Edgar Filing: Jacksonville Bancorp, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2013

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period of _________ to _________

Commission File Number 001-34821

Jacksonville Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period the registrant was required to submit and post such filings).

x Yes o No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act.

o Large Accelerated Filer o Accelerated Filer

o Non-Accelerated Filer x Smaller Reporting Company

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

As of November 1, 2013, there were 1,840,360 shares of the Registrant’s common stock issued and outstanding.

JACKSONVILLE BANCORP, INC.

FORM 10-Q

September 30, 2013

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets	1

	Condensed Consolidated Statements of Income	2

	Condensed Consolidated Statements of Comprehensive Income (Loss)	3

	Condensed Consolidated Statement of Stockholders’ Equity	4

	Condensed Consolidated Statements of Cash Flows	5

	Notes to the Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	52

Item 4	Controls and Procedures	54

PART II	OTHER INFORMATION	55

Item 1.	Legal Proceedings
Item 1.A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Mine Safety Disclosures
Item 5.	Other Information
Item 6.	Exhibits

	Signatures	57

EXHIBITS

	Section 302 Certifications
	Section 906 Certification
	XBRL Instance Document
	XBRL Taxonomy Extension Schema Document
	XBRL Taxonomy Calculation Linkbase Document
	XBRL Taxonomy Extension Definition Linkbase Document
	XBRL Taxonomy Label Linkbase Document
	XBRL Taxonomy Presentation Linkbase Document

PART I – FINANCIAL INFORMATION

JACKSONVILLE BANCORP, INC.
ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS
	September 30,			December 31,
ASSETS	2013			2012
	(Unaudited)
Cash and cash equivalents	$	5,551,947		$	7,293,711
Interest-earning time deposits in banks		2,972,000			2,972,000
Investment securities - available for sale		61,681,620			63,431,342
Mortgage-backed securities - available for sale		51,749,118			51,956,481
Federal Home Loan Bank stock		1,113,800			1,113,800
Other investment securities		84,616			96,041
Loans held for sale - net		1,287,916			711,986
Loans receivable - net of allowance for loan losses of $3,264,496 and $3,339,464 as of
September 30, 2013 and December 31, 2012		174,332,494			173,753,059
Premises and equipment - net		5,257,515			5,654,776
Cash surrender value of life insurance		6,766,550			6,612,642
Accrued interest receivable		2,890,297			2,053,472
Goodwill		2,726,567			2,726,567
Capitalized mortgage servicing rights, net of valuation allowance of $110,751 and $129,279
as of September 30, 2013 and December 31, 2012		648,061			664,436
Real estate owned		226,793			137,193
Deferred income taxes		2,267,487			464,548
Other assets		1,117,030			1,804,184

Total Assets	$	320,673,811		$	321,446,238

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits	$	247,654,888		$	258,520,729
Other borrowings		24,945,748			12,740,610
Advance payments by borrowers for taxes and insurance		427,713			832,345
Accrued interest payable		221,594			276,757
Deferred compensation payable		3,917,529			3,707,402
Income taxes payable		-			214,115
Other liabilities		1,600,692			1,033,951
Total liabilities		278,768,164			277,325,909

Commitments and contingencies		-			-

Preferred stock, $0.01 par value - authorized 10,000,000 shares;
none issued and outstanding		-			-
Common stock, $0.01 par value - authorized 25,000,000 shares; issued 1,861,254 shares
as of September 30, 2013 and 1,908,556 shares as of December 31, 2012		18,613			19,086
Additional paid-in-capital		15,074,441			15,943,273
Retained earnings		27,723,221			25,585,757
Less: Unallocated ESOP shares		(307,910	)		(324,380	)
Accumulated other comprehensive income (loss)		(602,718	)		2,896,593
Total stockholders’ equity		41,905,647			44,120,329

Total Liabilities and Stockholders’ Equity	$	320,673,811		$	321,446,238

See accompanying notes to the unaudited condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(Unaudited)				(Unaudited)
INTEREST INCOME:
Loans	$	2,363,765	$	2,515,263	$	7,008,755	$	7,517,252
Investment securities		464,823		477,945		1,340,875		1,504,186
Mortgage-backed securities		222,198		187,018		554,316		645,212
Other		10,231		10,931		33,952		34,696
Total interest income		3,061,017		3,191,157		8,937,898		9,701,346

INTEREST EXPENSE:
Deposits		435,627		573,449		1,356,775		1,761,913
Other borrowings		3,990		4,056		9,231		10,739
Total interest expense		439,617		577,505		1,366,006		1,772,652

NET INTEREST INCOME		2,621,400		2,613,652		7,571,892		7,928,694

PROVISION FOR LOAN LOSSES		10,000		120,000		40,000		370,000

NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		2,611,400		2,493,652		7,531,892		7,558,694

NON-INTEREST INCOME:
Fiduciary activities		55,362		72,443		179,471		211,163
Commission income		218,610		206,130		817,481		718,359
Service charges on deposit accounts		216,802		237,477		624,938		636,971
Mortgage banking operations, net		47,995		183,827		194,456		397,560
Net realized gains on sales of available-for-sale securities		170,771		399,280		859,670		926,188
Loan servicing fees		93,488		90,336		278,610		269,365
Other		207,331		170,180		569,579		490,236
Total non-interest income		1,010,359		1,359,673		3,524,205		3,649,842

NON-INTEREST EXPENSE:
Salaries and employee benefits		1,571,222		1,594,741		4,757,787		4,770,124
Occupancy and equipment		257,073		242,599		769,503		732,610
Data processing and telecommunications		180,763		130,885		464,284		401,079
Professional		53,483		61,809		210,853		195,058
Postage and office supplies		62,051		63,124		193,289		197,373
Deposit insurance premium		39,120		40,586		116,466		118,004
Other		400,639		271,858		1,004,658		919,152
Total non-interest expense		2,564,351		2,405,602		7,516,840		7,333,400

INCOME BEFORE INCOME TAXES		1,057,408		1,447,723		3,539,257		3,875,136
INCOME TAXES		271,739		417,870		981,065		1,083,471

NET INCOME	$	785,669	$	1,029,853	$	2,558,192	$	2,791,665

NET INCOME PER COMMON SHARE - BASIC	$	0.43	$	0.55	$	1.37	$	1.48
NET INCOME PER COMMON SHARE - DILUTED	$	0.42	$	0.55	$	1.37	$	1.48

See accompanying notes to the unaudited condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013			2012
	(Unaudited)				(Unaudited)

Net Income	$	785,669	$	1,029,853	$	2,558,192		$	2,791,665

Other Comprehensive Income (Loss)
Unrealized appreciation (depreciation) on available-
for-sale securities, net of taxes of $447,183 and
$325,334 for the three months ended September 30,
2013 and 2012, respectively, and $(1,510,388) and
$809,433 for the nine months ended September 30,
2013 and 2012, respectively.		868,062		631,530		(2,931,929	)		1,571,254
Less: reclassification adjustment for realized gains
included in net income, net of taxes of
$58,062 and $135,755, for the three months
ended September 30, 2013 and 2012, respectively,
and $292,288 and $314,904 for the nine months
ended September 30, 2013 and 2012, respectively.		112,709		263,525		567,382			611,284
		755,353		368,005		(3,499,311	)		959,970

Comprehensive Income (Loss)	$	1,541,022	$	1,397,858	$	(941,119	)	$	3,751,635

See accompanying notes to unaudited condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2013
													Accumulated
				Additional									Other			Total
	Common			Paid-in			Retained			Unallocated			Comprehensive			Stockholders’
(Unaudited)	Stock			Capital			Earnings			ESOP Shares			Income (Loss)			Equity

BALANCE, DECEMBER 31, 2012	$	19,086		$	15,943,273		$	25,585,757		$	(324,380	)	$	2,896,593		$	44,120,329

Net Income		-			-			2,558,192			-			-			2,558,192

Other comprehensive income (loss)		-			-			-			-			(3,499,311	)		(3,499,311	)

Stock repurchases		(520	)		(1,016,318	)		-			-			-			(1,016,838	)

Exercise of stock options		60			88,398			-			-			-			88,458
Less purchase/retirement of stock		(13	)		(25,000	)		-			-			-			(25,013	)
Tax benefit of nonqualified options		-			1,796			-			-			-			1,796
Stock based compensation expense		-			67,436			-			-			-			67,436

Shares held by ESOP, commited to be released		-			14,856			-			16,470			-			31,326

Dividends ($0.225 per share)		-			-			(420,728	)		-			-			(420,728	)

BALANCE, SEPTEMBER 30, 2013	$	18,613		$	15,074,441		$	27,723,221		$	(307,910	)	$	(602,718	)	$	41,905,647

See accompanying notes to unaudited condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended
	September 30,
	2013			2012
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,558,192		$	2,791,665
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and accretion:
Premises and equipment		288,420			249,543
Amortization of investment premiums and discounts, net		812,252			559,673
Accretion of loan discounts		(388	)		(37,228	)
Net realized gains on sales of available-for-sale securities		(859,670	)		(926,188	)
Provision for loan losses		40,000			370,000
Mortgage banking operations, net		(194,456	)		(397,560	)
Gain on sale of real estate owned		-			(50,185	)
Loss on sale of premises and fixed assets		74,432			-
Shares held by ESOP commited to be released		31,326			25,642
Tax benefit related to stock options exercised		1,796			1,291
Stock based compensation expense		67,436			45,205
Changes in income taxes payable		(222,345	)		213,219
Changes in assets and liabilities		426,093			(333,400	)
Net cash provided by operations before loan sales		3,023,088			2,511,677
Origination of loans for sale to secondary market		(20,938,733	)		(37,156,903	)
Proceeds from sales of loans to secondary market		20,573,634			37,502,084
Net cash provided by operating activities		2,657,989			2,856,858

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment and mortgage-backed securities		(39,747,350	)		(44,506,127	)
Purchase of interest-earning time deposits in other banks		-			(496,000	)
Maturity or call of investment securities available-for-sale		2,000,000			8,328,000
Sale of investment securities available-for-sale		25,258,182			23,198,514
Principal payments on mortgage-backed and investment securities		9,203,109			8,060,305
Purchase of bank-owned life insurance		-			(2,000,000	)
Proceeds from sale of real estate owned		-			332,261
Proceeds from the sale of premises and fixed assets		264,371			-
Net increase in loans		(708,647	)		(1,252,149	)
Additions to premises and equipment		(229,962	)		(374,274	)

Net cash used in investing activities		(3,960,297	)		(8,709,470	)

(Continued)

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

	Nine Months Ended
	September 30,
	2013			2012
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	$	(10,865,841	)	$	4,292,001
Net increase in other borrowings		12,205,138			51,883
Decrease in advance payments by borrowers for taxes and insurance		(404,632	)		(263,099	)
Stock repurchases		(1,016,838	)		-
Exercise of stock options		88,458			15,499
Purchase and retirement of treasury stock related to stock options		(25,013	)		-
Dividends paid - common stock		(420,728	)		(424,015	)

Net cash provided by (used in) financing activities		(439,456	)		3,672,269

NET DECREASE IN CASH AND CASH EQUIVALENTS		(1,741,764	)		(2,180,343	)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		7,293,711			11,387,947

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	5,551,947		$	9,207,604

ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits	$	1,413,289		$	1,805,020
Interest on other borrowings		7,881			10,739
Income taxes paid		1,203,673			872,000

NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans	$	89,600		$	217,130
Loans to facilitate sales of real estate owned		-			182,250

See accompanying notes to unaudited condensed consolidated financial statements

JACKSONVILLE BANCORP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	FINANCIAL STATEMENTS

The accompanying interim condensed consolidated financial statements include the accounts of Jacksonville Bancorp, Inc. and its wholly-owned subsidiary, Jacksonville Savings Bank (the “Bank”) and its wholly-owned subsidiary, Financial Resources Group, Inc. collectively (the “Company”). All significant intercompany accounts and transactions have been eliminated.

In the opinion of management, the preceding unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of September 30, 2013 and December 31, 2012 and the results of its operations for the three and nine month periods ended September 30, 2013 and 2012. The results of operations for the three and nine month periods ended September 30, 2013 are not necessarily indicative of the results which may be expected for the entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2012 filed as an exhibit to the Company’s Form 10-K filed in March, 2013. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP) and to prevailing practices within the industry.

Certain amounts included in the 2012 consolidated statements have been reclassified to conform to the 2013 presentation.

2.	NEW ACCOUNTING PRONOUNCEMENTS

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU improves the transparency of reporting of amounts reclassified out of accumulated other comprehensive income. The new amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income in financial statements. The new amendments will require the Company to present (either on the face of the statements where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. It will also require a cross-reference to other disclosures currently required. For public entities, the amendments are effective for reporting periods beginning after December 15, 2012. The Company adopted the ASU during the first quarter of 2013.

3.	EARNINGS PER SHARE

Earnings Per Share - Basic earnings per share is determined by dividing net income for the period by the weighted average number of common shares. Diluted earnings per share considers the potential effects of the exercise of the outstanding stock options under the Company’s stock option plans.

The following reflects earnings per share calculations for basic and diluted methods:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Net income available to common
shareholders	$	785,669	$	1,029,853	$	2,558,192	$	2,791,665

Basic average shares outstanding		1,847,069		1,887,359		1,864,701		1,886,216

Diluted potential common shares:
Stock option equivalents		2,168		479		292		377
Diluted average shares outstanding		1,849,237		1,887,838		1,864,993		1,886,593

Basic earnings per share	$	0.43	$	0.55	$	1.37	$	1.48

Diluted earnings per share	$	0.42	$	0.55	$	1.37	$	1.48

Stock options for 100,235 shares of common stock were not considered in computing diluted earnings per share for the nine month period ending September 30, 2013, because they were anti-dilutive. Stock options for 104,035 shares of common stock were not considered in computing diluted earnings per share for the three and nine month periods ending September 30, 2012, because they were anti-dilutive.

4.	STOCK-BASED COMPENSATION

In connection with the 2010 conversion and related stock offering, the ESOP purchased an additional 41,614 shares for its Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible employees. The ESOP borrowed funds from the Company in an amount sufficient to purchase the 41,614 shares (approximately 4% of the common stock issued in the offering). The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions will be applied to repay interest on the loan first, and the remainder will be applied to principal. The loan is expected to be repaid over a period of up to 20 years. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants. Participants will vest on a pro-rata basis and reach 100% vesting in the accrued benefits under the ESOP after six years. Vesting is accelerated upon retirement, death, or disability of the participant or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP. Since the Bank’s annual contributions are discretionary, benefits payable under the ESOP cannot be estimated.

In the event a terminated ESOP participant desires to sell his or her shares of the Company’s stock, the ESOP includes a put option, which is a right to demand that the Company buy any shares of its stock distributed to participants at fair value.

The Company is accounting for its ESOP in accordance with ASC Topic 718, “Employers Accounting for Employee Stock Ownership Plans.” Accordingly, the debt of the ESOP is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from the collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends, if any, on unallocated shares are recorded as a reduction of debt and accrued interest.

A summary of ESOP shares at September 30, 2013 and 2012 is shown below.

	September 30, 2013		September 30, 2012
Unearned shares		29,144		32,812
Shares committed for release		1,647		1,625
Allocated shares		57,162		51,438
Total ESOP shares		87,953		85,875

Fair value of unearned shares	$	601,964	$	541,398

On April 24, 2012, the compensation committee of the board of directors approved the awards of 104,035 options to purchase Company common stock. The stock options vest over a five-year period and expire ten years after the date of the grant. Apart from the vesting schedule, there are no performance-based conditions or any other material conditions applicable to the options issued.

The following table summarizes stock option activity for the nine months ended September 30, 2013.

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Instrinsic
	Options			Price/Share		Life (in years)		Value

Outstanding, December 31, 2012		107,338		$	15.60
Granted		-			-
Exercised		(6,002	)		15.04
Forfeited		-			-

Outstanding, September 30, 2013		101,336		$	15.63		8.41	$	397,049

Exercisable, September 30, 2013		18,151		$	15.55		8.01	$	72,628

Intrinsic value for stock options is defined as the difference between the current market value and the exercise price. The value is based upon a closing price of $19.50 per share on September 30, 2013.

5.	LOAN PORTFOLIO COMPOSITION

At September 30, 2013 and December 31, 2012, the composition of the Company’s loan portfolio is shown below.

	September 30, 2013					December 31, 2012
	Amount		Percent			Amount			Percent
Real estate loans:
One-to-four family residential	$	41,973,440		24.1	%	$	41,386,147			23.8	%
Commercial		34,049,170		19.5			30,973,177			17.8
Agricultural		37,303,424		21.4			37,392,116			21.5
Home equity		12,039,266		6.9			12,733,963			7.3
Total real estate loans		125,365,300		71.9			122,485,403			70.5

Commercial loans		25,615,485		14.7			29,046,437			16.7
Agricultural loans		12,220,491		7.0			10,982,491			6.3
Consumer loans		14,403,573		8.3			14,571,819			8.4
Total loans receivable		177,604,849		101.9			177,086,150			101.9

Less:
Net deferred loan fees		7,859		0.0			(6,373	)		(0.0	)
Allowance for loan losses		3,264,496		1.9			3,339,464			1.9
Total loans receivable, net	$	174,332,494		100.0	%	$	173,753,059			100.0	%

The Company believes that sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its depositors and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords. The Company maintains lending policies and procedures in place designed to focus lending efforts on the types, locations, and duration of loans most appropriate for the business model and markets. The Company’s principal lending activities include the origination of one-to four-family residential mortgage loans, multi-family loans, commercial real estate loans, agricultural loans, home equity lines of credits, commercial business loans, and consumer loans. The primary lending market includes the Illinois counties of Morgan, Macoupin and Montgomery. Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals. The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.

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 the Company. A loan application file is first reviewed by a loan officer in the 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 limit 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 $750,000 depending on the type of loan. Loans to borrowers with an aggregate 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 to borrowers with an aggregate principal balance over $1.0 million. The board of directors ratifies all loans that are originated. Once the loan is approved, the applicant is informed and a closing date is scheduled. Loan commitments are typically funded 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.

One-to-Four Family Mortgage Loans - Historically, the Bank’s primary lending origination activity has been one-to-four family, owner-occupied, residential mortgage loans secured by property located in the Company’s market area. The Company generates loans through marketing efforts, existing customers and referrals, real estate brokers, builders and local businesses. Generally, one-to-four family loan originations are limited to the financing of loans secured by properties located within the Company’s market area.

Fixed rate one-to-four family residential mortgage loans are generally conforming loans, underwritten according to secondary market guidelines. The Company generally originates both fixed and adjustable rate mortgage loans in amounts up to the maximum conforming loan limits established by the Federal Housing Finance Agency.

The Company originates for resale to Freddie Mac and the Federal Home Loan Bank fixed-rate one-to-four family residential mortgage loans with terms of 15 years or more. The 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. The Company offers fixed-rate one-to-four family residential mortgage loans with terms of up to 30 years without prepayment penalty.

The Company currently offers adjustable-rate mortgage loans for terms ranging up to 30 years. They 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 the net interest income. In the low interest rate environment that has existed over the past five years, the adjustable-rate portfolio has repriced downward resulting in lower interest income from this portion of the loan portfolio. In addition, during this period borrowers have shown a preference for fixed-rate loans. The Company has 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 one-year, three-years or five-years. 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, interest rate risk position and competitors’ loan products.

Adjustable-rate mortgage loans make the loan portfolio more interest rate sensitive and provide an alternative for those borrowers who meet the 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.

Residential first mortgage loans customarily include due-on-sale clauses, which gives the Company the right to declare a loan immediately due and payable in the event that, among other things, 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 mortgage portfolio during periods of rising interest rates.

When underwriting residential real estate loans, the Company reviews and verifies 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, generally should not 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%, private mortgage insurance is required. Fire and casualty insurance is also required on all properties securing real estate loans. Title insurance, or an attorney’s title opinion, may be required, as circumstances warrant.

The Company does 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). They 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. The Company does 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 Real Estate Loans - The Company originates and purchases commercial real estate loans. Commercial real estate loans are secured primarily by improved properties such as multi-family residential, retail facilities and office buildings, restaurants and other non-residential buildings. The maximum loan-to-value ratio for commercial real estate loans originated is generally 80%. Commercial 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 the fixed-rate commercial real estate loans are not fully amortizing and therefore require a “balloon” payment at maturity. The Company purchases from time to time commercial real estate loan participations primarily from outside the Company’s market area. All participation loans are approved following a review to ensure that the loan satisfies the underwriting standards.

Underwriting standards for commercial 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. There is an emphasis on 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, the value of the real estate offered as collateral in relation to the proposed loan amount is considered. Generally, the loan amount cannot be greater than 80% of the value of the real estate. Written appraisals are usually obtained from either licensed or certified appraisers on all commercial real estate loans in excess of $250,000. Creditworthiness of the applicant is assessed by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining other public records regarding the applicant.

Loans secured by commercial 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 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.

Agricultural Real Estate Loans - The Company originates and purchases agricultural real estate loans. The maximum loan-to-value ratio for agricultural real estate loans we originate is generally 80%. Our agricultural real estate loans are generally written up to terms of five years with adjustable interest rates. The rates are generally tied to the average yield on U.S. Treasury securities, adjusted to a constant maturity of one-year, three-years, or five-years and generally have a specified floor. Many of our fixed-rate agricultural real estate loans are not fully amortizing and therefore require a “balloon” payment at maturity. We purchase from time to time agricultural real estate loan participations primarily from other local institutions within our market area. All participation loans are approved following a review to ensure that the loan satisfies our underwriting standards.

Underwriting standards for agricultural real estate 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 farm operation or real estate offered as collateral is adequate to repay the loan. We emphasize the ratio of the property’s projected 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 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.

Loans secured by agricultural 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 and market conditions on farm operations and the successful operation or management of the properties securing the loans. The repayment of loans secured by agricultural estate is typically dependent upon the successful operation of the farm and real estate property. If the cash flow is reduced, the borrower’s ability to repay the loan may be impaired.

Home Equity Loans – The Company originates home equity loans and lines of credit, which 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 existing 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.

Underwriting standards for home equity 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.

Home equity loans entail greater risks than one-to-four family residential mortgage loans, which are secured by first lien mortgages. In such cases, collateral repossessed after a default may not provide an adequate source of repayment of the outstanding loan balance because of damage or depreciation in the value of the property or loss of equity to the first lien position. Further, home equity 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. 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.

Commercial Business Loans - The Company originates commercial business loans to borrowers located in the Company’s market area which are secured by collateral other than real estate or which can be unsecured. Commercial business loan participations are also purchased from other lenders, which may be made to borrowers outside the Company’s market area. Commercial 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. Unsecured business loans are originated on a limited basis in those instances where the applicant’s financial strength and creditworthiness has been established. Commercial 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. Personal guarantees are generally obtained from the borrower or a third party as a condition to originating its business loans.

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. The financial strength of each applicant is assessed 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. Business loans are periodically reviewed following origination. Financial statements are requested at least annually and review them for substantial deviations or changes that might affect repayment of the loan. 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.

Agricultural Business Loans - The Company originates agricultural business loans to borrowers located in our market area which are secured by collateral other than real estate or which can be unsecured. Agricultural business loans are generally secured by equipment and blanket security agreements on all farm assets. These loans are generally offered with fixed rates with terms up to five years. Agricultural business loans generally bear lower interest rates than residential loans due to competitive market pressures. The repayment of agricultural business loans is generally dependent on the successful operation of the farm operation. Personal guarantees are generally obtained from the borrower as a condition to originating agricultural business loans.

Underwriting standards for 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. The financial strength of each applicant is assessed through the review of financial statements, pro-forma cash flow 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. Financial statements are requested at least annually and reviewed for substantial deviations or changes that might affect repayment of the loan. Loan officers may also visit the premises of borrowers to observe the operation, facilities, equipment, and personnel and to inspect the pledged collateral. Underwriting standards for agricultural 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.

The repayment of agricultural business loans generally is dependent on the successful operation of a farm and can be adversely affected by fluctuations in crop prices, increase in interest rates, and changes in weather conditions. These developments may result in smaller harvests and less income for farmers which may adversely affect such borrower’s ability to repay a loan, and potentially result in an increase in the level of problem loans and loan losses in our agricultural portfolio. While not required, the majority of our agricultural business loans are covered by crop insurance, which provides protection against loss due to lower crop yields as a result of unfavorable weather conditions.

Consumer Loans – The Company originates consumer loans, including automobile loans, loans secured by deposit accounts, unsecured loans and mobile home loans. Consumer loans are generally offered on a fixed-rate basis. Automobile loans are offered 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. Automobile loans are generally originated with a loan-to-value ratio below the greater of 80% of the purchase price or 100% of NADA loan value. 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.

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.

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.

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 and for the periods ended September 30, 2013, September 30, 2012, and December 31, 2012.


	September 30, 2013
				Commercial			Agricultural
	1-4 Family			Real Estate			Real Estate			Home Equity			Commercial			Agricultural		Consumer			Unallocated			Total
Allowance for Loan Losses:
Beginning Balance,
July 1, 2013	$	828,553		$	793,509		$	185,386		$	216,571		$	978,915		$	53,383	$	161,133		$	255,086		$	3,472,536
Provision charged to
expense		135,415			(76,925	)		(383	)		36,705			(30,441	)		7,719		21,756			(83,846	)		10,000
Losses charged off		(162,447	)		-			-			(48,383	)		-			-		(14,281	)		-			(225,111	)
Recoveries		300			-			-			960			-			-		5,811			-			7,071
Ending balance,
September 30, 2013	$	801,821		$	716,584		$	185,003		$	205,853		$	948,474		$	61,102	$	174,419		$	171,240		$	3,264,496

Beginning Balance,
January 1, 2013	$	741,029		$	828,873		$	149,568		$	328,996		$	934,251		$	43,930	$	151,474		$	161,343		$	3,339,464
Provision charged to expense		207,468			(223,858	)		35,435			(89,270	)		6,882			17,172		76,274			9,897			40,000
Losses charged off		(162,447	)		-			-			(48,383	)		-			-		(66,467	)		-			(277,297	)
Recoveries		15,771			111,569			-			14,510			7,341			-		13,138			-			162,329
Ending balance, September 30, 2013	$	801,821		$	716,584		$	185,003		$	205,853		$	948,474		$	61,102	$	174,419		$	171,240		$	3,264,496

Ending balance:
individually evaluated
for impairment	$	-		$	225,005		$	-		$	-		$	604,231		$	-	$	-		$	-		$	829,236
Ending balance:
collectively evaluated
for impairment	$	801,821		$	491,579		$	185,003		$	205,853		$	344,243		$	61,102	$	174,419		$	171,240		$	2,435,260

Loans:
Ending balance	$	41,973,440		$	34,049,170		$	37,303,424		$	12,039,266		$	25,615,485		$	12,220,491	$	14,403,573		$	-		$	177,604,849
Ending balance:
individually evaluated
for impairment	$	512,974		$	1,261,003		$	302,816		$	56,700		$	675,626		$	-	$	5,527		$	-		$	2,814,646
Ending balance:
collectively evaluated
for impairment	$	41,460,466		$	32,788,167		$	37,000,608		$	11,982,566		$	24,939,859		$	12,220,491	$	14,398,046		$	-		$	174,790,203

	September 30, 2012
				Commercial			Agricultural
	1-4 Family			Real Estate			Real Estate		Home Equity			Commercial		Agricultural		Consumer			Unallocated		Total
Allowance for Loan Losses:
Beginning Balance,
July 1, 2012	$	629,452		$	961,695		$	48,918	$	325,931		$	811,630	$	36,034	$	159,451		$	157,392	$	3,130,503
Provision charged to
expense		(11,330	)		(74,191	)		89,538		(37,447	)		73,497		30,963		(11,365	)		60,335		120,000
Losses charged off		(6,410	)		(99,227	)		-		(13,382	)		-		-		(11,416	)		-		(130,435	)
Recoveries		2,810			17,716			-		6,607			2,969		-		1,572			-		31,674
Ending balance,
September 30, 2012	$	614,522		$	805,993		$	138,456	$	281,709		$	888,096	$	66,997	$	138,242		$	217,727	$	3,151,742

Beginning Balance,
January 1, 2012	$	697,223		$	1,107,585		$	115,154	$	309,409		$	711,864	$	58,428	$	138,385		$	158,559	$	3,296,607
Provision charged to
expense		(31,049	)		36,962			23,302		39,314			172,947		8,569		60,787			59,168		370,000
Losses charged off		(76,705	)		(356,270	)		-		(80,126	)		-		-		(64,801	)		-		(577,902	)
Recoveries		25,053			17,716			-		13,112			3,285		-		3,871			-		63,037
Ending balance,
September 30, 2012	$	614,522		$	805,993		$	138,456	$	281,709		$	888,096	$	66,997	$	138,242		$	217,727	$	3,151,742

Ending balance:
individually evaluated
for impairment	$	-		$	139,523		$	-	$	-		$	567,536	$	-	$	6,616		$	-	$	713,675
Ending balance:
collectively evaluated
for impairment	$	614,522		$	666,470		$	138,456	$	281,709		$	320,560	$	66,997	$	131,626		$	217,727	$	2,438,067

Loans:
Ending balance	$	42,323,156		$	34,826,019		$	34,614,339	$	13,188,975		$	26,449,502	$	8,813,230	$	14,678,893		$	-	$	174,894,114
Ending balance:
individually evaluated
for impairment	$	285,550		$	1,288,367		$	-	$	43,698		$	741,497	$	-	$	6,616		$	-	$	2,365,728
Ending balance:
collectively evaluated
for impairment	$	42,037,606		$	33,537,652		$	34,614,339	$	13,145,277		$	25,708,005	$	8,813,230	$	14,672,277		$	-	$	172,528,386

	December 31, 2012
				Commercial			Agricultural
	1-4 Family			Real Estate			Real Estate		Home Equity			Commercial		Agricultural			Consumer			Unallocated		Total
Allowance for Loan Losses:
Beginning Balance,
December 31, 2011	$	697,223		$	1,107,585		$	115,154	$	309,409		$	711,864	$	58,428		$	138,385		$	158,559	$	3,296,607
Provision charged to
expense		99,055			(11,157	)		34,414		86,076			219,102		(14,498	)		74,224			2,784		490,000
Losses charged off		(82,192	)		(356,270	)		-		(80,126	)		-		-			(66,958	)		-		(585,546	)
Recoveries		26,943			88,715			-		13,637			3,285		-			5,823			-		138,403
Ending balance,
December 31, 2012	$	741,029		$	828,873		$	149,568	$	328,996		$	934,251	$	43,930		$	151,474		$	161,343	$	3,339,464


Ending balance:
individually evaluated
for impairment	$	-		$	262,177		$	-	$	-		$	610,779	$	-		$	6,185		$	-	$	879,141
Ending balance:
collectively evaluated
for impairment	$	741,029		$	566,696		$	149,568	$	328,996		$	323,472	$	43,930		$	145,289		$	161,326	$	2,460,306

Loans:
Ending balance	$	41,386,147		$	30,973,177		$	37,392,116	$	12,733,963		$	29,046,437	$	10,982,491		$	14,571,819		$	-	$	177,086,150
Ending balance:
individually evaluated
for impairment	$	339,513		$	1,603,956		$	-	$	56,677		$	728,672	$	-		$	14,392		$	-	$	2,743,210
Ending balance:
collectively evaluated
for impairment	$	41,046,634		$	29,369,221		$	37,392,116	$	12,677,286		$	28,317,765	$	10,982,491		$	14,557,427		$	-	$	174,342,940

Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers.

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 the scheduled payments of principal or interest will not be able to be collected 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, individual consumer and residential loans are not separately identified 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 the 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.

There have been no changes to the Company’s accounting policies or methodology from the prior periods.

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. During the periods presented, none of our loans were classified as Doubtful.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2013 and December 31, 2012.

	1-4 Family				Commercial Real Estate				Agricultural Real Estate				Home Equity
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2013		2012		2013		2012		2013		2012		2013		2012
Rating:
Pass	$	38,882,817	$	38,123,451	$	31,874,059	$	28,283,081	$	37,000,608	$	37,392,116	$	11,483,313	$	11,919,440
Special Mention		860,310		1,273,558		122,294		187,936		-		-		172,684		272,563
Substandard		2,230,313		1,989,138		2,052,817		2,502,160		302,816		-		383,269		541,960
Total	$	41,973,440	$	41,386,147	$	34,049,170	$	30,973,177	$	37,303,424	$	37,392,116	$	12,039,266	$	12,733,963

	Commercial				Agricultural				Consumer				Total
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2013		2012		2013		2012		2013		2012		2013		2012
Rating:
Pass	$	24,926,781	$	28,301,663	$	12,220,491	$	10,982,491	$	14,224,756	$	14,291,487	$	170,612,825	$	169,293,729
Special Mention		-		849		-		-		99,984		111,945		1,255,272		1,846,851
Substandard		688,704		743,925		-		-		78,833		168,387		5,736,752		5,945,570
Total	$	25,615,485	$	29,046,437	$	12,220,491	$	10,982,491	$	14,403,573	$	14,571,819	$	177,604,849	$	177,086,150

The following tables present the Company’s loan portfolio aging analysis as of September 30, 2013 and December 31, 2012.

	September 30, 2013
	30-59 Days		60-89 Days		Greater than 90		Total						Total Loans >90
	Past Due		Past Due		Days Past Due		Past Due		Current		Total Loans		Days & Accruing

One-to-four family residential	$	263,517	$	518,819	$	524,759	$	1,307,095	$	40,666,345	$	41,973,440	$	-
Commercial real estate		65,047		-		85,193		150,240		33,898,930		34,049,170		-
Agricultural real estate		-		-		-		-		37,303,424		37,303,424		-
Home equity		91,319		43,922		57,588		192,829		11,846,437		12,039,266		-
Commercial		-		-		-		-		25,615,485		25,615,485		-
Agricultural		-		-		-		-		12,220,491		12,220,491		-
Consumer		99,865		-		5,987		105,852		14,297,721		14,403,573		-
Total	$	519,748	$	562,741	$	673,527	$	1,756,016	$	175,848,833	$	177,604,849	$	-

	December 31, 2012
	30-59 Days		60-89 Days		Greater than 90		Total						Total Loans >90
	Past Due		Past Due		Days Past Due		Past Due		Current		Total Loans		Days & Accruing

One-to-four family residential	$	727,315	$	213,126	$	984,996	$	1,925,437	$	39,460,710	$	41,386,147	$	-
Commercial real estate		-		-		279,622		279,622		30,693,555		30,973,177		-
Agricultural real estate		-		-		-		-		37,392,116		37,392,116		-
Home equity		158,414		70,596		136,508		365,518		12,368,445		12,733,963		-
Commercial		-		-		-		-		29,046,437		29,046,437		-
Agricultural		-		-		-		-		10,982,491		10,982,491		-
Consumer		181,171		64,390		33,692		279,253		14,292,566		14,571,819		-
Total	$	1,066,900	$	348,112	$	1,434,818	$	2,849,830	$	174,236,320	$	177,086,150	$	-

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 non-accrual or charged-off at the earlier date if collection of principal and interest is considered doubtful.

All interest accrued but not collected for loans that are placed on non-accrual status 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 principal and interest amounts contractually due are brought current and future payments are reasonably assured.

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.

Impairment is measured on a loan-by-loan basis by either the present value of the expected future cash flows, the loan’s observable market value, or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Significant restructured loans are considered impaired in determining the adequacy of the allowance for loan losses.

The Company actively seeks to reduce its investment in impaired loans. The primary tools to work through impaired loans are settlement with the borrowers or guarantors, foreclosure of the underlying collateral, or restructuring.

The Company will restructure loans when the borrower demonstrates the inability to comply with the terms of the loan, but can demonstrate the ability to meet acceptable restructured terms. Restructurings generally include one or more of the following restructuring options; reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance, or other actions intended to maximize collection. Restructured loans in compliance with modified terms are classified as impaired.

The following tables present impaired loans at or for the three and nine months ended September 30, 2013 and the year ended December 31, 2012.

	Three Months Ended September 30, 2013
							Average					Interest
			Unpaid				Impairment in		Interest			Income
	Recorded		Principal		Specific		Impaired		Income			Recognized
	Balance		Balance		Allowance		Loans		Recognized			Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	512,974	$	512,974	$	-	$	591,134	$	8,083		$	6,355
Commercial real estate		65,757		65,757		-		94,970		(2,710	)		(2,630	)
Agricultural real estate		302,816		302,816		-		303,071		11,938			12,227
Home equity		56,700		56,700		-		57,573		1,028			998
Consumer		5,527		5,527		-		5,957		106			112
Loans with a specific allowance:
Commercial real estate		1,195,246		1,195,246		225,005		1,197,414		18,983			13,456
Commercial		675,626		675,626		604,231		718,838		8,597			8,798
Total:
One-to-four family residential		512,974		512,974		-		591,134		8,083			6,355
Commercial real estate		1,261,003		1,261,003		225,005		1,292,384		16,273			10,826
Agricultural real estate		302,816		302,816		-		303,071		11,938			12,227
Commercial		675,626		675,626		604,231		718,838		8,597			8,798
Home equity		56,700		56,700		-		57,573		1,028			998
Consumer		5,527		5,527		-		5,957		106			112
Total	$	2,814,646	$	2,814,646	$	829,236	$	2,968,957	$	46,025		$	39,316

	Nine Months Ended September 30, 2013
							Average				Interest
			Unpaid				Impairment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Balance		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	512,974	$	512,974	$	-	$	594,836	$	15,585	$	12,084
Commercial real estate		65,757		65,757		-		99,115		4,088		4,129
Agricultural real estate		302,816		302,816				304,134		11,938		12,227
Home equity		56,700		56,700		-		51,809		2,853		2,813
Consumer		5,527		5,527				6,903		365		351
Loans with a specific allowance:
Commercial real estate		1,195,246		1,195,246		225,005		1,214,326		57,489		52,515
Commercial		675,626		675,626		604,231		732,675		26,037		26,637
Total:
One-to-four family residential		512,974		512,974		-		594,836		15,585		12,084
Commercial real estate		1,261,003		1,261,003		225,005		1,313,441		61,577		56,644
Agricultural real estate		302,816		302,816				304,134		11,938		12,227
Commercial		675,626		675,626		604,231		732,675		26,037		26,637
Home equity		56,700		56,700		-		51,809		2,853		2,813
Consumer		5,527		5,527		-		6,903		365		351
Total	$	2,814,646	$	2,814,646	$	829,236	$	3,003,798	$	118,355	$	110,756

	Year Ended December 31, 2012
							Average				Interest
			Unpaid				Impairment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Balance		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	339,513	$	339,513	$	-	$	343,593	$	17,163	$	16,909
Commercial real estate		201,135		201,135		-		205,756		27,727		16,136
Home equity		56,677		56,677		-		57,934		4,087		4,162
Consumer		8,207		8,207		-		9,795		495		422
Loans with a specific allowance:
Commercial real estate		1,402,821		1,402,821		262,177		1,443,005		91,130		91,075
Commercial		728,672		728,672		610,779		780,979		44,887		52,898
Consumer		6,185		6,185		6,185		7,096		573		576
Total:
One-to-four family residential		339,513		339,513		-		343,593		17,163		16,909
Commercial real estate		1,603,956		1,603,956		262,177		1,648,761		118,857		107,211
Commercial		728,672		728,672		610,779		780,979		44,887		52,898
Home equity		56,677		56,677		-		57,934		4,087		4,162
Consumer		14,392		14,392		6,185		16,891		1,068		998
Total	$	2,743,210	$	2,743,210	$	879,141	$	2,848,158	$	186,062	$	182,178

Included in certain loan categories in the impaired loans are troubled debt restructurings (TDR’s), where economic concessions have been granted to borrowers who have experienced financial difficulties, which were classified as impaired. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. TDR’s are considered impaired at the time of restructuring and typically are returned to accrual status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

When loans are modified into a TDR, the Company evaluates any possible impairment similar to other impaired loans based on the present value of expected cash flows, discounted at the contractual interest rate of the original loan agreement, or based upon on the current fair value of the collateral, less selling costs for collateral dependent loans. If the Company determined that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through an allowance estimate or a charge-off to the allowance. In periods subsequent to modification, the Company evaluates all TDR’s, including those that have payment defaults, for possible impairment and recognizes impairment through the allowance.

The following table presents the recorded balance, at original cost, of troubled debt restructurings, as of September 30, 2013 and December 31, 2012.

	September 30, 2013		December 31, 2012

One-to-four family residential	$	621,180	$	267,916
Commercial real estate		1,147,153		1,011,350
Agricultural real estate		302,816		-
Home equity		80,548		84,123
Commercial loans		647,845		701,271
Agricultural loans		-		-
Consumer loans		30,429		91,206

Total	$	2,829,971	$	2,155,866

The following table presents the recorded balance, at original cost, of troubled debt restructurings, which were performing according to the terms of the restructuring, as of September 30, 2013 and December 31, 2012.


	September 30, 2013		December 31, 2012

One-to-four family residential	$	549,338	$	127,399
Commercial real estate		1,147,153		983,450
Agricultural real estate		302,816		-
Home equity		75,774		84,123
Commercial loans		647,845		701,271
Agricultural loans		-		-
Consumer loans		30,429		89,045

Total	$	2,753,355	$	1,985,288

The following table presents loans modified as troubled debt restructurings during the three and nine months ended September 30, 2013 and 2012.

	Three Months Ended				Nine Months Ended
	September 30, 2013				September 30, 2013
	Number of		Recorded		Number of		Recorded
	Modifications		Investment		Modifications		Investment

One-to-four family residential		1	$	99,652		7	$	479,171
Commercial real estate		1		65,973		3		179,749
Agricultural real estate		1		302,816		1		302,816
Home equity		-		-		-		-
Commercial loans		-		-		-		-
Agricultural loans		-		-		-		-
Consumer loans		-		-		2		12,947

Total		3	$	468,441		13	$	974,683

	Three Months Ended				Nine Months Ended
	September 30, 2012				September 30, 2012
	Number of		Recorded		Number of		Recorded
	Modifications		Investment		Modifications		Investment

One-to-four family residential		-	$	-		1	$	43,215
Commercial real estate		-		-		-		-
Agricultural real estate		-		-		-		-
Home equity		1		10,797		2		16,555
Commercial loans		-		-		2		268,450
Agricultural loans		-		-		-		-
Consumer loans		-		-		2		18,034

Total		1	$	10,797		7	$	346,254

2013 Modifications

During the nine month period ended September 30, 2013, the Company modified seven one-to-four family residential real estate loans, with a recorded investment of $479,171, which were deemed to be TDR’s. One modification was made to combine notes and capitalize interest. Three of the modifications involved rate concessions. Three of the modifications were made to renew notes and capitalize real estate taxes. None of the modifications resulted in a write-off of the principal balance.

The Company also modified three commercial real estate loans with a recorded investment of $179,749. Two modifications were made for the same borrower to provide some payment concessions while trying to sell the property. The third modification was made to change payment terms to interest only. The modifications did not result in a reduction of the contractual interest rate or a write-off of the principal balance.

The company modified one agricultural real estate loan with a recorded investment of $302,816. The modification was made to change the payment schedule to interest only while the borrower attempts to sell the property. The modification did not result in a reduction of the contractual interest rate or a write-off of the principal balance.

The Company also modified two consumer loans with a recorded investment of $12,947. One modification was made to combine notes and capitalize interest. The second modification was a renewal with a rate concession. Neither modification resulted in a write-off of the principal balance.

Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. During the nine month period ended September 30, 2013, one residential real estate loan of $13,638 and one home equity loan of $4,774 that were considered TDR’s defaulted as they were more than 90 days past due at September 30, 2013. Default occurs when a loan is 90 days or more past due, transferred to nonaccrual or charged-off, and is within twelve months of restructuring.

2012 Modifications

During the nine month period ended September 30, 2012, the Company modified one one-to-four family residential real estate loan, with a recorded investment of $43,215, which was deemed to be a TDR. The modification was made to change the payment schedule to interest-only for a period of time. The modification did not result in a reduction of the contractual interest rate or a write-off of the principal balance.

The Company also modified two home equity loans with a recorded investment of $16,555. One modification was made to change the payment schedule to interest-only for a period of time. The second modification was to capitalize funds to bring other debts current. Neither modification resulted in a reduction of the contractual interest rate or a write-off of the principal balance.

The Company also modified two commercial loans with a total recorded investment of $268,450. Both modifications were made to reduce the contractual interest rate and payment amount. Neither modification resulted in a write-off of the principal balance.

The Company also modified two consumer loans with a total recorded investment of $18,818. Both modifications were made to extend the term of the loans to lower the payment amount. Neither modification resulted in a reduction of the contractual interest rate or a write-off of the principal balance.

Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. During the nine month period ended September 30, 2012, one residential real estate loan of $16,203, one commercial real estate loan of $28,000, and one home equity loan of $5,000 that were considered TDR’s defaulted as they were more than 90 days past due at September 30, 2012. Default occurs when a loan is 90 days or more past due, transferred to nonaccrual or charged-off, and is within twelve months of restructuring.

The following table presents the Company’s nonaccrual loans at September 30, 2013 and December 31, 2012. This table excludes performing troubled debt restructurings.

	September 30, 2013		December 31, 2012

One-to-four family residential	$	1,241,382	$	1,203,328
Commercial real estate		216,923		560,073
Agricultural real estate		-		-
Home equity		158,850		276,877
Commercial loans		41,087		51,436
Agricultural loans		-		-
Consumer loans		30,824		122,064

Total	$	1,689,066	$	2,213,778

6.	INVESTMENTS

The amortized cost and approximate fair value of securities, all of which are classified as available-for-sale, are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
September 30, 2013:
U.S. government and agencies	$	11,749,908	$	134,053	$	(367,564	)	$	11,516,397
Mortgage-backed securities (government-
sponsored enterprises - residential)		52,122,279		512,933		(886,094	)		51,749,118
Municipal bonds		50,471,758		1,216,267		(1,522,802	)		50,165,223
	$	114,343,945	$	1,863,253	$	(2,776,460	)	$	113,430,738

December 31, 2012:
U.S. government and agencies	$	10,090,835	$	248,601	$	(10,556	)	$	10,328,880
Mortgage-backed securities (government-
sponsored enterprises - residential)		50,917,555		1,134,245		(95,319	)		51,956,481
Municipal bonds		49,990,655		3,264,169		(152,362	)		53,102,462
	$	110,999,045	$	4,647,015	$	(258,237	)	$	115,387,823

The amortized cost and fair value of available-for-sale securities at September 30, 2013, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
Within one year	$	100,325	$	100,568
One to five years		9,966,022		10,320,843
Five to ten years		21,418,179		21,453,903
After ten years		30,737,140		29,806,306
		62,221,666		61,681,620
Mortgage-backed securities (government-
sponsored enterprises - residential)		52,122,279		51,749,118
	$	114,343,945	$	113,430,738

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $20,806,000 at September 30, 2013 and $24,371,000 at December 31, 2012.

The book value of securities sold under agreement to repurchase amounted to $9,565,000 at September 30, 2013 and $13,706,000 at December 31, 2012.

Gross gains of $860,000 and $926,000 and gross losses of $0 resulting from sales of available-for-sale securities were realized during the nine months ended September 30, 2013 and 2012, 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 September 30, 2013 and December 31, 2012 were $59,133,000 and $23,956,000, respectively, which is approximately 52.1% and 20.8% of the Company’s available-for-sale investment portfolio.

Management believes the declines in fair value for these securities are temporary. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

The following table shows the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at September 30, 2013 and December 31, 2012.

	Less Than Twelve Months					Twelve Months or More					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
September 30, 2013:
Municipal bonds	$	(1,506,532	)	$	23,374,901	$	(16,270	)	$	448,178	$	(1,522,802	)	$	23,823,079
U.S. government and agencies		(367,564	)		6,369,839		-			-		(367,564	)		6,369,839
Subtotal		(1,874,096	)		29,744,740		(16,270	)		448,178		(1,890,366	)		30,192,918
Mortgage-backed securities
(government sponsored
enterprises - residential)		(886,094	)		28,939,697		-			-		(886,094	)		28,939,697
Total	$	(2,760,190	)	$	58,684,437	$	(16,270	)	$	448,178	$	(2,776,460	)	$	59,132,615

December 31, 2012:
Municipal bonds	$	(152,362	)	$	7,237,453	$	-		$	-	$	(152,362	)	$	7,237,453
U.S. government and agencies		(10,556	)		545,291		-			-		(10,556	)		545,291
Subtotal		(162,918	)		7,782,744		-			-		(162,918	)		7,782,744
Mortgage-backed securities
(government sponsored
enterprises - residential)		(95,319	)		16,172,999		-			-		(95,319	)		16,172,999
Total	$	(258,237	)	$	23,955,743	$	-		$	-	$	(258,237	)	$	23,955,743

The unrealized losses on the Company’s investments in municipal bonds, U.S. government and agencies, and mortgage-backed securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2013 and December 31, 2012.

7.	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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


	September 30, 2013			December 31, 2012
Net unrealized gain(loss) on securities available-for-sale	$	(913,207	)	$	4,388,778
Tax effect		310,489			(1,492,185	)
Net-of-tax amount	$	(602,718	)	$	2,896,593

8.	CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI) BY COMPONENT

Amounts reclassified from AOCI and the affected line items in the statements of income during the nine months ended September 30, 2013 and 2012, were as follows:

	Amounts Reclassified
	from AOCI
							Affected Line Item in the
	September 30, 2013			September 30, 2012			Statements of Income
Unrealized gains on securities available-							Net realized gains on sales of
for-sale securities	$	859,670		$	926,188		available-for-sale securities
		859,670			926,188
Tax effect		(292,288	)		(314,904	)	Income taxes
Total reclassification out of AOCI	$	567,382		$	611,284		Net reclassified amount

9.	DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012:


			September 30, 2013
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and
agencies	$	11,516,397	$	-	$	11,516,397	$	-
Mortgage-backed securities
(Government sponsored
enterprises - residential)		51,749,118		-		51,749,118		-
Municipal bonds		50,165,223		-		50,165,223		-

			December 31, 2012
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and
agencies	$	10,328,880	$	-	$	10,328,880	$	-
Mortgage-backed securities
(Government sponsored
enterprises - residential)		51,956,481		-		51,956,481		-
Municipal bonds		53,102,462		-		53,102,462		-

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended September 30, 2013.

Available-for-Sale Securities – Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012:


			September 30, 2013 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)	$	108,819	$	-	$	-	$	108,819
Real estate owned		226,793		-		-		226,793


			December 31, 2012 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)	$	1,032,580	$	-	$	-	$	1,032,580
Real estate owned		137,193		-		-		137,193

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring 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. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Impaired Loans (Collateral Dependent) - The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary. Appraisals are reviewed for accuracy and consistency. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.

Real Estate Owned – Foreclosed assets are carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of foreclosed assets is based on appraisals or evaluations. Foreclosed assets are classified within Level 3 of the fair value hierarchy.

Appraisals of foreclosed assets are obtained when the real estate is acquired and subsequently as deemed necessary. Appraisals are reviewed for accuracy and consistency. Appraisers are selected from the list of approved appraisers maintained by management.

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements (dollars in thousands).

	Fair Value at 9/30/13		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

Real Estate Owned	$	226,793	Market comparable properties	Comparability adjustments (%)	Not available

Collateral-dependent impaired loans		108,819	Market comparable properties	Marketability discount	20% – 30% (25%)

	Fair Value at 12/31/12		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

Real Estate Owned	$	137,193	Market comparable properties	Comparability adjustments (%)	(26%)

Collateral-dependent impaired loans		1,032,580	Market comparable properties	Marketability discount	20% – 30% (25%)

Fair Value of Financial Instruments

The following table presents estimated fair values of the Company’s other financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012:


	September 30, 2013
			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents	$	5,551,947	$	5,551,947	$	-	$	-
Interest earning time deposits in banks		2,972,000		-		2,972,000		-
Other investments		84,616		-		84,616		-
Loans held for sale		1,287,916		-		1,287,916		-
Loans, net of allowance for loan losses		174,332,494		-		-		172,583,139
Federal Home Loan Bank stock		1,113,800		-		1,113,800		-
Interest receivable		2,890,297		-		2,890,297		-
Financial Liabilities
Deposits		247,654,888		-		135,231,019		115,501,799
Other borrowings		24,945,748		-		24,945,748		-
Advances from borrowers for taxes
and insurance		427,713		-		427,713		-
Interest payable		221,594		-		221,594		-
Unrecognized financial instruments (net
of contract amount)
Commitments to originate loans		-		-		-		-
Letters of credit		-		-		-		-
Lines of credit		-		-		-		-

	December 31, 2012
			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents	$	7,293,711	$	7,293,711	$	-	$	-
Interest earning time deposits in banks		2,972,000		-		2,972,000		-
Other investments		96,041		-		96,041		-
Loans held for sale		711,986		-		711,986		-
Loans, net of allowance for loan losses		173,753,059		-		-		172,609,490
Federal Home Loan Bank stock		1,113,800		-		1,113,800		-
Interest receivable		2,053,472		-		2,053,472		-
Financial Liabilities
Deposits		258,520,729		-		135,656,067		125,864,749
Short-term borrowings		12,740,610		-		12,740,610		-
Advances from borrowers for taxes
and insurance		832,345		-		832,345		-
Interest payable		276,757		-		276,757		-
Unrecognized financial instruments (net
of contract amount)
Commitments to originate loans		-		-		-		-
Letters of credit		-		-		-		-
Lines of credit		-		-		-		-

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value.

Cash and Cash Equivalents, Interest-Earning Time Deposits in Banks, Interest Receivable, Federal Home Loan Bank Stock, and 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.

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.

Other 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.

10. MORTGAGE SERVICING RIGHTS

Activity in the balance of mortgage servicing rights, measured using the amortization method, for the nine month period ending September 30, 2013 and the year ended December 31, 2012 was as follows:


	September 30, 2013			December 31, 2012
Balance, beginning of year	$	664,436		$	697,733
Servicing rights capitalized		87,160			219,975
Amortization of servicing rights		(122,063	)		(297,784	)
Change in valuation allowance		18,528			44,512
Balance, end of period	$	648,061		$	664,436

Activity in the valuation allowance for mortgage servicing rights for the nine month period ending September 30, 2013 and the year ended December 31, 2012 was as follows:


	September 30, 2013			December 31, 2012
Balance, beginning of year	$	129,279		$	173,791
Additions		-			-
Reductions		(18,528	)		(44,512	)
Balance, end of period	$	110,751		$	129,279

11. INCOME TAXES

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense for the nine months ended September 30, 2013 and 2012 is shown below.


	September 30, 2013			September 30, 2012
Computed at the statutory rate (34%)	$	1,203,347		$	1,317,546
Increase (decrease) resulting from
Tax exempt interest		(381,054	)		(409,508	)
State income taxes, net		208,141			227,151
Increase in cash surrender value		(49,753	)		(50,999	)
Other, net		384			(719	)

Actual tax expense	$	981,065		$	1,083,471

12. COMMITMENTS AND CONTINGENCIES

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

JACKSONVILLE BANCORP, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Forward Looking Statements

This Form 10-Q contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, the effect of disruptions in the financial markets, changes in interest rates, general economic conditions and the current weak state of the United States economy, deposit flows, demand for mortgage and other loans, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing of products and services.

Critical Accounting Policies and Use of Significant Estimates

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in preparing our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. Management believes the following discussion addresses our most critical accounting policies and significant estimates, which are those that are most important to the portrayal of our financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Allowance for Loan Losses - The Company believes the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is a material estimate that is particularly susceptible to significant changes in the near term and is established through a provision for loan losses. The allowance is based upon past loan experience and other factors which, in management’s 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 obtains independent appraisals for significant properties, which collateralize loans. Management uses the available information to make such determinations. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. While we believe we have established our existing allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing the Company’s loan portfolio, will not request an increase in the allowance for loan losses. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary if loan quality deteriorates.

Foreclosed Assets – Foreclosed assets primarily consist of real estate owned. 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 of an asset declines subsequent to foreclosure, the asset is written down through a charge to non-interest expense. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned are netted and posted to non-interest expense.

Deferred Income Tax Assets/Liabilities – Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine that they are realizable based upon the historical level of our taxable income, estimates of our future taxable income and the reversals of deferred tax liabilities. In most cases, the realization of the deferred tax asset is based on our future profitability. If we were to experience net operating losses for tax purposes in a future period, the realization of our deferred tax assets would be evaluated for a potential valuation reserve.

Impairment of Goodwill - Goodwill, an intangible asset with an indefinite life, was recorded on our balance sheet in prior periods as a result of acquisition activity. Goodwill is evaluated for impairment annually, unless there are factors present that indicate a potential impairment, in which case, the goodwill impairment test is performed more frequently.

Mortgage Servicing Rights - Mortgage servicing rights are very sensitive to movements in interest rates as expected future net servicing income depends on the projected outstanding principal balances of the underlying loans, which can be greatly reduced by prepayments. Prepayments usually increase when mortgage interest rates decline and decrease when mortgage interest rates rise.

Fair Value Measurements – The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The Company estimates the fair value of financial instruments using a variety of valuation methods. Where financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, the Company estimates fair value. Other factors such as model assumptions and market dislocations can affect estimates of fair value.

The above listing is not intended to be a comprehensive list of all our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

Basel III

On July 2, 2013, the Board of Governors of the Federal Reserve System announced its approval of the final rule to implement the Basel III regulatory capital reforms, among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Federal Deposit Insurance Corporation adopted the new rule on July 9, 2013. The approved rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, as well as a common equity Tier 1 capital conservation buffer of 2.5 of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking institutions. The phase-in for banking institutions such as Jacksonville Savings Bank will not begin until January 2015, while the phase-in for larger banks starts in January 2014. We are currently evaluating the impact of the implementation of the new capital standards.

Financial Condition

September 30, 2013 Compared to December 31, 2012

Total assets decreased by $772,000, or 0.2%, to $320.7 million at September 30, 2013 from $321.4 million at December 31, 2012. Net loans (excluding loans held for sale) increased $579,000, or 0.3%, to $174.3 million at September 30, 2013 from $173.8 million at December 31, 2012. The increase in loans reflects growth in commercial real estate loans, partially offset by a decrease in commercial business loans. The loan portfolio continues to be affected by low loan demand. Available-for-sale investment and mortgage-backed securities decreased $2.0 million, or 1.7%, to $113.4 million at September 30, 2013. This decrease is primarily due to a decrease of $5.3 million in unrealized gains on these investments due to increases in market interest rates, which reduce the principal value of such securities in our portfolio. The tax effect of this decrease in unrealized gains on available-for-sale investments contributed to the $1.8 million increase in deferred income taxes. At September 30, 2013 and December 31, 2012, goodwill totaled $2.7 million. At these dates, our goodwill was not impaired.

Total deposits decreased $10.9 million, or 4.2%, to $247.7 million at September 30, 2013 from $258.5 million at December 31, 2012. The decrease primarily reflects a $10.4 million decrease in time deposits. Other borrowings, which consisted of $15.5 million in overnight FHLB advances and $9.4 million in overnight repurchase agreements, increased a total of $12.2 million at September 30, 2013. The FHLB advances have been used as a low-cost, short-term source of funding. The repurchase agreements are a cash management service provided to our commercial deposit customers.

Stockholders’ equity decreased $2.2 million, or 5.0%, to $41.9 million at September 30, 2013. The decrease in stockholders’ equity was the result of accumulated other comprehensive income of $2.9 million at December 31, 2012 becoming other comprehensive loss of $603,000 at September 30, 2013, $1.0 million in stock repurchases, and the payment of $421,000 in dividends, which was partially offset by net income of $2.6 million. Other comprehensive loss consisted of a decrease in unrealized gains, net of tax, on available-for-sale securities reflecting changes in market prices for securities in our portfolio. Other comprehensive income does not include changes in the fair value of other financial instruments included on the balance sheet.

Results of Operations

Comparison of Operating Results for the Three Months Ended September 30, 2013 and 2012

General: Net income for the three months ended September 30, 2013 was $786,000, or $0.43 per common share, basic, and $0.42 per common share, diluted, compared to net income of $1.0 million, or $0.55 per common share, basic and diluted, for the three months ended September 30, 2012. The $244,000 decrease in net income was due to a decrease of $349,000 in non-interest income and an increase of $159,000 in non-interest expense, partially offset by an increase of $8,000 in net interest income and decreases of $110,000 in provision for loan losses and $146,000 in income taxes.

Interest Income: Total interest income for the three months ended September 30, 2013 decreased $130,000, or 4.1%, to $3.1 million from $3.2 million for the same period of 2012. The decrease in interest income reflected decreases of $151,000 in interest income on loans and $13,000 in interest income on investment securities, partially offset by an increase of $35,000 in interest income on mortgage-backed securities. As noted below, the changes in the composition of our interest-earning assets reflects the investment in investment and mortgage-backed securities during a time when satisfactory loan origination opportunities were lacking.

Interest income on loans decreased $151,000 to $2.4 million for the third quarter of 2013 due to decreases in the average yield and average balance of loans. The average yield decreased 31 basis points to 5.37% for the third quarter of 2013, compared to 5.68% for the third quarter of 2012. The decrease in the average yield reflected lower market rates of interest and the competitive lending environment. The average balance of the loan portfolio decreased $1.0 million to $176.2 million during the third quarter of 2013. The decrease in the average balance of the loan portfolio was due to a decrease in the average balance of residential real estate loans, reflecting the volume of loans refinanced and subsequently sold into the secondary market.

Interest income on investment securities decreased $13,000 to $465,000 for the third quarter of 2013 compared to the third quarter of 2012. The decrease reflected a decrease in the average yield of investment securities to 2.93% during the third quarter of 2013 from 3.33% during the third quarter of 2012. The majority of our investment portfolio consists of municipal bonds which are exempt from federal taxation, resulting in a higher tax-equivalent yield. The decrease in the average yield was partially offset by an increase of $6.0 million in the average balance of the investment securities portfolio to $63.4 million during the third quarter of 2013, compared to $57.4 million for the third quarter of 2012.

Interest income on mortgage-backed securities increased $35,000 to $222,000 for the third quarter of 2013, compared to $187,000 for the third quarter of 2012. The increase reflected a 13 basis point increase in the average yield of mortgage-backed securities to 1.73% for the third quarter of 2013, compared to 1.60% for the third quarter of 2012. The average yield benefitted from lower premium amortization resulting from slower prepayment speeds on mortgage-backed securities during the third quarter of 2013. The amortization of premiums on mortgage-backed securities, which reduces the average yield, decreased $48,000 to $178,000 during the third quarter of 2013, compared to $226,000 during the third quarter of 2012. Interest income on mortgage-backed securities also increased due to a $4.7 million increase in the average balance of mortgage-backed securities to $51.3 million during the third quarter of 2013.

Interest income on other interest-earning assets, consisting of interest-earning demand and time deposit accounts and federal funds sold, decreased $1,000 to $10,000 during the third quarter of 2013 compared to the same quarter of 2012. The average balance of these accounts decreased $3.6 million to $4.8 million for the three months ended September 30, 2013 compared to $8.3 million for the three months ended September 30, 2012. The decrease in the average balance reflected a decrease in the average balance of federal funds sold. The average yield on other interest-earning assets increased to 0.86% during the third quarter of 2013 from 0.52% during the third quarter of 2012, reflecting the decrease in the lower-yielding federal funds sold during the comparative periods.

Interest Expense: Total interest expense decreased $138,000, or 23.9%, to $440,000 for the three months ended September 30, 2013 compared to $578,000 for the three months ended September 30, 2012. The lower interest expense reflects a $138,000 decrease in the cost of deposits.

Interest expense on deposits decreased $138,000 to $436,000 for the third quarter of 2013 compared to $574,000 for the third quarter of 2012. The decrease in interest expense on deposits was primarily due to a 22 basis point decrease in the average rate paid on deposits to 0.76% during the third quarter of 2013 from 0.98% during the third quarter of 2012. The decrease reflected ongoing low short-term market interest rates during 2013, as well as a change in the composition of our deposits. The average balance of deposits decreased $5.5 million to $229.6 million for the third quarter of 2013. The decrease reflected a $17.3 million decrease in the average balance of time deposit accounts, partially offset by a $10.7 million increase in the average balance of lower cost transaction accounts.

Interest paid on borrowed funds equaled $4,000 for the third quarters of 2013 and 2012. The average rate paid on borrowed funds decreased to 0.10% during the third quarter of 2013 compared to 0.25% during the third quarter of 2012. The average balance of borrowed funds increased $9.2 million to $15.7 million for the third quarter of 2013 compared to $6.5 million for the third quarter of 2012.

Net Interest Income: As a result of the changes in interest income and interest expense noted above, net interest income increased by $8,000, or 0.3%, to $2.6 million for the three months ended September 30, 2013 from the same period of 2012. Our interest rate spread decreased by 3 basis points to 3.42% during the third quarter of 2013 from 3.45% during the third quarter of 2012. Our net interest margin decreased 6 basis points to 3.55% for the third quarter of 2013 from 3.61% for the third quarter of 2012.

Provision for Loan Losses: The provision for loan losses is determined by management as the amount needed to maintain the allowance for loan losses, after net charge-offs have been deducted, at a level considered adequate to absorb inherent losses in the loan portfolio following management’s evaluation of the repayment capacity and collateral protection afforded by each problem credit and in accordance with accounting principles generally accepted in the United States of America.

The provision for loan losses totaled $10,000 during the third quarter of 2013, compared to $120,000 during the third quarter of 2012. Net charge-offs increased to $218,000 during the third quarter of 2013, compared to net charge-offs of $99,000 during the third quarter of 2012. The allowance for loan losses increased $113,000 to $3.3 million at September 30, 2013 from $3.2 million at September 30, 2012. Loans delinquent 30 days or more decreased $1.1 million to $1.8 million, or 0.99% of total loans, as of September 30, 2013, from $2.8 million, or 1.61% of total loans, as of December 31, 2012. Loans delinquent 30 days or more totaled $2.3 million, or 1.32% of total loans at September 30, 2012.

Provisions for loan losses have been made to bring the allowance for loan losses to a level deemed adequate following management’s evaluation of the repayment capacity and collateral protection afforded by each problem credit. This review also considered the local economy and the level of bankruptcies and foreclosures in our market area. The following table sets forth information regarding nonperforming assets at the dates indicated.

	September 30, 2013			December 31, 2012

Non-accruing loans:
One-to-four family residential	$	1,241,382		$	1,203,328
Commercial real estate		216,923			560,073
Commercial business		41,087			51,436
Home equity		158,850			276,877
Consumer		30,824			122,064
Total	$	1,689,066		$	2,213,778

Accruing loans delinquent more than 90 days:
Consumer		-			-
Total	$	-		$	-

Real estate owned:
One-to-four family residential	$	77,600		$	-
Commercial real estate		149,193			137,193
Total	$	226,793		$	137,193

Total nonperforming assets	$	1,915,859		$	2,350,971

Total as a percentage of total assets		0.60	%		0.73	%

Nonperforming assets decreased $435,000 to $1.9 million, or 0.60% of total assets, as of September 30, 2013, compared to $2.4 million, or 0.73% of total assets, as of December 31, 2012. The decrease in nonperforming assets was due to a $525,000 decrease in nonperforming loans and a $90,000 increase in real estate owned. Nonperforming loans decreased to $1.7 million as of September 30, 2013, from $2.2 million at December 31, 2012. The decrease in nonperforming loans primarily reflected the payoff of approximately $400,000 in nonaccrual loans and $170,000 in charge-offs.

The following table shows the aggregate principal amount of potential problem credits on the Company’s watch list at September 30, 2013 and December 31, 2012. All non-accruing loans are automatically placed on the watch list. Total watch list credits decreased $800,000 during 2013 to $7.0 million at September 30, 2013. The decrease in Substandard credits reflected payoffs totaling approximately $580,000 and charge-offs of $212,000. The decrease in Special Mention credits primarily reflected payoffs of approximately $160,000 and charge-offs of $49,000.


	September 30, 2013		December 31, 2012

Special Mention credits	$	1,255,272	$	1,846,851
Substandard credits		5,736,752		5,945,570
Total watch list credits	$	6,992,024	$	7,792,421

Non-Interest Income: Non-interest income decreased $349,000, or 25.7%, to $1.0 million for the three months ended September 30, 2013 from $1.4 million for the same period in 2012. The decrease in non-interest income resulted primarily from decreases of $229,000 in gains on the sale of available-for-sale securities and $136,000 in net income from mortgage banking operations, partially offset by an increase of $12,000 in commission income. The decrease in gains on the sale of securities reflected changing market conditions and a lower volume of securities sold as $7.2 million were sold during the third quarter of 2013 compared to $8.3 million during the same period of 2012. The decrease in mortgage banking income was due to a lower volume of loan sales, reflecting decreased loan demand mortgage rates increased. We sold $5.6 million of loans to the secondary market during the third quarter of 2013, compared to $14.4 million during the same period of 2012. The increase in commission income reflected improved market conditions.

Non-Interest Expense: Total non-interest expense increased $159,000, or 6.6%, to $2.6 million for the three months ended September 30, 2013. The increase in non-interest expense consisted mainly of increases of $129,000 in other non-interest expense and $50,000 in data processing and telecommunications expense. The increase in other non-interest expense is primarily due to a one-time charge of $74,000 related to the sale of our former main office building. Future occupancy expense should be lower as a result of the sale of this facility. The increase in data processing expense reflects non-recurring consulting expenses related to software upgrades and training.

Income Taxes: The provision for income taxes decreased $146,000 to $272,000 during the third quarter of 2013 compared to the same period of 2012. The decrease in the income tax provision reflected a decrease in taxable income. The effective tax rate was 25.7% and 28.9% during the three months ended September 30, 2013 and 2012, respectively, reflecting the impact of tax-exempt income.

Comparison of Operating Results for the Nine Months Ended September 30, 2013 and 2012

General: Net income for the nine months ended September 30, 2013 was $2.6 million, or $1.37 per common share, basic and diluted, compared to net income of $2.8 million, or $1.48 per common share, basic and diluted, for the nine months ended September 30, 2012. The $233,000 decrease in net income reflects decreases of $357,000 in net interest income and $126,000 in non-interest income and an increase of $183,000 in non-interest expense, partially offset by decreases of $330,000 in the provision for loan losses and $103,000 in income taxes.

Interest Income: Total interest income for the nine months ended September 30, 2013 decreased $763,000, or 7.9%, to $8.9 million from $9.7 million for the same period of 2012. The decrease in interest income reflected decreases of $508,000 in interest income on loans, $163,000 in interest income on investment securities, and $91,000 in interest income on mortgage-backed securities.

Interest income on loans decreased $508,000 to $7.0 million for the first nine months of 2013, compared to $7.5 million for the same period of 2012. The decrease in interest income on loans was primarily due to a decrease in the average yield of loans. The average yield on loans decreased 39 basis points to 5.39% during the first nine months of 2013 from 5.78% during the first nine months of 2012. The decrease in the average yield reflected lower market rates of interest and the competitive lending environment. The average balance of the loan portfolio equaled $173.4 million and $173.3 million for the first nine months of 2013 and 2012, respectively.

Interest income on investment securities decreased $163,000 to $1.3 million for the first nine months of 2013 from the same period of 2012. The decrease in interest income reflects a decrease in the average yield, partially offset by an increase in the average balance of investment securities. The average yield of investment securities decreased 45 basis points to 2.99% during the first nine months of 2013 from 3.44% for the first nine months of 2012 due to purchases of newer securities at lower interest rates. The majority of our investment portfolio consists of municipal bonds which are exempt from federal taxation, resulting in a higher tax-equivalent yield. The average balance of the investment securities portfolio increased to $59.9 million during the first nine months of 2013, compared to $58.3 million for the first nine months of 2012.

Interest income on mortgage-backed securities decreased $91,000 to $554,000 for the first nine months of 2013, compared to $645,000 for the same period of 2012. The decrease reflected a 46 basis point decrease in the average yield of mortgage-backed securities to 1.46% for the first nine months of 2013, compared to 1.92% for the same period of 2012. The average yield was impacted by higher premium amortization resulting from faster prepayment speeds on mortgage-backed securities during 2013. The amortization of premiums on mortgage-backed securities, which reduces the average yield, increased $92,000 to $648,000 during the first nine months of 2013, compared to $556,000 during the first nine months of 2012. The decrease in interest income on mortgage-backed securities was partially offset by an increase of $5.9 million in the average balance of mortgage-backed securities to $50.7 million during the nine months of 2013 as compared to the same period in 2012.

Interest income on other interest-earning assets, consisting of interest-earning demand and time deposit accounts and federal funds sold, decreased to $34,000 during the first nine months of 2013 from $35,000 during the same period of 2012. The average balance of these accounts decreased $3.2 million to $9.0 million for the nine months ended September 30, 2013 compared to $12.2 million for the nine months ended September 30, 2012. The average yield on other interest-earning assets increased to 0.51% during the first nine months of 2013 from 0.38% during the first nine months of 2012.

Interest Expense: Total interest expense decreased $407,000, or 22.9%, to $1.4 million for the nine months ended September 30, 2013 compared to $1.8 million for the nine months ended September 30, 2012. The lower interest expense was primarily due to a $405,000 decrease in the cost of deposits.

Interest expense on deposits decreased $405,000 to $1.4 million for the nine months ended September 30, 2013 compared to $1.8 million for the nine months ended September 30, 2012. The decrease in interest expense on deposits was primarily due to a 21 basis point decrease in the average rate paid to 0.78% during the first nine months of 2013 from 0.99% during the first nine months of 2012. The decrease reflected low short-term market interest rates which continued during 2013, as well as a change in the composition of our deposits. The average balance of deposits decreased $3.5 million to $232.6 million for the first nine months of 2013 compared to $236.2 million for the first nine months of 2012.

Interest paid on borrowed funds decreased $2,000 to $9,000 for the nine months ended September 30, 2013 due to a decrease in the average cost of borrowings. The average rate paid on borrowed funds decreased to 0.14% during the first nine months of 2013 compared to 0.26% during the first nine months of 2012. The average balance of borrowed funds increased $3.1 million to $8.6 million during the first nine months of 2013 compared to $5.5 million during the same period of 2012.

Net Interest Income: As a result of the changes in interest income and interest expense noted above, net interest income decreased by $357,000, or 4.5%, to $7.6 million for the nine months ended September 30, 2013 from $7.9 million for the nine months ended September 30, 2012. Our interest rate spread decreased by 19 basis points to 3.31% during the first nine months of 2013 from 3.50% during the first nine months of 2012. Our net interest margin decreased 21 basis points to 3.45% for the first nine months of 2013 from 3.66% for the first nine months of 2012.

Provision for Loan Losses: The provision for loan losses is determined by management as the amount needed to maintain the allowance for loan losses, after net charge-offs have been deducted, at a level considered adequate to absorb inherent losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America. The following table shows the activity in the allowance for loan losses for the nine months ended September 30, 2013 and 2012.

	Nine Months Ended
	September 30, 2013		September 30, 2012

Balance at beginning of period	$	3,339,464	$	3,296,607
Charge-offs:
One-to-four family residential		162,447		76,705
Commercial real estate		-		356,270
Home equity		48,383		80,126
Consumer		66,467		64,801
Total		277,297		577,902
Recoveries:
One-to-four family residential		15,771		25,053
Commercial real estate		111,569		17,716
Commercial business		7,341		13,112
Home equity		14,510		3,285
Consumer		13,138		3,871
Total		162,329		63,037
Net loan charge-offs		114,968		514,865
Additions charged to operations		40,000		370,000
Balance at end of period	$	3,264,496	$	3,151,742

The allowance for loan losses increased $113,000 to $3.3 million at September 30, 2013, from $3.2 million at September 30, 2012. The provision decreased $330,000 to $40,000 during the first nine months of 2013, compared to $370,000 during the first nine months of 2012. Net charge-offs decreased $400,000 to $115,000 during the first nine months of 2013, compared to $515,000 during the first nine months of 2012. The decrease in net charge-offs during 2013 is primarily due to the write-off of $340,000 on one loan secured by commercial real estate during 2012. The decrease in the provision and the allowance for loan losses during 2013 reflected the lower level of nonperforming loans and watch list credits.

Non-Interest Income: Non-interest income decreased $126,000, or 3.4%, to $3.5 million for the nine months ended September 30, 2013. The decrease in non-interest income resulted primarily from decreases of $203,000 in net income from mortgage banking operations and $67,000 in gains on the sale of available-for-sale securities, partially offset by an increase of $99,000 in commission income. The decrease in mortgage banking operations income was due to a lower volume of loan sales in 2013, as we sold $20.6 million of loans to the secondary market during the first nine months of 2013, compared to $37.5 million during the same period of 2012. The lower volume of sales reflected a reduced volume of mortgage originations, which are affected by changes in market interest rates. The decrease in gains on the sale of securities reflected changing market conditions, as a higher volume of securities totaling $25.3 million were sold during the first nine months of 2013 compared to $23.2 million during the same period of 2012. Securities sales during 2013 were primarily made to reduce the volatility to interest rate changes in municipal bonds and to eliminate faster paying mortgage-backed securities. The increase in commission income reflected improved market conditions and increased account activity during 2013.

Non-Interest Expense: Total non-interest expense increased $183,000, or 2.5%, to $7.5 million for the nine months ended September 30, 2013. The increase in non-interest expense consisted mainly of increases of $86,000 in other non-interest expense and $63,000 in data processing and telecommunications expense. The increase in other non-interest expense is primarily due to a one-time charge of $74,000 related to the sale of our former main office building, which should benefit future occupancy expense. The increase in data processing expense reflects non-recurring consulting expenses related to software upgrades and training.

Income Taxes: The provision for income taxes decreased $102,000 to $981,000 during the first nine months of 2013 compared to $1.1 million during the same period of 2012. The decrease in the income tax provision reflected a decrease in taxable income. The effective tax rate was 27.7% and 28.0% during the nine months ended September 30, 2013 and 2012, respectively, reflecting the impact of tax exempt income.

Liquidity and Capital Resources

The Company’s most liquid assets are cash and cash equivalents. The levels of these assets are dependent on the Company’s operating, financing, and investing activities. At September 30, 2013 and December 31, 2012, cash and cash equivalents totaled $5.6 million and $7.3 million, respectively. The Company’s primary sources of funds include principal and interest repayments on loans (both scheduled payments and prepayments), maturities of investment securities and principal repayments from mortgage-backed securities (both scheduled payments and prepayments). During the past nine months, the most significant sources of funds have been calls and sales of investment securities, principal repayments on loans and mortgage-backed securities, and other borrowings. These funds have been used primarily for purchases of U.S. Agency, municipal and mortgage-backed securities, loan originations, and stock repurchases.

While scheduled loan repayments and proceeds from maturing investment securities and principal repayments on mortgage-backed securities are relatively predictable, deposit flows and prepayments are more influenced by interest rates, general economic conditions, and competition. The Company attempts to price its deposits to meet asset-liability objectives and stay competitive with the local market.

Liquidity management is both a short- and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) projected purchases of investment and mortgage-backed securities, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) liquidity of its asset/liability management program. Excess liquidity is generally invested in interest-earning overnight deposits and other short-term U.S. agency obligations. If the Company requires funds beyond its ability to generate them internally, it has the ability to borrow funds from the FHLB. The Company may borrow from the FHLB under a blanket agreement which assigns all investments in FHLB stock as well as qualifying first mortgage loans equal to 150% of the outstanding balance as collateral to secure the amounts borrowed. This borrowing arrangement is limited to a maximum of 30% of the Company’s total assets or twenty times the balance of FHLB stock held by the Company. At September 30, 2013, the Company had $15.5 million in outstanding overnight FHLB advances and approximately $7.4 million available to it under the above-mentioned borrowing arrangement.

The Company maintains minimum levels of liquid assets as established by the Board of Directors. The Company’s liquidity ratios at September 30, 2013 and December 31, 2012 were 41.9% and 43.5%, respectively. This ratio represents the volume of short-term liquid assets as a percentage of net deposits and borrowings due within one year.

The Company must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments. The Company anticipates that it will have sufficient funds available to meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed above. The following table summarizes these commitments at September 30, 2013 and December 31, 2012.


	September 30, 2013		December 31, 2012

Commitments to fund loans	$	37,904,233	$	34,748,383
Standby letters of credit		360,000		368,390

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined). Management believes that at September 30, 2013, the Company met all its capital adequacy requirements.

Under Illinois law, Illinois-chartered savings banks are required to maintain a minimum core capital to total assets ratio of 3%. The Illinois Commissioner of Savings and Residential Finance (the “Commissioner”) is authorized to require a savings bank to maintain a higher minimum capital level if the Commissioner determines that the savings bank’s financial condition or history, management or earnings prospects are not adequate. If a savings bank’s core capital ratio falls below the required level, the Commissioner may direct the savings bank to adhere to a specific written plan established by the Commissioner to correct the savings bank’s capital deficiency, as well as a number of other restrictions on the savings bank’s operations, including a prohibition on the declaration of dividends by the savings bank’s board of directors. At September 30, 2013, the Bank’s core capital ratio was 11.24% of total average assets, which substantially exceeded the required amount.

The Bank is also required to maintain regulatory capital requirements imposed by the Federal Deposit Insurance Corporation. The Bank must have: (i) Tier 1 Capital to Average Assets of 4.0%, (ii) Tier 1 Capital to Risk-Weighted Assets of 4.0%, and (iii) Total Capital to Risk-Weighted Assets of 8.0%. At September 30, 2013 and December 31, 2012, minimum requirements and the Bank’s actual ratios are as follows:


	September 30, 2013		December 31, 2012		Minimum
	Actual		Actual		Required
Tier 1 Capital to Average Assets		11.24%		10.89%		4.00%
Tier 1 Capital to Risk-Weighted Assets		16.75%		16.46%		4.00%
Total Capital to Risk-Weighted Assets		18.00%		17.72%		8.00%

Effect of Inflation and Changing Prices

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

The following table sets forth the average balances and interest rates (costs) on the Company’s assets and liabilities during the periods presented.

Consolidated Average Balance Sheet and Interest Rates
(Dollars in thousands)
	Three Months Ended September 30,
	2013							2012
	Average							Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost

Interest-earnings assets:
Loans	$	176,231	$	2,364		5.37	%	$	177,190	$	2,515		5.68	%
Investment securities		63,445		465		2.93	%		57,421		478		3.33	%
Mortgage-backed securities		51,302		222		1.73	%		46,630		187		1.60	%
Other		4,767		10		0.86	%		8,340		11		0.52	%
Total interest-earning assets		295,745		3,061		4.14	%		289,581		3,191		4.41	%

Non-interest earnings assets		21,382							22,448
Total assets	$	317,127						$	312,029

Interest-bearing liabilities:
Deposits	$	229,575	$	436		0.76	%	$	235,096	$	573		0.98	%
Other borrowings		15,677		4		0.10	%		6,467		4		0.25	%
Total interest-bearing liabilities		245,252		440		0.72	%		241,563		577		0.96	%

Non-interest bearing liabilities		30,829							26,559
Stockholders’ equity		41,046							43,907

Total liabilities/stockholders’ equity	$	317,127						$	312,029

Net interest income			$	2,621						$	2,614

Interest rate spread (average yield earned minus average rate paid)						3.42	%						3.45	%

Net interest margin (net interest income divided by average interest-earning assets)						3.55	%						3.61	%

The following table sets forth the changes in rate and changes in volume of the Company’s interest earning assets and liabilities for the comparative three month periods.

Analysis of Volume and Rate Changes
(In thousands)
Three Months Ended September 30,
	2013 Compared to 2012
	Increase(Decrease) Due to
	Rate			Volume			Net

Interest-earnings assets:
Loans	$	(138	)	$	(13	)	$	(151	)
Investment securities		(60	)		47			(13	)
Mortgage-backed securities		16			19			35
Other		5			(6	)		(1	)
Total net change in income on
interest-earning assets		(177	)		47			(130	)

Interest-bearing liabilities:
Deposits		(125	)		(13	)		(138	)
Other borrowings		(3	)		3			-
Total net change in expense on
interest-bearing liabilities		(128	)		(10	)		(138	)

Net change in net interest income	$	(49	)	$	57		$	8

The following table sets forth the average balances and interest rates (costs) on the Company’s assets and liabilities during the periods presented.


Consolidated Average Balance Sheet and Interest Rates
(Dollars in thousands)
	Nine Months Ended September 30,
	2013							2012
	Average							Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost

Interest-earnings assets:
Loans	$	173,382	$	7,009		5.39	%	$	173,288	$	7,517		5.78	%
Investment securities		59,867		1,341		2.99	%		58,322		1,504		3.44	%
Mortgage-backed securities		50,744		554		1.46	%		44,845		645		1.92	%
Other		8,963		34		0.51	%		12,246		35		0.38	%
Total interest-earning assets		292,956		8,938		4.07	%		288,701		9,701		4.48	%

Non-interest earnings assets		21,552							22,169
Total assets	$	314,508						$	310,870

Interest-bearing liabilities:
Deposits	$	232,632	$	1,357		0.78	%	$	236,175	$	1,762		0.99	%
Other borrowings		8,576		9		0.14	%		5,451		11		0.26	%
Total interest-bearing liabilities		241,208		1,366		0.76	%		241,626		1,773		0.98	%

Non-interest bearing liabilities		30,188							26,392
Stockholders’ equity		43,112							42,852

Total liabilities/stockholders’ equity	$	314,508						$	310,870

Net interest income			$	7,572						$	7,928

Interest rate spread (average yield earned
minus average rate paid)						3.31	%						3.50	%

Net interest margin (net interest income
divided by average interest-earning assets)						3.45	%						3.66	%

The following table sets forth the changes in rate and changes in volume of the Company’s interest earning assets and liabilities for the comparative nine month periods.


Analysis of Volume and Rate Changes
(In thousands)
Nine Months Ended September 30,
	2013 Compared to 2012
	Increase(Decrease) Due to
	Rate			Volume			Net

Interest-earnings assets:
Loans	$	(512	)	$	4		$	(508	)
Investment securities		(202	)		39			(163	)
Mortgage-backed securities		(169	)		78			(91	)
Other		10			(11	)		(1	)

Total net change in income on interest-earning assets		(873	)		110			(763	)

Interest-bearing liabilities:
Deposits		(379	)		(26	)		(405	)
Other borrowings		(6	)		5			(1	)

Total net change in expense on interest-bearing liabilities		(385	)		(21	)		(406	)

Net change in net interest income	$	(488	)	$	131		$	(357	)

JACKSONVILLE BANCORP, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s policy in recent years has been to reduce its interest rate risk by better matching the maturities of its interest rate sensitive assets and liabilities, selling its long-term fixed-rate residential mortgage loans with terms of 15 years or more to the secondary market, originating adjustable rate loans, balloon loans with terms ranging from three to five years and originating consumer and commercial business loans, which typically are for a shorter duration and at higher rates of interest than one-to-four family loans. Our portfolio of mortgage-backed securities also provides monthly cash flow. The remaining investment portfolio has been structured to better match the maturities and rates of its interest-bearing liabilities. With respect to liabilities, the Company has attempted to increase its savings and transaction deposit accounts, which management believes are more resistant to changes in interest rates than certificate accounts. The Board of Directors appoints the Asset-Liability Management Committee (ALCO), which is responsible for reviewing the Company’s asset and liability policies. The ALCO meets quarterly to review interest rate risk and trends, as well as liquidity and capital ratio requirements.

The Company uses a comprehensive asset/liability software package provided by a third-party vendor to perform interest rate sensitivity analysis for all product categories. The primary focus of the Company’s analysis is on the effect of interest rate increases and decreases on net interest income. Management believes that this analysis reflects the potential effects on current earnings of interest rate changes. Call criteria and prepayment assumptions are taken into consideration for investment securities and loans. All of the Company’s interest sensitive assets and liabilities are analyzed by product type and repriced based upon current offering rates. The software performs interest rate sensitivity analysis by performing rate shocks in 100 basis point increments.

The following table shows projected results at September 30, 2013 and December 31, 2012 of the impact on net interest income from an immediate change in interest rates, as well as the benchmarks established by the ALCO. The results are shown as a dollar and percentage change in net interest income over the next twelve months.

	Change in Net Interest Income
	(Dollars in thousands)
	September 30, 2013						December 31, 2012							ALCO
Rate Shock:	$ Change			% Change				$ Change			% Change			Benchmark
+ 300 basis points		(189	)		-1.64	%			(193	)		-1.64	%	> (20.00)%
+ 200 basis points		(123	)		-1.07	%			(95	)		-0.81	%	> (20.00)%
+ 100 basis points		(36	)		-0.31	%			(34	)		-0.29	%	> (12.50)%
- 100 basis points		(172	)		-1.49	%			(503	)		-4.26	%	> (12.50)%

The table above indicates that as of September 30, 2013, in the event of a 200 basis point increase in interest rates, we would experience a 1.07% decrease in net interest income. In the event of a 100 basis point decrease in interest rates, we would experience a 1.49% decrease in net interest income.

The foregoing computations are based upon numerous assumptions, including relative levels of market interest rates, prepayments, and deposit mix. The computed estimates should not be relied upon as a projection of actual results. Despite the limitations on precision inherent in these computations, management believes that the information provided is reasonably indicative of the effect of changes in interest rate levels on the net earning capacity of the Company’s current mix of interest earning assets and interest bearing liabilities. Management continues to use the results of these computations, along with the results of its computer model projections, in order to maximize current earnings while positioning the Company to minimize the effect of a prolonged shift in interest rates that would adversely affect future results of operations.

At the present time, the most significant market risk affecting the Company is interest rate risk. Other market risks such as foreign currency exchange risk and commodity price risk do not occur in the normal business of the Company. The Company also is not currently using trading activities or derivative instruments to control interest rate risk.

JACKSONVILLE BANCORP, INC.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13(a)-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13(a)-15(e) that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings

	At September 30, 2013, the Company is not involved in any pending legal proceedings other than non-material legal proceedings undertaken in the normal course of business.

Item 1.A.	Risk Factors

	There have been no material changes in the Company’s risk factors from those disclosed in its annual report on Form 10-K.

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

	The following table sets forth the issuer purchases of equity securities during the prior three months.

	Total number of shares purchased	Average price paid per share	Total number of shares purchased under publicly announced plan	Maximum number of shares that may be purchased under the repurchase plan
July 1 – July 31	26,500	$ 19.55	26,500	35,694
August 1 – August 31	14,800	19.60	14,800	20,894
September 1 – September 30	20,894	19.50	20,894	-

	On October 15, 2013, the Company’s Board of Directors authorized a new stock repurchase plan for the repurchase of up to 5% of its outstanding shares of common stock, or 92,018 shares. The shares may be repurchased in the open market, in block trades or in privately negotiated transactions depending on market conditions. The Company’s previous repurchase plan was fulfilled during the third quarter of 2013.

Item 3.	Defaults Upon Senior Securities

	None.

Item 4.	Mine Safety Disclosures

	None.

Item 5.	Other Information

	None.

Item 6.	Exhibits

	31.1 - Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
	31.2 - Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
	32.1 - Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	101 INS - XBRL Instance Document 101 SCH - XBRL Taxonomy Extension Schema Document 101 CAL - XBRL Taxonomy Calculation Linkbase Document 101 DEF - XBRL Taxonomy Extension Definition Linkbase Document 101 LAB - XBRL Taxonomy Label Linkbase Document 101 PRE - XBRL Taxonomy Presentation Linkbase Document

SIGNATURES

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

	JACKSONVILLE BANCORP, INC. Registrant

Date: 11/08/2013	/s/ Richard A. Foss
	Richard A. Foss
	President and Chief Executive Officer


	/s/ Diana S. Tone
	Diana S. Tone
	Chief Financial Officer

EXHIBITS