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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
 
FORM 10-Q
(Mark One)
     
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
 
     
OR
   
     
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period of _________ to _________
 
 
Commission File Number   001-34821
 
Jacksonville Bancorp, Inc.
(Exact name of registrant as specified in its charter)
 
Maryland 36-4670835
(State or other jurisdiction of incorporation) (I.R.S. Employer Identification Number)
 
1211 West Morton Avenue
Jacksonville, Illinois
62650
(Address of principal executive office) (Zip Code)
 
Registrant’s telephone number, including area code:  (217) 245-4111
 
Indicate by check whether issuer (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
x Yes                               o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period the registrant was required to submit and post such filings).
 
x Yes                               o  No
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer, large accelerated filer, and smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
o  Large Accelerated Filer
o  Accelerated Filer  
  o  Non-Accelerated Filer x  Smaller Reporting Company  
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
 
o Yes                                x  No
 
As of August 1, 2014, there were 1,826,708 shares of the Registrant’s common stock issued and outstanding.
 
 
 

 

 
JACKSONVILLE BANCORP, INC.
 
FORM 10-Q
 
June 30, 2014
TABLE OF CONTENTS
           
       
Page
PART I
 
FINANCIAL INFORMATION
     
           
Item 1.
 
Financial Statements
     
           
   
Condensed Consolidated Balance Sheets
 
1
 
           
   
Condensed Consolidated Statements of Income
 
2
 
           
   
Condensed Consolidated Statements of Comprehensive Income (Loss)
 
3
 
           
   
Condensed Consolidated Statement of Stockholders’ Equity
 
4
 
           
   
Condensed Consolidated Statements of Cash Flows
 
5
 
           
   
Notes to the Condensed Consolidated Financial Statements
 
7
 
           
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
38
 
           
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
 
52
 
           
Item 4
 
Controls and Procedures
 
54
 
           
PART II
 
OTHER INFORMATION
 
55
 
           
Item 1.
 
Legal Proceedings
  55  
Item 1.A.
 
Risk Factors
  55  
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
  55  
Item 3.
 
Defaults Upon Senior Securities
  55  
Item 4.
 
Mine Safety Disclosures
  55  
Item 5.
 
Other Information
  55  
Item 6.
 
Exhibits
  55  
           
   
Signatures
 
56
 
           
EXHIBITS
         
           
   
Section 302 Certifications
     
   
Section 906 Certification
     
   
XBRL Instance Document
     
   
XBRL Taxonomy Extension Schema Document
     
   
XBRL Taxonomy Calculation Linkbase Document
     
   
XBRL Taxonomy Extension Definition Linkbase Document
     
   
XBRL Taxonomy Label Linkbase Document
     
   
XBRL Taxonomy Presentation Linkbase Document
     

 
 

 

 
PART I – FINANCIAL INFORMATION
 
 
 

 

                 
JACKSONVILLE BANCORP, INC.
           
ITEM 1. FINANCIAL STATEMENTS
           
             
CONDENSED CONSOLIDATED BALANCE SHEETS
           
ASSETS
 
June 30,
2014
   
December 31,
2013
 
   
(Unaudited)
       
Cash and cash equivalents
  $ 5,298,795     $ 6,098,870  
Investment securities - available for sale
    59,455,244       60,638,942  
Mortgage-backed securities - available for sale
    48,356,203       48,345,655  
Federal Home Loan Bank stock
    1,113,800       1,113,800  
Other investment securities
    76,639       81,918  
Loans held for sale - net
    482,155       262,461  
Loans receivable - net of allowance for loan losses of $3,341,267 and $3,406,434 as of June 30, 2014 and December 31, 2013
    173,900,464       180,639,502  
Premises and equipment - net
    5,059,462       5,178,978  
Cash surrender value of life insurance
    6,861,328       6,815,059  
Accrued interest receivable
    1,903,253       1,817,415  
Goodwill
    2,726,567       2,726,567  
Capitalized mortgage servicing rights, net of valuation allowance of $66,406 and $73,392 as of June 30, 2014 and December 31, 2013
    653,732       673,576  
Real estate owned
    183,671       281,918  
Income taxes receivable
    47,768       -  
Deferred income taxes
    1,710,943       2,703,110  
Other assets
    999,669       1,041,005  
                 
Total Assets
  $ 308,829,693     $ 318,418,776  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
               
Deposits
  $ 252,086,057     $ 251,738,391  
Other borrowings
    5,307,729       19,610,297  
Advance payments by borrowers for taxes and insurance
    1,019,680       857,814  
Accrued interest payable
    180,355       210,226  
Deferred compensation payable
    4,127,037       3,999,371  
Income taxes payable
    -       34,621  
Other liabilities
    2,015,413       829,260  
Total liabilities
    264,736,271       277,279,980  
                 
Commitments and contingencies
    -       -  
                 
Preferred stock, $0.01 par value - authorized 10,000,000 shares; none issued and outstanding
    -       -  
Common stock, $0.01 par value - authorized 25,000,000 shares; issued 1,824,651 shares as of June 30, 2014 and 1,832,860 shares as of December 31, 2013
    18,247       18,329  
Additional paid-in-capital
    14,400,163       14,561,085  
Retained earnings
    29,412,656       28,233,876  
Less: Unallocated ESOP shares
    (276,310 )     (287,530 )
Accumulated other comprehensive income (loss)
    538,666       (1,386,964 )
Total stockholders’ equity
    44,093,422       41,138,796  
                 
Total Liabilities and Stockholders’ Equity
  $ 308,829,693     $ 318,418,776  
 
See accompanying notes to the condensed consolidated financial statements.
 
1
 

 

                                 
JACKSONVILLE BANCORP, INC.
                       
                     
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                   
             
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(Unaudited)
   
(Unaudited)
 
INTEREST INCOME:
                       
Loans
  $ 2,287,872     $ 2,299,427     $ 4,565,331     $ 4,644,989  
Investment securities
    443,985       441,778       893,561       876,052  
Mortgage-backed securities
    246,030       171,551       564,665       332,119  
Other
    597       11,958       698       23,721  
Total interest income
    2,978,484       2,924,714       6,024,255       5,876,881  
INTEREST EXPENSE:
                               
Deposits
    368,858       451,698       755,330       921,148  
Other borrowings
    2,178       2,600       5,364       5,241  
Total interest expense
    371,036       454,298       760,694       926,389  
                                 
NET INTEREST INCOME
    2,607,448       2,470,416       5,263,561       4,950,492  
                                 
PROVISION FOR LOAN LOSSES
    30,000       -       60,000       30,000  
                                 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    2,577,448       2,470,416       5,203,561       4,920,492  
                                 
NON-INTEREST INCOME:
                               
Fiduciary activities
    62,272       58,007       146,347       124,109  
Commission income
    301,569       289,711       655,905       598,871  
Service charges on deposit accounts
    183,488       206,711       343,144       408,137  
Mortgage banking operations, net
    49,833       75,844       62,246       146,461  
Net realized gains on sales of available-for-sale securities
    61,727       104,668       161,582       688,899  
Loan servicing fees
    90,642       91,599       182,575       185,122  
ATM and bank card interchange income
    127,948       105,538       248,098       200,717  
Other
    70,199       95,730       145,313       161,530  
Total non-interest income
    947,678       1,027,808       1,945,210       2,513,846  
                                 
NON-INTEREST EXPENSE:
                               
Salaries and employee benefits
    1,588,778       1,585,829       3,174,635       3,186,564  
Occupancy and equipment
    236,692       258,764       495,228       512,430  
Data processing and telecommunications
    136,004       140,099       274,588       283,522  
Professional
    313,335       72,077       369,406       157,370  
Postage and office supplies
    57,934       62,574       120,802       131,238  
ATM and bank card expense
    74,038       59,882       149,925       107,762  
Other
    317,091       288,385       609,634       573,603  
Total non-interest expense
    2,723,872       2,467,610       5,194,218       4,952,489  
                                 
INCOME BEFORE INCOME TAXES
    801,254       1,030,614       1,954,553       2,481,849  
INCOME TAXES
    176,277       270,539       489,786       709,326  
                                 
NET INCOME
  $ 624,977     $ 760,075     $ 1,464,767     $ 1,772,523  
                                 
NET INCOME PER COMMON SHARE - BASIC
  $ 0.35     $ 0.41     $ 0.82     $ 0.95  
NET INCOME PER COMMON SHARE - DILUTED
  $ 0.35     $ 0.41     $ 0.81     $ 0.95  
 
See accompanying notes to the condensed consolidated financial statements.
 
2
 

 

 
JACKSONVILLE BANCORP, INC.
                       
                         
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
             
                         
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(Unaudited)
   
(Unaudited)
 
                         
Net Income
  $ 624,977     $ 760,075     $ 1,464,767     $ 1,772,523  
                                 
Other Comprehensive Income (Loss)
                               
Unrealized appreciation (depreciation) on available- for-sale securities, net of taxes of $582,945 and $(1,713,570) for the three months ended June 30, 2014 and 2013, respectively, and $1,046,929 and $(1,957,571) for the six months ended June 30, 2014 and 2013, respectively.
    1,131,600       (3,326,340 )     2,032,274       (3,799,991 )
Less: reclassification adjustment for realized gains included in net income, net of taxes of $20,987 and $35,587, for the three months ended June 30, 2014 and 2013, respectively, and $54,938 and $234,226 for the six months ended June 30, 2014 and 2013, respectively.
    40,740       69,081       106,644       454,673  
      1,090,860       (3,395,421 )     1,925,630       (4,254,664 )
                                 
Comprehensive Income (Loss)
  $ 1,715,837     $ (2,635,346 )   $ 3,390,397     $ (2,482,141 )
 
See accompanying notes to condensed consolidated financial statements.
 
3
 

 

 
JACKSONVILLE BANCORP, INC.
                                   
                                     
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
                         
                                     
(Unaudited)
 
Common
Stock
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Unallocated
ESOP Shares
   
Accumulated
Other
Comprehensive
Income (Loss)
   
Total
Stockholders’
Equity
 
                                     
BALANCE, DECEMBER 31, 2013
  $ 18,329     $ 14,561,085     $ 28,233,876     $ (287,530 )   $ (1,386,964 )   $ 41,138,796  
                                                 
Net Income
    -       -       1,464,767       -       -       1,464,767  
                                                 
Other comprehensive income
    -       -       -       -       1,925,630       1,925,630  
                                                 
Stock repurchases
    (181 )     (370,551 )     -       -       -       (370,732 )
                                                 
Exercise of stock options
    99       149,153       -       -       -       149,252  
Tax benefit of non-qualified options
    -       3,860       -       -       -       3,860  
Vesting options expense
    -       44,711       -       -       -       44,711  
                                                 
Shares held by ESOP, committed to be released
    -       11,905       -       11,220       -       23,125  
                                                 
Dividends ($0.16 per share)
    -       -       (285,987 )     -       -       (285,987 )
                                                 
BALANCE, JUNE 30, 2014
  $ 18,247     $ 14,400,163     $ 29,412,656     $ (276,310 )   $ 538,666     $ 44,093,422  
 
See accompanying notes to condensed consolidated financial statements.
 
4
 

 

 
JACKSONVILLE BANCORP, INC.
           
             
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
           
             
   
Six Months Ended
June 30,
 
   
2014
   
2013
 
   
(Unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 1,464,767     $ 1,772,523  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization and accretion:
               
Premises and equipment
    194,456       188,640  
Amortization of investment premiums and discounts, net
    329,580       574,012  
Accretion of loan discounts
    (259 )     (259 )
Net realized gains on sales of available-for-sale securities
    (161,582 )     (688,899 )
Provision for loan losses
    60,000       30,000  
Mortgage banking operations, net
    (62,246 )     (146,461 )
Loss on sale of real estate owned
    5,569       -  
Shares held by ESOP commited to be released
    23,125       20,697  
Tax benefit related to stock options exercised
    3,860       1,796  
Stock option compensation expense
    44,711       44,711  
Changes in income taxes payable
    (82,389 )     (467,271 )
Changes in assets and liabilities
    1,207,100       1,154,674  
Net cash provided by operations before loan sales
    3,026,692       2,484,163  
Origination of loans for sale to secondary market
    (6,074,896 )     (14,825,738 )
Proceeds from sales of loans to secondary market
    5,933,423       14,951,997  
Net cash provided by operating activities
    2,885,219       2,610,422  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of investment and mortgage-backed securities
    (12,590,753 )     (26,942,590 )
Maturity or call of investment securities available-for-sale
    -       1,500,000  
Sale of investment securities available-for-sale
    13,337,041       18,021,637  
Principal payments on mortgage-backed and investment securities
    3,181,765       6,559,637  
Proceeds from sale of real estate owned
    78,930       -  
Net decrease in loans
    6,683,166       4,845,484  
Additions to premises and equipment
    (74,940 )     (135,483 )
                 
Net cash provided by investing activities
    10,615,209       3,848,685  
                 
           
(Continued)
 
 
5
 

 

 
JACKSONVILLE BANCORP, INC.
           
             
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
           
             
   
Six Months Ended
June 30,
 
   
2014
   
2013
 
   
(Unaudited)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Net increase (decrease) in deposits
  $ 347,666     $ (136,245 )
Net decrease in other borrowings
    (14,302,568 )     (5,643,553 )
Increase in advance payments by borrowers for taxes and insurance
    161,866       91,942  
Exercise of stock options
    149,252       86,893  
Stock repurchases
    (370,732 )     (232,063 )
Dividends paid - common stock
    (285,987 )     (283,542 )
                 
Net cash used in financing activities
    (14,300,503 )     (6,116,568 )
                 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    (800,075 )     342,539  
                 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    6,098,870       7,293,711  
                 
CASH AND CASH EQUIVALENTS, END OF PERIOD
  $ 5,298,795     $ 7,636,250  
                 
ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Cash paid during the year for:
               
Interest on deposits
  $ 784,386     $ 957,159  
Interest on other borrowings
    6,179       5,241  
Income taxes paid
    572,000       1,176,073  
                 
NONCASH INVESTING AND FINANCING ACTIVITIES:
               
Loans to facilitate sales of real estate owned
  $ 90,000     $ -  
 
See accompanying notes to condensed consolidated financial statements.
 
6
 

 

JACKSONVILLE BANCORP, INC.
 
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.
FINANCIAL STATEMENTS
 
The accompanying interim condensed consolidated financial statements include the accounts of Jacksonville Bancorp, Inc. and its wholly-owned subsidiary, Jacksonville Savings Bank (the “Bank”) and its wholly-owned subsidiary, Financial Resources Group, Inc. collectively (the “Company”).  All significant intercompany accounts and transactions have been eliminated.
 
In the opinion of management, the preceding unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of June 30, 2014 and the results of its operations for the three and six month periods ended June 30, 2014 and 2013.  The results of operations for the three and six month periods ended June 30, 2014 are not necessarily indicative of the results which may be expected for the entire year.  The condensed consolidated balance sheet of the Company as of December 31, 2013 has been derived from the audited consolidated balance sheet of the Company as of that date.  Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2013 filed as an exhibit to the Company’s Form 10-K filed in March, 2014.  The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP) and to prevailing practices within the industry.
 
Certain amounts included in the 2013 consolidated statements have been reclassified to conform to the 2014 presentation.
 
2.
NEW ACCOUNTING PRONOUNCEMENTS
 
In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-04, Troubled Debt Restructurings by Creditors (Subtopic 310-40:  Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure which affects all creditors who obtain physical possession (resulting from an in substance repossession or foreclosure) of residential real estate property collateralizing a consumer mortgage loan in satisfaction of a receivable.  The ASU is effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015 which the entity’s annual or interim financial statements have not been made available for issuance. The adoption of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.
 
7
 

 

 
3.
EARNINGS PER SHARE
 
Earnings Per Share - Basic earnings per share is determined by dividing net income for the period by the weighted average number of common shares.  Diluted earnings per share considers the potential effects of the exercise of 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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
                                 
Net income available to common shareholders
  $ 624,977     $ 760,075     $ 1,464,767     $ 1,772,523  
                                 
Basic average shares outstanding
    1,795,133       1,869,499       1,794,883       1,873,692  
 
                               
Diluted potential common shares:
                         
  Stock option equivalents
    11,347       299       8,156       284  
    Diluted average shares outstanding
    1,806,480       1,869,798       1,803,039       1,873,976  
                                 
Basic earnings per share
  $ 0.35     $ 0.41     $ 0.82     $ 0.95  
                                 
Diluted earnings per share
  $ 0.35     $ 0.41     $ 0.81     $ 0.95  
 
Stock options for 100,335 shares of common stock were not considered in computing diluted earnings per share for the three and six month periods ending June 30, 2013, because they were anti-dilutive.
 
8
 

 

 
4.
STOCK–BASED COMPENSATION
 
In connection with our 2010 second step conversion and related stock offering, the ESOP purchased an additional 41,614 shares for its Employee Stock Ownership Plan (ESOP) for the exclusive benefit of eligible employees.  The ESOP borrowed funds from the Company in an amount sufficient to purchase the 41,614 shares (approximately 4% of the common stock issued in the offering).  The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets.  Contributions will be applied to repay interest on the loan first, and the remainder will be applied to principal.  The loan is expected to be repaid over a period of up to 20 years.  Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid.  Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants.  Participants will vest on a pro-rata basis and reach 100% vesting in the accrued benefits under the ESOP after six years.  Vesting is accelerated upon retirement, death, or disability of the participant or a change in control of the Bank.  Forfeitures will be reallocated to remaining plan participants.  Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP.  Since the Bank’s annual contributions are discretionary, benefits payable under the ESOP cannot be estimated.
 
The Company is accounting for its ESOP in accordance with ASC Topic 718, “Employers Accounting for Employee Stock Ownership Plans.”  Accordingly, the debt of the ESOP is eliminated in consolidation and the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet.  Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement.  As shares are committed to be released from the collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations.  Dividends, if any, on unallocated shares are recorded as a reduction of debt and accrued interest.
 
A summary of ESOP shares at June 30, 2014 and 2013 is shown below.
                 
   
June 30, 2014
   
June 30, 2013
 
Unearned shares
    27,636       31,340  
Shares committed for release
    1,122       1,098  
Allocated shares
    54,539       56,292  
     Total ESOP shares
    83,297       88,730  
                 
Fair value of unearned shares
  $ 584,225     $ 597,340  
 
On April 24, 2012, the compensation committee of the board of directors approved the awards of 104,035 options to purchase Company common stock.  The stock options vest over a five-year period and expire ten years after issuance.  Apart from the vesting schedule, there are no performance-based conditions or any other material conditions applicable to the options issued.
 
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The following table summarizes stock option activity for the six months ended June 30, 2014.

               
Weighted
       
         
Weighted
   
Average
       
         
Average
   
Remaining
   
Aggregate
 
         
Exercise
   
Contractual
   
Instrinsic
 
   
Options
   
Price/Share
   
Life (in years)
   
Value
 
                         
Outstanding, December 31, 2013
    101,336     $ 15.63              
Granted
    -       -              
Exercised
    (9,901 )     15.46              
Forfeited
    (400 )     15.65              
                             
Outstanding, June 30, 2014
    91,035     $ 15.65       7.75     $ 499,782  
                                 
Exercisable, June 30, 2014
    28,800     $ 15.65       7.75     $ 158,112  
 
Intrinsic value for stock options is defined as the difference between the current market value and the exercise price.  The value is based upon a closing price of $21.14 per share on June 30, 2014.
 
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5.
LOAN PORTFOLIO COMPOSITION
 
At June 30, 2014 and December 31, 2013, the composition of the Company’s loan portfolio is shown below.

   
June 30, 2014
   
December 31, 2013
 
   
Amount
   
Percent
   
Amount
   
Percent
 
Real estate loans:
                       
  One-to-four family residential
  $ 43,684,425       25.1 %   $ 44,286,657       24.5 %
  Commercial
    37,004,558       21.3       38,920,692       21.5  
  Agricultural
    35,266,843       20.3       35,005,662       19.4  
  Home equity
    10,831,605       6.2       11,729,112       6.5  
     Total real estate loans
    126,787,431       72.9       129,942,123       71.9  
                                 
Commercial loans
    27,187,727       15.6       29,946,928       16.6  
Agricultural loans
    10,047,982       5.8       10,559,593       5.9  
Consumer loans
    13,223,710       7.6       13,605,897       7.5  
        Total loans receivable
    177,246,850       101.9       184,054,541       101.9  
                                 
Less:
                               
  Net deferred loan fees
    5,119       0.0       8,605       0.0  
  Allowance for loan losses
    3,341,267       1.9       3,406,434       1.9  
        Total loans receivable, net
  $ 173,900,464       100.0 %   $ 180,639,502       100.0 %
 
The Company believes that originating or purchasing sound loans are a necessary and desirable means of employing funds available for investment.  Recognizing the Company’s obligations to its depositors and to the communities it serves, authorized personnel are expected to seek to develop and make sound, profitable loans that resources permit and that opportunity affords.  The Company maintains lending policies and procedures in place designed to focus lending efforts on the types, locations, and duration of loans most appropriate for the business model and markets.  The Company’s principal lending activities include the origination of one-to four-family residential mortgage loans, multi-family loans, commercial real estate loans, agricultural loans, home equity lines of credits, commercial business loans, and consumer loans.  The primary lending market includes the Illinois counties of Morgan, Macoupin and Montgomery.  Generally, loans are collateralized by assets, primarily real estate, of the borrowers and guaranteed by individuals.  The loans are expected to be repaid from cash flows of the borrowers or from proceeds from the sale of selected assets of the borrowers.
 
Loan originations are derived from a number of sources such as real estate broker referrals, existing customers, builders, attorneys and walk-in customers.  Upon receipt of a loan application, a credit report is obtained to verify specific information relating to the applicant’s employment, income, and credit standing.  In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent appraiser approved by the Company.  A loan application file is first reviewed by a loan officer in the loan department who checks applications for accuracy and completeness, and verifies the information provided.  The financial resources of the borrower and the borrower’s credit history, as well as the collateral securing the loan, are considered an integral part of each risk evaluation prior to approval.  The board of directors has established individual lending authorities for each loan officer by loan type.  Loans over an individual officer’s lending limit must be approved by the officers’ loan committee consisting of the chairman of the board, president, chief lending officer and all lending officers, which meets three times a week, and has lending authority up to $750,000 depending on the type of loan.  Loans to borrowers with an aggregate principal balance over this limit, up to $1.0 million, must be approved by the directors’ loan committee, which meets weekly and consists of the chairman of the board, president, senior vice president, chief lending officer and at least two outside directors, plus all lending officers as non-voting members.  The board of directors approves all loans to borrowers with an aggregate principal balance over $1.0 million.  The board of directors ratifies all loans that are originated.  Once the loan is approved, the applicant is informed and a closing date is scheduled.  Loan commitments are typically funded within 30 days.
 
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If the loan is approved, the borrower must provide proof of fire and casualty insurance on the property serving as collateral which insurance must be maintained during the full term of the loan; flood insurance is required in certain instances.  Title insurance or an attorney’s opinion based on a title search of the property is generally required on loans secured by real property.
 
One-to-Four Family Mortgage Loans - Historically, the Bank’s primary lending origination activity has been one-to-four family, owner-occupied, residential mortgage loans secured by property located in the Company’s market area.  The Company generates loans through marketing efforts, existing customers and referrals, real estate brokers, builders and local businesses.  Generally, one-to-four family loan originations are limited to the financing of loans secured by properties located within the Company’s market area.  
 
Fixed rate one-to-four family residential mortgage loans are generally conforming loans, underwritten according to secondary market guidelines.  The Company generally originates both fixed and adjustable rate mortgage loans in amounts up to the maximum conforming loan limits established by the Federal Housing Finance Agency.
 
The Company originates for resale to Freddie Mac and the Federal Home Loan Bank fixed-rate one-to-four family residential mortgage loans with terms of 15 years or more.  The fixed-rate mortgage loans amortize monthly with principal and interest due each month.  Residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option.  The Company offers fixed-rate one-to-four family residential mortgage loans with terms of up to 30 years without prepayment penalty.
 
The Company currently offers adjustable-rate mortgage loans for terms ranging up to 30 years.  They generally offer adjustable-rate mortgage loans that adjust between one and five years on the anniversary date of origination.  Interest rate adjustments are up to two hundred basis points per year, with a cap of up to six hundred basis points on interest rate increases over the life of the loan.  In a rising interest rate environment, such rate limitations may prevent adjustable-rate mortgage loans from repricing to market interest rates, which would have an adverse effect on the net interest income.  In the low interest rate environment that has existed over the past five years, the adjustable-rate portfolio has repriced downward resulting in lower interest income from this portion of the loan portfolio.  In addition, during this period borrowers have shown a preference for fixed-rate loans.  The Company has used different interest indices for adjustable-rate mortgage loans in the past such as the average yield on U.S. Treasury securities, adjusted to a constant maturity of one-year, three-years or five-years.  The origination of fixed-rate mortgage loans versus adjustable-rate mortgage loans is monitored on an ongoing basis and is affected significantly by the level of market interest rates, customer preference, interest rate risk position and competitors’ loan products.
 
Adjustable-rate mortgage loans make the loan portfolio more interest rate sensitive and provide an alternative for those borrowers who meet the underwriting criteria, but are unable to qualify for a fixed-rate mortgage.  However, as the interest income earned on adjustable-rate mortgage loans varies with prevailing interest rates, such loans do not offer predictable cash flows in the same manner as long-term, fixed-rate loans.  Adjustable-rate mortgage loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest rates increase.  It is possible that during periods of rising interest rates that the risk of delinquencies and defaults on adjustable-rate mortgage loans may increase due to the upward adjustment of interest costs to the borrower, resulting in increased loan losses.
 
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Residential first mortgage loans customarily include due-on-sale clauses, which gives the Company the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the underlying real property serving as collateral for the loan.  Due-on-sale clauses are a means of imposing assumption fees and increasing the interest rate on mortgage portfolio during periods of rising interest rates.
 
When underwriting residential real estate loans, the Company reviews and verifies each loan applicant’s income and credit history.  Management believes that stability of income and past credit history are integral parts in the underwriting process.  Generally, the applicant’s total monthly mortgage payment, including all escrow amounts, is limited to 28% of the applicant’s total monthly income.  In addition, total monthly obligations of the applicant, including mortgage payments, generally should not exceed 38% of total monthly income.  Written appraisals are generally required on real estate property offered to secure an applicant’s loan.  For one-to-four family real estate loans with loan to value ratios of over 80%, private mortgage insurance is generally required.  Fire and casualty insurance is also required on all properties securing real estate loans.  Title insurance, or an attorney’s title opinion, may be required, as circumstances warrant.
 
The Company does not offer an “interest only” mortgage loan product on one-to-four family residential properties (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan).  They also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan.  The Company does not offer a “subprime loan” program (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation).
 
Commercial Real Estate Loans - The Company originates and purchases commercial real estate loans.  Commercial real estate loans are secured primarily by improved properties such as multi-family residential, retail facilities and office buildings, restaurants and other non-residential buildings.  The maximum loan-to-value ratio for commercial real estate loans originated is generally 80%.  Commercial real estate loans are generally written up to terms of five years with adjustable interest rates.  The rates are generally tied to the prime rate and generally have a specified floor.  Many of the fixed-rate commercial real estate loans are not fully amortizing and therefore require a “balloon” payment at maturity.  The Company purchases from time to time commercial real estate loan participations primarily from outside the Company’s market area. All participation loans are approved following a review to ensure that the loan satisfies the underwriting standards.
 
Underwriting standards for commercial real estate loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.  The income approach is primarily utilized to determine whether income generated from the applicant’s business or real estate offered as collateral is adequate to repay the loan.  There is an emphasis on the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%).  In underwriting a loan, the value of the real estate offered as collateral in relation to the proposed loan amount is considered.  Generally, the loan amount cannot be greater than 80% of the value of the real estate.  Written appraisals are usually obtained from either licensed or certified appraisers on all commercial real estate loans in excess of $250,000.  Creditworthiness of the applicant is assessed by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining other public records regarding the applicant.
 
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Loans secured by commercial real estate generally involve a greater degree of credit risk than one-to-four family residential mortgage loans and carry larger loan balances.  This increased credit risk is a result of several factors, including the effects of general economic conditions on income producing properties and the successful operation or management of the properties securing the loans.  Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related business and real estate property.  If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.
 
Agricultural Real Estate Loans - The Company originates and purchases agricultural real estate loans.  The maximum loan-to-value ratio for agricultural real estate loans we originate is generally 80%. Our agricultural real estate loans are generally written up to terms of five years with adjustable interest rates.  The rates are generally tied to the average yield on U.S. Treasury securities, adjusted to a constant maturity of one-year, three-years, or five-years and generally have a specified floor. Many of our fixed-rate agricultural real estate loans are not fully amortizing and therefore require a “balloon” payment at maturity. We purchase from time to time agricultural real estate loan participations primarily from other local institutions within our market area. All participation loans are approved following a review to ensure that the loan satisfies our underwriting standards
 
Underwriting standards for agricultural real estate include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.  The income approach is primarily utilized to determine whether income generated from the applicant’s farm operation or real estate offered as collateral is adequate to repay the loan. We emphasize the ratio of the property’s projected cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%).  In underwriting a loan, we consider the value of the real estate offered as collateral in relation to the proposed loan amount.  Generally, the loan amount cannot be greater than 80% of the value of the real estate.  We usually obtain written appraisals from either licensed or certified appraisers on all agricultural real estate loans in excess of $250,000.  We assess the creditworthiness of the applicant by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining other public records regarding the applicant.
 
Loans secured by agricultural real estate generally involve a greater degree of credit risk than one-to-four family residential mortgage loans and carry larger loan balances.  This increased credit risk is a result of several factors, including the effects of general economic and market conditions on farm operations and the successful operation or management of the properties securing the loans.  The repayment of loans secured by agricultural estate is typically dependent upon the successful operation of the farm and real estate property.  If the cash flow is reduced, the borrower’s ability to repay the loan may be impaired.
 
Home Equity Loans – The Company originates home equity loans and lines of credit, which are generally secured by the borrower’s principal residence.  The maximum amount of a home equity loan or line of credit is generally 95% of the appraised value of a borrower’s real estate collateral less the amount of any existing mortgages or related liabilities.  Home equity loans and lines of credit are approved with both fixed and adjustable interest rates which we determine based upon market conditions.  Such loans may be fully amortized over the life of the loan or have a balloon feature.  Generally, the maximum term for home equity loans is 10 years.
 
Underwriting standards for home equity loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.  The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income.  We also consider the length of employment with the borrower’s present employer as well as the amount of time the borrower has lived in the local area.  Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.
 
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Home equity loans entail greater risks than one-to-four family residential mortgage loans, which are secured by first lien mortgages.  In such cases, collateral repossessed after a default may not provide an adequate source of repayment of the outstanding loan balance because of damage or depreciation in the value of the property or loss of equity to the first lien position.  Further, home equity loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Finally, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default.
 
Commercial Business Loans - The Company originates commercial business loans to borrowers located in the Company’s market area which are secured by collateral other than real estate or which can be unsecured.  Commercial business loan participations are also purchased from other lenders, which may be made to borrowers outside the Company’s market area.  Commercial business loans are generally secured by equipment and inventory and generally are offered with adjustable rates tied to the prime rate or the average yield on U.S. Treasury securities, adjusted to a constant maturity of either one-year, three-years or five-years and various terms of maturity generally from three years to five years.  Unsecured business loans are originated on a limited basis in those instances where the applicant’s financial strength and creditworthiness has been established.  Commercial business loans generally bear higher interest rates than residential loans, but they also may involve a higher risk of default since their repayment is generally dependent on the successful operation of the borrower’s business.  Personal guarantees are generally obtained from the borrower or a third party as a condition to originating its business loans.  
 
Underwriting standards for commercial and agricultural business loans include a determination of the applicant’s ability to meet existing obligations and payments on the proposed loan from normal cash flows generated in the applicant’s business.  The financial strength of each applicant is assessed through the review of financial statements and tax returns provided by the applicant.  The creditworthiness of an applicant is derived from a review of credit reports as well as a search of public records.  Business loans are periodically reviewed following origination.  Financial statements are requested at least annually and review them for substantial deviations or changes that might affect repayment of the loan.  Loan officers also visit the premises of borrowers to observe the business premises, facilities, and personnel and to inspect the pledged collateral.  Underwriting standards for business loans are different for each type of loan depending on the financial strength of the applicant and the value of collateral offered as security.
 
Agricultural Business Loans - The Company originates agricultural business loans to borrowers located in our market area which are secured by collateral other than real estate or which can be unsecured. Agricultural business loans are generally secured by equipment and blanket security agreements on all farm assets.  These loans are generally offered with fixed rates with terms up to five years.  Agricultural business loans generally bear lower interest rates than residential loans due to competitive market pressures.  The repayment of agricultural business loans is generally dependent on the successful operation of the farm operation.  Personal guarantees are generally obtained from the borrower as a condition to originating agricultural business loans.
 
Underwriting standards for agricultural business loans include a determination of the applicant’s ability to meet existing obligations and payments on the proposed loan from normal cash flows generated in the applicant’s business.  The financial strength of each applicant is assessed through the review of financial statements, pro-forma cash flow statements, and tax returns provided by the applicant.  The creditworthiness of an applicant is derived from a review of credit reports as well as a search of public records.  Financial statements are requested at least annually and reviewed for substantial deviations or changes that might affect repayment of the loan.  Loan officers may also visit the premises of borrowers to observe the operation, facilities, equipment, and personnel and to inspect the pledged collateral.  Underwriting standards for agricultural business loans are different for each type of loan depending on the financial strength of the applicant and the value of collateral offered as security.
 
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The repayment of agricultural business loans generally is dependent on the successful operation of a farm and can be adversely affected by fluctuations in crop prices, increase in interest rates, and changes in weather conditions.  These developments may result in smaller harvests and less income for farmers which may adversely affect such borrower’s ability to repay a loan, and potentially result in an increase in the level of problem loans and loan losses in our agricultural portfolio.  While not required, the majority of our agricultural business loans are covered by crop insurance, which provides protection against loss due to lower crop yields as a result of unfavorable weather conditions.
 
Consumer Loans – The Company originates consumer loans, including automobile loans, loans secured by deposit accounts, unsecured loans and mobile home loans.  Consumer loans are generally offered on a fixed-rate basis.  Automobile loans are offered with maturities of up to 60 months for new automobiles.  Loans secured by used automobiles will have maximum terms which vary depending upon the age of the automobile.  Automobile loans are generally originated with a loan-to-value ratio below the greater of 80% of the purchase price or 100% of NADA loan value.  In the case of a new car loan, the loan-to-value ratio may be greater or less depending on the borrower’s credit history, debt to income ratio, home ownership and other banking relationships with us.
 
Underwriting standards for consumer loans include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan.  The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income.  We also consider the length of employment with the borrower’s present employer as well as the amount of time the borrower has lived in the local area.  Creditworthiness of the applicant is of primary consideration; however, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount.
 
Consumer loans entail greater risks than one-to-four family residential mortgage loans, particularly consumer loans secured by rapidly depreciating assets such as automobiles or loans that are unsecured.  In such cases, collateral repossessed after a default may not provide an adequate source of repayment of the outstanding loan balance because of damage, loss or depreciation.  Further, consumer loan payments are dependent on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.  Such events would increase our risk of loss on unsecured loans.  Finally, the application of various Federal and state laws, including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans in the event of a default.
 
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The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of and for the periods ended June 30, 2014, June 30, 2013, and December 31, 2013.
                                                                         
   
June 30, 2014
 
         
Commercial
   
Agricultural
                                     
   
1-4 Family
   
Real Estate
   
Real Estate
   
Home Equity
   
Commercial
   
Agricultural
   
Consumer
   
Unallocated
   
Total
 
Allowance for Loan Losses:
                                                 
  Beginning Balance,
                                                 
    April 1, 2014
  $ 1,062,470     $ 714,561     $ 178,854     $ 198,395     $ 834,930     $ 43,650     $ 199,926     $ 135,696     $ 3,368,482  
    Provision charged to expense
    (32,365 )     86,603       (3,151 )     (23,445 )     (96,626 )     6,590       (16,481 )     108,875       30,000  
Losses charged off
    (30,000 )     (30,000 )     -       -       -       -       -       -       (60,000 )
    Recoveries
    660       168       -       525       32       -       1,400       -       2,785  
  Ending balance,
                                                                       
    June 30, 2014
  $ 1,000,765     $ 771,332     $ 175,703     $ 175,475     $ 738,336     $ 50,240     $ 184,845     $ 244,571     $ 3,341,267  
                                                                         
  Beginning Balance, January 1, 2014
  $ 856,144     $ 745,760     $ 175,028     $ 201,993     $ 1,034,189     $ 52,798     $ 184,848     $ 155,674     $ 3,406,434  
    Provision charged to expense
    173,661       118,878       675       (27,568 )     (295,885 )     (2,558 )     3,900       88,897       60,000  
Losses charged off
    (30,000 )     (93,474 )     -       -       -       -       (5,503 )     -       (128,977 )
    Recoveries
    960       168       -       1,050       32       -       1,600       -       3,810  
  Ending balance,
                                                                       
    June 30, 2014
  $ 1,000,765     $ 771,332     $ 175,703     $ 175,475     $ 738,336     $ 50,240     $ 184,845     $ 244,571     $ 3,341,267  
                                                                         
  Ending balance:
                                                                       
    individually evaluated for impairment
  $ 151,622     $ 305,955     $ -     $ -     $ 460,722     $ -     $ 11,689     $ -     $ 929,988  
  Ending balance:
                                                                       
    collectively evaluated for impairment
  $ 849,143     $ 465,377     $ 175,703     $ 175,475     $ 277,614     $ 50,240     $ 173,156     $ 244,571     $ 2,411,279  
                                                                         
Loans:
                                                                       
  Ending balance
  $ 43,684,425     $ 37,004,558     $ 35,266,843     $ 10,831,605     $ 27,187,727     $ 10,047,982     $ 13,223,710     $ -     $ 177,246,850  
  Ending balance:
                                                                       
    individually evaluated for impairment
  $ 533,710     $ 1,457,895     $ 126,323     $ 29,246     $ 547,437     $ -     $ 110,179     $ -     $ 2,804,790  
  Ending balance:
                                                                       
    collectively evaluated for impairment
  $ 43,150,715     $ 35,546,663     $ 35,140,520     $ 10,802,359     $ 26,640,290     $ 10,047,982     $ 13,113,531     $ -     $ 174,442,060  
 
17
 

 

 
                                                                         
   
June 30, 2013
 
         
Commercial
   
Agricultural
                                     
   
1-4 Family
   
Real Estate
   
Real Estate
   
Home Equity
   
Commercial
   
Agricultural
   
Consumer
   
Unallocated
   
Total
 
Allowance for Loan Losses:
                                                 
  Beginning Balance,
                                                 
    April 1, 2013
  $ 779,243     $ 837,443     $ 183,780     $ 227,620     $ 959,663     $ 44,570     $ 173,674     $ 239,976     $ 3,445,969  
    Provision charged to expense
    48,470       (67,621 )     1,606       (11,574 )     11,911       8,813       (6,715 )     15,110       -  
Losses charged off
    -       -       -       -       -       -       (6,427 )     -       (6,427 )
    Recoveries
    840       23,687       -       525       7,341       -       601       -       32,994  
  Ending balance,
                                                                       
    June 30, 2013
  $ 828,553     $ 793,509     $ 185,386     $ 216,571     $ 978,915     $ 53,383     $ 161,133     $ 255,086     $ 3,472,536  
                                                                         
  Beginning Balance,
                                                                       
    January 1, 2013
  $ 741,029     $ 828,873     $ 149,568     $ 328,996     $ 934,251     $ 43,930     $ 151,474     $ 161,343     $ 3,339,464  
    Provision charged to expense
    72,053       (146,933 )     35,818       (125,975 )     37,323       9,453       54,518       93,743       30,000  
Losses charged off
    -       -       -       -       -       -       (52,186 )     -       (52,186 )
    Recoveries
    15,471       111,569       -       13,550       7,341       -       7,327       -       155,258  
  Ending balance,
                                                                       
    June 30, 2013
  $ 828,553     $ 793,509     $ 185,386     $ 216,571     $ 978,915     $ 53,383     $ 161,133     $ 255,086     $ 3,472,536  
                                                                         
  Ending balance:
                                                                       
    individually evaluated for impairment
  $ -     $ 231,740     $ -     $ -     $ 648,701     $ -     $ -     $ -     $ 880,441  
  Ending balance:
              &#