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 March 31, 2014
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 May 1, 2014, there were 1,824,651 shares of the Registrant’s common stock issued and outstanding.

JACKSONVILLE BANCORP, INC.

FORM 10-Q

March 31, 2014

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	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	49
PART II	OTHER INFORMATION	50
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	51
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.
CONDENSED CONSOLIDATED BALANCE SHEETS
	March 31,			December 31,
ASSETS	2014			2013
	(Unaudited)
Cash and cash equivalents	$	5,065,463		$	6,098,870
Investment securities - available for sale		60,194,704			60,638,942
Mortgage-backed securities - available for sale		49,009,615			48,345,655
Federal Home Loan Bank stock		1,113,800			1,113,800
Other investment securities		80,515			81,918
Loans held for sale - net		1,116,450			262,461
Loans receivable - net of allowance for loan losses of $3,368,482 and $3,406,434 as of March 31, 2014 and December 31, 2013		177,637,233			180,639,502
Premises and equipment - net		5,144,931			5,178,978
Cash surrender value of life insurance		6,866,888			6,815,059
Accrued interest receivable		2,000,675			1,817,415
Goodwill		2,726,567			2,726,567
Capitalized mortgage servicing rights, net of valuation allowance of $70,455 and $73,392 as of March 31, 2014 and December 31, 2013		659,915			673,576
Real estate owned		273,170			281,918
Deferred income taxes		2,273,862			2,703,110
Other assets		979,994			1,041,005
Total Assets	$	315,143,782		$	318,418,776
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	256,206,730		$	251,738,391
Other borrowings		9,112,412			19,610,297
Advance payments by borrowers for taxes and insurance		1,283,848			857,814
Accrued interest payable		197,971			210,226
Deferred compensation payable		4,062,423			3,999,371
Income taxes payable		278,917			34,621
Other liabilities		1,588,113			829,260
Total liabilities		272,730,414			277,279,980
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 1,818,876 shares as of March 31, 2014 and 1,832,860 as of December 31, 2013		18,189			18,329
Additional paid-in-capital		14,297,943			14,561,085
Retained earnings		28,931,350			28,233,876
Less: Unallocated ESOP shares		(281,920	)		(287,530	)
Accumulated other comprehensive loss		(552,194	)		(1,386,964	)
Total stockholders’ equity		42,413,368			41,138,796
Total Liabilities and Stockholders’ Equity	$	315,143,782		$	318,418,776
See accompanying notes to the condensed consolidated financial statements.

1

JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
	Three Months Ended
	March 31,
	2014		2013
	(Unaudited)
INTEREST INCOME:
Loans	$	2,277,458	$	2,345,562
Investment securities		449,576		434,274
Mortgage-backed securities		318,635		160,567
Other		101		11,764
Total interest income		3,045,770		2,952,167
INTEREST EXPENSE:
Deposits		386,471		469,450
Other borrowings		3,187		2,641
Total interest expense		389,658		472,091
NET INTEREST INCOME		2,656,112		2,480,076
PROVISION FOR LOAN LOSSES		30,000		30,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,626,112		2,450,076
NON-INTEREST INCOME:
Fiduciary activities		84,075		66,102
Commission income		354,337		309,160
Service charges on deposit accounts		159,656		201,426
Mortgage banking operations, net		12,412		70,617
Net realized gains on sales of available-for-sale securities		99,855		584,231
Loan servicing fees		91,933		93,523
ATM and bank card interchange income		120,150		95,179
Other		75,114		65,800
Total non-interest income		997,532		1,486,038
NON-INTEREST EXPENSE:
Salaries and employee benefits		1,585,857		1,600,735
Occupancy and equipment		258,536		253,666
Data processing and telecommunications		138,584		143,423
Professional		56,071		85,293
Postage and office supplies		62,868		68,664
Deposit insurance premium		38,903		38,121
ATM and bank card expense		75,886		47,880
Other		253,641		247,097
Total non-interest expense		2,470,346		2,484,879
INCOME BEFORE INCOME TAXES		1,153,298		1,451,235
INCOME TAXES		313,509		438,787
NET INCOME	$	839,789	$	1,012,448
NET INCOME PER COMMON SHARE - BASIC	$	0.47	$	0.54
NET INCOME PER COMMON SHARE - DILUTED	$	0.47	$	0.54
See accompanying notes to the condensed consolidated financial statements.

2

JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
	Three Months Ended
	March 31,
	2014		2013
	(Unaudited)
Net Income	$	839,789	$	1,012,448
Other Comprehensive Income (Loss)
Unrealized appreciation (depreciation) on available-for-sale
securities, net of taxes of $463,984 and $(244,001)
for 2014 and 2013, respectively.		900,674		(473,651	)
Less:  reclassification adjustment for realized gains
included in net income, net of taxes of $33,951 and
$198,639, for 2014 and 2013, respectively.		65,904		385,592
		834,770		(859,243	)
Comprehensive Income	$	1,674,559	$	153,205
See accompanying notes to 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 (Loss)			Equity
BALANCE, DECEMBER 31, 2013	$	18,329		$	14,561,085		$	28,233,876		$	(287,530	)	$	(1,386,964	)	$	41,138,796
Net Income		-			-			839,789			-			-			839,789
Other comprehensive income		-			-			-			-			834,770			834,770
Stock Repurchases		(169	)		(334,601	)		-			-			-			(334,770	)
Exercise of stock options		29			42,491			-			-			-			42,520
Tax benefit of nonqualified options		-			1,042			-			-			-			1,042
Stock-based compensation expense		-			22,232			-			-			-			22,232
Shares held by ESOP, commited to be released		-			5,694			-			5,610			-			11,304
Dividends ($0.08 per share)		-			-			(142,315	)		-			-			(142,315	)
BALANCE, MARCH 31, 2014	$	18,189		$	14,297,943		$	28,931,350		$	(281,920	)	$	(552,194	)	$	42,413,368
See accompanying notes to condensed consolidated financial statements.

4

JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
	Three Months Ended
	March 31,
	2014			2013
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	839,789		$	1,012,448
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and accretion:
Premises and equipment		100,458			96,092
Amortization of investment and loan premiums and discounts, net		131,654			290,595
Net realized gains on sales of available-for-sale securities		(99,855	)		(584,231	)
Provision for loan losses		30,000			30,000
Mortgage banking operations, net		(12,412	)		(70,617	)
Shares held by ESOP committed to be released		11,304			10,184
Stock-based compensation expense		22,232			22,232
Changes in income taxes payable		244,296			229,501
Changes in assets and liabilities		643,534			126,718
Net cash provided by operations before loan sales		1,911,000			1,162,922
Origination of loans for sale to secondary market		(2,454,771	)		(7,346,813	)
Proceeds from sales of loans to secondary market		1,624,949			7,808,255
Net cash provided by operating activities		1,081,178			1,624,364
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment and mortgage-backed securities		(7,160,293	)		(16,575,899	)
Maturity or call of investment securities available-for-sale		-			1,000,000
Sale of investment securities available-for-sale		6,638,996			14,424,509
Principal payments on mortgage-backed and investment securities		1,535,854			3,555,597
Net decrease in loans		2,974,304			5,521,899
Additions to premises and equipment		(66,411	)		(143,291	)
Net cash provided by investing activities		3,922,450			7,782,815
				(Continued)

5

JACKSONVILLE BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
	Three Months Ended
	March 31,
	2014			2013
	(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	4,468,339		$	3,352,909
Net decrease in other borrowings		(10,497,885	)		(8,937,596	)
Increase in advance payments by borrowers for taxes and insurance		426,034			326,959
Exercise of stock options		43,562			30,784
Stock repurchase		(334,770	)		-
Dividends paid - common stock		(142,315	)		(143,306	)
Net cash used in financing activities		(6,037,035	)		(5,370,250	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(1,033,407	)		4,036,929
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		6,098,870			7,293,711
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	5,065,463		$	11,330,640
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits	$	398,194		$	488,065
Interest on other borrowings		3,719			2,641
Income taxes paid		70,000			210,073
See accompanying notes to 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 consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary 1) for a fair presentation and 2) to make the financial statements not misleading as to the financial condition of the Company as of March 31, 2014, and the results of its operations for the three month periods ended March 31, 2014 and 2013.  The results of operations for the three month period ended March 31, 2014 are not necessarily indicative of the results which may be expected for the entire year.  The condensed consolidated balance sheet of the Company as of December 31, 2013 has been derived from the audited consolidated balance sheet of the Company as of that date.  Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2013 filed as an exhibit to the Company’s Form 10-K filed in March, 2014.  The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP), the requirements of Form 10-Q, and to prevailing practices within the industry.

Certain amounts included in the 2013 consolidated statements have been reclassified to conform to the 2014 presentation.

2. NEW ACCOUNTING PRONOUNCEMENTS

In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-04, Troubled Debt Restructurings by Creditors (Subtopic 310-40:  Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure which affects all creditors who obtain physical possession (resulting from an in substance repossession or foreclosure) of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable.  The ASU is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015 which the entity’s annual or interim financial statements have not been made available for issuance. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.

7

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 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
	March 31,
	2014		2013
Net income	$	839,789	$	1,012,448
Basic average shares outstanding		1,794,635		1,877,873
Diluted potential common shares:
Stock option equivalents		7,335		272
Diluted average shares outstanding		1,801,970		1,878,145
Basic earnings per share	$	0.47	$	0.54
Diluted earnings per share	$	0.47	$	0.54

Stock options for 104,035 shares of common stock were not considered in computing diluted earnings per share for the three month period ending March 31, 2013, because they were anti-dilutive.

4. STOCK BASED COMPENSATION

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

8

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 March 31, 2014 and 2013 is shown below.

	March 31, 2014		March 31, 2013
Unearned shares		27,636		31,340
Shares committed for release		561		549
Allocated shares		59,352		54,633
Total ESOP shares		87,549		86,522
Fair value of unearned shares	$	592,137	$	593,893

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

The following table summarizes stock option activity for the three months ended March 31, 2014.

						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Instrinsic
	Options			Price/Share		Life (in years)		Value
Outstanding, December 31, 2013		101,336		$	15.63
Granted		-
Exercised		(2,901	)		15.02
Forfeited		(400	)		15.65
Outstanding, March 31, 2014		98,035		$	15.65		8.00	$	524,487
Exercisable, March 31, 2014		35,800		$	15.65		8.00	$	191,530

9

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 $21.00 per share on March 31, 2014.

5. LOAN PORTFOLIO COMPOSITION

At March 31, 2014 and December 31, 2013, the composition of the Company’s loan portfolio is shown below.

	March 31, 2014					December 31, 2013
	Amount		Percent			Amount		Percent
Real estate loans:
One-to-four family residential	$	43,246,083		24.4	%	$	44,286,657		24.5	%
Commercial		38,778,453		21.8			38,920,692		21.5
Agricultural		35,897,025		20.2			35,005,662		19.4
Home equity		11,241,048		6.3			11,729,112		6.5
Total real estate loans		129,162,609		72.7			129,942,123		71.9
Commercial loans		29,435,402		16.6			29,946,928		16.6
Agricultural loans		8,730,075		4.9			10,559,593		5.8
Consumer loans		13,693,296		7.7			13,605,897		7.5
Total loans receivable		181,021,382		101.9			184,054,541		101.9
Less:
Net deferred loan fees		15,667		0.0			8,605		0.0
Allowance for loan losses		3,368,482		1.9			3,406,434		1.9
Total loans receivable, net	$	177,637,233		100.0	%	$	180,639,502		100.0	%

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

Loan originations are derived from a number of sources such as real estate broker referrals, existing customers, builders, attorneys and walk-in customers.  Upon receipt of a loan application, a credit report is obtained to verify specific information relating to the applicant’s employment, income, and credit standing.  In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent appraiser approved by the Company.  A loan application file is first reviewed by a loan officer in the loan department who checks applications for accuracy and completeness, and verifies the information provided.  The financial resources of the borrower and the borrower’s credit history, as well as the collateral securing the loan, are considered an integral part of each risk evaluation prior to approval.  The board of directors has established individual lending authorities for each loan officer by loan type.  Loans over an individual officer’s lending limit must be approved by the officers’ loan committee consisting of the chairman of the board, president, chief lending officer and all lending officers, which meets three times a week, and has lending authority up to $750,000 depending on the type of loan.  Loans to borrowers with an aggregate principal balance over this limit, up to $1.0 million, must be approved by the directors’ loan committee, which meets weekly and consists of the chairman of the board, president, senior vice president, chief lending officer and at least two outside directors, plus all lending officers as non-voting members.  The board of directors approves all loans to borrowers with an aggregate principal balance over $1.0 million.  The board of directors ratifies all loans that are originated.  Once the loan is approved, the applicant is informed and a closing date is scheduled.  Loan commitments are typically funded within 30 days.

10

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

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

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

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

The Company currently offers adjustable-rate mortgage loans for terms ranging up to 30 years.  They generally offer adjustable-rate mortgage loans that adjust between one and five years on the anniversary date of origination.  Interest rate adjustments are up to two hundred basis points per year, with a cap of up to six hundred basis points on interest rate increases over the life of the loan.  In a rising interest rate environment, such rate limitations may prevent adjustable-rate mortgage loans from repricing to market interest rates, which would have an adverse effect on the net interest income.  In the low interest rate environment that has existed over the past five years, the adjustable-rate portfolio has repriced downward resulting in lower interest income from this portion of the loan portfolio.  In addition, during this period borrowers have shown a preference for fixed-rate loans.  The Company has used different interest indices for adjustable-rate mortgage loans in the past such as the average yield on U.S. Treasury securities, adjusted to a constant maturity of one-year, three-years or five-years.  The origination of fixed-rate mortgage loans versus adjustable-rate mortgage loans is monitored on an ongoing basis and is affected significantly by the level of market interest rates, customer preference, interest rate risk position and competitors’ loan products.

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

11

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

When underwriting residential real estate loans, the Company reviews and verifies each loan applicant’s income and credit history.  Management believes that stability of income and past credit history are integral parts in the underwriting process.  Generally, the applicant’s total monthly mortgage payment, including all escrow amounts, is limited to 28% of the applicant’s total monthly income.  In addition, total monthly obligations of the applicant, including mortgage payments, generally should not exceed 38% of total monthly income.  Written appraisals are generally required on real estate property offered to secure an applicant’s loan.  For one-to-four family real estate loans with loan to value ratios of over 80%, private mortgage insurance is generally 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.

12

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

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

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

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

Home Equity Loans – The Company originates home equity loans and lines of credit, which are generally secured by the borrower’s principal residence.  The maximum amount of a home equity loan or line of credit is generally 95% of the appraised value of a borrower’s real estate collateral less the amount of any existing mortgages or related liabilities.  Home equity loans and lines of credit are approved with both fixed and adjustable interest rates which we determine based upon market conditions.  Such loans may be fully amortized over the life of the loan or have a balloon feature.  Generally, the maximum term for home equity loans is 10 years.

Underwriting standards for home equity loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.  The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income.  We also consider the length of employment with the borrower’s present employer as well as the amount of time the borrower has lived in the local area.  Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.

13

Home equity loans entail greater risks than one-to-four family residential mortgage loans, which are secured by first lien mortgages.  In such cases, collateral repossessed after a default may not provide an adequate source of repayment of the outstanding loan balance because of damage or depreciation in the value of the property or loss of equity to the first lien position.  Further, home equity loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Finally, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default.

Commercial Business Loans - The Company originates commercial business loans to borrowers located in the Company’s market area which are secured by collateral other than real estate or which can be unsecured.  Commercial business loan participations are also purchased from other lenders, which may be made to borrowers outside the Company’s market area.  Commercial business loans are generally secured by equipment and inventory and generally are offered with adjustable rates tied to the prime rate or the average yield on U.S. Treasury securities, adjusted to a constant maturity of either one-year, three-years or five-years and various terms of maturity generally from three years to five years.  Unsecured business loans are originated on a limited basis in those instances where the applicant’s financial strength and creditworthiness has been established.  Commercial business loans generally bear higher interest rates than residential loans, but they also may involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower’s business.  Personal guarantees are generally obtained from the borrower or a third party as a condition to originating its business loans.  

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

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

Underwriting standards for agricultural business loans include a determination of the applicant’s ability to meet existing obligations and payments on the proposed loan from normal cash flows generated in the applicant’s business.  The financial strength of each applicant is assessed through the review of financial statements, pro-forma cash flow statements, and tax returns provided by the applicant.  The creditworthiness of an applicant is derived from a review of credit reports as well as a search of public records.  Financial statements are requested at least annually and reviewed for substantial deviations or changes that might affect repayment of the loan.  Loan officers may also visit the premises of borrowers to observe the operation, facilities, equipment, and personnel and to inspect the pledged collateral.  Underwriting standards for agricultural business loans are different for each type of loan depending on the financial strength of the applicant and the value of collateral offered as security.

14

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

Consumer Loans – The Company originates consumer loans, including automobile loans, loans secured by deposit accounts, unsecured loans and mobile home loans.  Consumer loans are generally offered on a fixed-rate basis.  Automobile loans are offered with maturities of up to 60 months for new automobiles.  Loans secured by used automobiles will have maximum terms which vary depending upon the age of the automobile.  Automobile loans are generally originated with a loan-to-value ratio below the greater of 80% of the purchase price or 100% of NADA loan value.  In the case of a new car loan, the loan-to-value ratio may be greater or less depending on the borrower’s credit history, debt to income ratio, home ownership and other banking relationships with us.

Underwriting standards for consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.  The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income.  We also consider the length of employment with the borrower’s present employer as well as the amount of time the borrower has lived in the local area.  Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.

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

15

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 March 31, 2014, March 31, 2013, and December 31, 2013.

	March 31, 2014
				Commercial		Agricultural
	1-4 Family			Real Estate		Real Estate		Home Equity			Commercial			Agricultural			Consumer			Unallocated			Total
Allowance for Loan Losses:
Beginning Balance,
December 31, 2013	$	856,144		$	745,760	$	175,028	$	201,993		$	1,034,189		$	52,798		$	184,848		$	155,674		$	3,406,434
Provision charged to
expense		206,026			32,275		3,826		(4,123	)		(199,259	)		(9,148	)		20,381			(19,978	)		30,000
Losses charged off		(63,474	)		-		-		-			-			-			(5,503	)		-			(68,977	)
Recoveries		300			-		-		525			-			-			200			-			1,025
Ending balance,
March 31, 2014	$	998,996		$	778,035	$	178,854	$	198,395		$	834,930		$	43,650		$	199,926		$	135,696		$	3,368,482
Ending balance:
individually evaluated
for impairment	$	126,104		$	257,427	$	-	$	-		$	537,946		$	-		$	11,689		$	-		$	933,166
Ending balance:
collectively evaluated
for impairment	$	872,892		$	520,608	$	178,854	$	198,395		$	296,984		$	43,650		$	188,237		$	135,696		$	2,435,316
Loans:
Ending balance	$	43,246,083		$	38,778,453	$	35,897,025	$	11,241,048		$	29,435,402		$	8,730,075		$	13,693,296		$	-		$	181,021,382
Ending balance:
individually evaluated
for impairment	$	549,565		$	1,863,091	$	126,323	$	26,924		$	873,113		$	-		$	110,935		$	-		$	3,549,951
Ending balance:
collectively evaluated
for impairment	$	42,696,518		$	36,915,362	$	35,770,702	$	11,214,124		$	28,562,289		$	8,730,075		$	13,582,361		$	-		$	177,471,431

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	March 31, 2013
			Commercial			Agricultural
	1-4 Family		Real Estate			Real Estate		Home Equity			Commercial		Agricultural		Consumer			Unallocated		Total
Allowance for Loan Losses:
Beginning Balance,
December 31, 2012	$	741,029	$	828,873		$	149,568	$	328,996		$	934,251	$	43,930	$	151,474		$	161,343	$	3,339,464
Provision charged to
expense		23,583		(79,312	)		34,212		(114,401	)		25,412		640		61,233			78,633		30,000
Losses charged off		-		-			-		-			-		-		(45,759	)		-		(45,759	)
Recoveries		14,631		87,882			-		13,025			-		-		6,726			-		122,264
Ending balance,
March 31, 2013	$	779,243	$	837,443		$	183,780	$	227,620		$	959,663	$	44,570	$	173,674		$	239,976	$	3,445,969
Ending balance:
individually evaluated
for impairment	$	-	$	248,808		$	-	$	-		$	609,067	$	-	$	-		$	-	$	857,875
Ending balance:
collectively evaluated
for impairment	$	779,243	$	588,635		$	183,780	$	227,620		$	350,596	$	44,570	$	173,674		$	239,976	$	2,588,094
Loans:
Ending balance	$	40,465,539	$	33,479,415		$	36,756,071	$	11,844,071		$	25,701,469	$	8,914,015	$	14,479,652		$	-	$	171,640,232
Ending balance:
individually evaluated
for impairment	$	338,494	$	1,390,864		$	-	$	49,809		$	707,539	$	-	$	7,467		$	-	$	2,494,173
Ending balance:
collectively evaluated
for impairment	$	40,127,045	$	32,088,551		$	36,756,071	$	11,794,262		$	24,993,930	$	8,914,015	$	14,472,185		$	-	$	169,146,059

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	December 31, 2013
				Commercial			Agricultural
	1-4 Family			Real Estate			Real Estate		Home Equity			Commercial		Agricultural		Consumer			Unallocated			Total
Allowance for Loan Losses:
Beginning Balance,
December 31, 2012	$	741,029		$	828,873		$	149,568	$	328,996		$	934,251	$	43,930	$	151,474		$	161,343		$	3,339,464
Provision charged to
expense		261,492			(218,949	)		25,460		(78,628	)		92,597		8,868		84,829			(5,669	)		170,000
Losses charged off		(162,448	)		-			-		(63,410	)		-		-		(66,467	)		-			(292,325	)
Recoveries		16,071			135,836			-		15,035			7,341		-		15,012			-			189,295
Ending balance,
December 31, 2013	$	856,144		$	745,760		$	175,028	$	201,993		$	1,034,189	$	52,798	$	184,848		$	155,674		$	3,406,434
Ending balance:
individually evaluated
for impairment	$	-		$	248,857		$	-	$	-		$	622,730	$	-	$	10,836		$	-		$	882,423
Ending balance:
collectively evaluated
for impairment	$	856,144		$	496,903		$	175,028	$	201,993		$	411,459	$	52,798	$	174,012		$	155,674		$	2,524,011
Loans:
Ending balance	$	44,286,657		$	38,920,692		$	35,005,662	$	11,729,112		$	29,946,928	$	10,559,593	$	13,605,897		$	-		$	184,054,541
Ending balance:
individually evaluated
for impairment	$	563,524		$	1,531,078		$	-	$	71,548		$	662,730	$	-	$	101,089		$	-		$	2,929,969
Ending balance:
collectively evaluated
for impairment	$	43,723,133		$	37,389,614		$	35,005,662	$	11,657,564		$	29,284,198	$	10,559,593	$	13,504,808		$	-		$	181,124,572

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.

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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 $750,000, 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.  All watch list credits are reviewed by management and reported to the Board monthly.  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.

19

Loans not meeting the criteria above that are analyzed individually as part of the foregoing 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 March 31, 2014 and December 31, 2013.

	1-4 Family				Commercial Real Estate				Agricultural Real Estate				Home Equity
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2014		2013		2014		2013		2014		2013		2014		2013
Rating:
Pass	$	40,068,550	$	41,061,498	$	36,095,675	$	36,489,660	$	35,770,702	$	35,005,662	$	10,792,627	$	11,215,416
Special Mention		763,850		775,545		55,906		57,488		-		-		152,266		155,515
Substandard		2,413,683		2,449,614		2,626,872		2,373,544		126,323		-		296,155		358,181
Total	$	43,246,083	$	44,286,657	$	38,778,453	$	38,920,692	$	35,897,025	$	35,005,662	$	11,241,048	$	11,729,112
	Commercial				Agricultural				Consumer				Total
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2014		2013		2014		2013		2014		2013		2014		2013
Rating:
Pass	$	28,510,649	$	29,231,227	$	8,730,075	$	10,559,593	$	13,310,990	$	13,302,507	$	173,279,268	$	176,865,563
Special Mention		-		-		-		-		84,562		68,480		1,056,584		1,057,028
Substandard		924,753		715,701		-		-		297,744		234,910		6,685,530		6,131,950
Total	$	29,435,402	$	29,946,928	$	8,730,075	$	10,559,593	$	13,693,296	$	13,605,897	$	181,021,382	$	184,054,541

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2014 and December 31, 2013.

	March 31, 2014
	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	$	717,032	$	61,229	$	767,328	$	1,545,589	$	41,700,494	$	43,246,083	$	-
Commercial real estate		300,779		-		81,739		382,518		38,395,935		38,778,453		-
Agricultural real estate		-		-		126,323		126,323		35,770,702		35,897,025		-
Home equity		67,333		47,167		61,131		175,631		11,065,417		11,241,048		-
Commercial		-		-		-		-		29,435,402		29,435,402		-
Agricultural		-		-		-		-		8,730,075		8,730,075		-
Consumer		74,706		23,932		142,859		241,497		13,451,799		13,693,296		-
Total	$	1,159,850	$	132,328	$	1,179,380	$	2,471,558	$	178,549,824	$	181,021,382	$	-

20

	December 31, 2013
	30-59 Days		60-89 Days		Greater than 90		Total						Total Loans >90
	Past Due		Past Due		Days Past Due		Past Due		Current		Total Loans		Days & Accruing
One-to-four family residential	$	350,539	$	95,782	$	806,877	$	1,253,198	$	43,033,459	$	44,286,657	$	-
Commercial real estate		-		68,216		78,281		146,497		38,774,195		38,920,692		-
Agricultural real estate		-		-		-		-		35,005,662		35,005,662		-
Home equity		156,331		47,585		55,288		259,204		11,469,908		11,729,112		-
Commercial		-		-		-		-		29,946,928		29,946,928		-
Agricultural		-		-		-		-		10,559,593		10,559,593		-
Consumer		108,452		26,212		9,900		144,564		13,461,333		13,605,897		-
Total	$	615,322	$	237,795	$	950,346	$	1,803,463	$	182,251,078	$	184,054,541	$	-

The accrual of interest on loans is 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.

21

The following tables present impaired loans at or for the three months ended March 31, 2014 and 2013 and the year ended December 31, 2013.

	Three Months Ended March 31, 2014
							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	$	143,159	$	143,159	$	-	$	223,902	$	3,244	$	3,494
Commercial real estate		452,080		452,080		-		476,167		5,510		1,182
Agricultural real estate		126,323		126,323		-		127,166		3,100		843
Commercial		290,000		290,000		-		319,109		3,541		1,008
Home equity		26,924		26,924		-		30,851		718		798
Consumer		13,521		13,521		-		14,542		276		316
Loans with a specific allowance:
One-to-four family residential		406,406		406,406		126,104		410,611		5,929		4,655
Commercial real estate		1,411,011		1,411,011		257,427		1,447,978		21,174		20,948
Commercial		583,113		583,113		537,946		650,046		7,856		7,918
Consumer		97,414		97,414		11,689		97,414		958		-
Total:
One-to-four family residential		549,565		549,565		126,104		634,513		9,174		8,149
Commercial real estate		1,863,091		1,863,091		257,427		1,924,145		26,684		22,130
Agricultural real estate		126,323		126,323		-		127,166		3,100		843
Commercial		873,113		873,113		537,946		969,155		11,397		8,926
Home equity		26,924		26,924		-		30,851		718		798
Consumer		110,935		110,935		11,689		111,956		1,235		316
Total	$	3,549,951	$	3,549,951	$	933,166	$	3,797,786	$	52,308	$	41,162

22

	Three Months Ended March 31, 2013
							Average				Interest
			Unpaid				Impairment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Balance		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	338,494	$	338,494	$	-	$	339,117	$	4,242	$	4,177
Home equity		49,809		49,809		-		43,962		863		861
Consumer		7,467		7,467		-		7,866		137		109
Loans with a specific allowance:
Commercial real estate		1,390,864		1,390,864		248,808		1,451,747		22,634		22,523
Commercial		707,539		707,539		609,067		747,865		9,716		10,030
Total:
One-to-four family residential		338,494		338,494		-		339,117		4,242		4,177
Commercial real estate		1,390,864		1,390,864		248,808		1,451,747		22,634		22,523
Commercial		707,539		707,539		609,067		747,865		9,716		10,030
Home equity		49,809		49,809		-		43,962		863		861
Consumer		7,467		7,467		-		7,866		137		109
Total	$	2,494,173	$	2,494,173	$	857,875	$	2,590,557	$	37,592	$	37,700

	Year Ended December 31, 2013
							Average				Interest
			Unpaid				Impairment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Balance		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	563,524	$	563,524	$	-	$	652,373	$	27,250	$	25,347
Commercial real estate		63,293		63,293		-		96,019		5,282		5,327
Home equity		71,548		71,548		-		66,388		3,017		2,980
Consumer		4,528		4,528		-		6,419		453		442
Loans with a specific allowance:
Commercial real estate		1,467,785		1,467,785		248,857		1,488,243		79,719		74,028
Commercial		662,730		662,730		622,730		726,269		34,465		33,921
Consumer		96,561		96,561		10,836		99,401		1,586		1,576
Total:
One-to-four family residential		563,524		563,524		-		652,373		27,250		25,347
Commercial real estate		1,531,078		1,531,078		248,857		1,584,262		85,001		79,355
Commercial		662,730		662,730		622,730		726,269		34,465		33,921
Home equity		71,548		71,548		-		66,388		3,017		2,980
Consumer		101,089		101,089		10,836		105,820		2,039		2,018
Total	$	2,929,969	$	2,929,969	$	882,423	$	3,135,112	$	151,772	$	143,621

23

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 include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.  TDR’s are considered impaired at the time of restructuring and typically are returned to accrual status after considering the borrower’s sustained repayment performance for a reasonable period of at least six months.

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

The following table presents the recorded balance, at original cost, of TDR’s, as of March 31, 2014 and December 31, 2013.

	March 31, 2014		December 31, 2013
One-to-four family residential	$	629,546	$	661,880
Commercial real estate		1,061,843		1,137,667
Agricultural real estate		-		-
Home equity		77,046		79,087
Commercial loans		595,261		675,483
Agricultural loans		-		-
Consumer loans		61,034		43,559
Total	$	2,424,730	$	2,597,676

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 March 31, 2014 and December 31, 2013.

	March 31, 2014		December 31, 2013
One-to-four family residential	$	559,629	$	591,000
Commercial real estate		1,061,843		1,074,194
Agricultural real estate		-		-
Home equity		73,019		13,015
Commercial loans		595,261		675,483
Agricultural loans		-		-
Consumer loans		61,034		42,059
Total	$	2,350,786	$	2,395,751

24

The following table presents loans modified as TDR’s during the three months ended March 31, 2014 and 2013.

	Three Months Ended				Three Months Ended
	March 31, 2014				March 31, 2013
	Number of		Recorded		Number of		Recorded
	Modifications		Investment		Modifications		Investment
One-to-four family residential		-	$	-		3	$	151,226
Commercial real estate		-		-		2		112,279
Agricultural real estate		-		-		-		-
Home equity		-		-		-		-
Commercial loans		-		-		-		-
Agricultural loans		-		-		-		-
Consumer loans		1		19,582		2		15,259
Total		1	$	19,582		7	$	278,764

2014 Modifications

The Company modified one consumer loan with a recorded investment of $19,582.  The modification was made to change the payment schedule to interest-only for three months.  The modification did not result in a write-off of the principal balance.

Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses.  During the three month period ended March 31, 2014, two residential real estate loans of $69,918 and one home equity loan of $4,027 that were considered TDR’s defaulted as they were more than 90 days past due at March 31, 2014.  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.

2013 Modifications

During the three month period ended March 31, 2013, the Company modified three one-to-four family residential real estate loans, with a recorded investment of $151,226, which were deemed to be TDR’s.  One modification was made to combine notes and capitalize interest.  Two of the modifications involved rate concessions.  None of the modifications resulted in a write-off of the principal balance.

The Company also modified two commercial real estate loans with a recorded investment of $112,279.  Both modifications were made for the same borrower to provide some payment concessions while trying to sell the property.  The modification did not result in a reduction of the contractual interest rate or a write-off of the principal balance.

The Company also modified two consumer loans with a recorded investment of $15,259.  One modification was made to combine notes and capitalize interest.  The second modification was a renewal with a rate concession.  Neither modification resulted in a write-off of the principal balance.

Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses.  During the three month period ended March 31, 2013, two residential real estate loans of $110,792, one commercial real estate loan of $27,900, and one home equity loan of $5,407 that were considered TDR’s defaulted as they were more than 90 days past due at March 31, 2013.  Default occurs when a loan is 90 days or more past due, transferred to nonaccrual or charged-off, and is within twelve months of restructuring.

25

The following table presents the Company’s nonaccrual loans at March 31, 2014 and December 31, 2013.  This table excludes performing TDR’s.

	March 31, 2014		December 31, 2013
One-to-four family residential	$	1,319,087	$	1,339,487
Commercial real estate		200,556		208,297
Agricultural real estate		126,323		-
Home equity		119,921		133,823
Commercial loans		34,808		37,939
Agricultural loans		-		-
Consumer loans		211,531		62,617
Total	$	2,012,226	$	1,782,163

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
March 31, 2014:
U.S. government and agencies	$	10,665,828	$	103,698	$	(304,689	)	$	10,464,837
Mortgage-backed securities (government-
sponsored enterprises - residential)		49,644,442		258,131		(892,958	)		49,009,615
Municipal bonds		49,730,707		1,202,823		(1,203,663	)		49,729,867
	$	110,040,977	$	1,564,652	$	(2,401,310	)	$	109,204,319
December 31, 2013:
U.S. government and agencies	$	10,710,675	$	114,936	$	(405,535	)	$	10,420,076
Mortgage-backed securities (government-
sponsored enterprises - residential)		49,486,337		219,222		(1,359,904	)		48,345,655
Municipal bonds		50,889,046		1,053,134		(1,723,314	)		50,218,866
	$	111,086,058	$	1,387,292	$	(3,488,753	)	$	108,984,597

26

The amortized cost and fair value of available-for-sale securities at March 31, 2014, 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	$	96,049	$	97,076
One to five years		8,426,041		8,726,223
Five to ten years		25,087,635		25,113,697
After ten years		26,786,810		26,257,708
		60,396,535		60,194,704
Mortgage-backed securities (government-
sponsored enterprises - residential)		49,644,442		49,009,615
	$	110,040,977	$	109,204,319

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $20,313,000 at March 31, 2014 and $20,420,000 at December 31, 2013.

The book value of securities sold under agreement to repurchase amounted to $8,776,000 at March 31, 2014 and $9,541,000 at December 31, 2013.

Gross gains of $120,000 and $584,000 and gross losses of $20,000 and $0 resulting from sales of available-for-sale securities were realized during the three months ended March 31, 2014 and 2013, 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 March 31, 2014 and December 31, 2013 were $63,831,000, and $71,198,000, respectively, which were approximately 58% and 65% of the Company’s available-for-sale investment portfolio.

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

The following table shows the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at March 31, 2014 and December 31, 2013.

27

	Less Than Twelve Months					Twelve Months or More					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
March 31, 2014	Losses			Value		Losses			Value		Losses			Value
Municipal bonds	$	(789,168	)	$	16,895,964	$	(414,495	)	$	5,513,523	$	(1,203,663	)	$	22,409,487
U.S. government agencies		(221,116	)		5,221,925		(83,573	)		1,136,555		(304,689	)		6,358,480
Mortgage-backed securities
(government sponsored
enterprises - residential)		(639,756	)		28,713,653		(253,202	)		6,349,139		(892,958	)		35,062,792
Total	$	(1,650,040	)	$	50,831,542	$	(751,270	)	$	12,999,217	$	(2,401,310	)	$	63,830,759

	Less Than Twelve Months					Twelve Months or More					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
December 31, 2013	Losses			Value		Losses			Value		Losses			Value
Municipal bonds	$	(1,462,733	)	$	22,534,325	$	(260,581	)	$	2,759,523	$	(1,723,314	)	$	25,293,848
U.S. government agencies		(367,005	)		5,824,808		(38,530	)		470,324		(405,535	)		6,295,132
Mortgage-backed securities
(government sponsored
enterprises - residential)		(1,065,542	)		33,521,545		(294,362	)		6,087,526		(1,359,904	)		39,609,071
Total	$	(2,895,280	)	$	61,880,678	$	(593,473	)	$	9,317,373	$	(3,488,753	)	$	71,198,051

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 March 31, 2014 and December 31, 2013.

7. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

	March 31, 2014			December 31, 2013
Net unrealized gain (loss) on securities available-for-sale	$	(836,658	)	$	(2,101,461	)
Tax effect		284,464			714,497
Net-of-tax amount	$	(552,194	)	$	(1,386,964	)

28

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

Amounts reclassified from AOCI and the affected line items in the statements of income during the three months ended March 31, 2014 and 2013, were as follows:

	Amounts Reclassified
	from AOCI
							Affected Line Item in the
	March 31, 2014			March 31, 2013			Statements of Income
Unrealized gains on securities available-for-sale							Net realized gains on sales of
securities	$	99,855		$	584,231		available-for-sale securities
		99,855			584,231
Tax effect		(33,951	)		(198,639	)	Income taxes
Total reclassification out of AOCI	$	65,904		$	385,592		Net reclassified amount

9. DISCLOSURES ABOUT FAIR VALUE OF ASSETS

Fair value is the price that would be received to sell an asset 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.

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets; 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.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets.

29

Recurring Measurements

The following table presents the fair value measurements of assets  recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2014 and December 31, 2013:

			March 31,2014
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and
agencies	$	10,464,837	$	-	$	10,464,837	$	-
Mortgage-backed securities
(Government sponsored
enterprises - residential)		49,009,615		-		49,009,615		-
Municipal bonds		49,729,867		-		49,729,867		-

			December 31, 2013
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and
agencies	$	10,420,076	$	-	$	10,420,076	$	-
Mortgage-backed securities
(Government sponsored
enterprises - residential)		48,345,655		-		48,345,655		-
Municipal bonds		50,218,866		-		50,218,866		-

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 March 31, 2014.

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

30

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 March 31, 2014 and December 31, 2013:

			March 31, 2014
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets  for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans
(collateral dependent)	$	1,223,540	$	-	$	-	$	1,223,540
Foreclosed assets		34,899		-		-		34,899

			December 31, 2013
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets  for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans
(collateral dependent)	$	1,219,185	$	-	$	-	$	1,219,185
Mortgage servicing rights		673,576		-		-		673,576

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 condensed consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.  For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

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

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value.  Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary.  Appraisals are reviewed for accuracy and consistency.  Appraisers are selected from the list of approved appraisers maintained by management.  The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.  Fair value adjustments on impaired loans were $(49,889) at March 31, 2014 and $(23,206) at December 31, 2013.

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

Appraisals of foreclosed assets are obtained when the real estate is acquired and subsequently as deemed necessary.  Appraisals are reviewed for accuracy and consistency.  Appraisers are selected from the list of approved appraisers maintained by management.  Fair value adjustments on real estate owned were $8,748 at March 31, 2014 and $0 at December 31, 2013.

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 $0 at March 31, 2014 and $33,649 at December 31, 2013.

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 3/31/14		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Collateral-dependent impaired loans		1,223,540	Market comparable properties	Marketability discount		20% – 30% (25%)
Foreclosed assets		34,899	Market comparable Properties	Comparability Adjustment		(6%)

	Fair Value at 12/31/13		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Collateral-dependent impaired loans		1,219,185	Market comparable properties	Marketability discount		20% – 30% (25%)
Mortgage servicing rights		673,576	Discounted cash flow	Discount rate PSA standard prepayment model rate		8 – 12.5% (10.24%) 144 – 342 (164)

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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 March 31, 2014 and December 31, 2013:

			March 31, 2014
			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents	$	5,065,463	$	5,065,463	$	-	$	-
Other investments		80,515		-		80,515		-
Loans held for sale		1,116,450		-		1,116,450		-
Loans, net of allowance for loan losses		177,637,233		-		-		175,520,030
Federal Home Loan Bank stock		1,113,800		-		1,113,800		-
Interest receivable		2,000,675		-		2,000,675		-
Financial Liabilities
Deposits		256,206,730		-		149,696,066		109,337,212
Short-term borrowings		9,112,412		-		9,112,412		-
Advances from borrowers for taxes
and insurance		1,283,848		-		1,283,848		-
Interest payable		197,971		-		197,971		-
Unrecognized financial instruments (net
of contract amount)
Commitments to originate loans		-		-		-		-
Letters of credit		-		-		-		-
Lines of credit		-		-		-		-

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			December 31, 2013
			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents	$	6,098,870	$	6,098,870	$	-	$	-
Other investments		81,918		-		81,918		-
Loans held for sale		262,461		-		262,461		-
Loans, net of allowance for loan losses		180,639,502		-		-		178,866,833
Federal Home Loan Bank stock		1,113,800		-		1,113,800		-
Interest receivable		1,817,415		-		1,817,415		-
Financial Liabilities
Deposits		251,738,391		-		143,586,822		111,116,837
Short-term borrowings		19,610,297		-		19,610,297		-
Advances from borrowers for taxes
and insurance		857,814		-		857,814		-
Interest payable		210,226		-		210,226		-
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 Receivable, Federal Home Loan Bank Stock, and Other Investments - The carrying amount approximates fair value.

Loans Held for Sale - For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics.

Loans - The fair value of loans is estimated by discounting the future cash flows using the market rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  Loans with similar characteristics were aggregated for purposes of the calculations.

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

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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10. MORTGAGE SERVICING RIGHTS

Activity in the balance of mortgage servicing rights, measured using the amortization method, for the three month period ending March 31, 2014 and the year ended December 31, 2013 was as follows:

	March 31, 2014			December 31, 2013
Balance, beginning of year	$	673,576		$	664,436
Servicing rights capitalized		10,270			101,538
Amortization of servicing rights		(26,868	)		(148,285	)
Change in valuation allowance		2,937			55,887
Balance, end of period	$	659,915		$	673,576

Activity in the valuation allowance for mortgage servicing rights for the three month period ending March 31, 2014 and the year ended December 31, 2013 was as follows:

	March 31, 2014			December 31, 2013
Balance, beginning of year	$	73,392		$	129,279
Additions		-			-
Reductions		(2,937	)		(55,887	)
Balance, end of period	$	70,455		$	73,392

11. INCOME TAXES

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense for the three months ended March 31, 2014 and 2013 is shown below.

	March 31, 2014			March 31, 2013
Computed at the statutory rate (34%)	$	392,122		$	493,420
Increase (decrease) resulting from
Tax exempt interest		(133,698	)		(124,448	)
State income taxes, net		67,567			86,512
Increase in cash surrender value		(16,388	)		(16,244	)
Other, net		3,906			(453	)
Actual tax expense	$	313,509		$	438,787

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12. COMMITMENTS AND CONTINGENCIES

Occasionally, the Company is a defendant in legal actions arising from normal business activities.  Management, after consultation with legal counsel, believes that the resolution of these actions will not have any material adverse effect on the Company’s consolidated financial statements.

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 condensed consolidated financial statements and accompanying notes thereto.

Forward Looking Statements

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

Critical Accounting Policies and Use of Significant Estimates

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

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

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Other Real Estate Owned - Other real estate owned acquired through loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  The adjustment at the time of foreclosure is recorded through the allowance for loan losses.  Due to the subjective nature of establishing fair value when the asset is acquired, the actual fair value of the other real estate owned could differ from the original estimate.  If it is determined that fair value declines subsequent to foreclosure, the asset is written down through a charge to non-interest expense.  Operating costs associated with the assets after acquisition are also recorded as non-interest expense.  Gains and losses on the disposition of other real estate owned are netted and posted to non-interest expense.

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

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

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

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

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.

Basel III

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

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Financial Condition

March 31, 2014 Compared to December 31, 2013

Total assets decreased by $3.3 million, or 1.0%, to $315.1 million at March 31, 2014 from $318.4 million at December 31, 2013.  Net loans decreased $3.0 million, or 1.7%, to $177.6 million at March 31, 2014 from $180.6 million at December 31, 2013.  The decrease in loans is primarily due to decreases of $1.8 million in agricultural business loans reflecting seasonal payments on lines of credit and $1.0 million in residential real estate loans.  Investment securities decreased $444,000 while mortgage backed securities increased $664,000, resulting in a total balance of investment and mortgage-backed securities of $109.2 million at March 31, 2014, compared to $109.0 million at December 31, 2013.

Total deposits increased $4.5 million, or 1.8%, to $256.2 million at March 31, 2014, primarily due to a $6.1 million increase in transaction accounts.  Transaction accounts have continued to grow, and time deposits have declined, as customers have preferred to maintain short-term, liquid deposits in the current low-interest rate environment.  Other borrowings, which consist of overnight advances from the FHLB and overnight repurchase agreements, decreased $10.5 million, or 53.5%, to $9.1 million at March 31, 2014.  The decrease reflects the growth in deposits and paydowns on loans.

Stockholders’ equity increased $1.3 million, or 3.1%, to $42.4 million at March 31, 2014.  The increase in stockholders’ equity was the result of $840,000 in net income and a $835,000 decrease in accumulated other comprehensive loss, which was partially offset by the payment of $142,000 in dividends.  Accumulated other comprehensive loss consisted of unrealized losses, net of tax, on available-for-sale securities reflecting changes in market prices for securities in our portfolio. Accumulated other comprehensive loss does not include changes in the fair value of other financial instruments included on the condensed consolidated balance sheet.

Results of Operations

Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013

General:  Net income for the three months ended March 31, 2014 was $840,000, or $0.47 per common share, basic and diluted, compared to net income of $1,012,000, or $0.54 per common share, basic and diluted, for the three months ended March 31, 2013.  Net income decreased $172,000 during the first quarter of 2014 due to a decrease of $488,000 in noninterest income, partially offset by an increase of $176,000 in net interest income and decreases of $16,000 in noninterest expense and $125,000 in income taxes.

Interest Income:  Total interest income for the three months ended March 31, 2014 increased $94,000, or 3.2%, to $3.0 million from $2.9 million for the same period of 2013.  The increase in interest income reflected increases of $158,000 in interest income on mortgage-backed securities and $16,000 in interest income on investment securities, partially offset by decreases of $68,000 in interest income on loans and $12,000 in interest income on other interest-earnings assets.

Interest income on loans decreased $68,000 to $2.3 million for the first quarter of 2014 due to a decrease in the average yield of loans, partially offset by an increase in the average balance of loans.  The average yield decreased 37 basis points to 5.07% for the first quarter of 2014, compared to 5.44% for the first quarter of 2013.  The decrease in the average yield reflected lower market rates of interest and the competitive lending environment.  The average balance of the loan portfolio increased $7.2 million to $179.8 million during the first quarter of 2014.  The increase in the average balance of the loan portfolio primarily reflected an increase in residential real estate loans.

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Interest income on investment securities increased $16,000 to $450,000 for the first quarter of 2014 from $434,000 for the first quarter of 2013.  The increase was primarily due to a $4.7 million increase in the average balance of the investment securities portfolio during the first quarter of 2014.  The increase in the average balance of investment securities reflected a reallocation of assets from cash and cash equivalents in an effort to remain fully invested in higher-yielding investments.  The average yield of investment securities decreased 14 basis points to 2.95% during the first quarter of 2014 from 3.09% during the first quarter of 2013.  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 increased $158,000 to $319,000 for the first quarter of 2014, compared to $161,000 for the first quarter of 2013.  The increase reflects a 133 basis point increase in the average yield of mortgage-backed securities to 2.59% for the first quarter of 2014, compared to 1.26% for the first quarter of 2013.  The average yield benefited from lower premium amortization resulting from slower national prepayment speeds on mortgage-backed securities.  The amortization of premiums on mortgage-backed securities, which reduces the average yield, decreased $176,000 to $69,000 during the first quarter of 2014, compared to $245,000 during the first quarter of 2013.  The increase in the average yield was partially offset by a $1.6 million decrease in the average balance of mortgage-backed securities to $49.2 million during the first quarter of 2014, compared to $50.8 million during the same period of 2013.

Interest income on other interest-earning assets, which consisted of interest-earning demand and time deposit accounts and federal funds sold, decreased $12,000 during the first quarter of 2014, compared to the first quarter of 2013.  The decrease is due to decreases in both the average rate and average balance of these accounts during the same time period.  The average yield on other interest-earning assets decreased 38 basis points to 0.02% during the first quarter of 2014 from 0.40% during the first quarter of 2013.  The average balance of these accounts decreased $9.0 million to $2.6 million for the three months ended March 31, 2014 compared to $11.6 million for the three months ended March 31, 2013.  The decrease in the average balance and average yield reflect a decrease in the average balance of higher-yielding time deposits and federal funds sold.

Interest Expense:  Total interest expense decreased $82,000, or 17.5%, to $390,000 for the three months ended March 31, 2014 compared to $472,000 for the three months ended March 31, 2013.  The lower interest expense reflects an $83,000 decrease in the cost of deposits.

Interest expense on deposits decreased $83,000 to $386,000 for the three months ended March 31, 2014 compared to $469,000 for the three months ended March 31, 2013.  The decrease in interest expense on deposits was primarily due to an 11 basis point decrease in the average rate paid to 0.69% during the first quarter of 2014 from 0.80% during the first quarter of 2013.  The decrease reflected ongoing low short-term market interest rates during the first quarter of 2014, as well as a change in the composition of our deposits.  The average balance of deposits decreased $9.6 million to $225.1 million for the first quarter of 2014.  The decrease reflected a $13.3 million decrease in the average balance of time deposit accounts, partially offset by a $3.7 million increase in the average balance of lower cost transaction accounts.

Interest paid on borrowed funds, which consisted of overnight repurchase agreements and FHLB advances, increased to $3,000 during the first quarter of 2014 from $2,000 during the first quarter of 2013.  The average balance of borrowed funds increased $6.5 million to $10.6 million during the first quarter of 2014, reflecting the use of overnight FHLB advances during 2014.  The increase in the average balance was partially offset by a 14 basis point decrease in the average rate paid on borrowed funds to 0.12% during the first quarter of 2014.

Net Interest Income:  As a result of the changes in interest income and expense above, net interest income increased by $176,000, or 7.1%, to $2.7 million for the three months ended March 31, 2014 from $2.5 million for the three months ended March 31, 2013.  Our net interest margin increased to 3.63% for the first quarter of 2014 from 3.41% for the first quarter of 2013.  Our interest rate spread increased to 3.50% during the first quarter of 2014 from 3.26% during the first quarter of 2013.  Our ratio of interest earning assets to interest bearing liabilities was 1.24x and 1.22x at March 31, 2014 and March 31, 2013, respectively.

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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 three months ended March 31, 2014 and 2013.

	Three Months Ended
	March 31, 2014		March 31, 2013
Balance at beginning of period	$	3,406,434	$	3,339,464
Charge-offs:
Commercial real estate		63,474		-
Consumer		5,503		45,759
Total		68,977		45,759
Recoveries:
One-to-four family residential		300		14,631
Commercial real estate		-		87,882
Home equity		525		13,025
Consumer		200		6,726
Total		1,025		122,264
Net loan charge-offs		67,952		(76,505	)
Provisions charged to expense		30,000		30,000
Balance at end of period	$	3,368,482	$	3,445,969

The provision for loan losses totaled $30,000 during the first quarters of 2014 and 2013.  The allowance for loan losses decreased $38,000 during 2014 to $3.4 million at March 31, 2014.  The decrease in the allowance for loan losses reflected net charge-offs of $68,000 during 2014.  Loans delinquent 30 days or more increased $668,000 to $2.5 million, or 1.37% of total loans, as of March 31, 2014, from $1.8 million, or 0.99% of total loans, as of December 31, 2013.  Loans delinquent 30 days or more equaled $2.4 million, or 1.39% of total loans, as of March 31, 2013.  The increase in delinquent loans from December 31, 2013 is concentrated in loans delinquent 30-59 days which increased $545,000 during the first quarter of 2014, reflecting several small, slow pay credits, which are in the process of collection.

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

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	March 31, 2014			December 31, 2013
Non-accruing loans:
One-to-four family residential	$	1,319,087		$	1,339,487
Commercial real estate		200,556			208,297
Agricultural real estate		126,323			-
Home equity		119,921			133,823
Commercial business		34,808			37,939
Consumer		211,531			62,617
Total	$	2,012,226		$	1,782,163
Accruing loans delinquent more than 90 days:
Total	$	-		$	-
Foreclosed assets:
One-to-four family residential		123,977			132,725
Commercial real estate		149,193			149,193
Consumer		-			1,689
Total	$	273,170		$	283,607
Total nonperforming assets	$	2,285,396		$	2,065,770
Total nonperforming assets as a percentage
of total assets		0.73	%		0.65	%

Nonperforming assets increased $220,000 to $2.3 million, or 0.73% of total assets, as of March 31, 2014, compared to $2.1 million, or 0.65% of total assets, as of December 31, 2013.  The increase in nonperforming assets was due to a $230,000 increase in nonperforming loans, partially offset by a $10,000 decrease in foreclosed assets.  The increase in nonperforming loans is primarily due to an increase of $126,000 in agricultural real estate reflecting the delinquency of one well-secured loan, and a $149,000 increase in consumer loans.  The following table shows the aggregate principal amount of potential problem credits on the Company’s watch list at March 31, 2014 and December 31, 2013.  All non-accruing loans are automatically placed on the watch list.  The increase in substandard credits primarily reflects the use of seasonal lines of credit by one substandard commercial borrower.

	March 31, 2014		December 31, 2013
Special Mention credits	$	1,056,584	$	1,057,028
Substandard credits		6,685,530		6,131,950
Total watch list credits	$	7,742,114	$	7,188,978

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Non-Interest Income:  Non-interest income decreased $488,000, or 32.9%, to $998,000 for the three months ended March 31, 2014 from $1.5 million for the same period in 2013.  The decrease in non-interest income resulted primarily from a decrease of $484,000 in gains on the sale of available-for-sale securities.  The decrease reflected a decrease in the volume of securities sales to $6.6 million during the first quarter of 2014 from $14.4 million during the first quarter of 2013, as well as lower market valuations.  Non-interest income was also impacted by a decrease of $58,000 in income from mortgage banking operations, partially offset by an increase of $45,000 in commission income.  The decrease in mortgage banking income was due to a lower volume of loan sales in 2014.  We sold $1.6 million of loans in the secondary market during the first quarter of 2014, compared to $7.8 million during the same period of 2013.  The increase in commission income reflected increased account rollover activity and improved market conditions.

Non-Interest Expense:  Total non-interest expense decreased $15,000, or 0.6%, to $2.5 million for the three months ended March 31, 2014.  The decrease in non-interest expense consisted mainly of decreases of $29,000 in professional fees and $15,000 in compensation and benefits expense, partially offset by an increase of $28,000 in ATM and bank card interchange expense.  The decrease in professional fees is due to decreased legal expenses.  The decrease in compensation and benefits expense is primarily due to the reduction in full-time equivalent employees to 97 during the first quarter of 2014 from 102 during the first quarter of 2013.  The increase in ATM and bank card expense reflects processing fees related to higher transaction volumes.

Income Taxes:  The provision for income taxes decreased $125,000 to $314,000 during the first quarter of 2014 compared to the same period of 2013.  The decrease in the income tax provision reflected a decrease in taxable income, as well as an increase in tax-exempt income.  The effective tax rate was 27.2% and 30.2% for the first quarters of 2014 and 2013, 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 March 31, 2014 and December 31, 2013, cash and cash equivalents totaled $5.1 million and $6.1 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 three months, the most significant sources of funds have been growth in deposits, sales of investment securities, and principal repayments on loans and mortgage-backed securities.  These funds have been used primarily for purchases of investment and mortgage-backed securities and the reduction of other borrowings.

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-earning 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 March 31, 2014, the Company had $5.0 million in outstanding FHLB advances and approximately $20.4 million available to be accessed 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 March 31, 2014 and December 31, 2013 were 40.0% and 39.0%, 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 March 31, 2014 and December 31, 2013.

	March 31, 2014		December 31, 2013
Commitments to fund loans	$	42,623,846	$	41,694,350
Standby letters of credit		469,880		360,000

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 March 31, 2014, 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 March 31, 2014, the Bank’s core capital ratio was 11.92% 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 March 31, 2014, minimum requirements and the Bank’s actual ratios are as follows:

	March 31, 2014			December 31, 2013			Minimum
	Actual			Actual			Required
Tier 1 Capital to Average Assets		11.92	%		11.51	%		4.00	%
Tier 1 Capital to Risk-Weighted Assets		17.60	%		16.89	%		4.00	%
Total Capital to Risk-Weighted Assets		18.85	%		18.15	%		8.00	%

Effect of Inflation and Changing Prices

The condensed 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 March 31,
	2014							2013
	Average							Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost
Interest-earnings assets:
Loans	$	179,847	$	2,277		5.07	%	$	172,597	$	2,346		5.44	%
Investment securities		60,969		450		2.95	%		56,237		434		3.09	%
Mortgage-backed securities		49,197		319		2.59	%		50,781		160		1.26	%
Other		2,629		-		0.02	%		11,647		12		0.40	%
Total interest-earning assets		292,642		3,046		4.16	%		291,262		2,952		4.05	%
Non-interest earnings assets		20,641							21,727
Total assets	$	313,283						$	312,989
Interest-bearing liabilities:
Deposits	$	225,127	$	387		0.69	%	$	234,722	$	469		0.80	%
Other borrowings		10,625		3		0.12	%		4,100		3		0.26	%
Total interest-bearing liabilities		235,752		390		0.66	%		238,822		472		0.79	%
Non-interest bearing liabilities		35,610							30,052
Stockholders’ equity		41,921							44,115
Total liabilities/stockholders’ equity	$	313,283						$	312,989
Net interest income			$	2,656						$	2,480
Interest rate spread (average yield earned
minus average rate paid)						3.50	%						3.26	%
Net interest margin (net interest income
divided by average interest-earning assets)						3.63	%						3.41	%

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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.

Analysis of Volume and Rate Changes
(In thousands)
Three Months Ended March 31,
	2014 Compared to 2013
	Increase(Decrease) Due to
	Rate			Volume			Net
Interest-earnings assets:
Loans	$	(164	)	$	96		$	(68	)
Investment securities		(20	)		35			15
Mortgage-backed securities		163			(5	)		158
Other		(6	)		(5	)		(11	)
Total net change in income on
interest-earning assets		(27	)		121			94
Interest-bearing liabilities:
Deposits		(64	)		(19	)		(83	)
Other borrowings		(2	)		3			1
Total net change in expense on
interest-bearing liabilities		(66	)		(16	)		(82	)
Net change in net interest income	$	39		$	137		$	176

46

JACKSONVILLE BANCORP, INC.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

The following table shows projected results at March 31, 2014 and December 31, 2013 of the impact on net interest income from an immediate change in interest rates, as well as the benchmarks established by the ALCO.  The results are shown as a dollar and percentage change in net interest income over the next twelve months.

	Change in Net Interest Income
	(Dollars in thousands)
	March 31, 2014		December 31, 2013		ALCO
Rate Shock:	$ Change	% Change	$ Change	% Change	Benchmark
+ 300 basis points	(152)	-1.31%	(148)	-1.27%	> (20.00)%
+ 200 basis points	(107)	-0.92%	(95)	-0.82%	> (20.00)%
+ 100 basis points	(36)	-0.31%	(32)	-0.28%	> (12.50)%
- 100 basis points	(180)	-1.56%	(207)	-1.78%	> (12.50)%

The table above indicates that as of March 31, 2014, in the event of a 200 basis point increase in interest rates, we would experience a 0.92% decrease in net interest income.  In the event of a 100 basis point decrease in interest rates, we would experience a 1.56% decrease in net interest 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.

48

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 13a-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 March 31, 2014, the Company is not involved in any pending legal proceedings other than non-material legal proceedings undertaken in the normal course of business.

Item 1.A.                Risk Factors

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

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

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

	Total number of shares purchased	Average price paid per share	Total number of shares purchased under publicly announced plan	Maximum number of shares that may be purchased under the repurchase plan
January 1 – January 31	16,000	$        19.75	23,500	68,518
February 1 – February 28	-	-	-	68,518
March 1 – March 31	-	-	-	68,518

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

50

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: 05/08/2014	/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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EXHIBITS