Foresight Financial Group, Inc.
Annual Report 2012

Plain-text annual report

2012 ANNUAL REPORT Freeport, IL COMMUNITY BUILDING THROUGH COMMUNITY BANKING www.foresightfg.com Freeport, IL 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” Dear Stockholders, It would be accurate to say that 2012 was one of the most challenging in your Company’s 26 year history. Upon reflection, I am proud of the compassionate efforts put forth by our bank group, which worked closely for the past few years with many long term customers whose businesses were severely impacted by the Great Recession; unfortunately, several of those customers ran out of reserves and/or the will to keep operating in 2012. Circumstances varied, but all were operating in a local business climate that continued to fare poorly compared to the slowly improving national economy, against stubbornly high (12% average) unemployment, and a state political culture and tax burden that have combined to present major obstacles to business recovery. When the banks’ loan customers who had struggled for years ceased making payments on previously performing loans, the banks were faced with liquidating various types of real estate collateral at significant losses in an adverse market. Accounting for these circumstances forced recognition of credit costs of over $14 million in 2012, and a resultant 47.5% decline in net income for the year 2012 to $3,446,000 from the near record $6,568,000 recorded in 2011. For the first time since the start of the Great Recession in 2008, Foresight’s profitability as measured by return on assets of .39% was less than peer average of .73%. However, for the five year period since 2008 in working through adversity with customers, Foresight’s average return on assets of .65% far exceeds the peer average of .32%. Continued progress was made in 2012 in reducing the relative burden of non-performing assets, which declined by 15% to a year- end total of $17 million. Reserves for loan losses were increased to $14.9 million, or 2.4% of total loans. Reserve coverage of non-performing assets is well above peer average as a result of these strategic decisions. Asset quality improvement remains the most important goal for future performance improvement in an economy that remains challenging. For the year, net interest income declined by 1.3%, as loan volumes were lower due to increased competition and lack of credit worthy loan demand, along with the loss of customers that went out of business due to regulatory burdens and/or the recession. Non-interest operating expenses excluding the costs of foreclosed real estate increased by 4.3%, reflective of increased personnel and infrastructure costs incurred to meet regulatory requirements in compliance with the barrage of new banking regulations, as well as new internet security directives. On a more positive note, non-interest income increased 8.9% driven by mortgage banking revenues growth from the low interest rate environment and addition of experienced and talented key personnel in the fourth quarter from a local mortgage banking company that found our company to be the best partner they could find to deploy their mortgage lending skills. The most encouraging set of events in 2012 was the sale of $10 million in capital debentures in September which facilitated full redemption of $15.75 million of TARP preferred stock held by the U.S. Treasury in December. The support of the 84 local customers who purchased the debenture offering, most of whom are existing Foresight shareholders, was very encouraging, and positions the company to improve future performance from a position of strength, as evidenced by a maintaining regulatory capital at about 45% above regulatory requirements, continued payment of common stock dividends, and a strong cash position providing the parent company with flexibility to support the bank group. We have received numerous positive comments from stock analysts indicating their confidence in the company based on the elements described in this letter, and expect the common stock trading price to improve in 2013 as a result. With these elements of strength and your continued support, we can continue to pursue in confidence our mission of Community Building through Community Banking. Respectfully and Gratefully, Stephen G. Gaddis, President and CEO 2012 ANNUAL REPORT 5 FORESIGHT 7.0 - 6.0 - 5.0 - 4.0 - 3.0 - 2.0 - 1.0 - 0 - 20,000 - 15,000 - 5,000 - 0 -   Net Earnings Dollars (1,000,000s) 6.591 6.568 5.815 5.483 4.750 3.446       2 0 0 7   2 0 0 8   2 0 0 9   2 0 1 0   2 0 1 1   2 0 1 2 Credit Costs vs. Net Operating Income* (In 000’s) 10,000 - 11,146 18,388 19,783 19,833 14,398 9,508 9,963 15,399 6,757 12,434 4,801 580   2 0 0 7   2 0 0 8   2 0 0 9   2 0 1 0   2 0 1 1   2 0 1 2 *Tax equivalent net operating income before taxes and credit costs. Credit Costs Net Operating Income 6 2012 ANNUAL REPORT FORESIGHT Trends in Assets, Deposits and Loans  (In 000’s) 844,917 808,642 695,439 664,380 749,346 635,271 885,405 883,792 738,068 736,718 581,105 598,984 596,938 526,020 531,972 695,346 589,600 482,093    2 0 0 7   2 0 0 8   2 0 0 9   2 0 1 0   2 0 1 1   2 0 1 2 Assets Deposits Loans Trends in Combined Equity Capital and ALLL* to Non-Performing Assets  (In 000’s) 95,352 99,190 107,771 98,495 900,000 - 850,000 - 800,000 -  750,000 - 700,000 - 650,000 - 600,000 - 550,000 - 500,000 - 450,000 - 400,000 - 350,000 - 300,000 - 250,000 - 120,000 - 100,000 - 80,000 - 60,000 - 66,156 71,467 40,000 - 20,000 - 0 - 3,224    2 0 0 7   17,749 24,217 23,060 19,898 17,036 2 0 0 8   2 0 0 9   2 0 1 0   2 0 1 1   2 0 1 2 *ALLL: Allowance for loan and lease losses Equity Capital & ALLL Non Performing Assets 2012 ANNUAL REPORT 7 FORESIGHT Wipfli LLP 403 East Third Street Sterling, IL 61081 815.626.1277 Fax 815.626.9118 www.wipfli.com INDEPENDENT AUDITOR’S REPORT To the Board of Directors Foresight Financial Group, Inc. We have audited the accompanying consolidated financial statements of Foresight Financial Group, Inc. and Subsidiaries, which comprise the consolidated balances sheets as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 8 2012 ANNUAL REPORT FORESIGHT 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, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012, in accordance 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. Sterling, Illinois March 7, 2013 2012 ANNUAL REPORT 9 FORESIGHT 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 $14,948 and $11,173, respectively Foreclosed assets, net Premises and equipment, net Other assets CONSOLIDATED BALANCE SHEETS (000s omitted except share data) December 31, 2012 $19,733 7,347 2,137 29,217 1,728 213,845 2,184 5,598 596,938 6,770 10,230 17,282 2011 $17,121 8,396 0 25,517 2,042 221,634 2,177 2,198 598,984 5,997 10,115 16,741 Total assets $883,792 $885,405 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing Interest-bearing Total deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank (FHLB) advances and other borrowings Subordinated debentures Accrued interest payable and other liabilities Total liabilities Stockholders’ equity: Preferred stock (no par value; authorized 500,000 shares; 15,750 shares issued) Common stock ($.25 par value; authorized 5,000,000 shares; 3,867,169 and 3,867,129 shares issued, respectively) Additional paid-in capital Retained earnings Treasury stock, at cost (207,657 shares) Accumulated other comprehensive income Total stockholders’ equity $92,336 644,382 736,718 5,114 25,046 19,850 10,000 3,517 800,245 0 966 7,763 72,821 (4,060) 6,057 83,547 $82,036 656,032 738,068 3,899 27,698 14,400 0 4,742 788,807 15,394 966 7,666 71,193 (4,060) 5,439 96,598 Total liabilities and stockholders’ equity $883,792 $885,405 10 2012 ANNUAL REPORT See Notes to Consolidated Financial Statements. FORESIGHT CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF INCOME (000s omitted except share data) (000s omitted except share data) For the years ended December 31, For the years ended December 31, Interest and dividend income: Interest and dividend income: Loans, including fees Loans, including fees Debt securities: Debt securities: Taxable Taxable Tax-exempt Tax-exempt Interest-bearing deposits in banks and other Interest-bearing deposits in banks and other Federal funds sold Federal funds sold Total interest and dividend income Total interest and dividend income Interest expense: Interest expense: Deposits Deposits Federal funds purchased Federal funds purchased Securities sold under agreements to repurchase Securities sold under agreements to repurchase FHLB and other borrowings FHLB and other borrowings Subordinated debentures Subordinated debentures Total interest expense Total interest expense Net interest and dividend income Net interest and dividend income Provision for loan losses Provision for loan losses Net interest and dividend income, Net interest and dividend income, after provision for loan losses after provision for loan losses Noninterest income: Noninterest income: Customer service fees Customer service fees Gain on sales and calls of AFS securities, net Gain on sales and calls of AFS securities, net Gain on sales of loans, net Gain on sales of loans, net Loan servicing fees, net Loan servicing fees, net Other Other Total noninterest income Total noninterest income Noninterest expenses: Noninterest expenses: Salaries and employee benefits Salaries and employee benefits Occupancy expense of premises, net Occupancy expense of premises, net Outside services Outside services Data processing Data processing Foreclosed assets, net Foreclosed assets, net Other Other Total noninterest expenses Total noninterest expenses Income before income taxes Income before income taxes Income tax expense Income tax expense Net income Net income Earnings per common share: Earnings per common share: Basic Basic Diluted Diluted 2012 ANNUAL REPORT $0.60 $0.60 $0.60 $0.60 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 2012 2012 $31,487 $31,487 3,472 3,472 3,900 3,900 57 57 11 11 38,927 38,927 7,231 7,231 3 3 128 128 245 245 189 189 7,796 7,796 31,131 31,131 13,444 13,444 17,687 17,687 1,275 1,275 191 191 1,500 1,500 832 832 2,360 2,360 6,158 6,158 10,822 10,822 2,030 2,030 751 751 1,072 1,072 954 954 4,790 4,790 20,419 20,419 3,426 3,426 (20) (20) $3,446 $3,446 2011 2011 $33,530 $33,530 3,915 3,915 3,900 3,900 16 16 11 11 41,372 41,372 9,313 9,313 7 7 167 167 341 341 0 0 9,828 9,828 31,544 31,544 7,195 7,195 24,349 24,349 1,369 1,369 334 334 968 968 616 616 2,367 2,367 5,654 5,654 10,540 10,540 1,904 1,904 723 723 959 959 2,768 2,768 4,535 4,535 21,429 21,429 8,574 8,574 2,006 2,006 $6,568 $6,568 $1.53 $1.53 $1.52 $1.52 2010 2010 $31,789 $31,789 4,642 4,642 4,061 4,061 36 36 7 7 40,535 40,535 11,832 11,832 13 13 180 180 418 418 0 0 12,443 12,443 28,092 28,092 8,382 8,382 19,710 19,710 1,520 1,520 180 180 1,183 1,183 811 811 2,614 2,614 6,308 6,308 10,045 10,045 1,900 1,900 699 699 837 837 1,126 1,126 4,835 4,835 19,442 19,442 6,576 6,576 761 761 $5,815 $5,815 $1.32 $1.32 $1.32 $1.32 11 FORESIGHT CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (000s omitted except share data) For the years ended December 31, CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (000s omitted except share data) Net income Other comprehensive income: Unrealized holding gains on securities available for sale Net income Reclassification adjustments for net securities gains recognized in income Other comprehensive income: Unrealized holding gains on securities available for sale Deferred income tax effect Reclassification adjustments for net securities gains recognized in income Total other comprehensive income (loss) Deferred income tax effect Total comprehensive income Total other comprehensive income (loss) For the years ended December 31, 2012 2011 2010 $3,446 2012 $6,568 $5,815 2011 2010 1,228 $3,446 (191) 1,037 1,228 (418) (191) 619 1,037 (418) $4,065 619 7,603 $6,568 (2,459) $5,815 (334) 7,269 7,603 (2,958) (334) 4,311 7,269 (2,958) $10,879 4,311 (180) (2,639) (2,459) 1,014 (180) (1,625) (2,639) 1,014 $4,190 (1,625) Total comprehensive income $4,065 $10,879 $4,190 See Notes to Consolidated Financial Statements. 12 See Notes to Consolidated Financial Statements. 2012 ANNUAL REPORT FORESIGHT CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (000s omitted except share data) CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (000s omitted except share data) For the years ended December 31, For the years ended December 31, Net income Preferred Common Stock Stock Additional Paid-In Capital 2012 2011 Retained Earnings $3,446 Treasury Stock $6,568 Accumulated 2010 Other Comprehensive Income $5,815 Total Other comprehensive income: Balance, January 1, 2010 Unrealized holding gains on securities available for sale Net income Reclassification adjustments for net securities gains recognized in income Other comprehensive loss $15,094 $966 Deferred income tax effect Cash dividends ($.28 per share) Total other comprehensive income (loss) Accretion of preferred stock warrants 150 Total comprehensive income Cash dividends on preferred stock $7,487 $62,353 ($4,060) $2,753 $84,593 1,228 5,815 (191) 1,037 (418) (1,025) 619 (150) $4,065 (814) 7,603 (2,459) (334) 7,269 (2,958) (1,625) (180) (2,639) 1,014 4,311 (1,625) 5,815 (1,625) (1,025) 0 $10,879 $4,190 (814) Stock-based compensation expense 81 81 Balance, December 31, 2010 15,244 966 7,568 66,179 (4,060) 1,128 87,025 Net income Other comprehensive income Cash dividends ($.16 per share) Accretion of preferred stock warrants 150 Cash dividends on preferred stock 6,568 (586) (150) (818) Stock-based compensation expense 98 4,311 6,568 4,311 (586) 0 (818) 98 Balance, December 31, 2011 15,394 966 7,666 71,193 (4,060) 5,439 96,598 Net income Other comprehensive income Remption of preferred stock (15,750) Cash dividends ($.16 per share) Accretion of preferred stock warrants 356 Cash dividends on preferred stock Stock-based compensation expense 97 3,446 (586) (356) (877) 619 3,446 619 (15,750) (586) 0 (877) 97 Balance, December 31, 2012 $0 $966 $7,763 $72,820 ($4,060) $6,058 $83,547 See Notes to Consolidated Financial Statements. 2012 ANNUAL REPORT See Notes to Consolidated Financial Statements. 13 FORESIGHT CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (000s omitted except share data) For the years ended December 31, CONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted except share data) For the years ended December 31, 2011 2010 2012 2012 2011 2010 Net income Other comprehensive income: Unrealized holding gains on securities available for sale Reclassification adjustments for net securities gains recognized in income 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 of securities Deferred income tax benefit Net gain on the sales and calls of AFS securities Net (gain) loss on the sales of foreclosed assets Total other comprehensive income (loss) 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 Total comprehensive income Deferred income tax effect 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 subordinated debentures Redemption 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 (used in) provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year $3,446 $3,446 $6,568 $6,568 $5,815 $5,815 13,444 1,228 744 862 (191) 1,242 1,037 (1,642) (418) (191) (207) 619 97 $4,065 (128) (3,400) 812 (1,226) 13,853 6,685 359 65,079 (64,034) (7) (14,765) 2,057 (977) (5,603) (1,350) (2,652) (1,463) 1,215 10,000 (15,750) 17,000 (11,550) (4,550) 3,700 25,517 7,195 7,603 2,410 799 (334) 974 7,269 (473) (2,958) (334) 12 4,311 98 $10,879 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 8,382 (2,459) 900 741 (180) 1,094 (2,639) (822) 1,014 (180) 50 (1,625) 81 $4,190 (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 7,024 185 18,493 18,308 Cash and cash equivalents at end of year $29,217 $25,517 $18,493 See Notes to Consolidated Financial Statements. 14 See Notes to Consolidated Financial Statements. 2012 ANNUAL REPORT FORESIGHT CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (000s omitted except share data) CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (000s omitted except share data) For the years ended December 31, For the years ended December 31, Net income SUPPLEMENTAL DISCLOSURES OF CASH FLOW Other comprehensive income: INFORMATION: Unrealized holding gains on securities available for sale Cash paid during the year for: Reclassification adjustments for net securities Interest gains recognized in income Income taxes Deferred income tax effect Total other comprehensive income (loss) SUPPLEMENTAL SCHEDULE OF NONCASH AND Total comprehensive income FINANCING ACTIVITIES: Foreclosed assets acquired in settlement of loans 2012 2011 2010 $3,446 2012 $6,568 2011 $5,815 2010 1,228 (191) 1,037 (418) 619 7,603 $8,093 $2,009 (334) 7,269 (2,958) $10,040 $2,190 4,311 (2,459) (180) (2,639) 1,014 (1,625) $12,790 $1,905 $4,065 $10,879 $4,190 $3,367 $2,619 $8,598 See Notes to Consolidated Financial Statements. 2012 ANNUAL REPORT See Notes to Consolidated Financial Statements. 15 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies 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) (collectively the “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, 2013, 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. 16 2012 ANNUAL REPORT FORESIGHT 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) (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (1) Summary of Significant Accounting Policies (continued) (1) Summary of Significant Accounting Policies (continued) (g) Securities (g) Securities (g) Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as 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 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 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. available for sale (AFS) and recorded at fair value, with unrealized gains or losses excluded from earnings and reported in other comprehensive income. and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the 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 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. 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. 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 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 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 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. 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. 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 Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. specific-identification method. . . . (h) Non-Marketable Equity Securities (h) Non-Marketable Equity Securities (h) Non-Marketable Equity Securities The Banks, as members of the Federal Home Loan Bank (FHLB) system, are required to maintain a 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 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 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 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 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 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. quoted market value. FHLB stock is periodically evaluated for impairment based on the ultimate recovery of par value. of par value. (i) Loans Held for Sale (i) Loans Held for Sale (i) Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or market Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in the aggregate. Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in the aggregate. in the aggregate. Mortgage loans held for sale are generally sold with mortgage servicing rights retained by the Company. 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 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 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. 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. between the selling price and the carrying value of the related mortgage loans sold. (j) Loans and Allowance for Loan Losses (j) Loans and Allowance for Loan Losses (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 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 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. 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. income is accrued daily on the outstanding balances. A loan is considered to be delinquent when payments have not been made according to contractual terms, 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 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 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 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 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. 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. collection of principal or interest is considered doubtful. 2012 ANNUAL REPORT 17 FORESIGHT 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) Generally, interest accrued but not collected for loans that are placed on nonaccrual status or charged off 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- 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 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 principal and interest amounts contractually due are brought current and future payments are reasonably assured. assured. Loan origination fees approximate direct loan origination costs and are generally recognized as income Loan origination fees approximate direct loan origination costs and are generally recognized as income upon receipt. upon receipt. The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb credit losses relating to specifically identified loans, as well as probable credit losses inherent in the absorb credit losses relating to specifically identified loans, as well as probable credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio including the nature of the portfolio, credit concentrations, trends in historical loss the loan portfolio including the nature of the portfolio, credit concentrations, trends in historical loss experience, specifically impaired loans, and economic conditions. Because of uncertainties inherent in the experience, specifically impaired loans, and economic conditions. Because of uncertainties inherent in the estimation process, management’s estimate of credit losses inherent in the loan portfolio and the related estimation process, management’s estimate of credit losses inherent in the loan portfolio and the related allowance may change materially in the near term. The allowance is increased by a provision for loan allowance may change materially in the near term. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. losses, which is charged to expense and reduced by charge-offs, net of recoveries. The allowance consists of specific and general components. The specific component relates to loans The allowance consists of specific and general components. The specific component relates to loans classified as impaired. For loans classified as impaired, an allowance is established when the discounted classified as impaired. For loans classified as impaired, an allowance is established when the discounted cash flows or collateral value of the impaired loan is lower than the carrying value of that loan. The cash flows or collateral value 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 general component covers non-impaired loans and is based on historical-loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company. This actual loss experience is supplemented with other actual loss history experienced by the Company. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. trends and conditions; industry conditions; and effects of changes in credit concentrations. A loan is considered impaired when it is probable, based on current information and events, the Company A loan is considered impaired when it is probable, based on current information and events, the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of 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 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 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 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 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 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 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 less costs to sell if the loan is collateral observable market price or the fair value of the collateral less costs to sell if the loan is collateral dependent. The amount of impairment, if any, and subsequent changes are included in the allowance for 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 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 using the fair value of using the loan’s effective rate at inception, unless collateral dependent, then reported using the fair value of collateral method. collateral method. 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 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. interest income is recognized on those loans until the principal balance has been collected. 18 2012 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (k) Loan Commitments 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 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. (l) Loan Servicing 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, 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 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 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 using market-based assumptions. 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. 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 mortgage servicing rights is netted against loan servicing fee income. (m) Mortgage-Banking Derivatives 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 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 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 of these derivatives to be immaterial to the consolidated financial statements and has elected not to record fair values associated with these derivatives. (n) Foreclosed Assets 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 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 valuation allowance are included in net expenses from foreclosed assets. 2012 ANNUAL REPORT 19 FORESIGHT 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. 20 2012 ANNUAL REPORT FORESIGHT 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 2011 consolidated financial statements have been reclassified to conform to the 2012 presentation. 2012 ANNUAL REPORT 21 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (aa) Adoption of New Accounting Standards In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-02, 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 update is effective for financial statements issued for annual periods ending after December 15, 2012. The Company adopted this new accounting standard effective December 31, 2012. The adoption of this accounting standard did not have a significant effect on the financial statements of the Company. In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This standard results in common fair value measurement and disclosure requirements in U.S. and international accounting standards by changing certain fair value concepts and requiring additional disclosures about fair value. This update is effective for fiscal years beginning after December 15, 2011. The Company adopted this new accounting standard effective December 31, 2012. The adoption of this accounting standard did not have a significant effect on the financial statements of the Company. In June 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-05, Presentation of Comprehensive Income. This standard eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all components of net income and other comprehensive income be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update is effective for fiscal years ending after December 15, 2012. The Company retroactively adopted this new accounting standard effective December 31, 2012. The Company has chosen to present comprehensive income in a separate statement of comprehensive income. (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, 2012 and 2011 was approximately $2,251 and $2,900, respectively. In the normal course of business, the Company maintains cash and due from bank balances in accounts with correspondent banks. Balances in these accounts may exceed the Federal Insurance Deposit Corporation’s insured limit of $250,000. 22 2012 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (3) Securities The following tables reflect the amortized costs and approximate fair values of securities at December 31: Held-to-Maturity 2012 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal $1,728 $108 $0 $1,836 Held-to-Maturity 2011 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal $2,042 $77 ($9) $2,110 Available-for-Sale 2012 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses U.S. Government sponsored agencies State and municipal Mortgage-backed – residential $32,916 95,497 75,289 $728 7,277 2,476 ($97) (143) (98) Fair Value $33,547 102,631 77,667 $203,702 $10,481 ($338) $213,845 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 For the years ended December 31, 2012, 2011 and 2010, proceeds from sales of available-for-sale securities amounted to $6,685, $13,996 and $14,551, 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 2012 2011 2010 $191 $0 $368 ($34) $257 ($77) Securities with carrying amounts of approximately $99,121 and $101,632 at December 31, 2012 and 2011, 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, 2012 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. 2012 ANNUAL REPORT 23 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (3) Securities (continued) (3) Securities (continued) Held-to-Maturity Held-to-Maturity Due in one year or less Due after one year through five years Due in one year or less Due after five years through ten years Due after one year through five years Due after ten years Due after five years through ten years Due after ten years Available-for-Sale Available-for-Sale Due in one year or less Due after one year through five years Due in one year or less Due after five years through ten years Due after one year through five years Due after ten years Due after five years through ten years Due after ten years Mortgage-backed - residential Mortgage-backed - residential Amortized Cost Amortized Cost $170 155 $170 395 155 1,008 395 1,008 $1,728 $1,728 Amortized Cost Amortized Cost $11,742 19,426 $11,742 31,579 19,426 65,666 31,579 128,413 65,666 75,289 128,413 75,289 $203,702 Fair Value Fair Value $171 160 $171 420 160 1,085 420 1,085 $1,836 $1,836 Fair Value Fair Value $11,817 20,375 $11,817 33,262 20,375 70,724 33,262 136,178 70,724 77,667 136,178 77,667 $213,845 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, 2012 and The following tables show the fair values and unrealized losses aggregated by investment category and length 2011: of time that individual securities have been in a continuous unrealized loss position, at December 31, 2012 and 2011: There were no held-to-maturity securities in an unrealized loss position at December 31, 2012. $203,702 $213,845 There were no held-to-maturity securities in an unrealized loss position at December 31, 2012. Less than 12 Months Gross Less than 12 Months Unrealized Gross Loss Unrealized Loss $1 Fair Value Fair Value $285 2011 Held-to-Maturity 2011 Held-to-Maturity No. of No. Securities of Securities 1 Fair Value Fair Value $145 12 Months or More Gross 12 Months or More Unrealized Gross Loss Unrealized Loss $8 No. of No. Securities of Securities 2 State and municipal State and municipal Total temporarily impaired Total temporarily impaired $285 $285 $285 $1 $1 $1 1 1 1 $145 $145 $145 $8 $8 $8 2 2 2 Less than 12 Months Gross Less than 12 Months Unrealized Gross Loss Unrealized Loss Fair Value Fair Value 2012 Available-for-Sale 2012 Available-for-Sale No. of No. Securities of Securities Fair Value Fair Value 12 Months or More Gross 12 Months or More Unrealized Gross Loss Unrealized Loss No. of No. Securities of Securities $11,601 1,995 $11,601 7,153 1,995 7,153 $20,749 $20,749 $97 33 $97 98 33 98 $228 $228 37 6 37 11 6 11 54 54 $0 246 $0 0 246 0 $246 $246 $0 110 $0 0 110 0 $110 0 1 0 0 1 0 1 $110 1 2012 ANNUAL REPORT U.S. Government sponsored agencies U.S. Government sponsored State and municipal agencies Mortgage-backed - residential State and municipal Mortgage-backed - residential Total temporarily impaired Total temporarily impaired 24 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (3) Securities (continued) 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 Total temporarily impaired $13,687 $9 26 53 $88 9 18 14 41 $0 1,203 0 $0 179 0 $1,203 $179 0 10 0 10 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. (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 Residential real estate Commercial: Commercial and industrial Agricultural production Consumer and other Allowance for loan losses 2012 2011 $180,822 71,715 110,903 175,945 59,669 12,832 611,886 (14,948) $173,480 60,229 128,210 183,844 48,589 15,805 610,157 (11,173) $596,938 $598,984 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 2012 ANNUAL REPORT 2012 2011 2010 $11,173 13,444 497 25,114 (10,166) $12,165 7,195 286 19,646 (8,473) $10,759 8,362 442 19,563 (7,398) $14,948 $11,173 $12,165 25 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans Detailed analysis of the allowance for loan losses by portfolio segments at December 31 are as 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 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 As of December 31, 2012 $7,216 12,110 108 19,434 (9,144) $3,836 1,319 338 5,493 (946) $121 15 51 187 (76) $11,173 13,444 497 25,114 (10,166) $10,290 $4,547 $111 $14,948 $4,776 5,514 $10,290 $1,518 3,029 $4,547 $22 89 $6,316 8,632 $111 $14,948 Real Estate Commercial Consumer Total As of December 31, 2011 $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 Detailed analysis of loans evaluated for impairment by portfolio segment for the year ended December 31 follows: Real Estate Commercial Consumer Total 2012 Loans: Individually evaluated for impairment Collectively evaluated for impairment $21,118 342,322 $6,847 228,767 $196 12,636 $28,161 583,725 Totals $363,440 $235,614 $12,832 $611,886 26 2012 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) Real Estate Commercial Consumer Total 2011 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 Detailed information regarding impaired loans by class of loan as of December 31 follows: Recorded Investment Principal Balance Related Allowance Average Investment Interest Recognized As of December 31, 2012 Loans with no related allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other $1,491 3,826 167 4,092 0 159 $1,602 5,062 167 4,241 0 220 Totals 9,735 11,292 Loans with an allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Totals Grand Totals 9,175 6,459 0 2,401 354 37 9,698 7,340 0 3,962 358 38 18,426 21,396 N/A N/A N/A N/A N/A N/A 2,342 2,434 0 1,186 332 22 6,316 $1,554 4,376 174 4,756 0 201 11,061 9,257 6,673 0 2,505 416 40 18,891 $54 140 0 215 0 10 419 334 225 0 92 0 2 653 $28,161 $32,688 $6,316 $29,951 $1,072 2012 ANNUAL REPORT 27 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) Recorded Investment As of December 31, 2011 Related Allowance Average Investment Principal Balance Loans with no related allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural 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 Total 21,562 24,162 Loans with an allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Total Grand Total 3,402 7,459 0 998 363 60 3,448 8,072 0 1,015 363 99 Interest Recognized $227 227 0 176 0 9 639 149 339 0 54 0 2 544 N/A N/A N/A N/A N/A N/A 714 2,220 0 472 340 8 $6,965 6,086 215 4,086 0 131 17,483 2,489 6,211 0 771 267 62 12,282 12,997 3,754 9,800 $33,844 $37,159 $3,754 $27,283 $1,183 The average balance of impaired loans during the year ended December 31, 2010 approximated $26,920. Interest income and other loan income recognized on impaired loans during 2010 approximated $347. The Banks have no commitments to loan additional funds to the borrowers of impaired or non-accrual loans. 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. '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. '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. 28 2012 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) Information regarding the credit quality indicators most closely monitored by class of loan at December 31 follows: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other As of December 31, 2012 Pass Special Mention Substandard Doubtful Totals $161,858 92,191 71,064 166,925 59,306 12,591 $12,720 12,455 484 3,458 9 54 $6,244 6,209 167 5,561 301 187 $48 54 $180,822 110,903 71,715 175,944 59,670 12,832 Total $563,935 $29,180 $18,669 $102 $611,886 Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other As of December 31, 2011 Pass Special Mention Substandard Doubtful Totals $157,749 111,061 56,606 164,626 48,058 15,519 $7,762 6,511 3,328 14,699 168 97 $7,969 10,547 295 4,444 304 189 $91 75 59 $173,480 128,210 60,229 183,844 48,589 15,805 Total $553,619 $32,565 $23,748 $225 $610,157 Loan aging information by class of loan at December 31 follows: As of December 31, 2012 Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Total Loans Past Due 30-89 Days Loans Past Due 90+ Days Total Past Due $1,203 1,424 1,599 57 $4,283 $1,715 2,641 2,377 301 40 $7,074 $2,918 4,065 3,976 301 97 $11,357 2012 ANNUAL REPORT 29 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) As of December 31, 2012 Total Past Due Total Current Total Loans 90+ Days Due and Accruing Interest Total Non-accrual Loans Real Estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other $2,918 4,065 3,976 301 97 $169,709 115,053 71,715 $172,627 119,118 71,715 171,960 59,368 12,724 175,936 59,669 12,821 $292 103 12 11 Total $11,357 $600,529 $611,886 $418 $2,428 4,402 167 2,432 355 64 $9,848 As of December 31, 2011 Real estate: Commercial real estate Residential real estate Agricultural 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 As of December 31, 2011 Total Past Due Total Current Total Loans 90+ Days Due and Accruing Interest Total Non-accrual Loans Real Estate: Commercial real estate Residential real estate Agricultural 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 that occurred during the years ended December 31: 30 2012 ANNUAL REPORT FORESIGHT (4) Loans (continued) Real Estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and Other Total Real Estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and Other Total NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) Number of Loans As of December 31, 2012 Pre-Modification Investment Post-Modification Investment 5 2 0 0 0 0 7 $3,605 261 $3,605 167 $3,866 $3,772 Number of Loans As of December 31, 2011 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 The following table summarizes troubled debt restructurings that defaulted at December 31, within 12 months of their modification date: Real Estate: Commercial real estate Residential real estate Total Real Estate: Commercial real estate Residential real estate Total As of December 31, 2012 Number of Loans Recorded Investment 3 6 9 $3,886 2,037 $5,924 As of December 31, 2011 Number of Loans Recorded Investment 2 6 8 $1,270 1,038 $2,308 2012 ANNUAL REPORT 31 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (000s omitted except share data) (5) Loan Servicing (5) Loan Servicing Loans serviced for others are not included in the accompanying consolidated balance sheets. Mortgage loans serviced for others as of December 31, 2012 and 2011, were approximately $277,333 and $249,326, Loans serviced for others are not included in the accompanying consolidated balance sheets. Mortgage loans respectively. Custodial escrow balances maintained in conjunction with serviced loans were approximately serviced for others as of December 31, 2012 and 2011, were approximately $277,333 and $249,326, $2,536 and $1,910 at December 31, 2012 and 2011, respectively. respectively. Custodial escrow balances maintained in conjunction with serviced loans were approximately $2,536 and $1,910 at December 31, 2012 and 2011, respectively. The following summarizes the activity pertaining to mortgage servicing rights for the years ended December 31: The following summarizes the activity pertaining to mortgage servicing rights for the years ended December 31: 2012 2012 2011 2011 2010 2010 Mortgage servicing rights: Balance at beginning of year Mortgage servicing rights: Mortgage servicing rights capitalized Balance at beginning of year Mortgage servicing rights amortized Mortgage servicing rights capitalized Mortgage servicing rights amortized Balance at end of year Balance at end of year The approximate fair values of the mortgage servicing rights were deemed to be greater than their carrying values as of December 31, 2012, 2011, and 2010. The differences between the fair values and carrying values The approximate fair values of the mortgage servicing rights were deemed to be greater than their carrying were considered immaterial. values as of December 31, 2012, 2011, and 2010. The differences between the fair values and carrying values were considered immaterial. $1,521 940 $1,521 (813) 940 (813) $1,648 $1,648 $1,529 643 $1,529 (651) 643 (651) $1,521 $1,521 $1,277 970 $1,277 (718) 970 (718) $1,529 $1,529 (6) Mortgage Banking Loan Commitments (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 The Company enters into commitments to fund residential mortgage loans (interest rate locks) at specified mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest times in the future, with the intention that these loans will be subsequently sold to third-party investors. A rate and within a specified period of time, generally up to 60-days after inception of the rate lock. It is the mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest Company’s practice to enter into mandatory delivery forward commitments for the future delivery of rate and within a specified period of time, generally up to 60-days after inception of the rate lock. It is the residential mortgage loans to third-party investors when an interest rate lock commitment is granted. These Company’s practice to enter into mandatory delivery forward commitments for the future delivery of mandatory delivery forward commitments bind the Company to deliver a residential mortgage loan to a third- residential mortgage loans to third-party investors when an interest rate lock commitment is granted. These party investor even if the underlying loan never funds. As of December 31, 2012 and 2011, the Company had mandatory delivery forward commitments bind the Company to deliver a residential mortgage loan to a third- approximately $3,537 and $4,055 in interest rate lock commitments outstanding. As of December 31, 2012 party investor even if the underlying loan never funds. As of December 31, 2012 and 2011, the Company had and 2011, the Company had approximately $11,440 and $7,053 in mandatory delivery forward commitments approximately $3,537 and $4,055 in interest rate lock commitments outstanding. As of December 31, 2012 outstanding. These outstanding mortgage loan commitments are considered to be derivatives. The fair values and 2011, the Company had approximately $11,440 and $7,053 in mandatory delivery forward commitments associated with these derivatives were considered to be immaterial as of December 31, 2012 and 2011. 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, 2012 and 2011. (7) Allowance for Losses on Foreclosed Assets (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: 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 Balance at beginning of year Charge-offs Provision for losses Reversals from sales Charge-offs Recoveries Reversals from sales Recoveries Balance at end of year Balance at end of year 2012 2012 $3,320 744 $3,320 0 744 (353) 0 0 (353) 0 $3,711 $3,711 2011 2011 $910 2,410 $910 00 2,410 00 0 0 $3,320 $3,320 2010 2010 $20 900 $20 10 900 10 0 0 $910 $910 32 2012 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (8) Premises and Equipment The components of premises and equipment at December 31 are as follows: Land Buildings and leasehold improvements Furniture, fixtures, and equipment Less accumulated depreciation 2012 2011 $2,065 10,978 9,686 22,729 12,499 $1,969 10,726 9,057 21,752 11,637 $10,230 $10,115 Depreciation expense for the years ended December 31, 2012, 2011 and 2010 amounted to $862, $799, and $741, respectively. (9) Other Assets The components of other assets at December 31 are as follows: Cash surrender value of bank-owned life insurance Accrued interest receivable Mortgage servicing rights, net of amortization Net deferred tax assets Federal Deposit Insurance Corporation assessments Other 2012 2011 $5,110 4,935 1,648 2,321 1,334 1,934 $4,933 5,341 1,521 1,098 1,910 1,938 $17,282 $16,741 (10) Time Deposits The aggregate amount of time deposits with minimum a denomination of $100 was approximately $132,364 and $143,916 at December 31, 2012 and 2011, respectively. At December 31, 2012, the scheduled maturities of time deposits are as follows: 2013 2014 2015 2016 2017 and thereafter $154,783 95,831 56,409 32,016 29,410 $368,449 2012 ANNUAL REPORT 33 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (11) Dividends 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 were limited under the terms of the TARP agreement as described in Note 23. (12) Employee Benefit Plans 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 $215, $247, and $237, for 2012, 2011, and 2010, 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. 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 $9,099 and $8,961 as of December 31, 2012 and 2011, 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 $875, $894, and $912 at December 31, 2012, 2011, and 2010, respectively. Salary-continuation expenses were $41, $51, and $48 in 2012, 2011, and 2010, respectively. (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 2012 $992 630 1,622 (1,270) (372) (1,642) $1,623 857 2,480 (144) (330) (474) 2011 2010 Total income tax expense ($20) $2,006 $1,140 443 1,583 (752) (70) (822) $761 34 2012 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (13) Income Taxes (continued) 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: 2012 2011 2010 % of Pretax Earnings % of Pretax Earnings Amount % of Pretax Earnings Amount Amount $1,165 34.0% $2,915 34.0% $2,236 34.0% (1,413) (65) (41.2%) (1.9%) (1,452) (63) (16.9%) (0.7%) (1,518) (346) (23.1%) (5.3%) 170 123 4.9% 3.6% 348 258 4.1% 3.0% 246 143 3.7% 2.2% Statutory federal tax Increase (decrease) in taxes resulting from: Tax-exempt interest Bank-owned life insurance State taxes, net of federal benefit Other Effective tax rates ($20) (.6%) $2,006 23.5% $761 11.5% 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, 2012 and 2011 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 2012 2011 $5,825 1,516 723 $4,358 1,396 562 8,064 6,316 129 47 4,085 848 634 5,743 129 35 3,666 788 600 5,218 $2,321 $1,098 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 2010. 2012 ANNUAL REPORT 35 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (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 $16,656 and $14,209 at December 31, 2012 and 2011, respectively. Deposit accounts from related parties totaled approximately $10,233 and $10,612 at December 31, 2012 and 2011, respectively. (15) Financial Instruments with Off-Balance-Sheet Risk and Concentrations 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. 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 2012 $123,738 395 616 $124,749 2011 $123,099 1,352 761 $125,212 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. 36 2012 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (15) Financial Instruments with Off-Balance-Sheet Risk and Concentrations (continued) 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 $25,045 and $27,698 at December 31, 2012 and 2011, respectively, and are secured by investment securities with fair values of approximately $36,227 and $37,563. The weighted-average interest rates on these agreements were 0.18% and 0.54% at December 31, 2012 and 2011, respectively. Securities sold under agreements to repurchase mature on a daily basis. (17) Federal Home Loan Bank (FHLB) Advances and Other Borrowings FHLB: 2012 2011 Fixed-rate advances with rates ranging from .07% to 3.16% with weighted-average rates of .98% to 3.16% as of December 31, 2012 and 2011, respectively. Interest is payable monthly with principal due at maturity. $19,850 $14,400 Advances are collateralized by 1-4 family mortgage loans and other qualifying loans. The total amounts of collateral securing FHLB advances were approximately $82,708 and $86,879 as of December 31, 2012 and 2011, 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, 2012 was 75-basis points. Outstanding advances were $0 at December 31, 2012 and 2011. Advances are secured by investment securities pledged totaling approximately $11,663 and $8,950 at December 31, 2012 and 2011, respectively, to the Federal Reserve Bank. 2012 ANNUAL REPORT 37 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (17) Federal Home Loan Bank (FHLB) Advances and Other Borrowings (continued) At December 31, 2012, the scheduled maturities of Federal Home Loan Bank advances and other borrowings are as follows: 2012 2013 2014 2015 2016 2017 2012 2011 $0 11,100 2,750 4,000 1,300 700 $3,050 4,600 2,750 2,500 1,500 0 $19,850 $14,400 The Company issued $10,000,000 of Subordinated Debentures in the fiscal year ended 2012 that qualify as Tier 2 regulatory capital (with certain limitations applicable) for the Company. The Company issued the Subordinated Debentures for capital raising purposes primarily for the redemption of preferred stock as part of the Troubled Asset Relief Program. Note 22 details the Troubled Asset Relief Program. The Debentures mature on August 30, 2019 and the Company may redeem some or all of the Subordinated Debentures at any time after the third anniversary of their issuance in accordance with the contract price limitations. The redemption may be subject to approval by the Federal Reserve and must be on a pro rata basis amongst all holders. The terms call for interest payments to be made quarterly in arrears on the last day of March, June, September and December. The annual rate of interest on the Subordinated Debentures is 6.00%. The interest payments can be deferred for so long as the Company or a specific Bank remains subject to any regulatory order limiting or prohibiting the payment of dividends or interest on indebtedness of the Company, including the Debentures. If interest payments are deferred the interest will accrue until paid. The agreement contains certain restrictive covenants. (18) Fair Value Measurements 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. 38 2012 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (18) Fair Value Measurements (continued) 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. The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification. Non-real estate collateral may be valued using an appraisal, net book value of the borrower’s financial statements or aging reports, adjusted or discounted based on management’s expertise and knowledge of the borrower and borrower’s business. Fair value measurements prepared internally are based on management's comparisons to sales of comparable assets, but include significant unobservable data and are therefore considered Level 3 measurements. Foreclosed assets: Real estate acquired through or in lieu of loan foreclosure are not measured at fair value on a recurring basis. However, other real estate is initially measured at fair value (less estimated costs to sell) when it is acquired and may also be measured at fair value (less estimated costs to sell) if it becomes subsequently impaired. The fair value measurement for each property may be obtained from an independent appraiser or prepared internally. Fair value measurements obtained from independent appraisers generally utilize a market approach based on sales of comparable assets and/or an income approach. Such measurements are usually considered Level 2 measurements. However, management routinely evaluates fair value measurements of independent appraisers by comparing actual selling prices to the most recent appraisals. If management determines significant adjustments should be made to the independent appraisals based on these evaluations, these measurements are considered Level 3 measurements. Fair value measurements prepared internally are based management's comparisons to sales of comparable assets, but include significant unobservable data and are therefore considered Level 3 measurements. 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. Loan servicing rights are valued for impairment subsequent to initial recording. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Loan servicing rights do not trade in an active market with readily observable prices. Accordingly, the Company determines the fair value of loan servicing rights by estimating the present value of the future cash flows associated with the loans being serviced. Key economic assumptions used in measuring the fair value of loan servicing rights include prepayment speeds and discount rates. While market- based data is used to determine the input assumptions, the Company incorporates its own estimates of assumptions market participants would use in determining fair value of loan servicing rights (Level 3). 2012 ANNUAL REPORT 39 FORESIGHT 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, 2012 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 Fair Value Measurements at Reporting Date Using (Level 2) (Level 1) (Level 3) Total $213,845 $213,845 $12,110 $6,770 $1,648 $12,110 $6,770 $1,648 Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a carrying value of $18,426 with specific reserves of $6,316 as of December 31, 2012. Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, were carried at their fair value of $6,770, which is comprised of the outstanding balance of $10,481, net of an allowance for losses of $3,711 as of December 31, 2012. The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2012: Collateral dependent impaired loans, net of specific reserves Foreclosed assets Fair Value Valuation Technique Unobservable Input $12,110 $6,770 Sales comparison approach Sales comparison approach Appraised values Appraised values Management reduced the appraised values by estimated selling and holding costs in a range of 10% to 30%. 40 2012 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (000s omitted except share data) Fair Value Measurements at Fair Value Measurements at Reporting Date Using Reporting Date Using (Level 2) (Level 2) (Level 1) (Level 1) (Level 3) (Level 3) $221,634 $221,634 Total Total $221,634 $221,634 (18) Fair Value Measurements (continued) (18) Fair Value Measurements (continued) As of December 31, 2011 As of December 31, 2011 Assets measured at fair value Assets measured at fair value on a recurring basis: Assets: on a recurring basis: Assets: Securities available-for-sale Securities available-for-sale Assets measured at fair value Assets measured at fair value on a non-recurring basis: Assets: on a non-recurring basis: Assets: Collateral-dependent impaired loans Collateral-dependent impaired loans Foreclosed assets Foreclosed assets Mortgage servicing rights Mortgage servicing rights $8,528 $8,528 $5,997 $5,997 $1,521 $1,521 $8,528 $8,528 $5,997 $5,997 $1,521 $1,521 Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a carrying value of $12,282, with specific reserves of $3,754 as of December 31, 2011. a carrying value of $12,282, with specific reserves of $3,754 as of December 31, 2011. Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, had a carrying Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, had a carrying amount of $5,997, which is comprised of the outstanding balance of $9,317, net of an allowance for losses of amount of $5,997, which is comprised of the outstanding balance of $9,317, net of an allowance for losses of $3,320 as of December 31, 2011. $3,320 as of December 31, 2011. FASB guidance requires disclosure of fair value information about financial instruments, whether or not 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 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 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 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 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 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 certain nonfinancial instruments from its disclosure requirements. These fair value disclosures may not represent the fair value of the Company. represent the fair value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial 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: instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amounts are reasonable estimates of fair 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 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 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 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 quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. benchmark quoted securities. Non-marketable equity securities: No ready market exists for the equity securities as they have no quoted 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. 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 Loans held for sale: The fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices. investors or prevailing market prices. Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair 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 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 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 credit quality. For fair value estimates for collateral-dependent impaired loans, see previous description in this footnote. this footnote. 2012 ANNUAL REPORT 41 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (18) Fair Value Measurements (continued) 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. Subordinated debentures: The fair value of subordinated debentures approximates their fair value based on the Company’s current incremental borrowing rate approximating the instruments current fixed rate. 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. The estimated fair values of the Company’s financial instruments as of December 31 are as follows: December 31, 2012 December 31, 2011 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 Subordinated Debentures Accrued interest payable $29,217 215,573 2,184 5,598 596,938 4,935 $736,718 5,114 25,046 19,850 10,000 886 $29,217 215,681 2,184 5,598 597,466 4,935 $741,050 5,114 25,051 20,105 10,000 886 $25,517 223,676 2,177 2,198 598,984 5,341 $25,517 223,744 2,177 2,198 601,258 5,341 $738,068 3,899 $741,822 3,899 27,698 14,400 0 1,186 27,716 14,716 0 1,186 42 2012 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (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 model (Black-Scholes) based on 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. No options were granted for the years ended December 31, 2012 and 2011. The weighted average fair value of options granted during the year ended December 31, 2010 was $2.90. The fair value of options granted is estimated on the date of grant using the following weighted-average assumptions: Risk-free interest rate Expected option life Expected stock-price volatility Dividend yield 2012 N/A N/A N/A N/A 2011 N/A N/A N/A N/A 2010 1.27% 10 36.67% 1.82% For the years ended December 31, 2012, 2011 and 2010, the Company recognized $97, $98 and $81 in compensation expense for stock options, respectively. No tax benefits were recognized for the three year period ended December 31, 2012. As of December 31, 2012, stock-based compensation expense not yet recognized totaled $245, and is expected to be recognized over a weighted-average remaining period of 1.8 years. The intrinsic value of options exercised during the years ended December 31, 2012, 2011 and 2010 was $0, $4 and $3, respectively. The total fair value of shares vested during the years ended December 31, 2012, 2011 and 2010 was $341, $338 and $90, 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. 2012 ANNUAL REPORT 43 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (19) Stock-Compensation Plans (continued) The following tables summarize the activity of options and non-vested shares granted, exercised, or forfeited for the year ended December 31, 2012: Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value $10.32 7.4 $280 Shares under option, beginning of year Granted during the year Forfeited and canceled during the year Exercised during the year 2012 157,530 0 0 (40) 10.25 Shares under option, end of year 157,490 $10.32 6.4 Options exercisable, end of year 84,198 $10.37 5.61 Shares available for grant, end of year 0 0 $292 $153 Non-vested options, December 31, 2011 Granted during the year Vested during the year Forfeited or expired during the year Weighted Average Fair Value at Grant $10.26 10.24 Number of Options 101,256 0 (27,964) 0 Non-vested options, December 31, 2012 73,292 $10.27 The following table summarizes information about fixed stock options outstanding at December 31, 2012: Exercise Price $10.00 $10.25 $10.50 $11.00 $11.00 Number Outstanding at 12/31/12 26,500 93,280 20,000 8,030 9,680 157,490 Remaining Contractual Life (Years) 5.0 7.5 7.5 2.5 1.5 Number Exercisable at 12/31/12 21,200 37,288 8,000 8,030 9,680 84,198 During 2012, the Company approved a new equity incentive plan to promote the long-term financial success of the Company through stock based awards to employees, directors or service providers who contribute to that success. This equity incentive plan permits Company management to approve and grant a maximum of 150,000 shares of common stock based awards in the form of any combination of stock options, stock appreciation rights, stock awards or cash incentive awards. As of December 31, 2012, no awards under this plan have been granted. 44 2012 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (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 2012 2011 2010 $3,446 (877) (356) $2,213 $6,568 (818) (150) $5,600 $5,815 (818) (150) $4,847 Average number of common shares outstanding Effect of dilutive options 3,659,504 28,345 3,659,306 26,162 3,659,058 1,216 Average number of common shares outstanding used to calculate diluted earnings per common share 3,687,849 3,685,468 3,660,274 The total outstanding options of common stock which were excluded in the computation of diluted earnings per common share for the years ended 2012, 2011 and 2010 were 0, 0 and 71,170, 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. 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 (as defined), and of Tier-I capital (as defined) to average assets (as defined). Management believes that as of December 31, 2012, that the Company and the Banks meet all capital-adequacy requirements to which they are subject. As of December 31, 2012, 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. 2012 ANNUAL REPORT 45 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (21) Regulatory Matters (continued) 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 $95,572 23,492 19,466 13,568 21,495 8,668 $77,350 21,277 17,444 12,364 19,428 8,011 $77,350 21,277 17,444 12,364 19,428 8,011 $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 14.68% 13.43% 12.11% 14.26% 13.10% 16.78% 11.88% 12.17% 10.85% 13.00% 11.84% 15.51% 8.74% 8.78% 8.57% 8.97% 8.97% 10.05% 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% $52,082 13,989 12,861 7,609 13,124 4,132 $26,041 6,994 6,431 3,805 6,562 2,066 $35,403 9,688 8,140 5,512 8,660 3,189 $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% 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 $17,486 16,077 9,511 16,405 5,165 N/A $10,492 9,646 5,707 9,843 3,099 N/A $12,110 10,175 6,890 10,825 3,987 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% 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, 2012: 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 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 46 2012 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (22) 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. The Series A preferred stock had 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 had no par value and a redemption value of $1,000 per share. The Series A and Series B preferred stock were redeemable by the Company at any time. The dividend rate on the Series A preferred stock was 5% for the first five years and 9% thereafter. The dividend rate on the Series B preferred stock was 9%. Dividends on the preferred stock were cumulative and were 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 was being accreted as an increase to preferred stock over five years which was the Company’s expected redemption period. The Series A and Series B preferred stock were included as Tier-1 capital for regulatory purposes. Under the terms of the TARP agreement, the Company was subject to certain dividend limitations. Generally, without the UST’s consent, the Company was limited to a maximum quarterly dividend of $.08 per common share until May 14, 2012. Additionally, without the UST’s consent, the Company was 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. Additionally under the terms of the TARP agreement, without the consent of the UST, the Company generally could 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 placed certain restrictions on executive compensation, the effect of which did not have a material effect on the consolidated financial statements. Effective December 11, 2012, the Company redeemed the Series A and B preferred stock for total proceeds of $15,750. As a result, the Company is no longer under the terms of the TARP agreement as of December 31, 2012. 2012 ANNUAL REPORT 47 FORESIGHT CONSOLIDATING SCHEDULE 1 - BALANCE SHEET (000s omitted except share data) December 31, 2012 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 $2,765 512 39,509 534 152,536 38 1,125 3,683 $1,706 3,187 0 1,703 37,744 313 88,479 67 1,020 1,614 Total assets $200,702 $135,833 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 Subordinated debentures Accrued interest payable and other liabilities $20,847 147,914 168,761 2,410 10,000 1,002 $11,129 102,364 113,493 2,704 5,792 0 359 Total liabilities 182,173 122,348 Stockholders’ equity: Preferred stock Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income Total stockholders’ equity 400 2,756 14,288 1,085 18,529 100 1,559 10,705 1,121 13,485 Total liabilities and stockholders’ equity $200,702 $135,833 48 2012 ANNUAL REPORT FORESIGHT Northwest Bank State Bank Lena State Bank Foresight Financial Group, Inc. Eliminations Consolidated Total $8,982 1,026 50 25 51,740 636 5,598 156,796 3,696 4,754 6,580 $4,656 1,265 301 53,848 448 154,826 53 1,898 1,557 $1,624 1,357 1,786 31,004 253 44,131 341 548 2,735 $4,422 ($4,422) 170 2,575 885 1,113 84,581 (84,581) $19,733 7,347 2,137 1,728 213,845 2,184 5,598 596,938 6,770 10,230 17,282 $239,883 $218,852 $83,779 $93,746 ($89,003) $883,792 $31,572 177,614 209,186 3,866 3,000 980 $20,088 156,713 176,801 0 15,388 5,350 466 $8,925 63,974 72,899 1,500 511 217,032 198,005 74,910 1,450 7,148 12,679 1,574 22,851 1,000 4,565 13,863 1,419 20,847 500 3,677 3,833 859 8,869 ($225) (4,197) (4,422) (4,422) (3,450) (19,705) (55,367) (6,059) (84,581) $10,000 199 10,199 0 966 7,763 72,820 (4,060) 6,058 83,547 $92,336 644,382 736,718 5,114 25,046 19,850 10,000 3,517 800,245 0 966 7,763 72,821 (4,060) 6,057 83,547 $239,883 $218,852 $83,779 $93,746 ($89,003) $883,792 2012 ANNUAL REPORT 49 FORESIGHT For the year ended December 31, 2012 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 Subordinated debentures 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 50 German-American State Bank State Bank of Davis $7,780 $4,705 717 686 1 10 3 9,197 1,840 2 59 1,901 7,296 940 6,356 378 18 619 1,015 2,163 407 194 304 (17) 1,068 4,119 3,252 1,069 645 765 1 8 3 6,127 1,258 0 66 3 1,327 4,800 884 3,916 115 37 270 422 930 186 143 121 82 564 2,026 2,312 663 $2,183 $1,649 2012 ANNUAL REPORT FORESIGHT  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 $9,030 $7,795 $2,177 $31,487 817 853 16 2 10,718 1,723 1 12 51 1,787 8,931 8,225 776 1,003 9 2 9,585 1,644 0 50 127 1,821 7,764 2,910 517 593 12 1 3,300 779 0 5 784 2,516 485 706 4,854 2,031 423 133 1,500 832 549 3,437 4,728 930 64 296 289 1,890 8,197 (4,054) (1,986) 220 1 643 864 1,822 314 162 278 713 3,289 2,429 652 ($2,068) $1,777 2012 ANNUAL REPORT 139 2 262 403 799 184 130 73 380 1,566 868 132 $736 13 13 0 189 189 (176) 0 (176) ($13) (13) ($13) (13) 0 0 $4,277 ($4,277) 17 4,294 380 9 58 600 175 1,222 2,896 (550) (4,277) 0 (4,277) $3,446 ($4,277) 3,472 3,900 2 55 11 38,927 7,231 3 128 245 189 7,796 31,131 13,444 17,687 1,275 0 191 1,500 832 2,360 6,158 10,822 2,030 751 1,072 954 4,790 20,419 3,426 (20) $3,446 51 FORESIGHT GENERAL INFORMATION 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 Foresight Financial Group, Inc. 3106 North Rockton Ave. Rockford, IL 61103 Phone: 815/847-7500 Fax: 815/967-6107 E-mail: dcooke@ffgbank.net Registrar, Transfer Agent and Change of Address: Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 Telephone: 1-800-358-5948 E-mail: info@rtco.com Internet Address: www.rtco.com DIRECTORS Foresight Financial Group, Inc. Rockford, IL 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 Rosenstiel Robert W. Stenstrom Tom 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 Dr. Carolyn Sluiter Judd Thruman State Bank Freeport, IL Douglas Cross Bruce Johnson Dr. Joe Kanosky Fred Kundert Marilyn Smit Brian Stewart Sharon Summers Doug Wagner 52 2012 ANNUAL REPORT FORESIGHT NOTES NOTES  2012 ANNUAL REPORT Freeport, IL COMMUNITY BUILDING THROUGH COMMUNITY BANKING 

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