LOAN PORTFOLIO COMPOSITION

9 Months Ended

Sep. 30, 2013

5.	LOAN PORTFOLIO COMPOSITION

At September 30, 2013 and December 31, 2012, the composition of the Company’s loan portfolio is shown below.

	September 30, 2013					December 31, 2012
	Amount		Percent			Amount			Percent
Real estate loans:
One-to-four family residential	$	41,973,440		24.1	%	$	41,386,147			23.8	%
Commercial		34,049,170		19.5			30,973,177			17.8
Agricultural		37,303,424		21.4			37,392,116			21.5
Home equity		12,039,266		6.9			12,733,963			7.3
Total real estate loans		125,365,300		71.9			122,485,403			70.5

Commercial loans		25,615,485		14.7			29,046,437			16.7
Agricultural loans		12,220,491		7.0			10,982,491			6.3
Consumer loans		14,403,573		8.3			14,571,819			8.4
Total loans receivable		177,604,849		101.9			177,086,150			101.9

Less:
Net deferred loan fees		7,859		0.0			(6,373	)		(0.0	)
Allowance for loan losses		3,264,496		1.9			3,339,464			1.9
Total loans receivable, net	$	174,332,494		100.0	%	$	173,753,059			100.0	%

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

Loan originations are derived from a number of sources such as real estate broker referrals, existing customers, builders, attorneys and walk-in customers. Upon receipt of a loan application, a credit report is obtained to verify specific information relating to the applicant’s employment, income, and credit standing. In the case of a real estate loan, an appraisal of the real estate intended to secure the proposed loan is undertaken by an independent appraiser approved by the Company. A loan application file is first reviewed by a loan officer in the loan department who checks applications for accuracy and completeness, and verifies the information provided. The financial resources of the borrower and the borrower’s credit history, as well as the collateral securing the loan, are considered an integral part of each risk evaluation prior to approval. The board of directors has established individual lending authorities for each loan officer by loan type. Loans over an individual officer’s lending limit must be approved by the officers’ loan committee consisting of the chairman of the board, president, chief lending officer and all lending officers, which meets three times a week, and has lending authority up to $750,000 depending on the type of loan. Loans to borrowers with an aggregate principal balance over this limit, up to $1.0 million, must be approved by the directors’ loan committee, which meets weekly and consists of the chairman of the board, president, senior vice president, chief lending officer and at least two outside directors, plus all lending officers as non-voting members. The board of directors approves all loans to borrowers with an aggregate principal balance over $1.0 million. The board of directors ratifies all loans that are originated. Once the loan is approved, the applicant is informed and a closing date is scheduled. Loan commitments are typically funded within 30 days.

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

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

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

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

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

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

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

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

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

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

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

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

Agricultural Real Estate Loans - The Company originates and purchases agricultural real estate loans. The maximum loan-to-value ratio for agricultural real estate loans we originate is generally 80%. Our agricultural real estate loans are generally written up to terms of five years with adjustable interest rates. The rates are generally tied to the average yield on U.S. Treasury securities, adjusted to a constant maturity of one-year, three-years, or five-years and generally have a specified floor. Many of our fixed-rate agricultural real estate loans are not fully amortizing and therefore require a “balloon” payment at maturity. We purchase from time to time agricultural real estate loan participations primarily from other local institutions within our market area. All participation loans are approved following a review to ensure that the loan satisfies our underwriting standards.

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

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

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

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

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

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

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

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

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

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

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

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

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

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of and for the periods ended September 30, 2013, September 30, 2012, and December 31, 2012.


	September 30, 2013
				Commercial			Agricultural
	1-4 Family			Real Estate			Real Estate			Home Equity			Commercial			Agricultural		Consumer			Unallocated			Total
Allowance for Loan Losses:
Beginning Balance,
July 1, 2013	$	828,553		$	793,509		$	185,386		$	216,571		$	978,915		$	53,383	$	161,133		$	255,086		$	3,472,536
Provision charged to
expense		135,415			(76,925	)		(383	)		36,705			(30,441	)		7,719		21,756			(83,846	)		10,000
Losses charged off		(162,447	)		-			-			(48,383	)		-			-		(14,281	)		-			(225,111	)
Recoveries		300			-			-			960			-			-		5,811			-			7,071
Ending balance,
September 30, 2013	$	801,821		$	716,584		$	185,003		$	205,853		$	948,474		$	61,102	$	174,419		$	171,240		$	3,264,496

Beginning Balance,
January 1, 2013	$	741,029		$	828,873		$	149,568		$	328,996		$	934,251		$	43,930	$	151,474		$	161,343		$	3,339,464
Provision charged to expense		207,468			(223,858	)		35,435			(89,270	)		6,882			17,172		76,274			9,897			40,000
Losses charged off		(162,447	)		-			-			(48,383	)		-			-		(66,467	)		-			(277,297	)
Recoveries		15,771			111,569			-			14,510			7,341			-		13,138			-			162,329
Ending balance, September 30, 2013	$	801,821		$	716,584		$	185,003		$	205,853		$	948,474		$	61,102	$	174,419		$	171,240		$	3,264,496

Ending balance:
individually evaluated
for impairment	$	-		$	225,005		$	-		$	-		$	604,231		$	-	$	-		$	-		$	829,236
Ending balance:
collectively evaluated
for impairment	$	801,821		$	491,579		$	185,003		$	205,853		$	344,243		$	61,102	$	174,419		$	171,240		$	2,435,260

Loans:
Ending balance	$	41,973,440		$	34,049,170		$	37,303,424		$	12,039,266		$	25,615,485		$	12,220,491	$	14,403,573		$	-		$	177,604,849
Ending balance:
individually evaluated
for impairment	$	512,974		$	1,261,003		$	302,816		$	56,700		$	675,626		$	-	$	5,527		$	-		$	2,814,646
Ending balance:
collectively evaluated
for impairment	$	41,460,466		$	32,788,167		$	37,000,608		$	11,982,566		$	24,939,859		$	12,220,491	$	14,398,046		$	-		$	174,790,203

	September 30, 2012
				Commercial			Agricultural
	1-4 Family			Real Estate			Real Estate		Home Equity			Commercial		Agricultural		Consumer			Unallocated		Total
Allowance for Loan Losses:
Beginning Balance,
July 1, 2012	$	629,452		$	961,695		$	48,918	$	325,931		$	811,630	$	36,034	$	159,451		$	157,392	$	3,130,503
Provision charged to
expense		(11,330	)		(74,191	)		89,538		(37,447	)		73,497		30,963		(11,365	)		60,335		120,000
Losses charged off		(6,410	)		(99,227	)		-		(13,382	)		-		-		(11,416	)		-		(130,435	)
Recoveries		2,810			17,716			-		6,607			2,969		-		1,572			-		31,674
Ending balance,
September 30, 2012	$	614,522		$	805,993		$	138,456	$	281,709		$	888,096	$	66,997	$	138,242		$	217,727	$	3,151,742

Beginning Balance,
January 1, 2012	$	697,223		$	1,107,585		$	115,154	$	309,409		$	711,864	$	58,428	$	138,385		$	158,559	$	3,296,607
Provision charged to
expense		(31,049	)		36,962			23,302		39,314			172,947		8,569		60,787			59,168		370,000
Losses charged off		(76,705	)		(356,270	)		-		(80,126	)		-		-		(64,801	)		-		(577,902	)
Recoveries		25,053			17,716			-		13,112			3,285		-		3,871			-		63,037
Ending balance,
September 30, 2012	$	614,522		$	805,993		$	138,456	$	281,709		$	888,096	$	66,997	$	138,242		$	217,727	$	3,151,742

Ending balance:
individually evaluated
for impairment	$	-		$	139,523		$	-	$	-		$	567,536	$	-	$	6,616		$	-	$	713,675
Ending balance:
collectively evaluated
for impairment	$	614,522		$	666,470		$	138,456	$	281,709		$	320,560	$	66,997	$	131,626		$	217,727	$	2,438,067

Loans:
Ending balance	$	42,323,156		$	34,826,019		$	34,614,339	$	13,188,975		$	26,449,502	$	8,813,230	$	14,678,893		$	-	$	174,894,114
Ending balance:
individually evaluated
for impairment	$	285,550		$	1,288,367		$	-	$	43,698		$	741,497	$	-	$	6,616		$	-	$	2,365,728
Ending balance:
collectively evaluated
for impairment	$	42,037,606		$	33,537,652		$	34,614,339	$	13,145,277		$	25,708,005	$	8,813,230	$	14,672,277		$	-	$	172,528,386

	December 31, 2012
				Commercial			Agricultural
	1-4 Family			Real Estate			Real Estate		Home Equity			Commercial		Agricultural			Consumer			Unallocated		Total
Allowance for Loan Losses:
Beginning Balance,
December 31, 2011	$	697,223		$	1,107,585		$	115,154	$	309,409		$	711,864	$	58,428		$	138,385		$	158,559	$	3,296,607
Provision charged to
expense		99,055			(11,157	)		34,414		86,076			219,102		(14,498	)		74,224			2,784		490,000
Losses charged off		(82,192	)		(356,270	)		-		(80,126	)		-		-			(66,958	)		-		(585,546	)
Recoveries		26,943			88,715			-		13,637			3,285		-			5,823			-		138,403
Ending balance,
December 31, 2012	$	741,029		$	828,873		$	149,568	$	328,996		$	934,251	$	43,930		$	151,474		$	161,343	$	3,339,464


Ending balance:
individually evaluated
for impairment	$	-		$	262,177		$	-	$	-		$	610,779	$	-		$	6,185		$	-	$	879,141
Ending balance:
collectively evaluated
for impairment	$	741,029		$	566,696		$	149,568	$	328,996		$	323,472	$	43,930		$	145,289		$	161,326	$	2,460,306

Loans:
Ending balance	$	41,386,147		$	30,973,177		$	37,392,116	$	12,733,963		$	29,046,437	$	10,982,491		$	14,571,819		$	-	$	177,086,150
Ending balance:
individually evaluated
for impairment	$	339,513		$	1,603,956		$	-	$	56,677		$	728,672	$	-		$	14,392		$	-	$	2,743,210
Ending balance:
collectively evaluated
for impairment	$	41,046,634		$	29,369,221		$	37,392,116	$	12,677,286		$	28,317,765	$	10,982,491		$	14,557,427		$	-	$	174,342,940

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

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

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

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

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

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

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

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

Credit Quality Indicators

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

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

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

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

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

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2013 and December 31, 2012.

	1-4 Family				Commercial Real Estate				Agricultural Real Estate				Home Equity
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2013		2012		2013		2012		2013		2012		2013		2012
Rating:
Pass	$	38,882,817	$	38,123,451	$	31,874,059	$	28,283,081	$	37,000,608	$	37,392,116	$	11,483,313	$	11,919,440
Special Mention		860,310		1,273,558		122,294		187,936		-		-		172,684		272,563
Substandard		2,230,313		1,989,138		2,052,817		2,502,160		302,816		-		383,269		541,960
Total	$	41,973,440	$	41,386,147	$	34,049,170	$	30,973,177	$	37,303,424	$	37,392,116	$	12,039,266	$	12,733,963

	Commercial				Agricultural				Consumer				Total
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2013		2012		2013		2012		2013		2012		2013		2012
Rating:
Pass	$	24,926,781	$	28,301,663	$	12,220,491	$	10,982,491	$	14,224,756	$	14,291,487	$	170,612,825	$	169,293,729
Special Mention		-		849		-		-		99,984		111,945		1,255,272		1,846,851
Substandard		688,704		743,925		-		-		78,833		168,387		5,736,752		5,945,570
Total	$	25,615,485	$	29,046,437	$	12,220,491	$	10,982,491	$	14,403,573	$	14,571,819	$	177,604,849	$	177,086,150

The following tables present the Company’s loan portfolio aging analysis as of September 30, 2013 and December 31, 2012.

	September 30, 2013
	30-59 Days		60-89 Days		Greater than 90		Total						Total Loans >90
	Past Due		Past Due		Days Past Due		Past Due		Current		Total Loans		Days & Accruing

One-to-four family residential	$	263,517	$	518,819	$	524,759	$	1,307,095	$	40,666,345	$	41,973,440	$	-
Commercial real estate		65,047		-		85,193		150,240		33,898,930		34,049,170		-
Agricultural real estate		-		-		-		-		37,303,424		37,303,424		-
Home equity		91,319		43,922		57,588		192,829		11,846,437		12,039,266		-
Commercial		-		-		-		-		25,615,485		25,615,485		-
Agricultural		-		-		-		-		12,220,491		12,220,491		-
Consumer		99,865		-		5,987		105,852		14,297,721		14,403,573		-
Total	$	519,748	$	562,741	$	673,527	$	1,756,016	$	175,848,833	$	177,604,849	$	-

	December 31, 2012
	30-59 Days		60-89 Days		Greater than 90		Total						Total Loans >90
	Past Due		Past Due		Days Past Due		Past Due		Current		Total Loans		Days & Accruing

One-to-four family residential	$	727,315	$	213,126	$	984,996	$	1,925,437	$	39,460,710	$	41,386,147	$	-
Commercial real estate		-		-		279,622		279,622		30,693,555		30,973,177		-
Agricultural real estate		-		-		-		-		37,392,116		37,392,116		-
Home equity		158,414		70,596		136,508		365,518		12,368,445		12,733,963		-
Commercial		-		-		-		-		29,046,437		29,046,437		-
Agricultural		-		-		-		-		10,982,491		10,982,491		-
Consumer		181,171		64,390		33,692		279,253		14,292,566		14,571,819		-
Total	$	1,066,900	$	348,112	$	1,434,818	$	2,849,830	$	174,236,320	$	177,086,150	$	-

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

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

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

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

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

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

The following tables present impaired loans at or for the three and nine months ended September 30, 2013 and the year ended December 31, 2012.

	Three Months Ended September 30, 2013
							Average					Interest
			Unpaid				Impairment in		Interest			Income
	Recorded		Principal		Specific		Impaired		Income			Recognized
	Balance		Balance		Allowance		Loans		Recognized			Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	512,974	$	512,974	$	-	$	591,134	$	8,083		$	6,355
Commercial real estate		65,757		65,757		-		94,970		(2,710	)		(2,630	)
Agricultural real estate		302,816		302,816		-		303,071		11,938			12,227
Home equity		56,700		56,700		-		57,573		1,028			998
Consumer		5,527		5,527		-		5,957		106			112
Loans with a specific allowance:
Commercial real estate		1,195,246		1,195,246		225,005		1,197,414		18,983			13,456
Commercial		675,626		675,626		604,231		718,838		8,597			8,798
Total:
One-to-four family residential		512,974		512,974		-		591,134		8,083			6,355
Commercial real estate		1,261,003		1,261,003		225,005		1,292,384		16,273			10,826
Agricultural real estate		302,816		302,816		-		303,071		11,938			12,227
Commercial		675,626		675,626		604,231		718,838		8,597			8,798
Home equity		56,700		56,700		-		57,573		1,028			998
Consumer		5,527		5,527		-		5,957		106			112
Total	$	2,814,646	$	2,814,646	$	829,236	$	2,968,957	$	46,025		$	39,316

	Nine Months Ended September 30, 2013
							Average				Interest
			Unpaid				Impairment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Balance		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	512,974	$	512,974	$	-	$	594,836	$	15,585	$	12,084
Commercial real estate		65,757		65,757		-		99,115		4,088		4,129
Agricultural real estate		302,816		302,816				304,134		11,938		12,227
Home equity		56,700		56,700		-		51,809		2,853		2,813
Consumer		5,527		5,527				6,903		365		351
Loans with a specific allowance:
Commercial real estate		1,195,246		1,195,246		225,005		1,214,326		57,489		52,515
Commercial		675,626		675,626		604,231		732,675		26,037		26,637
Total:
One-to-four family residential		512,974		512,974		-		594,836		15,585		12,084
Commercial real estate		1,261,003		1,261,003		225,005		1,313,441		61,577		56,644
Agricultural real estate		302,816		302,816				304,134		11,938		12,227
Commercial		675,626		675,626		604,231		732,675		26,037		26,637
Home equity		56,700		56,700		-		51,809		2,853		2,813
Consumer		5,527		5,527		-		6,903		365		351
Total	$	2,814,646	$	2,814,646	$	829,236	$	3,003,798	$	118,355	$	110,756

	Year Ended December 31, 2012
							Average				Interest
			Unpaid				Impairment in		Interest		Income
	Recorded		Principal		Specific		Impaired		Income		Recognized
	Balance		Balance		Allowance		Loans		Recognized		Cash Basis
Loans without a specific allowance:
One-to-four family residential	$	339,513	$	339,513	$	-	$	343,593	$	17,163	$	16,909
Commercial real estate		201,135		201,135		-		205,756		27,727		16,136
Home equity		56,677		56,677		-		57,934		4,087		4,162
Consumer		8,207		8,207		-		9,795		495		422
Loans with a specific allowance:
Commercial real estate		1,402,821		1,402,821		262,177		1,443,005		91,130		91,075
Commercial		728,672		728,672		610,779		780,979		44,887		52,898
Consumer		6,185		6,185		6,185		7,096		573		576
Total:
One-to-four family residential		339,513		339,513		-		343,593		17,163		16,909
Commercial real estate		1,603,956		1,603,956		262,177		1,648,761		118,857		107,211
Commercial		728,672		728,672		610,779		780,979		44,887		52,898
Home equity		56,677		56,677		-		57,934		4,087		4,162
Consumer		14,392		14,392		6,185		16,891		1,068		998
Total	$	2,743,210	$	2,743,210	$	879,141	$	2,848,158	$	186,062	$	182,178

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

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

The following table presents the recorded balance, at original cost, of troubled debt restructurings, as of September 30, 2013 and December 31, 2012.

	September 30, 2013		December 31, 2012

One-to-four family residential	$	621,180	$	267,916
Commercial real estate		1,147,153		1,011,350
Agricultural real estate		302,816		-
Home equity		80,548		84,123
Commercial loans		647,845		701,271
Agricultural loans		-		-
Consumer loans		30,429		91,206

Total	$	2,829,971	$	2,155,866

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 September 30, 2013 and December 31, 2012.


	September 30, 2013		December 31, 2012

One-to-four family residential	$	549,338	$	127,399
Commercial real estate		1,147,153		983,450
Agricultural real estate		302,816		-
Home equity		75,774		84,123
Commercial loans		647,845		701,271
Agricultural loans		-		-
Consumer loans		30,429		89,045

Total	$	2,753,355	$	1,985,288

The following table presents loans modified as troubled debt restructurings during the three and nine months ended September 30, 2013 and 2012.

	Three Months Ended				Nine Months Ended
	September 30, 2013				September 30, 2013
	Number of		Recorded		Number of		Recorded
	Modifications		Investment		Modifications		Investment

One-to-four family residential		1	$	99,652		7	$	479,171
Commercial real estate		1		65,973		3		179,749
Agricultural real estate		1		302,816		1		302,816
Home equity		-		-		-		-
Commercial loans		-		-		-		-
Agricultural loans		-		-		-		-
Consumer loans		-		-		2		12,947

Total		3	$	468,441		13	$	974,683

	Three Months Ended				Nine Months Ended
	September 30, 2012				September 30, 2012
	Number of		Recorded		Number of		Recorded
	Modifications		Investment		Modifications		Investment

One-to-four family residential		-	$	-		1	$	43,215
Commercial real estate		-		-		-		-
Agricultural real estate		-		-		-		-
Home equity		1		10,797		2		16,555
Commercial loans		-		-		2		268,450
Agricultural loans		-		-		-		-
Consumer loans		-		-		2		18,034

Total		1	$	10,797		7	$	346,254

2013 Modifications

During the nine month period ended September 30, 2013, the Company modified seven one-to-four family residential real estate loans, with a recorded investment of $479,171, which were deemed to be TDR’s. One modification was made to combine notes and capitalize interest. Three of the modifications involved rate concessions. Three of the modifications were made to renew notes and capitalize real estate taxes. None of the modifications resulted in a write-off of the principal balance.

The Company also modified three commercial real estate loans with a recorded investment of $179,749. Two modifications were made for the same borrower to provide some payment concessions while trying to sell the property. The third modification was made to change payment terms to interest only. The modifications did not result in a reduction of the contractual interest rate or a write-off of the principal balance.

The company modified one agricultural real estate loan with a recorded investment of $302,816. The modification was made to change the payment schedule to interest only while the borrower attempts to sell the property. The modification did not result in a reduction of the contractual interest rate or a write-off of the principal balance.

The Company also modified two consumer loans with a recorded investment of $12,947. One modification was made to combine notes and capitalize interest. The second modification was a renewal with a rate concession. Neither modification resulted in a write-off of the principal balance.

Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. During the nine month period ended September 30, 2013, one residential real estate loan of $13,638 and one home equity loan of $4,774 that were considered TDR’s defaulted as they were more than 90 days past due at September 30, 2013. Default occurs when a loan is 90 days or more past due, transferred to nonaccrual or charged-off, and is within twelve months of restructuring.

2012 Modifications

During the nine month period ended September 30, 2012, the Company modified one one-to-four family residential real estate loan, with a recorded investment of $43,215, which was deemed to be a TDR. The modification was made to change the payment schedule to interest-only for a period of time. The modification did not result in a reduction of the contractual interest rate or a write-off of the principal balance.

The Company also modified two home equity loans with a recorded investment of $16,555. One modification was made to change the payment schedule to interest-only for a period of time. The second modification was to capitalize funds to bring other debts current. Neither modification resulted in a reduction of the contractual interest rate or a write-off of the principal balance.

The Company also modified two commercial loans with a total recorded investment of $268,450. Both modifications were made to reduce the contractual interest rate and payment amount. Neither modification resulted in a write-off of the principal balance.

The Company also modified two consumer loans with a total recorded investment of $18,818. Both modifications were made to extend the term of the loans to lower the payment amount. Neither modification resulted in a reduction of the contractual interest rate or a write-off of the principal balance.

Management considers the level of defaults within the various portfolios when evaluating qualitative adjustments used to determine the adequacy of the allowance for loan losses. During the nine month period ended September 30, 2012, one residential real estate loan of $16,203, one commercial real estate loan of $28,000, and one home equity loan of $5,000 that were considered TDR’s defaulted as they were more than 90 days past due at September 30, 2012. Default occurs when a loan is 90 days or more past due, transferred to nonaccrual or charged-off, and is within twelve months of restructuring.

The following table presents the Company’s nonaccrual loans at September 30, 2013 and December 31, 2012. This table excludes performing troubled debt restructurings.

	September 30, 2013		December 31, 2012

One-to-four family residential	$	1,241,382	$	1,203,328
Commercial real estate		216,923		560,073
Agricultural real estate		-		-
Home equity		158,850		276,877
Commercial loans		41,087		51,436
Agricultural loans		-		-
Consumer loans		30,824		122,064

Total	$	1,689,066	$	2,213,778

- Definition

The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses.

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