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EX-10.1 - EXHIBIT 10.1 LOAN AND SECURITY AGREEMENT - First Community Financial Partners, Inc.loanandsecurityagreement06.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER 06 2015 - First Community Financial Partners, Inc.a311rule13a-14a_x15dx14ace.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF THE CHIEF FINANIAL OFFICER 06 2015 - First Community Financial Partners, Inc.a312rule13a-14a_15dx14acer.htm
EX-32.1 - EXHIBIT 32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER 06 2015 - First Community Financial Partners, Inc.a321section1350certificati.htm
EX-32.2 - EXHIBIT 32.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER 06 2015 - First Community Financial Partners, Inc.a322section1350certificati.htm


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2015
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                          to                         
001-37505
Commission file number

FIRST COMMUNITY FINANCIAL PARTNERS, INC.
(Exact name of registrant as specified in its charter)
 
Illinois
 
20-4718752
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2801 Black Road, Joliet, IL
 
60435
(Address of Principal Executive Offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code:  (815) 725-0123

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No o 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer o
 
 
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company x
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No x

There were outstanding 16,986,471 shares of the Registrant’s common stock as of August 4, 2015.








FIRST COMMUNITY FINANCIAL PARTNERS, INC.

FORM 10-Q

June 30, 2015

INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
First Community Financial Partners, Inc. and Subsidiaries
 
 
Consolidated Balance Sheets
 
 
 
June 30, 2015
December 31, 2014
Assets
 (in thousands, except share data)(June 30, 2015 data is unaudited)
Cash and due from banks
$
9,669

$
13,329

Interest-bearing deposits in banks
38,390

19,667

Securities available for sale
182,982

168,687

Non-marketable equity securities
1,367

1,367

Mortgage loans held for sale
1,449

738

Loans, net of allowance for loan losses of $12,420 in 2015; $13,905 in 2014
715,377

675,288

Premises and equipment, net
18,847

19,369

Foreclosed assets
4,248

2,530

Cash surrender value of life insurance
4,387

4,323

Deferred tax asset, net
12,490

14,233

Accrued interest receivable and other assets
5,263

4,544

Total assets
$
994,469

$
924,075

 
 
 
Liabilities and Shareholders’ Equity


Liabilities


Deposits


Noninterest bearing
$
174,527

$
158,329

Interest bearing
659,861

611,081

Total deposits
834,388

769,410

Other borrowed funds
44,098

29,529

Subordinated debt
15,300

29,133

Accrued interest payable and other liabilities
4,513

3,950

Total liabilities
898,299

832,022

 
 
 
Concentrations, Commitments and Contingencies (Note 9 to Unaudited Consolidated Financial Statements)




 
 
 
First Community Financial Partners, Inc. Shareholders’ Equity
 
 
Common stock, $1.00 par value; 60,000,000 shares authorized; 16,984,221 issued and outstanding at June 30, 2015 and 16,668,002 issued and outstanding at December 31, 2014
16,984

16,668

Additional paid-in capital
81,707

81,648

Accumulated deficit
(3,069
)
(7,019
)
Accumulated other comprehensive income
548

756

Total shareholders' equity
96,170

92,053

Total liabilities and shareholders' equity
$
994,469

$
924,075

 
 
 
See Notes to Unaudited Consolidated Financial Statements.
 
 

3



First Community Financial Partners, Inc. and Subsidiaries
 
 
 
 
Consolidated Statements of Operations
 
 
 
 

Three months ended June 30,
Six months ended June 30,

2015
2014
2015
2014
Interest income:
(dollars in thousands, except share data)(unaudited)
Loans, including fees
$
8,090

$
8,086

$
15,906

$
15,751

Securities
962

737

1,913

1,413

Federal funds sold and other
15

19

28

37

Total interest income
9,067

8,842

17,847

17,201

Interest expense:




Deposits
987

1,133

1,964

2,269

Federal funds purchased and other borrowed funds
17

17

31

34

Subordinated debt
603

432

1,206

863

Total interest expense
1,607

1,582

3,201

3,166

Net interest income
7,460

7,260

14,646

14,035

Provision for loan losses
(749
)
667

(749
)
2,667

Net interest income after provision for loan losses
8,209

6,593

15,395

11,368

Noninterest income:




Service charges on deposit accounts
194

152

377

283

Gain on sale of loans

28


32

Gain on sale of securities

38

21

38

Gain on foreclosed assets, net



19

Mortgage fee income
153

83

257

140

Other
174

544

313

953


521

845

968

1,465

Noninterest expenses:




Salaries and employee benefits
2,810

2,785

5,694

5,640

Occupancy and equipment expense
505

577

997

1,102

Data processing
237

249

462

478

Professional fees
411

372

792

697

Advertising and business development
227

213

417

341

Losses on sale and writedowns of foreclosed assets, net
20

369

20

369

Foreclosed assets, net of rental income
70

55

141

135

Other expense
919

791

1,834

1,309


5,199

5,411

10,357

10,071

Income before income taxes
3,531

2,027

6,006

2,762

Income taxes
1,189

557

2,056

788

Net income attributable to First Community Financial Partners
2,342

1,470

3,950

1,974

Dividends and accretion on preferred shares

(144
)

(288
)
Net income applicable to common shareholders
$
2,342

$
1,326

$
3,950

$
1,686

 
 
 
 
 
Common share data
 
 
 
 
Basic earnings per common share
$
0.14

$
0.08

$
0.23

$
0.10

Diluted earnings per common share
0.14

0.08

0.23

0.10

 
 
 
 
 
Weighted average common shares outstanding for basic earnings per common share
16,970,721

16,548,399

16,870,372

16,474,053

Weighted average common shares outstanding for diluted earnings per common share
17,088,102

16,740,390

17,009,399

16,692,163

 
 
 
 
 
See Notes to Unaudited Consolidated Financial Statements.
 
 
 
 

4




First Community Financial Partners, Inc. and Subsidiaries
 
 
 
 
Consolidated Statements of Comprehensive Income
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
Six months ended June 30,
 
2015
2014
2015
2014
 
(in thousands)(unaudited)
Net income
$
2,342

$
1,470

$
3,950

$
1,974

 
 
 
 
 
Unrealized holding gains (losses) on investment securities
(2,026
)
460

(321
)
1,203

Reclassification adjustments for gains included in net income

(38
)
(21
)
(38
)
Tax effect of realized and unrealized gains and losses on investment securities
792

(141
)
134

(430
)
Other comprehensive income (loss), net of tax
(1,234
)
281

(208
)
735

 
 
 
 
 
Comprehensive income
$
1,108

$
1,751

$
3,742

$
2,709

 
 
 
 
 
See Notes to Unaudited Consolidated Financial Statements.
 
 
 
 


5



 
First Community Financial Partners, Inc. and Subsidiaries
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity
 
 
Three and Six Months Ended June 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
Series B Preferred Stock
Series C Preferred Stock
Common Stock
Additional Paid-In Capital
Accumulated Deficit
Accumulated Other Comprehensive Income
 Total
 
 
 
 
 (in thousands, except share data) (unaudited)
 
Balance, December 31, 2013
$
5,176

$
892

$
16,334

$
81,241

$
(12,381
)
$
325

$
91,587

 
Net income




1,974


1,974

 
Other comprehensive loss, net of tax





735

735

 
Discount accretion on preferred shares

109



(109
)


 
Dividends on preferred shares




(179
)

(179
)
 
Issuance of 214,731 shares of common stock for restricted stock awards and amortization


215

(259
)


(44
)
 
Stock based compensation expense



193



193

 
Balance, June 30, 2014
5,176

1,001

16,549

81,175

(10,695
)
1,060

94,266

 








 
Balance, December 31, 2014


16,668

81,648

(7,019
)
756

92,053

 
Net income




3,950


3,950

 
Other comprehensive income, net of tax





(208
)
(208
)
 
Issuance of 302,719 shares of common stock for restricted stock awards and amortization


303

(297
)


6

 
Issuance of 13,500 shares of common stock for exercise of warrants


13

45



58

 
Reclass of warrants upon redemption of preferred stock



(237
)


(237
)
 
Stock based compensation expense



548



548

 
Balance, June 30, 2015
$

$

$
16,984

$
81,707

$
(3,069
)
$
548

$
96,170

 








 
See Notes to Unaudited Consolidated Financial Statements.






6



First Community Financial Partners, Inc. and Subsidiaries
 
 
Consolidated Statements of Cash Flows
 
 
 
Six months ended June 30,
 
2015
2014
 
(in thousands)(unaudited)
Cash Flows From Operating Activities
 
 
Net income applicable to First Community Financial Partners, Inc.
$
3,950

$
1,974

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Net amortization of securities
893

292

Provision for loan losses
(749
)
2,667

Gain on sale of foreclosed assets, net
(46
)
(19
)
Writedown of foreclosed assets
67

369

Net accretion of deferred loan fees
(16
)
(44
)
Warrant accretion
6

14

Depreciation and amortization of premises and equipment
567

606

Realized gains on sales of available for sale securities, net
(21
)
(38
)
Increase (decrease) in cash surrender value of life insurance
(64
)
255

Deferred income taxes
1,877

141

Proceeds from sale of loans

8,897

Gain on sale of loans

(32
)
Decrease (increase) in accrued interest receivable and other assets
(719
)
375

Increase in accrued interest payable and other liabilities
611

8,257

Restricted stock compensation expense
511

193

Stock option compensation expense
37


Net cash provided by operating activities
6,904

23,907

Cash Flows From Investing Activities
 
 
Net change in interest bearing deposits in banks
(18,723
)
(9,355
)
Activity in available for sale securities:
 
 
     Purchases
(27,443
)
(45,671
)
     Maturities, prepayments and calls
9,671

12,727

     Sales
2,263

8,504

Purchases of non-marketable equity securities

(400
)
Net decrease (increase) in loans held for sale
(711
)
629

Net increase in loans
(41,129
)
(25,280
)
Purchases of premises and equipment
(45
)
(4,002
)
Proceeds from sale of foreclosed assets
66

234

Net cash used in investing activities
(76,051
)
(62,614
)
Cash Flows From Financing Activities
 
 
Net increase in deposits
64,978

38,231

Cash paid on redemption of subordinated debt
(14,060
)

Net increase in other borrowings
14,569

5,327

Dividends paid on preferred shares

(179
)
Net cash provided by financing activities
65,487

43,379

Net change in cash and due from banks
(3,660
)
4,672

Cash and due from banks:
 
 
  Beginning
13,329

10,815

  Ending
$
9,669

$
15,487

Supplemental Disclosures of Cash Flow Information
 
 
Cash payments for interest
$
2,915

$
3,441

Supplemental Schedule of Noncash Investing and Financing Activities
 
 
Transfer of loans to foreclosed assets
1,805


 
 
 
See Notes to Unaudited Consolidated Financial Statements.
 
 

7



Notes to Unaudited Consolidated Financial Statements

Note 1.
Basis of Presentation

These are the unaudited consolidated financial statements of First Community Financial Partners, Inc. (the “Company” or “First Community”), and its subsidiaries, including its wholly owned bank subsidiary, First Community Financial Bank (the “Bank”), based in Plainfield, Illinois. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the entire fiscal year.

These unaudited interim financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and industry practice.  Certain information in footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP and industry practice has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”).  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2014.
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods.  Actual results could differ from those estimates.
 
Certain prior period amounts have been reclassified to conform to current period presentation.  These reclassifications did not result in any changes to previously reported net income or shareholders’ equity.

Emerging Growth Company Critical Accounting Policy Disclosure
 
The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.



8



Note 2.
Earnings Per Share

Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the applicable period. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings
per common share (in thousands, except share data).
 
Three months ended June 30,
Six months ended June 30,
 
2015
2014
2015
2014
 
 
 
 
 
Undistributed earnings allocated to common shareholders
$
2,342

$
1,470

$
3,950

$
1,974

Preferred stock dividends and discount accretion

(144
)

(288
)
Net income allocated to common shareholders
$
2,342

$
1,326

$
3,950

$
1,686

 
 
 
 
 
Weighted average shares outstanding for basic earnings per common share
16,970,721

16,548,399

16,870,372

16,474,053

Dilutive effect of stock-based compensation
117,381

191,991

139,027

218,110

Weighted average shares outstanding for diluted earnings per common share
17,088,102

16,740,390

17,009,399

16,692,163

 
 
 
 
 
Basic earnings per common share
$
0.14

$
0.08

$
0.23

$
0.10

Diluted earnings per common share
0.14

0.08

0.23

0.10



9




Note 3.
Securities Available for Sale

The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follows (in thousands):
June 30, 2015
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Government sponsored enterprises
$
27,802

$
196

$

$
27,998

Residential collateralized mortgage obligations
40,898

234

64

41,068

Residential mortgage backed securities
38,344

269

97

38,516

State and political subdivisions
75,040

1,054

694

75,400

 
$
182,084

$
1,753

$
855

$
182,982

December 31, 2014
 
 
 
 
Government sponsored enterprises
$
30,904

$
83

$
36

$
30,951

Residential collateralized mortgage obligations
44,095

241

62

44,274

Residential mortgage backed securities
27,208

137

128

27,217

State and political subdivisions
65,240

1,096

91

66,245

 
$
167,447

$
1,557

$
317

$
168,687



Securities with a fair value of $44.1 million and $40.5 million were pledged as collateral on public funds, securities sold under agreements to repurchase or for other purposes as required or permitted by law as of June 30, 2015 and December 31, 2014, respectively.

The amortized cost and fair value of debt securities available for sale as of June 30, 2015, by contractual maturity are shown below (in thousands). Maturities may differ from contractual maturities in residential collateralized mortgage obligations and residential mortgage backed securities because the mortgages underlying the securities may be called or repaid without any penalties. Therefore, these securities are segregated in the following maturity summary:
 
Amortized
Fair
 
Cost
Value
Within 1 year
$
9,055

$
9,085

Over 1 year through 5 years
44,040

44,557

Over 5 years through 10 years
33,368

33,332

Over 10 years
16,379

16,424

Residential collateralized mortgage obligations and mortgage backed securities
79,242

79,584

 
$
182,084

$
182,982


Gains on the sales of securities were $21,000 and $38,000 during the six months ended June 30, 2015 and 2014, respectively.

There were no securities with material unrealized losses existing longer than 12 months, and no securities with unrealized losses which management believed were other-than-temporarily impaired, at June 30, 2015 and December 31, 2014.

The unrealized losses in the portfolio at June 30, 2015 resulted from fluctuations in market interest rates and not from deterioration in the creditworthiness of the issuers. Because the Company does not intend to sell and does not believe it will be required to sell these securities until market price recovery or maturity, these investment securities are not considered to be other-than-temporarily impaired.


10




Note 4.
Loans

A summary of the balances of loans follows (in thousands):
 
June 30, 2015
December 31, 2014
Construction and Land Development
$
19,612

$
18,700

Farmland and Agricultural Production
8,604

9,350

Residential 1-4 Family
109,819

100,773

Multifamily
29,829

24,426

Commercial Real Estate
363,575

353,973

Commercial
187,780

171,452

Consumer and other
8,564

10,706

 
727,783

689,380

Net deferred loan fees
14

(187
)
Allowance for loan losses
(12,420
)
(13,905
)
 
$
715,377

$
675,288


The following table presents the contractual aging of the recorded investment in past due and non-accrual loans by class of loans as of June 30, 2015 and December 31, 2014 (in thousands):
June 30, 2015
Current
30-59 Days Past Due
60-89 Days Past Due
90+ Days Past Due and Still Accruing
Total Accruing Loans
Non-accrual Loans
Total Loans
Construction and Land Development
$
19,612

$

$


$
19,612

$

$
19,612

Farmland and Agricultural Production
8,604




8,604


8,604

Residential 1-4 Family
109,688

69



109,757

62

109,819

Multifamily
29,829




29,829


29,829

Commercial Real Estate







   Retail
88,610




88,610


88,610

   Office
46,185




46,185


46,185

   Industrial and Warehouse
66,808




66,808

1,907

68,715

   Health Care
27,898




27,898


27,898

   Other
131,404


277


131,681

486

132,167

Commercial
185,876


121

55

186,052

1,728

187,780

Consumer and other
8,532

30



8,562

2

8,564

      Total
$
723,046

$
99

$
398

55

$
723,598

$
4,185

$
727,783


December 31, 2014
Current
30-59 Days Past Due
60-89 Days Past Due
90+ Days Past Due and Still Accruing
Total Accruing Loans
Non-accrual Loans
Total Loans
Construction and Land Development
$
18,619

$

$
81

$

$
18,700

$

$
18,700

Farmland and Agricultural Production
9,350




9,350


9,350

Residential 1-4 Family
100,285


109


100,394

379

100,773

Multifamily
24,426




24,426


24,426

Commercial Real Estate








 
 
 
   Retail
91,725




91,725


91,725

   Office
44,255




44,255


44,255

   Industrial and Warehouse
57,410




57,410

1,907

59,317

   Health Care
26,974




26,974


26,974

   Other
128,940




128,940

2,762

131,702

Commercial
169,395


118

50

169,563

1,889

171,452

Consumer and other
10,695

1



10,696

10

10,706

      Total
$
682,074

$
1

$
308

$
50

$
682,433

$
6,947

$
689,380



11



As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt and comply with various terms of their loan agreements. The Company considers current financial information, historical payment experience, credit documentation, public information and current economic trends. Generally, all sizable credits receive a financial review no less than annually to monitor and adjust, if necessary, the credit’s risk profile. Credits classified as watch generally receive a review more frequently than annually. For special mention, substandard, and doubtful credit classifications, the frequency of review is increased to no less than quarterly in order to determine potential impact on credit loss estimates.

The Company categorizes loans into the following risk categories based on relevant information about the ability of borrowers to service their debt:

Pass - A pass asset is well protected by the current worth and paying capacity of the borrower (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner. Pass assets also include certain assets considered watch, which are still protected by the worth and paying capacity of the borrower but deserve closer attention and a higher level of credit monitoring.

Special Mention - A special mention asset, or risk rating of 5, has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Special mention assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Substandard - A substandard asset, or risk rating of 6 or 7, is an asset with a well-defined weakness that jeopardizes repayment, in whole or in part, of the debt. These credits are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. These assets are characterized by the distinct possibility that the Company will or has sustained some loss of principal and/or interest if the deficiencies are not corrected.

Doubtful - An asset that has all the weaknesses, or risk rating of 8, inherent in the substandard classification, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. These credits have a high probability for loss, yet because certain important and reasonably specific pending factors may work toward the strengthening of the asset, its classification of loss is deferred until its more exact status can be determined.

Loss - An asset, or portion thereof, classified as loss, or risk rated 9, is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not necessarily mean that an asset has no recovery or salvage value but that it is not practical or desirable to defer writing off this basically worthless asset even though a partial recovery may occur in the future. There was no balance to report at June 30, 2015 and December 31, 2014.

Residential 1-4 family, consumer and other loans are assessed for credit quality based on the contractual aging status of the loan and payment activity. In certain cases, based upon payment performance, the loan being related with another commercial type loan or for other reasons, a loan may be categorized into one of the risk categories noted above. Such assessment is completed at the end of each reporting period.


12



The following tables present the risk category of loans evaluated by internal asset classification based on the most recent analysis performed and the contractual aging as of June 30, 2015 and December 31, 2014 (in thousands):
June 30, 2015
Pass
Special Mention
Substandard
Doubtful
Total
Construction and Land Development
$
15,966

$
3,646

$

$

$
19,612

Farmland and Agricultural Production
8,604




8,604

Multifamily
29,142

687



29,829

Commercial Real Estate





   Retail
80,608

8,002



88,610

   Office
46,185




46,185

   Industrial and Warehouse
65,949

859


1,907

68,715

   Health Care
27,898




27,898

   Other
125,685

2,820

3,267

395

132,167

Commercial
179,139

6,653

404

1,584

187,780

      Total
$
579,176

$
22,667

$
3,671

$
3,886

$
609,400

June 30, 2015
Performing
Non-performing
Total
Residential 1-4 Family
$
109,757

$
62

$
109,819

Consumer and other
8,562

2

8,564

      Total
$
118,319

$
64

$
118,383


December 31, 2014
Pass
Special Mention
Substandard
Doubtful
Total
Construction and Land Development
$
14,900

$
3,800

$


$
18,700

Farmland and Agricultural Production
9,350




9,350

Multifamily
24,426




24,426

Commercial Real Estate










   Retail
78,258

13,467



91,725

   Office
44,255




44,255

   Industrial and Warehouse
56,316

1,094


1,907

59,317

   Health Care
26,974




26,974

   Other
121,526

4,185

3,329

2,662

131,702

Commercial
159,648

8,706

2,116

982

171,452

      Total
$
535,653

$
31,252

$
5,445

5,551

$
577,901

December 31, 2014
Performing
Non-performing
Total
Residential 1-4 Family
$
100,394

$
379

$
100,773

Consumer and other
10,696

10

10,706

      Total
$
111,090

$
389

$
111,479


Non-performing loans include those on non-accrual status and those past due 90 days or more and still on accrual.


13



The following table provides additional detail of the activity in the allowance for loan losses, by portfolio segment, for the three months ended June 30, 2015 and 2014 (in thousands):
June 30, 2015
Construction and Land Development
Farmland and Agricultural Production
Residential 1-4 Family
Multifamily
Commercial Real Estate
Commercial
Consumer and other
Total
Allowance for loan losses:








Beginning balance
$
731

$
439

$
1,146

$
97

$
7,162

$
3,917

$
286

$
13,778

Provision for loan losses
49

(412
)
3

(2
)
(672
)
410

(125
)
(749
)
Loans charged-off


(123
)

(105
)
(507
)
(2
)
(737
)
Recoveries of loans previously charged-off
18


21


9

75

5

128

Ending balance
$
798

$
27

$
1,047

$
95

$
6,394

$
3,895

$
164

$
12,420










June 30, 2014








Allowance for loan losses:








Beginning balance
$
1,455

$
404

$
1,540

$
306

$
8,624

$
3,757

$
265

$
16,351

Provision for loan losses
(334
)
49

(266
)
(202
)
1,327

66

27

667

Loans charged-off


(88
)

(2,494
)
(264
)

(2,846
)
Recoveries of loans previously charged-off
18


5


149

39


211

Ending balance
$
1,139

$
453

$
1,191

$
104

$
7,606

$
3,598

$
292

$
14,383


The following table provides additional detail of the activity in the allowance for loan losses, by portfolio segment, for the six months ended June 30, 2015 and 2014 (in thousands):

June 30, 2015
Construction and Land Development
Farmland and Agricultural Production
Residential 1-4 Family
Multifamily
Commercial Real Estate
Commercial
Consumer and other
Total
Allowance for loan losses:
 
 
 
 
 
 


Beginning balance
$
758

$
459

$
1,199

$
67

$
6,828

$
4,296

$
298

$
13,905

Provision for loan losses
5

(432
)
(128
)
28

(347
)
263

(138
)
(749
)
Loans charged-off


(195
)

(104
)
(770
)
(3
)
(1,072
)
Recoveries of loans previously charged-off
35


171


17

106

7

336

Ending balance
$
798

$
27

$
1,047

$
95

$
6,394

$
3,895

$
164

$
12,420

June 30, 2014
 
 
 
 
 
 


Allowance for loan losses:
 
 
 
 
 
 
 
 
Beginning balance
$
2,711

$
427

$
1,440

$
97

$
7,812

$
3,183

$
150

$
15,820

Provision for loan losses
(424
)
26

(112
)
7

1,646

1,372

152

2,667

Loans charged-off
(1,186
)

(156
)

(2,677
)
(1,067
)
(16
)
(5,102
)
Recoveries of loans previously charged-off
38


19


825

110

6

998

Ending balance
$
1,139

$
453

$
1,191

$
104

$
7,606

$
3,598

$
292

$
14,383




14



The following table presents the balance in the allowance for loan losses and the unpaid principal balance of loans by portfolio segment and based on impairment method as of June 30, 2015 and December 31, 2014 (in thousands):
June 30, 2015
Construction and Land Development
Farmland and Agricultural Production
Residential 1-4 Family
Multifamily
Commercial Real Estate
Commercial
Consumer and other
Total
Period-ended amount allocated to:
 
 
 

 
 
 
 
Individually evaluated for impairment
$

$

$
25

$

$

$
37

$

$
62

Collectively evaluated for impairment
798

27

1,022

95

6,394

3,858

164

12,358

Ending balance
$
798

$
27

$
1,047

$
95

$
6,394

$
3,895

$
164

$
12,420

Loans:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

$

$
1,689

$

$
6,749

$
4,285

$
2

$
12,725

Collectively evaluated for impairment
19,612

8,604

108,130

29,829

356,826

183,495

8,562

715,058

Ending balance
$
19,612

$
8,604

$
109,819

$
29,829

$
363,575

$
187,780

$
8,564

$
727,783

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
Period-ended amount allocated to:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$


$
29

$

$

$
561

$

$
590

Collectively evaluated for impairment
758

459

1,170

67

6,828

3,735

298

13,315

Ending balance
$
758

$
459

$
1,199

$
67

$
6,828

$
4,296

$
298

$
13,905

Loans:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$


$
2,020

$

$
9,084

$
4,495

$
11

$
15,610

Collectively evaluated for impairment
18,700

9,350

98,753

24,426

344,889

166,957

10,695

673,770

Ending balance
$
18,700

$
9,350

$
100,773

$
24,426

$
353,973

$
171,452

$
10,706

$
689,380



15



The following tables present additional detail of impaired loans, segregated by class, as of and for the three and six months ended June 30, 2015 and year ended December 31, 2014 (dollars in thousands). The unpaid principal balance represents the recorded balance prior to any partial charge-offs. The recorded investment represents customer balances net of any partial charge-offs recognized on the loans. The interest income recognized column represents all interest income reported after the loan became impaired.
June 30, 2015
 
 
 
 
 
 
Three Months Ended
Six Months Ended

Unpaid Principal Balance
Recorded Investment
Allowance for Loan Losses Allocated
Average Recorded Investment
Interest Income Recognized
Average Recorded Investment
Interest Income Recognized
With no related allowance recorded:
 
 
 
 
 
 
 
Construction and Land Development
$

$

$

$

$

$

$

Farmland and Agricultural Production







Residential 1-4 Family
1,255

1,216


1,230

16

1,335

31

Multifamily







Commercial Real Estate
 
 
 
 
 
 
 
   Retail







   Office
502

502


504

5

506

13

   Industrial and Warehouse
1,993

1,907


1,907


1,907


   Health Care







   Other
7,007

4,340


5,300

27

5,755

59

Commercial
4,782

4,185


3,812

33

3,719

66

Consumer and other
2

2


3


6


With an allowance recorded:
 
 
 
 
 
 
 
Construction and Land Development







Farmland and Agricultural Production







Residential 1-4 Family
473

473

25

474

5

474

11

Multifamily







Commercial Real Estate
 
 
 
 
 
 
 
   Retail







   Office







   Industrial and Warehouse







   Health Care







   Other



160


107


Commercial
100

100

37

375


570


Consumer and other







          Total
$
16,114

$
12,725

$
62

$
13,765

$
86

$
14,379

$
180


16



December 31, 2014

Unpaid Principal Balance
Recorded Investment
Allowance for Loan Losses Allocated
Average Recorded Investment
Interest Income Recognized
With no related allowance recorded:
 
 
 
 
 
Construction and Land Development
$

$

$

$

$

Farmland and Agricultural Production





Residential 1-4 Family
1,732

1,543


1,298

63

Multifamily



119


Commercial Real Estate
 
 
 
 
 
   Retail



707


   Office
511

510


779

25

   Industrial and Warehouse
1,994

1,907


1,550


   Health Care






   Other
9,658

6,667


6,126


Commercial
3,733

3,534


4,147


Consumer and other
20

11


14


With an allowance recorded:
 
 
 
 
 
Construction and Land Development



887


Farmland and Agricultural Production





Residential 1-4 Family
477

477

29

637

31

Multifamily





Commercial Real Estate
 
 
 
 
 
   Retail



1,907


   Office





   Industrial and Warehouse





   Health Care





   Other



1,084


Commercial
1,312

961

561

453


Consumer and other





          Total
$
19,437

$
15,610

$
590

$
19,708

$
119


During the six months ended June 30, 2015, there were no troubled debt restructurings added. During the six months ended June 30, 2014, there were four contracts totaling $3.2 million in troubled debt restructurings added, two of which were the result of the payment of real estate taxes by the Bank on the behalf of the customer and the third was the result of a payment concession.

Troubled debt restructurings that were accruing were $2.8 million as of June 30, 2015 and December 31, 2014. Troubled debt restructurings that were non-accruing were $2.4 million as of June 30, 2015 and December 31, 2014.

The following presents a rollfoward activity of troubled debt restructurings (in thousands, except number of loans):
 
Six months ended
 
June 30, 2015
 
Recorded Investment
Number of Loans
Balance, beginning
$
5,621

10

Additions to troubled debt restructurings


Removal of troubled debt restructurings
(309
)
(1
)
Charge-off related to troubled debt restructurings


Transfers to other real estate owned


Repayments and other reductions
(139
)
(1
)
Balance, ending
$
5,173

8


17



Restructured loans are evaluated for impairment at each reporting date as part of the Company’s determination of the allowance for loan losses.

Note 5.
Deposits

The composition of interest-bearing deposits was as follows (in thousands):
 
June 30, 2015
December 31, 2014
NOW and money market accounts
$
326,592

$
269,977

Savings
33,567

30,211

Time deposit certificates of $250,000 or more
56,257

50,682

Time deposit certificates of $100,000 to $250,000
136,810

145,506

Other time deposit certificates
106,635

114,705

 
$
659,861

$
611,081


The composition of brokered deposits included in deposits was as follows (in thousands):
 
June 30, 2015
December 31, 2014
NOW and money market accounts
$
33,356

$

Time deposit certificates
9,404

9,145

 
$
42,760

$
9,145




Note 6.
Other Borrowed Funds

The composition of other borrowed funds was as follows (in thousands):
 
June 30, 2015
December 31, 2014
Securities sold under agreements to repurchase
$
30,038

$
29,059

Secured borrowings
14,060


Mortgage note payable

470

 
$
44,098

$
29,529


Securities sold under agreements to repurchase are agreements in which the Bank acquires funds by selling securities to another party under a simultaneous agreement to repurchase the same securities at a specified price and date.  These agreements represent a demand deposit account product to clients that sweep their balances in excess of an agreed upon target amount into overnight repurchase agreements.

The mortgage note payable was related to the purchase of a building in Burr Ridge, Illinois, the Bank, as successor in interest to Burr Ridge Bank and Trust, was the obligor to a $1.0 million mortgage note signed on February 28, 2012. During the second quarter of 2015 the remaining balance of this obligation was repaid in full.

On June 29, 2015, the Company entered into a credit facility with an unaffiliated bank for two credit facilities. The credit facilities include a $4.0 million revolving line of credit, which was fully drawn at June 30, 2015 and a $10.1 million term loan.  The revolving line matures in 2020 and the term loan matures in 2021. The credit facilities have an annual interest rate of 2.25% plus LIBOR, which is currently 2.4%.  The credit facilities are collateralized by the stock of the Company’s wholly-owned subsidiary, the Bank. 
A collateral pledge agreement exists whereby at all times, the Bank must keep on hand, free of all other pledges, liens, and encumbrances, commercial real estate loans, first mortgage loans, and home equity loans with unpaid principal balances aggregating no less than 133% for first mortgage loans and 200% for home equity loans of the outstanding secured advances from the Federal Home Loan Bank of Chicago (“FHLB”).  The Bank had $296.5 million and $267.2 million of loans pledged as collateral for FHLB advances as of June 30, 2015 and December 31, 2014, respectively. There were no advances outstanding at June 30, 2015 and December 31, 2014, respectively.

The Bank has entered into collateral pledge agreements whereby the Bank pledges commercial, commercial real estate, agricultural and consumer loans to the Federal Reserve Bank of Chicago Discount Window which allows the Bank to borrow on a short term basis, typically overnight.  The Bank had $101.3 million and $99.8 million of loans pledged as collateral under these agreements as of June 30, 2015 and December 31, 2014, respectively. There were no borrowings outstanding at June 30, 2015 and December 31, 2014.


Note 7.
Income Taxes

Income tax expense recognized is as follows (in thousands):
 
Six months ended June 30,
 
2015
2014
Current
$
179

$
647

Deferred
1,877

141

 
$
2,056

$
788


The table below presents a reconciliation of the amount of income taxes determined by applying the U.S. federal income tax rate to pretax income (in thousands):
 
Six months ended June 30,

2015
2014
Federal income tax at statutory rate
$
2,102

$
967

Increase (decrease) due to:


Federal tax exempt
(254
)
(135
)
State income tax, net of federal benefit
307

173

Benefit of income taxed at lower rate
(60
)
28

Tax exempt income
(16
)
(10
)
Cash surrender value of life insurance
(22
)
(164
)
Other
(1
)
(71
)

$
2,056

$
788


Deferred tax assets and liabilities consist of (in thousands):

June 30, 2015
December 31, 2014

Deferred tax assets:


Allowance for loan losses
$
4,275

$
4,836

Merger expenses
146

156

Organization expenses
240

262

Net operating losses
6,865

8,320

Contribution carryforward
38

38

Restricted stock
159


Non-qualified stock options
631

860

Foreclosed assets
308

291

Tax Credits
416

374

Other

76


13,078

15,213

Deferred tax liabilities:




Depreciation
(233
)
(334
)
Unrealized gains on securities available for sale
(350
)
(484
)
Other
(5
)
(162
)

(588
)
(980
)
Net deferred tax asset
$
12,490

$
14,233


Under U.S. GAAP, a valuation allowance against a net deferred tax asset is required to be recognized if it is more-likely-than-not that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, forecasts of future income, applicable tax planning strategies and assessments of current and future economic and business conditions.

18




The Company had a federal net operating loss carryforward of $17.3 million and $20.3 million at June 30, 2015 and December 31, 2014, respectively, which could be used to offset future regular corporate federal income tax as of June 30, 2015 and December 31, 2014. The net operating loss carryforward expires between the December 31, 2030 and December 31, 2033, fiscal tax years. The Company had an Illinois net operating loss carryforward of $14.0 million and $22.6 million at June 30, 2015 and December 31, 2014, respectively, that could be used to offset future regular corporate state income tax, as of June 30, 2015 and December 31, 2014. This Illinois net operating loss carryforward will expire between the December 31, 2025 and December 31, 2028, fiscal tax years.


Note 8.
Stock Compensation Plans

The Company maintains the First Community Financial Partners, Inc. Amended and Restated 2008 Equity Incentive Plan (the “2008 Equity Incentive Plan”), which assumed and incorporated all outstanding awards under previously adopted Company equity incentive plans. The 2008 Equity Incentive Plan allows for the granting of awards including stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and cash incentive awards. This plan was amended in December 2011 to increase the number of shares authorized for delivery by 1,000,000 shares. As a result, under the 2008 Equity Incentive Plan, 2,430,000 shares of Company common stock have been reserved for the granting of awards.

Under the 2008 Equity Incentive Plan, options are to be granted at the fair value of the stock at the date of the grant and generally vest at 33-1/3% as of the first anniversary of the grant date and an additional 33-1/3% as of each successive anniversary of the grant date. Options must be exercised within 10 years after the date of grant.

On August 15, 2013, the Company adopted the First Community Financial Partners, Inc. 2013 Equity Incentive Plan (the “2013 Equity Incentive Plan”). The 2013 Equity Incentive Plan allows for the granting of awards including stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and cash incentive awards. Under this plan, 1,000,000 shares of Company common stock have been reserved for the granting of awards.

The following table summarizes data concerning stock options (aggregate intrinsic value in thousands):
 
June 30, 2015
 
Shares
Weighted Average Exercise Price
Aggregate Intrinsic Value
Outstanding at beginning of year
1,089,404

$
7.00

$

Granted
217,500

5.20

294

Exercised



Canceled



Expired



Forfeited
(1,100
)
8.30


 
 
 
 
Outstanding at end of period
1,305,804

$
6.70

$
834

 
 
 
 
Exercisable at end of period
1,088,304

$
6.99

$
541


The aggregate intrinsic value of a stock option in the table above represents the total pre-tax amount by which the current market value of the underlying stock exceeds the price of the option that would have been received by the option holders had all option holders exercised their options on June 30, 2015. There was $834,000 and $0 in intrinsic value of the stock options outstanding at June 30, 2015 and December 31, 2014. The intrinsic value will change when the market value of the Company’s stock changes. The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option pricing model.


19



The Company recognized $37,000 and $0 of compensation expense related to the stock options for the six months ended June 30, 2015 and 2014. At June 30, 2015, there was $230,000 in compensation expense to be recognized related to outstanding stock options.

Information pertaining to options outstanding at June 30, 2015 is as follows:
Exercise Prices
Number Outstanding
Weighted Average Remaining Life (yrs)
Number Exercisable
$5.00
364,376

4.04
364,376

$5.20
217,500

9.52

$5.53
6,000

4.84
6,000

$6.25
30,600

4.42
30,600

$6.38
10,000

0.81
10,000

$7.50
433,700

2.07
433,700

$8.00
4,000

4.22
4,000

$9.25
239,628

2.88
239,628

 
1,305,804

 
1,088,304


No options vested during the three months ended June 30, 2015.

The Company grants restricted stock units to select officers and directors within the organization under the 2008 Equity Incentive Plan and the 2013 Equity Incentive Plan, which entitle the holder to receive shares of Company common stock in the future, subject to certain terms, conditions and restrictions. Holders of restricted stock units are also entitled to receive additional units equal in value to any dividends paid with respect to the restricted stock units during the vesting period. Compensation expense for the restricted stock units equals the market price of the related stock at the date of grant and is amortized on a straight-line basis over the vesting period.

In January 2015, restricted stock was issued with certain performance conditions for a minimum of 33,600 shares, and up to a maximum of 170,549 shares. These performance conditions are expected to be met by the end of 2015 and the expense related to these awards is being recognized over the year.

The Company recognized compensation expense of $407,000 and $123,000, respectively, for the six months ended June 30, 2015 and 2014, related to the 2008 Equity Incentive Plan and the 2013 Equity Incentive Plan. Total unrecognized compensation expense related to restricted stock grants was approximately $182,000 as of June 30, 2015.

The following is a summary of nonvested restricted stock units:
 
June 30, 2015
 
Number of Shares
Weighted Average Grant Date Fair Value
Outstanding at beginning of year
212,020

$
3.95

Granted
53,600

5.31

Vested
(202,020
)
3.97

Canceled


Forfeited


Nonvested shares, end of period
63,600

$
5.06



Note 9.
Concentrations, Commitments and Contingencies

Concentrations of credit risk: In addition to financial instruments with off-balance-sheet risk, the Company, to a certain extent, is exposed to varying risks associated with concentrations of credit. Concentrations of credit risk generally exist if a number of borrowers are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by economic or other conditions.

The Company conducts substantially all of its lending activities in Will, Grundy, DuPage, Cook and Kane counties in Illinois and their surrounding communities. Loans granted to businesses are primarily secured by business assets, investment real estate, owner-occupied real estate or personal assets of commercial borrowers. Loans to individuals are primarily secured by personal residences or other personal assets. Since the Company’s borrowers and its loan collateral have geographic

20



concentration in its primary market area, the Company could have exposure to declines in the local economy and real estate market. However, management believes that the diversity of its customer base and local economy, its knowledge of the local market, and its proximity to customers limits the risk of exposure to adverse economic conditions.

Credit related financial instruments: The Company is party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

A summary of the Company’s commitments is as follows (in thousands):
 
June 30, 2015
December 31, 2014
Commitments to extend credit
$
141,342

$
132,693

Standby letters of credit
10,335

10,169

Performance letters of credit
737

440

 
$
152,414

$
143,302


Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, is based on management’s credit evaluation of the party.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral, which may include accounts receivable, inventory, property and equipment or, income producing properties, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the summary above. If the commitment were funded, the Company would be entitled to seek recovery from the customer.

Contingencies: In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such pending proceedings would not be expected to have a material adverse effect on the Company’s consolidated financial statements.


Note 10.
Capital and Regulatory Matters

The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial results and condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. In addition, the Bank remains subject to certain of the de novo bank requirements of the Federal Deposit Insurance Corporation (“FDIC”) until the Bank has been chartered for a period longer than seven years. Until October 28, 2015, the Bank is required, among other items, to obtain FDIC approval for any material change to its business plan.

As of June 30, 2015, the Bank was well capitalized under the regulatory framework for prompt corrective action. Currently, to be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, common equity tier 1

21



capital, and Tier 1 leverage ratios as set forth in the following table. Bank regulators can modify capital requirements as part of their examination process.

In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”).  The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally non-public bank holding companies with consolidated assets of less than $1 billion).  The Basel III Rules not only increased most of the required minimum regulatory capital ratios, but they introduced a new common equity tier 1 capital ratio and the concept of a capital conservation buffer.  The Basel III Rules also expanded the definition of capital by establishing criteria that instruments must meet to be considered additional Tier 1 capital (Tier 1 capital in addition to common equity) and Tier 2 capital.  A number of instruments that generally qualified as Tier 1 capital will not qualify, or their qualifications will change when the Basel III rules are fully implemented.  The Basel III Rules also permitted banking organizations with less than $15.0 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Company made this one time election in the first quarter of 2015.  The Basel III Rules have maintained the general structure of the current prompt corrective action framework, while incorporating the increased requirements. The prompt corrective action guidelines were also revised to add the common equity Tier 1 capital ratio.  In order to be a “well-capitalized” depository institution under the new regime, a bank and holding company must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more.  The Company and Bank became subject to the new Basel III Rules on January 1, 2015, with phase-in periods for many of the changes.  Management believes, as of June 30, 2015 and December 31, 2014, the Company and the Bank met all capital adequacy requirements to which they were subject.

The Company’s and the Bank’s capital amounts and ratios are presented in the following table (dollar amounts in thousands):
 
Actual
Minimum Capital Requirement
Minimum To Be Well Capitalized under Prompt Corrective Action Provisions
 
Amount
Ratio
Amount
Ratio
Amount
Ratio
June 30, 2015
 
 
 
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
 
Consolidated
$
118,352

15.08
%
$
62,795

8.00
%
 N/A
 N/A
First Community Financial Bank
123,983

15.84
%
62,608

8.00
%
$
78,260

10.00
%
Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
Consolidated
90,041

11.47
%
47,096

6.00
%
 N/A
 N/A
First Community Financial Bank
113,992

14.59
%
46,956

6.00
%
62,795

8.00
%
Common equity tier 1 capital
 
 
 
 
 
 
Consolidated
90,041

11.47
%
55,684

6.00
%
 N/A
 N/A
First Community Financial Bank
113,992

14.59
%
55,684

6.00
%
50,869

6.50
%
Tier 1 leverage ratio


 
 
 
 
Consolidated
90,041

9.70
%
55,684

6.00
%
 N/A
 N/A
First Community Financial Bank
113,992

12.30
%
55,684

6.00
%
39,130

5.00
%
December 31, 2014
 
 
 
 
 
 
Total capital (to risk-weighted assets)
 
 
 
 
 
 
Consolidated
$
115,341

13.55
%
$
60,400

8.00
%
 N/A
 N/A
First Community Financial Bank
111,470

14.79
%
60,289

8.00
%
$
75,361

10.00
%
Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
Consolidated
77,547

10.27
%
30,200

4.00
%
 N/A
 N/A
First Community Financial Bank
101,997

13.53
%
30,144

4.00
%
45,217

6.00
%
Tier 1 capital (to average assets)
 
 
 
 
 
 
Consolidated
77,547

8.55
%
36,281

4.00
%
 N/A
 N/A
First Community Financial Bank
101,997

11.23
%
36,324

4.00
%
45,405

5.00
%

22




Under the Illinois Banking Act, Illinois-chartered banks generally may not pay dividends in excess of their net profits, after first deducting their losses (including any accumulated deficit) and provision for loan losses. The payment of dividends by any bank is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Moreover, the FDIC prohibits the payment of any dividends by a bank if the FDIC determines such payment would constitute an unsafe or unsound practice. In addition, the FDIC places restrictions on dividend payments during the first seven years of a new bank’s operations, after which time allowing cash dividends to be paid only from net operating income and does not permit dividends to be paid until an appropriate allowance for loan and lease losses has been established and overall capital is adequate. For the six months ended June 30, 2015 and the year ended December 31, 2014, the Bank was unable to pay common share dividends due to having an accumulated deficit.


23




Note 11.
Fair Value Measurements

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
 
ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity 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 a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.

Financial Instruments Recorded at Fair Value on a Recurring Basis
 
Securities Available for Sale: The fair value of the Company’s securities available for sale is determined using Level 2 inputs from independent pricing services. Level 2 inputs consider observable data that may include dealer quotes, market spread, cash flows, treasury yield curve, trading levels, credit information and terms, among other factors. Certain state and political subdivision securities are not valued based on observable transactions and are, therefore, classified as Level 3.

Derivatives: The Bank provides clients with interest rate swap transactions and offset the transactions with interest rate swap transactions with another financial institution as a means of providing loan terms agreeable to both parties. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the

24



expected cash flows of each derivative and classified as Level 2. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including LIBOR rate curves.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
June 30, 2015
Total
 Quoted Prices in Active Markets for Identical Assets (Level 1)
 Significant Other Observable Inputs (Level 2)
 Significant Unobservable Inputs (Level 3)
Financial Assets
 
 
 
 
Securities Available for Sale:
 
 
 
 
Government sponsored enterprises
$
27,998

$

$
27,998

$

Residential collateralized mortgage obligations
41,068


41,068


Residential mortgage backed securities
38,516


38,516


State and political subdivisions
75,400


73,900

1,500

Derivative financial instruments
292


292


Financial Liabilities
 
 
 
 
Derivative financial instruments
292


292


 
 
 
 
 
December 31, 2014
 
 
 
 
Financial Assets
 
 
 
 
Securities Available for Sale:
 
 
 
 
Government sponsored enterprises
$
30,951

$

$
30,951

$

Residential collateralized mortgage obligations
44,274


44,274


Residential mortgage backed securities
27,217


27,217


State and political subdivisions
66,245


64,731

1,514

Derivative financial instruments
314


314


Financial Liabilities








Derivative financial instruments
314


314












The significant unobservable inputs used in the Level 3 fair value measurements of the Company’s state and political subdivisions in the table above primarily relate to the discounted cash flows including the bond’s coupon, yield and expected maturity date.
 
The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2015. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.


25



The following tables present additional information about assets and liabilities measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value (in thousands):
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
State and political subdivisions
Beginning balance, December 31, 2014
$
1,514

Total gains or losses (realized/unrealized) included in other comprehensive income
(14
)
Included in earnings

Purchases

Paydowns and maturities

Transfers in and/or out of Level 3

Ending balance, June 30, 2015
$
1,500

 
 
Beginning balance, December 31, 2013
$
2,719

Total gains or losses (realized/unrealized) included in other comprehensive income
(19
)
Included in earnings

Purchases

Paydowns and maturities
(1,245
)
Transfers in and/or out of Level 3

Ending balance, June 30, 2014
$
1,455


Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are set forth below:
June 30, 2015
Total
 Quoted Prices in Active Markets for Identical Assets (Level 1)
 Significant Other Observable Inputs (Level 2)
 Significant Unobservable Inputs (Level 3)
Financial Assets
 
 
 
 
Mortgage loans held for sale
$
1,449



$
1,449

Impaired loans
$
12,663



$
12,663

Foreclosed assets
4,248



4,248

 
 
 
 
 
December 31, 2014
 
 
 
 
Financial Assets
 
 
 
 
Mortgage loans held for sale
$
738



$
738

Impaired loans
$
15,020



$
15,020

Foreclosed assets
2,530



2,530



26



The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:
 
Quantitative Information about Level 3 Fair Value Measurements
 
Fair Value Estimate
Valuation Techniques
Unobservable Input
Discount Range
Assets
 
 
 
 
June 30, 2015
 
 
 
 
Mortgage loans held for sale
$
1,449

Secondary market pricing
Selling costs
Impaired loans
12,663

Appraisal of Collateral
Appraisal adjustments Selling costs
10% to 25%
Foreclosed assets
4,248

Appraisal of Collateral
Selling costs
10.00%
December 31, 2014
 
 
 
 
Mortgage loans held for sale
738

Secondary market pricing
Selling costs
Impaired loans
15,020

Appraisal of Collateral
Appraisal adjustments Selling costs
10% to 25%
Foreclosed assets
2,530

Appraisal of Collateral
Selling costs
10.00%

Impaired loans: Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or fair value.  Fair value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy.  The fair value for an impaired loan is generally determined utilizing appraisals for real estate loans and value guides or consultants for commercial and industrial loans and other loans secured by items such as equipment, inventory, accounts receivable or vehicles. In substantially all instances, a 10% discount is utilized for selling costs which includes broker fees and closing costs. It is our general practice to obtain updated values on impaired loans every twelve to eighteen months. In instances where the appraisal is greater than one year old, an additional discount is considered ranging from 5% to 15%. Any adjustment is based on either comparisons from other recent appraisals obtained by the Company on like properties or using third party resources such as real estate brokers or Reis, Inc., a nationally recognized provider of commercial real estate information including real estate values.

As of June 30, 2015 and December 31, 2014, approximately $4.2 million, or 33%, and $10.8 million, or 69%, of impaired loans were evaluated for impairment using appraisals performed within twelve months of these dates, respectively.

Loans Held for Sale: The fair value of loans held for sale is determined using quoted secondary market prices and classified as Level 2.

Foreclosed assets: Foreclosed assets upon initial recognition are measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. Fair values are generally based on third party appraisals of the property resulting in Level 3 classification. The appraised value is discounted by 10% for estimated selling costs which includes broker fees and closing costs and appraisals are obtained annually.
  
Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. Fair value is determined under the framework established by Fair Value Measurements, based upon criteria noted above. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value at the Company. The methodologies for measuring fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.

The following methods and assumptions were used by the Company in estimating the fair value disclosures of its other financial instruments:

Cash and due from banks: The carrying amounts reported in the consolidated balance sheets for cash and due from banks and approximate their fair values.

Interest-bearing deposits in banks: The carrying amounts of interest-bearing deposits maturing within one year approximate their fair values.

27




Nonmarketable equity securities: These securities are either redeemable at par or current redemption values; therefore, market value equals cost.

Loans: For those variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed rate and all other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Deposits: The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amount payable on demand. The carrying amounts for variable-rate certificates of deposit approximate their fair value at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Subordinated debt: The fair values of the Company’s subordinated debt are estimated using discounted cash flows based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Other borrowed funds: The carrying amounts of securities sold under repurchase agreements, term notes, revolving lines of credit and mortgage notes payable approximate their fair values.

Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair values.

Off-balance-sheet instruments: Fair values for the Company’s off-balance-sheet lending commitments (standby letters of credit and commitments to extend credit) are based on fees currently charged to enter into similar agreements taking into account the remaining term of the agreements and the counterparties’ credit standing. The fair value of these commitments is not material.

The estimated fair values of the Company’s financial instruments are as follows as of June 30, 2015 (in thousands):
 
Carrying Amount
Estimated Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Financial assets:
 
 
 
 
 
Cash and due from banks
$
9,669

$
9,669

$
9,669

$

$

Interest-bearing deposits in banks
38,390

38,390

38,390



Securities available for sale
182,982

182,982


181,482

1,500

Nonmarketable equity securities
1,367

1,367



1,367

Loans, net
715,377

712,796



712,796

Accrued interest receivable
2,678

2,678

2,678



Derivative financial instruments
292

292


292


Financial liabilities:
 
 
 
 
 
Non-interest bearing deposits
174,527

174,527

174,527



Interest-bearing deposits
659,861

652,819

292,660


360,159

Other borrowed funds
44,098

43,587

43,587



Subordinated debt
15,300

15,168



15,168

Accrued interest payable
1,314

1,314

1,314



Derivative financial instruments
292

292


292




28



The estimated fair values of the Company’s financial instruments are as follows as of December 31, 2014 (in thousands):
 
Carrying Amount
Estimated Fair Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Financial assets:
 
 
 
 
 
Cash and due from banks
$
13,329

$
13,329

$
13,329

$

$

Interest-bearing deposits in banks
19,667

19,667

19,667



Securities available for sale
168,687

168,687


167,173

1,514

Nonmarketable equity securities
1,367

1,367



1,367

Mortgage loans held for sale
738

738



738

Loans, net
675,288

675,287



675,287

Accrued interest receivable
2,396

2,396

2,396



Derivative financial instruments
314

314


314


Financial liabilities:
 
 
 
 
 
Non-interest bearing deposits
158,329

158,329

158,329



Interest-bearing deposits
611,081

604,726

300,188


304,538

Other borrowed funds
29,529

28,957

28,957



Subordinated debt
29,133

28,819



28,819

Accrued interest payable
1,029

1,029

1,029



Derivative financial instruments
314

314


314



Note 12.
Derivatives and Hedging Activities

Derivative contracts entered into by the Bank are limited to those that do not qualify for hedge accounting treatment. The Bank provides clients with interest rate swap transactions and offsets the transactions with interest rate swap transactions with another financial institution as a means of providing loan terms agreeable to both parties. As of June 30, 2015 and December 31, 2014, there were $3.3 million and $3.4 million, respectively, outstanding notional values of swaps where the Bank receives a variable rate of interest and the client receives a fixed rate of interest. This is offset with counterparty contracts where the Bank pays a floating rate of interest and receives a fixed rate of interest. The estimated fair value of interest rate swaps was $292,000 and $314,000 as of June 30, 2015 and December 31, 2014, respectively, and was recorded gross as an asset and a liability. Swaps with clients and third-party financial institutions are carried at fair value with adjustments recorded in other income the gross amount of the adjustments to the income statement were $22,000 and $37,000 during the three months ended June 30, 2015 and June 30, 2014, respectively.

Note 13.
Preferred Stock

On December 4, 2014, the Company repurchased all of its remaining outstanding shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (“Series B Preferred Stock”) and Fixed Rate Cumulative Perpetual Preferred Stock, Series C (“Series C Preferred Stock”). 5,176 shares of Series B Preferred stock and 1,100 shares of Series C Preferred Stock were repurchased from certain third-party investors at an aggregate purchase price of $6.3 million, which included accrued and unpaid dividends earned on the shares through the date of repurchase. A gain on the retirement of preferred stock of $4,800 was recorded through accumulated deficit.


29



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this report. This report may contain certain forward-looking statements, such as discussions of the Company’s pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties, including those described in Item 1A. Risk Factors and other sections of the Company’s December 31, 2014 Annual Report on Form 10-K and the Company’s other filings with the SEC, and other risks and uncertainties, including changes in interest rates, general economic conditions and those in the Company’s market area, legislative/regulatory changes, including the rules adopted by the U.S. Federal banking authorities to implement the Basel III capital accords, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System, the Company’s success in raising capital, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles, policies and guidelines. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.
Overview
    
First Community, an Illinois corporation, is the holding company for the Bank. Through the Bank, we provide a full range of financial services to individuals and corporate clients.

The Bank has banking centers, located at 2801 Black Road, Joliet, Illinois, 24 West Gartner Road, Suite 104, Naperville, Illinois, 25407 South Bell Road, Channahon, Illinois, 14150 South U.S. Route 30, Plainfield, Illinois, 13901 South Bell Road, Homer Glen, Illinois, and 7020 South County Line Road, Burr Ridge, Illinois.

Through these banking centers the Bank offers a full range of deposit products and services, as well as credit and operational services. Depository services include: Individual Retirement Accounts (IRAs), tax depository and payment services, automatic transfers, bank by mail, direct deposits, money market accounts, savings accounts, and various forms and terms of certificates of deposit (CDs), both fixed and variable rate. The Bank attracts deposits through advertising and by pricing depository services competitively. Credit services include: commercial and industrial loans, real estate construction and land development loans, conventional and adjustable rate real estate loans secured by residential properties, real estate loans secured by commercial properties, customer loans for items such as home improvements, vehicles, boats and education offered on installment and single payment bases, as well as government guaranteed loans including Small Business Administration (“SBA”) loans, and letters of credit. Bank operation services include: cashier’s checks, traveler’s checks, collections, currency and coin processing, wire transfer services, deposit bag rentals, and stop payments. Other services include servicing of secondary market real estate loans, notary services, and signature guarantees. The Bank does not offer trust services at this time.

Second Quarter 2015 Highlights
Return on average assets (“ROAA”) improved to 0.96% in the second quarter of 2015 from 0.60% in the second quarter of 2014, while return on average equity (“ROAE”) rose sharply to 9.77% in the second quarter of 2015 compared with 5.66% in the second quarter of 2014.
Tangible book value per share rose to $5.66 at June 30, 2015, was up from $5.52 at December 31, 2014.
Pre-tax core net operating income, a non-GAAP measure, rose to $3.5 million in the second quarter of 2015 compared with $2.0 million in the second quarter of 2014.
Net interest income before provision for loan losses increased to $7.5 million in the second quarter of 2015, up 2.74% compared with $7.3 million in the second quarter of 2014, reflecting higher interest income offset by a slightly higher year-over-year interest expense.
Total shareholders’ equity at June 30, 2015 was $96.2 million, a 4.47% increase from $92.1 million at December 31, 2014, reflecting growth and a strengthened balance sheet.
Asset quality measures improved significantly, including a decline in the ratio of nonperforming assets to total assets to 0.85% at June 30, 2015 from 1.03% at year-end.

30




Year to Date 2015 Highlights
ROAA improved to 0.83% for the six months ended June 30, 2015, from 0.38% for the six months ended June 30, 2014, while ROAE rose sharply to 8.34% for the six months ended June 30, 2015 compared with 3.64% for the six months ended June 30, 2014.
Pre-tax core net operating income, a non-GAAP measure, rose to $6.0 million for the six months ended June 30, 2015 compared with $2.7 million for the same period in 2014.
Net interest income before provision for loan losses increased to $14.6 million for the six months ended June 30, 2015, up 4.29% compared with $14.0 million in the six months ended June 30, 2014, reflecting higher interest income offset by a slightly higher year-over-year interest expense.
Total assets reached a Company-record $994.5 million at June 30, 2015, an increase from $924.1 million at December 31, 2014.
Total loans increased 5.60% to $727.8 million at June 30, 2015 from $689.2 million at December 31, 2014.
Total deposits were $834.4 million at June 30, 2015, up 8.45% from $769.4 million at December 31, 2014. Core demand deposits comprised 64.08% of total deposits in the second quarter of 2015 compared with 59.59% of total deposits at December 31, 2014. Noninterest bearing deposit accounts, an important source of lower-cost funding to support loan activity, increased to $174.5 million in the second quarter of 2015 from $158.3 million at December 31, 2014.

Income Statement Highlights
Net interest income was $7.5 million and $14.6 million for the three and six months ended June 30, 2015, compared to $7.3 million and $14.0 million for the three and six months ended June 30, 2014. The Company’s net interest margin was 3.27% for the three and six months ended June 30, 2015, compared to 3.45% and 3.37% for the three and six months ended June 30, 2014.
Interest income on loans remained flat at $8.1 million for the quarter ended June 30, 2015 and $15.9 million for the six months ended June 30, 2015, compared to $8.1 million for the quarter ended June 30, 2014 and $15.8 million for the six months ended June 30, 2014, reflecting contributions of $63.4 million from loan growth, offset by newer loans being booked at lower average yields due to the ongoing low interest rate environment and competitive market conditions.
Interest income on securities was $962,000 for the quarter ended June 30, 2015, compared to $737,000 for the quarter ended June 30, 2014. Interest income on securities was $1.9 million and $1.4 million for the six months ended June 30, 2015 and 2014, respectively. The increase in interest income on securities was the result of growth in the portfolio, along with improvement in the overall yield of the government sponsored enterprises and state and political subdivision portfolios as a result of changes in the Company’s investment strategy over the past year.
Interest expense on deposits was $1.0 million in the second quarter of 2015, compared to $1.1 million in the second quarter of 2014. Interest expense on deposits was $2.0 million and $2.3 million for the six months ended June 30, 2015 and 2014, respectively. We continue to rebalance our funding mix with continued reduction in time deposits offset by continued growth noninterest bearing deposits, NOW, money market and savings accounts.
Noninterest income was $521,000 in the second quarter of 2015 and $968,000 for the six months ended June 30, 2015. Noninterest income included year-over-year growth in service charges on deposit accounts resulting from growth in noninterest bearing deposits that provide greater fee income. In addition to mortgage fee income of $153,000 for the quarter ended June 30, 2015, which rose 84.34% compared with a year earlier, and 83.57% for the six months ended to $257,000. Noninterest income for the three and six months ended June 30, 2014 was $845,000 and $1.5 million, respectively, which included other income of $483,000 related to proceeds received from a bank owned life insurance policy, in addition to $28,000 in gains on the sale of loans and $38,000 in gains on the sale of securities.
Noninterest expense was $5.2 million and $10.4 million for the three and six months ended June 30, 2015 compared to $5.4 million and $10.1 million for the three and six months ended June 30, 2014. Salaries and benefits were consistent year-over-year and lower occupancy expense was reflected by the purchase of the Channahon, Illinois branch in mid-2014. The second quarter of 2015 included a net loss on foreclosed assets of $20,000 as compared to a net loss of $369,000 in the same period in 2014. These losses relate to the timing of appraisals and sales of foreclosed properties.

Balance Sheet Highlights
Total assets were $994.5 million at June 30, 2015, up 7.62% from $924.1 million at December 31, 2014. Net loans (after allowance for loan losses) were $715.4 million at June 30, 2015, a 5.9% increase from $675.3 million at December 31, 2014,

31



reflecting balanced growth in most lending categories and a lower allowance for loan losses. Commercial real estate loans increased $9.6 million to $363.6 million at June 30, 2015 as compared to December 31, 2014. Commercial loans rose $16.3 million since year-end, an increase of 9.52% to $187.8 million. Residential 1-4 family loans were $109.8 million at June 30, 2015, up 8.93% from $100.8 million at December 31, 2014.
Investment securities increased to $184.3 million at June 30, 2015, compared with $170.1 million at December 31, 2014. Strong gains in low-cost deposits facilitated some of the growth. Average duration of the Company’s investment portfolio remains modest at approximately 4.03 years.
Total deposits, which increased to $834.4 million in the second quarter of 2015, compared with $769.4 million at December 31, 2014, reflecting the Company’s focus on growing core deposits from commercial business depositors. Approximately $16.2 million of the growth in 2015 came from commercial noninterest bearing demand deposits. Savings deposits increased 11.11% in the first six months of 2015, and NOW and money market accounts increased 20.97% to $326.6 million at June 30, 2015, from $270.0 million at December 31, 2014. This growth has reduced First Community’s overall reliance on time deposits for funding its asset growth. Ongoing rebalancing of the Company’s deposit portfolio resulted in a decline in time deposits to $299.7 million at June 30, 2015 from $310.9 million at December 31, 2014.

Asset Quality
Total nonperforming assets declined by 31.45% to $8.5 million at June 30, 2015 from $12.4 million at June 30, 2014, and 10.53% from $9.5 million at December 31, 2014. The improvement reflected a decline in total nonperforming loans to $4.2 million at June 30, 2015 from $8.5 million a year earlier, and from $7.0 million at December 31, 2014. Foreclosed assets were $4.2 million at June 30, 2015, up from $2.5 million at December 31, 2014 due to the addition of two new properties in the second quarter of 2015. Net charge-offs, which declined sharply beginning in the third quarter of 2014, were $609,000 in the second quarter of 2015, compared to $2.6 million in the second quarter of 2014 as a result of the lower level of nonperforming loans.
The Company had a negative provision for loan losses of $749,000 in the second quarter 2015 compared with a provision of $667,000 in the second quarter of 2014, reflecting significantly improved asset quality year over year. The loan loss provision for the six months ended June 30, 2015 was negative $749,000, as compared to $2.7 million in the second quarter of 2014. Even with this negative provision, the Company’s allowance for loan losses to nonperforming loans remained strong at 292.92% at June 30, 2015, compared to 198.73% at December 31, 2014.

Capital Ratios
The Bank was well capitalized according to applicable regulatory standards at June 30, 2015, with a Tier 1 leverage ratio of 9.24%, Tier 1 risk based ratio of 11.20%, a total risk-based capital ratio of 14.39%, and a common equity Tier 1 ratio of 11.20%. First Community’s ratio of tangible common shareholder’s equity to tangible assets was 9.67% at June 30, 2015, compared to 9.96% at December 31, 2014. See Note 10 to our Unaudited Consolidated Financial Statements.

32




Results of Operations
Net Interest Income
Net interest income is the largest component of our income, and is affected by the interest rate environment and the volume and the composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, interest-bearing deposits in other banks, investment securities, and federal funds sold. Our interest-bearing liabilities include deposits, advances from the FHLB, subordinated debentures, repurchase agreements and other short-term borrowings.
The following tables reflect the components of net interest income for the three months ended June 30, 2015 and 2014:
 
Three months ended June 30,
 
2015
 
2014
(Dollars in thousands)
Average
Balances
Income/
Expense
Yields/
Rates
 
Average
Balances
Income/
Expense
Yields/
Rates
Assets
 
 
 
 
 
 
 
Loans (1)
$
711,889

$
8,090

4.55
%
 
$
665,095

$
8,086

4.86
%
Investment securities (2)
189,011

962

2.04
%
 
152,251

737

1.94
%
Interest bearing deposits with other banks
11,973

15

0.50
%
 
24,210

19

0.31
%
Total earning assets
$
912,873

$
9,067

3.97
%
 
$
841,556

$
8,842

4.20
%
 
 
 
 
 
 
 
 
Other assets
58,679

 
 
 
46,789

 
 
Total assets
$
971,552

 
 
 
$
888,345

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
NOW accounts
$
71,739

$
24

0.13
%
 
$
75,102

$
27

0.14
%
Money market accounts
222,089

177

0.32
%
 
176,599

120

0.27
%
Savings accounts
32,961

14

0.17
%
 
26,904

10

0.15
%
Time deposits
301,399

772

1.02
%
 
345,682

976

1.13
%
Total interest bearing deposits
628,188

987

0.63
%
 
624,287

1,133

0.73
%
Securities sold under agreements to repurchase
29,087

7

0.10
%
 
27,610

7

0.10
%
Term borrowings and line of credit
155

2

5.16
%
 



Mortgage payable
278

7

10.07
%
 
593

10

6.75
%
FHLB Borrowings
1,385

1

0.29
%
 
2,155


%
Subordinated debentures
28,988

603

8.32
%
 
19,315

432

8.95
%
Total interest bearing liabilities
688,081

1,607

0.93
%
 
673,960

1,582

0.94
%
Non-interest bearing deposits
184,246

 
 
 
117,369

 
 
Other liabilities
3,333

 
 
 
3,360

 
 
Total liabilities
$
875,660

 
 
 
$
794,689

 
 
 
 
 
 
 
 
 
 
Total shareholders' equity
$
95,892

 
 
 
$
93,656

 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
$
971,552

 
 
 
$
888,345

 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
7,460

 
 
 
$
7,260

 
 
 
 
 
 
 
 
 
Interest rate spread
 
 
3.04
%
 
 
 
3.26
%
 
 
 
 
 
 
 
 
Net interest margin
 
 
3.27
%
 
 
 
3.45
%
Footnotes:
(1) Average loans include nonperforming loans.
(2) No tax-equivalent adjustments were made, as the effect thereof was not material.


33



The net interest income increase and margin decrease was primarily due to changes in loans. Loans booked in the past year have been at lower yields due to current competitive market conditions, which was offset by the volume of new loans booked over the past two quarters.

 
Six months ended June 30,
 
2015
2014
(Dollars in thousands)
Average
Balances
Income/
Expense
Yields/
Rates
Average
Balances
Income/
Expense
Yields/
Rates
Assets
 
 
 
 
 
 
Loans (1)
$
710,154

$
15,906

4.48
%
$
662,886

$
15,751

4.75
%
Investment securities (2)
185,775

1,913

2.06
%
148,553

1,413

1.90
%
Interest-bearing deposits with other banks
11,876

28

0.47
%
21,334

37

0.35
%
Total earning assets
$
907,805

$
17,847

3.93
%
$
832,773

$
17,201

4.13
%
 
 
 
 
 
 
 
Other assets
44,992

 
 
45,360

 
 
Total assets
$
952,797

 
 
$
878,133

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
NOW accounts
$
81,816

$
74

0.18
%
$
74,536

$
58

0.16
%
Money market accounts
215,802

290

0.27
%
171,852

239

0.28
%
Savings accounts
32,377

27

0.17
%
25,965

20

0.15
%
Time deposits
300,436

1,573

1.05
%
346,617

1,952

1.13
%
Total interest bearing deposits
630,431

1,964

0.62
%
618,970

2,269

0.73
%
Securities sold under agreements to repurchase
28,955

15

0.10
%
26,483

14

0.11
%
Term borrowings and line of credit
78

2

5.13
%



Mortgage payable
363

14

7.71
%
621

20

6.44
%
FHLB borrowings
1,022


%
1,111


%
Subordinated debentures
29,062

1,206

8.30
%
19,312

863

8.94
%
Total interest bearing liabilities
689,911

$
3,201

0.93
%
666,497

3,166

0.95
%
Noninterest bearing deposits
164,389

 
 
115,099

 
 
Other liabilities
3,762

 
 
3,917

 
 
Total liabilities
$
858,062

 
 
$
785,513

 
 
 
 
 
 
 
 
 
Total shareholders' equity
$
94,735

 
 
$
92,620

 
 
 
 
 
 
 
 
 
Total liabilities and equity
$
952,797

 
 
$
878,133

 
 
 
 
 
 
 
 
 
Net interest income
 
$
14,646

 
 
$
14,035

 
 
 
 
 
 
 
 
Interest rate spread
 
 
3.00
%
 
 
3.18
%
 
 
 
 
 
 
 
Net interest margin
 
 
3.23
%
 
 
3.37
%

The net interest income increase and margin decrease was primarily due to changes in loans. Loans booked in the past year have been at lower yields due to current competitive market conditions, which was offset by the volume of new loans booked over the past two quarters.


34



Rate/Volume Analysis

The following table sets forth certain information regarding changes in our interest income and interest expense for the periods noted (dollars in thousands):
 
Three months ended June 30,
 
2015 compared to 2014
 
Average Volume
Average Rate
Mix
Net Increase (Decrease)
 
 
 
 
 
Interest Income
 
 
 
 
Loans
$
554

$
(514
)
$
(36
)
$
4

Investment securities
179

38

9

226

Interest bearing deposits with other banks
(9
)
11

(6
)
(4
)
Total interest income
724

(465
)
(33
)
226

 
 
 
 
 
Interest expense
 
 
 
 
NOW accounts
$
(1
)
$
(2
)
$

$
(3
)
Money market accounts
29

22

6

57

Savings accounts
3

1


4

Time deposits
(121
)
(95
)
12

(204
)
Term borrowings
2



2

Securities sold under agreements to repurchase




FHLB advances
1



1

Mortgage payable
(5
)
5

(3
)
(3
)
Subordinated debentures
216

(30
)
(15
)
171

Total interest expense
124

(99
)

25

 
 
 
 
 
Change in net interest income
$
600

$
(366
)
$
(33
)
$
201

 
Six months ended June 30,
 
2015 compared to 2014
 
Average Volume
Average Rate
Mix
Net Increase (Decrease)
 
 
 
 
 
Interest Income
 
 
 
 
Loans
$
1,106

$
(888
)
$
(63
)
$
155

Investment securities
352

118

30

500

Interest bearing deposits with other banks
(16
)
13

(6
)
(9
)
Total interest income
1,442

(757
)
(39
)
646

 
 
 
 
 
Interest expense
 
 
 
 
NOW accounts
$
6

$
9

$
1

$
16

Money market accounts
62

(9
)
(2
)
51

Savings accounts
3

3

1

7

Time deposits
(259
)
(138
)
18

(379
)
Term borrowings
2



2

Securities sold under agreements to repurchase
2

(1
)

1

Mortgage payable
(8
)
4

(2
)
(6
)
Subordinated debentures
435

(61
)
(31
)
343

Total interest expense
243

(193
)
(15
)
35

 
 
 
 
 
Change in net interest income
$
1,199

$
(564
)
$
(24
)
$
611


35



Provision for Loan Losses
The provision for loan losses was a negative $749,000 for the three and six months ended June 30, 2015, compared to $667,000 and $2.7 million for the same periods in 2014, respectively. Net charge-offs decreased to $609,000 and $736,000 for the three and six months ended June 30, 2015 compared to $2.6 million and $4.1 million for the same periods in 2014. Nonperforming loans decreased 39.40% from $7.0 million at December 31, 2014 to $4.2 million at June 30, 2015. This decrease was related to charge-offs and paydowns on nonperforming loans. The decreases in nonperforming loans is the result of management’s continued focus on improving asset quality and cleaning up the loan portfolio.
Noninterest Income

The following table sets forth the components of noninterest income for the periods indicated:    
 
Three months ended June 30,
Six months ended June 30,
(Dollars in thousands)
2015
2014
2015
2014
Service charges on deposit accounts
$
194

$
152

$
377

$
283

Gain on sale of loans

28


32

Gain on foreclosed assets, net



19

Gain on sale of securities

38

21

38

Mortgage fee income
153

83

257

140

Other
174

544

313

953

Total noninterest income
$
521

$
845

$
968

$
1,465

    
Noninterest income for the three and six months ended June 30, 2015 decreased from the same period in 2014, primarily due to a decrease in other noninterest income, as noted below. Service charges on deposit accounts were up in the current year, primarily due to overdraft fees charged as the result of increases in overdraft balances. The Company’s residential mortgage operation, which started in late 2011, increased volumes significantly during the past three years; the second quarter of 2015 continued to show higher volumes than prior quarters, and in turn, higher mortgage fee income. In addition, there was a decrease in other noninterest income, which was primarily due to recognition of income in the second quarter of 2014 from income related to proceeds received from a bank owned life insurance policy in the amount of $483,000.

Noninterest Expense

The following table sets forth the components of noninterest expense for the periods indicated:
 
Three months ended June 30,
Six months ended June 30,
(Dollars in thousands)
2015
2014
2015
2014
Salaries and employee benefits
$
2,810

$
2,785

5,694

5,640

Occupancy and equipment expense
505

577

997

1,102

Data processing
237

249

462

478

Professional fees
411

372

792

697

Advertising and business development
227

213

417

341

Losses on sale and writedowns of foreclosed assets, net
20

369

20

369

Foreclosed assets, net of rental income
70

55

141

135

Other expense
919

791

1,834

1,309

Total noninterest expense
$
5,199

$
5,411

$
10,357

$
10,071


Salaries and employee benefits increased slightly for the six months ended June 30, 2015 compared to the same period in 2014 as a result of salary adjustments, despite a decrease for the three months ended June 30, 2015. Occupancy and equipment expense was down from the second quarter of 2014 as the result of the purchase of the Channahon branch building along with the completion of construction at the Burr Ridge location. Professional fees were up slightly primarily as the result of problem loan related legal fees paid during the first half of 2015. Advertising costs were higher than the prior year due to the update of our website along with other marketing initiatives. During 2014, we reversed the accrual for a contingent liability of approximately $210,000, which decreased other expense. In addition, there have been some smaller increases in other expenses during the first half of 2015, such as software purchases, correspondent fees and restricted stock and stock option expense for directors.

36



Income Taxes
    
The Company realized income tax expense of $1.2 million and $2.1 million for the three and six months ended June 30, 2015, compared with $557,000 and $788,000 of income tax expense for the three and six months ended June 30, 2014, respectively. Net deferred tax assets were $12.5 million and $14.2 million at June 30, 2015 and December 31, 2014, respectively.

Under U.S. GAAP, a valuation allowance against a net deferred tax asset is required to be recognized if it is more-likely-than-not that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, forecasts of future income, applicable tax planning strategies and assessments of current and future economic and business conditions.

Financial Condition
Our assets totaled $994.5 million at June 30, 2015 as compared to $924.1 million at December 31, 2014, an increase of $70.4 million, or 7.62%. Total loans at June 30, 2015 and December 31, 2014 were $727.8 million and $689.2 million, respectively, an increase of $38.6 million, or 5.60%. Total deposits were $834.4 million and $769.4 million at June 30, 2015 and December 31, 2014, respectively, an increase of $65.0 million, or 8.45%.
Loans
The loan portfolio consists principally of loans to individuals and small- and medium-sized businesses within our primary market area. The table below shows our loan portfolio composition (dollars in thousands):
 
June 30, 2015
 
December 31, 2014
 
June 30, 2014
 
Amount
% of Total
 
Amount
% of Total
 
Amount
% of Total
Construction and Land Development
$
19,612

3
%
 
$
18,700

3
%
 
$
15,060

2
%
Farmland and Agricultural Production
8,604

1
%
 
9,350

1
%
 
7,659

1
%
Residential 1-4 Family
109,819

15
%
 
100,773

15
%
 
95,284

14
%
Multifamily
29,829

4
%
 
24,426

4
%
 
23,873

4
%
Commercial Real Estate
363,575

50
%
 
353,973

51
%
 
345,755

53
%
Commercial
187,780

26
%
 
171,452

25
%
 
166,975

25
%
Consumer and other
8,564

1
%
 
10,706

1
%
 
9,784

1
%
Total Loans
$
727,783

100
%
 
$
689,380

100
%
 
$
664,390

100
%
Total loans increased by $38.6 million during the six months ended June 30, 2015 as a result of new loan originations. New loans originated during the six months ended June 30, 2015 were primarily in the commercial real estate, multifamily, commercial, and residential 1-4 family categories.
Allowance for Loan Losses

Management reviews the level of the allowance for loan losses on a quarterly basis. The methodology used to assess the adequacy of the allowance includes the allocation of specific and general reserves. The specific component relates to loans that are impaired. For such loans that are classified as impaired, an allowance is established when the collateral value, discounted cash flows or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. These qualitative factors include local economic trends, concentrations, management experience, and other elements of the Company’s lending operations.

At June 30, 2015 and December 31, 2014, the allowance for loan losses was $12.4 million and $13.9 million, respectively, with a resulting allowance to total loans ratio of 1.71% and 2.02%, respectively. Over the past year, we have seen a reduction in the allowance to total loan percentage from 2.16% at June 30, 2014, and 2.02% at December 31, 2014, to 1.71% at June 30, 2015. This decrease has been the result of the reduction in nonperforming assets and an improving net charge-off history, which is the starting point for the Company’s allowance for loan loss calculation. In addition, the allowance for loan losses to nonperforming loans increased from 169.49% at June 30, 2014, and 198.73% at December 31, 2014, to 292.92% at June 30, 2015.

37




Net charge-offs for the three and six months ended June 30, 2015 amounted to $609,000 and $736,000, respectively, compared to $2.6 million and $4.1 million for the same periods in 2014. Overall decreases in charge-offs have been seen over the past year as a result of the continued improvement in asset quality.

Charge-offs and recoveries for each major loan category are shown in the table below:
 
Three Months Ended
Six Months Ended
(Dollars in thousands)
June 30, 2015
June 30, 2014
June 30, 2015
June 30, 2014
Balance at beginning of period
$
13,778

$
16,351

$
13,905

$
15,820

Charge-offs:
 
 
 
 
Construction and Land Development



1,186

Residential 1-4 Family
123

88

195

156

Commercial Real Estate
104

2,494

104

2,677

Commercial
507

264

770

1,067

Consumer and other
2


3

16

Total charge-offs
$
736

$
2,846

$
1,072

$
5,102

Recoveries:
 
 
 
 
Construction and Land Development
18

18

35

38

Residential 1-4 Family
21

5

172

19

Commercial Real Estate
9

149

17

825

Commercial
75

39

106

110

Consumer and other
4


6

6

Total recoveries
$
127

$
211

$
336

$
998

Net charge-offs
609

2,635

736

4,104

Provision for loan losses
(749
)
667

(749
)
2,667

Allowance for loan losses at end of period
$
12,420

$
14,383

$
12,420

$
14,383

Selected loan quality ratios:
 
 
 
 
Net charge-offs to average loans
0.34
%
1.59
%
0.22
%
1.27
%
Allowance to total loans
1.71
%
2.16
%
1.71
%
2.16
%
Allowance to nonperforming loans
292.92
%
169.49
%
292.92
%
169.49
%

The following table provides additional detail of the balance of the allowance for loan losses by portfolio segment:
(Dollars in thousands)
June 30, 2015
 
December 31, 2014
Balance at end of period applicable to:
Amount
% of Total Loans
 
Amount
% of Total Loans
 
 
 
 
 
 
Construction and Land Development
$
798

6
%
 
$
758

5
%
Farmland and Agricultural Production
27

1
%
 
459

3
%
Residential 1-4 Family
1,047

8
%
 
1,199

9
%
Multifamily
95

1
%
 
67

1
%
Commercial Real Estate
6,394

52
%
 
6,828

49
%
Commercial
3,895

31
%
 
4,296

31
%
Consumer and other
164

1
%
 
298

2
%
Total
$
12,420

100
%
 
$
13,905

100
%

38



Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining the 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. Impairment is measured on a loan-by-loan basis using the fair value of collateral if the loan is collateral dependent, the present value of expected future cash flows discounted at the loan’s effective interest rate, or the loan’s obtainable market price due to financial difficulties of the borrower.
Residential 1-4 family and consumer loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
There were approximately $4.2 million of nonperforming loans at June 30, 2015, which were down from $7.0 million at December 31, 2014. The decrease was the result of current year charge-offs and paydowns.
Impaired loans were $12.7 million and $15.6 million at June 30, 2015 and December 31, 2014, respectively. Included in impaired loans at June 30, 2015 were $573,000 in loans with valuation allowances totaling $62,000, and $12.2 million in loans without valuation allowances. Included in impaired loans at December 31, 2014 were $1.4 million in loans with valuation allowances totaling $590,000, and $14.2 million in loans without valuation allowances.
The following presents the recorded investment in nonaccrual loans and loans past due over 90 days and still accruing:
 
June 30, 2015
December 31, 2014
June 30, 2014
Nonaccrual loans
$
4,185

$
6,947

$
8,025

Accruing loans delinquent 90 days or more
55

50

461

Nonperforming loans
4,240

6,997

8,486

Troubled debt restructurings accruing interest
2,780

2,814

2,522


We define potential problem loans as loans rated substandard which are still accruing interest.  We do not necessarily expect to realize losses on all potential problem loans, but we recognize potential problem loans carry a higher probability of default and require additional attention by management.  The aggregate principal amounts of potential problem loans as of June 30, 2015 and December 31, 2014 were approximately $3.5 million and $4.9 million, respectively.  Management believes it has established an adequate allowance for probable loan losses as appropriate under U.S. GAAP.

39



Investment Securities
Investment securities serve to enhance the overall yield on interest earning assets while supporting interest rate sensitivity and liquidity positions, and as collateral on public funds and securities sold under agreements to repurchase. All securities are classified as available for sale as the Company intends to hold the securities for an indefinite period of time, but not necessarily to maturity. Securities available for sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive income, net of the related deferred tax effect. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
The amortized cost and fair value of securities available for sale (in thousands) are as follows:
 
June 30, 2015
 
December 31, 2014
 
Amortized Cost
Fair Value
 
Amortized Cost
Fair Value
Government sponsored enterprises
$
27,802

$
27,998

 
$
30,904

$
30,951

Residential collateralized mortgage obligations
40,898

41,068

 
44,095

44,274

Residential mortgage backed securities
38,344

38,516

 
27,208

27,217

State and political subdivisions
75,040

75,400

 
65,240

66,245

Total securities available for sale
$
182,084

$
182,982

 
$
167,447

$
168,687

Available for sale securities increased $14.3 million to $183.0 million at June 30, 2015 from $168.7 million at December 31, 2014, as the Company continued to invest its excess cash in investment securities during 2015.     
Securities with a fair value of $44.1 million and $40.5 million were pledged as collateral on public funds, securities sold under agreements or for other purposes as required or permitted by law, as of June 30, 2015 and December 31, 2014, respectively.
Deposits

Deposits, which include noninterest-bearing demand deposits, NOW and money market accounts, savings deposits and time deposits, are the primary source of the Company’s funds. The Company offers a variety of products designed to attract and retain customers, with a primary focus on building and expanding relationships. The Company continues to focus on establishing comprehensive relationships with business borrowers, seeking deposit as well as lending relationships.

The following table sets forth the composition of our deposits at the dates indicated (dollars in thousands):
 
June 30, 2015
December 31, 2014
 
Amount
Percent
Amount
Percent
Noninterest bearing demand deposits
$
174,527

20.92
%
$
158,329

20.58
%
NOW and money market accounts
326,592

39.14
%
269,977

35.09
%
Savings
33,567

4.02
%
30,211

3.93
%
Time deposit certificates of $250,000 or more
56,257

6.74
%
50,682

6.59
%
Time deposit certificates, $100,000 to $250,000
136,810

16.40
%
145,506

18.91
%
Other time deposit certificates
106,635

12.78
%
114,705

14.90
%
Total
$
834,388

100.00
%
$
769,410

100.00
%
    
Total deposits increased $65.0 million to $834.4 million at June 30, 2015, from $769.4 million at December 31, 2014. The increase was primarily related to the increase in noninterest bearing demand deposits and NOW and money market accounts, which helped to improve the Company’s core deposits and lower the Company’s overall cost of funds.
Off-Balance Sheet Arrangements
Refer to Note 9 of our Unaudited Consolidated Financial Statements for a description of off-balance sheet arrangements.


40



Liquidity and Capital Resources

Our goal in liquidity management is to satisfy the cash flow requirements of depositors and borrowers as well as our operating cash needs with cost-effective funding. Our Board of Directors has established an Asset/Liability Policy in order to achieve and maintain earnings performance consistent with long-term goals while maintaining acceptable levels of interest rate risk, a “well-capitalized” balance sheet, and adequate levels of liquidity. This policy designates the Bank’s Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO, which includes members of management, reviews liquidity on a periodic basis and approves significant changes in strategies that affect balance sheet or cash flow positions.

Overall deposit levels are monitored on a constant basis as are liquidity policy levels. Primary sources of liquidity include cash and due from banks, short-term investments such as federal funds sold, securities sold under agreements to repurchase, and our investment portfolio, which can also be used as collateral on public funds. Alternative sources of funds include unsecured federal funds lines of credit through correspondent banks, brokered deposits, and FHLB advances. The Bank has established contingency plans in the event of extraordinary fluctuations in cash resources.

The following table reflects the average daily outstanding, year-end outstanding, maximum month-end outstanding and weighted average rates paid for each of the categories of short-term borrowings:
 
June 30, 2015
December 31, 2014
(Dollars in thousands)
 
 
Securities sold under agreements to repurchase:
 
 
Balance:
 
 
Average daily outstanding
$
28,955

$
29,081

Outstanding at end of period
30,038

29,059

Maximum month-end outstanding
3,038

32,668

Rate:
 
 
Weighted average interest rate during the year
0.10
%
0.10
%
Weighted average interest rate at end of the period
0.10
%
0.10
%
 
 
 
FHLB borrowings:
 
 
Balance:
 
 
Average daily outstanding
$
1,022

$
1,017

Outstanding at end of period


Maximum month-end outstanding
8,000

5,000

Rate:
 
 
Weighted average interest rate during the year
0.15
%
0.13
%
Weighted average interest rate at end of the period
%
%

Provisions of the Illinois banking laws place restrictions upon the amount of dividends that can be paid to the Company by the Bank. The availability of dividends may be further limited because of the need to maintain capital ratios satisfactory to applicable regulatory agencies. As of June 30, 2015, the Bank was unable to pay dividends due to having an accumulated deficit of $3.1 million at June 30, 2015 compared to $7.0 million at December 31, 2014.

The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial results and condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. In addition, the Bank remains subject to certain of the FDIC’s de novo bank requirements until the Bank has been chartered for a period longer than seven years. Until October 28, 2015, the Bank is required, among other items, to obtain FDIC approval for any material change to its business plan.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total, common equity and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets, each as defined in the applicable regulations. Management believes, as of June 30, 2015 and December 31, 2014, the

41



Company and the Bank met all capital adequacy requirements to which they were subject. See Note 10 to our Unaudited Consolidated Financial Statements for more information.
Critical Accounting Policies and Estimates
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. 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. When establishing the allowance for loan losses, management categorizes loans into risk categories generally based on the nature of the collateral and the basis of repayment.
    
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to recognize adjustments to its allowance based on their judgments of information available to them at the time of their examinations.

The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful or substandard. For such loans that are classified as impaired, an allowance is established when the collateral value, discounted cash flows or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. These qualitative factors consider local economic trends, concentrations, management experience, and other elements of the Company’s lending operations.
Foreclosed Assets
Assets acquired through loan foreclosure or other proceedings are initially recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. After foreclosure, foreclosed assets are held for sale and are carried at the lower of cost or fair value less estimated costs of disposal. Any valuation adjustments required at the date of transfer are charged to the allowance for loan losses. Subsequently, unrealized losses and realized gains and losses on sales are included in other noninterest income. Operating results from foreclosed assets are recorded in other noninterest expense.
Income taxes
Deferred taxes are provided using the liability method. Deferred tax assets are recognized for deductible temporary differences, operating loss and tax credit carryforwards while deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company follows the accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. There were no uncertain tax positions as of June 30, 2015 and December 31, 2014.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the

42



reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.




Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable





Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management carried out an evaluation, under the supervision and with the participation of the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934) as of June 30, 2015. Based upon that evaluation, the chief executive officer along with the chief financial officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report, were effective.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.



43




PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings to which the Company or any of its subsidiaries is a party or any of their property is subject, other than ordinary routine litigation incidental to their respective businesses.

Item 1A. Risk Factors
Not applicable

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None

Item 3. Defaults Upon Senior Securities
None

Item 4. Mine Safety Disclosures
Not applicable


Item 5. Other Information
None

Item 6. Exhibits
See Exhibit Index



44



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
FIRST COMMUNITY FINANCIAL PARTNERS, INC.
 
 
 Date: August 6, 2015
/s/ Roy C. Thygesen
 
Roy C. Thygesen
 
Chief Executive Officer
 
(Principal Executive Officer)
 
 
 Date: August 6, 2015
/s/ Glen L. Stiteley
 
Glen L. Stiteley
 
Executive Vice President and Chief Financial Officer
 
(Principal Financial and Accounting Officer)




45



Exhibit Index
10.1

Loan and Security Agreement, dated June 29, 2015, by and between the Company and M.B. Financial Bank, N.A. (filed herewith).
31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014; (ii) Consolidated Statements of Operations for the three months ended March 31, 2015 and March 31, 2014; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and March 31, 2014; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2015 and March 31, 2015; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and March 31, 2014; and (vi) Notes to Unaudited Consolidated Financial Statements.



46