First Community Financial Partners (FCMPE) 10-Q 2014 Q3 Quarterly report

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, 2014

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                          to                         

333-185041

333-185043

333-185044

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 Noo

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 filero	Accelerated filero
Non-accelerated filero (Do not check if a smaller reporting company)	Smaller reporting companyx

    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  YesoNox

There were outstanding 16,552,063 shares of the Registrant’s common stock as of November 10, 2014.

FIRST COMMUNITY FINANCIAL PARTNERS, INC.

FORM 10-Q

September 30, 2014

INDEX

		Page
PART I	FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets at September 30, 2014 (Unaudited) and December 31, 2013	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 (Unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (Unaudited)	7
	Notes to Unaudited Consolidated Financial Statements	9
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3	Quantitative and Qualitative Disclosures about Market Risk	52
Item 4	Controls and Procedures	53
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	54
Item 1A	Risk Factors	54
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3	Defaults Upon Senior Securities	54
Item 4	Mine Safety Disclosures	54
Item 5	Other Information	54
Item 6	Exhibits	54
	Signatures	55
	Exhibit Index	56

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Balance Sheets
	September 30, 2014			December 31, 2013
Assets	(in thousands, except share data)(September 30, 2014 data is unaudited)
Cash and due from banks	$	11,445		$	10,815
Interest-bearing deposits in banks	27,290			29,292
Securities available for sale	155,727			141,316
Non-marketable equity securities	1,367			967
Loans held for sale	—			2,619
Loans, net of allowance for loan losses of $13,871 in 2014; $15,820 in 2013	675,273			636,311
Premises and equipment, net	19,635			16,380
Foreclosed assets	3,489			4,416
Cash surrender value of life insurance	4,291			4,513
Deferred tax asset, net	15,246			16,781
Accrued interest receivable and other assets	4,128			4,166
Total assets	$	917,891		$	867,576
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest bearing	$	140,252		$	111,955
Interest bearing	617,863			613,446
Total deposits	758,115			725,401
Other borrowed funds	40,506			25,563
Subordinated debt	19,326			19,305
Accrued interest payable and other liabilities	3,963			5,720
Total liabilities	821,910			775,989
Commitments and Contingencies (Note 9 to Unaudited Consolidated Financial Statements)
First Community Financial Partners, Inc. Shareholders’ Equity
Preferred stock, Series A, non-cumulative convertible, $1.00 par value; 5,000 shares authorized; no shares issued and outstanding at September 30, 2014 and at December 31, 2013	—			—
Preferred stock, Series B, 5% cumulative perpetual, $1.00 par value; 22,000 shares authorized; 5,176 shares issued and outstanding at September 30, 2014 and at December 31, 2013	5,176			5,176
Preferred stock, Series C, 9% cumulative perpetual, $1.00 par value; 1,100 shares authorized; 1,100 issued and outstanding at September 30, 2014 and at December 31, 2013	1,057			892
Common stock, $1.00 par value; 60,000,000 shares authorized; 16,552,063 issued and outstanding at September 30, 2014 and 16,333,582 issued and outstanding at December 31, 2013	16,552			16,334
Additional paid-in capital	81,234			81,241
Accumulated deficit	(8,832		)	(12,381		)
Accumulated other comprehensive income	794			325
Total shareholders' equity	95,981			91,587
Total liabilities and shareholders' equity	$	917,891		$	867,576
See Notes to Unaudited Consolidated Financial Statements.

3

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Operations
	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Interest income:	(in thousands, except share data)(unaudited)
Loans, including fees	$	7,988		$	8,041		$	23,738		$	24,528
Securities	848			536			2,261			1,405
Federal funds sold and other	23			32			62			166
Total interest income	8,859			8,609			26,061			26,099
Interest expense:
Deposits	1,130			1,179			3,400			3,790
Federal funds purchased and other borrowed funds	16			20			50			60
Subordinated debt	432			315			1,295			757
Total interest expense	1,578			1,514			4,745			4,607
Net interest income	7,281			7,095			21,316			21,492
Provision for loan losses	—			1,216			2,667			3,916
Net interest income after provision for loan losses	7,281			5,879			18,649			17,576
Noninterest income:
Service charges on deposit accounts	210			133			492			310
Gain on sale of loans	—			—			32			265
Gain on sale of securities	407			—			446			—
Gain on foreclosed assets, net	—			—			19			—
Mortgage fee income	196			63			336			277
Other	153			110			1,106			363
	966			306			2,431			1,215
Noninterest expenses:
Salaries and employee benefits	2,812			2,709			8,452			7,897
Occupancy and equipment expense	543			560			1,607			1,654
Data processing	238			219			715			746
Professional fees	345			521			1,044			1,145
Advertising and business development	223			61			563			422
Losses on sale and writedowns of foreclosed assets, net	78			—			447			196
Foreclosed assets, net of rental income	55			57			190			199
Other expense	794			952			2,144			3,141
	5,088			5,079			15,162			15,400
Income before income taxes	3,159			1,106			5,918			3,391
Income taxes	1,149			(14,102		)	1,936			(14,068		)
Income before non-controlling interest	2,010			15,208			3,982			17,459
Net income attributable to non-controlling interest	—			—			—			54
Net income attributable to First Community Financial Partners	2,010			15,208			3,982			17,405
Dividends and accretion on preferred shares	(145		)	(236		)	(433		)	(788		)
Gain on redemption of preferred shares	—			1,988			—			4,933
Net income applicable to common shareholders	$	1,865		$	16,960		$	3,549		$	21,550
Common share data
Basic earnings per common share	$	0.11		$	1.05		$	0.22		$	1.42
Diluted earnings per common share	0.11			1.04			0.21			1.41
Weighted average common shares outstanding for basic earnings per common share	16,549,096			16,198,676			16,499,342			15,143,166
Weighted average common shares outstanding for diluted earnings per common share	16,770,189			16,319,291			16,719,545			15,251,841
See Notes to Unaudited Consolidated Financial Statements.

4

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(in thousands)(unaudited)
Net income	$	2,010		$	15,208		$	3,982		$	17,405
Unrealized holding gains (losses) on investment securities	(440		)	(60		)	765			(1,214		)
Reclassification adjustments for gains included in net income	(407		)	—			(446		)	—
Tax effect of realized and unrealized gains and losses on investment securities	581			24			150			471
Other comprehensive income (loss), net of tax	(266		)	(36		)	469			(743		)
Comprehensive income	$	1,744		$	15,172		$	4,451		$	16,662
See Notes to Unaudited Consolidated Financial Statements.

5

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
Nine Months Ended September 30, 2014 and 2013
	Series A Preferred Stock		Series B Preferred Stock			Series C Preferred Stock		Common Stock		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Non-controlling Interest			Total
	(in thousands, except share data) (unaudited)
Balance, December 31, 2012	$	—	$	22,000		$	672	$	12,175	$	70,113		$	(33,019	)	$	1,198		$	—		$	14,792		$	87,931
Net income	—		—			—		—		—			17,405			—			—			54			17,459
Repurchase of preferred shares	—		(16,824		)	—		—		—			4,933			—			—			—			(11,891		)
Repurchase of common shares	—		—			—		—		—			—			—			(60		)	—			(60		)
Sale of common shares	—		—			—		—		—			—			—			60			—			60
Other comprehensive loss, net of tax	—		—			—		—		—			—			(743		)	—			—			(743		)
Issuance of 4,000,537 shares of common stock and repurchase of minority interest	—		—			—		4,001		10,190			—			148			—			(14,846		)	(507		)
Issuance of 250,000 warrants	—		—			—		—		277			—			—			—			—			277
Discount accretion on preferred shares	—		—			165		—		—			(165		)	—			—			—			—
Dividends on preferred shares	—		—			—		—		—			(623		)	—			—			—			(623		)
Issuance of 45,475 shares of common stock for restricted stock awards and amortization	—		—			—		45		72			—			—			—			—			117
Stock based compensation expense	—		—			—		—		640			—			—			—			—			640
Balance, September 30, 2013	—		5,176			837		16,221		81,292			(11,469		)	603			—			—			92,660
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
See Notes to Unaudited Consolidated Financial Statements.

6

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
	Nine months ended September 30,
	2014			2013
	(in thousands)(unaudited)
Cash Flows From Operating Activities
Net income applicable to First Community Financial Partners, Inc.	$	3,982		$	17,405
Net income attributable to non-controlling interest	—			54
Net income before non-controlling interest	3,982			17,459
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities	483			455
Provision for loan losses	2,667			3,916
(Gain) loss on sale of foreclosed assets, net	11			139
Writedown of foreclosed assets	417			57
Net accretion of deferred loan fees	(80		)	(97		)
Warrant accretion	21			15
Depreciation and amortization of premises and equipment	796			879
Realized gains on sales of available for sale securities, net	(446		)	—
Decrease (increase) in cash surrender value of life insurance	222			(110		)
Deferred income taxes	1,236			(14,564		)
Proceeds from sale of loans	8,897			7,396
Gain on sale of loans	(32		)	(265		)
Decrease in accrued interest receivable and other assets	38			1,235
Increase (decrease) in accrued interest payable and other liabilities	(1,808		)	(790		)
Restricted stock compensation expense	262			743
Stock option compensation expense	—			5
Net cash provided by operating activities	16,666			16,473
Cash Flows From Investing Activities
Net change in interest bearing deposits in banks	2,002			124,593
Activity in available for sale securities:
Purchases	(74,479		)	(50,954		)
Maturities, prepayments and calls	20,995			15,102
Sales	39,804			—
Purchases of non-marketable equity securities	(400		)	—
Net decrease in loans held for sale	2,619			—
Net (increase) in loans	(50,510		)	(39,754		)
Purchases of premises and equipment	(4,051		)	(475		)
Proceeds from sale of foreclosed assets	595			1,043
Net cash (used in) provided by investing activities	(63,425		)	49,555
Cash Flows From Financing Activities
Net increase (decrease) in deposits	32,714			(82,332		)
Net increase in other borrowings	14,943			12,964
Proceeds from issuance of subordinated debt	—			15,500
Cash paid on cancellation of restricted shares	—			(497		)
Dividends paid on preferred shares	(268		)	(623		)
Repayment of preferred shares	—			(11,891		)
Cash received for sale of treasury stock	—			60
Net cash provided by (used in) financing activities	47,389			(66,819		)
Net change in cash and due from banks	630			(791		)
Cash and due from banks:
Beginning	10,815			14,933
Ending	$	11,445		$	14,142

7

Supplemental Disclosures of Cash Flow Information
Cash payments for interest	$	5,207	$	4,836
Cash payments for income taxes	—		131
Supplemental Schedule of Noncash Investing and Financing Activities
Transfer of loans to foreclosed assets	96		2,025
Transfer of loans to held for sale	—		2,118
Issuance of warrants	—		277
Acquisition of treasury stock in partial settlement of loans	—		60
See Notes to Unaudited Consolidated Financial Statements.

8

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, 2014 are not necessarily indicative of the results to be expected for the entire fiscal year.

On August 27, 2012, the Company and the Banks (as defined below) executed Agreements and Plans of Merger to effect a consolidation of banking charters. The consolidation resulted in the merger of First Community Bank of Joliet (“FCB Joliet”), First Community Bank of Plainfield (“FCB Plainfield”), First Community Bank of Homer Glen & Lockport (“FCB Homer Glen”) and Burr Ridge Bank and Trust (“Burr Ridge”, and collectively with FCB Joliet, FCB Plainfield and Homer Glen, the “Banks”) into one Illinois chartered banking institution wholly owned by the Company.

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 consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2013.

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.

9

Note 2. Earnings Per Share

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

The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings

per common share (in thousands, except share data).

	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Undistributed earnings allocated to common shareholders	$	2,010		$	15,208		$	3,982		$	17,405
Preferred stock dividends and discount accretion	(145		)	(236		)	(433		)	(788		)
Redemption of preferred shares	—			1,988			$	—		$	4,933
Net income allocated to common shareholders	$	1,865		$	16,960		$	3,549		$	21,550
Weighted average shares outstanding for basic earnings per common share	16,549,096			16,198,676			16,499,342			15,143,166
Dilutive effect of stock-based compensation	221,093			120,615			220,203			108,675
Weighted average shares outstanding for diluted earnings per common share	16,770,189			16,319,291			16,719,545			15,251,841
Basic earnings per common share	$	0.11		$	1.05		$	0.22		$	1.42
Diluted earnings per common share	0.11			1.04			0.21			1.41

10

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, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government federal agency	$	9,855	$	—	63		$	9,792
Government sponsored enterprises	20,543		77		19		20,601
Residential collateralized mortgage obligations	41,556		143		144		41,555
Residential mortgage backed securities	23,573		302		94		23,781
State and political subdivisions	58,899		1,145		46		59,998
	$	154,426	$	1,667	$	366	$	155,727
December 31, 2013
Government sponsored enterprises	$	22,185	$	122	$	30	$	22,277
Residential collateralized mortgage obligations	23,444		123		330		23,237
Residential mortgage backed securities	27,924		169		87		28,006
Corporate securities	29,013		155		76		29,092
State and political subdivisions	38,217		665		178		38,704
	$	140,783	$	1,234	$	701	$	141,316

Securities with a fair value of $49.9 million and $41.0 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, 2014 and December 31, 2013, respectively.

The amortized cost and fair value of debt securities available for sale as of September 30, 2014, 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	$	12,513	$	12,570
Over 1 year through 5 years	41,314		41,792
Over 5 years through 10 years	28,805		29,041
Over 10 years	6,665		6,988
Residential collateralized mortgage obligations and mortgage backed securities	65,129		65,336
	$	154,426	$	155,727

Gains on the on the sales of securities were $446,000 and $0 during the nine months ended September 30, 2014 and 2013, 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, 2014 and December 31, 2013.

The unrealized losses in the portfolio at September 30, 2014 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.

11

Note 4. Loans

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

	September 30, 2014			December 31, 2013
Construction and Land Development	$	15,898		$	20,745
Farmland and Agricultural Production	9,393			8,505
Residential 1-4 Family	100,716			86,770
Commercial Real Estate	377,952			366,689
Commercial	176,627			159,427
Consumer and other	8,846			10,315
	689,432			652,451
Net deferred loan fees	(288		)	(320		)
Allowance for loan losses	(13,871		)	(15,820		)
	$	675,273		$	636,311

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, 2014 and December 31, 2013 (in thousands):

September 30, 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	$	15,622	$	276	$	—	—	$	15,898	$	—	$	15,898
Farmland and Agricultural Production	9,393		—		—		—	9,393		—		9,393
Residential 1-4 Family	100,270		—		—		—	100,270		446		100,716
Commercial Real Estate
Multifamily	23,877		—		180		—	24,057		—		24,057
Retail	85,071		—		—		—	85,071		—		85,071
Office	46,009		—		—		—	46,009		—		46,009
Industrial and Warehouse	64,865		—		—		—	64,865		19		64,884
Health Care	33,335		—		—		—	33,335		—		33,335
Other	118,335		283		13		—	118,631		5,965		124,596
Commercial	173,709		—		294		—	174,003		2,624		176,627
Consumer and other	8,828		3		4		—	8,835		11		8,846
Total	$	679,314	$	562	$	491	—	$	680,367	$	9,065	$	689,432

December 31, 2013	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	$	16,309	$	—	$	—	$	—	$	16,309	$	4,436	$	20,745
Farmland and Agricultural Production	8,505		—		—		—		8,505		—		8,505
Residential 1-4 Family	85,965		67		57		—		86,089		681		86,770
Commercial Real Estate
Multifamily	21,342		—		—		—		21,342		597		21,939
Retail	86,896		—		—		—		86,896		7,358		94,254
Office	35,659		—		—		—		35,659		436		36,095
Industrial and Warehouse	63,825		—		—		351		64,176		—		64,176
Health Care	34,771		—		—		—		34,771		—		34,771
Other	109,305		1,685		—		—		110,990		4,464		115,454
Commercial	154,586		—		—		—		154,586		4,841		159,427
Consumer and other	10,273		11		1		—		10,285		30		10,315
Total	$	627,436	$	1,763	$	58	$	351	$	629,608	$	22,843	$	652,451

12

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. Therefore, there was no balance to report at September 30, 2014 and December 31, 2013.

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, 2014 and December 31, 2013 (in thousands):

13

September 30, 2014	Pass		Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	11,602	$	4,296	$	—	$	—	$	15,898
Farmland and Agricultural Production	9,393		—		—		—		9,393
Commercial Real Estate
Multifamily	24,057		—		—		—		24,057
Retail	79,656		5,415		—		—		85,071
Office	46,009		—		—		—		46,009
Industrial and Warehouse	62,625		802		—		1,457		64,884
Health Care	33,335		—		—		—		33,335
Other	112,726		3,062		6,047		2,761		124,596
Commercial	167,250		5,525		2,859		993		176,627
Total	$	546,653	$	19,100	$	8,906	$	5,211	$	579,870

September 30, 2014	Performing		Non-performing		Total
Residential 1-4 Family	$	100,270	$	446	$	100,716
Consumer and other	8,835		11		8,846
Total	$	109,105	$	457	$	109,562

December 31, 2013	Pass		Special Mention		Substandard		Doubtful	Total
Construction and Land Development	$	10,213	$	6,008	$	4,524	—	$	20,745
Farmland and Agricultural Production	8,505		—		—		—	8,505
Commercial Real Estate
Multifamily	20,629		713		597		—	21,939
Retail	71,489		15,407		4,768		2,590	94,254
Office	35,115		544		436		—	36,095
Industrial and Warehouse	63,531		645		—		—	64,176
Health Care	34,771		—		—		—	34,771
Other	105,896		2,228		3,681		3,649	115,454
Commercial	148,224		5,899		3,175		2,129	159,427
Total	$	498,373	$	31,444	$	17,181	8,368	$	555,366

December 31, 2013	Performing		Non-performing		Total
Residential 1-4 Family	$	86,089	$	681	$	86,770
Consumer and other	10,285		30		10,315
Total	$	96,374	$	711	$	97,085

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

14

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, 2014 and 2013 (in thousands):

September 30, 2014	Construction and Land Development			Farmland and Agricultural Production			Residential 1-4 Family			Commercial Real Estate			Commercial			Consumer and other			Total
Allowance for loan losses:
Beginning balance	$	1,139		$	453		$	1,191		$	7,710		$	3,598		$	292		$	14,383
Provision for loan losses	(281		)	(11		)	110			(818		)	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		$	6,901		$	4,187		$	290		$	13,871
September 30, 2013
Allowance for loan losses:
Beginning balance	$	2,729		$	379		$	2,024		$	11,842		$	3,529		$	131		$	20,634
Provision for loan losses	(511		)	59			(232		)	875			1,003			22			1,216
Loans charged-off	(7		)	—			(142		)	(1,414		)	(742		)	(11		)	(2,316		)
Recoveries of loans previously charged-off	548			—			9			71			41			—			669
Ending balance	$	2,759		$	438		$	1,659		$	11,374		$	3,831		$	142		$	20,203

The following table provides additional detail of the activity in the allowance for loan losses, by portfolio segment, for the nine months endedSeptember 30, 2014 and 2013 (in thousands):

September 30, 2014	Construction and Land Development			Farmland and Agricultural Production			Residential 1-4 Family			Commercial Real Estate			Commercial			Consumer and other			Total
Allowance for loan losses:
Beginning balance	$	2,711		$	427		$	1,440		$	7,909		$	3,183		$	150		$	15,820
Provision for loan losses	(705		)	15			(136		)	970			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		$	6,901		$	4,187		$	290		$	13,871
September 30, 2013
Allowance for loan losses:
Beginning balance	$	4,755		$	472		$	2,562		$	11,864		$	3,075		$	150		$	22,878
Provision for loan losses	(2,128		)	(34		)	(408		)	2,095			3,803			588			3,916
Loans charged-off	(1,295		)	—			(553		)	(2,811		)	(3,218		)	(604		)	(8,481		)
Recoveries of loans previously charged-off	1,427			—			58			226			171			8			1,890
Ending balance	$	2,759		$	438		$	1,659		$	11,374		$	3,831		$	142		$	20,203

15

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, 2014 and December 31, 2013 (in thousands):

September 30, 2014	Construction and Land Development		Farmland and Agricultural Production		Residential 1-4 Family		Commercial Real Estate		Commercial		Consumer and other		Total
Period-ended amount allocated to:
Individually evaluated for impairment	$	—	$	—	$	35	$	240	$	439	$	—	$	714
Collectively evaluated for impairment	876		442		1,140		6,661		3,748		290		13,157
Ending balance	$	876	$	442	$	1,175	$	6,901	$	4,187	$	290	$	13,871
Loans:
Individually evaluated for impairment	$	—	$	—	$	2,328	$	9,875	$	5,249	$	11	$	17,463
Collectively evaluated for impairment	15,898		9,393		98,388		368,077		171,378		8,835		671,969
Ending balance	$	15,898	$	9,393	$	100,716	$	377,952	$	176,627	$	8,846	$	689,432
December 31, 2013
Period-ended amount allocated to:
Individually evaluated for impairment	$	1,185	—		$	45	$	1,190	$	—	$	—	$	2,420
Collectively evaluated for impairment	1,526		427		1,395		6,719		3,183		150		13,400
Ending balance	$	2,711	$	427	$	1,440	$	7,909	$	3,183	$	150	$	15,820
Loans:
Individually evaluated for impairment	$	4,436	—		$	1,362	$	17,960	$	4,841	$	30	$	28,629
Collectively evaluated for impairment	16,309		8,505		85,408		348,729		154,586		10,285		623,822
Ending balance	$	20,745	$	8,505	$	86,770	$	366,689	$	159,427	$	10,315	$	652,451

16

The following tables present additional detail of impaired loans, segregated by class, as of and for the three and nine months ended September 30, 2014 and year ended December 31, 2013 (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, 2014
							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	1,737		1,657		—		1,650		16		1,236		47
Commercial Real Estate
Multifamily	—		—		—		—		—		149		—
Retail	—		—		—		473		—		884		—
Office	—		—		—		—		—		847		—
Industrial and Warehouse	1,993		1,456		—		1,677		—		1,460		—
Health Care	—		—		—		—				—		—
Other	9,613		6,622		—		5,842		19		5,990		56
Commercial	4,889		4,313		—		4,288		47		4,301		142
Consumer and other	20		11		—		9		—		15		—
With an allowance recorded:
Construction and Land Development	—		—		—		—		—		1,109		—
Farmland and Agricultural Production	—		—		—		—		—		—		—
Residential 1-4 Family	671		671		35		677		8		676		24
Commercial Real Estate
Multifamily	—		—		—		298		—		149		—
Retail	—		—		—		2,384		—		2,384		—
Office	—		—		—		—		—		—		—
Industrial and Warehouse	—		—		—		—		—		—		—
Health Care	—		—		—		—		—		—		—
Other	1,797		1,797		240		1,810		19		1,354		56
Commercial	936		936		439		185		—		327		—
Consumer and other	—		—		—		—		—		—		—
Total	$	21,656	$	17,463	$	714	$	19,293	$	109	$	20,881	$	325

17

December 31, 2013
	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	$	—	$	—	$	—	$	865
Farmland and Agricultural Production	—		—		—		—		—
Residential 1-4 Family	1,129		681		—		3,529		—
Commercial Real Estate
Multifamily	597		597		—		122		—
Retail	4,108		2,590		—		880		—
Office	3,055		3,055		—		3,168		—
Industrial and Warehouse	2,486		2,486		—		2,505		93
Health Care	—		—		—		—
Other	7,497		4,464		—		7,987		—
Commercial	9,441		4,841		—		8,765		—
Consumer and other	187		30		—		125		—
With an allowance recorded:
Construction and Land Development	4,436		4,436		1,185		—		—
Farmland and Agricultural Production	—		—		—		—		—
Residential 1-4 Family	681		681		45		1,458		8
Commercial Real Estate
Multifamily	—		—		—		—		—
Retail	5,980		4,768		1,190		—		—
Office	—		—		—		—		—
Industrial and Warehouse	—		—		—		—		—
Health Care	—		—		—		—		—
Other	—		—		—		2,516		—
Commercial	—		—		—		2,324		—
Consumer and other	—		—		—		—		—
Total	$	39,597	$	28,629	$	2,420	$	34,244	$	101

18

There were no troubled debt restructurings added during the three months ended September 30, 2014 and 2013. The following tables present troubled debt restructurings added during the nine months ended September 30, 2014 and 2013 (in thousands, except number of contracts):

Nine months ended September 30, 2014	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Charge-offs and Specific Reserves
Construction and Land Development	—	$	—	$	—	$	—
Farmland and Agricultural Production	—	—		—		—
Residential 1-4 Family	1	41		41		—
Commercial Real Estate
Multifamily	—	—		—		—
Retail	1	931		1,041		—
Office	—	—		—		—
Industrial and Warehouse	—	—		—		—
Health Care	—	—		—		—
Other	1	1,815		1,815		265
Commercial	1	413		544		—
Consumer and other	—	—		—		—
	4	$	3,200	$	3,441	$	265
Nine months ended September 30, 2013
Construction and Land Development	—	$	—	$	—	$	—
Farmland and Agricultural Production	—	—		—		—
Residential 1-4 Family	1	211		211		70
Commercial Real Estate						—
Multifamily	—	—		—		—
Retail	—	—		—		—
Office	—	—		—		—
Industrial and Warehouse	1	2,567		2,567		—
Health Care	—	—		—		—
Other	—	—		—		—
Commercial	—	—		—		—
Consumer and other	—	—		—		—
	2	2,778		2,778		70

During the nine months ended September 30, 2014, there were $3.2 million in troubled debt restructurings added, of which $3.16 million were the result of the payment of real estate taxes and $41,000 was the result of a payment concession. During the nine months ended September 30, 2013, there were $2.8 million in troubled debt restructurings added, of which all were the result of the reductions in payment amount to interest only.

Troubled debt restructurings that were accruing were $2.5 million and $3.2 million, respectively, as of September 30, 2014 and December 31, 2013. Troubled debt restructurings that were non-accruing were $2.8 million and $5.1 million, respectively, as of September 30, 2014 and December 31, 2013. Of the troubled debt restructurings entered into during the past twelve months, one commercial real estate loan of approximately $1.9 million subsequently defaulted during the nine months ended September 30, 2014. Performing troubled debt restructurings are considered to have defaulted when they become 90 days or more past due post-restructuring or are placed on nonaccrual status.

19

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

	Nine months ended
	September 30, 2014
	Recorded Investment			Number of Loans
Balance, beginning	$	8,274		11
Additions to troubled debt restructurings	3,200			4
Removal of troubled debt restructurings	—			—
Charge-off related to troubled debt restructurings	(780		)	—
Transfers to other real estate owned	—			—
Repayments and other reductions	(5,355		)	(6	)
Balance, ending	$	5,339		9

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 is as follows (in thousands):

	September 30, 2014		December 31, 2013
NOW and money market accounts	$	265,420	$	240,537
Savings	27,546		24,399
Time deposit certificates, $100,000 or more	204,593		223,436
Other time deposit certificates	120,304		125,074
	$	617,863	$	613,446

At September 30, 2014 and December 31, 2013, brokered deposits amounted to $25.4 million and $4.8 million, respectively, which are included in NOW and money market accounts and other time deposit certificates.

Note 6. Other Borrowed Funds

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

	September 30, 2014		December 31, 2013
Securities sold under agreements to repurchase	$	34,985	$	24,896
Federal Home Loan Bank Advances
Matures October 22, 2014, 0.14%	5,000		—
Mortgage note payable	521		667
	$	40,506	$	25,563

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.

In conjunction with the purchase of a building in Burr Ridge, Illinois, the Bank, as successor to Burr Ridge, signed a $1.0 million mortgage note on February 28, 2012. The terms of the note require monthly payments at a fixed rate of 6% amortized over a period of 5 years.

20

At September 30, 2014, future principal payments are as follows (in thousands):

2014	$	51
2015	210
2016	222
2017	38
	$	521

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 $279.4 million and $74.2 million of loans pledged as collateral for FHLB advances as of September 30, 2014 and December 31, 2013, respectively.  This increase was the result of pledging commercial real estate loans to the FHLB in the current year. There were $5.0 million and $0 in advances outstanding at September 30, 2014 and December 31, 2013, respectively.

The Bank has entered into collateral pledge agreements whereby the Bank pledges commercial, commercial real estate, agricultural and consumer loans to the Federal Reserve Bank of Chicago Discount Window which allows the Bank to borrow on a short term basis, typically overnight.  The Bank had $99.2 million and $87.1 million of loans pledged as collateral under these agreements as of September 30, 2014 and December 31, 2013, respectively. There were no borrowings outstanding at September 30, 2014 and December 31, 2013.

21

Note 7. Income Taxes

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

	Nine months ended September 30,
	2014		2013
Current	$	700	$	496
Deferred	1,236		1,035
Change in valuation allowance	—		(15,599		)
	$	1,936	$	(14,068	)

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,
	2014			2013
Federal income tax at statutory rate	$	2,072		$	1,187
Increase (decrease) due to:
Valuation allowance	—			(15,599		)
State income tax, net of federal benefit	371			213
Benefit of income taxed at lower rate	59			(34		)
Tax exempt income	(242		)	(161		)
Cash surrender value of life insurance	(175		)	(37		)
Other	(149		)	363
	$	1,936		$	(14,068	)

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

	September 30, 2014			December 31, 2013
Deferred tax assets:
Allowance for loan losses	$	4,768		$	5,390
Merger expenses	159			168
Organization expenses	269			291
Net operating losses	9,285			10,315
Contribution carryforward	36			33
Non-qualified stock options	860			860
Restricted stock	—			92
Foreclosed assets	350			393
Tax Credits	353			291
Other	186			—
	16,266			17,833
Deferred tax liabilities:
Depreciation	(340		)	(362		)
Unrealized gains on securities available for sale	(507		)	(208		)
Other	(173		)	(482		)
	(1,020		)	(1,052		)
Net deferred tax asset	$	15,246		$	16,781

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.

22

Prior to and after the consolidation of its four bank charters in March 2013, the Company determined a valuation allowance was necessary, largely based on negative evidence including cumulative losses caused by credit losses in its loan portfolio and general uncertainty surrounding future economic and business conditions.

The Company had a federal net operating loss carryforward of $22.7 million and $25.2 million, which could be used to offset future regular corporate federal income tax as of September 30, 2014 and December 31, 2013, respectively. This 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 $20.1 million and $27.7 million that could be used to offset future regular corporate state income tax as of September 30, 2014 and December 31, 2013, respectively. These Illinois net operating loss carryforwards 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, 100,000 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, 2014
	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding at beginning of year	1,091,204		$	7.00	$	—
Granted	—		—
Exercised	—		—
Canceled	—		—
Expired	—		—
Forfeited	(600	)	8.38
Outstanding at end of period	1,090,604		$	7.00	$	—
Exercisable at end of period	1,090,604		$	7.00	$	—

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, 2014. There was no intrinsic value of the stock options outstanding at September 30, 2014 and December 31, 2013. 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 no compensation expense related to the stock options for the nine months ended September 30, 2014. At September 30, 2014, there was no further compensation expense to be recognized related to outstanding stock options.

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In June 2014, the Board of Directors approved the extension in the expiration period of 370,376 of the options granted for an additional 5 year period. This adjustment is reflected in the contractual terms of the options outstanding below. Information pertaining to options outstanding at September 30, 2014 is as follows:

	Options Outstanding		Options Exercisable
Exercise Prices	Number Outstanding	Weighted Average Remaining Life (yrs)	Number Exercisable
$5.00	364,376	4.8	364,376
$5.53	6,000	5.6	6,000
$6.25	30,600	5.2	30,600
$6.38	10,000	1.6	10,000
$7.50	434,400	2.8	434,400
$8.00	4,000	5.0	4,000
$9.25	241,228	3.6	241,228
	1,090,604		1,090,604

There were no options vested during the three and nine months ended September 30, 2014.

The Company grants restricted stock units to select officers and directors within the organization under the 2008 and 2013 Equity Incentive Plans, 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 2012, FCB Plainfield granted 57,850 restricted stock units under its 2012 Equity Incentive Plan with a weighted-average grant-date per share fair value of $7.03, with vesting over a three-year period. In 2013, as a part of the consolidation, 408,262 restricted stock units were granted under the 2008 Equity Incentive Plan with a weighted-average grant-date per share fair value of $3.97, and with vesting over a two-year period, as replacement awards for the stock options which were canceled at the consolidation date. In addition, all restricted stock units granted as a part of the canceled FCB Plainfield 2012 Equity Incentive Plan were fully vested and canceled at the date of consolidation and all holders were paid out in an equivalent amount of cash.

The Company recognized compensation expense of $262,000 and $754,000, respectively, for the nine months ended September 30, 2014 and 2013, related to the 2008 and 2013 Equity Incentive Plans, which included $385,000 in expense related to the canceled FCB Plainfield awards in 2013. Total unrecognized compensation expense related to restricted stock grants was $98,000 as of September 30, 2014.

The following is a summary of nonvested restricted stock units:

	September 30, 2014
	Number of Shares		Weighted Average Grant Date Fair Value
Outstanding at beginning of year	538,261		$	3.43
Granted	21,750		2.61
Vested	(230,911	)	3.28
Canceled	—		—
Forfeited	(1,291	)	3.70
Nonvested shares, end of period	327,809		$	3.04

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

24

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, 2014		December 31, 2013
Commitments to extend credit	$	125,400	$	116,572
Standby letters of credit	8,141		17,497
Performance letters of credit	542		—
	$	134,083	$	134,069

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, 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. At September 30, 2014 and December 31, 2013, there was $0 and $220,000, respectively, recorded as liabilities for the Company’s potential obligations under these guarantees.

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 classification are also subject to qualitative

25

judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. In addition, the Bank remains subject to certain of the de novo bank requirements of the Federal Deposit Insurance Corporation (“FDIC”) until the Bank has been chartered for a period longer than seven years. Until October 28, 2015, the Bank is required, among other items, to obtain FDIC approval for any material change to its business plan.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets, each as defined in the applicable regulations. Management believes, as of September 30, 2014 and December 31, 2013, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of September 30, 2014, 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, and Tier I leverage ratios as set forth in the following table. Bank regulators can modify capital requirements as part of their examination process.

The Company’s and the Banks’ capital amounts and ratios are presented in the following table (dollar amounts in thousands):

	Actual				Minimum Capital Requirement				Minimum To Be Well Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2014
Total capital (to risk-weighted assets)
Consolidated	$	107,171	14.64	%	$	58,564	8.00	%	N/A		N/A
First Community Financial Bank	106,627		14.29	%	59,698		8.00	%	$	74,622	10.00	%
Tier I capital (to risk-weighted assets)
Consolidated	79,439		10.85	%	29,282		4.00	%	N/A		N/A
First Community Financial Bank	97,292		13.04	%	29,849		4.00	%	44,773		6.00	%
Tier I capital (to average assets)
Consolidated	79,439		8.81	%	36,076		4.00	%	N/A		N/A
First Community Financial Bank	97,292		10.78	%	36,118		4.00	%	45,147		5.00	%
December 31, 2013
Total capital (to risk-weighted assets)
Consolidated	$	103,635	13.55	%	$	61,177	8.00	%	N/A		N/A
First Community Financial Bank	100,758		12.93	%	62,357		8.00	%	$	77,947	10.00	%
Tier I capital (to risk-weighted assets)
Consolidated	74,688		9.77	%	30,588		4.00	%	N/A		N/A
First Community Financial Bank	91,116		11.69	%	31,179		4.00	%	46,768		6.00	%
Tier I capital (to average assets)
Consolidated	74,688		8.87	%	33,680		4.00	%	N/A		N/A
First Community Financial Bank	91,116		10.81	%	33,707		4.00	%	42,133		5.00	%

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 bank holding companies with consolidated assets of less than $500 million).  The Basel III Rules not only increase most of the required minimum regulatory capital ratios, but they introduce a new common equity tier 1 capital ratio and the concept of a capital conservation buffer.  The Basel III Rules also expand the definition of capital as in effect currently 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 now generally qualify 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 permit banking organizations with less than $15.0 billion in assets to retain, through a one-time election, the existing

26

treatment for accumulated other comprehensive income, which currently does not affect regulatory capital.  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.  Generally, financial institutions become subject to the new Basel III Rules on January 1, 2015, with phase-in periods for many of the changes.  Management has evaluated the effect the Basel III Rules will have on the Company's and the Bank's capital positions and is prepared for the changes.

Under the Illinois Banking Act, Illinois-chartered banks generally may not pay dividends in excess of their net profits, after first deducting their losses (including any accumulated deficit) and provision for loan losses. The payment of dividends by any bank is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Moreover, the FDIC prohibits the payment of any dividends by a bank if the FDIC determines such payment would constitute an unsafe or unsound practice. In addition, the FDIC places restrictions on dividend payments during the first seven years of a new bank’s operations, after which time allowing cash dividends to be paid only from net operating income and does not permit dividends to be paid until an appropriate allowance for loan and lease losses has been established and overall capital is adequate. For the nine months ended September 30, 2014 and the year ended December 31, 2013, the Bank was unable to pay common share dividends due to having an accumulated deficit.

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

27

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, 2014 and December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

September 30, 2014	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:
U.S. government federal agency	$	9,792	$	—	$	9,792	$	—
Government sponsored enterprises	20,601		—		20,601		—
Residential collateralized mortgage obligations	41,555		—		41,555		—
Residential mortgage backed securities	23,781		—		23,781		—
Corporate securities	—		—		—		—
State and political subdivisions	59,998		—		58,501		1,497
Derivative financial instruments	304		—		304		—
Financial Liabilities
Derivative financial instruments	304		—		304		—
December 31, 2013
Financial Assets
Securities Available for Sale:
Government sponsored enterprises	$	22,277	$	—	$	22,277	$	—
Residential collateralized mortgage obligations	23,237		—		23,237		—
Residential mortgage backed securities	28,006		—		28,006		—
Corporate securities	29,092		—		29,092		—
State and political subdivisions	38,704		—		35,985		2,719
Derivative financial instruments	324		—		324		—
Financial Liabilities
Derivative financial instruments	324		—		324		—

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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, 2014. 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, 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
Beginning balance, December 31, 2012	$	4,282
Total gains or losses (realized/unrealized) included in other comprehensive income	33
Included in earnings	—
Purchases	(1,579		)
Paydowns and maturities	—
Transfers in and/or out of Level 3	—
Ending balance, September 30, 2013	$	2,736

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, 2014	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	$	16,749	—	—	$	16,749
Foreclosed assets	3,489		—	—	3,489
December 31, 2013
Financial Assets
Impaired loans	$	26,209	—	—	$	26,209
Loans held for sale	2,619		—	—	2,619
Foreclosed assets	4,416		—	—	4,416

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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
September 30, 2014	Fair Value Estimate		Valuation Techniques	Unobservable Input	Discount Range
Assets
Impaired loans	$	16,749	Appraisal of Collateral	Appraisal adjustments Selling costs	10% to 25%
Loans held for sale	—		Secondary market pricing	Selling costs	10% to 25%
Foreclosed assets	3,489		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, 2014 and December 31, 2013, approximately $10.7 million or 61% and $13.2 million, or 46%, 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.

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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 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, 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	$	11,445	$	11,445	$	11,445	$	—	$	—
Interest-bearing deposits in banks	27,290		27,290		27,290		—		—
Securities available for sale	155,727		155,727		—		154,230		1,497
Nonmarketable equity securities	1,367		1,367		—		—		1,367
Loans, net	675,273		672,795		—		—		672,795
Accrued interest receivable	2,199		2,199		2,199		—		—
Derivative financial instruments	304		304		—		304		—
Financial liabilities:
Non-interest bearing deposits	140,252		140,252		140,252		—		—
Interest-bearing deposits	617,863		611,538		292,966		—		318,572
Other borrowed funds	40,506		40,506		40,506		—		—
Subordinated debt	19,326		19,114		—		—		19,114
Accrued interest payable	646		646		646		—		—
Derivative financial instruments	304		304		—		304		—

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The estimated fair values of the Company’s financial instruments are as follows as of December 31, 2013 (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	$	10,815	$	10,815	$	10,815	$	—	$	—
Interest-bearing deposits in banks	29,292		29,292		29,292		—		—
Securities available for sale	141,316		141,316		—		138,597		2,719
Nonmarketable equity securities	967		967		—		—		967
Loans held for sale	2,619		2,619		—		—		2,619
Loans, net	636,311		639,068		—		—		639,068
Accrued interest receivable	2,058		2,058		2,058		—		—
Derivative financial instruments	324		324		—		324		—
Financial liabilities:
Non-interest bearing deposits	111,955		111,955		111,955		—		—
Interest-bearing deposits	613,446		605,857		264,936		—		340,921
Other borrowed funds	25,563		25,563		25,563		—		—
Subordinated debt	19,305		19,076		—		—		19,076
Accrued interest payable	1,108		1,108		1,108		—		—
Derivative financial instruments	324		324		—		324		—

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, 2014 and December 31, 2013, there were $3.4 million and $3.5 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 $304,000 and $324,000 as of September 30, 2014 and December 31, 2013, 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 $37,000 and $46,000 during the three months ended September 30, 2014 and September 30, 2013, respectively.

Note 13. Preferred Stock

In December 2009, as part of the Troubled Asset Relief Program (“TARP”) Capital Purchase Program of the United States Treasury (“Treasury”), the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with Treasury, pursuant to which the Company (i) sold to Treasury 22,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B (“Series B Preferred Stock”), at $1,000 per share, or $22 million in the aggregate, and (ii) issued to Treasury warrants to purchase Fixed Rate Cumulative Perpetual Preferred Stock, Series C (“Series C Preferred Stock”), with a liquidation amount equal to 5% of the Treasury’s investment in Series B Preferred Stock or $1.1 million.  The warrants were immediately exercised for 1,100 shares of Series C Preferred Stock and are being accreted over an estimated life of five years. The Series B Preferred Stock and the Series C Preferred Stock qualify as Tier 1 capital.  

Dividends on the Series B Preferred Stock are paid quarterly at an annual rate of 5% until February 15, 2015, at which time the annual rate will increase to 9%. The book value of the Series C Preferred Stock was $1,057,000 at September 30, 2014 and dividends are paid quarterly at an annual rate of 9%. The Series C Preferred Stock may not be redeemed until all Series B Preferred Stock has been redeemed, repurchased or otherwise acquired by the Company.  All redemptions are subject to the approval of the Company’s federal banking regulatory agency.

In 2012, Treasury sold the Series B Preferred Stock and the Series C Preferred Stock to one or more third parties. None of the outstanding shares of the Series B Preferred Stock or the Series C Preferred Stock are currently held by Treasury.

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On November 8, 2012, First Community entered into a TARP Securities Purchase Option Agreement with certain holders of the Series B Preferred Stock and Series C Preferred Stock. Pursuant to the TARP Securities Purchase Option Agreement, First Community had the option, but was not required, to repurchase from such certain holders their shares of Series B Preferred Stock at a discount. $16,824,000 face amount, or 16,824 shares, of Series B Preferred Stock were subject to the discount option. As described below, all Series B Preferred Stock shares subject to the TARP Securities Purchase Option Agreement have been repurchased.

On March 12, 2013, pursuant to the terms of the TARP Securities Purchase Option Agreement, the Company repurchased 9,500 shares, or $9.5 million face amount, of its Series B Preferred Stock at $690.00 per share. The total cost of repurchasing these shares was approximately $6.6 million which included accrued and unpaid dividends earned on the shares through the date of repurchase. A gain on retirement of preferred stock of $2.9 million was recorded through accumulated deficit.

On September 30, 2013, pursuant to the terms of the TARP Securities Purchase Option Agreement the Company repurchased 7,324 shares, or $7.3 million face amount, of its Series B Preferred Stock at $728.61 per share. The total cost of repurchasing these shares was $5.3 million which included accrued and unpaid dividends earned on the shares through the date of repurchase. A gain on retirement of preferred stock of $2.0 million was recorded through accumulated deficit.

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Note 14. Subsequent Events

Management evaluated subsequent events through the date the financial statements were issued. On October 31, 2014, First Community closed a private placement offering resulting in the issuance of 7.0% Subordinated Notes (the “Notes”) in the aggregate principal amount of $9.8 million. The Notes were issued in denominations of $10,000 and integral multiples thereof to certain accredited investors.

The Notes mature on the eighth anniversary of their issuance and bear interest payable on March 31 and September 30 of each year, at an annual interest rate of 7.0%, with the first such payment to be due on March 31, 2015. Beginning on the fifth anniversary of the issuance date of the Notes (or an earlier date if the Notes cease to be deemed Tier 2 capital or the Company receives an opinion of counsel that there exists a material risk that interest payable by the Company is not, or will not be, deductible by the Company), the Company may, at its option, redeem the Notes at a redemption price equal to the principal amount outstanding plus accrued but unpaid interest. The Notes are intended to qualify as Tier 2 capital for regulatory purposes.

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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, 2013 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 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 First Community Financial 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 loans, and letters of credit. Bank operation services include: cashier’s checks, traveler’s checks, collections, currency and coin processing, wire transfer services, deposit bag rentals, and stop payments. Other services include servicing of secondary market real estate loans, notary services, and signature guarantees. The Bank does not offer trust services at this time.

Third Quarter 2014 Highlights

• Loans increased $37.0 million from $652.1 million at December 31, 2013 to $689.1 million at September 30, 2014.

• Noninterest bearing deposit accounts increased $28.3 million from $112.0 million at December 31, 2013 to $140.3 million at September 30, 2014.

• Pre-tax pre-provision income was $3.2 million for the quarter ended September 30, 2014 compared to $2.3 million for the same quarter in 2013.

• Book value per common share increased 3.44% from $5.24 at December 31, 2013 to $5.42 at September 30, 2014, and increased $.10 per common share since June 30, 2014.

• Nonperforming assets decreased to 1.37% of total assets at September 30, 2014 compared to 3.18% at December 31, 2013.

Third Quarter 2014 Financial Performance

Balance sheet

• Noninterest bearing deposit accounts increased $28.3 million from $112.0 million at December 31, 2013 to $140.3 million at September 30, 2014.

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• Commercial loans increased $9.7 million in the third quarter of 2014 and increased $11.3 million from December 31, 2013, allowing First Community to reduce its concentration of commercial real estate loans.

• Noninterest bearing deposit accounts increased $15.0 million in the third quarter of 2014 and $28.3 million from year-end, and money market accounts increased $2.1 million in the third quarter of 2014 and $23.3 million since year-end. This growth has reduced First Community's overall reliance on time deposits for funding its balance sheet. Time deposits decreased $26.5 million in the third quarter of 2014 and $23.6 million year over year.

• First Community's ratio of tangible common shareholders' equity to tangible assets was 9.78% at September 30, 2014, compared to 9.55% at June 30, 2014, and 9.86% at December 31, 2013.

Revenues

• Net interest income was $7.3 million for the third quarter of 2014 compared to $7.3 million for the second quarter of 2014, an increase of $21,000. Net interest income increased $186,000 from $7.1 million for the quarter ended September 30, 2013

◦ Interest income on loans was $8.0 million in the third quarter of 2014, compared to $8.1 million in the second quarter of 2014, and $8.0 million for the quarter ended September 30, 2013. Loans originated in the past year have been at lower yields due to current market conditions. In addition, balances on lower yielding commercial lines of credit have increased as the Bank continues to diversify away from commercial real estate loans.

◦ Interest income on securities was $848,000 for the third quarter of 2014 compared to $737,000 for the second quarter of 2014 and $536,000 for the quarter ended September 30, 2013. The increase in interest income on securities related to growth in the portfolio, which was up $12.6 million year over year; in addition, the change in investment strategy has led to increases in overall yield.

◦ Interest expense on deposits was $1.1 million for the third quarter of 2014, compared to $1.1 million for the second quarter of 2014 and $1.2 million for the quarter ended September 30, 2013. The shift in deposit mix from time deposits to noninterest bearing deposit accounts and money market accounts has helped to bring down the overall cost of funds and maintain overall deposit interest expense.

◦ Interest on subordinated debt increased $117,000 to $432,000 for the quarters ended September 30, 2014 and June 30, 2014, compared to $315,000 for the quarter ended September 30, 2013 as a result of the subordinated debt issued on September 30, 2013.

• Noninterest income was $966,000 for the third quarter of 2014, compared to $845,000 for the second quarter of 2014 and $306,000 for the third quarter 2013.

◦ Service charges on deposit accounts increased $58,000 in the third quarter of 2014 compared to the second quarter of 2014, and increased $77,000 from the third quarter of 2013. Increases in noninterest bearing deposits and money market accounts has lead to greater fee income in addition to higher levels of overdraft fees over prior periods.

◦ Gains on sale of securities increased $369,000 in the third quarter of 2014 compared to $38,000 in the second quarter of 2014 and $0 in the third quarter 2013. The increase in gains on sales of securities was the result of changes in investment strategy resulting in increased sales of securities.

◦ Mortgage fee income increased $113,000 in the third quarter of 2014 compared to the second quarter of 2014 and increased $133,000 from the third quarter of 2013. Mortgage lending staff was added in the third quarter 2013.

◦ Other noninterest income was down $391,000 over the second quarter of 2014 and $43,000 over the third quarter of 2013. Included in other noninterest income for the second quarter of 2014 was $483,000 of income related to proceeds received from a bank owned life insurance policy.

• Noninterest expense was $5.1 million for the third quarter of 2014 compared to $5.4 million for the second quarter of 2014 and $5.1 million for the third quarter of 2013.

◦ Salaries and benefits expense increased $27,000, or 0.97%, from the second quarter of 2014 and increased $103,000 from the third quarter of 2013. The increase from the third quarter of 2013 was due to additions to mortgage lending staff and the additions of two market presidents.

◦ Occupancy expense decreased $34,000 in the third quarter of 2014 compared to the second quarter of 2014, and was down $17,000 from the third quarter of 2013, due to the purchase of our previously leased Channahon branch building in the second quarter of 2014.

◦ Professional fees decreased $27,000 from the second quarter to the third quarter of 2014 and $176,000 from the third quarter of 2013. As nonperforming assets have declined, there has been a decrease in legal fees. In addition, cost savings continue as a result of the charter consolidation in 2013.

◦ Losses and write downs on foreclosed assets account for the biggest portion of other noninterest expense and were down $291,000 over the second quarter of 2014 and up $78,000 from the third quarter of 2013. The write downs on foreclosed assets were due to updated appraisals, and more write downs were taken in the second quarter 2014 based on timing of the appraisals. There were no writedowns on foreclosed assets taken in the third quarter of 2013.

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Continued Aggressive Cleanup of Loan Portfolio

• Nonperforming assets declined by $15.0 million from $27.6 million at December 31, 2013 and increased $140,000 from June 30, 2014, to $12.6 million at September 30, 2014.

◦ Nonperforming loans decreased $14.1 million or 60.92% since December 31, 2013. Nonperforming loans increased by $579,000 in the third quarter of 2014, due to the addition of one relationship.

◦ Provision for loan losses expense decreased from $667,000 for the quarter ended June 30, 2014 and $1.2 million for the quarter ended September 30, 2013 to $0 for the quarter ended September 30, 2014. The results reflect the substantial improvement in the credit quality of the loan portfolio since September 30, 2013, and overall improvement in the three year loss horizon, which is the starting point in the allowance for loan loss calculation, and in turn, loan loss provisions.

◦ Net charge-offs were $512,000 for the quarter ended September 30, 2014, compared to $2.6 million for the quarter ended June 30, 2014 and $1.6 million for the quarter ended September 30, 2013.

◦ The allowance for loan losses represents 2.01% of total loans and 153.02% of nonperforming loans at September 30, 2014. The ratio of allowance for loan losses to nonperforming loans improved over the last nine months from 68.21% at December 31, 2013.

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First Community Financial Partners, Inc.

Selected Quarterly Financial Data

	2014									2013
	Third Quarter			Second Quarter			First Quarter			Fourth Quarter			Third Quarter
Selected Operating Data	(dollars in thousands, except per share data)(unaudited)
Interest income	$	8,859		$	8,842		$	8,356		$	8,800		$	8,609
Interest expense	1,578			1,582			1,584			1,601			1,514
Net interest income	7,281			7,260			6,772			7,199			7,095
Provision for loan losses	—			667			1,999			4,086			1,216
Net interest income after provision for loan losses	7,281			6,593			4,773			3,113			5,879
Noninterest income	966			845			621			424			306
Noninterest expense	5,088			5,411			4,657			4,853			5,079
Income (loss) before income taxes	3,159			2,027			737			(1,316		)	1,106
Income tax expense (benefit)	1,149			557			231			(572		)	(14,102		)
Net income (loss)	2,010			1,470			506			(744		)	15,208
Dividends and accretion on preferred shares	(145		)	(144		)	(145		)	(177		)	(236		)
Redemption of preferred shares	—			—			—			—			1,988
Net income (loss) applicable to common shareholders	$	1,865		$	1,326		$	361		$	(921	)	$	16,960
Per Share Data
Basic earnings (loss) per common share	$	0.11		$	0.08		$	0.02		$	(0.06	)	$	1.05
Diluted earnings (loss) per common share	$	0.11		$	0.08		$	0.02		$	(0.06	)	$	1.03
Book value per common share	$	5.42		$	5.32		$	5.22		$	5.24		$	5.34
Weighted average common shares - basic	16,549,096			16,548,399			16,398,348			16,231,167			16,198,676
Weighted average common shares - diluted	16,770,189			16,740,390			16,642,021			16,231,167			16,403,793
Common shares outstanding-end of period	16,552,063			16,548,563			16,548,313			16,333,582			16,221,413
Performance Ratios
Annualized return on average assets	0.81		%	0.60		%	0.17		%	(0.42		)%	8.05		%
Annualized return on average common equity	7.81		%	5.66		%	1.67		%	(3.40		)%	71.68		%
Net interest margin	3.34		%	3.45		%	3.29		%	3.52		%	3.47		%
Interest rate spread	3.14		%	3.26		%	3.10		%	3.32		%	3.26		%
Efficiency ratio (1)	61.70		%	66.76		%	62.99		%	63.66		%	68.63		%
Average interest-earning assets to average interest-bearing liabilities	127.65		%	124.87		%	125.03		%	125.67		%	128.05		%
Average loans to average deposits	88.19		%	89.68		%	90.95		%	92.97		%	92.29		%

Footnotes:

⁽¹⁾  We calculate our efficiency ratio by dividing noninterest expense by the sum of net interest income and noninterest income.

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First Community Financial Partners, Inc.

Summary of Selected Period-End Financial Data

	September 30, 2014			June 30, 2014			March 31, 2014			December 31, 2013			September 30, 2013
Selected Balance Sheet Data	(dollars in thousands)(unaudited)
Total assets	$	917,891		$	922,128		$	870,058		$	867,576		$	852,409
Total securities (1)	157,094			168,072			149,902			142,283			144,111
Loans	689,144			664,390			661,898			652,131			659,040
Allowance for loan losses	(13,871		)	(14,383		)	(16,351		)	(15,820		)	(20,203		)
Net loans	675,273			650,007			645,547			636,311			638,837
Total deposits	758,115			763,632			729,426			725,401			698,330
Subordinated debt	19,326			19,319			19,312			19,305			19,298
Other borrowed funds	40,506			30,890			25,798			25,563			38,659
Shareholders’ equity (2)	95,981			94,266			92,534			91,587			92,660
Asset Quality
Nonperforming loans(3)	9,065			8,486			15,264			23,194			20,303
Nonperforming assets(4)	12,554			12,414			19,465			27,610			24,517
Nonperforming loans (3) to total loans	1.32		%	1.28		%	2.31		%	3.56		%	3.08		%
Nonperforming assets(4) to total assets	1.37		%	1.35		%	2.24		%	3.18		%	2.88		%
Allowance for loan losses to nonperforming loans	153.02		%	169.49		%	107.12		%	68.21		%	99.51		%
Allowance for loan losses to total loans	2.01		%	2.16		%	2.47		%	2.43		%	3.07		%
Capital Ratios
Tangible common equity to tangible assets(5)	9.78		%	9.55		%	9.93		%	9.86		%	10.16		%
Average equity to average total assets	10.37		%	10.54		%	10.66		%	10.85		%	9.91		%
Tier 1 leverage	8.81		%	8.79		%	8.76		%	8.87		%	9.22		%
Tier 1 risk-based capital	10.85		%	10.52		%	9.61		%	9.77		%	10.48		%
Total risk-based capital	14.64		%	14.44		%	13.37		%	13.55		%	14.41		%

Footnotes:

⁽¹⁾  Includes available for sale securities recorded at fair value and Federal Home Loan Bank stock at cost.

⁽²⁾  Includes shareholders’ equity attributable to outstanding shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series B, and Fixed Rate Cumulative Perpetual Preferred Stock, Series C.

⁽³⁾  Nonperforming loans include loans on non-accrual status and those past due more than 90 days and still accruing interest.

⁽⁴⁾  Nonperforming assets consist of nonperforming loans and other real estate owned.

⁽⁵⁾  Tangible common equity to tangible assets is total shareholders' equity less preferred stock divided by total assets

First Community Financial Partners, Inc.

Reconciliation of Non-GAAP Selected Quarterly Financial Data

	2014						2013
	Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter
Selected Operating Data	(dollars in thousands)(unaudited)
Net interest income	$	7,281	$	7,260	$	6,772	$	7,199	$	7,095
Noninterest income	966		845		621		424		306
Noninterest expense	5,088		5,411		4,657		4,853		5,079
Adjusted pre-tax pre-provision income	$	3,159	$	2,694	$	2,736	$	2,770	$	2,322

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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 reflects the components of net interest income for the three months ended September 30, 2014 and 2013:

	Three months ended September 30,
	2014						2013
(Dollars in thousands)	Average Balances		Income/ Expense		Yields/ Rates		Average Balances		Income/ Expense		Yields/ Rates
Assets
Loans (1)	$	677,117	$	7,988	4.72	%	$	652,304	$	8,041	4.93	%
Investment securities (2)	167,232		848		2.03	%	127,273		536		1.68	%
Interest bearing deposits with other banks	26,649		23		0.35	%	37,800		32		0.34	%
Total earning assets	$	870,998	$	8,859	4.07	%	$	817,377	$	8,609	4.21	%
Other assets	50,107						25,735
Total assets	$	921,105					$	843,112
Liabilities
NOW accounts	$	72,433	$	25	0.14	%	$	72,149	$	33	0.18	%
Money market accounts	192,293		130		0.27	%	139,914		101		0.29	%
Savings accounts	26,852		10		0.15	%	24,109		10		0.17	%
Time deposits	338,716		965		1.14	%	358,127		1,035		1.16	%
Total interest bearing deposits	630,294		1,130		0.72	%	594,299		1,179		0.79	%
Securities sold under agreements to repurchase	31,599		8		0.10	%	29,435		9		0.12	%
Mortgage payable	549		8		5.83	%	734		11		5.99	%
FHLB Borrowings	545		—		—	%	—		—		—	%
Subordinated debentures	19,322		432		8.94	%	13,854		315		9.09	%
Total interest bearing liabilities	682,309		1,578		0.93	%	638,322		1,514		0.95	%
Non-interest bearing deposits	137,459						112,515
Other liabilities	5,826						8,724
Total liabilities	$	825,594					$	759,561
Total shareholders' equity	$	95,511					$	83,551
Total liabilities and equity	$	921,105					$	843,112
Net interest income			$	7,281					$	7,095
Interest rate spread					3.14	%					3.26	%
Net interest margin					3.34	%					3.47	%

Footnotes:

⁽¹⁾ Average loans include nonperforming loans.

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

Net interest income was $7.3 million for the three months ended September 30, 2014, an increase of $186,000, or 2.6%, from $7.1 million for the three months ended September 30, 2013. The net interest margin was 3.34% for this period in 2014 and 3.47% for the same period in 2013. The net interest income and margin decrease was primarily due to changes in loans. Loans

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booked in the past year have been at lower yields due to current competitive market conditions. In addition, balances on lower yielding commercial lines of credit have increased as the Bank continues to diversify away from commercial real estate loans.

	Nine months ended September 30,
	2014						2013
(Dollars in thousands)	Average Balances		Income/ Expense		Yields/ Rates		Average Balances		Income/ Expense		Yields/ Rates
Assets
Loans (1)	$	667,682	$	23,738	4.74	%	$	645,277	$	24,528	5.07	%
Investment securities (2)	154,847		2,261		1.95	%	115,390		1,405		1.62	%
Federal funds sold	—		—		—	%	5,665		12		0.28	%
Interest-bearing deposits with other banks	23,125		62		0.36	%	67,701		154		0.30	%
Total Earning Assets	$	845,654	$	26,061	4.11	%	$	834,033	$	26,099	4.17	%
Other assets	47,309						28,450
Total assets	$	892,963					$	862,483
Liabilities
NOW accounts	$	73,828	$	83	0.15	%	$	72,370	$	121	0.22	%
Money market accounts	178,740		369		0.28	%	148,455		351		0.32	%
Savings accounts	26,264		30		0.15	%	24,856		37		0.20	%
Time deposits	343,954		2,918		1.13	%	373,522		3,281		1.17	%
Total interest bearing deposits	622,786		3,400		0.73	%	619,203		3,790		0.82	%
Securities sold under agreements to repurchase	28,207		23		0.11	%	26,858		24		0.12	%
FHLB borrowings	920		—		—	%	—		—		—	%
Mortgage payable	597		27		6.03	%	781		36		6.15	%
Subordinated debentures	19,315		1,295		8.94	%	11,331		757		8.91	%
Total interest bearing liabilities	671,825		4,745		0.94	%	658,173		4,607		0.93	%
Noninterest bearing deposits	122,634						113,403
Other liabilities	4,571						6,059
Total liabilities	$	799,030					$	777,635
Total shareholders' equity	$	93,933					$	84,848
Total liabilities and equity	$	892,963					$	862,483
Net interest income			$	21,316					$	21,492
Interest rate spread					3.17	%					3.24	%
Net interest margin					3.36	%					3.44	%

Footnotes:

⁽¹⁾ Average loans include nonperforming loans.

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

Net interest income was $21.3 million for the nine months ended September 30, 2014, a decrease of $176,000, or 0.82%, from $21.5 million for the nine months ended September 30, 2013. The net interest margin was 3.36% for this period in 2014 and 3.44% for the same period in 2013. The decrease in net interest income was the result of declines in our loan yields and increases in subordinated debt interest expense. These decreases were somewhat offset by decreases in our overall cost of

41

funds as a result of lower interest rates on deposits, in addition to increases in yields on investment securities as a result of the growth in the securities portfolio over the past year.

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,
	2014 Compared to 2013
	Average Volume			Average Rate			Mix			Net Increase (Decrease)
Interest Income
Loans	$	305		$	(345	)	$	(13	)	$	(53	)
Investment securities	166			111			35			312
Federal funds sold	—			—			—			—
Interest bearing deposits with other banks	(10		)	1			—			(9		)
Total interest income	461			(233		)	22			250
Interest expense
NOW accounts	$	—		$	(8	)	$	—		$	(8	)
Money market accounts	39			(7		)	(3		)	29
Savings accounts	1			(1		)	—			—
Time deposits	(53		)	(18		)	1			(70		)
Securities sold under agreements to repurchase	(1		)	—			—			(1		)
FHLB advances	—			—			—			—
Mortgage payable	(3		)	—			—			(3		)
Subordinated debentures	124			(5		)	(2		)	117
Total interest expense	$	107		$	(39	)	$	(4	)	$	64
Change in net interest income	$	354		$	(194	)	$	26		$	186

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	Nine months ended September 30,
	2014 Compared to 2013
	Average Volume			Average Rate			Mix			Net Increase (Decrease)
Interest Income
Loans	$	850		$	(1,585	)	$	(55	)	$	(790	)
Investment securities	474			285			97			856
Federal funds sold	(12		)	(12		)	12			(12		)
Interest bearing deposits with other banks	(102		)	30			(20		)	(92		)
Total interest income	1,210			(1,282		)	34			(38		)
Interest expense
NOW accounts	$	2		$	(39	)	$	(1	)	$	(38	)
Money market accounts	71			(44		)	(9		)	18
Savings accounts	2			(8		)	(1		)	(7		)
Time deposits	(260		)	(112		)	9			(363		)
Securities sold under agreements to repurchase	1			(2		)	—			(1		)
Mortgage payable	(8		)	(1		)	—			(9		)
Subordinated debentures	533			3			2			538
Total interest expense	$	341		$	(203	)	$	—		$	138
Change in net interest income	$	869		$	(1,079	)	$	34		$	(176	)

Provision for Loan Losses

The provision for loan losses was $0 for the three months ended September 30, 2014, compared to $1.2 million for the same period in 2013. Net charge-offs decreased to $512,000 for the three months ended September 30, 2014 compared to $1.6 million for the same period in 2013. Nonperforming loans decreased 60.92% from $23.2 million at December 31, 2013 to $9.1 million at September 30, 2014. In addition, nonperforming loans decreased 60.78%, or $14.1 million, from $23.2 million at December 31, 2013 to $9.1 million at September 30, 2014. These decreases were related to loan sales, charge-offs and paydowns on nonperforming loans.

43

Noninterest Income

Noninterest income for the three and nine months ended September 30, 2014 increased from the same periods in 2013. Service charges on deposit accounts were up in the current year, primarily due to overdraft fees charged as the result of increases in current year overdraft balances. Service charge income increased period over period also as a result of increased demand deposits. There were no loan sales during the third quarter of 2014 and 2013. Sales in the first quarter of 2014 and in the first two quarters of 2013 related primarily to SBA loans. The Company’s residential mortgage operation, which started in late 2011, increased volumes significantly during the past three years; the third quarter of 2014 showed higher volumes than prior quarters and in turn higher mortgage fee income. In addition, there was an increase in other noninterest income, which was primarily due to recognition of income in the first quarter of 2014 from an earnest deposit of approximately $288,000 for a loan sale that did not occur. Further, there was $483,000 in income related to proceeds received from a bank owned life insurance policy.

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)	2014		2013		2014		2013
Service charges on deposit accounts	$	210	$	133	$	492	$	310
Gain on sale of loans	—		—		32		265
Gain on foreclosed assets, net	—		—		19		—
Gain on sale of securities	407		—		446		—
Mortgage fee income	196		63		336		277
Other	153		110		1,106		363
Total noninterest income	$	966	$	306	$	2,431	$	1,215

Noninterest Expense

Noninterest expense increased slightly for the nine months ended September 30, 2014 compared to the same period in 2013. Salaries and employee benefits increased for the nine months ended September 30, 2014 compared to the same period in 2013 as a result of salary adjustments. In addition, during the first quarter 2013, there was no incentive compensation accrual, as the Company’s incentive plan was still in development after the consolidation of the Banks in the first quarter of 2013. During the third quarter of 2013, First Community added three staff members to its residential mortgage loan operation, increasing salary and benefits expense. The decrease in noninterest expense from the prior year in other areas is a result of the cost savings due to consolidation of the Banks, including lower costs related to data processing and professional fees. We continue to see improvements in asset quality, and in turn, decreases in the costs related to our problem assets. During the first quarter of 2014, we reversed the accrual for a contingent liability of approximately $210,000, which is included in other expense. During the third quarter of 2014 writedowns were taken on foreclosed assets as a result of updated appraisals received during the quarter. Decreases in other expenses were also noted due to the reductions in FDIC insurance as a result of the decrease in total assets of the Bank and the lifting of the Bank’s Memoranda of Understanding during the third quarter of 2013. During 2014, advertising and business development expenses have increased as we have placed a larger emphasis on these types of activities.

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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)	2014		2013		2014		2013
Salaries and employee benefits	$	2,812	$	2,709	8,452		7,897
Occupancy and equipment expense	543		560		1,607		1,654
Data processing	238		219		715		746
Professional fees	345		521		1,044		1,145
Advertising and business development	223		61		563		422
Losses on sale and writedowns of foreclosed assets, net	78		—		447		196
Foreclosed assets, net of rental income	55		57		190		199
Other expense	794		952		2,144		3,141
Total noninterest expense	$	5,088	$	5,079	$	15,162	$	15,400

Income Taxes

Prior to the consolidation of the Banks, the Company filed four tax returns, one consolidated return for the parent and FCB Joliet and one for each other banking subsidiary. Because of multiple returns, we separately calculated income tax expense, established deferred tax assets and determined valuation allowances.   Subsequent to the consolidation, the Company now calculates income tax expense on a consolidated basis.           

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.

Prior to the merger of the Banks in 2013, the Company determined a valuation allowance was necessary for two of those bank charters as of December 31, 2012, largely based on negative evidence including cumulative losses caused by credit losses in its loan portfolio and general uncertainty surrounding future economic and business conditions.

The Company evaluates the need for a deferred tax asset valuation allowance on an ongoing basis, considering both positive and negative evidence. As of September 30, 2013, positive evidence included eight consecutive quarters of income, continued improvement in asset quality ratios, termination of our Memoranda of Understanding with our banking regulators, completion of our consolidation in March 2013 and the prospect that other key drivers of profitability would continue in the future. Negative evidence included no available taxes paid in open carryback years, no significant tax planning opportunties to accelerate taxable income and that 2013 would be the first year of taxable income since 2007. Based on the Company’s assessment of all available evidence, management determined that it was more-likely-than-not that the deferred tax asset would be realized. Therefore, at September 30, 2013, the Company released its $15.6 million valuation allowance against the net deferred tax assets resulting in a credit to income tax expense.

The Company realized income tax expense of $1.1 million and $1.9 million for three and nine months ended September 30, 2014, respectively compared with $(14.1) million and $(14.1) million of income tax expense for the three and nine months ended September 30, 2013. The increase in income taxes for the three and nine months ended September 30, 2014 compared to the same periods in 2013 was a result of the new tax structure and the release of the deferred tax valuation allowance during the third quarter of 2013. Management now expects normalized income tax expense for the remainder of 2014 and beyond.

Financial Condition

Our assets totaled $917.9 million and $867.6 million at September 30, 2014 and December 31, 2013, respectively. Total loans at September 30, 2014 and December 31, 2013 were $689.1 million and $652.1 million, respectively. Total deposits were $758.1 million and $725.4 million at September 30, 2014 and December 31, 2013, respectively. The increase in noninterest bearing deposits from $112.0 million at December 31, 2013 to $140.3 million at September 30, 2014, an increase of 25.27%, was a result of efforts to grow our core deposits. Interest-bearing deposits also grew during 2014 as a result of the competitive rates offered in the current year. Borrowed funds, consisting of securities sold under agreements to repurchase and a mortgage note payable, totaled $40.5 million and $25.6 million at September 30, 2014 and December 31, 2013, respectively. The

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increase in other borrowed funds during the nine months ended September 30, 2014 related to increases in securities sold under agreements to repurchase, as clients increased their balances in these accounts.

Total shareholders’ equity was $96.0 million and $91.6 million at September 30, 2014 and December 31, 2013, respectively. The overall increase was a result of the net income for the nine months ended September��30, 2014, along with the changes in other comprehensive income during the third quarter related to the market value of the investment portfolio.

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, 2014				December 31, 2013				September 30, 2013
	Amount		% of Total		Amount		% of Total		Amount		% of Total
Construction and Land Development	$	15,898	2	%	$	20,745	3	%	$	21,694	3	%
Farmland and Agricultural Production	9,393		1	%	8,505		1	%	8,656		1	%
Residential 1-4 Family	100,716		14	%	86,770		13	%	80,208		12	%
Commercial Real Estate	377,952		56	%	366,689		56	%	383,320		58	%
Commercial	176,627		25	%	159,427		24	%	155,116		24	%
Consumer and other	8,846		2	%	10,315		2	%	10,362		2	%
Total Loans	$	689,432	100	%	$	652,451	100	%	$	659,356	100	%

Total loans increased by $37.0 million during the nine months ended September 30, 2014 as a result of new loan originations. New loans originated during the nine months ended September 30, 2014 were primarily in the commercial real estate, 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, 2014 and December 31, 2013, the allowance for loan losses was $13.9 million and $15.8 million, respectively, with a resulting allowance to total loans ratio of 2.01% and 2.43%, respectively. Over the past year, we have seen a reduction in the allowance to total loan percentage from 3.07% at September 30, 2013, and 2.43% at December 31, 2013, to 2.01% at September 30, 2014. This decrease was the result of the reduction in nonperforming assets and an improving loss history which is the starting point for the Company’s allowance for loan loss calculation. In addition, the allowance for loan losses to nonperforming assets has increased from 99.51% at September 30, 2013, and 68.21% at December 31, 2013, to 153.02% at September 30, 2014.

Net charge-offs for the three months ended September 30, 2014 amounted to $512,000, compared to $1.6 million for the same period in 2013. In addition, net charge-offs for the nine months ended September 30, 2014 were $4.6 million, compared to $6.6 million for the same period in 2013. Overall decreases in charge-offs have been seen over the past year as a result of the continued improvement in asset quality.

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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, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Balance at beginning of period	$	14,383		$	20,634		$	15,820		$	22,878
Charge-offs:
Construction and Land Development	—			7			1,186			1,295
Residential 1-4 Family	134			142			155			553
Commercial Real Estate	—			1,414			2,812			2,811
Commercial	517			742			1,583			3,218
Consumer and other	8			11			25			604
Total charge-offs	$	659		$	2,316		$	5,761		$	8,481
Recoveries:
Construction and Land Development	18			548			56			1,427
Residential 1-4 Family	8			9			26			58
Commercial Real Estate	9			71			834			226
Commercial	112			41			223			171
Consumer and other	—			—			6			8
Total recoveries	$	147		$	669		$	1,145		$	1,890
Net charge-offs	512			1,647			4,616			6,591
Provision for loan losses	—			1,216			2,667			3,916
Allowance for loan losses at end of period	$	13,871		$	20,203		$	13,871		$	20,203
Selected loan quality ratios:
Net charge-offs to average loans	0.31		%	1.01		%	1.42		%	1.36		%
Allowance to total loans	2.01		%	3.07		%	2.01		%	3.07		%
Allowance to nonperforming loans	153.02		%	99.51		%	153.02		%	99.51		%

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

(Dollars in thousands)	September 30, 2014				December 31, 2013
Balance at end of period applicable to:	Amount		% of Total Loans		Amount		% of Total Loans
Construction and Land Development	$	876	6	%	$	2,711	17	%
Farmland and Agricultural Production	442		3	%	427		3	%
Residential 1-4 Family	1,175		9	%	1,440		9	%
Commercial Real Estate	6,901		50	%	7,909		50	%
Commercial	4,187		30	%	3,183		20	%
Consumer and other	290		2	%	150		1	%
Total	$	13,871	100	%	$	15,820	100	%

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Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining the impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis using the fair value of collateral if the loan is collateral dependent, the present value of expected future cash flows discounted at the loan’s effective interest rate, or the loan’s obtainable market price due to financial difficulties of the borrower.

Residential 1-4 family and consumer loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.

There were approximately $9.1 million of nonperforming loans at September 30, 2014 which were down from $23.2 million at December 31, 2013. While there were loans downgraded during the nine months ended September 30, 2014, loan sales of approximately $8.3 million that took place during March and June of 2014 helped to reduce the balance of impaired loans from December 31, 2013. In addition, the decrease was the result of current year charge-offs and paydowns.

Impaired loans were $17.5 million and $28.6 million at September 30, 2014 and December 31, 2013, respectively. Included in impaired loans at September 30, 2014 were $3.4 million in loans with valuation allowances totaling $714,000, and $14.1 million in loans without a valuation allowance. Included in impaired loans at December 31, 2013 were $9.9 million in loans with valuation allowances totaling $2.4 million, and $18.7 million in loans without a valuation allowance.

The following presents the recorded investment in nonaccrual loans and loans past due over 90 days and still accruing:

	September 30, 2014		December 31, 2013		September 30, 2013
Non-accrual loans	$	9,065	$	22,843	$	20,253
Accruing loans delinquent 90 days or more	—		351		50
Non-performing loans	9,065		23,194		20,303
Troubled debt restructures accruing interest	2,509		3,167		9,259

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, 2014 and December 31, 2013 were approximately $6.7 million and $3.8 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:

48

	September 30, 2014				December 31, 2013
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. government federal agency	$	9,855	$	9,792	$	—	$	—
Government sponsored enterprises	20,543		20,601		22,185		22,277
Residential collateralized mortgage obligations	41,556		41,555		23,444		23,237
Residential mortgage backed securities	23,573		23,781		27,924		28,006
Corporate securities	—		—		29,013		29,092
State and political subdivisions	58,899		59,998		38,217		38,704
Total securities available for sale	$	154,426	$	155,727	$	140,783	$	141,316

Available for sale securities increased $14.4 million to $155.7 million at September 30, 2014 from $141.3 million at December 31, 2013, as the Company continued to invest its excess cash in investment securities during 2014.     

Securities with a fair value of $49.9 million and $41.0 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, 2014 and December 31, 2013, respectively.

Deposits

Deposits, which include noninterest-bearing demand deposits, interest-bearing demand deposits, 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, 2014				December 31, 2013
	Amount		Percent		Amount		Percent
Noninterest bearing demand deposits	$	140,252	18.50	%	$	111,955	15.43	%
NOW and money market accounts	265,420		35.00	%	240,537		33.17	%
Savings	27,546		3.63	%	24,399		3.36	%
Time deposit certificates, $100,000 or more	204,593		27.00	%	223,436		30.80	%
Other time deposit certificates	120,304		15.87	%	125,074		17.24	%
Total	$	758,115	100.00	%	$	725,401	100.00	%

Total deposits increased $32.7 million to $758.1 million at September 30, 2014, from $725.4 million at December 31, 2013. The increase was primarily related to the increase in noninterest bearing demand deposits which helped to improve the Company’s core deposits and lower the Company’s overall cost of funds. Increases in NOW and money market accounts can be attributed to a customer selling its business and depositing approximately $15.0 million into these types of accounts during the second quarter of 2014.

49

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, 2014			December 31, 2013
(Dollars in thousands)
Securities sold under agreements to repurchase:
Balance:
Average daily outstanding	$	28,207		$	23,993
Outstanding at end of period	34,985			24,896
Maximum month-end outstanding	34,985			32,431
Rate:
Weighted average interest rate during the year	0.10		%	0.14		%
Weighted average interest rate at end of the period	0.10		%	0.11		%
Federal Home Loan Bank borrowings:
Balance:
Average daily outstanding	$	920		$	330
Outstanding at end of period	5,000			—
Maximum month-end outstanding	5,000			—
Rate:
Weighted average interest rate during the year	0.14		%	0.15		%
Weighted average interest rate at end of the period	—		%	—		%

Provisions of the Illinois banking laws place restrictions upon the amount of dividends that can be paid to the Company by the Bank. The availability of dividends may be further limited because of the need to maintain capital ratios satisfactory to applicable regulatory agencies. As of September 30, 2014, the Bank was unable to pay dividends due to having an accumulated deficit of $(8.8) million at September 30, 2014 compared to $(12.4) million at December 31, 2013.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets and of Tier I

50

capital to average assets, each as defined in the applicable regulations. Management believes, as of September 30, 2014 and December 31, 2013, the Company and the Bank met all capital adequacy requirements to which they were subject.

As of September 30, 2014, 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, and Tier I leverage ratios as set forth in the following table. Bank regulators can modify capital requirements as part of their examination process. Moreover, the U.S. federal banking authorities’ approval of the Basel III Rules will affect the Company’s and the Bank’s capital requirements. See Note 10 to our Unaudited Consolidated Financial Statements for more information.

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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, 2014 and December 31, 2013.

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.

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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 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2014. 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.

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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

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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 13, 2014	/s/ Roy C. Thygesen
	Roy C. Thygesen
	Chief Executive Officer
	(Principal Executive Officer)
Date: November 13, 2014	/s/ Glen L. Stiteley
	Glen L. Stiteley
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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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, 2014 and December 31, 2013; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and September 30, 2013; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and September 30, 2013; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2014 and September 30, 2013; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and September 30, 2013; and (vi) Notes to Unaudited Consolidated Financial Statements.

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