Jacksonville Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Jacksonville Bancorp, Inc.	ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Jacksonville Bancorp, Inc.	ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Jacksonville Bancorp, Inc.	ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

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

For the transition period of _________ to _________

Commission File Number 001-34821

Jacksonville Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

x Yes o No

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

o Yes o No

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

o Large Accelerated Filer o Accelerated Filer

o Non-Accelerated Filer x Smaller Reporting Company

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

o Yes x No

As of May 1, 2011, there were 1,930,955 shares of the Registrant’s common stock issued and outstanding.

JACKSONVILLE BANCORP, INC.

FORM 10-Q

March 31, 2011

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 Statement of Stockholders’ Equity	3

	Condensed Consolidated Statements of Cash Flows	4-5

	Notes to the Condensed Consolidated Financial Statements	6-30

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31-41

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	42-43

Item 4.	Controls and Procedures	44

PART II	OTHER INFORMATION	45

Item 1.	Legal Proceedings	45

Item 1.A.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	45

Item 4.	Removed and Reserved	45

Item 5.	Other Information	45

Item 6.	Exhibits	45

	Signatures	46

EXHIBITS

	Section 302 Certifications
	Section 906 Certification

PART I – FINANCIAL INFORMATION

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2011			2010
	(Unaudited)
ASSETS
Cash and cash equivalents	$	10,556,677		$	8,943,400
Investment securities - available for sale		57,364,188			52,871,871
Mortgage-backed securities - available for sale		44,443,253			41,994,850
Federal Home Loan Bank stock		1,113,800			1,113,800
Other investment securities		127,958			130,049
Loans receivable - net of allowance for loan losses of $2,879,250 and $2,964,285 as of March 31, 2011 and December 31, 2010		173,996,907			176,442,118
Loans held for sale - net		480,400			280,000
Premises and equipment - net		5,703,622			5,659,074
Cash surrender value of life insurance		4,282,417			4,238,915
Accrued interest receivable		1,985,042			1,872,779
Goodwill		2,726,567			2,726,567
Capitalized mortgage servicing rights, net of valuation allowance of $153,594 and $163,989 as of March 31, 2011 and December 31, 2010		783,292			797,327
Real estate owned		624,432			459,877
Deferred income taxes		1,469,369			1,620,994
Other assets		2,158,839			2,329,232

Total Assets	$	307,816,763		$	301,480,853

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits	$	261,121,840		$	256,423,647
Other borrowings		4,049,703			4,018,235
Advance payments by borrowers for taxes and insurance		961,436			629,788
Accrued interest payable		483,058			556,257
Deferred compensation payable		3,100,545			3,060,637
Income taxes payable		336,349			122,934
Other liabilities		1,192,472			991,205
Total liabilities		271,245,403			265,802,703

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 1,926,942 shares as of March 31, 2011 and 1,923,689 shares as of December 31, 2010, respectively		19,269			19,237

Additional paid-in-capital		16,163,353			16,159,960

Retained earnings		20,635,358			20,045,095

Less: Unallocated ESOP shares		(390,150	)		(395,340	)

Accumulated other comprehensive income (loss)		143,530			(150,802	)

Total stockholders’ equity		36,571,360			35,678,150

Total Liabilities and Stockholders’ Equity	$	307,816,763		$	301,480,853

See accompanying notes to the unaudited condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended
	March 31,
	2011		2010
	(Unaudited)
INTEREST INCOME:
Loans	$	2,655,406	$	2,671,261
Investment securities		485,898		399,634
Mortgage-backed securities		279,763		160,878
Other		1,700		2,449
Total interest income		3,422,767		3,234,222

INTEREST EXPENSE:
Deposits		800,089		1,052,574
Other borrowings		4,628		2,180
Total interest expense		804,717		1,054,754

NET INTEREST INCOME		2,618,050		2,179,468

PROVISION FOR LOAN LOSSES		175,000		275,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,443,050		1,904,468

NON-INTEREST INCOME:
Fiduciary activities		60,019		42,421
Commission income		412,740		260,943
Service charges on deposit accounts		219,164		231,219
Mortgage banking operations, net		7,888		48,503
Net realized gains on sales of available-for-sale securities		53,505		140,028
Loan servicing fees		94,362		92,608
Other		137,084		135,408
Total non-interest income		984,762		951,130

NON-INTEREST EXPENSE:
Salaries and employee benefits		1,529,118		1,389,110
Occupancy and equipment		239,240		260,035
Data processing and telecommunications		146,426		117,075
Professional		50,381		37,065
Marketing		21,319		28,144
Postage and office supplies		77,260		68,634
Deposit insurance premium		96,626		103,030
Other		269,288		244,530
Total non-interest expense		2,429,658		2,247,623

INCOME BEFORE INCOME TAXES		998,154		607,975
INCOME TAXES		263,415		109,118

NET INCOME	$	734,739	$	498,857

NET INCOME PER COMMON SHARE - BASIC	$	0.39	$	0.26
NET INCOME PER COMMON SHARE - DILUTED	$	0.39	$	0.26

See accompanying notes to the unaudited condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

													Accumulated
				Additional									Other			Total
	Common			Paid-in			Unallocated			Retained			Comprehensive			Stockholders’			Comprehensive
(Unaudited)	Stock			Capital			ESOP Shares			Earnings			Income (Loss)			Equity			Income

BALANCE, DECEMBER 31, 2010	$	19,237		$	16,159,960		$	(395,340	)	$	20,045,095		$	(150,802	)	$	35,678,150

Net Income		-			-			-			734,739			-			734,739		$	734,739

Other comprehensive income - change in net unrealized gains(losses) on securities available-for-sale, net of taxes of $133,434		-			-			-			-			259,019			259,019			259,019
Less: reclassification adjustment for gains included in net income, net of tax of $18,192		-			-			-			-			35,313			35,313			35,313
Comprehensive Income																			$	1,029,071

Exercise of stock options		154			151,072			-			-			-			151,226
Tax benefit related to stock options exercised		-			2,815			-			-			-			2,815
Purchase and retirement of common stock		(122	)		(151,866	)		-			-			-			(151,988	)
Shares held by ESOP, commited to be released		-			1,372			5,190			-			-			6,562
Dividends ($0.075 per share)		-			-			-			(144,476	)		-			(144,476	)

BALANCE, MARCH 31, 2011	$	19,269		$	16,163,353		$	(390,150	)	$	20,635,358		$	143,530		$	36,571,360

See accompanying notes to unaudited condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	March 31,
	2011			2010
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	734,739		$	498,857
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion:
Premises and equipment		75,686			92,980
Amortization of investment and loan premiums and discounts, net		148,459			316,339
Net realized gains on sales of available-for-sale securities		(53,505	)		(140,028	)
Provision for loan losses		175,000			275,000
Mortgage banking operations, net		(7,888	)		(48,503	)
Loss (gain) on sale of real estate owned		(21,059	)		3,304
Shares held by ESOP committed to be released		6,562			-
Changes in income taxes payable		213,415			93,412
Changes in assets and liabilities		182,604			(41,789	)
Net cash provided by operations before loan sales		1,454,013			1,049,572
Origination of loans for sale to secondary market		(2,987,479	)		(4,178,138	)
Proceeds from sales of loans to secondary market		2,809,002			4,893,011
Net cash provided by operating activities		1,275,536			1,764,445

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment and mortgage-backed securities		(19,184,356	)		(25,500,252	)
Maturity or call of investment securities available-for-sale		4,250,000			3,500,000
Sale of investment securities available-for-sale		6,281,988			12,555,212
Principal payments on mortgage-backed and investment securities		2,063,293			4,082,547
Proceeds from sale of real estate owned		167,216			94,386
Net decrease in loans		1,960,948			2,395,918
Additions to premises and equipment		(120,234	)		(2,952	)

Net cash (used in) investing activities		(4,581,145	)		(2,875,141	)

				(Continued)

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW


	Three Months Ended
	March 31,
	2011			2010
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	4,698,193		$	438,242
Net increase (decrease) in other borrowings		31,468			(509,134	)
Increase in advance payments by borrowers for taxes and insurance		331,648			343,687
Exercise of stock options		151,226			-
Purchase and retirement of treasury stock related to stock options		(151,988	)		-
Tax benefit of nonqualified stock options		2,815			-
Dividends paid - common stock		(144,476	)		(66,156	)

Net cash provided by financing activities		4,918,886			206,639

NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS		1,613,277			(904,057	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		8,943,400			15,696,474

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	10,556,677		$	14,792,417

ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits	$	873,288		$	1,113,398
Interest on other borrowings		4,628			5,180
Income taxes paid		50,000			-

NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans	$	384,046		$	343,483
Loans to facilitate sales of real estate owned		73,334			-

See accompanying notes to unaudited condensed consolidated financial statements

JACKSONVILLE BANCORP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	FINANCIAL STATEMENTS

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

In the opinion of management, the preceding unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for 1) a fair presentation and 2) to make the financial statements not misleading relating to the financial condition of the Company as of March 31, 2011 and December 31, 2010 and the results of its operations for the three month periods ended March 31, 2011 and 2010. The results of operations for the three month period ended March 31, 2011 are not necessarily indicative of the results which may be expected for the entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2010 filed as an exhibit to the Company’s Form 10-K filed in March, 2011. 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.

On July 14, 2010, Jacksonville Bancorp, MHC, completed its conversion to stock form. At that date, Jacksonville Bancorp, Inc. (Maryland) became the successor holding company to the Bank. Financial information presented in this report is derived in part from the consolidated financial statements of Jacksonville Bancorp, Inc. (Maryland) and subsidiaries on and after July 14, 2010, and from consolidated financial statements of our former mid-tier holding company, Jacksonville Bancorp, Inc. (Federal) and subsidiaries prior to July 14, 2010. See Note 2 – Second Step Conversion.

Certain amounts included in the 2010 consolidated statements have been reclassified to conform to the 2011 presentation.

2.	SECOND STEP CONVERSION

On July 14, 2010, Jacksonville Bancorp, Inc. completed its conversion from the mutual holding company structure and the related public offering and is now a stock holding company that is fully owned by the public. Jacksonville Savings Bank is 100% owned by the Company and the Company is 100% owned by public stockholders. The Company sold a total of 1,040,352 shares of common stock in the subscription and community offerings, including 41,614 shares to the Jacksonville Savings Bank employee stock ownership plan. All shares were sold at a price of $10 per share, raising $10.4 million in gross proceeds. Conversion related expenses of $1.2 million were offset against the gross proceeds, resulting in $9.2 million of net proceeds. Concurrent with the completion of the offering, shares of Jacksonville Bancorp, Inc., a federal corporation, common stock owned by public stockholders were exchanged for 1.0016 shares of the Company’s common stock. As a result of the offering and the exchange, at March 31, 2011, the Company had 1,926,942 shares outstanding and a market capitalization of $24.5 million. The shares of common stock sold in the offering and issued in the exchange, trade on the NASDAQ Capital market under the symbol “JXSB.”

3.	NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued ASU No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends the fair value disclosure guidance. The amendments include new disclosures and changes to clarify existing disclosure requirements. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements of Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Adoption of this update as of March 31, 2011 did not have a material effect on the Company’s financial statements.

FASB ASC 310 Receivables (“ASC310”) was amended to enhance disclosures about credit quality of financing receivables and the allowance for credit losses. The amendments require an entity to disclose credit quality information, such as internal risk grades, more detailed nonaccrual and past due information and modifications of its financing receivables. The disclosures under ASC 310, as amended, were effective for interim and annual reporting periods ending on or after December 15, 2010. This amendment did not have a significant impact on the Company’s financial results, but it has significantly expanded the disclosures that the Company is required to provide.

In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” The provisions of ASU NO. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and add factors for creditors to use in determining whether a borrower is experiencing financial difficulties. A provision in ASU No. 2011-02 also ends the FASB’s deferral of the additional disclosures about troubled debt restructurings as required by ASU No. 2010-20. The provisions of ASU No. 2011-02 are effective for the Company’s reporting period ending September 30, 2011. The adoption of ASU 2011-02 is not expected to have a material impact on the Company’s statements of income and condition.

4.	EARNINGS PER SHARE

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

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

	Three Months Ended
	March 31,
	2011		2010

Net income	$	734,739	$	498,857

Basic average shares outstanding		1,885,601		1,920,817

Diluted potential common shares:
Stock option equivalents		2,151		3,559
Diluted average shares outstanding		1,887,752		1,924,376

Basic earnings per share	$	0.39	$	0.26

Diluted earnings per share	$	0.39	$	0.26

Stock options for 4,504 shares of common stock and 4,500 shares of common stock were not considered in computing diluted earnings per share for the three month periods ending March 31, 2011 and 2010, respectively, because they were anti-dilutive.

5.	EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

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

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

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

A summary of ESOP shares at March 31, 2011, is shown below.

	March 31, 2011
Unearned shares		39,015
Shares committed for release		2,599
Allocated shares		49,398
Total ESOP shares		91,012

Fair value of unearned shares	$	495,491

6.	LOAN PORTFOLIO COMPOSITION

At March 31, 2011 and December 31, 2010, the composition of the Company’s loan portfolio is shown below.

	March 31, 2011		December 31, 2010

Mortgage loans on real estate
One-to-four family residential	$	37,782,788	$	37,227,211
Commercial		44,049,716		45,361,944
Agricultural		29,607,376		28,163,488
Home equity		18,764,445		19,526,162
Total mortgage loans on real estate		130,204,325		130,278,805

Commercial business		22,573,869		22,810,203
Agricultural business		7,844,104		8,176,396
Consumer		16,292,900		18,190,307
		176,915,198		179,455,711
Less
Net deferred loan fees		39,041		49,307
Allowance for loan losses		2,879,250		2,964,285

Net loans	$	173,996,907	$	176,442,119

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

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

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

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

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

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

The Company currently offers adjustable-rate mortgage loans for terms ranging up to 30 years. They generally offer adjustable-rate mortgage loans that adjust between one and five years on the anniversary date of origination. Interest rate adjustments are up to two hundred basis points per year, with a cap of up to six hundred basis points on interest rate increases over the life of the loan. In a rising interest rate environment, such rate limitations may prevent adjustable-rate mortgage loans from repricing to market interest rates, which would have an adverse effect on the net interest income. In the low interest rate environment that has existed over the past two years, the adjustable-rate portfolio has repriced downward resulting in lower interest income from this portion of the loan portfolio. The Company has used different interest indices for adjustable-rate mortgage loans in the past such as the average yield on U.S. Treasury securities, adjusted to a constant maturity of either 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 provides an alternative for those borrowers who meet the underwriting criteria, but are unable to qualify for a fixed-rate mortgage. However, as the interest income earned on adjustable-rate mortgage loans varies with prevailing interest rates, such loans do not offer predictable cash flows in the same manner as long-term, fixed-rate loans. Adjustable-rate mortgage loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest rates increase. It is possible that during periods of rising interest rates that the risk of delinquencies and defaults on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrower, resulting in increased loan losses.

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

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

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

Commercial and Agricultural Real Estate Loans - The Company originates and purchases commercial and agricultural real estate loans. Commercial and agricultural real estate loans are secured primarily by improved properties such as farms, retail facilities and office buildings, churches and other non-residential buildings. The maximum loan-to-value ratio for commercial and agricultural real estate loans originated is generally 80%. The commercial and agricultural real estate loans are generally written up to terms of five years with adjustable interest rates. The rates are generally tied to the prime rate and generally have a specified floor. Many of the adjustable-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 and agricultural 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 and agricultural real estate loans in excess of $250,000. Creditworthiness of the applicant is assessed by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining other public records regarding the applicant.

Loans secured by commercial and 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 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 and agricultural real estate is typically dependent upon the successful operation of the related business and real estate property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

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

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

Home Equity and Consumer Loans – The Company originates home equity and other consumer loans. Home equity loans and lines of credit are generally secured by the borrower’s principal residence. The maximum amount of a home equity loan or line of credit is generally 95% of the appraised value of a borrower’s real estate collateral less the amount of any prior mortgages or related liabilities. Home equity loans and lines of credit are approved with both fixed and adjustable interest rates which are determined 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.

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

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. The length of employment with the borrower’s present employer is also considered, 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 the risk of loss on unsecured loans. Finally, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of March 31, 2011 and December 31, 2010.

	March 31, 2011
	1-4 Family			Commercial Real Estate			Agricultural Real Estate		Commercial		Agricultural		Home Equity			Consumer			Unallocated		Total

Allowance for loan losses:
Balance, beginning of period	$	561,309		$	1,193,928		$	92,988	$	472,376	$	58,250	$	300,257		$	163,690		$	121,487	$	2,964,285
Provision charged to expense		(39,577	)		152,268			11,879		33,741		82,794		(32,302	)		(41,922	)		8,119		175,000
Losses charged off		(7,402	)		(260,785	)		—		—		—		(4,162	)		(1,097	)		—		(273,446	)
Recoveries		—			8,142			—		200		—		3,867			1,202			—		13,411
Balance, end of period	$	514,330		$	1,093,553		$	104,867	$	506,317	$	141,044	$	267,660		$	121,873		$	129,606	$	2,879,250
Ending balance: individually evaluated for impairment	$	67,118		$	216,320		$	—	$	99,632	$	—	$	—		$	—		$	—	$	383,070
Ending balance: collectively evaluated for impairment	$	447,212		$	877,233		$	104,867	$	406,685	$	141,044	$	267,660		$	121,873		$	129,606	$	2,496,180
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—	$	—	$	—		$	—		$	—	$	—

Loans:
Ending balance	$	37,782,788		$	44,049,716		$	29,607,376	$	22,573,869	$	7,844,104	$	18,764,445		$	16,292,900		$	—	$	176,915,198
Ending balance: individually evaluated for impairment	$	643,002		$	1,741,709		$	—	$	585,106	$	—	$	—		$	—		$	—	$	2,969,817
Ending balance: collectively evaluated for impairment	$	37,139,786		$	42,308,007		$	29,607,376	$	21,988,763	$	7,844,104	$	18,764,445		$	16,292,900		$	—	$	173,945,381
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—	$	—	$	—		$	—		$	—	$	—

	December 31, 2010
	1-4 Family			Commercial Real Estate			Agricultural Real Estate		Commercial			Agricultural		Home Equity			Consumer			Unallocated		Total

Allowance for loan losses:
Balance, beginning of year	$	391,762		$	738,996		$	73,257	$	631,347		$	21,242	$	249,312		$	88,044		$	96,041	$	2,290,001
Provision charged to expense		246,401			1,217,072			19,731		(21,371	)		37,008		126,477			74,236			25,446		1,725,000
Losses charged off		(98,245	)		(787,191	)		—		(144,100	)		—		(88,106	)		(11,070	)		—		(1,128,712	)
Recoveries		21,391			25,051			—		6,500			—		12,574			12,480			—		77,996
Balance, end of year	$	561,309		$	1,193,928		$	92,988	$	472,376		$	58,250	$	300,257		$	163,690		$	121,487	$	2,964,285
Ending balance: individually evaluated for impairment	$	89,795		$	428,514		$	—	$	72,393		$	—	$	—		$	—		$	—	$	590,702
Ending balance: collectively evaluated for impairment	$	471,514		$	765,414		$	92,988	$	399,983		$	58,250	$	300,257		$	163,690		$	121,487	$	2,373,583
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—		$	—	$	—		$	—		$	—	$	—

Loans:
Ending balance	$	37,227,211		$	45,361,944		$	28,163,488	$	22,810,203		$	8,176,396	$	19,526,162		$	18,190,307		$	—	$	179,455,711
Ending balance: individually evaluated for impairment	$	369,749		$	2,220,562		$	—	$	606,273		$	—	$	—		$	—		$	—	$	3,196,584
Ending balance: collectively evaluated for impairment	$	36,857,462		$	43,141,382		$	28,163,488	$	22,203,930		$	8,176,396	$	19,526,162		$	18,190,307		$	—	$	176,259,127
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—		$	—	$	—		$	—		$	—	$	—

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

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

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

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

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

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

The general component covers non-classified loans and is based on historical charge-off experience and expected loss given the internal risk rating process. The loan portfolio is stratified into homogeneous groups of loans that possess similar loss characteristics and an appropriate loss ratio adjusted for other qualitative factors is applied to the homogeneous pools of loans to estimate the incurred losses in the loan portfolio.

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

Credit Quality Indicators

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

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

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

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

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

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, 2011 and December 31, 2010.

	1-4 Family				Commercial Real Estate				Agricultural Real Estate				Commercial Business				Agricultural Business
	March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010

Pass	$	34,943,815	$	34,258,180	$	40,824,334	$	41,534,866	$	29,170,869	$	27,768,600	$	21,288,780	$	21,621,978	$	6,910,691	$	7,818,536
Special Mention		1,444,505		1,476,077		775,676		733,561		436,507		394,888		198,755		186,598		933,413		357,860
Substandard		1,394,468		1,492,954		2,449,706		3,093,517		—		—		1,086,334		1,001,627		—		—

Total	$	37,782,788	$	37,227,211	$	44,049,716	$	45,361,944	$	29,607,376	$	28,163,488	$	22,573,869	$	22,810,203	$	7,844,104	$	8,176,396

	Home Equity				Consumer
	March 31, 2011		December 31, 2010		March 31, 2011		December 31, 2010

Rating:
Pass	$	17,528,691	$	18,064,116	$	15,970,904	$	17,471,747
Special Mention		222,550		223,034		217,825		570,589
Substandard		1,013,204		1,239,012		104,171		147,971

Total	$	18,764,445	$	19,526,162	$	16,292,900	$	18,190,307

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2011 and December 31, 2010.

	March 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing

One-to-four family residential	$	159,557	$	—	$	684,071	$	843,628	$	36,939,160	$	37,782,788	$	—
Agricultural real estate		—		—		—		—		29,607,376		29,607,376		—
Commercial real estate		50,494		—		71,709		122,203		43,927,513		44,049,716		—
Agricultural business		—		—		—		—		7,844,104		7,844,104		—
Commercial business		5,818		—		—		5,818		22,568,052		22,573,869		—
Home equity		360,017		2,992		143,461		506,470		18,257,975		18,764,445		—
Consumer		61,087		6,065		15,350		82,502		16,210,398		16,292,900		1,329

Total	$	636,973	$	9,057	$	914,591	$	1,560,621	$	175,354,578	$	176,915,199	$	1,329

	December 31, 2010
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing

One-to-four family residential	$	458,119	$	161,875	$	846,582	$	1,466,576	$	35,760,635	$	37,227,211	$	—
Agricultural real estate		—		—		—		—		28,163,488		28,163,488		—
Commercial real estate		921,392		146,090		521,012		1,588,494		43,773,450		45,361,944		—
Agricultural business		—		—		—		—		8,176,396		8,176,396		—
Commercial business		6,024		—		—		6,024		22,804,179		22,810,203		—
Home equity		511,203		10,387		275,179		796,769		18,729,393		19,526,162		—
Consumer		78,216		76,859		9,383		164,458		18,025,849		18,190,307		—

Total	$	1,974,954	$	395,211	$	1,652,156	$	4,022,321	$	175,433,390	$	179,455,711	$	—

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

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

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

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

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

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

The following tables present impaired loans at or for the three months ended March 31, 2011 and the year ended December 31, 2010.

	March 31, 2011
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized

Loans without a specific valuation allowance
One-to-four family	$	273,527	$	273,527	$	—	$	275,332	$	3,115
Commercial real estate		124,882		124,882		—		126,207		975
Loans with a specific valuation allowance
One-to-four family		369,475		369,475		67,118		401,190		6,357
Commercial real estate		1,616,827		1,616,827		216,320		1,796,665		19,877
Commercial business		585,106		585,106		99,632		679,026		10,542
Total:
One-to-four family		643,002		643,002		67,118		676,522		9,472
Commercial real estate		1,741,709		1,741,709		216,320		1,922,872		20,852
Commercial business		585,106		585,106		99,632		684,132		10,542

Total	$	2,969,817	$	2,969,817	$	383,070	$	3,278,420	$	40,866

	December 31, 2010
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized

Loans without a specific valuation allowance
Commercial real estate	$	127,653	$	127,653	$	—	$	309,365	$	14,432
Commercial business		—		—		—		10,636		545
Consumer		—		—		—		10,762		628
Loans with a specific valuation allowance
One-to-four family		369,749		369,749		109,622		536,944		4,785
Commercial real estate		2,092,909		2,092,909		408,687		2,578,312		77,973
Commercial business		606,273		606,273		72,393		722,393		36,958
Consumer		—		—		—		5,106		425
Total:
One-to-four family		369,749		369,749		109,622		536,944		4,785
Commercial real estate		2,220,562		2,220,562		408,687		2,887,677		92,405
Commercial business		606,273		606,273		72,393		733,029		37,503
Consumer		—		—		—		15,868		1,053

Total	$	3,196,584	$	3,196,584	$	590,702	$	4,173,518	$	135,746

The following table presents the Company’s nonaccrual loans at March 31, 2011 and December 31, 2010. This table excludes performing troubled debt restructurings.

	March 31, 2011		December 31, 2010

One-to-four family	$	942,939	$	1,019,252
Agricultural real estate		—		—
Commercial real estate		1,859,325		1,359,060
Agricultural business		—		—
Commercial business		77,056		84,361
Home equity		458,127		565,905
Consumer		157,653		106,159

Total	$	3,495,100	$	3,134,737

7.	INVESTMENTS

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

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
March 31, 2011:
U.S. government and agencies	$	14,661,722	$	58,644	$	(127,290	)	$	14,593,076
Mortgage-backed securities (government-sponsored enterprises - residential)		44,343,799		560,682		(461,228	)		44,443,253
Municipal bonds		42,584,450		592,021		(405,359	)		42,771,112
	$	101,589,971	$	1,211,347	$	(993,877	)	$	101,807,441

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

The amortized cost and fair value of available-for-sale securities at March 31, 2011, 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	$	91,223	$	91,325
One to five years		12,648,570		12,742,744
Five to ten years		26,464,206		26,565,618
After ten years		18,042,173		17,964,501
		57,246,172		57,364,188
Mortgage-backed securities (government-sponsored enterprises - residential)		44,343,799		44,443,253
	$	101,589,971	$	101,807,441

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $27,344,000 at March 31, 2011 and $26,629,000 at December 31, 2010.

The book value of securities sold under agreement to repurchase amounted to $4,050,000 at March 31, 2011 and $4,018,000 at December 31, 2010.

Gross gains of $54,000 and $140,000 and gross losses of $0 resulting from sales of available-for-sale securities were realized during the three months ended March 31, 2011 and 2010, 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, 2011 was $46,002,000, which is approximately 45% 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, 2011.

	Less Than Twelve Months					Twelve Months or More				Total
	Gross					Gross				Gross
	Unrealized			Fair		Unrealized		Fair		Unrealized			Fair
	Losses			Value		Losses		Value		Losses			Value

Municipal bonds	$	(405,359	)	$	16,433,140	$	-	$	-	$	(405,359	)	$	16,433,140
U.S. government and agencies		(127,290	)		8,921,547		-		-		(127,290	)		8,921,547
Subtotal		(532,649	)		25,354,687		-		-		(532,649	)		25,354,687

Mortgage-backed securities
(government sponsored
enterprises - residential)		(461,228	)		20,647,114		-		-		(461,228	)		20,647,114

Total	$	(993,877	)	$	46,001,801	$	-	$	-	$	(993,877	)	$	46,001,801

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, 2011.

8.	ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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


	March 31, 2011		March 31, 2010
Net unrealized gain (loss) on securities available-for-sale	$	499,463	$	(24,663	)
Less reclassification adjustment for realized gains included in income		53,505		140,028
Other comprehensive income (loss) before tax effect		445,958		(164,691	)
Less tax expense		151,626		(55,995	)
Other comprehensive income (loss)	$	294,332	$	(108,696	)

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


	March 31, 2011			March 31, 2010
Net unrealized gain on securities available-for-sale	$	217,470		$	889,590
Tax effect		(73,940	)		(302,461	)
Net-of-tax amount	$	143,530		$	587,129

9.	DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

ASC Topic 820, Fair Value Measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities.

Level 2

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

Level 3

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

Following is a description of the valuation methodologies and inputs used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

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

The following table presents the fair value measurements of assets recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2011 and December 31, 2010:

			March 31, 2011
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)

U.S. Government and agencies	$	14,593,076	$	-	$	14,593,076	$	-
Mortgage-backed securities (Government sponsored enterprises - residential)		44,443,253		-		44,443,253		-
Municipal bonds		42,771,112		-		42,771,112		-

			December 31, 2010
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and agencies	$	12,548,942	$	-	$	12,548,942	$	-
Mortgage-backed securities (Government sponsored enterprises - residential)		41,994,850		-		41,994,850		-
Municipal bonds		40,322,929		-		40,322,929		-

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 balance sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy.

Impaired Loans (Collateral Dependent) - Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral dependent loans.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Mortgage Servicing Rights - The fair value used to determine the valuation allowance is estimated using discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

Real Estate Owned – Real estate owned acquired through foreclosure is initially recorded at fair value less costs to sell when acquired. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the real estate owned could differ from the original estimate and are classified within Level 3 of the fair value hierarchy.

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, 2011 and December 31, 2010:

March 31, 2011

Fair Value Measurements Using

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans

(collateral dependent)

2,586,747

Mortgage servicing rights

783,292

Real estate owned

624,432

December 31, 2010

Fair Value Measurements Using

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans

(collateral dependent)

2,407,740

Mortgage servicing rights

797,327

Real estate owned

459,877

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

Cash and Cash Equivalents, Interest Receivable, Federal Home Loan Bank Stock, and Other Investments - The carrying amount approximates fair value.

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

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

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

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

Commitments to Originate Loans, Letters of Credit, and Lines of Credit - The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

The following table presents estimated fair values of the Company’s financial instruments at March 31, 2011 and December 31, 2010:

	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets
Cash and cash equivalents	$	10,556,677	$	10,556,677	$	8,943,400	$	8,943,400
Other investments		127,958		127,958		130,049		130,049
Loans held for sale		480,400		480,400		280,000		280,000
Loans, net of allowance for loan losses		173,996,907		172,548,120		176,442,118		175,436,281
Federal Home Loan Bank stock		1,113,800		1,113,800		1,113,800		1,113,800
Interest receivable		1,985,042		1,985,042		1,872,779		1,872,779
Financial Liabilities
Deposits		261,121,840		266,669,796		256,423,647		259,188,963
Short-term borrowings		4,049,703		4,049,703		4,018,235		4,018,235
Advances from borrowers for taxes and insurance		961,436		961,436		629,788		629,788
Interest payable		483,058		483,058		556,257		556,257
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		-		-		-		-
Letters of credit		-		-		-		-
Lines of credit		-		-		-		-

10.	FEDERAL HOME LOAN BANK STOCK

The Company owns $1,113,800 of Federal Home Loan Bank stock as of March 31, 2011. The Federal Home Loan Bank of Chicago (FHLB) is operating under a Cease and Desist Order from their regulator, the Federal Housing Finance Board. The order prohibits capital stock repurchases and redemptions until a time to be determined by the Federal Housing Finance Board. The FHLB will continue to provide liquidity and funding through advances. With regard to dividends, the FHLB will continue to assess their dividend capacity each quarter and make appropriate request for approval. The FHLB resumed paying dividends during the first quarter of 2011 at an annualized rate of 10 basis points per share. Management performed an analysis and deemed the cost method investment in FHLB stock is ultimately recoverable and therefore not impaired.

11.	MORTGAGE SERVICING RIGHTS

Activity in the balance of mortgage servicing rights, measured using the amortization method, for the three month period ending March 31, 2011 and the year ended December 31, 2010 was as follows:

	March 31, 2011			December 31, 2010
Balance, beginning of year	$	797,327		$	850,313
Servicing rights capitalized		18,696			257,316
Amortization of servicing rights		(43,126	)		(302,755	)
Change in valuation allowance		10,395			(7,547	)
Balance, end of period	$	783,292		$	797,327

Activity in the valuation allowance for mortgage servicing rights for the three month period ending March 31, 2011 and the year ended December 31, 2010 was as follows:

	March 31, 2011			December 31, 2010
Balance, beginning of year	$	163,989		$	156,442
Additions		-			165,651
Reductions		(10,395	)		(158,104	)
Balance, end of period	$	153,594		$	163,989

12.	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, 2011 and 2010 is shown below.

	March 31, 2011			March 31, 2010
Computed at the statutory rate (34%)	$	339,372		$	206,712
Increase (decrease) resulting from
Tax exempt interest		(122,552	)		(94,004	)
State income taxes, net		59,953			25,192
Increase in cash surrender value		(13,557	)		(15,676	)
Other, net		199			(13,106	)

Actual tax expense	$	263,415		$	109,118

13.	COMMITMENTS AND CONTINGENCIES

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.

JACKSONVILLE BANCORP, INC.

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

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

Forward Looking Statements

This Form 10-Q contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, the effect of the current 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.

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

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

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

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

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

ASC Topic 820, Fair Value Measurements, establishes a framework for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and establishes a three-level hierarchy for determining fair value based upon transparency of inputs to each valuation as of the fair value measurement date. The three levels are defined as follows:

●

Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets.

●

Level 2 – inputs include quoted prices for similar assets and liabilities in active markets, quoted prices of identical or similar assets or liabilities in markets that are not active, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

●

Level 3 – inputs that are unobservable and significant to the fair value measurement.

At the end of each quarter, the Company assesses the valuation hierarchy for each asset or liability measured. From time to time, assets or liabilities may be transferred within hierarchy levels due to changes in availability of observable market inputs to measure fair value at the measurement date. Transfers into or out of a hierarchy are based upon the fair value at the beginning of the reporting period.

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

Financial Condition

March 31, 2011 Compared to December 31, 2010

Total assets increased by $6.3 million, or 2.1%, to $307.8 million at March 31, 2011 from $301.5 million at December 31, 2010. Net loans decreased $2.4 million, or 1.4%, to $174.0 million at March 31, 2011 from $176.4 million at December 31, 2010. The decrease in loan volume is due to low loan demand as a result of the current weakened economy, as well as normal loan repayments. Available-for-sale investment securities increased $4.5 million, or 8.5%, to $57.4 million at March 31, 2011 from $52.9 million at December 31, 2010 primarily due to the investment of funds from deposit growth and decreased loan volume. Mortgage-backed securities also increased $2.4 million, or 5.7%, to $44.4 million at March 31, 2011 from $42.0 million at December 31, 2010. Cash and cash equivalents increased $1.7 million to $10.6 million at March 31, 2011 from $8.9 million at December 31, 2010.

Total deposits increased $4.7 million, or 1.8%, to $261.1 million at March 31, 2011, primarily due to a $9.2 million increase in transaction accounts, which was partially offset by a $4.5 million decrease in time deposits. 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-rate environment. Deposit volumes have also benefitted from customers choosing the safety of insured deposits versus alternative investments. Other borrowings, which consisted of overnight repurchase agreements, increased $31,000 during this same time frame.

Stockholders’ equity increased $893,000, or 2.5%, to $36.6 million at March 31, 2011. The increase in stockholders’ equity was the result of net income of $735,000, which was partially offset by the payment of $144,000 in dividends, and $294,000 in other comprehensive income. Other comprehensive income consisted of the increase in net unrealized gains, net of tax, on available-for-sale securities reflecting changes in market prices for securities in our portfolio. Other comprehensive income does not include changes in the fair value of other financial instruments included on the balance sheet.

Results of Operations

Comparison of Operating Results for the Three Months Ended March 31, 2011 and 2010

General: Net income for the three months ended March 31, 2011 was $735,000, or $0.39 per common share, basic and diluted, compared to net income of $499,000, or $0.26 per common share, basic and diluted, for the three months ended March 31, 2010. The $236,000 increase in net income was due to increases of $439,000 in net interest income and $33,000 in non-interest income and a decrease of $100,000 in provision for loan loss expense, partially offset by increases of $182,000 in non-interest expense and $154,000 in income taxes. Our net interest income continues to benefit from a steep yield curve. Low short-term market interest rates have resulted in our cost of funds decreasing faster than the yield on our loans.

Interest Income: Total interest income for the three months ended March 31, 2011 increased $189,000, or 5.8%, to $3.4 million from $3.2 million for the same period of 2010. The increase in interest income reflected a $16,000 decrease in interest income on loans, an $86,000 increase in interest income on investment securities, and an $119,000 increase in interest income on mortgage-backed securities.

Interest income on loans decreased $16,000 to $2.7 million for the first quarter of 2011 due to a decrease in the average yield on loans, partially offset by an increase in the average balance of loans. The average yield decreased to 5.93% during the first quarter of 2011 from 6.11% during the first quarter of 2010. The 18 basis point decrease primarily reflected the low interest rate environment. The average balance of the loan portfolio increased $4.3 million to $179.2 million for the first quarter of 2011. The increase in the average balance of the loan portfolio reflected an increase in the average balance of commercial real estate loans during the first quarter of 2011 compared to the first quarter of 2010.

Interest income on investment securities increased $86,000 to $486,000 for the first quarter of 2011 from $400,000 for the first quarter of 2010. The increase reflected a $15.8 million increase in the average balance of the investment securities portfolio to $56.1 million during the first quarter of 2011, compared to $40.3 million for the first quarter of 2010. The increase in the average balance of investment securities reflects the investment of funds from the capital raised during our 2010 stock offering and the lack of corresponding loan demand. The average yield of investment securities decreased to 3.47% during the first quarter of 2011 from 3.97% during the first quarter of 2010. 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 $119,000 to $280,000 for the first quarter of 2011, compared to $161,000 for the first quarter of 2010. The increase reflected a 97 basis point increase in the average yield of mortgage-backed securities to 2.63% for the first quarter of 2011, compared to 1.66% for the first quarter of 2010. The average yield benefitted from reduced 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 to $131,000 during the first quarter of 2011, compared to $330,000 during the first quarter of 2010. Interest income on mortgage-backed securities also reflected a $3.7 million increase in the average balance of mortgage-backed securities to $42.5 million during the first quarter of 2011.

Interest income on other interest-earning assets, which consisted of interest-earning deposit accounts and federal funds sold, remained unchanged at approximately $2,000 during the first quarters of 2011 and 2010. The average yield on other interest-earning assets increased to 0.11% during the first quarter of 2011 from 0.10% during the first quarter of 2010. The average balance of these accounts decreased $3.0 million to $6.4 million for the three months ended March 31, 2011 compared to $9.4 million for the three months ended March 31, 2010.

Interest Expense: Total interest expense decreased $250,000, or 23.7%, to $805,000 for the three months ended March 31, 2011 compared to $1.1 million for the three months ended March 31, 2010. The lower interest expense was due to a $252,000 decrease in the cost of deposits, partially offset by a $2,000 increase in the cost of borrowed funds.

Interest expense on deposits decreased $252,000 to $800,000 for the three months ended March 31, 2011 compared to $1.1 million for the three months ended March 31, 2010. The decrease in interest expense on deposits was primarily due to a 46 basis point decrease in the average rate paid to 1.35% during the first quarter of 2011 from 1.81% during the first quarter of 2010. The decrease reflected ongoing low short-term market interest rates during the first quarter of 2011. The decrease in the average rate paid was partially offset by a $4.5 million increase in the average balance of deposits to $237.7 million for the first quarter of 2011. The increase was primarily due to a $7.0 million increase in the average balance of transaction accounts.

Interest paid on borrowed funds increased $2,000 to $4,600 for the first quarter of 2011 due to an increase in the average cost of borrowings. The average rate paid on borrowed funds increased to 0.54% during the first quarter of 2011 compared to 0.27% during the first quarter of 2010. The average balance of borrowed funds also increased to $3.4 million during the first quarter of 2011 compared to $3.2 million during the same period of 2010.

Net Interest Income. As a result of the changes in interest income and interest expense noted above, net interest income increased by $439,000, or 20.1%, to $2.6 million for the three months ended March 31, 2011 from $2.2 million for the three months ended March 31, 2010. Our interest rate spread increased by 35 basis points to 3.48% during the first quarter of 2011 from 3.13% during the first quarter of 2010. Our net interest margin increased 38 basis points to 3.69% for the first quarter of 2011 from 3.31% for the first quarter of 2010.

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, 2011 and 2010.

	Three Months Ended
	March 31, 2011		March 31, 2010

Balance at beginning of period	$	2,964,285	$	2,290,001
Charge-offs:
One-to-four family residential		7,402		16,070
Commercial real estate		260,785		-
Home equity		4,162		30,127
Consumer		1,097		-
Total		273,446		46,197
Recoveries:
One-to-four family residential		-		20,215
Commercial real estate		8,142		3,228
Commercial business		200		-
Home equity		3,867		9,899
Consumer		1,202		3,184
Total		13,411		36,526
Net loan charge-offs		260,035		9,671
Provisions charged to expense		175,000		275,000
Balance at end of period	$	2,879,250	$	2,555,330

The provision for loan losses totaled $175,000 during the first quarter of 2011, compared to $275,000 during the first quarter of 2010. The decrease in the provision for loan losses reflected the decline in loan volume during the first quarter of 2011 and a lower level of specific allocations to the allowance for loan losses related to impaired loans. Loans delinquent 30 days or more decreased $2.5 million during the first quarter of 2011 to $1.6 million, or 0.88% of total loans, as of March 31, 2011 from $4.0 million, or 2.24% of total loans, as of December 31, 2010. Loans delinquent 30 days or more totaled $2.7 million, or 1.54% of total loans at March 31, 2010. The allowance for loan losses increased $324,000 to $2.9 million at March 31, 2011 from $2.6 million at March 31, 2010. The $250,000 increase in net charge-offs during the first quarter of 2011, compared to the same quarter of 2010, primarily reflected the charge-off of $261,000 on a single commercial real estate property which was transferred to real estate owned during the quarter.

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.

	March 31, 2011			December 31, 2010

Non-accruing loans:
One-to-four family residential	$	942,939		$	1,019,252
Commercial real estate		1,859,325			1,359,060
Commercial business		77,056			84,361
Home equity		458,127			565,905
Consumer		157,653			106,159
Total	$	3,495,100		$	3,134,737

Accruing loans delinquent more than 90 days:
Consumer	$	1,329		$	-
Total	$	1,329		$	-

Foreclosed assets:
One-to-four family residential	$	193,900		$	207,412
Commercial real estate		430,532			252,465
Total	$	624,432		$	459,877

Total nonperforming assets	$	4,120,861		$	3,594,614

Total nonperforming assets as a percentage of total assets		1.34	%		1.19	%

Nonperforming assets increased $526,000 to $4.1 million, or 1.34% of total assets, as of March 31, 2011, compared to $3.6 million, or 1.19% of total assets, as of December 31, 2010. The increase in nonperforming assets was due to a $362,000 increase in nonperforming loans and a $165,000 increase in real estate owned. Within nonperforming assets, nonperforming loans increased to $3.5 million as of March 31, 2011, from $3.1 million at December 31, 2010. The increase in nonperforming loans primarily reflected the non-accruing status of one commercial real estate loan totaling $925,000. This loan, which is secured by an apartment building, was restructured during the first quarter of 2011. The loan is performing as agreed under the restructured terms. The increase of real estate owned reflected the addition of one commercial property at its net realizable value of $237,000 during the first quarter of 2011.

The following table shows the aggregate principal amount of potential problem credits on the Company’s watch list at March 31, 2011 and December 31, 2010. All non-accruing loans are automatically placed on the watch list. The decrease in substandard credits was primarily due to the writedown and subsequent transfer to real estate owned of the commercial loan discussed above.

	March 31, 2011		December 31, 2010

Special Mention credits	$	4,229,231	$	3,942,607
Substandard credits		6,047,883		6,975,081
Total watch list credits	$	10,277,114	$	10,917,688

Non-Interest Income: Non-interest income increased $33,000, or 3.5%, to $985,000 for the three months ended March 31, 2011 from $951,000 for the same period in 2010. The increase in non-interest income resulted primarily from increases of $152,000 in commission income and $18,000 in trust income, partially offset by decreases of $87,000 in gains on the sale of available-for-sale securities and $41,000 in income from mortgage banking operations. The increase in commission and trust income reflected improved market conditions and growth in customer accounts. The lower gains on the sale of securities reflected a lower volume of sales during the first quarter of 2011. The decrease in mortgage banking income was due to a lower volume of loan sales in 2011, as we sold $2.8 million of loans to the secondary market during the first quarter of 2011, compared to $4.4 million during the same period of 2010. The decrease in loan sales in 2011 reflected higher loan originations for sale in 2010 as the decline in mortgage interest rates in 2010 resulted in a higher level of mortgage originations during the first quarter of 2010.

Non-Interest Expense: Total non-interest expense increased $182,000 to $2.4 million for the three months ended March 31, 2011 from $2.2 million for the same period of 2010. The increase in non-interest expense consisted mainly of increases of $140,000 in compensation and benefits expense and $29,000 in data processing and telecommunications expense, partially offset by a $21,000 decrease in occupancy and equipment expense. The increase in compensation and benefits expense resulted from normal salary and benefit cost increases, higher commissions, and expenses related to funding of benefit plans. Data processing and telecommunications expense increased due to expenses related to an ongoing upgrade of our network and telecommunications equipment. Occupancy and equipment expense decreased due to lower depreciation expense during the first quarter of 2011, compared to the first quarter of 2010.

Income Taxes: The provision for income taxes increased $154,000 to $263,000 during the first quarter of 2011 compared to the same period of 2010. The increase in the income tax provision reflected an increase in taxable income due to higher income levels, as well as higher state tax rates, partially offset by an increase in tax-exempt income. The effective tax rate was 26.4% and 17.9% for the first quarters of 2011 and 2010, 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, 2011 and December 31, 2010, cash and cash equivalents totaled $10.6 million and $8.9 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, calls and sales of investment securities, and principal repayments on loans and mortgage-backed securities. These funds have been used primarily for purchases of U.S. Agency and mortgage-backed securities.

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

Liquidity management is both a short- and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) projected purchases of investment and mortgage-backed securities, (iii) expected deposit flows, (iv) yields available on interest-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, 2011, the Company had no outstanding FHLB advances and approximately $22.3 million remaining available to it under the above-mentioned borrowing arrangement.

The Company maintains minimum levels of liquid assets as established by the Board of Directors. The Company’s liquidity ratios at March 31, 2011 and December 31, 2010 were 37.1% and 34.2%, respectively. This ratio represents the volume of short-term liquid assets as a percentage of net deposits and borrowings due within one year.

The Company must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments. The Company anticipates that it will have sufficient funds available to meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed above. The following table summarizes these commitments at March 31, 2011 and December 31, 2010.

	March 31, 2011		December 31, 2010
	(In thousands)
Commitments to fund loans	$	39,554	$	36,871
Standby letters of credit		392		453

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, 2011, 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, 2011, the Bank’s core capital ratio was 9.53% 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, 2011, minimum requirements and the Bank’s actual ratios are as follows:

	March 31, 2011			December 31, 2010			Minimum
	Actual			Actual			Required
Tier 1 Capital to Average Assets		9.53	%		9.25	%		4.00	%
Tier 1 Capital to Risk-Weighted Assets		13.87	%		13.52	%		4.00	%
Total Capital to Risk-Weighted Assets		15.12	%		14.77	%		8.00	%

Effect of Inflation and Changing Prices

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

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


Consolidated Average Balance Sheet and Interest Rates
(Dollars in thousands)
	Three Months Ended March 31,
	2011							2010
	Average							Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost

Interest-earnings assets:
Loans	$	179,150	$	2,655		5.93	%	$	174,874	$	2,671		6.11	%
Investment securities		56,080		486		3.47	%		40,286		400		3.97	%
Mortgage-backed securities		42,519		280		2.63	%		38,853		161		1.66	%
Other		6,423		2		0.11	%		9,357		2		0.10	%
Total interest-earning assets		284,172		3,423		4.82	%		263,370		3,234		4.91	%

Non-interest earnings assets		20,371							22,435
Total assets	$	304,543						$	285,805

Interest-bearing liabilities:
Deposits	$	237,673	$	800		1.35	%	$	233,160	$	1,053		1.81	%
Other borrowings		3,440		5		0.54	%		3,185		2		0.27	%
Total interest-bearing liabilities		241,113		805		1.66	%		236,345		1,055		1.78	%

Non-interest bearing liabilities		27,429							24,037
Stockholders’ equity		36,001							25,423

Total liabilities/stockholders’ equity	$	304,543						$	285,805

Net interest income			$	2,618						$	2,179

Interest rate spread (average yield earned minus average rate paid)						3.48	%						3.13	%

Net interest margin (net interest income divided by average interest-earning assets)						3.69	%						3.31	%

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,
	2011 Compared to 2010
	Increase(Decrease) Due to
	Rate			Volume		Net

Interest-earnings assets:
Loans	$	(80	)	$	64	$	(16	)
Investment securities		(55	)		141		86
Mortgage-backed securities		102			17		119
Total net change in income on interest-earning assets		(33	)		222		189

Interest-bearing liabilities:
Deposits		(272	)		20		(252	)
Other borrowings		2			-		2
Total net change in expense on interest-bearing liabilities		(270	)		20		(250	)

Net change in net interest income	$	237		$	202	$	439

JACKSONVILLE BANCORP, INC.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s policy in recent years has been to reduce its interest rate risk by better matching the maturities of its interest rate sensitive assets and liabilities, selling its long-term fixed-rate residential mortgage loans with terms of 15 years or more to the secondary market, originating adjustable rate loans, balloon loans with terms ranging from three to five years and originating consumer and commercial business loans, which typically are for a shorter duration and at higher rates of interest than one-to-four family loans. Our portfolio of mortgage-backed securities, including both fixed and variable rates, also provides monthly cash flow. The remaining investment portfolio has been structured to better match the maturities and rates of its interest-bearing liabilities. During 2010, the Company increased its holdings of variable-rate mortgage-backed securities and shorter term U.S. Agency securities in order to help protect the balance sheet from a potential rising rate environment. With respect to liabilities, the Company has attempted to increase its savings and transaction deposit accounts, which management believes are more resistant to changes in interest rates than certificate accounts. The Board of Directors appoints the Asset-Liability Management Committee (ALCO), which is responsible for reviewing the Company’s asset and liability policies. The ALCO meets quarterly to review interest rate risk and trends, as well as liquidity and capital ratio requirements.

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

The following table shows projected results at March 31, 2011 and December 31, 2010 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, 2011						December 31, 2010						ALCO
Rate Shock:	$ Change			% Change			$ Change			% Change			Benchmark
+ 200 basis points		61			0.53	%		64			0.57	%	> (20.00	)%
+ 100 basis points		153			1.32	%		134			1.19	%	> (12.50	)%
- 100 basis points		75			0.64	%		(36	)		-0.32	%	> (12.50	)%
- 200 basis points		(210	)		-1.81	%		(385	)		-3.42	%	> (20.00	)%

The table above indicates that as of March 31, 2011, in the event of a 200 basis point increase in interest rates, we would experience a 0.53% increase in net interest income. In the event of a 100 basis point decrease in interest rates, we would experience a 0.64% increase in net interest income.

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

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

JACKSONVILLE BANCORP, INC.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 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.

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings

	At March 31, 2011, 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

	None.

Item 3.	Defaults Upon Senior Securities

	None.

Item 4.	Removed and Reserved

Item 5.	Other Information

	None.

Item 6.	Exhibits

	31.1 -	Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
	31.2 -	Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
	32.1 -	Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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: 05/10/2011	/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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