Foresight Financial Group, Inc.
Annual Report 2014

Plain-text annual report

FORESIGHT FINANCIAL GROUP 2014 Annual Report I I G N K N A B Y T N U M M O C H G U O R H T G N D L U B Y T N U M M O C I I I 3106 NORTH ROCKTON AVENUE • ROCKFORD, ILLINOIS 61103 • www.foresightfg.com • 815.847.7500 www.foresightfg.com State Bank Freeport, IL Dear Stockholders, I am pleased to report that your company earned $8.26 million for 2014 up over 20% from 2013, representing two consecutive record earnings years. We were able to deliver these results through a driven sales force that increased loan out standings by 7.5% while maintaining our high credit quality standards. Our deposit team also contributed to our growth with innovative new products. These products and our continued commitment to quality service helped our deposit base to grow by almost 5%. Improved interest rate margins, decreased credit costs and a marked decline in non-performing assets further contributed to our success. The company’s basic earnings per share increased $0.40 to $2.27 and book value per share increased $2.10 per share to $24.96. We believe our company is still undervalued in the marketplace and is the main reason the Board of Directors approved continuation of our stock repurchase program. During 2014 we repurchased 63,962 shares through the repurchase program. Performance throughout 2014 and prior has positioned the company to look toward expansion into other markets. Our strong capital affords us the ability to proactively seek and identify possible acquisition of banks that fit our community bank model. This past year we began to add staff at the corporate level to strengthen our management team. These additional company officers will position us to smoothly integrate banks that could join our group. We are encouraged as we look toward the future. Our past performance has placed us on solid footing to remain on course to provide strong earnings and growth. Our team of professional bankers continues to innovate and find new ways to serve our customers and fulfill their financial service needs. I look forward to sharing exciting news in 2015 and beyond as we move forward staying true to our mission statement of “Community Building through Community Banking”. Respectfully, Brent Myers, President and CEO 2 2014 ANNUAL REPORT FORESIGHT Net Earnings Dollars (1,000,000s) 8.260 6.568 6.838 5.483 5.815 3.446 2009 2010 2011 2012 2013 2014 Trends in Combined Equity Capital and ALLL* to Non-Performing Assets (in 000s) 95,352 99,190 107,771 108,556 98,495 99,003 9.0 - 8.0 - 7.0 - 6.0 - 5.0 - 4.0 - 3.0 - 2.0 - 1.0 - 0 - 120,000 - 100,000 - 80,000 - 60,000 - 40,000 - 20,000 - 24,217 23,060 19,898 17,036 15,778 0 - 2009 2010 2011 2012 2013 10,265 2014 Equity Capital & ALLL Non-Performing Assets 2014 ANNUAL REPORT 3 FORESIGHT Trends in Assets, Deposits and Loans (In 000’s) 1,000,000 - 900,000 - 800,000 - 808,642 700,000 - 600,000 - 664,380 500,000 - 531,972 844,917 695,439 581,105 885,405 883,792 872,057 738,068 736,718 729,057 598,984 596,938 595,718 922,953 765,336 640,795 400,000 - 300,000 - 200,000 - $25.00 - $20.00 - $15.00 - $10.00 - $5.00 - 0 - 2009 2010 2011 2012 Assets 2013 2014 Deposits Loans Common Stock Per Share Book & Market Value - December 31 $18.24 $19.31 $20.70 $21.17 $24.96 $21.00 $22.86 $18.75 $9.84 $10.30 $12.10 $12.18 2009 2010 2011 2012 2013 2014 Book Value Market Value 4 2014 ANNUAL REPORT FORESIGHT Wipfli LLP Wipfli LLP 4949 Harrison Avenue 4949 Harrison Avenue Rockford, Illinois 61108 Rockford, Illinois 61108 815.399.7700 815.399.7700 Fax 815.399.7644 Fax 815.399.7644 www.wipfli.com www.wipfli.com INDEPENDENT AUDITOR’S REPORT INDEPENDENT AUDITOR’S REPORT To the Board of Directors To the Board of Directors Foresight Financial Group, Inc. Foresight Financial Group, Inc. We have audited the accompanying consolidated financial statements of Foresight Financial Group, Inc. and 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, 2014 and 2013, and the related Subsidiaries, which comprise the consolidated balances sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each in the three-year period ended December 31, 2014, and the related notes to the financial statements. of the years in the three-year period ended December 31, 2013, and the related notes to the financial statements. Management’s Responsibility for 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 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, 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 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. free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We 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. 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 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. 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 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 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, 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 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 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. 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 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 significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. opinion. 2014 ANNUAL REPORT 5 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, 2013 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, 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. Rockford, Illinois February 27, 2015 6 2014 ANNUAL REPORT FORESIGHT CONSOLIDATED BALANCE SHEETS (000s omitted except share data) December 31, CONSOLIDATED BALANCE SHEETS (000s omitted except share data) December 31, 2013 2014 A S S E T S A S S E T S Cash and due from banks Interest-bearing deposits in banks Cash and due from banks Federal funds sold Interest-bearing deposits in banks Total cash and cash equivalents Federal funds sold Total cash and cash equivalents Interest-bearing deposits in banks - term deposits Securities: Interest-bearing deposits in banks - term deposits Securities held-to-maturity (HTM) Securities: Securities available-for-sale (AFS) Securities held-to-maturity (HTM) Non-marketable equity securities, at cost Securities available-for-sale (AFS) Loans held for sale Non-marketable equity securities, at cost Loans, net of allowance for loan losses of $14,571 and $14,777, Loans held for sale respectively Loans, net of allowance for loan losses of $14,571 and $14,777, Foreclosed assets, net respectively Premises and equipment, net Foreclosed assets, net Other assets Premises and equipment, net Other assets Total assets 2014 $20,717 8,336 $20,717 939 8,336 29,992 939 29,992 5,197 5,197 1,396 214,393 1,396 2,243 214,393 1,439 2,243 1,439 640,795 1,622 640,795 9,500 1,622 16,376 9,500 16,376 $922,953 2013 $16,787 911 $16,787 0 911 17,698 0 17,698 4,963 4,963 1,584 216,065 1,584 2,220 216,065 1,521 2,220 1,521 595,718 3,265 595,718 9,746 3,265 19,277 9,746 19,277 $872,057 Total assets LIABILITIES AND STOCKHOLDERS' EQUITY $922,953 $872,057 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Liabilities: Noninterest-bearing Deposits: Interest-bearing Noninterest-bearing Total deposits Interest-bearing Federal funds purchased Total deposits Securities sold under agreements to repurchase Federal funds purchased Federal Home Loan Bank (FHLB) advances and other borrowings Securities sold under agreements to repurchase Subordinated debentures Federal Home Loan Bank (FHLB) advances and other borrowings Accrued interest payable and other liabilities Subordinated debentures Total liabilities Accrued interest payable and other liabilities Total liabilities Stockholders’ equity: Preferred stock (no par value; authorized 500,000 shares) Stockholders’ equity: Common stock ($.25 par value; authorized 5,000,000 shares; Preferred stock (no par value; authorized 500,000 shares) 3,898,449 and 3,879,357 shares issued, respectively) Common stock ($.25 par value; authorized 5,000,000 shares; Additional paid-in capital 3,898,449 and 3,879,357 shares issued, respectively) Retained earnings Additional paid-in capital Treasury stock, at cost (273,619 and 209,657 shares, respectively) Retained earnings Accumulated other comprehensive income Treasury stock, at cost (273,619 and 209,657 shares, respectively) Total stockholders’ equity Accumulated other comprehensive income Total stockholders’ equity Total liabilities and stockholders’ equity $97,745 667,591 $97,745 765,336 667,591 3,036 765,336 23,506 3,036 23,100 23,506 10,000 23,100 3,990 10,000 828,968 3,990 828,968 0 0 975 8,260 975 86,570 8,260 (5,312) 86,570 3,492 (5,312) 93,985 3,492 93,985 $922,953 $93,806 635,251 $93,806 729,057 635,251 6,310 729,057 23,365 6,310 15,350 23,365 10,000 15,350 3,749 10,000 787,831 3,749 787,831 0 0 969 7,979 969 79,036 7,979 (4,098) 79,036 340 (4,098) 84,226 340 84,226 $872,057 Total liabilities and stockholders’ equity $922,953 $872,057 2014 ANNUAL REPORT See Notes to Consolidated Financial Statements. 7 See Notes to Consolidated Financial Statements. FORESIGHT A S S E T S CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF INCOME (000s omitted except share data) (000s omitted except share data) (000s omitted except share data) For the years ended December 31, For the years ended December 31, For the years ended December 31, Interest and dividend income: Interest and dividend income: Interest and dividend income: Loans, including fees Loans, including fees Loans, including fees Debt securities: Debt securities: Debt securities: Taxable Taxable Cash and due from banks Taxable Tax-exempt Tax-exempt Interest-bearing deposits in banks Tax-exempt Interest-bearing deposits in banks and other Interest-bearing deposits in banks and other Federal funds sold Interest-bearing deposits in banks and other Federal funds sold Federal funds sold Total cash and cash equivalents Federal funds sold Total interest and dividend income Total interest and dividend income Total interest and dividend income Interest-bearing deposits in banks - term deposits Interest expense: Interest expense: Securities: Interest expense: Deposits Deposits Securities held-to-maturity (HTM) Deposits Federal funds purchased Federal funds purchased Securities available-for-sale (AFS) Federal funds purchased Securities sold under agreements to repurchase Securities sold under agreements to repurchase Non-marketable equity securities, at cost Securities sold under agreements to repurchase FHLB and other borrowings FHLB and other borrowings Loans held for sale FHLB and other borrowings Subordinated debentures Subordinated debentures Loans, net of allowance for loan losses of $14,571 and $14,777, Subordinated debentures Total interest expense Total interest expense respectively Total interest expense Foreclosed assets, net Premises and equipment, net Other assets Net interest and dividend income Net interest and dividend income Net interest and dividend income Provision for loan losses Provision for loan losses Provision for loan losses Total assets Net interest and dividend income, Net interest and dividend income, Net interest and dividend income, after provision for loan losses after provision for loan losses after provision for loan losses LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest income: Noninterest income: Noninterest income: Customer service fees Customer service fees Customer service fees Gain on sales and calls of AFS securities, net Gain on sales and calls of AFS securities, net Gain on sales and calls of AFS securities, net Gain on sales of loans, net Gain on sales of loans, net Gain on sales of loans, net Loan servicing fees, net Loan servicing fees, net Loan servicing fees, net Other Other Other Total noninterest income Total noninterest income Total noninterest income Liabilities: Deposits: Noninterest-bearing Interest-bearing Total deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank (FHLB) advances and other borrowings Noninterest expenses: Noninterest expenses: Subordinated debentures Noninterest expenses: Salaries and employee benefits Salaries and employee benefits Accrued interest payable and other liabilities Salaries and employee benefits Occupancy expense of premises, net Occupancy expense of premises, net Total liabilities Occupancy expense of premises, net Outside services Outside services Outside services Data processing Data processing Stockholders’ equity: Data processing Foreclosed assets, net Foreclosed assets, net Preferred stock (no par value; authorized 500,000 shares) Foreclosed assets, net Other Other Common stock ($.25 par value; authorized 5,000,000 shares; Other Total noninterest expenses Total noninterest expenses 3,898,449 and 3,879,357 shares issued, respectively) Total noninterest expenses Additional paid-in capital Retained earnings Treasury stock, at cost (273,619 and 209,657 shares, respectively) Accumulated other comprehensive income Total stockholders’ equity Income before income taxes Income before income taxes Income before income taxes Income tax expense Income tax expense Income tax expense Net income Net income Net income Total liabilities and stockholders’ equity Earnings per common share: Earnings per common share: Earnings per common share: Basic Basic Basic Diluted Diluted Diluted CONSOLIDATED BALANCE SHEETS (000s omitted except share data) December 31, 2014 2014 2014 $29,495 $29,495 $29,495 3,076 3,076 3,076 3,512 3,512 3,512 104 104 104 6 6 6 36,193 36,193 36,193 5,136 5,136 5,136 14 14 14 70 70 70 188 188 188 600 600 600 6,008 6,008 6,008 30,185 30,185 30,185 2,621 2,621 2,621 27,564 27,564 27,564 1,150 1,150 1,150 125 125 125 1,118 1,118 1,118 655 655 655 2,364 2,364 2,364 5,412 5,412 5,412 12,651 12,651 12,651 2,463 2,463 2,463 261 261 261 417 417 417 487 487 487 4,992 4,992 4,992 21,271 21,271 21,271 11,705 11,705 11,705 3,445 3,445 3,445 $8,260 $8,260 $8,260 2013 2013 2013 $29,245 $29,245 2014 $29,245 2,945 2,945 $20,717 2,945 3,736 3,736 8,336 3,736 83 83 939 83 13 13 29,992 13 36,022 36,022 36,022 5,197 1,396 214,393 2,243 1,439 5,751 5,751 5,751 9 9 9 81 81 81 203 203 203 600 600 600 6,644 6,644 6,644 640,795 1,622 9,500 16,376 29,378 29,378 29,378 4,777 4,777 4,777 $922,953 24,601 24,601 24,601 1,166 1,166 1,166 156 156 156 1,535 1,535 1,535 751 751 751 2,379 2,379 2,379 5,987 5,987 5,987 $97,745 667,591 765,336 3,036 23,506 23,100 10,000 3,990 828,968 12,508 12,508 12,508 2,391 2,391 2,391 212 212 212 414 414 414 622 622 0 622 5,243 5,243 5,243 21,390 21,390 975 21,390 8,260 86,570 (5,312) 3,492 93,985 9,198 9,198 9,198 2,360 2,360 2,360 $6,838 $6,838 $6,838 $922,953 $1.87 $1.87 $1.87 $1.84 $1.84 $1.84 2012 2012 2012 $31,487 2013 $31,487 $31,487 3,472 3,472 $16,787 3,472 3,900 3,900 911 3,900 57 57 0 57 11 11 17,698 11 38,927 38,927 38,927 4,963 7,231 7,231 1,584 7,231 3 3 216,065 3 128 128 2,220 128 245 245 1,521 245 189 189 189 7,796 7,796 595,718 7,796 3,265 9,746 19,277 31,131 31,131 31,131 13,444 13,444 13,444 $872,057 17,687 17,687 17,687 1,275 1,275 1,275 191 191 $93,806 191 1,500 1,500 635,251 1,500 832 832 729,057 832 2,360 2,360 6,310 2,360 6,158 6,158 23,365 6,158 15,350 10,000 11,963 11,963 3,749 11,963 2,152 2,152 787,831 2,152 235 235 235 297 297 297 954 954 954 4,818 4,818 4,818 20,419 20,419 20,419 0 969 7,979 3,426 3,426 79,036 3,426 (4,098) (20) (20) 340 (20) 84,226 $3,446 $3,446 $3,446 $872,057 $0.60 $0.60 $0.60 $0.60 $0.60 $0.60 2014 ANNUAL REPORT 8 $2.27 $2.27 $2.27 $2.24 $2.24 $2.24 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. FORESIGHT CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (000s omitted except share data) For the years ended December 31, Net income Other comprehensive income: Unrealized holding (loss) gains on securities available for sale, net of tax of $(2,052), $3,949 & $(494), respectively Reclassification adjustments for net securities gains recognized in income, net of tax of $50, $62 & $76, respectively Total other comprehensive income (loss) 2014 $8,260 2013 2012 $6,838 $3,446 3,228 (5,625) 734 (75) (94) 3,153 (5,719) (115) 619 Total comprehensive income $11,413 $1,119 $4,065 2014 ANNUAL REPORT 9 See Notes to Consolidated Financial Statements. FORESIGHT CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (000s omitted except share data) For the years ended December 31, CONSOLIDATED BALANCE SHEETS (000s omitted except share data) December 31, A S S E T S Cash and due from banks Interest-bearing deposits in banks Federal funds sold Total cash and cash equivalents Balance, January 1, 2012 Preferred Common Stock Stock Additional Paid-In Capital Retained Earnings $15,394 $966 $7,666 $71,193 Accumulated Other Comprehensive Income 2014 $20,717 8,336 939 29,992 Treasury Stock ($4,060) Net income Other comprehensive income Redemption of preferred stock Interest-bearing deposits in banks - term deposits 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 $14,571 and $14,777, respectively Foreclosed assets, net Cash dividends on preferred stock Premises and equipment, net Other assets Accretion of preferred stock warrants Cash dividends ($.16 per share) (15,750) 356 Stock-based compensation expense 3,446 (586) (356) (877) 97 5,197 1,396 214,393 2,243 1,439 640,795 1,622 9,500 16,376 $5,439 619 2013 $16,787 911 Total 0 17,698 $96,598 4,963 3,446 619 1,584 216,065 (15,750) 2,220 1,521 (586) 0 595,718 3,265 9,746 19,277 (877) 97 Total assets Balance, December 31, 2012 0 966 7,763 72,820 $922,953 (4,060) 6,058 $872,057 83,547 Net income LIABILITIES AND STOCKHOLDERS' EQUITY 6,838 Other comprehensive income (loss) Purchase of treasury stock (2,000 shares) Liabilities: Deposits: Cash dividends ($.17 per share) Noninterest-bearing Interest-bearing Total deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank (FHLB) advances and other borrowings Stock-based compensation expense Subordinated debentures Balance, December 31, 2013 0 Accrued interest payable and other liabilities Total liabilities Stock options exercised 969 3 121 95 7,979 Net income Cash dividends ($.20 per share) Stockholders’ equity: Other comprehensive income Preferred stock (no par value; authorized 500,000 shares) Common stock ($.25 par value; authorized 5,000,000 shares; 3,898,449 and 3,879,357 shares issued, respectively) Additional paid-in capital Retained earnings Stock options exercised Treasury stock, at cost (273,619 and 209,657 shares, respectively) Accumulated other comprehensive income Total stockholders’ equity Purchase of treasury stock (63,962 shares) Stock-based compensation expense 6 190 91 (621) 79,037 8,260 (727) 6,838 (5,719) (5,719) $97,745 667,591 (38) 765,336 3,036 23,506 23,100 10,000 3,990 828,968 (4,098) 339 (621) (38) 124 95 $93,806 635,251 729,057 6,310 23,365 15,350 10,000 3,749 787,831 84,226 8,260 3,153 0 3,153 0 (1,214) 975 8,260 86,570 (5,312) 3,492 93,985 (727) 969 7,979 (1,214) 79,036 (4,098) 340 84,226 196 91 Balance, December 31, 2014 $0 Total liabilities and stockholders’ equity $975 $8,260 $86,570 ($5,312) $922,953 $3,492 $93,985 $872,057 10 2014 ANNUAL REPORT See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. FORESIGHT CONSOLIDATED BALANCE SHEETS (000s omitted except share data) December 31, CONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted except share data) For the years ended December 31, 2013 2014 2012 2014 2013 A S S E T S CASH FLOWS FROM OPERATING ACTIVITIES: Cash and due from banks Net income Interest-bearing deposits in banks Adjustments to reconcile net earnings to net cash Federal funds sold provided by operating activities: Total cash and cash equivalents Provision for loan losses Provision for foreclosed asset losses Depreciation Interest-bearing deposits in banks - term deposits Net amortization of securities Securities: Deferred income tax benefit Securities held-to-maturity (HTM) Net gain on the sales and calls of AFS securities Securities available-for-sale (AFS) Net (gain) loss on the sales of foreclosed assets Non-marketable equity securities, at cost Stock-based compensation (income) expense Loans held for sale Net change in: Loans, net of allowance for loan losses of $14,571 and $14,777, Servicing rights respectively Loans held for sale Foreclosed assets, net Other assets Premises and equipment, net Accrued expenses and other liabilities Other assets Net cash provided by operating activities Total assets LIABILITIES AND STOCKHOLDERS' EQUITY CASH FLOWS FROM INVESTING ACTIVITIES: Net change in interest-bearing deposits in banks - term deposits Proceeds from sales of AFS securities Proceeds from maturities, calls, and paydowns of HTM securities Liabilities: Proceeds from maturities, calls, and paydowns of AFS securities Deposits: Purchases of AFS securities Noninterest-bearing Purchases of non-marketable equity securities Loan originations and principal collections, net Interest-bearing Proceeds from sales of foreclosed assets Total deposits Purchases of premises and equipment, net Federal funds purchased Net cash used in investing activities Securities sold under agreements to repurchase Federal Home Loan Bank (FHLB) advances and other borrowings CASH FLOWS FROM FINANCING ACTIVITIES: Subordinated debentures Net change in deposits Accrued interest payable and other liabilities Net change is securities sold under agreements to repurchase Total liabilities Cash dividends paid Net change in federal funds purchased Stockholders’ equity: Proceeds from issuance of subordinated debentures Preferred stock (no par value; authorized 500,000 shares) Redemption of preferred stock Common stock ($.25 par value; authorized 5,000,000 shares; Stock options excercised 3,898,449 and 3,879,357 shares issued, respectively) Purchase of treasury stock Additional paid-in capital Proceeds from lines of credit and FHLB advances and other borrowings Retained earnings Payments on lines of credit and FHLB advances and other borrowings Treasury stock, at cost (273,619 and 209,657 shares, respectively) Net cash (used in) provided by financing activities Accumulated other comprehensive income Total stockholders’ equity Net increase (decrease) in cash and cash equivalents $8,260 2,621 490 847 784 101 (125) (205) 91 164 82 510 241 13,861 (234) 14,601 235 33,021 (41,378) (23) (48,871) 2,553 (622) (40,718) 36,279 141 (727) (3,274) 0 0 196 (1,214) 54,250 (46,500) 39,151 12,294 $6,838 $20,717 8,336 939 29,992 4,777 1,158 935 1,303 699 (156) (2,853) 95 5,197 1,396 214,393 2,243 1,439 $3,446 $16,787 911 0 17,698 13,444 744 862 1,242 (1,642) 1,584 (191) 216,065 (207) 2,220 97 1,521 4,963 640,795 1,622 9,500 16,376 33 4,077 1,286 232 18,424 $922,953 (128) 595,718 (3,400) 3,265 812 9,746 (1,226) 19,277 13,853 $872,057 (250) 15,917 190 40,642 (69,702) (36) (5,046) 6,688 (451) (12,048) $97,745 667,591 765,336 3,036 23,506 23,100 10,000 3,990 828,968 0 (7,662) (1,681) (621) 1,196 0 0 124 (38) 32,600 (37,100) (13,182) 975 8,260 86,570 (5,312) 3,492 93,985 (6,806) (3,863) 6,685 359 65,079 (64,034) $93,806 (7) (14,765) 635,251 2,057 729,057 (977) 6,310 (9,466) 23,365 15,350 10,000 3,749 787,831 (1,350) (2,652) (1,463) 1,215 10,000 (15,750) 0 969 0 7,979 17,000 79,036 (11,550) (4,098) (4,550) 340 84,226 (163) 0 Cash and cash equivalents at beginning of year Total liabilities and stockholders’ equity 17,698 $922,953 24,504 $872,057 24,667 Cash and cash equivalents at end of year $29,992 $17,698 $24,504 See Notes to Consolidated Financial Statements. 2014 ANNUAL REPORT See Notes to Consolidated Financial Statements. 11 FORESIGHT CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (000s omitted except share data) For the years ended December 31, A S S E T S CONSOLIDATED BALANCE SHEETS (000s omitted except share data) December 31, Cash and due from banks Interest-bearing deposits in banks Federal funds sold Total cash and cash equivalents SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest-bearing deposits in banks - term deposits Cash paid during the year for: Interest Securities: Securities held-to-maturity (HTM) Securities available-for-sale (AFS) Income taxes Non-marketable equity securities, at cost Loans held for sale Loans, net of allowance for loan losses of $14,571 and $14,777, SUPPLEMENTAL SCHEDULE OF NONCASH AND respectively FINANCING ACTIVITIES: Foreclosed assets, net Foreclosed assets acquired in settlement of loans Premises and equipment, net Other assets 2014 2013 2014 $20,717 8,336 939 29,992 5,197 $6,042 $2,302 1,396 214,393 2,243 1,439 $1,173 640,795 1,622 9,500 16,376 2013 $16,787 911 2012 0 17,698 4,963 $6,826 $8,093 $1,935 $1,489 $2,009 1,584 216,065 2,220 1,521 $3,367 595,718 3,265 9,746 19,277 Total assets $922,953 $872,057 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing Interest-bearing Total deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank (FHLB) advances and other borrowings Subordinated debentures Accrued interest payable and other liabilities Total liabilities Stockholders’ equity: Preferred stock (no par value; authorized 500,000 shares) Common stock ($.25 par value; authorized 5,000,000 shares; 3,898,449 and 3,879,357 shares issued, respectively) Additional paid-in capital Retained earnings Treasury stock, at cost (273,619 and 209,657 shares, respectively) Accumulated other comprehensive income Total stockholders’ equity $97,745 667,591 765,336 3,036 23,506 23,100 10,000 3,990 828,968 0 975 8,260 86,570 (5,312) 3,492 93,985 $93,806 635,251 729,057 6,310 23,365 15,350 10,000 3,749 787,831 0 969 7,979 79,036 (4,098) 340 84,226 Total liabilities and stockholders’ equity $922,953 $872,057 12 2014 ANNUAL REPORT See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 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, Seward, Kankakee, Loves Park, and Machesney Park, 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 February 27, 2015, 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, and 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 interest-bearing deposits in banks, loans, deposits, federal funds purchased, and securities sold under agreements to repurchase are reported net. (f) Interest-bearing Deposits in Banks Interest-bearing deposits in banks are comprised of liquid non-maturing deposits in banks but also include some balances in time deposits in banks with the remaining maturity being the determining factor for inclusion in cash and cash equivalents with the non-maturing interest bearing deposits. Interest-bearing deposits in banks are carried at cost. 2014 ANNUAL REPORT 13 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) (g) Securities (g) Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as held 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 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 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 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 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 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. specific-identification method. (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 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 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 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 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 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 Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in the aggregate. 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 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 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 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 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 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 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 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 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. 2014 ANNUAL REPORT 14 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 is 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- 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 usually approximate direct loan origination costs and are generally recognized as Loan origination fees usually approximate direct loan origination costs and are generally recognized as income upon receipt. income 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 general 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 qualitative 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 actual loss 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 economic 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 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 which the loan agreement. Loans for which the terms have been modified to provide a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. collateral value, and the probability of collecting scheduled principal and interest payments when due. Impaired loans are measured on an individual basis based on the present value of expected future cash Impaired loans are measured on an individual basis based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable 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 dependent. The 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 loan losses. amount of impairment, if any, and subsequent changes are included in the allowance for loan losses. Troubled debt restructurings are measured at the present value of estimated future cash flows using the 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 collateral loan’s effective rate at inception, unless collateral dependent, then reported using the fair value of collateral method, less estimated costs to sell. method, less estimated costs to sell. For impaired loans, accrual of interest is discontinued when management believes, after considering For impaired loans, accrual of interest is discontinued when management believes, after considering collection efforts and other factors, the borrower’s financial condition is such that the collection of interest collection efforts and other factors, the borrower’s financial condition is such that the collection of interest is doubtful. Cash collections on impaired loans are credited to the loan receivable balance, and no interest is doubtful. Cash collections on impaired loans are credited to the loan receivable balance, and no interest income is recognized on those loans until the principal balance has been collected. income is recognized on those loans until the principal balance has been collected. 2014 ANNUAL REPORT 15 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 Generally Accepted 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. 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 offset 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, accordingly, 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. Revenues and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. 16 2014 ANNUAL REPORT 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, net of taxes. Such items, along with net income, are components of comprehensive income. 2014 ANNUAL REPORT 17 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. (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 2012 and 2013 consolidated financial statements have been reclassified to conform to the 2014 presentation. 18 2014 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (aa) Adoption of New Accounting Standard In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. When adopted, this guidance will require the Company to provide information about the amounts reclassified out of accumulated other comprehensive income by component, including the respective line items of net income significantly affected by those reclassifications. This new accounting standard is effective for reporting periods beginning after December 15, 2013. The adoption of this standard required additional disclosures regarding amounts reclassified out of accumulated other comprehensive income. Newly Issued Not Yet Effective Accounting Standards In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The primary purpose of this new guidance is to clarify, for residential mortgage loans, when an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a residential mortgage loan. This new accounting standard is effective for financial statements issued for annual periods beginning after December 15, 2014. The Company does not believe this will have a significant impact on its financial statements. In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-02, Accounting for Goodwill. This guidance will allow the Company to elect an accounting alternative to amortize goodwill on a straight-line basis over 10 years, or less than 10 years if another useful life is more appropriate. This new accounting standard is effective for financial statements issued for annual periods beginning after December 15, 2014. The Company is still evaluating whether it will elect this accounting alternative to goodwill and, if so, the impact it will have on its financial statements. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The objective of this new standard is to provide a common revenue standard for all entities that enter into contracts with customers to transfer goods or services or contracts to transfer nonfinancial assets. This new accounting standard is effective for financial statements issued for annual reporting periods beginning after December 15, 2016. The Company is evaluating what impact this new standard will have on its financial statements. 2014 ANNUAL REPORT 19 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (aa) Newly Issued Not Yet Effective Accounting Standards (continued) In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860):"Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." This Update aligns the accounting for repurchase-to- maturity transactions and repurchase agreements executed as repurchase financings with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. The Update requires a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The Update also requires expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The Update is effective for interim or annual period beginning after December 15, 2014. All of the Company's repurchase agreements are typical in nature (i.e., not repurchase-to-maturity transactions or repurchase agreements executed as a repurchase financing) and are accounted for as secured borrowings. As such, the adoption of ASU No. 2014-11 is not expected to have a material impact on the Company's consolidated financial statements. (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, 2014 and 2013 was approximately $481 and $899, 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. 20 2014 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 2014 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal $1,396 $60 ($0) $1,456 Held-to-Maturity 2013 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal $1,584 $41 ($22) $1,603 Available-for-Sale 2014 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses U.S. Government sponsored entities and agencies State and municipal Mortgage-backed – residential $40,279 94,488 73,777 $369 4,834 1,582 ($526) (189) (221) Fair Value $40,122 99,133 75,138 $208,544 $6,785 ($936) $214,393 Available-for-Sale 2013 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses U.S. Government sponsored entities and agencies State and municipal Mortgage-backed - residential $45,565 95,008 74,924 $239 3,169 1,329 ($2,188) (952) (1,029) Fair Value $43,616 97,225 75,224 $215,497 $4,737 ($4,169) $216,065 For the years ended December 31, 2014, 2013 and 2012, proceeds from sales of available-for-sale securities amounted to $14,601, $15,917 and $6,685, 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 2014 $140 ($15) 2013 2012 $361 ($205) $191 $0 Securities with carrying amounts of approximately $112,371 and $91,924 at December 31, 2014 and 2013, 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, 2014 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. 2014 ANNUAL REPORT 21 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (3) Securities (continued) Held-to-Maturity Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Available-for-Sale Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Mortgage-backed - residential Amortized Cost $257 89 407 643 Fair Value $260 98 433 665 $1,396 $1,456 Amortized Cost Fair Value $6,242 17,546 48,770 62,209 134,767 73,777 $6,339 17,915 50,162 64,839 139,255 75,138 $208,544 $214,393 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, 2014 and 2013: 2014 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 entities and agencies State and municipal Mortgage-backed - residential $5,454 5,358 5,547 $48 52 29 Total temporarily impaired $16,359 $129 13 19 8 40 $18,777 4,214 14,396 $37,387 $478 137 192 $807 55 13 26 94 There were no held-to-maturity securities in an unrealized loss position as of December 31, 2014. 22 2014 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (3) Securities (continued) 2013 Held-to-Maturity Less than 12 Months Gross Unrealized Loss No. of Securities Fair Value 12 Months or More Gross Unrealized Loss No. of Securities Fair Value State and municipal Total temporarily impaired $429 $429 $22 $22 2 2 $0 $0 $0 $0 0 0 2013 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 entities and agencies State and municipal Mortgage-backed - residential $30,520 14,905 37,632 $1,612 716 1,001 79 56 65 $4,523 1,189 1,731 Total temporarily impaired $83,057 $3,329 200 $7,443 $577 236 27 $840 16 4 2 22 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 Residential real estate Agricultural real estate Commercial: Commercial and industrial Agricultural production Consumer and other Allowance for loan losses Totals 2014 ANNUAL REPORT 2014 2013 $216,722 105,426 85,839 160,600 73,703 13,076 655,366 (14,571) $182,993 109,209 79,076 158,945 68,124 12,148 610,495 (14,777) $640,795 $595,718 23 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) 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 Real Estate Commercial Consumer Total 2014 $10,818 1,702 145 12,665 (2,434) $3,858 893 105 4,856 (619) $101 26 18 145 (42) $14,777 2,621 268 17,666 (3,095) $10,231 $4,237 $103 $14,571 Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment $4,089 6,142 $993 3,244 $23 80 $5,105 9,466 Totals $10,231 $4,237 $103 $14,571 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 Real Estate Commercial Consumer Total 2013 $10,290 3,386 117 13,793 (2,975) $4,547 1,346 146 6,039 (2,181) $111 45 16 172 (71) $14,948 4,777 279 20,004 (5,227) $10,818 $3,858 $101 $14,777 Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment $5,205 5,613 $863 2,995 $15 86 $6,083 8,694 Totals $10,818 $3,858 $101 $14,777 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 24 Real Estate Commercial Consumer Total 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 2014 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (000s omitted except share data) (4) Loans (continued) (4) Loans (continued) Detailed analysis of loans evaluated for impairment by portfolio segment for the year ended December 31 Detailed analysis of loans evaluated for impairment by portfolio segment for the year ended December 31 follows: follows: Loans: Loans: Individually evaluated for impairment Individually evaluated for impairment Collectively evaluated for impairment Collectively evaluated for impairment Totals Totals Loans: Loans: Individually evaluated for impairment Individually evaluated for impairment Collectively evaluated for impairment Collectively evaluated for impairment Totals Totals Real Estate Real Estate 2014 2014 Commercial Commercial Consumer Consumer Total Total $25,593 $25,593 382,394 382,394 $407,987 $407,987 $5,009 $5,009 229,294 229,294 $234,303 $234,303 $107 $107 12,969 12,969 $13,076 $13,076 $30,709 $30,709 624,657 624,657 $655,366 $655,366 Real Estate Real Estate 2013 2013 Commercial Commercial Consumer Consumer Total Total $27,883 $27,883 343,395 343,395 $371,278 $371,278 $5,440 $5,440 221,629 221,629 $227,069 $227,069 $119 $119 12,029 12,029 $12,148 $12,148 $33,442 $33,442 577,053 577,053 $610,495 $610,495 Detailed information regarding impaired loans by class of loan as of December 31 follows: Detailed information regarding impaired loans by class of loan as of December 31 follows: Recorded Recorded Investment Investment Principal Principal Balance Balance 2014 2014 Related Related Allowance Allowance Average Average Investment Investment Interest Interest Recognized Recognized Loans with no related Loans with no related allowance for loan losses: allowance for loan losses: Real estate: Real estate: Commercial real estate Commercial real estate Residential real estate Residential real estate Agricultural real estate Agricultural real estate Commercial Commercial Commercial & industrial Commercial & industrial Agricultural production Agricultural production Consumer and other Consumer and other Totals Totals Loans with an allowance Loans with an allowance for loan losses: for loan losses: Real estate: Real estate: Commercial real estate Commercial real estate Residential real estate Residential real estate Agricultural real estate Agricultural real estate Commercial Commercial Commercial & industrial Commercial & industrial Agricultural production Agricultural production Consumer and other Consumer and other Totals Totals Grand Totals Grand Totals 2014 ANNUAL REPORT $4,518 $4,518 3,335 3,335 602 602 3,060 3,060 356 356 50 50 11,921 11,921 13,141 13,141 3,997 3,997 0 0 1,552 1,552 41 41 57 57 18,788 18,788 $30,709 $30,709 $4,699 $4,699 3,495 3,495 602 602 3,076 3,076 356 356 50 50 12,278 12,278 13,142 13,142 4,195 4,195 0 0 1,581 1,581 41 41 58 58 19,017 19,017 $31,295 $31,295 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 2,713 2,713 1,376 1,376 0 0 975 975 18 18 23 23 5,105 5,105 $5,105 $5,105 $5,035 $5,035 3,432 3,432 605 605 3,102 3,102 390 390 56 56 12,620 12,620 13,255 13,255 4,078 4,078 0 0 1,733 1,733 44 44 64 64 19,174 19,174 $31,793 $31,793 $192 $192 91 91 11 11 115 115 21 21 3 3 433 433 539 539 114 114 0 0 70 70 0 0 4 4 727 727 $1,161 $1,161 25 FORESIGHT (4) Loans (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) Recorded Investment Principal Balance 2013 Related Allowance Average Investment Interest Recognized 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 $12,439 2,566 662 3,815 0 89 $14,304 3,420 662 3,985 0 90 Total 19,571 22,461 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 5,897 6,319 0 1,578 47 30 5,904 6,529 0 1,580 47 30 N/A N/A N/A N/A N/A N/A 2,897 2,599 0 546 26 15 $12,904 2,834 659 3,915 0 112 20,424 5,895 6,425 0 1,696 50 33 $586 75 31 93 0 6 791 329 185 0 75 0 2 591 13,871 14,090 6,083 14,099 $33,442 $36,551 $6,083 $34,523 $1,382 26 2014 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) 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 Total 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 Recorded Investment Principal Balance 2012 Related Allowance Average Investment Interest Recognized $1,491 3,826 167 4,092 0 159 9,735 9,175 6,459 0 2,401 354 37 $1,602 5,062 167 4,241 0 220 11,292 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 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 collectability 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 collectability 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 collectability 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 collectability of the contractual loan payments is unlikely. 2014 ANNUAL REPORT 27 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 Pass Special Mention Substandard Doubtful Totals 2014 $201,266 95,875 84,601 151,092 72,749 12,971 $877 3,638 636 5,723 557 0 $14,579 5,913 602 3,785 356 105 $41 $216,722 105,426 85,839 160,600 73,703 13,076 Total $618,554 $11,431 $25,340 $41 $655,366 Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other Pass Special Mention Substandard Doubtful Totals 2013 $161,622 95,867 77,733 151,405 67,979 12,003 $3,503 5,956 681 4,561 98 27 $17,868 7,386 662 2,662 118 $317 47 $182,993 109,209 79,076 158,945 68,124 12,148 Total $566,609 $14,826 $28,696 $364 $610,495 Loan aging information by class of loan at December 31 follows: As of December 31, 2014 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 $1,538 320 50 89 $1,859 1,866 437 777 7 $1,859 3,404 437 1,097 50 96 $6,943 Total $1,997 $4,946 28 2014 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) As of December 31, 2014 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 $1,859 3,404 437 1,097 50 96 $209,193 107,692 85,402 $211,052 111,096 85,839 159,503 73,653 13,157 160,600 73,703 13,076 $121 1 7 Total $6,943 $648,600 $655,366 $129 $2,703 3,775 437 1,536 41 22 $8,514 As of December 31, 2013 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 $3,552 3,596 461 18 211 $2,044 4,493 221 560 8 $5,596 8,089 221 1,021 18 219 Total $7,838 $7,326 $15,164 As of December 31, 2013 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 $5,596 8,089 221 1,021 18 219 $177,397 101,323 78,855 $182,993 109,412 79,076 157,924 68,305 11,929 158,945 68,323 12,148 Total $15,164 $595,733 $610,897 $419 168 120 6 $713 $4,492 5,831 53 1,373 47 4 $11,800 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. 2014 ANNUAL REPORT 29 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) 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: Real Estate: Commercial real estate Commercial Commercial & industrial Total Real Estate: Commercial real estate Commercial Commercial & industrial Total Number of Loans Pre-Modification Investment Post-Modification Investment 2014 3 2 5 $2,551 232 $2,783 2013 $1,833 232 $2,065 Number of Loans Pre-Modification Investment Post-Modification Investment 8 4 12 $8,832 491 $9,323 $9,207 491 $9,698 The following table summarizes troubled debt restructurings that defaulted at December 31, within 12 months of their modification date: Real Estate: Commercial real estate Total Real Estate: Commercial real estate Residential real estate Total As of December 31, 2014 Number of Loans Recorded Investment 3 3 $7,576 $7,576 As of December 31, 2013 Number of Loans Recorded Investment 2 2 4 $738 776 $1,514 30 2014 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (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, 2014 and 2013, were approximately $316,755 and $311,845, respectively. Custodial escrow balances maintained in conjunction with serviced loans were approximately $3,055 and $2,861 at December 31, 2014 and 2013, respectively. The following summarizes the activity pertaining to mortgage servicing rights for the years ended December 31: Balance at beginning of year Mortgage servicing rights capitalized Mortgage servicing rights amortized Balance at end of year 2014 $1,615 404 (568) $1,451 2013 $1,648 643 (676) $1,615 2012 $1,521 940 (813) $1,648 The approximate fair values of the mortgage servicing rights were $2,627 and $2,449 as of December 31, 2014 and 2013. (6) Mortgage Banking Loan Commitments The Company enters into commitments to fund residential mortgage loans (interest rate locks) at specified times in the future, with the intention that these loans will be subsequently sold to third-party investors. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60-days after inception of the rate lock. It is the Company’s practice to enter into mandatory delivery forward commitments for the future delivery of residential mortgage loans to third-party investors when an interest rate lock commitment is granted. These mandatory delivery forward commitments bind the Company to deliver a residential mortgage loan to a third-party investor even if the underlying loan never funds. As of December 31, 2014 and 2013, the Company had approximately $1,221 and $538 in interest rate lock commitments outstanding. As of December 31, 2014 and 2013, the Company had approximately $2,442 and $2,293 in mandatory delivery forward commitments outstanding. These outstanding mortgage loan commitments are considered to be derivatives. The approximate fair values associated with these derivatives were considered to be immaterial as of December 31, 2014 and 2013. (7) Allowance for Losses on Foreclosed Assets Foreclosed assets are presented in the balance sheets net of an allowance for losses. Activity in the allowance for losses on foreclosed assets for the years ended December 31, was as follows: Balance at beginning of year Provision for losses Write-downs Reductions from sales Recoveries Balance at end of year 2014 $1,892 490 0 (435) 0 $1,947 2013 $3,711 807 0 (2,626) 0 $1,892 2012 $3,320 744 0 (353) 0 $3,711 2014 ANNUAL REPORT 31 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 2014 2013 $2,074 11,289 10,395 23,758 14,258 $9,500 $2,065 11,146 9,967 23,178 13,432 $9,746 Depreciation expense for the years ended December 31, 2014, 2013 and 2012 amounted to $847, $935 and $862, 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 accumulated amortization Net deferred tax assets Other 2014 2013 $5,455 5,369 1,451 3,253 848 $5,282 4,793 1,615 5,480 2,107 $16,376 $19,277 (10) Time Deposits The aggregate amount of time deposits with minimum a denomination of $250 was approximately $37,745 and $22,735 at December 31, 2014 and 2013, respectively. At December 31, 2014, the scheduled maturities of time deposits are as follows: 2015 2016 2017 2018 2019 and thereafter $133,481 122,992 58,117 29,870 24,355 $368,815 32 2014 ANNUAL REPORT 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. (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 $241, $249, and $215, for 2014, 2013, and 2012, respectively. Each plan participant elects how the employer contributions are invested. Participants choose between purchasing the Company’s common stock or 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 $9,234 and $9,148 as of December 31, 2014 and 2013, 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 $825, $854, and $875 at December 31, 2014, 2013, and 2012, respectively. Salary-continuation expenses were $46, $42, and $41 in 2014, 2013, and 2012, 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 2014 $2,302 1,042 3,344 (131) 232 101 $1,035 626 1,661 524 175 699 Total income tax expense $3,445 $2,360 $992 630 1,622 (1,270) (372) (1,642) ($20) 2013 2012 2014 ANNUAL REPORT 33 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: 2014 2013 2012 % of Pretax Earnings % of Pretax Earnings % of Pretax Earnings Amount Amount Amount $3,980 34.0% $3,127 34.0% $1,165 34.0% (1,257) (73) (10.7%) (0.6%) (1,339) (59) (14.6%) (0.6%) (1,413) (65) (41.2%) (1.9%) 841 (46) 7.2% (0.4%) 529 102 5.8% 1.1% 170 123 4.9% 3.6% 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 $3,445 29.5% $2,360 25.7% ($20) (.6%) 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, 2014 and 2013 are summarized as follows: Deferred tax assets: Allowance for loan losses Allowance for losses on foreclosed assets Alternative minimum tax Deferred compensation and other Total deferred tax assets Deferred tax liabilities: FHLB stock dividend Available-for-sale securities Depreciation Mortgage servicing rights and other Total deferred tax liabilities Net deferred tax assets 2014 2013 $5,700 831 202 397 7,130 129 2,356 794 598 3,877 $3,253 $5,763 660 202 656 7,281 129 227 800 645 1,801 $5,480 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 2012. 34 2014 ANNUAL REPORT 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 $21,560 and $20,625 at December 31, 2014 and 2013, respectively. Activity for related party loans for the year ended December 31, 2014 is as follows: Balance at beginning of year New credits Participated outside the Company Repayments Balance at end of year 2014 $20,625 10,025 (1,475) (7,615) $21,560 Deposit accounts from related parties totaled approximately $10,954 and $10,074 at December 31, 2014 and 2013, 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 2014 $162,142 503 219 $162,864 2013 $142,503 377 394 $143,274 2014 ANNUAL REPORT 35 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (15) Financial Instruments with Off-Balance-Sheet Risk and Concentrations (continued) Financial instruments with off-balance-sheet risk (continued): Commitments to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Banks evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, crops, livestock, property and equipment, residential real estate, and income-producing commercial properties. Standby, performance and commercial letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. They are considered financial guarantees under FASB guidance. The fair value of these financial guarantees is considered immaterial. Concentration of credit risk: The Company and its subsidiary banks provide several types of loans to customers including real estate, agricultural, commercial, and installment loans. The largest component of loans is secured by residential real estate, commercial real estate, or other interest in real property. Lending activities are conducted with customers in a wide variety of industries as well as with individuals with a wide variety of credit requirements. The Company does not have a concentration of loans in any specific industry. Credit risk, as it relates to the Company’s business activities, tends to be geographically concentrated in that the majority of the customer base lies within the surrounding communities served by its subsidiary banks. (16) Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase amounted to $23,506 and $23,365 at December 31, 2014 and 2013, respectively, and are collateralized by investment securities with fair values of approximately $38,997 and $38,934. The weighted-average interest rates on these agreements were 0.27% and 0.29% at December 31, 2014 and 2013, respectively. Securities sold under agreements to repurchase mature on a daily basis. (17) Federal Home Loan Bank (FHLB) and Federal Reserve Advances Fixed-rate advances with rates ranging from .15% to 2.64% and .15% to 3.16% and weighted average rates of .86% and 1.05% as of December 31, 2014 and 2013, respectively. Interest is payable monthly with principal due at maturity. 2014 2013 $23,100 $15,350 Advances are collateralized by 1-4 family mortgage loans, other qualifying loans and securities. The total amounts of collateral securing FHLB advances were approximately $83,973 and $77,634 as of December 31, 2014 and 2013, respectively. FHLB advances are subject to a prepayment penalty if they are repaid prior to maturity. 36 2014 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (17) Federal Home Loan Bank (FHLB) and Federal Reserve Advances (continued) (17) Federal Home Loan Bank (FHLB) and Federal Reserve Advances (continued) (17) Federal Home Loan Bank (FHLB) and Federal Reserve Advances (continued) 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 Banks participate in the Federal Reserve Bank of Chicago’s Discount Window Lending Program. Primary The primary advance interest rate at December 31, 2014 was 75-basis points. Outstanding advances were $0 at advances generally mature daily and bear interest at a general approved rate in relation to the federal funds rate. The Banks participate in the Federal Reserve Bank of Chicago’s Discount Window Lending Program. Primary December 31, 2014 and 2013. Advances are collateralized by investment securities pledged totaling The primary advance interest rate at December 31, 2014 was 75-basis points. Outstanding advances were $0 at advances generally mature daily and bear interest at a general approved rate in relation to the federal funds rate. approximately $10,622 and $10,791 at December 31, 2014 and 2013, respectively, to the Federal Reserve Bank. December 31, 2014 and 2013. Advances are collateralized by investment securities pledged totaling The primary advance interest rate at December 31, 2014 was 75-basis points. Outstanding advances were $0 at approximately $10,622 and $10,791 at December 31, 2014 and 2013, respectively, to the Federal Reserve Bank. December 31, 2014 and 2013. Advances are collateralized by investment securities pledged totaling At December 31, the scheduled maturities of Federal Home Loan Bank advances and other borrowings are as approximately $10,622 and $10,791 at December 31, 2014 and 2013, respectively, to the Federal Reserve Bank. follows: At December 31, the scheduled maturities of Federal Home Loan Bank advances and other borrowings are as follows: At December 31, the scheduled maturities of Federal Home Loan Bank advances and other borrowings are as follows: 2014 2015 2014 2016 2015 2014 2017 2016 2015 2018 2017 2016 2019 2018 2017 2019 2018 2019 2013 2014 2014 2013 $9,250 2013 3,600 $9,250 1,800 3,600 $9,250 700 1,800 3,600 0 700 1,800 0 0 700 0 0 $15,350 0 $15,350 2014 $0 12,100 $0 6,300 12,100 $0 3,200 6,300 12,100 1,000 3,200 6,300 500 1,000 3,200 500 1,000 $23,100 500 $23,100 $23,100 $15,350 (18) Subordinated Debentures (18) Subordinated Debentures (18) Subordinated Debentures 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 The Company issued $10,000,000 of Subordinated Debentures in the fiscal year ended 2012 that qualify as Tier Subordinated Debentures for capital raising purposes primarily for the redemption of preferred stock as part of 2 regulatory capital (with certain limitations applicable) for the Company. The Company issued the The Company issued $10,000,000 of Subordinated Debentures in the fiscal year ended 2012 that qualify as Tier the Troubled Asset Relief Program. The Debentures mature on August 30, 2019 and the Company may Subordinated Debentures for capital raising purposes primarily for the redemption of preferred stock as part of 2 regulatory capital (with certain limitations applicable) for the Company. The Company issued the redeem some or all of the Subordinated Debentures at any time after the third anniversary of their issuance in the Troubled Asset Relief Program. The Debentures mature on August 30, 2019 and the Company may Subordinated Debentures for capital raising purposes primarily for the redemption of preferred stock as part of accordance with the contract price limitations. The redemption may be subject to approval by the Federal redeem some or all of the Subordinated Debentures at any time after the third anniversary of their issuance in the Troubled Asset Relief Program. The Debentures mature on August 30, 2019 and the Company may Reserve and must be on a pro rata basis amongst all holders. The terms call for interest payments to be made accordance with the contract price limitations. The redemption may be subject to approval by the Federal redeem some or all of the Subordinated Debentures at any time after the third anniversary of their issuance in quarterly in arrears on the last day of March, June, September and December. The annual rate of interest on Reserve and must be on a pro rata basis amongst all holders. The terms call for interest payments to be made accordance with the contract price limitations. The redemption may be subject to approval by the Federal the Subordinated Debentures is 6.00%. The interest payments can be deferred for so long as the Company or a quarterly in arrears on the last day of March, June, September and December. The annual rate of interest on Reserve and must be on a pro rata basis amongst all holders. The terms call for interest payments to be made specific Bank remains subject to any regulatory order limiting or prohibiting the payment of dividends or the Subordinated Debentures is 6.00%. The interest payments can be deferred for so long as the Company or a quarterly in arrears on the last day of March, June, September and December. The annual rate of interest on interest on indebtedness of the Company, including the Debentures. If interest payments are deferred, the specific Bank remains subject to any regulatory order limiting or prohibiting the payment of dividends or the Subordinated Debentures is 6.00%. The interest payments can be deferred for so long as the Company or a interest will accrue until paid. The agreement contains certain restrictive covenants that are effective if the interest on indebtedness of the Company, including the Debentures. If interest payments are deferred, the specific Bank remains subject to any regulatory order limiting or prohibiting the payment of dividends or Company is in default on the debentures. interest will accrue until paid. The agreement contains certain restrictive covenants that are effective if the interest on indebtedness of the Company, including the Debentures. If interest payments are deferred, the Company is in default on the debentures. interest will accrue until paid. The agreement contains certain restrictive covenants that are effective if the Company is in default on the debentures. (19) Fair Value Measurements (19) Fair Value Measurements (19) 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 Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in participants on the measurement date. The standard describes three levels of inputs that may be used to the principal or most advantageous market for the asset or liability in an orderly transaction between market Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in measure fair value: participants on the measurement date. The standard describes three levels of inputs that may be used to the principal or most advantageous market for the asset or liability in an orderly transaction between market measure fair value: participants on the measurement date. The standard describes three levels of inputs that may be used to Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has measure fair value: the ability to access as of the measurement date. 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 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets the ability to access as of the measurement date. or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets corroborated by observable market data. or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets corroborated by observable market data. or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions corroborated by observable market data. that market participants would use in pricing an asset or liability. 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. 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. 2014 ANNUAL REPORT 37 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (19) 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. 38 2014 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (19) 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, 2014 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 Fair Value Measurements at Reporting Date Using (Level 2) (Level 1) (Level 3) Total $214,393 $214,393 $13,683 $1,622 $13,683 $1,622 Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a carrying value of $18,788 with specific reserves of $5,105 as of December 31, 2014. Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, were carried at their fair value of $1,622, which is comprised of the outstanding balance of $3,569, net of an allowance for losses of $1,947 as of December 31, 2014. As of December 31, 2013 Assets measured at fair value on a recurring basis: Assets: Securities available-for-sale Fair Value Measurements at Reporting Date Using (Level 2) (Level 1) (Level 3) Total $216,065 $216,065 Assets measured at fair value on a non-recurring basis: Assets: Collateral-dependent impaired loans Foreclosed assets $7,788 $3,265 $7,788 $3,265 Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a carrying value of $13,871 with specific reserves of $6,083 as of December 31, 2013. Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, were carried at their fair value of $3,265, which is comprised of the outstanding balance of $5,157, net of an allowance for losses of $1,892 as of December 31, 2013. 2014 ANNUAL REPORT 39 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (19) Fair Value Measurements (continued) 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, 2014: Collateral dependent impaired loans, net of specific reserves Foreclosed assets Valuation Technique Unobservable Input Range Sales comparison approach Sales comparison approach Appraised values 10% - 20% Appraised values 10% - 20% FASB guidance requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates may not be realized in immediate settlement of the instrument. Accounting guidance excludes certain financial instruments and certain nonfinancial instruments from its disclosure requirements. These fair value disclosures may not represent the fair value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amounts are reasonable estimates of fair value (Level 1). Interest-bearing deposits in other banks: The carrying amounts are reasonable estimates of fair value (Level 1). Securities: See previous description in this footnote for securities available-for-sale. The fair values of the Company’s securities held-to-maturity are primarily determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). 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 (Level 3). Loans held for sale: The fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices (Level 2). 40 2014 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (19) Fair Value Measurements (continued) Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. For fair value estimates for collateral-dependent impaired loans, see previous description in this footnote (Level 3). 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 (Level 3). 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 (Level 2). 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 (Level 3). 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 (Level 3). Accrued interest: The carrying amounts of accrued interest approximate their fair value (Level 3). 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 (Level 3). The estimated fair values of the Company’s financial instruments as of December 31 are as follows: Financial assets: Cash and cash equivalents Interest-bearing deposits in other banks 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 December 31, 2014 Fair Value Carrying Amount December 31, 2013 Carrying Amount Fair Value $20,717 8,336 215,789 2,243 1,439 640,795 5,369 $20,717 8,336 215,848 2,243 1,439 642,671 5,369 $17,698 4,963 217,649 2,220 1,521 595,718 4,793 $17,698 4,963 217,668 2,220 1,521 597,900 4,793 $765,336 3,036 $769,590 3,036 $729,057 6,310 $732,476 6,310 23,506 23,100 10,000 670 23,511 23,140 10,000 670 23,365 15,350 10,000 704 23,369 15,447 10,000 704 2014 ANNUAL REPORT 41 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (20) Stock-Compensation Plans 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, 2013 and 2012. 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 2014 2013 2012 1.64% 10 29.71% 1.05% N/A N/A N/A N/A N/A N/A N/A N/A For the years ended December 31, 2014, 2013 and 2012, the Company recognized $109, $95 and $97 in compensation expense for stock options, respectively. No tax benefits were recognized for the three year period ended December 31, 2014. As of December 31, 2014, stock-based compensation expense not yet recognized totaled $155, and is expected to be recognized over a weighted-average remaining period of approximately five years. The intrinsic value of options exercised during the years ended December 31, 2014, 2013 and 2012 was $168, $99 and $0, respectively. 42 2014 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (20) 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, 2014: Shares under option, beginning of year Granted during the year Forfeited and expired during the year Exercised during the year Weighted Average Exercise Price $10.29 19.00 10.49 Options 142,057 25,000 0 (19,914) Shares under option, end of year 147,143 $11.74 Options exercisable, end of year 96,627 $10.25 Shares available for grant, end of year 116,738 Weighted Average Remaining Contractual Term Aggregate Intrinsic Value 5.7 9.2 6.0 5.3 $1,202 50 (168) $1,363 $1,039 Non-vested options, December 31, 2013 Granted during the year Vested during the year, net Forfeited or expired during the year Non-vested options, December 31, 2014 Number of Options Weighted Average Fair Value at Grant 51,031 25,000 (25,515) 0 50,516 $2.79 4.88 3.48 0 $4.17 The following table summarizes information about fixed stock options outstanding at December 31, 2014: Exercise Price $10.00 $10.25 $10.50 $19.00 Number Outstanding 19,143 83,000 20,000 25,000 147,143 Remaining Contractual Life (Years) 3.0 5.8 5.6 9.2 Number Exercisable 15,771 64,856 16,000 0 96,627 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. 2014 ANNUAL REPORT 43 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (20) Stock-Compensation Plans (continued) The following table summarizes information regarding unvested restricted stock and shares outstanding at December 31, 2014: Restricted stock, December 31, 2013 Granted during the year Forfeited during the year Vested during the year Restricted stock, December 31, 2014 Unvested Shares Weighted Average Grant Value 0 8,516 (254) 0 8,262 $0 19.00 19.00 0 $19.00 During 2014, total compensation expense of $59 (before tax benefits of $24) was recorded from amortization of restricted shares expected to vest. Future projected compensation expense (before tax benefits) assuming all restricted shares eventually vest to employees would be $78 and $20 for years 2015 and 2016, respectively. (21) Stock Repurchase Program In October 2013 and October 2014, the Company’s Board of Directors authorized a stock repurchase program authorizing an aggregate repurchase of up to 100,000 of common stock at market price, each year. For the years ended December 31, 2014 and 2013, the Company had repurchased 63,962 and 2,000 shares under this program, respectively. The purchase price for the shares of the Company’s stock repurchased is reflected as a reduction to shareholders’ equity. In accordance with accounting guidance, the Company is required to allocate the purchase price of the repurchased shares as (i) a reduction to retained earnings until retained earnings are zero and then as an increase to accumulated deficit and (ii) a reduction of common stock and additional paid-in capital. (22) 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 2014 2013 2012 $8,260 0 0 $8,260 $6,838 0 0 $6,838 $3,446 (877) (356) $2,213 Average number of common shares outstanding Effect of dilutive options 3,638,004 57,420 3,661,934 54,982 3,659,504 28,345 Average number of common shares outstanding used to calculate diluted earnings per common share 3,695,424 3,716,916 3,687,849 44 2014 ANNUAL REPORT FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (23) 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, 2014, that the Company and the Banks meet all capital-adequacy requirements to which they are subject. As of December 31, 2014, the most recent notifications from the Federal Deposit Insurance Corporation (FDIC) categorized all five Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum total risk-based, Tier-I risk-based, and Tier-I leverage ratios as set forth in the table must be maintained. There are no conditions or events occurring since the FDIC notified each Bank which management believes have changed the categories of the Banks. The actual capital amounts and ratios for the Company and Banks as of December 31 are presented in the following tables: Amount In $000s Actual Ratio Minimum Capital Requirement Amount In $000s Ratio Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount In $000s Ratio $107,104 25,135 22,164 15,478 24,899 9,642 $90,351 22,830 20,093 14,107 22,688 8,865 $90,351 22,830 20,093 14,107 22,688 8,865 15.42% 13.72% 13.45% 14.17% 14.29% 15.69% 13.01% 12.46% 12.19% 12.92% 13.02% 14.43% 9.99% 9.25% 9.75% 9.82% 10.30% 10.31% $55,556 14,656 13,182 8,738 13,941 4,916 $27,778 7,328 6,591 4,369 6,971 2,458 $36,182 9,873 8,242 5,749 8,810 3,441 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% N/A $18,320 16,477 10,923 17,427 6,145 N/A $10,992 9,886 6,554 10,456 3,687 N/A $12,342 10,302 7,186 11,013 4,301 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, 2014: 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 2014 ANNUAL REPORT 45 FORESIGHT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (23) Regulatory Matters (continued) As of December 31, 2013: 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 $102,007 24,558 20,843 14,363 23,282 8,993 $83,747 22,379 18,889 13,175 21,089 8,282 $83,747 22,379 18,889 13,175 21,089 8,282 15.59% 14.25% 13.41% 15.19% 13.44% 16.09% 12.80% 12.99% 12.15% 13.93% 12.17% 14.82% 9.62% 9.47% 9.75% 9.38% 9.80% 10.23% $52,340 13,787 12,434 7,566 13,863 4,471 $26,170 6,894 6,217 3,783 6,932 2,235 $34,837 9,455 7,753 5,620 8,611 3,240 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 $17,234 15,543 9,458 17,329 5,588 N/A $10,340 9,326 5,675 10,398 3,353 N/A $11,818 9,691 7,025 10,764 4,050 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% (24) Lease Commitments One of the banks has operating lease commitments on office space in Loves Park, Illinois. The terms of the Perryville lease location requires base lease amounts of approximately $77 per year. The lease expires September 2015 and is renewable up to four additional one year terms. The terms of North Second lease location require base lease amounts of approximately $34 per year. The lease expires September 2020 and is renewable up to two additional five year terms. Rent expense of $92 and $111 was recognized in 2014 and 2013, respectively. In addition, there is an operating lease agreement for bank premises in Winnebago, and Kankakee, Illinois. The Winnebago lease requires payment of approximately $51 per year, expiring November 2015. There is no formal lease for the Kankakee location. The Bank is verbally agreeing to pay $7 for 2015. The minimum lease commitments is $146 for 2015. (25) Subsequent Event In February, 2015, the Company entered into a definitive agreement to acquire 100% of the common shares of State Bank of Herscher. The consummation of the transaction is still contingent upon regulatory approval and is expected to occur in 2015. As part of the terms of the proposed transaction, the acquired bank will become a wholly owned subsidiary of the Company and certain intangible assets and the assets and liabilities of the acquired bank will be adjusted to estimated fair value. The amount of these adjustments has not been determined at this time. 46 2014 ANNUAL REPORT FORESIGHT General Information Foresight Financial Group, Inc. 3106 North Rockton Ave. Rockford, IL 61103 815.847.7500 ph 815.967.6107 fx Email: dcooke@ffgbank.net Directors Registrar, transfer agent and change of address: Computershare Shareholder Services PO Box 30170 College Station, TX 77842-3170 800.368.5948 ph www.computershare.com/investor Foresight common stock is listed on the OTCQB Marketplace under the symbol FGFH For more information, contact Foresight Financial Group, Inc. at the corporate address or visit our website at www.foresightfg.com Foresight Financial Group, Inc. Rockford, IL Lena State Bank Lena, IL State Bank of Davis Davis, IL John Collman Stephen G. Gaddis John Jeschke Fred Kundert Brent Myers Carolyn Sluiter, D.V.M. Robert W. Stenstrom Judd Thruman, J.D. Doug Wagner Northwest Bank of Rockford Rockford, IL Stephen G. Gaddis Charles B. Kullberg Stephen P. McKeever John J. Morrissey, C.P.A. Brent Myers Robert W. Stenstrom Tom Walsh Todd Bussian, O.D. Gordon Dammann, D.D.S. John Jeschke James Moest, D.V.M. Brent Myers Steven Rothschadl Judd Thruman, J.D. Dan Dietmeier John Jeschke Brent Myers Thomas Olsen Carolyn Sluiter, D.V.M. Richard Stenzinger, C.P.A. Judd Thruman, J.D. German-American State Bank German Valley, IL State Bank Freeport, IL Robert Borneman John Collman Robert Ebbesmeyer, D.V.M. Jack Janssen Angela K. Larson James G. Sacia Michael Schirger, J.D. Jeffrey M. Sterling Douglas Cross Mary Hartman Bruce Johnson Dr. Joe Kanosky Fred Kundert Marilyn Smit Brian Stewart Ken Thompson Doug Wagner 2014 ANNUAL REPORT 47 FORESIGHT CONSOLIDATING SCHEDULE 1 - BALANCE SHEET (000s omitted except share data) December 31, 2014 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 Interest-bearing deposits in banks - term deposits 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 $4,052 23 992 45,558 534 155,395 20 983 3,906 $1,569 293 113 1,215 1,371 38,543 313 100,196 23 1,024 1,403 Total assets $211,463 $146,063 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 $20,560 162,282 182,842 2,322 4,500 1,035 $14,299 104,892 119,191 0 7,197 4,500 335 Total liabilities 190,699 131,223 Stockholders’ equity: Preferred stock Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income Total stockholders’ equity 400 2,794 16,899 671 20,764 100 1,582 12,424 734 14,840 Total liabilities and stockholders’ equity $211,463 $146,063 48 2014 ANNUAL REPORT FORESIGHT Northwest Bank State Bank Lena State Bank Foresight Financial Group, Inc. Eliminations Consolidated Total $8,995 6,398 0 1,744 25 48,214 695 1,439 170,792 1,364 4,360 5,082 $4,901 15 826 1,744 51,534 448 161,390 0 1,794 2,615 $1,202 9 0 1,100 30,544 253 52,900 5 484 2,895 $10,557 122 210 855 475 92,075 ($10,559) 1,598 (1,598) (92,075) $20,717 $8,336 939 5,197 1,396 214,393 2,243 1,439 640,795 1,622 9,500 16,376 $249,108 $225,267 $89,392 $104,294 ($102,634) $922,953 $35,377 180,647 216,024 0 2,373 6,000 1,183 $22,183 159,064 181,247 0 13,676 6,100 627 225,580 201,650 1,450 7,199 14,181 698 1,000 4,594 17,094 929 23,528 23,617 $5,507 71,084 76,591 714 260 2,000 501 80,066 500 3,693 4,672 461 9,326 ($181) (10,378) (10,559) (10,559) (3,450) (19,861) (65,270) (3,494) (92,075) $10,000 309 10,309 0 975 8,259 86,570 (5,312) 3,493 93,985 $97,745 667,591 765,336 3,036 23,506 23,100 10,000 3,990 828,968 0 975 8,260 86,570 (5,312) 3,492 93,985 $249,108 $225,267 $89,392 $104,294 ($102,634) $922,953 2014 ANNUAL REPORT 49 FORESIGHT For the year ended December 31, 2014 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 $7,303 $4,308 628 668 3 13 2 8,617 1,441 2 56 1,499 7,118 385 6,733 319 68 698 1,085 2,390 396 197 359 (73) 1,137 4,406 3,412 1,135 759 678 2 24 1 5,772 859 5 43 3 910 4,862 573 4,289 106 1 215 322 963 195 137 148 6 715 2,164 2,447 747 $2,277 $1,700 2014 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 $8,478 $7,276 $2,126 673 700 25 1 9,877 1,254 3 10 39 1,306 8,571 1,000 610 886 20 1 8,793 1,136 3 17 84 1,240 7,553 550 406 580 17 1 3,130 465 1 6 472 2,658 113 7,571 7,003 2,545 4 19 23 0 600 600 (577) 0 (577) ($19) (19) ($19) (19) 0 0 410 8 1,118 655 576 2,767 4,756 1,102 98 375 293 1,823 8,447 1,891 464 208 45 688 941 2,140 315 264 304 16 721 3,760 4,184 1,400 $1,427 $2,784 2014 ANNUAL REPORT 107 3 181 291 704 188 157 75 106 395 1,625 1,211 272 $939 $9,129 ($9,129) 1,480 10,609 1,698 267 38 139 201 2,343 7,689 (573) $8,262 (1,474) (10,603) (630) (844) (1,474) (9,129) ($9,129) $29,495 3,076 3,512 5 99 6 36,193 5,136 14 70 188 600 6,008 30,185 2,621 27,564 1,150 0 125 1,118 655 2,364 5,412 12,651 2,463 261 417 487 4,992 21,271 11,705 3,445 $8,260 51 FORESIGHT Notes ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ ___________________________________________________________________________________________ 52 2014 ANNUAL REPORT FORESIGHT Board of Directors John Collman Stephen G. Gaddis John Jeschke, Chairman Fred Kundert Brent Meyers Carolyn Sluiter Robert W. Stenstrom Judd Thruman Doug Wagner Bank Presidents Mary Hartman State Bank, Freeport Brent Meyers Lena State Bank & State Bank of Davis Jeffrey Sterling German American State Bank Tom Walsh Northwest Bank 2014 ANNUAL REPORT 53 FORESIGHT An “Enterprising” Look to the Future Last year’s annual report cover fea- tured the word, “ E n t e r p r i s i n g . ” With the Great Recession behind us, this word was chosen to illustrate Foresight’s desire to embark on new ventures. We particularly liked the word “Enterprising,” because it is a verb, an action word indicating we are willing to undertake important new projects marked by imagination and initiative and will do so in an energetic fashion. We believe that capitalizing on this expansion opportunity is an investment in our future while staying true to our mission of providing excellent community banking services. This initiative triggered an evaluation by the Board of Directors and Management of Foresight Financial Group of where our company has been successful and where we strive to further succeed with a focus on enriching shareholder value, enhancing product services, and improving efficiency. It became evident that expanding our market footprint would accomplish such ambitions. This objective led us to research the marketplace for State Bank of Hersher 12-31-14 (Unaudited - in millions) 135 127 80 150 - 125 - 100 - 75 - 50 - 25 - 0 - 54 State Bank of Hersher, Hersher, IL State Bank of Hersher, Branch growth and expansion opportunities and ultimately to acquire the State Bank of Herscher*. The State Bank of Herscher was chartered in 1902 by a group of community citizens with a vision to provide services to the local community in a culture where bank employees take the time to know their customers, a principle deeply ingrained with Foresight and its’ affiliate banks. State Bank of Herscher’s board of directors is excited about becoming a member of Foresight Financial Group because of our mission of Community Building through Community Banking. Our acquisition of the State Bank of Herscher will allow for continuous service to the local people, families and businesses, as it has been for over a century. We believe that capitalizing on this expansion opportunity is an investment in our future while staying true to our mission of providing excellent community banking services. Assets Loans Deposit Accounts *Pending regulatory approval 2014 ANNUAL REPORT FORESIGHT The Banks of Foresight LENA FREEPORT DAVIS PECATONICA WINNABAGO SEWARD GERMAN VALLEY MACHESNEY PARK LOVES PARK ROCKFORD KANKAKEE HERSHER I L L I N O I S 2014 ANNUAL REPORT 55 FORESIGHT 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” FORESIGHT FINANCIAL GROUP 2014 Annual Report G N I K N A B Y T I N U M M O C H G U O R H T G N I D L I U B Y T I N U M M O C 3106 NORTH ROCKTON AVENUE • ROCKFORD, ILLINOIS 61103 • www.foresightfg.com • 815.847.7500 

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