank functions as a central reserve bank providing credit for us and other member savings associations and financial institutions.  As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain of our home mortgages, provided certain standards related to creditworthiness have been met.  Advances are made pursuant to several different programs.  Each credit program has its own interest rate and range of maturities.  Depending on the program, limitations on the amount of advances are based either on a fixed percentage of a member institution’s stockholders’ equity or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness.  At December 31, 2010, we had noFederal Home Loan Bank advances outstanding.

Other borrowings consist of securities sold under agreements to repurchase which are swept daily from commercial deposit accounts.  We may be required to provide additional collateral based on the fair value of the underlying securities.

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Our borrowings consist of advances from the Federal Home Loan Bank of Chicago and funds borrowed under repurchase agreements.  At December 31, 2010, we had access to Federal Home Loan Bank advances of up to $22.3 million.  The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances at the dates and for the periods indicated.

	At or For the Years Ended December 31,
	2010			2009			2008
	(Dollars in thousands)
Balance at end of period	$	—		$	—		$	13,500
Average balance during period	$	—		$	5,349		$	12,029
Maximum outstanding at any month end	$	—		$	10,000		$	21,000
Weighted average interest rate at end of period		—	%		—	%		2.59	%
Average interest rate during period		—	%		1.94	%		3.91	%

The following table sets forth information concerning balances and interest rates on our repurchase agreements at the dates and for the periods indicated.

	At or For the Years Ended December 31,
	2010			2009			2008
	(Dollars in thousands)
Balance at end of period	$	4,018		$	3,789		$	7,633
Average balance during period	$	2,847		$	5,168		$	6,031
Maximum outstanding at any month end	$	4,018		$	6,920		$	7,633
Weighted average interest rate at end of period		0.46	%		0.19	%		0.03	%
Average interest rate during period		0.39	%		0.24	%		1.29	%

Trust Services

We operate a full-service trust department. We primarily manage farms and personal estates.  As of December 31, 2010, our trust department managed or administered 100 trust accounts and had $53.3 million in trust assets under management.  Trust fees collected in 2010 and 2009 totaled $206,000 and $166,000, respectively.  The increase in fees was due to a growth in assets under management and additional trust work performed during 2010.

Subsidiary Activities

Jacksonville Savings Bank has one wholly owned subsidiary, Financial Resources Group, Inc. (“Financial Resources”), an Illinois corporation.  Financial Resources operates an investment center engaged in the business of buying and selling stocks, bonds, annuities and mutual funds for its customers’ accounts.  In addition, Financial Resources is engaged in the business of originating commercial business loans and commercial real estate loans.  For the years ended December 31, 2010 and 2009, Financial Resources had gross revenues of$1.2 million and $1.0 million, respectively.

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Regulation and Supervision

General

Jacksonville Bancorp, Inc. is a nondiversified savings and loan holding company within the meaning of the Home Owners’ Loan Act.  As such, it is registered with the Office of Thrift Supervision and is subject to regulation by the Office of Thrift Supervision.  Under the Dodd-Frank Act, the functions of the Office of Thrift Supervision relating to savings and loan holding companies and their subsidiaries, as well as rulemaking and supervision authority over thrift holding companies will be transferred to the Federal Reserve Board.

  Jacksonville Savings Bank is an Illinois-chartered savings bank subject to extensive regulation by the Illinois Department of Financial and Professional Regulation and the Federal Deposit Insurance Corporation.  Jacksonville Savings Bank’s deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation.  Jacksonville Savings Bank must file reports with the Illinois Department of Financial and Professional Regulation and the Federal Deposit Insurance Corporation concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers or acquisitions with other depository institutions.  There are periodic examinations of the Bank by the Illinois Department of Financial and Professional Regulation and the Federal Deposit Insurance Corporation to review Jacksonville Savings Bank’s compliance with various regulatory requirements.  Jacksonville Savings Bank is also subject to certain reserve requirements established by the Board of Governors of the Federal Reserve.  This regulation and supervision establishes a comprehensive framework of activities in which a savings bank can engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation and depositors.  The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.  Any change in such regulation, whether by the Illinois Department of Financial and Professional Regulation, the Federal Deposit Insurance Corporation, or Congress could have a material impact on the operations of Jacksonville Savings Bank.

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 authorizes the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies like Jacksonville Bancorp, Inc., in addition to bank holding companies which it currently regulates.  The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for all depository institution 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.  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.Bank holding companies with assets of less than $500 million are exempt from these capital requirements.  Savings and loan holding companies are subject to a five year transition period before the holding company capital requirement will apply.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.

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 Jacksonville Savings 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 applicable 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.

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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, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.  The Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing 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.  Further, the legislation requires that originators of securitized loans retain a percentage of the risk for transferred loans, directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage origination.  Many of the provisions of Dodd-Frank involve delayed effective dates and/or require implementing regulations.  Accordingly, it will be some time before management can assess the full impact on operations.  However, there is a significant possibility that the Dodd-Frank Act will, at a minimum, result in an increased regulatory burden and compliance, operating and interest expense for Jacksonville Savings Bank and Jacksonville Bancorp, Inc.

Illinois Savings Bank Regulation

As an Illinois-chartered savings bank, Jacksonville Savings Bank is subject to regulation and supervision by the Illinois Department of Financial and Professional Regulation.  The Illinois Department of Financial and Professional Regulation’s regulation of Jacksonville Savings Bank covers, among other things, Jacksonville Savings Bank’s internal organization (i.e., charter, bylaws, capital requirements, transactions with directors and officers, and composition of the board of directors), as well as supervision of permissible activities and mergers and acquisitions.  Jacksonville Savings Bank is required to file periodic reports with, and is subject to periodic examinations at least once within every 18-month period by the Illinois Department of Financial and Professional Regulation.  The lending and investment authority of Jacksonville Savings Bank is prescribed by Illinois law and regulations, as well as applicable Federal laws and regulations, and Jacksonville Savings Bank is prohibited from engaging in any activities not permitted by such laws and regulations.

Under Illinois law, savings banks are required to maintain a minimum core capital to total assets ratio of 3%.  The Illinois Department of Financial and Professional Regulation is authorized to require a savings bank to maintain a higher minimum capital level if the Illinois Department of Financial and Professional Regulation 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 Illinois Department of Financial and Professional Regulation may direct the savings bank to adhere to a specific written plan established by the Illinois Department of Financial and Professional Regulation 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.

Under Illinois law, a savings bank may make both secured and unsecured loans.  However, loans for business, corporate, commercial or agricultural purposes, whether secured or unsecured, may not in the aggregate exceed 15% of a savings bank’s total assets unless authorized by the Illinois Department of Financial and Professional Regulation.  With the prior written consent of the Illinois Department of Financial and Professional Regulation, savings banks may also engage in real estate development activities, provided that the total investment in any one project may not exceed 15% of total capital, and the total investment in all projects may not exceed 50% of total capital.  The total loans and extensions of credit outstanding at one time, both direct and indirect, by a savings bank to any borrower may not exceed 25% of the savings bank’s total capital.  At December 31, 2010, Jacksonville Savings Bank did not have any loans-to-one borrower which exceeded these limitations.

Illinois-chartered savings banks generally have all lending, investment and other powers which are possessed by federal savings banks based in Illinois.  Recent federal and state legislative developments have reduced distinctions between commercial banks and savings institutions in Illinois with respect to lending and investment authority.  As federal law has expanded the authority of federally chartered savings institutions to engage in activities previously reserved for commercial banks, Illinois legislation and regulations (“parity legislation”) have given Illinois-chartered savings institutions, such as the Bank, the powers of federally chartered savings institutions.

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The board of directors of a savings bank may declare dividends on its capital stock based upon the savings bank’s annualized net profits except (1) dividends may not be declared if the bank fails to meet its capital requirements, (2) dividends are limited to 100% of net income in that year and (3) if total capital is less than 6% of total assets, dividends are limited to 50% of net income without prior approval of the Illinois Department of Financial and Professional Regulation.

An Illinois-chartered savings bank may not make a loan to a person owning 10% or more of its stock, an affiliated person, an agent or an attorney of the savings bank, either individually or as an agent or partner of another, except under the rules of the Illinois Department of Financial and Professional Regulation and regulations of the Federal Deposit Insurance Corporation.  This restriction does not apply, however, to loans made (i) on the security of single-family residential property used by the borrower as his or her residence, and (ii) to a non-profit, religious, charitable or fraternal organization or a corporation in which the savings bank has been authorized to invest by the Illinois Department of Financial and Professional Regulation.  Furthermore, a savings bank may not purchase, lease or acquire a site for an office building or an interest in real estate from an officer, director, employee or the holder of more than 10% of the savings bank’s stock or certain affiliated persons as set forth in Illinois law, unless the prior written approval of the Illinois Department of Financial and Professional Regulation is obtained.

Illinois law provides that any depository institution may merge into a savings bank operating under the Illinois Savings Bank Act.  The board of directors of each merging institution must approve a plan of merger by resolution adopted by majority vote of all members of the respective boards.  After such approval, the plan of merger must be submitted to the Illinois Department of Financial and Professional Regulation for approval.  The Illinois Department of Financial and Professional Regulation may make an examination of the affairs of each merging institution (and their affiliates).  The Illinois Department of Financial and Professional Regulation shall not approve a merger agreement unless he finds that, among other things, (i) the resulting institution meets all requirements of the Illinois Savings Bank Act; (ii) the merger agreement is fair to all persons affected; and (iii) the resulting institution will be operated in a safe and sound manner.  If approved by the Illinois Department of Financial and Professional Regulation, the plan of merger must be submitted to stockholders of the depository institution for approval, and may be required to be submitted to members if a mutual savings bank is one of the constituent entities.  A two-thirds affirmative vote is required for approval of the plan of merger.

Branching and Interstate Banking. The establishment of branches by Jacksonville Savings Bank is subject to approval of the Illinois Department of Financial and Professional Regulation and Federal Deposit Insurance Corporation and geographic limits established by state laws. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) facilitates the interstate expansion and consolidation of banking organizations by permitting, among other things, (i) bank holding companies that are adequately capitalized and managed to acquire banks located in states outside their home state regardless of whether such acquisitions are authorized under the law of the host state, (ii) the interstate merger of banks, subject to the right of individual states to “opt out” of this authority, and (iii) banks to establish new branches on an interstate basis provided that such action is specifically authorized by the law of the host state.

Qualified Thrift Lender Test.  In order for Jacksonville Bancorp, Inc. to be regulated as a savings and loan holding company by the Office of Thrift Supervision (rather than as a bank holding company by the Board of Governors of the Federal Reserve System), Jacksonville Savings Bank must qualify as a “qualified thrift lender” under Office of Thrift Supervision regulations or satisfy the “domestic building and loan association” test under the Internal Revenue Code. Under the qualified thrift lender test, an institution is required to maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) goodwill and other intangible assets; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine out of each 12 month period.  Jacksonville Savings Bank currently maintains the majority of its portfolio assets in qualified thrift investments and has met the qualified thrift lender test in each of the last 12 months.  The Dodd-Frank Act makes noncompliance with the QTL test subject to agency enforcement action for a violation of law.

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Transactions with Related Parties.  A savings bank’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated by the Board of Governors of the Federal Reserve System.  An affiliate is generally a company that controls, is controlled by, or is under common control with an insured depository institution such as Jacksonville Savings Bank.  Jacksonville Bancorp, Inc. is an affiliate of Jacksonville Savings Bank.  In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements.  In addition, applicable regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary.  Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates.  Applicable regulators require savings banks to maintain detailed records of all transactions with affiliates.

Jacksonville Savings Bank’s authority to extend credit to its directors, executive officers and 10% or greater stockholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated by the Board of Governors of the Federal Reserve System.  Among other things, these provisions require that extensions of credit to insiders:

(i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and

(ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Jacksonville Savings Bank’s capital.

In addition, extensions of credit in excess of certain limits must be approved in advance by Jacksonville Savings Bank’s board of directors.

Capital Maintenance.  Under Federal Deposit Insurance Corporation regulations, Jacksonville Savings Bank must maintain minimum levels of capital.  The regulations establish a minimum leverage capital requirement of not less than 3% core capital to total assets for banks in the strongest financial and managerial condition, with the highest supervisory rating of the federal regulators for banks.  For all other banks, the minimum leverage capital requirement is between 4% and 5% of total assets.  Core capital is composed of the sum of common stockholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets (other than qualifying mortgage servicing rights and qualifying supervisory intangible core deposits), identified losses, investments in certain subsidiaries, and unrealized gains (losses) on investment securities.

The Federal Deposit Insurance Corporation also requires that savings banks meet a risk-based capital standard.  The risk-based capital standard requires the maintenance of total capital (which is defined as core capital and supplementary capital) to risk weighted assets of 8.0%.  In determining the amount of risk-weighted assets, all assets, including certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the federal regulators believe are inherent in the type of asset.  The components of core capital are equivalent to those discussed earlier under the 3% leverage requirement.  The components of supplementary capital currently include cumulative perpetual preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and allowance for loan and lease losses.  Allowance for loan and lease losses includible in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets.  Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital.  At December 31, 2010, Jacksonville Savings Bank exceeded its applicable capital requirements.

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Insurance of Deposit Accounts.The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009.  Non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.

Pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), the Federal Deposit Insurance Corporation is authorized to set the reserve ratio for the Deposit Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits. The Dodd-Frank Act mandates that the statutory minimum reserve ratio of the Deposit Insurance Fund increase from 1.15% to 1.35% of insured deposits by September 30, 2020.  Banks with assets of less than $10 billion are exempt from any additional assessments necessary to increase the reserve fund above 1.15%.

As part of a plan to restore the reserve ratio to 1.15%, the Federal Deposit Insurance Corporation imposed a special assessment equal to five basis points of assets less Tier 1 capital as of June 30, 2009, which was payable on September 30, 2009.  In addition, the Federal Deposit Insurance Corporation has increased its quarterly deposit insurance assessment rates and amended the method by which rates are calculated.  Beginning in the second quarter of 2009, institutions are assigned an initial base assessment rate ranging from 12 to 45 basis points of deposits depending on risk category. The initial base assessment is then adjusted based upon the level of unsecured debt, secured liabilities, and brokered deposits to establish a total base assessment rate ranging from seven to 77.5 basis points.

On November 12, 2009, the Federal Deposit Insurance Corporation approved a final rule requiring insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012.   Estimated assessments for the fourth quarter of 2009 and for all of 2010 are based upon the assessment rate in effect on September 30, 2009, with three basis points added for the 2011 and 2012 assessment rates.  In addition, a 5% annual growth in the assessment base is assumed.  Prepaid assessments are to be applied against the actual quarterly assessments until exhausted, and may not be applied to any special assessments that may occur in the future.  Any unused prepayments will be returned to the institution on June 30, 2013.  On December 30, 2009, we prepaid $1.4 million in estimated assessment fees for the fourth quarter of 2009 through 2012.  Because the prepaid assessments represent the prepayment of future expense, they do not affect our regulatory capital (the prepaid asset will have a risk-weighting of 0%) or tax obligations.

In February 2011, as required by the Dodd Frank Act, the Federal Deposit Insurance Corporation adopted a final rule revising the assessment base to consist of average consolidated total assets during the assessment period minus the average tangible equity during the assessment period.  In addition, the final rule eliminates the adjustment for secured borrowings and make certain other changes to the impact of unsecured borrowings and brokered deposits on an institution’s deposit insurance assessment. The proposed rule also revises the assessment rate schedule to provide assessments ranging from five to 45 basis points.  The final rule is effective April 1, 2011.

Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.

In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2010, the annualized FICO assessment was equal to 1.02 basis points for each $100 in domestic deposits maintained at an institution.

Temporary Liquidity Guarantee Program.  The Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program guarantees newly issued senior unsecured debt of a participating organization, up to certain limits established for each institution, issued between October 14, 2008 and June 30, 2009.  The Federal Deposit Insurance Corporation extended this component of the program to cover debt issued through October 31, 2009.  The Federal Deposit Insurance Corporation paid the unpaid principal and interest on Federal Deposit Insurance Corporation-guaranteed debt instruments upon the uncured failure of the participating entity to make timely payments of principal or interest in accordance with the terms of the instrument.  The guarantee will remain in effect until December 31, 2012. In return for the Federal Deposit Insurance Corporation’s guarantee, participating institutions are required to pay the Federal Deposit Insurance Corporation a fee based on the amount and maturity of the debt.  We opted not to participate in this part of the Temporary Liquidity Guarantee Program.

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The other component of the Temporary Liquidity Guarantee Program provided full federal deposit insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount, until December 31, 2010.  Through December 31, 2009, an annualized 10 basis point assessment on balances in noninterest-bearing transaction accounts that exceed $250,000 was assessed to insured depository institutions that have not opted out of this component of the Temporary Liquidity Guarantee Program.  Beginning January 1, 2010, the fees are based on the institution’s risk category rating assigned with respect to regular Federal Deposit Insurance Corporation assessments.  Institutions in Risk Category I (generally well-capitalized institutions with composite CAMELS 1 or 2 ratings) pay an annualized assessment rate of 15 basis points.  Institutions in Risk Category II (generally adequately capitalized institutions with composite CAMELS 3 or better) pay an annualized assessment rate of 20 basis points.  Institutions in Risk Category III or IV (generally under capitalized or composite CAMELS 4 or 5) pay an annualized assessment rate of 25 basis points.  We opted to participate in this component of the Temporary Liquidity Guarantee Program. The Dodd-Frank Act extended the unlimited coverage for certain non-interest bearing transaction accounts through December 31, 2012 with no opt out option.  The cost is included in the regular FDIC assessment.

U.S. Treasury’s Troubled Asset Relief Program Capital Purchase Program. The Emergency Economic Stabilization Act of 2008, which was enacted on October 3, 2008, provides the U.S. Secretary of the Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. financial markets. One of the programs resulting from the legislation is the Troubled Asset Relief Program Capital Purchase Program (“CPP”), which provides direct equity investment by the U.S. Treasury Department in perpetual preferred stock of qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends.  The CPP provides for a minimum investment of one percent of total risk-weighted assets and a maximum investment equal to the lesser of three percent of total risk-weighted assets or $25 billion. Participation in the program is not automatic and is subject to approval by the U.S. Treasury Department.  We opted not to participate in the CPP.

Community Reinvestment Act.Under the Community Reinvestment Act (“CRA”), as implemented by Federal Deposit Insurance Corporation regulations, a savings institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods.  The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA.  The CRA requires the Federal Deposit Insurance Corporation, in connection with its examination of a savings institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution.

Federal Home Loan Bank System.  Jacksonville Savings Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks.  The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending.  As a member of the Federal Home Loan Bank of Chicago, Jacksonville Savings Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank.  As of December 31, 2010, Jacksonville Savings Bank was in compliance with this requirement.

Prompt Corrective Regulatory Action.  The Federal Deposit Insurance Corporation Improvement Act requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to institutions that do not meet minimum capital requirements. For these purposes, the statute establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

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The Federal Deposit Insurance Corporation may order savings banks which have insufficient capital to take corrective actions. For example, a savings bank which is categorized as “undercapitalized” would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a savings bank would be required to guarantee that the savings bank complies with the restoration plan. A “significantly undercapitalized” savings bank would be subject to additional restrictions. Savings banks deemed by the Federal Deposit Insurance Corporation to be “critically undercapitalized” would be subject to the appointment of a receiver or conservator.

At December 31, 2010, Jacksonville Savings Bank is “well capitalized” under the prompt corrective action rules.

Federal Reserve System

Federal Reserve Board regulations require savings banks to maintain interest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts.  At December 31, 2010, Jacksonville Savings Bank was in compliance with these reserve requirements.

Other Regulations

Interest and other charges collected or contracted for by Jacksonville Savings Bank are subject to state usury laws and federal laws concerning interest rates.  Jacksonville Savings Bank’s operations are also subject to federal and state laws applicable to credit transactions, such as the:

● Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

● Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

● Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

● Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

● Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

● Truth in Savings Act;

● Illinois High Risk Home Loan Act, which protects borrowers who enter into high risk home loans;

● Illinois Predatory Lending Database Program, which helps provide counseling for homebuyers in connection with certain loans; and

● rules and regulations of the various federal and state agencies charged with the responsibility of implementing such laws.

The operations of Jacksonville Savings Bank also are subject to the:

● Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

● Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

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● Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

● The USA PATRIOT Act, which requires savings banks operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and

● The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer will be required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.

Holding Company Regulation

Permitted Activities.  Pursuant to Section 10(o) of the Home Owners’ Loan Act and Office of Thrift Supervision regulations and policy, a savings and loan holding company such as Jacksonville Bancorp, Inc. may engage in the following activities: (i) investing in the stock of a savings association; (ii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association; (iii) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (iv) furnishing or performing management services for a savings association subsidiary of such company; (v) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (vi) holding or managing properties used or occupied by a savings association subsidiary of such company; (vii) acting as trustee under deeds of trust; (vii) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; (ix) any activity permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act, including securities and insurance underwriting; and (x) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Director of the Office of Thrift Supervision.

The Home Owners’ Loan Act prohibits a savings and loan holding company, including Jacksonville Bancorp, Inc. directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company thereof, without prior written approval of the Office of Thrift Supervision.  It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary savings institution, a nonsubsidiary holding company, or a nonsubsidiary company engaged in activities other than those permitted by the Home Owners’ Loan Act; or acquiring or retaining control of an institution that is not federally insured.  In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.

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The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions.  The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Under the Dodd-Frank Act, the functions of the Office of Thrift Supervision relating to savings and loan holding companies and their subsidiaries, as well as rulemaking and supervision authority over thrift holding companies, will be transferred to the Federal Reserve Board.   There can be no assurance that the Federal Reserve Board will not impose additional regulations on savings and loan holding companies.

Capital.  Savings and loan holding companies are not currently subject to specific regulatory capital requirements.  The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves.  Instruments such as cumulative preferred stock and trust preferred securities will no longer be includable as Tier 1 capital as is currently the case with bank holding companies. Instruments issued by May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less.  There is a five-year transition period (from the July 21, 2010 effective date of the Dodd-Frank Act) before the capital requirements will apply to savings and loan holding companies.

Source of Strength.The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies.  The regulatory agencies must issue regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress.

TAXATION

Federal Taxation

General.  Jacksonville Bancorp, Inc. and Jacksonville Savings Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below.  The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Jacksonville Bancorp, Inc. or Jacksonville Savings Bank.

Method of Accounting.  For federal income tax purposes, Jacksonville Bancorp, Inc. currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its federal and state income tax returns.

Bad Debt Reserves.  Historically, Jacksonville Savings Bank has been subject to special provisions in the tax law regarding allowable tax bad debt deductions and related reserves.  Tax law changes were enacted in 1996, pursuant to the Small Business Protection Act of 1996 (the “1996 Act”), that repealed the percentage of taxable income method by qualifying savings institutions to determine deductions for bad debts.  This change was effective for taxable years beginning after 1995 and required the recapture of “applicable excess reserves” of a savings institution, of which Jacksonville Savings Bank is, into taxable income over a six year period.  The applicable excess reserve is generally the excess of its bad debt reserves as of the close of its last taxable year beginning before January 1, 1996 over the balance of such reserves as of the close of its last taxable year beginning before January 1, 1988.

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Currently, Jacksonville Savings Bank utilizes the experience method to account for bad debt deductions for income tax purposes as defined in Internal Revenue Code Section 585.  Under this method, the annual deduction is the amount necessary to increase the balance of the reserve at the close of the taxable year to the greater of the amount which bears the same ratio to loans outstanding at the close of the taxable year as the total net charge offs sustained during the current and preceding five taxable years bear to the sum of the loans outstanding at the close of those six years or the lower of (i) the balance in the reserve account at the close of the base year,  (the last taxable year beginning before 1988), or (ii) if the amount of outstanding loans at the close of the taxable year is less than the amount of outstanding loans at the close of the base year, the amount which bears the same ratio to outstanding loans at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of outstanding loans at the close of the base year.

Taxable Distributions and Recapture.  Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income if Jacksonville Savings Bank failed to meet certain thrift asset and definitional tests.

At December 31, 2010, Jacksonville Savings Bank’s total federal pre-base year reserve was approximately $2.6 million.  However, under current law, base-year reserves remain subject to recapture if Jacksonville Savings Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.

Alternative Minimum Tax.  The Internal Revenue Code of 1986, as amended (the “Code”), imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”).  The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax.  Net operating losses can offset no more than 90% of AMTI.  Certain payments of AMT may be used as credits against regular tax liabilities in future years.  During 2009, Jacksonville Bancorp, Inc. and Jacksonville Savings Bank were subject to the AMT in the amount of $76,000.  As of December 31, 2010, the majority of this amount will be utilized against the current liability.

Net Operating Loss Carryovers.  Generally, a financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years.  However, as a result of recent legislation, subject to certain limitations, the carryback period for net operating losses incurred in 2008 or 2009 (but not both years) has been expanded to five years.  At December 31, 2010, Jacksonville Bancorp, Inc. had no federal tax loss carryforward.  The Company has an Illinois carryforward of approximately $2.4 million at December 31, 2010.   Recent Illinois legislation has suspended the use of these loss carryforwards for tax years 2011, 2012, and 2013.  Three years have been added to the expiration of said net loss years.

Corporate Dividends-Received Deduction.  Jacksonville Bancorp, Inc. may exclude from its federal taxable income 100% of dividends received from Jacksonville Savings Bank as a wholly owned subsidiary.  The corporate dividends-received deduction is 80% when the dividend is received from a corporation having at least 20% of its stock owned by the recipient corporation.  A 70% dividends-received deduction is available for dividends received from corporations owning less than 20% by the recipient corporation.

State Taxation

The State of Illinois imposes a tax on the Illinois taxable income of corporations, including savings banks, at the rate of 7.30%.  Recent Illinois legislation has raised the corporate state income tax rates.  Beginning in 2011, this rate has been increased to 9.50%.  A reduction of this rate will occur on January 1, 2015 to 7.75% and again on January 1, 2025 to 7.30%.

Illinois taxable income is generally similar to federal taxable income except that interest from state and municipal obligations is taxable and no deduction is allowed for state income taxes.  However, a deduction is allowed for certain U.S. Government and agency obligations.  Jacksonville Savings Bank’s state income tax returns have not been audited by Illinois tax authorities during the past five years. As a Maryland business corporation, Jacksonville Bancorp, Inc. is required to file annual returns and pay annual fees to the State of Maryland.

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Personnel

As of December 31, 2010, Jacksonville Savings Bank and its subsidiary had a total of 95 full-time and 20 part-time employees.  None of Jacksonville Savings Bank’s employees is represented by a collective bargaining group.  Management believes that it has good working relations with its employees.

Availability of Annual Report on Form 10-K

Our Annual Report on Form 10-K is available on our website at www.Jacksonvillesavings.com.  Information on the website is not incorporated into, and is not otherwise considered a part of, this Annual Report on Form 10-K.

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ITEM 1A.                Risk Factors

In addition to risk disclosed elsewhere in this Annual Report, the following are risks associated with our business and operations.

Non-residential loans increase our exposure to credit risks.

Over the last several years, we have increased our non-residential lending in order to improve the average yield of our interest-earning assets and reduce the average maturity of our loan portfolio.  At December 31, 2010, our portfolio of commercial and agricultural real estate loans totaled $69.1 million, or 39.2% of our total loans, compared to $39.6 million, or 25.6% of our total loans at December 31, 2006. The largest category of these loans is secured by farmland. Our portfolio of commercial business and agricultural business loans totaled $31.0 million, or 17.6% of our total loans at December 31, 2010, compared to 32.8 million, or 21.2% of our total loans at December 31, 2006. These loans are typically secured by equipment or inventory. It is difficult to assess the future performance of our non-residential loan portfolio due to the recent origination or purchase of many of these loans.  These loans may have delinquency or charge-off rates above our historical experience, which could adversely affect our future performance.

These loans generally have more risk than one- to four-family residential mortgage loans.  Because the repayment of commercial and agricultural real estate loans and commercial and agricultural business loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of these loans can be affected by adverse conditions in the real estate market or the local economy. Loans secured by agricultural real estate and agricultural businesses which rely on the successful operation of a farm can be adversely affected by fluctuations in crop prices and changes in weather conditions. These developments may result in smaller harvests and less income for farmers which may adversely impact such borrower’s ability to repay a loan. Many of our borrowers also have more than one commercial and agricultural real estate loan or commercial and agricultural business loan outstanding with us.  Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.  Finally, if we foreclose on a commercial and agricultural real estate or commercial loan, our holding period for the collateral, if any, typically is longer than for one- to four-family residential mortgage loans because there are fewer potential purchasers of the collateral. Because we plan to continue to increase our originations of commercial and agricultural real estate and commercial loans, it may be necessary to increase the level of our allowance for loan losses because of the increased risk characteristics associated with these types of loans. Any such increase to our allowance for loan losses would adversely affect our earnings.

Our loan portfolio has significant concentrations among a small number of borrowers and, as a result, we could be adversely affected by difficulties experienced by a small number of borrowers.

As a result of large loan concentrations among a relatively small number of borrowers, we could incur significant losses if these borrowers are unable to repay their loans. At December 31, 2010, we had 22 borrowers with aggregate loan balances of $44.6 million, which represented 24.8% of our total loan portfolio at that date. These loans are primarily commercial and agricultural real estate loans and commercial and agricultural business loans, including purchased loan participations. Aggregate loan balances to these borrowers ranged from $1.0 million to $4.7 million for our largest borrower.  While we seek to control our risk and minimize losses on these large loan concentrations, if one or more of our large borrowers were to default on their loans we could incur significant losses.

A portion of our loan portfolio consists of loan participations secured by properties outside our market area.  Loan participations may have a higher risk of loss than loans we originate because we are not the lead lender and we have limited control over credit monitoring.

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We occasionally purchase commercial real estate and commercial business loan participations secured by properties outside our market area in which we are not the lead lender. We have purchased loan participations secured by properties in diverse geographic areas such as in Nebraska, Iowa, Minnesota, Arizona and Indiana.  These participations are secured by various types of collateral such as hotels, senior living facilities, stores and condominium developments. Loan participations may have a higher risk of loss than loans we originate because we rely on the lead lender to monitor the performance of the loan. Moreover, our decision regarding the classification of a loan participation and loan loss provisions associated with a loan participation are made in part based upon information provided by the lead lender. A lead lender also may not monitor a participation loan in the same manner as we would for loans that we originate.  At December 31, 2010, our loan participations totaled $12.7 million, or 7.1% of our loan portfolio.  At December 31, 2010, commercial real estate loan participations outside our market area totaled $8.6 million, or 12.4% of the commercial and agricultural real estate loan portfolio, and commercial business loan participations outside our market area totaled $1.4 million, or 4.5% of the commercial and agricultural business loan portfolio. At December 31, 2010, loan participations delinquent 60 days or more included one loan with a balance of $498,000. If our underwriting of these participation loans is not sufficient, our non-performing loans may increase and our earnings may decrease.

If the allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

Our customers may not repay their loans according to the original terms, and the collateral, if any, securing the payment of these loans may be insufficient to pay any remaining loan balance.  We may experience significant loan losses, which may have a material adverse effect on our operating results.  We make various assumptions and judgments about the collectability of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans.  If our assumptions are incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to the allowance.  Additions to the allowance would decrease our net income. At December 31, 2010, our allowance for loan losses was $3.0 million, or 1.65% of total loans and 94.56% of non-performing loans, compared to $2.3 million, or 1.29% of total loans and 117.20% of non-performing loans, at December 31, 2009.

In determining the amount of the allowance for loan losses, management reviews delinquent loans for potential impairments in our carrying value.  Additionally, we apply a factor to the loan portfolio principally based on historical loss experience applied to the composition of the loan portfolio and integrated with management’s perception of risk in the economy.  Since we use assumptions regarding individual loans and the economy, the current allowance for loan losses may not be sufficient to cover actual loan losses, and increases in the allowance may be necessary.  Consequently, we may need to significantly increase the provision for losses on loans, particularly if one or more of our larger loans or credit relationships becomes delinquent or if we expand non-residential lending such as commercial and agricultural real estate loans. As we continue to increase our originations of such loans, increased provisions for loan losses may be necessary, which would decrease our earnings.

Bank regulators periodically review our allowance for loan losses and may require an increase to the provision for loan losses or further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our financial condition and results of operations.

If our non-performing assets increase, our earnings will suffer.

At December 31, 2010, our non-performing assets (which consist of non-accrual loans, loans 90 days or more delinquent, and foreclosed real estate assets) totaled $3.6 million, which is an increase of $1.3 million from our non-performing assets at December 31, 2009.  Our non-performing assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or real estate owned. We must reserve for probable losses which results in additional provisions for loan losses. As circumstances warrant, we must write down the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, we have legal fees associated with the resolution of problem assets as well as additional costs such as taxes, insurance and maintenance related to our other real estate owned. The resolution of non-performing assets also requires the active involvement of management, which can adversely affect the amount of time we devote to the income-producing activities of Jacksonville Savings Bank.  If our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance accordingly.

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We could experience further impairment losses on the value of our mortgage servicing rights.

A significant aspect of our business is the origination of one- to four-family residential mortgage loans for sale on a servicing retained basis. The fees we receive for servicing such loans are referred to as mortgage servicing rights. At December 31, 2010, the unpaid principal balance of mortgage loans serviced for others was $149.6 million. Mortgage servicing rights fair values are 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. If the fair value of our mortgage servicing rights is less than the carrying value of such rights, we may be required to recognize an impairment loss. Such impairment can occur due to changes in interest rates, loan performance or prepayment of the underlying mortgage.  At December 31, 2008, we recognized an impairment charge of $428,000 against the value of our mortgage servicing income. Subsequently, as long term interest rates began to rise, we were able to recognize a partial recovery of $123,000 during 2009.  Due to the changes in long-term rates during 2010, we recognized an additional impairment charge of $101,000 during 2010.

Changes in interest rates could adversely affect our financial condition and results of operations.

Our financial condition and results of operations are significantly affected by changes in interest rates.  Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.  Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would tend to result in a decrease in net interest income.

Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs.  Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans. Also, increases in interest rates may extend the life of fixed-rate assets, which would restrict our ability to reinvest in higher yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive from higher interest rates.

Changes in interest rates also affect the current fair value of our interest-earning securities portfolio.  Generally, the value of securities moves inversely with changes in interest rates.  At December 31, 2010, the fair value of our portfolio of investment securities and mortgage-backed securities totaled $94.9 million.  Gross unrealized losses on these securities totaled $1.2 million at December 31, 2010.

Any rise in market interest rates may result in increased payments for borrowers who have adjustable rate mortgage loans, thereby increasing the possibility of default.

If we are unable to borrow funds, we may not be able to meet the cash flow requirements of our depositors, creditors, and borrowers, or the operating cash needed to fund corporate expansion and other corporate activities.

Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost.  Our liquidity is used to make loans and to repay deposit liabilities as they become due or are demanded by customers.  Liquidity policies and procedures are established by the board, with operating limits set based upon the ratio of loans to deposits and percentage of assets funded with non-core or wholesale funding.  We regularly monitor our overall liquidity position to ensure various alternative strategies exist to cover unanticipated events that could affect liquidity.  We also establish policies and monitor guidelines to diversify our wholesale funding sources to avoid concentrations in any one market source.  Wholesale funding sources include federal funds purchased, securities sold under repurchase agreements, non-core deposits, and debt.  Jacksonville Savings Bank is a member of the Federal Home Loan Bank of Chicago, which provides funding through advances to members that are collateralized with mortgage-related assets.

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We maintain a portfolio of available-for-sale securities that can be used as a secondary source of liquidity.  There are other sources of liquidity available to us should they be needed.  These sources include the sale of loans, the ability to acquire national market, non-core deposits, issuance of additional collateralized borrowings such as Federal Home Loan Bank advances and federal funds purchased, and the issuance of preferred or common securities.

If our stock price remains below book value, we will continue to evaluate our goodwill balances for impairment quarterly, and if the values of our businesses have declined, we could recognize an impairment charge for our goodwill.

We obtained an independent analysis of our goodwill as of December 31, 2010.  This analysis concluded that the fair value of capital exceeded the fair value of our assets and liabilities and, therefore, goodwill was not considered impaired as of that date.  It is possible that the assumptions and conclusions regarding the valuation of our business could change adversely, which could result in the recognition of impairment for our goodwill, which could have a material adverse effect on our financial condition and results of operations.

Our business may continue to be adversely affected by the continued weakness in the national and local economies.

Our operations are significantly affected by national and local economic conditions. Substantially all of our loans, excluding purchased loan participations, are to businesses and individuals in Cass, Morgan, Macoupin and Montgomery Counties, Illinois and surrounding communities. All of our branches and most of our deposit customers are also located in these counties. The severe economic recession of 2008 and 2009, as well as the continuing weakness of the economic recovery in 2010 both nationally and in our market area could have a material adverse effect on our business, financial condition, results of operations and prospects. In particular, these counties have experienced declines in real estate values, increased foreclosures and higher unemployment rates.

A further deterioration in economic conditions in our market area could result in the following consequences, any of which could have a material adverse effect on our business, financial condition and results of operations:

● demand for our products and services may decline;

● loan delinquencies, problem assets and foreclosures may increase;

● collateral for our loans may continue to decline in value; and

● the amount of our low-cost or non-interest bearing deposits may decrease.

Strong competition may limit growth and profitability.

Competition in the banking and financial services industry is intense.  We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, government sponsored entities, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere.  Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide.  Our profitability depends upon our ability to successfully compete in our market areas.

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We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

We are subject to extensive regulation, supervision and examination by the Illinois Department of Financial and Professional Regulation, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. Such regulators govern the activities in which we may engage, primarily for the protection of depositors and the Deposit Insurance Fund.  These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for loan losses and determine the level of deposit insurance premiums assessed.  Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums, could have a material impact on our operations.  Because our business is highly regulated, the laws and applicable regulations are subject to frequent change.  Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.

Financial reform legislation recently enacted by Congress will, among other things, eliminate the Office of Thrift Supervision, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations.

Congress recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank 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 authorizes the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies like Jacksonville Bancorp, Inc., in addition to bank holding companies which it currently regulates.  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.  Savings and loan holding companies are subject to a five year transition period before the holding company capital requirement will apply.  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.

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 Jacksonville Savings 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 applicable 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, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012.  The Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and by authorizing 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.  Further, the legislation requires that originators of securitized loans retain a percentage of the risk for transferred loans, directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage origination.

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It is difficult to predict at this time what effect the new legislation and implementing regulations will have on community banks with regard to the lending and credit practices of such banks.  Moreover, many of the provisions of the Dodd-Frank Act will not take effect for at least a year, and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years.  Although the substance and scope of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations, particularly those relating to the new Consumer Financial Protection Bureau, will increase our operating and compliance costs.

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income.

In response to the financial crisis of 2008 and early 2009, Congress has taken actions that are intended to strengthen confidence and encourage liquidity in financial institutions, and the Federal Deposit Insurance Corporation has taken actions to increase insurance coverage on deposit accounts. In addition, there have been proposals made by members of Congress that would reduce the amount delinquent borrowers are otherwise contractually obligated to pay on their mortgage loans and limit the ability of lenders to foreclose on mortgage collateral.

The potential exists for additional federal or state laws and regulations, or changes in policy, affecting lending and funding practices and liquidity standards.  Moreover, bank regulatory agencies have been active in responding to concerns and trends identified in examinations, and have issued many formal enforcement orders requiring capital ratios in excess of regulatory requirements. Bank regulatory agencies, such as the Illinois Department of Financial and Professional Regulation, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors. In addition, new laws and regulations may increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge, and our ongoing operations, costs and profitability. Legislative proposals limiting our rights as a creditor may result in credit losses or increased expense in pursuing our remedies as a creditor.

If our investment in the Federal Home Loan Bank of Chicago becomes impaired, our earnings and stockholders’ equity could decrease.

We are required to own common stock of the Federal Home Loan Bank of Chicago to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the Federal Home Loan Bank’s advance program.  The aggregate cost of our Federal Home Loan Bank common stock as of December 31, 2010 was $1.1 million.  Federal Home Loan Bank common stock is not a marketable security and can only be redeemed by the Federal Home Loan Bank.  However, the Federal Home Loan Bank of Chicago is currently prohibited by its regulator from repurchasing or redeeming its outstanding stock until its financial condition improves.

Federal Home Loan Banks may be subject to accounting rules and asset quality risks that could materially lower their regulatory capital. In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the Federal Home Loan Bank of Chicago, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in Federal Home Loan Bank of Chicago common stock could be deemed impaired at some time in the future, and if this occurs, it would cause our earnings and stockholders’ equity to decrease by the amount of the impairment charge.

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System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.

ITEM 1B.                Unresolved Staff Comments

Not applicable.

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ITEM 2.                   Properties

We conduct our business through our main office and two branch offices located in Jacksonville, and branch offices located in Virden, Litchfield, Chapin, and Concord, Illinois.  The following table sets forth certain information concerning the main office and each branch office at December 31, 2010.  At December 31, 2010, our premises and equipment had an aggregate net book value of approximately $5.7 million.  We believe that our branch facilities are adequate to meet the present and immediately foreseeable needs.  All facilities are owned.

Location	Year Occupied		Net Book Value at December 31, 2010
			(In Thousands)
Main Office
1211 West Morton Avenue
Jacksonville, Illinois		1994	$	3,732
Branch Office (1)
211 West State Street
Jacksonville, Illinois		1961		587
Branch Office (1)
903 South Main
Jacksonville, Illinois		1989		165
Branch Office
501 North State Street
Litchfield, Illinois		1997		541
Branch Office
100 North Dye
Virden, Illinois		1986		167
Branch Office
510 Superior
Chapin, Illinois		2000		440
Branch Office (1)
202 State
Concord, Illinois		2000		27

(1)           Transaction facilities only.

ITEM 3.                   Legal Proceedings

At December 31, 2010, we were not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which management believes are immaterial to our financial condition, our results of operations and our cash flows.

ITEM 4.                   Removed and Reserved.

PART II

ITEM 5.                   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The “Stockholder Information” section of our annual report to stockholders for the fiscal year ended December 31, 2010 (the “2010 Annual Report to Stockholders”) is filed as an exhibit to this Form 10-K and is incorporated herein by reference.  We did not purchase any shares of our common stock during the fourth quarter of 2010.

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Set forth below is information as of December 31, 2010 regarding equity compensation plans. The plans that have been approved by the stockholders are the 1996 Stock Option Plan and 2001 Stock Option Plan.  Other than our Employee Stock Ownership Plan, we do not have any equity compensation plans that were not approved by our stockholders.

Plan	Number of securities to be issued upon exercise of outstanding options and rights		Weighted average exercise price		Number of securities remaining available for issuance under plan
Equity compensation plans approved by stockholders		33,382		10.52		4,400
Equity compensation plans not approved by stockholders		—		—		—
Total		33,382		10.52		4,400

ITEM 6.                   Selected Financial Data

The “Selected Consolidated Financial Information” section of the 2010 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.

ITEM 7.                   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2010 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.

ITEM 7A.                Quantitative and Qualitative Disclosures about Market Risk

The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the 2010 Annual Report to Stockholders is filed as an exhibit to this Form 10-K and is incorporated herein by reference.

ITEM 8.                   Financial Statements and Supplementary Data

The material identified in Item 15(a)(1) hereof is incorporated herein by reference.

ITEM 9.                   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.                Controls and Procedures

(a)           Evaluation of disclosure controls and procedures.

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures (as defined by the Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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(b)           Management’s Report on Internal Control over Financial Reporting

The management of Jacksonville Bancorp, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even an effective system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.

Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on that assessment, management concludes that, as of December 31, 2010, the Company’s internal control over financial reporting is effective.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to  rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in the annual report.

(c)           Changes in internal controls.

There were no significant changes made in our internal control over financial reporting during the quarter ended December 31, 2010 that has materially affected or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

ITEM 9B.                Other Information

None.

PART III

ITEM 10.                 Directors, Executive Officers and Corporate Governance

Information concerning our directors and certain officers is incorporated by reference hereunder in the Proxy Statement for the 2011 Annual Meeting.

ITEM 11.                 Executive Compensation

Information with respect to management compensation required under this item is incorporated by reference hereunder in the Proxy Statement for the 2011 Annual Meeting.

48

ITEM 12.                 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required under this item is incorporated by reference to the Proxy Statement for the 2011 Annual Meeting.

ITEM 13.                 Certain Relationships and Related Transactions and Director Independence

Information required under this item is incorporated by reference to the Proxy Statement for the 2011 Annual Meeting.

ITEM 14.                 Principal Accountant Fees and Services

Information required under this item is incorporated by reference to the Proxy Statement for the 2011 Annual Meeting.

PART IV

ITEM 15.                 Exhibits and Financial Statement Schedules

(a)(1)  Financial Statements

The documents filed as a part of this Form 10-K are:

(A) Report of Independent Registered Public Accounting Firm;

(B) Consolidated Balance Sheets - December 31, 2010 and 2009;

(C) Consolidated Statements of Income - years ended December 31, 2010 and 2009;

(D) Consolidated Statements of Stockholders’ Equity - years ended December 31, 2010 and 2009;

(E) Consolidated Statements of Cash Flows - years ended December 31, 2010 and 2009; and

(F) Notes to Consolidated Financial Statements.

(a)(2)           Financial Statement Schedules

All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.

(a)(3)           Exhibits

3.1           Articles of Incorporation(1)

3.2            Bylaws(2)

4              Stock Certificate of Jacksonville Bancorp, Inc.(3)

10.1         Employment Agreement between Jacksonville Savings Bank and Andrew F. Applebee(4)

10.2         Employment Agreement between Jacksonville Savings Bank and Richard A. Foss(5)

10.3         Employment Agreement between Jacksonville Savings Bank and John Williams(6)

10.4         Jacksonville Savings Bank and Jacksonville Bancorp, MHC 1996 Stock Option Plan(7)

10.5         Jacksonville Savings Bank 2001 Stock Option Plan(8)

49

10.6         Amendmentsto the Jacksonville Savings Bank and Jacksonville Bancorp, MHC Stock Option Plans(9)

10.7         Jacksonville Savings Bank Supplemental Life Insurance Plan(10)

10.8         Jacksonville Savings Bank Salary Continuation Plan 1(11)

10.9         Jacksonville Savings Bank Long-Term Deferred Compensation Plan, as amended(12)

10.10       Deferred Compensation Agreement between Chapin State Bank and John C. Williams(13)

10.11        Director’s Compensation Agreement between Chapin State Bank and John C. Williams(14)

10.12       Deferred Compensation Agreement between Chapin State Bank and Dean H. Hess(15)

10.13        Director’s Compensation Agreement between Chapin State Bank and Dean H. Hess(16)

13            2010 Annual Report to Stockholders

14            Code of Ethics(17)

21            Subsidiaries

23  Consent of BKD LLP to incorporate financial statements into Registration Statement on Form S-8

31.1         Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2         Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1  Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(2) Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(3) Incorporated by reference to Exhibit 4 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(4) Incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2009 (File No. 000-49792).

(5) Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2008 (File No. 000-49792).

(6) Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2008 (File No. 000-49792).

(7) Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on February 2, 2004 (File No. 333-112420).

(8) Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on February 2, 2004 (File No. 333-112420).

(9) Incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(10) Incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(11) Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2008 (File No. 000-49792).

(12) Incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(13) Incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(14) Incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(15) Incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(16) Incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(17) Incorporated by reference to Exhibit 14 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2004 (File No. 000-49792).

50

Signatures

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Jacksonville Bancorp, Inc.
Date: March 16, 2011	By:	/s/ Richard A. Foss
		Richard A.  Foss, President
		and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By:	/s/ Richard A. Foss	By:	/s/ Andrew F. Applebee
	Richard A. Foss, President,		Andrew F. Applebee, Chairman of the Board
	Chief Executive Officer and Director
Date: March 16, 2011		Date: March 16, 2011
By:	/s/ Diana S. Tone	By:	/s/ Dean H. Hess
	Diana S. Tone		Dean H. Hess, Director
	Chief Financial Officer
Date: March 16, 2011		Date: March 16, 2011
By:	/s/ John L. Eyth	By:	/s/ Emily J. Osburn
	John L. Eyth, Director		Emily J. Osburn, Director
Date: March 16, 2011		Date: March 16, 2011
By:	/s/ Harmon B. Deal III	By:	/s/ John C. Williams
	Harmon B. Deal, III, Director		John C. Williams, Director
			Senior Vice President and Trust Officer
Date: March 16, 2011		Date: March 16, 2011
By:	/s/ John M. Buchanan
	John M. Buchanan, Director
Date: March 16, 2011

51

EXHIBIT INDEX

3.1           Articles of Incorporation(1)

3.2            Bylaws(2)

4              Stock Certificate of Jacksonville Bancorp, Inc.(3)

10.1         Employment Agreement between Jacksonville Savings Bank and Andrew F. Applebee(4)

10.2         Employment Agreement between Jacksonville Savings Bank and Richard A. Foss(5)

10.3         Employment Agreement between Jacksonville Savings Bank and John Williams(6)

10.4         Jacksonville Savings Bank and Jacksonville Bancorp, MHC 1996 Stock Option Plan(7)

10.5         Jacksonville Savings Bank 2001 Stock Option Plan(8)

10.6  Amendmentsto the Jacksonville Savings Bank and Jacksonville Bancorp, MHC Stock Option Plans(9)

10.7         Jacksonville Savings Bank Supplemental Life Insurance Plan(10)

10.8         Jacksonville Savings Bank Salary Continuation Plan 1(11)

10.9         Jacksonville Savings Bank Long-Term Deferred Compensation Plan, as amended(12)

10.10       Deferred Compensation Agreement between Chapin State Bank and John C. Williams(13)

10.11        Director’s Compensation Agreement between Chapin State Bank and John C. Williams(14)

10.12       Deferred Compensation Agreement between Chapin State Bank and Dean H. Hess(15)

10.13        Director’s Compensation Agreement between Chapin State Bank and Dean H. Hess(16)

13            2010 Annual Report to Stockholders

14             Code of Ethics(17)

21            Subsidiaries

23  Consent of BKD LLP to incorporate financial statements into Registration Statement on Form S-8

31.1         Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2         Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1  Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1) Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(2) Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(3) Incorporated by reference to Exhibit 4 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(4) Incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2009 (File No. 000-49792).

(5) Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2008 (File No. 000-49792).

(6) Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2008 (File No. 000-49792).

(7) Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on February 2, 2004 (File No. 333-112420).

(8) Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on February 2, 2004 (File No. 333-112420).

(9) Incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(10) Incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(11) Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 4, 2008 (File No. 000-49792).

(12) Incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(13) Incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

52

(14) Incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(15) Incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(16) Incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on March 12, 2010 (File No. 333-165466).

(17) Incorporated by reference to Exhibit 14 to the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2004 (File No. 000-49792).

53

EX-13

Exhibit 13

 Jacksonville Bancorp, Inc.

 2010 Annual Report

To Our Shareholders:

National data for 2010 indicates the economic recovery has begun; however, lagging effects from the Great Recession continue as national unemployment remains unacceptably high, the housing market lingers in the doldrums, and over 150 financial institutions failed last year.  In our area of the country, while we are not insulated from the economic volatility, the effects tend to be more subtle.

Locally, the 2010 economic signals were mixed.  Some companies downsized or closed their doors, but others added jobs, and the heart of our economy, agriculture and its related businesses, performed well once again.

Jacksonville Bancorp, Inc. had much to be pleased with in 2010.  A successful conversion from our mutual holding company (MHC) form of ownership to a 100% stock company was certainly one of the highlights.  The transaction provided us with the additional capital we need to grow the company, raised our loan limit, and eliminated any uncertainty we had about how mutual holding companies will be regulated in the future.  We were both excited and humbled as over $10 million in gross proceeds from the sale of new shares was received from investors in what was described by our investment bankers as a “difficult market”.

Another highlight of 2010 was our strong earnings.  At year end, net income was a record $2,066,000, representing a substantial increase over 2009.  The low interest rate environment has been beneficial in reducing our cost of funds.  A lower provision for loan losses than a year ago, and an increase in the non-interest income specifically derived from service charges and commissions generated by our brokerage subsidiary, Financial Resources Group, Inc. also contributed significantly to the improvement in earnings.

New year-end highs were reached in total assets, $301.5 million, and total deposits, $256.4 million.  Stockholders’ equity increased considerably to $35.7 million, reflecting the completion of the stock offering in July.

We are pleased to report these operating results for 2010 and look forward to continued success in 2011.  It is understood by our employees and directors that as we look for opportunities to grow the bank and our earnings, we must also be able to manage the risk factors that are inherent with our industry.  We look forward to the continued support of our shareholders as we work to deliver the very best in financial services to our customers.

Sincerely,

Andrew F. Applebee	Richard A. Foss
Chairman	President and CEO

Table of Contents

	Page
Business of the Company	1
Selected Consolidated Financial Information	2-3
Management’s Discussion and Analysis of Financial Condition and Results of Operations	4-19
Report of Independent Registered Public Accounting Firm	20
Consolidated Financial Statements	21-28
Notes to Consolidated Financial Statements	29-75
Common Stock Information	76
Directors and Officers	77
Corporate Information	78
Annual Meeting	78

Business of the Company

Jacksonville Bancorp, Inc. (the “Company”) is a Maryland corporation.  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.  The Company owns 100% of Jacksonville Savings Bank.

Jacksonville Savings Bank is an Illinois-chartered savings bank headquartered in Jacksonville, Illinois.  We conduct our business from our main office and six branches, two of which are located in Jacksonville and one of which is located in each of the following Illinois communities: Virden, Litchfield, Chapin, and Concord.  We were originally chartered in 1916 as an Illinois-chartered mutual savings and loan association and converted to a mutual savings bank in 1992.  In 1995, Jacksonville Savings Bank converted to an Illinois-chartered stock savings bank and reorganized from the mutual to the mutual holding company form of organization.  We have been a member of the Federal Home Loan Bank System since 1932.  Our deposits are insured by the Federal Deposit Insurance Corporation.

We are a community-oriented savings bank engaged primarily in the business of attracting retail deposits from the general public in our market area and using such funds, together with borrowings and funds from other sources, to originate mortgage loans secured by one- to four-family residential real estate, commercial and agricultural real estate and consumer loans. We also originate commercial and agricultural business loans and multi-family real estate loans.  Additionally, we invest in United States Government agency securities, bank-qualified, general obligation municipal issues, and mortgage-backed securities issued or guaranteed by the United States Government or agencies thereof.  We maintain a portion of our assets in liquid investments, such as overnight funds at the Federal Home Loan Bank.

Our principal sources of funds are customer deposits, proceeds from the sale of loans, funds received from the repayment and prepayment of loans and mortgage-backed securities, and the sale, call, or maturity of investment securities.  Principal sources of income are interest income on loans and investments, sales of loans and securities, service charges, commissions, loan servicing fees and other fees.  Our principal expenses are interest paid on deposits, employee compensation and benefits, occupancy and equipment expense and Federal Deposit Insurance Corporation insurance premiums.

We operate a full service trust department and an investment center.  The investment center is operated through Financial Resources Group, Inc., Jacksonville Savings Bank’s wholly-owned subsidiary.

1

Selected Consolidated Financial Information

The following tables set forth certain information concerning the consolidated financial position, consolidated data from operations and performance ratios of the Company at the dates and for the years indicated.  Selected quarterly financial data for each of the last two years is set forth at Note 20 to the Consolidated Financial Statements.

	At December 31,
	2010		2009		2008		2007		2006
	(In thousands)
Selected Financial Condition Data:
Total assets	$	301,481	$	288,846	$	288,275	$	288,489	$	267,372
Cash and cash equivalents		8,943		15,696		7,145		12,175		9,331
Investment securities		52,872		37,196		50,988		66,295		79,978
Mortgage-backed securities		41,995		40,984		27,795		15,415		8,210
Loans, net(1)		176,722		174,497		184,337		177,728		155,264
Federal Home Loan Bank of Chicago stock, at cost		1,114		1,109		1,109		1,109		1,109
Foreclosed assets, net		460		383		769		364		152
Bank owned life insurance		4,239		4,095		3,907		3,186		334
Deposits		256,424		254,700		238,151		245,721		232,913
Federal Home Loan Bank of Chicago advances		—		—		13,500		10,000		4,000
Short-term borrowings		4,018		3,789		7,633		4,936		5,035
Stockholders’ equity		35,678		25,263		24,259		22,618		21,145

	For the Years Ended December 31,
	2010		2009		2008		2007		2006
	(In thousands, except per share amounts)
Selected Operating Data:
Interest income	$	13,529	$	14,420	$	15,908	$	15,609	$	13,978
Interest expense		3,953		5,432		7,716		9,056		7,031
Net interest income		9,576		8,988		8,192		6,553		6,947
Provision for loan losses		1,725		2,575		310		155		60
Net interest income after provision for loan losses		7,851		6,413		7,882		6,398		6,887
Noninterest income		4,197		4,209		3,161		2,492		2,235
Noninterest expense		9,576		9,126		9,221		8,261		7,893
Income before income tax		2,472		1,497		1,822		629		1,229
Provision for income taxes		406		101		304		10		334
Net income	$	2,066	$	1,396	$	1,518	$	619	$	895
Earnings per share:
Basic	$	1.09	$	0.72	$	0.76	$	0.31	$	0.45
Diluted	$	1.08	$	0.72	$	0.76	$	0.31	$	0.45
Dividends per share	$	0.30	$	0.30	$	0.30	$	0.30	$	0.30

(1)           Includes loans held for sale of $280,000, $814,000, $1.4 million, $1.9 million, and $426,000 at December 31, 2010, 2009, 2008, 2007, and 2006, respectively.

2

	At or For the Years Ended December 31,
	2010			2009			2008			2007			2006
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets (ratio of net income to average total assets)		0.70	%		0.47	%		0.52	%		0.22	%		0.35	%
Return on average equity (ratio of net income to average equity)		6.77	%		5.69	%		6.59	%		2.86	%		4.37	%
Interest rate spread(1)		3.30	%		3.08	%		2.70	%		2.15	%		2.48	%
Net interest margin(2)		3.51	%		3.30	%		3.01	%		2.53	%		2.85	%
Efficiency ratio(3)		69.53	%		69.15	%		81.22	%		91.33	%		85.97	%
Dividend pay-out ratio(4)		20.37	%		18.96	%		18.75	%		45.94	%		31.69	%
Non-interest expense to average total assets		3.25	%		3.10	%		3.14	%		2.95	%		3.05	%
Average interest-earning assets to average interest-bearing liabilities		114.78	%		111.14	%		110.66	%		110.69	%		112.81	%
Average equity to average total assets		10.37	%		8.33	%		7.85	%		7.79	%		7.90	%
Asset Quality Ratios:
Non-performing assets to total assets		1.19	%		0.81	%		0.68	%		0.51	%		0.56	%
Non-performing loans to total loans		1.75	%		1.11	%		0.64	%		0.61	%		0.86	%
Allowance for loan losses to non-performing loans		94.56	%		117.20	%		162.47	%		161.90	%		137.90	%
Allowance for loan losses to gross loans(5)		1.65	%		1.29	%		1.04	%		0.98	%		1.19	%
Capital Ratios:
Total capital (to risk-weighted assets)		14.77	%		11.83	%		10.94	%		11.32	%		12.34	%
Tier I capital (to risk-weighted assets)		13.52	%		10.70	%		10.02	%		10.38	%		11.25	%
Tier I capital (to total assets)		9.25	%		7.44	%		7.30	%		7.02	%		7.45	%
Other Data:
Number of offices		7			7			7			7			7
Full time equivalent employees		104			106			106			109			111

(1) The interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted- average cost of interest-bearing liabilities for the period.

(2) The net interest margin represents net interest income as a percent of average interest-earning assets for the period.

(3) The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income.

(4) The dividend payout ratio represents dividends declared per share divided by net income per share.

(5) Gross loans include loans held for sale.

3

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

General

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding our financial condition and results of operations.  The information contained in this section should be read in conjunction with our consolidated financial statements and the accompanying notes.

Certain statements in this annual report and throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and involve known and unknown risk, uncertainties and other factors that may cause the Company’s actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward looking statement.  Factors that impact such forward looking statements include, among others, changes in general economic conditions, changes in interest rates and competition.  We decline any obligation to publicly announce future events or developments that may affect the forward-looking statements herein.

Operating Strategy – Overview

Our business consists principally of attracting deposits from the general public and using deposits and borrowings to originate mortgage loans secured by one- to four-family residences, commercial real estate and agricultural real estate. In addition, we originate commercial and agricultural business loans and consumer loans.  Our net income, like other financial institutions, is primarily dependent on our net interest income, which is the difference between the income earned on our interest-earning assets, such as loans and investments, and the cost of our interest-bearing liabilities, primarily deposits and borrowings.  Our net income is also affected by provisions for loan losses and other operating income and expenses.  General economic conditions, particularly changes in market interest rates, government legislation, monetary policies, and attendant actions of the regulatory authorities are the external influences affecting many of the factors of our net income.

Management has implemented various strategies designed to enhance our profitability.  These strategies include reducing our exposure to interest rate risk by selling fixed-rate loans and offering other fee-based services to our customers.  We recognize the need to establish and adhere to strict loan underwriting criteria and guidelines.  We generally limit our investment portfolio to securities issued by the United States Government and Government sponsored entities, mortgage-backed securities collateralized by United States Government sponsored entities, and bank-qualified general obligation municipal issues.

The recession which began in 2008 and only recently ended has had a severe impact on the entire banking industry resulting in increased bank failures nationwide and a decline in market interest rates.  The low interest rate environment resulted in higher levels of originations of fixed-rate residential loans for sale to the secondary market during 2010 and 2009.  During the years ended December 31, 2010 and 2009, we sold $47.4 million and $66.7 million, respectively, of fixed-rate residential mortgage loans.  Market conditions and higher prepayment speeds resulted in a decline in the value of our mortgage servicing rights during 2010.  We do not have a subprime mortgage loan product.  Our investment portfolio has not been affected by the recession and financial crisis, since all of our mortgage-backed securities are issued by United States Government or United States Government sponsored entities.  Since the real estate values in our market area did not increase as dramatically as they did in other parts of the nation prior to 2008, we have not experienced dramatic decreases in home values during the current recession.  While still at a manageable level, we have experienced an increase in non-accruing loans during 2010, as compared to 2009.

4

We continue to service our existing borrowers and originate new loans to credit-worthy borrowers in an effort to meet the credit needs of our community.  We intend to remain a community-oriented financial institution dedicated to meeting the credit and financial services needs of our customers in our market area.

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 judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Allowance for Loan Losses. We believe 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 judgment, deserve current recognition in estimating loan losses.  The evaluation includes a review of all loans on which full collectability 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 uses 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 our 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.

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.

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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.  During 2010, goodwill was evaluated quarterly due to market conditions.

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.  We estimate 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, we estimate fair value.  Other factors such as model assumptions and market dislocations can affect estimates of fair value.

Recent Accounting Pronouncements

Accounting Standards Update (ASU) No. 2009-16, “Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets.”  ASU 2009-16 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets.  ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets.  ASU 2009-16 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period.  The provisions of ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact on the Company’s financial statements.

ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures About Fair Value Measurements.”  ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for the Company beginning January 1, 2011.  The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010.

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ASU No. 2010-20, “Receivables (Topic 310)—Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”  ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses.  Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment.  The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators.  ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period.  Disclosures that relate to activity during a reporting period will be required for the Company’s financial statements that include periods beginning on or after January 1, 2011.  ASU 2011-01, “Receivables (Topic 310)—Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” temporarily deferred the effective date for disclosures related to troubled debt restructurings to coincide with the effective date of a proposed accounting standards update related to troubled debt restructurings, which is currently expected to be effective for periods ending after June 15, 2011.

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.  The FDIC recently made two changes to the rules that broadened the FDIC insurance.  On July 21, 2010, basic FDIC insurance coverage was permanently increased to $250,000 per depositor.  In addition, the FDIC had instituted a Temporary Liquidity Guaranty Program (“TLGP”) which provided full deposit insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount, until December 31, 2010.  The Company opted into the TLGP.  On November 9, 2010, the FDIC issued a final rule to provide separate unlimited deposit insurance coverage for non-interest bearing transaction accounts effective December 31, 2010 until December 31, 2012.  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.

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, 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.  As a result of the offering and the exchange, at December 31, 2010, the Company had 1,923,689 shares outstanding and a market capitalization of $20.7 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.”

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Financial Condition

Total assets increased $12.6 million, or 4.4%, to $301.5 million at December 31, 2010, from $288.8 million at December 31, 2009.  The increase is primarily due to the net proceeds from our second step conversion and stock offering which was completed on July 14, 2010.  The proceeds have primarily been invested in available-for-sale securities and used for loan originations.  Available-for-sale investment securities increased $15.7 million, or 42.1%, to $52.9 million at December 31, 2010 from $37.2 million at December 31, 2009, primarily due to $36.3 million in purchases of U.S. government agency securities and general obligation municipal bonds, partially offset by calls of $16.8 million in calls and maturities of U.S. government agency securities.  Net loans have increased $2.8 million, or 1.6%, to $176.4 million as of December 31, 2010.  The increase in net loans reflected a $10.6 million increase in loans secured by commercial real estate, partially offset by an $8.6 million decrease in home equity loans, primarily due to the refinancing of loans which were sold in the secondary market during 2010, with servicing retained.  Cash and cash equivalents decreased $6.8 million to $8.9 million at December 31, 2010 from $15.7 million at December 31, 2009.

At December 31, 2010, we owned $1.1 million of Federal Home Loan Bank of Chicago stock.  Management reviews this investment on a quarterly basis, in light of the Federal Home Loan Bank’s financial performance.  At December 31, 2010, management deemed that the cost method investment in Federal Home Loan Bank of Chicago stock was ultimately recoverable and therefore not impaired.  We also recognized $2.7 million in goodwill associated with our prior acquisition of Chapin State Bank.  In 2010, management reviewed goodwill for impairment quarterly.  Given the current market conditions and the fact that our common stock was trading below our book value, we obtained an independent goodwill impairment analysis from a third party as of December 31, 2010.  This analysis concluded that our goodwill was not impaired.

At December 31, 2010, we had $797,000 in net mortgage servicing rights.  Our mortgage servicing rights asset represents approximately 53 basis points of the $149.6 million in loans that we serviced.  We obtain an independent valuation of the mortgage servicing rights at least annually.  Our most recent valuation was obtained as of December 31, 2010.  Due to the lower market rates and increased prepayment speeds, we recorded a net impairment charge of $101,000 on our mortgage servicing rights during 2010.

Total deposits increased $1.7 million, or 0.7%, to $256.4 million as of December 31, 2010, primarily due to an increase of $2.1 million in transaction accounts, partially offset by a decrease of $341,000 in time deposits.  Short-term borrowings, which consist of overnight repurchase agreements, increased $229,000 to $4.0 million as of December 31, 2010.

Stockholders’ equity increased $10.4 million to $35.7 million at December 31, 2010.  The increase in stockholders’ equity reflects the infusion of net proceeds from the completion on July 14, 2010, of the second step conversion 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 $2.1 million, which was partially offset by the payment of $421,000 in dividends and a decrease of $847,000 in other comprehensive income.  Other comprehensive income consisted of the decrease 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.

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COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

General

Net income for the year ended December 31, 2010 totaled $2.1 million, or $1.09 per common share, basic, and $1.08 per common share, diluted, compared to net income for the year ended December 31, 2009 of $1.4 million, or $0.72 per common share, basic and diluted.  The increase of $670,000 in net income reflected an increase of $588,000 in net interest income and a decrease of $850,000 in the provision for loan losses, partially offset by a decrease of $12,000 in non-interest income and increases of $451,000 in non-interest expense and $305,000 in income taxes.  Our operations have benefited from the steep yield curve during 2009 and 2010 as lower short-term interest rates decreased significantly in 2008 through 2010 resulting in our deposits repricing downward faster than our loans, which have yields tied to higher long-term interest rates.

Interest Income

Interest income decreased to $13.5 million for the year ended December 31, 2010 from $14.4 million for the year ended December 31, 2009.  The $890,000 decrease in interest income resulted from decreased income of $676,000 on loans, $378,000 on mortgage-backed securities, and $1,000 on other interest-earning assets, partially offset by an increase of $165,000 in interest income on investment securities.

Interest income on loans decreased $676,000 to $10.9 million for 2010 from $11.6 million for 2009 due to decreases in both the average yield and average balance of the loan portfolio.  The average yield of the loan portfolio decreased 20 basis points to 6.14% for 2010 from 6.34% for 2009. The decrease in the average yield reflected lower market rates of interest.  The average balance of loans decreased $5.0 million to $177.8 million during 2010.  The decrease in the average balance of loans is primarily due to a decrease in the average balance of one-to-four family residential and home equity loans, reflecting the volume of loans refinanced and subsequently sold into the secondary market.

Interest income on investment securities increased $165,000 to $1.7 million in 2010 from $1.6 million for 2009, reflecting a $7.9 million increase in the average balance of the investment securities portfolio to $48.7 million during 2010 from $40.7 million during 2009.  The increase in the average balance reflected the investment of funds from our recent stock offering.  The increase in the average balance was partially offset by a decrease in the average yield of investment securities to 3.53% for 2010 from 3.81% for 2009.  This average yield does not reflect the benefit of the higher tax-equivalent yield of our municipal bonds, which was reflected as a reduction in income tax expense.  Adjusting for this benefit, the tax equivalent yield of the investment portfolio equals 4.86% for 2010 compared to 5.14% for 2009.

Interest income on mortgage-backed securities decreased $378,000 to $884,000 in 2010 from $1.3 million in 2009, reflecting a 73 basis point decrease in the average yield of these securities to 2.40% for 2010 from 3.13% for 2009.  The decrease in the average yield was partially due to accelerated premium amortization resulting from higher prepayments on mortgage-backed securities.  The average balance of mortgage-backed securities decreased $3.6 million to $36.8 million in 2010 from $40.4 million in 2009.

Interest income from other interest-earning assets, which consisted of interest-earning deposit accounts and federal funds sold, decreased $1,000 to $11,000 during 2010 primarily due to a decrease in the average yield to 0.12% for 2010 from 0.15% for 2009, reflecting the low short-term market interest rates.  The average balance of these assets increased $1.1 million to $9.4 million during 2010 compared to 2009.

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Interest Expense

Total interest expense decreased $1.5 million to $3.9 million during 2010 from $5.4 million during 2009.  The decrease in interest expense was due to decreases of $1.4 million in the cost of deposits and $105,000 in the cost of borrowings.

The cost of deposits decreased $1.4 million to $3.9 million in 2010 from $5.3 million in 2009 due primarily to a decrease in the average rate paid on deposits.  The average rate paid decreased 59 basis points to 1.68% during 2010 from 2.27% during 2009, reflecting a decrease in market interest rates as short-term interest rates remained historically low throughout 2010.  The average balance of deposits equaled $234.7 million and $234.3 million during 2010 and 2009, respectively.

The cost of borrowed funds decreased $105,000 to $11,000 in 2010 from $116,000 in 2009, primarily due to a $7.7 million decrease in the average balance of borrowed funds to $2.8 million during 2010 from $10.5 million during 2009.  The average rate paid on borrowed funds also decreased 71 basis points to 0.39% during 2010 from 1.10% during 2009.  The decrease in the cost of borrowed funds reflects the $5.4 million and 194 basis points in the average balance and average rate of advances from the Federal Home Loan Bank during 2009.  There were no advances outstanding at any point during 2010.  The remainder of the balance of borrowed funds consisted of securities sold overnight under agreements to repurchase.

Net Interest Income

Net interest income increased by $588,000, or 6.5%, to $9.6 million for the year ended December 31, 2010 from $9.0 million for the year ended December 31, 2009, primarily due to the improvement in our net interest rate spread and net interest margin.  Our interest rate spread increased by 22 basis points to 3.30% during 2010 from 3.08% during 2009.  Our net interest margin improved 21 basis points to 3.51% for the year ended December 31, 2010 from 3.30% for the year ended December 31, 2009.  The improvement in our net interest rate spread and net interest margin reflected the steepened yield curve as short-term market interest rates used to price our deposits resulted in a decrease in the cost of our deposits and other liabilities which was greater than the decrease in the yield on our loans and investments.

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 known and probable losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America.

The allowance for loan losses increased $674,000, or 29.4%, to $3.0 million as of December 31, 2010 from $2.3 million as of December 31, 2009.  The increase was the result of the provision for loan losses exceeding net charge-offs.  We recorded a provision for loan losses of $1.7 million for the year ended December 31, 2010, compared to $2.6 million during 2009.  The decrease in the provision reflects the lower charge-offs, a lower level of specific allocations to the allowance, and a decrease in the average balance of the loan portfolio during 2010.  Net charge-offs decreased $1.2 million to $1.0 million during 2010 from $2.2 million during 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.  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 real estate and commercial loan portfolios, and have contributed to the higher balance in the allowance for loan losses.

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The provisions in 2010 and 2009 were 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 loan identified by management.  The review also considered the local economy and the level of bankruptcies and foreclosures in our market area.

The following table sets forth the composition of our non-performing assets at December 31, 2010 and 2009, respectively.

	12/31/10			12/31/09
	(Dollars in thousands)
Non-accrual loans:
Real estate loans:
One- to four-family residential	$	1,019		$	484
Commercial and agricultural		1,249			274
Multi-family residential		110			132
Commercial and agricultural business loans		85			240
Consumer loans:
Home equity/home improvement		566			407
Automobile		8			8
Other		98			52
Total non-accrual loans		3,135			1,597
Loans delinquent 90 days or greater and still accruing:
Real estate loans:
One- to four-family residential		—			349
Commercial and agricultural		—			—
Multi-family residential		—			—
Commercial and agricultural business loans		—			—
Consumer loans:
Home equity/home improvement		—			—
Automobile		—			3
Other		—			5
Total loans delinquent 90 days or greater and still accruing		—			357
Total non-performing loans		3,135			1,954
Other real estate owned and foreclosed assets:
Real estate loans:
One- to four-family residential		207			324
Commercial and agricultural		253			59
Multi-family residential		—			—
Commercial and agricultural business loans		—			—
Consumer loans:
Home equity/home improvement		—			—
Automobile		—			—
Other		—			—
Total  other real estate owned and foreclosed assets		460			383
Total non-performing assets	$	3,595		$	2,337
Ratios:
Non-performing loans to total loans		1.75	%		1.11	%
Non-performing assets to total assets		1.19			0.81

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Management monitors all past due loans and non-performing assets.  Such loans are placed under close supervision with consideration given to the need for additions to the allowance for loan losses and (if appropriate) partial or full charge-off.  At December 31, 2010, we had no loans 90 days or more delinquent which were still accruing interest. Non-performing assets increased by $1.3 million to $3.6 million at December 31, 2010 as compared to $2.3 million at December 31, 2009.  The increase in the level of non-performing assets reflects an increase of $1.2 million in non-performing loans and $77,000 in foreclosed assets.  The $1.1 million increase in non-performing loans primarily reflects the impairment of two purchased commercial real estate loans totaling $1.0 million as of December 31, 2010.

The first loan had an outstanding principal balance of $1.5 million at December 31, 2009 secured by a real estate development project.  Construction of the property had been delayed due to the declining real estate market during 2009.  During 2010, the loan matured and became delinquent.  We recognized a charge-off of $719,000 during 2010.  We also received principal reductions of approximately $282,000 from the borrower and their new guarantor, which reduced the outstanding principal balance to $514,000 at December 31, 2010.  The borrower is current on all payments but the loan remained in a nonaccrual status as of December 31, 2010.  We have provided an additional $143,000 to the allowance for loan losses, after the charge-off noted above, for any further potential loss on this loan.

The second loan has an outstanding principal balance of $498,000 at December 31, 2010 and is secured by a hotel.  Occupancy has been below projections and the loan is currently over 90 days delinquent.  The borrower did not made any principal reductions nor have we recognized any charge-offs on this loan during 2010.  The hotel is being operated by an independent third party.  Subsequent to year-end, we transferred the loan to other real estate at its net realizable value.

The allowance for loan losses to non-performing loans decreased to 94.56% at December 31, 2010, as compared to 117.20% at December 31, 2009.  This decrease was primarily due to lower specific provisions associated with the non-performing loans at December 31, 2010, due to the nature of the collateral coverage.  Management believes the increase in non-performing loans is primarily attributed to the declining national economy of 2009 and 2010.  We have an experienced chief lending officer and collections and loan review departments which monitor the loan portfolio and actively seek to prevent any deterioration of asset quality.

The following table shows the principal amount of special mention and classified loans at December 31, 2010 and December 31, 2009.

	12/31/10		12/31/09
	(In thousands)
Special Mention loans	$	3,943	$	6,489
Substandard loans		6,975		4,865
Total Special Mention and Substandard loans	$	10,918	$	11,354

The total amount of classified and special mention assets decreased $436,000, or 3.8%, to $10.9 million at December 31, 2010 from $11.4 million at December 31, 2009.  The decrease in classified and special mention assets during 2010 was primarily due to a decrease of $2.5 million in special mention loans, partially offset by an increase of $2.1 million in substandard loans.  The decrease in special mention loans was primarily due to $4.1 million in loans that were downgraded to a substandard rating and $612,000 in principal reductions on these loans, partially offset by $2.4 million in additional loans rated as special mention during 2010.  The $2.1 million increase in substandard loans was primarily related to the downgrade of $4.1 million of loans from the special mention rating and $913,000 of additional loans rated as substandard during 2010, partially offset by charge-offs of $1.0 million and principal reductions of $821,000.

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Non-interest Income

Non-interest income decreased $12,000 to $4.2 million for the year ended December 31, 2010.  The decrease in non-interest income resulted primarily from decreases of $215,000 in net income from mortgage banking operations and $137,000 in gains on sales of available-for-sale securities, which were partially offset by increases of $203,000 in commission income and $105,000 in service charges on deposit accounts.  The decrease in net mortgage banking income was due to a lower volume of loan sales to the secondary market of $47.4 million during 2010 from $66.7 million during 2009.  The high volume of loan sales has resulted from the historically low mortgage rates during 2009 and 2010. We expect the level of mortgage banking activity to moderate in 2011.  The decrease in gains on sales of available-for-sale securities reflects a decrease in the sale of $25.2 million of securities during 2010 from $57.4 million in sales of securities during 2009.  The sales were made in order to realize gains on the securities while restructuring a portion of the portfolio to reduce our interest rate risk position and improve tax equivalent yields.  The increase in commission income was due to a growth in brokerage accounts and improved market conditions.  The increase in service charges on deposits reflects an increase in non-sufficient fund fees during 2010.

Non-interest Expense

Non-interest expense increased $451,000 to $9.6 million during the year ended December 31, 2010, compared to $9.1 million for the year ended December 31, 2009.  The increase in non-interest expense reflects increases of $286,000 in compensation and benefits, $224,000 in the impairment of mortgage servicing assets, and $124,000 in other non-interest expenses.  The increase in compensation and benefits expense resulted from normal salary and benefit cost increases, as well as higher commissions.  The increase in the impairment of mortgage servicing rights was due to a $101,000 impairment recognized during 2010, compared to a recovery of $123,000 realized during 2009.  The decrease in the value of mortgage servicing rights reflects the higher levels of prepayments during 2010.  The $124,000 increase in other non-interest expense includes higher regulatory fees, consulting fees, and collection expense.  The increase in non-interest expense was partially offset by a decrease of $137,000 in FDIC deposit insurance assessments reflecting the special assessment that was made during the second quarter of 2009.

Income Taxes

The provision for income taxes increased $305,000 to $405,000 during 2010 compared to 2009. The provision reflected an increase in taxable income due to higher income, partially offset by the benefit of our tax-exempt investment securities.  Our effective tax rate was 16.4% for 2010 as compared to 6.7% for 2009.

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Average Balances and Yields

The following table sets forth, for the years indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin, and ratio of average interest-earning assets to average interest-bearing liabilities.

	For the Years Ended December 31,
	2010							2009
	Average Outstanding Balance		Interest		Yield/ Rate			Average Outstanding Balance		Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans (1)	$	177,840	$	10,915		6.14	%	$	182,813	$	11,592		6.34	%
Investment securities (2)		48,651		1,719		3.53			40,732		1,554		3.81
Mortgage-backed securities		36,796		884		2.40			40,381		1,262		3.13
Cash and cash equivalents		9,371		11		0.12			8,231		12		0.15
Total interest-earning assets		272,658		13,529		4.96			272,157		14,420		5.30
Non-interest-earning assets		21,935							22,626
Total assets	$	294,593						$	294,783
Interest-bearing liabilities:
Interest bearing checking	$	31,164	$	98		0.32	%	$	29,009	$	94		0.32	%
Savings accounts		26,686		177		0.66			24,849		218		0.88
Certificates of deposit		144,362		3,366		2.33			149,124		4,586		3.08
Money market savings		27,058		258		0.95			26,750		378		1.41
Money market deposits		5,431		43		0.79			4,616		40		0.86
Total interest-bearing deposits		234,701		3,942		1.68			234,348		5,316		2.27
Federal Home Loan Bank advances		0		0		0.00			5,359		104		1.94
Short-term borrowings		2,847		11		0.39			5,168		12		0.24
Total borrowings		2,847		11		0.39			10,527		116		1.10
Total interest-bearing liabilities		237,548		3,953		1.66	%		244,875		5,432		2.22	%
Non-interest-bearing liabilities		26,504							25,360
Total liabilities		264,052							270,235
Stockholders’ equity		30,541							24,548
Total liabilities and stockholders’ equity	$	294,593						$	294,783
Net interest income			$	9,576						$	8,988
Net interest rate spread (3)						3.30	%						3.08	%
Net interest-earning assets (4)			$	35,110						$	27,282
Net interest margin (5)						3.51	%						3.30	%
Average interest-earning assets to average interest-bearing liabilities						114.78	%						111.14	%

(1) Includes non-accrual loans and loans held for sale and fees of $93,000 for 2010 and $110,000 for 2009.

(2) Includes Federal Home Loan Bank stock and U.S. Agency securities.

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

(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(5) Net interest margin represents net interest income divided by average total interest-earning assets.

14

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the fiscal years indicated.  The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume).  The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate).  The net column represents the sum of the prior columns.  For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

	Years Ended December 31,
	2010 vs. 2009
	Increase (Decrease) Due to						Total Increase (Decrease)
	Rate			Volume
	(In thousands)
Interest-earning assets:
Loans	$	(366	)	$	(310	)	$	(676	)
Investment securities		(121	)		286			165
Mortgage-backed securities		(273	)		(105	)		(378	)
Cash and cash equivalents		(2	)		1			(1	)
Total interest-earning assets	$	(762	)	$	(128	)	$	(890	)
Interest-bearing liabilities:
Interest bearing checking	$	(2	)	$	7		$	5
Savings accounts		(56	)		15			(41	)
Certificates of deposit		(1,078	)		(142	)		(1,220	)
Money market savings		(124	)		4			(120	)
Money market deposits		(4	)		7			3
Total interest-bearing deposits		(1,264	)		(109	)		(1,373	)
Federal Home Loan Bank advances		(52	)		(52	)		(104	)
Short-term borrowings		6			(7	)		(1	)
		(46	)		(59	)		(105	)
Total interest-bearing liabilities		(1,310	)		(168	)		(1,478	)
Change in net interest income	$	548		$	40		$	588

15

Asset and Liability Management

As a financial institution, we face risk from interest rate volatility.  Fluctuations in interest rates affect both our level of income and expense on a large portion of our assets and liabilities.  Fluctuations in interest rates also affect the market value of all interest-earning assets.

The primary goal of our interest rate risk management strategy is to maximize net interest income while maintaining an acceptable interest rate risk profile.  We seek to coordinate asset and liability decisions so that, under changing interest rate scenarios, portfolio equity and net interest income remain within an acceptable range.

Our policy in recent years has been to reduce our interest rate risk by better matching the maturities of our interest rate sensitive assets and liabilities, selling our 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 residential mortgage 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 our interest-bearing liabilities.  With respect to liabilities, we have attempted to increase our 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 our asset and liability management policies.  The ALCO meets quarterly to review interest rate risk and trends, as well as liquidity and capital requirements.

We use comprehensive asset/liability software provided by a third-party vendor to perform interest rate sensitivity analysis for all product categories.  The primary focus of our analysis is 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 our 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 December 31, 2010 and 2009, of the impact on net interest income from an immediate change in interest rates, as well as the benchmarks established by 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
	December 31, 2010						December 31, 2009						ALCO Benchmark
Rate Shock	$ Change			% Change			$ Change			% Change
	(Dollars in thousands)
+300 basis points		(2	)		(0.02	)		174			1.71		>(20.00)%
+200 basis points		64			0.57			220			2.16		>(20.00)%
+100 basis points		134			1.19			184			1.80		>(12.50)%
(100) basis points		(36	)		(0.32	)		(271	)		(2.66	)	>(12.50)%
(200) basis points		(385	)		(3.42	)		(412	)		(4.05	)	>(20.00)%
(300) basis points		(619	)		(5.49	)		(589	)		(5.78	)	>(20.00)%

The table above indicates that at December 31, 2010, in the event of a 200 basis point increase in interest rates, we would experience a 0.57% increase in net interest income.  In the event of a 100 basis point decrease in interest rates, we would experience a 0.32% decrease in net interest income.

16

The effects of interest rates on net interest income are not predictable. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments, and deposit run-offs, and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in these computations. Although some assets and liabilities may have similar maturity or periods of repricing, they may react at different times and in different degrees to changes in market interest rates. Rates on other types of assets and liabilities may lag behind changes in market interest rates. Assets, such as adjustable rate mortgage loans, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset. After a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in making the calculations set forth above. Additionally, increased credit risk may result if our borrowers are unable to meet their repayment obligations as interest rates increase.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future short-term financial obligations.  Our ALCO Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies.  At December 31, 2010, we had access to immediately available funds of approximately $22.3 million from the Federal Home Loan Bank of Chicago and $48.8 million in overnight federal funds purchased.

We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program.  Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.

Our most liquid assets are cash and cash equivalents.  The levels of these assets are dependent on our operating, financing, and investing activities.  At December 31, 2010 and 2009, cash and cash equivalents totaled $8.9 million and $15.7 million, respectively.  Our primary sources of funds include customer deposits, proceeds from sales of loans, maturities and sales of investments, and principal repayments from loans and mortgage-backed securities (both scheduled and prepayments).  During the years ended December 31, 2010 and 2009, the most significant sources of funds have been stock offering proceeds, deposit growth, and investment calls, sales, and principal payments.

Our cash and cash equivalents decreased $6.8 million during the year ended December 31, 2010, compared to an increase of $8.6 million during the year ended December 31, 2009.  Net cash provided by operating activities increased to $5.1 million during 2010 from $3.5 million during 2009.  Net cash used in investing activities increased to $23.1 million during 2010 from the $6.5 million in cash provided during 2009.  Cash used in purchases of investment and mortgage-backed securities, net of sales and maturities, increased to $18.3 million during 2010 from the $479,000 net cash used during 2009.  Cash used in net loan originations and payments increased to $5.0 million during 2010 from the net cash provided of $6.6 million during 2009.  Cash provided by financing activities increased to $11.2 million during 2010 from the $1.5 million in cash used during 2009.  The increase was primarily due to the $9.2 million in net proceeds from our stock offering during 2010.

While loan sales and principal repayments on mortgage-backed securities are relatively predictable, deposit flows and early prepayments are more influenced by interest rates, general economic conditions, and competition.  We attempt to price our deposits to meet asset/liability objectives and stay competitive with local market conditions.

17

Liquidity management is both a short- and long-term responsibility of management.  We adjust our investments in liquid assets based upon management’s assessment of expected loan demand, projected purchases of investment and mortgage-backed securities, expected deposit flows, yields available on interest-bearing deposits, and liquidity of its asset/liability management program.  Excess liquidity is generally invested in interest-earning overnight deposits, federal funds sold, and other short-term U.S. agency obligations.  We use securities sold under agreements to repurchase as an additional funding source.  The agreements represent our obligations to third parties and are secured by investments which we pledge as collateral.  At December 31, 2010, we had $4.0 million in outstanding repurchase agreements, which were for overnight funding.

If we require funds beyond our ability to generate them internally, we have the ability to borrow funds from the Federal Home Loan Bank.  We may borrow from the Federal Home Loan Bank under a blanket agreement which assigns all investments in Federal Home Loan Bank 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 the lesser of 30% of our total assets, 75% of the balance of qualifying one- to four-family residential loans, or twenty times the balance of Federal Home Loan Bank stock held by us.  At December 31, 2010, we had no outstanding advances and a borrowing capacity of approximately $22.3 million.

We maintain levels of liquid assets as established by the board of directors.  Our liquidity ratio, adjusted for pledged assets, at December 31, 2010 and 2009 was 34.2% 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.

We must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments.  We anticipate that we will have sufficient funds available to meet our current commitments principally through the use of current liquid assets and through our borrowing capacity discussed above.  The following table summarizes our outstanding loan commitments at December 31, 2010 and 2009.

	December 31, 2010		December 31, 2009
	(In thousands)
Commitments to fund loans	$	36,871	$	36,050
Standby letters of credit		453		488

Quantitative measures established by regulation to ensure capital adequacy require Jacksonville Savings Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets and Tier I capital to average assets.  At December 31, 2010, Jacksonville Savings Bank meets all capital adequacy requirements to which it is subject.

The Director of the Illinois Department of Financial and Professional Regulation is authorized to require a savings bank to maintain a minimum capital level based upon the savings bank’s financial condition or history, management or earnings.  If a savings bank’s core capital ratio falls below the required level, the Director may direct the savings bank to adhere to a specific written plan established by the Director 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 December 31, 2010, Jacksonville Savings Bank’s core capital ratio was 9.25% of total adjusted average assets, which exceeded the required ratio of 4.00%.

18

As of December 31, 2010, the Federal Deposit Insurance Corporation categorized Jacksonville Savings Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as adequately capitalized, Jacksonville Savings Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below.  There are no conditions or events since that notification that management believes have changed Jacksonville Savings Bank’s category.  Jacksonville Savings Bank’s actual capital ratios at December 31, 2010 and 2009 are presented in the table below.

	Minimum Required			December 31, 2010 Actual			December 31, 2009 Actual
Tier 1 Capital to Average Assets		4.00	%		9.25	%		7.44	%
Tier 1 Capital to Risk-Weighted Assets		4.00	%		13.52	%		10.70	%
Total Capital to Risk-Weighted Assets		8.00	%		14.77	%		11.83	%

Effect of Inflation and Changing Prices

The consolidated financial statements and related notes of Jacksonville Bancorp-Federal have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”).  GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation.  The impact of inflation is reflected in the increased cost of our operations.  Unlike industrial companies, our assets and liabilities are primarily monetary in nature.  As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

* * * * * *

19

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors, and Stockholders

Jacksonville Bancorp, Inc.

Jacksonville, Illinois

We have audited the accompanying consolidated balance sheets of Jacksonville Bancorp, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended.  The Company’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits include consideration of internal control over financial reporting as a basis for designing auditing procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  Our audits also include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jacksonville Bancorp, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/sig/ BKD, LLP

Decatur, Illinois

March 15, 2011

20

Jacksonville Bancorp, Inc.

Consolidated Balance Sheets

December 31, 2010 and 2009

Assets

	2010		2009
Cash and due from banks	$	2,799,482	$	4,412,988
Federal funds sold		4,100,000		9,925,855
Interest-bearing demand deposits in banks		2,043,918		1,357,631
Cash and cash equivalents		8,943,400		15,696,474
Available-for-sale securities:
Investment securities		52,871,871		37,196,298
Mortgage-backed securities		41,994,850		40,984,395
Other investments		130,049		149,902
Loans held for sale		280,000		814,074
Loans, net of allowance for loan losses of $2,964,285 and $2,290,001 at December 31, 2010 and 2009		176,442,118		173,683,310
Premises and equipment, net of accumulated depreciation of $7,523,691 and $7,199,085 at December 31, 2010 and 2009		5,659,074		5,766,858
Federal Home Loan Bank stock		1,113,800		1,108,606
Foreclosed assets held for sale, net		459,877		382,879
Cash surrender value of life insurance		4,238,915		4,094,663
Interest receivable		1,872,779		1,988,394
Deferred income taxes		1,620,994		724,139
Mortgage servicing rights, net of valuation allowance of $163,989 and $156,442 as of December 31, 2010 and 2009		797,327		850,313
Goodwill		2,726,567		2,726,567
Other assets		2,329,232		2,679,600
Total assets	$	301,480,853	$	288,846,472

See Notes to Consolidated Financial Statements

21

Jacksonville Bancorp, Inc.

Consolidated Balance Sheets

December 31, 2010 and 2009

Liabilities and Stockholders’ Equity

	2010			2009
Liabilities
Deposits
Demand	$	19,856,437		$	20,668,169
Savings, NOW and money market		91,288,015			88,412,078
Time		145,279,195			145,619,976
Total deposits		256,423,647			254,700,223
Short-term borrowings		4,018,235			3,789,453
Deferred compensation		3,060,637			2,826,227
Advances from borrowers for taxes and insurance		629,788			508,356
Interest payable		556,257			734,903
Other liabilities		1,114,139			1,023,890
Total liabilities		265,802,703			263,583,052
Stockholders’ Equity
Preferred stock, $.01 par value, authorized 10,000,000 shares; none issued and outstanding		—			—
Common stock, $.01 par value; authorized 25,000,000 shares; issued 1,923,689 – December 31, 2010 and 1,987,904 – December 31, 2009		19,237			19,879
Additional paid-in capital		16,159,960			6,634,591
Retained earnings – substantially restricted		20,045,095			18,399,506
Accumulated other comprehensive income (loss)		(150,802	)		695,825
Unallocated ESOP shares		(395,340	)		—
Treasury stock, at cost Common; 2010 – 0 shares; 2009 – 67,087 shares		—			(486,381	)
Total stockholders’ equity		35,678,150			25,263,420
Total liabilities and stockholders’ equity	$	301,480,853		$	288,846,472

See Notes to Consolidated Financial Statements

22

Jacksonville Bancorp, Inc.

Consolidated Statements of Income

Years Ended December 31, 2010 and 2009

	2010		2009
Interest and Fee Income
Loans, including fees	$	10,915,275	$	11,591,716
Debt securities
Taxable		465,419		503,211
Tax-exempt		1,253,011		1,050,667
Mortgage-backed securities		884,229		1,262,357
Other		11,468		11,966
Total interest income		13,529,402		14,419,917
Interest Expense
Deposits		3,942,161		5,315,273
Short-term borrowings		11,159		12,452
Federal Home Loan Bank advances		—		103,803
Total interest expense		3,953,320		5,431,528
Net Interest Income		9,576,082		8,988,389
Provision for Loan Losses		1,725,000		2,575,000
Net Interest Income After Provision for Loan Losses		7,851,082		6,413,389
Noninterest Income
Fiduciary activities		205,746		166,138
Commission income		1,072,276		869,368
Service charges on deposit accounts		1,000,534		895,264
Mortgage banking operations, net		521,452		736,681
Net realized gains on sales of available-for-sale securities		451,805		588,959
Loan servicing fees		369,733		359,813
Increase in cash surrender value of life insurance		171,863		178,676
Other		403,796		414,195
Total noninterest income		4,197,205		4,209,094

See Notes to Consolidated Financial Statements

23

Jacksonville Bancorp, Inc.

Consolidated Statements of Income

Years Ended December 31, 2010 and 2009

	2010		2009
Noninterest Expense
Salaries and employee benefits	$	5,865,742	$	5,579,322
Occupancy and equipment		1,023,853		1,075,728
Data processing		400,404		356,666
Professional		181,922		230,699
Marketing		130,994		112,273
Postage and office supplies		279,349		287,671
Deposit insurance premium		417,993		555,223
Impairment (recovery) on mortgage servicing rights asset		100,809		(122,790	)
Other		1,175,281		1,050,935
Total noninterest expense		9,576,347		9,125,727
Income Before Income Taxes		2,471,940		1,496,756
Provision for Income Taxes		405,480		100,589
Net Income	$	2,066,460	$	1,396,167
Basic Earnings Per Share	$	1.09	$	0.72
Diluted Earnings Per Share	$	1.08	$	0.72
Cash Dividends Per Share	$	0.30	$	0.30

See Notes to Consolidated Financial Statements

24

Jacksonville Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2010 and 2009

							Additional
	Issued Common Stock						Paid-in			Retained
	Shares			Amount			Capital			Earnings
Balance, January 1, 2009		1,987,904		$	19,879		$	6,634,108		$	17,268,043
Comprehensive income
Net income		—			—			—			1,396,167
Change in unrealized appreciation on available-for-sale securities, net of taxes		—			—			—			—
Total comprehensive income
Purchase of treasury stock (67,087 shares)		—			—			—			—
Stock option compensation expense		—			—			483			—
Dividends on common stock, $.30 per share		—			—			—			(264,704	)
Balance, December 31, 2009		1,987,904			19,879			6,634,591			18,399,506
Comprehensive income
Net income		—			—			—			2,066,460
Change in unrealized depreciation on available-for-sale securities, net of taxes		—			—			—			—
Total comprehensive income
Corporate reorganization:
Merger of Jacksonville Bancorp, MHC		(1,038,738	)		(10,387	)		799,479			—
Treasury stock retired		(67,087	)		(671	)		(485,710	)		—
Exchange of common stock		1,258			12			(1,542	)		—
Proceeds from stock offering, net of expenses of $1,180,415		1,040,352			10,404			9,212,701			—
Purchase of shares for ESOP		—			—			—			—
Common shares held by ESOP, committed to be released		—			—			441			—
Dividends on common stock, $.30 per share		—			—			—			(420,871	)
Balance, December 31, 2010		1,923,689		$	19,237		$	16,159,960		$	20,045,095

See Notes to Consolidated Financial Statements

25

Jacksonville Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2010 and 2009

	Accumulated
	Other
	Comprehensive			Unallocated			Treasury
	Income (Loss)			ESOP			Stock			Total
Balance, January 1, 2009	$	337,410		$	—		$	—		$	24,259,440
Comprehensive income
Net income		—			—			—			1,396,167
Change in unrealized appreciation on available-for-sale securities, net of taxes		358,415			—			—			358,415
Total comprehensive income											1,754,582
Purchase of treasury stock (67,087 shares)		—			—			(486,381	)		(486,381	)
Stock option compensation expense		—			—			—			483
Dividends on common stock, $.30 per share		—			—			—			(264,704	)
Balance, December 31, 2009		695,825			—			(486,381	)		25,263,420
Comprehensive income
Net income		—			—			—			2,066,460
Change in unrealized depreciation on available-for-sale securities, net of taxes		(846,627	)		—			—			(846,627	)
Total comprehensive income											1,219,833
Corporate reorganization:
Merger of Jacksonville Bancorp, MHC		—			—			—			789,092
Treasury stock retired		—			—			486,381			—
Exchange of common stock		—			—			—			(1,530	)
Proceeds from stock offering, net of expenses of $1,180,415		—			—			—			9,223,105
Purchase of shares for ESOP		—			(416,140	)		—			(416,140	)
Common shares held by ESOP, committed to be released		—			20,800			—			21,241
Dividends on common stock, $.30 per share		—			—			—			(420,871	)
Balance, December 31, 2010	$	(150,802	)	$	(395,340	)	$	—		$	35,678,150

See Notes to Consolidated Financial Statements

26

Jacksonville Bancorp, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2010 and 2009

	2010			2009
Operating Activities
Net income	$	2,066,460		$	1,396,167
Items not requiring (providing) cash
Depreciation and amortization		355,670			406,469
Provision for loan losses		1,725,000			2,575,000
Amortization of premiums and discounts on securities and loans		786,494			955,364
Deferred income taxes		(460,714	)		(17,047	)
Net realized gains on available-for-sale securities		(451,805	)		(588,959	)
Amortization of mortgage servicing rights		396,017			507,313
Impairment (recovery) of mortgage servicing rights asset		100,809			(122,790	)
Increase in cash surrender value of life insurance		(144,252	)		(187,324	)
(Gains) losses on sales of foreclosed assets		1,164			(11,701	)
Stock option compensation expense		—			483
Shares held by ESOP committed to be released		21,241			—
Changes in
Interest receivable		115,615			356,108
Other assets		(828,451	)		(1,990,045	)
Interest payable		(178,646	)		(190,758	)
Other liabilities		593,919			523,316
Origination of loans held for sale		(46,367,505	)		(66,814,834	)
Proceeds from sales of loans held for sale		47,375,208			66,699,701
Net cash provided by operating activities		5,106,224			3,496,463
Investing Activities
Purchases of available-for-sale securities		(71,217,559	)		(101,825,114	)
Proceeds from maturities of available-for-sale securities		27,714,036			43,966,667
Proceeds from the sales of available-for-sale investments and other investments		25,211,312			57,378,873
Net change in loans		(5,008,693	)		6,600,703
Purchase of premises and equipment		(247,886	)		(66,581	)
Proceeds from the sale of foreclosed assets		442,198			487,568
Net cash provided by (used in) investing activities		(23,106,592	)		6,542,116

See Notes to Consolidated Financial Statements

27

Jacksonville Bancorp, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2010 and 2009

	2010			2009
Financing Activities
Net increase in demand deposits, money market, NOW and savings accounts	$	2,064,295		$	11,424,556
Net increase (decrease) in certificates of deposit		(340,871	)		5,124,439
Net increase (decrease) in short-term borrowings		228,782			(3,843,626	)
Repayment of Federal Home Loan Bank advances		—			(13,500,000	)
Net increase in advances from borrowers for taxes and insurance		121,432			63,279
Purchase of treasury stock		—			(486,381	)
Merger of Jacksonville Bancorp, MHC		789,092			—
Cash paid for fractional shares in exchange		(1,530	)		—
Net proceeds from stock offering		9,223,105			—
Purchase of shares for ESOP		(416,140	)		—
Dividends paid		(420,871	)		(269,660	)
Net cash provided by (used in) financing activities		11,247,294			(1,487,393	)
Increase (Decrease) in Cash and Cash Equivalents		(6,753,074	)		8,551,186
Cash and Cash Equivalents, Beginning of Year		15,696,474			7,145,288
Cash and Cash Equivalents, End of Year	$	8,943,400		$	15,696,474
Supplemental Cash Flows Information
Interest paid	$	4,131,966		$	5,622,286
Income taxes paid	$	474,000		$	559,000
Sale and financing of foreclosed assets	$	141,430		$	218,636
Real estate acquired in settlement of loans	$	669,699		$	307,915
Dividends declared not paid	$	144,278		$	66,157

See Notes to Consolidated Financial Statements

28

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Jacksonville Bancorp, Inc. (the “Company”) is a Maryland corporation.  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.  References to the Company include references to Jacksonville Bancorp, Inc.’s predecessor mid-tier federally chartered company.  The Company owns 100% of Jacksonville Savings Bank (the “Bank”).

The Bank was founded in 1916 as an Illinois-chartered savings and loan association and converted to an Illinois-chartered savings bank in 1992.  The Bank is headquartered in Jacksonville, Illinois and operates six branches in addition to its main office.  The Bank’s deposits have been federally insured since 1945 by the Federal Deposit Insurance Corporation (“FDIC”).  The Bank has been a member of the Federal Home Loan Bank (“FHLB”) System since 1932.

On April 20, 1995, the Bank reorganized into the mutual holding company form of ownership, pursuant to which the Bank amended its charter from an Illinois-chartered mutual savings bank into an Illinois-chartered mutual holding company (“MHC”), Jacksonville Bancorp, MHC.  On December 28, 2000, Jacksonville Bancorp, MHC, converted from an Illinois-chartered mutual holding company to a federally-chartered mutual holding company.

The Bank is a community-oriented savings bank engaged primarily in the business of attracting retail deposits from the general public in the Bank’s market area and using such funds together with borrowings and funds from other sources to originate consumer loans and mortgage loans secured by one- to four-family residential real estate.  The Bank also originates commercial real estate loans, multi-family real estate loans, commercial business loans, and agricultural loans.  When possible, the Bank emphasizes the origination of mortgage loans with adjustable interest rates (“ARM”), as well as fixed-rate balloon loans with terms ranging from three to five years, consumer loans, which are primarily home equity loans secured by second mortgages, commercial business loans, and agricultural loans.  The Bank also offers trust and investment services.  The investment center, Berthel Fisher and Company Financial Services, Inc., is operated through the Bank’s wholly-owned subsidiary, Financial Resources Group, Inc.

The Company is subject to competition from other financial institutions and nonfinancial institutions providing financial products.  Additionally, the Company is subject to the regulations of certain regulatory agencies and undergoes periodic examinations by those regulatory agencies.

The significant accounting and reporting policies of the Company and its subsidiary follow:

29

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Principles of Consolidation and Financial Statement Presentation

The consolidated financial statements include the accounts of the Company, the Bank and the Bank’s wholly owned subsidiary, Financial Resources Group, Inc.  Significant intercompany accounts and transactions have been eliminated in consolidation.  Based on the Company’s approach to decision making, it has decided that its business is comprised of a single segment.

The consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America and conform to predominate practice within the banking industry.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, fair value of securities, Federal Home Loan Bank stock impairment, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of loan servicing rights, valuation of deferred tax assets and goodwill impairment.

Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents.  At December 31, 2010 and 2009, cash equivalents consisted primarily of federal funds sold and interest-earning demand deposits in banks.

The financial institutions holding the Company’s cash accounts are participating in the FDIC’s Transaction Account Guarantee Program.  Under that program, through December 31, 2010, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account.  Pursuant to legislation enacted in 2010, the FDIC will fully insure all noninterest-bearing transaction accounts beginning December 31, 2010 through December 31, 2012, at all FDIC-insured institutions.

Effective July 21, 2010, the FDIC’s insurance limits were permanently increased to $250,000.  At December 31, 2010, the Company’s interest-bearing cash accounts did not exceed federally insured limits.

30

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Securities

Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.  Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

For debt securities with fair value below carrying value when the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

Other Investments

Other investments at December 31, 2010 and 2009 include local municipal bonds and equity investments in local community development organizations.  The municipal bonds mature ratably through the year 2030.  These securities have no readily ascertainable market value and are carried at cost.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate.  Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income.  Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on loans is generally discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection.  Past due status is based on contractual terms of the loan.  In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

31

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income.  Loan losses are charged against the allowance when management believes collectibility of the principal is unlikely.  Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components.  The allocated component relates to loans that are classified as impaired.  For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process.  Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.

32

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans.  Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

Premises and Equipment

Depreciable assets are stated at cost less accumulated depreciation.  Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets.

The estimated useful lives for each major depreciable classification of premises and equipment are as follows:

Buildings and improvements	35-40 years
Equipment	3-5 years

Federal Home Loan Bank Stock

Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system.  The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.

The Company owns $1,113,800 and $1,108,606 of Federal Home Loan Bank stock as of December 31, 2010 and 2009, respectively.  The Federal Home Loan Bank of Chicago (FHLB) is operating under a Cease and Desist Order from their regulator, the Federal Housing Finance Board.  The order prohibits capital stock repurchases 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 their dividend capacity each quarter and make appropriate request for approval.  The FHLB did not pay a dividend during 2010 or 2009; however, early in 2011 the FHLB announced they have declared a dividend at an annualized rate of 10 basis points per share paid on February 14, 2011.  Management performed an analysis and deemed the cost method investment in FHLB stock is ultimately recoverable and therefore not impaired.

Foreclosed Assets Held for Sale

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.  Revenue and expenses from operations and changes in the valuation allowance are included in income or expense from foreclosed assets.

33

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Bank-owned Life Insurance

Bank-owned life insurance policies are reflected on the consolidated balance sheets at the estimated cash surrender value.  Changes in the cash surrender value are reflected in noninterest income in the consolidated statements of income.

Goodwill

Goodwill is tested annually for impairment.  If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value.  Subsequent increases in goodwill value are not recognized in the financial statements.  The goodwill was not deemed impaired as of December 31, 2010 or 2009.

Mortgage Servicing Rights

Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets.  Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer.  Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income.  The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses.  These variables change from quarter to quarter as market conditions and projected interest rates change.

The Company subsequently measures each class of servicing asset using either the fair value or the amortization method.  The Company has elected to subsequently measure the mortgage servicing rights under the amortization method.  Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income.  The amortized assets are assessed for impairment or increased obligation based on fair value at each reporting date.  Each class of separately recognized servicing assets subsequently measured using the amortization method are evaluated and measured for impairment.  Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type.  Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche.  The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment.  Changes in valuation allowances are reported as a separate line item in noninterest expense on the income statement.  Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized.

34

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Servicing fee income is recorded for fees earned for servicing loans.  The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned in loan servicing fees in non-interest income.  The amortization of mortgage servicing rights is netted from the gains on sale of loans, both cash gains as well as the capitalized gains, and is included in mortgage banking operations, net in non-interest income.

Treasury Stock

Common stock shares repurchased are recorded at cost.  Cost of shares retired or reissued is determined using the first-in, first-out method.

Stock Options

At December 31, 2010 and 2009, the Company has a stock-based employee compensation plan, which is described more fully in Note 15.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company —put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Income Taxes

The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes).  The income tax accounting guidance results in two components of income tax expense:  current and deferred.  Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.  The Company determines deferred income taxes using the liability (or balance sheet) method.  Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.  Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

35

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination.  The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.  A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.  The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the management’s judgment.

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

The Company files consolidated income tax returns with its subsidiary.

Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during each period.  Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued.  Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

Treasury stock shares are not deemed outstanding for earnings per share calculations.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes.  Other comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities.

36

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Trust Assets

Assets held in fiduciary or agency capacities are not included in the consolidated balance sheets since such items are not assets of the Company.  Fees from trust activities are recorded as revenue over the period in which the service is provided.  Fees are a function of the market value of assets managed and administered, the volume of transactions, and fees for other services rendered, as set forth in the underlying client agreement with the Trust Department.  This revenue recognition involves the use of estimates and assumptions, including components that are calculated based on estimated asset valuations and transaction volumes.  Generally, the actual trust fee is charged to each account on a quarterly basis.  Any out of pocket expenses or services not typically covered by the fee schedule for trust activities are charged directly to the trust account on a gross basis as trust revenue is incurred. The Company managed or administered approximately 100 trust accounts with assets totaling approximately $53.3million and $50.1 million at December 31, 2010 and 2009, respectively.

Reclassifications

Certain reclassifications have been made to the 2009 financial statements to conform to the 2010 financial statement presentation.  These reclassifications had no effect on net income or stockholders’ equity.

Recent and Future Accounting Requirements

Accounting Standards Update (ASU) No. 2009-16, “Transfers and Servicing (Topic 860)—Accounting for Transfers of Financial Assets.”  ASU 2009-16 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets.  ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets.  ASU 2009-16 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The provisions of ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact on the Company’s financial statements.

ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures About Fair Value Measurements.”  ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for the Company beginning January 1, 2011.  The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010.  See Note 17 – Disclosure about Fair Value of Assets and Liabilities.

37

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

ASU No. 2010-20, “Receivables (Topic 310)—Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”  ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses.  Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment.  The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators.  ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period.  Disclosures that relate to activity during a reporting period will be required for the Company’s financial statements that include periods beginning on or after January 1, 2011.  ASU 2011-01, “Receivables (Topic 310)—Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” temporarily deferred the effective date for disclosures related to troubled debt restructurings to coincide with the effective date of a proposed accounting standards update related to troubled debt restructurings, which is currently expected to be effective for periods ending after June 15, 2011.  See Note 5 – Loans and Allowance for Loan Losses.

Note 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 was paid at a fraction of $10 per share, our offering price 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 $20.7 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,”

38

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Note 3: Restriction on Cash and Due From Banks

The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank.  The reserve required at December 31, 2010 and 2009, was $1,162,000 and $1,160,000, respectively.

Note 4: Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale Securities
December 31, 2010:
U.S. Government and agencies	$	12,530,787	$	112,102	$	(93,947	)	$	12,548,942
Mortgage-backed securities (Government-sponsored enterprises - residential)		41,979,525		480,709		(465,384	)		41,994,850
Municipal bonds		40,584,897		407,015		(668,983	)		40,322,929
	$	95,095,209	$	999,826	$	(1,228,314	)	$	94,866,721
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

39

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

The amortized cost and fair value of available-for-sale securities at December 31, 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.

	Available-for-sale
	Amortized Cost		Fair Value
Within one year	$	91,678	$	91,733
One to five years		13,607,859		13,740,590
Five to ten years		22,180,218		22,217,670
After ten years		17,235,929		16,821,878
		53,115,684		52,871,871
Mortgage-backed securities		41,979,525		41,994,850
Totals	$	95,095,209	$	94,866,721

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $26,629,298 at December 31, 2010 and $31,178,386 at December 31, 2009.

The book value of securities sold under agreements to repurchase amounted to $4,018,235 and $3,789,453 and at December 31, 2010 and 2009, respectively.

Gross gains of $451,805 and $588,959 and gross losses of $0 and $0 resulting from sales of available-for-sale securities were realized for 2010 and 2009, respectively.  The tax provision applicable to these net realized gains amounted to $153,614 and $200,246, respectively.

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 December 31, 2010 and 2009, was $46,014,849 and $17,438,959, which is approximately 48% and 22%, respectively, of the Company’s available-for-sale investment portfolio.  The declines primarily resulted from recent changes in market interest rates.

Management believes the declines in fair value for these securities are temporary.

40

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

The following table shows the Company’s investments’ gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2010 and 2009:

	December 31, 2010
	Less than 12 Months					12 Months or More				Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale Securities
U.S. Government and agencies	$	2,433,233	$	(93,947	)	$	—	$	—	$	2,433,233	$	(93,947	)
Mortgage-backed securities (Government-sponsored enterprises - residential)		20,455,620		(465,384	)		—		—		20,455,620		(465,384	)
Municipal bonds		23,125,996		(668,983	)		—		—		23,125,996		(668,983	)
Total temporarily impaired securities	$	46,014,849	$	(1,228,314	)	$	—	$	—	$	46,014,849	$	(1,228,314	)

	December 31, 2009
	Less than 12 Months					12 Months or More				Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Available-for-sale Securities
U.S. Government and agencies	$	2,477,539	$	(27,556	)	$	—	$	—	$	2,477,539	$	(27,556	)
Mortgage-backed securities (Government-sponsored enterprises - residential)		7,435,781		(54,518	)		—		—		7,435,781		(54,518	)
Municipal bonds		7,525,639		(76,462	)		—		—		7,525,639		(76,462	)
Total temporarily impaired securities	$	17,438,959	$	(158,536	)	$	—	$	—	$	17,438,959	$	(158,536	)

U.S. Government Agencies

The unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by interest rate increases.  The contractual terms of those 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 those investments to be other-than-temporarily impaired at December 31, 2010.

41

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Residential Mortgage-backed Securities

The unrealized losses on the Company’s investment in residential mortgage-backed securities were caused by interest rate increases.  The Company expects to recover the amortized cost basis over the term of the securities.  Because the decline in market value is attributable to changes in interest rates and not credit quality, and 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 those investments to be other-than-temporarily impaired at December 31, 2010.

Municipal Bonds

The unrealized losses on the Company’s investments in securities of municipal bonds were caused by interest rate increases.  The contractual terms of those 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 those investments to be other-than-temporarily impaired at December 31, 2010.

Note 5: Loans and Allowance for Loan Losses

Categories of loans at December 31, include:

	2010		2009
Mortgage loans on real estate
Residential 1-4 family	$	37,227,211	$	38,580,967
Commercial		45,361,944		34,773,390
Agricultural		28,163,488		26,220,405
Home equity		19,526,162		28,119,373
Total mortgage loans on real estate		130,278,805		127,694,135
Commercial loans		22,810,203		25,548,697
Agricultural		8,176,396		8,844,759
Consumer		18,190,307		13,954,476
		179,455,711		176,042,067
Less
Net deferred loan fees		49,307		68,756
Allowance for loan losses		2,964,285		2,290,001
Net loans	$	176,442,119	$	173,683,310

42

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2010 and 2009:

	2010
	1-4 Family			Commercial Real Estate			Agricultural Real Estate		Commercial			Agricultural		Home Equity			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of year	$	391,762		$	738,996		$	73,257	$	631,347		$	21,242	$	249,312		$	88,044		$	96,041	$	2,290,001
Provision charged to expense		246,401			1,217,072			19,731		(21,371	)		37,008		126,477			74,236			25,446		1,725,000
Losses charged off		(98,245	)		(787,191	)		—		(144,100	)		—		(88,106	)		(11,070	)		—		(1,128,712	)
Recoveries		21,391			25,051			—		6,500			—		12,574			12,480			—		77,996
Balance, end of year	$	561,309		$	1,193,928		$	92,988	$	472,376		$	58,250	$	300,257		$	163,690		$	121,487	$	2,964,285
Ending balance:  individually evaluated for impairment	$	89,795		$	428,514		$	—	$	72,393		$	—	$	—		$	—		$	—	$	590,702
Ending balance:  collectively evaluated for impairment	$	471,514		$	765,414		$	92,988	$	399,983		$	58,250	$	300,257		$	163,690		$	121,487	$	2,373,583
Ending balance:  loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—		$	—	$	—		$	—		$	—	$	—
Loans:
Ending balance	$	37,227,211		$	45,361,944		$	28,163,488	$	22,810,203		$	8,176,396	$	19,526,162		$	18,190,307		$	—	$	179,455,711
Ending balance:  individually evaluated for impairment	$	369,749		$	2,220,562		$	—	$	606,273		$	—	$	—		$	—		$	—	$	3,196,584
Ending balance:  collectively evaluated for impairment	$	36,857,462		$	43,141,382		$	28,163,488	$	22,203,930		$	8,176,396	$	19,526,162		$	18,190,307		$	—	$	176,259,127
Ending balance:  loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—		$	—	$	—		$	—		$	—	$	—

43

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

	2009
	1-4 Family			Commercial Real Estate			Agricultural Real Estate		Commercial			Agricultural		Home Equity			Consumer			Unallocated			Total
Allowance for loan losses:
Balance, beginning of year	$	510,315		$	519,839		$	28,862	$	287,611		$	16,211	$	300,622		$	85,230		$	185,382		$	1,934,072
Provision charged to expense		26,920			326,710			44,395		2,226,556			5,031		3,471			31,258			(89,341	)		2,575,000
Losses charged off		(146,431	)		(111,836	)		—		(1,882,820	)		—		(58,581	)		(43,445	)		—			(2,243,113	)
Recoveries		958			4,283			—		—			—		3,800			15,001			—			24,042
Balance, end of year	$	391,762		$	738,996		$	73,257	$	631,347		$	21,242	$	249,312		$	88,044		$	96,041		$	2,290,001
Ending balance:  individually evaluated for impairment	$	78,604		$	188,656		$	—	$	292,221		$	—	$	—		$	—		$	—		$	559,481
Ending balance:  collectively evaluated for impairment	$	313,158		$	550,340		$	73,257	$	339,126		$	21,242	$	249,312		$	88,044		$	96,041		$	1,730,520
Ending balance:  loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—		$	—	$	—		$	—		$	—		$	—
Loans:
Ending balance	$	38,580,967		$	34,773,390		$	26,220,405	$	25,548,697		$	8,844,759	$	28,119,373		$	13,954,476		$	—		$	176,042,067
Ending balance:  individually evaluated for impairment	$	474,254		$	1,923,300		$	—	$	1,047,710		$	—	$	—		$	—			—		$	3,445,264
Ending balance:  collectively evaluated for impairment	$	38,106,713		$	32,850,090		$	26,220,405	$	24,500,987		$	8,844,759	$	28,119,373		$	13,954,476		$	—		$	172,596,803
Ending balance:  loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—		$	—	$	—		$	—		$	—		$	—

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2010 and 2009:

	1-4 Family				Commercial Real Estate				Agricultural Real Estate				Commercial				Agricultural Business
	2010		2009		2010		2009		2010		2009		2010		2009		2010		2009
Pass	$	34,258,180	$	35,980,574	$	41,534,866	$	31,717,757	$	27,768,600	$	26,069,974	$	21,621,978	$	21,683,588	$	7,818,536	$	8,777,131
Spec. Ment		1,476,077		1,226,983		733,561		2,125,881		394,888		14,473		186,598		2,190,082		357,860		67,628
Subst.		1,492,954		1,373,410		3,093,517		929,752		—		135,958		1,001,627		1,675,027		—		—
Total	$	37,227,211	$	38,580,967	$	45,361,944	$	34,773,390	$	28,163,488	$	26,220,405	$	22,810,203	$	25,548,697	$	8,176,396	$	8,844,759

	Home Equity				Consumer
	2010		2009		2010		2009
Rating:
Pass	$	18,064,116	$	26,773,821	$	17,471,747	$	13,684,899
Special Mention		223,034		769,518		570,589		94,879
Substandard		1,239,012		576,034		147,971		174,698
Total	$	19,526,162	$	28,119,373	$	18,190,307	$	13,954,476

44

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  This analysis is performed on all loans at origination.  In addition, lending relationships over $500,000, new commercial and commercial real estate loans, and watch list credits are reviewed annually by our loan review department in order to verify risk ratings.  The Company uses the following definitions for risk ratings:

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans.

The following tables present the Company’s loan portfolio aging analysis as of December 31, 2010 and 2009:

	2010
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
1-4 Family	$	458,119	$	161,875	$	846,582	$	1,466,576	$	35,760,635	$	37,227,211	$	—
Agricultural real estate		—		—		—		—		28,163,488		28,163,488		—
Commercial real estate		921,392		146,090		521,012		1,588,494		43,773,450		45,361,944		—
Agricultural business		—		—		—		—		8,176,396		8,176,396		—
Commercial:		6,024		—		—		6,024		22,804,179		22,810,203		—
Home equity		511,203		10,387		275,179		796,769		18,729,393		19,526,162		—
Consumer		78,216		76,859		9,383		164,458		18,025,849		18,190,307		—
Total	$	1,974,954	$	395,211	$	1,652,156	$	4,022,321	$	175,433,390	$	179,455,711	$	—

45

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

	2009
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
1-4 Family	$	479,946	$	214,358	$	744,015	$	1,438,319	$	37,142,648	$	38,580,967	$	348,723
Agricultural real estate		—		—		—		—		26,220,405		26,220,405		—
Commercial real estate		375,416		542,638		152,538		1,070,592		33,702,798		34,773,390		—
Agricultural business		—		—		—		—		8,844,759		8,844,759		—
Commercial:		277,926		13,843		83,644		375,413		25,173,284		25,548,697		—
Home equity		470,380		42,102		193,635		706,117		27,413,256		28,119,373		—
Consumer		141,392		8,313		35,064		184,769		13,769,707		13,954,476		7,811
Total	$	1,745,060	$	821,254	$	1,208,896	$	3,775,210	$	172,266,857	$	176,042,067	$	356,534

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan.  Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties.  These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

46

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

The following tables present impaired loans for the years ended December 31, 2010 and 2009:

	2010
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Commercial real estate	$	127,653	$	127,653	$	—	$	309,365	$	14,432
Commercial		—		—		—		10,636		545
Consumer		—		—		—		10,762		628
Loans with a specific valuation allowance
1-4 family		369,749		369,749		109,622		536,944		4,785
Commercial real estate		2,092,909		2,092,909		408,687		2,578,312		77,973
Commercial		606,273		606,273		72,393		722,393		36,958
Consumer		—		—		—		5,106		425
Total:
1-4 family		369,749		369,749		109,622		536,944		4,785
Commercial real estate		2,220,562		2,220,562		408,687		2,887,677		92,405
Commercial		606,273		606,273		72,393		733,029		37,503
Consumer		—		—		—		15,868		1,053
Total	$	3,196,584	$	3,196,584	$	590,702	$	4,173,518	$	135,746

47

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

	2009
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Home equity	$	—	$	—	$	—	$	9,210	$	420
Consumer		1,085		1,085		—		4,189		—
Loans with a specific valuation allowance
1-4 family		530,004		530,004		241,600		550,645		15,935
Commercial real estate		1,845,113		1,845,113		281,536		1,989,545		115,835
Commercial		1,069,062		1,069,062		36,345		2,704,383		90,997
Total:
1-4 family		530,004		530,004		241,600		550,645		15,935
Commercial real estate		1,845,113		1,845,113		281,536		1,989,545		115,835
Commercial		1,069,062		1,069,062		36,345		2,704,383		90,997
Home equity		—		—		—		9,210		420
Consumer		1,085		1,085		—		4,189		—
Total	$	3,445,264	$	3,445,264	$	559,481	$	5,257,972	$	223,187

The following table presents the Company’s nonaccrual loans at December 31, 2010 and 2009.  This table excludes purchased impaired loans and performing troubled debt restructurings.

	2010		2009
1-4 family	$	1,019,252	$	483,643
Agricultural real estate		—		—
Commercial real estate		1,359,060		405,701
Agricultural business		—		—
Commercial		84,361		240,296
Home equity		565,905		407,080
Consumer		106,159		60,307
Total	$	3,134,737	$	1,597,027

48

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Note 6: Premises and Equipment

Major classifications of premises and equipment, stated at cost, are as follows:

	2010			2009
Land	$	983,276		$	983,276
Buildings and improvements		7,540,045			7,542,073
Equipment		4,659,444			4,440,594
		13,182,765			12,965,943
Less accumulated depreciation		(7,523,691	)		(7,199,085	)
Net premises and equipment	$	5,659,074		$	5,766,858

Note 7: Loan Servicing

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.  The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates.  The unpaid principal balance of mortgage loans serviced for others was $149,550,019 and $147,962,049 at December 31, 2010 and 2009, respectively.

The following summarized the activity pertaining to mortgage servicing rights measured using the amortization method, along with the aggregate activity in related valuation allowances:

	2010			2009
Mortgage servicing rights
Balance, beginning of year	$	1,006,755		$	973,524
Additions		257,316			391,746
Amortization		(302,755	)		(358,515	)
Balance at end of year		961,316			1,006,755
Valuation allowances
Balance at beginning of year		156,442			428,030
Additions due to decreases in market value		165,651			—
Reduction due to increases in market value		(64,842	)		(122,790	)
Reduction due to payoff of loans		(93,262	)		(148,798	)
Balances at end of year		163,989			156,442
Mortgage servicing assets, net	$	797,327		$	850,313
Fair value disclosures
Fair value as of the beginning of the period	$	1,083,576		$	545,494
Fair value as of the end of the period	$	1,012,722		$	1,083,576

49

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

During 2008, a valuation allowance of $428,030 was necessary to adjust the aggregate cost basis of the mortgage servicing right asset to fair market value.  The valuation allowance was adjusted during 2009 and 2010 due to both payments received on the related loans as well as changes in the estimated market value on the mortgage servicing rights asset.

Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value.  For purposes of measuring impairment, risk characteristics including product type, investor type, and interest rates, were used to stratify the originated mortgage servicing rights.

Note 8: Interest-bearing Deposits

Interest-bearing deposits in denominations of $100,000 or more totaled $100,134,939 at December 31, 2010 and $89,917,806 at December 31, 2009.

The following table represents deposit interest expense by deposit type:

	December 31,
	2010		2009
Savings, NOW and Money Market	$	579,178	$	729,009
Certificates of deposit		3,362,983		4,586,264
Total deposit interest expense	$	3,942,161	$	5,315,273

At December 31, 2010, the scheduled maturities of time deposits are as follows:

2011	$	94,508,604
2012		27,175,130
2013		4,489,924
2014		5,488,422
2015		13,617,115
	$	145,279,195

50

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Note 9: Short-term Borrowings

Short-term borrowings consist of securities sold under agreements to repurchase totaling $4,018,235 and $3,789,453 at December 31, 2010 and 2009, respectively.

Securities sold under agreements to repurchase consist of obligations of the Company to other parties.  The obligations are secured by investments and such collateral is held by the Company.  The maximum amount of outstanding agreements at any month end during 2010 and 2009 totaled $4,018,235 and $6,919,503, respectively, and the monthly average of such agreements totaled $3,152,340 and $5,160,416 for 2010 and 2009, respectively.  The agreements at December 31, 2010, are all overnight agreements.

Note 10: Income Taxes

The Company and its subsidiary file income tax returns in the U.S. federal and state of Illinois jurisdictions.  With a few exceptions, the Company is no longer subject to U.S. federal and Illinois  income tax examinations by tax authorities for years before 2007.  During the years ended December 31, 2010 and 2009, the Company did not recognize expense for interest or penalties.

The provision for income taxes includes these components:

	2010			2009
Taxes currently payable
Federal	$	866,194		$	117,636
State		—			—
Deferred income taxes		(460,714	)		(17,047	)
Income tax expense	$	405,480		$	100,589

51

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:

	2010			2009
Computed at the statutory rate (34%)	$	840,459		$	508,897
Increase (decrease) resulting from Tax exempt interest		(427,603	)		(354,497	)
Graduated tax rates		(24,719	)		(14,968	)
State income taxes, net		103,306			58,345
Increase in cash surrender value		(58,433	)		(60,750	)
Other		(27,530	)		(36,438	)
Actual tax expense	$	405,480		$	100,589
Tax expense as a percentage of pre-tax income		16.40	%		6.72	%

The tax effects of temporary differences related to deferred taxes shown on the balance sheets were:

	2010			2009
Deferred tax assets
Allowance for loan losses	$	1,025,297		$	763,554
Deferred compensation		1,188,078			1,097,085
State net operating loss carryforward		117,202			160,488
Unrealized losses on securities available-for-sale		77,686			—
Other		76,054			—
		2,484,317			2,021,127
Deferred tax liabilities
Unrealized gains on available-for-sale securities		—			(358,456	)
Depreciation		(322,501	)		(360,916	)
Federal Home Loan Bank stock dividends		(146,736	)		(146,736	)
Prepaid expenses		(55,226	)		(68,875	)
Mortgage servicing rights		(309,506	)		(330,075	)
Other		(29,354	)		(31,930	)
		(863,323	)		(1,296,988	)
Net deferred tax asset	$	1,620,994		$	724,139

52

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

At December 31, 2010 and 2009, the Company had Illinois net operating loss carryforwards totaling approximately $2,432,590 and $3,331,005, respectively, which will expire in varying amounts between 2018 and 2022.  Recent Illinois legislation has suspended the use of these loss carryovers for tax years 2011 through 2013 and the expiration dates were extended by three years.  Management believes the Company will produce taxable earnings in the future which will enable the net operating loss carryforwards to be utilized prior to expiration.

Retained earnings at December 31, 2010 and 2009, include approximately $2,600,000, for which no deferred federal income tax liability has been recognized.  These amounts represent an allocation of income to bad debt deductions for tax purposes only.  Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then-current corporate income tax rate.  The deferred income tax liabilities on the preceding amounts that would have been recorded if they were expected to reverse into taxable income in the foreseeable future were approximately $1,000,000 at December 31, 2010 and 2009.

Note 11: Comprehensive Income (Loss)

Other comprehensive income (loss) components and related taxes were as follows:

	2010			2009
Net unrealized gain (loss) on available-for-sale securities	$	(830,964	)	$	1,132,013
Less reclassification adjustment for realized gains included in income		451,805			588,959
Other comprehensive income (loss), before tax effect		(1,282,769	)		543,054
Less tax expense		436,142			184,639
Other comprehensive income (loss)	$	(846,627	)	$	358,415

The components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:

	2010			2009
Net unrealized gain (loss) on securities available-for-sale	$	(228,488	)	$	1,054,281
Tax effect		77,686			(358,456	)
Net-of-tax amount	$	(150,802	)	$	695,825

53

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Note 12: Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined).  Management believes, as of December 31, 2010 and 2009, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2010, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table.  There are no conditions or events since that notification that management believes have changed the Bank’s category.

54

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

The Bank’s actual capital amounts (in thousands) and ratios are also presented in the table.

	Actual					Minimum Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2010
Total risk-based capital (to risk-weighted assets)	$	30,551		14.77	%	$	16,542		8.0	%	$	20,678		10.0	%
Tier I capital (to risk-weighted assets)		27,962		13.52			8,271		4.0			12,407		6.0
Tier I capital (to average assets)		27,962		9.25			12,095		4.0			15,119		5.0
Tangible capital (to adjusted tangible assets)		27,962		9.25			4,536		1.5			—		N/A
As of December 31, 2009
Total risk-based capital (to risk-weighted assets)	$	23,891		11.83	%	$	16,146		8.0	%	$	20,183		10.0	%
Tier I capital (to risk-weighted assets)		21,601		10.70			8,073		4.0			12,110		6.0
Tier I capital (to average assets)		21,601		7.44			11,611		4.0			14,514		5.0
Tangible capital (to adjusted tangible assets)		21,601		7.44			4,354		1.5			—		N/A

The following is a reconciliation of the Bank equity amount included in the consolidated balance sheets to the amounts (in thousands) reflected above for regulatory capital purposes as of December 31:

	2010			2009
Bank equity	$	30,538		$	25,024
Less net unrealized gain (loss)		(151	)		696
Less disallowed goodwill		2,727			2,727
Less disallowed servicing amounts		—			—
Tier 1 capital		27,962			21,601
Plus allowance for loan losses		2,589			2,290
Total risked-based capital	$	30,551		$	23,891

55

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.  As of December 31, 2010, the Bank has $3,900,000 available for the payment of dividends without prior regulatory approval.

Note 13: Related Party Transactions

At December 31, 2010 and 2009, the Company had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties) in the amount of $2,820,414 and $4,161,647, respectively.

Annual activity consisted of the following:

	2010			2009
Balance beginning of year	$	4,161,647		$	1,007,901
Additions		5,000,975			2,642,550
Repayments		(6,342,208	)		(1,854,717	)
Change in related parties		—			2,365,913
Balance, end of year	$	2,820,414		$	4,161,647

In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons.  Further, in management’s opinion, these loans did not involve more than normal risk of collectibility or present other unfavorable features.

Deposits from related parties held by the Company at December 31, 2010 and 2009 totaled approximately $3,391,000 and $2,036,000, respectively.

Note 14: Employee Benefits

401(k) Plan — The Company maintains a 401(k) savings plan for eligible employees.  The Company’s contributions to this plan were $150,557 and $143,770 for the years ended December 31, 2010 and 2009, respectively.  The plan invests its assets in deposit accounts at the Company which earned interest at a rate of 2.75% to 3.20% for the year ended December 31, 2010 and 3.15% to 3.75% for the year ended December 31, 2009.

56

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Deferred Compensation Plan — The Company maintains a deferred compensation plan for certain key officers and employees.  Contributions are determined annually by the Company’s Board of Directors.  Effective in 2005, the Company froze this plan and no contributions to this plan were made for the years ended December 31, 2010 or 2009.  The plan accrues interest at a variable rate which fluctuates based on Moody’s Corporate Bond Average Index.  The amount recorded on the balance sheets as deferred compensation was $2,229,292 and $2,166,147 as of December 31, 2010 and 2009, respectively.  Compensation expense related to the plan was $157,299 and $168,394 for the years ended December 31, 2010 and 2009, respectively.

The Company has also entered into deferred compensation agreements with certain key officers and employees.  The agreements provide for monthly payments at retirement or death.  The charge to expense for this plan reflects the accrual using the principal and interest method over the vesting period of the present value of benefits due each participant on the full eligibility date using a 6 to 8% discount rate.  The amount recorded on the balance sheets as deferred compensation was $831,345 and $660,080 as of December 31, 2010 and 2009, respectively.  Compensation expense related to the plans was $188,929 and $181,578 for the years ended December 31, 2010 and 2009, respectively.

Employee Stock Ownership Plan — The ESOP is a noncontributory defined contribution plan which covers substantially all employees.  The Company may contribute to the Plan, at its discretion, an amount determined by the Board of Directors.  The Company made no contributions in 2009.

As part of the second step conversion, in July 2010 the Company acquired 41,614 additional shares of Company common stock at $10 per share in the conversion with funds provided by a loan from the Company.  Accordingly, $416,140 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity.  Shares are released to participants proportionately as the loan is repaid.  Dividends on allocated shares are recorded as dividends and charged to retained earnings.  Dividends on unallocated shares are used to repay the loan and are treated as compensation expense.  Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company, are made to the ESOP.

ESOP expense for the years ended December 31, 2010, 2009 and 2008 was $21,491, $0 and $0, respectively.

	2010		2009		2008
Allocated shares		53,273		53,273		53,273
Shares committed for allocation		2,080		—		—
Unearned shares		35,659		—		—
Total ESOP shares		91,012		53,273		53,273
Fair value of unearned shares at December 31	$	384,404	$	—	$	—

57

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

The Company is obligated at the option of each beneficiary to repurchase shares of the ESOP upon the beneficiary’s termination or after retirement.  At December 31, 2010, the fair value of the 53,273 allocated shares held by the ESOP is $574,283.  The fair value of all shares subject to the repurchase obligation is $22,422.

Note 15: Stock Option Plans

The Jacksonville Savings Bank and Jacksonville Bancorp, MHC 1996 Stock Option Plan was adopted on April 23, 1996 and is administered by the Board of Directors.  A total of 83,625 shares of common stock were reserved and awarded under the Plan.  Awards expire ten years after the grant date and are exercisable at a price of $8.83 per share.  In 2004, 5,600 shares related to this plan were reissued at a price of $14.00 per share.  The Jacksonville Savings Bank 2001 Stock Option Plan was adopted on April 30, 2001 and is administered by the Stock Benefits Committee.  A total of 87,100 shares of common stock were reserved and awarded under the Plan during 2001 that expire ten years after the grant date and are exercisable at a price of $10.00 per share.  No shares were granted during 2010 or 2009.

The fair value of each option award is estimated on the date of grant using a binomial option valuation model that uses the assumptions noted in the following table.  Expected volatility is based on historical volatility of the Company’s stock and other factors.  The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes.  The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behavior.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

58

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

A summary of option activity under the Plan as of December 31, 2010 and 2009, and changes during the years then ended, is presented below:

	2010
	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding, beginning of year		33,345	$	10.54
Adjustment for second step conversion		37		9.98
Exercised		—		—
Forfeited or expired		—		—
Outstanding, end of year		33,382	$	10.52		0.76	$	7,517
Exercisable, end of year		33,382	$	10.52		0.76	$	7,517

The aggregate intrinsic value of options outstanding and exercisable at the end of the year 2010 excludes 4,504 shares that are exercisable at a price of $14.00 per share and were antidilutive.

	2009
	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding, beginning of year		34,445		$	10.65
Granted		—			—
Exercised		—			—
Forfeited or expired		(1,100	)		14.00
Outstanding, end of year		33,345		$	10.54		1.76	$	0
Exercisable, end of year		33,345		$	10.54		1.76	$	0

59

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

The aggregate intrinsic value of options outstanding at the end of the year 2009 excludes 28,845 and 4,500 shares that are exercisable at prices of $10.00 and $14.00 per share and were antidilutive.

The total intrinsic value of options exercised during the years ended December 31, 2010 and 2009 were $0.  There were no shares exercised during 2010 or 2009.

As of December 31, 2010, there was $0 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan.  The total fair value of shares vested during the years ended December 31, 2010 and 2009, was $0 and $972, respectively.

Note 16: Earnings Per Share

Earnings per share (EPS) were computed as follows:

	Year Ended December 31, 2010
	Income		Weighted- Average Shares		Per Share Amount
Net income	$	2,066,460
Basic earnings per share
Income available to common stockholders				1,903,336	$	1.09
Effect of dilutive securities
Stock options		—		2,389
Diluted earnings per share
Income available to common stockholders	$	2,066,460		1,905,725	$	1.08

60

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Options to purchases 4,504 shares of common stock at $14.00 per share were outstanding at December 31, 2010, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares.

	Year Ended December 31, 2009
	Income		Weighted- Average Shares		Per Share Amount
Net income	$	1,396,167
Basic earnings per share
Income available to common stockholders				1,927,250	$	0.72
Effect of dilutive securities
Stock options		—		—
Diluted earnings per share
Income available to common stockholders	$	1,396,167		1,927,250	$	0.72

Options to purchases 28,845 and 4,500 shares of common stock at $10.00 and $14.00 per share were outstanding at December 31, 2009, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares.

Note 17: 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

61

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

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 and inputs 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.

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.  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 December 31, 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 December 31, 2010 and 2009:

			2010
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Government and agencies	$	12,548,942	$	—	$	12,548,942	$	—
Mortgage-backed securities (Government-sponsored enterprises - residential)		41,994,850		—		41,994,850		—
Municipal bonds		40,322,929		—		40,322,929		—

62

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

			2009
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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		—

Following is a description of the valuation methodologies and inputs 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.

63

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

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 December 31, 2010 and 2009:

			2010
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans (collateral dependent)	$	2,407,740	$	—	$	—	$	2,407,740
Mortgage servicing rights		797,327		—		—		797,327
Foreclosed assets		459,877		—		—		459,877

64

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

			2009
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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, Interest Receivable 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.

65

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

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.

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.

66

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

The following table presents estimated fair values of the Company’s financial instruments at December 31, 2010 and 2009:

	December 31, 2010				December 31, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	8,943,400	$	8,943,400	$	15,696,474	$	15,696,474
Available-for-sale securities		94,866,721		94,866,721		78,180,693		78,180,693
Other investments		130,049		130,049		149,902		149,902
Loans held for sale		280,000		280,000		814,074		814,074
Loans, net of allowance for loan losses		176,442,118		175,436,281		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		1,872,779		1,872,779		1,988,394		1,988,394
Financial liabilities
Deposits		256,423,647		259,188,963		254,700,223		257,948,804
Short-term borrowings		4,018,235		4,018,235		3,789,453		3,789,453
Advances from borrowers for taxes and insurance		629,788		629,788		508,356		508,356
Interest payable		556,257		556,257		734,903		734,903
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

67

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Note 18: Significant Estimates and Concentrations

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations.  Estimates related to the allowance for loan losses are reflected in the footnote regarding loans.  Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on commitments and credit risk.  Other significant estimates and concentrations not discussed in those footnotes include:

Current Economic Conditions

The current protracted economic decline continues to present financial institutions with circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair values of investments and other assets, constraints on liquidity and capital and significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting loans.

At December 31, 2010 and 2009, the Company held $8,176,396 and $8,844,759 in agricultural production loans and $28,163,488 and $26,220,405, respectively in agricultural real estate loans in the Company’s geographic area.  Prices for corn, beans and livestock remained lower than previous years and due to weather patterns in Illinois, crops were late in being harvested.  These issues could affect the repayment ability for many agricultural loan customers.

At December 31, 2010 and 2009, the Company held $45,361,947 and $34,773,390 in commercial real estate, respectively, including $9,955,396 and $11,080,199 that are outside of the Company’s normal lending area.  Due to national, state and local economic conditions, values for commercial and development real estate have declined significantly, and the market for these properties is depressed.

The accompanying financial statements have been prepared using values and information currently available to the Company.

Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses and capital that could negatively impact the Company ‘s ability to meet regulatory capital requirements and maintain sufficient liquidity.

68

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Goodwill

As discussed in Note 1, the Company annually tests its goodwill for impairment.  At the most recent testing date, the fair value of the banking  reporting unit exceeded its carrying value.  Estimated fair value of the banking reporting unit was based principally on forecasts of future income.  Due to the volatility of the current economic environment, coupled with the Company’s recent loan loss experience, management’s forecasts of future income are subject to significantly more uncertainty than during more stable environments.  Management believes it has applied reasonable judgment in developing its estimates; however, unforeseen negative changes in the national, state or local economic environment may negatively impact those estimates in the near term.

Note 19: Commitments and Credit Risk

The Company grants agribusiness, commercial and residential loans to customers in Cass, Morgan, Macoupin, Montgomery and surrounding counties in Illinois.  The Company’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets.  Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon economic conditions and the agricultural economy in these counties.  The Company also purchases participation loans from out of territory areas.

Commitments to Originate Loans

Commitments to originate loans 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 a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Each customer’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty.  Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

At December 31, 2010 and 2009, the Company had outstanding commitments to originate loans aggregating approximately $4,189,869 and $2,133,026, respectively.  The commitments extended over varying periods of time with the majority being disbursed within a one-year period.  Loan commitments at fixed rates of interest amounted to $3,159,869 and $2,968,415 at December 31, 2010 and 2009, respectively, with the remainder at floating market rates.  The range of fixed rates was 4.00% to 10.00% as of December 31, 2010.

69

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Standby Letters of Credit

Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions.  Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations.  The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.  Should the Company be obliged to perform under the standby letters of credit, the Company may seek recourse from the customer for reimbursement of amounts paid.

The Company had total outstanding standby letters of credit amounting to $452,524 and $488,388 at December 31, 2010 and 2009, respectively, with terms of one year or less.  At December 31, 2010 and 2009, the Company’s deferred revenue under standby letters of credit agreements was nominal.

Lines of Credit

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Lines of credit generally have fixed expiration dates.  Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements.  Each customer’s creditworthiness is evaluated on a case-by-case basis.  The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty.  Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.  Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

At December 31, 2010, the Company had unused lines of credit to borrowers aggregating approximately $22,261,320 and $10,419,945 for commercial lines and open-end consumer lines, respectively.  At December 31, 2009, unused lines of credit to borrowers aggregated approximately $22,936,541 for commercial lines and $10,980,694 for open-end consumer lines.

70

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Note 20: Quarterly Results of Operations (Unaudited)

	Year Ended December 31, 2010
	Three Months Ended
	December 31		September 30		June 30			March 31
Interest income	$	3,417,003	$	3,494,306	$	3,383,871		$	3,234,222
Interest expense		913,400		976,373		1,008,793			1,054,754
Net interest income		2,503,603		2,517,933		2,375,078			2,179,468
Provision for loan losses		225,000		375,000		850,000			275,000
Net interest income after provision for loan losses		2,278,603		2,142,933		1,525,078			1,904,468
Noninterest income		1,048,245		1,174,117		1,023,713			951,130
Noninterest expense		2,365,098		2,486,440		2,477,186			2,247,623
Income before income taxes		961,750		830,610		71,605			607,975
Income tax expense (benefit)		227,592		177,289		(108,519	)		109,118
Net income	$	734,158	$	653,321	$	180,124		$	498,857
Basic earnings per share	$	0.39	$	0.35	$	0.09		$	0.26
Diluted earnings per share	$	0.38	$	0.35	$	0.09		$	0.26

71

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

	Year Ended December 31, 2009
	Three Months Ended
	December 31		September 30		June 30			March 31
Interest income	$	3,387,087	$	3,649,444	$	3,609,769		$	3,773,617
Interest expense		1,204,502		1,314,222		1,421,744			1,491,060
Net interest income		2,182,585		2,335,222		2,188,025			2,282,557
Provision for loan losses		425,000		250,000		1,550,000			350,000
Net interest income after provision for loan losses		1,757,585		2,085,222		638,025			1,932,557
Other income		1,184,528		871,823		1,247,162			905,581
Other expense		2,419,836		2,270,706		2,219,603			2,215,582
Income (loss) before income taxes		522,277		686,339		(334,416	)		622,556
Income tax expense (benefit)		91,752		149,123		(261,592	)		121,306
Net income (loss)	$	430,525	$	537,216	$	(72,824	)	$	501,250
Basic earnings (loss) per share	$	0.22	$	0.28	$	(0.04	)	$	0.26
Diluted earnings (loss) per share	$	0.22	$	0.28	$	(0.04	)	$	0.26

72

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Note 21: Condensed Financial Information (Parent Company Only)

Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:

Condensed Balance Sheets

	December 31,
	2010		2009
Assets
Cash and due from banks	$	4,805,757	$	146,663
Investment in common stock of subsidiary		30,537,330		25,023,244
Loan receivable from subsidiary		395,333		—
Other assets		128,292		190,588
Total assets	$	35,866,712	$	25,360,495
Liabilities
Other liabilities	$	188,562	$	97,075
Total liabilities		188,562		97,075
Stockholders’ Equity		35,678,150		25,263,420
Total liabilities and stockholders’ equity	$	35,866,712	$	25,360,495

73

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Condensed Statements of Income

	Year Ending December 31,
	2010			2009
Income
Dividends from subsidiary	$	132,312		$	864,624
Other income		15,318			746
Total income		147,630			865,370
Expenses
Other expenses		213,855			218,720
Total expenses		213,855			218,720
Income (Loss) Before Income Tax and Equity in Undistributed Income of Subsidiary		(66,225	)		646,650
Income Tax Benefit		(77,072	)		(84,908	)
Income Before Equity in Undistributed Income of Subsidiary		10,847			731,558
Equity in Undistributed Income of Subsidiary		2,055,613			664,609
Net Income	$	2,066,460		$	1,396,167

74

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Condensed Statements of Cash Flows

	Year Ending December 31,
	2010			2009
Operating Activities
Net income	$	2,066,460		$	1,396,167
Items not providing cash, net		(2,055,613	)		(664,126	)
Change in other assets and liabilities, net		153,784			(37,710	)
Net cash provided by operating activities		164,631			694,331
Investing Activity
Net loan proceeds to subsidiary		(395,334	)		—
Capital infusion to subsidiary		(4,700,000	)		—
Net cash used in investing activities		(5,095,334	)		—
Financing Activities
Dividends paid		(420,871	)		(264,704	)
Purchase of treasury stock		—			(486,381	)
Merger of Jacksonville Bancorp, MHC		789,092			—
Net proceeds from stock offering		9,223,105			—
Cash paid for fractional shares in exchange		(1,529	)		—
Net cash provided by (used in) financing activities		9,589,797			(751,085	)
Net Change in Cash and Cash Equivalents		4,659,094			(56,754	)
Cash and Cash Equivalents at Beginning of Year		146,663			203,417
Cash and Cash Equivalents at End of Year	$	4,805,757		$	146,663

75

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Common Stock Information

Our common stock is traded on the Nasdaq Capital Market under the symbol “JXSB”.  As of December 31, 2010, we had approximately 810 stockholders of record, including brokers, who held 1,923,689 shares of our outstanding shares of common stock.

The following table sets forth market price and dividend information for our common stock for the two years in the period ending December 31, 2010.

	Price Per Share				Cash
	High		Low		Dividend Declared
2010
Fourth quarter	$	11.13	$	9.90	$	0.075
Third quarter		11.15		9.51		0.075
Second quarter		13.83		10.48		0.075
First quarter		15.97		8.99		0.075
2009
Fourth quarter	$	10.38	$	8.14	$	0.075
Third quarter		11.48		8.12		0.075
Second quarter		11.49		7.84		0.075
First quarter		9.75		7.01		0.075

For a discussion of the restrictions on the Company’s ability to pay dividends, see Note 12 to the Consolidated Financial Statements.

The Company did not repurchase any Company stock during the fourth quarter of 2010.

76

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Directors and Executive Officers

Directors	Executive Officers
Andrew F. Applebee Chairman of the Board	Andrew F. Applebee   Chairman of the Board
Richard A. Foss   President and Chief Executive Officer	Richard A. Foss   President and Chief Executive Officer
John C. Williams   Senior Vice President and Trust Officer	John C. Williams   Senior Vice President and Trust Officer
John M. Buchanan   Certified Funeral Service Practitioner   Buchanan & Cody Funeral Home and Crematory, Inc.	John D. Eilering   Vice President – Operations / Corporate Secretary
Harmon B. Deal, III   Investment Advisor   L.A. Burton & Associates	Laura A. Marks   Senior Vice President – Retail Banking
John L. Eyth   Certified Public Accountant   Zumbahlen Eyth Surratt Foote & Flynn, Ltd.	Chris A. Royal   Senior Vice President and Chief Lending Officer
Dean H. Hess   Self-employed farmer	Diana S. Tone   Chief Financial Officer and Compliance Officer
Emily J. Osburn   Retired radio station manager

77

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2010 and 2009

Corporate Information

Corporate Headquarters	Transfer Agent
1211 West Morton	Hickory Point Bank & Trust, fsb
Jacksonville, Illinois  62650	P.O. Box 2557
(217) 245-4111	Decatur, Illinois  62525-2557
Website:  www.jacksonvillesavings.com	(217) 872-6373
E-mail:  info@jacksonvillesavings.com
Special Counsel	Independent Registered Public Accounting Firm
Luse Gorman Pomerenk & Schick, P.C.	BKD, LLP
5335 Wisconsin Ave., N.W., Suite 780	225 North Water Street, Suite 400
Washington, D.C.  20015	Decatur, Illinois  62525-1580
(202) 274-2000	(217) 429-2411

Annual Meeting

The Annual Meeting of the Stockholders will be held April 26, 2011 at 1:30 p.m., central time, at our main office at 1211 West Morton, Jacksonville, Illinois.

General Inquiries

A copy of our Annual Report to the SEC on Form 10-K may be obtained without charge by written request of stockholders to Diana Tone or by calling us at (217) 245-4111.  The Form 10-K is also available on our website at www.jacksonvillesavings.com.  Our Code of Ethics, Nominating and Corporate Governance Committee Charter, and Beneficial Ownership reports of our directors and executive officers are also available on our website.

FDIC Disclaimer

This Annual Report has not been reviewed or confirmed for accuracy or relevance by the FDIC.

78

EX-21

Exhibit 21

Subsidiaries

Jacksonville Savings Bank	100% owned by Jacksonville Bancorp, Inc.
Financial Resources Group, Inc.	100% ownership by Jacksonville Savings Bank

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-168355) of our report dated March 15, 2011, included in the Annual Report on Form 10-K of Jacksonville Bancorp, Inc. for the year ended December 31, 2010.

/s/ BKD, LLP

Decatur, Illinois

March 15, 2011

EX-31.1

Exhibit 31.1

 

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Richard A. Foss, certify that:

1. I have reviewed this annual report on Form 10-K of Jacksonville Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controlover financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 16, 2011	/s/  Richard A. Foss
Date	Richard A. Foss
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

 

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Diana S. Tone, certify that:

1. I have reviewed this annual report on Form 10-K of Jacksonville Bancorp, Inc.;

5. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

6. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

7. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

March 16, 2011	/s/ Diana S. Tone
Date	Diana S. Tone
	Chief Financial Officer and Compliance Officer

EX-32.1

Exhibit 32.1

Certification pursuant to

18 U.S.C. Section 1350,

as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Jacksonville Bancorp, Inc. (“Company”) on Form 10-K for the period ending December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard A. Foss, President and Chief Executive Officer and I, Diana S. Tone, Chief Financial Officer and Compliance Officer of the Company certify pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002:

(1) the Report fully complies with the requirements of Sections 13(a) of the Securities Exchange Act of 1934; and

(2) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

March 16, 2011	/s/ Richard A. Foss
Date	Richard A. Foss
	President and Chief Executive Officer

March 16, 2011	/s/ Diana S. Tone
Date	Diana S. Tone
	Chief Financial Officer and Compliance Officer