First Community Financial Partners (FCMPE) 10-Q 2016 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, 2016

OR

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

For the transition period from                          to                         

001-37505

Commission file number

FIRST COMMUNITY FINANCIAL PARTNERS, INC.

(Exact name of registrant as specified in its charter)

Illinois	20-4718752
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2801 Black Road, Joliet, IL	60435
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code:  (815) 725-0123

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes  x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x 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 filerx
Non-accelerated filero (Do not check if a smaller reporting company)	Smaller reporting companyo

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

There were outstanding 17,237,845 shares of the Registrant’s common stock as of October 31, 2016.

FIRST COMMUNITY FINANCIAL PARTNERS, INC.

FORM 10-Q

September 30, 2016

INDEX

		Page
PART I	FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets at September 30, 2016 (Unaudited) and December 31, 2015	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)	5
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)	7
	Notes to Unaudited Consolidated Financial Statements	8
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3	Quantitative and Qualitative Disclosures about Market Risk	56
Item 4	Controls and Procedures	58
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	59
Item 1A	Risk Factors	59
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3	Defaults Upon Senior Securities	59
Item 4	Mine Safety Disclosures	60
Item 5	Other Information	60
Item 6	Exhibits	60
	Signatures	61
	Exhibit Index	62

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Balance Sheets
	September 30, 2016		December 31, 2015
Assets	(dollars in thousands, except per share data) (September 30, 2016 data is unaudited)
Cash and due from banks	$	21,622	$	10,699
Federal funds sold	550		—
Interest-bearing deposits in banks	33,349		7,406
Securities available for sale	188,062		205,604
Non-marketable equity securities	3,959		1,367
Mortgage loans held for sale	1,331		400
Loans and leases, net of allowance for loan losses of $12,284 in 2016; $11,741 in 2015	944,671		760,578
Premises and equipment, net	22,454		18,529
Foreclosed assets	725		5,487
Cash surrender value of life insurance	19,324		16,561
Deferred tax asset, net	3,653		9,191
Accrued interest receivable and other assets	6,898		4,830
Total assets	$	1,246,598	$	1,040,652
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest bearing	$	246,262	$	196,063
Interest bearing	818,989		669,928
Total deposits	1,065,251		865,991
Other borrowed funds	46,579		53,015
Subordinated debt	15,300		15,300
Accrued interest payable and other liabilities	4,304		3,305
Total liabilities	1,131,434		937,611
Concentrations, Commitments and Contingencies (Note 10)
First Community Financial Partners, Inc. Shareholders’ Equity
Common stock, $1.00 par value; 60,000,000 shares authorized; 17,237,845 issued and outstanding at September 30, 2016 and 17,026,941 issued and outstanding at December 31, 2015	17,238		17,027
Additional paid-in capital	83,365		82,211
Retained earnings	11,227		2,800
Accumulated other comprehensive income	3,334		1,003
Total shareholders' equity	115,164		103,041
Total liabilities and shareholders' equity	$	1,246,598	$	1,040,652
See Notes to Unaudited Consolidated Financial Statements.

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Operations
	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016		2015
Interest income:	(dollars in thousands, except per share data)(unaudited)
Loans, including fees	$	10,229		$	8,218		$	27,761	$	24,124
Securities	1,041			1,103			3,184		3,017
Federal funds sold and other	43			19			83		47
Total interest income	11,313			9,340			31,028		27,188
Interest expense:
Deposits	1,081			973			2,978		2,937
Federal funds purchased and other borrowed funds	112			98			324		129
Subordinated debentures	297			297			891		1,503
Total interest expense	1,490			1,368			4,193		4,569
Net interest income	9,823			7,972			26,835		22,619
Provision for loan losses	383			(813		)	883		(1,562		)
Net interest income after provision for loan losses	9,440			8,785			25,952		24,181
Noninterest income:
Service charges on deposit accounts	289			188			700		565
Gain on sale of securities	14			251			617		272
Mortgage fee income	169			178			363		435
Bargain purchase gain	1,920			—			1,920		—
Other	381			152			969		465
	2,773			769			4,569		1,737
Noninterest expenses:
Salaries and employee benefits	3,812			2,841			10,379		8,535
Occupancy and equipment expense	568			486			1,434		1,483
Data processing	700			248			1,647		710
Professional fees	369			342			1,136		1,134
Advertising and business development	328			217			805		633
Losses on sale and writedowns of foreclosed assets, net	1			58			14		78
Foreclosed assets expenses, net of rental income	(99		)	(61		)	50		80
Other expense	1,380			1,005			3,663		2,840
	7,059			5,136			19,128		15,493
Income before income taxes	5,154			4,418			11,393		10,425
Income taxes	1,019			1,471			2,966		3,527
Net income	$	4,135		$	2,947		$	8,427	$	6,898
Common share data
Basic earnings per common share	$	0.24		$	0.17		$	0.49	$	0.41
Diluted earnings per common share	0.24			0.17			0.48		0.40
Weighted average common shares outstanding for basic earnings per common share	17,189,113			16,993,822			17,165,808		16,910,441
Weighted average common shares outstanding for diluted earnings per common share	17,565,667			17,161,783			17,492,403		17,048,967
See Notes to Unaudited Consolidated Financial Statements.

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
	(in thousands)(unaudited)
Net income	$	4,135		$	2,947		$	8,427		$	6,898
Unrealized holding gains (losses) on investment securities	(1,208		)	1,297			4,438			976
Reclassification adjustments for gains included in net income	(14		)	(251		)	(617		)	(272		)
Tax effect of realized and unrealized gains and losses on investment securities	477			(408		)	(1,490		)	(274		)
Other comprehensive income (loss), net of tax	(745		)	638			2,331			430
Comprehensive income	$	3,390		$	3,585		$	10,758		$	7,328
See Notes to Unaudited Consolidated Financial Statements.

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
Nine months ended September 30, 2016 and 2015
	Common Stock		Additional Paid-In Capital			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income		Total
	(in thousands, except share data)(unaudited)
Balance, December 31, 2014	$	16,668	$	81,648		$	(7,019	)	$	756	$	92,053
Net income	—		—			6,898			—		6,898
Other comprehensive loss, net of tax	—		—			—			430		430
Issuance of 306,189 shares of common stock for restricted stock awards and amortization	306		(304		)	—			—		2
Issuance of 43,250 shares of common stock for exercise of warrants	43		155			—			—		198
Reclass of warrants upon redemption of preferred stock	—		(225		)	—			—		(225		)
Stock based compensation expense	—		763			—			—		763
Balance, September 30, 2015	$	17,017	$	82,037		$	(121	)	$	1,186	$	100,119
Balance, December 31, 2015	$	17,027	$	82,211		$	2,800		$	1,003	$	103,041
Net income	—		—			8,427			—		8,427
Other comprehensive income, net of tax	—		—			—			2,331		2,331
Issuance of 139,684 shares of common stock for restricted stock awards and amortization	140		(178		)	—			—		(38		)
Issuance of 27,500 shares of common stock for exercise of warrants	27		88			—			—		115
Issuance of 43,720 shares of common stock for exercise of stock options	44		266			—			—		310
Tax windfall benefit	—		78			—			—		78
Stock based compensation expense	—		900			—			—		900
Balance, September 30, 2016	$	17,238	$	83,365		$	11,227		$	3,334	$	115,164
See Notes to Unaudited Consolidated Financial Statements.

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
	Nine months ended September 30,
	2016			2015
	(in thousands)(unaudited)
Cash Flows From Operating Activities
Net income	$	8,427		$	6,898
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities	1,549			1,383
Provision for loan losses	883			(1,562		)
Bargain purchase gain	(1,920		)	—
Gain on sale of foreclosed assets	—			(13		)
Losses on sales of foreclosed assets	50			92
Net accretion of deferred loan fees	149			58
Warrant accretion	—			6
Depreciation and amortization of premises and equipment	864			954
Realized gains on sales of available for sale securities, net	(617		)	(272		)
Increase in cash surrender value of life insurance	(446		)	(96		)
Amortization of core deposit intangible	51			—
Deferred income taxes	2,776			3,419
(Increase) decrease in mortgage loans held for sale	(931		)	738
(Decrease) in accrued interest receivable and other assets	(707		)	(1,210		)
(Decrease) increase in accrued interest payable and other liabilities	631			311
Restricted stock compensation expense	607			716
Stock option compensation expense	293			47
Net cash provided by operating activities	11,659			11,469
Cash Flows From Investing Activities
Acquisition payment, net of cash acquired	(2,746		)	—
Net change in interest bearing deposits in banks	(25,943		)	(1,657		)
Activity in available for sale securities:
Purchases	—			(81,392		)
Maturities, prepayments and calls	59,608			12,611
Sales	—			21,234
Purchases of non-marketable equity securities	(2,458		)	—
Net increase in loans	(153,106		)	(56,315		)
Purchases of premises and equipment	(596		)	(265		)
Proceeds from sale of foreclosed assets	4,721			147
Net cash used in investing activities	(120,520		)	(105,637		)
Cash Flows From Financing Activities
Net increase in deposits	126,220			77,287
Cash paid on redemption of subordinated debt	—			(14,060		)
Net increase (decrease) in other borrowings	(6,436		)	27,722
Net cash provided by financing activities	119,784			90,949
Net change in cash and due from banks	10,923			(3,219		)
Cash and due from banks:
Beginning	10,699			13,329
Ending	$	21,622		$	10,110

Supplemental Disclosures of Cash Flow Information
Cash payments for interest	$	4,345	$	5,209
Supplemental Schedule of Noncash Investing and Financing Activities
Transfer of loans to foreclosed assets	—		1,805
See Notes to Unaudited Consolidated Financial Statements.

Notes to Unaudited Consolidated Financial Statements

Note 1. Basis of Presentation

These are the unaudited consolidated financial statements of First Community Financial Partners, Inc. (“we,” “us,” “our,” the “Company” or “First Community”) and its subsidiaries, including its wholly owned bank subsidiary, First Community Financial Bank (the “Bank”). 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, 2016 are not necessarily indicative of the results to be expected for the entire fiscal year or for any other period.

These unaudited interim financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and industry practice.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2015.

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.

Significant Accounting Policies

In addition to the assumptions and methodologies that the Company used to apply significant accounting policies and develop significant estimates as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, the following policies have been added:

Business Combinations and Valuations of Loans Acquired in Business Combinations: We account for acquisitions under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. Assets acquired and liabilities assumed in a business combination are recorded at estimated fair value on their purchase date. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of acquired assets and assumed liabilities, where it was not possible to estimate the acquisition date fair value upon consummation.

In particular, the valuation of acquired loans involves significant estimates, assumptions and judgments based on information available as of the acquisition date. Substantially all loans acquired in the transaction are evaluated either individually or in pools of loans with similar characteristics; since the estimated fair value of acquired loans includes a credit consideration, no carryover of any previously recorded allowance for loan losses is recorded at acquisition. A number of factors are considered in determining the estimated fair value of purchased loans including, among other things, the remaining life of the acquired loans, estimated prepayments, estimated loss ratios, estimated value of the underlying collateral, estimated holding periods, contractual interest rates compared to market interest rates, and net present value of cash flows expected to be received.

In determining the fair value of acquired loans, management calculates a nonaccretable difference (the credit mark component of the acquired loans) and an accretable difference (the market rate or yield component of the acquired loans). The nonaccretable difference is the difference between the undiscounted contractually required payments and the undiscounted cash flows expected to be collected in accordance with management’s determination of the fair value.

The accretable yield on acquired loans is the difference between the expected cash flows and the initial investment in the acquired loans. The accretable yield is recognized into earnings using the effective yield method over the term of the loans. Management separately monitors the acquired loan portfolio and periodically reviews loans contained within this portfolio against the factors and assumptions used in determining the fair value.

Core Deposit Intangible: Core deposit base premiums represent the value of the acquired customer core deposit bases and are included in as an asset on the consolidated balance sheets. The core deposit intangible has an estimated finite life, is amortized on a straight line basis over a 84-month period, and is subject to periodic impairment evaluation.

Management will periodically review the carrying value of its long-lived and intangible assets to determine if any impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life, in which case an impairment charge would be recorded as an expense in the period of impairment. In making such determination, management evaluates whether there are any adverse qualitative factors indicating that an impairment may exist, as well as the performance, on an undiscounted basis, of the underlying operations or assets which give rise to the intangible. Given that the acquisition of Mazon State Bank took place during the third quarter of 2016, there was no impairment charge to the core deposit intangible at September 30, 2016. The net book value of core deposit intangible was $767,000 and $0 at September 30, 2016 and December 31, 2015, respectively and is included in other assets on the consolidated balance sheets.

Emerging Growth Company Critical Accounting Policy Disclosure

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

Management anticipates that the Company will no longer be considered an emerging growth company, and thus will no longer be eligible to use this extended transition period, after the fiscal year ending December 31, 2018.

Certain information in footnote disclosure normally included 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”).

New Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). The ASU requires a lessee to recognize on the balance sheet assets and liabilities for leases with lease terms of more than 12 months. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike U.S. GAAP, which requires that only capital leases be recognized on the balance sheet, the ASU requires that both types of leases by recognized on the balance sheet. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2018. Early application is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Among other items, the ASU, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. For public companies, this update will be effective for interim and annual periods beginning after December 15, 2017. The effect of the adoption of this guidance is being evaluated by the Company.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forwardlooking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For the Company, this update will be effective for interim and annual periods beginning after December 15, 2019. The Company has not yet determined the impact the adoption of ASU 2016-13 will have on the consolidated financial statements.

Notes to Unaudited Consolidated Financial Statements

Note 2. Acquisition

On July 1, 2016, the Company completed its acquisition of Mazon State Bank, an Illinois state-chartered commercial bank, pursuant to that certain Agreement and Plan of Merger dated March 14, 2016 (the “Merger Agreement”) by and among the Company, the Bank, Mazon State Bank and First Mazon Bancorp, Inc., a Delaware corporation and the former parent company of Mazon State Bank. Under the terms of the Merger Agreement, the Company acquired Mazon State Bank, through the merger of Mazon State Bank with and into the Bank, for aggregate consideration of $8.5 million in cash. The three branches of Mazon State Bank opened on July 1, 2016 as branches of the Bank. The system integration was completed during the third quarter of 2016.

The purpose of the acquisition was for strategic reasons beneficial to the Company. The acquisition is consistent with its growth plans to expand into the markets in Grundy County, diversify its loan portfolio, and expand our core deposit base. The Company believes it is well-positioned to achieve stronger financial performance and enhance shareholder value through synergies of the combined operations.

The Company accounted for the transaction under the acquisition method of accounting under FASB ASC Topic 805, Business Combinations, and thus, the financial position and results of operations of Mazon State Bank prior to the closing date were not included in the accompanying consolidated financial statements. The accounting required assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value with the assistance of third-party valuations, appraisals, and third-party advisors. The estimated fair values will be subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period of approximately one year from consummation of the acquisition.

During the three and nine months ended September 30, 2016, the Company incurred $643,000 and $1.2 million, respectively of merger related costs.

The fair value of the assets acquired and liabilities assumed on July 1, 2016 were as follows (in thousands):

	As Recorded by Mazon State Bank		Fair Value Adjustments			As recorded by the Company
Cash and due from banks	$	5,754	$	—		$	5,754
Federal funds sold	550		—			550
Securities available for sale	39,177		—			39,177
Nonmarketable equity securities	134		—			134
Loans, net of allowance of $243	32,381		(362		)	32,019
Premises and equipment, net	899		3,294			4,193
Foreclosed assets	9		—			9
Cash surrender value of life insurance	2,317		—			2,317
Other assets	540		823			1,363
	$	81,761	$	3,755		$	85,516
Deposits	$	73,040	$	(49	)	$	72,991
Deferred tax liability, net	—		1,272			1,272
Other liabilities	833		—			833
	$	73,873	$	1,223		$	75,096
Excess of assets acquired over liabilities assumed	$	7,888	$	2,532		$	10,420
Less: Purchase price paid in cash						8,500
Bargain purchase gain						$	1,920

Note 3. 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 by dividing net income by the weighted-average number of common shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.

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

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

	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Net income	$	4,135	$	2,947	$	8,427	$	6,898
Weighted average shares outstanding for basic earnings per common share	17,189,113		16,993,822		17,165,808		16,910,441
Dilutive effect of stock-based compensation and warrants	376,554		167,961		326,595		138,526
Weighted average shares outstanding for diluted earnings per common share	17,565,667		17,161,783		17,492,403		17,048,967
Basic income per common share	$	0.24	$	0.17	$	0.49	$	0.41
Diluted income per common share	0.24		0.17		0.48		0.40

Note 4. Securities Available for Sale

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, with gross unrealized gains and losses, follows (in thousands):

September 30, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Residential collateralized mortgage obligations	$	55,620	$	1,471	$	—	$	57,091
Residential mortgage backed securities	26,095		313		—		26,408
State and political subdivisions	100,881		3,715		33		104,563
	$	182,596	$	5,499	$	33	$	188,062
December 31, 2015
Government sponsored enterprises	$	16,284	$	125	$	—	$	16,409
Residential collateralized mortgage obligations	62,701		138		475		62,364
Residential mortgage backed securities	28,494		65		268		28,291
State and political subdivisions	96,480		2,178		118		98,540
	$	203,959	$	2,506	$	861	$	205,604

Securities with a fair value of $101.2 million and $82.2 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, 2016 and December 31, 2015, respectively.

The amortized cost and fair value of debt securities available for sale as of September 30, 2016, 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	$	4,137	$	4,146
Over 1 year through 5 years	25,467		25,689
Over 5 years through 10 years	32,839		34,054
Over 10 years	38,438		40,674
Residential collateralized mortgage obligations and mortgage backed securities	81,715		83,499
	$	182,596	$	188,062

Realized gains on the sales of securities were $617,000 and $272,000 during the nine months ended September 30, 2016 and 2015, respectively.

There were $33,000 and $861,000 in securities with unrealized losses at September 30, 2016 and December 31, 2015, respectively, and no unrealized losses which management believed were other-than-temporarily impaired. Unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position are summarized as of September 30, 2016 and December 31, 2015 are as follows (in thousands):

	Less than 12 Months				12 Months or More				Total
September 30, 2016	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
State and political subdivisions	$	9,395	$	33	$	—	$	—	$	9,395	$	33
	$	9,395	$	33	$	—	$	—	$	9,395	$	33
	Less than 12 Months				12 Months or More				Total
December 31, 2015	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Residential collateralized mortgage obligations	$	46,373	$	475	$	—	$	—	$	46,373	$	475
Residential mortgage backed securities	27,012		268		—		—		27,012		268
State and political subdivisions	12,283		118		—		—		12,283		118
	$	85,668	$	861	$	—	$	—	$	85,668	$	861

Note 5. Loans and Leases

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

	September 30, 2016			December 31, 2015
Construction and Land Development	$	39,836		$	22,082
Farmland and Agricultural Production	12,985			9,989
Residential 1-4 Family	167,388			135,864
Multifamily	31,880			34,272
Commercial Real Estate	419,958			381,098
Commercial and Industrial	274,889			179,623
Leases, net	739			—
Consumer and other	9,286			9,417
	956,961			772,345
Net deferred loan fees	(6		)	(26		)
Allowance for loan losses	(12,284		)	(11,741		)
	$	944,671		$	760,578

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, 2016 and December 31, 2015 (in thousands):

September 30, 2016	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	$	38,587	$	164	$	—	$	—	$	38,751	$	1,085	$	39,836
Farmland and Agricultural Production	12,985		—		—		—		12,985		—		12,985
Residential 1-4 Family	166,551		12		—		—		166,563		825		167,388
Multifamily	31,880		—		—		—		31,880		—		31,880
Commercial Real Estate
Retail	97,689		—		—		—		97,689		—		97,689
Office	53,848		—		—		—		53,848		—		53,848
Industrial and Warehouse	74,600		—		—		—		74,600		—		74,600
Health Care	28,737		—		—		—		28,737		—		28,737
Other	163,042		568		25		91		163,726		1,358		165,084
Commercial and Industrial	269,734		38		—		—		269,772		5,117		274,889
Leases, net	739		—		—		—		739		—		739
Consumer and other	9,236		50		—		—		9,286		—		9,286
Total	$	947,628	$	832	$	25	$	91	$	948,576	$	8,385	$	956,961

December 31, 2015	Current		30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due and Still Accruing		Total Accruing Loans		Non-accrual Loans		Total Loans
Construction and Land Development	$	21,885	$	—	$	197	$	—	$	22,082	$	—	$	22,082
Farmland and Agricultural Production	9,989		—		—		—		9,989		—		9,989
Residential 1-4 Family	135,632		182		—		—		135,814		50		135,864
Multifamily	34,272		—		—		—		34,272		—		34,272
Commercial Real Estate
Retail	95,570		—		—		—		95,570		—		95,570
Office	55,151		—		—		—		55,151		—		55,151
Industrial and Warehouse	65,536		—		—		—		65,536		—		65,536
Health Care	29,985		—		—		—		29,985		—		29,985
Other	134,762		—		—		—		134,762		94		134,856
Commercial and Industrial	178,289		—		—		67		178,356		1,267		179,623
Consumer and other	9,417		—		—		—		9,417		—		9,417
Total	$	770,488	$	182	$	197	$	67	$	770,934	$	1,411	$	772,345

As part of the ongoing 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. Loans rated a 6 are still on accrual status, while loans rated at 7 are placed on nonaccrual.

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

Loss - An asset, or portion thereof, classified as loss, or risk rated 9, is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This classification does not necessarily mean that an asset has no recovery or salvage value but that it is not practical or desirable to defer writing off this basically worthless asset even though a partial recovery may occur in the future. There was no balance to report at September 30, 2016 and December 31, 2015.

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, 2016 and December 31, 2015 (in thousands):

September 30, 2016	Pass		Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	36,240	$	2,511	$	1,085	$	—	$	39,836
Farmland and Agricultural Production	12,942		—		43		—		12,985
Multifamily	31,101		779		—		—		31,880
Commercial Real Estate
Retail	86,149		2,501		9,039		—		97,689
Office	50,322		—		3,526		—		53,848
Industrial and Warehouse	73,799		801		—		—		74,600
Health Care	28,737		—		—		—		28,737
Other	156,209		4,353		4,514		8		165,084
Commercial and Industrial	264,091		1,759		7,470		1,569		274,889
Leases, net	739		—		—		—		739
Total	$	740,329	$	12,704	$	25,677	$	1,577	$	780,287

September 30, 2016	Performing		Non-performing(*)		Total
Residential 1-4 Family	$	166,563	$	825	$	167,388
Consumer and other	9,286		—		9,286
Total	$	175,849	$	825	$	176,674

December 31, 2015	Pass		Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	19,450	$	2,632	$	—	$	—	$	22,082
Farmland and Agricultural Production	9,989		—		—		—		9,989
Multifamily	33,598		674		—		—		34,272
Commercial Real Estate
Retail	87,665		—		7,905		—		95,570
Office	55,151		—		—		—		55,151
Industrial and Warehouse	64,699		837		—		—		65,536
Health Care	29,985		—		—		—		29,985
Other	128,988		2,664		3,192		12		134,856
Commercial and Industrial	173,324		4,714		355		1,230		179,623
Total	$	602,849	$	11,521	$	11,452	$	1,242	$	627,064

December 31, 2015	Performing		Non-performing*		Total
Residential 1-4 Family	$	135,814	$	50	$	135,864
Consumer and other	9,417		—		9,417
Total	$	145,231	$	50	$	145,281

^(*) Non-performing loans include those on non-accrual status and those that are 90 days or more past due and still on accrual.

The following table provides additional detail of the activity in the allowance for loan losses, by portfolio segment, for the three months ended September 30, 2016 and 2015 (in thousands):

September 30, 2016	Construction and Land Development			Farmland and Agricultural Production			Residential 1-4 Family			Multifamily			Commercial Real Estate			Commercial and Industrial			Leases		Consumer and Other			Total
Allowance for loan losses:
Beginning balance	$	424		$	41		$	1,277		$	141		$	4,988		$	5,125		$	2	$	46		$	12,044
Provision for loan losses	351			4			(9		)	11			(361		)	383			2		2			383
Loans charged-off	—			—			(6		)	—			—			(330		)	—		(4		)	(340		)
Recoveries of loans previously charged-off	18			—			1			—			5			172			—		1			197
Ending balance	$	793		$	45		$	1,263		$	152		$	4,632		$	5,350		$	4	$	45		$	12,284
September 30, 2015
Allowance for loan losses:
Beginning balance	$	798		$	27		$	1,047		$	95		$	6,394		$	3,895		$	—	$	164		$	12,420
Provision for loan losses	(135		)	(2		)	69			(7		)	(760		)	31			—		(9		)	(813		)
Loans charged-off	—			—			—			—			(444		)	(203		)	—		(7		)	(654		)
Recoveries of loans previously charged-off	18			—			41			—			709			29			—		3			800
Ending balance	$	681		$	25		$	1,157		$	88		$	5,899		$	3,752		$	—	$	151		$	11,753

The following table provides additional detail of the activity in the allowance for loan losses, by portfolio segment, for the nine months ended September 30, 2016 and 2015 (in thousands):

September 30, 2016	Construction and Land Development			Farmland and Agricultural Production			Residential 1-4 Family			Multifamily		Commercial Real Estate			Commercial and Industrial			Leases		Consumer and Other			Total
Allowance for loan losses:
Beginning balance	$	813		$	43		$	1,370		$	141	$	4,892		$	4,286		$	—	$	196		$	11,741
Provision for loan losses	(67		)	2			(123		)	11		(279		)	1,482			4		(147		)	883
Loans charged-off	—			—			(15		)	—		—			(1,017		)	—		(7		)	(1,039		)
Recoveries of loans previously charged-off	47			—			31			—		19			599			—		3			699
Ending balance	$	793		$	45		$	1,263		$	152	$	4,632		$	5,350		$	4	$	45		$	12,284
September 30, 2015
Allowance for loan losses:
Beginning balance	$	758		$	459		$	1,199		$	67	$	6,828		$	4,296		$	—	$	298		$	13,905
Provision for loan losses	(130		)	(434		)	(59		)	21		(1,108		)	294			—		(146		)	(1,562		)
Loans charged-off	—			—			(195		)	—		(548		)	(973		)	—		(10		)	(1,726		)
Recoveries of loans previously charged-off	53			—			212			—		727			135			—		9			1,136
Ending balance	$	681		$	25		$	1,157		$	88	$	5,899		$	3,752		$	—	$	151		$	11,753

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, 2016 and December 31, 2015 (in thousands):

September 30, 2016	Construction and Land Development		Farmland and Agricultural Production		Residential 1-4 Family		Multifamily		Commercial Real Estate		Commercial and Industrial		Leases		Consumer and other		Total
Period-ended amount allocated to:
Individually evaluated for impairment	$	—	$	—	$	30	$	—	$	—	$	937	$	—	$	—	$	967
Collectively evaluated for impairment	793		45		1,233		152		4,632		4,413		4		45		11,317
Ending balance	$	793	$	45	$	1,263	$	152	$	4,632	$	5,350	$	4	$	45	$	12,284
Loans:
Individually evaluated for impairment	$	1,084	$	—	$	2,015	$	—	$	7,055	$	7,562	$	—	$	—	$	17,716
Collectively evaluated for impairment	38,752		12,985		165,373		31,880		412,903		267,327		739		9,286		939,245
Ending balance	$	39,836	$	12,985	$	167,388	$	31,880	$	419,958	$	274,889	$	739	$	9,286	$	956,961
December 31, 2015
Period-ended amount allocated to:
Individually evaluated for impairment	$	—	$	—	$	30	$	—	$	—	$	441	$	—	$	—	$	471
Collectively evaluated for impairment	813		43		1,340		141		4,892		3,845		—		196		11,270
Ending balance	$	813	$	43	$	1,370	$	141	$	4,892	$	4,286	$	—	$	196	$	11,741
Loans:
Individually evaluated for impairment	$	—	$	—	$	1,661	$	—	$	4,381	$	3,777	$	—	$	—	$	9,819
Collectively evaluated for impairment	22,082		9,989		134,203		34,272		376,717		175,846		—		9,417		762,526
Ending balance	$	22,082	$	9,989	$	135,864	$	34,272	$	381,098	$	179,623	$	—	$	9,417	$	772,345

The following tables present additional detail regarding impaired loans, segregated by class, as of and for the three and nine months ended September 30, 2016 and year ended December 31, 2015 (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, 2016
							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	$	1,085	$	1,085	$	—	$	543	$	—	$	271	$	—
Farmland and Agricultural Production	—		—		—		—		—		—		—
Residential 1-4 Family	1,593		1,553		—		1,612		15		1,391		30
Multifamily	—		—		—		—		—		—		—
Commercial Real Estate
Retail	3,288		3,288		—		1,644		20		822		81
Office	—		—		—		—		—		165		—
Industrial and Warehouse	—		—		—		—		—		—		—
Health Care	—		—		—		—				—		—
Other	3,831		3,767		—		3,786		14		3,823		43
Commercial and Industrial	5,937		4,888		—		4,090		—		3,652		—
Consumer and other	—		—		—		—		—		—		—
With an allowance recorded:
Construction and Land Development	—		—		—		—		—		—		—
Farmland and Agricultural Production	—		—		—		—		—		—		—
Residential 1-4 Family	461		461		30		462		6		465		17
Multifamily	—		—		—		—		—		—		—
Commercial Real Estate
Retail	—		—		—		—		—		—		—
Office	—		—		—		—		—		—		—
Industrial and Warehouse	—		—		—		—		—		—		—
Health Care	—		—		—		—		—		—		—
Other	—		—		—		—		—		—		—
Commercial and Industrial	2,874		2,674		937		1,926		—		1,434		—
Consumer and other	—		—		—		—		—		—		—
Total	$	19,069	$	17,716	$	967	$	14,063	$	55	$	12,023	$	171

December 31, 2015
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Construction and Land Development	$	—	$	—	$	—	$	—	$	—
Farmland and Agricultural Production	—		—		—		—		—
Residential 1-4 Family	1,232		1,193		—		1,280		61
Multifamily	—		—		—		—		—
Commercial Real Estate
Retail	—		—		—		—		—
Office	494		494		—		502		26
Industrial and Warehouse	—		—		—		1,441		—
Health Care	—		—		—		—		—
Other	3,952		3,887		—		5,015		127
Commercial and Industrial	3,331		3,131		—		3,640		130
Consumer and other	—		—		—		4		—
With an allowance recorded:
Construction and Land Development	—		—		—		—		—
Farmland and Agricultural Production	—		—		—		—		—
Residential 1-4 Family	468		468		30		473		23
Multifamily	—		—		—		—		—
Commercial Real Estate
Retail	—		—		—		—		—
Office	—		—		—		—		—
Industrial and Warehouse	—		—		—		—		—
Health Care	—		—		—		—		—
Other	—		—		—		64		—
Commercial and Industrial	1,109		646		441		491		—
Consumer and other	—		—		—		—		—
Total	$	10,586	$	9,819	$	471	$	12,910	$	367

During the nine months ended September 30, 2016, there was one troubled debt restructurings added as a result of the payment of real estate taxes. There were no troubled debt restructurings added during the nine months ended September 30, 2015.

Troubled debt restructurings that were accruing were $4.2 million and $2.7 million as of September 30, 2016 and December 31, 2015, respectively. Troubled debt restructurings that were non-accruing were $75,000 and $94,000 as of September 30, 2016 and December 31, 2015.

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

	Nine months ended September 30,
	2016
	Recorded Investment			Number of Loans
Balance, beginning	$	2,832		6
Additions to troubled debt restructurings	2,006			1
Removal of troubled debt restructurings	(519		)	(2	)
Charge-off related to troubled debt restructurings	—			—
Transfers to other real estate owned	—			—
Repayments and other reductions	(55		)	—
Balance, ending	$	4,264		5

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

Note 6. Deposits

The composition of interest-bearing deposits was as follows (in thousands):

	September 30, 2016		December 31, 2015
NOW and money market accounts	$	418,910	$	336,197
Savings	61,399		36,207
Time deposit certificates of $250,000 or more	111,384		69,961
Time deposit certificates of $100,000 to $250,000	123,917		127,091
Other time deposit certificates	103,379		100,472
	$	818,989	$	669,928

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

	September 30, 2016		December 31, 2015
NOW and money market accounts	$	35,001	$	35,271
Time deposit certificates	42,842		11,874
	$	77,843	$	47,145

Note 7. Other Borrowed Funds

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

	September 30, 2016		December 31, 2015
Securities sold under agreements to repurchase	$	24,561	$	25,069
Federal Home Loan Bank Advances
Maturity dates, fixed interest rate
Matures January 6, 2016, 0.28%	—		11,000
Matures January 4, 2016, 0.16%	—		5,000
Matures October 13, 2016, 0.32%	9,000		—
Matures November 4, 2016, 0.40%	6,000		—
Total Federal Home Loan Bank Advances	15,000		16,000
Secured borrowings	7,018		11,946
	$	46,579	$	53,015

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

A collateral pledge agreement exists whereby at all times, the Bank must keep on hand, free of all other pledges, liens, and encumbrances, commercial real estate loans, first mortgage loans, and home equity loans with unpaid principal balances aggregating no less than 133% for first mortgage loans and 200% for home equity loans of the outstanding secured advances from the Federal Home Loan Bank of Chicago (“FHLB”).  The Bank had $383.0 million and $338.0 million of loans pledged as collateral for FHLB advances as of September 30, 2016 and December 31, 2015, respectively. There were $15.0 million and $16.0 million in advances outstanding at September 30, 2016 and December 31, 2015, respectively. All FHLB borrowings were repaid on their maturity dates.

On June 29, 2015, the Company entered into a credit agreement with an unaffiliated bank for two credit facilities (secured borrowings). The credit facilities include a $4.0 million revolving line of credit, which had no balance at September 30, 2016 and a term loan with a balance of $7.0 million.  The revolving line matures in 2020 and the term loan matures in 2021. The credit facilities have an annual interest rate of 30 day LIBOR plus 2.25%, which was 2.69% at September 30, 2016.  The credit facilities are collateralized by the stock of the Bank. 

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 $186.4 million and $100.1 million of loans pledged as collateral under these agreements as of September 30, 2016 and December 31, 2015, respectively. There were no borrowings outstanding at September 30, 2016 and December 31, 2015.

Note 8. Income Taxes

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

	Nine months ended September 30,
	2016		2015
Current	$	190	$	108
Deferred	2,776		3,419
	$	2,966	$	3,527

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,
	2016			2015
Federal income tax at statutory rate	$	3,987		$	3,648
Increase (decrease) due to:
Federal tax exempt	(577		)	(419		)
State income tax, net of federal benefit	583			533
Benefit of income taxed at lower rate	(114		)	(104		)
Tax exempt income	(11		)	(24		)
Cash surrender value of life insurance	(155		)	(33		)
Bargain purchase gain	(652		)	—
Other	(95		)	(74		)
	$	2,966		$	3,527

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

	September 30, 2016			December 31, 2015
Deferred tax assets:
Allowance for loan losses	$	4,699		$	4,169
Merger expenses	186			140
Organization expenses	205			226
Net operating losses	311			3,774
Contribution carryforward	9			5
Restricted stock	222			—
Non-qualified stock options	715			644
Foreclosed assets	282			315
Tax credits	396			334
Other	203			412
	7,228			10,019
Deferred tax liabilities:
Depreciation	(1,138		)	(186		)
Core deposit intangible	(305		)	—
Unrealized gains on securities available for sale	(2,132		)	(642		)
	(3,575		)	(828		)
Net deferred tax asset	$	3,653		$	9,191

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. As of September 30, 2016, the Company did not have a valuation allowance against the net deferred tax assets.

The Company had a federal net operating loss carryforward of $736,000 and $9.3 million at September 30, 2016 and December 31, 2015, respectively, which could be used to offset future regular corporate federal income tax. The net operating loss carryforward expires during the December 31, 2033 fiscal tax year. The Company had an Illinois net operating loss carryforward of $1.1 million and $11.1 million at September 30, 2016 and December 31, 2015, respectively, that could be used to offset future regular corporate state income tax. This Illinois net operating loss carryforward will expire during the December 31, 2028 fiscal tax year.

Note 9. 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 allowed 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 were reserved for the granting of awards.

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 allowed for the granting of awards including nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, stock awards and cash incentive awards. This plan was amended in December 2014 to increase the number of shares authorized for delivery by 900,000 shares. As a result, under this plan, 1,000,000 shares of Company common stock were reserved for the granting of awards.

On May 19, 2016, the Company adopted the First Community Financial Partners, Inc. 2016 Equity Incentive Plan (the “2016 Equity Incentive Plan”).  The 2016 Equity Incentive Plan allows for the grant of awards including nonqualified stock options, incentive stock options, stock appreciation rights, stock awards, and cash incentive awards. This plan allows for a maximum of 2,000,000 shares of the Company common stock have been reserved for the granting of awards. The 2016 Equity Incentive Plan replaced the 2008 Equity Incentive Plan and the 2013 Equity Incentive Plan, and the Company will not make any new award grants under the prior plans.

The following table summarizes data concerning stock options (aggregate intrinsic value in thousands):

	Nine months ended,						Year ended,
	September 30, 2016						December 31, 2015
	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value		Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding at beginning of year	1,305,504		$	6.69	$	1,308	1,089,404		$	7.00	$	—
Granted	343,950		7.73		591		217,500		5.20		444
Exercised	(43,720	)	7.08		901		—		—		—
Canceled	—		—		—		—		—		—
Expired	—		—		—		—		—		—
Forfeited	—		—		—		(1,400	)	8.25		—
Outstanding at end of period	1,605,734		$	6.91	$	4,157	1,305,504		$	6.69	$	1,308
Exercisable at end of period	1,243,234		$	7.05	$	4,232	1,088,004		$	6.99	$	864

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, 2016. There was $4.2 million and $1.3 million in intrinsic value of the stock options outstanding at September 30, 2016 and December 31, 2015. 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 $293,000 and $47,000, respectively, of compensation expense related to the stock options for the nine months ended September 30, 2016 and 2015. At September 30, 2016, there was $170,000 in compensation expense to be recognized related to outstanding stock options.

Information pertaining to options outstanding at September 30, 2016 is as follows:

Exercise Prices	Number Outstanding	Weighted Average Remaining Life (yrs)	Number Exercisable
$5.00	364,376	2.79	364,376
$5.20	217,500	8.26	72,500
$5.53	6,000	3.59	6,000
$6.25	25,000	4.03	25,000
$7.24	217,500	9.26	—
$7.50	405,380	0.82	405,380
$8.00	4,000	2.96	4,000
$8.58	126,450	9.76	126,450
$9.25	239,528	1.63	239,528
	1,605,734		1,243,234

No options vested during the three or nine months ended September 30, 2016.

The Company grants restricted stock units to select officers and directors within the organization under its 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 January 2016, restricted stock units were issued to directors and participants of a long term incentive plan, with certain performance conditions for a minimum of 52,301 shares, and up to a maximum of 131,948 shares. These performance conditions are expected to be met by the end of 2016 and the expense related to these awards will be recognized over the year.

The Company recognized compensation expense of $607,000 and $716,000, respectively, for the nine months ended September 30, 2016 and 2015, related to the restricted stock units. Total unrecognized compensation expense related to restricted stock grants was approximately $270,000 as of September 30, 2016.

The following is a summary of nonvested restricted stock units:

	September 30, 2016
	Number of Shares		Weighted Average Grant Date Fair Value
Nonvested shares, at beginning of year	25,000		$	5.14
Granted	—		—
Vested	(11,666	)	4.73
Canceled	—		—
Forfeited	—		—
Nonvested shares, end of period	13,334		$	5.50

Note 10. Concentrations, Commitments and Contingencies

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

The Company conducts substantially all of its lending activities in Will, Grundy, DuPage, Cook and Kane counties in Illinois and their surrounding communities. Loans granted to businesses are primarily secured by business assets, investment real estate, owner-occupied real estate or personal assets of commercial borrowers. Loans to individuals are primarily secured by personal residences or other personal assets. Since the Company’s borrowers and its loan collateral have geographic concentration in its primary market area, the Company could have exposure to declines in the local economy and real estate market. However, management believes that the diversity of its customer base and local economy, its knowledge of the local market, and its proximity to customers limits the risk of exposure to adverse economic conditions.

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

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

A summary of the Company’s commitments is as follows (in thousands):

	September 30, 2016		December 31, 2015
Commitments to extend credit	$	269,551	$	179,517
Standby letters of credit	10,492		10,353
Performance letters of credit	2,357		1,088
	$	282,400	$	190,958

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

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

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

Note 11. Capital and Regulatory Matters

The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial results and condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

As of September 30, 2016, the Bank was well capitalized under the regulatory framework for prompt corrective action. Currently, to be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, common equity tier 1 capital, and Tier 1 leverage ratios as set forth in the following table. Bank regulators can modify capital requirements as part of their examination process.

In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”).  The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally non-public bank holding companies with consolidated assets of less than $1 billion).  The Basel III Rules not only increased most of the required minimum regulatory capital ratios, but they introduced a new common equity Tier 1 capital ratio and the concept of a capital conservation buffer.  The Basel III Rules also expanded the definition of capital by establishing criteria that instruments must meet to be considered additional Tier 1 capital (Tier 1 capital in addition to common equity) and Tier 2 capital.  A number of instruments that generally qualified as Tier 1 capital will not qualify, or their qualifications will change when the Basel III rules are fully implemented.  The Basel III Rules also permitted banking organizations with less than $15.0 billion in assets to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Company made this one time election in the first quarter of 2015.  The Basel III Rules have maintained the general structure of the current prompt corrective action framework, while incorporating the increased requirements. The prompt corrective action guidelines were also revised to add the common equity Tier 1 capital ratio.  In order to be a “well-capitalized” depository institution under the new regime, a bank and holding company must maintain a common equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more.  The Company and Bank became subject to the new Basel III Rules on January 1, 2015, with phase-in periods for many of the changes.  Management believes, as of September 30, 2016 and December 31, 2015, the Company and the Bank met all capital adequacy requirements to which they were subject.

							As of September 30, 2016
	September 30, 2016			December 31, 2015			For Capital Adequacy Purposes With Capital Conservation buffer			Regulatory Minimum To Be Well Capitalized under Prompt Corrective Action Provisions
	Ratio		Amount	Ratio		Amount	Ratio		Amount	Ratio		Amount
Bank capital ratios:
Total capital to risk-weighted assets	13.69	%	140,047	15.79	%	133,247	8.625	%	88,215	10.00	%	102,279
Tier 1 capital to risk weighted assets	12.49	%	127,763	14.54	%	122,664	6.625	%	67,760	8.00	%	81,823
Tier 1 common equity to risk-weighted assets	12.49	%	127,763	14.54	%	122,664	5.125	%	52,418	6.50	%	66,481
Tier 1 leverage to average assets	10.52	%	127,763	11.71	%	122,664	4.00	%	48,563	5.00	%	60,704
Company capital ratios:
Total capital to risk-weighted assets	13.52	%	138,642	14.69	%	124,159	8.625	%	88,415	N/A		N/A
Tier 1 capital to risk weighted assets	10.83	%	111,058	11.62	%	98,276	6.625	%	67,913	N/A		N/A
Tier 1 common equity to risk-weighted assets	10.83	%	111,058	11.62	%	98,276	5.125	%	52,536	N/A		N/A
Tier 1 leverage to average assets	9.15	%	111,058	9.36	%	98,276	4.00	%	48,593	N/A		N/A

Under the Illinois Banking Act, Illinois-chartered banks generally may not pay dividends in excess of their net profits, after first deducting their losses (including any accumulated deficit) and provision for loan losses. The payment of dividends by any bank is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. Moreover, the Federal Deposit Insurance Corporation (“FDIC”) prohibits the payment of any dividends by a bank if the FDIC determines such payment would constitute an unsafe or unsound practice.

Note 12. Fair Value Measurements

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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

Financial Instruments Recorded at Fair Value on a Recurring Basis

Securities Available for Sale: The fair value of the Company’s securities available for sale is determined using Level 2 inputs from independent pricing services. Level 2 inputs consider observable data that may include dealer quotes, market spread, cash

flows, treasury yield curve, trading levels, credit information and terms, among other factors. Certain state and political subdivision securities are not valued based on observable transactions and are, therefore, classified as Level 3.

Derivatives: The Bank provides clients with interest rate swap transactions and offset the transactions with interest rate swap transactions with another financial institution as a means of providing loan terms agreeable to both parties. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative and classified as Level 2. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including LIBOR rate curves.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

September 30, 2016	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:
Residential collateralized mortgage obligations	$	57,091	$	—	$	57,091	$	—
Residential mortgage backed securities	26,408		—		26,408		—
State and political subdivisions	104,563		—		103,059		1,504
Derivative financial instruments	73		—		73		—
Financial Liabilities
Derivative financial instruments	73		—		73		—
December 31, 2015
Financial Assets
Securities Available for Sale:
Government sponsored enterprises	$	16,409	$	—	$	16,409	$	—
Residential collateralized mortgage obligations	62,364		—		62,364		—
Residential mortgage backed securities	28,291		—		28,291		—
State and political subdivisions	98,540		—		97,036		1,504
Derivative financial instruments	95		—		95		—
Financial Liabilities
Derivative financial instruments	95		—		95		—

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, 2016. 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, 2015	$	1,504
Total gains or losses (realized/unrealized) included in other comprehensive income
Included in earnings	—
Purchases	—
Paydowns and maturities	—
Transfers in and/or out of Level 3	—
Ending balance, September 30, 2016	$	1,504
Beginning balance, December 31, 2014	$	1,514
Total gains or losses (realized/unrealized) included in other comprehensive income	(9		)
Included in earnings	—
Purchases	—
Paydowns and maturities	—
Transfers in and/or out of Level 3	—
Ending balance, September 30, 2015	$	1,505

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, 2016	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets
Mortgage loans held for sale	$	1,331	$	—	$	—	$	1,331
Impaired loans	16,749		—		—		16,749
Foreclosed assets	725		—		—		725
December 31, 2015
Financial Assets
Mortgage loans held for sale	$	400	$	—	$	—	$	400
Impaired loans	9,348		—		—		9,348
Foreclosed assets	5,487		—		—		5,487

The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Discount Range
Assets
September 30, 2016
Mortgage loans held for sale	$	1,331	Secondary market pricing	Selling costs	—
Impaired loans	16,749		Appraisal of Collateral	Appraisal adjustments Selling costs	10% to 25%
Foreclosed assets	725		Appraisal of Collateral	Selling costs	10.00%
December 31, 2015
Mortgage loans held for sale	400		Secondary market pricing	Selling costs	—
Impaired loans	9,348		Appraisal of Collateral	Appraisal adjustments Selling costs	10% to 25%
Foreclosed assets	5,487		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, 2016 and December 31, 2015, approximately $2.6 million, or 26%, and $3.1 million, or 32%, of impaired loans were evaluated for impairment using appraisals performed within twelve months of these dates, respectively.

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

Foreclosed assets: Foreclosed assets upon initial recognition are measured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset. Fair values are generally based on third party appraisals of the property resulting in Level 3 classification. The appraised value is discounted by 10% for estimated selling costs which includes broker fees and closing costs and appraisals are obtained annually.

Disclosures about Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. Fair value is determined under the framework established by Fair Value Measurements, based upon criteria noted above. Certain financial instruments and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value at the Company. The methodologies for measuring fair value of financial assets and financial liabilities that are measured at fair value on a recurring or nonrecurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below.

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

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

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

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

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

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

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

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

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

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

The estimated fair values of the Company’s financial instruments are as follows as of September 30, 2016 (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	$	21,622	$	21,622	$	21,622	$	—	$	—
Federal funds sold	550		550		550		—		—
Interest-bearing deposits in banks	33,349		33,349		33,349		—		—
Securities available for sale	188,062		188,062		—		186,558		1,504
Nonmarketable equity securities	3,959		3,959		—		—		3,959
Mortgage loans held for sale	1,331		1,331		—		—		1,331
Loans, net	944,671		930,266		—		—		930,266
Accrued interest receivable	3,255		3,255		3,255		—		—
Derivative financial instruments	73		73		—		73		—
Financial liabilities:
Non-interest bearing deposits	246,262		246,262		246,262		—		—
Interest-bearing deposits	818,989		806,285		475,617		—		330,668
Other borrowed funds	46,579		46,274		46,274		—		—
Subordinated debt	15,300		16,228		—		—		16,228
Accrued interest payable	393		393		393		—		—
Derivative financial instruments	73		73		—		73		—

The estimated fair values of the Company’s financial instruments are as follows as of December 31, 2015 (in thousands):

	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and due from banks	$	10,699	$	10,699	$	10,699	$	—	$	—
Interest-bearing deposits in banks	7,406		7,406		7,406		—		—
Securities available for sale	205,604		205,604		—		204,100		1,504
Nonmarketable equity securities	1,367		1,367		—		—		1,367
Mortgage loans held for sale	400		400		—		—		400
Loans, net	760,578		760,159		—		—		760,159
Accrued interest receivable	3,106		3,106		3,106		—		—
Derivative financial instruments	95		95		—		95		—
Financial liabilities:
Non-interest bearing deposits	196,063		196,063		196,063		—		—
Interest-bearing deposits	669,928		663,174		372,404		—		290,770
Other borrowed funds	53,015		53,015		53,015		—		—
Subordinated debt	15,300		15,656		—		—		15,656
Accrued interest payable	545		545		545		—		—
Derivative financial instruments	95		95		—		95		—

Note 13. 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, 2016 and December 31, 2015, there were $1.2 million and $1.3 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 $73,000 and $95,000 as of September 30, 2016 and December 31, 2015, 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 $14,000 and $28,000 during the three months ended September 30, 2016 and September 30, 2015, respectively.

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

The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this report. This report may contain certain forward-looking statements, such as discussions of the Company’s pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties, including those described in Item 1A. Risk Factors and other sections of the Company’s December 31, 2015 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 national and international economic conditions as well as those in the Company’s market area, legislative/regulatory changes, including the rules adopted by the U.S. Federal banking authorities to implement the Basel III capital accords, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System, the Company’s success in raising capital, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, system failure or breaches of our network security, accounting principles, policies and guidelines, and unexpected results of acquisitions (including the acquisition of Mazon State Bank), which may include failure to realize the anticipated benefits of such acquisitions and the possibility that transaction costs may be greater than anticipated. Furthermore, forward-looking statements speak only as of the date they are made. Except as required under the federal securities laws or the rules and regulations of the SEC, we do not undertake any obligation to update or review any forward-looking information, whether as a result of new information, future events or otherwise.

Overview

First Community, an Illinois corporation, is the holding company for the Bank. Through the Bank, we provide a full range of financial services to individuals and corporate clients.

The Bank has banking centers located at 2801 Black Road, Joliet, Illinois, 24 West Gartner Road, Suite 104, Naperville, Illinois, 25407 South Bell Road, Channahon, Illinois, 14150 South U.S. Route 30, Plainfield, Illinois, 13901 South Bell Road, Homer Glen, Illinois, 7020 South County Line Road, Burr Ridge, Illinois, 606 Depot Street, Mazon, Illinois, 130 North Washington Street, Braidwood, Illinois, and 2315 E. Division, Coal City, Illinois.

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

Merger Transaction

On July 1, 2016, the Company completed its acquisition of Mazon State Bank through the merger of Mazon State Bank with and into the Bank. In connection with the merger, the Bank paid aggregate merger consideration of $8.5 million in cash.

The purpose of the acquisition was for strategic reasons beneficial to the Company. The acquisition is consistent with its growth plans to expand into the Grundy County market, diversify its loan portfolio, and expand its core deposit base. The Company believes it is well-positioned to achieve stronger financial performance and enhance shareholder value through synergies of the combined operations of the Bank and Mazon State Bank.

For additional information on this merger, see Note 2. “Acquisition” to our unaudited consolidated financial statements.

Financial Results

Net income for the quarter ended September 30, 2016 was $4.1 million, or $0.24 per diluted share, compared with $2.9 million, or $0.17 per diluted share, for the quarter ended September 30, 2015. Net income for the nine months ended September 30, 2016 was $8.4 million, or $0.48 per diluted share, compared with $6.9 million, or $0.40 per diluted share for the nine months ended September 30, 2015. Earnings for the year to date 2016 compared to the same period in 2015 reflected year-over-year growth in net interest income, offset by growth in expenses related to the addition of six commercial bankers and one leasing officer. Growth in noninterest expenses reflects of merger costs and additional staffing expenses in connection with the acquisition of Mazon State Bank. Net income for the third quarter of 2016 was positively impacted by a $1.9 million bargain purchase gain related to the acquisition of Mazon State Bank.

FINANCIAL SUMMARY
	Three months ended,
	September 30, 2016			June 30, 2016		March 31, 2016		December 31, 2015			September 30, 2015
Interest income:	(In thousands, except per share data)(Unaudited)
Loans, including fees	$	10,229		$	9,024	$	8,508	$	8,401		$	8,218
Securities	1,041			1,042		1,101		1,117			1,103
Federal funds sold and other	43			21		19		19			19
Total interest income	11,313			10,087		9,628		9,537			9,340
Interest expense:
Deposits	1,081			957		940		986			973
Federal funds purchased and other borrowed funds	112			119		93		87			98
Subordinated debentures	297			297		297		297			297
Total interest expense	1,490			1,373		1,330		1,370			1,368
Net interest income	9,823			8,714		8,298		8,167			7,972
Provision for loan losses	383			500		—		(515		)	(813		)
Net interest income after provision for loan losses	9,440			8,214		8,298		8,682			8,785
Noninterest income:
Service charges on deposit accounts	289			207		204		190			188
Gain on sale of securities	14			603		—		212			251
Mortgage fee income	169			116		78		96			178
Bargain purchase gain	1,920			—		—		—			—
Other	381			315		273		261			152
Total noninterest income	2,773			1,241		555		759			769
Noninterest expenses:
Salaries and employee benefits	3,812			3,311		3,256		3,004			2,841
Occupancy and equipment expense	568			429		437		494			486
Data processing	700			690		257		203			248
Professional fees	369			375		392		68			342
Advertising and business development	328			262		215		219			217
Losses on sale and writedowns of foreclosed assets, net	1			31		16		109			58
Foreclosed assets expenses, net of rental income	(99		)	60		53		50			(61		)
Other expense	1,380			974		1,310		898			1,005
Total noninterest expense	7,059			6,132		5,936		5,045			5,136
Income before income taxes	5,154			3,323		2,917		4,396			4,418
Income taxes	1,019			1,058		889		1,474			1,471
Net income applicable to common shareholders	$	4,135		$	2,265	$	2,028	$	2,922		$	2,947
Basic earnings per share	$	0.24		$	0.13	$	0.12	$	0.17		$	0.17
Diluted earnings per share	$	0.24		$	0.13	$	0.12	$	0.17		$	0.17

	Nine months ended September 30,
	2016		2015
Interest income:	(dollars in thousands, except per share data)(unaudited)
Loans, including fees	$	27,761	$	24,124
Securities	3,184		3,017
Federal funds sold and other	83		47
Total interest income	31,028		27,188
Interest expense:
Deposits	2,978		2,937
Federal funds purchased and other borrowed funds	324		129
Subordinated debentures	891		1,503
Total interest expense	4,193		4,569
Net interest income	26,835		22,619
Provision for loan losses	883		(1,562		)
Net interest income after provision for loan losses	25,952		24,181
Noninterest income:
Service charges on deposit accounts	700		565
Gain on sale of securities	617		272
Gain on foreclosed assets, net	—		—
Mortgage fee income	363		435
Bargain purchase gain	1,920		—
Other	969		465
	4,569		1,737
Noninterest expenses:
Salaries and employee benefits	10,379		8,535
Occupancy and equipment expense	1,434		1,483
Data processing	1,647		710
Professional fees	1,136		1,134
Advertising and business development	805		633
Losses on sale and writedowns of foreclosed assets, net	14		78
Foreclosed assets expenses, net of rental income	50		80
Other expense	3,663		2,840
	19,128		15,493
Income before income taxes	11,393		10,425
Income taxes	2,966		3,527
Net income	$	8,427	$	6,898
Basic earnings per share	$	0.49	$	0.41
Diluted earnings per share	$	0.48	$	0.40

FINANCIAL SUMMARY
	September 30, 2016		June 30, 2016		March 31, 2016		December 31, 2015		September 30, 2015
Period-End Balance Sheet
(In thousands)(Unaudited)
Assets
Cash and due from banks	$	21,622	$	13,777	$	9,132	$	10,699	$	10,110
Interest-bearing deposits in banks	33,349		19,335		30,558		7,406		21,324
Securities available for sale	188,062		179,517		203,874		205,604		215,827
Mortgage loans held for sale	1,331		711		133		400		—
Leases, net	739		448		—		—		—
Commercial real estate	419,958		410,461		378,304		381,098		368,896
Commercial	274,889		239,038		181,142		179,623		180,674
Residential 1-4 family	167,388		143,908		139,208		135,864		126,316
Multifamily	31,880		30,809		31,511		34,272		30,771
Construction and land development	39,836		30,834		27,798		22,082		19,451
Farmland and agricultural production	12,985		9,235		9,060		9,989		8,984
Consumer and other	9,280		7,924		7,250		9,391		7,963
Total loans	956,216		872,209		774,273		772,319		743,055
Allowance for loan losses	12,284		12,044		11,335		11,741		11,753
Net loans	943,932		860,165		762,938		760,578		731,302
Other assets	57,563		51,409		54,227		55,965		44,869
Total Assets	$	1,246,598	$	1,125,362	$	1,060,862	$	1,040,652	$	1,023,432
Liabilities and Shareholders' Equity
Noninterest bearing deposits	$	246,262	$	203,258	$	204,414	$	196,063	$	174,849
Savings deposits	61,399		40,603		38,481		36,207		34,933
NOW accounts	151,243		103,324		104,136		102,882		101,828
Money market accounts	267,667		238,229		237,873		233,315		232,195
Time deposits	338,680		311,416		294,076		297,524		302,892
Total deposits	1,065,251		896,830		878,980		865,991		846,697
Total borrowings	61,879		114,701		72,237		68,315		72,551
Other liabilities	4,304		2,722		2,855		3,305		4,065
Total Liabilities	1,131,434		1,014,253		954,072		937,611		923,313
Shareholders’ equity	115,164		111,109		106,790		103,041		100,119
Total Shareholders’ Equity	115,164		111,109		106,790		103,041		100,119
Total Liabilities and Shareholders’ Equity	$	1,246,598	$	1,125,362	$	1,060,862	$	1,040,652	$	1,023,432

COMMON STOCK DATA
	2016						2015
	Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter
	(Unaudited)
Market value (1):
End of period	$	9.52	$	8.80	$	8.70	$	7.24	$	6.51
High	9.55		9.10		8.84		7.31		7.00
Low	8.35		8.18		7.00		6.26		6.25
Book value (end of period)	6.68		6.47		6.22		6.05		5.88
Tangible book value (end of period)	6.62		6.47		6.22		6.05		5.88
Shares outstanding (end of period)	17,237,845		17,183,780		17,175,864		17,026,941		17,017,441
Average shares outstanding	17,189,113		17,182,197		17,125,928		16,939,010		16,993,822
Average diluted shares outstanding	17,565,667		17,550,547		17,451,354		17,085,752		17,161,783

(1) The prices shown are as reported on the NASDAQ Capital Market

ASSET QUALITY DATA
	September 30, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015
(Dollars in thousands)(Unaudited)
Loans identified as nonperforming	$	8,385		$	2,622		$	2,146		$	1,411		$	3,117
Other nonperforming loans	91			—			—			67			55
Total nonperforming loans	8,476			2,622			2,146			1,478			3,172
Foreclosed assets	725			2,211			5,231			5,487			4,109
Total nonperforming assets	$	9,201		$	4,833		$	7,377		$	6,965		$	7,281
Allowance for loan losses	$	12,284		$	12,044		$	11,335		$	11,741		$	11,753
Nonperforming assets to total assets	0.74		%	0.43		%	0.70		%	0.67		%	0.71		%
Nonperforming loans to total assets	0.68		%	0.23		%	0.20		%	0.14		%	0.31		%
Allowance for loan losses to nonperforming loans	144.93		%	459.34		%	528.19		%	794.38		%	370.52		%

ALLOWANCE FOR LOAN LOSSES ROLLFORWARD
(Dollars in thousands)(Unaudited)	Three months ended,
	September 30, 2016			June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015
Beginning balance	$	12,044		$	11,335		$	11,741		$	11,753		$	12,420
Charge-offs	340			193			506			133			654
Recoveries	197			402			100			636			800
Net charge-offs	143			(209		)	406			(503		)	(146		)
Provision for loan losses	383			500			—			(515		)	(813		)
Ending balance	$	12,284		$	12,044		$	11,335		$	11,741		$	11,753
Net charge-offs	$	143		$	(209	)	$	406		$	(503	)	$	(146	)
Net chargeoff percentage annualized	0.06		%	(0.11		)%	0.21		%	(0.26		)%	(0.08		)%

OTHER DATA
(Unaudited)
	Three months ended,
	September 30, 2016		June 30, 2016		March 31, 2016		December 31, 2015		September 30, 2015
Return on average assets	1.36	%	0.84	%	0.78	%	1.11	%	1.17	%
Return on average equity	14.50	%	8.36	%	7.68	%	11.48	%	12.01	%
Net interest margin	3.44	%	3.39	%	3.36	%	3.29	%	3.31	%
Average loans to assets	75.50	%	76.55	%	73.63	%	72.12	%	72.37	%
Average loans to deposits	90.92	%	94.16	%	88.00	%	85.95	%	86.63	%
Average noninterest bearing deposits to total deposits	22.51	%	22.75	%	23.35	%	23.45	%	20.79	%
COMPANY CAPITAL RATIOS
(Unaudited)	September 30, 2016		June 30, 2016		March 31, 2016		December 31, 2015		September 30, 2015
Tier 1 leverage ratio	9.15	%	9.77	%	9.72	%	9.36	%	9.39	%
Common equity tier 1 capital ratio	10.83	%	11.26	%	11.94	%	11.62	%	11.57	%
Tier 1 capital ratio	10.83	%	11.26	%	11.94	%	11.62	%	11.57	%
Total capital ratio	13.52	%	14.14	%	14.99	%	14.69	%	14.71	%
Tangible common equity to tangible assets	9.24	%	10.47	%	10.26	%	10.07	%	10.07	%

NON-GAAP MEASURES
Pre-tax pre-provision core income (1)
(In thousands)(Unaudited)
	For the three months ended,
	September 30, 2016			June 30, 2016			March 31, 2016		December 31, 2015			September 30, 2015
Pre-tax net income	$	5,154		$	3,323		$	2,917	$	4,396		$	4,418
Provision for loan losses	383			500			—		(515		)	(813		)
Gain on sale of securities	(14		)	(603		)	—		(212		)	(251		)
Merger related expenses included in professional fees	24			26			100		—			—
Merger related expenses included in data processing fees	363			410			—		—			—
Severances paid in relation to the merger	92			—			—		—			—
Stock options included in other expense	164			—			—		—			—
Bargain purchase gain	(1,920		)	—			—		—			—
Losses on sale and writedowns of foreclosed assets, net	1			31			16		109			58
Foreclosed assets expense, net of rental income	(99		)	60			53		50			(61		)
Pre-tax pre-provision core income	$	4,148		$	3,747		$	3,086	$	3,828		$	3,351

⁽¹⁾  This is a non-GAAP financial measure. In compliance with applicable rules of the SEC, this non-GAAP measure is reconciled to pre-tax net income, which is the most directly comparable GAAP financial measure. The Company’s management believes the presentation of pre-tax pre-provision core income provides investors with a greater understanding of the Company’s operating results, in addition to the results measured in accordance with GAAP.

Results of Operations

Net Interest Income

Net interest income is the largest component of our income, and is affected by the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, interest-bearing deposits in other banks, investment securities, and federal funds sold. Our interest-bearing liabilities include deposits, advances from the FHLB, subordinated debentures, repurchase agreements and other short-term borrowings.

The following tables reflect the components of net interest income for the three and nine months ended September 30, 2016, and 2015

	Three months ended September 30,
	2016						2015
(Dollars in thousands)	Average Balances		Income/ Expense		Yields/ Rates		Average Balances		Income/ Expense		Yields/ Rates
Assets
Loans (1)	$	919,777	$	10,229	4.45	%	$	731,871	$	8,218	4.49	%
Investment securities (2)	199,139		1,041		2.09	%	207,843		1,103		2.12	%
Interest-bearing deposits with other banks	24,580		43		0.70	%	23,790		19		0.32	%
Total earning assets	$	1,143,496	$	11,313	3.96	%	$	963,504	$	9,340	3.88	%
Other assets	74,740						47,787
Total assets	$	1,218,236					$	1,011,291
Liabilities
NOW accounts	$	122,727	$	90	0.29	%	$	98,915	$	64	0.26	%
Money market accounts	260,070		190		0.29	%	234,898		166		0.28	%
Savings accounts	62,179		15		0.10	%	34,447		15		0.17	%
Time deposits	326,860		786		0.96	%	300,476		728		0.97	%
Total interest bearing deposits	771,836		1,081		0.56	%	668,736		973		0.58	%
Securities sold under agreements to repurchase	23,339		10		0.17	%	33,112		11		0.13	%
Secured borrowings	7,752		58		2.99	%	13,406		86		—
Mortgage payable	—		—		—	%	—		—		—	%
FHLB borrowings	42,391		44		0.42	%	1,413		1		0.28	%
Subordinated debentures	15,300		297		7.76	%	15,300		297		7.76	%
Total interest bearing liabilities	860,618		$	1,490	0.69	%	731,967		1,368		0.75	%
Noninterest bearing deposits	239,802						176,040
Other liabilities	3,726						5,117
Total liabilities	$	1,104,146					$	913,124
Total shareholders' equity	$	114,090					$	98,167
Total liabilities and equity	$	1,218,236					$	1,011,291
Net interest income			$	9,823					$	7,972
Interest rate spread					3.27	%					3.13	%
Net interest margin					3.44	%					3.31	%

Footnotes:

⁽¹⁾  Average loans include nonperforming loans

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

	Nine months ended September 30,
	2016						2015
(Dollars in thousands)	Average Balances		Income/ Expense		Yields/ Rates		Average Balances		Income/ Expense		Yields/ Rates
Assets
Loans (1)	$	830,640	$	27,761	4.46	%	$	717,473	$	24,124	4.48	%
Investment securities (2)	198,867		3,184		2.13	%	193,212		3,017		2.08	%
Interest-bearing deposits with other banks	16,464		83		0.67	%	16,892		47		0.37	%
Total earning assets	$	1,045,971	$	31,028	3.96	%	$	927,577	$	27,188	3.91	%
Other assets	68,064						45,933
Total assets	$	1,114,035					$	973,510
Liabilities
NOW accounts	$	112,221	$	242	0.29	%	$	87,578	$	139	0.21	%
Money market accounts	242,098		514		0.28	%	220,448		457		0.28	%
Savings accounts	46,357		38		0.11	%	33,074		42		0.17	%
Time deposits	304,138		2,184		0.96	%	303,240		2,299		1.01	%
Total interest bearing deposits	704,814		2,978		0.56	%	644,340		2,937		0.61	%
Securities sold under agreements to repurchase	22,965		27		0.16	%	30,355		25		0.11	%
Secured borrowings	9,175		200		2.91	%	4,569		88		2.57	%
Mortgage payable	—		—		—	%	241		14		7.75	%
FHLB borrowings	33,059		97		0.39	%	1,154		2		0.23	%
Subordinated debentures	15,300		891		7.76	%	24,424		1,503		8.21	%
Total interest bearing liabilities	785,313		$	4,193	0.71	%	705,083		4,569		0.86	%
Noninterest bearing deposits	216,430						168,316
Other liabilities	3,113						4,221
Total liabilities	$	1,004,856					$	877,620
Total shareholders' equity	$	109,179					$	95,890
Total liabilities and equity	$	1,114,035					$	973,510
Net interest income			$	26,835					$	22,619
Interest rate spread					3.25	%					3.05	%
Net interest margin					3.42	%					3.25	%

Footnotes:

⁽¹⁾  Average loans include nonperforming loans

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

The net interest income and margin increases for the three and nine months ended September 30, 2016 compared to the same periods in 2015 were primarily due to increased loan volume as well as the refinancing of our subordinated debentures with lower cost secured borrowings.

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,
	2016 compared to 2015
	Average Volume			Average Rate			Mix			Net Increase (Decrease)
Interest Income
Loans	$	2,103		$	(73	)	$	(19	)	$	2,011
Investment securities	(47		)	(16		)	1			(62		)
Interest bearing deposits with other banks	1			22			1			24
Total interest income	2,057			(67		)	(17		)	1,973
Interest expense
NOW accounts	17			7			2			26
Money market accounts	17			6			1			24
Savings accounts	11			(6		)	(5		)	—
Time deposits	66			(7		)	(1		)	58
Secured borrowings	(36		)	14			(6		)	(28		)
Securities sold under agreements to repurchase	(3		)	3			(1		)	(1		)
FHLB advances	43			—			—			43
Mortgage payable	—			—			—			—
Subordinated debentures	—			—			—			—
Total interest expense	115			17			(10		)	122
Change in net interest income	$	1,942		$	(84	)	$	(7	)	$	1,851

	Nine months ended September 30,
	2016 compared to 2015
	Average Volume			Average Rate			Mix			Net Increase (Decrease)
Interest Income
Loans	$	3,762		$	(108	)	$	(17	)	$	3,637
Investment securities	92			73			2			167
Interest bearing deposits with other banks	—			37			(1		)	36
Total interest income	3,854			2			(16		)	3,840
Interest expense
NOW accounts	39			49			15			103
Money market accounts	57			—			—			57
Savings accounts	17			(15		)	(6		)	(4		)
Time deposits	7			(122		)	—			(115		)
Secured borrowings	88			12			12			112
Securities sold under agreements to repurchase	(6		)	11			(3		)	2
FHLB advances	55			1			39			95
Mortgage payable	(13		)	(14		)	13			(14		)
Subordinated debentures	(560		)	(83		)	31			(612		)
Total interest expense	(316		)	(161		)	101			(376		)
Change in net interest income	$	4,170		$	163		$	(117	)	$	4,216

Provision for Loan Losses

The Company recorded a provision for loan losses of $383,000 and a reversal of $813,000 for the three months ended September 30, 2016 and 2015, respectively. The Company had net charge-offs of $143,000 and net recoveries of $146,000 for the three months ended September 30, 2016 and 2015, respectively. In addition, the Company had net charge-offs of $340,000 and of $590,000 for the nine months ended September 30, 2016 and 2015, respectively. Nonperforming loans increased 473.48% from $1.5 million at December 31, 2015 to $8.5 million at September 30, 2016. The increase in nonperforming loans was primarily the result of the downgrade of two loan relationships during the second and third quarters, offset by paydowns and charge-offs on other nonperforming loans throughout first nine months of the year.

Noninterest Income

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

	Three months ended September 30,									Nine months ended September 30,
(Dollars in thousands)	2016		2015		$ Change			% Change		2016		2015		$ Change			% Change
Service charges on deposit accounts	$	289	$	188	$	101		54	%	$	700	$	565	$	135		24	%
Gain on sale of securities	14		251		(237		)	(94	)%	617		272		$	345		127	%
Mortgage fee income	169		178		(9		)	(5	)%	363		435		$	(72	)	(17	)%
Bargain purchase gain	1,920		—		1,920			100	%	1,920		—		$	1,920		100	%
Other	381		152		229			151	%	969		465		$	504		108	%
Total noninterest income	$	2,773	$	769	$	2,004		261	%	$	4,569	$	1,737	$	2,832		163	%

Service charges on deposits increased for the three and nine months ended September 30, 2016 due to continued growth in noninterest bearing accounts. Noninterest bearing accounts were up $71.4 million at September 30, 2016 since September 30, 2015.

Gain on the sale of securities for the three and nine months ended September 30, 2016, were the result of securities sold during the year in order to fund loan growth. For the three months ended September 30, 2016 gain on sales of securities were lower than the three months ended September 30, 2015 as there were higher sales in the same period in 2015. For the nine months ended September 30, 2016 were higher as a result of there being higher sales volumes in the current year in order to fund loan growth.

Mortgage fee income was down for the three and nine months ended September 30, 2016 compared to the same periods in 2015 as a result of decreased mortgage sale volumes.

The bargain purchase gain of $1.9 million for the three and nine months ended September 30, 2016 was related to the acquisition of Mazon State Bank in the third quarter of 2016.

Other noninterest income increased for the three and nine months ended September 30, 2016 compared to the same periods in 2015 driven primarily by additional ATM fee income from the acquisition of Mazon State Bank and additional bank owned life insurance (“BOLI”) income. BOLI was purchased in the fourth quarter of 2015 by the Bank and also acquired in the acquisition of Mazon State Bank in the third quarter 2016.

Noninterest Expense

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

	Three months ended September 30,											Nine months ended September 30,
(Dollars in thousands)	2016			2015			$ Change			% Change		2016		2015		$ Change			% Change
Salaries and employee benefits	$	3,812		$	2,841		$	971		34	%	10,379		8,535		1,844			22	%
Occupancy and equipment expense	568			486			82			17	%	1,434		1,483		(49		)	(3	)%
Data processing	700			248			452			182	%	1,647		710		937			132	%
Professional fees	369			342			27			8	%	1,136		1,134		2			—	%
Advertising and business development	328			217			111			51	%	805		633		172			27	%
Losses on sale and writedowns of foreclosed assets, net	1			58			(57		)	(98	)%	14		78		(64		)	(82	)%
Foreclosed assets, net of rental income	(99		)	(61		)	(38		)	(62	)%	50		80		(30		)	(38	)%
Other expense	1,380			1,005			$	375		37	%	3,663		2,840		823			29	%
Total noninterest expense	$	7,059		$	5,136		$	1,923		37	%	$	19,128	$	15,493	$	3,635		23	%

Salaries and employee benefit expenses were higher for the three and nine months ended September 30, 2016 compared to the same periods in 2015. This was the result of new hires during 2015 and 2016 primarily in the lending area and the addition of staff from the acquisition of Mazon State Bank during the third quarter of 2016.

Occupancy and equipment expense was higher for the three months ended September 30, 2016, despite being flat for the nine months ended September 30, 2016, as we saw an increase in purchases and depreciation and amortization as a result the recent acquisition.

Data processing expense increased $452,000 and $937,000 for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in 2015 as a part of the costs related to the acquisition.

Professional fees increased slightly for the three months ended September 30, 2016 and remained flat for the nine months ended September 30, 2016 compared to the same periods in 2015, primarily due to lower loan related legal payments during 2016 offset by merger related legal fees.

Advertising and business development expenses were up slightly for the three and nine months ended September 30, 2016 as new advertising conducted during 2016 for new products and as a result of the acquisition.

Losses on sale and writedowns of foreclosed assets, net, were lower in the current year for the three and nine months, as a result of lower discounts taken on the properties sold during 2016.

Foreclosed asset expenses were lower for the three and nine months ended September 30, 2016, as a result of reversals of real estate tax accruals related to foreclosed assets.

The increase in other expenses was in relation to the addition of six commercial banking officers and one leasing officer and the related recruitment expenses as well as stock option expense related to the merger in the third quarter 2016.

Income Taxes

The Company recorded income tax expense of $3.0 million and $3.5 million for the three months ended September 30, 2016 and 2015, respectively, and $1.0 million and $1.5 million for the nine months ended September 30, 2016 and 2015, respectively. Net deferred tax assets were $3.7 million and $9.2 million at September 30, 2016 and December 31, 2015, respectively.

Under U.S. GAAP, a valuation allowance against a net deferred tax asset is required to be recognized if it is more-likely-than-not that a deferred tax asset will not be realized. The determination of the realizability of the deferred tax asset is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, forecasts of future income, applicable tax planning strategies and assessments of current and future economic and business conditions. As of September 30, 2016, the Company did not have a valuation allowance against the net deferred tax assets.

The Company had a federal net operating loss carryforward of $736,000 and $9.3 million at September 30, 2016 and December 31, 2015, respectively, which could be used to offset future regular corporate federal income tax. The net operating loss carryforward expires during the December 31, 2033 fiscal tax year. The Company had an Illinois net operating loss carryforward of $1.1 million and $11.1 million at September 30, 2016 and December 31, 2015, respectively, that could be used to offset future regular corporate Illinois state income tax. This Illinois net operating loss carryforward will expire during the December 31, 2028 fiscal tax year.

Financial Condition

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, 2016				December 31, 2015				September 30, 2015
	Amount		% of Total		Amount		% of Total		Amount		% of Total
Construction and Land Development	$	39,836	4	%	$	22,082	3	%	$	19,451	3	%
Farmland and Agricultural Production	12,985		1	%	9,989		1	%	8,984		1	%
Residential 1-4 Family	167,388		17	%	135,864		18	%	126,316		17	%
Multifamily	31,880		3	%	34,272		5	%	30,771		4	%
Commercial Real Estate	419,958		45	%	381,098		49	%	368,896		50	%
Commercial and Industrial	274,889		29	%	179,623		23	%	180,674		24	%
Leases, net	739		—	%	—		—	%	—		—	%
Consumer and other	9,286		1	%	9,417		1	%	8,010		1	%
Total Loans	$	956,961	100	%	$	772,345	100	%	$	743,102	100	%

Total loans increased by $184.6 million during the nine months ended September 30, 2016. Excluding the $32.6 million in loans added through the Mazon State Bank acquisition ($28.2 million of which were residential 1-4 family loans), total organic loan growth was $51.7 million in the third quarter of 2016. The organic loan growth was the result of a strong loan pipeline along with results produced by the addition of six commercial lenders during the first quarter of 2016. New loans originated during the nine months ended September 30, 2016 were primarily in the commercial real estate and commercial and industrial categories.

The contractual maturity distributions of our loan portfolio as of September 30, 2016 are indicated in the tables below:

	Loans Maturities September 30, 2016
(Dollars in thousands)	Within One Year		One Year to Five Years		After Five Years		Total
Construction and Land Development	$	23,293	$	15,081	$	1,462	$	39,836
Farmland and Agricultural Production	2,347		10,616		22		12,985
Residential 1-4 Family	22,371		94,820		50,197		167,388
Multifamily	872		24,927		6,081		31,880
Commercial Real Estate	49,773		220,086		150,099		419,958
Commercial and Industrial	124,874		128,892		21,123		274,889
Leases, net	204		535		—		739
Consumer and other	4,592		4,640		54		9,286
Total	$	228,326	$	499,597	$	229,038	$	956,961

	September 30, 2016
(Dollars in thousands)	Due After One Year
Loans with:
Predetermined interest rates	$	581,002
Floating or adjustable rates	147,633
	$	728,635

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, 2016 and December 31, 2015, the allowance for loan losses was $12.3 million and $11.7 million, respectively. The allowance to total loan percentage declined from 1.58% at September 30, 2015, to 1.28% at September 30, 2016. This decrease has been the result of an improving net charge-off history, which is the starting point for the Company’s allowance for loan losses calculation. In addition, the allowance for loan losses to nonperforming loans decreased from 377.06% at September 30, 2015, to 144.93% at September 30, 2016 as a result of increases in nonperforming loans during 2016.

Charge-offs and recoveries for each major loan category are shown in the table below:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2016			2015			2016			2015
Balance at beginning of period	$	12,044		$	12,420		$	11,741		$	13,905
Charge-offs:
Construction and Land Development	—			—			—			—
Residential 1-4 Family	6			—			16			195
Commercial Real Estate	—			444			—			548
Commercial and Industrial	330			203			1,017			973
Consumer and other	4			7			6			10
Total charge-offs	$	340		$	654		$	1,039		$	1,726
Recoveries:
Construction and Land Development	18			18			47			53
Residential 1-4 Family	1			41			31			213
Commercial Real Estate	5			709			19			726
Commercial and Industrial	172			29			599			135
Consumer and other	1			3			3			9
Total recoveries	$	197		$	800		$	699		$	1,136
Net charge-offs (recoveries)	143			(146		)	340			590
Provision for loan losses	383			(813		)	883			(1,562		)
Allowance for loan losses at end of period	$	12,284		$	11,753		$	12,284		$	11,753
Selected loan quality ratios:
Net charge-offs (recoveries) to average loans	0.05		%	(0.08		)%	0.05		%	0.11		%
Allowance to total loans at end of period	1.28		%	1.58		%	1.28		%	1.58		%
Allowance to nonperforming loans at end of period	144.93		%	377.06		%	144.93		%	377.06		%

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

(Dollars in thousands)	September 30, 2016				December 31, 2015
Balance at end of period applicable to:	Amount		% of Total Loans		Amount		% of Total Loans
Construction and Land Development	$	793	6	%	$	813	7	%
Farmland and Agricultural Production	45		—	%	43		—	%
Residential 1-4 Family	1,263		10	%	1,370		12	%
Multifamily	152		1	%	141		1	%
Commercial Real Estate	4,632		38	%	4,892		42	%
Commercial	5,350		45	%	4,286		37	%
Leases, net	4		—	%	—		—	%
Consumer and other	45		—	%	196		1	%
Total	$	12,284	100	%	$	11,741	100	%

Impaired Loans

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

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

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

There were approximately $8.5 million of nonperforming loans (loans with a nonaccrual status or past due 90 days or more) at September 30, 2016, which were higher than the $1.5 million of nonperforming loans at December 31, 2015. During 2016 two large relationships were moved to nonaccrual and caused the increase over year-end.

There were $4.2 million in troubled debt restructurings accruing interest at September 30, 2016. The increase from year-end was the result of one loan being added to troubled debt restructuring status as a result of the payment of real estate taxes.

Impaired loans were $17.7 million and $9.8 million at September 30, 2016 and December 31, 2015, respectively. Included in impaired loans at September 30, 2016 were $3.1 million in loans with valuation allowances totaling $1.0 million, and $14.6 million in loans without valuation allowances. Included in impaired loans at December 31, 2015 were $1.1 million in loans with valuation allowances totaling $471,000 and $8.7 million in loans without valuation allowances.

The following presents the recorded investment in impaired loans:

	September 30, 2016		December 31, 2015		September 30, 2015
Nonaccrual loans	$	8,385	$	1,411	$	3,117
Accruing loans delinquent 90 days or more	91		67		—
Nonperforming loans	$	8,476	$	1,478	$	3,117
Troubled debt restructurings accruing interest	$	4,189	$	2,738	$	2,758

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, 2016 and December 31, 2015 were approximately $20.2 million and $11.8 million, respectively.  Management believes it has established an adequate allowance for probable loan losses, as appropriate under U.S. GAAP and applicable regulatory guidance.

Investment Securities

Investment securities serve to enhance the overall yield on interest earning assets while supporting interest rate sensitivity and liquidity positions, and as collateral on public funds and securities sold under agreements to repurchase. All securities are classified as “available for sale” as the Company intends to hold the securities for an indefinite period of time, but not necessarily to maturity. Securities available for sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive income, net of the related deferred tax effect. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

The amortized cost and fair value of securities available for sale (in thousands) are as follows:

	September 30, 2016				December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Government sponsored enterprises	$	—	$	—	$	16,284	$	16,409
Residential collateralized mortgage obligations	55,620		57,091		62,701		62,364
Residential mortgage backed securities	26,095		26,408		28,494		28,291
State and political subdivisions	100,881		104,563		96,480		98,540
Total securities available for sale	$	182,596	$	188,062	$	203,959	$	205,604

The decrease in available for sale securities during the nine months ended September 30, 2016 was the result of approximately $55.7 million in securities sold to fund loan growth, offset by the securities acquired from Mazon State Bank as a part of the acquisition.

Securities with a fair value of $101.2 million and $82.2 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, 2016 and December 31, 2015, respectively.

Deposits

Deposits, which include noninterest-bearing demand deposits, NOW and money market accounts, savings deposits and time deposits, are the primary source of the Bank’s funds. The Bank offers a variety of products designed to attract and retain customers, with a primary focus on building and expanding relationships. The Bank 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, 2016				December 31, 2015
	Amount		Percent		Amount		Percent
Noninterest-bearing demand deposits	$	246,262	23	%	$	196,063	23	%
NOW and money market accounts	418,910		39	%	336,197		39	%
Savings	61,399		6	%	36,207		4	%
Time deposit certificates of $250,000 or more	111,384		10	%	69,961		8	%
Time deposit certificates, $100,000 to $250,000	123,917		12	%	127,091		15	%
Other time deposit certificates	103,379		10	%	100,472		11	%
Total	$	1,065,251	100	%	$	865,991	100	%

Total deposits increased $199.3 million, or 23.01%, since December 31, 2015, of which $73.0 million was related to the acquisition of Mazon State Bank. Noninterest bearing demand deposits increased $50.2 million, or 25.60%, since December 31, 2015, of which $34.4 million was related to the acquisition of Mazon State Bank. There was an increase in time deposits of $41.2 million, or 13.83%, to $338.7 million at September 30, 2016, from $297.5 million at December 31, 2015, of which $10.4 million was related to the acquisition of Mazon State Bank. The ratio of time deposits to total deposits decreased slightly from to 34.36% at December 31, 2015 to 31.79% at September 30, 2016 as we to continue to fund our loan growth.

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

	September 30, 2016		December 31, 2015
NOW and money market accounts	$	35,001	$	35,271
Time deposit certificates	42,842		11,874
	$	77,843	$	47,145

The following table sets forth our time deposits segmented by months to maturity and deposit amount (dollars in thousands):

	September 30, 2016
	Time Deposits $250 and Greater		Time Deposits of $100 - $250		Time Deposits of Less than $100		Total
Months to maturity:
Three or less	$	20,223	$	24,818	$	27,651	$	72,692
Over Three to Six	16,815		18,086		27,426		62,327
Over Six to Twelve	29,993		36,519		29,505		96,017
Over Twelve	36,348		44,494		26,802		107,644
Total	$	103,379	$	123,917	$	111,384	$	338,680

Off-Balance Sheet Arrangements

Refer to Note 10 of our Unaudited Consolidated Financial Statements for a description of off-balance sheet arrangements.

Liquidity and Capital Resources

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

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

The following table reflects the average daily outstanding, year-end outstanding, maximum month-end outstanding and weighted average rates paid for each of the categories of short-term borrowings:

	September 30, 2016			December 31, 2015
(Dollars in thousands)
Securities sold under agreements to repurchase:
Balance:
Average daily outstanding	$	23,339		$	30,849
Outstanding at end of period	24,561			25,069
Maximum month-end outstanding	24,561			37,474
Rate:
Weighted average interest rate during the year	0.17		%	0.15		%
Weighted average interest rate at end of the period	0.17		%	0.16		%
FHLB borrowings:
Balance:
Average daily outstanding	$	42,391		$	1,686
Outstanding at end of period	15,000			16,000
Maximum month-end outstanding	15,000			16,000
Rate:
Weighted average interest rate during the year	0.39		%	0.18		%
Weighted average interest rate at end of the period	0.35		%	0.24		%

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, 2016, the Bank was permitted to pay dividends due to having retained earnings of $5.5 million. Dividends of $7.3 million were paid by the Bank to the Company during the nine months ended September 30, 2016 in order to pay down outstanding holding company debt.

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.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total, common equity, Tier 1 capital and Tier 1 capital to risk-weighted assets, and Tier 1 capital to average assets, each as defined in the applicable regulations. Management believes that as of September 30, 2016

and December 31, 2015, the Company and the Bank each met all of their respective capital adequacy requirements. See Note 11 to our Unaudited Consolidated Financial Statements for more information.

Critical Accounting Policies and Estimates

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. When establishing the allowance for loan losses, management categorizes loans into risk categories generally based on the nature of the collateral and the basis of repayment.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to recognize adjustments to its allowance based on their judgments of information available to them at the time of their examinations.

The allowance consists of specific and general components. The specific component relates to loans that are classified as either doubtful or substandard. For such loans that are classified as impaired, an allowance is established when the collateral value, discounted cash flows or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical loss experience adjusted for qualitative factors. These qualitative factors consider local economic trends, concentrations, management experience, and other elements of the Company’s lending operations.

Foreclosed Assets

Assets acquired through loan foreclosure or other proceedings are initially recorded at fair value less estimated selling costs at the date of foreclosure, establishing a new cost basis. After foreclosure, foreclosed assets are held for sale and are carried at the lower of cost or fair value less estimated costs of disposal. Any valuation adjustments required at the date of transfer are charged to the allowance for loan losses. Subsequently, unrealized losses and realized gains and losses on sales are included in other noninterest income. Operating results from foreclosed assets are recorded in other noninterest expense.

Income taxes

Deferred taxes are provided using the liability method. Deferred tax assets are recognized for deductible temporary differences, operating loss and tax credit carryforwards while deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company follows the accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. There were no uncertain tax positions as of September 30, 2016 and December 31, 2015.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk refers to potential losses arising from changes in interest rates. We are exposed to interest rate risk inherent in our lending and deposit taking activities as a financial institution. We offer an extensive variety of financial products to meet the diverse needs of our clients. These products sometimes contribute to interest rate risk for us when product groups do not complement one another. For example, depositors may want short-term deposits while borrower desire long-term loans. Changes in market interest rates may also result in changes in the fair value of our financial instruments, cash flows, and net interest income.

Interest rate risk is comprised of repricing risk, basis risk, yield curve risk and options risk. Repricing risk arises from

differences in the cash flow or repricing between asset and liability portfolios. Basis risk arises when asset and liability

portfolios are related to different market rate indexes, which do not always change by the same amount. Yield curve risk arises

when assets and liability portfolios are related to different maturities on a given yield curve; when the yield curve changes shape, the risk position is altered. Options risk arises from “embedded options” within asset and liability products because some borrowers have the option to prepay their loans when rates fall while some depositors can redeem their certificates of deposit early when rates rise.

We have established an ALCO for the Bank, which is responsible for the Bank's interest rate risk management. We have implemented a sophisticated asset/liability model at the Bank to measure interest rate risk. Interest rate risk measures include earnings simulation, economic value of equity (“EVE”) and gap analysis.

Gap analysis and EVE are static measures that do not incorporate assumptions regarding future business. Gap analysis, while a helpful diagnostic tool, displays cash flows for only a single rate environment. EVE's long-term horizon helps identify changes in optionality and longer-term positions. However, EVE's liquidation perspective does not translate into the earnings-based measures that are the focus of managing and valuing a going concern. Net interest income simulations explicitly measure the exposure to earnings from changes in market rates of interest. Our current financial position is combined with assumptions regarding future business to calculate net interest income under various hypothetical rate scenarios. The Bank's ALCO reviews earnings simulations over the ensuing 12 and 24 months under various interest rate scenarios. Reviewing these various measures provides us with a reasonably comprehensive view of our interest rate risk profile.

The following gap analysis compares the difference between the amount of interest earning assets and interest bearing liabilities subject to repricing over a period of time. A ratio of more than one indicates a higher level of repricing assets over repricing liabilities for the time period. Conversely, a ratio of less than one indicates a higher level of repricing liabilities over repricing assets for the time period.

The table below does not include unrealized gains on investment securities of $5.5 million at September 30, 2016, in rate sensitive assets.

	September 30, 2016
	0-3 Months			3-12 Months			12-60 Months			> 60 Months			Total
Rate Sensitive Assets
Interest-Bearing Deposits with Bank	$	33,349		$	—		$	—		$	—		$	33,349
Fed funds sold	550			—			—			—			550
Investment Securities	3,596			10,454			68,380			100,166			182,596
Loans	345,795			164,753			340,944			89,928			941,420
Non-Marketable Equity Securities	3,959			—			—			—			3,959
Total Rate Sensitive Assets	$	387,249		$	175,207		$	409,324		$	190,094		$	1,161,874
Rate Sensitive Liabilities
NOW Accounts	$	5,338		$	16,014		$	69,394		$	60,497		$	151,243
Money Market Accounts	68,840			81,339			117,488			—			267,667
Savings	7,368			22,103			31,928			—			61,399
Time Deposits	71,413			141,176			118,877			7,214			338,680
Total Interest Bearing Deposits	152,959			260,632			337,687			67,711			818,989
Borrowed Funds	22,885			2,601			17,481			18,912			61,879
Total Rate Sensitive Liabilities	$	175,844		$	263,233		$	355,168		$	86,623		$	880,868
Cumulative Gap Report Summary Information
Rate Sensitive Assets (RSA)	$	387,249		$	562,456		$	971,780		$	1,161,874		$	1,161,874
Rate Sensitive Liabilities (RSL)	175,844			439,077			794,245			880,868			880,868
Cumulative Gap (GAP=RSA-RSL)	211,405			123,379			177,535			281,006			281,006
Total Assets	$	1,246,598
RSA/RSL	220.22		%	128.10		%	122.35		%	131.90		%	131.90		%
RSA/Assets	31.06		%	45.12		%	77.95		%	93.20		%	93.20		%
RSL/Assets	14.11		%	35.22		%	63.71		%	70.66		%	70.66		%
Gap/Assets	16.96		%	9.90		%	14.24		%	22.54		%	22.54		%
Gap/RSA	54.59		%	21.94		%	18.27		%	24.19		%	24.19		%

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s management carried out an evaluation, under the supervision and with the participation of the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934) as of September 30, 2016. Based upon that evaluation, the chief executive officer along with the chief financial officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were effective.

Changes in Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

Other than the risk factors listed below, there have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1A “Risk Factors,” in the Company’s 2015 Annual Report on Form 10-K. Please refer to that section of the Company’s Form 10-K for disclosures regarding the risks and uncertainties related to the Company’s business.

The acquisition of Mazon State Bank, and other potential future acquisitions, could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and adversely affect our financial results.

On March 14, 2016, we entered into the Merger Agreement providing for the acquisition of Mazon State Bank, which closed on July 1, 2016. As part of our business strategy, we may consider acquisitions of other banks or financial institutions or branches, assets or deposits of such organizations. There is no assurance, however, that we will determine to pursue any of these opportunities or that if we determine to pursue them that we will be successful. Acquisitions involve numerous risks, any of which could harm our business, including:

• difficulties in integrating the operations, technologies, products, existing contracts, accounting processes and personnel of the target company and realizing the anticipated synergies of the combined businesses;

• difficulties in supporting and transitioning customers of the target company;

• diversion of financial and management resources from existing operations;

• the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;

• risks of entering new markets or areas in which we have limited or no experience or are outside our core competencies;

• potential loss of key employees, customers and strategic alliances from either our current business or the business of the target company;

• assumption of unanticipated problems or latent liabilities; and

• inability to generate sufficient revenue to offset acquisition costs.

Future acquisitions may involve the issuance of our equity securities as payment or in connection with financing the business or assets acquired, and as a result, could dilute the ownership interests of existing stockholders. In addition, consummating these transactions could result in the incurrence of additional debt and related interest expense, as well as unforeseen liabilities, all of which could have a material adverse effect on our business, results of operations and financial condition. The failure to successfully evaluate and execute acquisitions or otherwise adequately address the risks associated with acquisitions could have a material adverse effect on our business, results of operations and financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

See Exhibit Index

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

First Community Financial Partners, Inc.

	FIRST COMMUNITY FINANCIAL PARTNERS, INC.
Date: November 4, 2016	/s/ Glen L. Stiteley
	Glen L. Stiteley
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

Exhibit Index

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and September 30, 2015; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and September 30, 2015; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2016 and September 30, 2015; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and September 30, 2015; and (vi) Notes to Unaudited Consolidated Financial Statements.