First Community Financial Partners, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 CERTICIATION OF THE CHIEF FINANCIAL OFFICER 09 2015 - First Community Financial Partners, Inc.	a322section1350certificati.htm
EX-32.1 - EXHIBIT 32.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER 09 2015 - First Community Financial Partners, Inc.	a321section1350certificati.htm
EX-31.2 - EXHIBIT 31.2 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER 09 2015 - First Community Financial Partners, Inc.	a312rule13a-14a_15dx14acer.htm
EX-31.1 - EXHIBIT 31.1 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER 09 2015 - First Community Financial Partners, Inc.	a311rule13a-14a_x15dx14ace.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 September 30, 2015



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 17,023,941 shares of the Registrant’s common stock as of October 30, 2015.

FIRST COMMUNITY FINANCIAL PARTNERS, INC.

FORM 10-Q

September 30, 2015

INDEX



		Page
PART I	FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets at September 30, 2015 (Unaudited) and December 31, 2014	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4	Controls and Procedures	44

PART II	OTHER INFORMATION
Item 1	Legal Proceedings	45
Item 1A	Risk Factors	45
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3	Defaults Upon Senior Securities	45
Item 4	Mine Safety Disclosures	45
Item 5	Other Information	45
Item 6	Exhibits	45

	Signatures	46
	Exhibit Index	47

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements



First Community Financial Partners, Inc. and Subsidiaries
Consolidated Balance Sheets
	September 30, 2015			December 31, 2014
Assets	(in thousands, except share data)(September 30, 2015 data is unaudited)
Cash and due from banks	$	10,110		$	13,329
Interest-bearing deposits in banks	21,324			19,667
Securities available for sale	215,827			168,687
Non-marketable equity securities	1,367			1,367
Mortgage loans held for sale	—			738
Loans, net of allowance for loan losses of $11,753 in 2015; $13,905 in 2014	731,302			675,288
Premises and equipment, net	18,680			19,369
Foreclosed assets	4,109			2,530
Cash surrender value of life insurance	4,419			4,323
Deferred tax asset, net	10,540			14,233
Accrued interest receivable and other assets	5,754			4,544
Total assets	$	1,023,432		$	924,075

Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest bearing	$	174,849		$	158,329
Interest bearing	671,848			611,081
Total deposits	846,697			769,410
Other borrowed funds	57,251			29,529
Subordinated debt	15,300			29,133
Accrued interest payable and other liabilities	4,065			3,950
Total liabilities	923,313			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; 17,017,441 issued and outstanding at September 30, 2015 and 16,668,002 issued and outstanding at December 31, 2014	17,017			16,668
Additional paid-in capital	82,037			81,648
Accumulated deficit	(121		)	(7,019		)
Accumulated other comprehensive income	1,186			756
Total shareholders' equity	100,119			92,053
Total liabilities and shareholders' equity	$	1,023,432		$	924,075

See Notes to Unaudited Consolidated Financial Statements.



First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Operations
	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Interest income:	(dollars in thousands, except share data)(unaudited)
Loans, including fees	$	8,218		$	7,988		$	24,124		$	23,738
Securities	1,103			848			3,017			2,261
Federal funds sold and other	19			23			47			62
Total interest income	9,340			8,859			27,188			26,061
Interest expense:
Deposits	973			1,130			2,937			3,400
Federal funds purchased and other borrowed funds	98			16			129			50
Subordinated debt	297			432			1,503			1,295
Total interest expense	1,368			1,578			4,569			4,745
Net interest income	7,972			7,281			22,619			21,316
Provision for loan losses	(813		)	—			(1,562		)	2,667
Net interest income after provision for loan losses	8,785			7,281			24,181			18,649
Noninterest income:
Service charges on deposit accounts	188			210			565			492
Gain on sale of loans	—			—			—			32
Gain on sale of securities	251			407			272			446
Gain on foreclosed assets, net	—			—			—			19
Mortgage fee income	178			196			435			336
Other	152			153			465			1,106
	769			966			1,737			2,431
Noninterest expenses:
Salaries and employee benefits	2,841			2,812			8,535			8,452
Occupancy and equipment expense	486			543			1,483			1,607
Data processing	248			238			710			715
Professional fees	342			345			1,134			1,044
Advertising and business development	217			223			633			563
Losses on sale and writedowns of foreclosed assets, net	58			78			78			447
Foreclosed assets expenses, net of rental income	(61		)	55			80			190
Other expense	1,005			794			2,840			2,144
	5,136			5,088			15,493			15,162
Income before income taxes	4,418			3,159			10,425			5,918
Income taxes	1,471			1,149			3,527			1,936
Net income attributable to First Community Financial Partners	2,947			2,010			6,898			3,982
Dividends and accretion on preferred shares	—			(145		)	—			(433		)
Net income applicable to common shareholders	$	2,947		$	1,865		$	6,898		$	3,549

Common share data
Basic earnings per common share	$	0.17		$	0.11		$	0.41		$	0.22
Diluted earnings per common share	0.17			0.11			0.40			0.21

Weighted average common shares outstanding for basic earnings per common share	16,993,822			16,549,096			16,910,441			16,499,342
Weighted average common shares outstanding for diluted earnings per common share	17,161,783			16,770,189			17,048,967			16,719,545

See Notes to Unaudited Consolidated Financial Statements.



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

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(in thousands)(unaudited)
Net income	$	2,947		$	2,010		$	6,898		$	3,982

Unrealized holding gains (losses) on investment securities	1,297			(440		)	976			1,214
Reclassification adjustments for gains included in net income	(251		)	(407		)	(272		)	(446		)
Tax effect of realized and unrealized gains and losses on investment securities	(408		)	581			(274		)	(299		)
Other comprehensive income (loss), net of tax	638			(266		)	430			469

Comprehensive income	$	3,585		$	1,744		$	7,328		$	4,451

See Notes to Unaudited Consolidated Financial Statements.



First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Nine Months Ended September 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	—		—		—		—			3,982			—		3,982
Other comprehensive income, net of tax	—		—		—		—			—			469		469
Discount accretion on preferred shares	—		165		—		—			(165		)	—		—
Dividends on preferred shares	—		—		—		—			(268		)	—		(268		)
Issuance of 218,481 shares of common stock for restricted stock awards and amortization	—		—		218		(269		)	—			—		(51		)
Stock based compensation expense	—		—		—		262			—			—		262
Balance, September 30, 2014	5,176		1,057		16,552		81,234			(8,832		)	794		95,981

Balance, December 31, 2014	—		—		16,668		81,648			(7,019		)	756		92,053
Net income	—		—		—		—			6,898			—		6,898
Other comprehensive income, net of tax	—		—		—		—			—			430		430
Issuance of 306,189 shares of common stock for restricted stock awards and amortization	—		—		306		(304		)	—			—		2
Issuance of 43,250 shares of common stock for exercise of warrants	—		—		43		155			—			—		198
Reclass of warrants upon redemption of preferred stock	—		—		—		(225		)	—			—		(225		)
Stock based compensation expense	—		—		—		763			—			—		763
Balance, September 30, 2015	$	—	$	—	$	17,017	$	82,037		$	(121	)	$	1,186	$	100,119

See Notes to Unaudited Consolidated Financial Statements.



First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
	Nine months ended September 30,
	2015			2014
	(in thousands)(unaudited)
Cash Flows From Operating Activities
Net income applicable to First Community Financial Partners, Inc.	$	6,898		$	3,982
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities	1,383			483
Provision for loan losses	(1,562		)	2,667
(Gain) loss on sale of foreclosed assets, net	(13		)	11
Writedown of foreclosed assets	92			417
Net accretion (amortization) of deferred loan fees	58			(80		)
Warrant accretion	6			21
Depreciation and amortization of premises and equipment	954			796
Realized gains on sales of available for sale securities, net	(272		)	(446		)
(Increase) decrease in cash surrender value of life insurance	(96		)	222
Deferred income taxes	3,419			1,236
Proceeds from sale of loans	—			8,897
Gain on sale of loans	—			(32		)
Decrease (increase) in accrued interest receivable and other assets	(1,210		)	38
Increase (decrease) in accrued interest payable and other liabilities	311			(1,808		)
Restricted stock compensation expense	716			262
Stock option compensation expense	47			—
Net cash provided by operating activities	10,731			16,666
Cash Flows From Investing Activities
Net change in interest bearing deposits in banks	(1,657		)	2,002
Activity in available for sale securities:
Purchases	(81,392		)	(74,479		)
Maturities, prepayments and calls	12,611			20,995
Sales	21,234			39,804
Purchases of non-marketable equity securities	—			(400		)
Net decrease in loans held for sale	738			2,619
Net increase in loans	(56,315		)	(50,510		)
Purchases of premises and equipment	(265		)	(4,051		)
Proceeds from sale of foreclosed assets	147			595
Net cash used in investing activities	(104,899		)	(63,425		)
Cash Flows From Financing Activities
Net increase in deposits	77,287			32,714
Cash paid on redemption of subordinated debt	(14,060		)	—
Net increase in other borrowings	27,722			14,943
Dividends paid on preferred shares	—			(268		)
Net cash provided by financing activities	90,949			47,389
Net change in cash and due from banks	(3,219		)	630
Cash and due from banks:
Beginning	13,329			10,815
Ending	$	10,110		$	11,445



Supplemental Disclosures of Cash Flow Information
Cash payments for interest	$	5,209	$	5,207
Supplemental Schedule of Noncash Investing and Financing Activities
Transfer of loans to foreclosed assets	1,805		96

See Notes to Unaudited Consolidated Financial Statements.

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 nine months ended September 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.

Management anticipates that the Company will no longer be considered an emerging growth company, and thus will no longer be eligible to use this extended transition period, after the fiscal year ending December 31, 2015.


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 (dollars in thousands, except per share data).



	Three months ended September 30,					Nine months ended September 30,
	2015		2014			2015		2014

Undistributed earnings allocated to common shareholders	$	2,947	$	2,010		$	6,898	$	3,982
Preferred stock dividends and discount accretion	—		(145		)	—		(433		)
Net income allocated to common shareholders	$	2,947	$	1,865		$	6,898	$	3,549

Weighted average shares outstanding for basic earnings per common share	16,993,822		16,549,096			16,910,441		16,499,342
Dilutive effect of stock-based compensation	167,961		221,093			138,526		220,203
Weighted average shares outstanding for diluted earnings per common share	17,161,783		16,770,189			17,048,967		16,719,545

Basic earnings per common share	$	0.17	$	0.11		$	0.41	$	0.22
Diluted earnings per common share	0.17		0.11			0.40		0.21


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):



September 30, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Government sponsored enterprises	$	26,754	$	383	$	—	$	27,137
Residential collateralized mortgage obligations	61,325		419		111		61,633
Residential mortgage backed securities	29,286		205		49		29,442
State and political subdivisions	96,518		1,425		328		97,615
	$	213,883	$	2,432	$	488	$	215,827
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 $56.8 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 September 30, 2015 and December 31, 2014, respectively.

The amortized cost and fair value of debt securities available for sale as of September 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	$	8,037	$	8,050
Over 1 year through 5 years	48,504		49,309
Over 5 years through 10 years	34,492		34,729
Over 10 years	32,239		32,664
Residential collateralized mortgage obligations and mortgage backed securities	90,611		91,075
	$	213,883	$	215,827

Gains on the sales of securities were $272,000 and $446,000 during the nine months ended September 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 September 30, 2015 and December 31, 2014.

The unrealized losses in the portfolio at September 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.


Note 4.	Loans

A summary of the balances of loans follows (in thousands):



	September 30, 2015			December 31, 2014
Construction and Land Development	$	19,451		$	18,700
Farmland and Agricultural Production	8,984			9,350
Residential 1-4 Family	126,316			100,773
Multifamily	30,771			24,426
Commercial Real Estate	368,896			353,973
Commercial and Industrial	180,674			171,452
Consumer and other	8,010			10,706
	743,102			689,380
Net deferred loan fees	(47		)	(187		)
Allowance for loan losses	(11,753		)	(13,905		)
	$	731,302		$	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 September 30, 2015 and December 31, 2014 (in thousands):



September 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	$	19,451	$	—	$	—	—	$	19,451	$	—	$	19,451
Farmland and Agricultural Production	8,984		—		—		—	8,984		—		8,984
Residential 1-4 Family	126,098		161		—		—	126,259		57		126,316
Multifamily	30,771		—		—		—	30,771		—		30,771
Commercial Real Estate
Retail	90,790		—		—		—	90,790		—		90,790
Office	51,673		—		—		—	51,673		—		51,673
Industrial and Warehouse	65,937		—		—		—	65,937		1,486		67,423
Health Care	27,755		—		—		—	27,755		—		27,755
Other	131,156		—		—		—	131,156		99		131,255
Commercial and Industrial	179,200		—		—		—	179,200		1,474		180,674
Consumer and other	8,009		—		—		—	8,009		1		8,010
Total	$	739,824	$	161	$	—	—	$	739,985	$	3,117	$	743,102



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 and Industrial	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

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 September 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.

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 September 30, 2015 and December 31, 2014 (in thousands):



September 30, 2015	Pass		Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	15,976	$	3,475	$	—	$	—	$	19,451
Farmland and Agricultural Production	8,984		—		—		—		8,984
Multifamily	30,090		681		—		—		30,771
Commercial Real Estate
Retail	82,836		7,954		—		—		90,790
Office	51,673		—		—		—		51,673
Industrial and Warehouse	65,089		848		—		1,486		67,423
Health Care	27,755		—		—		—		27,755
Other	125,439		2,575		3,228		13		131,255
Commercial and Industrial	171,432		7,462		445		1,335		180,674
Total	$	579,274	$	22,995	$	3,673	$	2,834	$	608,776



September 30, 2015	Performing		Non-performing*		Total
Residential 1-4 Family	$	126,259	$	57	$	126,316
Consumer and other	8,009		1		8,010
Total	$	134,268	$	58	$	134,326



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 and Industrial	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.

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



September 30, 2015	Construction and Land Development			Farmland and Agricultural Production			Residential 1-4 Family			Multifamily			Commercial Real Estate			Commercial and Industrial			Consumer and other			Total
Allowance for loan losses:
Beginning balance	$	798		$	27		$	1,047		$	95		$	6,394		$	3,895		$	164		$	12,420
Provision for loan losses	(135		)	(2		)	69			(7		)	(760		)	31			(9		)	(813		)
Loans charged-off	—			—			—			—			(444		)	(203		)	(7		)	(654		)
Recoveries of loans previously charged-off	18			—			41			—			709			29			3			800
Ending balance	$	681		$	25		$	1,157		$	88		$	5,899		$	3,752		$	151		$	11,753

September 30, 2014
Allowance for loan losses:
Beginning balance	$	1,139		$	453		$	1,191		$	104		$	7,606		$	3,598		$	292		$	14,383
Provision for loan losses	(281		)	(11		)	110			(42		)	(776		)	994			6			—
Loans charged-off	—			—			(134		)	—			—			(517		)	(8		)	(659		)
Recoveries of loans previously charged-off	18			—			8			—			9			112			—			147
Ending balance	$	876		$	442		$	1,175		$	62		$	6,839		$	4,187		$	290		$	13,871

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



September 30, 2015	Construction and Land Development			Farmland and Agricultural Production			Residential 1-4 Family			Multifamily			Commercial Real Estate			Commercial and Industrial			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	(130		)	(434		)	(59		)	21			(1,108		)	294			(146		)	(1,562		)
Loans charged-off	—			—			(195		)	—			(548		)	(973		)	(10		)	(1,726		)
Recoveries of loans previously charged-off	53			—			212						727			135			9			1,136
Ending balance	$	681		$	25		$	1,157		$	88		$	5,899		$	3,752		$	151		$	11,753

September 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	(705		)	15			(136		)	(35		)	1,005			2,364			159			2,667
Loans charged-off	(1,186		)	—			(155		)	—			(2,812		)	(1,583		)	(25		)	(5,761		)
Recoveries of loans previously charged-off	56			—			26			—			834			223			6			1,145
Ending balance	$	876		$	442		$	1,175		$	62		$	6,839		$	4,187		$	290		$	13,871

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 September 30, 2015 and December 31, 2014 (in thousands):



September 30, 2015	Construction and Land Development		Farmland and Agricultural Production		Residential 1-4 Family		Multifamily		Commercial Real Estate		Commercial and Industrial		Consumer and other		Total
Period-ended amount allocated to:
Individually evaluated for impairment	$	—	$	—	$	23	$	—	$	—	$	37	$	—	$	60
Collectively evaluated for impairment	681		25		1,134		88		5,899		3,715		151		11,693
Ending balance	$	681	$	25	$	1,157	$	88	$	5,899	$	3,752	$	151	$	11,753
Loans:
Individually evaluated for impairment	$	—	$	—	$	1,676	$	—	$	5,905	$	4,010	$	1	$	11,592
Collectively evaluated for impairment	19,451		8,984		124,640		30,771		362,991		176,664		8,009		731,510
Ending balance	$	19,451	$	8,984	$	126,316	$	30,771	$	368,896	$	180,674	$	8,010	$	743,102

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

The following tables present additional detail regarding impaired loans, segregated by class, as of and for the three and nine months ended September 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.



September 30, 2015
							Three Months Ended				Nine 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	1,244		1,205		—		1,211		15		1,302		46
Multifamily	—		—		—		—		—		—		—
Commercial Real Estate
Retail	—		—		—		—		—		—		—
Office	498		498		—		500		6		504		19
Industrial and Warehouse	2,017		1,486		—		1,696		—		1,802		—
Health Care	—		—		—		—				—		—
Other	5,893		3,921		—		4,130		32		5,297		96
Commercial and Industrial	4,709		3,910		—		4,047		34		3,766		101
Consumer and other	3		1		—		2		—		5		—
With an allowance recorded:
Construction and Land Development	—		—		—		—		—		—		—
Farmland and Agricultural Production	—		—		—		—		—		—		—
Residential 1-4 Family	471		471		23		472		6		473		17
Multifamily	—		—		—		—		—		—		—
Commercial Real Estate
Retail	—		—		—		—		—		—		—
Office	—		—		—		—		—		—		—
Industrial and Warehouse	—		—		—		—		—		—		—
Health Care	—		—		—		—		—		—		—
Other	—		—		—		—		—		107		—
Commercial and Industrial	100		100		37		100		—		283		—
Consumer and other	—		—		—		—		—		—		—
Total	$	14,935	$	11,592	$	60	$	12,158	$	93	$	13,539	$	279



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 and Industrial	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 and Industrial	1,312		961		561		453		—
Consumer and other	—		—		—		—		—
Total	$	19,437	$	15,610	$	590	$	19,708	$	119

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

Troubled debt restructurings that were accruing were $2.8 million as of September 30, 2015 and December 31, 2014. Troubled debt restructurings that were non-accruing were $1.6 million and $2.8 million as of September 30, 2015 and December 31, 2014.

The following presents a rollfoward activity of troubled debt restructurings (in thousands, except number of loans):



	Nine months ended
	September 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	(969		)	(2	)
Balance, ending	$	4,343		7

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):



	September 30, 2015		December 31, 2014
NOW and money market accounts	$	334,023	$	269,977
Savings	34,933		30,211
Time deposit certificates of $250,000 or more	62,522		50,682
Time deposit certificates of $100,000 to $250,000	134,081		145,506
Other time deposit certificates	106,289		114,705
	$	671,848	$	611,081

The composition of brokered deposits included in deposits was as follows (in thousands):



	September 30, 2015		December 31, 2014
NOW and money market accounts	$	35,271	$	—
Time deposit certificates	17,091		9,145
	$	52,362	$	9,145


Note 6.	Other Borrowed Funds

The composition of other borrowed funds was as follows (in thousands):



	September 30, 2015		December 31, 2014
Securities sold under agreements to repurchase	$	33,257	$	29,059
Federal Home Loan Bank Advances
Maturity dates, fixed interest rate
Matures October 16, 2015, 0.197%	5,000		—
Matures October 23, 2015, 0.207%	5,000		—
Secured borrowings	13,994		—
Mortgage note payable	—		470
	$	57,251	$	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.

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 $319.2 million and $267.2 million of loans pledged as collateral for FHLB advances as of September 30, 2015 and December 31, 2014, respectively. There were $10 million and $0 in advances outstanding at September 30, 2015 and December 31, 2014, respectively. All FHLB advances were repaid upon maturity in October 2015.

On June 29, 2015, the Company entered into a credit facility with an unaffiliated bank for two credit facilities (secured borrowings). The credit facilities include a $4.0 million revolving line of credit, which was fully drawn at September 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.

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.

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 $104.5 million and $99.8 million of loans pledged as collateral under these agreements as of September 30, 2015 and December 31, 2014, respectively. There were no borrowings outstanding at September 30, 2015 and December 31, 2014.


Note 7.	Income Taxes

Income tax expense recognized is as follows (in thousands):



	Nine months ended September 30,
	2015		2014
Current	$	108	$	700
Deferred	3,419		1,236
	$	3,527	$	1,936

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):



	Nine months ended September 30,
	2015			2014
Federal income tax at statutory rate	$	3,648		$	2,072
Increase (decrease) due to:
Federal tax exempt	(419		)	(225		)
State income tax, net of federal benefit	533			371
Benefit of income taxed at lower rate	(104		)	59
Tax exempt income	(24		)	(17		)
Cash surrender value of life insurance	(33		)	(175		)
Other	(74		)	(149		)
	$	3,527		$	1,936

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



	September 30, 2015			December 31, 2014
Deferred tax assets:
Allowance for loan losses	$	4,094		$	4,836
Merger expenses	143			156
Organization expenses	233			262
Net operating losses	5,437			8,320
Contribution carryforward	4			38
Non-qualified stock options	637			860
Foreclosed assets	273			291
Tax credits	313			374
Other	372			76
	11,506			15,213
Deferred tax liabilities:
Depreciation	(208		)	(334		)
Unrealized gains on securities available for sale	(758		)	(484		)
Other	—			(162		)
	(966		)	(980		)
Net deferred tax asset	$	10,540		$	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.

The Company had a federal net operating loss carryforward of $13.6 million and $20.3 million at September 30, 2015 and December 31, 2014, respectively, which could be used to offset future regular corporate federal income tax as of September 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 $15.4 million and $22.6 million at September 30, 2015 and December 31, 2014, respectively, that could be used to offset future regular corporate state income tax, as of September 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):



	September 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		279
Exercised	—		—		—
Canceled	—		—		—
Expired	—		—		—
Forfeited	(1,400	)	8.25		—

Outstanding at end of period	1,305,504		$	6.69	$	834

Exercisable at end of period	1,088,004		$	6.99	$	555

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 September 30, 2015. There was $834,000 and $0 in intrinsic value of the stock options outstanding at September 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.

The Company recognized $47,000 and $0 of compensation expense related to the stock options for the nine months ended September 30, 2015 and 2014. At September 30, 2015, there was $187,000 in compensation expense to be recognized related to outstanding stock options.

Information pertaining to options outstanding at September 30, 2015 is as follows:



Exercise Prices	Number Outstanding	Weighted Average Remaining Life (yrs)	Number Exercisable
$5.00	364,376	3.79	364,376
$5.20	217,500	9.26	—
$5.53	6,000	4.59	6,000
$6.25	30,600	4.17	30,600
$6.38	10,000	0.55	10,000
$7.50	433,500	1.82	433,500
$8.00	4,000	3.96	4,000
$9.25	239,528	2.63	239,528
	1,305,504		1,088,004

No options vested during the three and nine months ended September 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 $609,000 and $262,000, respectively, for the nine months ended September 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 $180,000 as of September 30, 2015.

The following is a summary of nonvested restricted stock units:



	September 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	(207,020	)	3.96
Canceled	—		—
Forfeited	—		—
Nonvested shares, end of period	58,600		$	5.17


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 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):



	September 30, 2015		December 31, 2014
Commitments to extend credit	$	169,048	$	132,693
Standby letters of credit	10,498		10,169
Performance letters of credit	838		440
	$	180,384	$	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.

As of September 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 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 September 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 Ratios to be Adequately Capitalized				Minimum To Be Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2015
Total capital (to risk-weighted assets)
Consolidated	$	118,352	14.71	%	$	65,009	8.00	%	N/A		N/A
First Community Financial Bank	128,955		15.92	%	64,789		8.00	%	$	80,987	10.00	%
Tier 1 capital (to risk-weighted assets)
Consolidated	90,041		11.57	%	48,757		6.00	%	N/A		N/A
First Community Financial Bank	118,778		14.67	%	48,592		6.00	%	64,789		8.00	%
Common equity tier 1 capital
Consolidated	90,041		11.57	%	45,059		4.50	%	N/A		N/A
First Community Financial Bank	118,778		14.67	%	36,444		4.50	%	52,641		6.50	%
Tier 1 leverage ratio
Consolidated	90,041		9.39	%	45,059		4.00	%	N/A		N/A
First Community Financial Bank	118,778		11.85	%	40,088		4.00	%	50,110		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	%

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 Federal Deposit Insurance Corporation (“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. As of September 30, 2015, the Bank was permitted to pay dividends on shares of its common stock due to having positive retained earnings.


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

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 September 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):



September 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	$	27,137	$	—	$	27,137	$	—
Residential collateralized mortgage obligations	61,633		—		61,633		—
Residential mortgage backed securities	29,442		—		29,442		—
State and political subdivisions	97,615		—		96,110		1,505
Derivative financial instruments	319		—		319		—
Financial Liabilities
Derivative financial instruments	319		—		319		—

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 nine months ended September 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.

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	(9		)
Included in earnings	—
Purchases	—
Paydowns and maturities	—
Transfers in and/or out of Level 3	—
Ending balance, September 30, 2015	$	1,505

Beginning balance, December 31, 2013	$	2,719
Total gains or losses (realized/unrealized) included in other comprehensive income	23
Included in earnings	—
Purchases	—
Paydowns and maturities	(1,245		)
Transfers in and/or out of Level 3	—
Ending balance, September 30, 2014	$	1,497

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:



September 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
Impaired loans	$	11,531	—	—	$	11,531
Foreclosed assets	4,109		—	—	4,109

December 31, 2014
Financial Assets
Mortgage loans held for sale	$	738	—	—	$	738
Impaired loans	15,020		—	—	15,020
Foreclosed assets	2,530		—	—	2,530

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
September 30, 2015
Impaired loans	$	11,531	Appraisal of Collateral	Appraisal adjustments Selling costs	10% to 25%
Foreclosed assets	4,109		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 September 30, 2015 and December 31, 2014, approximately $4.7 million, or 41%, 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.

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 September 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	$	10,110	$	10,110	$	10,110	$	—	$	—
Interest-bearing deposits in banks	21,324		21,324		21,324		—		—
Securities available for sale	215,827		215,827		—		214,322		1,505
Nonmarketable equity securities	1,367		1,367		—		—		1,367
Loans, net	731,302		731,400		—		—		731,400
Accrued interest receivable	2,994		2,994		2,994		—		—
Derivative financial instruments	319		319		—		319		—
Financial liabilities:
Non-interest bearing deposits	174,849		174,527		174,527		—		—
Interest-bearing deposits	671,848		667,126		292,660		—		374,466
Other borrowed funds	57,251		56,615		56,615		—		—
Subordinated debt	15,300		15,166		—		—		15,166
Accrued interest payable	388		388		388		—		—
Derivative financial instruments	319		319		—		319		—

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 September 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 $319,000 and $314,000 as of September 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 $28,000 and $37,000 during the three months ended September 30, 2015 and September 30, 2014, respectively.

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. The Bank’s 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.

Third Quarter 2015 Highlights


•	Return on average assets (“ROAA”) improved to 1.17% in the third quarter of 2015 from 0.81% in the third quarter of 2014, while return on average equity (“ROAE”) rose sharply to 12.01% in the third quarter of 2015 compared with 7.81% in the third quarter of 2014.


•	Tangible book value per share rose to $5.88 at September 30, 2015, from $5.42 a year earlier, and was up from $5.52 at December 31, 2014.


•	Pre-tax pre-provision core income, a non-GAAP measure, rose to $3.4 million in the third quarter of 2015 compared with $2.9 million in the third quarter of 2014.


•	Net interest income before provision for loan losses increased to $8.0 million in the third quarter of 2015, up 9.49% compared with $7.3 million in the third quarter of 2014, reflecting higher interest income and lower year-over-year interest expense.


•	Total assets increased $105.5 million, or 11.50%, and reached a Company-record $1.0 billion at September 30, 2015 from $917.9 million at September 30, 2014.


•	Total loans increased 7.8%, or $54.0 million, to $743.1 million at September 30, 2015 from $689.1 million at September 30, 2014, with year-over-year growth in almost all loan categories led by commercial real estate, commercial, and residential 1-4 family.

•

Total deposits increased 11.7%, or $88.6 million, to $846.7 million at September 30, 2015 from $758.1 million at September 30, 2014. Core demand deposits comprised 64.2% of total deposits at the end of the third quarter of 2015 compared with 57.1% of total deposits at the end of the third quarter of 2014. Noninterest bearing deposit accounts, an important source of lower-cost funding to support loan activity, increased $34.5 million, or 24.7%, to $174.8 million at the end of the third quarter of 2015 from $140.3 million at the end of the third quarter of 2014.


•	Asset quality measures improved dramatically, including a decline in the ratio of nonperforming assets to total assets to 0.71% at September 30, 2015 from 1.37% a year earlier. Nonperforming assets decreased $5.3 million, or 42.0%, from $12.6 million at September 30, 2014 to $7.3 million at September 30, 2015.

Year to Date 2015 Highlights


•	ROAA improved to 0.94% for the nine months ended September 30, 2015, from 0.53% for the nine months ended September 30, 2014, while ROAE rose sharply to 9.59% for the nine months ended September 30, 2015 compared with 5.04% for the nine months ended September 30, 2014.


•	Pre-tax pre-provision core income, a non-GAAP measure, rose to $8.7 million for the nine months ended September 30, 2015 compared with $8.3 million for the same period in 2014.

•

Net interest income before provision for loan losses increased to $22.6 million for the nine months ended September 30, 2015, up 6.1% compared with $21.3 million for the nine months ended September 30, 2014, reflecting higher interest income, which was the result of current year loan growth, and lower year-over-year interest expense. Interest expense was lower in 2015 due to lower parent company debt costs, in addition to improved deposit funding and a shift to noninterest bearing deposit accounts.


•	Total assets reached a Company-record $1.0 billion at September 30, 2015, an increase of $99.4 million, or 10.8%, from $924.1 million at December 31, 2014.


•	Total loans increased $53.9 million, or 7.8%, to $743.1 million at September 30, 2015 from $689.2 million at December 31, 2014.

•

Total deposits increased $77.3 million, or 10.0%, to $846.7 million at September 30, 2015 from $769.4 million at December 31, 2014. Core demand deposits comprised 64.2% of total deposits in the third quarter of 2015 compared with 59.6% of total deposits at December 31, 2014. Noninterest bearing deposit accounts, an important source of lower-cost funding to support loan activity, increased $16.5 million, or 10.4%, to $174.8 million in the third quarter of 2015 from $158.3 million at December 31, 2014.

Income Statement Highlights

Net interest income was $8.0 million for the third quarter of 2015, compared to $7.3 million for the third quarter of 2014, an increase of $0.7 million or 9.6%. The Company’s net interest margin was 3.31% in the third quarter of 2015, compared to 3.34% in the third quarter of 2014, while the net interest spread was 3.13% compared to 3.14% in the prior year’s third quarter.

Interest income on loans was $8.2 million for the quarter ended September 30, 2015, compared to $8.0 million for the quarter ended September 30, 2014, reflecting contributions from $67.8 million in loan growth, partially offset by newer loans booked at lower average yields due to the ongoing low interest rate environment and competitive market conditions. There were approximately $136.0 million in new loans and renewals during the first three quarters of 2015, at a weighted average rate of 4.13%.

Interest income on securities was $1.1 million for the quarter ended September 30, 2015, compared to $848,000 for the quarter ended September 30, 2014. 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.

Interest expense on deposits was $973,000 in the third quarter of 2015, compared to $1.1 million in the third quarter of 2014, which primarily reflected a decline in time deposits, that were replaced by growth in noninterest bearing deposits, along with an increase in lower cost NOW, money market and savings accounts. In addition, the reduced borrowing costs at the parent company helped to lower interest expense during the third quarter, after the refinancing of outstanding subordinated debt with a lower interest rate line of credit.

Noninterest income was $769,000 in the third quarter of 2015, a decrease of $197,000, or 20.4%, which included small decreases in service charges on deposit accounts and slightly lower mortgage fee income of $178,000. Year-to-date 2015 both service charges and mortgage income were up over the prior year despite lower results in the third quarter. Noninterest income in the third quarter of 2014 was $966,000, which included $407,000 in gains on the sale of securities, compared to $251,000 in gains on sales of securities in 2015, as a result of changes in investment strategy during 2014.

Noninterest expense remained flat at $5.1 million for the quarter ended September 30, 2015 compared to $5.1 million for the quarter ended September 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 third quarter of 2015 included a net loss on foreclosed assets of $58,000 compared to $78,000 in the same period in 2014. Losses were related to changes in property values, as appraisals are updated annually.

Balance Sheet Highlights

Total assets were $1.0 billion at September 30, 2015, up 11.5% or $105.5 million, from $917.9 million at September 30, 2014, and up 10.8%, or $99.4 million, from $924.1 million at December 31, 2014.

Net loans (after allowance for loan losses) were $731.3 million at September 30, 2015, an 8.3%, or $56.0 million, increase from $675.3 million at September 30, 2014, and a 8.3%, or a $56.0 million, increase from $675.3 million at December 31, 2014, reflecting balanced growth in all lending categories, other than consumer and other loans, and a lower allowance for loan losses. Commercial real estate loans increased $15.4 million, or 4.4%, to $368.9 million year-over-year. Commercial loans rose $4.0 million year-over-year, an increase of 2.3% to $180.7 million. Residential 1-4 family loans, which grew steadily throughout 2014, were $126.3 million at September 30, 2015 up $25.6 million, or 25.4%, from $100.7 million at September 30, 2014, and up 25.3% from $100.8 million at December 31, 2014.

Year-over-year asset comparisons include growth of investment securities to $217.2 million at September 30, 2015, compared with $157.1 million at September 30, 2014 and $170.1 million at December 31, 2014. Strong gains in low-cost deposits facilitated some of the growth.

Total deposits, which increased $77.3 million from December 31, 2014, or 10.0%, to $846.7 million in the third quarter of 2015, compared with $769.4 million at December 31, 2014, and $758.1 million at September 30, 2014, reflected the Company’s focus on growing core deposits from commercial business depositors. Approximately $34.6 million of the growth from September 30, 2014, came from commercial noninterest bearing demand deposits by expanding and developing those relationships. Noninterest bearing demand deposits increased 24.7%, or $34.6 million, year-over-year despite being flat in the third quarter of 2015. Savings deposits increased 26.8%, or $7.4 million, year-over-year and 4.1%, or $1.4 million, in the third quarter. NOW accounts increased 35.1%, or $26.4 million, from September 30, 2014, and 6.7% in the third quarter. Money market accounts increased $42.2 million or 22.2% to $232.2 million at September 30, 2015 from $190.0 million at September 30, 2014 and increased $36.0 million or 18.3% from $196.2 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 $302.9 million at September 30, 2015 from $310.9 million at December 31, 2014 and $324.9 million at September 30, 2014, a decrease of 6.8%, or $22.0 million, year-over-year.

Asset Quality

Total nonperforming assets declined by 42.4%, or $5.3 million, to $7.2 million at September 30, 2015 from $12.6 million at September 30, 2014, and 23.6% from $9.5 million at December 31, 2014. The improvement reflected a decline in total nonperforming loans to $3.1 million from $9.1 million a year earlier, and from $7.0 million at December 31, 2014. Foreclosed assets were $4.1 million at September 30, 2015, which were up from $3.5 million at September 30, 2014 and an increase from $2.5 million at December 31, 2014 due to the transfer of two properties in the second quarter of 2015 from nonperforming loans. The Company had net recoveries of $146,000 in the third quarter of 2015, compared to net charge-offs of $512,000 in

the third quarter of 2014. Net charge-offs for the nine months ended September 30, 2015 were $590,000 as compared to $4.6 million for the same period in 2014.

The Company had a negative provision for loan losses of $813,000 in the third quarter, and a negative provision for loan losses of $1.6 million for the nine months ended September 30, 2015, compared with no provision in the third quarter of 2014 and a provision of $2.7 million for the nine months ended September 30, 2014, reflecting significantly improved asset quality year over year. Even with this negative provision, the Company’s allowance for loan losses to nonperforming loans remains strong at 377.06% at September 30, 2015, compared to 198.73% at December 31, 2014 and 153.02% at September 30, 2014.

Capital Ratios

The Company was “well capitalized” according to applicable regulatory standards at September 30, 2015, with a Tier 1 leverage ratio of 9.39%, Tier 1 risk based ratio of 11.57%, a total risk-based capital ratio of 14.71%, and a common equity Tier 1 ratio of 11.57%. First Community’s ratio of tangible common shareholder’s equity to tangible assets was 9.78% at September 30, 2015, compared to 9.96% at December 31, 2014 and 9.78% at September 30, 2014.



NON-GAAP MEASURES

Pre-tax pre-provision core income ⁽¹⁾
(Dollars in thousands)

	Three months ended						Nine months ended
	September 30, 2015			September 30, 2014			September 30, 2015				September 30, 2014

Pre-tax net income	$	4,418		$	3,159		$	10,425			$	5,918
Provision for loan losses	(813		)	—			(1,562		)		2,667
Gain on sale of investment securities	(251		)	(407		)	(272		)	466	(446		)
Gain on sale of foreclosed assets	—			—			—				(19		)
Bank owned life insurance gain	—			—			—				(483		)
Losses on sale and writedowns of foreclosed assets, net	58			78			78				447
Foreclosed assets expenses, net of rental income	(61		)	55			80				190
Adjusted pre-tax pre-provision core income	$	3,351		$	2,885		$	8,749			$	8,274

⁽¹⁾ This is a non-GAAP financial measure. The Company’s management believes the presentation of pre-tax pre-provision core net operating income provides investors with a greater understanding of the Company’s operating results, in addition to the results measured in accordance with GAAP.

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 September 30, 2015 and 2014:



	Three months ended September 30,
	2015						2014
(Dollars in thousands)	Average Balances		Income/ Expense		Yields/ Rates		Average Balances		Income/ Expense		Yields/ Rates
Assets
Loans ⁽¹⁾	$	731,871	$	8,218	4.49	%	$	677,117	$	7,988	4.72	%
Investment securities ⁽²⁾	207,843		1,103		2.12	%	167,232		848		2.03	%
Interest bearing deposits with other banks	23,790		19		0.32	%	26,649		23		0.35	%
Total earning assets	$	963,504	$	9,340	3.88	%	$	870,998	$	8,859	4.07	%

Other assets	47,787						50,107
Total assets	$	1,011,291					$	921,105

Liabilities
NOW accounts	$	98,915	$	64	0.26	%	$	72,433	$	25	0.14	%
Money market accounts	234,898		166		0.28	%	192,293		130		0.27	%
Savings accounts	34,447		15		0.17	%	26,852		10		0.15	%
Time deposits	300,476		728		0.97	%	338,716		965		1.14	%
Total interest bearing deposits	668,736		973		0.58	%	630,294		1,130		0.72	%
Securities sold under agreements to repurchase	33,112		11		0.13	%	31,599		8		0.10	%
Secured borrowings	13,406		86		2.57	%	—		—		—
Mortgage payable	—		—		—	%	549		8		5.83	%
FHLB Borrowings	1,413		1		0.28	%	545		—		—	%
Subordinated debentures	15,300		297		7.76	%	19,322		432		8.94	%
Total interest bearing liabilities	731,967		1,368		0.75	%	682,309		1,578		0.93	%
Non-interest bearing deposits	176,040						137,459
Other liabilities	5,117						5,826
Total liabilities	$	913,124					$	825,594

Total shareholders' equity	$	98,167					$	95,511

Total liabilities and equity	$	1,011,291					$	921,105

Net interest income			$	7,972					$	7,281

Interest rate spread					3.13	%					3.14	%

Net interest margin					3.31	%					3.34	%

Footnotes:

⁽¹⁾ Average loans include nonperforming loans.

⁽²⁾ No tax-equivalent adjustments were made, as the effect thereof was not material.

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



	Nine months ended September 30,
	2015						2014
(Dollars in thousands)	Average Balances		Income/ Expense		Yields/ Rates		Average Balances		Income/ Expense		Yields/ Rates
Assets
Loans ⁽¹⁾	$	717,473	$	24,124	4.48	%	$	667,682	$	23,738	4.74	%
Investment securities ⁽²⁾	193,212		3,017		2.08	%	154,847		2,261		1.95	%
Interest-bearing deposits with other banks	16,892		47		0.37	%	23,125		62		0.36	%
Total earning assets	$	927,577	$	27,188	3.91	%	$	845,654	$	26,061	4.11	%

Other assets	45,933						47,309
Total assets	$	973,510					$	892,963

Liabilities
NOW accounts	$	87,578	$	139	0.21	%	$	73,828	$	83	0.15	%
Money market accounts	220,448		457		0.28	%	178,740		369		0.28	%
Savings accounts	33,074		42		0.17	%	26,264		30		0.15	%
Time deposits	303,240		2,299		1.01	%	343,954		2,918		1.13	%
Total interest bearing deposits	644,340		2,937		0.61	%	622,786		3,400		0.73	%
Securities sold under agreements to repurchase	30,355		25		0.11	%	28,207		23		0.11	%
Secured borrowings	4,569		88		2.57	%	—		—		—
Mortgage payable	241		14		7.75	%	597		27		6.03	%
FHLB borrowings	1,154		2		0.23	%	920		—		—	%
Subordinated debentures	24,424		1,503		8.21	%	19,315		1,295		8.94	%
Total interest bearing liabilities	705,083		$	4,569	0.86	%	671,825		4,745		0.94	%
Noninterest bearing deposits	168,316						122,634
Other liabilities	4,221						4,571
Total liabilities	$	877,620					$	799,030

Total shareholders' equity	$	95,890					$	93,933

Total liabilities and equity	$	973,510					$	892,963

Net interest income			$	22,619					$	21,316

Interest rate spread					3.05	%					3.17	%

Net interest margin					3.25	%					3.36	%

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 three quarters.

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 September 30,
	2015 compared to 2014
	Average Volume			Average Rate			Mix			Net Increase (Decrease)

Interest Income
Loans	$	649		$	(388	)	$	(31	)	$	230
Investment securities	208			38			9			255
Interest bearing deposits with other banks	(2		)	(2		)	—			(4		)
Total interest income	855			(352		)	(22		)	481

Interest expense
NOW accounts	$	9		$	22		$	8		$	39
Money market accounts	30			5			1			36
Savings accounts	4			1			—			5
Time deposits	(109		)	(144		)	16			(237		)
Term borrowings	—			—			86			86
Securities sold under agreements to repurchase	—			3			—			3
FHLB advances	1			—			—			1
Mortgage payable	(8		)	(8		)	8			(8		)
Subordinated debentures	(90		)	(57		)	12			(135		)
Total interest expense	(163		)	(178		)	131			(210		)

Change in net interest income	$	1,018		$	(174	)	$	(153	)	$	691



	Nine months ended September 30,
	2015 compared to 2014
	Average Volume			Average Rate			Mix			Net Increase (Decrease)

Interest Income
Loans	$	1,781		$	(1,298	)	$	(97	)	$	386
Investment securities	568			151			37			756
Interest bearing deposits with other banks	(17		)	2			—			(15		)
Total interest income	2,332			(1,145		)	(60		)	1,127

Interest expense
NOW accounts	$	15		$	35		$	6		$	56
Money market accounts	88			—			—			88
Savings accounts	7			4			1			12
Time deposits	(347		)	(309		)	37			(619		)
Term borrowings	—			—			88			88
Securities sold under agreements to repurchase	2			—			—			2
Mortgage payable	(16		)	10			(5		)	(11		)
Subordinated debentures	341			(105		)	(28		)	208
Total interest expense	90			(363		)	99			(174		)

Change in net interest income	$	2,242		$	(782	)	$	(159	)	$	1,301

Provision for Loan Losses

The Company had a negative provision for loan losses of $813,000 and $1,562,000 for the three and nine months ended September 30, 2015, respectively, compared to no provision and a provision of $2.7 million for the respective periods in 2014. The Company had net recoveries of $146,000 and net charge-offs of $590,000 for the three and nine months ended September 30, 2015, respectively, compared to net charge-offs of $512,000 and $4.6 million for the respective periods in 2014. Nonperforming loans decreased 55.45% from $7.0 million at December 31, 2014 to $3.1 million at September 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 September 30,				Nine months ended September 30,
(Dollars in thousands)	2015		2014		2015		2014
Service charges on deposit accounts	$	188	$	210	$	565	$	492
Gain on sale of loans	—		—		—		32
Gain on foreclosed assets, net	—		—		—		19
Gain on sale of securities	251		407		272		446
Mortgage fee income	178		196		435		336
Other	152		153		465		1,106
Total noninterest income	$	769	$	966	$	1,737	$	2,431

Noninterest income for the three and nine months ended September 30, 2015 decreased from the same periods in 2014, primarily due to a decrease in gains on sales of securities and other income items. Decreases in gains on sales of securities related to the change in investment strategies during the third quarter of 2014. Service charges on deposit accounts were up year-to-date, primarily due to overdraft fees charged as the result of increases in overdraft balances, despite being lower for the third quarter of 2015 as compared to the same period in 2014. The third quarter of 2015 showed slightly lower mortgage loan sale volumes than prior quarters, and in turn, lower mortgage fee income, despite volumes being up in the first and second quarters of 2015 over 2014. Other noninterest income remained flat for the the third quarter 2015 as compared to the same period of 2014. Despite the third quarter consistency, there was a decrease in other noninterest income for the nine months ended September 30, 2015, which was primarily due to recognition of income in 2014 from income related to proceeds received from a bank owned life insurance policy in the amount of $483,000 in the second quarter of 2014.

Noninterest Expense

The following table sets forth the components of noninterest expense for the periods indicated:



	Three months ended September 30,					Nine months ended September 30,
(Dollars in thousands)	2015			2014		2015		2014
Salaries and employee benefits	$	2,841		$	2,812	8,535		8,452
Occupancy and equipment expense	486			543		1,483		1,607
Data processing	248			238		710		715
Professional fees	342			345		1,134		1,044
Advertising and business development	217			223		633		563
Losses on sale and writedowns of foreclosed assets, net	58			78		78		447
Foreclosed assets, net of rental income	(61		)	55		80		190
Other expense	1,005			794		2,840		2,144
Total noninterest expense	$	5,136		$	5,088	$	15,493	$	15,162

Salaries and employee benefits remained fairly flat for the three and nine months ended September 30, 2015 compared to the same periods in 2014. Occupancy and equipment expense was down for the three and nine months ended 2015 as we continue to see cost savings resulting from the purchase of the Channahon branch building, along with the completion of construction at the Burr Ridge location. Professional fees also remained fairly consistent for the three and nine months ended September 30,

2015, compared to the same periods in 2014. Advertising costs were flat for the three months ended September 30, 2015, but were up for the nine months ended, in comparison to the prior year due to the update of our website, along with other marketing initiatives. Losses on foreclosed assets were also down from the prior periods as a result of larger writedowns on foreclosed assets taken during 2014. During the first quarter of 2014, we reversed the accrual for a contingent liability of approximately $210,000, which lowered other expense for the 2014 periods. In addition, there have been some smaller increases in other expenses during the first nine months of 2015, such as correspondent fees and restricted stock and stock option expense for directors.

Income Taxes

The Company realized income tax expense of $1.5 million and $3.5 million for the three and nine months ended September 30, 2015, compared with $1.1 million and $1.9 million of income tax expense for the three and nine months ended September 30, 2014, respectively. Net deferred tax assets were $10.5 million and $14.2 million at September 30, 2015 and December 31, 2014, respectively.

Financial Condition

Our assets totaled $1.0 billion at September 30, 2015 as compared to $924.1 million at December 31, 2014, an increase of $99.4 million, or 10.75%. Total loans at September 30, 2015 and December 31, 2014 were $743.1 million and $689.2 million, respectively, an increase of $53.9 million, or 7.81%. Total deposits were $846.7 million and $769.4 million at September 30, 2015 and December 31, 2014, respectively, an increase of $77.3 million, or 10.04%.

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):



	September 30, 2015				December 31, 2014				September 30, 2014
	Amount		% of Total		Amount		% of Total		Amount		% of Total
Construction and Land Development	$	19,451	3	%	$	18,700	3	%	$	15,898	2	%
Farmland and Agricultural Production	8,984		1	%	9,350		1	%	9,393		1	%
Residential 1-4 Family	126,316		17	%	100,773		15	%	100,716		14	%
Multifamily	30,771		4	%	24,426		4	%	24,496		4	%
Commercial Real Estate	368,896		50	%	353,973		51	%	353,456		52	%
Commercial and Industrial	180,674		24	%	171,452		25	%	176,627		25	%
Consumer and other	8,010		1	%	10,706		1	%	8,846		2	%
Total Loans	$	743,102	100	%	$	689,380	100	%	$	689,432	100	%

Total loans increased by $53.9 million during the nine months ended September 30, 2015 as a result of new loan originations. New loans originated during the nine months ended September 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 September 30, 2015 and December 31, 2014, the allowance for loan losses was $11.8 million and $13.9 million, respectively. Over the past year, we have seen a reduction in the allowance to total loan percentage from 2.01% at September 30, 2014, and 2.02% at December 31, 2014, to 1.58% at September 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 losses calculation. In addition, the allowance for loan losses to nonperforming loans increased from 153.02% at September 30, 2014, and 198.73% at December 31, 2014, to 377.06% at September 30, 2015.

For the three and nine months ended September 30, 2015 the Company had net recoveries of $146,000 and net charge-offs of $590,000, respectively, compared to net charge-offs of $512,000 and $4.6 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						Nine Months Ended
(Dollars in thousands)	September 30, 2015			September 30, 2014			September 30, 2015			September 30, 2014
Balance at beginning of period	$	12,420		$	14,383		$	13,905		$	15,820
Charge-offs:
Construction and Land Development	—			—			—			1,186
Residential 1-4 Family	—			134			195			155
Commercial Real Estate	444			—			548			2,812
Commercial and Industrial	203			517			973			1,583
Consumer and other	7			8			10			25
Total charge-offs	$	654		$	659		$	1,726		$	5,761
Recoveries:
Construction and Land Development	18			18			53			56
Residential 1-4 Family	41			8			213			26
Commercial Real Estate	709			9			726			834
Commercial and Industrial	29			112			135			223
Consumer and other	3			—			9			6
Total recoveries	$	800		$	147		$	1,136		$	1,145
Net charge-offs	(146		)	512			590			4,616
Provision for loan losses	(813		)	—			(1,562		)	2,667
Allowance for loan losses at end of period	$	11,753		$	13,871		$	11,753		$	13,871
Selected loan quality ratios:
Net charge-offs to average loans	(0.08		)%	0.31		%	0.11		%	1.42		%
Allowance to total loans	1.58		%	2.01		%	1.58		%	2.01		%
Allowance to nonperforming loans	377.06		%	153.02		%	377.06		%	153.02		%

The following table provides additional detail of the balance of the allowance for loan losses by portfolio segment:



(Dollars in thousands)	September 30, 2015				December 31, 2014
Balance at end of period applicable to:	Amount		% of Total Loans		Amount		% of Total Loans

Construction and Land Development	$	681	5.79	%	$	758	5.45	%
Farmland and Agricultural Production	25		0.21	%	459		3.30	%
Residential 1-4 Family	1,157		9.84	%	1,199		8.62	%
Multifamily	88		0.75	%	67		0.48	%
Commercial Real Estate	5,899		50.21	%	6,828		49.11	%
Commercial	3,752		31.92	%	4,296		30.90	%
Consumer and other	151		1.28	%	298		2.14	%
Total	$	11,753	100.00	%	$	13,905	100.00	%

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 since they are not individually risk rated. 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 $3.1 million of nonperforming loans at September 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 $11.6 million and $15.6 million at September 30, 2015 and December 31, 2014, respectively. Included in impaired loans at September 30, 2015 were $571,000 in loans with valuation allowances totaling $60,000, and $11.0 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:



	September 30, 2015		December 31, 2014		September 30, 2014
Nonaccrual loans	$	3,117	$	6,947	$	9,065
Accruing loans delinquent 90 days or more	—		50		—
Nonperforming loans	3,117		6,997		9,065
Troubled debt restructurings accruing interest	2,758		2,814		2,509

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 September 30, 2015 and December 31, 2014 were approximately $3.9 million and $4.9 million, respectively. Management believes it has established an adequate allowance for probable loan losses, as appropriate under U.S. GAAP.

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:



	September 30, 2015				December 31, 2014
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Government sponsored enterprises	$	26,754	$	27,137	$	30,904	$	30,951
Residential collateralized mortgage obligations	61,325		61,633		44,095		44,274
Residential mortgage backed securities	29,286		29,442		27,208		27,217
State and political subdivisions	96,518		97,615		65,240		66,245
Total securities available for sale	$	213,883	$	215,827	$	167,447	$	168,687

Available for sale securities increased $47.1 million to $215.8 million at September 30, 2015 from $168.7 million at December 31, 2014, as the Company continued to invest its excess cash in investment securities during 2015 in order to generate additional interest income.

Securities with a fair value of $56.8 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 September 30, 2015 and December 31, 2014, respectively. The increase in pledged securities is a result of increases in public funds deposits, in addition to securities sold under agreements to repurchase.

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):



	September 30, 2015				December 31, 2014
	Amount		Percent		Amount		Percent
Noninterest bearing demand deposits	$	174,849	20.65	%	$	158,329	20.58	%
NOW and money market accounts	334,023		39.45	%	269,977		35.09	%
Savings	34,933		4.13	%	30,211		3.93	%
Time deposit certificates of $250,000 or more	62,522		7.38	%	50,682		6.59	%
Time deposit certificates, $100,000 to $250,000	134,081		15.84	%	145,506		18.91	%
Other time deposit certificates	106,289		12.55	%	114,705		14.90	%
Total	$	846,697	100.00	%	$	769,410	100.00	%

Total deposits increased $77.3 million to $846.7 million at September 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. In 2015, there has been some increases in brokered deposits in response to client and funding needs.

Off-Balance Sheet Arrangements

Refer to Note 9 of our Unaudited Consolidated Financial Statements for a description of off-balance sheet arrangements.

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:



	September 30, 2015			December 31, 2014
(Dollars in thousands)
Securities sold under agreements to repurchase:
Balance:
Average daily outstanding	$	30,355		$	29,081
Outstanding at end of period	33,257			29,059
Maximum month-end outstanding	33,346			32,668
Rate:
Weighted average interest rate during the year	0.13		%	0.10		%
Weighted average interest rate at end of the period	0.14		%	0.10		%

FHLB borrowings:
Balance:
Average daily outstanding	$	1,154		$	1,017
Outstanding at end of period	10,000			—
Maximum month-end outstanding	10,000			5,000
Rate:
Weighted average interest rate during the year	0.23		%	0.13		%
Weighted average interest rate at end of the period	0.20		%	—		%

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 September 30, 2015, the Bank was permitted to pay dividends due to having retained earnings of $1.1 million, compared to an accumulated deficit of $6.3 million at December 31, 2014.

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, Tier 1 capital 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 September 30, 2015 and December 31, 2014, the 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 September 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 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 September 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.

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

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: November 4, 2015	/s/ Roy C. Thygesen
	Roy C. Thygesen
	Chief Executive Officer
	(Principal Executive Officer)

Date: November 4, 2015	/s/ Glen L. Stiteley
	Glen L. Stiteley
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

Exhibit Index



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 September 30, 2015 and December 31, 2014; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and September 30, 2014; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and September 30, 2014; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2015 and September 30, 2014; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and September 30, 2014; and (vi) Notes to Unaudited Consolidated Financial Statements.

First Community Financial Partners, Inc. - FORM 10-Q - November 4, 2015

Attached files

First Community Financial Partners, Inc. Reports