Jacksonville Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - Jacksonville Bancorp, Inc.	tv492893_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Jacksonville Bancorp, Inc.	tv492893_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Jacksonville Bancorp, Inc.	tv492893_ex31-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

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 ¨ 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 ¨ No

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

¨ Large Accelerated Filer	¨ Accelerated Filer
¨ Non-Accelerated Filer (Do not check if a smaller reporting company)
	x Smaller Reporting Company
	¨ Emerging Growth Company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

¨ Yes x No

As of May 1, 2018, there were 1,814,467 shares of the Registrant’s common stock issued and outstanding.

JACKSONVILLE BANCORP, INC.

FORM 10-Q

March 31, 2018

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	40

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51

Item 4.	Controls and Procedures	53

PART II	OTHER INFORMATION	54

Item 1.	Legal Proceedings	54
Item 1.A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
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.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2018			2017
	(Unaudited)
ASSETS
Cash and cash equivalents	$	7,003,615		$	5,889,628
Interest-earning time deposits in banks		998,000			998,000
Investment securities - available for sale		52,608,847			56,164,109
Mortgage-backed securities - available for sale		56,383,116			55,231,197
Federal Home Loan Bank stock		428,500			490,500
Other investment securities		51,864			52,502
Loans held for sale - net		275,115			178,833
Loans receivable - net of allowance for loan losses of $2,737,933 and $2,879,510 as of March 31, 2018 and December 31, 2017		186,070,456			186,557,550
Premises and equipment - net		4,167,048			4,260,196
Cash surrender value of life insurance		7,341,204			7,439,062
Accrued interest receivable		2,029,454			1,997,798
Goodwill		2,726,567			2,726,567
Capitalized mortgage servicing rights		543,210			547,092
Real estate owned		10,500			10,500
Deferred income taxes		2,296,441			1,892,749
Other assets		519,142			560,038

Total Assets	$	323,453,079		$	324,996,321

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits	$	261,518,469		$	252,700,432
Other borrowings		3,663,976			16,112,154
Advance payments by borrowers for taxes and insurance		1,828,407			1,153,926
Accrued interest payable		91,774			106,068
Deferred compensation payable		4,926,955			4,874,292
Income taxes payable		182,608			28,502
Dividends payable		181,447			181,287
Other liabilities		3,290,018			1,086,750
Total liabilities		275,683,654			276,243,411

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 1,814,467 shares as of March 31, 2018 and 1,812,871 as of December 31, 2017		18,145			18,129
Additional paid-in-capital		14,167,829			14,128,221
Retained earnings		36,021,473			35,512,950
Less: Unallocated ESOP shares		(141,470	)		(147,650	)
Accumulated other comprehensive loss		(2,296,552	)		(758,740	)
Total stockholders' equity		47,769,425			48,752,910

Total Liabilities and Stockholders' Equity	$	323,453,079		$	324,996,321

See accompanying notes to the condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended
	March 31,
	2018			2017
	(Unaudited)
INTEREST INCOME:
Loans	$	2,219,117		$	2,167,207
Investment securities		402,490			385,926
Mortgage-backed securities		323,537			236,060
Other		7,789			11,363
Total interest income		2,952,933			2,800,556

INTEREST EXPENSE:
Deposits		290,013			250,621
Other borrowings		37,058			5,346
Total interest expense		327,071			255,967

NET INTEREST INCOME		2,625,862			2,544,589

PROVISION (CREDIT) FOR LOAN LOSSES		(160,000	)		30,000

NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR LOAN LOSSES		2,785,862			2,514,589

NON-INTEREST INCOME:
Fiduciary activities		107,830			88,160
Commission income		341,412			321,596
Service charges on deposit accounts		179,340			177,946
Mortgage banking operations, net		48,570			68,483
Net realized gains on sales of available-for-sale securities		32,780			128,617
Loan servicing fees		82,365			84,599
ATM and bank card interchange income		174,151			171,802
Other		181,438			67,091
Total non-interest income		1,147,886			1,108,294

NON-INTEREST EXPENSE:
Salaries and employee benefits		1,744,392			1,682,132
Occupancy and equipment		265,757			259,403
Data processing and telecommunications		194,970			167,917
Professional		386,345			39,122
Postage and office supplies		53,456			58,977
Deposit insurance premium		24,133			24,794
ATM and bank card expense		110,557			103,798
Other		311,786			251,026
Total non-interest expense		3,091,396			2,587,169

INCOME BEFORE INCOME TAXES		842,352			1,035,714
INCOME TAXES		154,106			276,148

NET INCOME	$	688,246		$	759,566

NET INCOME PER COMMON SHARE - BASIC	$	0.38		$	0.43
NET INCOME PER COMMON SHARE - DILUTED	$	0.38		$	0.42

See accompanying notes to the condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	Three Months Ended
	March 31,
	2018			2017
	(Unaudited)

Net Income	$	688,246		$	759,566

Other Comprehensive Income (Loss)
Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes of $(396,808) and $324,666 for 2018 and 2017, respectively.		(1,511,916	)		630,234
Less: reclassification adjustment for realized gains included in net income, net of taxes of $6,884 and $43,730, for 2018 and 2017, respectively.		25,896			84,887
		(1,537,812	)		545,347

Comprehensive Income (Loss)	$	(849,566	)	$	1,304,913

See accompanying notes to condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

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

BALANCE, DECEMBER 31, 2017	$	18,129	$	14,128,221	$	35,512,950		$	(147,650	)	$	(758,740	)	$	48,752,910

Net Income		-		-		688,246			-			-			688,246

Other comprehensive loss		-		-		-			-			(1,537,812	)		(1,537,812	)

Exercise of stock options		16		24,961		-			-			-			24,977

Shares held by ESOP, commited to be released		-		14,647		-			6,180			-			20,827

Dividends ($0.10 per share)		-		-		(179,723	)		-			-			(179,723	)

BALANCE, MARCH 31, 2018	$	18,145	$	14,167,829	$	36,021,473		$	(141,470	)	$	(2,296,552	)	$	47,769,425

See accompanying notes to condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	March 31,
	2018			2017
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	688,246		$	759,566
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion:
Premises and equipment		96,210			103,845
Amortization of investment and loan premiums and discounts, net		264,162			268,853
Net realized gains on sales of available-for-sale securities		(32,780	)		(128,617	)
Provision (credit) for loan losses		(160,000	)		30,000
Mortgage banking operations, net		(48,570	)		(68,483	)
Shares held by ESOP committed to be released		20,827			18,818
Stock-based compensation expense		-			22,232
Gain on BOLI claim		(84,035	)		-
Changes in income taxes payable		154,106			276,061
Changes in other assets and liabilities		2,211,493			(39,297	)
Net cash provided by operations before loan sales		3,109,659			1,242,978
Origination of loans for sale to secondary market		(3,675,700	)		(4,696,587	)
Proceeds from sales of loans to secondary market		3,631,751			5,001,018
Net cash provided by operating activities		3,065,710			1,547,409

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of FHLB stock, investment and mortgage-backed securities		(5,993,457	)		(19,533,430	)
Maturity or call of investment securities available-for-sale		-			870,000
Sale of investment securities available-for-sale and FHLB stock		4,424,064			8,998,123
Principal payments on mortgage-backed and investment securities		1,862,315			1,763,589
Proceeds from BOLI claim		221,211			-
Net change in loans		647,452			5,674,177
Additions to premises and equipment		(3,062	)		(56,536	)

Net cash provided by (used in) investing activities		1,158,523			(2,284,077	)
					(Continued)

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	March 31,
	2018			2017
	(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	$	8,818,037		$	(36,983	)
Net decrease in other borrowings		(12,448,178	)		(3,831,007	)
Increase in advance payments by borrowers for taxes and insurance		674,481			523,935
Exercise of stock options		24,977			39,125
Stock repurchase		-			(31,290	)
Dividends paid - common stock		(179,563	)		(177,907	)

Net cash used in financing activities		(3,110,246	)		(3,514,127	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,113,987			(4,250,795	)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		5,889,628			12,909,924

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	7,003,615		$	8,659,129

ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits	$	297,750		$	264,121
Interest on other borrowings		43,615			5,346

NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans	$	-		$	222,704
Loans to facilitate sales of real estate owned		-			26,467

See accompanying notes to condensed consolidated financial statements

JACKSONVILLE BANCORP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

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

In the opinion of management, the preceding unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary 1) for a fair presentation and 2) to make the financial statements not misleading as to the financial condition of the Company as of March 31, 2018, and the results of its operations for the three month periods ended March 31, 2018 and 2017. The results of operations for the three month periods 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, 2017 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 in the United States of America (GAAP) 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, 2017 filed as an exhibit to the Company’s Annual Report on Form 10-K filed in March 2018. The accounting and reporting policies of the Company conform to GAAP and to prevailing practices within the industry.

Certain amounts included in the 2017 consolidated statements have been reclassified to conform to the 2018 presentation.

Summary of Significant Accounting Policies

Revenue Recognition

The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectibility is reasonable assured. The Company’s principal source of revenue is interest income from loans and investment and mortgage-backed securities. The Company also earns noninterest income from various banking and financial services offered primarily through the Bank and its subsidiary.

Interest Income – The largest source of revenue for the Company is interest income which is primarily recognized on an accrual basis according to nondiscretionary formulas written in contracts, such as loan agreements or investment securities contracts.

Noninterest Income – The Company earns noninterest income through a variety of financial and transaction services provided to consumer and corporate clients such as investment brokerage and trust, deposit account, debit card, and mortgage banking. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The update provides a five-step revenue recognition model for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts are included in the scope of other standards). The guidance requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date, which provides a one-year deferral of ASU 2014-09. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and must be applied either retrospectively or using the modified retrospective approach. The Company adopted ASU 2014-09 on January 1, 2018, and did not identify any material changes in the timing of revenue recognition when considering the amended accounting guidance. See Note 1 for additional disclosures related to revenue recognition.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-01 on January 1, 2018 and there was not a significant impact on the Company’s consolidated financial statements, with the exception of the loan fair value calculation in Note 9.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company has been receiving training and gathering historical data in order to determine the impact the adoption of ASU 2016-13 will have on the consolidated financial statements.

In January 2017, FASB amended FASB ASC Topic 350, Simplifying the Test for Goodwill. The amendments in the update simplify the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Instead, under this amendment, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss should not exceed the total amount of goodwill allocated to that reporting unit. The amendments are effective for public business entities for the first interim and annual reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company has goodwill from a prior business combination and performs an annual impairment test or more frequently if changes or circumstances occur that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company’s most recent annual impairment assessment determined that the Company’s goodwill was not impaired. Although the Company cannot anticipate future goodwill impairment assessments, based on the most recent assessment it is unlikely that an impairment amount would need to be calculated and, therefore, does not anticipate a material impact from these amendments to the Company’s financial position and results of operations. The current accounting policies and processes are not anticipated to change, except for the elimination of the Step 2 analysis.

In March 2017, FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20). The ASU amends the amortization period for certain callable debt securities held at a premium. The amendments require the premium to be amortized to the earliest call date. The ASU’s amendments are effective for public business entities for interim and annual periods beginning after December 15, 2018. Early adoption is permitted. The Company adopted the ASU early and there was not a material impact on the Company’s consolidated financial statements.

In February 2018, FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (AOCI). Because the Tax Change & Jobs Act was signed on December 22, 2017, the accounting for the change in tax rates and effect on deferred tax assets and liabilities must be reflected in the 2017 financial statements as an adjustment to income tax expense, even though a portion of the tax effects were initially recognized directly in other comprehensive income. This adjustment would leave a stranded balance in AOCI that would not reflect the appropriate tax rate. Under this ASU, entities are allowed, but not required, to reclassify from AOCI to retained earnings the stranded tax effects resulting from the new federal corporate income tax rate. The ASU is effective for all entities for annual reporting periods beginning after December 15, 2018. Early adoption would be permitted for interim or annual financial statements that have not been issued or made available for issuance. Early adoption will allow entities to align the timing of the stranded tax reclassification in their 2017 financial statements. The Company adopted the ASU retrospectively and the impact was reflected in the Company’s 2017 consolidated financial statements.

EARNINGS PER SHARE

Earnings Per Share - Basic earnings per share is determined by dividing net income for the period by the weighted average number of common shares. Diluted earnings per share considers the potential effects of the exercise of outstanding stock options under the Company’s stock option plans. Average shares outstanding exclude unallocated shared held by the Jacksonville Savings Bank employee stock ownership plan (ESOP).

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

	Three Months Ended
	March 31,
	2018		2017

Net income	$	688,246	$	759,566

Basic average shares outstanding		1,799,897		1,784,584

Diluted potential common shares:
Stock option equivalents		15,248		20,938
Diluted average shares outstanding		1,815,145		1,805,522

Basic earnings per share	$	0.38	$	0.43

Diluted earnings per share	$	0.38	$	0.42

STOCK BASED COMPENSATION

In connection with the 2010 second-step conversion and related stock offering, the ESOP purchased an additional 41,614 shares 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. 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. 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. Discretionary contributions are determined by the board annually.

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, 2018 and 2017 is shown below.

	March 31, 2018		March 31, 2017
Unearned shares		14,147		16,619
Shares committed for release		618		618
Allocated shares		60,538		63,778
Total ESOP shares		75,303		81,015

Fair value of unearned shares	$	472,510	$	520,175

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

The following table summarizes stock option activity for the three months ended March 31, 2018.

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

Outstanding, December 31, 2017		31,067		$	15.65
Granted		-			-
Exercised		(1,596	)		15.65
Forfeited		-			-

Outstanding, March 31, 2018		29,471		$	15.65		4.00	$	523,110

Exercisable, March 31, 2018		27,686		$	15.65		4.00	$	491,427

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 $33.40 per share on March 31, 2018.

LOAN PORTFOLIO COMPOSITION

At March 31, 2018 and December 31, 2017, the composition of the Company’s loan portfolio is shown below.

	March 31, 2018					December 31, 2017
	Amount		Percent			Amount		Percent
Real estate loans:
One-to-four family residential	$	46,695,828		25.1	%	$	45,844,543		24.6	%
Commercial		36,092,381		19.4			37,260,090		20.0
Agricultural		40,611,733		21.8			40,129,028		21.5
Home equity		9,670,718		5.2			10,117,647		5.4
Total real estate loans		133,070,660		71.5			133,351,308		71.5

Commercial loans		27,857,933		15.0			26,934,790		14.4
Agricultural loans		12,551,929		6.8			13,400,651		7.2
Consumer loans		15,340,380		8.2			15,760,797		8.4
Total loans receivable		188,820,902		101.5			189,447,546		101.5

Less:
Net deferred loan fees		12,513		0.0			10,486		0.0
Allowance for loan losses		2,737,933		1.5			2,879,510		1.5
Total loans receivable, net	$	186,070,456		100.0	%	$	186,557,550		100.0	%

The Company believes that sound loans are a necessary and desirable means of employing funds available for investment. Recognizing the Company’s obligations to its depositors and to the communities it serves, authorized personnel are expected to 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 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. All residential real estate loans are then verified by our loan risk management department prior to closing. 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 45 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 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.

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 several years, the adjustable-rate portfolio has repriced downward resulting in lower interest income from this portion of the loan portfolio. In addition, during this period borrowers have shown a preference for fixed-rate loans. The Company has used different interest indices for adjustable-rate mortgage loans in the past such as the average yield on U.S. Treasury securities, adjusted to a constant maturity of one-year, three-years or five-years. The origination of fixed-rate mortgage loans versus adjustable-rate mortgage loans is monitored on an ongoing basis and is affected significantly by the level of market interest rates, customer preference, interest rate risk position and competitors’ loan products.

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

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

When underwriting residential real estate loans, the Company reviews and verifies each loan applicant’s income and credit history. Management believes that stability of income and past credit history are integral parts in the underwriting process. Generally, the applicant’s total monthly mortgage payment, including all escrow amounts, is limited to 30% of the applicant’s total monthly income. In addition, total monthly obligations of the applicant, including mortgage payments, generally should not exceed 43% 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 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 an internal review to ensure that the loan satisfies the underwriting standards.

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

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

Agricultural Real Estate Loans - The Company originates and purchases agricultural real estate loans. The maximum loan-to-value ratio for agricultural real estate loans we originate is generally 75%. Our agricultural real estate loans are generally written up to terms of five years with adjustable interest rates. The rates are generally tied to the average yield on U.S. Treasury securities, adjusted to a constant maturity of one-year, three-years, or five-years and generally have a specified floor. Many of our fixed-rate agricultural real estate loans are not fully amortizing and therefore require a “balloon” payment at maturity. We purchase from time to time agricultural real estate loan participations primarily from other local institutions within our market area. All participation loans are approved following a review to ensure that the loan satisfies our underwriting standards.

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

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

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

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

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

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

Underwriting standards for commercial 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 reviewed for substantial deviations or changes that might affect repayment of the loan. Loan officers also visit the premises of borrowers to observe the business premises, facilities, and personnel and to inspect the pledged collateral. Underwriting standards for business loans are different for each type of loan depending on the financial strength of the applicant and the value of collateral offered as security.

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

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

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

Consumer Loans – The Company originates consumer loans, including automobile loans, loans secured by deposit accounts, unsecured loans and mobile home loans. Consumer loans are generally offered on a fixed-rate basis. Automobile loans are generally 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. The loan-to-value ratio may be greater or less depending on the borrower’s credit history, debt to income ratio, home ownership and other banking relationships with us.

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

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

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of and for the periods ended March 31, 2018, March 31, 2017, and December 31, 2017.

	March 31, 2018
				Commercial		Agricultural
	1-4 Family			Real Estate		Real Estate		Home Equity			Commercial		Agricultural			Consumer			Unallocated		Total
Allowance for Loan Losses:
Beginning Balance, December 31, 2017	$	677,107		$	846,045	$	225,478	$	95,902		$	397,572	$	288,922		$	239,936		$	108,548	$	2,879,510
Provision (credit) charged to expense		(110,505	)		42,717		4,778		(29,500	)		4,261		(40,191	)		(35,059	)		3,499		(160,000	)
Losses charged off		-			-		-		-			-		-			-			-		-
Recoveries		9,454			5,808		-		525			32		-			2,604			-		18,423
Ending balance, March 31, 2018	$	576,056		$	894,570	$	230,256	$	66,927		$	401,865	$	248,731		$	207,481		$	112,047	$	2,737,933

Ending balance:
individually evaluated for impairment	$	224,993		$	451,367	$	-	$	-		$	129,416	$	113,131		$	-		$	-	$	918,907
Ending balance:
collectively evaluated for impairment	$	351,063		$	443,203	$	230,256	$	66,927		$	272,449	$	135,600		$	207,481		$	112,047	$	1,819,026

Loans:
Ending balance	$	46,695,828		$	36,092,381	$	40,611,733	$	9,670,718		$	27,857,933	$	12,551,929		$	15,340,380		$	-	$	188,820,902
Ending balance:
individually evaluated for impairment	$	1,154,224		$	1,806,302	$	-	$	46,629		$	1,241,386	$	269,534		$	-		$	-	$	4,518,075
Ending balance:
collectively evaluated for impairment	$	45,541,604		$	34,286,079	$	40,611,733	$	9,624,089		$	26,616,547	$	12,282,395		$	15,340,380		$	-	$	184,302,827

	March 31, 2017
				Commercial		Agricultural
	1-4 Family			Real Estate		Real Estate		Home Equity			Commercial			Agricultural			Consumer			Unallocated			Total
Allowance for Loan Losses:
Beginning Balance, December 31, 2016	$	832,000		$	1,044,553	$	191,359	$	173,626		$	301,478		$	167,469		$	182,653		$	114,257		$	3,007,395
Provision charged to expense		(49,055	)		167,304		26,801		(17,364	)		(26,604	)		(33,605	)		(12,992	)		(24,485	)		30,000
Losses charged off		(18,367	)		-		-		-			-			-			-			-			(18,367	)
Recoveries		6,550			3,872		-		2,525			29			-			3,404			-			16,380
Ending balance, March 31, 2017	$	771,128		$	1,215,729	$	218,160	$	158,787		$	274,903		$	133,864		$	173,065		$	89,772		$	3,035,408

Ending balance:
individually evaluated for impairment	$	251,976		$	894,407	$	-	$	-		$	62,059		$	10,796		$	-		$	-		$	1,219,238
Ending balance:
collectively evaluated for impairment	$	519,152		$	321,322	$	218,160	$	158,787		$	212,844		$	123,068		$	173,065		$	89,772		$	1,816,170

Loans:
Ending balance	$	45,367,530		$	38,872,870	$	38,665,494	$	11,032,862		$	21,302,516		$	11,171,580		$	15,190,490		$	-		$	181,603,342
Ending balance:
individually evaluated for impairment	$	728,294		$	2,765,091	$	-	$	52,541		$	518,326		$	379,307		$	-		$	-		$	4,443,559
Ending balance:
collectively evaluated for impairment	$	44,639,236		$	36,107,779	$	38,665,494	$	10,980,321		$	20,784,190		$	10,792,273		$	15,190,490		$	-		$	177,159,783

	December 31, 2017
				Commercial			Agricultural
	1-4 Family			Real Estate			Real Estate		Home Equity			Commercial			Agricultural		Consumer			Unallocated			Total
Allowance for Loan Losses:
Beginning Balance, December 31, 2016	$	832,000		$	1,044,553		$	191,359	$	173,626		$	301,478		$	167,469	$	182,653		$	114,257		$	3,007,395
Provision (credit) charged to expense		(127,286	)		95,961			34,119		(81,824	)		(305,586	)		121,453		88,872			(5,709	)		(180,000	)
Losses charged off		(51,695	)		(315,766	)		-		-			(2,706	)		-		(39,692	)		-			(409,859	)
Recoveries		24,088			21,297			-		4,100			404,386			-		8,103			-			461,974
Ending balance, December 31, 2017	$	677,107		$	846,045		$	225,478	$	95,902		$	397,572		$	288,922	$	239,936		$	108,548		$	2,879,510

Ending balance:
individually evaluated for impairment	$	176,635		$	472,393		$	-	$	-		$	132,901		$	144,438	$	-		$	-		$	926,367
Ending balance:
collectively evaluated for impairment	$	500,472		$	373,652		$	225,478	$	95,902		$	264,671		$	144,484	$	239,936		$	108,548		$	1,953,143

Loans:
Ending balance	$	45,844,543		$	37,260,090		$	40,129,028	$	10,117,647		$	26,934,790		$	13,400,651	$	15,760,797		$	-		$	189,447,546
Ending balance:
individually evaluated for impairment	$	663,366		$	1,434,722		$	-	$	43,683		$	553,950		$	375,951	$	-		$	-		$	3,071,672
Ending balance:
collectively evaluated for impairment	$	45,181,177		$	35,825,368		$	40,129,028	$	10,073,964		$	26,380,840		$	13,024,700	$	15,760,797		$	-		$	186,375,874

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 $750,000, new commercial and commercial real estate loans, and watch list credits are reviewed annually by our external loan review firm in order to verify risk ratings. All watch list credits are reviewed by management and reported to the Board monthly. The Company uses the following definitions for risk ratings:

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

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

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

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

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2018 and December 31, 2017.

	1-4 Family				Commercial Real Estate				Agricultural Real Estate				Home Equity
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2018		2017		2018		2017		2018		2017		2018		2017
Rating:
Pass	$	44,082,787	$	43,254,380	$	33,956,183	$	35,239,108	$	40,375,233	$	39,892,528	$	9,465,581	$	9,893,063
Special Mention		259,479		809,345		57,637		310,770		-		-		49,149		75,347
Substandard		2,353,562		1,780,818		2,078,561		1,710,212		236,500		236,500		155,988		149,237
Total	$	46,695,828	$	45,844,543	$	36,092,381	$	37,260,090	$	40,611,733	$	40,129,028	$	9,670,718	$	10,117,647

	Commercial				Agricultural				Consumer				Total
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2018		2017		2018		2017		2018		2017		2018		2017
Rating:
Pass	$	26,609,443	$	26,367,452	$	11,843,253	$	12,507,114	$	14,568,695	$	15,043,520	$	180,901,175	$	182,197,165
Special Mention		3,187		8,819		43,500		139,306		11,343		17,092		424,295		1,360,679
Substandard		1,245,303		558,519		665,176		754,231		760,342		700,185		7,495,432		5,889,702
Total	$	27,857,933	$	26,934,790	$	12,551,929	$	13,400,651	$	15,340,380	$	15,760,797	$	188,820,902	$	189,447,546

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2018 and December 31, 2017.

	March 31, 2018
	30-59 Days		60-89 Days		Greater than 90		Total						Total Loans >90
	Past Due		Past Due		Days Past Due		Past Due		Current		Total Loans		Days & Accruing

One-to-four family residential	$	545,313	$	34,336	$	147,753	$	727,402	$	45,968,426	$	46,695,828	$	-
Commercial real estate		-		-		158,662		158,662		35,933,719		36,092,381		-
Agricultural real estate		-		-		-		-		40,611,733		40,611,733		-
Home equity		52,062		24,193		-		76,255		9,594,463		9,670,718		-
Commercial		4,793		-		3,918		8,711		27,849,222		27,857,933		-
Agricultural		-		-		-		-		12,551,929		12,551,929		-
Consumer		114,636		23,820		94,378		232,834		15,107,546		15,340,380		-
Total	$	716,804	$	82,349	$	404,711	$	1,203,864	$	187,617,038	$	188,820,902	$	-

	December 31, 2017
	30-59 Days		60-89 Days		Greater than 90		Total						Total Loans >90
	Past Due		Past Due		Days Past Due		Past Due		Current		Total Loans		Days & Accruing

One-to-four family residential	$	243,627	$	169,154	$	157,550	$	570,331	$	45,274,212	$	45,844,543	$	-
Commercial real estate		-		139,467		19,195		158,662		37,101,428		37,260,090		-
Agricultural real estate		-		-		-		-		40,129,028		40,129,028		-
Home equity		20,082		75,247		-		95,329		10,022,318		10,117,647		-
Commercial		5,485		-		4,317		9,802		26,924,988		26,934,790		-
Agricultural		-		-		-		-		13,400,651		13,400,651		-
Consumer		74,459		105,845		11,307		191,611		15,569,186		15,760,797		-
Total	$	343,653	$	489,713	$	192,369	$	1,025,735	$	188,421,811	$	189,447,546	$	-

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

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, 2018 and 2017 and for the year ended December 31, 2017.

	Three Months Ended March 31, 2018
							Average				Interest
			Unpaid				Impairment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Balance		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	212,908	$	212,908	$	-	$	217,436	$	2,834	$	2,886
Commercial real estate		838,443		838,443		-		835,880		12,795		11,067
Commercial		1,111,970		1,111,970		-		1,094,363		12,940		4,828
Home equity		46,629		46,629		-		47,404		844		796
Loans with a specific allowance:
One-to-four family residential		941,316		941,316		224,993		951,131		12,372		12,023
Commercial real estate		967,859		967,859		451,367		1,040,249		14,765		14,984
Commercial		129,416		129,416		129,416		145,514		2,274		3,125
Agricultural		269,534		269,534		113,131		279,762		3,159		7,549
Total:
One-to-four family residential		1,154,224		1,154,224		224,993		1,168,567		15,206		14,909
Commercial real estate		1,806,302		1,806,302		451,367		1,876,129		27,560		26,051
Commercial		1,241,386		1,241,386		129,416		1,239,877		15,214		7,953
Agricultural		269,534		269,534		113,131		279,762		3,159		7,549
Home equity		46,629		46,629		-		47,404		844		796
Total	$	4,518,075	$	4,518,075	$	918,907	$	4,611,739	$	61,983	$	57,258

	Three Months Ended March 31, 2017
							Average				Interest
			Unpaid				Impairment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Balance		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	231,961	$	231,961	$	-	$	265,795	$	3,563	$	3,713
Commercial real estate		1,053,432		1,053,432		-		1,053,606		14,552		19,933
Commercial		411,682		411,682		-		535,531		6,732		5,924
Home equity		52,541		52,541		-		53,321		893		790
Loans with a specific allowance:
One-to-four family residential		496,333		496,333		251,976		499,324		6,350		5,076
Commercial real estate		1,711,659		1,711,659		894,407		1,740,514		22,022		20,011
Commercial		106,644		106,644		62,059		112,152		975		391
Agricultural		379,307		379,307		10,796		395,658		4,800		18,313
Total:						-
One-to-four family residential		728,294		728,294		251,976		765,119		9,913		8,789
Commercial real estate		2,765,091		2,765,091		894,407		2,794,120		36,574		39,944
Commercial		518,326		518,326		62,059		647,683		7,707		6,315
Agricultural		379,307		379,307		10,796		395,658		4,800		18,313
Home equity		52,541		52,541		-		53,321		893		790
Total	$	4,443,559	$	4,443,559	$	1,219,238	$	4,655,901	$	59,887	$	74,151

	Year Ended December 31, 2017
							Average				Interest
			Unpaid				Impairment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Balance		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	223,997	$	223,997	$	-	$	244,463	$	12,789	$	12,771
Commercial real estate		444,500		444,500		-		951,010		41,732		40,184
Commercial		421,049		421,049		-		473,657		24,123		23,768
Home equity		43,683		43,683		-		52,350		3,617		3,393
Loans with a specific allowance:
One-to-four family residential		439,369		439,369		176,635		434,203		21,596		20,823
Commercial real estate		990,222		990,222		472,393		1,071,991		61,601		63,773
Commercial		132,901		132,901		132,901		145,858		2,608		1,545
Agricultural		375,951		375,951		144,438		381,803		18,053		26,240
Total:
One-to-four family residential		663,366		663,366		176,635		678,666		34,385		33,594
Commercial real estate		1,434,722		1,434,722		472,393		2,023,001		103,333		103,957
Commercial		553,950		553,950		132,901		619,515		26,731		25,313
Agricultural		375,951		375,951		144,438		381,803		18,053		26,240
Home equity		43,683		43,683		-		52,350		3,617		3,393
Total	$	3,071,672	$	3,071,672	$	926,367	$	3,755,335	$	186,119	$	192,497

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

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

The following table presents the recorded balance, at original cost, of TDRs, as of March 31, 2018 and December 31, 2017.

	March 31, 2018		December 31, 2017

One-to-four family residential	$	661,579	$	677,031
Commercial real estate		947,651		965,926
Agricultural real estate		236,500		236,500
Home equity		-		4,417
Commercial loans		337,748		343,414
Agricultural loans		94,000		93,914
Consumer loans		77,351		80,011

Total	$	2,354,829	$	2,401,213

The following table presents the recorded balance, at original cost, of TDRs, which were performing according to the terms of the restructuring, as of March 31, 2018 and December 31, 2017.

	March 31, 2018		December 31, 2017

One-to-four family residential	$	625,816	$	677,031
Commercial real estate		808,184		826,459
Agricultural real estate		236,500		236,500
Home equity		-		4,417
Commercial loans		337,748		343,414
Agricultural loans		94,000		93,914
Consumer loans		61,173		65,006

Total	$	2,163,421	$	2,246,741

The following table presents loans modified as TDRs during the three months ended March 31, 2018 and 2017.

	Three Months Ended				Three Months Ended
	March 31, 2018				March 31, 2017
	Number of		Recorded		Number of		Recorded
	Modifications		Investment		Modifications		Investment

One-to-four family residential		-	$	-		-	$	-
Commercial real estate		-		-		1		459,987
Agricultural real estate		-		-		1		236,500
Home equity		-		-		-		-
Commercial loans		-		-		1		53,194
Agricultural loans		1		94,000		-		-
Consumer loans		-		-		-		-

Total		1	$	94,000		3	$	749,681

First Quarter, 2018 Modifications

The Company modified one agricultural loan with a recorded investment of $94,000. The modification was made to renew the loan and defer the principal payment to maturity. The modification did not result in a write-off of the principal balance nor was there a significant difference between the pre-modification balance and the post-modification balance.

First Quarter, 2017 Modifications

The Company modified one commercial real estate loan with a recorded investment of $459,987. The modification was made to lower the rate and extend the amortization. The Company modified one agricultural real estate loan with a recorded investment of $236,500. The modification was made to consolidate notes and extend the amortization. The Company modified one commercial loan with a recorded investment of $53,194. The modification was made to combine three notes and lower the rate. The modifications did not result in a write-off of the principal balance nor was there a significant difference between the pre-modification balance and the post-modification balance.

TDRs with Defaults

Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. During the three month period ended March 31, 2018, one commercial real estate loan of $139,467 was considered a TDR defaulted as it was more than 90 days past due at March 31, 2018. Default occurs when a loan is 90 days or more past due, transferred to nonaccrual or charged-off, and is within twelve months of restructuring.

During the three month period ended March 31, 2017, one residential real estate loan of $67,025 and one consumer loan of $4,245 that were considered TDRs defaulted as they were more than 90 days past due at March 31, 2017.

The following table presents the Company’s nonaccrual loans at March 31, 2018 and December 31, 2017. This table excludes performing TDRs.

	March 31, 2018		December 31, 2017

One-to-four family residential	$	435,820	$	366,992
Commercial real estate		790,269		1,057,663
Agricultural real estate		-		-
Home equity		93,253		86,239
Commercial loans		133,333		137,471
Agricultural loans		-		-
Consumer loans		184,648		104,360

Total	$	1,637,323	$	1,752,725

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, 2018:
U.S. government and agencies	$	11,320,387	$	-	$	(701,514	)	$	10,618,873
Mortgage-backed securities (government- sponsored enterprises - residential)		58,154,675		-		(1,771,559	)		56,383,116
Municipal bonds		42,423,929		255,895		(689,850	)		41,989,974
	$	111,898,991	$	255,895	$	(3,162,923	)	$	108,991,963

December 31, 2017:
U.S. government and agencies	$	11,360,796	$	-	$	(489,616	)	$	10,871,180
Mortgage-backed securities (government- sponsored enterprises - residential)		56,048,355		1,499		(818,657	)		55,231,197
Municipal bonds		44,951,679		618,470		(277,220	)		45,292,929
	$	112,360,830	$	619,969	$	(1,585,493	)	$	111,395,306

The amortized cost and fair value of available-for-sale securities at March 31, 2018, 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	$	346,687	$	346,260
More than one to five years		4,805,045		4,818,452
More than five to ten years		19,657,634		19,308,274
After ten years		28,934,950		28,135,861
		53,744,316		52,608,847
Mortgage-backed securities (government- sponsored enterprises - residential)		58,154,675		56,383,116
	$	111,898,991	$	108,991,963

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $56,728,000 at March 31, 2018 and $57,341,000 at December 31, 2017.

The book value of securities sold under agreement to repurchase amounted to $3,664,000 at March 31, 2018 and $5,212,000 at December 31, 2017. At March 31, 2018, we had $1,990,000 of repurchase agreements secured by U.S. government agency bonds and $1,674,000 of repurchase agreements secured by mortgage backed securities. All of our repurchase agreements mature overnight. The right of offset for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default. The collateral is held by the Company in a segregated custodial account. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained.

Gross gains of $51,000 and $129,000 and gross losses of $18,000 and $0 resulting from sales of available-for-sale securities were realized during the three months ended March 31, 2018 and 2017, 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, 2018 and December 31, 2017 were $95,152,000, and $82,720,000, respectively, which was approximately 87% and 74%, respectively, of the Company’s available-for-sale investment portfolio at each date.

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, 2018 and December 31, 2017.

	Less Than Twelve Months					Twelve Months or More					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
March 31, 2018	Losses			Value		Losses			Value		Losses			Value

U.S. government agencies	$	(46,195	)	$	974,666	$	(655,319	)	$	9,644,208	$	(701,514	)	$	10,618,874
Mortgage-backed securities (government sponsored enterprises - residential)		(718,942	)		30,218,221		(1,052,617	)		26,164,896		(1,771,559	)		56,383,117
Municipal bonds		(208,906	)		5,044,653		(480,944	)		23,105,108		(689,850	)		28,149,761

Total	$	(974,043	)	$	36,237,540	$	(2,188,880	)	$	58,914,212	$	(3,162,923	)	$	95,151,752

	Less Than Twelve Months					Twelve Months or More					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
December 31, 2017	Losses			Value		Losses			Value		Losses			Value

U.S. government agencies	$	(23,513	)	$	997,972	$	(466,103	)	$	9,873,208	$	(489,616	)	$	10,871,180
Mortgage-backed securities (government sponsored enterprises - residential)		(240,968	)		26,489,556		(577,689	)		27,776,303		(818,657	)		54,265,859
Municipal bonds		(138,840	)		12,341,123		(138,380	)		5,241,641		(277,220	)		17,582,764

Total	$	(403,321	)	$	39,828,651	$	(1,182,172	)	$	42,891,152	$	(1,585,493	)	$	82,719,803

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, 2018 and December 31, 2017.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

	March 31, 2018			December 31, 2017
Net unrealized loss on securities available-for-sale	$	(2,907,028	)	$	(965,524	)
Tax effect		610,476			206,784
Net-of-tax amount	$	(2,296,552	)	$	(758,740	)

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI) BY COMPONENT

Amounts reclassified from AOCI and the affected line items in the statements of income during the three months ended March 31, 2018 and 2017, were as follows:

	Amounts Reclassified
	from AOCI
							Affected Line Item in the
	March 31, 2018			March 31, 2017			Statements of Income
Realized gains on securities available-for-sale securities	$	32,780		$	128,617		Net realized gains on sales of available-for-sale securities
		32,780			128,617
Tax effect		(6,884	)		(43,730	)	Income taxes
Total reclassification out of AOCI	$	25,896		$	84,887		Net reclassified amount

DISCLOSURES ABOUT FAIR VALUE OF ASSETS

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

Level 1

Quoted prices in active markets for identical assets.

Level 2

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

Level 3

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

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2018 and December 31, 2017:

			March 31, 2018
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and agencies	$	10,618,873	$	-	$	10,618,873	$	-
Mortgage-backed securities (Government sponsored enterprises - residential)		56,383,116		-		56,383,116		-
Municipal bonds		41,989,974		-		41,989,974		-

			December 31, 2017
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and agencies	$	10,871,180	$	-	$	10,871,180	$	-
Mortgage-backed securities (Government sponsored enterprises - residential)		55,231,197		-		55,231,197		-
Municipal bonds		45,292,929		-		45,292,929		-

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the three months ended March 31, 2018.

Available-for-Sale Securities - Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based on independently sourced market perspectives, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy.

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2018 and December 31, 2017:

March 31, 2018

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)

1,094,952

December 31, 2017

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)

1,049,668

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

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

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

Unobservable (Level 3) Inputs

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

	Fair Value at 3/31/18		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

Collateral-dependent impaired loans		1,094,952	Market comparable properties	Marketability discount	20% – 30% (25%)

	Fair Value at 12/31/17		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

Collateral-dependent impaired loans		1,049,668	Market comparable properties	Marketability discount	20% – 30% (25%)

Fair Value of Financial Instruments

The following table presents estimated fair values of the Company’s other financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2018 and December 31, 2017:

			March 31, 2018
			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents	$	7,003,615	$	7,003,615	$	-	$	-
Interest-earning time deposits in banks		998,000		998,000		-		-
Other investments		51,864		-		51,864		-
Loans held for sale		275,115		-		275,115		-
Loans, net of allowance for loan losses		186,070,456		-		-		184,967,405
Federal Home Loan Bank stock		428,500		-		428,500		-
Interest receivable		2,029,454		-		2,029,454		-
Financial Liabilities
Deposits		261,518,469		-		192,415,562		69,878,446
Other borrowings		3,663,976		-		3,663,976		-
Advances from borrowers for taxes and insurance		1,828,407		-		1,828,407		-
Interest payable		91,774		-		91,774		-
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		-		-		-		-
Letters of credit		-		-		-		-
Lines of credit		-		-		-		-

			December 31, 2017
			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents	$	5,889,628	$	5,889,628	$	-	$	-
Interest-earning time deposits		998,000		998,000		-		-
Other investments		52,502		-		52,502		-
Loans held for sale		178,833		-		178,833		-
Loans, net of allowance for loan losses		186,557,550		-		-		185,755,924
Federal Home Loan Bank stock		490,500		-		490,500		-
Interest receivable		1,997,798		-		1,997,798		-
Financial Liabilities
Deposits		252,700,432		-		181,052,653		72,392,640
Short-term borrowings		16,112,154		-		16,112,154		-
Advances from borrowers for taxes and insurance		1,153,926		-		1,153,926		-
Interest payable		106,068		-		106,068		-
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		-		-		-		-
Letters of credit		-		-		-		-
Lines of credit		-		-		-		-

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

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

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

Loans – For March 31, 2018, the fair value of loans is estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. This is not comparable with the fair values disclosed for December 31, 2017, which were based on an entrance price basis. For that date, fair values of variable rate loans that reprice frequently and with no significant change in credit risk were based on carrying values. The fair values of other loans as of that date were estimated using discounted cash flow analyses which used interest rates then being offered for loans with similar terms to borrowers of similar credit quality. Loans with similar characteristics were aggregated for purposes of the calculations.

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

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

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

10.

MORTGAGE SERVICING RIGHTS

Activity in the balance of mortgage servicing rights, measured using the amortization method, for the three month period ended March 31, 2018 and the year ended December 31, 2017 was as follows:

	March 31, 2018			December 31, 2017
Balance, beginning of period	$	547,092		$	552,827
Servicing rights capitalized		15,878			78,824
Amortization of servicing rights		(19,760	)		(84,559	)
Balance, end of period	$	543,210		$	547,092

11.

INCOME TAXES

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense for the three months ended March 31, 2018 and 2017 is shown below.

	March 31, 2018			March 31, 2017
Computed at the statutory rate	$	176,894		$	352,143
Increase (decrease) resulting from
Tax exempt interest		(70,899	)		(109,662	)
State income taxes, net		55,959			47,224
Increase in cash surrender value		(7,973	)		(13,837	)
Other, net		125			280

Actual tax expense	$	154,106		$	276,148

12.

COMMITMENTS AND CONTINGENCIES

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

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

JACKSONVILLE BANCORP, INC.

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

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

Forward Looking Statements

This Form 10-Q contains certain “forward-looking statements” which may be identified by the use of words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors that could cause actual results to differ materially from these estimates and most other statements that are not historical in nature. These factors include, but are not limited to, changes in general economic conditions, changes in interest rates, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve board, the quality and composition of the loan and investment portfolios, demand for loan products, deposit flows, competition, and the potential delay of the merger with CNB Bank Shares, Inc.

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 of operations 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 composition 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.

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

Recent Developments

On January 18, 2018, the Company announced the signing of a merger agreement under which CNB Bank Shares, Inc. will acquire the Company in an all-cash transaction for total consideration valued at approximately $61.6 million. Subject to the satisfaction or waiver of the closing conditions contained in the merger agreement, including the approval of the merger agreement by the Company’s stockholders and the receipt of required regulatory approvals, CNB Bank Shares and the Company expect that the merger will be completed during the second quarter of 2018. However, it is possible that factors outside the control of both companies could result in the merger being completed at a different time or not at all.

Financial Condition

March 31, 2018 Compared to December 31, 2017

Total assets at March 31, 2018 were $323.5 million, a decrease of $1.5 million, or 0.5%, from $325.0 million at December 31, 2017. The decrease in total assets was primarily due to a decrease of $3.6 million in investment securities. The decrease was partially offset by increases of $1.2 million in mortgage-backed securities and $1.1 million in cash and cash equivalents.

Cash and cash equivalents increased $1.1 million, or 18.9%, to $7.0 million at March 31, 2018, from $5.9 million at December 31, 2017. Mortgage-backed securities increased $1.2 million, or 2.1%, to $56.4 million at March 31, 2018, from $55.2 million at December 31, 2017. The increase in mortgage-backed securities reflected the investment of cash from the sales of investment securities. The sales of investment securities resulted in a decrease of $3.6 million during the first quarter of 2018.

Net loans receivable (excluding loans held for sale) decreased $487,000, or 0.3%, to $186.1 million at March 31, 2018 from $186.6 million at December 31, 2017. The decrease in loans was primarily due to a decrease of $1.2 million in commercial real estate loans, reflecting the payoff of two loans after the sale of the securing properties.

At March 31, 2018 and December 31, 2017, goodwill totaled $2.7 million. At these dates, our goodwill was not impaired.

Total deposits increased $8.8 million, or 3.5%, to $261.5 million at March 31, 2018 from $252.7 million at December 31, 2017. The increase was primarily due to an increase of $11.2 million in transaction accounts, partially offset by a decrease of $2.4 million in time deposits. Other borrowings, which consisted of $3.7 million in overnight repurchase agreements at March 31, 2018, decreased $12.4 million, or 77.3%, from December 31, 2017. The decrease reflected the payoff of $10.9 million in FHLB advances during the first quarter of 2018. The repurchase agreements are a cash management service provided to our commercial deposit customers.

Total stockholders’ equity decreased $1.0 million, or 2.0%, to $47.8 million at March 31, 2018, compared to $48.8 million at December 31, 2017. The decrease in stockholders’ equity was the result of a $1.5 million increase in accumulated other comprehensive loss and $180,000 in cash dividends, partially offset by net income of $688,000 during the first quarter of 2018. Accumulated other comprehensive loss increased primarily due to an increase in unrealized losses, net of tax, on available-for-sale securities reflecting changes in market prices for securities in our portfolio due to an increase in market interest rates during the first quarter of 2018. Accumulated other comprehensive loss does not include changes in the fair value of other financial instruments included in the condensed consolidated balance sheet.

Results of Operations

Comparison of Operating Results for the Three Months Ended March 31, 2018 and 2017

General: Net income for the three months ended March 31, 2018 was $688,000, or $0.38 per common share, basic and diluted, compared to net income of $760,000, or $0.43 per common share basic, and $0.42 per common share diluted, for the three months ended March 31, 2017. Net income decreased $71,000 during the first quarter of 2018, as compared to the prior year quarter, due to an increase of $504,000 in noninterest expense, reflecting professional fees related to the pending merger with CNB Bank Shares, Inc. Partially offsetting the increase in noninterest expense were increases of $81,000 in net interest income and $40,000 in noninterest income and decreases of $190,000 in provision for loan losses and $122,000 in income taxes.

Interest Income: Total interest income for the three months ended March 31, 2018 increased $152,000, or 5.4%, to $3.0 million during the first quarter of 2018, compared to the same period in 2017. The increase in interest income reflected increases of $52,000 in interest income on loans, $17,000 in interest income on investment securities, and $87,000 in interest income on mortgage-backed securities.

Interest income on loans increased $52,000 to $2.2 million during the first quarter of 2018. The increase in interest income on loans was due to an increase in the average balance of loans. The average balance of loans increased $6.6 million to $190.3 million during the first quarter of 2018, from $183.7 million during the first quarter of 2017. The increase in the average balance of the loan portfolio reflected increases in the average balance of commercial business and agricultural business loans. The average yield of the loan portfolio decreased six basis points to 4.66% during the first quarter of 2018, compared to 4.72% during the first quarter of 2017. The decrease in the average yield reflected the low interest rate environment and the competitive lending environment.

Interest income on investment securities increased $17,000 to $402,000 during the first quarter of 2018 compared to $385,000 during the first quarter of 2017. The increase resulted primarily from an increase in the average yield of investment securities. The average yield increased 10 basis points to 2.94% during the first quarter of 2018 from 2.84% during the first quarter of 2017. The majority of our investment portfolio (excluding mortgage-backed securities) consists of municipal bonds which are exempt from federal taxation, resulting in a higher tax-equivalent yield. The average balance of investment securities equaled $54.7 million during the first quarter of 2018, compared to $54.4 million during the first quarter of 2017.

Interest income on mortgage-backed securities increased $87,000 to $324,000 during the first quarter of 2018, compared to the first quarter of 2017. The increase in interest income reflected increases in both the average yield and average balance of mortgage-backed securities. The average yield of mortgage-backed securities increased 39 basis points to 2.28% during the first quarter of 2018 from 1.89% during the first quarter of 2017. The average balance of mortgage-backed securities increased $6.6 million to $56.7 million during the first quarter of 2018, compared to $50.1 million during the first quarter of 2017. The increase in the average balance of mortgage-backed securities reflected the investment of funds from loan payments and sales of investment securities, as loan demand remained weak and acceptable higher-yielding investment securities were not available.

Interest income on other interest-earning assets, consisting of interest-earning demand and time deposit accounts and federal funds sold, decreased $4,000 to $8,000 during the first quarter of 2018, compared to the first quarter of 2017. The average balance of other interest-earning assets decreased $3.9 million to $4.0 million during the quarter ended March 31, 2018 compared to $7.9 million for the quarter ended March 31, 2017. The average yield on other interest-earning assets increased 22 basis points to 0.79% during the first quarter of 2018 from 0.57% during the first quarter of 2017. The increase in the average yield reflected an increase in short-term market rates.

Interest Expense: Total interest expense increased $71,000, or 27.8%, to $327,000 for the three months ended March 31, 2018 compared to $256,000 for the three months ended March 31, 2017. The higher interest expense reflected increases in the cost of deposits of $39,000 and other borrowings of $32,000.

Interest expense on deposits increased $39,000 to $290,000 during the first quarter of 2018 compared to $251,000 during the first quarter of 2017. The increase in interest expense on deposits was primarily due to an increase in the average rate paid on deposits. The average rate on deposits increased seven basis points to 0.52% during the first quarter of 2018 from 0.45% during the first quarter of 2017. The increase in the average rate was partially offset by a decrease of $1.8 million in the average balance of deposits to $221.5 million during the first quarter of 2018 from $223.3 million during the first quarter of 2017. The decrease reflected a $6.1 million decrease in the average balance of time deposit accounts, partially offset by a $4.3 million increase in the average balance of transaction accounts.

Interest paid on borrowed funds, which consisted of overnight repurchase agreements and FHLB advances, increased $32,000 to $37,000 during the first quarter of 2018. The average balance of borrowed funds increased $6.3 million to $10.2 million during the first quarter of 2018, compared to $3.9 million during the first quarter of 2017. The average rate paid on borrowed funds increased 90 basis points to 1.45% during the first quarter of 2018, compared to 0.55% during the first quarter of 2017, which reflected the increase in short-term rates.

Net Interest Income: As a result of the changes in interest income and interest expense noted above, net interest income increased by $81,000, or 3.2%, to $2.6 million for the three months ended March 31, 2018 compared to the same time period in 2017. Our net interest margin remained stable at 3.44% during the first quarters of 2018 and 2017. Our interest rate spread decreased 3 basis points to 3.30% during the first quarter of 2018 from 3.33% during the first quarter of 2017. Our ratio of interest earning assets to interest bearing liabilities increased to 1.32x for the three months ended March 31, 2018 from 1.30x for the three months ended March 31, 2017.

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, 2018 and 2017.

	Three Months Ended
	March 31, 2018			March 31, 2017

Balance at beginning of period	$	2,879,510		$	3,007,395
Charge-offs:
One-to-four family residential		-			18,367
Total		-			18,367
Recoveries:
One-to-four family residential		9,454			6,550
Commercial real estate		5,808			3,872
Home equity		525			2,525
Commercial		32			29
Consumer		2,604			3,404
Total		18,423			16,380
Net loan charge-offs (recoveries)		(18,423	)		1,987
Provisions (credit) charged to expense		(160,000	)		30,000
Balance at end of period	$	2,737,933		$	3,035,408

The allowance for loan losses decreased $142,000 during the first quarter to $2.7 million as of March 31, 2018. The decrease was the result of a credit in the provision for loan losses, reflecting net recoveries, decreased loan volume, and lower loan loss history. We recorded a credit of $160,000 during the first quarter of 2018, compared to a provision of $30,000 during the first quarter of 2017. We recognized a net recovery of $18,000 during the first quarter of 2018, compared to net charge-offs of $2,000 during the first quarter of 2017. Loans delinquent 30 days or more increased $178,000 to $1.2 million, or 0.64% of total loans, as of March 31, 2018, from $1.0 million, or 0.54% of total loans, as of December 31, 2017. Loans delinquent 30 days or more totaled $1.8 million, or 0.99% of total loans at March 31, 2017.

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, as well as management’s periodic review of the collectability of the remainder of the portfolio. 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, 2018			December 31, 2017

Nonaccrual loans:
One-to-four family residential	$	435,820		$	366,992
Commercial real estate		790,269			1,057,663
Home equity		93,253			86,239
Commercial business		133,333			137,471
Consumer		184,648			104,360
Total	$	1,637,323		$	1,752,725

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

Foreclosed assets:
One-to-four family residential		10,500			10,500
Consumer		-			10,000
Total	$	10,500		$	20,500

Total nonperforming assets	$	1,647,823		$	1,773,225

Total nonperforming loans as a percentage of total loans		0.87	%		0.93	%
Total nonperforming assets as a percentage of total assets		0.51	%		0.55	%

Nonperforming assets decreased $125,000 to $1.6 million, or 0.51% of total assets, as of March 31, 2018, compared to $1.8 million, or 0.55% of total assets, as of December 31, 2017. The decrease in nonperforming assets was primarily due to a decrease in nonperforming loans, reflecting the payoff of a $252,000 nonperforming commercial real estate loan after the sale of the securing property.

The following table shows the aggregate principal amount of potential problem credits on the Company’s watch list at March 31, 2018 and December 31, 2017. All nonaccrual loans are automatically placed on the watch list. The $1.6 million increase in substandard credits reflected advances of $1.1 million on a commercial borrower’s line of credit and the downgrade from special mention of $511,000 in commercial real estate loans to a single borrower.

	March 31, 2018		December 31, 2017

Special Mention credits	$	424,295	$	1,360,679
Substandard credits		7,495,432		5,889,702
Total watch list credits	$	7,919,727	$	7,250,381

Noninterest Income: Noninterest income increased $40,000, or 3.6%, during the first quarter of 2018. The increase in noninterest income was primarily due to an increase of $114,000 in other noninterest income, partially offset by a decrease of $96,000 in gains on the sale of available-for-sale securities. Other noninterest income benefitted from the gain of $84,000 on a bank-owned life insurance policy claim and a $37,000 profit sharing distribution related to credit life insurance sales during the first quarter of 2018. The decrease in gains on the sales of securities reflected a lower volume of sales. Securities totaling $4.4 million were sold during the first quarter of 2018 compared to $9.0 million during the same period of 2017.

Noninterest Expense: Total noninterest expense increased $504,000, or 19.5%, to $3.1 million for the first quarter of 2018 compared to the same period of 2017. The increase in noninterest expense consisted primarily of increases of $347,000 in professional fees, $62,000 in compensation and benefits expense, and $61,000 in other noninterest expense. The increases in professional fees and other noninterest expense reflected higher legal and consulting expenses related to the recently announced merger agreement. The increase in compensation and benefits expense reflected normal cost increases.

Income Taxes: The provision for income taxes decreased $122,000 to $154,000 during the first quarter of 2018 compared to the same period of 2017. The decrease in the income tax provision reflected a decrease in taxable income during the comparative periods, as well as the lower federal income tax rate effective January 1, 2018. The effective tax rate was 18.3% and 26.7% during the three months ended March 31, 2018 and 2017, 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. Cash and cash equivalents totaled $7.0 million and $5.9 million at March 31, 2018 and December 31, 2017, 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 three months ended March 31, 2018, the most significant sources of funds have been deposit growth and sales of investment securities and loans. These funds have been used primarily for the reduction of other borrowings and the purchases of investment 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. 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, 2018, the Company had no outstanding FHLB advances and approximately $77.7 million available to be accessed under the above-mentioned borrowing arrangement.

The Company maintains minimum levels of liquid assets as established by the Board of Directors. The Company’s liquidity ratios at March 31, 2018 and December 31, 2017 were 36.5% and 36.6%, 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, 2018 and December 31, 2017.

	March 31, 2018		December 31, 2017

Commitments to fund loans	$	44,810,462	$	45,995,992
Standby letters of credit		80,250		80,250

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and common equity 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). In addition, the Bank is subject to the new capital conservation buffer which began phasing in during the first quarter of 2016 at 0.625% of risk-weighted assets. For 2018, the conservation buffer is 1.875% of risk-weighted assets. The capital conservation buffer will continue to increase 0.625% each year until fully phased in at 2.50% of risk-weighted assets beginning in the first quarter of 2019. Management believes that at March 31, 2018, the Bank 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, 2018, the Bank’s core capital ratio was 13.13% 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. At March 31, 2018, minimum requirements and the Bank's actual ratios are as follows:

	March 31, 2018			Minimum			Minimum Required
	Actual			Required			With Capital Buffer
Tier 1 Capital to Average Assets		13.13	%		4.00	%		4.000	%
Common Equity Tier 1		19.39	%		4.50	%		6.375	%
Tier 1 Capital to Risk-Weighted Assets		19.39	%		6.00	%		7.875	%
Total Capital to Risk-Weighted Assets		20.64	%		8.00	%		9.875	%

Effect of Inflation and Changing Prices

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

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,
	2018							2017
	Average							Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost

Interest-earnings assets:
Loans	$	190,319	$	2,219		4.66	%	$	183,738	$	2,167		4.72	%
Investment securities		54,727		402		2.94	%		54,438		386		2.84	%
Mortgage-backed securities		56,676		324		2.28	%		50,053		236		1.89	%
Other		3,960		8		0.79	%		7,919		12		0.57	%
Total interest-earning assets		305,682		2,953		3.86	%		296,148		2,801		3.78	%

Non-interest earnings assets		19,197							19,555
Total assets	$	324,879						$	315,703

Interest-bearing liabilities:
Interest-bearing checking	$	62,277	$	108		0.69	%	$	56,489	$	51		0.36	%
Savings accounts		47,552		20		0.17	%		45,685		23		0.20	%
Certificates of deposit		70,613		135		0.76	%		76,693		148		0.77	%
Money market savings		33,418		24		0.28	%		36,227		26		0.28	%
Money market deposits		7,590		3		0.18	%		8,181		3		0.16	%
Total interest-bearing deposits		221,450		290		0.52	%		223,275		251		0.45	%
Federal Home Loan Bank advances		5,671		21		1.46	%		5		-		0.72	%
Short-term borrowings		4,522		16		1.44	%		3,903		5		0.55	%
Total borrowings		10,193		37		1.45	%		3,908		5		0.55	%
Total interest-bearing liabilities		231,643		327		0.56	%		227,183		256		0.45	%

Non-interest bearing liabilities		45,089							41,854
Stockholders' equity		48,147							46,666

Total liabilities/stockholders' equity	$	324,879						$	315,703

Net interest income			$	2,626						$	2,545

Interest rate spread (average yield earned minus average rate paid)						3.30	%						3.33	%

Net interest margin (net interest income divided by average interest-earning assets)						3.44	%						3.44	%

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,
	2018 Compared to 2017
	Increase (Decrease) Due to
	Rate			Volume			Net

Interest-earnings assets:
Loans	$	(25	)	$	77		$	52
Investment securities		15			2			17
Mortgage-backed securities		53			34			87
Other		3			(7	)		(4	)
Total net change in income on interest-earning assets		46			106			152

Interest-bearing liabilities:
Interest-bearing checking		51			6			57
Savings accounts		(4	)		1			(3	)
Certificates of deposit		(1	)		(12	)		(13	)
Money market savings		-			(2	)		(2	)
Money market deposits		-			-			-
Total interest-bearing deposits		46			(7	)		39
Federal Home Loan Bank advances		-			21			21
Short-term borrowings		10			1			11
Total borrowings		10			22			32
Total net change in expense on interest-bearing liabilities		56			15			71

Net change in net interest income	$	(10	)	$	91		$	81

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 fixed-rate residential mortgage loans with terms of 15 years or more in the secondary market, originating adjustable rate loans and 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 residential loans. Our portfolio of mortgage-backed securities also provides monthly cash flows. The remaining investment portfolio has been structured to better match the maturities and rates of its interest-bearing liabilities. With respect to liabilities, the Company has attempted to increase its savings and transaction deposit accounts, which management believes are more resistant to changes in interest rates than time deposits. 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 rate 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 300 basis points in 100 basis point increments and minus 100 basis points.

The following table shows projected results at March 31, 2018 and December 31, 2017 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.

	(Dollars in thousands)
	March 31, 2018						December 31, 2017						ALCO
Rate Shock:	$ Change			% Change			$ Change			% Change			Benchmark
+ 300 basis points		124			1.08	%		(220	)		-1.95	%		> (20.00)%
+ 200 basis points		129			1.11	%		(140	)		-1.24	%		> (20.00)%
+ 100 basis points		134			1.16	%		(51	)		-0.45	%		> (12.50)%
- 100 basis points		(128	)		-1.10	%		(274	)		-2.43	%		> (12.50)%

The table above indicates that as of March 31, 2018, in the event of a 200 basis point increase in interest rates, we would experience a 1.11% increase in net interest income. In the event of a 100 basis point decrease in interest rates, we would experience a 1.10% decrease in net interest income.

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

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

JACKSONVILLE BANCORP, INC.

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rules 13a-15(e) or 15d-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 Rules 13(a)-15(d) or 15d-15(d) of the Exchange Act 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

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A.

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 for the year ended December 31, 2017.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

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

	Total Number of shares purchased		Average price paid per share		Total number of shares purchased under publicly announced plan		Maximum number of shares that may be purchased under the repurchase plan ⁽¹⁾
January 1 – January 31		-		-		-		18,758
February 1 – February 28		-		-		-		18,758
March 1 – March 31		-		-		-		18,758

(1)

On October 16, 2013, the Company announced the adoption of a stock repurchase program under which the Company can repurchase up to 92,018 shares of its common stock, or approximately 5% of the then current outstanding shares, from time to time, depending on market conditions and other considerations The program provides for repurchases through open market or private transactions, through block trades, and pursuant to any trading plan adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The Company has repurchased 73,260 shares permitted under the program.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

None.

Item 5.

Other Information

None.

Item 6.

Exhibits

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

101 INS -		XBRL Instance Document
101 SCH -		XBRL Taxonomy Extension Schema Document
101 CAL -		XBRL Taxonomy Calculation Linkbase Document
101 DEF -		XBRL Taxonomy Extension Definition Linkbase Document
101 LAB -		XBRL Taxonomy Label Linkbase Document
101 PRE -		XBRL Taxonomy Presentation Linkbase Document

SIGNATURES

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

		JACKSONVILLE BANCORP, INC.
		Registrant

Date:	05/10/2018	/s/ Richard A. Foss
		Richard A. Foss
		President and Chief Executive Officer

		/s/ Diana S. Tone
		Diana S. Tone
		Executive Vice President and Chief Financial Officer

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