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
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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