R O U G H C OMMUNITY BANKING
R O U G H C OMMUNITY BANKING
H
H
G T
G T
MUNITY BUIL DI N
MUNITY BUIL DI N
M
M
O
O
C
C
TWENTY FIVE
1986 - 2011
Years
R O U G H C OMMUNITY BANKING
H
G T
MUNITY BUIL DI N
M
O
C
FORESIGHT FINANCIAL GROUP, INC ∫ 2011 ANNUAL REPORT
www.foresightfg.com
STATE
BANK
of
DAVIS
Freeport, IL
1986 - 2011 TWENTY∫ FIVE
Dear Shareholders,
Your company completed its first 25 years in business in 2011 in an operating environment few of the company’s organizers
would have imagined. Yet, it is the fundamental philosophies of community banking embraced by those wise local citizens that
provided the model Foresight Financial Group has followed to successfully manage through the myriad of changes that has
occurred in the economy and banking industry the past 25 years. Their philosophical foundation of having individual bank
charters, with local boards and decision makers serving as committed financial stewards working together with like minded
community bankers through the changing dynamics of balancing the collective interests of Customers, Communities,
Shareholders, and Team Members, has provided the means to successfully pursue our mission of Community Building
Through Community Banking while many others have failed.
Customers have benefitted over the years from industry-wide adoption of convenient technology driven electronic products
and services, with payments evolving from unwieldy paper checks to debit cards and automated bill payment. Banking using
the internet and mobile phones was likely not envisioned 25 years ago when the banking industry had over 15,000 institutions.
Industry consolidation driven by regulatory and economic changes has reduced that number to 7,357 at the end of 2011, with
813 of those institutions still on the FDIC’s problem list after nearly 400 bank failures, when only six years ago there were less
than a handful of banks on that problem list. Home mortgage loan interest rates have dropped the past 25 years from double
digits to currently as low as 3% for a 15 year fixed rate loan. These stunning facts are an outcome of years of regulatory,
technological, and economic change, including the great recession of 2008 that was precipitated by the Wall Street banks’
credit and liquidity crisis. Those banks brought the confidence crisis upon themselves by engaging in unsound practices that
included abuses in sub-prime mortgages, check “bounce protection” programs, and credit card and auto loan securitizations
that community banks, including the Foresight group, chose to avoid as not in their customers’ best interests. Communities
cannot prosper when Customers’ interests are compromised.
The following points from Foresight’s history, along with charts on the next pages, are illustrative of the soundness of the
fundamental philosophies put in place from the beginning, along with the prudent stewardship of our local boards of directors,
and careful execution of sound community banking management practices by our executives and Team Members over our
25 year journey working cooperatively together:
• Organizational growth from 2 banks with $45 million in assets with 14 employees to 5 banks with $885 million in assets with
over 190 employees;
• Pooling of resources to consolidate “back-room” operations, technology, financial, capital, and audit and compliance
support that has reduced the relative cost of operating (based on asset size) by over 50% over the years, with operating
overhead cost performance consistently significantly better than 80% of our peers for the past decade;
• Sharing of lending expertise and capacity, with shared loans between the Foresight Bank group reaching $210 million at
year end 2011, and a combined legal lending limit of $21.7 million, up from less than $1 million in 1986; this has supported
Customers and Communities.
• Profitability that has been consistently above peers, with continuous dividend payments to Shareholders despite the
impact of the great recession, with a 25 year growth in book value per share of common stock of over 2,000%;
• Rewarding careers for our Team Members nearly one third of whom have had over 20 years experience at community
banks, most of which with the Foresight group.
2
2011 ANNUAL REPORT
Years 1986 - 2011 TWENTY∫ FIVE
We appreciate your recognition and support of these fundamental philosophies as we rely upon them as the basis to navigate
the future changes and challenges of the next 25 years of Community Building Through Community Banking in our
chosen markets. We think they have stood the test of time.
The 25th year of operations in 2011 was again challenged by the lingering effects of the great recession, as local
unemployment improved slightly from 14% to 12%, and the national economy grew 2-3%, despite significant political turmoil
in the U.S. and world-wide. Local real estate markets, both residential and commercial are still extremely weak, although
manufacturing is improving, and agriculture is on a high note. With interest rates very low and even declining further during
2011, the Foresight banks were able to improve profits again despite the ongoing burden of high credit costs. For the year net
income increased 12.9% to $6,568,000 from $5,815,000 in 2010. This was just short of our record earnings year in 2007 of
$6,591,000. Return on assets of 76 basis points was much better than peer group average of 53 basis points. Nationwide in
2011, 15% of all banks were still not profitable.
The Foresight Banks improved net income in 2011 with careful management of net interest income, which increased $3.3
million (up 11.7%), and of noninterest overhead costs, which increased less than 2%. For a third consecutive year, the Foresight
banks achieved positive loan growth (up 3.2% in 2011), while peer group banks averaged a 3% decline in loan volume. Credit
costs including expense related to foreclosed assets remained burdensome, reaching $9.96 million, up 5% from $9.51 million
in 2010. The level of non-accrual loans and foreclosed real estate did decline from $23 million to $19 million during 2011, but
remain the biggest obstacle to the company along with the depressed real estate markets
Foresight’s total risk based capital remains very strong at 15.06%, and we are working toward building further upon the $6
million in cash we hold to begin repayment of the $15.75 redemption value of our TARP Capital in a significant amount by
year end 2012. Asset quality will be the determining factor of how much progress can be made. Significant additional pages
in the footnotes to the auditors’ report this year discloses much more detail than in past years, as regulations and accounting
principles have further addressed this important area to enhance transparency of bank financial statements. We see the
restoration of asset quality to closer to pre-recession levels as the trigger for TARP repayment, and we believe for significant
improvement in the market trading price of our common stock as well, from year end 2011 at $12.10 per share, which was up
over 17% from $10.30 at the end of 2010. We appreciate your ongoing support of our mission of Community Building
Through Community Banking!
Respectfully and Gratefully,
Stephen G. Gaddis, President and CEO
2011 ANNUAL REPORT
3
Years 9 -
8 -
7 -
6 -
5 -
4 -
3 -
2 -
1 -
0 -
24 -
22 -
20 -
18 -
16 -
14 -
12 -
10 -
8 -
6 -
4 -
2 -
0 -
Total Assets (1,000,000s)
885
659
449
172
123
45
1986 1991 1996 2001 2006 2011
$ Per Share Book Value 12.31 (Adj for all stock splits)
20.70
14.78
8.43
5.88
.98
1.35
1986 1991 1996 2001 2006 2011
7 -
6 -
5 -
4 -
3 -
2 -
1 -
0 -
22 -
20 -
18 -
16 -
14 -
12 -
10 -
8 -
6 -
4 -
2 -
0 -
1986 - 2011 TWENTY∫ FIVE
Net Income (1,000,000s)
6.6
6.2
2.9
1.8
.74
.28
1986 1991 1996 2001 2006 2011
Legal Loan Limit (1,000,000s)
21.7
15.0
9.0
3.4
2.0
.8
1986 1991 1996 2001 2006 2011
4
2011 ANNUAL REPORT
Years 1986 - 2011 TWENTY∫ FIVE
900,000 -
850,000 -
800,000 -
750,000 -
700,000 -
Trends in Assets, Deposits & Loans
885,405
844,917
808,642
749,346
738,068
695,346
695,439
650,000 -
658,729
664,380
600,000 -
635,271
550,000 -
568,159
568,159
589,600
581,105
598,984
500,000 -
526,020
531,972
450,000 -
470,430
482,093
400,000 -
350,000 -
300,000 -
2006 2007 2008 2009 2010 2011
Assets
Deposits
Loans
Credit Costs vs. Net Operating Income* (000s)
20,000 -
19,783
18,388
15,000 -
15,399
7 -
6 -
5 -
4 -
3 -
2 -
1 -
0 -
120,000 -
100,000 -
80,000 -
Net Earnings Dollars (1,000,000s)
6.591
6.153
6.568
5.815
5.483
4.750
2006 2007 2008 2009 2010 2011
Trends in Combined Equity Capital & ALLL*
to Non-Performing Assets (000s)
107,771
99,190
95,352
12,434
10,846
11,146
10,000 -
71,467
66,156
9,963
60,000 -
60,093
9,508
5,000 -
6,757
4,801
40,000 -
20,000 -
24,217
23,060
19,898
17,749
1,086
580
0 -
2006 2007 2008 2009 2010 2011
0 -
3,224
2,607
2006 2007 2008 2009 2010 2011
*Tax equivalent net operating income
before taxes and credit costs.
Credit Costs
Net Operating Income
*ALLL: Allowance for loan and lease losses
Equity Capital & ALLL
Non Performing Assets
2011 ANNUAL REPORT
1
Years
1986 - 2011 TWENTY∫ FIVE
Wipfli LLP
403 East Third Street
Sterling, IL 61081
Wipfli LLP
403 East Third Street
Sterling, IL 61081
815.626.1277
Fax 815.626.9118
www.wipfli.com
815.626.1277
Fax 815.626.9118
www.wipfli.com
INDEPENDENT AUDITOR’S REPORT
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors
Foresight Financial Group, Inc.
To the Board of Directors
Foresight Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of Foresight Financial Group, Inc. and
Subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, changes
in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The consolidated statements of income, changes in
stockholders’ equity and cash flows of Foresight Financial Group, Inc. and Subsidiaries for the year ended
December 31, 2009 were audited by Lindgren, Callihan, Van Osdol & Co., Ltd., whose practice was acquired
by Wipfli LLP as of October 1, 2010 and whose report dated March 1, 2010 expressed an unqualified opinion
on those statements.
We have audited the accompanying consolidated balance sheets of Foresight Financial Group, Inc. and
Subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, changes
in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. The consolidated statements of income, changes in
stockholders’ equity and cash flows of Foresight Financial Group, Inc. and Subsidiaries for the year ended
December 31, 2009 were audited by Lindgren, Callihan, Van Osdol & Co., Ltd., whose practice was acquired
by Wipfli LLP as of October 1, 2010 and whose report dated March 1, 2010 expressed an unqualified opinion
on those statements.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. 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. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. 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. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Foresight Financial Group, Inc. and Subsidiaries as of December 31, 2011 and 2010,
and the results of their operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Foresight Financial Group, Inc. and Subsidiaries as of December 31, 2011 and 2010,
and the results of their operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a
whole. The consolidating information included in Schedules 1 and 2 is presented for purposes of additional
analyses and is not a required part of the consolidated financial statements. Such information is the
responsibility of management and was derived from and relates directly to the underlying accounting and
other records used to prepare the financial statements. The information has been subjected to the auditing
procedures applied in the audit of the financial statements and certain additional procedures, including
comparing and reconciling such information directly to the underlying accounting and other records used to
prepare the financial statements or to the financial statements themselves, and other additional procedures in
accordance with auditing standards generally accepted in the United States of America. In our opinion, the
information is fairly stated in all material respects in relation to the financial statements as a whole.
Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements as a
whole. The consolidating information included in Schedules 1 and 2 is presented for purposes of additional
analyses and is not a required part of the consolidated financial statements. Such information is the
responsibility of management and was derived from and relates directly to the underlying accounting and
other records used to prepare the financial statements. The information has been subjected to the auditing
procedures applied in the audit of the financial statements and certain additional procedures, including
comparing and reconciling such information directly to the underlying accounting and other records used to
prepare the financial statements or to the financial statements themselves, and other additional procedures in
accordance with auditing standards generally accepted in the United States of America. In our opinion, the
information is fairly stated in all material respects in relation to the financial statements as a whole.
Sterling, Illinois
March 7, 2012
Sterling, Illinois
March 7, 2012
6
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
December 31,
A S S E T S
Cash and due from banks
Interest-bearing deposits in banks
Federal funds sold
Total cash and cash equivalents
Securities:
Securities held-to-maturity (HTM)
Securities available-for-sale (AFS)
Non-marketable equity securities, at cost
Loans held for sale
Loans, net of allowance for loan losses of $11,173 and $12,165,
respectively
Foreclosed assets, net
Premises and equipment, net
Other assets
CONSOLIDATED BALANCE SHEETS
(000s omitted except share data)
2011
$17,121
8,396
0
25,517
2,042
221,634
2,177
2,198
598,984
5,997
10,115
16,741
2010
$12,676
829
4,988
18,493
2,597
202,100
2,053
1,179
581,105
7,408
10,443
19,539
Total assets
$885,405
$844,917
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Federal funds purchased
Securities sold under agreements to repurchase
Federal Home Loan Bank (FHLB) advances and other borrowings
Accrued interest payable and other liabilities
Total liabilities
Stockholders’ equity:
Preferred stock (no par value; authorized 500,000 shares;
15,750 shares issued)
Common stock ($.25 par value; authorized 5,000,000 shares;
3,867,129 and 3,866,794 shares issued, respectively)
Additional paid-in capital
Retained earnings
Treasury stock, at cost (207,657 shares)
Accumulated other comprehensive income
Total stockholders’ equity
$82,036
656,032
738,068
3,899
27,698
14,400
4,742
788,807
15,394
966
7,666
71,193
(4,060)
5,439
96,598
$62,146
633,293
695,439
2,084
26,327
29,700
4,342
757,892
15,244
966
7,568
66,179
(4,060)
1,128
87,025
Total liabilities and stockholders’ equity
$885,405
$844,917
See Notes to Consolidated Financial Statements.
2011 ANNUAL REPORT
7
Years CONSOLIDATED STATEMENTS OF INCOME
(000s omitted except share data)
For the years ended December 31,
Interest and dividend income:
Loans, including fees
Debt securities:
Taxable
Tax-exempt
Interest-bearing deposits in banks
Federal funds sold
Total interest and dividend income
Interest expense:
Deposits
Federal funds purchased
Securities sold under agreements to repurchase
FHLB and other borrowings
Total interest expense
Net interest and dividend income
Provision for loan losses
Net interest and dividend income, after provision for loan losses
Noninterest income:
Customer service fees
Gain on sales and calls of AFS securities, net
Gain on sales of loans, net
Loan servicing fees, net
Other
Total noninterest income
Noninterest expenses:
Salaries and employee benefits
Occupancy expense of premises, net
Outside services
Data processing
Foreclosed assets, net
Other
Total noninterest expenses
Income before income taxes
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
1986 - 2011 TWENTY∫ FIVE
2011
2010
2009
$33,830
$32,209
$31,848
3,915
3,900
16
11
41,672
9,313
7
167
341
9,828
31,844
7,195
24,649
1,369
334
705
579
2,367
5,354
10,540
1,904
723
959
2,768
4,535
21,429
8,574
2,006
$6,568
$1.53
$1.52
4,642
4,061
36
7
40,955
11,832
13
180
418
12,443
28,512
8,382
5,498
3,444
32
15
40,837
15,267
9
139
715
16,130
24,707
6,405
20,130
18,302
1,520
180
797
777
2,614
5,888
10,045
1,900
699
837
1,126
4,835
19,442
6,576
761
1,553
437
855
775
2,068
5,688
9,201
1,918
575
841
352
4,462
17,349
6,641
1,158
$5,815
$5,483
$1.32
$1.32
$1.36
$1.36
8
2011 ANNUAL REPORT
See Notes to Consolidated Financial Statements.
Years 1986 - 2011 TWENTY∫ FIVE
For the years ended December 31,
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(000s omitted except share data)
Preferred Common
Stock
Stock
Additional
Paid-In
Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income
Total
Balance, January 1, 2009
$0
$966
$7,454
$58,547
($4,060)
$1,160
$64,067
Comprehensive income:
Net income
Other comprehensive income -
Change in unrealized gain on
securities available-for-sale, net
of reclassification and tax effect
Total comprehensive income
Cash dividends ($.32 per share)
Issuance of preferred stock
Accretion of preferred stock warrants
Cash dividends on preferred stock
Stock-based compensation expense
5,483
(1,174)
(94)
(409)
1,593
5,483
1,593
7,076
(1,174)
15,000
0
(409)
33
15,000
94
33
Balance, December 31, 2009
15,094
966
7,487
62,353
(4,060)
2,753
84,593
Comprehensive income:
Net income
Other comprehensive loss -
Change in unrealized gain on
securities available-for-sale, net
of reclassification and tax effect
Total comprehensive income
Cash dividends ($.28 per share)
Accretion of preferred stock warrants
Cash dividends on preferred stock
Stock-based compensation expense
5,815
(1,025)
(150)
(814)
(1,625)
5,815
(1,625)
4,190
(1,025)
0
(814)
81
150
81
Balance, December 31, 2010
15,244
966
7,568
66,179
(4,060)
1,128
87,025
Comprehensive income:
Net income
Other comprehensive income -
Change in unrealized gain on
securities available-for-sale, net
of reclassification and tax effect
Total comprehensive income
Cash dividends ($.16 per share)
Accretion of preferred stock warrants
Cash dividends on preferred stock
Stock-based compensation expense
6,568
(586)
(150)
(818)
4,311
6,568
4,311
10,879
(586)
0
(818)
98
150
98
Balance, December 31, 2011
$15,394
$966
$7,666
$71,193
($4,060)
$5,439
$96,598
See Notes to Consolidated Financial Statements.
2011 ANNUAL REPORT
9
Years CONSOLIDATED STATEMENTS OF CASH FLOWS
(000s omitted except share data)
For the years ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for loan losses
Provision for foreclosed asset losses
Depreciation
Net amortization (accretion) of securities
Deferred income tax benefit
Net gain on the sales and calls of AFS securities
Net loss on the sales of foreclosed assets
Stock-based compensation expense
Net change in:
Servicing rights
Loans held for sale
Other assets
Accrued expenses and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of AFS securities
Proceeds from maturities, calls, and paydowns of HTM securities
Proceeds from maturities, calls, and paydowns of AFS securities
Purchases of AFS securities
Purchases of non-marketable equity securities
Loan originations and principal collections, net
Proceeds from sales of foreclosed assets
Purchases of premises and equipment, net
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits
Net change is securities sold under agreements to repurchase
Cash dividends paid
Net change in federal funds purchased
Proceeds from issuance of preferred stock
Proceeds from lines of credit and FHLB advances and other borrowings
Payments on lines of credit and FHLB advances and other borrowings
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
1986 - 2011 TWENTY∫ FIVE
2011
2010
2009
$6,568
$5,815
$5,483
7,195
2,410
799
974
(473)
(334)
12
98
8
(1,019)
305
400
16,943
13,966
606
48,466
(75,388)
(124)
(27,693)
1,608
(471)
(39,030)
42,629
1,371
(1,404)
1,815
0
10,500
(25,800)
29,111
7,024
18,493
8,382
900
741
1,094
(822)
(180)
50
81
(251)
(732)
1,016
259
16,353
14,551
999
56,977
(52,762)
(244)
(66,113)
810
(2,131)
(47,913)
31,059
1,973
(1,839)
(2,648)
0
19,750
(16,550)
31,745
6,405
113
818
230
(1,251)
(437)
113
33
(311)
144
(3,531)
(689)
7,120
17,736
1,520
43,772
(110,028)
(189)
(12,931)
819
(548)
(59,849)
29,109
6,507
(1,583)
3,696
15,000
18,250
(18,100)
52,879
185
150
18,308
18,158
Cash and cash equivalents at end of year
$25,517
$18,493
$18,308
10
2011 ANNUAL REPORT
See Notes to Consolidated Financial Statements.
Years 1986 - 2011 TWENTY∫ FIVE
For the years ended December 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(000s omitted except share data)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest
Income taxes
2011
2010
2009
$10,040
$12,790
$16,652
$2,190
$1,905
$1,934
SUPPLEMENTAL SCHEDULE OF NONCASH AND FINANCING ACTIVITIES:
Foreclosed assets acquired in settlement of loans
$2,619
$8,598
$470
See Notes to Consolidated Financial Statements.
2011 ANNUAL REPORT
11
Years NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(1) Summary of Significant Accounting Policies
1986 - 2011 TWENTY∫ FIVE
The accounting and reporting policies of Foresight Financial Group, Inc. (Company) and its wholly owned
subsidiaries (Banks) conform to accounting principles generally accepted in the United States of America and to
general practices within the banking industry. The following is a description of the more significant accounting
policies:
(a) Nature of Operations
The Company provides a variety of banking services to individuals and businesses through its facilities in
the Rockford, Freeport, German Valley, Davis, Lena, Winnebago, Pecatonica, and Seward, Illinois areas.
Its primary deposit products are demand deposits and certificates of deposit and its primary lending
products are agribusiness, commercial, real estate, and installment loans.
(b) Basis of Consolidation
The consolidated financial statements include the accounts and results of operations of the Company and
its wholly owned subsidiaries, German-American State Bank (German), State Bank of Davis (Davis), State
Bank (Freeport), Northwest Bank of Rockford (Northwest), and Lena State Bank (Lena) (Banks). All
significant intercompany accounts and transactions have been eliminated in consolidation.
(c) Subsequent Events
The Company has evaluated subsequent events for recognition and disclosure through March 7, 2012,
which is the date the financial statements were available to be issued.
(d) 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. The allowance for loan losses, fair values of securities, fair values of
foreclosed assets, deferred tax assets and liabilities and fair values of financial instruments are particularly
subject to change in the near-term.
(e) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and
balances due from banks, interest-bearing deposits in banks, and federal funds sold, all of which generally
mature within ninety days. Cash flows from loans, deposits, federal funds purchased, securities sold under
agreements to repurchase, and treasury stock are reported net.
(f) Interest-bearing Deposits in Banks
Interest-bearing deposits in banks are largely comprised of liquid non-maturing deposits in banks but also
include some small balances in time deposits in banks with varying maturities. Interest-bearing deposits in
banks are carried at cost.
12
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(1) Summary of Significant Accounting Policies (continued)
(g) Securities
Debt securities that management has the positive intent and ability to hold to maturity are classified as held
to maturity (HTM) and recorded at amortized cost. Securities not classified as HTM are classified as
available for sale (AFS) and recorded at fair value, with unrealized gains or 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. Declines in the fair value of HTM and AFS securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
In estimating other-than-temporary impairment losses, management considers (1) the length of time and
the extent to which the fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in fair value.
Gains and losses on the sale of securities are recorded on the trade date and are determined using the
specific-identification method.
(h) Non-Marketable Equity Securities
The Banks, as members of the Federal Home Loan Bank (FHLB) system, are required to maintain a
minimum investment in capital stock of the FHLB in an amount equal to the greater of 1% of their
mortgage-related assets or 5% of advances from the FHLB. The Banks may choose to invest in amounts
greater than the minimum investment. Excess capital stock redemptions are subject to guidelines
established by the FHLB. FHLB stock is reported at cost since no ready market exists and it has no
quoted market value. FHLB stock is periodically evaluated for impairment based on the ultimate recovery
of par value.
.
(i) Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in
the aggregate.
Mortgage loans held for sale are generally sold with mortgage servicing rights retained by the Company.
The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage
servicing rights. Gains or losses on sales of mortgage loans are recognized based on the difference
between the selling price and the carrying value of the related mortgage loans sold.
(j) Loans and Allowance for Loan Losses
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or
pay-off are stated at the amount of unpaid principal balances less the allowance for loan losses. Interest
income is accrued daily on the outstanding balances.
2011 ANNUAL REPORT
13
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(1) Summary of Significant Accounting Policies (continued)
(j) Loans and Allowance for Loan Losses (continued)
A loan is considered to be delinquent when payments have not been made according to contractual terms,
typically evidenced by nonpayment of a monthly installment by the due date. The accrual of interest on
loans is discontinued at the time the loan is 90-days delinquent unless the credit is well-secured and in the
process of collection. Credit card loans and other personal loans are typically charged off no later than
180-days delinquent. Generally, loans are placed on non-accrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful.
Generally, interest accrued but not collected for loans that are placed on nonaccrual status or charged off is
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.
Loan origination fees approximate direct loan origination costs and are generally recognized as income
upon receipt.
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 uncollectibility 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 specific and general components. The specific component relates to loans that
are classified as impaired. For loans that are classified as impaired, an allowance is established when the
discounted cash flows, collateral value or observable market price of the impaired loan is lower than the
carrying value of that loan. The general component covers non-impaired loans and is based on historical
loss experience adjusted for qualitative factors.
A loan is considered impaired when it is probable, based on current information and events, the Bank will
be unable to collect all contractual principal and interest payments due in accordance with the terms of the
loan agreement. Loans for which the terms have been modified to provide a concession, and for which the
borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as
impaired. Factors considered by management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and interest payments when due. Impaired
loans are measured on an individual basis based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if
any, and subsequent changes are included in the allowance for loan losses. Troubled debt restructurings
are measured at the present value of estimated future cash flows using the loan’s effective rate at inception,
unless collateral dependent, then reported net of the fair value of collateral.
14
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(000s omitted except share data)
(1) Summary of Significant Accounting Policies (continued)
(1) Summary of Significant Accounting Policies (continued)
(j) Loans and Allowance for Loan Losses (continued)
(j) Loans and Allowance for Loan Losses (continued)
For impaired loans, accrual of interest is discontinued when management believes, after considering
For impaired loans, accrual of interest is discontinued when management believes, after considering
collection efforts and other factors, the borrower’s financial condition is such that the collection of interest
collection efforts and other factors, the borrower’s financial condition is such that the collection of interest
is doubtful. Cash collections on impaired loans are credited to the loan receivable balance, and no interest
is doubtful. Cash collections on impaired loans are credited to the loan receivable balance, and no interest
income is recognized on those loans until the principal balance has been collected.
income is recognized on those loans until the principal balance has been collected.
(k) Loan Commitments
(k) Loan Commitments
The Banks enter into off-balance-sheet financial instruments consisting of commitments to extend credit
The Banks enter into off-balance-sheet financial instruments consisting of commitments to extend credit
and letters of credit issued to meet customer-financing needs. Loan commitments are recorded when they
and letters of credit issued to meet customer-financing needs. Loan commitments are recorded when they
are funded. Standby or performance letters of credit are considered financial guarantees in accordance with
are funded. Standby or performance letters of credit are considered financial guarantees in accordance with
accounting standards and are recorded at fair value, if material.
accounting standards and are recorded at fair value, if material.
(l) Loan Servicing
(l) Loan Servicing
Mortgage servicing rights are recognized as separate assets when rights are acquired through a sale of loans
Mortgage servicing rights are recognized as separate assets when rights are acquired through a sale of loans
and are reported in other assets. When the originating mortgage loans are sold into the secondary market,
and are reported in other assets. When the originating mortgage loans are sold into the secondary market,
the Company allocates the total cost of the mortgage loans between mortgage servicing rights and the
the Company allocates the total cost of the mortgage loans between mortgage servicing rights and the
loans, based on their relative fair values. The cost of originated mortgage-servicing rights is amortized in
loans, based on their relative fair values. The cost of originated mortgage-servicing rights is amortized in
proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage-servicing
proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage-servicing
rights is assessed based on the fair value of those rights. The amount of impairment is the amount by
rights is assessed based on the fair value of those rights. The amount of impairment is the amount by
which the capitalized mortgage servicing rights exceed their fair value. Fair value is determined using
which the capitalized mortgage servicing rights exceed their fair value. Fair value is determined using
prices for similar assets with similar characteristics, when available, or based upon discounted cash flows
prices for similar assets with similar characteristics, when available, or based upon discounted cash flows
using market-based assumptions.
using market-based assumptions.
Residential mortgage loans are generally sold to the secondary market. At the time the loans are sold, a
Residential mortgage loans are generally sold to the secondary market. At the time the loans are sold, a
gain or loss is calculated based on the cash received versus the carrying value of the assets transferred.
gain or loss is calculated based on the cash received versus the carrying value of the assets transferred.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual
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. The amortization of
percentage of the outstanding principal and are recorded as income when earned. The amortization of
mortgage servicing rights is netted against loan servicing fee income.
mortgage servicing rights is netted against loan servicing fee income.
(m) Mortgage-Banking Derivatives
(m) Mortgage-Banking Derivatives
Commitments to fund mortgage loans (interest-rate locks) to be sold into the secondary market and
Commitments to fund mortgage loans (interest-rate locks) to be sold into the secondary market and
mandatory delivery forward commitments for the future delivery of these mortgage loans are to be
mandatory delivery forward commitments for the future delivery of these mortgage loans are to be
accounted for as derivatives not qualifying for hedge accounting. The fair values of these mortgage
accounted for as derivatives not qualifying for hedge accounting. The fair values of these mortgage
derivatives are to be estimated based on the net future cash flows related to the associated servicing of the
derivatives are to be estimated based on the net future cash flows related to the associated servicing of the
loans and on changes in mortgage interest rates from the date of the commitments. Changes in fair values
loans and on changes in mortgage interest rates from the date of the commitments. Changes in fair values
on these derivatives are to be included in net gains on sales of loans. The Company has deemed the effect
on these derivatives are to be included in net gains on sales of loans. The Company has deemed the effect
of these derivatives to be immaterial to the consolidated financial statements and has elected not to record
of these derivatives to be immaterial to the consolidated financial statements and has elected not to record
fair values associated with these derivatives.
fair values associated with these derivatives.
(n) Foreclosed Assets
(n) Foreclosed Assets
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated cost
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated cost
of disposal when acquired. Subsequent to foreclosure, valuations are periodically performed by
of disposal when acquired. Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs
management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Costs
after acquisition are generally expensed. Revenues and expenses from operations and changes in the
after acquisition are generally expensed. Revenues and expenses from operations and changes in the
valuation allowance are included in net expenses from foreclosed assets.
valuation allowance are included in net expenses from foreclosed assets.
2011 ANNUAL REPORT
15
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(1) Summary of Significant Accounting Policies (continued)
(o) Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation, based on the estimated useful
lives of the assets. Depreciation is generally computed on the straight-line method over estimated useful
lives ranging from 3 to 40 years.
(p) Bank-Owned Life Insurance
The Bank has purchased life insurance policies on certain key employees. Bank-owned life insurance is
recorded at its cash surrender value, or the amount that can be realized.
(q) Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located in the area and communities noted above.
Note 3 details the types of securities in which the Company invests. Note 4 details the types of lending in
which the Company engages. The Company does not have any significant concentrations with any one
industry or customer.
(r) Income Taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.
Under this method, the net deferred tax asset or liability is determined based on the tax effects of the
temporary differences between the book and tax bases of the various balance sheet assets and liabilities and
gives current recognition to changes in tax rates and laws. The Company files consolidated Federal and
State income tax returns.
The Company may also recognize a liability for unrecognized tax benefits from uncertain tax positions.
Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in
a tax return and the benefit recognized and measured in the financial statements. Interest and penalties
related to unrecognized tax benefits are classified as income taxes, if applicable. No liabilities for
unrecognized tax benefits from uncertain tax positions have been recorded.
(s) Comprehensive Income
Accounting principles generally require the Company to include in net income recognized revenue,
expenses, gains and losses. Certain changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the equity section of the balance sheet.
Such items, along with net income, are components of comprehensive income.
16
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(1) Summary of Significant Accounting Policies (continued)
(t) Earnings Per Share
Basic earnings per share (EPS) represent income available to common stockholders divided by the
weighted-average number of common shares outstanding during the period. Diluted EPS reflects
additional common shares that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed issuance. Potential
common shares that may be issued by the Company relate solely to outstanding stock options and are
determined using the treasury stock method. The dividends on preferred stock and the accretion of the
preferred warrants are subtracted from net income in arriving at the net income available to common
stockholders.
(u) Loss Contingencies
Loss contingencies, including claims and legal actions arising from time to time in the ordinary course of
business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss
can be reasonably estimated. Management does not believe there now are such matters that could have a
material effect on the consolidated financial statements.
(v) 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, (2) the transferee obtains the 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.
(w) Trust Assets
Assets of the trust department of State Bank, other than trust cash on deposit at the Bank, are not included
in these financial statements because they are not assets of the Company.
(x) Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase liabilities represent amounts advanced by various
customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit
insurance.
(y) Stock Compensation Plans
The Company records the cost of stock-based employee compensation using the fair-value method.
Compensation expense for share-based awards is recorded over the vesting period at the fair value of the
award at the time of grant. The Company has historically assumed no projected forfeitures on its stock
based compensation, since forfeitures have not been significant.
(z) Reclassifications
Certain amounts in the 2010 consolidated financial statements have been reclassified to conform to the
2011 presentation.
2011 ANNUAL REPORT
17
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(1) Summary of Significant Accounting Policies (continued)
(aa) Adoption of New Accounting Standards
In July 2010, the FASB issued new accounting guidance for disclosures about the credit quality of loans
and the allowance for loan losses. The primary purpose of this new guidance is to provide additional
information to assist financial statement users in assessing the Company’s credit risk exposures and
evaluating the adequacy of its allowance for loan losses. This new accounting standard is effective for
financial statements issued for annual periods ending after December 15, 2011. The Company adopted
this new accounting standard effective December 31, 2011.
(ab) Newly Issued Not Yet Effective Accounting Standards
In April 2011, the FASB issued new accounting guidance impacting a creditor’s determination of whether
a restructuring is a troubled debt restructuring. The primary purpose of this new guidance is to provide
additional clarity in determining whether a restructuring constitutes a troubled debt restructuring. This
new accounting standard is effective for financial statements issued for annual periods ending after
December 15, 2012. The Company is evaluating the impact this standard will have on the financial
statements of the Company.
(2) Cash and Due From Banks
The Banks are required to maintain reserve balances, in cash or on deposit with the Federal Reserve Bank,
based upon a percentage of deposits. The total required reserve balances as of December 31, 2011 and
2010 was approximately $2,900 and $2,232, respectively.
In the normal course of business, the Banks maintain cash and due from bank balances in non-interest-
bearing transaction accounts with correspondent banks. Balances in these accounts are temporarily
guaranteed by the FDIC through December 31, 2012.
18
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
(3) Securities
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
The following tables reflect the amortized costs and approximate fair values of securities at December 31:
Held-to-Maturity
2011
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
State and municipal
$2,042
$77
($9)
$2,110
Held-to-Maturity
2010
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
State and municipal
$2,597
$34
($72)
$2,559
Available-for-Sale
2011
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
U.S. Government sponsored agencies
State and municipal
Mortgage-backed – residential
$43,836
99,179
69,513
$903
5,830
2,640
($9)
(205)
(53)
Fair
Value
$44,730
104,804
72,100
$212,528
$9,373
($267)
$221,634
Available-for-Sale
2010
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
U.S. Government sponsored agencies
State and municipal
Mortgage-backed - residential
$36,224
96,295
67,744
$634
1,075
2,604
($139)
(2,269)
(68)
Fair
Value
$36,719
95,101
70,280
$200,263
$4,313
($2,476)
$202,100
For the years ended December 31, 2011, 2010 and 2009, proceeds from sales of available-for-sale securities
amounted to $13,966, $14,551 and $17,736, respectively. Gross realized gains and losses from the sales and
calls of available-for-sale securities for the years ended December 31 are as follows:
Realized gains
Realized losses
2011
$368
($34)
2010
2009
$257
($77)
$440
($3)
2011 ANNUAL REPORT
19
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(3) Securities (continued)
Securities with carrying amounts of approximately $101,632 and $100,674 at December 31, 2011 and 2010,
respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.
The amortized costs and fair values of securities at December 31, 2011 are shown below by contractual
maturities, except for U.S. agencies which are shown by contractual maturities or their expected call dates if the
call dates are considered likely to occur based on present market conditions. Expected maturities may differ
from contractual maturities on mortgage-backed securities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Held-to-Maturity
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Available-for-Sale
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed - residential
Amortized
Cost
$128
554
392
968
Fair
Value
$132
561
420
997
$2,042
$2,110
Amortized
Cost
Fair
Value
$25,962
24,838
26,698
65,517
143,015
69,513
$26,189
25,738
28,111
69,496
149,534
72,100
$212,528
$221,634
The following tables show the fair values and unrealized losses aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss position, at December 31, 2011 and
2010:
2011
Held-to-Maturity
Less than 12 Months
Gross
Unrealized
Loss
No.
of
Securities
Fair Value
12 Months or More
Gross
Unrealized
Loss
No.
of
Securities
Fair Value
State and municipal
Total temporarily impaired
$285
$285
$1
$1
1
1
$145
$145
$8
$8
2
2
20
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
(3)
Securities (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
2010
Held-to-Maturity
Less than 12 Months
Gross
Unrealized
Loss
No.
of
Securities
Fair Value
12 Months or More
Gross
Unrealized
Loss
No.
of
Securities
Fair Value
State and municipal
Total temporarily impaired
$342
$342
$17
$17
2
2
$258
$258
$55
$55
3
3
2011
Available-for-Sale
Less than 12 Months
Gross
Unrealized
Loss
No.
of
Securities
Fair Value
12 Months or More
Gross
Unrealized
Loss
No.
of
Securities
Fair Value
U.S. Government sponsored
agencies
State and municipal
Mortgage-backed - residential
$2,749
2,401
8,537
$9
26
53
Total temporarily impaired
$13,687
$88
9
18
14
41
$0
1,203
0
$0
179
0
$1,203
$179
0
10
0
10
2010
Available-for-Sale
Less than 12 Months
Gross
Unrealized
Loss
No.
of
Securities
Fair Value
12 Months or More
Gross
Unrealized
Loss
No.
of
Securities
Fair Value
U.S. Government sponsored
agencies
State and municipal
Mortgage-backed - residential
$7,884
49,925
5,519
$139
1,831
68
Total temporarily impaired
$63,328
$2,038
26
195
10
231
$0
1,722
0
$0
438
0
$1,722
$438
0
17
0
17
Unrealized losses on securities have not been recognized into income because the bonds are of high credit
quality, management has the intent and ability to hold for the foreseeable future and the decline in fair value is
largely due to market interest rate fluctuations and current bond markets. The fair value is expected to recover
as the bonds approach their maturity dates and/or market rates. The unrealized losses on the remaining
securities have not been recognized into income because the bonds are of high credit quality and management
has the intent and ability to hold for the foreseeable future.
2011 ANNUAL REPORT
21
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(4) Loans
The following table presents total loans at December 31 by portfolio segment and class of loan:
Real estate:
Commercial real estate
Agricultural real estate
Consumer real estate
Commercial:
Commercial & industrial
Agricultural production
Consumer and other
Allowance for loan losses
2011
2010
$173,480
60,229
128,210
183,844
48,589
15,805
610,157
(11,173)
$164,029
57,802
133,139
177,249
39,865
21,186
593,270
(12,165)
$598,984
$581,105
The following is a summary of the activity in the allowance for loan losses for the years ended December 31:
Balance at beginning of year
Provision charged to operations, net
Recoveries on loans previously charged-off
Less loans charged-off
Balance at end of year
2011
2010
2009
$12,165
7,195
286
19,646
(8,473)
$10,759
8,362
442
19,563
(7,398)
$7,400
6,405
95
13,900
(3,141)
$11,173
$12,165
$10,759
Detailed analysis of the allowance for loan losses by portfolio segment for the year ended December 31, 2011
follows:
Balance at beginning of year
Provision charged to operations, net
Recoveries on loans previously charged-off
Less loans charged-off
Balance at end of year
Allowance for loan losses:
Individually evaluated for impairment
Collectively evaluated for impairment
Totals
Real Estate
Commercial
Consumer
Total
$7,331
5,888
124
13,343
(6,127)
$4,594
1,376
97
6,067
(2,231)
$240
(69)
65
236
(115)
$12,165
7,195
286
19,646
(8,473)
$7,216
$3,836
$121
$11,173
$2,934
4,282
$7,216
$812
3,024
$3,836
$8
113
$3,754
7,419
$121
$11,173
22
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
(4) Loans (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
Detailed analysis of loans evaluated for impairment by portfolio segment for the year ended December 31,
2011 follows:
Real Estate
Commercial
Consumer
Total
Loans:
Individually evaluated for impairment
Collectively evaluated for impairment
$28,256
333,663
$5,398
227,035
$190
15,615
$33,844
576,313
Totals
$361,919
$232,433
$15,805
$610,157
The following is a summary of information pertaining to impaired and non-accrual loans as of December 31:
Impaired loans without a valuation allowance
Impaired loans with a valuation allowance
Total impaired loans
Valuation allowance related to impaired loans
Total non-accrual loans
Average balance of impaired loans
Total loans past-due 90-days or more and still accruing
2011
$21,562
12,282
2010
$6,440
16,375
$33,844
$22,815
$3,754
$3,922
$13,622
$13,622
$27,283
$26,920
$279
$2,030
Interest income and other loan income recognized on impaired loans during 2011, 2010, and 2009
approximated $1,183, $347, and $260, respectively. The Banks have no commitments to loan additional funds
to the borrowers of impaired or non-accrual loans.
Detailed information regarding impaired loans by class of loan for the year ended December 31, 2011 follows:
Recorded
Investment
Principal
Balance
Related
Allowance
Average
Investment
Interest
Recognized
Loans with no related
allowance for loan losses:
Real estate:
Commercial real estate
Residential real estate
Farm real estate
Commercial
Commercial & industrial
Agricultural production
Consumer and other
$9,557
7,543
295
4,037
0
130
$10,163
8,535
295
5,039
0
130
N/A
N/A
N/A
N/A
N/A
N/A
Total
21,562
24,162
$6,965
6,086
215
4,086
0
131
17,483
$227
227
0
176
0
9
639
2011 ANNUAL REPORT
23
Years
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(4) Loans (continued)
1986 - 2011 TWENTY∫ FIVE
(4) Loans (continued)
Detailed information regarding impaired loans by class of loan for the year ended December 31, 2011 follows
(continued):
Detailed information regarding impaired loans by class of loan for the year ended December 31, 2011 follows
(continued):
Recorded
Investment
Recorded
Investment
Principal
Balance
Principal
Balance
Related
Allowance
Related
Allowance
Average
Investment
Average
Investment
Interest
Recognized
Interest
Recognized
Loans with an allowance
for loan losses:
Real estate:
Commercial real estate
Residential real estate
Farm real estate
Commercial
Commercial & industrial
Agricultural production
Consumer and other
Loans with an allowance
for loan losses:
Real estate:
Commercial real estate
Residential real estate
Farm real estate
Commercial
Commercial & industrial
Agricultural production
Consumer and other
Total
3,402
7,459
3,402
0
7,459
0
998
363
998
60
363
60
12,282
3,448
8,072
3,448
0
8,072
0
1,015
363
1,015
99
363
99
12,997
714
2,220
714
0
2,220
0
472
340
472
8
340
8
3,754
2,489
6,211
2,489
0
6,211
0
771
267
771
62
267
62
9,800
149
339
149
0
339
0
54
0
54
2
0
2
544
Total
Grand Total
Grand Total
12,282
$33,844
$33,844
12,997
$37,159
$37,159
3,754
$3,754
$3,754
9,800
$27,283
$27,283
544
$1,183
$1,183
The Company regularly evaluates various attributes of loans to determine the appropriateness of the allowance
for loan losses. The Company generally monitors credit quality indicators for all loans using the following
internally prepared ratings:
The Company regularly evaluates various attributes of loans to determine the appropriateness of the allowance
for loan losses. The Company generally monitors credit quality indicators for all loans using the following
internally prepared ratings:
'Pass' ratings are assigned to loans with adequate collateral and debt service ability such that collectibility of the
contractual loan payments is highly probable.
'Pass' ratings are assigned to loans with adequate collateral and debt service ability such that collectibility of the
contractual loan payments is highly probable.
'Special Mention' ratings are assigned to loans where management has some concern that the collateral or debt
service ability may not be adequate, though the collectibility of the contractual loan payments is still probable.
'Special Mention' ratings are assigned to loans where management has some concern that the collateral or debt
service ability may not be adequate, though the collectibility of the contractual loan payments is still probable.
'Substandard' ratings are assigned to loans that do not have adequate collateral and/or debt service ability such
that collectibility of the contractual loan payments is no longer probable.
'Substandard' ratings are assigned to loans that do not have adequate collateral and/or debt service ability such
that collectibility of the contractual loan payments is no longer probable.
'Doubtful' ratings are assigned to loans that do not have adequate collateral and/or debt service ability, and
collectibility of the contractual loan payments is unlikely.
'Doubtful' ratings are assigned to loans that do not have adequate collateral and/or debt service ability, and
collectibility of the contractual loan payments is unlikely.
Information regarding the credit quality indicators most closely monitored by class of loan for the year ended
December 31, 2011 follows:
Information regarding the credit quality indicators most closely monitored by class of loan for the year ended
December 31, 2011 follows:
Real estate:
Commercial estate
Real estate:
Residential
Commercial estate
Farm real estate
Residential
Commercial:
Farm real estate
Commercial & industrial
Commercial:
Agricultural production
Commercial & industrial
Consumer and other
Agricultural production
Consumer and other
Total
Pass
Pass
$157,749
111,061
$157,749
56,606
111,061
56,606
164,626
48,058
164,626
15,519
48,058
15,519
$553,619
Special
Mention
Special
Mention
Substandard
Doubtful
Totals
Substandard
Doubtful
Totals
$7,762
6,511
$7,762
3,328
6,511
3,328
14,699
168
14,699
97
168
97
$32,565
$7,969
10,547
$7,969
295
10,547
295
4,444
304
4,444
189
304
189
$23,748
$91
$91
75
59
75
59
$225
$173,480
128,210
$173,480
60,229
128,210
60,229
183,844
48,589
183,844
15,805
48,589
15,805
$610,157
Total
$553,619
$32,565
$23,748
$225
$610,157
24
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(4) Loans (continued)
Loan aging information by class of loan for the year ended December 31, 2011 follows:
Real estate:
Commercial real estate
Residential real estate
Farm real estate
Commercial
Commercial & industrial
Agricultural production
Consumer and other
Loans Past Due
30-89 Days
Loans Past Due
90+ Days
Total
Past Due
$539
908
259
101
$5,184
6,274
295
1,329
304
121
$5,723
7,182
295
1,588
304
222
Total
$1,807
$13,507
$15,314
Total Past
Due
Total
Current
Total
Loans
90+ Days
Due and
Accruing Interest
Total
Non-accrual
Loans
Real Estate:
Commercial estate
Residential real estate
Farm real estate
Commercial:
Commercial & industrial
Agricultural production
Consumer and other
$5,723
7,182
295
1,588
304
222
$167,757
121,028
59,934
182,256
48,285
15,583
$173,480
128,210
60,229
183,844
48,589
15,805
$224
5
50
$5,519
6,050
295
1,324
363
71
Total
$15,314
$594,843
$610,157
$279
$13,622
When, for economic or legal reasons related the borrower's financial difficulties, the Company grants a
concession to the borrower that the Company would not otherwise consider, the modified loan is classified as a
troubled debt restructuring. Loan modifications may consist of forgiveness of interest and/or principal, a
reduction of the interest rate, interest only payments for a period of time, and/or extending amortization terms.
All troubled debt restructurings are classified as impaired loans. The following table presents information
regarding modifications of loans that are classified as troubled debt restructurings by class of loan during the
year ended December 31, 2011:
Real Estate:
Commercial real estate
Residential real estate
Farm real estate
Commercial
Commercial & industrial
Agricultural production
Consumer and Other
Total
Number of
Loans
Pre-Modification
Investment
Post-Modification
Investment
13
60
0
7
0
1
81
$8,535
9,646
3,585
7
$21,773
$8,177
9,646
2,440
7
$20,270
2011 ANNUAL REPORT
25
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(4) Loans (continued)
The following table summarizes troubled debt restructurings that defaulted during the year ended December
31, 2011, within 12 months of their modification date.
Real Estate:
Commercial real estate
Residential real estate
Total
(5) Loan Servicing
Number of
Loans
Recorded
Investment
2
6
8
$1,270
1,038
$2,308
Loans serviced for others are not included in the accompanying consolidated balance sheets. Mortgage loans
serviced for others as of December 31, 2011 and 2010, were approximately $249,326 and $235,528,
respectively. Custodial escrow balances maintained in conjunction with serviced loans were approximately
$1,910 and $1,905 at December 31, 2011 and 2010, respectively.
The following summarizes the activity pertaining to mortgage servicing rights for the years ended December
31:
Mortgage servicing rights:
Balance at beginning of year
Mortgage servicing rights capitalized
Mortgage servicing rights amortized
Balance at end of year
2011
2010
2009
$1,529
643
(651)
$1,521
$1,277
970
(718)
$1,529
$970
1,174
(867)
$1,277
The approximate fair values of the mortgage servicing rights were deemed to be greater than their carrying
values as of December 31, 2011, 2010, and 2009. The differences between the fair values and carrying values
were considered immaterial.
26
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(6) Mortgage Banking Loan Commitments
The Company enters into commitments to fund residential mortgage loans (interest rate locks) at specified
times in the future, with the intention that these loans will be subsequently sold to third-party investors. A
mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest
rate and within a specified period of time, generally up to 60-days after inception of the rate lock. It is the
Company’s practice to enter into mandatory delivery forward commitments for the future delivery of residential
mortgage loans to third-party investors when an interest rate lock commitment is granted. These mandatory
delivery forward commitments bind the Company to deliver a residential mortgage loan to a third-party
investor even if the underlying loan never funds. As of December 31, 2011 and 2010, the Company had
approximately $4,055 and $706 in interest rate lock commitments outstanding. As of December 31, 2011 and
2010, the Company had approximately $7,053 and $706 in mandatory delivery forward commitments
outstanding. These outstanding mortgage loan commitments are considered to be derivatives. The fair values
associated with these derivatives were considered to be immaterial as of December 31, 2011 and 2010.
(7) Allowance for Losses on Foreclosed Assets
Foreclosed assets are presented in the balance sheets net of an allowance for losses. Activity in the allowance
for losses on foreclosed assets for the years ended December 31, was as follows:
Balance at beginning of year
Provision for losses
Charge-offs
Recoveries
Balance at end of year
(8) Premises and Equipment
2011
$910
2,410
0
0
$3,320
2010
$20
900
10
0
$910
2009
$0
20
0
0
$20
The components of premises and equipment at December 31 are as follows:
Land
Buildings and leasehold improvements
Furniture, fixtures, and equipment
Less accumulated depreciation
2011
2010
$1,969
10,726
9,057
21,752
11,637
$2,049
10,593
8,650
21,292
10,849
$10,115
$10,443
Depreciation expense for the years ended December 31, 2011, 2010 and 2009 amounted to $799, $741, and
$818, respectively.
2011 ANNUAL REPORT
27
Years
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(000s omitted except share data)
(9) Other Assets
(9) Other Assets
(9) Other Assets
(9) Other Assets
The components of other assets at December 31 are as follows:
The components of other assets at December 31 are as follows:
The components of other assets at December 31 are as follows:
The components of other assets at December 31 are as follows:
Cash surrender value of bank-owned life insurance
Cash surrender value of bank-owned life insurance
Accrued interest receivable
Cash surrender value of bank-owned life insurance
Accrued interest receivable
Mortgage servicing rights, net of amortization
Cash surrender value of bank-owned life insurance
Accrued interest receivable
Mortgage servicing rights, net of amortization
Net deferred tax assets
Accrued interest receivable
Mortgage servicing rights, net of amortization
Net deferred tax assets
Federal Deposit Insurance Corporation assessments
Mortgage servicing rights, net of amortization
Net deferred tax assets
Federal Deposit Insurance Corporation assessments
Other
Net deferred tax assets
Federal Deposit Insurance Corporation assessments
Other
Federal Deposit Insurance Corporation assessments
Other
Other
1986 - 2011 TWENTY∫ FIVE
2011
2011
2011
$4,933
2011
$4,933
5,341
$4,933
5,341
1,521
$4,933
5,341
1,521
1,098
5,341
1,521
1,098
1,910
1,521
1,098
1,910
1,938
1,098
1,910
1,938
1,910
1,938
$16,741
1,938
$16,741
$16,741
$16,741
2010
2010
2010
2010
$4,759
$4,759
5,644
$4,759
5,644
1,529
$4,759
5,644
1,529
3,583
5,644
1,529
3,583
2,531
1,529
3,583
2,531
1,493
3,583
2,531
1,493
2,531
1,493
$19,539
1,493
$19,539
$19,539
$19,539
(10) Time Deposits
(10) Time Deposits
(10) Time Deposits
(10) Time Deposits
The aggregate amount of time deposits with minimum a denomination of $100 was approximately $143,916
The aggregate amount of time deposits with minimum a denomination of $100 was approximately $143,916
and $154,686 at December 31, 2011 and 2010, respectively.
The aggregate amount of time deposits with minimum a denomination of $100 was approximately $143,916
and $154,686 at December 31, 2011 and 2010, respectively.
The aggregate amount of time deposits with minimum a denomination of $100 was approximately $143,916
and $154,686 at December 31, 2011 and 2010, respectively.
At December 31, 2011, the scheduled maturities of time deposits are as follows:
and $154,686 at December 31, 2011 and 2010, respectively.
At December 31, 2011, the scheduled maturities of time deposits are as follows:
At December 31, 2011, the scheduled maturities of time deposits are as follows:
2012
At December 31, 2011, the scheduled maturities of time deposits are as follows:
2012
2013
2012
2013
2014
2012
2013
2014
2015
2013
2014
2015
2016 and thereafter
2014
2015
2016 and thereafter
2015
2016 and thereafter
2016 and thereafter
$206,798
$206,798
90,013
$206,798
90,013
45,371
$206,798
90,013
45,371
29,996
90,013
45,371
29,996
27,917
45,371
29,996
27,917
29,996
27,917
$400,095
27,917
$400,095
$400,095
$400,095
(11) Dividends
(11) Dividends
(11) Dividends
(11) Dividends
State banking regulations restrict the amount of dividends that a bank may pay to its stockholders. The
State banking regulations restrict the amount of dividends that a bank may pay to its stockholders. The
regulations provide that dividends are limited to the balance of undivided profits, subject to capital-adequacy
State banking regulations restrict the amount of dividends that a bank may pay to its stockholders. The
regulations provide that dividends are limited to the balance of undivided profits, subject to capital-adequacy
requirements, plus an additional amount equal to the bank’s current-year earnings through the date of any
State banking regulations restrict the amount of dividends that a bank may pay to its stockholders. The
regulations provide that dividends are limited to the balance of undivided profits, subject to capital-adequacy
requirements, plus an additional amount equal to the bank’s current-year earnings through the date of any
declaration of dividends. Additionally, dividends are limited under the terms of the TARP agreement as
regulations provide that dividends are limited to the balance of undivided profits, subject to capital-adequacy
requirements, plus an additional amount equal to the bank’s current-year earnings through the date of any
declaration of dividends. Additionally, dividends are limited under the terms of the TARP agreement as
described in Note 23.
requirements, plus an additional amount equal to the bank’s current-year earnings through the date of any
declaration of dividends. Additionally, dividends are limited under the terms of the TARP agreement as
described in Note 23.
declaration of dividends. Additionally, dividends are limited under the terms of the TARP agreement as
described in Note 23.
(12) Employee Benefit Plans
described in Note 23.
(12) Employee Benefit Plans
(12) Employee Benefit Plans
(12) Employee Benefit Plans
The Company and the Banks maintain a 401(k) plan with profit sharing features covering substantially all
The Company and the Banks maintain a 401(k) plan with profit sharing features covering substantially all
employees under which they match 50% of eligible employee contributions to a maximum employee
The Company and the Banks maintain a 401(k) plan with profit sharing features covering substantially all
employees under which they match 50% of eligible employee contributions to a maximum employee
contribution of 6% of annual salary. Total 401(k) expense was approximately $247, $237, and $206, for 2011,
The Company and the Banks maintain a 401(k) plan with profit sharing features covering substantially all
employees under which they match 50% of eligible employee contributions to a maximum employee
contribution of 6% of annual salary. Total 401(k) expense was approximately $247, $237, and $206, for 2011,
2010, and 2009, respectively. Each plan participant elects how the employer contributions are invested.
employees under which they match 50% of eligible employee contributions to a maximum employee
contribution of 6% of annual salary. Total 401(k) expense was approximately $247, $237, and $206, for 2011,
2010, and 2009, respectively. Each plan participant elects how the employer contributions are invested.
Participants choose between purchasing the Company’s common stock and investing in the plan’s investment
contribution of 6% of annual salary. Total 401(k) expense was approximately $247, $237, and $206, for 2011,
2010, and 2009, respectively. Each plan participant elects how the employer contributions are invested.
Participants choose between purchasing the Company’s common stock and investing in the plan’s investment
funds.
2010, and 2009, respectively. Each plan participant elects how the employer contributions are invested.
Participants choose between purchasing the Company’s common stock and investing in the plan’s investment
funds.
Participants choose between purchasing the Company’s common stock and investing in the plan’s investment
funds.
In addition, Northwest, German-American, and Lena maintain salary-continuation plans whereby certain
funds.
In addition, Northwest, German-American, and Lena maintain salary-continuation plans whereby certain
officers are provided with guaranteed annual payments for periods ranging from ten to thirteen years after
In addition, Northwest, German-American, and Lena maintain salary-continuation plans whereby certain
officers are provided with guaranteed annual payments for periods ranging from ten to thirteen years after
reaching a retirement age of 65. The salary-continuation plans are funded by whole life insurance policies
In addition, Northwest, German-American, and Lena maintain salary-continuation plans whereby certain
officers are provided with guaranteed annual payments for periods ranging from ten to thirteen years after
reaching a retirement age of 65. The salary-continuation plans are funded by whole life insurance policies
purchased by the Banks which had an aggregate death benefit of approximately $8,961 and $8,943 as of
officers are provided with guaranteed annual payments for periods ranging from ten to thirteen years after
reaching a retirement age of 65. The salary-continuation plans are funded by whole life insurance policies
purchased by the Banks which had an aggregate death benefit of approximately $8,961 and $8,943 as of
December 31, 2011 and 2010, respectively (see Note 9 for cash surrender value of bank-owned life insurance).
reaching a retirement age of 65. The salary-continuation plans are funded by whole life insurance policies
purchased by the Banks which had an aggregate death benefit of approximately $8,961 and $8,943 as of
December 31, 2011 and 2010, respectively (see Note 9 for cash surrender value of bank-owned life insurance).
The Banks accrue for the total amounts to be paid over the employee’s active service life. The accrued benefits
purchased by the Banks which had an aggregate death benefit of approximately $8,961 and $8,943 as of
December 31, 2011 and 2010, respectively (see Note 9 for cash surrender value of bank-owned life insurance).
The Banks accrue for the total amounts to be paid over the employee’s active service life. The accrued benefits
were $894, $912, and $963 at December 31, 2011, 2010, and 2009, respectively. Salary-continuation expenses
December 31, 2011 and 2010, respectively (see Note 9 for cash surrender value of bank-owned life insurance).
The Banks accrue for the total amounts to be paid over the employee’s active service life. The accrued benefits
were $894, $912, and $963 at December 31, 2011, 2010, and 2009, respectively. Salary-continuation expenses
were $51, $48, and $47 in 2011, 2010, and 2009, respectively.
The Banks accrue for the total amounts to be paid over the employee’s active service life. The accrued benefits
were $894, $912, and $963 at December 31, 2011, 2010, and 2009, respectively. Salary-continuation expenses
were $51, $48, and $47 in 2011, 2010, and 2009, respectively.
were $894, $912, and $963 at December 31, 2011, 2010, and 2009, respectively. Salary-continuation expenses
were $51, $48, and $47 in 2011, 2010, and 2009, respectively.
were $51, $48, and $47 in 2011, 2010, and 2009, respectively.
2011 ANNUAL REPORT
28
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(13) Income Taxes
The components of income tax expense (benefit) for the years ended December 31 are as follows:
Current – federal
Current – state
Deferred – federal
Current – state
2011
$1,623
857
2,480
(144)
(330)
(474)
2010
2009
$1,140
443
1,583
(752)
(70)
(822)
$1,854
555
2,409
(1,091)
(160)
(1,251)
Total income tax expense
$2,006
$761
$1,158
A reconciliation of the differences between the statutory federal income tax rate and the effective federal
income tax rate with the resulting dollar amounts is shown in the following table:
Statutory federal tax
Increase (decrease) in taxes
resulting from:
Tax-exempt interest
Bank-owned life insurance
State taxes, net of
federal benefit
Other
2011
2010
2009
% of
Pretax
Earnings
34.0%
% of
Pretax
Earnings
34.0%
% of
Pretax
Earnings
34.0%
Amount
$2,258
Amount
$2,236
Amount
$2,915
(1,452)
(63)
(16.9%)
(0.7%)
(1,518)
(346)
(23.1%)
(5.3%)
(1,318)
(164)
(19.8%)
(2.5%)
348
258
4.1%
3.0%
246
143
3.7%
2.2%
260
122
3.9%
1.8%
Effective tax rates
$2,006
23.5%
$761
11.5%
$1,158
17.4%
2011 ANNUAL REPORT
29
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(13) Income Taxes (continued)
The tax effects of existing temporary differences that give rise to significant portions of the deferred tax
liabilities and deferred tax assets at December 31, 2011 and 2010 are summarized as follows:
Deferred tax assets:
Allowance for loan losses
Allowance for losses on foreclosed assets and non-accrual interest
Deferred compensation and other
Total gross deferred tax assets
Deferred tax liabilities:
FHLB stock dividend
Security accretion
Available-for-sale securities
Tax depreciation in excess of book depreciation
Mortgage servicing rights and other
Total gross deferred tax liabilities
Net deferred tax assets
2011
2010
$4,358
1,396
562
$4,744
435
642
6,316
5,821
129
35
3,666
788
600
5,218
129
34
708
772
595
2,238
$1,098
$3,583
No valuation allowance has been recorded since deferred tax assets are expected to be realized.
With few exceptions, the Company is no longer subject to federal or state examinations by tax authorities for
years before 2009.
(14) Transactions with Related Parties
The Company and subsidiary banks have had, and may be expected to have in the future, loans or other
banking transactions in the ordinary course of business with directors, significant stockholders, principal
officers, their immediate families, and affiliated companies in which they are principal stockholders (commonly
referred to as related parties). In management’s opinion, these loans and transactions were on the same terms
as those for comparable loans and transactions with non-related parties.
Loans to related parties amounted to approximately $14,209 and $10,637 at December 31, 2011 and 2010,
respectively.
Deposit accounts from related parties totaled approximately $10,612 and $8,647 at December 31, 2011 and
2010, respectively.
(15) Financial Instruments with Off-Balance-Sheet Risk and Commitments
Financial instruments with off-balance-sheet risk:
The Banks are parties to financial instruments with off-balance-sheet risk in the normal course of business to
meet the financing needs of their customers. These financial instruments include commitments to extend
credit, credit lines, letters of credit, and overdraft protection. They involve, to varying degrees, elements of
credit risk in excess of amounts recognized on the consolidated balance sheets.
30
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(15) Financial Instruments with Off-Balance-Sheet Risk and Commitments (continued)
Financial instruments with off-balance-sheet risk (continued):
The Banks’ exposures to credit losses in the event of nonperformance by the other parties to the financial
instruments, for commitments to extend credit, and letters of credit are represented by the contractual amounts
of those instruments. The Banks use the same credit policies in making commitments and issuing letters of
credit as they do for on-balance-sheet instruments.
A summary of the contractual amounts of the Banks’ exposure to off-balance-sheet risk as of December 31 is
approximately as follows:
Unused lines of credit and other loan commitments
Commercial letters of credits
Performance and standby letters of credit
2011
$123,099
1,352
761
$125,212
2010
$112,593
808
475
$113,876
Commitments to extend credit are agreements to lend to customers as long as there are no violations of any
conditions established in the contracts. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Banks evaluate each customer’s credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based
on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, crops, livestock, property and equipment, residential real estate, and income-producing
commercial properties.
Standby, performance and commercial letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. They are considered financial guarantees under
FASB guidance. The fair value of these financial guarantees is considered immaterial.
Concentration of credit risk:
The Company and its subsidiary banks provide several types of loans to customers including real estate,
agricultural, commercial, and installment loans. The largest component of loans is secured by residential real
estate, commercial real estate, or other interest in real property. Lending activities are conducted with
customers in a wide variety of industries as well as with individuals with a wide variety of credit requirements.
The Company does not have a concentration of loans in any specific industry. Credit risk, as it relates to the
Company’s business activities, tends to be geographically concentrated in that the majority of the customer base
lies within the surrounding communities served by its subsidiary banks.
(16) Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase amounted to $27,698 and $26,327 at December 31, 2011 and
2010, respectively, and are secured by investment securities with fair values of approximately $37,563 and
$34,449. The weighted-average interest rates on these agreements were 0.54% and 0.76% at December 31,
2011 and 2010, respectively. Securities sold under agreements to repurchase mature on a daily basis.
2011 ANNUAL REPORT
31
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(17) Federal Home Loan Bank (FHLB) Advances and Other Borrowings
FHLB:
2011
2010
Fixed-rate advances with rates ranging from .98% to 3.16% with
weighted-average rates of 1.82% and 1.32% as of December 31, 2011 and
2010, respectively. Interest is payable monthly with principal due at
maturity.
Variable-rate advances with weighted-average rates of .58% as of
December 31, 2010. Interest was payable monthly with principal due at
maturity.
$14,400
$29,200
0
500
$14,400
$29,700
Advances are collateralized by 1-4 family mortgage loans and other qualifying loans. The total amounts of
collateral securing FHLB advances were approximately $86,879 and $90,624 as of December 31, 2011 and
2010, respectively.
The Banks participate in the Federal Reserve Bank of Chicago’s Discount Window Lending Program. Primary
advances generally mature daily and bear interest at a general approved rate in relation to the federal funds rate.
The primary advance interest rate at December 31, 2011 was 75-basis points. Outstanding advances were $0 at
December 31, 2011 and 2010. Advances are secured by investment securities pledged to the Federal Reserve
Bank.
At December 31, 2011, the scheduled maturities of Federal Home Loan Bank advances and other borrowings
are as follows:
2011
2012
2013
2014
2015
2016
2011
$0
3,050
4,600
2,750
2,500
1,500
$14,400
2010
$19,300
3,050
4,600
1,750
1,000
0
$29,700
32
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
(18) Fair Value Measurements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. The standard describes three levels of inputs that may be used to
measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has
the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets
or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be
corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions
that market participants would use in pricing an asset or liability.
The following is a description of valuation methodologies used for assets recorded at fair value:
Securities available-for-sale: The fair values of the Company’s securities available-for-sale are primarily
determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt
securities without relying exclusively on quoted prices for specific securities, but rather by relying on the
securities’ relationship to other benchmark quoted securities. The values determined by matrix pricing are
considered Level 2 fair value measurements.
Collateral-dependent impaired loans: The Company does not record loans at fair value on a recurring basis.
However, from time to time, fair value adjustments are recorded on these loans to reflect (1) partial write-
downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-
quoted value of the underlying collateral or (2) the full charge-off of the loan carrying value. In some cases, the
properties for which market quotes or appraised values have been obtained are located in areas where
comparable sales data is limited, outdated, or unavailable. Fair-value estimates for collateral-dependent
impaired loans are obtained from real-estate brokers or other third-party consultants. The values determined
are considered Level 3 fair value measurements.
Foreclosed assets: Periodic valuation adjustments to certain commercial and residential and real estate
properties classified as foreclosed assets are measured at the lower of carrying amount or fair value, less selling
costs. Fair values are generally based on third party appraisals of the property, resulting in a Level 3
classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is
recognized.
Mortgage servicing rights: Loan servicing rights are initially recorded at approximate fair value and are
subsequently measured using the amortization method which requires servicing rights to be amortized into
non-interest income in proportion to, and over the period of, the estimated future net servicing income of the
underlying loans. The values determined are considered Level 3 fair value measurements.
2011 ANNUAL REPORT
33
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(18) Fair Value Measurements (continued)
The following table presents the Company’s approximate fair-value hierarchy for the assets measured at fair
value as of December 31:
As of December 31, 2011
Assets measured at fair value
on a recurring basis:
Assets:
Securities available-for-sale
Assets measured at fair value
on a non-recurring basis:
Assets:
Collateral-dependent impaired loans
Foreclosed assets
Mortgage servicing rights
As of December 31, 2010
Assets measured at fair value
on a recurring basis:
Assets:
Securities available-for-sale
Fair Value Measurements at
Reporting Date Using
(Level 2)
(Level 1)
(Level 3)
Total
$221,634
$221,634
$8,528
$5,997
$1,521
Total
$8,528
$5,997
$1,521
Fair Value Measurements at
Reporting Date Using
(Level 2)
(Level 1)
(Level 3)
$202,100
$202,100
Assets measured at fair value
on a non-recurring basis:
Assets:
Collateral-dependent impaired loans
Foreclosed assets
Mortgage servicing rights
$12,453
$7,408
$1,529
$12,453
$7,408
$1,529
Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a
carrying value of $12,282 and $16,375, with specific reserves of $3,754 and $3,922 as of December 31, 2011
and 2010, respectively.
Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, had a carrying
amount of $5,997 and $7,408, which is comprised of the outstanding balance of $9,317 and $8,318, net of an
allowance for losses of $3,320 and $910 as of December 31, 2011 and 2010, respectively.
FASB guidance requires disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including the discount rate and estimates
of future cash flows. In that regard, the derived fair value estimates may not be realized in immediate
settlement of the instrument. Accounting guidance excludes certain financial instruments and certain
nonfinancial instruments from its disclosure requirements. These fair value disclosures may not represent the
fair value of the Company.
34
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(18) Fair Value Measurements (continued)
The following methods and assumptions were used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value:
Cash and cash equivalents: The carrying amounts are reasonable estimates of fair value.
Securities: See previous description in this footnote for securities available-for-sale. The fair values of the
Company’s securities held-to-maturity are primarily determined by matrix pricing, which is a mathematical
technique used widely in the industry to value debt securities without relying exclusively on quoted prices
for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted
securities.
Non-marketable equity securities: No ready market exists for the equity securities as they have no quoted
market value. The carrying amount of equity securities approximates its fair value.
Loans held for sale: The fair values of loans held for sale are based on commitments on hand from
investors or prevailing market prices.
Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair
values are based on carrying values. Fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar
credit quality. For fair value estimates for collateral-dependent impaired loans, see previous description in
this footnote.
Deposits: The fair values disclosed for demand deposits, savings accounts, and certain money market
deposits are, by definition, equal to the amount payable on demand at the reporting date (carrying
amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Federal funds purchased and securities sold under agreements to repurchase: The carrying amounts of
federal funds and securities sold under agreements to repurchase approximate fair value.
FHLB advances: The fair value of FHLB advances was estimated using discounted cash flow analyses
based on the Company’s current incremental borrowing rates for similar types of borrowing
arrangements.
Other borrowings: The carrying amounts of other borrowings approximate their fair value.
Accrued interest: The carrying amounts of accrued interest approximate their fair value.
Off-balance-sheet financial instruments: No estimated fair value is attributable to unused lines of credit
and letters of credit as they are deemed immaterial.
2011 ANNUAL REPORT
35
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(18) Fair Value Measurements (continued)
The estimated fair values of the Company’s financial instruments as of December 31 are as follows:
December 31, 2011
December 31, 2010
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
Financial assets:
Cash and cash equivalents
Securities
Non-marketable equity securities
Loans held for sale
Loans, net of allowance
Accrued interest receivable
Financial liabilities:
Deposits
Federal funds purchased
Securities sold under
agreements to repurchase
FHLB advances and other borrowings
Accrued interest payable
$25,517
223,676
2,177
2,198
598,984
5,341
$738,068
3,899
27,698
14,400
1,186
$25,517
223,744
2,177
2,198
601,258
5,341
$741,822
3,899
27,716
14,716
1,186
$18,493
204,697
2,053
1,179
581,105
5,644
$18,493
204,659
2,053
1,179
580,991
5,644
$695,439
2,084
$700,045
2,084
26,327
29,700
1,415
26,336
29,809
1,415
(19) Stock-Compensation Plans
The Company has entered into non-qualified and incentive stock option agreements whereby shares of
common stock were made available for purchase by certain executive officers. All incentive and non-qualified
options have been issued pursuant to various shareholder approved stock option plans. In May of 2008, the
stockholders’ approved an additional 100,000 shares of common stock be made available for future purchase
by certain officers. Under these agreements, the exercise price of each option equals the market price of the
Company’s stock on the grant date. The options’ maximum terms are ten years. The options vest under a
three, five or seven year period after the date of grant. The Company’s general practice is to use previously
authorized but unissued shares of common stock to satisfy stock option exercises. Currently, the Company has
a sufficient number of authorized common shares to satisfy expected stock option exercises, but treasury stock
may also be used.
The fair value of each option award is estimated on the date of grant using a closed form option valuation
(Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on
historical volatilities of the Company’s common stock. The Company uses historical data to estimate option
exercise and post-vesting termination behavior. The expected term of options granted is based on historical
data and represents the period of time that options granted are expected to be outstanding, which takes into
account that the options are not transferable. The risk-free interest rate for the expected term of the option is
based on the U.S. Treasury yield in effect at the time of the grant.
The fair value of each option granted was determined using the following assumptions as of grant date:
Risk-free interest rate
Expected option life
Expected stock-price volatility
Dividend yield
Intrinsic value of options exercised
Weighted average fair value of options granted
2011
2010
2009
1.23%-2.23%
10
29.4%-36.8%
1.56%-3.20%
$4
N/A
1.23%-6.00%
10
12.7%-37.0%
0.53%-1.75%
$3
$2.90
2.72%-6.00%
10
12.7%-22.0%
0.53%-1.75%
N/A
N/A
36
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(19) Stock-Compensation Plans (continued)
For the years ended December 31, 2011, 2010 and 2009, the Company recognized $98, $81 and $33 in
compensation expense for stock options, respectively. No tax benefits were recognized for the three year
period ended December 31, 2011. As of December 31, 2011, stock-based compensation expense not yet
recognized totaled $341, and is expected to be recognized over a weighted-average remaining period of 2.3
years. The total fair value of shares vested during the years ended December 31, 2011, 2010 and 2009 was
$338, $90 and $70, respectively.
During 2010, the Company modified the exercise price on 49,760 fully and partially vested incentive stock
options outstanding affecting thirteen employees. The options were originally granted in 2004, 2005 and 2008
and represented a weighted average exercise price of $19.57 per share. As a result of the modification, the
weighted average exercise price on the modified options was reduced to $10.43 per share. Consistent with
generally accepted accounting principles, the Company revaluated the fair value of the modified options
resulting in additional compensation expense of $75 to be recognized over the remaining vesting period. For
the modified options already fully vested, the Company recognized the additional compensation expense in
2010. The fair value of the stock options granted in 2008, 2005 and 2004 were revised from $5.08, $12.55 and
$9.37 per share, respectively as originally reported to modified fair values of $7.21, $14.08, and $10.74 per
share, respectively.
The following tables summarize the activity of options and non-vested shares granted, exercised, or forfeited
for the year ended December 31, 2011:
Shares under option, beginning of year
Granted during the year
Forfeited and canceled during the year
Exercised during the year
2011
193,090
0
(26,710)
(8,850)
11.91
12.25
Shares under option, end of year
157,530
$10.32
Options exercisable, end of year
56,274
$10.43
Shares available for grant, end of year
0
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
$10.63
7.07
$13
$4
$280
$94
7.4
5.91
Non-vested options, December 31, 2010
Granted during the year
Vested during the year
Forfeited or expired during the year
Non-vested options, December 31, 2011
Number of
Options
130,480
0
(27,964)
(1,260)
101,256
Weighted
Average
Fair Value
at Grant
$10.26
10.24
11.91
$10.26
2011 ANNUAL REPORT
37
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(19) Stock-Compensation Plans (continued)
The exercise of 8,850 and 2,117 stock options in 2011 and 2010, respectively, involved a like-kind exchange of
8,515 and 1,860 shares, respectively, of the Company’s common stock valued at the current market value on
the date of exercise plus additional cash. This like-kind exchange resulted in the issuance of 335 and 257
additional shares of common stock, respectively.
The following table summarizes information about fixed stock options outstanding at December 31, 2011:
Exercise Price
$10.00
$10.25
$10.50
$11.00
$11.00
Number Outstanding
at 12/31/11
26,500
93,320
20,000
8,030
9,680
157,530
Remaining
Contractual Life
(Years)
6.0
8.5
8.5
3.5
2.5
Number Exercisable
at 12/31/11
15,900
18,664
4,000
8,030
9,680
56,274
(20) Earnings Per Common Share
For the years ended December 31, earnings per common share have been computed based on the following:
Net income
Less - preferred stock dividends
Less - accretion of preferred stock warrants
Net income available to common stockholders
2011
2010
2009
$6,568
(818)
(150)
$5,600
$5,815
(818)
(150)
$4,847
$5,483
(409)
(94)
$4,980
Average number of common shares outstanding
Effect of dilutive options
3,659,306
26,162
3,659,058
1,216
3,658,880
0
Average number of common shares outstanding used
to calculate diluted earnings per common share
3,685,468
3,660,274
3,658,880
The total outstanding options of common stock which were excluded in the computation of diluted earnings
per common share for the years ended 2011, 2010 and 2009 were 0, 71,170 and 99,530, respectively because
they were considered anti-dilutive.
(21) Regulatory Matters
The Company and Banks are 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 financial statements. Under capital-adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative
measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
38
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
(21) Regulatory Matters (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
Quantitative measures established by regulation to ensure capital adequacy require the Company and its
subsidiaries to maintain minimum amounts and ratios (set forth in the following table) of total and Tier-I
capital (as defined in the regulations) to risk-weighted assets, and of Tier-I capital to average assets.
Management believes that as of December 31, 2011, that the Company and the Banks meet all capital-adequacy
requirements to which they are subject.
As of December 31, 2011, the most recent notifications from the Federal Deposit Insurance Corporation
(FDIC) categorized all five Banks as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, minimum total risk-based, Tier-I risk-based, and Tier-I leverage
ratios as set forth in the table must be maintained. There are no conditions or events occurring since the FDIC
notified each Bank which management believes have changed the categories of the Banks.
The actual capital amounts and ratios for the Company and Banks as of December 31 are presented in the
following tables:
Amount
In $000s
Actual
Ratio
Minimum Capital
Requirement
Amount
In $000s
Ratio
Minimum
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount
In $000s
Ratio
$99,291
23,655
18,941
13,271
21,160
9,008
$91,018
21,316
17,036
12,038
19,100
8,351
$91,018
21,316
21,316
12,038
19,100
8,351
15.06%
12.68%
12.50%
13.51%
12.88%
17.27%
13.81%
11.42%
11.24%
12.26%
11.63%
16.01%
10.30%
8.65%
8.82%
8.62%
8.83%
10.30%
$52,727
14,927
12,120
7,857
13,142
4,173
$26,364
7,463
6,060
3,929
6,571
2,086
$35,354
9,852
7,728
5,587
8,651
3,243
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
N/A
$18,659
15,150
9,822
16,428
5,216
N/A
$11,195
9,090
5,893
9,857
3,129
N/A
$12,316
9,660
6,984
10,814
4,053
N/A
10.00%
10.00%
10.00%
10.00%
10.00%
N/A
6.00%
6.00%
6.00%
6.00%
6.00%
N/A
5.00%
5.00%
5.00%
5.00%
5.00%
As of December 31, 2011:
Total Capital to Risk
Weighted Assets:
Company
Northwest
German
Davis
Freeport
Lena
Tier-I Capital to Risk
Weighted Assets:
Company
Northwest
German
Davis
Freeport
Lena
Tier-I Capital to
Average Assets:
Company
Northwest
German
Davis
Freeport
Lena
2011 ANNUAL REPORT
39
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(21) Regulatory Matters (continued)
As of December 31, 2010:
Total Capital to Risk
Weighted Assets:
Company
Northwest
German
Davis
Freeport
Lena
Tier-I Capital to Risk
Weighted Assets:
Company
Northwest
German
Davis
Freeport
Lena
Tier-I Capital to
Average Assets:
Company
Northwest
German
Davis
Freeport
Lena
$93,715
22,236
17,539
12,430
19,027
8,757
$85,756
19,983
15,778
11,261
17,021
8,095
$85,756
19,983
15,778
11,261
17,021
8,095
14.81%
12.49%
12.48%
13.35%
11.89%
16.64%
13.55%
11.23%
11.22%
12.09%
10.64%
15.38%
10.14%
8.39%
8.82%
8.71%
8.42%
10.01%
$50,614
14,238
11,245
7,449
12,798
4,210
$25,307
7,119
5,623
3,725
6,399
2,105
$33,832
9,524
7,157
5,173
8,087
3,236
8.00%
8.00%
8.00%
8.00%
8.00%
8.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
N/A
$17,798
14,057
9,312
15,998
5,263
N/A
$10,679
8,434
5,587
9,599
3,158
N/A
$11,905
8,946
6,466
10,108
4,045
N/A
10.00%
10.00%
10.00%
10.00%
10.00%
N/A
6.00%
6.00%
6.00%
6.00%
6.00%
N/A
5.00%
5.00%
5.00%
5.00%
5.00%
(22) Other Comprehensive Income (Loss)
Other comprehensive income components and related taxes for the years ended December 31 were as follows:
Holding gains (losses) on securities available-for-sale
Less reclassification adjustments for gains
recognized in income
Net unrealized gains (losses)
Deferred tax effect
Other comprehensive income (loss)
2011
2010
2009
$7,603
(334)
7,269
(2,958)
$4,311
($2,459)
$3,029
(180)
(2,639)
1,014
(437)
2,592
(999)
($1,625)
$1,593
40
2011 ANNUAL REPORT
Years
1986 - 2011 TWENTY∫ FIVE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(000s omitted except share data)
(23) TARP Capital Purchase Plan (in actual dollars)
On May 15, 2009, as part of the United States Treasury Department’s (UST) Troubled Asset Relief Program
(TARP) Capital Purchase Program, the Company issued 15,000 shares of fixed rate cumulative perpetual
preferred stock (Series A preferred stock) to the UST for total proceeds of $15,000,000. The Series A
preferred stock has no par value and a redemption value of $1,000 per share. The UST also received warrants
to purchase 750 shares of fixed rate cumulative preferred stock (Series B preferred stock) for an exercise price
of $.01 per share. The UST immediately exercised the warrants. The Series B preferred stock has no par
value and a redemption value of $1,000 per share. The Series A and Series B preferred stock are redeemable
by the Company at any time. The dividend rate on the Series A preferred stock is 5% for the first five years
and 9% thereafter. The dividend rate on the Series B preferred stock is 9%. Dividends on the preferred stock
are cumulative and are payable quarterly in arrears on the 15th of February, May, August and November. The
redemption value of the 750 shares of Series B preferred stock is being accreted as an increase to preferred
stock over five years which is the Company’s expected redemption period. The Series A and Series B
preferred stock is included as Tier-1 capital for regulatory purposes.
Under the terms of the TARP agreement, the Company is subject to certain dividend limitations. Generally,
without the UST’s consent, the Company is limited to a maximum quarterly dividend of $.08 per common
share until May 14, 2012. Additionally, without the UST’s consent, the Company is limited to a maximum
dividend of 103% of the aggregate per share dividends of the prior fiscal year for the period from May 15,
2012 to May 14, 2019. Subsequent to May 14, 2019, without the UST’s consent, the Company may not pay a
dividend until the Series A and Series B preferred stock is redeemed.
Additionally under the terms of the TARP agreement, without the consent of the UST, the Company generally
may not acquire additional shares of treasury stock, except in connection with the administration of any
employee benefit plan in the ordinary course of business and consistent with past practice. The TARP
agreement also places certain restrictions on executive compensation, the effect of which has not had a
material effect on the consolidated financial statements.
2011 ANNUAL REPORT
41
Years
1986 - 2011 TWENTY∫ FIVE
CONSOLIDATING SCHEDULE 1 - BALANCE SHEET
(000s omitted except share data)
December 31, 2011
A S S E T S
German-American
State Bank
State Bank
of Davis
Cash and due from banks
Interest-bearing deposits in banks
Federal funds sold
Securities:
Securities held-to-maturity
Securities available-for-sale
Non-marketable equity securities, at cost
Loans held for sale
Loans, net
Foreclosed assets, net
Premises and equipment
Other assets
Investment in subsidiary banks
$3,063
263
45,312
534
141,577
70
1,237
3,871
$1,818
2,030
0
1,976
37,354
306
90,938
312
929
1,293
Total assets
$195,927
$136,956
LIABILITIES AND STOCKHOLDLERS' EQUITY
Liabilities:
Deposits:
Noninterest bearing
Interest-bearing
Total deposits
Federal funds purchased
Securities sold under agreements to repurchase
Federal Home Loan Bank borrowings and other
Accrued interest payable and other liabilities
Total liabilities
Stockholders’ equity:
Preferred stock
Common stock
Additional paid-in capital
Retained earnings
Treasury stock
Accumulated other comprehensive income
Total stockholders’ equity
$15,606
154,484
170,090
3,303
3,500
1,028
177,921
400
2,737
13,899
970
18,006
$12,195
102,148
114,343
596
7,870
750
377
123,936
100
1,547
10,391
982
13,020
Total liabilities and stockholders’ equity
$195,927
$136,956
42
2011 ANNUAL REPORT
Years 1986 - 2011 TWENTY∫ FIVE
Northwest
Bank
State
Bank
Lena
State Bank
Foresight Financial
Group, Inc.
Eliminations
Consolidated
Total
$6,829
2,242
0
66
48,847
636
2,198
173,353
1,453
4,783
5,566
$4,126
2,605
0
58,186
448
148,210
1,944
1,863
$1,285
1,256
0
31,935
253
44,621
156
486
2,598
$6,940
($6,940)
285
4,006
736
1,550
83,279
(83,279)
$17,121
8,396
0
2,042
221,634
2,177
2,198
598,984
5,997
10,115
16,741
$245,973
$217,382
$82,590
$96,796
($90,219)
$885,405
$32,442
179,222
211,664
5,760
4,000
1,904
$19,148
156,979
176,127
0
14,068
6,150
615
$6,382
66,402
72,784
0
620
223,328
196,960
73,404
1,450
5,120
14,745
1,330
22,645
1,000
4,550
13,550
1,322
20,422
500
3,670
4,181
835
9,186
($3,737)
(3,203)
(6,940)
(6,940)
(3,450)
(17,624)
(56,766)
(5,439)
(83,279)
$198
198
15,394
966
7,666
71,193
(4,060)
5,439
96,598
$82,036
656,032
738,068
3,899
27,698
14,400
4,742
788,807
15,394
966
7,666
71,193
(4,060)
5,439
96,598
$245,973
$217,382
$82,590
$96,796
($90,219)
$885,405
2011 ANNUAL REPORT
43
Years For the year ended December 31, 2011
Interest and dividend income:
Loans, including fees
Securities:
Taxable
Tax-exempt
Dividends
Interest-bearing deposits in banks
Federal funds sold
Total interest and dividend income
Interest expense:
Deposits
Federal funds purchased
Securities sold under agreements to repurchase
Federal Home Loan Bank advances and other borrowings
Total interest expense
Net interest and dividend income
Provision for loan losses
Net interest and dividend income,
after provision for loan losses
Noninterest income:
Customer service fees
Equity in earnings of subsidiaries
Gain on sales and calls of AFS securuties, net
Gain on sales of loans, net
Loan-servicing fees
Other
Total noninterest income
Noninterest expenses:
Salaries and employee benefits
Occupancy expense of premises, net
Outside services
Data processing
Foreclosed assets, net
Other
Total noninterest expenses
Income before income taxes
Income tax expense (benefit)
Net income
44
1986 - 2011 TWENTY∫ FIVE
German-American
State Bank
State Bank
of Davis
$7,883
$5,002
834
687
1
8
2
9,415
2,249
1
91
2,341
7,074
1,100
5,974
370
2
666
1,038
2,079
402
186
262
78
1,044
4,051
2,961
957
643
784
4
4
6,437
1,706
1
73
19
1,799
4,638
879
3,759
129
(7)
173
295
918
159
147
108
67
570
1,969
2,085
556
$2,004
$1,529
2011 ANNUAL REPORT
Years 1986 - 2011 TWENTY∫ FIVE
CONSOLIDATING SCHEDULE 2 - STATEMENT OF INCOME
(000s omitted except share data)
Northwest
Bank
State
Bank
Lena
State Bank
Foresight Financial
Group, Inc.
Eliminations
Consolidated
Total
$10,131
$8,197
$2,617
$33,830
896
847
1
1
11,876
2,160
2
21
84
2,267
9,609
3,255
970
989
3
10,159
2,100
2
73
147
2,322
7,837
1,270
572
593
2
1
3,785
1,109
1
0
1,110
2,675
591
6,354
6,567
2,084
473
295
705
579
719
2,771
4,515
866
56
250
223
1,697
7,607
1,518
215
240
40
603
883
1,888
292
149
275
651
3,255
4,195
1,366
$1,303
$2,829
157
4
178
339
813
175
144
64
394
1,590
833
121
$712
11
11
0
0
11
100
(89)
($11)
(11)
($11)
(11)
0
0
$8,377
($8,377)
28
8,405
327
10
41
2,400
179
2,957
5,359
(1,209)
$6,568
(8,377)
0
(8,377)
($8,377)
3,915
3,900
1
15
11
41,672
9,313
7
167
341
9,828
31,844
7,195
24,649
1,369
0
334
705
579
2,367
5,354
10,540
1,904
723
959
2,768
4,535
21,429
8,574
2,006
$6,568
2011 ANNUAL REPORT
45
Years 1986 - 2011 TWENTY∫ FIVE
GENERAL INFORMATION
Foresight Financial Group, Inc.
3106 North Rockton Ave.
Rockford, IL 61103
Phone: 815/847-7500
E-mail: dcooke@ffgbank.net
Registrar, Transfer Agent and
Change of Address:
Foresight Financial Group, Inc. at its
Corporate Address
Foresight common stock is listed
on the NASDAQ Bulletin Board
under the symbol FGFH
For more information,
contact Foresight
Financial Group, Inc. at its
Corporate Address
or visit our
website at
www.foresightfg.com
DIRECTORS
Foresight Financial Group, Inc.
Rockford, IL
Douglas M. Cross
Stephen G. Gaddis
John Jeschke
Brent Myers
Dr. Carolyn Sluiter
Robert W. Stenstrom
Doug Wagner
Richard L. Weigle
Northwest Bank of Rockford
Rockford, IL
German-American State Bank
German Valley, IL
State Bank of Davis
Davis, IL
Robert Borneman
John Collman
Jack Janssen
Gary R. Johnson
James G. Sacia
Jeff Sterling
Richard Weigle
Stephen G. Gaddis
Charles B. Kullberg
Stephen P. McKeever
John J. Morrissey
Richard L. Rosenstiel
Robert W. Stenstrom
Thomas R. Walsh
Lena State Bank
Lena, IL
Todd Bussian, O.D.
Dr. Gordon Dammann
John Jeschke
Dr. James Moest
Brent Myers
Steven Rothschadl
Dan Dietmeier
John Jeschke
Brent Myers
Thomas Olsen
Gerald Osowski
Dr. Carolyn Sluiter
Judd Thruman
State Bank
Freeport, IL
Douglas Cross
Dr. Joe M. Kanosky
Fred Kundert
Richard Rosenstiel
Marilyn Smit
Brian Stewart
Sharon Summers
Doug Wagner
46
2011 ANNUAL REPORT
Years
We are a market driven, people oriented
community banking organization dedicated to
enhancing shareholder value by
providing our customers with
diversified financial services that
help them achieve economic success
and financial security.
We will pursue these goals while
balancing shareholder and customer interests
with the ongoing welfare of our
employees and local communities.
The member banks of our group
maintain a high degree of independence
and sensitivity to the concerns of the
local communities and markets
that we choose to serve.
We will seek to expand sensibly
into new markets when we believe
that our business model and
community banking philosophy
can be successfully extended.
In summary:
“Community Building through Community Banking”
NOTES
R O U G H C OMMUNITY BANKING
R O U G H C OMMUNITY BANKING
H
H
G T
G T
MUNITY BUIL DI N
MUNITY BUIL DI N
M
M
O
O
C
C
TWENTY FIVE
1986 - 2011
Years
R O U G H C OMMUNITY BANKING
H
G T
MUNITY BUIL DI N
M
O
C
FORESIGHT FINANCIAL GROUP, INC ∫ 2011 ANNUAL REPORT