Foresight Financial Group, Inc.
Annual Report 2016

Plain-text annual report

30 YEARS 1986 • 2016 2016 Annual Report 3106 North Rockton Avenue • Rockford, Illinois 61103-2839 • www.foresightfg.com • 815.847.7500 Celebrating Thirty Years of Community Building Through Community Banking THE FORESIGHT BANKS Freeport, IL www.foresightfg.com Dear Stockholders, 2016 was a very strong performance year for Foresight Financial Group. We continued our outstanding earnings growth trend along with strong organic growth in deposits and loans. In 2016 Foresight grew loans by 8% and deposit growth exceeded 5%. Core earnings increased 5.5% or $522,000 over 2015. Basic earnings per share excluding the discount purchase of $0.31 per share in 2015 increased $0.14 to $2.73. Book value increased $2.44 per share. These results come from highly motivated employees who are engaged in their communities always looking for ways to improve the customer’s banking experience. We continue to focus on growing our relationships with our current customer base by adding value. Our hands on approach working with our customers continues to build loyalty and leads to over 60% of our loan growth and contributes to strong fee income growth. We continue to hold the largest market share in Stephenson County. Strong growth was also experienced in Winnebago and Kankakee Counties. We look forward to increased growth in the Kankakee market as we bring more innovative products and services to our newest franchise in Herscher, IL. We continue to look forward to the future and the continued success of Foresight Financial Group. We have positioned the company with a strong Board of Directors and management teams at all the subsidiary banks. This along with our strong capital position, we believe we will continue to out- perform our peers over the long term as we have for many years. We remain committed to improving Shareholder value, improving our delivery systems and staying true to our mission statement of “Community Building through Community Banking”. Respectfully, Brent Myers President and CEO 4 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking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” 1986 German American State Bank and State Bank of Davis merge to form Foresight Financial Group; 14 employees – Market Value $.98 per share relative to todays price; total assets $45 million; net income $277,000. 1989 Vale Nortridge named President; corporate office established in Freeport at 223 W. Stephenson Street; company debt of $4.5 million incurred to buy Northwest Bank of Rockford. German American State Bank & State Bank of Davis merge to form Foresight Financial Group 1990 Blunt, Ellis, and Lowe be- comes first market maker for FFG stock; stock split 2 for 1. Market Value $1.20/share 1991 Residential Mortgage Division started by Northwest Bank; Woody Burt named Board Chairman; total assets $123 million; net income $744,000; Market Value $1.20 per share . 1993 Vale Nortridge retires; Stephen Gaddis is hired as President & CEO. State Bank of Davis opens new building on Highway 75 in Davis enabling a TIF district to be formed which fueled growth for many years therafter for the Davis Community. Kemper securities takes over as market maker. Market value $3.44 per share; net income $1,367,000; total assets $142 million. “Community building through community banking.” 1995 Formalized corporate mission statement as “Community Building through Community Banking”. 1996 First step taken in consolidating operations with a common central computer and check processing; moved corporate office to 3106 N. Rockton Ave, Rockford; Completed tenth year in business; 75 employees; total assets $172 million; net income $1,815,000; corporate debt reduced to $1 million; stock split 2 for 1 – Market Value $5.15 per share. 1998 Doug Cross joins FFG to start a new community bank for the Freeport market. 1999 A sale of new FFG common stock raises $5 million to capitalize the State Bank, Freeport, which opened in May in the former branch office of State Bank of Davis and commenced in Freeport. German American State Bank opens a branch in Pecatonica. Initial internet banking product introduced to FFG bank customers. Net income $2,493,000; total assets $287 million; corporate debt -0-; FFG stock listed on the NASDAQ bulletin board under the symbol FGFH – Market Value $10.13 per share. Market Value $10.13/share 2000 The Foresight operations center project is completed, with major upgrading of technology infrastructure to a state of the art mainframe and networking infrastructure. Brent Myers hired as President of State Bank of Davis. Stock split 2 for 1. Future 8,200 square foot headquarters of Foresight Financial Group at 809 Cannell-Puri Court, Winnebago, IL. 6 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking 2001 Completion of 15 years; Lena State Bank acquired in a stock transaction, giving FFG the largest deposit market share in Stephenson County; fully transactional internet banking product made available to all customers. Net income $2,946,000; total assets $449 million. Market Value $12.13 per share. 2003 FFG market value jumps 37.5% to $16.50 per share. Total assets exceed $506 million, led by State Bank, Freeport’s growth to over $90 million in total assets after four years in operation. Stock split 2 for 1 1990, 1996, 2000, 2006 2004 State Bank of Davis is named to the top 20 national elite list for return on equity among the nation’s community banks under $100 million in total assets. Net income exceeds $6 million; Market Value up 16% to $19.12 per share; initial stock buyback program announced. 2005 Cash dividends doubled; Northwest Bank opens new banking office in Machesney Park; German American opens a new banking office in Winnebago; FFG operations center implements digital and image technology, replacing paper check statement delivery. FFG informational website launched at www.foresightfg.com 2006 Completion of 20 years; 200 employees; stock split 2 for 1. Total assets $659 million, net income $6,153,000; FFG stock trades at all time high of $23.25 per share. Market capital value exceeds $85 million; John Jeschke succeeds Ted Ingrassia as Chairman of the Board. FFG takes the number five position in our four county market area deposit market share, while strenghtening the number one position in Stephenson County. 2007 Jeff Sterling promoted to President of German American State Bank suc- ceeding Jim Schneiderman. 2007 marks the beginning of the greatest economic downturn since the Great Depression. 2008 Although Foresight’s financial performance was negatively impacted by adverse economic conditions, profitability and capital strength continued above industry peers. Foresight common stock declined in market value to $7.75 per share. 2010 Tom Walsh succeeds Dick Rosenstiel as President of Northwest Bank. Passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Foresight recognized in US Banker magazine as one of the top 200 community banks for the third time in the past five years. 2011 Foresight celebrates 25 years with over $885 million in assets and an employee base of over 190 staff members. Stock value climbs to $12.10 per share with a 25 year growth in common stock book value per share of over 2000%. Foresight celebrates 25 years! 2012 Foresight successfully places $10 million in subordinated debentures to shareholders and friends of the company which combined with cash reserves, retires over $15 million in TARP capital. This strategy lessens the annual draw to company equity by over $600,000 through eliminating TARP dividends. Northwest Bank of Rockford establishes full service Mortgage Division branch office in Loves Park, IL. 2013 Mary Hartman is promoted to President of State Bank, Freeport, replacing Doug Cross who remains Chairman of the Board. State Bank of Davis opens a Loan Production Office in Kankakee, IL. 2014 Brent Myers is appointed Foresight’s CEO, a position held by Steve Gaddis since 1993. 2015 Foresight expands its geographical footprint through the acquisition of State Bank of Herscher, a $130 million, two branch community bank located in Herscher and Limestone, IL. Randy Chaplinski is named President of the newly acquired State Bank of Herscher. Record income of $10.5 million is reported with total consolidated assets exceeding $1 billion. Market Value $29.75/share Foresight recognized in US Banker magazine as one of the top 200 community banks for the third time in five years. 2016 Foresight acquires a retail center in Winnebago, IL with plans to renovate a portion of the facility to house company headquarters. Market value of Foresight stock increases over 20% closing the year at a market value of $29.75 per share. With 250 employees and 15 locations including a loan production office, Foresight celebrates 30 years of Community Building through Community Banking! 7 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking  Total Assets (1,000,000s) Total Assets (1,000,000s) 123 45 172 172 1135 1135 885 885 659 659 449 449 10 - 10 - 9 - 9 - 8 - 8 - 7 - 7 - 6 - 6 - 5 - 5 - 4 - 4 - 3 - 3 - 2 - 2 - 1 - Net Income (1,000,000s) Net Income (1,000,000s) 9.9 9.9 6.6 6.6 6.2 6.2 2.9 2.9 1.8 1.8 .74 .28 123 1986 1991 1996 2001 2006 2011 2016 45 $ Per Share Book Value 12.31 (Adj for all stock splits) 1986 1991 1996 2001 2006 2011 2016 1986 1991 1996 2001 2006 2011 2016 .74 .28 Legal Loan Limit (1,000,000s) 1986 1991 1996 2001 2006 2011 2016 $ Per Share Book Value 12.31 (Adj for all stock splits) 30.03 30.03 20.70 20.70 14.78 14.78 8.43 5.88 8.43 .98 1.35 5.88 1 - 0 - 0 - 32 - 30 - 32 - 28 - 30 - 26 - 28 - 24 - 26 - 22 - 24 - 20 - 22 - 18 - 20 - 16 - 18 - 14 - 16 - 12 - 14 - 10 - 12 - 8 - 10 - 6 - 8 - 4 - 6 - 2 - 4 - 0 - 2 - 0 - Legal Loan Limit (1,000,000s) 31.6 31.6 21.7 21.7 15.0 15.0 9.0 9.0 3.4 .8 2.0 3.4 .8 2.0 12 - 11 - 12 - 10 - 11 - 9 - 10 - 8 - 9 - 7 - 8 - 6 - 7 - 5 - 6 - 4 - 5 - 3 - 4 - 2 - 3 - 1 - 2 - 0 - 1 - 0 - 32 - 30 - 32 - 28 - 30 - 26 - 28 - 24 - 26 - 22 - 24 - 20 - 22 - 18 - 20 - 16 - 18 - 14 - 16 - 12 - 14 - 10 - 12 - 8 - 10 - 6 - 8 - 4 - 6 - 2 - 4 - 0 - 2 - 0 - 1986 1991 1996 2001 2006 2011 2016 1986 1991 1996 2001 2006 2011 2016 .98 1.35 1986 1991 1996 2001 2006 2011 2016 1986 1991 1996 2001 2006 2011 2016 8 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking Trends in Assets, Deposits & Loans (000’s) Net Income (1,000,000s) 1,200,000 - 1,100,000 - 1,000,000 - 900,000 - 850,000 - 800,000 - 750,000 - 885,405 883,792 872,057 700,000 - 738,068 736,718 729,057 598,984 596,938 595,718 1,135,478 1,076,551 922,953 913,250 961,485 766,481 708,271 765,336 640,795 11.0 - 10.0 - 9.0 - 8.0 - 7.0 - 6.0 - 5.0 - 4.0 - 3.0 - 2.0 - 1.0 - 0 - 10.544 9.933 8.260 6.568 6.838 3.446 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 Assets Deposits Loans Common Stock Per Share Book & Market Value - 12/31 Trends in Combined Equity Capital & ALLL* to Non-Performing Assets (000s) 130,000 - 120,000 - $30.03 $29.75 $27.59 $24.96 $24.60 100,000 - 107,771 98,495 99,003 123,740 117,995 108,556 650,000 - 600,000 - 550,000 - 500,000 - 450,000 - 400,000 - 350,000 - 300,000 - $35.00 - $30.00 - $25.00 - $20.00 - $20.70 $21.17 $22.86 $18.75 $21.00 $15.00 - $10.00 - $12.10 $12.18 $5.00 - $0 - 80,000 - 60,000 - 40,000 - 20,000 - 0 - 19,898 17,036 15,778 10,265 15,936 15,744 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 Book Value Market Value *ALLL: Allowance for loan and lease losses Equity Capital & ALLL Non Performing Assets 9 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking General Information Foresight Financial Group, Inc. 3106 North Rockton Ave. Rockford, IL 61103 815.847.7500 ph 815.968.7206 fx Email: investor.relations@ffgbank.net 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 OTC Pink Marketplace under the trading symbol “FGFH”. For more information, contact Foresight Financial Group, Inc. at the corporate address or visit our website at www.foresightfg.com Directors Foresight Financial Group, Inc. Rockford, IL John Collman John Jeschke Charles B. Kullberg Fred Kundert Brent Myers Carolyn Sluiter, D.V.M. Robert W. Stenstrom Judd Thruman, J.D. Douglas Wagner Northwest Bank of Rockford Rockford, IL Charles B. Kullberg Stephen P. McKeever John J. Morrissey, C.P.A. Brent Myers Amy M. Ott Robert W. Stenstrom Tom Walsh 10 State Bank Freeport, IL Douglas Cross, Director Emeritus Mary Hartman Bruce Johnson Dr. Joe Kanosky Fred Kundert Christopher Schneiderman Marilyn Smit Brian Stewart Ken Thompson Douglas Wagner State Bank of Herscher, Herscher, IL Randall Chaplinski, J.D. Wayne Koelling, C.P.A. Fred Kundert Brent Myers K. Denise Osadjan Mike Scanlon Lena State Bank Lena, IL Todd Bussian, O.D. John Jeschke James Moest, D.V.M. Brent Myers Steven Rothschadl Judd Thruman, J.D. German-American State Bank German Valley, IL Robert Borneman John Collman Guy Cunningham Robert Ebbesmeyer, D.V.M. Kerry L. Hoops Angela K. Larson Michael Schirger, J.D. Jeffrey M. Sterling State Bank of Davis Davis, IL Dan Dietmeier John Jeschke Brent Myers Thomas Olsen Carolyn Sluiter, D.V.M. Richard Stenzinger, C.P.A. Judd Thruman, J.D. 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) Wipfli LLP 4949 Harrison Avenue Rockford, Illinois 61108 Wipfli LLP 4949 Harrison Avenue Rockford, Illinois 61108 815.399.7700 Fax 815.399.7644 815.399.7700 Fax 815.399.7644 www.wipfli.com www.wipfli.com INDEPENDENT AUDITOR’S REPORT INDEPENDENT AUDITOR’S REPORT To the Board of Directors Foresight Financial Group, Inc. To the Board of Directors Foresight Financial Group, Inc. and Subsidiaries 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, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013, and the related notes to the financial statements. We have audited the accompanying consolidated financial statements of Foresight Financial Group, Inc. and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016, and the related notes to the consolidated 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 accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are 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 conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 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, 2016 and 2015, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2016, in accordance with accounting principles generally accepted in the United States. Report on Supplementary Information Our audits were 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 analysis 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. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Rockford, Illinois March 6, 2017 12 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking 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 $15,496 and $14,841, Loans held for sale respectively Loans, net of allowance for loan losses of $15,496 and $14,841, Foreclosed assets, net respectively Premises and equipment, net Foreclosed assets, net Core deposit intangible Premises and equipment, net Bank owned life insurance Core deposit intangible Other assets Bank owned life insurance Other assets Total assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Liabilities: Deposits: Noninterest-bearing Interest-bearing Noninterest-bearing Total deposits Interest-bearing Federal funds purchased Total deposits Securities sold under agreements to repurchase Federal funds purchased Federal Home Loan Bank (FHLB) advances and other borrowings Securities sold under agreements to repurchase Subordinated debentures Federal Home Loan Bank (FHLB) advances and other borrowings Accrued interest payable and other liabilities Subordinated debentures Total liabilities Accrued interest payable and other liabilities Total liabilities Stockholders’ equity: Preferred stock (no par value; authorized 500,000 shares) Stockholders’ equity: Common stock ($.25 par value; authorized 10,000,000 shares; Preferred stock (no par value; authorized 500,000 shares) 3,949,918 and 3,924,836 shares issued, respectively) Common stock ($.25 par value; authorized 10,000,000 shares; Additional paid-in capital 3,949,918 and 3,924,836 shares issued, respectively) Retained earnings Additional paid-in capital Treasury stock, at cost (314,919 and 293,619 shares, respectively) Retained earnings Accumulated other comprehensive (loss) income Treasury stock, at cost (314,919 and 293,619 shares, respectively) Total stockholders’ equity Accumulated other comprehensive (loss) income Total stockholders’ equity Total liabilities and stockholders’ equity Total liabilities and stockholders’ equity CONSOLIDATED BALANCE SHEETS (000s omitted except share data) CONSOLIDATED BALANCE SHEETS December 31, (000s omitted except share data) December 31, 2016 2016 $19,974 16,120 $19,974 2,767 16,120 38,861 2,767 38,861 10,607 10,607 732 256,699 732 2,852 256,699 2,217 2,852 2,217 766,481 1,766 766,481 13,476 1,766 1,535 13,476 21,527 1,535 18,725 21,527 18,725 $1,135,478 $1,135,478 $143,480 818,005 $143,480 961,485 818,005 1,211 961,485 25,107 1,211 23,818 25,107 10,000 23,818 5,613 10,000 1,027,234 5,613 1,027,234 0 0 988 8,955 988 105,518 8,955 (6,320) 105,518 (897) (6,320) 108,244 (897) 108,244 $1,135,478 $1,135,478 2015 2015 $21,461 5,398 $21,461 1,047 5,398 27,906 1,047 27,906 13,878 13,878 868 277,300 868 2,852 277,300 3,050 2,852 3,050 708,271 3,106 708,271 11,694 3,106 1,847 11,694 9,018 1,847 16,761 9,018 16,761 $1,076,551 $1,076,551 $122,283 790,967 $122,283 913,250 790,967 503 913,250 23,600 503 20,846 23,600 10,000 20,846 5,198 10,000 973,397 5,198 973,397 0 0 981 8,613 981 96,385 8,613 (5,787) 96,385 2,962 (5,787) 103,154 2,962 103,154 $1,076,551 $1,076,551 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 13 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking 2016 2016 $36,492 2016 $36,492 3,219 $36,492 3,450 3,219 324 3,450 3,219 17 324 3,450 43,502 17 324 43,502 17 43,502 5,813 12 5,813 102 12 5,813 458 102 12 602 458 102 6,987 602 458 6,987 602 36,515 6,987 36,515 2,917 36,515 2,917 2,917 33,598 CONSOLIDATED STATEMENTS OF INCOME (000s omitted except share data) CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF INCOME (000s omitted except share data) For the years ended December 31, (000s omitted except share data) For the years ended December 31, Interest and dividend income: For the years ended December 31, Loans, including fees Interest and dividend income: Debt securities: Loans, including fees Interest and dividend income: Taxable Debt securities: Loans, including fees Tax-exempt Taxable Debt securities: Interest-bearing deposits in banks and other Tax-exempt Taxable Federal funds sold Interest-bearing deposits in banks and other Tax-exempt Total interest and dividend income Federal funds sold Interest-bearing deposits in banks and other Total interest and dividend income Federal funds sold Interest expense: Total interest and dividend income Deposits Interest expense: Federal funds purchased Deposits Interest expense: Securities sold under agreements to repurchase Federal funds purchased Deposits FHLB and other borrowings Securities sold under agreements to repurchase Federal funds purchased Subordinated debentures FHLB and other borrowings Securities sold under agreements to repurchase Total interest expense Subordinated debentures FHLB and other borrowings Total interest expense Subordinated debentures Net interest and dividend income Total interest expense Net interest and dividend income Provision for loan losses Net interest and dividend income Provision for loan losses Net interest and dividend income, Provision for loan losses after provision for loan losses Net interest and dividend income, after provision for loan losses Net interest and dividend income, Noninterest income: after provision for loan losses Customer service fees Noninterest income: (Loss) Gain on sales and calls of AFS securities, net Customer service fees Noninterest income: Gain on sales of loans, net (Loss) Gain on sales and calls of AFS securities, net Customer service fees Loan servicing fees, net Gain on sales of loans, net (Loss) Gain on sales and calls of AFS securities, net Gain on acquisition bargain purchase Loan servicing fees, net Gain on sales of loans, net Other Gain on acquisition bargain purchase Loan servicing fees, net Total noninterest income Other Gain on acquisition bargain purchase Total noninterest income Other Noninterest expenses: Total noninterest income Salaries and employee benefits Noninterest expenses: Occupancy expense of premises, net Salaries and employee benefits Noninterest expenses: Outside services Occupancy expense of premises, net Salaries and employee benefits Data processing Outside services Occupancy expense of premises, net Foreclosed assets, net Data processing Outside services Other Foreclosed assets, net Data processing Total noninterest expenses Other Foreclosed assets, net Total noninterest expenses Other Income before income taxes Total noninterest expenses Income before income taxes Income tax expense Income before income taxes Income tax expense Net income Income tax expense Net income Earnings per common share: Net income Basic Earnings per common share: Diluted Basic Earnings per common share: Diluted Basic Diluted 33,598 33,598 1,204 (167) 1,204 1,521 (167) 1,204 911 1,521 (167) 0 911 1,521 3,499 0 911 6,968 3,499 0 6,968 3,499 6,968 15,223 2,406 15,223 441 2,406 15,223 924 441 2,406 588 924 441 7,138 588 924 26,719 7,138 588 26,719 7,138 13,847 26,719 13,847 3,914 13,847 3,914 $9,933 3,914 $9,933 $9,933 $2.73 $2.70 $2.73 $2.70 $2.73 See Notes to Consolidated Financial Statements. $2.70 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 2015 2015 $31,908 2015 $31,908 3,437 $31,908 3,455 3,437 223 3,455 3,437 16 223 3,455 39,039 16 223 39,039 16 39,039 5,310 10 5,310 71 10 5,310 318 71 10 600 318 71 6,309 600 318 6,309 600 32,730 6,309 32,730 1,660 32,730 1,660 1,660 31,070 31,070 31,070 1,165 426 1,165 1,338 426 1,165 740 1,338 426 1,133 740 1,338 2,854 1,133 740 7,656 2,854 1,133 7,656 2,854 7,656 14,139 2,627 14,139 236 2,627 14,139 582 236 2,627 601 582 236 6,286 601 582 24,471 6,286 601 24,471 6,286 14,255 24,471 14,255 3,711 14,255 3,711 $10,544 3,711 $10,544 $10,544 $2.90 $2.85 $2.90 $2.85 $2.90 $2.85 2014 2014 $29,495 2014 $29,495 3,076 $29,495 3,512 3,076 104 3,512 3,076 6 104 3,512 36,193 6 104 36,193 6 36,193 5,136 14 5,136 70 14 5,136 188 70 14 600 188 70 6,008 600 188 6,008 600 30,185 6,008 30,185 2,621 30,185 2,621 2,621 27,564 27,564 27,564 1,150 125 1,150 1,118 125 1,150 655 1,118 125 0 655 1,118 2,364 0 655 5,412 2,364 0 5,412 2,364 5,412 12,651 2,463 12,651 261 2,463 12,651 417 261 2,463 487 417 261 4,992 487 417 21,271 4,992 487 21,271 4,992 11,705 21,271 11,705 3,445 11,705 3,445 $8,260 3,445 $8,260 $8,260 $2.27 $2.24 $2.27 $2.24 $2.27 $2.24 14 1986 - 2016 Celebrating Thirty Years of Community Building Through Community BankingCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (000s omitted except share data) For the years ended December 31, Net income Other comprehensive (loss) income: Unrealized holding (gains) losses on securities available for sale, net of tax of $2,639, $182 & ($2,052), respectively Reclassification adjustments for net securities losses (gains) recognized in income, net of tax of ($67), $169 & $50, respectively Total other comprehensive (loss) income 2016 2015 2014 $9,933 $10,544 $8,260 (3,959) (273) 3,228 100 (3,859) (257) (530) (75) 3,153 Total comprehensive income $6,074 $10,014 $11,413 See Notes to Consolidated Financial Statements. 15 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking CONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted except share data) For the years ended December 31, 2015 2014 2016 $9,933 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (000s omitted except share data) For the years ended December 31, CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (000s omitted except share data) (000s omitted except share data) CASH FLOWS FROM OPERATING ACTIVITIES: For the years ended December 31, For the years ended December 31, Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Provision for foreclosed asset (gains) losses Depreciation Net amortization of securities premiums $0 Income on bank owned life insurance Deferred income tax benefit Net loss (gain) on the sales and calls of AFS securities Net gain on the sales of foreclosed assets Stock-based compensation expense Net change in: Cash dividends ($.20 per share) Loans held for sale Other assets Purchase of treasury stock (63,962 shares) Purchase of treasury stock (63,962 shares) Purchase of treasury stock (63,962 shares) Accrued interest payable and other liabilities Net cash provided by operating activities Additional Paid-In Preferred Common Preferred Common Stock Capital Stock Stock Preferred Common Stock Stock Additional Additional Retained Paid-In Paid-In Earnings Capital Capital Cash dividends ($.20 per share) Cash dividends ($.20 per share) Other comprehensive income Other comprehensive income Balance, January 1, 2014 Balance, January 1, 2014 Other comprehensive income Balance, January 1, 2014 Net income Net income Net income $79,037 $7,979 $7,979 $7,979 $969 $969 Stock 8,260 (727) 2,917 Treasury Retained Retained 137 Stock Earnings Earnings 953 1,635 ($4,098) $79,037 $79,037 (447) 2,684 8,260 8,260 167 (82) 0 (727) (727) 833 (4,336) (1,214) 415 14,809 $969 $0 $0 Stock options exercised Stock options exercised Stock options exercised 6 190 190 190 6 6 91 8,260 975 975 Stock-based compensation expense Balance, December 31, 2014 Net income Other comprehensive loss Cash dividends ($.20 per share) 0 0 0 975 Net income Net income Balance, December 31, 2014 Balance, December 31, 2014 CASH FLOWS FROM INVESTING ACTIVITIES: Stock-based compensation expense Stock-based compensation expense 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 Proceeds from maturities, calls, and paydowns of AFS securities Purchases of AFS securities Purchases of bank owned life insurance Purchases of non-marketable equity securities Loan originations and principal collections, net Proceeds from sales of foreclosed assets Cash and cash equivalents from bank acquisition Purchase of treasury stock (20,000 shares) Purchase of treasury stock (20,000 shares) Purchases of premises and equipment, net Net cash used in investing activities Cash dividends ($.20 per share) Cash dividends ($.20 per share) Other comprehensive loss Other comprehensive loss Purchase of treasury stock (20,000 shares) Stock options exercised Stock options exercised Stock options exercised 5 226 5 5 1 Stock-based compensation expense Restricted stock vested (4,075 shares) Restricted stock vested (4,075 shares) CASH FLOWS FROM FINANCING ACTIVITIES: Restricted stock vested (4,075 shares) Net change in deposits Net change is securities sold under agreements to repurchase Stock-based compensation expense Stock-based compensation expense Cash dividends paid Net change in federal funds purchased Balance, December 31, 2015 Balance, December 31, 2015 Stock options and restricted stock Purchase of treasury stock Proceeds from lines of credit and FHLB advances and other borrowings Payments on lines of credit and FHLB advances and other borrowings Net cash provided by financing activities Other comprehensive loss Other comprehensive loss Balance, December 31, 2015 Other comprehensive loss Net income Net income Net income 8,613 981 981 981 76 1 1 51 0 0 0 91 91 86,570 8,260 8,260 10,544 (729) 226 226 76 76 51 51 96,385 8,613 8,613 9,933 3,271 19,233 (5,312) 86,570 86,570 170 95,213 10,544 10,544 (99,540) (12,062) 0 (62,786) (729) (729) 2,944 0 (475) (2,735) (56,292) 48,235 1,507 (800) 708 (5,787) 96,385 96,385 349 (533) 9,933 9,933 46,972 (44,000) 52,438 $10,544 $8,260 Accumulated Other 1,660 Comprehensive Treasury Treasury (756) Income (Loss) Stock Stock 886 1,689 ($4,098) ($4,098) (235) 318 (426) (121) 51 Accumulated Accumulated Other Other 2,621 Comprehensive Comprehensive 490 Total Income (Loss) Income (Loss) 847 784 $84,226 $339 $339 (215) 101 (125) (205) 3,153 3,153 3,153 91 3,153 8,260 $339 (1,611) (3,190) (1,214) (1,214) (1,261) 7,548 3,492 (530) (8,681) 20,475 (5,312) (5,312) 565 60,813 (113,401) 0 0 (13,815) 2,930 23,756 (161) (27,519) (475) (475) 23,474 94 (729) (2,533) (5,787) (5,787) 308 (475) 41,290 (43,544) 17,885 2,962 (3,859) (727) (1,214) 82 459 241 13,431 196 91 10,544 (234) 14,601 93,985 3,492 3,492 235 33,021 (41,378) 0 (530) (530) (530) (23) (48,871) 2,553 0 (475) (622) (40,718) (729) 231 77 51 36,279 141 (727) (3,274) 103,154 2,962 2,962 196 (1,214) 54,250 (46,500) 39,151 9,933 (3,859) (3,859) (3,859) Cash dividends ($.22 per share) Cash dividends ($.22 per share) Cash dividends ($.22 per share) Net increase (decrease) in cash and cash equivalents (800) (800) (800) 10,955 (2,086) (800) 11,864 Purchase of treasury stock (21,300 shares) Purchase of treasury stock (21,300 shares) Purchase of treasury stock (21,300 shares) Cash and cash equivalents at beginning of year Stock options exercised Stock options exercised Stock options exercised Cash and cash equivalents at end of year Restricted stock vested (8,082 shares) Restricted stock vested (8,082 shares) Restricted stock vested (8,082 shares) 5 2 181 5 5 161 2 2 181 181 161 161 (533) 27,906 (533) (533) 29,992 (533) 17,698 $38,861 $27,906 $29,562 186 163 Total Total $84,226 $84,226 8,260 8,260 3,153 3,153 (727) (727) (1,214) (1,214) 196 196 91 91 93,985 93,985 10,544 10,544 (530) (530) (729) (729) (475) (475) 231 231 77 77 51 51 103,154 103,154 9,933 9,933 (3,859) (3,859) (800) (800) (533) (533) 186 186 163 163 Balance, December 31, 2016 Balance, December 31, 2016 Balance, December 31, 2016 16 $0 $988 $8,955 $988 $988 See Notes to Consolidated Financial Statements. $105,518 $8,955 $8,955 $0 $0 $105,518 $105,518 ($6,320) ($6,320) ($6,320) ($897) $108,244 ($897) ($897) $108,244 $108,244 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 1986 - 2016 Celebrating Thirty Years of Community Building Through Community BankingCONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted except share data) For the years ended December 31, 2015 CONSOLIDATED STATEMENTS OF CASH FLOWS 2014 (000s omitted except share data) For the years ended December 31, $10,544 2015 $9,933 $8,260 2014 2016 2016 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: CASH FLOWS FROM OPERATING ACTIVITIES: Provision for loan losses Net income Provision for foreclosed asset (gains) losses Adjustments to reconcile net income to net cash Depreciation provided by operating activities: Net amortization of securities premiums Provision for loan losses Income on bank owned life insurance Provision for foreclosed asset (gains) losses Deferred income tax benefit Depreciation Net loss (gain) on the sales and calls of AFS securities Net amortization of securities premiums Net gain on the sales of foreclosed assets Income on bank owned life insurance Stock-based compensation expense Deferred income tax benefit Net change in: Net loss (gain) on the sales and calls of AFS securities Loans held for sale Net gain on the sales of foreclosed assets Other assets Stock-based compensation expense Accrued interest payable and other liabilities Net change in: Net cash provided by operating activities Loans held for sale Other assets CASH FLOWS FROM INVESTING ACTIVITIES: Accrued interest payable and other liabilities Net change in interest-bearing deposits in banks - term deposits Net cash provided by operating activities Proceeds from sales of AFS securities Proceeds from maturities, calls, and paydowns of HTM securities CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities, calls, and paydowns of AFS securities Net change in interest-bearing deposits in banks - term deposits Purchases of AFS securities Proceeds from sales of AFS securities Purchases of bank owned life insurance Proceeds from maturities, calls, and paydowns of HTM securities Purchases of non-marketable equity securities Proceeds from maturities, calls, and paydowns of AFS securities Loan originations and principal collections, net Purchases of AFS securities Proceeds from sales of foreclosed assets Purchases of bank owned life insurance Cash and cash equivalents from bank acquisition Purchases of non-marketable equity securities Purchases of premises and equipment, net Loan originations and principal collections, net Net cash used in investing activities Proceeds from sales of foreclosed assets Cash and cash equivalents from bank acquisition Purchases of premises and equipment, net Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits Net change is securities sold under agreements to repurchase Cash dividends paid CASH FLOWS FROM FINANCING ACTIVITIES: Net change in federal funds purchased Net change in deposits Stock options and restricted stock Net change is securities sold under agreements to repurchase Purchase of treasury stock Cash dividends paid Proceeds from lines of credit and FHLB advances and other borrowings Net change in federal funds purchased Payments on lines of credit and FHLB advances and other borrowings Stock options and restricted stock Net cash provided by financing activities Purchase of treasury stock Proceeds from lines of credit and FHLB advances and other borrowings Payments on lines of credit and FHLB advances and other borrowings Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents $9,933 2,917 137 953 1,635 2,917 (447) 137 2,684 953 167 1,635 (82) (447) 0 2,684 167 833 (82) (4,336) 0 415 14,809 833 (4,336) 415 3,271 14,809 19,233 170 95,213 3,271 (99,540) 19,233 (12,062) 170 0 95,213 (62,786) (99,540) 2,944 (12,062) 0 0 (2,735) (62,786) (56,292) 2,944 0 (2,735) (56,292) 48,235 1,507 (800) 708 48,235 349 1,507 (533) (800) 46,972 708 (44,000) 349 52,438 (533) 46,972 (44,000) 52,438 10,955 $10,544 1,660 (756) 886 1,689 (235) 318 (426) (121) 51 1,660 (756) 886 1,689 (235) 318 (426) (1,611) (121) (3,190) 51 (1,261) 7,548 (1,611) (3,190) (1,261) 7,548 (8,681) 20,475 565 60,813 (8,681) (113,401) 20,475 0 565 0 60,813 (13,815) (113,401) 2,930 0 23,756 0 (161) (13,815) (27,519) 2,930 23,756 (161) 23,474 (27,519) 94 (729) (2,533) 23,474 308 94 (475) (729) 41,290 (2,533) (43,544) 308 17,885 (475) 41,290 (43,544) 17,885 (2,086) $8,260 2,621 490 847 784 (215) 101 (125) (205) 91 2,621 490 847 784 (215) 101 (125) (205) 91 82 459 241 13,431 82 459 241 13,431 (234) 14,601 235 33,021 (234) (41,378) 14,601 0 235 (23) 33,021 (48,871) (41,378) 2,553 0 0 (23) (622) (48,871) (40,718) 2,553 0 (622) 36,279 (40,718) 141 (727) (3,274) 36,279 196 141 (1,214) (727) 54,250 (3,274) (46,500) 196 39,151 (1,214) 54,250 (46,500) 39,151 11,864 Cash and cash equivalents at beginning of year Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at end of year Cash and cash equivalents at beginning of year 27,906 10,955 $38,861 27,906 29,992 (2,086) $27,906 29,992 17,698 11,864 $29,562 17,698 Cash and cash equivalents at end of year $38,861 $27,906 $29,562 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 17 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking CONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted except share data) For the years ended December 31, 2015 2014 $10,544 $8,260 $9,933 2016 CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) CASH FLOWS FROM OPERATING ACTIVITIES: (000s omitted except share data) (000s omitted except share data) Net income Adjustments to reconcile net income to net cash For the years ended December 31, For the years ended December 31, provided by operating activities: Provision for loan losses Provision for foreclosed asset (gains) losses Depreciation Net amortization of securities premiums SUPPLEMENTAL DISCLOSURES OF CASH FLOW SUPPLEMENTAL DISCLOSURES OF CASH FLOW Income on bank owned life insurance INFORMATION: INFORMATION: Deferred income tax benefit Cash paid during the year for: Cash paid during the year for: Net loss (gain) on the sales and calls of AFS securities Interest Interest Net gain on the sales of foreclosed assets Stock-based compensation expense Income taxes Net change in: Loans held for sale Other assets SUPPLEMENTAL SCHEDULE OF NONCASH Accrued interest payable and other liabilities INVESTING ACTIVITIES: Net cash provided by operating activities Assets acquired in exchange for deposits and liabilities assumed SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Assets acquired in exchange for deposits and liabilities assumed Income taxes 2,917 137 2016 953 1,635 (447) 2,684 167 $6,919 (82) 0 $1,342 833 (4,336) 415 14,809 $6,919 $1,342 $0 $0 2016 2015 2014 1,660 (756) 2015 886 1,689 (235) 318 (426) $6,239 (121) 51 $3,901 2,621 490 2014 847 784 (215) 101 (125) (205) 91 $2,302 $6,042 $6,239 $6,042 $3,901 $2,302 (1,611) (3,190) (1,261) 7,548 $127,975 $127,975 82 459 241 13,431 $0 $0 SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Foreclosed assets acquired in settlement of loans CASH FLOWS FROM INVESTING ACTIVITIES: Net change in interest-bearing deposits in banks - term deposits Proceeds from sales of AFS securities SUPPLEMENTAL SCHEDULE OF NONCASH Proceeds from maturities, calls, and paydowns of HTM securities FINANCING ACTIVITIES: Proceeds from maturities, calls, and paydowns of AFS securities Foreclosed assets acquired in settlement of loans Purchases of AFS securities Purchases of bank owned life insurance Purchases of non-marketable equity securities Loan originations and principal collections, net Proceeds from sales of foreclosed assets Cash and cash equivalents from bank acquisition Purchases of premises and equipment, net Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits Net change is securities sold under agreements to repurchase Cash dividends paid Net change in federal funds purchased Stock options and restricted stock Purchase of treasury stock Proceeds from lines of credit and FHLB advances and other borrowings Payments on lines of credit and FHLB advances and other borrowings Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year $1,659 $1,878 3,271 19,233 170 95,213 $1,659 (99,540) (12,062) 0 (62,786) 2,944 0 (2,735) (56,292) (8,681) 20,475 565 60,813 $1,878 (113,401) 0 0 (13,815) 2,930 23,756 (161) (27,519) $1,173 (234) 14,601 235 33,021 $1,173 (41,378) 0 (23) (48,871) 2,553 0 (622) (40,718) 48,235 1,507 (800) 708 349 (533) 46,972 (44,000) 52,438 10,955 27,906 23,474 94 (729) (2,533) 308 (475) 41,290 (43,544) 17,885 36,279 141 (727) (3,274) 196 (1,214) 54,250 (46,500) 39,151 (2,086) 11,864 29,992 17,698 Cash and cash equivalents at end of year $38,861 $27,906 $29,562 See Notes to Consolidated Financial Statements. 18 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking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, Machesney Park, and Herscher, Illinois areas. Its primary deposit products are demand deposits and certificates of deposit and its primary lending products are agriculture, 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), Lena State Bank (Lena), and State Bank of Herscher (Herscher) (collectively the “Banks”). All significant intercompany accounts and transactions have been eliminated in consolidation. (c) Subsequent Events The Company has evaluated subsequent events for recognition and disclosure through March 6, 2017, 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, deferred tax assets, fair values of securities, foreclosed assets and financial instruments are particularly susceptible 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. (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 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. 19 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (1) Summary of Significant Accounting Policies (continued) (1) Summary of Significant Accounting Policies (continued) (g) Securities (g) Securities (g) Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity (HTM) and recorded at amortized cost. Securities not classified as HTM are classified as Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity (HTM) and recorded at amortized cost. Securities not classified as HTM are classified as available for sale (AFS) and recorded at fair value, with unrealized gains or losses excluded from earnings held to maturity (HTM) and recorded at amortized cost. Securities not classified as HTM are classified as available for sale (AFS) and recorded at fair value, with unrealized gains or losses excluded from earnings are and reported in other comprehensive income or loss. Amortization premiums available for sale (AFS) and recorded at fair value, with unrealized gains or losses excluded from earnings are and reported in other comprehensive income or loss. Amortization premiums recognized in interest income using the interest method over the estimated lives of the securities. Declines and reported in other comprehensive income or loss. Amortization premiums are recognized in interest income using the interest method over the estimated lives of the securities. Declines in the fair value of HTM and AFS securities below their cost that are deemed to be other than temporary recognized in interest income using the interest method over the estimated lives 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. Gains and losses on the sale of securities are recorded on the 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. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. trade date and are determined using the specific-identification method. In estimating other-than-temporary impairment losses, management considers (1) the length of time and In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. for a period of time sufficient to allow for any anticipated recovery in fair value. and discounts and discounts and discounts (h) Non-Marketable Equity Securities (h) Non-Marketable Equity Securities (h) Non-Marketable Equity Securities The Banks, as members of the Federal Home Loan Bank (FHLB) system, are required to maintain a The Banks, as members of the Federal Home Loan Bank (FHLB) system, are required to maintain a minimum investment in capital stock of the FHLB in an amount equal to the greater of 0.40% of their The Banks, as members of the Federal Home Loan Bank (FHLB) system, are required to maintain a minimum investment in capital stock of the FHLB in an amount equal to the greater of 0.40% of their mortgage-related assets or 4.5% of advances from the FHLB. The Banks may choose to invest in minimum investment in capital stock of the FHLB in an amount equal to the greater of 0.40% of their mortgage-related assets or 4.5% of advances from the FHLB. The Banks may choose to invest in amounts greater than the minimum investment. Excess capital stock redemptions are subject to guidelines mortgage-related assets or 4.5% of advances from the FHLB. The Banks may choose to invest in amounts greater than the minimum investment. Excess capital stock redemptions are subject to guidelines established by the FHLB. FHLB stock is reported at cost since no ready market exists and it has no amounts greater than the minimum investment. Excess capital stock redemptions are subject to guidelines established by the FHLB. FHLB stock is reported at cost since no ready market exists and it has no quoted market value. FHLB stock is periodically evaluated for impairment based on the ultimate recovery established by the FHLB. FHLB stock is reported at cost since no ready market exists and it has no quoted market value. FHLB stock is periodically evaluated for impairment based on the ultimate recovery of par value. quoted market value. FHLB stock is periodically evaluated for impairment based on the ultimate recovery of par value. of par value. (i) Loans Held for Sale (i) Loans Held for Sale (i) Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or market Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. income. Mortgage loans held for sale are generally sold with mortgage servicing rights retained by the Company. Mortgage loans held for sale are generally sold with mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage Mortgage loans held for sale are generally sold with mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Realized gains or losses on sales of mortgage loans are recognized based on the difference The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Realized gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. servicing rights. Realized gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. between the selling price and the carrying value of the related mortgage loans sold. (j) Loans and Allowance for Loan Losses (j) Loans and Allowance for Loan Losses (j) Loans and Allowance for Loan Losses Loans that management has the intent and ability to hold for the foreseeable future or until maturity or Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances adjusted for purchase Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff generally are reported at their outstanding unpaid principal balances adjusted for purchase premiums or discounts, charge-offs, and an allowance for loan losses. Interest on loans is accrued daily payoff generally are reported at their outstanding unpaid principal balances adjusted for purchase premiums or discounts, charge-offs, and an allowance for loan losses. Interest on loans is accrued daily based on the unpaid principal balance. premiums or discounts, charge-offs, and an allowance for loan losses. Interest on loans is accrued daily based on the unpaid principal balance. based on the unpaid principal balance. A loan is considered to be delinquent when payments have not been made according to contractual terms, A loan is considered to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date. The accrual of interest on a A loan is considered to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date. The accrual of interest on a loan is generally discontinued when the loan becomes 90 days delinquent unless the credit is well-secured typically evidenced by nonpayment of a monthly installment by the due date. The accrual of interest on a loan is generally discontinued when the loan becomes 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 at an loan is generally discontinued when the loan becomes 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 at an earlier date if collection of principal or interest is considered doubtful. Generally, interest accrued but not and in the process of collection. Credit card loans and other personal loans are typically charged off at an earlier date if collection of principal or interest is considered doubtful. Generally, interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. earlier date if collection of principal or interest is considered doubtful. Generally, interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. contractually due are brought current and future payments are reasonably assured. . . . 20 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (j) Loans and Allowance for Loan Losses (continued) Loan-origination fees and direct origination costs are generally recognized as income or expense when received or incurred since capitalization of these fees and costs would not have a significant impact on the consolidated financial statements. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDRs) and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. All problem loans meeting Company criteria are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected from the collateral. Troubled debt restructurings are individually evaluated for impairment and included in the separately identified impairment disclosures. TDRs are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans individually identified as impaired The general component covers loans that are collectively evaluated for impairment. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not included in the impairment disclosures. The general allowance component also includes loans that are not individually identified for impairment evaluation, such as commercial loans below the individual evaluation threshold, as well as those loans that are individually evaluated but are not considered impaired. 21 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (j) Loans and Allowance for Loan Losses (continued) The general component is based on historical loss experience adjusted for current qualitative factors. The historical loss experience is determined by portfolio segment or loan class and is based on the actual loss history experienced by the Company. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment or loan class. These economic factors include: 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 selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and employees; national and economic trends and conditions; industry conditions; and effects of changes in credit concentrations. Management considers the following when assessing the risk in the loan portfolio:  Residential real estate loans are affected by the local residential real estate market, the local economy, and, for variable rate mortgages, movement in indices tied to these loans. At the time of origination the Company evaluates the borrower's repayment ability through a review of debt to income and credit scores. Appraisals are generally obtained to support the loan amount. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service debt at the time of origination.  Agricultural and commercial real estate loans are dependent on the industries tied to these loans. Agricultural real estate loans are primarily for land acquisition. Commercial real estate loans are primarily secured by office and industrial buildings, warehouses, retail shopping facilities and various special purpose properties, including hotels and restaurants. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service debt and is periodically updated during the life of the loan. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.  Commercial and agricultural loans are primarily for working capital, physical asset expansion, asset acquisition loans and other. These loans are made based primarily on historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Financial information is obtained from the borrowers to evaluate cash flows sufficiency to service debt and is periodically updated during the life of the loan.  Consumer and other loans may take the form of installment loans, demand loans, or single payment loans and are extended to individuals for household, family, and other personal expenditures. At the time of origination the Company evaluates the borrower's repayment ability through a review of debt to income and credit scores. (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. 22 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking 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) (l) Loan Servicing (l) Loan Servicing Mortgage servicing rights are recognized as separate assets when rights are acquired through a sale of loans Mortgage servicing rights are recognized as separate assets when rights are acquired through a sale of loans and are reported in other assets. When the originating mortgage loans are sold into the secondary market, and are reported in other assets. When the originating mortgage loans are sold into the secondary market, the Company allocates the total cost of the mortgage loans between mortgage servicing rights and the the Company allocates the total cost of the mortgage loans between mortgage servicing rights and the loans, based on their relative fair values. The cost of originated mortgage-servicing rights is amortized in loans, based on their relative fair values. The cost of originated mortgage-servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage- 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 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 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 using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. flows using market-based assumptions. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is offset against loan servicing fee income. mortgage servicing rights is offset against loan servicing fee income. (m) Rate Lock Commitments (m) Rate Lock Commitments Commitments to fund mortgage loans (interest-rate locks) to be sold into the secondary market and Commitments to fund mortgage loans (interest-rate locks) to be sold into the secondary market and mandatory delivery forward commitments for the future delivery of these mortgage loans are to be mandatory delivery forward commitments for the future delivery of these mortgage loans are to be accounted for as derivatives not qualifying for hedge accounting. The fair values of these mortgage accounted for as derivatives not qualifying for hedge accounting. The fair values of these mortgage derivatives are to be estimated based on the net future cash flows related to the associated servicing of the derivatives are to be estimated based on the net future cash flows related to the associated servicing of the loans and on changes in mortgage interest rates from the date of the commitments. Changes in fair values loans and on changes in mortgage interest rates from the date of the commitments. Changes in fair values on these derivatives are to be included in net gains on sales of loans. The Company has deemed the effect on these derivatives are to be included in net gains on sales of loans. The Company has deemed the effect of these derivatives to be immaterial to the consolidated financial statements and, accordingly, has elected of these derivatives to be immaterial to the consolidated financial statements and, accordingly, has elected not to record fair values associated with these derivatives. not to record fair values associated with these derivatives. (n) Foreclosed Assets (n) Foreclosed Assets Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated cost Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated cost of disposal when acquired. Subsequent to foreclosure, valuations are periodically performed by of disposal when acquired. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. 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 Revenues and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. expenses from foreclosed assets. (o) Premises and Equipment (o) Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation, based on the estimated useful 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 of the assets. Depreciation is generally computed on the straight-line method over estimated useful lives ranging from 3 to 40 years. lives ranging from 3 to 40 years. (p) Bank-Owned Life Insurance (p) Bank-Owned Life Insurance The Bank has purchased life insurance policies on certain key employees and directors. Bank-owned life The Bank has purchased life insurance policies on certain key employees and directors. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized. insurance is recorded at its cash surrender value, or the amount that can be realized. (q) Significant Group Concentrations of Credit Risk (q) Significant Group Concentrations of Credit Risk Most of the Company’s activities are with customers located in the area and communities noted above. 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 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 which the Company engages. The Company does not have any significant concentrations with any one industry or customer. industry or customer. 23 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (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. (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 and State Bank of Herscher, other than trust cash on deposit at the Bank, are not included in these financial statements because they are not assets of the Company. 24 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (x) Goodwill and Intangible Assets Intangible assets attributable to the value of core deposits are stated at cost less accumulated amortization. Intangible assets are amortized on a straight-line basis over the estimated lives of the assets. The excess of purchase price over fair value of net assets acquired (goodwill) is not amortized. The Company evaluates whether goodwill and other intangible assets may be impaired at least annually and whenever events or changes in circumstances indicate it is more likely than not the fair value of the reporting unit or asset is less than its carrying amount. (y) 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. (z) 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. (aa) Advertising Advertising costs are expensed as incurred. (bb) Reclassifications Certain amounts in the 2014 and 2015 consolidated financial statements have been reclassified to conform to the 2016 presentation. (cc) New Accounting Standards In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The objective of this 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, 2017. The Company is evaluating what impact this new standard will have on its financial statements. 25 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (cc) New Accounting Standards (continued) In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. This standard makes a number of changes to the recognition and measurement standards of financial instruments, including the following changes: 1) equity securities with a readily determinable fair value will have to be measured at fair value with changes in fair value recognized in net income; 2) entities that are public business entities will no longer be required to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost; and 3) entities that are public business entities will be required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. This new standard is effective for consolidated financial statements issued for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company does not believe the adoption of the standard with have a significant impact on its financial statements except that it will no longer disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost as permitted by the standard. Newly Issued Not Yet Effective Accounting Standards In April 2016, the FASB issued ASU No. 2016-02, Leases. When this standard is adopted, the primary accounting change will require lessees to recognize right of use assets and lease obligations for most operating leases as well as finance leases. This new standard is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those years. The Company is evaluating what impact this new standard will have on its financial statements. In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This standard will significantly change how financial assets measured at amortized cost are presented. Such assets, which include most loans and securities held to maturity, will be presented at the net amount expected to be collected over their remaining contractual lives. Estimated credit losses will be based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. The standard will also change the accounting for credit losses related to securities available for sale and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. This new accounting standard is effective for consolidated financial statements issued for annual periods beginning after December 15, 2020. The Company is evaluating what impact this new standard will have on its consolidated financial statements. 26 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (2) Cash Equivalents and Interest Bearing Deposits 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, 2016 and 2015 was approximately $1,122 and $625, 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. Management believes these financial institutions have strong credit ratings and that credit risk related to these deposits is not material. Interest-bearing deposits consist of certificates of deposit at other financial institutions. Certificates of deposit are in denominations of $250 or less and are fully insured by the FDIC. Certificates of deposit maturing in 2017 totaled $3,832 and are included with cash and cash equivalents. Maturities of certificates of deposits at other financial institutions as of December 31, 2016 are as follows: 2018 2019 2020 2021 and thereafter (3) Securities $4,709 4,434 745 719 $10,607 The following tables reflect the amortized costs and approximate fair values of securities at December 31: Held-to-Maturity 2016 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal $732 $46 ($0) $778 Held-to-Maturity 2015 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal $868 $48 ($0) $916 27 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (3) Securities (continued) Available-for-Sale 2016 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Government sponsored entities and U.S. agencies State and municipal Agency mortgage-backed – residential $36,148 116,283 105,741 $119 2,192 415 ($1,051) (1,358) (1,790) $35,216 117,117 104,366 $258,172 $2,726 ($4,199) $256,699 Available-for-Sale 2015 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Government sponsored entities and U.S. agencies State and municipal Agency mortgage-backed – residential $69,117 109,054 94,258 $477 4,448 861 ($214) (142) (559) $69,380 113,360 94,560 $272,429 $5,786 ($915) $277,300 For the years ended December 31, 2016, 2015 and 2014, proceeds from sales of available-for-sale securities amounted to $19,233, $20,475 and $14,601, 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 2016 $332 ($499) 2015 2014 $589 ($163) $140 ($15) Securities with carrying amounts of approximately $145,171 and $142,769 at December 31, 2016 and 2015, 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, 2016 are shown below by contractual maturities, except for U.S. agencies which are shown by contractual maturities or their expected call dates if the call dates are considered likely to occur based on present market conditions. Expected maturities may differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Held-to-Maturity Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Amortized Cost Fair Value $257 475 0 0 $732 $271 501 0 0 $778 28 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (3) Securities (continued) 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 Agency mortgage-backed – residential Amortized Cost Fair Value $12,839 30,575 63,625 45,392 152,431 105,741 $12,912 31,294 62,752 45,375 152,333 104,366 $258,172 $256,699 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, 2016 and 2015: 2016 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 U.S. agencies State and municipal Agency mortgage-backed – residential $25,476 48,030 $1,051 1,290 77,787 1,731 Total temporarily impaired $151,293 $4,072 52 167 138 357 $0 999 2,851 $0 68 59 $3,850 $127 0 4 6 10 2015 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 U.S. agencies State and municipal Mortgage-backed - residential $18,023 10,530 53,408 $114 79 474 32 33 80 $4,300 1,503 4,263 Total temporarily impaired $81,961 $667 145 $10,066 $100 63 85 $248 14 6 7 27 There were no held-to-maturity securities in an unrealized loss position as of December 31, 2016 and 2015. 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. 29 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans The following table presents total loans at December 31 by portfolio segment and class of loan: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial and industrial Agricultural production Consumer and other Allowance for loan losses Totals 2016 2015 $273,920 117,173 99,967 206,609 65,628 18,680 781,977 (15,496) $247,491 127,936 89,803 167,905 73,526 16,451 723,112 (14,841) $766,481 $708,271 Detailed analysis of the allowance for loan losses by portfolio segments at December 31 are as follows: Balance at beginning of year Provision charged to operations, net Recoveries on loans previously charged-off Less loans charged-off Balance at end of year Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Loans acquired with deteriorated credit Loans acquired without deteriorated credit Totals Real Estate Commercial Consumer Total 2016 $10,851 1,004 109 11,964 (1,901) $3,897 1,818 46 5,761 (495) $93 95 13 201 (34) $14,841 2,917 168 17,926 (2,430) $10,063 $5,266 $167 $15,496 $2,822 7,241 0 0 $10,063 $1,786 3,480 0 0 $5,266 $21 146 0 0 $4,629 10,867 0 0 $167 $15,496 30 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) 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 Loans acquired with deteriorated credit Loans acquired without deteriorated credit Real Estate Commercial Consumer Total 2015 $10,231 1,720 73 12,024 (1,173) $4,237 (62) 27 4,202 (305) $103 2 22 127 (34) $14,571 1,660 122 16,353 (1,512) $10,851 $3,897 $93 $14,841 $3,899 6,952 0 0 $460 3,437 0 0 $6 87 0 0 $4,365 10,476 0 0 Totals $10,851 $3,897 $93 $14,841 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 31 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) Detailed analysis of loans evaluated for impairment by portfolio segment for the year ended December 31 follows: Real Estate Commercial Consumer Total 2016 Loans: Individually evaluated for impairment Collectively evaluated for impairment $24,518 466,542 $9,460 262,777 $63 18,617 $34,041 747,936 Totals $491,060 $272,237 $18,680 $781,977 Real Estate Commercial Consumer Total 2015 Loans: Individually evaluated for impairment Collectively evaluated for impairment $26,788 438,442 $6,315 235,116 $108 16,343 $33,211 689,901 Totals $465,230 $241,431 $16,451 $723,112 32 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) Detailed information regarding impaired loans by class of loan as of December 31 follows: Recorded Investment Principal Balance Related Allowance Average Investment Interest Recognized 2016 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 $3,399 8,235 3,764 6,704 133 42 $4,823 10,762 4,182 7,212 367 54 Totals 22,277 27,400 Loans with an allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Totals Grand Totals 8,780 340 0 2,623 0 21 8,864 382 0 2,656 0 21 11,764 11,923 N/A N/A N/A N/A N/A N/A 2,671 151 0 1,786 0 21 4,629 $3,846 8,928 4,055 6,345 165 70 23,409 8,908 365 0 1,786 0 22 11,081 $177 263 121 315 16 3 895 914 19 0 51 0 2 986 $34,041 $39,323 $4,629 $34,490 $1,881 33 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking (4) Loans (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) Recorded Investment Principal Balance 2015 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 $4,608 7,162 1,428 5,628 0 92 $5,334 10,575 1,833 11,132 245 103 Total 18,918 29,222 N/A N/A N/A N/A N/A N/A 2,748 1,151 0 455 5 6 $5,323 9,287 1,840 12,316 259 120 29,145 9,929 3,948 0 691 37 16 $251 226 65 306 17 6 871 480 68 0 31 0 0 579 9,743 3,847 0 653 34 16 9,988 4,078 0 667 34 15 14,293 14,782 4,365 14,621 $33,211 $44,004 $4,365 $43,766 $1,450 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 34 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) Recorded Investment Principal Balance 2014 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 $4,518 3,335 602 3,060 356 50 $4,699 3,495 602 3,076 356 50 Total 11,921 12,278 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 13,141 3,997 0 1,552 41 57 13,142 4,195 0 1,581 41 58 N/A N/A N/A N/A N/A N/A 2,713 1,376 0 975 18 23 $5,035 3,432 605 3,102 390 56 12,620 13,255 4,078 0 1,733 44 64 $192 91 11 115 21 3 433 539 114 0 70 0 4 727 18,788 19,017 5,105 19,174 $30,709 $31,295 $5,105 $31,793 $1,161 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. 35 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking 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 2016 $258,187 108,820 85,584 196,404 57,266 18,590 $5,110 883 10,349 1,330 8,229 27 $10,609 7,418 3,764 8,807 133 63 $14 52 0 68 0 0 $273,920 117,173 99,967 206,609 65,628 18,680 Total $725,121 $25,928 $30,794 $134 $781,977 Pass Special Mention Substandard Doubtful Totals 2015 Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other $232,449 117,212 81,941 160,981 67,349 16,330 $2,148 1,059 6,433 1,218 6,143 25 $12,894 9,665 1,428 5,706 34 95 Total $676,262 $17,026 $29,822 Loan aging information by class of loan at December 31 follows: $247,491 127,936 89,803 167,905 73,526 16,451 $723,112 As of December 31, 2016 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 $8,082 1,848 0 280 150 49 $232 2,636 1,528 3,811 89 13 $8,314 4,484 1,528 4,091 239 62 Total $10,409 $8,309 $18,718 36 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) As of December 31, 2016 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 $8,314 4,484 1,528 4,091 239 62 $266,173 112,689 98,439 201,951 65,389 18,618 $273,920 117,173 99,967 206,609 65,628 18,680 $399 $1,090 4,949 2,938 4,467 108 27 Total $18,718 $763,259 $781,977 $399 $13,579 As of December 31, 2015 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 $342 2,267 60 2,111 69 25 $510 4,860 427 809 31 $852 7,127 487 2,920 69 55 Total $4,874 $6,637 $11,510 As of December 31, 2015 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 $852 7,127 487 2,920 69 55 $246,639 120,809 89,316 $247,491 127,936 89,803 164,985 73,457 16,750 167,905 73,526 16,451 $42 554 9 1 $2,137 6,446 427 3,150 34 30 Total $11,510 $711,956 $723,112 $606 $12,224 When, for economic or legal reasons related to 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. 37 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking 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: Residential real estate Commercial: Commercial & industrial Total Real Estate: Commercial real estate Residential real estate Commercial: Commercial & industrial Consumer and other Total Number of Loans Pre-Modification Investment Post-Modification Investment 2016 1 4 5 $1,140 $1,068 $2,208 2015 $800 $2,779 $3,579 Number of Loans Pre-Modification Investment Post-Modification Investment 2 1 1 1 5 $222 59 131 17 $428 $222 58 131 17 $427 The following table summarizes troubled debt restructurings that defaulted during the year, within 12 months of their modification during the years ended December 31: 2016 Number of Loans Recorded Investment 1 1 $176 $176 2015 Number of Loans Recorded Investment 1 1 2 $206 34 $240 Commercial: Commercial & industrial Total Real Estate: Commercial real estate Residential real estate Total 38 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) The Company has acquired purchased credit impaired (PCl) loans, which are loans that, at acquisition, evidenced deterioration of credit quality since origination, and the Company determined it was probable, at the acquisition date, all contractually required payments would not be collected. These loans are included in the carrying amount of loans in the Company's Balance Sheet. The outstanding balance and carrying amount of PCI loans for the year ended December 31 follows: Outstanding balance: Commercial Residential Real Estate Total outstanding balance 2016 $3,283 278 $3,561 2015 $9,306 3,275 $12,581 The carrying value of the PCI loans was $1,956 and $3,970 at December 31, 2016 and 2015, respectively. No increases to the allowance for loan losses were done for PCI loans during 2016 and 2015. No allowances for loan losses were reversed during 2016 and 2015. A summary of the change in the accretable yield related to PCI loans during the year ended December 31 follows: Beginning balance Accretion Ending Balance 2016 $276 (276) $0 PCI loans acquired during the year ended December 31 follows: Contractually required payments receivable at acquisition: Commercial Residential Real Estate Total contractually required payments receivable at acquisition Cash flows expected to be collected at acquisition Basis in acquired loans at acquisition 2015 $515 (239) $276 2015 $9,392 4,477 $13,869 $5,198 $4,683 Some PCI loans are not accruing interest income because the Company cannot reasonable estimate the cash flows expected to be collected. The carrying amount of nonaccruing PCI loans was $0 and $8,755 at December 31, 2016 and 2015, respectively. The carrying amount of nonaccruing PCI loans acquired was $0 and $9,907 during 2016 and 2015, respectively. 39 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking (5) Loan Servicing NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) 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, 2016 and 2015, were approximately $347,152 and $349,121, Loans serviced for others are not included in the accompanying consolidated balance sheets. Mortgage loans respectively. Custodial escrow balances maintained in conjunction with serviced loans were approximately serviced for others as of December 31, 2016 and 2015, were approximately $347,152 and $349,121, $3,498 and $3,163 at December 31, 2016 and 2015, respectively. respectively. Custodial escrow balances maintained in conjunction with serviced loans were approximately $3,498 and $3,163 at December 31, 2016 and 2015, respectively. The following summarizes the activity pertaining to mortgage servicing rights for the years ended December 31: The following summarizes the activity pertaining to mortgage servicing rights for the years ended December 31: Balance at beginning of year Mortgage servicing rights capitalized Balance at beginning of year Mortgage servicing rights amortized Mortgage servicing rights capitalized Mortgage servicing rights amortized Balance at end of year 2015 $1,451 457 $1,451 (584) 457 (584) $1,324 2014 $1,615 404 $1,615 (568) 404 (568) $1,451 2016 $1,324 545 $1,324 (541) 545 (541) $1,328 2014 2015 2016 Balance at end of year No impairment of mortgage servicing rights existed and no valuation allowance was recognized for 2016, 2015 and 2014. No impairment of mortgage servicing rights existed and no valuation allowance was recognized for 2016, 2015 and 2014. $1,328 $1,324 $1,451 (6) Mortgage Banking Loan Commitments (6) Mortgage Banking Loan Commitments The Company enters into commitments to fund residential mortgage loans (interest rate locks) at specified times in the future, with the intention that these loans will be subsequently sold to third-party investors. A The Company enters into commitments to fund residential mortgage loans (interest rate locks) at specified mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest times in the future, with the intention that these loans will be subsequently sold to third-party investors. A rate and within a specified period of time, generally up to 60-days after inception of the rate lock. It is the mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest Company’s practice to enter into mandatory delivery forward commitments for the future delivery of rate and within a specified period of time, generally up to 60-days after inception of the rate lock. It is the residential mortgage loans to third-party investors when an interest rate lock commitment is granted. These Company’s practice to enter into mandatory delivery forward commitments for the future delivery of mandatory delivery forward commitments bind the Company to deliver a residential mortgage loan to a third- residential mortgage loans to third-party investors when an interest rate lock commitment is granted. These party investor even if the underlying loan never funds. As of December 31, 2016 and 2015, the Company had mandatory delivery forward commitments bind the Company to deliver a residential mortgage loan to a third- approximately $2,269 and $1,895 in interest rate lock commitments outstanding. As of December 31, 2016 party investor even if the underlying loan never funds. As of December 31, 2016 and 2015, the Company had and 2015, the Company had approximately $4,537 and $3,791 in mandatory delivery forward commitments approximately $2,269 and $1,895 in interest rate lock commitments outstanding. As of December 31, 2016 outstanding. These outstanding mortgage loan commitments are considered to be derivatives. The and 2015, the Company had approximately $4,537 and $3,791 in mandatory delivery forward commitments approximate fair values associated with these derivatives were considered to be immaterial as of December 31, outstanding. These outstanding mortgage loan commitments are considered to be derivatives. The 2016 and 2015. approximate fair values associated with these derivatives were considered to be immaterial as of December 31, 2016 and 2015. (7) Foreclosed Assets (7) Foreclosed Assets Foreclosed assets net of valuation allowance consist of the following at December 31: Foreclosed assets net of valuation allowance consist of the following at December 31: 2016 Residential real estate Commercial real estate Residential real estate Non-farm non-residential properties Commercial real estate Construction, land development and other land Non-farm non-residential properties Other repossessed assets Construction, land development and other land Other repossessed assets Balance at end of year 2016 $1,155 49 $1,155 246 49 316 246 0 316 0 $1,766 2015 2015 $244 1,112 $244 1,184 1,112 533 1,184 33 533 33 $3,106 Balance at end of year Residential real estate loans that are in process of foreclosure totaled $1,521 at December 31, 2016 and $1,367 at December 31, 2015. Residential real estate loans that are in process of foreclosure totaled $1,521 at December 31, 2016 and $1,367 at December 31, 2015. $1,766 $3,106 40 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking 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 2016 2015 $2,882 15,362 11,510 29,754 16,278 $2,252 $13,638 11,131 27,021 15,327 $13,476 $11,694 Depreciation expense for the years ended December 31, 2016, 2015 and 2014 amounted to $953, $886 and $847, respectively. (9) Intangible Assets The core deposit premium intangible asset had a gross carrying amount of $1,952 and accumulated amortization of $417 and $105 at December 31, 2016 and 2015, respectively. The following table shows the estimated future amortization of the core deposit premium intangible asset for the next five years. The projections of amortization expense are based on existing asset balances as of December 31, 2016. 2017 2018 2019 2020 2021 (10) Other Assets The components of other assets at December 31 are as follows: Accrued interest receivable Mortgage servicing rights, net of accumulated amortization Net deferred tax assets Other $315 315 315 315 275 2016 2015 $5,719 1,328 6,949 4,729 $5,551 1,324 7,411 2,475 $18,725 $16,761 41 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (11) Time Deposits The aggregate amount of time deposits with a minimum denomination of $250 was approximately $56,863 and $40,076 at December 31, 2016 and 2015, respectively. Time deposits are included in the interest-bearing deposits for financial statement presentation. At December 31, 2016, the scheduled maturities of time deposits are as follows: 2017 2018 2019 2020 2021 2022 $160,048 94,111 57,384 43,218 44,432 5 399,198 (12) Employee and Director 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 $300, $257, and $241, for 2016, 2015, and 2014, respectively. Each plan participant elects how the employer contributions are invested whereby the participants choose between purchasing the Company’s common stock or investing in the plan’s investment funds. In addition, the Company and the Banks maintain non-qualified deferred compensation plans whereby certain directors and officers are provided with guaranteed annual payments for periods ranging after reaching a variation of retirement ages pending participant plan. The compensation plans are funded by bank-owned life insurance policies which had an aggregate death benefit of approximately $53,710 and $17,557 as of December 31, 2016 and 2015, respectively. The Banks accrue amounts to be paid, over the participant’s active service life. The accrued benefits were $1,047, $905, and $825 at December 31, 2016, 2015, and 2014, respectively. Non-qualified deferred compensation expenses were $192, $49, and $46 in 2016, 2015, and 2014, respectively. The State Bank of Herscher sponsored a defined benefit pension plan that covered substantially all employees that was terminated in 2016. The plan called for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Company and compensation rates. To be eligible, an employee must have been employed by the Company for a period of one year or more and be 21 years of age or older. Contributions to the plan reflected benefits attributed to employees' services to date as well as services expected to be earned in the future. The plan was funded in accordance with federal laws and regulations. 42 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (12) Employee and Director Benefit Plans (continued) A summary of the weighted average asset allocations of plan assets by asset type as of December 31, 2015 were as follows: Fair values of plan assets $1,643 Equity securities Debt securities Total 49.1% 50.9% 100% Equity securities included $806 (49.1% of plan assets) at December 31, 2015. The fair values of the Company's pension plan assets by asset category at December 31, 2015 were as follows: Fair Value Measurements Using Quoted Prices in Active Markets (Level 1) Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Plan assets: Interest-bearing cash Corporate common stocks Treasury and corporate bonds Total $255 806 582 $1,643 Total $255 806 582 $1,643 The investment policy included various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected guidelines consider a broad range of economic conditions. Central to the policy were target allocation ranges by major asset categories. The objectives of the target allocations were to maintain investment portfolios that diversified risk through prudent asset allocation parameters, achieved asset returns that met or exceeded the plan's actuarial assumptions, and achieved asset returns that were competitive with like institutions employing similar investment strategies. The investment policy was periodically reviewed by the Company and a designated third-party fiduciary for investment matters. The policy was established and administered in a manner that was compliant at all times with applicable government regulations. The Company acquired the defined benefit pension plan in the State Bank of Herscher business combination. Prior to the acquisition, the benefits of the plan were frozen with the investment plan objectives modified as the assets were transferred to more liquid and less volatile investment types. In February 2015, the State Bank of Herscher’s Board of Directors formally voted for plan termination. 43 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (12) Employee and Director Benefit Plans (continued) Because of the imminent liquidation of the plan, the Company did not perform a computation of the benefit plan obligation at December 31, 2015; instead a range of estimates of the obligation for liquidation was computed. Management did not believe the pension benefit obligation at December 31, 2015 materially differed from the liquidation obligation estimates. As there was no certainty on the financial impact of liquidation due to various factors, including plan participant liquidation elections, the range was $1,595 to $2,511. It was estimated the most likely scenario would result in an estimated payout of approximately $1,791 based on a combination of lump sum and annuities. The Company had accrued a liability for the pension benefit liability in excess of plan assets of $168 at December 31, 2015. This included the accrual for costs associated with plan termination totaling $44 as of December 31, 2015. In 2016, the Company recorded expenses of $230 related to the final benefit expenses and other related costs, including termination. (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 2016 2015 2014 $614 616 1,230 2,110 574 2,684 $2,542 851 3,393 227 91 318 $2,302 1,042 3,344 (131) 232 101 Total income tax expense $3,914 $3,711 $3,445 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: 2016 2015 2014 % of Pretax Earnings % of Pretax Earnings % of Pretax Earnings Amount Amount Amount $4,708 34.0% $4,847 34.0% $3,980 34.0% (1,272) (152) 786 0 (156) (9.2%) (1.1%) 5.7% 0% (1.1%) (1,270) (80) 622 (385) (23) (9.5%) (0.6%) 4.7% (2.9%) (0.2%) (1,257) (73) (10.7%) (0.6%) 841 0 (46) 7.2% 0.0% (0.4%) Statutory federal tax Increase (decrease) in taxes resulting from: Tax-exempt interest Bank-owned life insurance State taxes, net of federal benefit Bargain purchase gain Other Effective tax rates $3,914 28.3% $3,711 27.9% $3,445 29.5% 44 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (13) Income Taxes (continued) The tax effects of existing temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 2016 and 2015 are summarized as follows: Deferred tax assets: Allowance for loan losses Allowance for losses on foreclosed assets Alternative minimum tax Available-for-sale securities Deferred compensation and other Purchase accounting adjustments 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 2016 2015 $6,062 114 244 576 690 799 8,485 168 0 825 543 1,536 $6,949 $5,805 1,011 0 0 546 3,146 10,508 168 1,906 799 224 3,097 $7,411 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 2013. (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 $18,753 and $18,933 at December 31, 2016 and 2015, respectively. Activity for related party loans for the year ended December 31, 2016 is as follows: Balance at beginning of year New credits Participated outside the Company Repayments Balance at end of year 2016 2015 2014 $18,933 7,820 (915) (7,085) $18,753 $21,560 14,108 (1,685) (15,050) $20,625 10,025 (1,475) (7,615) $18,933 $21,560 Deposit accounts from related parties totaled approximately $13,721 and $13,839 at December 31, 2016 and 2015, respectively. 45 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (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 2016 $203,008 580 2,050 $205,638 2015 $232,231 571 758 $233,560 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. The Company participates in the FHLB Mortgage Partnership Finance Program (the "Program"). In addition to entering into forward commitments to sell mortgage loans to a secondary market agency, the Company enters into firm commitments to deliver loans to the FHLB through the Program. Under the Program, loans are funded by the FHLB, and the Company receives an agency fee reported as a component of gain on sale of loans. The Company had no firm commitments outstanding to deliver loans through the Program at December 31, 2016. Once delivered to the Program, the Company provides a contractually agreed-upon credit enhancement and performs servicing of the loans. Under the credit enhancement, the Company is liable for losses on loans delivered to the Program after application of any mortgage insurance and a contractually agreed-upon credit enhancement provided by the Program subject to an agreed-upon maximum. The agreed- upon accrumulated credit enhancement provided by the Program totaled $2,859, subject to an agreed-upon maximum. The fee the Company received for this credit enhancement was not material in each of the years ended December 31, 2016, 2015 and 2014. 46 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (15) Financial Instruments with Off-Balance-Sheet Risk and Concentrations (continued) Concentration of credit risk: The Company and its subsidiary banks provide several types of loans to customers including real estate, agricultural, commercial, and installment loans. The largest component of loans is secured by residential real estate, commercial real estate, or other interest in real property. Lending activities are conducted with customers in a wide variety of industries as well as with individuals with a wide variety of credit requirements. The Company does not have a concentration of loans in any specific industry. Credit risk, as it relates to the Company’s business activities, tends to be geographically concentrated in that the majority of the customer base lies within the surrounding communities served by its subsidiary banks. (16) Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase amounted to $25,107 and $23,600 at December 31, 2016 and 2015, respectively, and are collateralized by U.S. agencies, state and municipal and mortgage-backed investment securities with fair values of approximately $34,459 and $30,570. The weighted-average interest rates on these agreements were 0.45% and 0.35% at December 31, 2016 and 2015, respectively. Securities sold under agreements to repurchase mature on a daily basis. (17) Federal Home Loan Bank (FHLB), Federal Reserve Advances and Other Borrowings Fixed-rate advances with rates ranging from .91% to 2.64% and .33% to 2.64% and weighted average rates of 1.18% and 1.11% as of December 31, 2016 and 2015, respectively. Interest is payable monthly with principal due at maturity. 2016 2015 $13,450 $13,500 Advances are collateralized by 1-4 family mortgage loans, other qualifying loans and securities. The total amounts of collateral securing FHLB advances were approximately $67,382 and $75,909 as of December 31, 2016 and 2015, respectively. FHLB advances are subject to a prepayment penalty if they are repaid prior to maturity. FHLB advances are also secured by $2,846 of FHLB stock owned by the Company at December 31, 2016 and 2015. 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 generally approved rate in relation to the federal funds rate. The primary advance interest rate at December 31, 2016 was 100-basis points. Outstanding advances were $0 at December 31, 2016 and 2015. Advances are collateralized by investment securities pledged totaling approximately $10,270 and $10,943 at December 31, 2016 and 2015, respectively, to the Federal Reserve Bank. On July 2, 2015, the Company entered into a $7,000 note with Bankers’ Bank for the purchase of the State Bank of Herscher. The noted is a fixed rate at 4% due July 2, 2020 and is secured by common stock of Company subsidiaries. The balance was $6,273 and $6,858 at December 31, 2016 and 2015, respectively, with payments of $214, consisting of principal and interest, due quarterly. Other borrowings totaled $4,095 and $488 at December 31, 2016 and 2015, respectively, and mature from 2017 to 2024, at interest rates ranging from 1.60% to 3.25%. 47 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (17) Federal Home Loan Bank (FHLB), Federal Reserve Advances and Other Borrowings (continued) At December 31, the scheduled maturities of Federal Home Loan Bank advances and other borrowings are as follows: 2016 2017 2018 2019 2020 2021 and thereafter (18) Subordinated Debentures 2016 2015 $0 6,900 6,202 1,514 7,023 2,179 $0 8,038 3,950 1,250 750 6,858 $23,818 $20,846 The Company issued $10,000 of Subordinated Debentures in the fiscal year ended 2012 that qualify as Tier 2 regulatory capital (with certain limitations applicable) for the Company. The Company issued the Subordinated Debentures for capital raising purposes primarily for the redemption of preferred stock as part of the Troubled Asset Relief Program. The Debentures mature on August 30, 2019 and the Company may redeem some or all of the Subordinated Debentures at any time after the third anniversary of their issuance in accordance with the contract price limitations. The redemption may be subject to approval by the Federal Reserve and must be on a pro rata basis amongst all holders. The terms call for interest payments to be made quarterly in arrears on the last day of March, June, September and December. The annual rate of interest on the Subordinated Debentures is 6.00%. The interest payments can be deferred for so long as the Company or a specific Bank remains subject to any regulatory order limiting or prohibiting the payment of dividends or interest on indebtedness of the Company, including the Debentures. If interest payments are deferred, the interest will accrue until paid. The Company did not defer any interest payments and there was no deferred interest at December 31, 2016. The agreement contains certain restrictive covenants that are effective if the Company is in default on the debentures. 48 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (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 participants on the measurement date. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The following is a description of valuation methodologies used for assets recorded at fair value: Securities available-for-sale: The fair values of the Company’s securities available-for-sale are primarily determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The values determined by matrix pricing are considered Level 2 fair value measurements. Collateral-dependent impaired loans: The Company does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect (1) partial write- downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market- quoted value of the underlying collateral or (2) the full charge-off of the loan carrying value. 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 on management's comparisons to sales of comparable assets, but include significant unobservable data and are therefore considered Level 3 measurements. 49 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking 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, 2016 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 $256,699 $256,699 $7,135 $1,766 $7,135 $1,766 Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a carrying value of $11,764 with specific reserves of $4,629 as of December 31, 2016. Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, were carried at their fair value of $1,766, which is comprised of the outstanding balance of $2,109, net of an allowance for losses of $343 as of December 31, 2016. As of December 31, 2015 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 $277,300 $277,300 Assets measured at fair value on a non-recurring basis: Assets: Collateral-dependent impaired loans Foreclosed assets $9,928 $3,106 $9,928 $3,106 Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a carrying value of $14,293 with specific reserves of $4,365 as of December 31, 2015. Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, were carried at their fair value of $3,106, which is comprised of the outstanding balance of $5,630, net of an allowance for losses of $2,524 as of December 31, 2015. 50 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (000s omitted except share data) (19) Fair Value Measurements (continued) (19) Fair Value Measurements (continued) The following table presents quantitative information about level 3 fair value measurements for financial 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, 2016: instruments measured at fair value on a non-recurring basis at December 31, 2016: Collateral dependent impaired loans, Collateral dependent impaired loans, net of specific reserves net of specific reserves Foreclosed assets Foreclosed assets Valuation Valuation Technique Technique Sales comparison Sales comparison approach approach Sales comparison Sales comparison approach approach Unobservable Unobservable Input Input Appraised values Appraised values Appraised values Appraised values Range Range 10% - 20% 10% - 20% 10% - 20% 10% - 20% FASB guidance requires disclosure of fair value information about financial instruments, whether or not FASB guidance requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates may not be realized in and estimates of future cash flows. In that regard, the derived fair value estimates may not be realized in immediate settlement of the instrument. Accounting guidance excludes certain financial instruments and immediate settlement of the instrument. Accounting guidance excludes certain financial instruments and certain nonfinancial instruments from its disclosure requirements. These fair value disclosures may not certain nonfinancial instruments from its disclosure requirements. These fair value disclosures may not represent the fair value of the Company. represent the fair value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amounts are reasonable estimates of fair value (Level 1). Cash and cash equivalents: The carrying amounts are reasonable estimates of fair value (Level 1). Interest-bearing deposits in other banks – term deposits: The carrying amounts are reasonable estimates of fair Interest-bearing deposits in other banks – term deposits: The carrying amounts are reasonable estimates of fair value (Level 1). value (Level 1). Securities: See previous description in this footnote for securities available-for-sale. The fair values of the Securities: See previous description in this footnote for securities available-for-sale. The fair values of the Company’s securities held-to-maturity are primarily determined by matrix pricing, which is a Company’s securities held-to-maturity are primarily determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). benchmark quoted securities (Level 2). Non-marketable equity securities: No ready market exists for the equity securities as they have no quoted Non-marketable equity securities: No ready market exists for the equity securities as they have no quoted market value. The carrying amount of equity securities approximates its fair value (Level 3). 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 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). investors or prevailing market prices (Level 2). Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. For fair value estimates for collateral-dependent impaired loans, see previous description in credit quality. For fair value estimates for collateral-dependent impaired loans, see previous description in this footnote (Level 3). this footnote (Level 3). Cash surrender value of life insurance: The fair value is based on reported values by insurers (Level 1). Cash surrender value of life insurance: The fair value is based on reported values by insurers (Level 1). Deposits: The fair values disclosed for demand deposits, savings accounts, and certain money market 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 (Level 1). Fair deposits are, by definition, equal to the amount payable on demand at the reporting date (Level 1). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies 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 interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits (Level 3). maturities on time deposits (Level 3). 51 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking (19) Fair Value Measurements (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (19) Fair Value Measurements (continued) 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). 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 and other borrowings: 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 FHLB advances and other borrowings: The fair value of FHLB advances was estimated using discounted cash arrangements (Level 3). The fair value of other borrowings is assumed to be materially similar to the flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing carrying value. arrangements (Level 3). The fair value of other borrowings is assumed to be materially similar to the carrying value. 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 Subordinated debentures: The fair value of subordinated debentures approximates their fair value based on (Level 3). 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 1). Accrued interest: The carrying amounts of accrued interest approximate their fair value (Level 1). 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). 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: The estimated fair values of the Company’s financial instruments as of December 31 are as follows: Carrying Amount December 31, 2016 Fair December 31, 2016 Value Fair Value Carrying Amount December 31, 2015 Carrying Amount Fair December 31, 2015 Value Fair Value Carrying Amount Financial assets: Cash and cash equivalents Financial assets: Interest-bearing deposits in other banks- Cash and cash equivalents term deposits Interest-bearing deposits in other banks- Securities term deposits Non-marketable equity securities Securities Loans held for sale Non-marketable equity securities Loans, net of allowance Loans held for sale Accrued interest receivable Loans, net of allowance Cash surrender value of bank-owned life Accrued interest receivable Insurance Cash surrender value of bank-owned life Financial liabilities: Insurance Demand and saving deposits Financial liabilities: Certificates of deposits Demand and saving deposits Federal funds purchased Certificates of deposits Securities sold under Federal funds purchased agreements to repurchase Securities sold under FHLB advances and other borrowings agreements to repurchase Subordinated Debentures FHLB advances and other borrowings Accrued interest payable Subordinated Debentures Accrued interest payable $38,861 $38,861 10,607 257,431 10,607 2,852 257,431 2,217 2,852 766,481 2,217 5,719 766,481 5,719 21,525 21,525 $562,287 399,198 $562,287 1,211 399,198 1,211 25,107 23,818 25,107 10,000 23,818 818 10,000 818 $38,861 $38,861 10,607 257,477 10,607 2,852 257,477 2,217 2,852 765,728 2,217 5,719 765,728 5,719 21,525 $27,906 $27,906 13,878 278,168 13,878 2,243 278,168 3,050 2,243 708,271 3,050 5,551 708,271 5,551 9,018 $27,906 $27,906 13,878 278,216 13,878 2,243 278,216 3,050 2,243 709,587 3,050 5,551 709,587 5,551 9,018 21,525 $562,287 403,484 $562,287 1,211 403,484 1,211 25,107 23,781 25,107 10,000 23,781 818 10,000 818 9,018 $532,211 381,039 $532,211 503 381,039 503 23,600 20,846 23,600 10,000 20,846 672 10,000 672 9,018 $532,211 384,334 $532,211 503 384,334 503 23,600 20,848 23,600 10,000 20,848 672 10,000 672 (20) Stock-Compensation Plans (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. 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. 52 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (20) Stock-Compensation Plans (continued) No options were granted for the year ended December 31, 2016 and 2015. 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 2016 2015 2014 N/A N/A N/A N/A N/A N/A N/A N/A 1.64% 10 29.71% 1.05% For the years ended December 31, 2016, 2015 and 2014, the Company recognized $24, $75 and $109 in compensation expense for stock options, respectively. No tax benefits were recognized for the three year period ended December 31, 2016. As of December 31, 2016, stock-based compensation expense not yet recognized totaled $55, and is expected to be recognized over a weighted-average remaining period of approximately three years. The intrinsic value of options exercised during the years ended December 31, 2016, 2015 and 2014 was $280, $284 and $168, respectively. The following tables summarize the activity of options and non-vested shares granted, exercised, or forfeited for the year ended December 31, 2016: Shares under option, beginning of year Granted during the year Forfeited and expired during the year Exercised during the year Weighted Average Exercise Price Weighted Average Remaining Contractual Term $12.02 5.3 10.19 Options 124,416 0 0 (18,624) Shares under option, end of year 105,792 $12.34 Options exercisable, end of year 90,792 $11.24 4.5 4.0 Shares available for grant, end of year 102,203 Aggregate Intrinsic Value $1,565 0 0 280 $1,842 $1,681 Non-vested options, December 31, 2015 Granted during the year Vested during the year, net Forfeited or expired during the year Non-vested options, December 31, 2016 Number of Options Weighted Average Fair Value at Grant 20,000 0 (5,000) 0 15,000 $4.88 0 4.88 0 $4.88 53 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (20) Stock-Compensation Plans (continued) The following table summarizes information about stock options outstanding at December 31, 2016: Exercise Price $10.00 $10.25 $10.50 $19.00 Number Outstanding 3,893 61,899 15,000 25,000 105,792 Remaining Contractual Life (Years) 1.0 3.8 3.6 7.2 Number Exercisable 3,893 61,899 15,000 510,000 90,792 During 2012, the Company approved an 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. The following table summarizes information regarding unvested restricted stock and shares outstanding during the year ended 2016: Restricted stock, December 31, 2015 Granted during the year Forfeited during the year Restricted shares (net for taxes) Vested during the year Unvested Shares Weighted Average Grant Value 12,328 7,847 (155) (883) (7,199) $20.62 24.75 20.68 20.23 20.23 Restricted stock, December 31, 2016 11,938 $23.61 During 2016, 2015 and 2014, total compensation expense of $178, $142, and $59 (before tax benefits of $70, $57 and $24) was recorded from amortization of restricted shares expected to vest, respectively. Future projected compensation expense (before tax benefits) assuming all restricted shares eventually vest to employees would be $119 and $24 for years 2017 and 2018, respectively. (21) Stock Repurchase Program In October 2015 and October 2016, 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, 2016 and 2015, the Company had repurchased 21,300 and 20,000 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 as treasury stock. 54 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (22) Earnings Per Common Share For the years ended December 31, earnings per common share have been computed based on the following: Net income Net income available to common stockholders 2016 2015 2014 $9,933 $9,933 $10,544 $10,544 $8,260 $8,260 Average number of common shares outstanding Effect of dilutive options 3,633,278 51,468 3,633,369 60,796 3,638,004 57,420 Average number of common shares outstanding used to calculate diluted earnings per common share 3,684,746 3,694,165 3,695,424 (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. Effective January 1, 2015, the Company and Banks are subject to new capital adequacy framework called Basel III. Basel III includes several changes to the capital adequacy guidelines, including a new Common Equity Tier 1 capital requirement, increases in the minimum required Tier 1 risk-based capital ratios, and other changes to the calculation of regulatory capital and risk-weighted assets. Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiaries to maintain minimum regulatory capital amounts and ratios (set forth in the following table). Management believes that as of December 31, 2016, that the Company and the Banks meet all capital- adequacy requirements to which they are subject. As of December 31, 2016, the most recent notifications from the Federal Deposit Insurance Corporation (FDIC) categorized all six Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum capital 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. 55 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (23) Regulatory Matters (continued) The actual capital amounts and ratios for the Company and Banks as of December 31 are presented in the following tables: Amount In $000s Actual Ratio Minimum Capital Requirement Amount In $000s Ratio Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount In $000s Ratio $122,145 27,991 23,072 16,621 25,943 10,268 17,949 $106,769 25,220 21,064 14,970 23,469 9,327 16,772 $106,769 25,220 21,064 14,970 23,469 9,327 16,772 $106,769 25,220 21,064 14,970 23,469 9,327 16,772 13.48% 12.66% 12.43% 12.63% 13.21% 13.78% 19.58% 11.79% 11.40% 11.35% 11.38% 11.95% 12.52% 18.29% 11.79% 11.40% 11.35% 11.38% 11.95% 12.52% 18.29% 9.42% 9.42% 9.14% 9.24% 9.99% 10.03% 11.93% $72,477 17,693 14,846 10,526 15,717 5,960 7,335 $54,358 13,270 11,134 7,895 11,788 4,470 5,501 $40,768 9,952 8,351 5,921 8,841 3,352 4,126 $45,338 10,706 9,220 6,479 9,396 3,719 5,623 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% $90,596 22,116 18,557 13,158 19,646 7,450 9,169 $72,477 17,693 14,846 10,526 15,717 5,960 7,335 $58,887 14,376 12,062 8,553 12,770 4,482 5,960 $56,673 13,383 11,526 8,099 11,745 4,649 7,028 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% As of December 31, 2016: Total Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Tier 1 Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Common Equity Tier 1 Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Tier 1 Capital to Average Assets: Company Northwest German Davis Freeport Lena Herscher 56 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (23) Regulatory Matters (continued) As of December 31, 2015: Total Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Tier 1 Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Common Equity Tier 1 Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Tier 1 Capital to Average Assets: Company Northwest German Davis Freeport Lena Herscher $114,995 26,369 21,867 15,574 24,319 9,663 17,128 $98,467 23,851 19,776 13,900 21,978 8,728 16,901 $98,467 23,851 19,776 13,900 21,978 8,728 16,901 $98,467 23,851 19,776 13,900 21,978 8,728 16,901 13.74% 13.17% 13.11% 11.68% 13.13% 13.04% 22.76% 11.76% 11.91% 11.85% 10.43% 11.87% 11.78% 11.98% 11.76% 11.91% 11.85% 10.43% 11.87% 11.78% 22.46% 9.04% 9.58% 9.15% 8.35% 9.80% 9.65% 11.98% $66,966 16,022 13,347 10,663 14,818 5,927 6,019 $50,225 12,017 10,010 7,998 11,113 4,445 4,514 $37,669 9,013 7,508 5,998 8,335 3,334 3,386 $43,549 9,957 8,643 6,656 8,972 3,618 5,642 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% $83,708 20,028 16,684 13,329 18,522 7,409 7,524 $66,966 16,022 13,347 10,663 14,818 5,927 6,019 $54,410 13,018 10,845 8,664 12,039 4,816 4,891 $54,436 12,446 10,804 8,320 11,215 4,522 7,052 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% (24) 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. (25) 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 $78 per year. The lease expired September 2016 and was renewed for an additional year and remains renewable up to two 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 $120 and $168 was recognized in 2016 and 2015, respectively. 57 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (25) Lease Commitments (continued) In addition, there is an operating lease agreement for bank premises in Kankakee, Illinois. There is no formal lease for the Kankakee location. The Bank is verbally agreeing to pay $7 for 2017. The minimum lease commitments on all leases is $102 for 2017. (26) Qualified Affordable Housing Project Investments The Company invests in qualified affordable housing projects. At December 31, 2016 and 2015, the balance of the investment for qualified affordable housing projects was $2,215 and $1,292. These balances are reflected in the other assets line on the consolidated balance sheets. (27) State Bank of Herscher Acquisition On July 2, 2015, the Company purchased 100% of the outstanding common shares of the State Bank of Herscher. As a result of the acquisition, the Company expects to offer its expanded line of bank products and services to State Bank of Herscher’s existing and prospective customers while reducing administrative costs through economies of scale. The Company was able to purchase State Bank of Herscher at a bargain purchase price primarily because the credit quality of State Bank of Herscher’s loan portfolio shows significant deterioration. A bargain purchase gain of $1,133 was recognized in other noninterest income on the consolidated statements of income for the year ended December 31, 2015. Consideration paid for the net assets acquired included $1 of cash. Costs related to the acquisition are included in other noninterest expense on the consolidated statements of income and totaled $206 for the year ended December 31, 2015. Recognized amounts of identifiable assets acquired and liabilities assumed: Cash and cash equivalents Securities Loans Premise and equipment Core deposit intangibles Foreclosed assets Other assets Total assets acquired Deposits Other liabilities Total Liabilities assumed Bargain purchase gain Total 2015 $23,756 32,798 56,810 2,033 1,952 2,635 8,232 $128,216 124,748 2,335 127,083 1,133 $128,216 The fair value of net assets includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence of credit deterioration since origination. 58 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (27) State Bank of Herscher Acquisition (continued) The following table presents pro forma information as if the acquisition had occurred at the beginning of 2015. The pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates. Net interest income Net income Basic earnings per share Diluted earnings per share 2015 2014 $34,561 $34,747 $10,102 $5,795 $2.78 $2.73 $1.59 $1.57 59 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking CONSOLIDATING SCHEDULE 1 - BALANCE SHEET CONSOLIDATING SCHEDULE 1 - BALANCE SHEET (000s omitted except share data) (000s omitted except share data) December 31, 2016 December 31, 2016 A S S E T S A S S E T S Cash and due from banks Cash and due from banks Interest-bearing deposits in banks Interest-bearing deposits in banks Federal funds sold Federal funds sold Interest-bearing deposits in banks - term deposits Interest-bearing deposits in banks - term deposits Securities: Securities: Securities held-to-maturity Securities held-to-maturity Securities available-for-sale Securities available-for-sale Non-marketable equity securities, at cost Non-marketable equity securities, at cost Loans held for sale Loans held for sale Loans, net Loans, net Foreclosed assets, net Foreclosed assets, net Premises and equipment Premises and equipment Core deposit intangible Core deposit intangible Bank owned life insurance Bank owned life insurance Other assets Other assets Investment in subsidiary banks Investment in subsidiary banks German-American State Bank German-American State Bank State Bank of Davis State Bank of Davis Northwest Bank Northwest Bank $3,463 1,330 331 3,723 $3,463 1,330 331 3,723 $1,817 1,908 257 1,940 $1,817 1,908 257 1,940 0 53,947 534 0 159,686 101 1,257 0 3,064 3,031 0 0 53,947 534 0 159,686 101 1,257 0 3,064 3,031 0 732 33,431 313 0 109,460 120 955 0 1,773 4,251 0 732 33,431 313 0 109,460 120 955 0 1,773 4,251 0 $7,218 1,193 285 0 0 43,061 695 2,217 197,983 238 4,213 0 6,019 3,447 0 $7,218 1,193 285 0 0 43,061 695 2,217 197,983 238 4,213 6,019 3,447 0 0 Total assets Total assets $230,467 $230,467 $156,957 $156,957 $266,569 $266,569 LIABILITIES AND STOCKHOLDLERS' EQUITY LIABILITIES AND STOCKHOLDLERS' EQUITY Liabilities: Liabilities: Deposits: Deposits: Noninterest bearing Noninterest bearing Interest-bearing Interest-bearing Total deposits Total deposits Federal funds purchased Federal funds purchased Securities sold under agreements to repurchase Securities sold under agreements to repurchase Federal Home Loan Bank borrowings and other Federal Home Loan Bank borrowings and other Subordinated debentures Subordinated debentures Accrued interest payable and other liabilities Accrued interest payable and other liabilities $28,036 176,531 204,567 0 $28,036 176,531 204,567 0 3,750 0 1,150 3,750 0 1,150 $14,230 116,058 130,288 0 11,188 0 0 442 $14,230 116,058 130,288 0 11,188 0 0 442 $39,232 193,101 232,333 0 1,401 6,547 0 1,200 $39,232 193,101 232,333 1,401 6,547 0 0 1,200 Total liabilities Total liabilities 209,467 209,467 141,918 141,918 241,481 241,481 Stockholders’ equity: Stockholders’ equity: Preferred stock Preferred stock Common stock Common stock Additional paid-in capital Additional paid-in capital Retained earnings Retained earnings Treasury stock Treasury stock Accumulated other comprehensive income (loss) Accumulated other comprehensive income (loss) 0 400 2,856 17,808 0 (64) 0 400 2,856 17,808 0 (64) 0 100 1,612 13,257 0 70 0 100 1,612 13,257 0 70 0 1,450 7,286 16,484 0 (132) 1,450 7,286 16,484 0 0 (132) Total stockholders’ equity Total stockholders’ equity 21,000 21,000 15,039 15,039 25,088 25,088 Total liabilities and stockholders’ equity Total liabilities and stockholders’ equity $230,467 $230,467 $156,957 $156,957 $266,569 $266,569 60 1986 - 2016 Celebrating Thirty Years of Community Building Through Community BankingState Bank Lena State Bank State Bank of Herscher Foresight Financial Group, Inc. Eliminations Consolidated Total $4,244 3,592 904 2,219 0 52,162 448 0 168,166 0 1,605 0 1,372 3,101 0 $1,200 3,912 990 1,338 0 25,633 253 0 59,872 0 427 0 2,232 1,351 0 $2,032 353 0 5,219 0 48,465 609 0 71,148 1,304 1,965 1,535 4,238 4,863 0 $175 8,247 0 0 0 0 0 0 166 3 3,054 0 2,829 (1,319) 109,677 ($175) (4,415) (3,832) (109,677) $19,974 $16,120 2,767 10,607 732 256,699 2,852 2,217 766,481 1,766 13,476 1,535 21,527 18,725 $237,813 $97,208 $141,731 $122,832 ($118,099) $1,135,478 $27,148 169,236 196,384 0 11,953 5,248 0 696 214,281 0 1,000 4,646 17,823 0 63 23,532 $4,530 80,822 85,352 0 0 2,000 0 557 87,909 0 500 3,715 5,112 0 (28) 9,299 $22,232 98,751 120,983 1,211 565 0 0 774 123,533 0 400 28,443 (7,360) 0 (3,285) 18,198 $0 0 $0 0 0 6,273 10,000 794 17,067 0 988 8,955 105,518 (6,320) (3,376) $8,072 (16,494) (8,422) $143,480 818,005 961,485 1,211 25,107 23,818 10,000 5,613 (8,422) 1,027,234 (3,850) (48,558) (63,124) 5,855 0 988 8,955 105,518 (6,320) (897) 105,765 (109,677) 108,244 $237,813 $97,208 $141,731 $122,832 ($118,099) $1,135,478 61 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking For the year ended December 31, 2016 For the year ended December 31, 2016 Interest and dividend income: Interest and dividend income: Loans, including fees Loans, including fees Securities: Securities: Taxable Taxable Tax-exempt Tax-exempt Interest-bearing deposits in banks and other Interest-bearing deposits in banks and other Federal funds sold Federal funds sold Total interest and dividend income Total interest and dividend income Interest expense: Interest expense: Deposits Deposits Federal funds purchased Federal funds purchased Securities sold under agreements to repurchase Securities sold under agreements to repurchase Federal Home Loan Bank advances and other borrowings Federal Home Loan Bank advances and other borrowings Subordinated debentures Subordinated debentures Total interest expense Total interest expense German-American State Bank German-American State Bank State Bank of Davis State Bank of Davis Northwest Bank Northwest Bank $7,240 $7,240 $4,651 $4,651 $9,271 $9,271 729 662 71 3 8,705 729 662 71 3 8,705 1,380 3 0 68 0 1,451 1,380 3 0 68 0 1,451 427 655 64 3 5,800 427 655 64 3 5,800 1,031 0 62 0 0 1,093 1,031 0 62 0 0 1,093 429 429 630 630 54 54 3 3 10,387 10,387 1,486 3 6 60 0 1,555 1,486 3 6 60 0 1,555 Net interest and dividend income Net interest and dividend income 7,254 7,254 4,707 4,707 8,832 8,832 Provision for loan losses Provision for loan losses 90 90 154 154 400 400 Net interest and dividend income, after provision for loan losses Net interest and dividend income, after provision for loan losses Noninterest income: Noninterest income: Customer service fees Customer service fees Equity in earnings of subsidiaries Equity in earnings of subsidiaries Gain on sales and calls of AFS securuties, net Gain on sales and calls of AFS securuties, net Gain on sales of loans, net Gain on sales of loans, net Loan-servicing fees Loan-servicing fees Gain on acquisition bargain purchase Gain on acquisition bargain purchase Other Other Total noninterest income Total noninterest income Noninterest expenses: Noninterest expenses: Salaries and employee benefits Salaries and employee benefits Occupancy expense of premises, net Occupancy expense of premises, net Outside services Outside services Data processing Data processing Foreclosed assets, net Foreclosed assets, net Other Other Total noninterest expenses Total noninterest expenses Income before income taxes Income tax expense (benefit) Income before income taxes Income tax expense (benefit) Net income Net income 62 7,164 7,164 4,553 4,553 8,432 8,432 271 271 107 107 482 482 (47) 0 0 0 820 1,044 (47) 0 0 0 820 1,044 2,537 393 180 390 (11) 1,235 4,724 2,537 393 180 390 (11) 1,235 4,724 3,484 1,090 3,484 1,090 29 0 0 0 239 375 29 0 0 0 239 375 1,113 165 191 153 2 668 2,292 1,113 165 191 153 2 668 2,292 2,636 663 2,636 663 (49) 1,521 830 0 639 3,423 (49) 1,521 830 0 639 3,423 4,843 979 166 429 (2) 2,156 8,571 4,843 979 166 429 (2) 2,156 8,571 3,284 966 3,284 966 $2,394 $2,394 $1,973 $1,973 $2,318 $2,318 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking CONSOLIDATING SCHEDULE 2 - STATEMENT OF INCOME (000s omitted except share data) State Bank Lena State Bank State Bank of Herscher Foresight Financial Group, Inc. Eliminations Consolidated Total $7,311 $2,612 $5,406 589 776 32 2 8,710 1,151 4 34 48 0 1,237 7,473 0 7,473 129 (156) 0 0 0 696 669 2,060 198 186 297 0 883 3,624 4,518 1,497 273 458 25 1 3,369 516 2 0 18 0 536 2,833 123 2,710 92 (51) 0 0 0 194 235 695 106 148 121 (37) 396 1,429 1,516 411 $3,021 $1,105 772 269 81 5 6,533 265 0 0 0 0 265 6,268 2,150 4,118 123 107 0 81 0 746 1,057 1,685 377 364 433 606 1,091 4,556 619 102 $517 1 0 0 13 0 14 0 0 0 264 602 866 (852) 0 (852) ($16) (16) ($16) (16) 0 0 $11,328 ($11,328) 0 1,961 13,289 2,290 244 46 30 709 3,319 9,118 (815) (1,796) (13,124) (56) (840) (899) (1,796) (11,328) $9,933 ($11,328) $36,492 3,219 3,450 324 17 43,502 5,813 12 102 458 602 6,987 36,515 2,917 33,598 1,204 0 (167) 1,521 911 0 3,499 6,968 15,223 2,406 441 924 588 7,138 26,719 13,847 3,914 $9,933 63 1986 - 2016 Celebrating Thirty Years of Community Building Through Community Banking BOARD OF DIRECTORS NOTES 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_________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ _________________________________________________________________________________________ BOARD OF DIRECTORS John Jeschke, Chairman John Collman Fred Kundert Charles B. Kullberg Brent Myers Carolyn Sluiter, D.V.M. Robert W. Stenstrom Judd Thruman, J.D. Douglas Wagner 30 YEARS 1986 • 2016 2016 Annual Report 3106 North Rockton Avenue • Rockford, Illinois 61103-2839 • www.foresightfg.com • 815.847.7500 Celebrating Thirty Years of Community Building Through Community Banking 

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