Jacksonville Bancorp, Inc. - FORM 10-K - EX-13 - EXHIBIT 13

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Jacksonville Bancorp, Inc.	tv486937_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Jacksonville Bancorp, Inc.	tv486937_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Jacksonville Bancorp, Inc.	tv486937_ex31-1.htm
EX-23 - EXHIBIT 23 - Jacksonville Bancorp, Inc.	tv486937_ex23.htm
EX-21 - EXHIBIT 21 - Jacksonville Bancorp, Inc.	tv486937_ex21.htm
10-K - FORM 10-K - Jacksonville Bancorp, Inc.	tv486937_10k.htm

Exhibit 13

Report to Stockholders

Jacksonville Bancorp, Inc.

2017 Annual Report

Table of Contents

	Page

Business of the Company	1

Selected Consolidated Financial Information	2

Management’s Discussion and Analysis of Financial Condition and Results of Operations	4

Report of Independent Registered Public Accounting Firm	20

Consolidated Financial Statements	22

Notes to Consolidated Financial Statements	30

Common Stock Information	87

Directors and Executive Officers	88

Corporate Information	89

Business of the Company

Jacksonville Bancorp, Inc. (the “Company”) is a Maryland corporation. On July 14, 2010, Jacksonville Bancorp, Inc. converted from the mutual holding company structure to a stock holding company that is fully owned by the public. The Company owns 100% of Jacksonville Savings Bank.

Jacksonville Savings Bank is an Illinois-chartered savings bank headquartered in Jacksonville, Illinois. We conduct our business from our main office and five branches, two of which are located in Jacksonville and one of which is located in each of the following Illinois communities: Virden, Litchfield, and Chapin. We were originally chartered in 1916 as an Illinois-chartered mutual savings and loan association and converted to a mutual savings bank in 1992. In 1995, Jacksonville Savings Bank converted to an Illinois-chartered stock savings bank and reorganized into the mutual holding company form of organization. We have been a member of the Federal Home Loan Bank System since 1932. Our deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation.

We are a community-oriented savings bank engaged primarily in the business of attracting retail deposits from the general public in our market area and using such funds, together with borrowings and funds from other sources, to originate mortgage loans secured by one- to four-family residential real estate, commercial and agricultural real estate and home equity loans. We also originate commercial and agricultural business loans and consumer loans. Additionally, we invest in United States government agency securities, bank-qualified, general obligation municipal issues, and mortgage-backed securities issued or guaranteed by the United States government or enterprises thereof. We maintain a portion of our assets in liquid investments, such as overnight funds at the Federal Home Loan Bank.

Our principal sources of funds are customer deposits, proceeds from the sale of loans, short-term borrowings, funds received from the repayment and prepayment of loans and mortgage-backed securities, and the sale, call, or maturity of investment securities. Principal sources of income are interest income on loans and investments, sales of loans and securities, service charges, commissions, card interchange income and other fees. Our principal expenses are interest paid on deposits, employee compensation and benefits, occupancy and equipment expense, and data processing and telecommunications expense.

We operate a full-service trust department and an investment center. The investment center is operated through Financial Resources Group, Inc., Jacksonville Savings Bank’s wholly-owned subsidiary.

Selected Consolidated Financial Information

The following tables set forth certain information concerning the consolidated financial position, consolidated data from operations and performance ratios of the Company at the dates and for the years indicated. Selected quarterly financial data for each of the last two years is set forth at Note 20 to the Consolidated Financial Statements.

	At December 31,
	2017		2016		2015		2014		2013
	(In thousands)
Selected Financial Condition Data:

Total assets	$	324,996	$	319,319	$	308,642	$	311,925	$	318,419
Cash and cash equivalents		5,890		12,910		4,103		9,612		6,099
Investment securities		56,164		55,748		64,295		55,265		60,639
Mortgage-backed securities		55,231		44,413		23,178		41,420		48,346
Loans, net⁽¹⁾		186,736		184,951		193,579		184,954		180,902
Federal Home Loan Bank of Chicago stock, at cost		491		364		1,114		1,114		1,114
Foreclosed assets, net		11		—		331		177		282
Bank owned life insurance		7,439		7,271		7,094		6,913		6,815
Deposits		252,700		258,678		239,282		245,942		251,738
Federal Home Loan Bank of Chicago advances		10,900		—		8,500		5,000		10,800
Short-term borrowings		5,212		7,135		6,632		8,822		8,810
Stockholders’ equity		48,753		46,246		45,567		45,016		41,139

	For the Years Ended December 31,
	2017			2016		2015		2014		2013
	(In thousands, except per share amounts)
Selected Operating Data:

Interest income	$	11,441		$	11,435	$	11,514	$	11,892	$	12,078
Interest expense		1,167			1,048		1,127		1,451		1,782
Net interest income		10,274			10,387		10,387		10,441		10,296
(Credit) provision for loan losses		(180	)		120		140		240		170
Net interest income after provision for loan losses		10,454			10,267		10,247		10,201		10,126
Noninterest income		4,333			4,261		4,187		3,919		4,443
Noninterest expense		10,246			10,392		10,341		10,213		10,167
Income before income tax		4,541			4,136		4,093		3,907		4,402
Provision for income taxes		2,100			1,088		1,067		934		1,188
Net income	$	2,441		$	3,048	$	3,026	$	2,973	$	3,214
Earnings per share:
Basic	$	1.36		$	1.72	$	1.71	$	1.66	$	1.73
Diluted	$	1.35		$	1.70	$	1.70	$	1.65	$	1.73
Dividends per share	$	0.40		$	0.40	$	1.32	$	0.32	$	0.31

(1) Includes loans held for sale of $179,000, $503,000, $539,000, $236,000, and $262,000, at December 31, 2017, 2016, 2015, 2014, and 2013, respectively.

	At or For the Years Ended December 31,
	2017			2016			2015			2014			2013

Selected Financial Ratios and Other Data:

Performance Ratios:
Return on average assets (ratio of net income to average total assets)		0.76	%		0.98	%		0.99	%		0.96	%		1.02	%
Return on average equity (ratio of net income to average equity)		5.04	%		6.45	%		6.57	%		6.80	%		7.51	%
Interest rate spread⁽¹⁾		3.29	%		3.48	%		3.54	%		3.48	%		3.38	%
Net interest margin⁽²⁾		3.41	%		3.58	%		3.65	%		3.61	%		3.51	%
Efficiency ratio⁽³⁾		70.14	%		70.95	%		70.95	%		71.12	%		68.98	%
Dividend pay-out ratio		29.37	%		22.49	%		77.88	%		19.20	%		17.60	%
Non-interest expense to average total assets		3.19	%		3.35	%		3.39	%		3.29	%		3.23	%
Average interest-earning assets to average interest-bearing liabilities		129.79	%		127.86	%		127.68	%		124.52	%		121.63	%
Average equity to average total assets		15.08	%		15.23	%		15.11	%		14.08	%		13.58	%

Asset Quality Ratios:
Nonperforming assets to total assets		0.55	%		0.48	%		0.76	%		0.78	%		0.65	%
Nonperforming loans to total loans		0.93	%		0.82	%		1.03	%		1.21	%		0.97	%
Allowance for loan losses to nonperforming loans		164.29	%		196.56	%		144.45	%		130.57	%		191.14	%
Allowance for loan losses to gross loans⁽⁴⁾		1.52	%		1.60	%		1.49	%		1.57	%		1.85	%

Capital Ratios (Bank):
Total capital (to risk-weighted assets)		19.94	%		19.52	%		19.15	%		18.81	%		18.15	%
Tier I capital (to risk-weighted assets)		18.69	%		18.27	%		17.90	%		17.56	%		16.89	%
Common equity Tier I capital (to risk-weighted assets)		18.69	%		18.27	%		17.90	%		—			—
Tier I capital (to total assets)		13.00	%		12.58	%		12.82	%		12.25	%		11.51	%

Other Data:
Number of offices		6			6			6			6			6
Full time equivalent employees		91			91			93			96			98

(1)

The interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted- average cost of interest-bearing liabilities for the year.

(2)

The net interest margin represents net interest income as a percent of average interest-earning assets for the year.

(3)

The efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.

(4)

Gross loans include loans held for sale.

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

General

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

Certain statements in this annual report and throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward looking statements. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and experiences of the Company, are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions. Factors that impact such forward looking statements include, among others, changes in general economic conditions, changes in interest rates, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan and investment portfolios, demand for loan products, deposit flows, and competition. We decline any obligation to publicly announce future events or developments that may affect the forward-looking statements herein.

Operating Strategy – Overview

Our business consists principally of attracting deposits from the general public and using deposits and borrowings to originate mortgage loans secured by one- to four-family residences, commercial real estate and agricultural real estate. In addition, we originate commercial and agricultural business loans and consumer loans. Our net income, like other financial institutions, is primarily dependent on our net interest income, which is the difference between the income earned on our interest-earning assets, such as loans and investments, and the cost of our interest-bearing liabilities, primarily deposits and borrowings. Our net income is also affected by provisions for loan losses and other noninterest income and expenses. General economic conditions, particularly changes in market interest rates, government legislation, monetary policies, and attendant actions of the regulatory authorities are the external influences affecting many of the factors of our net income.

Management has implemented various strategies designed to enhance our profitability. These strategies include reducing our exposure to interest rate risk by selling fixed-rate loans, offering other fee-based services to our customers, and improving operating efficiencies. We recognize the need to establish and adhere to strict loan underwriting criteria and guidelines. We generally limit our investment portfolio to securities issued by the United States government and government-sponsored enterprises, mortgage-backed securities collateralized by United States government-sponsored enterprises, and bank-qualified general obligation municipal issues. We continue to service our existing borrowers and originate new loans to credit-worthy borrowers in an effort to meet the credit needs of our community.

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 judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Allowance for Loan Losses. We believe 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 judgment, deserve current recognition in estimating loan losses. The evaluation includes a review of all loans on which full collectability may not be reasonably assured. Other factors considered by management include the size and composition of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions and historical losses on each portfolio category. In connection with the determination of the allowance for loan losses, management uses 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 our loan portfolio, will not request an increase in the allowance for loan losses. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary if loan quality deteriorates.

Foreclosed Assets. Foreclosed assets, consisting of 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 foreclosed asset could differ from the original estimate. If it is determined that the fair value has declined subsequent to foreclosure, the asset is written down through a charge to noninterest expense. Operating costs associated with the assets after acquisition are also recorded as noninterest expense. Gains and losses on the disposition of foreclosed assets are netted and posted to noninterest 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. We estimate 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, we estimate fair value. Other factors such as model assumptions and market dislocations can affect estimates of fair value.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The update provides a five-step revenue recognition model for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers (unless the contracts are included in the scope of other standards). The guidance requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date, which provides a one-year deferral of ASU 2014-09. For public entities, the guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and must be applied either retrospectively or using the modified retrospective approach. Management has evaluated the impact of the new guidance and it will not have a material impact on the Company’s revenue recognition practices. However, the Company does expect additional documentation and disclosure.

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

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

In March 2016, FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objective of the simplification initiative is to identify, evaluate, and improve areas of US GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas for simplification involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The new guidance was effective for public companies for reporting periods beginning after December 15, 2016. The Company adopted the ASU and there was not a material impact on the Company’s financial statements.

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

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

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

Recent Developments

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

Financial Condition

Total assets at December 31, 2017 were $325.0 million, an increase of $5.7 million, or 1.8%, from $319.3 million at December 31, 2016. The increase in total assets was primarily due to a $10.8 million increase in mortgage-backed securities and a $2.1 million increase in loans, partially offset by a decrease of $7.0 million in cash and cash equivalents.

Available-for-sale mortgage-backed securities increased $10.8 million, or 24.4%, to $55.2 million at December 31, 2017 from $44.4 million at December 31, 2016. The growth in mortgage-backed securities reflected the reinvestment of cash and cash equivalents. Cash and cash equivalents decreased $7.0 million to $5.9 million at December 31, 2017, including a $3.5 million decrease in federal funds sold.

Net loans receivable (excluding loans held for sale) increased $2.1 million, or 1.1%, to $186.6 million at December 31, 2017 from December 31, 2016. The increase in loans was primarily due to increases of $5.3 million in commercial business loans and $1.9 million in agricultural real estate loans, partially offset by decreases of $4.2 million in commercial real estate loans and $1.5 million in home equity loans. The increase in commercial business loans primarily reflected additional advances to existing borrowers, while the decrease in commercial real estate reflected the payoff of three loans resulting from the sale of the securing properties.

At December 31, 2017 and 2016, we had $2.7 million recorded in goodwill. At these dates our goodwill was not impaired. At December 31, 2017, we also had $547,000 in mortgage servicing rights. Our mortgage servicing rights asset represented approximately 43 basis points of the $128.0 million in loans that we serviced. We obtain an independent valuation of the mortgage servicing rights at least annually. Our most recent valuation was obtained as of December 31, 2017, which reported a fair value of approximately $857,000.

Total deposits decreased $6.0 million, or 2.3%, to $252.7 million at December 31, 2017. The decrease was primarily due to an $8.5 million decrease in time deposit accounts, partially offset by a growth in transaction accounts. Borrowings, which consisted of $10.9 million in overnight FHLB advances and $5.2 million in overnight repurchase agreements at December 31, 2017, increased $9.0 million, or 125.8%, from December 31, 2016. The repurchase agreements are a cash management service provided to our commercial deposit customers.

Stockholders’ equity increased $2.5 million, or 5.4%, to $48.8 million at December 31, 2017. The increase in stockholders’ equity was primarily the result of $2.4 million in net income and a $418,000 increase in accumulated other comprehensive income, partially offset by the payment of $717,000 in cash dividends during 2017. Accumulated other comprehensive income increased primarily due to a decrease in unrealized losses, net of tax, on available-for-sale securities, reflecting increases in market prices for securities in our portfolio due to increases in market interest rates. Other comprehensive income (loss) does not include changes in the fair value of other financial instruments included on the balance sheet. Our book value per share increased to $26.89 as of December 31, 2017 from $25.69 at December 31, 2016.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

General

Net income for the year ended December 31, 2017 totaled $2.44 million, or $1.36 per basic common share and $1.35 per diluted common share, compared to net income for the year ended December 31, 2016 of $3.0 million, or $1.72 per basic common share and $1.70 per diluted common share. Net income decreased $607,000 in 2017 as compared to 2016 primarily due to an increase of $1.0 million in income tax expense. The increase in income tax expense was result of $816,000 in additional income tax expense because of the revaluation of the deferred tax assets required due to the passage of the Tax Cuts & Jobs Act. Net income for the year benefited from decreases of $300,000 in provision for loan losses and $146,000 in noninterest expense and an increase of $72,000 in noninterest income, partially offset by a decrease of $113,000 in net interest income. Excluding the impact of the new tax law, net income would have been $3.3 million, or $1.82 per basic common share, for 2017.

Interest Income

Interest income increased $6,000, or 0.1%, to $11.4 million for the year ended December 31, 2017 from the year ended December 31, 2016. The $6,000 increase in interest income resulted from increased income of $506,000 on mortgage-backed securities and $14,000 in other interest-earning assets, nearly offset by decreased income of $341,000 on loans and $173,000 on investment securities.

Interest income on loans decreased $341,000 to $8.8 million for the year ended December 31, 2017 from $9.2 million for the year ended December 31, 2016, primarily due to a decrease in the average balance of loans. The average balance of the loan portfolio decreased $6.6 million to $185.3 million during 2017. The decrease in the average balance of loans was primarily due to decreases in the average balance of commercial real estate loans and agricultural business loans, reflecting lower balances on lines of credit during the year. The average yield on loans decreased to 4.77% during 2017 from 4.78% during 2016. The stable average yield reflected the continuing low interest rate environment.

Interest income on investment securities decreased $173,000 to $1.5 million for the year ended December 31, 2017. The decrease reflected a $7.3 million decrease in the average balance of investment securities to $53.1 million during 2017. The decrease in the average balance of investment securities mostly reflected the decrease in the average balance of U.S. agency bonds, primarily due to sales. The average yield of investment securities increased to 2.89% during 2017 from 2.83% during 2016. The majority of our investment portfolio (excluding mortgage-backed securities) consists of municipal bonds which are exempt from federal taxation, resulting in a reduction in income tax expense. Adjusting for this benefit, the tax equivalent yield of the investment portfolio equaled 4.11% for 2017 compared to 3.94% for 2016.

Interest income on mortgage-backed securities increased $506,000 to $990,000 for the year ended December 31, 2017 from the year ended December 31, 2016. The increase was primarily due to an increase of $26.2 million in the average balance of mortgage-backed securities to $53.9 million during 2017. The increase in the average balance of mortgage-backed securities reflected the investment of funds from loan payments, deposit growth, and sales of investment securities, as loan demand remained weak, and acceptable higher-yielding investment securities were not available. The increase in interest income on mortgage-backed securities also benefited from an increase in the average yield of mortgage-backed securities to 1.84% during 2017 from 1.75% during 2016. The average yield continues to be affected by low long-term rates and the impact of higher premium amortization resulting from faster national prepayment speeds on mortgage-backed securities. The amortization of premiums on mortgage-backed securities, which reduces the average yield, increased $450,000 to $883,000 during 2017, compared to $433,000 during 2016. The increase in premium amortization also reflected the increase in the average volume of mortgage-backed securities.

Interest income from other interest-earning assets, which consisted of interest-earning demand and time deposits and federal funds sold, increased $14,000 to $76,000 during the year ended December 31, 2017, from the year ended December 31, 2016. The increase in interest income was due to an increase in the average yield on these investments to 0.84% during 2017 from 0.62% during 2016, reflecting the increase in short-term interest rates. The average balance of other interest-earning assets decreased to $9.1 million during 2017 from $10.0 million during 2016, reflecting a decrease in the average balance of federal funds sold.

Interest Expense

Total interest expense increased $119,000, or 11.3%, to $1.2 million during the year ended December 31, 2017 from the year ended December 31, 2016. The increase in interest expense was due to increases of $80,000 in the cost of deposits and $39,000 in the cost of borrowings.

Interest expense on deposits increased $80,000 to $1.1 million during the year ended December 31, 2017 from $1.0 million during the year ended December 31, 2016. While the average rate paid on deposits increased only two basis points to 0.49% during 2017, our interest expense on deposits was impacted by the higher average rate paid on interest-bearing checking accounts, offset by the lower average rate paid on time deposits. The higher rate reflected the growth in higher-cost, public funds during 2017. The average balance of deposits increased to $225.9 million during 2017 from $220.2 million during 2016. The increase in the average balance of deposits was primarily due to a $10.7 million increase in the average balance of transaction accounts, partially offset by a decrease of $5.1 million in the average balance of time deposit accounts.

Interest paid on borrowed funds increased $39,000 to $62,000 during 2017 from $23,000 during 2016. Borrowed funds consisted of overnight repurchase agreements and overnight advances from the FHLB. The average rate paid on borrowed funds increased 63 basis points to 0.98% during 2017 from 0.35% during 2016, reflecting the increase in short-term interest rates. The average balance of borrowed funds decreased to $6.3 million during 2017 from $6.6 million during 2016.

Net Interest Income

As a result of the changes in interest income and interest expense noted above, net interest income decreased by $113,000 to $10.3 million in 2017 as compared to 2016. Our interest rate spread decreased by 19 basis points to 3.29% during 2017 from 3.48% during 2016. Our net interest margin decreased 17 basis points to 3.41% during 2017 from 3.58% during 2016. Our ratio of average interest earning assets to average interest bearing liabilities for the years ended December 31, 2017 and 2016 was 1.30x and 1.28x, 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 known and probable losses in the loan portfolio, in accordance with accounting principles generally accepted in the United States of America.

The allowance for loan losses decreased $128,000 during 2017 to $2.9 million as of December 31, 2017. The decrease was the result of a credit in the provision for loan losses, due in part to net recoveries during 2017. We recorded a negative provision for loan losses of $180,000 for the year ended December 31, 2017, reflecting the receipt of a principal payoff and significant recovery from a troubled commercial borrower during the fourth quarter of 2017. Net charge-offs decreased to a net recovery of $52,000 during 2017 from a net charge-off of $32,000 during 2016.

The credit in 2017 and provision in 2016 were 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 loan identified by management. The review also considered the local economy and the level of bankruptcies and foreclosures in our market area.

The following table sets forth the composition of our non-performing assets at December 31, 2017 and 2016, respectively.

	December 31, 2017			December 31, 2016
	(Dollars in thousands)
Nonaccrual loans:
Real estate loans:
One- to four-family residential	$	367		$	590
Commercial		1,058			709
Agricultural		—			—
Home equity		86			50
Commercial business loans		137			17
Agricultural business loans		—			—
Consumer loans		104			164

Total nonaccrual loans		1,752			1,530

Loans delinquent 90 days or greater and still accruing:
Real estate loans:
One- to four-family residential		—			—
Commercial		—			—
Agricultural		—			—
Home equity		—			—
Commercial business loans		—			—
Agricultural business loans		—			—
Consumer loans		—			—

Total loans delinquent 90 days or greater and still accruing		—			—

Total nonperforming loans		1,752			1,530

Other real estate owned and foreclosed assets:
Real estate loans:
One- to four-family residential		11			—
Commercial		—			—
Agricultural		—			—
Home equity		—			—
Commercial business loans		—			—
Agricultural business loans		—			—
Consumer loans		10			—

Total other real estate owned and foreclosed assets		21			—

Total nonperforming assets	$	1,773		$	1,530

Ratios:
Nonperforming loans to total loans		0.93	%		0.82	%
Nonperforming assets to total assets		0.55			0.48

Management monitors all past due loans and nonperforming assets. Such loans are placed under close supervision with consideration given to the need for additions to the allowance for loan losses and, if appropriate, partial or full charge-off. At December 31, 2017, we had no loans 90 days or more delinquent which were still accruing interest. Nonperforming assets increased by $243,000 to $1.8 million at December 31, 2017. The increase in the level of nonperforming assets reflected increases of $222,000 in nonperforming loans and $21,000 in foreclosed assets. The increase in nonperforming loans primarily reflected the nonaccrual status of two loans totaling $392,000 secured by commercial real estate properties, both of which are listed for sale.

The allowance for loan losses as a percentage of nonperforming loans decreased to 164.29% at December 31, 2017, as compared to 196.56% at December 31, 2016. The decrease in this coverage ratio was due to both a decrease in the allowance for loan losses and an increase in nonperforming loans during 2017. The allowance for loan losses at $2.9 million represented 1.52% of total loans at December 31, 2017. On this same date, nonperforming loans totaled 0.93% of total loans. We have an experienced chief lending officer, collections, and independent loan review program which monitor the loan portfolio and seek to prevent any deterioration of asset quality.

The following table shows the principal amount of special mention and classified loans at December 31, 2017 and December 31, 2016.

	December 31, 2017		December 31, 2016
	(In thousands)
Special Mention loans	$	1,360	$	2,431
Substandard loans		5,890		5,229
Total Special Mention and Substandard loans	$	7,250	$	7,660

Classified and special mention loans decreased $410,000 to $7.3 million at December 31, 2017 from $7.7 million at December 31, 2016. The decrease in classified and special mention loans during 2017 was due to a decrease of $1.1 million in special mention loans, partially offset by an increase of $661,000 in substandard loans. The decrease in special mention loans reflected $999,000 in loans downgraded to substandard and $386,000 in principal reductions, partially offset by $316,000 in additional loans listed as special mention during 2017. The increase in substandard loans was primarily related to the $999,000 in downgraded loans and $893,000 in additional loans classified as substandard, partially offset by charge-offs of $367,000, principal reductions of $357,000, and $233,000 of loans transferred to real estate owned during 2017.

Noninterest Income

Noninterest income increased $72,000, or 1.7%, to $4.3 million for the year ended December 31, 2017, compared to the year ended December 31, 2016. The increase in noninterest income resulted primarily from increases of $61,000 in commissions, $43,000 from service charges on deposits, $33,000 in ATM and bank card interchange income and $31,000 in income from fiduciary activities, partially offset by a decrease of $71,000 in gains on the sale of available for sale securities.

The increase in income from commissions and fiduciary activities was primarily due to growth in assets under management and favorable market conditions. The increase in service charges on deposits was mostly due to an increase in fees related to nonsufficient funds, reflecting changes made to our overdraft program during 2016. ATM and debit card interchange income also increased reflecting a higher volume of transactions. The decrease in gains on the sales of securities reflected a lower volume of sales, as securities totaling $32.6 million were sold during 2017, compared to $39.3 million during 2016. The sales during 2017 and 2016 were primarily made to reduce price volatility and improve yields.

Noninterest Expense

Total noninterest expense decreased $146,000, or 1.4%, to $10.2 million for the year ended December 31, 2017, compared to the year ended December 31, 2016. The decrease in noninterest expense was primarily due to decreases of $98,000 in salaries and employee benefits, $49,000 in marketing expense, and $113,000 in other expense, partially offset by an increase of $107,000 in professional fees.

The decrease in salaries and employee benefits expense reflected a decrease in average full-time equivalent employees during 2017. Marketing expense decreased due to the additional advertising and promotion expenses related to the Bank’s 100^th anniversary celebration during 2016. The decrease in other expense was primarily due to a decrease in real estate owned expense reflecting higher gains on the sale of real estate owned during 2017. The increase in professional fees was primarily due to strategic expenses related to the recently announced merger.

Income Taxes

The provision for income taxes increased $1.0 million to $2.1 million during 2017 compared to $1.1 million during 2016. The increase in the income tax provision primarily reflected the new tax law and resulting revaluation of our deferred tax assets, which resulted in additional income tax expense of $816,000. Our effective tax rate was 46.3% for 2017 and 26.3% for 2016.

Average Balances and Yields

The following table sets forth, for the years indicated, information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities, resultant yields, interest rate spread, net interest margin, and ratio of average interest-earning assets to average interest-bearing liabilities.

	For the Years Ended December 31,
	2017							2016							2015
	Average Outstanding Balance		Interest		Yield/ Rate			Average Outstanding Balance		Interest		Yield/ Rate			Average Outstanding Balance		Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans ⁽¹⁾	$	185,264	$	8,839		4.77	%	$	191,887	$	9,180		4.78	%	$	189,667	$	9,294		4.90	%
Investment securities ⁽²⁾		53,122		1,536		2.89			60,388		1,709		2.83			56,859		1,643		2.89
Mortgage-backed securities		53,897		990		1.84			27,701		484		1.75			31,248		542		1.74
Cash and cash equivalents		9,065		76		0.84			10,037		62		0.62			6,478		35		0.54
Total interest-earning assets		301,348		11,441		3.79	%		290,013		11,435		3.94	%		284,252		11,514		4.05	%
Non-interest-earning assets		19,645							20,253							20,702
Total assets	$	320,993						$	310,266						$	304,954
Interest-bearing liabilities:
Interest bearing checking	$	63,064	$	336		0.53	%	$	55,610	$	168		0.30	%	$	39,270	$	57		0.14	%
Savings accounts		46,110		88		0.19			43,265		86		0.20			39,954		80		0.20
Certificates of deposit		73,931		568		0.77			78,988		659		0.83			86,614		852		0.98
Money market savings		34,641		99		0.29			34,741		100		0.29			34,947		101		0.29
Money market deposits		8,127		14		0.17			7,628		12		0.15			7,957		11		0.15
Total interest-bearing deposits		225,873		1,105		0.49			220,232		1,025		0.47			208,742		1,101		0.53
Federal Home Loan Bank advances		937		13		1.34			1,348		4		0.30			7,877		19		0.24
Short-term borrowings		5,369		49		0.92			5,247		19		0.35			6,009		7		0.12
Total borrowings		6,306		62		0.98			6,595		23		0.35			13,886		26		0.19
Total interest-bearing liabilities		232,179		1,167		0.50	%		226,827		1,048		0.46	%		222,628		1,127		0.51	%
Non-interest-bearing liabilities		40,406							36,197							36,238
Total liabilities		272,585							263,024							258,866
Stockholders’ equity		48,408							47,242							46,088
Total liabilities and stockholders’ equity	$	320,993						$	310,266						$	304,954

Net interest income			$	10,274						$	10,387						$	10,387
Net interest rate spread ⁽³⁾						3.29	%						3.48	%						3.54	%
Net interest-earning assets ⁽⁴⁾			$	69,169						$	63,186						$	61,624
Net interest margin ⁽⁵⁾						3.41	%						3.58	%						3.65	%
Average interest-earning assets to average interest-bearing liabilities						129.79	%						127.86	%						127.68	%

(1)

Includes non-accrual loans and loans held for sale and fees of $83,000 for 2017, $93,000 for 2016, and $104,000 for 2015.

(2)

Includes Federal Home Loan Bank stock and U.S. Agency securities.

(3)

Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(4)

Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(5)

Net interest margin represents net interest income divided by average total interest-earning assets.

Rate/volume analysis

The following table presents the effects of changing rates and volumes on our net interest income for the fiscal years indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

	Years Ended December 31, 2017 vs. 2016									Years Ended December 31, 2016 vs. 2015
	Increase (Decrease) Due to						Total Increase			Increase (Decrease) Due to						Total Increase
	Rate			Volume			(Decrease)			Rate			Volume			(Decrease)
	(In thousands)
Interest-earning assets:
Loans	$	(25	)	$	(316	)	$	(341	)	$	(222	)	$	108		$	(114	)
Investment securities		37			(209	)		(172	)		(35	)		100			65
Mortgage-backed securities		26			480			506			4			(62	)		(58	)
Cash and cash equivalents		20			(7	)		13			5			22			27

Total interest-earning assets	$	58		$	(52	)	$	6		$	(248	)	$	168		$	(80	)

Interest-bearing liabilities:
Interest bearing checking	$	143		$	25		$	168		$	81		$	31		$	112
Savings accounts		(4	)		6			2			(1	)		7			6
Certificates of deposit		(50	)		(41	)		(91	)		(122	)		(71	)		(193	)
Money market savings		—			(1	)		(1	)		—			(1	)		(1	)
Money market deposits		1			1			2			1			(1	)		—
Total interest-bearing deposits		90			(10	)		80			(41	)		(35	)		(76	)
Federal Home Loan Bank advances		10			(1	)		9			3 3			(18	)		(15	)
Short-term borrowings		30			—			30			13			(1	)		12
		40			(1	)		39			16			(19	)		(3	)
Total interest-bearing liabilities		130			(11	)		119			(25	)		(54	)		(79	)

Change in net interest income	$	(72	)	$	(41	)	$	(113	)	$	(223	)	$	222		$	(1	)

Asset and Liability Management

As a financial institution, we face risk from interest rate volatility. Fluctuations in interest rates affect both our level of income and expense on a large portion of our assets and liabilities. Fluctuations in interest rates also affect the market value of all interest-earning assets.

The primary goal of our interest rate risk management strategy is to maximize net interest income while maintaining an acceptable interest rate risk profile. We seek to coordinate asset and liability decisions so that, under changing interest rate scenarios, net interest income remains within an acceptable range.

Our policy in recent years has been to reduce our interest rate risk by better matching the maturities of our interest rate sensitive assets and liabilities, selling our fixed-rate residential mortgage loans with terms of 15 years or more to the secondary market, originating adjustable-rate loans, 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 mortgage loans. Our portfolio of mortgage-backed securities also provides monthly cash flows. The remaining investment portfolio has been structured to better match the maturities and rates of our interest-bearing liabilities. With respect to liabilities, we have attempted to increase our savings and transaction deposit accounts, which management believes are more resistant to changes in interest rates than time deposit accounts. The board of directors appoints the Asset-Liability Management Committee (“ALCO”), which is responsible for reviewing our asset and liability management policies. The ALCO meets quarterly to review interest rate risk and trends, as well as liquidity and capital requirements.

We use comprehensive asset/liability software provided by a third-party vendor to perform interest rate sensitivity analysis for all product categories. The primary focus of our analysis is 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 our interest sensitive assets and liabilities are analyzed by product type and repriced based upon current offering rates. The software performs interest rate sensitivity analysis by performing rate shocks of plus or minus 300 basis points in 100 basis point increments. As a result of the historically low interest rate environment, the table below only shows the change in our assets and liabilities based upon a 100 basis point decrease in interest rates.

The following table shows projected results at December 31, 2017 and 2016 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
	December 31, 2017						December 31, 2016						ALCO
Rate Shock	$ Change			% Change			$ Change			% Change			Benchmark
	(Dollars in thousands)

+300 basis points		(220	)		(1.95	)%		(99	)		(0.87	)%		>(20.00	)%
+200 basis points		(140	)		(1.24	)		(64	)		(0.56	)		>(20.00	)%
+100 basis points		(51	)		(0.45	)		(13	)		(0.12	)		>(12.50	)%
(100) basis points		(274	)		(2.43	)		(195	)		(1.70	)		>(12.50	)%

The table above indicates that at December 31, 2017, in the event of a 200 basis point increase in interest rates, we would experience a 1.24% decrease in net interest income. In the event of a 100 basis point decrease in interest rates, we would experience a 2.43% decrease in net interest income.

The effects of interest rates on net interest income are not predictable. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments, and deposit run-offs, and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in these computations. Although some assets and liabilities may have similar maturity or periods of repricing, they may react at different times and in different degrees to changes in market interest rates. Rates on other types of assets and liabilities may lag behind changes in market interest rates. Assets, such as adjustable-rate mortgage loans, generally have features that restrict changes in interest rates on a short-term basis and over the life of the asset. After a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in making the calculations set forth above. Additionally, increased credit risk may result if our borrowers are unable to meet their repayment obligations as interest rates increase.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future short-term financial obligations. Our ALCO Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. At December 31, 2017, we had access to immediately available funds of an additional $65.2 million from the Federal Home Loan Bank of Chicago and approximately $36.2 million in overnight federal funds purchased.

We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, and investing activities. At December 31, 2017 and 2016, cash and cash equivalents totaled $5.9 million and $12.9 million, respectively. Our primary sources of funds include deposits, borrowings, proceeds from sales of loans, maturities and sales of investments, and principal repayments from loans and mortgage-backed securities (both scheduled and prepayments). During the years ended December 31, 2017 and 2016, the most significant sources of funds have been loan sales, investment sales and principal payments, and short-term borrowings.

Our cash and cash equivalents decreased $7.0 million during the year ended December 31, 2017, compared to an increase of $8.8 million during the year ended December 31, 2016. Net cash provided by operating activities remained stable at $4.2 million during 2017 and 2016. Net cash used in investing activities increased to $13.7 million during 2017 from the $4.6 million used during 2016. Cash used in net loan originations and payments increased to $2.1 million during 2017 from $8.6 million in cash provided during 2016. Cash provided by financing activities decreased to $2.5 million during 2017 from the $9.2 million in cash used during 2016. The decrease was primarily due to the decline in deposit accounts during 2017.

While loan sales and principal repayments on mortgage-backed securities are relatively predictable, deposit flows and early prepayments are more influenced by interest rates, general economic conditions, and competition. We attempt to price our 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. We adjust our investments in liquid assets based upon management’s assessment of expected loan demand, projected purchases of investment and mortgage-backed securities, expected deposit flows, yields available on interest-earning deposits, and liquidity of our asset/liability management program. Excess liquidity is generally invested in interest-earning overnight deposits, federal funds sold, and other short-term U.S. agency obligations. We use securities sold under agreements to repurchase as an additional funding source. The agreements represent our obligations to third parties and are secured by investments which we pledge as collateral. At December 31, 2017, we had $5.2 million in outstanding repurchase agreements, which were utilized for overnight funding.

If we require funds beyond our ability to generate them internally, we have the ability to borrow funds from the Federal Home Loan Bank. We may borrow from the Federal Home Loan Bank under a blanket agreement which assigns all investments in Federal Home Loan Bank stock as well as qualifying loans as collateral to secure the amounts borrowed. This borrowing arrangement is limited to the lesser of 35% of our total assets, the balance of qualifying loans, or twenty times the balance of Federal Home Loan Bank stock held by us. At December 31, 2017, we had $10.9 million in outstanding advances and a remaining borrowing capacity of approximately $65.2 million.

We maintain levels of liquid assets as established by the board of directors. Our liquidity ratio, adjusted for pledged assets, at December 31, 2017 and 2016 was 36.6% and 36.3%, respectively. This ratio represents the volume of short-term liquid assets as a percentage of net deposits and borrowings due within one year.

We must also maintain adequate levels of liquidity to ensure the availability of funds to satisfy loan commitments. We anticipate that we will have sufficient funds available to meet our current commitments principally through the use of current liquid assets and through our borrowing capacity discussed above. The following table summarizes our outstanding loan commitments at December 31, 2017 and 2016.

	December 31, 2017		December 31, 2016
	(In thousands)
Commitments to fund loans	$	45,996	$	47,944
Standby letters of credit		80		110

Quantitative measures established by regulation to ensure capital adequacy require Jacksonville Savings Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier I, and common equity Tier 1 capital to risk-weighted assets and Tier I capital to average assets. In addition, the Bank is subject to the new capital conservation buffer which began phasing in during the first quarter of 2016 at 0.625% of risk-weighted assets. For 2017, the conservation buffer was 1.25% of risk-weighted assets and will continue to increase 0.625% each year until full phased in at 2.50% of risk-weighted assets beginning in the first quarter of 2019. At December 31, 2017, Jacksonville Savings Bank met all capital adequacy requirements to which it is subject.

The Director of the Illinois Department of Financial and Professional Regulation is authorized to require a savings bank to maintain a minimum capital level based upon the savings bank’s financial condition or history, management or earnings. If a savings bank’s core capital ratio falls below the required level, the Director may direct the savings bank to adhere to a specific written plan established by the Director 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 December 31, 2017, Jacksonville Savings Bank’s core capital ratio was 13.00% of total adjusted average assets, which exceeded the required ratio of 4.00%.

As of December 31, 2017, the Federal Deposit Insurance Corporation categorized Jacksonville Savings Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Jacksonville Savings Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed Jacksonville Savings Bank’s category. Jacksonville Savings Bank’s actual capital ratios at December 31, 2017 and 2016 are presented in the table below.

	Well Capitalized			December 31, 2017 Actual			December 31, 2016 Actual

Tier 1 Capital to Average Assets		5.00	%		13.00	%		12.58	%
Common Equity Tier 1 Capital to Risk-Weighted Assets		6.50	%		18.69	%		18.27	%
Tier 1 Capital to Risk-Weighted Assets		8.00	%		18.69	%		18.27	%
Total Capital to Risk-Weighted Assets		10.00	%		19.94	%		19.52	%

Effect of Inflation and Changing Prices

The consolidated financial statements and related notes of Jacksonville Bancorp, Inc. have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

* * * * * *

Report of Independent Registered Public Accounting Firm

Audit Committee, Board of Directors, and Stockholders

Jacksonville Bancorp, Inc.

Jacksonville, Illinois

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Jacksonville Bancorp, Inc. (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2005.

/s/ BKD LLP

Decatur, Illinois
March 7, 2018

Jacksonville Bancorp, Inc.

Consolidated Balance Sheets

December 31, 2017 and 2016

Assets

	2017		2016

Cash and due from banks	$	2,532,589	$	5,984,640
Interest-earning demand deposits in banks		3,357,039		6,925,284

Cash and cash equivalents		5,889,628		12,909,924

Interest-earning time deposits in banks		998,000		750,000
Available-for-sale securities:
Investment securities		56,164,109		55,748,263
Mortgage-backed securities		55,231,197		44,413,177
Other investments		52,502		55,481
Loans held for sale		178,833		503,003
Loans, net of allowance for loan losses of $2,879,510 and $3,007,395 at December 31, 2017 and 2016		186,557,550		184,448,003
Premises and equipment, net of accumulated depreciation of $6,643,926 and $6,519,729 at December 31, 2017 and 2016		4,260,196		4,498,653
Federal Home Loan Bank stock		490,500		363,800
Foreclosed assets held for sale, net		10,500		—
Cash surrender value of life insurance		7,439,062		7,271,438
Interest receivable		1,997,798		1,588,545
Deferred income taxes		1,892,749		2,738,789
Income taxes receivable		—		45,444
Mortgage servicing rights		547,092		552,827
Goodwill		2,726,567		2,726,567
Other assets		560,038		704,845

Total assets	$	324,996,321	$	319,318,759

See Notes to Consolidated Financial Statements

Jacksonville Bancorp, Inc.

Consolidated Balance Sheets

December 31, 2017 and 2016

Liabilities and Stockholders’ Equity

	2017			2016
Liabilities
Deposits
Demand	$	34,335,977		$	33,633,972
Savings, NOW and money market		146,716,676			144,857,452
Time		71,647,779			80,186,536

Total deposits		252,700,432			258,677,960

Short-term borrowings		16,112,154			7,135,182
Deferred compensation		4,874,292			4,680,268
Advances from borrowers for taxes and insurance		1,153,926			1,102,204
Interest payable		106,068			106,755
Income taxes payable		28,502			—
Dividends payable		181,287			179,904
Other liabilities		1,086,750			1,190,921

Total liabilities		276,243,411			273,073,194

Stockholders’ Equity
Preferred stock, $.01 par value, authorized 10,000,000 shares; none issued and outstanding		—			—
Common stock, $.01 par value; authorized 25,000,000 shares; issued 1,812,871 – December 31, 2017 and 1,800,244 – December 31, 2016		18,129			18,002
Additional paid-in capital		14,128,221			13,908,728
Retained earnings		35,512,950			33,667,499
Accumulated other comprehensive income (loss)		(758,740	)		(1,176,294	)
Unallocated ESOP shares		(147,650	)		(172,370	)

Total stockholders’ equity		48,752,910			46,245,565

Total liabilities and stockholders’ equity	$	324,996,321		$	319,318,759

See Notes to Consolidated Financial Statements

Jacksonville Bancorp, Inc.

Consolidated Statements of Income

Years Ended December 31, 2017 and 2016

	2017			2016
Interest and Fee Income
Loans, including fees	$	8,838,456		$	9,179,752
Debt securities
Taxable		280,451			410,510
Tax-exempt		1,255,591			1,298,051
Mortgage-backed securities		989,912			484,264
Other		76,168			62,407

Total interest income		11,440,578			11,434,984

Interest Expense
Deposits		1,105,281			1,025,232
Short-term borrowings		49,136			19,064
Federal Home Loan Bank advances		12,582			4,030

Total interest expense		1,166,999			1,048,326

Net Interest Income		10,273,579			10,386,658

Provision (Credit) for Loan Losses		(180,000	)		120,000

Net Interest Income After Provision for Loan Losses		10,453,579			10,266,658

Noninterest Income
Fiduciary activities		359,435			328,917
Commission income		1,285,266			1,223,860
Service charges on deposit accounts		790,651			747,942
Mortgage banking operations, net		258,721			259,008
Net realized gains on sales of available-for-sale securities		328,845			399,599
Loan servicing fees		337,287			333,441
Increase in cash surrender value of life insurance		162,330			172,504
ATM and bank card interchange income		706,914			674,065
Other		104,137			122,109

Total noninterest income		4,333,586			4,261,445

See Notes to Consolidated Financial Statements

Jacksonville Bancorp, Inc.

Consolidated Statements of Income

Years Ended December 31, 2017 and 2016

	2017		2016
Noninterest Expense
Salaries and employee benefits	$	6,665,730	$	6,763,951
Occupancy and equipment		1,066,236		1,047,048
Data processing and telecommunications		585,872		588,053
Professional		300,892		193,937
Marketing		108,121		156,826
Postage and office supplies		210,213		228,445
Deposit insurance premium		99,063		122,246
ATM and bank card expense		415,076		384,602
Other		794,847		907,428

Total noninterest expense		10,246,050		10,392,536

Income Before Income Taxes		4,541,115		4,135,567

Provision for Income Taxes		2,100,295		1,087,658

Net Income	$	2,440,820	$	3,047,909

Basic Earnings Per Share	$	1.36	$	1.72

Diluted Earnings Per Share	$	1.35	$	1.70

Cash Dividends Per Share	$	0.40	$	0.40

Consolidated Statements of Comprehensive Income

Years Ended December 31, 2017 and 2016

	2017		2016

Net Income	$	2,440,820	$	3,047,909

Other Comprehensive Income (Loss)
Unrealized appreciation (depreciation) on available-for-sale securities, net of taxes of $389,499 and $(877,251) for 2017 and 2016, respectively		756,086		(1,702,900	)
Less: reclassification adjustment for realized gains included in net income, net of taxes of $111,807 and $135,864 for 2017 and 2016, respectively		217,038		263,735

		539,048		(1,966,635	)

Comprehensive Income	$	2,979,868	$	1,081,274

See Notes to Consolidated Financial Statements

Jacksonville Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2017 and 2016

							Additional
	Issued Common Stock						Paid-in			Retained
	Shares			Amount			Capital			Earnings

Balance, January 1, 2016		1,791,513		$	17,915		$	13,664,914		$	31,305,040

Net income		—			—			—			3,047,909

Other comprehensive loss		—			—			—			—

Stock repurchases		(4,801	)		(48	)		(127,070	)		—
Exercise of stock options		13,532			135			201,441			—
Tax benefit of nonqualified options		—			—			10,199			—
Stock-based compensation expense		—			—			90,163			—
Common shares held by ESOP, committed to be released		—			—			69,081			—
Dividends on common stock, $0.40 per share		—			—			—			(685,450	)

Balance, December 31, 2016		1,800,244			18,002			13,908,728			33,667,499

Net income		—			—			—			2,440,820

Other comprehensive income		—			—			—			—

Reclassification of certain tax effects		—			—			—			121,494

Stock repurchases		(3,394	)		(33	)		(104,256	)		—
Exercise of stock options		16,021			160			242,384			—
Tax benefit of nonqualified options		—			—			8,185			—
Stock-based compensation expense		—			—			22,232			—
Common shares held by ESOP, committed to be released		—			—			50,948			—
Dividends on common stock, $0.40 per share		—			—			—			(716,863	)

Balance, December 31, 2017		1,812,871		$	18,129		$	14,128,221		$	35,512,950

See Notes to Consolidated Financial Statements

Jacksonville Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2017 and 2016

	Accumulated
	Other
	Comprehensive			Unallocated
	Income (Loss)			ESOP			Total

Balance, January 1, 2016	$	790,341		$	(211,710	)	$	45,566,500

Net income		—			—			3,047,909

Other comprehensive loss		(1,966,635	)		—			(1,966,635	)

Stock repurchases		—			—			(127,118	)
Exercise of stock options		—			—			201,576
Tax benefit of nonqualified options		—			—			10,199
Stock-based compensation expense		—			—			90,163
Common shares held by ESOP, committed to be released		—			39,340			108,421
Dividends on common stock, $0.40 per share		—			—			(685,450	)

Balance, December 31, 2016		(1,176,294	)		(172,370	)		46,245,565

Net income		—			—			2,440,820

Other comprehensive income		539,048			—			539,048

Reclassification of certain tax effects		(121,494	)		—			—

Stock repurchases		—			—			(104,289	)
Exercise of stock options		—			—			242,544
Tax benefit of nonqualified options		—			—			8,185
Stock-based compensation expense		—			—			22,232
Common shares held by ESOP, committed to be released		—			24,720			75,668
Dividends on common stock, $0.40 per share		—			—			(716,863	)

Balance, December 31, 2017	$	(758,740	)	$	(147,650	)	$	48,752,910

See Notes to Consolidated Financial Statements

Jacksonville Bancorp, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2017 and 2016

	2017			2016
Operating Activities
Net income	$	2,440,820		$	3,047,909
Items not requiring (providing) cash
Depreciation and amortization		441,365			394,935
Provision (credit) for loan losses		(180,000	)		120,000
Amortization of premiums and discounts on securities and loans		1,202,121			722,191
Deferred income taxes		446,854			(142,607	)
Net realized gains on available-for-sale securities		(328,845	)		(399,599	)
Amortization of mortgage servicing rights		84,559			120,980
Impairment of mortgage servicing rights asset		—			38,967
Increase in cash surrender value of life insurance, net		(167,624	)		(177,798	)
Gains on sales of foreclosed assets		(89,211	)		(33,970	)
Shares held by ESOP committed to be released		75,668			108,421
Stock-based compensation expense		22,232			90,163
Changes in
Interest receivable		(409,253	)		127,131
Other assets		(76,979	)		(265,939	)
Interest payable		(687	)		(11,580	)
Other liabilities		163,799			207,498
Origination of loans held for sale		(18,191,845	)		(20,376,281	)
Proceeds from sales of loans held for sale		18,779,169			20,675,254

Net cash provided by operating activities		4,212,143			4,245,675

Investing Activities
Net change in interest-earning time deposits		(248,000	)		1,974,000
Proceeds from redemption of Federal Home Loan Bank stock		70,100			750,000
Purchases of Federal Home Loan Bank stock		(196,800	)		—
Purchases of available-for-sale securities		(52,850,704	)		(66,685,397	)
Proceeds from maturities and payments of available-for-sale securities		8,921,035			11,400,048
Proceeds from the sales of available-for-sale investments and other investments		32,641,729			39,301,125
Net change in loans		(2,104,682	)		8,564,794
Purchase of premises and equipment		(202,908	)		(165,431	)
Proceeds from the sale of foreclosed assets		255,665			266,613

Net cash used in investing activities		(13,714,565	)		(4,594,248	)

See Notes to Consolidated Financial Statements

Jacksonville Bancorp, Inc.

Consolidated Statements of Cash Flows

Years Ended December 31, 2017 and 2016

	2017			2016

Financing Activities
Net increase in demand deposits, money market, NOW and savings accounts	$	2,561,229		$	18,264,018
Net (decrease) increase in certificates of deposit		(8,538,757	)		1,132,012
Net increase (decrease) in short-term borrowings		8,976,972			(7,996,529	)
Net increase in advances from borrowers for taxes and insurance		51,722			111,287
Stock repurchases		(104,289	)		(127,118	)
Proceeds from stock options exercised		250,729			211,775
Dividends paid		(715,480	)		(2,440,380	)

Net cash provided by financing activities		2,482,126			9,155,065

Increase (Decrease) in Cash and Cash Equivalents		(7,020,296	)		8,806,492

Cash and Cash Equivalents, Beginning of Year		12,909,924			4,103,432

Cash and Cash Equivalents, End of Year	$	5,889,628		$	12,909,924

Supplemental Cash Flows Information

Interest paid	$	1,167,686		$	1,059,906

Income taxes paid	$	1,458,000		$	1,325,000

Sale and financing of foreclosed assets	$	26,467		$	204,850

Real estate acquired in settlement of loans	$	233,204		$	114,400

Dividends declared not paid	$	181,287		$	179,904

Exercise and retirement of shares in stock option plan	$	138,255		$	74,458

See Notes to Consolidated Financial Statements

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 1:

Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Jacksonville Bancorp, Inc. (the “Company”) is a Maryland corporation. The Company owns 100% of Jacksonville Savings Bank (the “Bank”). The Bank was founded in 1916 as an Illinois-chartered savings and loan association and converted to an Illinois-chartered savings bank in 1992. The Bank is headquartered in Jacksonville, Illinois and operates five branches in addition to its main office. The Bank’s deposits have been federally insured since 1945 by the Federal Deposit Insurance Corporation (“FDIC”). The Bank has been a member of the Federal Home Loan Bank (“FHLB”) System since 1932.

The Bank is a community-oriented savings bank engaged primarily in the business of attracting retail deposits from the general public in the Bank’s market area and using such funds together with borrowings and funds from other sources to originate consumer loans and mortgage loans secured by one- to four-family residential real estate. The Bank also originates commercial real estate loans, multi-family real estate loans, commercial business loans, and agricultural loans. When possible, the Bank emphasizes the origination of mortgage loans with adjustable interest rates (“ARM”), as well as fixed-rate balloon loans with terms ranging from three to five years, consumer loans, which are primarily home equity loans secured by second mortgages, commercial business loans, and agricultural loans. The Bank also offers trust and investment services. The investment center, Berthel Fisher and Company Financial Services, Inc., is operated through the Bank’s wholly-owned subsidiary, Financial Resources Group, Inc.

The Company is subject to competition from other financial institutions and nonfinancial institutions providing financial products. Additionally, the Company is subject to the regulations of certain regulatory agencies and undergoes periodic examinations by those regulatory agencies.

The significant accounting and reporting policies of the Company and its subsidiary follow:

Principles of Consolidation and Financial Statement Presentation

The consolidated financial statements include the accounts of the Company, the Bank and the Bank’s wholly owned subsidiary, Financial Resources Group, Inc. Significant intercompany accounts and transactions have been eliminated in consolidation. Based on the Company’s approach to decision making, it has decided that its business is comprised of a single segment.

The consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America and conform to predominate practice within the banking industry.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, fair value of securities, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, valuation of loan servicing rights, valuation of deferred tax assets, goodwill impairment, and fair value measurements.

Cash Equivalents

The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2017 and 2016, cash equivalents consisted primarily of federal funds sold and interest-earning demand deposits in banks.

At December 31, 2017, the Company’s cash accounts did not exceed federally insured limits.

Interest-earning Time Deposits in Banks

Interest-earning time deposits in banks are generally short-term and are carried at cost.

Securities

Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the settlement date and are determined using the specific identification method.

For debt securities with fair value below amortized cost when the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Other Investments

Other investments at December 31, 2017 and 2016 include local municipal bonds and equity investments in local community development organizations. The municipal bonds mature ratably through the year 2020. These securities have no readily ascertainable market value and are carried at cost.

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to noninterest income. Gains and losses on loan sales are recorded in noninterest income, and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

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

All interest accrued but not collected for loans that are placed on nonaccrual 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 the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the size and composition 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 collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers nonimpaired loans and is based on historical charge-off experience and expected loss derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest 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 construction 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, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

Premises and Equipment

Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets.

The estimated useful lives for each major depreciable classification of premises and equipment are as follows:

Buildings and improvements	35-40 years
Equipment	3-5 years

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Federal Home Loan Bank Stock

Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment.

Foreclosed Assets Held for Sale

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in income or expense from foreclosed assets.

Bank-owned Life Insurance

Bank-owned life insurance policies are reflected on the consolidated balance sheets at the estimated cash surrender value. Changes in the cash surrender value are reflected in noninterest income in the consolidated statements of income.

Goodwill

Goodwill is evaluated annually for impairment or more frequently if impairment indicators are present. A qualitative assessment is performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value is less than the carrying amount. If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. Goodwill was not deemed impaired as of December 31, 2017 or 2016.

Mortgage Servicing Rights

Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

The Company has elected to subsequently measure the mortgage servicing rights under the amortization method. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment or increased obligation based on fair value at each reporting date. Each class of separately recognized servicing assets subsequently measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Changes in valuation allowances are reported as a separate line item in noninterest expense on the consolidated income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned in loan servicing fees in non-interest income. The amortization of mortgage servicing rights is netted from the gains on sale of loans, both cash gains as well as the capitalized gains, and is included in mortgage banking operations, net in non-interest income.

Stock Options

At December 31, 2017 and 2016, the Company recognizes the fair value (calculated value) of stock-based awards to employees as compensation cost over the requisite service period. The stock-based employee compensation plan is described more fully in Note 15.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company — put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Income Taxes

The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. With a few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2014.

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

The Company files consolidated income tax returns with its subsidiary.

On December 22, 2017, the Tax Cuts & Jobs Act was signed into law and reduced the corporate tax rate from 34% to 21%, effective January 1, 2018. As a result, generally accepted accounting principles required the revaluation of our deferred tax assets and liabilities at the lower statutory tax rate during the fourth quarter of 2017. This revaluation resulted in an additional $816,000 in federal income tax expense for 2017. As of December 31, 2017, the difference in the tax rate that was lodged in accumulated other comprehensive income related to investment fair values was reclassified to retained earnings.

Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during each period. Diluted earnings per share reflects additional potential common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss), net of applicable income taxes. Other comprehensive income (loss) includes unrealized appreciation (depreciation) on available-for-sale securities.

Trust Assets

Assets held in fiduciary or agency capacities are not included in the consolidated balance sheets since such items are not assets of the Company. Fees from trust activities are recorded as revenue over the period in which the service is provided. Fees are a function of the market value of assets managed and administered, the volume of transactions, and fees for other services rendered, as set forth in the underlying client agreement with the Trust Department. This revenue recognition involves the use of estimates and assumptions, including components that are calculated based on estimated asset valuations and transaction volumes. Generally, the actual trust fee is charged to each account on a monthly basis. Any out of pocket expenses or services not typically covered by the fee schedule for trust activities are charged directly to the trust account on a gross basis as trust revenue is incurred. The Company managed or administered approximately 142 and 131 trust accounts with assets totaling approximately $111.5 million and $99.3 million at December 31, 2017 and 2016, respectively.

Reclassifications

Certain amounts included in the 2016 consolidated statements have been reclassified to conform to the 2017 presentation.

Recent and Future Accounting Requirements

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 2:

Restriction on Cash and Due From Banks

The Company is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2017 and 2016 was $2,749,000 and $2,449,000, respectively.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 3:

Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale Securities
December 31, 2017:
U.S. Government and federal agencies	$	11,360,796	$	—	$	(489,616	)	$	10,871,180
Mortgage-backed securities (Government-sponsored enterprises - residential)		56,048,355		1,499		(818,657	)		55,231,197
Municipal bonds		44,951,679		618,470		(277,220	)		45,292,929

	$	112,360,830	$	619,969	$	(1,585,493	)	$	111,395,306

December 31, 2016:
U.S. Government and federal agencies	$	13,985,863	$	9,641	$	(661,964	)	$	13,333,540
Mortgage-backed securities (Government-sponsored enterprises - residential)		45,457,262		70,512		(1,114,597	)		44,413,177
Municipal bonds		42,500,579		558,776		(644,632	)		42,414,723

	$	101,943,704	$	638,929	$	(2,421,193	)	$	100,161,440

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

The amortized cost and fair value of available-for-sale securities at December 31, 2017, 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.

	Available-for-sale
	Amortized Cost		Fair Value

Within one year	$	908,433	$	915,349
One to five years		5,240,861		5,300,006
Five to ten years		22,344,265		22,378,493
After ten years		27,818,916		27,570,261
		56,312,475		56,164,109
Mortgage-backed securities		56,048,355		55,231,197

Totals	$	112,360,830	$	111,395,306

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $57,340,588 at December 31, 2017 and $42,463,127 at December 31, 2016.

The carrying value of securities sold under agreement to repurchase amounted to $7,528,988 at December 31, 2017 and $9,709,793 at December 31, 2016.

Gross gains of $337,618 and $402,981 and gross losses of $(8,773) and $(3,382) resulting from sales of available-for-sale securities were realized for 2017 and 2016, respectively. The tax provision applicable to these net realized gains amounted to $111,807 and $135,864, respectively.

Certain investments in debt securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2017 and 2016 was $82,719,803 and $71,583,259, which is approximately 74% and 71%, respectively, of the Company’s available-for-sale investment portfolio. The declines primarily resulted from recent changes in market interest rates.

Management believes the declines in fair value for these securities are temporary.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

The following table shows the Company’s investments’ gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2017 and 2016:

	December 31, 2017
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Available-for-sale Securities

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

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

	December 31, 2016
	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Available-for-sale Securities

U.S. government agencies	$	12,333,924	$	(661,964	)	$	—	$	—		$	12,333,924	$	(661,964	)
Mortgage-backed securities (Government-sponsored enterprises - residential)		37,144,915		(1,114,597	)		—		—			37,144,915		(1,114,597	)
Municipal bonds		22,104,420		(644,632	)		—		—			22,104,420		(644,632	)

Total temporarily impaired securities	$	71,583,259	$	(2,421,193	)	$	—	$	—		$	71,583,259	$	(2,421,193	)

U.S. Government Agencies

The unrealized losses on the Company’s investments in direct obligations of U.S. government agencies were caused by interest rate increases. The contractual terms of those 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 those investments to be other-than-temporarily impaired at December 31, 2017.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Residential Mortgage-backed Securities

The unrealized losses on the Company’s investment in residential mortgage-backed securities were caused by changes in interest rates. The Company expects to recover the amortized cost basis over the term of the securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and 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 those investments to be other-than-temporarily impaired at December 31, 2017.

Municipal Bonds

The unrealized losses on the Company’s investments in securities of municipal bonds were caused by changes in interest rates. The contractual terms of those 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 those investments to be other-than-temporarily impaired at December 31, 2017.

Note 4:

Loans and Allowance for Loan Losses

Classes of loans at December 31, include:

	2017		2016

Mortgage loans on real estate
Residential 1-4 family	$	45,844,543	$	45,311,103
Commercial		37,260,090		41,477,480
Agricultural		40,129,028		38,271,758
Home equity		10,117,647		11,606,002
Total mortgage loans on real estate		133,351,308		136,666,343

Commercial loans		26,934,790		21,617,744
Agricultural		13,400,651		14,649,622
Consumer		15,760,797		14,543,356
		189,447,546		187,477,065

Less
Net deferred loan fees		10,486		21,667
Allowance for loan losses		2,879,510		3,007,395

Net loans	$	186,557,550	$	184,448,003

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

The Company’s loan portfolio includes loan participations purchased from other institutions. The outstanding balance of these purchased loans totaled $13,832,942 and $11,960,699 as of December 31, 2017 and 2016, respectively. Participations purchased during the years ended December 31, 2017 and 2016 totaled $2,440,146 and $2,157,442, respectively.

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 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, Cass, Macoupin and Montgomery and the surrounding counties. 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 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

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

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 for the secondary market.

The Company originates for resale to the secondary market 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. It generally offers 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 net interest income. In the low interest rate environment that has existed over the past two years, the adjustable-rate portfolio has repriced downward resulting in lower interest income from this portion of the loan portfolio. The Company has used different interest indices for adjustable-rate mortgage loans in the past such as the average yield on U.S. Treasury securities, adjusted to a constant maturity of either one year, three years or five years. The origination of fixed-rate mortgage loans versus adjustable-rate mortgage loans is monitored on an ongoing basis and is affected significantly by the level of market interest rates, customer preference, interest rate risk position and competitors’ loan products.

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

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

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

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

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

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

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

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

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

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

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

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

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

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

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

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 December 31, 2017 and 2016:

	December 31, 2017
	1-4 Family			Commercial Real Estate			Agricultural Real Estate		Commercial			Agricultural		Home Equity			Consumer			Unallocated			Total

Allowance for loan losses:
Balance, beginning of year	$	832,000		$	1,044,553		$	191,359	$	301,478		$	167,469	$	173,626		$	182,653		$	114,257		$	3,007,395
Provision (credit) charged to expense		(127,286	)		95,961			34,119		(305,586	)		121,453		(81,824	)		88,872			(5,709	)		(180,000	)
Losses charged off		(51,695	)		(315,766	)		—		(2,706	)		—		—			(39,692	)		—			(409,859	)
Recoveries		24,088			21,297			—		404,386			—		4,100			8,103			—			461,974
Balance, end of year	$	677,107		$	846,045		$	225,478	$	397,572		$	288,922	$	95,902		$	239,936		$	108,548		$	2,879,510
Ending balance: individually evaluated for impairment	$	176,635		$	472,393		$	—	$	132,901		$	144,438	$	—		$	—		$	—		$	926,367
Ending balance: collectively evaluated for impairment	$	500,472		$	373,652		$	225,478	$	264,671		$	144,484	$	95,902		$	239,936		$	108,548		$	1,953,143

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

	December 31, 2016
	1-4 Family			Commercial Real Estate		Agricultural Real Estate			Commercial			Agricultural		Home Equity		Consumer			Unallocated		Total

Allowance for loan losses:
Balance, beginning of year	$	829,604		$	917,526	$	201,918		$	386,620		$	163,346	$	149,253	$	169,381		$	101,946	$	2,919,594
Provision charged to expense		14,683			112,411		(10,559	)		(85,258	)		4,123		22,273		50,016			12,311		120,000
Losses charged off		(38,171	)		—		—			—			—		—		(43,777	)		—		(81,948	)
Recoveries		25,884			14,616		—			116			—		2,100		7,033			—		49,749
Balance, end of year	$	832,000		$	1,044,553	$	191,359		$	301,478		$	167,469	$	173,626	$	182,653		$	114,257	$	3,007,395
Ending balance: individually evaluated for impairment	$	304,922		$	723,481	$	—		$	56,409		$	—	$	—	$	—		$	—	$	1,084,812
Ending balance: collectively evaluated for impairment	$	527,078		$	321,072	$	191,359		$	245,069		$	167,469	$	173,626	$	182,653		$	114,257	$	1,922,583

Loans:
Ending balance	$	45,311,103		$	41,477,480	$	38,271,758		$	21,617,744		$	14,649,622	$	11,606,002	$	14,543,356		$	—	$	187,477,065
Ending balance: individually evaluated for impairment	$	713,151		$	1,658,323	$	—		$	155,067		$	—	$	54,011	$	—		$	—	$	2,580,552
Ending balance: collectively evaluated for impairment	$	44,597,952		$	39,819,157	$	38,271,758		$	21,462,677		$	14,649,622	$	11,551,991	$	14,543,356		$	—	$	184,896,513

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

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 and watch list credits over $250,000 are reviewed annually by our independent loan review in order to verify risk ratings. The Company uses the following definitions for risk ratings:

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. During the periods presented, none of our loans were classified as Doubtful.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2017 and 2016:

	1-4 Family				Commercial Real Estate				Agricultural Real Estate				Commercial
	2017		2016		2017		2016		2017		2016		2017		2016

Pass	$	43,254,380	$	42,327,337	$	35,239,108	$	39,078,740	$	39,892,528	$	38,271,758	$	26,367,452	$	21,141,466
Special Mention		809,345		1,016,025		310,770		429,877		—		—		8,819		100,234
Substandard		1,780,818		1,967,741		1,710,212		1,968,863		236,500		—		558,519		376,044

Total	$	45,844,543	$	45,311,103	$	37,260,090	$	41,477,480	$	40,129,028	$	38,271,758	$	26,934,790	$	21,617,744

	Agricultural Business				Home Equity				Consumer
	2017		2016		2017		2016		2017		2016

Pass	$	12,507,114	$	13,845,865	$	9,893,063	$	10,790,377	$	15,043,520	$	14,361,125
Special Mention		139,306		803,757		75,347		70,983		17,092		10,575
Substandard		754,231		—		149,237		744,642		700,185		171,656

Total	$	13,400,651	$	14,649,622	$	10,117,647	$	11,606,002	$	15,760,797	$	14,543,356

The following tables present the Company’s loan portfolio aging analysis as of December 31, 2017 and 2016:

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

1-4 Family	$	243,627	$	169,154	$	157,550	$	570,331	$	45,274,212	$	45,844,543	$	—
Commercial real estate		—		139,467		19,195		158,662		37,101,428		37,260,090		—
Agricultural real estate		—		—		—		—		40,129,028		40,129,028		—
Commercial		5,485		—		4,317		9,802		26,924,988		26,934,790		—
Agricultural business		—		—		—		—		13,400,651		13,400,651		—
Home equity		20,082		75,247		—		95,329		10,022,318		10,117,647		—
Consumer		74,459		105,845		11,307		191,611		15,569,186		15,760,797		—

Total	$	343,653	$	489,713	$	192,369	$	1,025,735	$	188,421,811	$	189,447,546	$	—

	December 31, 2016
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing

1-4 Family	$	237,783	$	136,340	$	544,425	$	918,548	$	44,392,555	$	45,311,103	$	—
Commercial real estate		—		16,273		—		16,273		41,461.207		41,477,480		—
Agricultural real estate		—		—		—		—		38,271,758		38,271,758		—
Commercial		—		41,474		13,309		54,783		21,562,961		21,617,744		—
Agricultural business		—		—		—		—		14,649,622		14,649,622		—
Home equity		151,482		—		—		151,482		11,454,520		11,606,002		—
Consumer		68,077		17,757		72,150		157,984		14,385,372		14,543,356		—

Total	$	457,342	$	211,844	$	629,884	$	1,299,070	$	186,177,995	$	187,477,065	$	—

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

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

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

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

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

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

The following tables present impaired loans for the years ended December 31, 2017 and 2016:

	December 31, 2017
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest Income Recognized Cash Basis

Loans without a specific valuation allowance
1-4 Family	$	223,997	$	223,997	$	—	$	244,463	$	12,789	$	12,771
Commercial real estate		444,500		444,500		—		951,010		41,732		40,184
Commercial		421,049		421,049		—		473,657		24,123		23,768
Home equity		43,683		43,683		—		52,350		3,617		3,393
Loans with a specific valuation allowance
1-4 Family		439,369		439,369		176,635		434,203		21,596		20,823
Commercial real estate		990,222		990,222		472,393		1,071,991		61,601		63,773
Commercial		132,901		132,901		132,901		145,858		2,608		1,545
Agricultural		375,951		375,951		144,438		381,803		18,053		26,240
Total:
1-4 family		663,366		663,366		176,635		678,666		34,385		33,594
Commercial real estate		1,434,722		1,434,722		472,393		2,023,001		103,333		103,957
Commercial		553,950		553,950		132,901		619,515		26,731		25,313
Agricultural		375,951		375,951		144,438		381,803		18,053		26,240
Home equity		43,683		43,683		—		52,350		3,617		3,393

Total	$	3,071,672	$	3,071,672	$	926,367	$	3,755,335	$	186,119	$	192,497

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

	December 31, 2016
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Interest Income Recognized Cash Basis

Loans without a specific valuation allowance
1-4 Family	$	39,598	$	39,598	$	—	$	41,880	$	2,653	$	2,888
Commercial real estate		120,172		120,172		—		272,557		13,499		14,061
Commercial		61,483		61,483		—		87,359		4,332		4,419
Home equity		54,011		54,011		—		54,067		3,670		3,871
Loans with a specific valuation allowance
1-4 Family		673,553		673,553		304,922		719,834		41,323		34,208
Commercial real estate		1,538,151		1,538,151		723,481		1,572,203		68,918		64,878
Commercial		93,584		93,584		56,409		165,473		7,580		7,814
Total:
1-4 family		713,151		713,151		304,922		761,714		43,976		37,096
Commercial real estate		1,658,323		1,658,323		723,481		1,844,760		82,417		78,939
Commercial		155,067		155,067		56,409		252,832		11,912		12,233
Home equity		54,011		54,011		—		54,067		3,670		3,871

Total	$	2,580,552	$	2,580,552	$	1,084,812	$	2,913,373	$	141,975	$	132,139

The following table presents the Company’s nonaccrual loans at December 31, 2017 and 2016. This table excludes performing troubled debt restructurings.

	2017		2016

1-4 family	$	366,992	$	590,514
Commercial real estate		1,057,663		708,922
Agricultural real estate		—		—
Commercial		137,471		16,561
Agricultural business		—		—
Home equity		86,239		49,542
Consumer		104,360		164,472

Total	$	1,752,725	$	1,530,011

At December 31, 2017 and 2016, the Company had a number of loans that were modified in troubled debt restructurings (TDRs). The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

The following table presents the recorded balance, at original cost, of troubled debt restructurings, as of December 31, 2017 and 2016.

	2017		2016

1-4 family	$	677,031	$	836,867
Commercial real estate		965,926		1,362,088
Agricultural real estate		236,500		—
Commercial		343,414		245,710
Agricultural business		93,914		—
Home equity		4,417		6,009
Consumer		80,011		81,880

Total	$	2,401,213	$	2,532,554

The following table presents the recorded balance, at original cost, of troubled debt restructurings, which were performing according to the terms of the restructuring, as of December 31, 2017 and 2016.

	2017		2016

1-4 family	$	677,031	$	666,744
Commercial real estate		826,459		1,362,088
Agricultural real estate		236,500		—
Commercial		343,414		245,710
Agricultural business		93,914		—
Home equity		4,417		6,009
Consumer		65,006		57,540

Total	$	2,246,741	$	2,338,091

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

The following table presents loans modified as troubled debt restructurings during the years ended December 31, 2017 and 2016.

	Year Ended December 31, 2017				Year Ended December 31, 2016
	Number of Modifications		Recorded Investment		Number of Modifications		Recorded Investment

1-4 family		2	$	103,621		1	$	40,395
Commercial real estate		1		139,467		1		708,922
Agricultural real estate		1		236,500		—		—
Commercial		1		132,901		1		217,725
Agricultural business		1		93,914		—		—
Home equity		—		—		—		—
Consumer		3		13,974		—		—

Total		9	$	720,377		3	$	967,042

2017 Modifications

The Company modified two one- to four-family residential real estate loans, with a recorded investment in the aggregate of $103,621, which were deemed TDRs. One loan was restructured after bankruptcy to lower the rate and the other was extended three months with the interest capitalized. The Company modified one commercial real estate loan with a total recorded balance of $139,467, which was deemed a TDR. The loan was restructured to extend the term and lower the rate. The Company modified one agricultural real estate loan in the amount of $236,500, which was deemed a TDR, as the amortization period was extended. The Company modified one commercial loan with a total recorded balance of $132,901, which was deemed a TDR. The loan was modified to extend the term and capitalize interest. The Company modified one agricultural loan in the amount of $93,914, which was deemed a TDR, as the payment schedule was extended nine months. The Company modified three consumer loans in the aggregate amount of $13,974 which were deemed TDRs. The loans were modified to extend the term and lower the payments. The modifications did not result in a write-off of the principal balance nor was there a significant difference between the pre modification balance and the post-modification balance.

2016 Modifications

The Company modified a one- to four-family residential real estate loan, with a recorded investment of $40,395, which was deemed a TDR. The loan was restructured to combine three loans and capitalize delinquent real estate taxes. The Company modified one commercial real estate loan with a recorded balance of $708,922, which was deemed a TDR. The loan was restructured after bankruptcy to extend the term, lower the rate, and capitalize the interest to a second note. The Company modified one commercial loan with a total recorded balance of $217,725, which was deemed a TDR. The loan was modified to allow for interest-only payments for four months. The modifications did not result in a write-off of the principal balance nor was there a significant difference between the pre modification balance and the post-modification balance.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

TDRs with Defaults

Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. During the year ended December 31, 2017, one residential real estate loan of $32,523, two commercial real estate loans of $786,224, two commercial loans of $133,153, and two consumer loans of $66,035 were considered TDRs in default as they were in a nonaccrual status.

During the year ended December 31, 2016, three residential real estate loans of $170,123 were considered TDRs in default as they were more than 90 days past due at December 31, 2016. In addition, one commercial real estate loan of $708,922, one commercial loan of $3,252, and two consumer loans of $76,106 were considered TDRs in default as they were in a nonaccrual status but are performing in accordance with their modified terms.

At December 31, 2017 and 2016, the balance of real estate owned was $10,500 and $0, respectively, with foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property. At December 31, 2017 and 2016, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process is $156,468 and $143,634, respectively.

Note 5:

Premises and Equipment

Major classifications of premises and equipment, stated at cost, are as follows:

	2017			2016

Land	$	773,186		$	773,186
Buildings and improvements		6,735,840			6,752,503
Equipment		3,395,096			3,492,693
		10,904,122			11,018,382
Less accumulated depreciation		(6,643,926	)		(6,519,729	)

Net premises and equipment	$	4,260,196		$	4,498,653

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 6:

Loan Servicing

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The unpaid principal balance of mortgage loans serviced for others was $127,961,143 and $130,505,264 at December 31, 2017 and 2016, respectively.

The following summarized the activity pertaining to mortgage servicing rights measured using the amortization method, along with the aggregate activity in related valuation allowances:

	2017			2016
Mortgage servicing rights
Balance, beginning of year	$	552,827		$	645,067
Additions		78,824			87,579
Write-downs		—			(72,580	)
Amortization		(84,559	)		(107,239	)
Balance at end of year		547,092			552,827

Valuation allowances
Balance at beginning of year		—			47,354
Additions due to decreases in market value		—			38,967
Reduction due to write-downs		—			(72,580	)
Reduction due to payoff of loans		—			(13,741	)
Balances at end of year		—			—

Mortgage servicing assets, net	$	547,092		$	552,827

Fair value disclosures
Fair value as of the beginning of the period	$	898,625		$	870,619
Fair value as of the end of the period	$	857,016		$	898,625

The valuation allowance was adjusted during 2016 due to payments received on the related loans as well as changes in the estimated market value and subsequent write-off of a portion of the mortgage servicing rights asset.

Comparable market values and a valuation model that calculates the present value of future cash flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics including product type, investor type, and interest rates, were used to stratify the originated mortgage servicing rights.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 7:

Interest-bearing Deposits

Interest-bearing deposits in denominations of $100,000 or more totaled $106,783,393 at December 31, 2017 and $110,971,051 at December 31, 2016.

The following table represents deposit interest expense by deposit type:

	December 31,
	2017		2016

Savings, NOW and Money Market	$	537,404	$	366,123
Certificates of deposit		567,877		659,109

Total deposit interest expense	$	1,105,281	$	1,025,232

At December 31, 2017, the scheduled maturities of time deposits are as follows:

2018	$	40,447,326
2019		14,761,344
2020		6,302,009
2021		4,868,337
2022		5,268,763

	$	71,647,779

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 8:

Short-term Borrowings

Short-term borrowings include securities sold under agreements to repurchase totaling $5,212,154 and $7,135,182 at December 31, 2017 and 2016, respectively.

Securities sold under agreements to repurchase consist of obligations of the Company to other parties. The maximum amount of outstanding agreements at any month end during 2017 and 2016 totaled $7,232,914 and $7,342,844, respectively, and the monthly average of such agreements totaled $5,378,538 and $5,254,122 for 2017 and 2016, respectively. The agreements at December 31, 2017, were all for overnight borrowings.

At December 31, 2017, we had $5,212,154 of repurchase agreements secured by mortgage backed securities. All of our repurchase agreements mature overnight. The right of offset for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default. The collateral is held by the Company in a segregated custodial account. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained.

Also included in short-term borrowings at December 31, 2017 were overnight advances with the Federal Home Loan Bank (FHLB) of $10,900,000 at a rate of 1.44%.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 9:

Income Taxes

The Company and its subsidiary file income tax returns in the U.S. federal and state of Illinois jurisdictions. During the years ended December 31, 2017 and 2016, the Company did not recognize expense for interest or penalties.

The provision for income taxes includes these components:

	2017		2016

Taxes currently payable
Federal	$	1,286,506	$	916,248
State		366,935		314,017
Deferred income taxes		446,854		(142,607	)

Income tax expense	$	2,100,295	$	1,087,658

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax expense is shown below:

	2017			2016

Computed at the statutory rate (34%)	$	1,543,979		$	1,406,093
Increase (decrease) resulting from
Tax exempt interest		(440,716	)		(445,584	)
State income taxes, net		234,225			184,535
Increase in cash surrender value		(55,192	)		(58,651	)
Deferred tax asset adjustment for tax rate change		815,779			—
Other		2,220			1,265

Actual tax expense	$	2,100,295		$	1,087,658

Tax expense as a percentage of pre-tax income		46.25	%		26.30	%

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

The tax effects of temporary differences related to deferred taxes shown on the consolidated balance sheets were:

	2017			2016
Deferred tax assets
Allowance for loan losses	$	728,735		$	1,050,004
Deferred compensation		1,389,417			1,830,687
Net unrealized loss on available for sale securities		206,784			605,970
Other		87,073			—
		2,412,009			3,486,661

Deferred tax liabilities
Depreciation		(282,852	)		(390,787	)
Federal Home Loan Bank stock dividends		(34,069	)		(48,291	)
Prepaid expenses		(46,390	)		(65,504	)
Mortgage servicing rights		(155,949	)		(216,238	)
Other		—			(27,052	)
		(519,260	)		(747,872	)

Net deferred tax asset	$	1,892,749		$	2,738,789

Retained earnings at December 31, 2017 and 2016 include approximately $2,600,000, for which no deferred federal income tax liability has been recognized. These amounts represent an allocation of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The deferred income tax liabilities on the preceding amounts that would have been recorded if they were expected to reverse into taxable income in the foreseeable future were approximately $750,000 and $1,000,000 at December 31, 2017 and 2016, respectively.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 10:

Accumulated Other Comprehensive Income (Loss)

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

	2017			2016

Net unrealized loss on securities available-for-sale	$	(965,524	)	$	(1,782,264	)

Tax effect		206,784			605,970

Net-of-tax amount	$	(758,740	)	$	(1,176,294	)

Note 11:

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 years ended December 31, 2017 and 2016, were as follows:

	Amounts Reclassified from AOCI						Affected Line Item in the
	2017			2016			Statements of Income

Realized gains on available-for-sale securities	$	328,845		$	399,599		Realized gain on sale of securities
							Total reclassified amount before tax
		(111,807	)		(135,864	))	Tax expense

	$	217,038		$	263,735		Net reclassified amount

Note 12:

Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under U.S. GAAP, regulatory reporting requirements and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these consolidated financial statements.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Quantitative measures established by regulatory reporting standards to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined) to risk-weighted assets (as defined), common equity Tier 1 capital (as defined) to total risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2017 and 2016, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2017, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based capital, Tier I risk-based capital, common equity Tier 1 risk-based capital, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

The Bank’s actual capital amounts (in thousands) and ratios are also presented in the table.

	Actual					Minimum Capital Requirement					Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2017
Total risk-based capital (to risk-weighted assets)	$	43,957		19.94	%	$	17,636		8.0	%	$	22,045		10.0	%

Tier I capital (to risk-weighted assets)		41,199		18.69			13,227		6.0			17,636		8.0

Common equity Tier I (to risk-weighted assets)		41,199		18.69			9,920		4.5			14,329		6.5

Tier I capital (to average assets)		41,199		13.00			12,672		4.0			15,840		5.0

Tangible capital (to adjusted tangible assets)		41,199		13.00			4,752		1.5			—		N/A

As of December 31, 2016
Total risk-based capital (to risk-weighted assets)	$	42,543		19.52	%	$	17,434		8.0	%	$	21,793		10.0	%

Tier I capital (to risk-weighted assets)		39,816		18.27			13,076		6.0			17,434		8.0

Common equity Tier I (to risk-weighted assets)		39,816		18.27			9,807		4.5			14,165		6.5

Tier I capital (to average assets)		39,816		12.58			12,662		4.0			15,828		5.0

Tangible capital (to adjusted tangible assets)		39,816		12.58			4,748		1.5			—		N/A

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Basel III Capital Rules

In 2013, the Board of Governors of the Federal Reserve System approved a final rule implementing changes intended to strengthen the regulatory capital framework for all banking organizations (Basel III) which became effective January 1, 2015, subject to a phase-in period for certain provisions. Basel III establishes and defines quantitative measures to ensure capital adequacy which require the Bank to maintain minimum amounts and ratios of Common Equity tier 1 capital, total and tier 1 capital to risk-weighted assets and tier 1 capital to average assets (leverage ratio).

The rule includes a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a new capital conservation buffer of 2.5% of risk-weighted assets that will begin on January 1, 2016 at 0.625% and be phased-in over a four-year period, increasing by the same amount on each subsequent January 1, until fully phased-in on January 1, 2019. The capital conservation buffer is required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers.

Further, the minimum ratio of tier 1 capital to risk-weighted assets increased from 4.0% to 6.0% and all banks are now subject to a 4.0% minimum leverage ratio. The required total risk-based capital ratio was unchanged. Failure to maintain the required common equity Tier 1 capital conservation buffer will result in potential restrictions on a bank’s ability to pay dividends, repurchase stock and/or pay discretionary compensation to its employees. The revised capital requirements also provide strict eligibility criteria for regulatory capital instruments and change the method for calculating risk-weighted assets in an effort to better identify riskier assets, such as highly volatile commercial real estate and nonaccrual loans, requiring higher capital allocations. The net unrealized gain or loss on available securities is not included in computing regulatory capital.

The following is a reconciliation of the Bank equity amount included in the consolidated balance sheets to the amounts (in thousands) reflected above for regulatory capital purposes as of December 31:

	2017			2016

Bank equity	$	43,167		$	41,367
Less net unrealized gain (loss)		(759	)		(1,176	)
Less disallowed goodwill		2,727			2,727

Tier 1 and common equity Tier 1 capital		41,199			39,816

Plus allowance for loan losses		2,758			2,727

Total risked-based capital	$	43,957		$	42,543

The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. As of December 31, 2017, the Bank has $1,179,265 available for the payment of dividends without prior regulatory approval.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

On January 19, 2010, the Boards of Directors of the Company, Jacksonville Bancorp, MHC and the Bank each unanimously adopted a Plan of Conversion and Reorganization of Jacksonville Bancorp, MHC pursuant to which Jacksonville Bancorp, MHC undertook a “second-step” conversion and ceased to exist. Jacksonville Bancorp, MHC reorganized from a two-tier mutual holding company structure to a fully public stock holding company structure effective July14, 2010.

In accordance with Board of Governors of the Federal Reserve System regulations, at the time of the reorganization, the Company substantially restricted retained earnings by establishing a liquidation account. The liquidation account is maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The Bank established a parallel liquidation account to support the Company’s liquidation account in the event the Company does not have sufficient assets to fund its obligations under its liquidation account. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts. In the event of a complete liquidation of the Bank or the Company, each account holder will be entitled to receive a distribution in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

Note 13:

Related Party Transactions

At December 31, 2017 and 2016, the Company had loans outstanding to executive officers, directors, significant shareholders and their affiliates (related parties) in the amount of $2,880,978 and $3,111,976, respectively.

Annual activity consisted of the following:

	2017			2016

Balance beginning of year	$	3,111,976		$	3,193,470
Additions		1,101,702			1,178,281
Repayments		(1,332,700	)		(1,259,775	)

Balance, end of year	$	2,880,978		$	3,111,976

Deposits from related parties held by the Company at December 31, 2017 and 2016 totaled approximately $3,874,000 and $3,264,000, respectively.

In management’s opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectibility or present other unfavorable features.

Note 14:

Employee Benefits

401(k) Plan — The Company maintains a 401(k) savings plan for eligible employees. The Company’s contributions to this plan were $229,084 and $223,615 for the years ended December 31, 2017 and 2016, respectively. The plan invests some of its assets in deposit accounts at the Company which earned interest at a rate of 1.85% for the years ended December 31, 2017 and 2016.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Deferred Compensation Plan — The Company maintains a deferred compensation plan for certain key officers and employees. Contributions are determined annually by the Company’s Board of Directors. Effective in 2005, the Company froze this plan and no contributions to this plan were made for the years ended December 31, 2017 or 2016. The plan accrues interest at a variable rate which fluctuates based on Moody’s Corporate Bond Average Index. The amount recorded on the consolidated balance sheets as deferred compensation was $2,693,893 and $2,591,531 as of December 31, 2017 and 2016, respectively. Compensation expense related to the plan was $134,580 and $133,988 for the years ended December 31, 2017 and 2016, respectively.

The Company has also entered into deferred compensation agreements with certain key officers and employees. The agreements provide for monthly payments at retirement or death. The charge to expense for this plan reflects the accrual using the principal and interest method over the vesting period of the present value of benefits due each participant on the full eligibility date using a 4.75% discount rate. The amount recorded on the consolidated balance sheets as deferred compensation was $2,180,399 and $2,088,737 as of December 31, 2017 and 2016, respectively. Compensation expense related to the plans was $168,818 and $182,796 for the years ended December 31, 2017 and 2016, respectively. The deferred compensation agreements with certain officers include a change in control provision. The Company also has employment agreements with certain officers that include a change in control provision.

Employee Stock Ownership Plan (ESOP) — The ESOP is a noncontributory defined contribution plan which covers substantially all employees. The Company may contribute to the Plan, at its discretion, an amount determined by the Board of Directors.

As part of the second step conversion, in July 2010, the Company acquired 41,614 additional shares of Company common stock at $10 per share in the conversion with funds provided by a loan from the Company. Accordingly, $416,140 of common stock acquired by the ESOP was shown as a reduction of stockholders’ equity. Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Dividends on unallocated shares are used to repay the loan and are treated as compensation expense. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company, are made to the ESOP.

ESOP expense for the years ended December 31, 2017 and 2016 was $75,668 and $108,421, respectively.

	2017		2016

Allocated shares		58,353		59,838
Shares committed for allocation		2,472		3,934
Unearned shares		14,765		17,237

Total ESOP shares		75,590		81,009

Fair value of unearned shares at December 31	$	472,775	$	517,110

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 15:

Stock Option Plans

The Jacksonville Bancorp, Inc. 2012 Stock Option Plan permits the grant of up to 104,035 stock options and shares to its employees. The Company believes that such awards better align the interests of its employees with those of its shareholders. All shares were awarded as of the approval date, expire ten years after the grant date, and are exercisable at a price of $15.65 per share. The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model

A summary of option activity under the Plans as of December 31, 2017 and 2016, and changes during the years then ended, is presented below:

	2017
	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding, beginning of year		47,488		$	15.65
Granted		—			—
Exercised		(16,021	)		15.65
Forfeited or expired		(400	)		15.65

Outstanding, end of year		31,067		$	15.65		4.25	$	508,567

Exercisable, end of year		29,282		$	15.65		4.25	$	479,346

	2016
	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding, beginning of year		61,120		$	15.65
Granted		—			—
Exercised		(13,532	)		15.65
Forfeited or expired		(100	)		15.65

Outstanding, end of year		47,488		$	15.65		5.25	$	681,453

Exercisable, end of year		25,653		$	15.65		5.25	$	368,121

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

The total intrinsic value of options exercised during the years ended December 31, 2017 and 2016 was $239,995 and $161,572, respectively.

As of December 31, 2017, there was no unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2012 Plan. The total fair value of shares vested during the years ended December 31, 2017 and 2016 was $22,232 and $90,163, respectively. The recognized tax benefit related thereto was $8,696 and $35,267 for the years ended December 31, 2017 and 2016, respectively.

A summary of the status of the Company’s nonvested shares as of December 31, 2017 and 2016, and changes during the year then ended, is presented below:

	December 31, 2017
	Shares			Weighted- Average Grant- Date Fair Value

Nonvested, beginning of year		21,835		$	4.34
Granted		—			—
Vested		(19,650	)		4.34
Forfeited		(400	)		4.34

Nonvested, end of year		1,785		$	4.34

	December 31, 2016
	Shares			Weighted- Average Grant- Date Fair Value

Nonvested, beginning of year		42,085		$	4.34
Granted		—			—
Vested		(20,150	)		4.34
Forfeited		(100	)		4.34

Nonvested, end of year		21,835		$	4.34

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 16:

Earnings Per Share

Earnings per share (EPS) were computed as follows:

	Year Ended December 31, 2017
	Income		Weighted- Average Shares		Per Share Amount

Net income	$	2,440,820

Basic earnings per share
Income available to common stockholders				1,792,392	$	1.36

Effect of dilutive securities
Stock options				14,692

Diluted earnings per share
Income available to common stockholders	$	2,440,820		1,807,084	$	1.35

	Year Ended December 31, 2016
	Income		Weighted- Average Shares		Per Share Amount

Net income	$	3,047,909

Basic earnings per share
Income available to common stockholders				1,776,342	$	1.72

Effect of dilutive securities
Stock options				17,539

Diluted earnings per share
Income available to common stockholders	$	3,047,909		1,793,881	$	1.70

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 17:

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 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 December 31, 2017 and 2016:

			December 31, 2017
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

U.S. government agencies	$	10,871,180	$	—	$	10,871,180	$	—
Mortgage-backed securities (Government-sponsored enterprises - residential)		55,231,197		—		55,231,197		—
Municipal bonds		45,292,929		—		45,292,929		—

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

			December 31, 2016
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

U.S. government agencies	$	13,333,540	$	—	$	13,333,540	$	—
Mortgage-backed securities (Government-sponsored enterprises - residential)		44,413,177		—		44,413,177		—
Municipal bonds		42,414,723		—		42,414,723		—

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 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 year ended December 31, 2017.

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. 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.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

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 December 31, 2017 and 2016:

			December 31, 2017
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Impaired loans (collateral dependent)	$	1,049,668	$	—	$	—	$	1,049,668

			December 31, 2016
			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Impaired loans (collateral dependent)	$	1,157,329	$	—	$	—	$	1,157,329
Mortgage servicing rights		552,827		—		—		552,827

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 consolidated balance sheets, as well as the general classification of such assets and liabilities 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.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

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. Fair value adjustments on impaired loans were $276,713 and $391,745 at December 31, 2017 and 2016.

Mortgage Servicing Rights

Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.

Mortgage servicing rights are tested for impairment on at least an annual basis. The Company uses a third-party to measure mortgage servicing rights through the completion of a proprietary model. Inputs to the model are reviewed by the Company. Fair value adjustments on mortgage servicing rights were $0 and $(38,967) at December 31, 2017 and 2016.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Unobservable (Level 3) Inputs

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

	Fair Value at December 31, 2017		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

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

	Fair Value at December 31, 2016		Valuation Technique	Unobservable Inputs	Range (Weighted Average)

Collateral-dependent impaired loans	$	1,157,329	Market comparable properties	Marketability discount	20% – 30% (25%)
Mortgage servicing rights	$	552,827	Discounted cash flow	Discount rate PSA standard prepayment model rate	9% - 13.5% (10.25%) 104 – 300 (153)

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Fair Value of Other 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 December 31, 2017 and 2016:

			December 31, 2017
			Fair Value Measurements Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Financial assets
Cash and cash equivalents	$	5,889,628	$	5,889,628	$	—	$	—
Interest-earning time deposits		998,000		998,000		—		—
Other investments		52,502		—		52,502		—
Loans held for sale		178,833		—		178,833		—
Loans, net of allowance for loan losses		186,557,550		—		—		185,755,924
Federal Home Loan Bank stock		490,500		—		490,500		—
Interest receivable		1,997,798		—		1,997,798		—

Financial liabilities
Deposits		252,700,432		—		181,052,653		72,392,640
Short-term borrowings		16,112,154		—		16,112,154		—
Advances from borrowers for taxes and insurance		1,153,926		—		1,153,926		—
Interest payable		106,068		—		106,068		—

Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

			December 31, 2016
			Fair Value Measurements Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Financial assets
Cash and cash equivalents	$	12,909,924	$	12,909,924	$	—	$	—
Interest-earning time deposits		750,000		750,000		—		—
Other investments		55,481		—		55,481		—
Loans held for sale		503,003		—		503,003		—
Loans, net of allowance for loan losses		184,448,003		—		—		183,941,877
Federal Home Loan Bank stock		363,800		—		363,800		—
Interest receivable		1,588,545		—		1,588,545		—

Financial liabilities
Deposits		258,677,960		—		178,491,424		81,241,011
Short-term borrowings		7,135,182		—		7,135,182
Advances from borrowers for taxes and insurance		1,102,204		—		1,102,204		—
Interest payable		106,755		—		106,755		—

Unrecognized financial instruments (net of contract amount)
Commitments to originate loans		—		—		—		—
Letters of credit		—		—		—		—
Lines of credit		—		—		—		—

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

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, 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.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 18:

Significant Estimates and Concentrations

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the note regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the note on commitments and credit risk. Other significant estimates not discussed in those notes include:

General Litigation

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company.

Goodwill

As discussed in Note 1, the Company annually tests its goodwill for impairment. At the most recent testing date, the fair value of the banking reporting unit exceeded its carrying value. Estimated fair value was based principally on forecasts of future income. Management believes it has applied reasonable judgment in developing its estimates; however, unforeseen negative changes in the national, state or local economic environment may negatively impact those estimates in the near term.

Note 19:

Commitments and Credit Risk

The Company grants agribusiness, commercial and residential loans to customers in Cass, Morgan, Macoupin, Montgomery and surrounding counties in Illinois. The Company’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon economic conditions and the agricultural economy in these counties. The Company also purchases participation loans from outside of the Company’s market area.

Commitments to Originate Loans

Commitments to originate loans 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 a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate.

At December 31, 2017 and 2016, the Company had outstanding commitments to originate loans aggregating approximately $4,487,069 and $5,238,175, respectively. The commitments extended over varying periods of time with the majority being disbursed within a one-year period. Loan commitments at fixed rates of interest amounted to $3,975,319 and $2,028,000 at December 31, 2017 and 2016, respectively, with the remainder at floating market rates. The range of fixed rates was 3.35% to 7.75% as of December 31, 2017.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Standby Letters of Credit

Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should the Company be obliged to perform under the standby letters of credit, the Company may seek recourse from the customer for reimbursement of amounts paid.

The Company had total outstanding standby letters of credit amounting to $80,250 and $110,000 at December 31, 2017 and 2016, respectively, with terms of one year or less. At December 31, 2017 and 2016, the Company’s deferred revenue under standby letters of credit agreements was nominal.

Lines of Credit

Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments.

At December 31, 2017, the Company had unused lines of credit to borrowers aggregating approximately $25,397,811 and $16,111,112 for commercial lines and open-ended consumer lines, respectively. At December 31, 2016, unused lines of credit to borrowers aggregated approximately $26,836,352 for commercial lines and $15,869,821 for open-ended consumer lines.

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 20:

Quarterly Results of Operations (Unaudited)

	Year Ended December 31, 2017
	Three Months Ended
	December 31			September 30		June 30		March 31

Interest income	$	2,973,503		$	2,850,335	$	2,816,184	$	2,800,556
Interest expense		311,795			314,467		284,771		255,967
Net interest income		2,661,708			2,535,868		2,531,413		2,544,589
Provision (credit) for loan losses		(270,000	)		30,000		30,000		30,000
Net interest income after provision for loan losses		2,931,708			2,505,868		2,501,413		2,514,589
Noninterest income		1,039,969			1,117,289		1,068,034		1,108,294
Noninterest expense		2,598,686			2,603,618		2,456,576		2,587,169
Income before income taxes		1,372,991			1,019,539		1,112,871		1,035,714
Income tax expense		1,231,888			285,297		306,962		276,148

Net income	$	141,103		$	734,242	$	805,909	$	759,566

Basic earnings per share	$	0.08		$	0.41	$	0.45	$	0.43
Diluted earnings per share	$	0.08		$	0.41	$	0.45	$	0.42

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

	Year Ended December 31, 2016
	Three Months Ended
	December 31		September 30		June 30		March 31

Interest income	$	2,817,513	$	2,858,551	$	2,849,785	$	2,909,135
Interest expense		274,630		277,603		247,184		248,909
Net interest income		2,542,883		2,580,948		2,602,601		2,660,226
Provision for loan losses		30,000		30,000		30,000		30,000
Net interest income after provision for loan losses		2,512,883		2,550,948		2,572,601		2,630,226
Noninterest income		1,099,642		1,088,058		1,034,670		1,039,075
Noninterest expense		2,681,987		2,613,954		2,564,033		2,532,562
Income before income taxes		930,538		1,025,052		1,043,238		1,136,739
Income tax expense		233,278		267,287		277,732		309,361

Net income	$	697,260	$	757,765	$	765,506	$	827,378

Basic earnings per share	$	0.39	$	0.43	$	0.43	$	0.47
Diluted earnings per share	$	0.39	$	0.42	$	0.43	$	0.46

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Note 21:

Condensed Financial Information (Parent Company Only)

Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:

Condensed Balance Sheets

	December 31,
	2017		2016
Assets
Cash and due from banks	$	5,492,406	$	4,806,252
Investment in common stock of subsidiary		43,167,293		41,366,024
Loan receivable from subsidiary		154,623		177,347
Other assets		160,837		118,460

Total assets	$	48,975,159	$	46,468,083

Liabilities
Other liabilities	$	222,249	$	222,518

Stockholders' Equity		48,752,910		46,245,565

Total liabilities and stockholders' equity	$	48,975,159	$	46,468,083

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Condensed Statements of Income and Comprehensive Income

	Year Ending December 31,
	2017			2016
Income
Dividends from subsidiary	$	1,500,000		$	2,500,000
Other income		11,145			10,544

Total income		1,511,145			2,510,544

Expenses
Other expenses		393,654			360,950

Income Before Income Tax and Equity in Undistributed Income of Subsidiary		1,117,491			2,149,594

Income Tax Benefit		(144,064	)		(136,020	)

Income Before Equity in Undistributed Income of Subsidiary		1,261,555			2,285,614

Equity in Undistributed Income of Subsidiary		1,179,265			762,295

Net Income	$	2,440,820		$	3,047,909

Comprehensive Income	$	2,979,868		$	1,081,274

Jacksonville Bancorp, Inc.

Notes to Consolidated Financial Statements

Years Ended December 31, 2017 and 2016

Condensed Statements of Cash Flows

	Year Ending December 31,
	2017			2016
Operating Activities
Net income	$	2,440,820		$	3,047,909
Items not providing cash, net		(1,179,265	)		(762,295	)
Stock-based compensation expense		22,232			90,163
Change in other assets and liabilities, net		(51,317	)		(53,487	)

Net cash provided by operating activities		1,232,470			2,322,290

Investing Activity
Loan payment from subsidiary		22,724			39,159

Net cash provided by investing activities		22,724			39,159

Financing Activities
Dividends paid		(715,480	)		(2,440,380	)
Stock repurchase		(104,289	)		(127,118	)
Exercise of stock options		250,729			211,775

Net cash used in financing activities		(569,040	)		(2,355,723	)

Net Change in Cash and Cash Equivalents		686,154			5,726

Cash and Cash Equivalents at Beginning of Year		4,806,252			4,800,526

Cash and Cash Equivalents at End of Year	$	5,492,406		$	4,806,252

Common Stock Information

Our common stock is traded on the Nasdaq Capital Market under the symbol “JXSB”. As of December 31, 2017, we had approximately 641 stockholders of record. Certain shareholders of Jacksonville Bancorp are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not included in the foregoing number.

The following table sets forth market price and dividend information for our common stock for the two years ended December 31, 2017.

	Price Per Share				Cash
	High		Low		Dividend Declared

2017

Fourth quarter	$	34.99	$	30.00	$	0.100
Third quarter		31.27		29.62		0.100
Second quarter		31.45		29.50		0.100
First quarter		31.50		29.00		0.100

2016

Fourth quarter	$	30.00	$	29.25	$	0.100
Third quarter		30.00		27.24		0.100
Second quarter		27.24		25.75		0.100
First quarter		26.28		23.79		0.100

For a discussion of the restrictions on the Company’s ability to pay dividends, see Note 12 to the Consolidated Financial Statements.

Directors and Executive Officers

*Directors*		*Executive Officers*

Andrew F. Applebee Chairman of the Board		Andrew F. Applebee Chairman of the Board

Richard A. Foss President and Chief Executive Officer		Richard A. Foss President and Chief Executive Officer

John C. Williams Senior Vice President and Trust Officer		Diana S. Tone Executive Vice President / Chief Financial Officer

Harmon B. Deal, III Investment Advisor L.A. Burton & Associates		Chris A. Royal Executive Vice President / Chief Lending Officer

John L. Eyth Retired Certified Public Accountant		John C. Williams Senior Vice President and Trust Officer

John M. Buchanan Certified Funeral Service Practitioner Buchanan & Cody Funeral Home and Crematory, Inc.		Laura A. Marks Senior Vice President – Retail Banking

Peggy S. Davidsmeyer Retired Administrator		John D. Eilering Vice President – Operations / Corporate Secretary

Corporate Information

*Corporate Headquarters*		*Transfer Agent*

1211 West Morton		Hickory Point Bank & Trust, fsb
Jacksonville, Illinois 62650		P.O. Box 2557
(217) 245-4111		Decatur, Illinois 62525-2557
Website: www.jacksonvillesavings.com		(217) 872-6373
E-mail: info@jacksonvillesavings.com

*Special Counsel*		*Independent Registered Public Accounting Firm*

Luse Gorman, P.C.		BKD, LLP
5335 Wisconsin Ave., N.W., Suite 780		225 North Water Street, Suite 400
Washington, D.C. 20015		Decatur, Illinois 62523-2326
(202) 274-2000		(217) 429-2411

General Inquiries

A copy of our Annual Report to the SEC on Form 10-K may be obtained without charge by written request of stockholders to Diana Tone or by calling us at (217) 245-4111. The Form 10-K is also available on our website at www.jacksonvillesavings.com. Our Code of Ethics, Audit Committee Charter, Nominating and Corporate Governance Committee Charter, Compensation Committee Charter, and Beneficial Ownership reports of our directors and executive officers are also available on our website.

FDIC Disclaimer

This Annual Report has not been reviewed or confirmed for accuracy or relevance by the FDIC.

Attached files

Stock widget

Investing forum

Jacksonville Bancorp, Inc. Reports