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 June 30, 2012

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 August 1, 2012, there were 1,920,955 shares of the Registrant’s common stock issued and outstanding.

JACKSONVILLE BANCORP, INC.

FORM 10-Q

June 30, 2012

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	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	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	53
Item 4	Controls and Procedures	55
PART II	OTHER INFORMATION	56
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

	June 30,			December 31,
ASSETS	2012			2011
	(Unaudited)
Cash and cash equivalents	$	9,298,031		$	11,387,947
Interest-earning time deposits in banks		2,972,000			2,476,000
Investment securities - available for sale		61,715,684			62,257,962
Mortgage-backed securities - available for sale		48,917,896			40,364,086
Federal Home Loan Bank stock		1,113,800			1,113,800
Other investment securities		106,038			116,088
Loans held for sale - net		674,052			446,818
Loans receivable - net of allowance for loan losses of $3,130,503 and $3,296,607 as of June 30, 2012 and December 31, 2011		172,029,486			170,865,102
Premises and equipment - net		5,586,334			5,532,720
Cash surrender value of life insurance		6,502,054			4,402,602
Accrued interest receivable		2,083,481			2,071,534
Goodwill		2,726,567			2,726,567
Capitalized mortgage servicing rights, net of valuation allowance of $148,983 and $173,791 as of June 30, 2012 and December 31, 2011		668,247			697,733
Real estate owned		291,983			435,480
Deferred income taxes		108,944			413,110
Other assets		2,112,935			1,981,808
Total Assets	$	316,907,532		$	307,289,357
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	261,552,747		$	254,240,060
Other borrowings		6,109,700			6,517,750
Advance payments by borrowers for taxes and insurance		952,129			740,083
Accrued interest payable		323,926			349,121
Deferred compensation payable		3,467,536			3,295,827
Other liabilities		1,208,861			981,093
Total liabilities		273,614,899			266,123,934
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 1,922,156 shares as of June 30, 2012 and 1,920,955 shares as of December 31, 2011		19,222			19,210
Additional paid-in-capital		16,111,816			16,066,624
Retained earnings		24,246,970			22,767,719
Less: Unallocated ESOP shares		(349,830	)		(360,620	)
Accumulated other comprehensive income		3,264,455			2,672,490
Total stockholders’ equity		43,292,633			41,165,423
Total Liabilities and Stockholders’ Equity	$	316,907,532		$	307,289,357

See accompanying notes to the unaudited condensed consolidated financial statements.

1

 JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
	(Unaudited)				(Unaudited)
INTEREST INCOME:
Loans	$	2,461,445	$	2,711,572	$	5,001,988	$	5,366,978
Investment securities		501,739		516,333		1,026,241		1,002,231
Mortgage-backed securities		252,869		366,951		458,194		646,715
Other		12,245		640		23,766		2,339
Total interest income		3,228,298		3,595,496		6,510,189		7,018,263
INTEREST EXPENSE:
Deposits		583,718		747,041		1,188,464		1,547,130
Other borrowings		3,892		5,238		6,683		9,865
Total interest expense		587,610		752,279		1,195,147		1,556,995
NET INTEREST INCOME		2,640,688		2,843,217		5,315,042		5,461,268
PROVISION FOR LOAN LOSSES		170,000		150,000		250,000		325,000
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		2,470,688		2,693,217		5,065,042		5,136,268
NON-INTEREST INCOME:
Fiduciary activities		60,944		57,688		138,720		117,708
Commission income		265,811		347,187		512,228		759,927
Service charges on deposit accounts		208,992		232,858		399,494		452,023
Mortgage banking operations, net		96,606		58,689		213,732		66,577
Net realized gains on sales of available-for-sale securities		301,580		55,713		526,908		109,218
Loan servicing fees		88,767		92,243		179,029		186,605
Other		163,083		130,331		320,057		267,414
Total non-interest income		1,185,783		974,709		2,290,168		1,959,472
NON-INTEREST EXPENSE:
Salaries and employee benefits		1,602,441		1,554,657		3,175,383		3,083,776
Occupancy and equipment		241,759		255,588		490,012		494,828
Data processing and telecommunications		140,551		137,935		270,194		284,361
Professional		81,821		46,226		133,250		96,607
Postage and office supplies		68,090		62,591		134,249		139,851
Deposit insurance premium		38,452		53,830		77,419		150,456
Other		337,581		283,858		647,289		574,466
Total non-interest expense		2,510,695		2,394,685		4,927,796		4,824,345
INCOME BEFORE INCOME TAXES		1,145,776		1,273,241		2,427,414		2,271,395
INCOME TAXES		298,713		368,407		665,601		631,822
NET INCOME	$	847,063	$	904,834	$	1,761,813	$	1,639,573
NET INCOME PER COMMON SHARE - BASIC	$	0.45	$	0.48	$	0.93	$	0.87
NET INCOME PER COMMON SHARE - DILUTED	$	0.45	$	0.48	$	0.93	$	0.87

See accompanying notes to the unaudited condensed consolidated financial statements.

2

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
	(Unaudited)				(Unaudited)
Net Income	$	847,063	$	904,834	$	1,761,813	$	1,639,573
Other Comprehensive Income
Unrealized appreciation on available-for-sale securities, net of taxes of $431,054 and $716,438 for the three months ended June 30, 2012 and 2011, respectively, and $484,101 and $886,256 for the six months ended June 30, 2012 and 2011, respectively.		836,753		1,390,735		939,724		1,720,380
Less: reclassification adjustment for realized gains included in net income, net of taxes of $102,537 and $18,942, for the three months ended June 30, 2012 and 2011, respectively, and $179,149 and $37,134 for the six months ended June 30, 2012 and 2011, respectively.		199,043		36,771		347,759		72,084
		637,710		1,353,964		591,965		1,648,296
Comprehensive Income	$	1,484,773	$	2,258,798	$	2,353,778	$	3,287,869

See accompanying notes to unaudited condensed consolidated financial statements.

3

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

											Accumulated
			Additional								Other		Total
	Common		Paid-in		Retained			Unallocated			Comprehensive		Stockholders’
(Unaudited)	Stock		Capital		Earnings			ESOP Shares			Income		Equity
BALANCE, DECEMBER 31, 2011	$	19,210	$	16,066,624	$	22,767,719		$	(360,620	)	$	2,672,490	$	41,165,423
Net Income		-		-		1,761,813			-			-		1,761,813
Other comprehensive income		-		-		-			-			591,965		591,965
Exercise of stock options		12		15,487		-			-			-		15,499
Tax benefit of non-qualified options		-		1,291		-			-			-		1,291
Vesting options expense		-		22,479		-			-			-		22,479
Shares held by ESOP, commited to be released		-		5,935		-			10,790			-		16,725
Dividends ($0.15 per share)		-		-		(282,562	)		-			-		(282,562	)
BALANCE, JUNE 30, 2012	$	19,222	$	16,111,816	$	24,246,970		$	(349,830	)	$	3,264,455	$	43,292,633

See accompanying notes to unaudited condensed consolidated financial statements.

4

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
	2012			2011
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,761,813		$	1,639,573
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion:
Premises and equipment		166,365			155,589
Amortization of investment premiums and discounts, net		334,966			225,574
Accretion of loan discounts		(37,228	)		(2,901	)
Net realized gains on sales of available-for-sale securities		(526,908	)		(109,218	)
Provision for loan losses		250,000			325,000
Mortgage banking operations, net		(213,732	)		(66,577	)
Gain on sale of real estate owned		(30,609	)		(31,142	)
Shares held by ESOP commited to be released		16,725			13,127
Tax benefit related to stock options exercised		1,291			4,609
Stock option compensation expense		22,479			-
Changes in income taxes payable		(205,437	)		(7,178	)
Changes in assets and liabilities		357,497			(393,449	)
Net cash provided by operations before loan sales		1,897,222			1,753,007
Origination of loans for sale to secondary market		(23,066,615	)		(7,348,818	)
Proceeds from sales of loans to secondary market		23,082,599			7,467,242
Net cash provided by operating activities		1,913,206			1,871,431
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment and mortgage-backed securities		(33,802,052	)		(33,369,259	)
Purchases of interest-earning time deposits in other banks		(496,000	)		-
Maturity or call of investment securities available-for-sale		7,328,000			6,255,000
Sale of investment securities available-for-sale		14,854,329			16,910,803
Principal payments on mortgage-backed and investment securities		4,707,101			3,589,255
Purchase of bank-owned life insurance		(2,000,000	)		-
Proceeds from sale of real estate owned		327,395			198,699
Net (increase) decrease in loans		(1,551,536	)		1,141,405
Additions to premises and equipment		(219,979	)		(130,758	)
Net cash used in investing activities		(10,852,742	)		(5,404,855	)

(Continued)

5

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

	Six Months Ended June 30,
	2012			2011
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	7,312,687		$	183,095
Net increase (decrease) in other borrowings		(408,050	)		135,227
Increase in advance payments by borrowers for taxes and insurance		212,046			86,009
Exercise of stock options		15,499			211,568
Purchase and retirement of treasury stock related to stock options		-			(181,941	)
Dividends paid - common stock		(282,562	)		(279,546	)
Net cash provided by financing activities		6,849,620			154,412
NET DECREASE IN CASH AND CASH EQUIVALENTS		(2,089,916	)		(3,379,012	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		11,387,947			8,943,400
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	9,298,031		$	5,564,388
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits	$	1,213,658		$	1,695,106
Interest on other borrowings		6,683			9,801
Income taxes paid		872,000			589,000
NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans	$	217,130		$	391,246
Loans to facilitate sales of real estate owned		42,750			131,834

See accompanying notes to unaudited condensed consolidated financial statements.

6

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 June 30, 2012 and December 31, 2011 and the results of its operations for the three and six month periods ended June 30, 2012 and 2011.  The results of operations for the three and six month periods ended June 30, 2012 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, 2011 filed as an exhibit to the Company’s Form 10-K filed in March, 2012.  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 2011 consolidated statements have been reclassified to conform to the 2012 presentation.

2.   NEW ACCOUNTING PRONOUNCEMENTS

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements by U.S. GAAP and IFRSs.  The amendments in this ASU generally represent clarifications of FASB ASC Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed.  This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs.  The amendments in this ASU are to be applied prospectively.  For public entities, the amendments are effective for interim and annual periods beginning after December 15, 2011.  Early application by public entities was not permitted.  The adoption of this ASU is reflected in Note 8 – Disclosures about Fair Value of Assets and Liabilities.

In June 2011, the FASB issued ASU No. 2011-05, Amendments to Topic 220, Comprehensive Income.  Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income.  This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity.  The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  The amendments in this ASU should be applied retrospectively.  For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  Early adoption was permitted.  The Company retrospectively adopted the ASU during the first quarter of 2012 with separate condensed consolidated statements of comprehensive income.

7

In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment.  The update provides entities with the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.  However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit.  If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any.  Under the amendments in ASU No. 2011-08, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the first step of the two-step goodwill impairment test.  An entity may resume performing the qualitative assessment in any subsequent period.  The amendments enacted by ASU No. 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for the nonpublic entities, have not yet been made available for issuance.  The adoption of this update did not have any impact on the Company’s consolidated financial position or results of operations.

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.  ASU 2011-11 requires an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement.  ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2012, and interim periods within those annual periods.  Retrospective disclosure is required for all comparative periods presented.  The adoption of this update did not have any impact on the Company’s consolidated financial position or results of operations.

8

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 June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Net income available to common shareholders	$	847,063	$	904,834	$	1,761,813	$	1,639,573
Basic average shares outstanding		1,886,211		1,891,706		1,885,638		1,888,670
Diluted potential common shares:
Stock option equivalents		475		-		326		-
Diluted average shares outstanding		1,886,686		1,891,706		1,885,964		1,888,670
Basic earnings per share	$	0.45	$	0.48	$	0.93	$	0.87
Diluted earnings per share	$	0.45	$	0.48	$	0.93	$	0.87

Stock options for 104,035 shares of common stock were not considered in computing diluted earnings per share for the three and six month periods ending June 30, 2012, because they were anti-dilutive.  Stock options for 4,504 shares of common stock were not considered in computing diluted earnings per share for the three and six month periods ending June 30, 2011, because they were anti-dilutive.

9

4.   STOCK–BASED COMPENSATION

In connection with our 2010 second step conversion and related stock offering, the Bank 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 June 30, 2012 and 2011 is shown below.

	June 30, 2012		June 30, 2011
Unearned shares		34,983		38,495
Shares committed for release		1,079		1,038
Allocated shares		52,815		49,344
Total ESOP shares		88,877		88,877
Fair value of unearned shares	$	591,213	$	481,188

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 issuance.  Apart from the vesting schedule, there are no performance-based conditions or any other material conditions applicable to the options issued.

10

The following table summarizes stock option activity for the six months ended June 30, 2012.

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Instrinsic
	Options			Price/Share		Life (in years)		Value
Outstanding, December 31, 2011		4,504		$	13.98
Granted		104,035			15.65
Exercised		(1,201	)		13.98
Forfeited		-			-
Outstanding, June 30, 2012		107,338		$	15.60		9.75	$	139,539
Exercisable, June 30, 2012		3,303		$	13.98		2.00	$	9,645

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 $16.90 per share on June 30, 2012.

The fair value for each option grant is estimated on the date of grant using the Black-Scholes option pricing model that uses the following assumptions.  The Company uses the U.S. Treasury yield curve in effect at the time of the grant to determine the risk-free interest rate.  The expected dividend yield is estimated using the projected annual dividend level and the recent stock price of the Company’s common stock at the date of grant.  Expected volatility is based upon historical volatility of the Company’s stock.  The expected term of the options granted represents the period of time that options are expected to be outstanding.

The weighted average assumptions used in the Black-Scholes option pricing model for the year indicated were as follows:

	2012
Risk-free interest rate		1.37	%
Expected dividend yield		2.19	%
Expected stock volatility		33.41	%
Expected life (years)		7.00
Fair value	$	4.34

11

5.   LOAN PORTFOLIO COMPOSITION

At June 30, 2012 and December 31, 2011, the composition of the Company’s loan portfolio is shown below.

	June 30, 2012						December 31, 2011
	Amount			Percent			Amount		Percent
Real estate loans:
One-to-four family residential	$	41,293,201			24.0	%	$	39,472,008		23.1	%
Commercial		37,868,011			22.0			40,169,813		23.5
Agricultural		32,612,241			19.0			29,971,649		17.5
Home equity		14,226,553			8.3			16,042,788		9.4
Total real estate loans		126,000,006			73.2			125,656,258		73.5
Commercial loans		23,953,566			13.9			23,198,454		13.6
Agricultural loans		10,263,526			6.0			9,590,745		5.6
Consumer loans		14,939,089			8.7			15,755,973		9.2
Total loans receivable		175,156,187			101.8			174,201,430		102.0
Less:
Net deferred loan fees		(3,802	)		(0.0	)		39,721		0.0
Allowance for loan losses		3,130,503			1.8			3,296,607		1.9
Total loans receivable, net	$	172,029,486			100.0	%	$	170,865,102		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 limits must be approved by the officers’ loan committee consisting of the chairman of the board, president, chief lending officer and all lending officers, which meets three times a week, and has lending authority up to $500,000 depending on the type of loan.  Loans with a principal balance over this limit, up to $1.0 million, must be approved by the directors’ loan committee, which meets weekly and consists of the chairman of the board, president, senior vice president, chief lending officer and at least two outside directors, plus all lending officers as non-voting members.  The board of directors approves all loans with a principal balance over $1.0 million.  The board of directors ratifies all loans 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.

12

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 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 Freddie Mac 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 for Freddie Mac.

The Company originates for resale to Freddie Mac 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 two years, the adjustable-rate portfolio has repriced downward resulting in lower interest income from this portion of the loan portfolio.  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.

13

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, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as collateral for the loan.  Due-on-sale clauses are a means of imposing assumption fees and increasing the interest rate on 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, should not generally exceed 38% of total monthly income.  Written appraisals are generally required on real estate property offered to secure an applicant’s loan.  For one-to-four family real estate loans with loan to value ratios of over 80%, 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.

14

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 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 prior mortgages or related liabilities.  Home equity loans and lines of credit are approved with both fixed and adjustable interest rates which we determine based upon market conditions.  Such loans may be fully amortized over the life of the loan or have a balloon feature.  Generally, the maximum term for home equity loans is 10 years.

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.

15

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.  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.

16

Current drought conditions are expected to reduce 2012 crop yields.  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 drought conditions.  The Company is currently evaluating the impact these conditions may have on its agricultural customers and to the local economy.

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.

17

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 June 30, 2012, June 30, 2011, and December 31, 2011.

	June 30, 2012
	1-4 Family			Commercial Real Estate			Agricultural Real Estate			Home Equity			Commercial		Agricultural			Consumer			Unallocated			Total
Allowance for Loan Losses:
Beginning Balance, April 1, 2012	$	667,641		$	1,098,838		$	123,105		$	349,467		$	708,016	$	62,562		$	128,927		$	192,355		$	3,330,911
Provision charged to expense		11,488			119,900			(74,187	)		(9,516	)		103,614		(26,528	)		80,192			(34,963	)		170,000
Losses charged off		(70,295	)		(257,043	)		-			(20,000	)		-		-			(50,421	)		-			(397,759	)
Recoveries		20,618			-			-			5,980			-		-			753			-			27,351
Ending balance, June 30, 2012	$	629,452		$	961,695		$	48,918		$	325,931		$	811,630	$	36,034		$	159,451		$	157,392		$	3,130,503
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		(19,719	)		111,153			(66,236	)		76,761			99,450		(22,394	)		72,152			(1,167	)		250,000
Losses charged off		(70,295	)		(257,043	)		-			(66,744	)		-		-			(53,385	)		-			(447,467	)
Recoveries		22,243			-			-			6,505			316		-			2,299			-			31,363
Ending balance, June 30, 2012	$	629,452		$	961,695		$	48,918		$	325,931		$	811,630	$	36,034		$	159,451		$	157,392		$	3,130,503
Ending balance:
individually evaluated for impairment	$	-		$	137,608		$	-		$	-		$	515,688	$	-		$	7,359		$	-		$	660,655
Ending balance:
collectively evaluated for impairment	$	629,452		$	824,087		$	48,918		$	325,931		$	295,942	$	36,034		$	152,092		$	157,392		$	2,469,848
Loans:
Ending balance	$	41,293,201		$	37,868,011		$	32,612,241		$	14,226,553		$	23,953,566	$	10,263,526		$	14,939,089		$	-		$	175,156,187
Ending balance:
individually evaluated for impairment	$	286,800		$	1,389,183		$	-		$	58,090		$	752,809	$	-		$	7,359		$	-		$	2,494,241
Ending balance:
collectively evaluated for impairment	$	41,006,401		$	36,478,828		$	32,612,241		$	14,168,463		$	23,200,757	$	10,263,526		$	14,931,730		$	-		$	172,661,946

18

	June 30, 2011
	1-4 Family			Commercial Real Estate			Agricultural Real Estate		Home Equity			Commercial			Agricultural		Consumer			Unallocated		Total
Allowance for Loan Losses:
Beginning Balance, April 1, 2011	$	514,330		$	1,093,553		$	104,867	$	267,660		$	506,317		$	141,044	$	121,873		$	129,606	$	2,879,250
Provision charged to expense		72,461			50,535			7,341		8,713			(52,393	)		11,375		4,490			47,478		150,000
Losses charged off		(24,809	)		-			-		-			-			-		-			-		(24,809	)
Recoveries		-			700			-		1,275			153,609			-		801			-		156,385
Ending balance, June 30, 2011	$	561,982		$	1,144,788		$	112,208	$	277,648		$	607,533		$	152,419	$	127,164		$	177,084	$	3,160,826
Beginning Balance, January 1, 2011	$	561,309		$	1,193,928		$	92,988	$	300,257		$	472,376		$	58,250	$	163,690		$	121,487	$	2,964,285
Provision charged to expense		32,884			202,803			19,220		(23,589	)		(18,652	)		94,169		(37,432	)		55,597		325,000
Losses charged off		(32,211	)		(260,785	)		-		(4,162	)		-			-		(1,097	)		-		(298,255	)
Recoveries		-			8,842			-		5,142			153,809			-		2,003			-		169,796
Ending balance, June 30, 2011	$	561,982		$	1,144,788		$	112,208	$	277,648		$	607,533		$	152,419	$	127,164		$	177,084	$	3,160,826
Ending balance:
individually evaluated for impairment	$	89,795		$	314,285		$	-	$	-		$	227,698		$	-	$	-		$	-	$	631,778
Ending balance:
collectively evaluated for impairment	$	472,187		$	830,503		$	112,208	$	277,648		$	379,835		$	152,419	$	127,164		$	177,084	$	2,529,048
Loans:
Ending balance	$	38,208,843		$	43,011,180		$	31,632,558	$	17,939,927		$	22,430,621		$	8,503,056	$	16,194,069		$	-	$	177,920,254
Ending balance:
individually evaluated for impairment	$	639,589		$	1,754,057		$	-	$	-		$	570,677		$	-	$	-		$	-	$	2,964,323
Ending balance:
collectively evaluated for impairment	$	37,569,254		$	41,257,123		$	31,632,558	$	17,939,927		$	21,859,944		$	8,503,056	$	16,194,069		$	-	$	174,955,931

19

	December 31, 2011
	1-4 Family			Commercial Real Estate			Agricultural Real Estate		Home Equity			Commercial		Agricultural		Consumer			Unallocated		Total
Allowance for Loan Losses:
Balance, beginning of year	$	561,309		$	1,193,928		$	92,988	$	300,257		$	472,376	$	58,250	$	163,690		$	121,487	$	2,964,285
Provision charged to expense		266,296			195,118			22,166		26,863			83,654		178		(6,347	)		37,072		625,000
Losses charged off		(130,382	)		(306,303	)		-		(24,904	)		-		-		(25,289	)		-		(486,878	)
Recoveries		-			24,842			-		7,193			155,834		-		6,331			-		194,200
Balance, end of year	$	697,223		$	1,107,585		$	115,154	$	309,409		$	711,864	$	58,428	$	138,385		$	158,559	$	3,296,607
Ending balance:
individually evaluated for impairment	$	36,300		$	357,880		$	-	$	-		$	296,149	$	-	$	-		$	-	$	690,329
Ending balance:
collectively evaluated for impairment	$	660,923		$	749,705		$	115,154	$	309,409		$	415,715	$	58,428	$	138,385		$	158,559	$	2,606,278
Loans:
Ending balance	$	39,472,008		$	40,169,813		$	29,971,649	$	16,042,788		$	23,198,454	$	9,590,745	$	15,755,973		$	-	$	174,201,430
Ending balance:
individually evaluated for impairment	$	551,921		$	1,727,406		$	-	$	29,353		$	552,814	$	-	$	7,569		$	-	$	2,869,063
Ending balance:
collectively evaluated for impairment	$	38,920,087		$	38,442,407		$	29,971,649	$	16,013,435		$	22,645,640	$	9,590,745	$	15,748,404		$	-	$	171,332,367

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.

20

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.

21

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

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of June 30, 2012 and December 31, 2011.

	1-4 Family				Commercial Real Estate				Agricultural Real Estate				Home Equity
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2012		2011		2012		2011		2012		2011		2012		2011
Rating:
Pass	$	38,761,356	$	36,040,795	$	34,980,711	$	36,936,906	$	32,612,241	$	29,567,057	$	13,095,024	$	14,746,631
Special Mention		1,221,466		1,642,602		582,523		574,484		-		404,592		169,610		278,323
Substandard		1,310,379		1,788,611		2,304,777		2,658,423		-		-		961,919		1,017,834
Total	$	41,293,201	$	39,472,008	$	37,868,011	$	40,169,813	$	32,612,241	$	29,971,649	$	14,226,553	$	16,042,788
	Commercial				Agricultural				Consumer				Total
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2012		2011		2012		2011		2012		2011		2012		2011
Rating:
Pass	$	23,019,375	$	22,253,904	$	10,158,226	$	9,336,899	$	14,725,790	$	15,409,729	$	167,352,723	$	164,291,921
Special Mention		18,485		3,402		105,300		253,846		74,075		153,316		2,171,459		3,310,565
Substandard		915,706		941,148		-		-		139,224		192,928		5,632,005		6,598,944
Total	$	23,953,566	$	23,198,454	$	10,263,526	$	9,590,745	$	14,939,089	$	15,755,973	$	175,156,187	$	174,201,430

The following tables present the Company’s loan portfolio aging analysis as of June 30, 2012 and December 31, 2011.

	June 30, 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	$	496,878	$	100,178	$	264,707	$	861,763	$	40,431,438	$	41,293,201	$	-
Commercial real estate		91,177		-		46,778		137,955		37,730,056		37,868,011		-
Agricultural real estate		-		-		-		-		32,612,241		32,612,241		-
Home equity		145,859				452,108		597,967		13,628,586		14,226,553		-
Commercial		-		-		16,576		16,576		23,936,990		23,953,566		-
Agricultural		-		-		-		-		10,263,526		10,263,526		-
Consumer		154,184		6,950		15,177		176,311		14,762,778		14,939,089		-
Total	$	888,098	$	107,128	$	795,346	$	1,790,572	$	173,365,615	$	175,156,187	$	-

22

	December 31, 2011
	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	$	289,337	$	161,654	$	1,020,862	$	1,471,853	$	38,000,155	$	39,472,008	$	-
Commercial real estate		75,924		-		48,428		124,352		40,045,461		40,169,813		-
Agricultural real estate		-		-		-		-		29,971,649		29,971,649		-
Home equity		511,562		50,455		197,191		759,208		15,283,580		16,042,788		-
Commercial		-		-		-		-		23,198,454		23,198,454		-
Agricultural		-		-		-		-		9,590,745		9,590,745		-
Consumer		156,404		126,077		37,337		319,818		15,436,155		15,755,973		-
Total	$	1,033,227	$	338,186	$	1,303,818	$	2,675,231	$	171,526,199	$	174,201,430	$	-

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 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.

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The following tables present impaired loans at or for the three and six months ended June 30, 2012 and the year ended December 31, 2011.

	Three Months Ended June 30, 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	$	286,800	$	286,800	$	-	$	287,253	$	4,238	$	4,427
Commercial real estate		293,163		293,163		-		298,241		14,445		14,546
Home equity		58,090		58,090		-		72,018		1,556		1,619
Loans with a specific allowance:
Commercial real estate		1,096,020		1,096,020		137,608		1,144,327		10,365		9,385
Commercial		752,809		752,809		515,688		786,002		15,369		23,374
Consumer		7,359		7,359		7,359		7,491		145		200
Total:
One-to-four family residential		286,800		286,800		-		287,253		4,238		4,427
Commercial real estate		1,389,183		1,389,183		137,608		1,442,568		24,810		23,931
Commercial		752,809		752,809		515,688		786,002		15,369		23,374
Home equity		58,090		58,090		-		72,018		1,556		1,619
Consumer		7,359		7,359		7,359		7,491		145		200
Total	$	2,494,241	$	2,494,241	$	660,655	$	2,595,332	$	46,118	$	53,551

	Six Months Ended June 30, 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	$	286,800	$	286,800	$	-	$	287,387	$	6,694	$	6,714
Commercial real estate		293,163		293,163		-		310,295		15,298		15,462
Home equity		58,090		58,090		-		70,889		2,287		2,368
Loans with a specific allowance:
Commercial real estate		1,096,020		1,096,020		137,608		1,146,774		34,593		34,675
Commercial		752,809		752,809		515,688		791,202		24,434		32,485
Consumer		7,359		7,359		7,359		7,530		313		300
Total:
One-to-four family residential		286,800		286,800		-		287,387		6,694		6,714
Commercial real estate		1,389,183		1,389,183		137,608		1,457,069		49,891		50,137
Commercial		752,809		752,809		515,688		791,202		24,434		32,485
Home equity		58,090		58,090		-		70,889		2,287		2,368
Consumer		7,359		7,359		7,359		7,530		313		300
Total	$	2,494,241	$	2,494,241	$	660,655	$	2,614,077	$	83,619	$	92,004

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	December 31, 2011
							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	$	235,856	$	235,856	$	-	$	249,103	$	10,446	$	11,162
Commercial real estate		69,249		69,249		-		71,972		457		254
Home equity		29,353		29,353		-		21,954		1,933		1,605
Loans with a specific allowance:
One-to-four family residential		316,065		316,065		36,300		368,040		25,241		18,341
Commercial real estate		1,658,157		1,658,157		357,880		1,726,905		88,084		117,289
Commercial		552,814		552,814		296,149		592,796		37,192		36,628
Consumer		7,569		7,569		-		7,569		37		-
Total:
One-to-four family residential		551,921		551,921		36,300		617,143		35,687		29,503
Commercial real estate		1,727,406		1,727,406		357,880		1,798,877		88,541		117,543
Commercial		552,814		552,814		296,149		592,796		37,192		36,628
Home equity		7,569		7,569		-		7,569		37		-
Consumer		29,353		29,353		-		21,954		1,933		1,605
Total	$	2,869,063	$	2,869,063	$	690,329	$	3,038,339	$	163,390	$	185,279

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, that 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.

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The following table presents the recorded balance, at original cost, of TDR’s, as of June 30, 2012 and December 31, 2011.

	June 30, 2012		December 31, 2011
One-to-four family residential	$	245,211	$	213,966
Commercial real estate		1,030,405		1,075,483
Agricultural real estate		-		-
Home equity		111,349		125,588
Commercial loans		725,714		477,798
Agricultural loans		-		-
Consumer loans		96,155		83,962
Total	$	2,208,834	$	1,976,797

The following table presents the recorded balance, at original cost, of TDR’s, which were performing according to the terms of the restructuring, as of June 30, 2012 and December 31, 2011.

	June 30, 2012		December 31, 2011
One-to-four family residential	$	245,211	$	131,990
Commercial real estate		1,002,405		1,007,723
Agricultural real estate		-		-
Home equity		101,530		95,769
Commercial loans		725,714		477,798
Agricultural loans		-		-
Consumer loans		21,623		83,962
Total	$	2,096,483	$	1,797,242

The following table presents loans modified as TDR’s during the three and six months ended June 30, 2012.

	Three Months Ended				Six Months Ended
	June 30, 2012				June 30, 2012
	Number of		Recorded		Number of		Recorded
	Modifications		Investment		Modifications		Investment
One-to-four family residential		-	$	-		1	$	44,267
Commercial real estate		-		-		-		-
Agricultural real estate		-		-		-		-
Home equity		-		-		1		6,041
Commercial loans		2		269,909		2		269,909
Agricultural loans		-		-		-		-
Consumer loans		2		18,818		2		18,818
Total		4	$	288,727		6	$	339,035

During the six month period ended June 30, 2012, the Company modified one one-to-four family residential real estate loan, with a recorded investment of $44,267, 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.

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The Company also modified one home equity loan with a recorded investment of $6,041.  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 commercial loans with a total recorded investment of $269,909.  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 six month period ended June 30, 2012, one commercial real estate loan of $28,000, and one home equity loan of $9,819 that were considered TDR’s defaulted as they were more than 90 days past due at June 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 June 30, 2012 and December 31, 2011.  This table excludes performing troubled debt restructurings.

	June 30, 2012		December 31, 2011
One-to-four family residential	$	636,919	$	1,297,953
Commercial real estate		632,877		361,524
Agricultural real estate		-		-
Home equity		668,595		423,113
Commercial loans		75,147		66,852
Agricultural loans		-		-
Consumer loans		106,729		251,025
Total	$	2,120,267	$	2,400,467

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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
June 30, 2012:
U.S. government and agencies	$	9,545,987	$	235,594	$	(468	)	$	9,781,113
Mortgage-backed securities (government-
sponsored enterprises - residential)		47,519,605		1,398,291		-			48,917,896
Municipal bonds		48,621,844		3,392,390		(79,663	)		51,934,571
	$	105,687,436	$	5,026,275	$	(80,131	)	$	110,633,580
December 31, 2011:
U.S. government and agencies	$	14,132,240	$	211,540	$	(8,137	)	$	14,335,643
Mortgage-backed securities (government-
sponsored enterprises - residential)		39,479,133		905,509		(20,556	)		40,364,086
Municipal bonds		44,961,448		2,995,639		(34,768	)		47,922,319
	$	98,572,821	$	4,112,688	$	(63,461	)	$	102,622,048

The amortized cost and fair value of available-for-sale securities at June 30, 2012, 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	$	100,877	$	101,206
One to five years		6,922,630		7,231,133
Five to ten years		29,295,940		31,023,047
After ten years		21,848,384		23,360,298
		58,167,831		61,715,684
Mortgage-backed securities (government-
sponsored enterprises - residential)		47,519,605		48,917,896
	$	105,687,436	$	110,633,580

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $24,254,000 at June 30, 2012 and $25,424,000 at December 31, 2011.

The book value of securities sold under agreement to repurchase amounted to $6,110,000 at June 30, 2012 and $6,785,000 at December 31, 2011.

Gross gains of $527,000 and $109,000 and gross losses of $0 resulting from sales of available-for-sale securities were realized during the six months ended June 30, 2012 and 2011, 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 June 30, 2012 was $5,318,000, which is approximately 5% of the Company’s available-for-sale investment portfolio.

28

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 June 30, 2012 and December 31, 2011.

	Less Than Twelve Months					Twelve Months or More					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
June 30, 2012:
Municipal bonds	$	(79,663	)	$	4,818,867	$	-		$	-	$	(79,663	)	$	4,818,867
U.S. government and agencies		(468	)		499,533		-			-		(468	)		499,533
Total	$	(80,131	)	$	5,318,400	$	-		$	-	$	(80,131	)	$	5,318,400
December 31, 2011:
Municipal bonds	$	(34,768	)	$	2,234,403	$	-		$	-	$	(34,768	)	$	2,234,403
U.S. government and agencies		(8,137	)		1,491,864		-			-		(8,137	)		1,491,864
Subtotal		(42,905	)		3,726,267		-			-		(42,905	)		3,726,267
Mortgage-backed securities
(government sponsored
enterprises - residential)		(18,488	)		4,910,314		(2,068	)		623,455		(20,556	)		5,533,769
Total	$	(61,393	)	$	8,636,581	$	(2,068	)	$	623,455	$	(63,461	)	$	9,260,036

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 June 30, 2012 and December 31, 2011.

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7. ACCUMULATED OTHER COMPREHENSIVE INCOME

Other comprehensive income components and related taxes were as follows:

	Three Months Ended				Six Months Ended
	June 30, 2012		June 30, 2011		June 30, 2012		June 30, 2011
Net unrealized gain on securities available-for-sale	$	1,267,807	$	2,107,173	$	1,423,825	$	2,606,636
Less reclassification adjustment for realized gains
included in income		301,580		55,713		526,908		109,218
Other comprehensive income before tax effect		966,227		2,051,460		896,917		2,497,418
Less tax expense		328,517		697,496		304,952		849,122
Other comprehensive income	$	637,710	$	1,353,964	$	591,965	$	1,648,296

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

	June 30, 2012			December 31, 2011
Net unrealized gain on securities available-for-sale	$	4,946,144		$	4,049,227
Tax effect		(1,681,689	)		(1,376,737	)
Net-of-tax amount	$	3,264,455		$	2,672,490

8. 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 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 June 30, 2012 and December 31, 2011:

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			June 30,2012
			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	$	9,781,113	$	-	$	9,781,113	$	-
Mortgage-backed securities
(Government sponsored
enterprises - residential)		48,917,896		-		48,917,896		-
Municipal bonds		51,934,571		-		51,934,571		-

			December 31, 2011
			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	$	14,335,643	$	-	$	14,335,643	$	-
Mortgage-backed securities
(Government sponsored
enterprises - residential)		40,364,086		-		40,364,086		-
Municipal bonds		47,922,319		-		47,922,319		-

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 June 30, 2012.

Available-for-Sale Securities - Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  The Company has no Level 1 securities.  If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows.  For those investments, the inputs used by the pricing service to determine fair value may include one, or a combination of, observable inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data market research publications are classified within Level 2 of the valuation hierarchy.  Level 2 securities include U.S. Government and agencies, mortgage-backed securities (Government-sponsored enterprises – residential) and municipal bonds.  In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.  The Company did not have securities considered Level 3 as of June 30, 2012 or December 31, 2011.

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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 June 30, 2012 and December 31, 2011:

			June 30, 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)
Impaired loans
(collateral dependent)	$	574,672	$	-	$	-	$	574,672
Real estate owned		291,983		-		-		291,983

			December 31, 2011
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans
(collateral dependent)	$	867,318	$	-	$	-	$	867,318
Mortgage servicing rights		697,733						697,733
Real estate owned		435,480		-		-		435,480

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.

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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.  Fair value adjustments on impaired loans were $(7,265) at June 30, 2012 and $(393,319) at December 31, 2011.

Mortgage Servicing Rights – Mortgage servicing rights do not trade in an active, open market with readily observable prices.  Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate.  Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

Mortgage servicing rights are tested for impairment on at least an annual basis.  The Company uses a third-party to measure mortgage servicing rights through the completion of a proprietary model.  Inputs to the model are reviewed by the Company.  Fair value adjustments on mortgage servicing rights were $(58,818) at December 31, 2011.

Real Estate Owned – Real estate owned (REO) is 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 REO is based on appraisals or evaluations.  REO is classified within Level 3 of the fair value hierarchy.

Appraisals of REO 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.  Fair value adjustments on real estate owned were $(143,497) at June 30, 2012 and $32,352 at December 31, 2011.

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 6/30/12		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Real estate owned	$	291,983	Market comparable properties	Comparability adjustments (%)	Not available
Collateral-dependent impaired loans		574,672	Market comparable properties	Marketability discount	20% – 30% (25%)

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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 June 30, 2012 and December 31, 2011:

	June 30, 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	$	9,298,031	$	9,298,031	$	-	$	-
Interest earning time deposits in banks		2,972,000		-		2,972,000		-
Other investments		106,038		-		106,038		-
Loans held for sale		674,052		-		674,052		-
Loans, net of allowance for loan losses		172,029,486		-		-		170,878,318
Federal Home Loan Bank stock		1,113,800		-		1,113,800		-
Interest receivable		2,083,481		-		2,083,481		-
Financial Liabilities
Deposits		261,552,747		-		127,993,795		136,711,695
Short-term borrowings		6,109,700		-		6,109,700		-
Advances from borrowers for taxes and insurance		952,129		-		952,129		-
Interest payable		323,926		-		323,926		-
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		-		-		-		-
Letters of credit		-		-		-		-
Lines of credit		-		-		-		-

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	December 31, 2011
	Carrying		Fair
	Amount		Value
Financial Assets
Cash and cash equivalents	$	11,387,947	$	11,387,947
Interest earning time deposits in banks		2,476,000		2,476,000
Other investments		116,088		116,088
Loans held for sale		446,818		446,818
Loans, net of allowance for loan losses		170,865,102		169,667,091
Federal Home Loan Bank stock		1,113,800		1,113,800
Interest receivable		2,071,534		2,071,534
Financial Liabilities
Deposits		254,240,060		265,515,126
Short-term borrowings		6,517,750		6,517,750
Advances from borrowers for taxes and insurance		740,083		740,083
Interest payable		349,121		349,121
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.  The carrying amount of accrued interest approximates its fair value.

Deposits - Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits.  The carrying amount approximates fair value.  The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Short-term Borrowings, Interest Payable, and Advances from Borrowers for Taxes and Insurance - The carrying amount approximates fair value.

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.

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9. FEDERAL HOME LOAN BANK STOCK

The Company owns $1,113,800 of Federal Home Loan Bank stock as of June 30, 2012.  The Federal Home Loan Bank of Chicago (FHLB) has been operating under a Cease and Desist Order from their regulator, the Federal Housing Finance Agency (FHFA).  The FHFA terminated the Cease and Desist Order during April 2012.  The FHLB’s new capital structure and excess stock repurchase plan has been approved by the FHFA.  The repurchase plan allows for the FHLB to repurchase approximately $500 million in excess capital stock held by members which will represent 45% of the excess stock outstanding.  The FHLB will continue to provide liquidity and funding through advances and purchasing loans through the MPF program.  In 2012 and 2011, the FHLB declared and paid quarterly dividends.  Management performed an analysis and deemed the cost method investment in FHLB stock was ultimately recoverable.

10. MORTGAGE SERVICING RIGHTS

Activity in the balance of mortgage servicing rights, measured using the amortization method, for the six month period ending June 30, 2012 and the year ended December 31, 2011 was as follows:

	June 30, 2012			December 31, 2011
Balance, beginning of year	$	697,733		$	797,327
Servicing rights capitalized		96,131			137,206
Amortization of servicing rights		(150,425	)		(226,998	)
Change in valuation allowance		24,808			(9,802	)
Balance, end of period	$	668,247		$	697,733

Activity in the valuation allowance for mortgage servicing rights for the six month period ending June 30, 2012 and the year ended December 31, 2011 was as follows:

	June 30, 2012			December 31, 2011
Balance, beginning of year	$	173,791		$	163,989
Additions		-			58,818
Reductions		(24,808	)		(49,016	)
Balance, end of period	$	148,983		$	173,791

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11. INCOME TAXES

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense for the six months ended June 30, 2012 and 2011 is shown below.

	June 30, 2012			June 30, 2011
Computed at the statutory rate (34%)	$	825,321		$	772,274
Increase (decrease) resulting from Tax exempt interest		(268,978	)		(249,046	)
State income taxes, net		141,573			135,251
Increase in cash surrender value		(32,054	)		(27,063	)
Other, net		(261	)		406
Actual tax expense	$	665,601		$	631,822

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.

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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, including the Dodd-Frank Act and the elimination of the Office of Thrift Supervision; and other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing of products and services.

Critical Accounting Policies and Use of Significant Estimates

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

Allowance for Loan Losses - The Company believes the allowance for loan losses is the critical accounting policy that requires the most significant judgments and assumptions used in the preparation of the consolidated financial statements.  The allowance for loan losses is a material estimate that is particularly susceptible to significant changes in the near term and is established through a provision for loan losses.  The allowance is based upon past loan experience and other factors which, in management’s judgement, deserve current recognition in estimating loan losses.  The evaluation includes a review of all loans on which full collectibility may not be reasonably assured.  Other factors considered by management include the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions and historical losses on each portfolio category.  In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties, which collateralize loans.  Management uses the available information to make such determinations.  If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected.  While we believe we have established our existing allowance for loan losses in conformity with accounting principles generally accepted in the United States of America, there can be no assurance that regulators, in reviewing the Company’s loan portfolio, will not request an increase in the allowance for loan losses.  Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary if loan quality deteriorates.

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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 judgement in their application.  There are also areas in which management’s judgement in selecting any available alternative would not produce a materially different result.

Recent Developments

Midwest Drought - Current drought conditions are expected to reduce 2012 crop yields. As further discussed in Note 5 to the financial statements included herein, the Company originates agricultural operating lines of credit, which generally have terms of one year and are secured by growing crops, livestock and equipment, and mortgages on farmland.  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 drought conditions.  The Company is currently evaluating the impact these conditions may have on its agricultural customers and to the local economy.

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Financial Condition

June 30, 2012 Compared to December 31, 2011

Total assets increased by $9.6 million, or 3.1%, to $316.9 million at June 30, 2012 from $307.3 million at December 31, 2011.  Net loans increased $1.2 million, or 0.7%, to $172.0 million at June 30, 2012 from $170.8 million at December 31, 2011.  The increase is primarily due to growth in our agricultural real estate portfolio during 2012.  The loan portfolio continues to be affected by low loan demand as a result of the current weakened economy.  Available-for-sale mortgage-backed securities increased $8.6 million, or 21.2%, to $48.9 million at June 30, 2012 from $40.3 million at December 31, 2011.  The growth in loans and mortgage-backed securities was primarily due to the investment of funds from cash and cash equivalents and deposit growth.  Cash and cash equivalents decreased $2.1 million to $9.3 million at June 30, 2012.

Total deposits increased $7.3 million, or 2.9%, to $261.6 million at June 30, 2012, primarily due to a $5.3 million increase in transaction accounts.  Transaction accounts have continued to grow as customers have preferred to maintain short-term, liquid deposits in the current low-rate environment.  Deposit growth reflects customer preference for insured deposits versus alternative investments.  Other borrowings, which consisted of overnight repurchase agreements, decreased $408,000 during this same time frame.

Stockholders’ equity increased $2.1 million, or 5.2%, to $43.3 million at June 30, 2012.  The increase in stockholders’ equity was primarily the result of $1.8 million in net income and $592,000 in other comprehensive income, which was partially offset by the payment of $283,000 in cash dividends.  Other comprehensive income consisted of the increase in net unrealized gains, net of tax, on available-for-sale securities reflecting changes in market prices for securities in our portfolio. Other comprehensive income does not include changes in the fair value of other financial instruments included on the balance sheet.

Results of Operations

Comparison of Operating Results for the Three Months Ended June 30, 2012 and 2011

General:  Net income for the three months ended June 30, 2012 was $847,000, or $0.45 per common share, basic and diluted, compared to net income of $905,000, or $0.48 per common share, basic and diluted, for the three months ended June 30, 2011.  The $58,000 decrease in net income was due to a decrease of $203,000 in net interest income and increases of $20,000 in the provision for loan losses and $116,000 in non-interest expense, partially offset by an increase of $211,000 in non-interest income and a decrease of $70,000 in income taxes.

Interest Income:  Total interest income for the three months ended June 30, 2012 decreased $367,000, or 10.2%, to $3.2 million from $3.6 million for the same period of 2011.  The decrease in interest income reflected decreases of $250,000 in interest income on loans, $15,000 in interest income on investment securities, and $114,000 in interest income on mortgage-backed securities, partially offset by an increase of $12,000 in interest income on other interest-earning assets.  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 $250,000 to $2.5 million for the second quarter of 2012 primarily due to a decrease in the average balance of loans.  The average balance of the loan portfolio decreased $4.8 million to $172.7 million for the second quarter of 2012.  The decrease in the average balance of the loan portfolio reflected a decrease in the average balance of residential real estate and home equity loans, reflecting the volume of loans refinanced and subsequently sold into the secondary market.  The average yield on loans also decreased to 5.70% during the second quarter of 2012 from 6.11% during the second quarter of 2011.

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Interest income on investment securities decreased $15,000 to $502,000 for the second quarter of 2012 compared to the second quarter of 2011. The decrease reflected a decrease in the average yield of investment securities to 3.43% during the second quarter of 2012 from 3.59% during the second quarter of 2011.  The average yield does not reflect the benefit of the higher tax-equivalent yield of our municipal bonds, which is reflected in income tax expense.  The decrease in the average yield was partially offset by an increase of $1.0 million in the average balance of the investment securities portfolio to $58.6 million during the second quarter of 2012, compared to $57.6 million for the second quarter of 2011.

Interest income on mortgage-backed securities decreased $114,000 to $253,000 for the second quarter of 2012, compared to $367,000 for the second quarter of 2011.  The decrease reflected a 101 basis point decrease in the average yield of mortgage-backed securities to 2.19% for the second quarter of 2012, compared to 3.20% for the second quarter of 2011.  The average yield was impacted by higher premium amortization resulting from faster prepayments on mortgage-backed securities.  The amortization of premiums on mortgage-backed securities, which reduces the average yield, increased to $164,000 during the second quarter of 2012, compared to $66,000 during the second quarter of 2011.  The decrease in interest income on mortgage-backed securities also reflected a $363,000 increase in the average balance of mortgage-backed securities to $46.2 million during the second quarter of 2012.

Interest income on other interest-earning assets, which consisted of interest-earning demand and time deposit accounts and federal funds sold, increased $12,000 during the second quarter of 2012.  The average balance of these accounts increased $6.3 million to $12.7 million for the three months ended June 30, 2012 compared to $6.4 million for the three months ended June 30, 2011.  The average yield on other interest-earning assets increased to 0.39% during the second quarter of 2012 from 0.04% during the second quarter of 2011, primarily due to the investment in higher-yielding time deposit accounts during the fourth quarter of 2011.

Interest Expense:  Total interest expense decreased $164,000, or 21.9%, to $588,000 for the three months ended June 30, 2012 compared to $752,000 for the three months ended June 30, 2011.  The lower interest expense was due to a $163,000 decrease in the cost of deposits and a $1,000 decrease in the cost of borrowed funds.

Interest expense on deposits decreased $163,000 to $584,000 for the second quarter of 2012 compared to $747,000 for the second quarter of 2011.  The decrease in interest expense on deposits was primarily due to a 28 basis point decrease in the average rate paid on deposits to 0.98% during the second quarter of 2012 from 1.26% during the second quarter of 2011.  The decrease reflected ongoing low short-term market interest rates during 2012.  The average balance of deposits was $237.5 million for the second quarter of 2012 compared to $237.4 million for the second quarter of 2011.

Interest paid on borrowed funds decreased $1,000 to $4,000 for the second quarter of 2012 due to a decrease in the average cost of borrowings.  The average rate paid on borrowed funds decreased to 0.29% during the second quarter of 2012 compared to 0.43% during the second quarter of 2011.  The average balance of borrowed funds was $5.4 million for the second quarter of 2012 compared to $4.9 million for the second quarter of 2011.

Net Interest Income.  As a result of the changes in interest income and interest expense noted above, net interest income decreased by $203,000, or 7.1%, to $2.6 million for the three months ended June 30, 2012 from $2.8 million for the three months ended June 30, 2011.  Our interest rate spread decreased by 28 basis points to 3.48% during the second quarter of 2012 from 3.76% during the second quarter of 2011.  Our net interest margin decreased 32 basis points to 3.64% for the second quarter of 2012 from 3.96% for the second quarter of 2011.

Provision for Loan Losses: The provision for loan losses is determined by management as the amount needed to replenish the allowance for loan losses, after net charge-offs have been deducted, to a level considered adequate to absorb inherent losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America.

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The provision for loan losses totaled $170,000 during the second quarter of 2012, compared to $150,000 during the second quarter of 2011.  The increase in the provision for loan losses reflected a higher level of net charge-offs during the second quarter of 2012.  Net charge-offs equaled $370,000 during the second quarter of 2012 compared to a net recovery of $132,000 during the second quarter of 2011.

The allowance for loan losses decreased $30,000 to $3.1 million at June 30, 2012 from $3.2 million at June 30, 2011.  Loans delinquent 30 days or more decreased $885,000 to $1.8 million, or 1.02% of total loans, as of June 30, 2012, from $2.7 million, or 1.53% of total loans, as of December 31, 2011.  Loans delinquent 30 days or more totaled $1.9 million, or 1.07% of total loans at June 30, 2011.

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.  During the recent quarter, management has also considered the expected impact the severe drought in our area will have on our agricultural borrowers and the potential adverse effect it will have in our market area economy.  The following table sets forth information regarding nonperforming assets at the dates indicated.

	June 30, 2012			December 31, 2011
Non-accruing loans:
One-to-four family residential	$	636,919		$	1,297,953
Commercial real estate		632,877			361,524
Commercial business		75,147			66,852
Home equity		668,595			423,113
Consumer		106,729			251,025
Total	$	2,120,267		$	2,400,467
Accruing loans delinquent more than 90 days:
Total	$	-		$	-
Real estate owned:
One-to-four family residential	$	124,790		$	18,800
Commercial real estate		167,193			416,680
Total	$	291,983		$	435,480
Total nonperforming assets	$	2,412,250		$	2,835,947
Total as a percentage of total assets		0.76	%		0.92	%

Nonperforming assets decreased $424,000 to $2.4 million, or 0.76% of total assets, as of June 30, 2012, compared to $2.8 million, or 0.92% of total assets, as of December 31, 2011.  The decrease in nonperforming assets was due to a $280,000 decrease in nonperforming loans and a $144,000 decrease in real estate owned.  Nonperforming loans decreased to $2.1 million as of June 30, 2012, from $2.4 million at December 31, 2011.  The decrease in nonperforming loans primarily reflected the payoff of two residential real estate secured loans totaling $589,000 during 2012, partially offset by increases in nonperforming commercial real estate and home equity loans.

The following table shows the aggregate principal amount of potential problem credits on the Company’s watch list at June 30, 2012 and December 31, 2011.  All non-accruing loans are automatically placed on the watch list.  The decrease in Substandard credits reflected the payoffs totaling $589,000 noted above and charge-offs of $298,000.  The decrease in Special Mention credits primarily reflected the improvement and upgrade of one borrower totaling $754,000.

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	June 30, 2012		December 31, 2011
Special Mention credits	$	2,171,459	$	3,310,565
Substandard credits		5,632,005		6,598,944
Total watch list credits	$	7,803,464	$	9,909,509

Non-Interest Income:  Non-interest income increased $211,000, or 21.7%, to $1.2 million for the three months ended June 30, 2012 from $1.0 million for the same period in 2011.  The increase in non-interest income resulted primarily from increases of $246,000 in gains on the sale of available-for-sale securities and $38,000 in income from mortgage banking operations, partially offset by a decrease of $81,000 in commission income.  The increase in gains on the sale of securities reflected changing market conditions, as a lower volume of securities totaling $4.7 million were sold during the second quarter of 2012 compared to $10.6 million during the same period of 2011.  Bonds sold during the second quarter of 2012 primarily consisted of longer-term, taxable municipal bonds which were sold in order to reduce the volatility of the investment portfolio in a rising rate environment.  The increase in mortgage banking income was due to a higher volume of loan sales, as we sold $9.8 million of loans to the secondary market during the second quarter of 2012, compared to $4.8 million during the same period of 2011.  The decrease in commission income reflected changing market conditions and reduced account rollover activity during 2012.

Non-Interest Expense:  Total non-interest expense increased $116,000 to $2.5 million for the three months ended June 30, 2012 from $2.4 million for the same period of 2011.  The increase in non-interest expense consisted mainly of increases of $48,000 in compensation and benefits expense, $36,000 in professional fees, and $54,000 in other expense, partially offset by a decrease of $15,000 in FDIC insurance premiums.  The increase in compensation and benefits expense resulted primarily from higher expenses related to the effect of lower discount rates and the funding of benefit plans, as well as normal salary and benefit cost increases.  The increase in other expense is primarily due to higher expenses related to real estate owned, advertising, and regulatory fees.  FDIC insurance premiums have benefitted from reduced premium rates.

Income Taxes:  The provision for income taxes decreased $70,000 to $299,000 during the second quarter of 2012 compared to the same period of 2011.  The decrease in the income tax provision reflected a decrease in taxable income.  The effective tax rate was 26.07% and 28.93% during the three months ended June 30, 2012 and 2011, respectively.

Comparison of Operating Results for the Six Months Ended June 30, 2012 and 2011

General:  Net income for the six months ended June 30, 2012 was $1,762,000, or $0.93 per common share, basic and diluted, compared to net income of $1,640,000, or $0.87 per common share, basic and diluted, for the six months ended June 30, 2011.  The $122,000 increase in net income was due to a decrease of $75,000 in the provision for loan losses and an increase of $331,000 in non-interest income, partially offset by a decrease of $146,000 in net interest income and increases of $104,000 in non-interest expense and $34,000 in income taxes.

Interest Income:  Total interest income for the six months ended June 30, 2012 decreased $508,000, or 7.2%, to $6.5 million from $7.0 million for the same period of 2011.  The decrease in interest income reflected a $365,000 decrease in interest income on loans, a $24,000 increase in interest income on investment securities, an $188,000 decrease in interest income on mortgage-backed securities, and a $21,000 increase in interest income on other interest-earning assets.  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.

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Interest income on loans decreased $365,000 to $5.0 million for the first half of 2012 due to decreases in the average balance and yield of loans.  The average balance of the loan portfolio decreased $7.0 million to $171.3 million for the first six months of 2012 compared to $178.3 million for the first six months of 2011.  The decrease in the average balance of the loan portfolio was primarily due to a decrease in the average balance of residential real estate and home equity loans, reflecting the volume of loans refinanced and subsequently sold into the secondary market.  The average yield on loans decreased to 5.84% during the first six months of 2012 from 6.02% during the first six months of 2011.  The decrease primarily reflected the low interest rate environment.

Interest income on investment securities increased $24,000 to $1.0 million for the first half of 2012 from the same period of 2010.  The increase reflected a $1.9 million increase in the average balance of the investment securities portfolio to $58.8 million during the first six months of 2012, compared to $56.9 million for the first six months of 2011.  The increase in the average balance of investment securities was primarily due to the investment of funds from deposit growth and the lack of corresponding loan demand.  The average yield of investment securities decreased to 3.48% during the first six months of 2012 from 3.53% for the first six months of 2011 due to purchases of newer securities at lower interest rates.  The average yield does not reflect the benefit of the higher tax-equivalent yield of our municipal bonds, which is reflected in income tax expense.

Interest income on mortgage-backed securities decreased $188,000 to $458,000 for the first half of 2012, compared to $646,000 for the first half of 2011.  The decrease reflected an 85 basis point decrease in the average yield of mortgage-backed securities to 2.08% for the first half of 2012, compared to 2.93% for the first half of 2011.  The average yield was impacted by higher premium amortization resulting from faster prepayments on mortgage-backed securities.  The amortization of premiums on mortgage-backed securities, which reduces the average yield, increased to $330,000 during the first six months of 2012, compared to $197,000 during the first six months of 2011.  The decrease in interest income on mortgage-backed securities also reflected a $220,000 decrease in the average balance of mortgage-backed securities to $44.0 million during the first half of 2012.

Interest income on other interest-earning assets, which consisted of interest-earning demand and time deposit accounts and federal funds sold, increased $21,000 to $24,000 during the first half of 2012 primarily due to a an increase in the average balance.  The average balance of these accounts increased $7.8 million to $14.2 million for the six months ended June 30, 2012 compared to $6.4 million for the six months ended June 30, 2011.  The average yield on other interest-earning assets increased to 0.33% during the first half of 2012 from 0.07% during the first half of 2011, primarily due to the investment in higher-yielding time deposit accounts during the fourth quarter of 2011.

Interest Expense:  Total interest expense decreased $362,000, or 23.2%, to $1.2 million for the six months ended June 30, 2012 compared to $1.5 million for the six months ended June 30, 2011.  The lower interest expense was due to a $359,000 decrease in the cost of deposits and a $3,000 decrease in the cost of borrowed funds.

Interest expense on deposits decreased $359,000 to $1.2 million for the six months ended June 30, 2012 compared to $1.5 million for the six months ended June 30, 2011.  The decrease in interest expense on deposits was primarily due to a 30 basis point decrease in the average rate paid to 1.00% during the first half of 2012 from 1.30% during the first half of 2011.  The decrease reflected low short-term market interest rates which continued during 2012.  The average balance of deposits was $236.6 million for the first half of 2012 compared to $237.5 million for the first half of 2011.

Interest paid on borrowed funds decreased $3,000 to $7,000 for the first half of 2012 due to a decrease in the average cost of borrowings.  The average rate paid on borrowed funds decreased to 0.27% during the first six months of 2012 compared to 0.47% during the first six months of 2011.  The decrease in the average cost was partially offset by an increase of $783,000 in the average balance of borrowed funds to $4.9 million during the first six months of 2012 compared to the same period of 2011.

Net Interest Income.  As a result of the changes in interest income and interest expense noted above, net interest income decreased by $146,000, or 2.7%, to $5.3 million for the six months ended June 30, 2012 from $5.5 million for the six months ended June 30, 2011.  Our interest rate spread decreased by 9 basis points to 3.53% during the first half of 2012 from 3.62% during the first half of 2011.  Our net interest margin decreased 13 basis points to 3.69% for the first half of 2012 from 3.82% for the first half of 2011.

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Provision for Loan Losses: The provision for loan losses is determined by management as the amount needed to replenish the allowance for loan losses, after net charge-offs have been deducted, to a level considered adequate to absorb inherent losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America.  The following table shows the activity in the allowance for loan losses for the six months ended June 30, 2012 and 2011.

	Six Months Ended
	June 30, 2012		June 30, 2011
Balance at beginning of period	$	3,296,607	$	2,964,285
Charge-offs:
One-to-four family residential		70,295		32,211
Commercial real estate		257,043		260,785
Home equity		66,744		4,162
Consumer		53,385		1,097
Total		447,467		298,255
Recoveries:
One-to-four family residential		22,243		-
Commercial real estate		-		8,842
Commercial business		316		153,809
Home equity		6,505		5,142
Consumer		2,299		2,003
Total		31,363		169,796
Net loan charge-offs		416,104		128,459
Additions charged to operations		250,000		325,000
Balance at end of period	$	3,130,503	$	3,160,826

The allowance for loan losses decreased $30,000 at June 30, 2012, from $3.2 million at June 30, 2011.  The decrease was the result of the net charge-offs exceeding the provision for loan losses.  The provision decreased $75,000 to $250,000 during the first six months of 2012, compared to $325,000 during the first six months of 2011.  Net charge-offs increased $288,000 to $416,000 during the first half of 2012, compared to $128,000 during the first half of 2011.  The decrease in the provision and the allowance for loan losses during 2012 reflected the lower level of nonperforming loans and watch list credits.

Non-Interest Income:  Non-interest income increased $331,000, or 16.9%, to $2.3 million for the six months ended June 30, 2012.  The increase in non-interest income resulted primarily from increases of $418,000 in gains on the sale of available-for-sale securities and $147,000 in net income from mortgage banking operations, partially offset by a decrease of $248,000 in commission income.  The increase in gains on the sale of securities reflected changing market conditions, as a lower volume of securities totaling $14.8 million were sold during the first half of 2012 compared to $16.9 million during the same period of 2011.  Securities sales during 2012 were primarily made to eliminate factored-down mortgage-backed securities, which were subject to increased prepayment risk due to new government-assisted homeowner refinancing programs, and longer-term, taxable municipal bonds, which had higher volatility in a rising rate environment.  The increase in mortgage banking operations income was due to a higher volume of loan sales in 2012, as we sold $22.9 million of loans to the secondary market during the first half of 2012, compared to $7.6 million during the same period of 2011.  The higher volume of sales reflected a higher volume of mortgage originations, which are affected by changes in market interest rates.  The decrease in commission income reflected changing market conditions and reduced account rollover activity during 2012.

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Non-Interest Expense:  Total non-interest expense increased $103,000, or 2.1%, to $4.9 million for the six months ended June 30, 2012 from $4.8 million for the same period of 2011.  The increase in non-interest expense consisted primarily of increases of $92,000 in compensation and benefits expense and $73,000 in other expense, partially offset by a decrease of $73,000 in FDIC insurance premiums.  The increase in compensation and benefits expense resulted primarily from higher expenses related to the effect of lower discount rates and the funding of benefit plans, as well as normal salary and benefit cost increases.  The increase in other expense is primarily due to higher expenses related to real estate owned, advertising, and regulatory fees.  FDIC insurance premiums have benefitted from reduced premium rates.

Income Taxes:  The provision for income taxes increased $34,000 to $666,000 during the first six months of 2012 compared to the same period of 2011.  The increase in the income tax provision reflected an increase in taxable income, partially offset by an increase in the benefit of tax-exempt income.  The effective tax rate was 27.42% and 27.82% during the six months ended June 30, 2012 and 2011, respectively.

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 June 30, 2012 and December 31, 2011, cash and cash equivalents totaled $9.3 million and $11.4 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 six months, the most significant sources of funds have been deposit growth, calls and sales of investment securities, and principal repayments on loans and mortgage-backed securities.  These funds have been used primarily for purchases of U.S. Agency, municipal and mortgage-backed securities, loan originations, and the purchase of bank-owned life insurance.

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

Liquidity management is both a short- and long-term responsibility of management.  The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) projected purchases of investment and mortgage-backed securities, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) liquidity of its asset/liability management program.  Excess liquidity is generally invested in interest-earning overnight deposits and other short-term U.S. agency obligations.  If the Company requires funds beyond its ability to generate them internally, it has the ability to borrow funds from the FHLB.  The Company may borrow from the FHLB under a blanket agreement which assigns all investments in FHLB stock as well as qualifying first mortgage loans equal to 150% of the outstanding balance as collateral to secure the amounts borrowed.  This borrowing arrangement is limited to a maximum of 30% of the Company’s total assets or twenty times the balance of FHLB stock held by the Company.  At June 30, 2012 the Company had no outstanding FHLB advances and approximately $22.3 million available to it under the above-mentioned borrowing arrangement.

The Company maintains minimum levels of liquid assets as established by the Board of Directors.  The Company’s liquidity ratios at June 30, 2012 and December 31, 2011 were 41.8% and 40.4%, respectively.  This ratio represents the volume of short-term liquid assets as a percentage of net deposits and borrowings due within one year.

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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 June 30, 2012 and December 31, 2011.

	June 30, 2012		December 31, 2011
Commitments to fund loans	$	41,932,776	$	40,878,143
Standby letters of credit		357,744		400,914

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 June 30, 2012, 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 June 30, 2012, the Bank’s core capital ratio was 10.35% 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 June 30, 2012 and December 31, 2011, minimum requirements and the Bank's actual ratios are as follows:

	June 30, 2012 Actual			December 31, 2011 Actual			Minimum Required
Tier 1 Capital to Average Assets		10.35	%		10.35	%		4.00	%
Tier 1 Capital to Risk-Weighted Assets		15.42	%		15.42	%		4.00	%
Total Capital to Risk-Weighted Assets		16.67	%		16.67	%		8.00	%

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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.

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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 June 30,
	2012							2011
	Average Balance		Interest		Yield/Cost			Average Balance		Interest		Yield/Cost
Interest-earnings assets:
Loans	$	172,705	$	2,461		5.70	%	$	177,544	$	2,711		6.11	%
Investment securities		58,578		502		3.43	%		57,588		516		3.59	%
Mortgage-backed securities		46,188		253		2.19	%		45,825		367		3.20	%
Other		12,678		12		0.39	%		6,371		1		0.04	%
Total interest-earning assets		290,149		3,228		4.45	%		287,328		3,595		5.01	%
Non-interest earnings assets		22,297							19,911
Total assets	$	312,446						$	307,239
Interest-bearing liabilities:
Deposits	$	237,455	$	584		0.98	%	$	237,385	$	747		1.26	%
Other borrowings		5,419		4		0.29	%		4,880		5		0.43	%
Total interest-bearing liabilities		242,874		588		0.97	%		242,265		752		1.24	%
Non-interest bearing liabilities		26,959							27,614
Stockholders’ equity		42,613							37,360
Total liabilities/stockholders’ equity	$	312,446						$	307,239
Net interest income			$	2,640						$	2,843
Interest rate spread (average yield earned minus average rate paid)						3.48	%						3.76	%
Net interest margin (net interest income divided by average interest-earning assets)						3.64	%						3.96	%

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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 June 30,
	2012 Compared to 2011
	Increase(Decrease) Due to
	Rate			Volume			Net
Interest-earnings assets:
Loans	$	(178	)	$	(72	)	$	(250	)
Investment securities		(23	)		9			(14	)
Mortgage-backed securities		(117	)		3			(114	)
Other		10			1			11
Total net change in income on       interest-earning assets		(308	)		(59	)		(367	)
Interest-bearing liabilities:
Deposits		(163	)					(163	)
Other borrowings		(2	)		1			(1	)
Total net change in expense on interest-bearing liabilities		(165	)		1			(164	)
Net change in net interest income	$	(143	)	$	(60	)	$	(203	)

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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)
	Six Months Ended June 30,
	2012							2011
	Average Balance		Interest		Yield/Cost			Average Balance		Interest		Yield/Cost
Interest-earnings assets:
Loans	$	171,337	$	5,002		5.84	%	$	178,347	$	5,367		6.02	%
Investment securities		58,772		1,026		3.48	%		56,834		1,002		3.53	%
Mortgage-backed securities		43,952		458		2.08	%		44,172		647		2.93	%
Other		14,199		24		0.33	%		6,397		2		0.07	%
Total interest-earning assets		288,260		6,510		4.52	%		285,750		7,018		4.91	%
Non-interest earnings assets		22,030							20,141
Total assets	$	310,290						$	305,891
Interest-bearing liabilities:
Deposits	$	236,573	$	1,188		1.00	%	$	237,535	$	1,547		1.30	%
Other borrowings		4,943		7		0.27	%		4,160		10		0.47	%
Total interest-bearing liabilities		241,516		1,195		0.99	%		241,695		1,557		1.29	%
Non-interest bearing liabilities		26,450							27,435
Stockholders’ equity		42,324							36,761
Total liabilities/stockholders’ equity	$	310,290						$	305,891
Net interest income			$	5,315						$	5,461
Interest rate spread (average yield earned minus average rate paid)						3.53	%						3.62	%
Net interest margin (net interest income divided by average interest-earning assets)						3.69	%						3.82	%

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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 six month periods.

Analysis of Volume and Rate Changes
(In thousands)
Six Months Ended June 30,
	2012 Compared to 2011 Increase(Decrease) Due to
	Rate			Volume			Net
Interest-earnings assets:
Loans	$	(158	)	$	(207	)	$	(365	)
Investment securities		(10	)		34			24
Mortgage-backed securities		(185	)		(3	)		(188	)
Other		16			5			21
Total net change in income on interest-earning assets		(337	)		(171	)		(508	)
Interest-bearing liabilities:
Deposits		(352	)		(7	)		(359	)
Other borrowings		(5	)		2			(3	)
Total net change in expense on interest-bearing liabilities		(357	)		(5	)		(362	)
Net change in net interest income	$	20		$	(166	)	$	(146	)

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JACKSONVILLE BANCORP, INC.

 ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The Company uses a comprehensive asset/liability software package provided by a third-party vendor to perform interest rate sensitivity analysis for all product categories.  The primary focus of the Company’s analysis is on the effect of interest rate increases and decreases on net interest income.  Management believes that this analysis reflects the potential effects on current earnings of interest rate changes.  Call criteria and prepayment assumptions are taken into consideration for investment securities and loans.  All of the Company’s interest sensitive assets and liabilities are analyzed by product type and repriced based upon current offering rates.  The software performs interest rate sensitivity analysis by performing rate shocks of plus or minus 300 basis points in 100 basis point increments.

The following table shows projected results at June 30, 2012 and December 31, 2011 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 twelve months following the June 30, 2012 and December 31, 2011 dates.

	Change in Net Interest Income
	(Dollars in thousands)
	June 30, 2012						December 31, 2011						ALCO
Rate Shock:	$ Change			% Change			$ Change			% Change			Benchmark
+ 200 basis points		43			0.36	%		(84	)		-0.71	%	> (20.00)	%
+ 100 basis points		95			0.80	%		(21	)		-0.18	%	> (12.50)	%
- 100 basis points		(211	)		-1.78	%		(200	)		-1.70	%	> (12.50)	%
- 200 basis points		(607	)		-5.12	%		(415	)		-3.51	%	> (20.00)	%

The table above indicates that as of June 30, 2012, in the event of a 200 basis point increase in interest rates, we would experience a 0.36% increase in net interest income.  In the event of a 100 basis point decrease in interest rates, we would experience a 1.78% decrease in net interest income.  Because of the low interest rate environment, we do not believe that a 200 basis point decrease in interest rates is meaningful in showing changes in our net income.

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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.

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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.

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PART II - OTHER INFORMATION

Item 1.	Legal Proceedings
	At June 30, 2012, 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
	At June 30, 2012, we had 86,547 shares available under a previously announced share repurchase program, of which no shares were repurchased during the past three months.
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

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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:	08/07/2012	/s/ Richard A. Foss
		Richard A. Foss
		President and Chief Executive Officer

/s/ Diana S. Tone

Diana S. Tone

Chief Financial Officer

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