Jacksonville Bancorp 10Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2011

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period of _________ to _________

Commission File Number 001-34821

Jacksonville Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

x Yes o No

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

x Yes o No

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

o Large Accelerated Filer �� o Accelerated Filer

o Non-Accelerated Filer x Smaller Reporting Company

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

o Yes x No

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

JACKSONVILLE BANCORP, INC.

FORM 10-Q

June 30, 2011

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets	1

	Condensed Consolidated Statements of Income	2

	Condensed Consolidated Statement of Stockholders’ Equity	3

	Condensed Consolidated Statements of Cash Flows	4-5

	Notes to the Condensed Consolidated Financial Statements	6-30

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31-46

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47-48

Item 4	Controls and Procedures	49

PART II	OTHER INFORMATION	50

Item 1.	Legal Proceedings
Item 1.A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Removed and Reserved
Item 5.	Other Information
Item 6.	Exhibits

	Signatures	51

EXHIBITS

	Section 302 Certifications
	Section 906 Certification
	XBRL Instance Document
	XBRL Taxonomy Extension Schema Document
	XBRL Taxonomy Calculation Linkbase Document
	XBRL Taxonomy Extension Definition Linkbase Document
	XBRL Taxonomy Label Linkbase Document
	XBRL Taxonomy Presentation Linkbase Document

PART I – FINANCIAL INFORMATION

JACKSONVILLE BANCORP, INC.

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2011			2010
	(Unaudited)
ASSETS
Cash and cash equivalents	$	5,564,388		$	8,943,400
Investment securities - available for sale		58,646,240			52,871,871
Mortgage-backed securities - available for sale		45,223,784			41,994,850
Federal Home Loan Bank stock		1,113,800			1,113,800
Other investment securities		122,010			130,049
Loans receivable - net of allowance for loan losses of $3,160,826 and $2,964,285 as of June 30, 2011 and December 31, 2010		174,719,202			176,442,118
Loans held for sale - net		231,800			280,000
Premises and equipment - net		5,634,243			5,659,074
Cash surrender value of life insurance		4,323,689			4,238,915
Accrued interest receivable		2,394,999			1,872,779
Goodwill		2,726,567			2,726,567
Capitalized mortgage servicing rights, net of valuation allowance of $146,661 and $163,989 as of June 30, 2011 and December 31, 2010		793,680			797,327
Real estate owned		551,732			459,877
Deferred income taxes		771,871			1,620,994
Other assets		2,085,170			2,329,232

Total Assets	$	304,903,175		$	301,480,853

LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits	$	256,606,742		$	256,423,647
Other borrowings		4,153,462			4,018,235
Advance payments by borrowers for taxes and insurance		715,797			629,788
Accrued interest payable		408,345			556,257
Deferred compensation payable		3,165,810			3,060,637
Income taxes payable		115,756			122,934
Other liabilities		1,003,427			991,205
Total liabilities		266,169,339			265,802,703

Commitments and contingencies		-			-

Preferred stock, $0.01 par value - authorized 10,000,000 shares; none issued and outstanding		-			-
Common stock, $0.01 par value - authorized 25,000,000 shares; issued 1,930,955 shares as of June 30, 2011 and 1,923,689 shares as of December 31, 2010		19,310			19,237
Additional paid-in-capital		16,196,860			16,159,960
Retained earnings		21,405,122			20,045,095
Less: Unallocated ESOP shares		(384,950	)		(395,340	)
Accumulated other comprehensive income (loss)		1,497,494			(150,802	)
Total stockholders’ equity		38,733,836			35,678,150

Total Liabilities and Stockholders’ Equity	$	304,903,175		$	301,480,853

See accompanying notes to the unaudited condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011		2010			2011		2010
	(Unaudited)					(Unaudited)
INTEREST INCOME:
Loans	$	2,711,572	$	2,683,484		$	5,366,978	$	5,354,746
Investment securities		516,333		451,523			1,002,231		851,157
Mortgage-backed securities		366,951		246,749			646,715		407,627
Other		640		2,115			2,339		4,564
Total interest income		3,595,496		3,383,871			7,018,263		6,618,094

INTEREST EXPENSE:
Deposits		747,041		1,006,361			1,547,130		2,058,935
Other borrowings		5,238		2,432			9,865		4,612
Total interest expense		752,279		1,008,793			1,556,995		2,063,547

NET INTEREST INCOME		2,843,217		2,375,078			5,461,268		4,554,547

PROVISION FOR LOAN LOSSES		150,000		850,000			325,000		1,125,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,693,217		1,525,078			5,136,268		3,429,547

NON-INTEREST INCOME:
Fiduciary activities		57,688		42,397			117,708		84,818
Commission income		347,187		213,055			759,927		473,999
Service charges on deposit accounts		232,858		253,718			452,023		484,937
Mortgage banking operations, net		58,689		77,431			66,577		125,934
Net realized gains on sales of available-for-sale securities		55,713		204,020			109,218		344,048
Loan servicing fees		92,243		92,004			186,605		184,612
Other		130,331		141,088			267,414		276,496
Total non-interest income		974,709		1,023,713			1,959,472		1,974,844

NON-INTEREST EXPENSE:
Salaries and employee benefits		1,554,657		1,390,347			3,083,776		2,779,458
Occupancy and equipment		255,588		237,853			494,828		497,888
Data processing and telecommunications		137,935		114,910			284,361		231,986
Professional		46,226		42,324			96,607		79,389
Postage and office supplies		62,591		76,935			139,851		145,569
Deposit insurance premium		53,830		101,802			150,456		204,833
Impairment on mortgage servicing rights asset		-		165,651			-		165,651
Other		283,858		347,364			574,466		620,037
Total non-interest expense		2,394,685		2,477,186			4,824,345		4,724,811

INCOME BEFORE INCOME TAXES		1,273,241		71,605			2,271,395		679,580
INCOME TAXES (BENEFIT)		368,407		(108,519	)		631,822		599

NET INCOME	$	904,834	$	180,124		$	1,639,573	$	678,981

NET INCOME PER COMMON SHARE - BASIC	$	0.48	$	0.09		$	0.87	$	0.35
NET INCOME PER COMMON SHARE - DILUTED	$	0.48	$	0.09		$	0.87	$	0.35

See accompanying notes to the unaudited condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

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

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

Net Income		-			-			-			1,639,573			-			1,639,573		$	1,639,573

Other comprehensive income - change in net unrealized gains on securities available-for-sale, net of taxes of $886,256		-			-			-			-			1,720,380			1,720,380			1,720,380
Less: reclassification adjustment for gains included in net income, net of tax of $37,134		-			-			-			-			72,084			72,084			72,084
Comprehensive Income																			$	3,287,869

Exercise of stock options		217			211,351			-			-			-			211,568
Tax benefit related to stock options exercised		-			4,609			-			-			-			4,609
Purchase and retirement of common stock		(144	)		(181,797	)		-			-			-			(181,941	)
Shares held by ESOP, commited to be released		-			2,737			10,390			-			-			13,127
Dividends ($0.15 per share)		-			-			-			(279,546	)		-			(279,546	)

BALANCE, JUNE 30, 2011	$	19,310		$	16,196,860		$	(384,950	)	$	21,405,122		$	1,497,494		$	38,733,836

See accompanying notes to unaudited condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended
	June 30,
	2011			2010
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,639,573		$	678,981
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and accretion:
Premises and equipment		155,589			184,867
Amortization of investment premiums and discounts, net		225,574			467,172
Accretion of loan discounts		(2,901	)		(483	)
Net realized gains on sales of available-for-sale securities		(109,218	)		(344,048	)
Provision for loan losses		325,000			1,125,000
Mortgage banking operations, net		(66,577	)		(125,934	)
Loss (gain) on sale of real estate owned		(31,142	)		13,666
Impairment on mortgage servicing rights asset		-			165,651
Shares held by ESOP commited to be released		13,127			-
Tax benefit related to stock options exercised		4,609			-
Changes in income taxes payable		(7,178	)		(398,463	)
Changes in assets and liabilities		(393,449	)		(290,889	)
Net cash provided by operations before loan sales		1,753,007			1,475,520
Origination of loans for sale to secondary market		(7,348,818	)		(10,717,922	)
Proceeds from sales of loans to secondary market		7,467,242			10,859,321
Net cash provided by operating activities		1,871,431			1,616,919

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment and mortgage-backed securities		(33,369,259	)		(45,121,188	)
Maturity or call of investment securities available-for-sale		6,255,000			8,000,000
Sale of investment securities available-for-sale		16,910,803			22,327,124
Principal payments on mortgage-backed and investment securities		3,589,255			6,324,215
Proceeds from sale of real estate owned		198,699			302,024
Net (increase) decrease in loans		1,141,405			(1,208,169	)
Additions to premises and equipment		(130,758	)		(18,587	)

Net cash used in investing activities		(5,404,855	)		(9,394,581	)

				(Continued)

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

	Six Months Ended
	June 30,
	2011			2010
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	183,095		$	7,818,291
Net increase (decrease) in other borrowings		135,227			(1,009,447	)
Increase in advance payments by borrowers for taxes and insurance		86,009			140,361
Exercise of stock options		211,568			-
Purchase and retirement of treasury stock related to stock options		(181,941	)		-
Dividends paid - common stock		(279,546	)		(132,313	)

Net cash provided by financing activities		154,412			6,816,892

NET DECREASE IN CASH AND CASH EQUIVALENTS		(3,379,012	)		(960,770	)

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

CASH AND CASH EQUIVALENTS, END OF YEAR	$	5,564,388		$	14,735,704

ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest on deposits	$	1,695,106		$	2,184,535
Interest on other borrowings		9,801			7,612
Income taxes paid		589,000			403,000

NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans	$	391,246		$	355,483
Loans to facilitate sales of real estate owned		131,834			59,000

See accompanying notes to unaudited condensed consolidated financial statements

JACKSONVILLE BANCORP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	FINANCIAL STATEMENTS

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

In the opinion of management, the preceding unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial condition of the Company as of June 30, 2011 and December 31, 2010 and the results of its operations for the three and six month periods ended June 30, 2011 and 2010. The results of operations for the three and six month periods ended June 30, 2011 are not necessarily indicative of the results which may be expected for the entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2010 filed as an exhibit to the Company’s Form 10-K filed in March, 2011. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP) and to prevailing practices within the industry.

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

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

2.	SECOND STEP CONVERSION

On July 14, 2010, Jacksonville Bancorp, Inc. completed its conversion from the mutual holding company structure and the related public offering and is now a stock holding company that is fully owned by the public. Jacksonville Savings Bank is 100% owned by the Company and the Company is 100% owned by public stockholders. The Company sold a total of 1,040,352 shares of common stock in the subscription and community offerings, including 41,614 shares to the Jacksonville Savings Bank employee stock ownership plan. All shares were sold at a price of $10 per share, raising $10.4 million in gross proceeds. Conversion related expenses of $1.2 million were offset against the gross proceeds, resulting in $9.2 million of net proceeds. Concurrent with the completion of the offering, shares of Jacksonville Bancorp, Inc., a federal corporation, common stock owned by public stockholders were exchanged for 1.0016 shares of the Company’s common stock. As a result of the offering and the exchange, at June 30, 2011, the Company had 1,930,955 shares outstanding and a market capitalization of $24.1 million. The shares of common stock sold in the offering and issued in the exchange, trade on the NASDAQ Capital market under the symbol “JXSB.”

3.	NEW ACCOUNTING PRONOUNCEMENTS

ASU No. 2011-02; A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“TDR”). In April, 2011, FASB issued ASU No. 2011-02, intended to provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011, and are to be applied retrospectively to the beginning of the annual period of adoption. As a result of applying these amendments, an entity may identify receivables that are newly considered impaired. Early adoption is permitted. The Company intends to adopt the methodologies prescribed by this ASU by the date required, and is continuing to evaluate the impact of adoption of this ASU.

ASU No. 2011-03; Reconsideration of Effective Control for Repurchase Agreements. In April, 2011, FASB issued ASU No. 2011-03. The amendments in this ASU remove from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. The amendments in this ASU also eliminate the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets.

The guidance in this ASU is effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

ASU No. 2011-04; Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. In May, 2011, FASB issued ASU No. 2011-04. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. and international accounting standards.

The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

ASU No. 2011-05; Amendments to Topic 220, Comprehensive Income. In June, 2011, FASB issued ASU No. 2011-05. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.

The amendments in this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The Company is currently evaluating the impact of this standard.

4.	EARNINGS PER SHARE

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

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
Net income available to common
shareholders	$	904,834	$	180,124	$	1,639,573	$	678,981

Basic average shares outstanding		1,891,706		1,920,817		1,888,670		1,920,817

Diluted potential common shares:
Stock option equivalents		-		4,440		-		4,088
Diluted average shares outstanding		1,891,706		1,925,257		1,888,670		1,924,905

Basic earnings per share	$	0.48	$	0.09	$	0.87	$	0.35

Diluted earnings per share	$	0.48	$	0.09	$	0.87	$	0.35

Stock options for 4,504 shares of common stock were not considered in computing diluted earnings per share for the three and six month periods ending June 30, 2011, because they were anti-dilutive. Stock options for 4,500 shares of common stock were not considered in computing diluted earnings per share for the three and six month periods ending June 30, 2010, because they were anti-dilutive.

5.	EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

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

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

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

A summary of ESOP shares at June 30, 2011, is shown below.

Unearned shares		38,495
Shares committed for release		1,038
Allocated shares		49,344
Total ESOP shares		88,877

Fair value of unearned shares	$	481,188

6.	LOAN PORTFOLIO COMPOSITION

At June 30, 2011 and December 31, 2010, the composition of the Company’s loan portfolio is shown below.

	June 30, 2011		December 31, 2010

Mortgage loans on real estate
One-to-four family residential	$	38,208,843	$	37,227,211
Commercial		43,011,180		45,361,944
Agricultural		31,632,558		28,163,488
Home equity		17,939,927		19,526,162
Total mortgage loans on real estate		130,792,508		130,278,805

Commercial business		22,430,621		22,810,203
Agricultural business		8,503,056		8,176,396
Consumer		16,194,069		18,190,307
		177,920,254		179,455,711

Less
Net deferred loan fees		40,226		49,308
Allowance for loan losses		3,160,826		2,964,285

Net loans	$	174,719,202	$	176,442,118

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

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

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

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

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

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

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

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

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

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

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

Commercial and Agricultural Real Estate Loans - The Company originates and purchases commercial and agricultural real estate loans. Commercial and agricultural real estate loans are secured primarily by improved properties such as farms, retail facilities and office buildings, churches and other non-residential buildings. The maximum loan-to-value ratio for commercial and agricultural real estate loans originated is generally 80%. The commercial and agricultural real estate loans are generally written up to terms of five years with adjustable interest rates. The rates are generally tied to the prime rate and generally have a specified floor. Many of the adjustable-rate commercial real estate loans are not fully amortizing and therefore require a “balloon” payment at maturity. The Company purchases from time to time commercial real estate loan participations primarily from outside the Company’s market area. All participation loans are approved following a review to ensure that the loan satisfies the underwriting standards.

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

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

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

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

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

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

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

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

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of June 30, 2011 and December 31, 2010.

	June 30, 2011
	1-4 Family			Commercial Real Estate			Agricultural Real Estate		Commercial			Agricultural		Home Equity			Consumer			Unallocated		Total

Allowance for loan losses:

Beginning balance, April 1, 2011	$	514,330		$	1,093,553		$	104,867	$	506,317		$	141,044	$	267,660		$	121,873		$	129,606	$	2,879,250
Provision charged to expense		72,461			50,535			7,341		(52,393	)		11,375		8,713			4,490			47,478		150,000
Losses charged off		(24,809	)		—			—		—			—		—			—			—		(24,809	)
Recoveries		—			700			—		153,609			—		1,275			801			—		156,385
Ending balance, June 30, 2011	$	561,982		$	1,144,788		$	112,208	$	607,533		$	152,419	$	277,648		$	127,164		$	177,084	$	3,160,826

Beginning balance, January 1, 2011	$	561,309		$	1,193,928		$	92,988	$	472,376		$	58,250	$	300,257		$	163,690		$	121,487	$	2,964,285
Provision charged to expense		32,884			202,803			19,220		(18,652	)		94,169		(23,589	)		(37,432	)		55,597		325,000
Losses charged off		(32,211	)		(260,785	)		—		—			—		(4,162	)		(1,097	)		—		(298,255	)
Recoveries		—			8,842			—		153,809			—		5,142			2,003			—		169,796
Ending balance, June 30, 2011	$	561,982		$	1,144,788		$	112,208	$	607,533		$	152,419	$	277,648		$	127,164		$	177,084	$	3,160,826

Ending balance: individually evaluated for impairment	$	89,795		$	314,285		$	—	$	227,698		$	—	$	—		$	—		$	—	$	631,778
Ending balance: collectively evaluated for impairment	$	472,187		$	830,503		$	112,208	$	379,835		$	152,419	$	277,648		$	127,164		$	177,084	$	2,529,048
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—		$	—	$	—		$	—		$	—	$	—

Loans:
Ending balance	$	38,208,843		$	43,011,180		$	31,632,558	$	22,430,621		$	8,503,056	$	17,939,927		$	16,194,069		$	—	$	177,920,254
Ending balance: individually evaluated for impairment	$	639,589		$	1,754,057		$	—	$	570,677		$	—	$	—		$	—		$	—	$	2,964,323
Ending balance: collectively evaluated for impairment	$	37,569,254		$	41,257,123		$	31,632,558	$	21,859,944		$	8,503,056	$	17,939,927		$	16,194,069		$	—	$	174,955,931
Ending balance: loans acquired with deteriorated credit quality	$	—		$	—		$	—	$	—		$	—	$	—		$	—		$	—	$	—


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

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

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

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

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

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

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

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

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

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

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

Credit Quality Indicators

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

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

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

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

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

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of June 30, 2011 and December 31, 2010.

	1-4 Family				Commercial Real Estate				Agricultural Real Estate				Commercial Business				Agricultural Business
	June 30, 2011		December 31, 2010		June 30, 2011		December 31, 2010		June 30, 2011		December 31, 2010		June 30, 2011		December 31, 2010		June 30, 2011		December 31, 2010

Pass	$	35,449,250	$	34,258,180	$	39,459,596	$	41,534,866	$	31,203,691	$	27,768,600	$	21,373,420	$	21,621,978	$	7,578,129	$	7,818,536
Special Mention		1,633,658		1,476,077		866,808		733,561		428,867		394,888		318,370		186,598		924,927		357,860
Substandard		1,125,935		1,492,954		2,684,776		3,093,517		—		—		738,831		1,001,627		—		—

Total	$	38,208,843	$	37,227,211	$	43,011,180	$	45,361,944	$	31,632,558	$	28,163,488	$	22,430,621	$	22,810,203	$	8,503,056	$	8,176,396

	Home Equity				Consumer
	June 30, 2011		December 31, 2010		June 30, 2011		December 31, 2010

Rating:
Pass	$	16,711,020	$	18,064,116	$	15,879,366	$	17,471,747
Special Mention		225,871		223,034		215,435		570,589
Substandard		1,003,036		1,239,012		99,268		147,971

Total	$	17,939,927	$	19,526,162	$	16,194,069	$	18,190,307

The following tables present the Company’s loan portfolio aging analysis as of June 30, 2011 and December 31, 2010.

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

One-to-four family residential	$	629,440	$	82,965	$	533,140	$	1,245,545	$	36,963,298	$	38,208,843	$	—
Agricultural real estate		—		—		—		—		31,632,558		31,632,558		—
Commercial real estate		—		—		93,077		93,077		42,918,103		43,011,180		—
Agricultural business		—		—		—		—		8,503,056		8,503,056		—
Commercial business		—		5,094		—		5,094		22,425,527		22,430,621		—
Home equity		110,814		10,691		229,916		351,421		17,588,506		17,939,927		—
Consumer		187,963		11,910		1,329		201,202		15,992,867		16,194,069		1,329

Total	$	928,217	$	110,660	$	857,462	$	1,896,339	$	176,023,915	$	177,920,254	$	1,329

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

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

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

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

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

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

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

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

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

The following tables present impaired loans at or for the three and six months ended June 30, 2011 and the year ended December 31, 2010.

	Three Months Ended June 30, 2011
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized

Loans without a specific valuation allowance
One-to-four family	$	270,743	$	270,743	$	—	$	272,147	$	2,943
Commercial real estate		121,962		121,962		—		123,353		950
Loans with a specific valuation allowance
One-to-four family		368,846		368,846		89,795		400,722		6,328
Commercial real estate		1,632,094		1,632,094		314,285		1,709,108		17,553
Commercial business		570,678		570,678		227,698		596,623		10,441
Total:
One-to-four family		639,589		639,589		89,795		672,869		9,271
Commercial real estate		1,754,056		1,754,056		314,285		1,832,461		18,503
Commercial business		570,678		570,678		227,698		596,623		10,441

Total	$	2,964,323	$	2,964,323	$	631,778	$	3,101,953	$	38,215

	Six Months Ended June 30, 2011
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized

Loans without a specific valuation allowance
One-to-four family	$	270,743	$	270,743	$	—	$	274,924	$	6,058
Commercial real estate		121,962		121,962		—		124,771		1,925
Loans with a specific valuation allowance
One-to-four family		368,846		368,846		89,795		400,955		12,685
Commercial real estate		1,632,094		1,632,094		314,285		1,752,553		37,430
Commercial business		570,678		570,678		227,698		603,151		20,983
Total:
One-to-four family		639,589		639,589		89,795		675,879		18,743
Commercial real estate		1,754,056		1,754,056		314,285		1,877,324		39,355
Commercial business		570,678		570,678		227,698		603,151		20,983

Total	$	2,964,323	$	2,964,323	$	631,778	$	3,156,354	$	79,081

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

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

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

The following table presents the Company’s nonaccrual loans at June 30, 2011 and December 31, 2010. This table excludes performing troubled debt restructurings.

	June 30, 2011		December 31, 2010

One-to-four family	$	831,511	$	1,019,252
Agricultural real estate		—		—
Commercial real estate		1,329,740		1,359,060
Agricultural business		—		—
Commercial business		73,517		84,361
Home equity		429,896		565,905
Consumer		150,545		106,159

Total	$	2,815,209	$	3,134,737

7.	INVESTMENTS

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

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
June 30, 2011:
U.S. government and agencies	$	14,155,117	$	224,807	$	(6,038	)	$	14,373,886
Mortgage-backed securities (government-sponsored enterprises - residential)		44,436,598		869,049		(81,863	)		45,223,784
Municipal bonds		43,009,377		1,325,899		(62,922	)		44,272,354
	$	101,601,092	$	2,419,755	$	(150,823	)	$	103,870,024

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

The amortized cost and fair value of available-for-sale securities at June 30, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
	Cost		Value
Within one year	$	590,424	$	593,387
One to five years		10,007,212		10,231,600
Five to ten years		24,723,091		25,423,249
After ten years		21,843,767		22,398,004
		57,164,494		58,646,240
Mortgage-backed securities (government-sponsored enterprises - residential)		44,436,598		45,223,784
	$	101,601,092	$	103,870,024

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $23,967,000 at June 30, 2011 and $26,629,000 at December 31, 2010.

The book value of securities sold under agreement to repurchase amounted to $4,153,000 at June 30, 2011 and $4,018,000 at December 31, 2010.

Gross gains of $109,000 and $344,000 and gross losses of $0 resulting from sales of available-for-sale securities were realized during the six months ended June 30, 2011 and 2010, respectively.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2011 was $17,634,000, which is approximately 17% of the Company’s available-for-sale investment portfolio.

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

The following table shows the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at June 30, 2011.

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

Municipal bonds	$	(62,922	)	$	5,694,614	$	-	$	-	$	(62,922	)	$	5,694,614
U.S. government and agencies		(6,038	)		993,962		-		-		(6,038	)		993,962
Subtotal		(68,960	)		6,688,576		-		-		(68,960	)		6,688,576

Mortgage-backed securities
(government sponsored enterprises - residential)		(81,863	)		10,945,721		-		-		(81,863	)		10,945,721

Total	$	(150,823	)	$	17,634,297	$	-	$	-	$	(150,823	)	$	17,634,297

The unrealized losses on the Company’s investments in municipal bonds, U.S. government and agencies, and mortgage-backed securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2011.

8.	ACCUMULATED OTHER COMPREHENSIVE INCOME

Other comprehensive income components and related taxes were as follows:

	June 30, 2011
Net unrealized gain on securities available-for-sale	$	2,606,636
Less reclassification adjustment for realized gains included in income		109,218
Other comprehensive income before tax effect		2,497,418
Tax expense		(849,122	)
Other comprehensive income	$	1,648,296

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

	June 30, 2011			December 31, 2010
Net unrealized gain on securities available-for-sale	$	2,268,932		$	(228,488	)
Tax effect		(771,438	)		77,686
Net-of-tax amount	$	1,497,494		$	(150,802	)

9.	DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

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

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

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

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

Level 3

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

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

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

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2011 and December 31, 2010:

					June 30, 2011
			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Fair Value		(Level 1)		(Level 2)		(Level 3)
U.S. Government and agencies	$	14,373,886	$	-	$	14,373,886	$	-
Mortgage-backed securities (Government sponsored enterprises - residential)		45,223,784		-		45,223,784		-
Municipal bonds		44,272,354		-		44,272,354		-

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

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

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

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

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method. Fair value adjustments were $(75,195) at June 30, 2011 and $(746,263) at December 31, 2010.

Mortgage Servicing Rights - The fair value used to determine the valuation allowance is estimated using discounted cash flow models. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. Fair value adjustments on mortgage servicing rights were $(17,328) at June 30, 2011 and $(7,547) at December 31, 2010.

Foreclosed Assets – Foreclosed assets consist primarily of real estate owned. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of the real estate owned or foreclosed asset could differ from the original estimate and are classified within Level 3 of the fair value hierarchy. Fair value adjustments on foreclosed assets were $91,855 at June 30, 2011 and $76,998 at December 31, 2010.

The following table presents the fair value measurement of assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2011 and December 31, 2010:

June 30, 2011

Fair Value Measurements Using

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans

(collateral dependent)

2,332,545

Mortgage servicing rights

793,680

Foreclosed assets

551,732

December 31, 2010

Fair Value Measurements Using

Quoted Prices

in Active

Significant

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Fair Value

(Level 1)

(Level 2)

(Level 3)

Impaired loans

(collateral dependent)

2,407,740

Mortgage servicing rights

797,327

Foreclosed assets

459,877

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

Cash and Cash Equivalents and Federal Home Loan Bank Stock - The carrying amount approximates fair value.

Other Investments - The carrying amount approximates fair value.

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

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

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

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

Federal Home Loan Bank Advances - Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market. If a quoted market price is not available, an expected present value technique is used to estimate fair value.

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

The following table presents estimated fair values of the Company’s financial instruments at June 30, 2011 and December 31, 2010:

	June 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets
Cash and cash equivalents	$	5,564,388	$	5,564,388	$	8,943,400	$	8,943,400
Available-for-sale securities		103,870,024		103,870,024		94,866,721		94,866,721
Other investments		122,010		122,010		130,049		130,049
Loans, held for sale		231,800		231,800		280,000		280,000
Loans, net of allowance for loan losses		174,719,202		173,556,376		176,442,118		175,436,281
Federal Home Loan Bank stock		1,113,800		1,113,800		1,113,800		1,113,800
Interest receivable		2,394,999		2,394,999		1,872,779		1,872,779
Financial Liabilities
Deposits		256,606,742		259,030,406		256,423,647		259,188,963
Short-term borrowings		4,153,462		4,153,462		4,018,235		4,018,235
Advances from borrowers for taxes and insurance		715,797		715,797		629,788		629,788
Interest payable		408,345		408,345		556,257		556,257
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		-		-		-		-
Letters of credit		-		-		-		-
Lines of credit		-		-		-		-

10.	FEDERAL HOME LOAN BANK STOCK

The Company owns $1,113,800 of Federal Home Loan Bank stock as of June 30, 2011. The Federal Home Loan Bank of Chicago (FHLB) is operating under a Cease and Desist Order from its regulator, the Federal Housing Finance Board. The order prohibits capital stock repurchases and redemptions until a time to be determined by the Federal Housing Finance Board. The FHLB will continue to provide liquidity and funding through advances. With regard to dividends, the FHLB will continue to assess its dividend capacity each quarter and make appropriate request for approval. The FHLB resumed paying dividends during the first quarter of 2011 at an annualized rate of 10 basis points per share. Management performed an analysis and deemed the cost method investment in FHLB stock is ultimately recoverable and therefore not impaired.

11.	MORTGAGE SERVICING RIGHTS

Activity in the balance of mortgage servicing rights, measured using the amortization method, for the six month period ending June 30, 2011 and the year ended December 31, 2010 was as follows:

	June 30, 2011			December 31, 2010
Balance, beginning of year	$	797,327		$	850,313
Servicing rights capitalized		43,759			257,316
Amortization of servicing rights		(64,734	)		(302,755	)
Change in valuation allowance		17,328			(7,547	)
Balance, end of period	$	793,680		$	797,327

Activity in the valuation allowance for mortgage servicing rights for the six month period ending June 30, 2011 and the year ended December 31, 2010 was as follows:

	June 30, 2011			December 31, 2010
Balance, beginning of year	$	163,989		$	156,442
Additions		-			165,651
Reductions		(17,328	)		(158,104	)
Balance, end of period	$	146,661		$	163,989

12.	INCOME TAXES

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense for the six months ended June 30, 2011 and 2010 is shown below.

	June 30, 2011			June 30, 2010
Computed at the statutory rate (34%)	$	772,274		$	231,057
Increase (decrease) resulting from
Tax exempt interest		(249,046	)		(199,349	)
State income taxes, net		135,251			33,180
Increase in cash surrender value		(27,063	)		(60,000	)
Other, net		406			(4,289	)

Actual tax expense	$	631,822		$	599

13.	COMMITMENTS AND CONTINGENCIES

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

JACKSONVILLE BANCORP, INC.

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

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

Forward Looking Statements

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

Critical Accounting Policies and Use of Significant Estimates

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

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

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

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

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

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

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

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

●

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

●

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

●

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

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

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

Financial Condition

June 30, 2011 Compared to December 31, 2010

Total assets increased by $3.4 million, or 1.1%, to $304.9 million at June 30, 2011 from $301.5 million at December 31, 2010. Net loans decreased $1.7 million, or 1.0%, to $174.7 million at June 30, 2011 from $176.4 million at December 31, 2010. The decrease in loan volume was due to low loan demand as a result of the current weakened economy, as well as normal loan repayments. Available-for-sale investment securities increased $5.8 million, or 10.9%, to $58.6 million at June 30, 2011 from $52.9 million at December 31, 2010. Mortgage-backed securities also increased $3.2 million, or 7.7%, to $45.2 million at June 30, 2011 from $42.0 million at December 31, 2010. The growth in investment securities and mortgage-backed securities was primarily due to the investment of funds from cash and cash equivalents and decreased loan volume. Cash and cash equivalents decreased $3.4 million to $5.6 million at June 30, 2011 from $8.9 million at December 31, 2010.

Total deposits increased $183,000 to $256.6 million at June 30, 2011. The mix of our deposits has changed during 2011 with an $11.9 million increase in transaction accounts, partially offset by an $11.7 million decrease in time deposits. Transaction accounts have continued to grow, and time deposits have declined, as customers have preferred to maintain short-term, liquid deposits in the current low interest rate environment. Deposit volumes have also benefitted from customers choosing the safety of insured deposits versus alternative investments. Other borrowings, which consisted of overnight repurchase agreements, increased $135,000 during this same time frame.

Stockholders’ equity increased $3.1 million, or 8.6%, to $38.7 million at June 30, 2011. The increase in stockholders’ equity was the result of $1.6 million in net income and $1.6 million in other comprehensive income, which was partially offset by the payment of $280,000 in cash dividends. Other comprehensive income consisted of the increase in net unrealized gains, net of tax, on available-for-sale securities reflecting changes in market prices for securities in our portfolio. Other comprehensive income does not include changes in the fair value of other financial instruments included on the balance sheet.

Results of Operations

Comparison of Operating Results for the Three Months Ended June 30, 2011 and 2010

General: Net income for the three months ended June 30, 2011 was $905,000, or $0.48 per common share, basic and diluted, compared to net income of $180,000, or $0.09 per common share, basic and diluted, for the three months ended June 30, 2010. The $725,000 increase in net income was due to an increase of $468,000 in net interest income and decreases of $700,000 in the provision for loan losses and $83,000 in non-interest expense, partially offset by a decrease of $49,000 in non-interest income and an increase of $477,000 in income taxes.

Interest Income: Total interest income for the three months ended June 30, 2011 increased $212,000, or 6.3%, to $3.6 million from $3.4 million for the same period of 2010. The increase in interest income reflected a $28,000 increase in interest income on loans, a $65,000 increase in interest income on investment securities, a $120,000 increase in interest income on mortgage-backed securities and a $1,000 decrease in other interest-earning assets.

Interest income on loans increased $28,000 to $2.7 million for the second quarter of 2011 primarily due to an increase in the average balance of loans. The average balance of the loan portfolio increased $1.2 million to $177.5 million for the second quarter of 2011. The increase in the average balance of the loan portfolio reflected an increase in the average balance of commercial and agricultural real estate loans during the second quarter of 2011 compared to the second quarter of 2010. The average yield on loans increased to 6.11% during the second quarter of 2011 from 6.09% during the second quarter of 2010.

Interest income on investment securities increased $65,000 to $516,000 for the second quarter of 2011 from $451,000 for the second quarter of 2010. The increase reflected a $6.1 million increase in the average balance of the investment securities portfolio to $57.6 million during the second quarter of 2011, compared to $51.5 million for the second quarter of 2010. The increase in the average balance of investment securities reflected the investment of funds from the capital raised during our 2010 second step offering and the lack of corresponding loan demand. The average yield of investment securities increased to 3.59% during the second quarter of 2011 from 3.51% during the second quarter of 2010. The average yield does not reflect the benefit of the higher tax-equivalent yield of our municipal bonds, which is reflected in income tax expense.

Interest income on mortgage-backed securities increased $120,000 to $367,000 for the second quarter of 2011, compared to $247,000 for the second quarter of 2010. The increase was mostly due to a $12.4 million increase in the average balance of mortgage-backed securities to $45.8 million during the second quarter of 2011 from $33.4 million during the second quarter of 2010. The increase in the average balance of mortgage-backed securities also reflected the investment of funds from the capital raised during our 2010 second step offering. The increase in interest income on mortgage-backed securities also reflected a 25 basis point increase in the average yield of mortgage-backed securities to 3.20% for the second quarter of 2011, compared to 2.95% for the second quarter of 2010. The average yield benefitted from reduced premium amortization resulting from slower national prepayment speeds on mortgage-backed securities. The amortization of premiums on mortgage-backed securities, which reduces the average yield, decreased $71,000 to $66,000 during the second quarter of 2011, compared to $137,000 during the second quarter of 2010.

Interest income on other interest-earning assets, which consisted of interest-earning deposit accounts and federal funds sold, decreased $1,000 during the second quarter of 2011. The average yield on other interest-earning assets decreased to 0.04% during the second quarter of 2011 from 0.14% during the second quarter of 2010. The average balance of these accounts increased $400,000 to $6.4 million for the three months ended June 30, 2011 compared to $6.0 million for the three months ended June 30, 2010.

Interest Expense: Total interest expense decreased $256,000, or 25.4%, to $752,000 for the three months ended June 30, 2011 compared to $1.0 million for the three months ended June 30, 2010. The lower interest expense was due to a $259,000 decrease in the cost of deposits, partially offset by a $3,000 increase in the cost of borrowed funds.

Interest expense on deposits decreased $259,000 to $747,000 for the second quarter of 2011 compared to $1.0 million for the second quarter of 2010. The decrease in interest expense on deposits was primarily due to a 47 basis point decrease in the average rate paid on deposits to 1.26% during the second quarter of 2011 from 1.73% during the second quarter of 2010. The decrease reflected ongoing low short-term market interest rates during 2011. The decrease in the average rate paid was partially offset by a $4.1 million increase in the average balance of deposits to $237.4 million for the second quarter of 2011. The increase was primarily due to a $5.5 million increase in the average balance of transaction accounts.

Interest paid on borrowed funds increased $3,000 to $5,000 for the second quarter of 2011 due to an increase in the average balance and cost of borrowings. The average balance of borrowed funds increased to $4.9 million during the second quarter of 2011 compared to $3.0 million during the same period of 2010. The average rate paid on borrowed funds increased to 0.43% during the second quarter of 2011 compared to 0.33% during the second quarter of 2010.

Net Interest Income. As a result of the changes in interest income and interest expense noted above, net interest income increased by $468,000, or 19.7%, to $2.8 million for the three months ended June 30, 2011 from $2.4 million for the three months ended June 30, 2010. Our interest rate spread increased by 40 basis points to 3.76% during the second quarter of 2011 from 3.36% during the second quarter of 2010. Our net interest margin increased 40 basis points to 3.96% for the second quarter of 2011 from 3.56% for the first quarter of 2010. Our net interest income continues to benefit from a steeper than normal yield curve. Low short-term market interest rates have resulted in our cost of funds decreasing faster than the yield on our loans.

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 provision for loan losses totaled $150,000 during the second quarter of 2011, compared to $850,000 during the second quarter of 2010. The decrease in the provision for loan losses reflected a lower level of net charge-offs. Net charge-offs decreased $877,000 to a net recovery of $132,000 during the second quarter of 2011, compared to net charge-offs of $745,000 during the second quarter of 2010.

While the level of charge-offs decreased during 2011 compared to 2010, the historically higher level of charge-offs for both years have resulted in an increase in our average loss factors. The higher level of charge-offs was concentrated in our commercial and commercial real estate portfolios, and have contributed to the higher balance of the allowance for loan losses. The allowance for loan losses increased $501,000 to $3.2 million at June 30, 2011 from $2.7 million at June 30, 2010. Loans delinquent 30 days or more decreased $2.1 million to $1.9 million, or 1.07% of total loans, as of June 30, 2011, from $4.0 million, or 2.24% of total loans, as of December 31, 2010. Loans delinquent 30 days or more totaled $4.1 million, or 2.33% of total loans at June 30, 2010.

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

	June 30, 2011			December 31, 2010

Non-accruing loans:
One-to-four family residential	$	831,511		$	1,019,252
Commercial real estate		1,329,740			1,359,060
Commercial business		73,517			84,361
Home equity		429,896			565,905
Consumer		150,545			106,159
Total	$	2,815,209		$	3,134,737

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

Foreclosed assets:
One-to-four family residential	$	121,200		$	207,412
Commercial real estate		430,532			252,465
Total	$	551,732		$	459,877

Total nonperforming assets	$	3,368,270		$	3,594,614

Total as a percentage of total assets		1.10	%		1.19	%

Nonperforming assets decreased $226,000 to $3.4 million, or 1.10% of total assets, as of June 30, 2011, compared to $3.6 million, or 1.19% of total assets, as of December 31, 2010. The decrease in nonperforming assets was due to a $320,000 decrease in nonperforming loans, partially offset by a $92,000 increase in real estate owned. Nonperforming loans decreased to $2.8 million as of June 30, 2011, from $3.1 million at December 31, 2010. The decrease in nonperforming loans primarily reflected the transfer of $399,000 of loans into real estate owned.

The following table shows the aggregate principal amount of potential problem credits on the Company’s watch list at June 30, 2011 and December 31, 2010. All non-accruing loans are automatically placed on the watch list. The decrease in Substandard credits reflected $682,000 in transfers to real estate owned and write-offs and $412,000 in credits upgraded to Special Mention.

	June 30, 2011		December 31, 2010

Special Mention credits	$	4,613,936	$	3,942,607
Substandard credits		5,651,846		6,975,081
Total watch list credits	$	10,265,782	$	10,917,688

Non-Interest Income: Non-interest income decreased $49,000, or 4.8%, to $975,000 for the three months ended June 30, 2011 from $1.0 million for the same period in 2010. The decrease in non-interest income resulted primarily from decreases of $148,000 in gains on the sale of available-for-sale securities, $21,000 in service charges on deposits, and $19,000 in income from mortgage banking operations, partially offset by increases of $134,000 in commission income and $15,000 in income from fiduciary activities. The decrease in gains on the sale of securities reflected a lower volume of sales during the second quarter of 2011. Service charges on deposits decreased primarily due to a lower volume of insufficient fund fees during this same period. The decrease in mortgage banking income was due to a lower volume of loan sales in 2011 due to a lower volume of mortgage originations, which are affected by changes in market interest rates. The increase in commission income and fiduciary activities reflected improved market conditions and growth in customer accounts.

Non-Interest Expense: Total non-interest expense decreased $83,000 to $2.4 million for the three months ended June 30, 2011 from $2.5 million for the same period of 2010. The decrease in non-interest expense consisted mainly of decreases of $166,000 in the impairment of mortgage servicing rights, $48,000 in FDIC insurance premiums, and $64,000 in other expense, partially offset by increases of $164,000 in compensation and benefits expense and $23,000 in data processing and telecommunications expense. The decrease in the impairment of mortgage servicing rights was due to a $166,000 impairment charge taken during the second quarter of 2010. FDIC insurance premiums have benefitted from reduced premium rates effective for the second quarter of 2011. The reduction in other expense was primarily due to a decrease of $41,000 in real estate owned expenses, which benefitted by an increase of $36,000 in gains on the sale of real estate owned during the second quarter of 2011 compared to the second quarter of 2010. The increase in compensation and benefits expense resulted from normal salary and benefit cost increases, higher commissions, and expenses related to funding of benefit plans. Data processing and telecommunications expense increased due to expenses related to an ongoing upgrade of our network and telecommunications equipment.

Income Taxes: The provision for income taxes increased $477,000 to $368,000 during the second quarter of 2011 compared to the same period of 2010. The increase in the income tax provision reflected an increase in taxable income due to higher income levels, as well as higher state tax rates, partially offset by an increase in tax-exempt income. The effective tax rate was 28.93% and (151.55)% during the three months ended June 30, 2011 and 2010, respectively.

Comparison of Operating Results for the Six Months Ended June 30, 2011 and 2010

General: Net income for the six months ended June 30, 2011 was $1.6 million, or $0.87 per common share, basic and diluted, compared to net income of $679,000, or $0.35 per common share, basic and diluted, for the six months ended June 30, 2010. The $961,000 increase in net income was due to an increase of $907,000 in net interest income and a decrease of $800,000 in provision for loan losses, partially offset by a decrease of $15,000 in non-interest income and increases of $100,000 in non-interest expense and $631,000 in income taxes.

Interest Income: Total interest income for the six months ended June 30, 2011 increased $400,000, or 6.1%, to $7.0 million from $6.6 million for the same period of 2010. The increase in interest income reflected a $12,000 increase in interest income on loans, a $151,000 increase in interest income on investment securities, a $239,000 increase in interest income on mortgage-backed securities and a $2,000 decrease in other interest-earning assets.

Interest income on loans increased $12,000 to $5.4 million for the first half of 2011 due to an increase in the average balance of loans, partially offset by a decrease in the average yield on loans. The average balance of the loan portfolio increased $2.8 million to $178.3 million for the first six months of 2011. The increase in the average balance of the loan portfolio was primarily due to an increase in the average balance of commercial and agricultural real estate loans. The average yield on loans decreased to 6.02% during the first six months of 2011 from 6.10% during the first six months of 2010. The decrease primarily reflected the low interest rate environment.

Interest income on investment securities increased $151,000 to $1.0 million for the first half of 2011 from $851,000 for the first half of 2010. The increase reflected a $10.9 million increase in the average balance of the investment securities portfolio to $56.8 million during the first six months of 2011, compared to $45.9 million for the first six months of 2010. The increase in the average balance of investment securities was primarily due to the investment of funds from the capital raised during our 2010 second step offering and the lack of corresponding loan demand. The average yield of investment securities decreased to 3.53% during the first six months of 2011 from 3.71% for the first six months of 2010 due to purchases of newer securities at lower interest rates. The average yield does not reflect the benefit of the higher tax-equivalent yield of our municipal bonds, which is reflected in income tax expense.

Interest income on mortgage-backed securities increased $239,000 to $647,000 for the first half of 2011, compared to $408,000 for the first half of 2010. The increase reflected a 67 basis point increase in the average yield of mortgage-backed securities to 2.93% for the first six months of 2011, compared to 2.26% for the first six months of 2010. The average yield on mortgage-backed securities has benefitted from reduced premium amortization resulting from slower national prepayment speeds on mortgage-backed securities. The amortization of premiums on mortgage-backed securities, which reduces the average yield, decreased $270,000 to $196,000 during first half of 2011, compared to $466,000 during the first half of 2010. Interest income on mortgage-backed securities also benefitted from an $8.0 million increase in the average balance of mortgage-backed securities to $44.2 million during the first half of 2011 due to the investment of funds from the capital raised during our 2010 second step offering.

Interest income on other interest-earning assets, which consisted of interest-earning deposit accounts and federal funds sold, decreased $2,000 to $2,000 during the first half of 2011 primarily due to a decrease in the average yield. The average yield on other interest-earning assets decreased to 0.07% during the first six months of 2011 from 0.12% during the first six months of 2010. The average balance of these accounts also decreased $1.3 million to $6.4 million for the six months ended June 30, 2011 compared to $7.7 million for the six months ended June 30, 2010.

Interest Expense: Total interest expense decreased $507,000, or 24.6%, to $1.6 million for the six months ended June 30, 2011 compared to $2.1 million for the six months ended June 30, 2010. The lower interest expense was due to a $512,000 decrease in the cost of deposits, partially offset by a $5,000 increase in the cost of borrowed funds.

Interest expense on deposits decreased $512,000 to $1.5 million for the six months ended June 30, 2011 compared to $2.1 million for the six months ended June 30, 2010. The decrease in interest expense on deposits was primarily due to a 47 basis point decrease in the average rate paid to 1.30% during the first half of 2011 from 1.77% during the first half of 2010. The decrease reflected low short-term market interest rates which continued during 2011. The decrease in the average rate paid was partially offset by a $4.3 million increase in the average balance of deposits to $237.5 million for the first half of 2011, compared to $233.2 million for the first half of 2010.

Interest paid on borrowed funds increased $5,000 to $10,000 for the first half of 2011 due to increases in the average cost and in the average balance of borrowings. The average rate paid on borrowed funds increased to 0.47% during the first six months of 2011 compared to 0.30% during the first six months of 2010. The average balance of borrowed funds also increased to $4.2 million during the first six months of 2011 compared to $3.1 million during the same period of 2010.

Net Interest Income. As a result of the changes in interest income and interest expense noted above, net interest income increased by $907,000, or 19.9%, to $5.5 million for the six months ended June 30, 2011 from $4.6 million for the six months ended June 30, 2010. Our interest rate spread increased by 38 basis points to 3.62% during the first half of 2011 from 3.24% during the first half of 2010. Our net interest margin increased 39 basis points to 3.82% for the first half of 2011 from 3.43% for the first half of 2010. Our net interest income continues to benefit from a steeper than normal yield curve. Low short-term market interest rates have resulted in our cost of funds decreasing faster than the yield on our loans.

	Six Months Ended
	June 30, 2011		June 30, 2010

Balance at beginning of period	$	2,964,285	$	2,290,001
Charge-offs:
One-to-four family residential		32,211		21,046
Commercial real estate		260,785		718,806
Home equity		4,162		52,948
Consumer		1,097		6,062
Total		298,255		798,862
Recoveries:
One-to-four family residential		-		20,941
Commercial real estate		8,842		4,288
Commercial business		153,809		-
Home equity		5,142		11,424
Consumer		2,003		6,813
Total		169,796		43,466
Net loan charge-offs		128,459		755,396
Additions charged to operations		325,000		1,125,000
Balance at end of period	$	3,160,826	$	2,659,605

The allowance for loan losses increased $501,000 to $3.2 million at June 30, 2011, from $2.7 million at June 30, 2010. The increase was the result of the provision for loan losses exceeding net charge-offs. The provision decreased $800,000 to $325,000 during the first six months of 2011, compared to $1.1 million during the first six months of 2010. Net charge-offs decreased $627,000 to $128,000 during the first half of 2011, compared to $755,000 during the first half of 2010. The decrease in the provision during 2011 reflected the lower level of charge-offs. While the level of charge-offs decreased during 2011 compared to 2010, the historically higher level of charge-offs for both years have resulted in an increase in our average loss factors. The higher level of charge-offs was concentrated in our commercial and commercial real estate loan portfolios, and have contributed to the higher balance of the allowance for loan losses.

Non-Interest Income: Non-interest income decreased $15,000, or 0.8%, to $2.0 million for the six months ended June 30, 2011. The decrease in non-interest income resulted primarily from decreases of $235,000 in gains on the sale of available-for-sale securities, $59,000 in net income from mortgage banking operations, and $33,000 in service charges on deposits, partially offset by increases of $286,000 in commission income and $33,000 in income from fiduciary activities. The decrease in mortgage banking operations income was due to a lower volume of loan sales in 2011, as we sold $7.5 million of loans to the secondary market during the first half of 2011, compared to $10.9 million during the same period of 2010. The lower volume of sales reflected a lower volume of mortgage originations, which are affected by changes in market interest rates. The decrease in gains on the sale of securities reflected a lower volume of sales during 2011. Service charges on deposits decreased primarily due to a lower volume of insufficient fund fees during 2011. The increase in commission income and fiduciary activities reflected improved market conditions and growth in customer accounts.

Non-Interest Expense: Total non-interest expense increased $100,000, or 2.1%, to $4.8 million for the six months ended June 30, 2011 from $4.7 million for the same period of 2010. The increase in non-interest expense consisted mainly of increases of $304,000 in compensation and benefits expense and $52,000 in data processing and telecommunications, partially offset by decreases of $166,000 in the impairment of mortgage servicing rights, $54,000 in FDIC insurance premiums, and $46,000 in other expense. The increase in compensation and benefits expense resulted from normal salary and benefit cost increases, higher commissions, and expenses related to funding of benefit plans. Data processing and telecommunications expense increased due to expenses related to an ongoing upgrade of our network and telecommunications equipment. The decrease in the impairment of mortgage servicing rights was due to a $166,000 impairment charge taken during the second quarter of 2010. FDIC insurance premiums have benefitted from reduced premium rates effective for the second quarter of 2011. The reduction in other expense was primarily due to a decrease of $50,000 in real estate owned expenses, which benefitted from $31,000 in gains on the sale of real estate owned during the first six months of 2011 compared to $30,000 in losses on the sale of real estate owned during the same period of 2010.

Income Taxes: The provision for income taxes increased $631,000 to $632,000 during the first six months of 2011 compared to $1,000 during the same period of 2010. The increase in the income tax provision reflected an increase in taxable income due to higher income as well as higher state tax rates, partially offset by an increase in the benefit of tax-exempt income. The effective tax rate was 27.82% and 0.09% during the six months ended June 30, 2011 and 2010, respectively.

Liquidity and Capital Resources

The Company’s most liquid assets are cash and cash equivalents. The levels of these assets are dependent on the Company’s operating, financing, and investing activities. At June 30, 2011 and December 31, 2010, cash and cash equivalents totaled $5.6 million and $8.9 million, respectively. The Company’s primary sources of funds include principal and interest repayments on loans (both scheduled payments and prepayments), maturities of investment securities and principal repayments from mortgage-backed securities (both scheduled payments and prepayments). During the past six months, the most significant sources of funds have been calls and sales of investment securities, and principal repayments on loans and mortgage-backed securities. These funds have been used primarily for purchases of U.S. Agency, municipal and mortgage-backed securities.

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

Liquidity management is both a short- and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) projected purchases of investment and mortgage-backed securities, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits, and (v) liquidity of its asset/liability management program. Excess liquidity is generally invested in interest-earning overnight deposits and other short-term U.S. agency obligations. If the Company requires funds beyond its ability to generate them internally, it has the ability to borrow funds from the FHLB. The Company may borrow from the FHLB under a blanket agreement which assigns all investments in FHLB stock as well as qualifying first mortgage loans equal to 150% of the outstanding balance as collateral to secure the amounts borrowed. This borrowing arrangement is limited to a maximum of 30% of the Company’s total assets or twenty times the balance of FHLB stock held by the Company. At June 30, 2011, the Company had no outstanding FHLB advances and approximately $22.3 million available to it under the above-mentioned borrowing arrangement.

The Company maintains minimum levels of liquid assets as established by the Board of Directors. The Company’s liquidity ratios at June 30, 2011 and December 31, 2010 were 36.8% and 34.2%, respectively. This ratio represents the volume of short-term liquid assets as a percentage of net deposits and borrowings due within one year.

The Company must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments. The Company anticipates that it will have sufficient funds available to meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed above. The following table summarizes these commitments at June 30, 2011 and December 31, 2010.

	June 30, 2011		December 31, 2010
	(In thousands)
Commitments to fund loans	$	38,302	$	36,871
Standby letters of credit		401		453

Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined). Management believes that at June 30, 2011, the Company met all its capital adequacy requirements.

Under Illinois law, Illinois-chartered savings banks are required to maintain a minimum core capital to total assets ratio of 3%. The Illinois Commissioner of Savings and Residential Finance (the “Commissioner”) is authorized to require a savings bank to maintain a higher minimum capital level if the Commissioner determines that the savings bank’s financial condition or history, management or earnings prospects are not adequate. If a savings bank’s core capital ratio falls below the required level, the Commissioner may direct the savings bank to adhere to a specific written plan established by the Commissioner to correct the savings bank’s capital deficiency, as well as a number of other restrictions on the savings bank’s operations, including a prohibition on the declaration of dividends by the savings bank’s board of directors. At June 30, 2011, the Bank’s core capital ratio was 9.75% of total average assets, which substantially exceeded the required amount.

The Bank is also required to maintain regulatory capital requirements imposed by the Federal Deposit Insurance Corporation. The Bank must have: (i) Tier 1 Capital to Average Assets of 4.0%, (ii) Tier 1 Capital to Risk-Weighted Assets of 4.0%, and (iii) Total Capital to Risk-Weighted Assets of 8.0%. At June 30, 2011, minimum requirements and the Bank’s actual ratios are as follows:

	June 30, 2011			December 31, 2010			Minimum
	Actual			Actual			Required
Tier 1 Capital to Average Assets		9.75	%		9.25	%		4.00	%
Tier 1 Capital to Risk-Weighted Assets		14.40	%		13.52	%		4.00	%
Total Capital to Risk-Weighted Assets		15.66	%		14.77	%		8.00	%

Effect of Inflation and Changing Prices

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

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

Consolidated Average Balance Sheet and Interest Rates
(Dollars in thousands)
	Three Months Ended June 30,
	2011							2010
	Average							Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost

Interest-earnings assets:
Loans	$	177,544	$	2,711		6.11	%	$	176,297	$	2,683		6.09	%
Investment securities		57,588		516		3.59	%		51,474		452		3.51	%
Mortgage-backed securities		45,825		367		3.20	%		33,413		247		2.95	%
Other		6,371		1		0.04	%		5,967		2		0.14	%
Total interest-earning assets		287,328		3,595		5.01	%		267,151		3,384		5.07	%

Non-interest earnings assets		19,911							22,134
Total assets	$	307,239						$	289,285

Interest-bearing liabilities:
Deposits	$	237,385	$	747		1.26	%	$	233,265	$	1,006		1.73	%
Other borrowings		4,880		5		0.43	%		2,971		3		0.33	%
Total interest-bearing liabilities		242,265		752		1.24	%		236,236		1,009		1.71	%

Non-interest bearing liabilities		27,614							27,223
Stockholders’ equity		37,360							25,826

Total liabilities/stockholders’ equity	$	307,239						$	289,285

Net interest income			$	2,843						$	2,375

Interest rate spread (average yield earned
minus average rate paid)						3.76	%						3.36	%

Net interest margin (net interest income
divided by average interest-earning assets)						3.96	%						3.56	%

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 June 30,
	2011 Compared to 2010
	Increase(Decrease) Due to
	Rate			Volume		Net

Interest-earnings assets:
Loans	$	9		$	19	$	28
Investment securities		10			55		65
Mortgage-backed securities		22			98		120
Other		(1	)		-		(1	)
Total net change in income on
interest-earning assets		40			172		212

Interest-bearing liabilities:
Deposits		(277	)		18		(259	)
Other borrowings		1			2		3
Total net change in expense on
interest-bearing liabilities		(276	)		20		(256	)

Net change in net interest income	$	316		$	152	$	468

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

Consolidated Average Balance Sheet and Interest Rates
(Dollars in thousands)
	Six Months Ended June 30,
	2011							2010
	Average							Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost

Interest-earnings assets:
Loans	$	178,347	$	5,367		6.02	%	$	175,585	$	5,355		6.10	%
Investment securities		56,834		1,002		3.53	%		45,880		851		3.71	%
Mortgage-backed securities		44,172		647		2.93	%		36,133		408		2.26	%
Other		6,397		2		0.07	%		7,662		4		0.12	%
Total interest-earning assets	��	285,750		7,018		4.91	%		265,260		6,618		4.99	%

Non-interest earnings assets		20,141							22,285
Total assets	$	305,891						$	287,545

Interest-bearing liabilities:
Deposits	$	237,535	$	1,547		1.30	%	$	233,212	$	2,059		1.77	%
Other borrowings		4,160		10		0.47	%		3,078		4		0.30	%
Total interest-bearing liabilities		241,695		1,557		1.29	%		236,290		2,063		1.75	%

Non-interest bearing liabilities		27,435							25,429
Stockholders’ equity		36,761							25,826

Total liabilities/stockholders’ equity	$	305,891						$	287,545

Net interest income			$	5,461						$	4,555

Interest rate spread (average yield earned
minus average rate paid)						3.62	%						3.24	%

Net interest margin (net interest income
divided by average interest-earning assets)						3.82	%						3.43	%

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)
Six Months Ended June 30,
	2011 Compared to 2010
	Increase(Decrease) Due to
	Rate			Volume		Net

Interest-earnings assets:
Loans	$	(71	)	$	83	$	12
Investment securities		(44	)		195		151
Mortgage-backed securities		137			102		239
Other		(2	)		-		(2	)
Total net change in income on
interest-earning assets		20			380		400

Interest-bearing liabilities:
Deposits		(549	)		37		(512	)
Other borrowings		3			2		5
Total net change in expense on
interest-bearing liabilities		(546	)		39		(507	)

Net change in net interest income	$	566		$	341	$	907

JACKSONVILLE BANCORP, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

The following table shows projected results at June 30, 2011 and December 31, 2010 of the impact on net interest income from an immediate change in interest rates, as well as the benchmarks established by the ALCO. The results are shown as a dollar and percentage change in net interest income over the next twelve months.

	Change in Net Interest Income
	(Dollars in thousands)
	June 30, 2011						December 31, 2010						ALCO
Rate Shock:	$ Change			% Change			$ Change			% Change			Benchmark
+ 200 basis points		(38	)		-0.31	%		64		0.57		%		> (20.00	)%
+ 100 basis points		62			0.52	%		134			1.19	%		> (12.50	)%
- 100 basis points		(40	)		-0.33	%		(36	)		-0.32	%		> (12.50	)%
- 200 basis points		(359	)		-2.98	%		(385	)		-3.42	%		> (20.00	)%

The table above indicates that as of June 30, 2011, in the event of a 200 basis point increase in interest rates, we would experience a 0.31% decrease in net interest income. In the event of a 100 basis point decrease in interest rates, we would experience a 0.33% 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 Rule 13(a)-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by Rule 13(a)-15(e) that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

At June 30, 2011, the Company is not involved in any pending legal proceedings other than non-material legal proceedings undertaken in the normal course of business.

Item 1.A. Risk Factors

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

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Removed and Reserved

Item 5. Other Information

None.

Item 6. Exhibits

31.1 - Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

31.2 - Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

32.1 - Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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: 08/08/2011		/s/ Richard A. Foss
		Richard A. Foss
		President and Chief Executive Officer

		/s/ Diana S. Tone
		Diana S. Tone
		Chief Financial Officer

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Jacksonville Bancorp Inactive 10-Q2011 Q2 Quarterly report

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