Foresight Financial Group, Inc.
Annual Report 2018

Plain-text annual report

2018 Annual Report p • c o mmunity b ial gro u c n a n i f t h g i s e r o ity banking • f m u n u i l d i n g t h r o u g h com Freeport, IL HBSS T A T E B A N K O F H E R S C H E R 809 Cannell-Puri Court, Suite 5 • Winnebago, Illinois 61088 • 815.847.7500 • foresightfg.com the FORESIGHT BANKS Freeport, IL www.foresightfg.com Dear Stockholders, The financial environment Foresight Financial Group and its many customers faced in 2018 was profoundly affected by trade tariffs and overall rising interest rates. Foresight navigated this environment and produced the highest level of earnings, $11.4 million, ever recorded by our company while maintaining its steadfast commitment to the four constituencies we serve, shareholders, customers, employees and communities. The federal tax cuts had a positive effect on the 2018 reported earnings adding approximately $1.05 million to net income. Basic earnings per common share were $3.09, an increase of 22.12% greater than the $2.53 per share reported in 2017, producing a return on average equity of 9.38% for 2018. The market performance of Foresight Stock in the past year increased 4.78% to $33.95 per share at December 31, 2018. We improved our net interest margin by 0.07% despite the rising interest rate environment experienced in 2018. We continue to diligently manage credit risk and net overhead expenses with a focus on improving future earnings and increasing shareholder value. We continued to invest in technology, human capital, and facility development aimed at improving future earnings of the company. We completed a majority of the scheduled technology upgrades and conversions by year end of 2018, allowing us to more efficiently service customers while enhancing the customers’ digital experience throughout the member bank charters. As we grow, we continually recruit or promote the best talent sourced externally or internally, a prime example being the internal promotion of Linda Heckert, as President of the State Bank of Davis in April of 2018. As we look to expand our market, future investments in human capital will be prudently executed. We completed and occupied the new facility constructed by Northwest Bank, a Foresight subsidiary member bank in October of 2018. The prime location of this facility allows us to compete in the fastest growing area of Rockford. In 2018 we saw a dividend increase of $.04 per share or a 15.38% increase from the year ending December 31, 2017. Total Stockholder’s equity also increased 6.87% or $8.1 million to a year-end balance of $125.6 million. The Foresight board and management have developed a three year business plan addressing organic and external growth opportunities. The enhancements in human capital and technology recently made will contribute to a faster more efficient deployment of new products and the integration of external growth opportunities. The business plan also confirms the use of the Bank Charter model, keeping the Bank Charters operating as independent entities. The year of 2018 was a strong performance period for the company and shareholders that produced the highest level of consolidated earnings, the company’s largest reported earnings per share and an increase in dividends. It is with great appreciation to all shareholders, from myself and the Board of Directors of Foresight, for your steadfast support of our company. We remain dedicated to increasing future shareholder value. Respectfully, Rex K. Entsminger President/Chief Executive Officer 2 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” 3 Trends in Assets, Deposits & Loans (000’s) 1,200,000 - 1,200,000 - 900,000 - 900,000 - 800,000 - 800,000 - 700,000 - 700,000 - 600,000 - 600,000 - 500,000 - 500,000 - 0 - 0 - 3 5 9 3 , 5 2 9 2 , 9 2 2 9 0 5 2 0 , 5 3 2 1 , 9 3 1 9 1 5 5 1 , 5 6 5 7 , 0 6 , 7 1 0 , 1 5 8 4 5 , 8 1 4 6 , 9 1 6 9 1 7 2 1 , 7 8 2 0 , 7 8 0 7 8 7 4 8 , 7 5 4 3 , 1 5 , 3 1 1 , 1 9 5 6 9 , 5 1 6 6 , 9 1 6 9 3 3 9 3 , 3 3 9 6 , 1 3 , 6 1 1 , 1 4 2 0 4 , 2 0 0 8 , 9 0 8 9 3 2 3 3 , 2 0 3 8 , 1 0 , 8 1 1 , 1 1 8 4 1 , 8 6 4 6 , 7 6 6 7 0 2 9 0 , 2 7 9 7 , 7 7 7 7 3 9 3 3 , 9 4 3 8 , 7 4 8 7 7 5 0 7 , 5 2 0 7 , 8 2 7 8 7 5 0 7 , 5 9 0 2 , 7 9 2 7 , 8 1 7 8 1 5 7 9 , 5 5 9 5 6 3 3 6 , 3 5 3 6 , 7 5 6 7 , 5 9 7 5 9 0 7 4 , 6 0 4 6 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 Loans Loans 2018 2018 Assets Assets Deposits Deposits Trends in Combined Equity Capital & ALLL* to Non Performing Assets (000’s) 150,000 - 150,000 - 115,000 - 115,000 - 80,000 - 80,000 - 45,000 - 45,000 - 10,000 - 10,000 - 3 0 0 3 , 9 0 9 0 , 9 9 6 5 5 6 , 5 8 0 5 1 , 8 0 1 , 8 7 7 8 5 7 1 7 , 5 1 0 - 0 - 2013 2013 , 0 4 7 0 4 3 7 2 , 1 3 2 1 , 5 9 9 5 9 7 9 1 , 1 7 1 1 , 6 4 5 6 4 0 5 3 , 1 0 3 1 , 4 7 8 4 7 9 8 3 , 1 9 3 1 , 5 6 2 5 0 6 1 2 , 0 1 2014 2014 , 6 3 9 6 5 3 1 9 , 5 1 2015 2015 4 4 7 , 4 5 4 1 7 , 5 1 , 8 5 9 8 5 5 1 9 , 5 1 , 5 4 0 5 0 4 1 0 , 0 1 2016 2017 2018 Equity Capital & ALLL 2016 2017 Non Performing Assets 2018 *ALLL: Allowance for loan and lease losses Equity Capital & ALLL Non Performing Assets 4 2018 Annual Report Community Building Through Community Banking Net Income (1,000,000,000’s) 12.0 - 12.0 - 10.0 - 10.0 - 8.0 - 8.0 - 6.0 - 6.0 - 4.0 - 4.0 - 2.0 - 2.0 - 0 - 0 - 4 4 5 4 . 0 4 1 5 . 0 1 3 3 9 3 . 9 3 9 . 9 5 4 2 5 . 9 4 2 . 9 5 6 3 5 . 1 6 1 3 . 1 1 0 6 2 . 0 8 6 2 8 . 8 3 8 . 8 6 3 8 6 . 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 Common Stock Per Share Book & Market Value - 12/31 $35.00 - $35.00 - $30.00 - $30.00 - $25.00 - $25.00 - $20.00 - $20.00 - $15.00 - $15.00 - $10.00 - $10.00 - 0 - 0 - . 7 1 2 7 3 1 $ . 2 3 $ . 0 4 2 0 3 4 $ . 2 3 $ . 3 0 0 3 3 0 $ . 0 3 $ . 5 7 9 5 2 7 $ . 9 2 $ . 9 7 4 9 3 7 $ . 4 3 $ . 5 9 3 5 3 9 $ . 3 3 $ . 9 5 7 9 2 $ 5 . 7 2 $ 0 6 . 4 2 0 $ 6 . 4 2 $ 6 9 . 4 2 6 $ 9 . 4 2 $ 0 0 . 1 2 0 $ 0 . 1 2 $ 6 8 . 2 2 6 $ 8 . 2 2 $ 5 7 . 8 1 5 $ 7 . 8 1 $ 2013 2013 2014 2014 2015 2015 2016 2016 2017 2018 Book Value 2017 Book Value Market Value 2018 Market Value 5 Community Building Through Community Banking 2018 Annual Report Board of Directors Robert W. Stenstrom Chairman, Board of Directors Chairman & CEO, Stenstrom Companies Rex K. Entsminger Chairman Judd D. Thruman Partner, Fishburn, Whiton, Thruman, LTD. Carolyn S. Sluiter, D.V.M. Veterinarian, New Hope Veterinary Clinic Douglas A. Wagner Owner, Floor to Ceiling. To the Board of Directors Foresight Financial Group, Inc. and Subsidiaries Doug Fitzgerald Retired Partner, Wipfli LLP Frederick J. Kundert Retired, Harder Corporation Charles B. Kullberg Retired John Collman Ag Production Executive Officers Auditor’s Responsibility Rex K. Entsminger President/Chief Executive Officer Dean E. Cooke Chief Financial Officer Aaron Patterson Chief Information Officer John W. Stichnoth Chief Credit Officer K. Denise Osadjan Chief Risk Officer Nora Koehler Director of Human Services 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) Wipfli LLP 4949 Harrison Avenue Rockford, Illinois 61108 815.399.7700 Fax 815.399.7644 www.wipfli.com INDEPENDENT AUDITOR’S REPORT 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, 2017 and 2016, 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, 2017, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements 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. 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 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit statements. opinion. 2018 Annual Report 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) Wipfli LLP Wipfli LLP 2501 W. Beltline Hwy #104 Wipfli LLP 2501 W. Beltline Hwy #401 Madison, WI 53713 4949 Harrison Avenue Madison, WI 53713 Rockford, Illinois 61108 608.274.1980 Fax 608.274.8085 608.274.1980 815.399.7700 Fax 608.274.8085 Fax 815.399.7644 www.wipfli.com www.wipfli.com www.wipfli.com INDEPENDENT AUDITOR’S REPORT INDEPENDENT AUDITOR’S REPORT To the Board of Directors To the Board of Directors Foresight Financial Group, Inc. and Subsidiaries Foresight Financial Group, Inc. and Subsidiaries We have audited the accompanying consolidated financial statements of Foresight Financial Group, Inc. and We have audited the accompanying consolidated financial statements of Foresight Financial Group, Inc. and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes to the consolidated financial years in the three-year period ended December 31, 2017, and the related notes to the consolidated financial statements. 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 consolidated financial statements in 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, 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 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. 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 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 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 require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. opinion. 7 Community Building Through Community Banking 2018 Annual Report 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, 2018 and 2017, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2018, 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. Madison, Wisconsin March 5, 2019 8 2018 Annual Report Community Building Through Community BankingA S S E T S Cash and due from banks Interest-bearing deposits in banks Federal funds sold Total cash and cash equivalents Interest-bearing deposits in banks - term deposits Securities: Securities available-for-sale (AFS) Securities held-to-maturity (HTM) Non-marketable equity securities, at cost Loans held for sale Loans, net of allowance for loan losses of $14,431 and $13,164, respectively Foreclosed assets, net Premises and equipment, net Core deposit intangible Bank owned life insurance Other assets CONSOLIDATED BALANCE SHEETS (000s omitted except share data) December 31, 2018 $20,284 7,083 954 28,321 9,968 294,862 520 995 1,722 784,393 515 19,003 911 21,477 17,636 2017 $24,334 9,427 4,634 38,395 10,672 273,001 766 950 2,339 777,920 1,092 16,320 1,223 22,168 19,087 Total assets $1,180,323 $1,163,933 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing Interest-bearing Total deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank (FHLB) and Federal Reserve advances and other borrowings Subordinated debentures Accrued interest payable and other liabilities Total liabilities Stockholders’ equity: Preferred stock (no par value; authorized 500,000 shares) Common stock ($.25 par value; authorized 10,000,000 shares; 4,009,810 and 3,979,208 shares issued, respectively) Additional paid-in capital Retained earnings Treasury stock, at cost (314,919 shares) Accumulated other comprehensive (loss) Total stockholders’ equity $148,645 831,379 980,024 6,013 27,754 33,216 0 7,873 1,054,880 0 1,002 9,810 124,068 (6,320) (3,117) 125,443 $137,697 823,962 961,659 8,394 32,434 28,308 10,000 5,756 1,046,551 0 995 9,410 113,811 (6,320) (514) 117,382 Total liabilities and stockholders’ equity $1,180,323 $1,163,933 See Notes to Consolidated Financial Statements. 9 Community Building Through Community Banking 2018 Annual ReportCONSOLIDATED STATEMENTS OF INCOME (000s omitted except share data) For the years ended December 31, Interest and dividend income: Loans, including fees Debt securities: Taxable Tax-exempt Interest-bearing deposits in banks and other Federal funds sold Total interest and dividend income Interest expense: Deposits Federal funds purchased Securities sold under agreements to repurchase FHLB and other borrowings Subordinated debentures Total interest expense Net interest and dividend income Provision for loan losses Net interest and dividend income, after provision for loan losses Noninterest income: Customer service fees (Loss) Gain on sales and calls of AFS securities, net Gain on sales of loans, net Loan servicing fees, net Other Total noninterest income Noninterest expenses: Salaries and employee benefits Occupancy expense of premises, net Outside services Data processing Foreclosed assets, net Other Total noninterest expenses Income before income taxes Income tax expense Net income Earnings per common share: Basic Diluted 2018 2017 2016 $38,877 $36,241 $36,492 4,564 3,140 669 73 47,323 7,944 54 533 580 296 9,407 37,916 1,448 3,569 3,378 474 34 43,696 6,401 29 229 426 600 7,685 3,219 3,450 324 17 43,502 5,813 12 102 458 602 6,987 36,011 36,515 868 2,917 36,468 35,143 33,598 1,160 (14) 1,297 775 4,378 7,596 17,317 2,686 773 2,372 218 6,724 30,090 13,974 2,609 $11,365 $3.09 $3.06 1,127 0 1,658 869 3,445 7,099 15,982 2,096 1,207 1,835 404 6,220 27,744 14,498 5,253 $9,245 $2.53 $2.50 1,204 (167) 1,521 911 3,499 6,968 15,222 2,406 441 1,520 588 6,542 26,719 13,847 3,914 $9,933 $2.73 $2.70 10 See Notes to Consolidated Financial Statements. 2018 Annual Report 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 $1,040, $370 & $2,639, respectively Reclassification adjustments for net securities losses (gains) recognized in income, net of tax of ($4), $0 & ($67), respectively Total other comprehensive (loss) income 2018 2017 2016 $11,365 $9,245 $9,933 (2,613) 10 (2,603) 383 0 383 (3,959) 100 (3,859) Total comprehensive income $8,762 $9,628 $6,074 See Notes to Consolidated Financial Statements. 11 Community Building Through Community Banking 2018 Annual Report CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (000s omitted except share data) For the years ended December 31, Preferred Common Stock Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Balance, January 1, 2016 $0 $981 $8,613 $96,385 ($5,787) $2,962 $103,154 Net income Other comprehensive loss Cash dividends ($.22 per share) 9,933 (800) Purchase of treasury stock (21,300 shares) (533) Stock options exercised (18,624 shares) Restricted stock vested (8,082 shares) 5 2 181 161 9,933 (3,859) (3,859) (800) (533) 186 163 Balance, December 31, 2016 0 988 8,955 105,518 (6,320) (897) 108,244 Net income Other comprehensive income Cash dividends ($.26 per share) 9,245 (952) Stock options exercised (23,050 shares) Restricted stock vested (6,829 shares) 5 2 299 156 383 9,245 383 (952) 304 158 Balance, December 31, 2017 0 995 9,410 113,811 (6,320) (514) 117,382 Net income Other comprehensive loss Cash dividends ($.30 per share) 11,365 (1,108) Stock options exercised (25,554 shares) Restricted stock vested (5,048 shares) 6 1 268 132 11,365 (2,603) (2,603) (1,108) 274 133 Balance, December 31, 2018 $0 $1,002 $9,810 $124,068 ($6,320) ($3,117) $125,443 See Notes to Consolidated Financial Statements. 12 2018 Annual Report Community Building Through Community BankingCONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted except share data) For the years ended December 31, 2017 2016 2018 CASH FLOWS FROM OPERATING ACTIVITIES: 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 Income on bank owned life insurance Gain on death benefits Deferred income tax (benefit) expense Net loss (gain) on the sales and calls of AFS securities Net loss (gain) on the sales of foreclosed assets Net change in: Loans held for sale Other assets Accrued interest payable and other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Net change in interest-bearing deposits in banks - term deposits Proceeds from sales of AFS securities Proceeds from maturities, calls, and paydowns of HTM securities Proceeds from maturities, calls, and paydowns of AFS securities Purchases of AFS securities Purchases of bank owned life insurance Proceeds from death benefits (Purchases) redemption of non-marketable equity securities, net Loan originations and principal collections, net Proceeds from sales of foreclosed assets Purchases of premises and equipment, net Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits Net change is securities sold under agreements to repurchase Cash dividends paid Net change in federal funds purchased Redemption of subordinated debentures 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 $11,365 $9,245 $9,933 1,448 (108) 1,300 1,566 (620) (684) (40) 14 174 617 1,608 2,117 18,757 704 3,119 0 34,780 (63,697) 0 1,995 (45) (8,891) 1,481 (3,788) (34,342) 18,365 (4,680) (1,108) (2,381) (10,000) 407 0 60,500 (55,592) 5,511 (10,074) 868 137 918 1,695 (641) 0 3,321 0 (134) (122) (3,371) 143 12,059 (65) 0 0 38,549 (56,197) 0 0 1,902 (13,280) 1,644 (3,762) (31,209) 174 7,327 (952) 7,183 0 462 0 39,490 (35,000) 18,684 2,917 137 953 1,635 (447) 0 2,684 167 (82) 833 (4,336) 415 14,809 3,271 19,233 170 95,213 (99,540) (12,062) 0 0 (62,786) 2,944 (2,735) (56,292) 48,235 1,507 (800) 708 0 349 (533) 46,972 (44,000) 52,438 (466) 10,955 Cash and cash equivalents at beginning of year 38,395 38,861 27,906 Cash and cash equivalents at end of year $28,321 $38,395 $38,861 See Notes to Consolidated Financial Statements. 13 Community Building Through Community Banking 2018 Annual ReportCONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (000s omitted except share data) For the years ended December 31, SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest Income taxes SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Foreclosed assets acquired in settlement of loans 2018 2017 2016 $9,039 $7,652 $6,919 $895 $3,011 $1,342 $970 $973 $1,659 See Notes to Consolidated Financial Statements. 14 2018 Annual Report 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 5, 2019, 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 but also include some balances in time deposits 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. 15 Community Building Through Community Banking 2018 Annual ReportNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (g) Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity (HTM) and recorded at amortized cost. Securities not classified as HTM are classified as available for sale (AFS) and recorded at fair value, with unrealized gains or losses excluded from earnings and reported in other comprehensive income or loss. Amortization premiums are recognized in interest income using the interest method over the estimated lives or earliest call date of the securities, as applicable. 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 trade date and are determined using the specific-identification method. and discounts In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. (h) Non-Marketable Equity Securities The Banks, as members of the Federal Home Loan Bank (FHLB) system, are required to maintain a minimum investment in capital stock of the FHLB in an amount equal to the greater of 0.40% of their mortgage-related assets or 4.5% of advances from the FHLB. FHLB stock is reported at cost since no ready market exists and it has no quoted market value. FHLB stock is periodically evaluated for impairment based on the ultimate recovery of par value. . (i) Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. 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 between the selling price and the carrying value of the related mortgage loans sold. (j) Loans and Allowance for Loan Losses Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or 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. 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 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. 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. 16 2018 Annual Report 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 a 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. TDRs 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. 17 Community Building Through Community Banking 2018 Annual Report 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. 18 2018 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (l) Loan Servicing Mortgage servicing rights are recognized as separate assets when rights are acquired through a sale of loans and are reported in other assets. When the originating mortgage loans are sold into the secondary market, the Company allocates the total cost of the mortgage loans between mortgage servicing rights and the loans, based on their relative fair values. The cost of originated mortgage-servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage- servicing rights is assessed based on the fair value of those rights. The amount of impairment is the amount by which the capitalized mortgage servicing rights exceed their fair value. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is offset against loan servicing fee income. (m) Rate Lock Commitments Commitments to fund mortgage loans (interest-rate locks) to be sold into the secondary market and mandatory delivery forward commitments for the future delivery of these mortgage loans are to be accounted for as derivatives not qualifying for hedge accounting. The fair values of these mortgage derivatives are to be estimated based on the net future cash flows related to the associated servicing of the loans and on changes in mortgage interest rates from the date of the commitments. Changes in fair values on these derivatives are to be included in net gains on sales of loans. The Company has deemed the effect of these derivatives to be immaterial to the consolidated financial statements and, accordingly, has elected not to record fair values associated with these derivatives. (n) Foreclosed Assets Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated cost of disposal when acquired. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. (o) Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation, based on the estimated useful lives of the assets. Depreciation is generally computed on the straight-line method over estimated useful lives ranging from 3 to 40 years. (p) Bank-Owned Life Insurance The Banks have 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. (q) Significant Group Concentrations of Credit Risk Most of the Company’s activities are with customers located in the area and communities noted above. Note 3 details the types of securities in which the Company invests. Note 4 details the types of lending in which the Company engages. The Company does not have any significant concentrations with any one industry or customer. 19 Community Building Through Community Banking 2018 Annual Report 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 departments of State Bank and State Bank of Herscher, other than trust cash on deposit at the Banks, are not included in these financial statements because they are not assets of the Company. 20 2018 Annual Report 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 2016 and 2017 consolidated financial statements have been reclassified to conform to the 2018 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 adoption of this accounting standard did not have a significant effect on the Company's consolidated financial statements. 21 Community Building Through Community Banking 2018 Annual Report 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 adoption of this accounting standard did not have a significant effect on the Company's consolidated financial statements.; except that it no longer discloses the methods and significant assumptions used to estimate the fair value that was 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. In December 2018, the FASB issued ASU No. 2018-13, Changes to the Disclosure Requirement for Fair Value Measurement. This standard will modify the disclosure requirements on fair value measurements. This new standard is effective for consolidated financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods. The Company is evaluating what impact this new standard will have on its consolidated financial statements. 22 2018 Annual Report 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 of Chicago, based upon a percentage of deposits. The total required reserve balances as of December 31, 2018 and 2017 was approximately $1,088 and $876, 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 Deposit Insurance Corporation’s (FDIC) 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 2019 total $5,527 and are included with cash and cash equivalents. Maturities of certificates of deposits at other financial institutions as of December 31, 2018 are as follows: 2020 2021 2022 2023 and thereafter (3) Securities $996 3,229 3,654 2,089 $9,968 The following tables reflect the amortized costs and approximate fair values of securities at December 31: Held-to-Maturity 2018 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal $520 $32 ($0) $552 Held-to-Maturity 2017 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal $766 $50 ($0) $816 Available-for-Sale 2018 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 $79,276 108,435 111,510 $96 983 57 ($1,465) (952) (3,078) $77,907 108,466 108,489 $299,221 $1,136 ($5,495) $294,862 23 Community Building Through Community Banking 2018 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (3) Securities (continued) Available-for-Sale 2017 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 $43,288 117,481 112,953 $58 2,068 304 ($1,066) (459) (1,626) $42,280 119,090 111,630 $273,722 $2,431 ($3,152) $273,001 For the years ended December 31, 2018, 2017 and 2016, proceeds from sales of available-for-sale securities amounted to $3,119, $0 and $19,233, 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 2018 2017 2016 $43 ($57) $0 ($0) $332 ($499) Securities with carrying amounts of approximately $162,847 and $153,862 at December 31, 2018 and 2017, 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, 2018 are shown below by contractual maturities, except for U.S. agencies which are shown by contractual maturities or their expected call dates if the call dates are considered likely to occur based on present market conditions. Expected maturities may differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Held-to-Maturity Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Available-for-Sale Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Agency mortgage-backed 24 Amortized Cost Fair Value $0 128 392 0 $0 145 407 0 $520 $552 Amortized Cost Fair Value $20,927 67,151 66,274 33,359 187,711 111,510 $21,027 66,659 65,547 33,139 186,373 108,489 $299,221 $294,862 2018 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (3) Securities (continued) 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, 2018 and 2017: 2018 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 $12,266 22,004 26,253 $63 223 300 21 74 64 $38,120 29,600 75,795 $1,402 729 2,778 Total temporarily impaired $60,523 $586 159 $143,516 $4,909 79 104 175 358 2017 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 $18,846 26,609 39,220 Total temporarily impaired $84,675 $274 257 414 $945 40 89 77 $19,794 7,232 54,121 $792 202 1,212 206 $81,147 $2,206 39 28 101 168 There were no held-to-maturity securities in an unrealized loss position as of December 31, 2018 and 2017. 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. 25 Community Building Through Community Banking 2018 Annual Report 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 2018 2017 $289,056 105,009 109,199 211,029 58,657 25,874 798,824 (14,431) $277,448 116,632 101,027 208,868 64,255 22,854 791,084 (13,164) $784,393 $777,920 Detailed analysis of the allowance for loan losses by portfolio segments at December 31 are as follows: Balance at beginning of year Provision charged to operations, net Recoveries on loans previously charged-off Less loans charged-off Balance at end of year Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Totals Real Estate Commercial Consumer Total 2018 $7,672 1,114 296 9,082 (468) $5,342 336 137 5,845 (131) $150 (32) 18 136 (33) $13,164 1,448 451 15,063 (632) $8,614 $5,714 $103 $14,431 $668 7,946 $8,614 $2,320 3,394 $5,714 $0 103 $2,988 11,443 $103 $14,431 26 2018 Annual Report 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 Totals Balance at beginning of year Provision charged to operations, net Recoveries on loans previously charged-off Less loans charged-off Balance at end of year Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Loans acquired with deteriorated credit Loans acquired without deteriorated credit Totals Real Estate Commercial Consumer Total 2017 $10,063 734 136 10,933 (3,261) $5,266 148 351 5,765 (423) $167 (14) 16 169 (19) $15,496 868 503 16,867 (3,703) $7,672 $5,342 $150 $13,164 $413 7,259 0 0 $7,672 $1,763 3,579 0 0 $5,342 $20 130 0 0 $2,196 10,968 0 0 $150 $13,164 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 27 Community Building Through Community Banking 2018 Annual Report 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 2018 Loans: Individually evaluated for impairment Collectively evaluated for impairment $24,733 478,531 $12,579 257,107 $25 25,849 $37,337 761,487 Totals $503,264 $269,686 $25,874 $798,824 Real Estate Commercial Consumer Total 2017 Loans: Individually evaluated for impairment Collectively evaluated for impairment $21,649 473,459 $14,427 258,695 $28 22,826 $36,104 754,980 Totals $495,108 $273,122 $22,854 $791,084 28 2018 Annual Report 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 2018 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 $7,829 2,453 8,084 5,664 1,523 25 $8,667 3,452 8,161 6,003 1,543 32 N/A N/A N/A N/A N/A N/A $7,758 2,686 6,571 5,829 1,783 33 $399 150 256 300 131 2 Totals $25,578 $27,858 $24,660 $1,238 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 5,821 546 0 5,392 0 0 5,050 556 0 5,418 0 0 11,759 11,024 456 212 0 2,320 0 0 2,988 5,108 839 0 5,474 0 0 11,421 213 26 0 72 0 0 311 $37,337 $38,882 $2,988 $36,081 $1,549 29 Community Building Through Community Banking 2018 Annual Report (4) Loans (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) Recorded Investment Principal Balance 2017 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 $7,576 5,519 3,707 6,185 5,669 8 $9,918 7,132 4,243 7,063 5,688 9 Totals $28,664 $34,053 N/A N/A N/A N/A N/A N/A 295 95 24 1,763 0 19 2,196 $8,046 6,131 3,804 6,523 5,110 15 $29,629 4,209 1,182 427 2,653 0 21 8,492 $282 148 150 146 237 0 $963 112 17 0 67 0 1 197 3,825 872 151 2,573 0 19 7,440 3,916 936 234 2,613 0 19 7,718 $36,104 $41,771 $2,196 $38,121 $1,160 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 30 2018 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) Recorded Investment Principal Balance 2016 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 $3,399 8,235 3,764 6,704 133 42 $4,823 10,762 4,182 7,212 367 54 Total 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 Total Grand Total 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 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. 31 Community Building Through Community Banking 2018 Annual Report 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: Pass Special Mention Substandard Doubtful Totals 2018 Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other $264,617 99,206 83,886 179,859 43,955 25,843 $13,693 2,086 18,647 19,997 13,179 6 $10,746 3,717 6,666 11,173 1,523 25 Total $697,366 $67,608 $33,850 $0 0 0 0 0 0 $0 $289,056 105,009 109,199 211,029 58,657 25,874 $798,824 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 2017 $249,950 110,068 85,038 181,958 50,626 22,807 $16,620 1,892 12,264 18,880 7,958 20 $10,878 4,672 3,726 7,967 5,669 27 $0 0 0 64 0 0 $277,448 116,632 101,027 208,868 64,255 22,854 Total $700,447 $57,634 $32,939 $64 $791,084 Loan aging information by class of loan at December 31 follows: As of December 31, 2018 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 $4,514 1,919 610 742 960 19 $659 1,728 1,053 4,097 383 4 $5,173 3,647 1,663 4,839 1,343 23 Total $8,764 $7,924 $16,688 32 2018 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) As of December 31, 2018 Total Past Due Total Current Total Loans 90+ Days Due and Accruing Interest Total Non-accrual Loans Real Estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other $5,173 3,647 1,663 4,839 1,343 23 $283,883 101,362 107,536 206,190 57,314 25,851 $289,056 105,009 109,199 211,029 58,657 25,874 $599 684 0 15 383 4 $60 2,376 1,138 4,251 11 9 Total $16,688 $782,136 $798,824 $1,685 $7,845 As of December 31, 2017 Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Loans Past Due 30-89 Days Loans Past Due 90+ Days Total Past Due $1,118 1,319 49 371 0 65 $275 1,804 1,480 312 70 3 $1,393 3,123 1,529 683 70 68 Total $2,922 $3,944 $6,866 As of December 31, 2017 Total Past Due Total Current Total Loans 90+ Days Due and Accruing Interest Total Non-accrual Loans Real Estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other $1,393 3,123 1,529 683 70 68 $276,055 113,509 99,498 208,185 64,185 22,786 $277,448 116,632 101,027 208,868 64,255 22,854 $46 $5,147 3,037 2,444 4,165 24 3 Total $6,866 $784,219 $791,084 $46 $14,820 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. 33 Community Building Through Community Banking 2018 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) The following table presents information regarding modifications of loans that are classified as troubled debt restructurings by class of loan that occurred during the years ended December 31: Real Estate: Commercial real estate Farm real estate Commercial: Commercial & industrial Total Real Estate: Commercial real estate Residential real estate Commercial: Commercial & industrial Total Number of Loans Pre-Modification Investment Post-Modification Investment 2018 1 2 4 7 $1,696 1,417 4,001 $7,114 2017 $1,696 1,417 3,993 $7,106 Number of Loans Pre-Modification Investment Post-Modification Investment 1 1 3 5 $6,939 $90 $464 $7,493 $4,800 $90 $154 $5,044 There were no troubled debt restructurings that defaulted during the year, within 12 months of their modification as of December 31, 2018 and 2017. As for December 31, 2016, the following table summarizes troubled debt restructurings that defaulted during the year, within 12 months of their modification: Commercial: Commercial & industrial Total 2016 Number of Loans Recorded Investment 1 1 $176 $176 34 2018 Annual Report 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 2018 $1,428 0 $1,428 2017 $2,870 221 $3,091 The carrying value of the PCI loans was $598 and $1,717 at December 31, 2018 and 2017, respectively. No increases to the allowance for loan losses were done for PCI loans during 2018 and 2017. No allowances for loan losses were reversed during 2018 and 2017. There was no change in the accretable yield related to PCI loans during the years ended December 31, 2018 and 2017. Some PCI loans are not accruing interest income because the Company cannot reasonably estimate the cash flows expected to be collected. The carrying amount of nonaccruing PCI loans was $0 and $891 at December 31, 2018 and 2017, respectively. (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, 2018 and 2017, were approximately $335,441 and $342,567, respectively. Custodial escrow balances maintained in conjunction with serviced loans were approximately $3,772 and $3,645 at December 31, 2018 and 2017, respectively. The following summarizes the activity pertaining to mortgage servicing rights for the years ended December 31: Balance at beginning of year Mortgage servicing rights capitalized Mortgage servicing rights amortized Balance at end of year 2018 $1,290 337 (500) $1,167 2017 $1,328 445 (483) $1,290 2016 $1,324 545 (541) $1,328 No impairment of mortgage servicing rights existed and no valuation allowance was recognized for 2018, 2017 and 2016. 35 Community Building Through Community Banking 2018 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (6) Mortgage Banking Loan Commitments The Company enters into commitments to fund residential mortgage loans (interest rate locks) at specified times in the future, with the intention that these loans will be subsequently sold to third-party investors. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock. It is the Company’s practice to enter into mandatory delivery forward commitments for the future delivery of residential mortgage loans to third-party investors when an interest rate lock commitment is granted. These mandatory delivery forward commitments bind the Company to deliver a residential mortgage loan to a third- party investor even if the underlying loan never funds. As of December 31, 2018 and 2017, the Company had approximately $1,715 and $296 in interest rate lock commitments outstanding. As of December 31, 2018 and 2017, the Company had approximately $3,429 and $591 in mandatory delivery forward commitments outstanding. These outstanding mortgage loan commitments are considered to be derivatives. The approximate fair values associated with these derivatives were considered to be immaterial as of December 31, 2018 and 2017. (7) Foreclosed Assets Foreclosed assets net of valuation allowance consist of the following at December 31: Residential real estate Commercial real estate Non-farm non-residential properties Construction, land development and other land Balance at end of year 2018 2017 $175 100 208 32 $515 $273 327 215 277 $1,092 Residential real estate loans that are in process of foreclosure totaled $421 at December 31, 2018 and $719 at December 31, 2017. (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 2018 2017 $2,744 21,696 12,711 37,151 18,148 $3,539 17,700 11,991 33,230 16,910 $19,003 $16,320 Depreciation expense for the years ended December 31, 2018, 2017 and 2016 amounted to $1,300, $918 and $953, respectively. 36 2018 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (9) Intangible Assets The core deposit premium intangible asset had a gross carrying amount of $1,952 and accumulated amortization of $1,041 and $729 at December 31, 2018 and 2017, respectively. The following table shows the estimated future amortization of the core deposit premium intangible asset. The projections of amortization expense are based on existing asset balances as of December 31, 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 $315 315 281 2018 2017 $5,989 1,167 4,708 5,772 $5,881 1,290 3,632 8,284 $17,636 $19,087 (11) Time Deposits The aggregate amount of time deposits with a minimum denomination of $250 was approximately $73,716 and $54,644 at December 31, 2018 and 2017, respectively. Time deposits are included in the interest-bearing deposits for financial statement presentation. At December 31, 2018, the scheduled maturities of time deposits are as follows: 2019 2020 2021 2022 2023 $173,604 113,672 58,403 35,889 34,860 416,428 37 Community Building Through Community Banking 2018 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (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 $341, $310, and $300, for 2018, 2017, and 2016, 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 $51,592 and $53,878 as of December 31, 2018 and 2017, respectively. The Banks accrue amounts to be paid over the participant’s active service life. The accrued benefits were $2,019, $1,620, and $1,061 at December 31, 2018, 2017, and 2016, respectively. Non-qualified deferred compensation expenses were $476, $643, and $206 in 2018, 2017, and 2016, respectively. (13) Income Taxes The components of income tax expense for the years ended December 31 are as follows: Current – federal Current – state Deferred – federal Deferred – state 2018 $1,669 980 2,649 (57) 17 (40) 2017 2016 $1,715 216 1,931 2,723 599 3,321 $614 616 1,230 2,110 574 2,684 Total income tax expense $2,609 $5,253 $3,914 38 2018 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (13) Income Taxes (continued) A reconciliation of the differences between the statutory federal income tax rate and the effective federal income tax rate with the resulting dollar amounts is shown in the following table: 2018 2017 2016 % of Pretax Earnings % of Pretax Earnings % of Pretax Earnings Amount Amount Amount $2,934 21% $4,929 34.0% $4,708 34.0% (750) (274) 788 (89) (5.4%) (2.0%) 5.6% (0.6%) 0 0% (1,271) (217) (8.8%) (1.5%) 538 67 1,206 3.7% 0.5% 8.3% (1,272) (152) 786 (156) (9.2%) (1.1%) 5.7% (1.1%) 0 0.0% Statutory federal tax Increase (decrease) in taxes resulting from: Tax-exempt interest Bank-owned life insurance State taxes, net of federal benefit Other Adjustment to the net defered tax asset for the Tax Cuts and Jobs Act Effective tax rates $2,609 18.7% $5,252 36.2% $3,914 28.3% 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, 2018 and 2017 are summarized as follows: Deferred tax assets: Allowance for loan losses Allowance for losses on foreclosed assets Available-for-sale securities Deferred compensation and other Purchase accounting adjustments Total deferred tax assets Deferred tax liabilities: FHLB stock dividend Depreciation Mortgage servicing rights and other Total deferred tax liabilities Net deferred tax assets 2018 2017 $4,113 211 1,242 1,090 88 6,744 59 1,601 376 2,036 $3,753 60 206 764 378 5,161 63 1,078 388 1,529 $4,708 $3,632 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 2015. 39 Community Building Through Community Banking 2018 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (14) Transactions with Related Parties The Company and subsidiary banks have had, and may be expected to have in the future, loans or other banking transactions in the ordinary course of business with directors, significant stockholders, principal officers, their immediate families, and affiliated companies in which they are principal stockholders (commonly referred to as related parties). In management’s opinion, these loans and transactions were on the same terms as those for comparable loans and transactions with non-related parties. Activity for related party loans for the years ending December 31, is as follows: Balance at beginning of year New credits Repayments Balance at end of year 2018 2017 $17,761 8,511 (10,752) $15,520 $18,753 7,143 (8,135) $17,761 Deposit accounts from related parties totaled approximately $18,821 and $14,196 at December 31, 2018 and 2017, respectively. (15) Financial Instruments with Off-Balance-Sheet Risk and Concentrations Financial instruments with off-balance-sheet risk: The Banks are parties to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit, credit lines, letters of credit, and overdraft protection. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets. The Banks’ exposures to credit losses in the event of nonperformance by the other parties to the financial instruments, for commitments to extend credit, and letters of credit are represented by the contractual amounts of those instruments. The Banks use the same credit policies in making commitments and issuing letters of credit as they do for on-balance-sheet instruments. A summary of the contractual amounts of the Banks’ exposures 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 2018 $173,200 761 1,305 $175,266 2017 $185,451 176 1,437 $187,064 40 2018 Annual Report 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) 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, 2018. 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 accumulated credit enhancement provided by the Program totaled $2,547, 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, 2018, 2017 and 2016. Concentration of credit risk: The Company and its subsidiary banks provide several types of loans to customers including real estate, agricultural, commercial, and installment loans. The largest component of loans is secured by residential real estate, commercial real estate, or other interest in real property. Lending activities are conducted with customers in a wide variety of industries as well as with individuals with a wide variety of credit requirements. The Company does not have a concentration of loans in any specific industry. Credit risk, as it relates to the Company’s business activities, tends to be geographically concentrated in that the majority of the customer base lies within the surrounding communities served by its subsidiary banks. (16) Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase amounted to $27,754 and $32,434 at December 31, 2018 and 2017, respectively, and are collateralized by U.S. agencies, state and municipal and mortgage-backed investment securities with fair values of approximately $49,038 and $39,943. The weighted-average interest rates on these agreements were 1.94% and 1.05% at December 31, 2018 and 2017, respectively. Securities sold under agreements to repurchase mature on a daily basis. 41 Community Building Through Community Banking 2018 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (17) Federal Home Loan Bank (FHLB) and Federal Reserve Advances and Other Borrowings FHLB Advances at December 31: 2018 2017 Fixed-rate advances with rates ranging from .91% to 3.03% and .91% to 2.05% and weighted average rates of 2.48% and 1.49% as of December 31, 2018 and 2017, respectively. Interest is payable monthly with principal due at maturity. $22,000 $19,000 Advances are collateralized by 1-4 family mortgage loans, other qualifying loans and securities. The total amounts of collateral securing FHLB advances were approximately $87,893 and $83,183 as of December 31, 2018 and 2017, respectively. FHLB advances are subject to a prepayment penalty if they are repaid prior to maturity. FHLB advances are also secured by $989 and $944 of FHLB stock owned by the Company at December 31, 2018 and 2017, respectively. The Banks participate in the Federal Reserve Bank of Chicago’s Discount Window Lending Program. Primary advances generally mature daily and bear interest at a generally approved rate in relation to the federal funds rate. The primary advance interest rate at December 31, 2018 was 300-basis points. Outstanding advances were $0 at December 31, 2018 and 2017. Advances are collateralized by investment securities pledged totaling approximately $8,954 and $9,257 at December 31, 2018 and 2017, 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 $5,028 and $5,663 at December 31, 2018 and 2017, respectively, with payments of $212, consisting of principal and interest, due quarterly. On June 27, 2018, the Company entered into a $5,500 note with Bankers’ Bank for the redemption of subordinated debentures. The noted is a stepped fixed rate of 4.75% until June 27, 2023, then will adjust to the current Wall Street Journal prime rate until maturity with a minumum rate of 4.75% due June 27, 2025 and is secured by common stock of Company subsidiaries. The balance was $2,875 at December 31, 2018, with quarterly principal payments of $63 plus accrued interest. Additional other borrowings totaled $3,313 and $3,645 at December 31, 2018 and 2017, respectively, and mature from 2019 to 2024, at interest rates ranging from 1.60% to 4.75%. At December 31, the scheduled maturities of FHLB advances and other borrowings are as follows: 2018 2019 2020 2021 2022 2023 and thereafter 2018 $0 22,145 5,778 250 0 5,043 $33,216 2017 $16,093 3,750 6,413 250 340 1,462 $28,308 The Company had federal funds purchased with its main correspondent institutions totaling $6,013 and $8,394 as of December 31, 2018 and 2017, respectively. Federal funds purchased generally mature within one day from transaction date. The weighted average interest rate was 2.7% and 1.6% as of December 31, 2018 and 2017, respectively. 42 2018 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (18) Subordinated Debentures 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. During 2018, the Company elected to redeem all the Subordinated Debentures in accordance with the contract price limitations. The redemption was subject to approval by the Federal Reserve. Total subordinated debentures were 10,000 at December 31, 2017, with an interest rate of 6%. (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. 43 Community Building Through Community Banking 2018 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (19) Fair Value Measurements (continued) 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. 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, 2018 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 $294,862 $294,862 $8,771 $515 $8,771 $515 Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a carrying value of $11,759 with specific reserves of $2,988 as of December 31, 2018. Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, were carried at their fair value of $515, which is comprised of the outstanding balance of $985, net of an allowance for losses of $470 as of December 31, 2018. As of December 31, 2017 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 $273,001 $273,001 Assets measured at fair value on a non-recurring basis: Assets: Collateral-dependent impaired loans Foreclosed assets $5,243 $1,092 $5,243 $1,092 44 2018 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (19) Fair Value Measurements (continued) Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a carrying value of $7,439 with specific reserves of $2,196 as of December 31, 2017. Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, were carried at their fair value of $1,092, which is comprised of the outstanding balance of $1,304, net of an allowance for losses of $212 as of December 31, 2017. 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, 2018: Collateral dependent impaired loans, net of specific reserves Foreclosed assets Valuation Technique Unobservable Input Range Sales comparison approach Sales comparison approach Appraised values 10% - 20% Appraised values 10% - 20% FASB guidance requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates may not be realized in immediate settlement of the instrument. Accounting guidance excludes certain financial instruments and certain nonfinancial instruments from its disclosure requirements. These fair value disclosures may not represent the fair value of the Company. The estimated fair values of the Company’s financial instruments as of December 31 are as follows: December 31, 2018 Fair Value Carrying Amount December 31, 2017 Carrying Amount Fair Value Financial assets: Cash and cash equivalents Interest-bearing deposits in other banks- term deposits Securities Non-marketable equity securities Loans held for sale Loans, net of allowance Accrued interest receivable Cash surrender value of bank-owned life Insurance Financial liabilities: Demand and saving deposits Time deposits Federal funds purchased Securities sold under agreements to repurchase FHLB advances and other borrowings Subordinated Debentures Accrued interest payable $28,033 $28,033 $38,395 $38,395 10,256 295,382 995 1,722 784,393 5,989 10,256 295,414 995 1,722 776,975 5,989 10,672 273,767 950 2,339 777,920 5,881 10,672 273,817 950 2,339 772,725 5,881 21,477 21,477 22,168 22,168 $563,596 416,428 6,013 27,754 33,216 0 1,209 $563,596 410,850 6,013 27,706 32,995 0 1,209 $566,042 395,617 8,394 32,434 28,308 10,000 843 $566,042 393,710 8,394 32,405 28,245 10,000 843 45 Community Building Through Community Banking 2018 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (20) Stock-Compensation Plans 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 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 Company’s accounting policy is to recognize forfeitures as they occur. For the year ended December 31, 2018, 25,000 shares of non-qualified stock options granted. No options were granted for the years ended December 31, 2017 and 2016. The following assumptions were used in estimating the fair value of options granted during the year ended December 31, 2018: Expected volatility Expected dividend yield Expected term (in years) Risk free rate 0.0084 0.79% 5.75 2.8340% Based on these assumptions the estimated weighted average grant date fair value of options granted was $3.70 during 2018. For the years ended December 31, 2018, 2017 and 2016, the Company recognized $8, $18 and $24 in compensation expense for stock options, respectively. No tax benefits were recognized for the three-year period ended December 31, 2018. The intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $617, $472 and $280, respectively. The following table summarizes the activity of options for the year ended: Shares under option, beginning of year Granted during the year Forfeited and expired during the year Exercised during the year December 31, 2018 December 31, 2017 Weighted Average Exercise Price $12.08 35.55 0 10.27 Options 72,742 25,000 0 (25,554) Weighted Average Exercise Price $12.34 19.00 10.28 Options 105,792 0 (10,000) (23,050) Shares under option, end of year 72,188 $20.85 72,742 $12.08 Options exercisable, end of year 47,188 $13.07 72,742 $12.08 46 2018 Annual Report 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, 2018: Exercise Price $10.25 $10.50 $19.00 $35.55 Number Outstanding 25,688 6,500 15,000 25,000 72,188 Remaining Contractual Life (Years) 1.8 1.6 5.2 9.5 Number Exercisable 25,688 6,500 15,000 0 47,188 The following table summarizes information regarding unvested restricted stock and shares outstanding during the year ended: December 31, 2018 December 31, 2017 Unvested Shares Weighted Average Grant Value Unvested Shares Weighted Average Grant Value Restricted stock, beginning of year Granted during the year Forfeited during the year Restricted shares (net for taxes) Vested during the year 8,627 6,229 (177) (822) (5,048) $28.90 33.20 31.35 33.20 27.75 11,938 6,153 (1,690) (945) (6,829) $23.61 31.35 27.34 23.05 23.05 Restricted stock, end of year 8,809 $32.66 8,627 $28.90 During 2018, 2017 and 2016, total compensation expense of $178, $165, and $178 (before tax benefits of $51, $66 and $70) 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 $123 and $26 for years 2019 and 2020, respectively. Total shares available for grant under this plan were 78,455 and 108,685 at December 31, 2018 and 2017, respectively. (21) Stock Repurchase Program In October 2016, the Company’s Board of Directors authorized a stock repurchase program authorizing an aggregate repurchase of up to 100,000 shares of common stock at market price, each year. In October 2017, the Company’s Board of Directors authorized a stock repurchase program authorizing an aggregate repurchase of up to 100,000 of common stock at up to 110% of book value. For the year ended December 31, 2016, the Company had repurchased 21,300 shares at market value under this program. There were no shares repurchased in 2017 and 2018. The purchase price for the shares of the Company’s stock repurchased is reflected as a reduction to shareholders’ equity as treasury stock. 47 Community Building Through Community Banking 2018 Annual Report 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 2018 2017 2016 $11,365 $11,365 $9,245 $9,245 $9,933 $9,933 Average number of common shares outstanding Effect of dilutive options 3,680,578 29,997 3,656,234 45,234 3,633,278 51,468 Average number of common shares outstanding used to calculate diluted earnings per common share 3,710,575 3,701,469 3,684,746 (23) Regulatory Matters The Company and Banks are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital-adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiaries to maintain minimum regulatory capital amounts and ratios (set forth in the following table). Management believes that as of December 31, 2018, the Company and the Banks meet all capital-adequacy requirements to which they are subject. As of December 31, 2018, all six Banks were categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum capital ratios set forth in the table must be maintained. There are no conditions or events occurring since December 31, 2018, which management believes have changed the capital categories of the Banks. 48 2018 Annual Report 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 $139,430 30,096 26,352 18,730 29,826 11,318 19,159 $127,595 27,271 24,363 17,335 27,097 10,471 17,904 $127,595 27,271 24,363 17,335 27,097 10,471 17,904 $127,595 27,271 24,363 17,335 27,097 10,471 17,904 14.77% 12.68% 12.97% 16.86% 13.73% 16.83% 19.35% 13.51% 11.49% 11.99% 15.60% 12.47% 15.57% 18.08% 13.51% 11.49% 11.99% 15.60% 12.47% 15.57% 18.08% 10.73% 9.91% 9.82% 11.09% 10.19% 11.73% 12.26% $75,537 18,993 16,260 8,889 17,383 5,381 7,922 $56,653 14,245 12,195 6,667 13,037 4,036 5,942 $42,490 10,683 9,146 5,000 9,778 3,027 4,456 $47,564 11,005 9,926 6,253 10,633 3,570 5,843 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% $94,421 23,741 20,325 11,112 21,728 6,726 9,903 $75,537 18,993 16,260 8,889 17,383 5,381 7,922 $61,374 15,432 13,211 7,223 14,123 4,372 6,437 $59,455 13,757 12,408 7,816 13,292 4,462 7,303 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, 2018: 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 49 Community Building Through Community Banking 2018 Annual Report NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (23) Regulatory Matters (continued) As of December 31, 2017: 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 $130,386 28,941 24,384 17,545 27,310 10,621 19,571 $116,759 26,777 22,366 15,990 24,812 9,756 18,328 $116,759 26,777 22,366 15,990 24,812 9,756 18,328 $116,759 26,777 22,366 15,990 24,812 9,756 18,328 14.04% 12.26% 12.67% 14.13% 13.73% 15.45% 19.93% 12.57% 11.34% 11.62% 12.88% 12.47% 14.19% 18.66% 12.57% 11.34% 11.62% 12.88% 12.47% 14.19% 18.66% 10.05% 9.56% 9.30% 9.90% 10.17% 11.43% 12.84% $74,289 18,886 15,394 9,932 15,915 5,500 7,857 $55,717 14,165 11,545 7,449 11,936 4,125 5,893 $41,788 10,624 8,659 5,587 8,952 3,094 4,420 $46,491 11,200 9,622 6,461 9,759 3,416 5,709 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% $92,862 23,608 19,242 12,415 19,894 6,875 9,822 $74,289 18,886 15,394 9,932 15,915 5,500 7,857 $60,360 15,345 12,507 8,070 12,931 4,469 6,384 $58,114 14,000 12,027 8,076 12,199 4,270 7,136 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. The payment of dividends would also be restricted if a Bank does not meet the minimum capital conservation buffer as defined by Basel III regulatory capital guidelines. (25) Lease Commitments One of the Banks had operating lease commitments on office space in Loves Park, Illinois. The terms of the Perryville lease location required base lease amounts of approximately $80 per year. The lease expired September 2016 and was renewed for additional terms with expiration in 2018. The terms of North Second lease location requires 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 $105 and $122 was recognized in 2018 and 2017, respectively. 50 2018 Annual Report 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. A formal lease agreement was signed for 2018 for the Kankakee location. The terms of the 2018 lease require base lease amount of $10. The minimum lease commitments on all leases is $46 for 2019 and $23 for 2020. (26) Qualified Affordable Housing Project Investments The Company invests in qualified affordable housing projects. At December 31, 2018 and 2017, the balance of the investment for qualified affordable housing projects was $1,503 and $1,857. These balances are reflected in the other assets line on the consolidated balance sheets. 51 Community Building Through Community Banking 2018 Annual Report CONSOLIDATING SCHEDULE 1 - BALANCE SHEET (000s omitted except share data) December 31, 2018 CONSOLIDATING SCHEDULE 1 - BALANCE SHEET CONSOLIDATING SCHEDULE 1 - BALANCE SHEET (000s omitted except share data) (000s omitted except share data) December 31, 2018 December 31, 2018 A S S E T S A S S E T S A S S E T S German-American State Bank German-American German-American State Bank State Bank of Davis State Bank State Bank State Bank of Davis of Davis Northwest Bank Northwest Northwest Bank Bank State Bank State State Lena Lena Lena State Bank State Bank State Bank Foresight Financial Foresight Financial Foresight Financial Consolidated Consolidated Consolidated Bank Bank State Bank State Bank State Bank of Herscher of Herscher of Herscher Group, Inc. Group, Inc. Group, Inc. Eliminations Eliminations Eliminations Total Total Total Cash and due from banks Cash and due from banks Cash and due from banks Interest-bearing deposits in banks Interest-bearing deposits in banks Interest-bearing deposits in banks Federal funds sold Federal funds sold Federal funds sold Interest-bearing deposits in banks - term deposits Interest-bearing deposits in banks - term deposits Interest-bearing deposits in banks - term deposits Securities: Securities: Securities: Securities available-for-sale Securities available-for-sale Securities available-for-sale Securities held-to-maturity Securities held-to-maturity Securities held-to-maturity Non-marketable equity securities, at cost Non-marketable equity securities, at cost Non-marketable equity securities, at cost Loans held for sale Loans held for sale Loans held for sale Loans, net Loans, net Loans, net Foreclosed assets, net Foreclosed assets, net Foreclosed assets, net Premises and equipment Premises and equipment Premises and equipment Core deposit intangible Core deposit intangible Core deposit intangible Bank owned life insurance Bank owned life insurance Bank owned life insurance Other assets Other assets Other assets Investment in subsidiary banks Investment in subsidiary banks Investment in subsidiary banks $3,834 303 237 3,222 53,576 0 189 0 176,810 111 1,181 0 3,249 3,339 0 $3,834 $3,834 303 303 237 237 3,222 3,222 $1,478 266 0 3,001 53,576 53,576 189 189 0 0 176,810 176,810 111 111 1,181 1,181 0 0 3,249 3,249 3,339 3,339 0 0 48,705 520 106 0 91,915 2 870 0 1,872 3,417 0 $1,478 $1,478 266 266 0 0 3,001 3,001 $6,643 69 0 0 48,705 48,705 44,086 0 106 262 106 0 1,722 0 91,915 205,478 91,915 2 332 2 870 8,172 870 0 0 0 1,872 5,732 1,872 3,417 3,617 3,417 0 0 0 $6,643 $6,643 $4,102 $4,102 $4,102 $1,177 69 69 0 0 0 0 74 0 4,451 74 74 0 0 672 702 4,451 4,451 1,091 $1,177 $1,177 $3,050 672 672 702 702 172 15 1,091 1,091 3,730 $3,050 $3,050 $201 172 172 4,580 $201 $201 4,580 4,580 ($201) 947 ($201) ($201) $20,284 947 947 $7,083 954 (5,527) (5,527) (5,527) 9,968 44,086 44,086 69,812 69,812 69,812 26,404 26,404 26,404 52,279 52,279 52,279 294,862 294,862 294,862 205,478 205,478 179,267 179,267 179,267 54,312 54,312 54,312 76,483 76,483 76,483 128 8,172 8,172 1,600 1,600 1,600 381 381 381 1,907 1,907 1,907 4,892 225 225 225 0 0 262 262 1,722 1,722 332 332 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5,732 5,732 3,617 3,617 1,449 3,234 1,449 1,449 3,234 3,234 1,690 1,262 1,690 1,690 1,262 1,262 0 0 55 55 0 0 0 0 0 0 0 0 158 0 0 70 911 4,472 2,646 0 0 0 122,232 122,232 122,232 (122,232) (122,232) (122,232) $20,284 $20,284 $7,083 $7,083 954 954 9,968 9,968 520 520 995 995 1,722 1,722 784,393 784,393 515 515 19,003 19,003 911 911 21,477 21,477 17,636 17,636 520 995 1,722 784,393 515 19,003 911 21,477 17,636 15 15 3,730 3,730 158 158 0 0 0 0 70 70 0 0 0 0 0 0 0 0 911 911 4,472 4,472 2,646 2,646 3,013 121 Total assets Total assets Total assets $246,051 $246,051 $246,051 $152,152 $152,152 $152,152 $276,113 $276,113 $276,113 $264,214 $264,214 $264,214 $87,746 $87,746 $87,746 $145,893 $145,893 $145,893 $135,167 $135,167 $135,167 ($127,013) ($127,013) ($127,013) $1,180,323 $1,180,323 $1,180,323 LIABILITIES AND STOCKHOLDLERS' EQUITY LIABILITIES AND STOCKHOLDLERS' EQUITY LIABILITIES AND STOCKHOLDLERS' EQUITY Liabilities: Deposits: Noninterest bearing Interest-bearing Total deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank (FHLB) and Federal Reserve advances and other borrowings Subordinated debentures Accrued interest payable and other liabilities 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 (FHLB) and Federal Reserve advances Federal Home Loan Bank (FHLB) and Federal Reserve advances and other borrowings and other borrowings Subordinated debentures Subordinated debentures Accrued interest payable and other liabilities Accrued interest payable and other liabilities $28,293 186,573 214,866 0 6,000 0 1,450 $28,293 $14,915 $28,293 186,573 109,861 186,573 214,866 124,776 214,866 0 2,014 0 7,870 6,000 6,000 1,450 1,450 0 0 371 $14,915 $14,915 109,861 109,861 124,776 124,776 2,014 2,014 7,870 7,870 $42,224 190,833 233,057 3,578 1,900 0 0 371 371 9,443 0 1,386 $42,224 $42,224 190,833 190,833 233,057 233,057 $29,304 182,960 212,264 3,578 3,578 421 1,900 1,900 17,432 9,443 9,443 6,370 0 0 0 1,386 1,386 1,196 421 421 17,432 17,432 6,370 6,370 0 0 1,196 1,196 689 689 689 $29,907 $29,907 93,105 93,105 123,012 123,012 0 0 552 552 $0 0 $0 0 0 3,500 3,500 7,903 0 0 - 956 956 1,825 0 0 0 0 0 0 0 0 0 552 3,500 0 956 $29,304 $29,304 $4,203 182,960 182,960 72,627 212,264 212,264 76,830 $4,203 $4,203 $29,907 72,627 72,627 93,105 76,830 76,830 123,012 $0 $0 ($201) 0 0 (4,580) $0 $0 (4,781) ($201) ($201) $148,645 (4,580) (4,580) 831,379 (4,781) (4,781) 980,024 $148,645 $148,645 831,379 831,379 980,024 980,024 6,013 6,013 27,754 27,754 33,216 33,216 0 0 7,873 7,873 6,013 27,754 33,216 0 7,873 Total liabilities Total liabilities Total liabilities 222,316 222,316 222,316 135,031 135,031 135,031 249,364 249,364 249,364 237,683 237,683 237,683 77,519 77,519 77,519 128,020 128,020 128,020 9,728 9,728 9,728 (4,781) (4,781) (4,781) 1,054,880 1,054,880 1,054,880 Stockholders’ equity: Preferred stock Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) 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 2,914 21,049 0 (628) 0 0 400 400 2,914 2,914 21,049 21,049 0 0 (628) (628) 0 100 1,633 15,602 0 (214) 0 0 100 100 1,633 1,633 15,602 15,602 0 0 (214) (214) 0 1,450 7,365 18,457 0 (523) 1,450 1,450 7,365 7,365 1,000 4,695 18,457 18,457 21,402 0 0 0 0 0 0 1,000 1,000 4,695 4,695 21,402 21,402 500 3,733 6,238 0 0 0 0 0 0 500 500 6,238 6,238 0 0 0 400 524 0 3,733 3,733 17,891 (523) (523) (566) (566) (566) (244) (244) (244) (942) 0 0 400 400 17,891 17,891 0 1,002 9,807 524 524 124,068 0 0 (6,320) (942) (942) (3,118) 1,002 1,002 (3,850) 9,807 9,807 (38,228) 124,068 124,068 (83,272) (6,320) (6,320) (3,118) (3,118) 3,118 0 (3,850) (3,850) 1,002 (38,228) (38,228) 9,810 (83,272) (83,272) 124,068 (6,320) 3,118 3,118 (3,117) 0 0 1,002 1,002 9,810 9,810 124,068 124,068 (6,320) (6,320) (3,117) (3,117) Total stockholders’ equity Total stockholders’ equity Total stockholders’ equity 23,735 23,735 23,735 17,121 17,121 17,121 26,749 26,749 26,749 26,531 26,531 26,531 10,227 10,227 10,227 17,873 17,873 17,873 125,439 125,439 125,439 (122,232) (122,232) (122,232) 125,443 125,443 125,443 Total liabilities and stockholders’ equity Total liabilities and stockholders’ equity Total liabilities and stockholders’ equity $246,051 $246,051 $246,051 $152,152 $152,152 $152,152 $276,113 $276,113 $276,113 $264,214 $264,214 $264,214 $87,746 $87,746 $87,746 $145,893 $145,893 $145,893 $135,167 $135,167 $135,167 ($127,013) ($127,013) ($127,013) $1,180,323 $1,180,323 $1,180,323 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 128 128 4,892 4,892 3,013 3,013 121 121 7,903 7,903 - - 1,825 1,825 0 55 0 0 0 0 0 0 0 0 0 0 52 2018 Annual Report Community Building Through Community Banking Eliminations Eliminations State Bank of Herscher State Bank of Herscher Consolidated Total Consolidated Total Foresight Financial Group, Inc. Foresight Financial Group, Inc. A S S E T S A S S E T S German-American German-American State Bank State Bank Northwest Northwest State Bank State Bank of Davis of Davis Bank Bank State Bank State Bank Lena State Bank Lena State Bank CONSOLIDATING SCHEDULE 1 - BALANCE SHEET CONSOLIDATING SCHEDULE 1 - BALANCE SHEET (000s omitted except share data) (000s omitted except share data) December 31, 2018 December 31, 2018 LIABILITIES AND STOCKHOLDLERS' EQUITY LIABILITIES AND STOCKHOLDLERS' EQUITY 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 available-for-sale Securities available-for-sale Securities held-to-maturity Securities held-to-maturity 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 Total assets Total assets 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 (FHLB) and Federal Reserve advances Federal Home Loan Bank (FHLB) and Federal Reserve advances and other borrowings and other borrowings Subordinated debentures Subordinated debentures Accrued interest payable and other liabilities Accrued interest payable and other liabilities Total liabilities Total liabilities 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) 53,576 53,576 48,705 48,705 44,086 $3,834 $3,834 303 237 303 237 3,222 3,222 $1,478 $1,478 266 266 0 0 3,001 3,001 189 189 111 111 1,181 1,181 3,249 3,249 3,339 3,339 0 0 0 0 0 0 0 0 520 106 520 106 0 2 0 0 870 870 1,872 1,872 3,417 3,417 0 2 0 0 $6,643 69 $6,643 69 0 0 0 0 0 44,086 0 262 1,722 205,478 332 8,172 0 5,732 3,617 0 0 0 262 1,722 332 8,172 5,732 3,617 $4,102 74 0 4,451 $4,102 74 0 4,451 69,812 69,812 0 0 225 225 0 0 179,267 179,267 0 0 1,600 1,600 0 0 1,449 1,449 3,234 3,234 0 0 $1,177 672 702 1,091 $1,177 672 702 1,091 26,404 26,404 0 0 55 55 0 0 54,312 54,312 0 0 381 381 0 0 1,690 1,690 1,262 1,262 0 0 $3,050 172 15 3,730 $3,050 172 15 3,730 52,279 52,279 0 0 158 158 0 0 76,483 76,483 70 70 1,907 1,907 911 911 4,472 4,472 2,646 2,646 0 0 $201 4,580 0 0 $201 4,580 0 0 0 0 0 0 128 0 4,892 0 3,013 121 122,232 0 0 0 0 128 0 4,892 0 3,013 121 122,232 176,810 176,810 91,915 91,915 205,478 ($201) 947 ($201) 947 (5,527) (5,527) (122,232) (122,232) $20,284 $7,083 954 9,968 $20,284 $7,083 954 9,968 294,862 520 995 1,722 784,393 515 19,003 911 21,477 17,636 294,862 520 995 1,722 784,393 515 19,003 911 21,477 17,636 $246,051 $246,051 $152,152 $152,152 $276,113 $276,113 $264,214 $264,214 $87,746 $87,746 $145,893 $145,893 $135,167 $135,167 ($127,013) ($127,013) $1,180,323 $1,180,323 $28,293 $28,293 186,573 186,573 214,866 214,866 0 0 6,000 6,000 0 0 1,450 1,450 $14,915 $14,915 109,861 109,861 124,776 124,776 2,014 2,014 7,870 7,870 0 0 0 0 371 371 $42,224 190,833 233,057 3,578 1,900 $42,224 190,833 233,057 3,578 1,900 9,443 0 1,386 9,443 0 1,386 $29,304 182,960 212,264 421 17,432 $29,304 182,960 212,264 421 17,432 6,370 0 1,196 6,370 0 1,196 $4,203 $4,203 72,627 72,627 76,830 76,830 0 0 0 0 0 0 689 0 0 689 $29,907 $29,907 93,105 93,105 123,012 123,012 0 0 552 552 3,500 0 956 3,500 0 956 $0 0 $0 0 0 $0 0 $0 0 0 7,903 - 1,825 7,903 - 1,825 ($201) (4,580) (4,781) ($201) (4,580) (4,781) $148,645 831,379 980,024 6,013 27,754 $148,645 831,379 980,024 6,013 27,754 33,216 33,216 0 0 7,873 7,873 222,316 222,316 135,031 135,031 249,364 249,364 237,683 237,683 77,519 77,519 128,020 128,020 9,728 9,728 (4,781) (4,781) 1,054,880 1,054,880 0 0 400 400 2,914 2,914 21,049 21,049 0 0 (628) (628) 0 0 100 100 1,633 1,633 15,602 15,602 0 0 (214) (214) 1,450 7,365 18,457 0 0 0 1,450 7,365 18,457 0 (523) (523) 0 0 1,000 1,000 4,695 4,695 21,402 21,402 0 0 (566) (566) 0 500 3,733 6,238 0 (244) 0 500 3,733 6,238 0 (244) 0 400 17,891 524 0 (942) 0 400 17,891 524 0 (942) 0 1,002 9,807 124,068 (6,320) (3,118) 0 1,002 9,807 124,068 (6,320) (3,118) (3,850) (38,228) (83,272) (3,850) (38,228) (83,272) 3,118 3,118 0 1,002 9,810 124,068 (6,320) (3,117) 0 1,002 9,810 124,068 (6,320) (3,117) Total stockholders’ equity Total stockholders’ equity 23,735 23,735 17,121 17,121 26,749 26,749 26,531 26,531 10,227 10,227 17,873 17,873 125,439 125,439 (122,232) (122,232) 125,443 125,443 Total liabilities and stockholders’ equity Total liabilities and stockholders’ equity $246,051 $246,051 $152,152 $152,152 $276,113 $276,113 $264,214 $264,214 $87,746 $87,746 $145,893 $145,893 $135,167 $135,167 ($127,013) ($127,013) $1,180,323 $1,180,323 53 Community Building Through Community Banking 2018 Annual Report For the year ended December 31, 2018 For the year ended December 31, 2018 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: Deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank advances and other borrowings Subordinated debentures Total interest expense Interest expense: Deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank advances and other borrowings Subordinated debentures Total interest expense German-American State Bank German-American State Bank State Bank of Davis CONSOLIDATING SCHEDULE 2 - STATEMENT OF INCOME CONSOLIDATING SCHEDULE 2 - STATEMENT OF INCOME (000s omitted except share data) (000s omitted except share data) State Bank of Davis Northwest Bank Northwest Bank State Bank State Lena Lena State Bank State Bank Foresight Financial Foresight Financial Consolidated Consolidated Bank State Bank State Bank of Herscher of Herscher Group, Inc. Group, Inc. Eliminations Eliminations Total Total $8,765 $8,765 $4,356 $4,356 $10,123 $10,123 $8,455 $8,455 $2,599 $2,599 $4,576 $4,576 $38,877 $38,877 852 670 118 13 10,418 2,229 12 0 54 0 2,295 852 118 13 10,418 12 0 54 0 2,295 776 596 140 11 5,879 1,095 5 191 0 0 1,291 776 140 11 5,879 645 576 72 17 11,433 1,886 8 45 125 0 2,064 5 191 0 0 1,291 11,433 10,469 10,469 3,377 3,377 5,744 5,744 (21) (21) 47,323 47,323 1,886 1,633 1,633 740 740 382 ($21) ($21) 7,944 7,944 ($21) ($21) 4,564 3,140 669 73 4,564 3,140 669 73 1,156 1,156 645 576 72 17 8 45 125 0 665 177 16 18 297 29 0 395 336 40 7 3 0 13 0 665 177 16 18 297 29 0 395 336 40 7 740 297 122 9 3 0 13 0 8 0 12 0 2,064 1,977 1,977 756 756 402 (21) (21) 9,407 9,407 3 0 0 0 21 24 0 0 0 347 296 643 3 0 0 21 0 24 0 0 0 347 296 643 Net interest and dividend income Net interest and dividend income 8,123 8,123 4,588 4,588 9,369 9,369 8,492 8,492 2,621 2,621 5,342 5,342 (619) (619) 0 0 37,916 37,916 Provision for loan losses Provision for loan losses 120 120 100 100 740 740 360 360 0 0 128 128 0 0 1,448 1,448 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 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) 8,003 8,003 4,488 4,488 8,629 8,629 8,132 8,132 2,621 2,621 5,214 5,214 (619) (619) 0 0 36,468 36,468 301 5 64 0 1,032 1,402 2,859 328 291 617 (29) 1,278 5,344 4,061 953 86 0 0 0 323 409 904 159 291 339 19 431 2,143 2,754 494 0 1,032 1,402 2,859 328 291 (29) 1,278 5,344 4,061 405 405 150 150 97 97 121 $13,880 $13,880 ($13,880) ($13,880) (30) 1,233 722 833 3,163 5,389 1,032 216 1,030 15 2,416 10,098 1,694 234 0 323 409 904 159 291 19 431 2,143 2,754 (30) 1,233 722 833 3,163 13 0 0 1,006 1,169 5,389 1,032 216 1,030 15 2,416 236 219 591 0 601 13 0 0 1,006 1,169 236 219 591 0 601 (2) 0 0 793 888 637 117 196 254 0 296 (2) 0 0 793 888 637 117 196 254 0 296 0 0 53 528 702 327 253 455 213 806 2,211 16,091 2,211 (2,348) 16,091 (16,228) (2,348) (16,228) 529 538 161 0 896 (42) (1,231) (1,075) 529 538 161 0 896 17,317 (42) 2,686 (1,231) (1,075) 2,563 2,563 1,949 1,949 3,016 3,016 10,098 4,210 4,210 1,500 1,500 4,003 4,003 5,140 5,140 (2,348) (2,348) 30,090 1,694 234 5,091 1,268 5,091 1,268 2,009 281 2,009 1,913 281 412 1,913 10,332 10,332 (13,880) (13,880) 13,974 412 (1,033) (1,033) Net income Net income $3,108 $3,108 $2,260 $2,260 $1,460 $1,460 $3,823 $3,823 $1,728 $1,728 $1,501 $1,501 $11,365 $11,365 ($13,880) ($13,880) $11,365 $11,365 54 740 297 122 9 382 8 0 12 0 402 121 0 0 53 528 702 327 253 455 213 806 54 533 580 296 54 533 580 296 1,160 0 (14) 1,297 775 4,378 7,596 773 2,372 218 6,724 2,609 1,160 0 (14) 1,297 775 4,378 7,596 17,317 2,686 773 2,372 218 6,724 30,090 13,974 2,609 2018 Annual Report Community Building Through Community BankingFor the year ended December 31, 2018 For the year ended December 31, 2018 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 Net interest and dividend income, Net interest and dividend income, after provision for loan losses after provision for loan losses Noninterest income: Noninterest income: Customer service fees Customer service fees 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 Other Other Total noninterest income Total noninterest income Noninterest expenses: Noninterest expenses: Salaries and employee benefits Salaries and employee benefits Occupancy expense of premises, net Occupancy expense of premises, net Outside services Outside services Data processing Data processing Foreclosed assets, net Foreclosed assets, net Other Other Total noninterest expenses Total noninterest expenses Income before income taxes Income before income taxes Income tax expense (benefit) Income tax expense (benefit) Net income Net income German-American German-American State Bank State Bank Northwest Northwest State Bank State Bank of Davis of Davis Bank Bank State Bank State Bank Lena State Bank Lena State Bank State Bank of Herscher State Bank of Herscher Foresight Financial Group, Inc. Foresight Financial Group, Inc. Eliminations Eliminations Consolidated Total Consolidated Total CONSOLIDATING SCHEDULE 2 - STATEMENT OF INCOME (000s omitted except share data) CONSOLIDATING SCHEDULE 2 - STATEMENT OF INCOME (000s omitted except share data) $8,765 $8,765 $4,356 $4,356 $10,123 $10,123 $8,455 $8,455 $2,599 $2,599 $4,576 $4,576 852 670 118 13 852 670 118 13 776 596 140 11 776 596 140 11 10,418 10,418 5,879 5,879 11,433 2,229 2,229 1,095 1,095 1,886 12 0 54 0 12 0 54 0 191 191 5 0 0 5 0 0 2,295 2,295 1,291 1,291 2,064 645 576 72 17 645 576 72 17 11,433 8 45 125 0 1,886 8 45 125 0 2,064 1,156 665 177 16 10,469 1,156 665 177 16 10,469 395 336 40 7 3,377 395 336 40 7 3,377 740 297 122 9 5,744 740 297 122 9 5,744 1,633 18 297 29 0 1,977 1,633 18 297 29 0 1,977 740 3 0 13 0 756 740 3 0 13 0 756 382 8 0 12 0 402 382 8 0 12 0 402 3 0 0 21 0 24 0 0 0 347 296 643 3 0 0 21 0 24 0 0 0 347 296 643 Net interest and dividend income Net interest and dividend income 8,123 8,123 4,588 4,588 9,369 9,369 8,492 8,492 2,621 2,621 5,342 5,342 (619) (619) Provision for loan losses Provision for loan losses 120 120 100 100 740 740 360 360 0 0 128 128 0 0 8,003 8,003 4,488 4,488 8,629 8,629 8,132 8,132 2,621 2,621 5,214 5,214 (619) (619) $38,877 $38,877 4,564 3,140 669 73 47,323 4,564 3,140 669 73 47,323 7,944 54 533 580 296 9,407 7,944 54 533 580 296 9,407 ($21) ($21) (21) (21) ($21) ($21) (21) (21) 0 0 0 37,916 37,916 1,448 1,448 0 36,468 36,468 301 301 86 86 405 405 150 150 97 97 121 121 5 64 0 5 64 0 1,032 1,402 1,032 1,402 2,859 2,859 328 291 617 328 291 617 (29) (29) 1,278 5,344 1,278 5,344 0 0 0 323 409 904 159 291 339 19 431 0 0 0 323 409 904 159 291 339 19 431 2,143 2,143 (30) 1,233 722 833 3,163 (30) 1,233 722 833 3,163 5,389 1,032 216 1,030 15 2,416 10,098 5,389 1,032 216 1,030 15 2,416 10,098 13 0 0 1,006 1,169 2,563 236 219 591 0 601 4,210 13 0 0 1,006 1,169 2,563 236 219 591 0 601 4,210 (2) 0 0 793 888 (2) 0 0 793 888 637 117 196 254 0 296 1,500 637 117 196 254 0 296 1,500 0 0 53 528 702 0 0 53 528 702 1,949 327 253 455 213 806 4,003 1,949 327 253 455 213 806 4,003 $13,880 $13,880 ($13,880) ($13,880) 2,211 16,091 2,211 16,091 (2,348) (16,228) (2,348) (16,228) 3,016 529 538 161 0 896 5,140 3,016 529 538 161 0 896 5,140 (42) (1,231) (1,075) (42) (1,231) (1,075) (2,348) (2,348) (13,880) (13,880) 1,160 0 (14) 1,297 775 4,378 7,596 1,160 0 (14) 1,297 775 4,378 7,596 17,317 2,686 773 2,372 218 6,724 30,090 17,317 2,686 773 2,372 218 6,724 30,090 13,974 2,609 13,974 2,609 4,061 4,061 953 953 2,754 2,754 494 494 1,694 234 1,694 234 5,091 1,268 5,091 1,268 2,009 281 2,009 281 1,913 412 1,913 412 10,332 (1,033) 10,332 (1,033) $3,108 $3,108 $2,260 $2,260 $1,460 $1,460 $3,823 $3,823 $1,728 $1,728 $1,501 $1,501 $11,365 $11,365 ($13,880) ($13,880) $11,365 $11,365 55 Community Building Through Community Banking 2018 Annual ReportGeneral Information Foresight Financial Group, Inc. P.O. Box 339 809 Cannell-Puri Court, Suite 5 Winnebago, IL 61088 815.847.7500 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 computershare.com/investor Market: OTC Pink Marketplace Trading symbol: FGFH Banks’ Board of Directors Northwest Bank of Rockford Rockford, IL Charles B. Kullberg Stephen P. McKeever John J. Morrissey, C.P.A. Amy M. Ott Robert W. Stenstrom Thomas R. Walsh Lena State Bank Lena, IL Todd Bussian, O.D. Curt Derrer James Moest, D.V.M. 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 Freeport, IL Mary Hartman Jay Kempel Dr. Joe Kanosky Fred Kundert Christopher Schneiderman Marilyn Smit Brian Stewart Ken Thompson Douglas Wagner State Bank of Davis Davis, IL State Bank of Herscher, Herscher, IL Dan Dietmeier Linda Heckert Thomas Olsen Carolyn Sluiter, D.V.M. Richard Stenzinger, C.P.A. Judd Thruman, J.D. Randall Chaplinski, J.D. Troy Coffman Wayne Koelling, C.P.A. Fred Kundert K. Denise Osadjan Brian Scott 56 2018 Annual Report Community Building Through Community Banking2018 Annual Report p • c o mmunity b ial gro u c n a n i f t h g i s e r o ity banking • f u n m u i l d i n g t h r o u g h com Freeport, IL HBSS T A T E B A N K O F H E R S C H E R 809 Cannell-Puri Court, Suite 5 • Winnebago, Illinois 61088 • 815.847.7500 • foresightfg.com 

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