Jacksonville Bancorp 10Q 2016 Q1 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 endedMarch 31, 2016

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

Commission File Number001-34821

Jacksonville Bancorp, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

x Yes ¨No

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

x Yes ¨No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

¨ Large Accelerated Filer	¨ Accelerated Filer
¨ 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).

¨ Yes x No

As of May 1, 2016, there were 1,796,323 shares of the Registrant’s common stock issued and outstanding.

JACKSONVILLE BANCORP, INC.

FORM 10-Q

March 31, 2016

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets	1

	Condensed Consolidated Statements of Income	2

	Condensed Consolidated Statements of Comprehensive Income	3

	Condensed Consolidated Statement of Stockholders’ Equity	4

	Condensed Consolidated Statements of Cash Flows	5

	Notes to the Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49

Item 4.	Controls and Procedures	51

PART II	OTHER INFORMATION	52

Item 1.	Legal Proceedings	52
Item 1.A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	53

	Signatures	54

EXHIBITS

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

PART I – FINANCIAL INFORMATION

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2016			2015
ASSETS	(Unaudited)
Cash and cash equivalents	$	7,442,323		$	4,103,432
Interest-earning time deposits in banks		2,724,000			2,724,000
Investment securities - available for sale		61,724,702			64,294,937
Mortgage-backed securities - available for sale		20,673,085			23,178,395
Federal Home Loan Bank stock		1,113,800			1,113,800
Other investment securities		60,007			62,223
Loans held for sale - net		112,449			539,000
Loans receivable - net of allowance for loan losses of $2,934,691 and $2,919,594 as of March 31, 2016 and December 31, 2015		188,691,035			193,039,879
Premises and equipment - net		4,645,944			4,728,157
Cash surrender value of life insurance		7,138,566			7,093,640
Accrued interest receivable		1,851,308			1,715,676
Goodwill		2,726,567			2,726,567
Capitalized mortgage servicing rights, net of valuation allowance of $44,028 and $47,354 as of March 31, 2016 and December 31, 2015		591,590			597,713
Real estate owned		304,280			330,981
Deferred income taxes		1,503,983			1,583,067
Other assets		773,019			811,007

Total Assets	$	302,076,658		$	308,642,474

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits	$	243,908,970		$	239,281,930
Other borrowings		3,946,947			15,131,710
Advance payments by borrowers for taxes and insurance		1,511,505			990,917
Accrued interest payable		106,747			118,335
Deferred compensation payable		4,543,138			4,492,594
Income taxes payable		28,001			49,291
Dividends payable		179,201			1,934,834
Other liabilities		1,325,779			1,076,363
Total liabilities		255,550,288			263,075,974

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 1,792,013 shares as of March 31, 2016 and 1,791,513 as of December 31, 2015		17,920			17,915
Additional paid-in-capital		13,704,026			13,664,914
Retained earnings		31,980,207			31,305,040
Less: Unallocated ESOP shares		(205,730	)		(211,710	)
Accumulated other comprehensive income		1,029,947			790,341
Total stockholders' equity		46,526,370			45,566,500

Total Liabilities and Stockholders' Equity	$	302,076,658		$	308,642,474

See accompanying notes to the condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended
	March 31,
	2016		2015
	(Unaudited)
INTEREST INCOME:
Loans	$	2,328,778	$	2,343,354
Investment securities		435,831		380,823
Mortgage-backed securities		130,303		172,367
Other		14,223		4,948
Total interest income		2,909,135		2,901,492

INTEREST EXPENSE:
Deposits		241,850		308,927
Other borrowings		7,059		5,123
Total interest expense		248,909		314,050

NET INTEREST INCOME		2,660,226		2,587,442

PROVISION FOR LOAN LOSSES		30,000		30,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		2,630,226		2,557,442

NON-INTEREST INCOME:
Fiduciary activities		80,004		78,626
Commission income		348,565		308,113
Service charges on deposit accounts		167,187		156,436
Mortgage banking operations, net		25,272		42,940
Net realized gains on sales of available-for-sale securities		101,561		133,216
Loan servicing fees		84,526		87,480
ATM and bank card interchange income		160,646		152,739
Other		71,314		104,380
Total non-interest income		1,039,075		1,063,930

NON-INTEREST EXPENSE:
Salaries and employee benefits		1,702,139		1,638,242
Occupancy and equipment		256,941		255,393
Data processing and telecommunications		136,613		147,647
Professional		55,836		45,736
Postage and office supplies		64,635		55,110
Deposit insurance premium		37,267		38,547
ATM and bank card expense		87,649		85,058
Other		191,482		278,528
Total non-interest expense		2,532,562		2,544,261

INCOME BEFORE INCOME TAXES		1,136,739		1,077,111
INCOME TAXES		309,361		290,854

NET INCOME	$	827,378	$	786,257

NET INCOME PER COMMON SHARE - BASIC	$	0.47	$	0.44
NET INCOME PER COMMON SHARE - DILUTED	$	0.46	$	0.44

See accompanying notes to the condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended
	March 31,
	2016		2015
	(Unaudited)

Net Income	$	827,378	$	786,257

Other Comprehensive Income
Unrealized appreciation on available-for-sale securities, net of taxes of $157,965 and $298,922 for 2016 and 2015, respectively.		306,636		580,261
Less: reclassification adjustment for realized gains included in net income, net of taxes of $34,531 and $45,293, for 2016 and 2015, respectively.		67,030		87,923
		239,606		492,338

Comprehensive Income	$	1,066,984	$	1,278,595

See accompanying notes to condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

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

BALANCE, DECEMBER 31, 2015	$	17,915	$	13,664,914	$	31,305,040		$	(211,710	)	$	790,341	$	45,566,500

Net Income		-		-		827,378			-			-		827,378

Other comprehensive income		-		-		-			-			239,606		239,606

Exercise of stock options		5		7,820		-			-			-		7,825
Stock-based compensation expense		-		22,232		-			-			-		22,232

Shares held by ESOP, commited to be released		-		9,060		-			5,980			-		15,040

Dividends ($0.10 per share)		-		-		(152,211	)		-			-		(152,211	)

BALANCE, MARCH 31, 2016	$	17,920	$	13,704,026	$	31,980,207		$	(205,730	)	$	1,029,947	$	46,526,370

See accompanying notes to condensed consolidated financial statements.

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	March 31,
	2016			2015
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	827,378		$	786,257
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion:
Premises and equipment		96,152			97,750
Amortization of investment and loan premiums and discounts, net		102,572			169,629
Net realized gains on sales of available-for-sale securities		(101,561	)		(133,216	)
Provision for loan losses		30,000			30,000
Mortgage banking operations, net		(25,272	)		(42,940	)
Shares held by ESOP committed to be released		15,040			13,047
Stock-based compensation expense		22,232			22,232
Changes in income taxes payable		(21,290	)		41,641
Changes in assets and liabilities		60,922			(170,838	)
Net cash provided by operations before loan sales		1,006,173			813,562
Origination of loans for sale to secondary market		(2,239,822	)		(4,300,964	)
Proceeds from sales of loans to secondary market		2,697,768			3,701,856
Net cash provided by operating activities		1,464,119			214,454

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment and mortgage-backed securities		(10,323,462	)		(9,188,892	)
Purchases of interest-earning time deposits in banks		-			(1,233,000	)
Maturity or call of investment securities available-for-sale		500,000			1,000,000
Sale of investment securities available-for-sale		13,864,755			14,482,743
Principal payments on mortgage-backed and investment securities		1,398,367			1,531,221
Proceeds from sales of real estate owned		29,633			47,085
Net change in loans		4,356,573			(83,890	)
Additions to premises and equipment		(13,939	)		(25,935	)

Net cash provided by investing activities		9,811,927			6,529,332

(Continued)

JACKSONVILLE BANCORP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

	Three Months Ended
	March 31,
	2016			2015
	(Unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits	$	4,627,040		$	(1,984,414	)
Net decrease in other borrowings		(11,184,764	)		(4,993,607	)
Increase in advance payments by borrowers for taxes and insurance		520,588			393,868
Exercise of stock options		7,825			31,300
Stock repurchase		-			(31,280	)
Dividends paid - common stock		(1,907,844	)		(141,709	)

Net cash used in financing activities		(7,937,155	)		(6,725,842	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		3,338,891			17,944

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		4,103,432			9,611,638

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	7,442,323		$	9,629,582

ADDITIONAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest on deposits	$	251,948		$	321,722
Interest on other borrowings		8,549			5,140
Income taxes paid		375,000			250,000

NONCASH INVESTING AND FINANCING ACTIVITIES:
Real estate acquired in settlement of loans	$	42,400		$	-
Loans to facilitate sales of real estate owned		80,000			-

See accompanying notes to condensed consolidated financial statements

JACKSONVILLE BANCORP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

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

In the opinion of management, the preceding unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary 1) for a fair presentation and 2) to make the financial statements not misleading as to the financial condition of the Company as of March 31, 2016, and the results of its operations for the three month periods ended March 31, 2016 and 2015. The results of operations for the three month periods are not necessarily indicative of the results which may be expected for the entire year. The condensed consolidated balance sheet of the Company as of December 31, 2015 has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2015 filed as an exhibit to the Company’s Form 10-K filed in March, 2016. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP), the requirements of Form 10-Q, and to prevailing practices within the industry.

Certain amounts included in the 2015 consolidated statements have been reclassified to conform to the 2016 presentation.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The update provides a five-step revenue recognition model for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts are included in the scope of other standards). The guidance requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and must be applied either retrospectively or using the modified retrospective approach. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date, which provides a one-year deferral of ASU 2014-09. Management is evaluating the new guidance, but does not expect the adoption of this guidance to have a material impact on the Company’s consolidated financial statements. Early adoption would be permitted, but not before the original public entity effective date.

In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing agreement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU No. 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company’s current method of accounting for fees paid in a cloud computing arrangement is consistent with the accounting guidance provided by ASU No. 2015-05. Therefore, the adoption of ASU No. 2015-05 did not have a material impact on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.

EARNINGS PER SHARE

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

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

	Three Months Ended
	March 31,
	2016		2015

Net income	$	827,378	$	786,257

Basic average shares outstanding		1,770,917		1,775,287

Diluted potential common shares:
Stock option equivalents		18,055		17,080
Diluted average shares outstanding		1,788,972		1,792,367

Basic earnings per share	$	0.47	$	0.44

Diluted earnings per share	$	0.46	$	0.44

STOCK BASED COMPENSATION

In connection with the 2010 second-step conversion and related stock offering, the ESOP purchased an additional 41,614 shares for the exclusive benefit of eligible employees. The ESOP borrowed funds from the Company in an amount sufficient to purchase the 41,614 shares (approximately 4% of the common stock issued in the offering). The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Bank and dividends received by the ESOP, with funds from any contributions on ESOP assets. Contributions will be applied to repay interest on the loan first, and the remainder will be applied to principal. The loan is expected to be repaid over a period of up to 20 years. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants. Participants will vest on a pro-rata basis and reach 100% vesting in the accrued benefits under the ESOP after six years. Vesting is accelerated upon retirement, death, or disability of the participant or a change in control of the Bank. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP. Since the Bank’s annual contributions are discretionary, benefits payable under the ESOP cannot be estimated.

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

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

A summary of ESOP shares at March 31, 2016 and 2015 is shown below.

	March 31, 2016		March 31, 2015
Unearned shares		20,573		23,845
Shares committed for release		598		573
Allocated shares		61,455		58,863
Total ESOP shares		82,626		83,281

Fair value of unearned shares	$	534,898	$	586,032

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

The following table summarizes stock option activity for the three months ended March 31, 2016.

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

Outstanding, December 31, 2015		61,120		$	15.65
Granted		-
Exercised		(500	)		15.65
Forfeited		-			-

Outstanding, March 31, 2016		60,620		$	15.65		6.00	$	632,592

Exercisable, March 31, 2016		18,535		$	15.65		6.00	$	197,012

Intrinsic value for stock options is defined as the difference between the current market value and the exercise price. The value is based upon a closing price of $26.00 per share on March 31, 2016.

LOAN PORTFOLIO COMPOSITION

At March 31, 2016 and December 31, 2015, the composition of the Company’s loan portfolio is shown below.

	March 31, 2016					December 31, 2015
	Amount		Percent			Amount		Percent
Real estate loans:
One-to-four family residential	$	47,145,148		25.0	%	$	47,395,344		24.6	%
Commercial		42,066,787		22.3			40,381,680		20.9
Agricultural		41,214,973		21.9			41,223,190		21.3
Home equity		11,197,637		5.9			11,691,545		6.1
Total real estate loans		141,624,545		75.1			140,691,759		72.9

Commercial loans		22,032,482		11.7			25,453,058		13.2
Agricultural loans		14,611,902		7.7			16,102,856		8.3
Consumer loans		13,383,278		7.1			13,741,093		7.1
Total loans receivable		191,652,207		101.6			195,988,766		101.5

Less:
Net deferred loan fees		26,481		0.0			29,293		0.0
Allowance for loan losses		2,934,691		1.6			2,919,594		1.5
Total loans receivable, net	$	188,691,035		100.0	%	$	193,039,879		100.0	%

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

Loan originations are derived from a number of sources such as real estate broker referrals, existing customers, builders, attorneys and walk-in customers. Upon receipt of a loan application, a credit report is obtained to verify specific information relating to the applicant’s employment, income, and credit standing. In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent appraiser approved by the Company. A loan application file is first reviewed by a loan officer in the loan department who checks applications for accuracy and completeness, and verifies the information provided. The financial resources of the borrower and the borrower’s credit history, as well as the collateral securing the loan, are considered an integral part of each risk evaluation prior to approval. All residential real estate loans are then verified by our loan risk management department prior to closing. The board of directors has established individual lending authorities for each loan officer by loan type. Loans over an individual officer’s lending limit must be approved by the officers’ loan committee consisting of the chairman of the board, president, chief lending officer and all lending officers, which meets three times a week, and has lending authority up to $750,000 depending on the type of loan. Loans to borrowers with an aggregate principal balance over this limit, up to $1.0 million, must be approved by the directors’ loan committee, which meets weekly and consists of the chairman of the board, president, senior vice president, chief lending officer and at least two outside directors, plus all lending officers as non-voting members. The board of directors approves all loans to borrowers with an aggregate principal balance over $1.0 million. The board of directors ratifies all loans that are originated. Once the loan is approved, the applicant is informed and a closing date is scheduled. Loan commitments are typically funded within 45 days.

If the loan is approved, the borrower must provide proof of fire and casualty insurance on the property serving as collateral which insurance must be maintained during the full term of the loan; flood insurance is required in certain instances. Title insurance is generally required on loans secured by real property.

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

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

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

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

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

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

When underwriting residential real estate loans, the Company reviews and verifies each loan applicant’s income and credit history. Management believes that stability of income and past credit history are integral parts in the underwriting process. Generally, the applicant’s total monthly mortgage payment, including all escrow amounts, is limited to 30% of the applicant’s total monthly income. In addition, total monthly obligations of the applicant, including mortgage payments, generally should not exceed 43% of total monthly income. Written appraisals are generally required on real estate property offered to secure an applicant’s loan. For one-to-four family real estate loans with loan to value ratios of over 80%, private mortgage insurance is generally required. Fire and casualty insurance is also required on all properties securing real estate loans. Title insurance may be required, as circumstances warrant.

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

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

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

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

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

Underwriting standards for agricultural real estate include a determination of the applicant’s credit history and an assessment of the applicant’s ability to meet existing obligations and payments on the proposed loan. The income approach is primarily utilized to determine whether income generated from the applicant’s farm operation or real estate offered as collateral is adequate to repay the loan. We emphasize the ratio of the property’s projected cash flow to the loan’s debt service requirement (generally requiring a minimum ratio of 120%). In underwriting a loan, we consider the value of the real estate offered as collateral in relation to the proposed loan amount. Generally, the loan amount cannot be greater than 75% of the value of the real estate. We usually obtain written appraisals from either licensed or certified appraisers on all agricultural real estate loans in excess of $250,000. We assess the creditworthiness of the applicant by reviewing a credit report, financial statements and tax returns of the applicant, as well as obtaining other public records regarding the applicant.

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

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

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

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

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

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

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

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

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

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

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

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

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of and for the periods ended March 31, 2016, March 31, 2015, and December 31, 2015.

	March 31, 2016
			Commercial			Agricultural
	1-4 Family		Real Estate			Real Estate		Home Equity		Commercial			Agricultural			Consumer			Unallocated			Total
Allowance for Loan Losses:
Beginning Balance, December 31, 2015	$	829,604	$	917,526		$	201,918	$	149,253	$	386,620		$	163,346		$	169,381		$	101,946		$	2,919,594
Provision charged to expense		31,178		3,332			86		51,759		(40,645	)		(2,976	)		(8,834	)		(3,900	)		30,000
Losses charged off		-		(20,465	)		-		-		-			-			-			-			(20,465	)
Recoveries		4,081		29			-		525		-			-			927			-			5,562
Ending balance, March 31, 2016	$	864,863	$	900,422		$	202,004	$	201,537	$	345,975		$	160,370		$	161,474		$	98,046		$	2,934,691

Ending balance:
individually evaluated for impairment	$	234,439	$	500,459		$	-	$	9,742	$	121,866		$	-		$	-		$	-		$	866,506
Ending balance:
collectively evaluated for impairment	$	630,424	$	399,963		$	202,004	$	191,795	$	224,109		$	160,370		$	161,474		$	98,046		$	2,068,185

Loans:
Ending balance	$	47,145,148	$	42,066,787		$	41,214,973	$	11,197,637	$	22,032,482		$	14,611,902		$	13,383,278		$	-		$	191,652,207
Ending balance:
individually evaluated for impairment	$	656,330	$	1,875,577		$	814,272	$	63,682	$	265,869		$	406,950		$	-		$	-		$	4,082,680
Ending balance:
collectively evaluated for impairment	$	46,488,818	$	40,191,210		$	40,400,701	$	11,133,955	$	21,766,613		$	14,204,952		$	13,383,278		$	-		$	187,569,527

	March 31, 2015
			Commercial			Agricultural
	1-4 Family		Real Estate			Real Estate		Home Equity			Commercial			Agricultural		Consumer			Unallocated		Total
Allowance for Loan Losses:
Beginning Balance, December 31, 2014	$	999,260	$	855,463		$	195,546	$	205,577		$	421,809		$	57,934	$	167,319		$	53,356	$	2,956,264
Provision charged to expense		32,739		(37,210	)		16,505		(52,423	)		(20,663	)		58,595		(1,669	)		34,126		30,000
Losses charged off		-		(27,464	)		-		-			-			-		(6,430	)		-		(33,894	)
Recoveries		300		8,745			-		9,013			85			-		483			-		18,626
Ending balance, March 31, 2015	$	1,032,299	$	799,534		$	212,051	$	162,167		$	401,231		$	116,529	$	159,703		$	87,482	$	2,970,996

Ending balance:
individually evaluated for impairment	$	207,554	$	359,054		$	-	$	9,982		$	165,190		$	-	$	-		$	-	$	741,780
Ending balance:
collectively evaluated for impairment	$	824,745	$	440,480		$	212,051	$	152,185		$	236,041		$	116,529	$	159,703		$	87,482	$	2,229,216

Loans:
Ending balance	$	44,129,552	$	41,494,647		$	43,395,717	$	11,478,191		$	23,945,542		$	10,854,507	$	12,465,317		$	-	$	187,763,473
Ending balance:
individually evaluated for impairment	$	698,555	$	1,975,380		$	985,606	$	57,163		$	469,036		$	272,021	$	8,124		$	-	$	4,465,885
Ending balance:
collectively evaluated for impairment	$	43,430,997	$	39,519,267		$	42,410,111	$	11,421,028		$	23,476,506		$	10,582,486	$	12,457,193		$	-	$	183,297,588

	December 31, 2015
				Commercial			Agricultural
	1-4 Family			Real Estate			Real Estate		Home Equity			Commercial			Agricultural		Consumer			Unallocated		Total
Allowance for Loan Losses:
Beginning Balance, December 31, 2014	$	999,260		$	855,463		$	195,546	$	205,577		$	421,809		$	57,934	$	167,319		$	53,356	$	2,956,264
Provision charged to expense		(10,386	)		29,238			6,372		(53,188	)		(35,327	)		105,412		49,289			48,590		140,000
Losses charged off		(199,392	)		(27,464	)		-		(13,724	)		-			-		(53,249	)		-		(293,829	)
Recoveries		40,122			60,289			-		10,588			138			-		6,022			-		117,159
Ending balance, December 31, 2015	$	829,604		$	917,526		$	201,918	$	149,253		$	386,620		$	163,346	$	169,381		$	101,946	$	2,919,594

Ending balance:
individually evaluated for impairment	$	176,079		$	487,205		$	-	$	9,922		$	127,458		$	-	$	-		$	-	$	800,664
Ending balance:
collectively evaluated for impairment	$	653,525		$	430,321		$	201,918	$	139,331		$	259,162		$	163,346	$	169,381		$	101,946	$	2,118,930

Loans:
Ending balance	$	47,395,344		$	40,381,680		$	41,223,190	$	11,691,545		$	25,453,058		$	16,102,856	$	13,741,093		$	-	$	195,988,766
Ending balance:
individually evaluated for impairment	$	658,734		$	1,598,530		$	839,546	$	58,340		$	277,628		$	406,950	$	428		$	-	$	3,840,156
Ending balance:
collectively evaluated for impairment	$	46,736,610		$	38,783,150		$	40,383,644	$	11,633,205		$	25,175,430		$	15,695,906	$	13,740,665		$	-	$	192,148,610

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

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

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

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

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

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

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

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

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on all loans at origination. In addition, lending relationships over $750,000, new commercial and commercial real estate loans, and watch list credits are reviewed annually by our loan review department in order to verify risk ratings. All watch list credits are reviewed by management and reported to the Board monthly. The Company uses the following definitions for risk ratings:

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

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

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

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

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2016 and December 31, 2015.

	1-4 Family				Commercial Real Estate				Agricultural Real Estate				Home Equity
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2016		2015		2016		2015		2016		2015		2016		2015
Rating:
Pass	$	44,124,037	$	44,120,334	$	39,050,733	$	37,628,385	$	40,400,701	$	40,383,644	$	10,383,533	$	11,324,889
Special Mention		1,271,744		1,323,266		448,547		454,194		814,272		839,546		581,065		68,044
Substandard		1,749,367		1,951,744		2,567,507		2,299,101		-		-		233,039		298,612
Total	$	47,145,148	$	47,395,344	$	42,066,787	$	40,381,680	$	41,214,973	$	41,223,190	$	11,197,637	$	11,691,545

	Commercial				Agricultural				Consumer				Total
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2016		2015		2016		2015		2016		2015		2016		2015
Rating:
Pass	$	21,714,472	$	25,117,982	$	13,622,473	$	15,110,606	$	13,152,401	$	13,501,477	$	182,448,350	$	187,187,317
Special Mention		46,638		51,196		989,429		992,250		36,684		52,656		4,188,379		3,781,152
Substandard		271,372		283,880		-		-		194,193		186,960		5,015,478		5,020,297
Total	$	22,032,482	$	25,453,058	$	14,611,902	$	16,102,856	$	13,383,278	$	13,741,093	$	191,652,207	$	195,988,766

The following tables present the Company’s loan portfolio aging analysis as of March 31, 2016 and December 31, 2015.

	March 31, 2016
	30-59 Days		60-89 Days		Greater than 90		Total						Total Loans >90
	Past Due		Past Due		Days Past Due		Past Due		Current		Total Loans		Days & Accruing

One-to-four family residential	$	212,544	$	35,846	$	531,643	$	780,033	$	46,365,115	$	47,145,148	$	-
Commercial real estate		-		-		749,281		749,281		41,317,506		42,066,787		-
Agricultural real estate		-		-		-		-		41,214,973		41,214,973		-
Home equity		25,427		36,443		9,742		71,612		11,126,025		11,197,637		-
Commercial		41,734		-		-		41,734		21,990,748		22,032,482		-
Agricultural		-		-		-		-		14,611,902		14,611,902		-
Consumer		86,109		21,359		26,922		134,390		13,248,888		13,383,278		-
Total	$	365,814	$	93,648	$	1,317,588	$	1,777,050	$	189,875,157	$	191,652,207	$	-

	December 31, 2015
	30-59 Days		60-89 Days		Greater than 90		Total						Total Loans >90
	Past Due		Past Due		Days Past Due		Past Due		Current		Total Loans		Days & Accruing

One-to-four family residential	$	345,169	$	77,588	$	623,055	$	1,045,812	$	46,349,532	$	47,395,344	$	-
Commercial real estate		-		-		766,840		766,840		39,614,840		40,381,680		-
Agricultural real estate		-		-		-		-		41,223,190		41,223,190		-
Home equity		22,122		66,305		69,515		157,942		11,533,603		11,691,545		-
Commercial		-		-		-		-		25,453,058		25,453,058		-
Agricultural		-		-		-		-		16,102,856		16,102,856		-
Consumer		183,526		5,972		6,031		195,529		13,545,564		13,741,093		-
Total	$	550,817	$	149,865	$	1,465,441	$	2,166,123	$	193,822,643	$	195,988,766	$	-

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

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

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

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

The following tables present impaired loans at or for the three months ended March 31, 2016 and 2015 and for the year ended December 31, 2015.

	Three Months Ended March 31, 2016
							Average				Interest
			Unpaid				Impairment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Balance		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	106,506	$	106,506	$	-	$	205,469	$	2,952	$	2,981
Commercial real estate		815,495		815,495		-		773,399		9,795		6,887
Agricultural real estate		814,272		814,272		-		824,530		10,292		29,411
Commercial		80,258		80,258		-		80,258		1,001		-
Agricultural		406,950		406,950		-		406,950		4,899		13,802
Home equity		53,940		53,940		-		51,701		902		902
Loans with a specific allowance:
One-to-four family residential		549,824		549,824		234,439		567,106		8,056		5,753
Commercial real estate		1,060,082		1,060,082		500,459		1,108,109		16,666		22,558
Commercial		185,611		185,611		121,866		245,832		3,659		3,626
Home equity		9,742		9,742		9,742		9,982		252		181
Total:
One-to-four family residential		656,330		656,330		234,439		772,575		11,008		8,734
Commercial real estate		1,875,577		1,875,577		500,459		1,881,508		26,461		29,445
Agricultural real estate		814,272		814,272		-		824,530		10,292		29,411
Commercial		265,869		265,869		121,866		326,090		4,660		3,626
Agricultural		406,950		406,950		-		406,950		4,899		13,802
Home equity		63,682		63,682		9,742		61,683		1,154		1,083
Total	$	4,082,680	$	4,082,680	$	866,506	$	4,273,336	$	58,474	$	86,101

	Three Months Ended March 31, 2015
							Average				Interest
			Unpaid				Impairment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Balance		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	125,019	$	125,019	$	-	$	214,838	$	3,105	$	2,863
Commercial real estate		854,026		854,026		-		887,087		10,983		7,531
Agricultural real estate		985,606		985,606		-		998,835		13,875		30,345
Commercial		237,590		237,590		-		289,166		3,209		-
Agricultural		272,021		272,021		-		311,499		2,762		14,573
Home equity		47,181		47,181		-		38,916		795		793
Consumer		8,124		8,124		-		8,858		170		30
Loans with a specific allowance:
One-to-four family residential		573,536		573,536		207,554		582,275		10,868		9,060
Commercial real estate		1,121,354		1,121,354		359,054		1,123,872		16,764		5,040
Commercial		231,446		231,446		165,190		283,538		3,207		12,667
Home equity		9,982		9,982		9,982		9,982		175		181
Total:
One-to-four family residential		698,555		698,555		207,554		797,113		13,973		11,923
Commercial real estate		1,975,380		1,975,380		359,054		2,010,959		27,747		12,571
Agricultural real estate		985,606		985,606		-		998,835		13,875		30,345
Commercial		469,036		469,036		165,190		572,704		6,416		12,667
Agricultural		272,021		272,021		-		311,499		2,762		14,573
Home equity		57,163		57,163		9,982		48,898		970		974
Consumer		8,124		8,124		-		8,858		170		30
Total	$	4,465,885	$	4,465,885	$	741,780	$	4,748,866	$	65,913	$	83,083

	Year Ended December 31, 2015
							Average				Interest
			Unpaid				Impairment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Balance		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	111,166	$	111,166	$	-	$	211,346	$	12,248	$	12,042
Commercial real estate		516,560		516,560		-		663,640		34,155		34,586
Agricultural real estate		839,546		839,546		-		864,705		43,335		44,885
Commercial		80,172		80,172		-		83,509		634		150
Agricultural business		406,950		406,950		-		307,729		11,403		808
Home equity		48,418		48,418		-		43,342		3,333		3,331
Consumer		428		428		-		1,160		78		82
Loans with a specific allowance:
One-to-four family residential		547,568		547,568		176,079		568,790		32,908		25,352
Commercial real estate		1,081,970		1,081,970		487,205		1,118,044		67,505		47,864
Commercial		197,456		197,456		127,458		269,496		11,517		11,139
Home equity		9,922		9,922		9,922		9,982		810		722
Total:
One-to-four family residential		658,734		658,734		176,079		780,136		45,156		37,394
Commercial real estate		1,598,530		1,598,530		487,205		1,781,684		101,660		82,450
Agricultural real estate		839,546		839,546		-		864,705		43,335		44,885
Commercial		277,628		277,628		127,458		353,005		12,151		11,289
Agricultural business		406,950		406,950		-		307,729		11,403		808
Home equity		58,340		58,340		9,922		53,324		4,143		4,053
Consumer		428		428		-		1,160		78		82
Total	$	3,840,156	$	3,840,156	$	800,664	$	4,141,743	$	217,926	$	180,961

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

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

The following table presents the recorded balance, at original cost, of TDRs, as of March 31, 2016 and December 31, 2015.

	March 31, 2016		December 31, 2015

One-to-four family residential	$	778,929	$	723,421
Commercial real estate		1,675,565		1,708,013
Agricultural real estate		-		-
Home equity		9,344		10,897
Commercial loans		48,154		57,783
Agricultural loans		-		-
Consumer loans		103,931		109,340

Total	$	2,615,923	$	2,609,454

The following table presents the recorded balance, at original cost, of TDRs, which were performing according to the terms of the restructuring, as of March 31, 2016 and December 31, 2015.

	March 31, 2016		December 31, 2015

One-to-four family residential	$	587,786	$	526,004
Commercial real estate		926,284		941,173
Agricultural real estate		-		-
Home equity		9,344		10,897
Commercial loans		48,154		57,783
Agricultural loans		-		-
Consumer loans		82,516		86,255

Total	$	1,654,084	$	1,622,112

The following table presents loans modified as TDRs during the three months ended March 31, 2016 and 2015.

	Three Months Ended				Three Months Ended
	March 31, 2016				March 31, 2015
	Number of		Recorded		Number of		Recorded
	Modifications		Investment		Modifications		Investment

One-to-four family residential		1	$	41,107		1	$	107,357
Commercial real estate		-		-		-		-
Agricultural real estate		-		-		-		-
Home equity		-		-		-		-
Commercial loans		-		-		-		-
Agricultural loans		-		-		-		-
Consumer loans		-		-		1		2,469

Total		1	$	41,107		2	$	109,826

First Quarter, 2016 Modifications

The Company modified one residential real estate loan with a recorded investment of $41,107. The modification was made to restructure loan and capitalize delinquent real estate taxes. The modification did not result in a write-off of the principal balance.

Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. During the three month period ended March 31, 2016, three residential real estate loans of $191,144 and one commercial real estate loan of $749,281 that were considered TDRs defaulted as they were more than 90 days past due at March 31, 2016. Default occurs when a loan is 90 days or more past due, transferred to nonaccrual or charged-off, and is within twelve months of restructuring.

First Quarter, 2015 Modifications

The Company modified one residential real estate loan with a recorded investment of $107,357. The modification was made to consolidate and restructure delinquent loans into a workout. The modification did not result in a write-off of the principal balance.

The Company modified one consumer loan with a recorded investment of $2,469. The modification was made to extend the payment schedule three months. The modification did not result in a write-off of the principal balance.

Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. During the three month period ended March 31, 2015, three residential real estate loans of $203,578, one commercial real estate loan of $794,110, and one home equity loan of $3,238 that were considered TDRs defaulted as they were more than 90 days past due at March 31, 2015. Default occurs when a loan is 90 days or more past due, transferred to nonaccrual or charged-off, and is within twelve months of restructuring.

The following table presents the Company’s nonaccrual loans at March 31, 2016 and December 31, 2015. This table excludes performing TDRs.

	March 31, 2016		December 31, 2015

One-to-four family residential	$	719,195	$	911,283
Commercial real estate		816,432		840,449
Agricultural real estate		-		-
Home equity		103,513		118,502
Commercial loans		5,788		9,314
Agricultural loans		-		-
Consumer loans		157,090		141,605

Total	$	1,802,018	$	2,021,153

INVESTMENTS

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

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
March 31, 2016:
U.S. government and agencies	$	18,094,872	$	134,043	$	(28,855	)	$	18,200,060
Mortgage-backed securities (government- sponsored enterprises - residential)		20,386,254		313,560		(26,729	)		20,673,085
Municipal bonds		42,356,135		1,305,038		(136,531	)		43,524,642
	$	80,837,261	$	1,752,641	$	(192,115	)	$	82,397,787

December 31, 2015:
U.S. government and agencies	$	15,979,475	$	44,972	$	(85,750	)	$	15,938,697
Mortgage-backed securities (government- sponsored enterprises - residential)		23,067,200		211,987		(100,792	)		23,178,395
Municipal bonds		47,229,171		1,306,328		(179,259	)		48,356,240
	$	86,275,846	$	1,563,287	$	(365,801	)	$	87,473,332

The amortized cost and fair value of available-for-sale securities at March 31, 2016, 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	$	1,283,331	$	1,286,737
More than one to five years		7,919,604		8,203,234
More than five to ten years		36,423,253		37,138,652
After ten years		14,824,819		15,096,079
		60,451,007		61,724,702
Mortgage-backed securities (government- sponsored enterprises - residential)		20,386,254		20,673,085
	$	80,837,261	$	82,397,787

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $28,173,000 at March 31, 2016 and $25,681,000 at December 31, 2015.

The book value of securities sold under agreement to repurchase amounted to $3,947,000 at March 31, 2016 and $7,591,000 at December 31, 2015. At March 31, 2016, we had $4,687,000 of repurchase agreements secured by mortgage backed securities, $1,482,000 of repurchase agreements secured by time deposits in other banks, and $598,000 in repurchase agreements secured by U.S. government agency bonds. All of our repurchase agreements mature overnight. The right of offset for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default. The collateral is held by the Company in a segregated custodial account. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained.

Gross gains of $105,000 and $165,000 and gross losses of $3,000 and $32,000 resulting from sales of available-for-sale securities were realized during the three months ended March 31, 2016 and 2015, respectively.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2016 and December 31, 2015 were $18,573,000, and $30,677,000, respectively, which were approximately 23% and 35% of the Company’s available-for-sale investment portfolio.

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

The following table shows the gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position, at March 31, 2016 and December 31, 2015.

	Less Than Twelve Months					Twelve Months or More					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
March 31, 2016
U.S. government agencies	$	(21,456	)	$	4,315,863	$	(7,399	)	$	391,880	$	(28,855	)	$	4,707,743
Mortgage-backed securities (government sponsored enterprises - residential)		(10,801	)		2,898,027		(15,928	)		1,238,174		(26,729	)		4,136,201
Municipal bonds		(60,764	)		6,613,604		(75,767	)		3,115,831		(136,531	)		9,729,435

Total	$	(93,021	)	$	13,827,494	$	(99,094	)	$	4,745,885	$	(192,115	)	$	18,573,379

	Less Than Twelve Months					Twelve Months or More					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
December 31, 2015
U.S. government agencies	$	(49,205	)	$	8,591,014	$	(36,545	)	$	1,809,745	$	(85,750	)	$	10,400,759
Mortgage-backed securities (government sponsored enterprises - residential)		(45,886	)		5,843,754		(54,906	)		2,257,674		(100,792	)		8,101,428
Municipal bonds		(48,383	)		5,440,291		(130,876	)		6,734,290		(179,259	)		12,174,581

Total	$	(143,474	)	$	19,875,059	$	(222,327	)	$	10,801,709	$	(365,801	)	$	30,676,768

The unrealized losses on the Company’s investments in municipal bonds, U.S. government and agencies, and mortgage-backed securities were caused by interest rate increases. The contractual terms of these investments do not permit the issuer to settle the securities at a price less than the amortized cost bases of the investments. Because the Company does not intend to sell the investments and it is not more likely than not the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2016 and December 31, 2015.

ACCUMULATED OTHER COMPREHENSIVE INCOME

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

	March 31, 2016			December 31, 2015
Net unrealized gain on securities available-for-sale	$	1,560,526		$	1,197,486
Tax effect		(530,579	)		(407,145	)
Net-of-tax amount	$	1,029,947		$	790,341

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (AOCI) BY COMPONENT

Amounts reclassified from AOCI and the affected line items in the statements of income during the three months ended March 31, 2016 and 2015, were as follows:

	Amounts Reclassified
	from AOCI
							Affected Line Item in the
	March 31, 2016			March 31, 2015			Statements of Income
Unrealized gains on securities available-for-sale securities	$	101,561		$	133,216		Net realized gains on sales of available-for-sale securities
		101,561			133,216
Tax effect		(34,531	)		(45,293	)	Income taxes
Total reclassification out of AOCI	$	67,030		$	87,923		Net reclassified amount

DISCLOSURES ABOUT FAIR VALUE OF ASSETS

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

Level 1 Quoted prices in active markets for identical assets.

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets.

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

Recurring Measurements

The following table presents the fair value measurements of assets recognized in the accompanying condensed consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2016 and December 31, 2015:

			March 31, 2016
			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	$	18,200,060	$	-	$	18,200,060	$	-
Mortgage-backed securities (Government sponsored enterprises - residential)		20,673,085		-		20,673,085		-
Municipal bonds		43,524,642		-		43,524,642		-

			December 31, 2015
			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	$	15,938,697	$	-	$	15,938,697	$	-
Mortgage-backed securities (Government sponsored enterprises - residential)		23,178,395		-		23,178,395		-
Municipal bonds		48,356,240		-		48,356,240		-

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the three months ended March 31, 2016.

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

Nonrecurring Measurements

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2016 and December 31, 2015:

March 31, 2016

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)

680,572

Real estate owned

42,400

December 31, 2015

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)

899,981

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

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

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

Real Estate Owned –Real estate owned is carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of real estate owned is based on appraisals or evaluations. Real estate owned is classified within Level 3 of the fair value hierarchy.

Appraisals of real estate owned are obtained when the real estate is acquired and subsequently as deemed necessary. Appraisals are reviewed for accuracy and consistency. Appraisers are selected from the list of approved appraisers maintained by management.

Unobservable (Level 3) Inputs

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

	Fair Value at 3/31/16		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

Collateral-dependent impaired loans		680,572	Market comparable properties	Marketability discount	20% – 30% (25%)

Real estate owned		42,400	Market comparable Properties	Comparability Adjustment	(6%)

	Fair Value at 12/31/15		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

Collateral-dependent impaired loans		899,981	Market comparable properties	Marketability discount	20% – 30% (25%)

Fair Value of Financial Instruments

The following table presents estimated fair values of the Company’s other financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2016 and December 31, 2015:

			March 31, 2016
			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents	$	7,442,323	$	7,442,323	$	-	$	-
Interest-earning time deposits in banks		2,724,000		2,724,000		-		-
Other investments		60,007		-		60,007		-
Loans held for sale		112,449		-		112,449		-
Loans, net of allowance for loan losses		188,691,035		-		-		188,555,889
Federal Home Loan Bank stock		1,113,800		-		1,113,800		-
Interest receivable		1,851,308		-		1,851,308		-
Financial Liabilities
Deposits		243,908,970		-		166,734,358		78,229,853
Other borrowings		3,946,947		-		3,946,947		-
Advances from borrowers for taxes and insurance		1,511,505		-		1,511,505		-
Interest payable		106,747		-		106,747		-
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		-		-		-		-
Letters of credit		-		-		-		-
Lines of credit		-		-		-		-

			December 31, 2015
			Fair Value Measurements Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Amount		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Cash and cash equivalents	$	4,103,432	$	4,103,432	$	-	$	-
Interest-earning time deposits		2,724,000		2,724,000		-		-
Other investments		62,223		-		62,223		-
Loans held for sale		539,000		-		539,000		-
Loans, net of allowance for loan losses		193,039,879		-		-		193,006,301
Federal Home Loan Bank stock		1,113,800		-		1,113,800		-
Interest receivable		1,715,676		-		1,715,676		-
Financial Liabilities
Deposits		239,281,930		-		160,227,406		80,300,060
Short-term borrowings		15,131,710		-		6,631,710		8,500,000
Advances from borrowers for taxes and insurance		990,917		-		990,917		-
Interest payable		118,335		-		118,335		-
Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		-		-		-		-
Letters of credit		-		-		-		-
Lines of credit		-		-		-		-

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

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

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

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

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

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

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

10.

MORTGAGE SERVICING RIGHTS

Activity in the balance of mortgage servicing rights, measured using the amortization method, for the three month period ended March 31, 2016 and the year ended December 31, 2015 was as follows:

	March 31, 2016			December 31, 2015
Balance, beginning of period	$	597,713		$	632,634
Servicing rights capitalized		9,671			73,650
Amortization of servicing rights		(19,120	)		(118,186	)
Change in valuation allowance		3,326			9,615
Balance, end of period	$	591,590		$	597,713

Activity in the valuation allowance for mortgage servicing rights for the three month period ended March 31, 2016 and the year ended December 31, 2015 was as follows:

	March 31, 2016			December 31, 2015
Balance, beginning of period	$	47,354		$	56,969
Additions		-			-
Reductions		(3,326	)		(9,615	)
Balance, end of period	$	44,028		$	47,354

11.

INCOME TAXES

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense for the three months ended March 31, 2016 and 2015 is shown below.

	March 31, 2016			March 31, 2015
Computed at the statutory rate (34%)	$	386,491		$	366,218
Increase (decrease) resulting from
Tax exempt interest		(113,550	)		(107,610	)
State income taxes, net		51,698			48,124
Increase in cash surrender value		(14,817	)		(14,937	)
Other, net		(461	)		(941	)

Actual tax expense	$	309,361		$	290,854

12.

COMMITMENTS AND CONTINGENCIES

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

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

JACKSONVILLE BANCORP, INC.

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

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

Forward Looking Statements

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

Critical Accounting Policies and Use of Significant Estimates

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

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

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

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

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

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

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

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

Basel III

On July 2, 2013, the Board of Governors of the Federal Reserve System announced its approval of the final rule to implement the Basel III regulatory capital reforms, among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Federal Deposit Insurance Corporation adopted the new rule on July 9, 2013. The new rule became applicable to Jacksonville Savings Bank beginning in January 2015. The new rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, as well as a capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking institutions. The capital conservation buffer will be phased in beginning in the first quarter of 2016 at 0.625% and increasing by 0.625% each year until it is fully phased in beginning in the first quarter of 2019.

Financial Condition

March 31, 2016 Compared to December 31, 2015

Total assets at March 31, 2016 were $302.1 million, a decrease of $6.5 million, or 2.1%, from $308.6 million at December 31, 2015. The decrease in total assets was primarily due to a $4.3 million decrease in loans receivable and a $5.1 million decrease in investment and mortgage-backed securities. The decrease was partially offset by an increase of $3.3 million in cash and cash equivalents.

Cash and cash equivalents increased $3.3 million, or 81.4%, to $7.4 million at March 31, 2016, from $4.1 million at December 31, 2015. Investment and mortgage-backed securities were $82.4 million at March 31, 2016, a decrease of $5.1 million, or 5.8%, from $87.5 million at December 31, 2015. The decrease was due to decreases of $2.6 million in investment securities and $2.5 million in mortgage-backed securities. As cash was received from sales and paydowns on investment and mortgage-backed securities, a portion of the funds were used to reduce borrowings.

Net loans receivable (excluding loans held for sale) decreased $4.3 million, or 2.3%, to $188.7 million at March 31, 2016 from $193.0 million at December 31, 2015. The decrease in loans was primarily due to decreases of $3.4 million in commercial business loans and $1.5 million in agricultural business loans, reflecting paydowns on lines of credit.

At March 31, 2016 and December 31, 2015, goodwill totaled $2.7 million. At these dates, our goodwill was not impaired.

Total deposits increased $4.6 million, or 1.9%, to $243.9 million at March 31, 2016 from $239.3 million at December 31, 2015. The increase was primarily due to a $6.4 million increase in transaction accounts, reflecting an increase of $3.5 million in public funds. The increase was partially offset by a $1.8 million decrease in time deposits. Other borrowings, which consisted of $3.9 million in overnight repurchase agreements at March 31, 2016, decreased a total of $11.2 million, or 73.9%, from December 31, 2015. The repurchase agreeements are a cash management service provided to our commercial deposit customers. FHLB advances totaling $8.5 million were paid off during the first quarter of 2016, such that none remained outstanding at March 31, 2016.

Total stockholders’ equity increased $960,000, or 2.1%, to $46.5 million at March 31, 2016, compared to $45.6 million at December 31, 2015. The increase in stockholders’ equity was the result of $827,000 in net income and a $240,000 increase in accumulated other comprehensive income, partially offset by the payment of $152,000 in cash dividends. Accumulated other comprehensive income increased primarily due to an increase in unrealized gains, net of tax, on available-for-sale securities reflecting changes in market prices for securities in our portfolio due to a decrease in market interest rates. Accumulated other comprehensive income does not include changes in the fair value of other financial instruments included in the condensed consolidated balance sheet.

Results of Operations

Comparison of Operating Results for the Three Months Ended March 31, 2016 and 2015

General: Net income for the three months ended March 31, 2016 was $827,000, or $0.47 per common share, basic, and $0.46 per common share, diluted, compared to net income of $786,000, or $0.44 per common share, basic and diluted, for the three months ended March 31, 2015. Net income increased $41,000 during the first quarter of 2016, as compared to the prior year quarter, due to an increase of $73,000 in net interest income and a decrease of $12,000 in noninterest expense, partially offset by a decrease of $25,000 in noninterest income and an increase of $19,000 in income taxes.

Interest Income:Total interest income for the three months ended March 31, 2016 increased $8,000, or 0.3%, to $2.9 million during the first quarter of 2016, compared to the same period of 2015. The increase in interest income reflected increases of $55,000 in interest income on investment securities and $9,000 in interest income on other interest-earning assets, partially offset by decreases of $42,000 in interest income on mortgage-backed securities and $14,000 in interest income on loans.

Interest income on loans decreased $14,000 to $2.3 million during the first quarter of 2016. The decrease in interest income on loans was primarily due to a decrease in the average yield on loans, partially offset by an increase in the average balance of loans. The average yield of the loan portfolio decreased 20 basis points to 4.85% during the first quarter of 2016, compared to 5.05% during the first quarter of 2015. The decrease in the average yield reflected lower market rates of interest and the competitive lending environment. The average balance of loans increased $6.6 million to $192.1 million during the first quarter of 2016, from $185.5 million during the first quarter of 2015. The increase in the average balance of the loan portfolio reflected increases in the average balance of agricultural business loans and residential real estate loans.

Interest income on investment securities increased $55,000 to $436,000 during the first quarter of 2016 compared to $381,000 during the first quarter of 2015. The increase resulted primarily from an increase in the average balance of investment securities of $9.0 million to $60.8 million during the first quarter of 2016, compared to $51.8 million during the first quarter of 2015. The increase in the average balance reflected an increase in U.S. agency bonds. The average yield of investment securities decreased to 2.86% during the first quarter of 2016 from 2.94% during the first quarter of 2015. The majority of our investment portfolio consists of municipal bonds which are exempt from federal taxation, resulting in a higher tax-equivalent yield.

Interest income on mortgage-backed securities decreased $42,000 to $130,000 during the first quarter of 2016, compared to $172,000 during the first quarter of 2015. The decrease primarily reflected a $16.1 million decrease in the average balance of mortgage-backed securities to $21.2 million during the first quarter of 2016, compared to $37.3 million during the first quarter of 2015. The decrease in the average balance of mortgage-backed securities reflected the use of sales and payment proceeds to fund loan growth and the decrease in deposits during this same time period. The decrease in the average balance of mortgage-backed securities was partially offset by a 61 basis points increase in the average yield of mortgage-backed securities to 2.46% during the first quarter of 2016 from 1.85% during the first quarter of 2015. The average yield benefitted from lower premium amortization resulting from slower national prepayment speeds on mortgage-backed securities. The amortization of premiums on mortgage-backed securities, which reduces the average yield, decreased $83,000 to $44,000 during the first quarter of 2016, compared to $127,000 during the first quarter of 2015.

Interest income on other interest-earning assets, consisting of interest-earning demand and time deposit accounts and federal funds sold, increased $9,000 to $14,000 during the first quarter of 2016, compared to the first quarter of 2015. The average yield on other interest-earning assets increased 87 basis points to 1.06% during the first quarter of 2016 from 0.19% during the first quarter of 2015. The increase in the average yield reflected an increase in the average balance of higher-yielding time deposit accounts. The increase in the average yield was partially offset by a $4.8 million decrease in the average balance of other interest-earning assets to $5.4 million during the three months ended March 31, 2016 compared to $10.2 million for the three months ended March 31, 2015.

Interest Expense: Total interest expense decreased $65,000, or 20.7%, to $249,000 for the three months ended March 31, 2016 compared to $314,000 for the three months ended March 31, 2015. The lower interest expense reflected a $67,000 decrease in interest expense on deposits.

Interest expense on deposits decreased $67,000 to $242,000 during the first quarter of 2016 compared to $309,000 during the first quarter of 2015. The decrease in interest expense on deposits was primarily due to a 12 basis points decrease in the average rate paid on deposits to 0.46% during the first quarter of 2016 from 0.58% during the first quarter of 2015, as a result of the low interest rate environment. The decrease also reflected lower average deposit balances in the first quarter of 2016 as compared to the first quarter of 2015, as well as a change in the composition of our deposits to lower cost deposits. The average balance of deposits decreased $4.9 million to $208.7 million during the first quarter of 2016. The decrease reflected a $14.2 million decrease in the average balance of time deposit accounts, partially offset by a $9.3 million increase in the average balance of lower cost transaction accounts.

Interest paid on borrowed funds, which consisted of overnight repurchase agreements and FHLB advances, increased $2,000 to $7,000 during the first quarter of 2016. The average rate paid on borrowed funds increased to 0.31% during the first quarter of 2016, compared to 0.23% during the first quarter of 2015. The average balance of borrowed funds equalled $9.0 million and $8.9 million for the first quarters of 2016 and 2015, respectively.

Net Interest Income: As a result of the changes in interest income and interest expense noted above, net interest income increased by $73,000, or 2.8%, to $2.7 million for the three months ended March 31, 2016 compared to the same time period in 2015. Our net interest margin increased 18 basis points to 3.81% during the first quarter of 2016, compared to 3.63% during the first quarter of 2015. Our interest rate spread increased 20 basis points to 3.71% during the first quarter of 2016 from 3.51% during the first quarter of 2015. Our ratio of interest earning assets to interest bearing liabilities remained stable at 1.28x for the three months ended March 31, 2016 and 2015, respectively.

Provision for Loan Losses: The provision for loan losses is determined by management as the amount needed to replenish the allowance for loan losses, after net charge-offs have been deducted, to a level considered adequate to absorb inherent losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America. The following table shows the activity in the allowance for loan losses for the three months ended March 31, 2016 and 2015.

	Three Months Ended
	March 31, 2016		March 31, 2015

Balance at beginning of period	$	2,919,594	$	2,956,264
Charge-offs:
One-to-four family residential		20,465		-
Commercial real estate		-		27,464
Consumer		-		6,430
Total		20,465		33,894
Recoveries:
One-to-four family residential		4,081		300
Commercial real estate		29		8,745
Home equity		525		9,013
Commercial		-		85
Consumer		927		483
Total		5,562		18,626
Net loan charge-offs		14,903		15,268
Provisions charged to expense		30,000		30,000
Balance at end of period	$	2,934,691	$	2,970,996

The provision for loan losses totaled $30,000 during the first quarters of 2016 and 2015. The allowance for loan losses increased $15,000 to $2.9 million at March 31, 2016 from December 31, 2015. Net charge-offs remained stable at $15,000 during the first quarters of 2016 and 2015, respectively. Loans delinquent 30 days or more decreased $389,000 to $1.8 million, or 0.93% of total loans, as of March 31, 2016, from $2.2 million, or 1.11% of total loans, as of December 31, 2015. Loans delinquent 30 days or more totaled $2.3 million, or 1.25% of total loans at March 31, 2015.

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

	March 31, 2016			December 31, 2015

Nonaccrual loans:
One-to-four family residential	$	719,195		$	911,283
Commercial real estate		816,432			840,449
Home equity		103,513			118,503
Commercial business		5,788			9,314
Consumer		157,090			141,604
Total	$	1,802,018		$	2,021,153

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

Foreclosed assets:
One-to-four family residential		190,400			217,101
Commercial real estate		113,880			113,880
Total	$	304,280		$	330,981

Total nonperforming assets	$	2,106,298		$	2,352,134

Total nonperforming loans as a percentage of total loans		0.94	%		1.03	%
Total nonperforming assets as a percentage of total assets		0.70	%		0.76	%

Nonperforming assets decreased $246,000 to $2.1 million, or 0.70% of total assets, as of March 31, 2016, compared to $2.4 million, or 0.76% of total assets, as of December 31, 2015. The decrease in nonperforming assets was due to decreases of $219,000 in nonperforming loans and $27,000 in foreclosed assets. The decrease in nonperforming loans primarily reflected a decrease of $192,000 in nonaccrual loans secured by residential real estate.

The following table shows the aggregate principal amount of potential problem credits on the Company’s watch list at March 31, 2016 and December 31, 2015. All nonaccrual loans are automatically placed on the watch list. The $407,000 increase in special mention credits reflected the addition of a residential real estate borrower.

	March 31, 2016		December 31, 2015

Special Mention credits	$	4,188,379	$	3,781,152
Substandard credits		5,015,478		5,020,297
Total watch list credits	$	9,203,857	$	8,801,449

Non-Interest Income: Non-interest income decreased $25,000, or 2.3%, to $1.0 million during the first quarter of 2016. The decrease in non-interest income was primarily due to decreases of $32,000 in gains on the sale of available-for-sale securities and $18,000 from net income on mortgage banking operations, partially offset by an increase of $40,000 in commission income. The decrease in gains on the sale of securities reflected a lower volume of securities sales totaling $13.9 million during the first quarter of 2016 compared to $14.5 million during the same period of 2015. Securities sales during 2016 were primarily made to improve yields and reduce the volatility to interest rate changes. Net income on mortgage banking operations decreased due to a lower volume of loan sales during the first quarter of 2016, as we sold $2.7 million of loans to the secondary market during the first quarter of 2016, compared to $3.7 million during the same period of 2015. The lower volume of sales reflected a decreased volume of mortgage originations, which are affected by changes in market interest rates. The increase in commission income reflected changing market conditions and account growth during the first quarter of 2016.

Non-Interest Expense: Total non-interest expense decreased $12,000, or 0.5%, to $2.5 million for the first quarter of 2016 compared to the same period of 2015. The decrease in non-interest expense consisted primarily of decreases of $60,000 in real estate owned expense and $11,000 in data processing and telecommunications expense, partially offset by an increase of $64,000 in compensation and benefits expense. The decrease in real estate owned expense was due to $48,000 of gains on the sale of properties during the first quarter of 2016, compared to $16,000 of losses on the sale of real estate properties during the first quarter of 2015. The decrease in data processing and telecommunications expense was due to nonrecurring costs during the first quarter of 2015 related to the redesign of our company website. The increase in compensation and benefits expense resulted from normal salary and benefit cost increases.

Income Taxes: The provision for income taxes increased $19,000 to $309,000 during the first quarter of 2016 compared to the same period of 2015. The increase in the income tax provision reflected an increase in taxable income during the first quarter of 2016 as compared to the same period of 2015. The effective tax rate was 27.2% and 27.0% during the three months ended March 31, 2016 and 2015, respectively.

Liquidity and Capital Resources

The Company’s most liquid assets are cash and cash equivalents. The levels of these assets are dependent on the Company’s operating, financing, and investing activities. Cash and cash equivalents totaled $7.4 million and $4.1 million at March 31, 2016 and December 31, 2015, respectively. The Company’s primary sources of funds include principal and interest repayments on loans (both scheduled payments and prepayments), maturities of investment securities and principal repayments from mortgage-backed securities (both scheduled payments and prepayments). During the three months ended March 31, 2016, the most significant sources of funds have been deposit growth, sales of investment securities and principal repayments on loans and mortgage-backed securities. These funds have been used primarily for purchases of investment and mortgage-backed securities and the reduction of other borrowings.

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

Liquidity management is both a short- and long-term responsibility of management. The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) projected purchases of investment and mortgage-backed securities, (iii) expected deposit flows, (iv) yields available on interest-earning deposits, and (v) liquidity of its asset/liability management program. Excess liquidity is generally invested in interest-earning overnight deposits and other short-term U.S. agency obligations. If the Company requires funds beyond its ability to generate them internally, it has the ability to borrow funds from the FHLB. The Company may borrow from the FHLB under a blanket agreement which assigns all investments in FHLB stock as well as qualifying first mortgage loans equal to 150% of the outstanding balance as collateral to secure the amounts borrowed. This borrowing arrangement is limited to a maximum of 30% of the Company’s total assets or twenty times the balance of FHLB stock held by the Company. At March 31, 2016, the Company had no outstanding FHLB advances and approximately $90.5 million available to be accessed under the above-mentioned borrowing arrangement.

The Company maintains minimum levels of liquid assets as established by the Board of Directors. The Company’s liquidity ratios at March 31, 2016 and December 31, 2015 were 31.2% and 32.0%, respectively. This ratio represents the volume of short-term liquid assets as a percentage of net deposits and borrowings due within one year.

The Company must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments. The Company anticipates that it will have sufficient funds available to meet its current commitments principally through the use of current liquid assets and through its borrowing capacity discussed above. The following table summarizes these commitments at March 31, 2016 and December 31, 2015.

	March 31, 2016		December 31, 2015

Commitments to fund loans	$	44,622,974	$	36,996,683
Standby letters of credit		110,000		110,000

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined). In addition, the Bank is subject to the new capital conservation buffer which will be phased in beginning in the first quarter of 2016 at 0.625% of risk-weighted assets. The capital conservation buffer will continue to increase 0.625% each year until fully phased in at 2.50% of risk-weighted assets beginning in the first quarter of 2019. Management believes that at March 31, 2016, the Bank met all its capital adequacy requirements.

Under Illinois law, Illinois-chartered savings banks are required to maintain a minimum core capital to total assets ratio of 3%. The Illinois Commissioner of Savings and Residential Finance (the “Commissioner”) is authorized to require a savings bank to maintain a higher minimum capital level if the Commissioner determines that the savings bank’s financial condition or history, management or earnings prospects are not adequate. If a savings bank’s core capital ratio falls below the required level, the Commissioner may direct the savings bank to adhere to a specific written plan established by the Commissioner to correct the savings bank’s capital deficiency, as well as a number of other restrictions on the savings bank’s operations, including a prohibition on the declaration of dividends by the savings bank’s board of directors. At March 31, 2016, the Bank’s core capital ratio was 13.41% of total average assets, which substantially exceeded the required amount.

The Bank is also required to maintain regulatory capital requirements imposed by the Federal Deposit Insurance Corporation. At March 31, 2016, minimum requirements and the Bank's actual ratios are as follows:

	March 31, 2016			Minimum			Minimum Required
	Actual			Required			With Capital Buffer
Tier 1 Capital to Average Assets		13.41	%		4.00	%		4.000	%
Common Equity Tier 1		18.58	%		4.50	%		5.125	%
Tier 1 Capital to Risk-Weighted Assets		18.58	%		6.00	%		6.625	%
Total Capital to Risk-Weighted Assets		19.84	%		8.00	%		8.625	%

Effect of Inflation and Changing Prices

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

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

Consolidated Average Balance Sheet and Interest Rates
(Dollars in thousands)
	Three Months Ended March 31,
	2016							2015
	Average							Average
	Balance		Interest		Yield/Cost			Balance		Interest		Yield/Cost

Interest-earnings assets:
Loans	$	192,072	$	2,329		4.85	%	$	185,482	$	2,343		5.05	%
Investment securities		60,853		436		2.86	%		51,806		381		2.94	%
Mortgage-backed securities		21,194		130		2.46	%		37,277		172		1.85	%
Other		5,372		14		1.06	%		10,202		5		0.19	%
Total interest-earning assets		279,491		2,909		4.16	%		284,767		2,901		4.08	%

Non-interest earnings assets		20,435							20,131
Total assets	$	299,926						$	304,898
		��
Interest-bearing liabilities:
Interest-bearing checking	$	45,697	$	27		0.24	%	$	39,077	$	13		0.13	%
Savings accounts		42,147		21		0.20	%		38,944		20		0.21	%
Certificates of deposit		78,353		166		0.85	%		92,550		248		1.07	%
Money market savings		35,184		25		0.29	%		35,333		25		0.28	%
Money market deposits		7,272		3		0.15	%		7,639		3		0.14	%
Total interest-bearing deposits		208,653		242		0.46	%		213,543		309		0.58	%
Federal Home Loan Bank advances		4,943		4		0.29	%		5,000		4		0.33	%
Short-term borrowings		4,051		3		0.34	%		3,909		1		0.10	%
Total borrowings		8,994		7		0.31	%		8,909		5		0.23	%
Total interest-bearing liabilities		217,647		249		0.46	%		222,452		314		0.56	%

Non-interest bearing liabilities		36,092							36,890
Stockholders' equity		46,187							45,556

Total liabilities/stockholders' equity	$	299,926						$	304,898

Net interest income			$	2,660						$	2,587

Interest rate spread (average yield earned minus average rate paid)						3.71	%						3.51	%

Net interest margin (net interest income divided by average interest-earning assets)						3.81	%						3.63	%

The following table sets forth the changes in rate and changes in volume of the Company’s interest earning assets and liabilities.

Analysis of Volume and Rate Changes
(In thousands)
Three Months Ended March 31,
	2016 Compared to 2015
	Increase(Decrease) Due to
	Rate			Volume			Net

Interest-earnings assets:
Loans	$	(96	)	$	81		$	(15	)
Investment securities		(10	)		65			55
Mortgage-backed securities		46			(88	)		(42	)
Other		13			(3	)		10
Total net change in income on interest-earning assets		(47	)		55			8

Interest-bearing liabilities:
Interest-bearing checking		12			2			14
Savings accounts		(1	)		2			1
Certificates of deposit		(47	)		(35	)		(82	)
Money market savings		-			-			-
Money market deposits		-			-			-
Total interest-bearing deposits		(36	)		(31	)		(67	)
Federal Home Loan Bank advances		-			-			-
Short-term borrowings		2			-			2
Total borrowings		2			-			2
Total net change in expense on interest-bearing liabilities		(34	)		(31	)		(65	)

Net change in net interest income	$	(13	)	$	86		$	73

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

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

The following table shows projected results at March 31, 2016 and December 31, 2015 of the impact on net interest income from an immediate change in interest rates, as well as the benchmarks established by the ALCO. The results are shown as a dollar and percentage change in net interest income over the next twelve months.

	Change in Net Interest Income
	(Dollars in thousands)
	March 31, 2016						December 31, 2015						ALCO
Rate Shock:	$ Change			% Change			$ Change			% Change			Benchmark
+ 300 basis points		(154	)		-1.38	%		(344	)		-3.00	%		>(20.00)	%
+ 200 basis points		(118	)		-1.06	%		(242	)		-2.10	%		>(20.00)	%
+ 100 basis points		(61	)		-0.55	%		(119	)		-1.04	%		>(12.50)	%
- 100 basis points		(117	)		-1.06	%		(88	)		-0.76	%		>(12.50)	%

The table above indicates that as of March 31, 2016, in the event of a 200 basis point increase in interest rates, we would experience a 1.06% decrease in net interest income. In the event of a 100 basis point decrease in interest rates, we would experience a 1.06% 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 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

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

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

At March 31, 2016, the Company is not involved in any pending legal proceedings other than non-material legal proceedings undertaken in the normal course of business.

Item 1.A.

Risk Factors

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

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

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

(1)

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

Item 3.	Defaults Upon Senior Securities

	None.

Item 4.	Mine Safety Disclosures

	None.

Item 5.	Other Information

	None.

Item 6.

Exhibits

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

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

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

101 INS - XBRL Instance Document

101 SCH - XBRL Taxonomy Extension Schema Document

101 CAL - XBRL Taxonomy Calculation Linkbase Document

101 DEF - XBRL Taxonomy Extension Definition Linkbase Document

101 LAB - XBRL Taxonomy Label Linkbase Document

101 PRE - XBRL Taxonomy Presentation Linkbase Document

SIGNATURES

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

	JACKSONVILLE BANCORP, INC.
	Registrant

Date: 05/10/2016	/s/ Richard A. Foss
	Richard A. Foss
	President and Chief Executive Officer

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

EXHIBITS

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Jacksonville Bancorp Inactive 10-Q2016 Q1 Quarterly report

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