First Community Financial Partners (FCMPE) 10-Q 2017 Q1 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 March 31, 2017

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, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” 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
Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. o

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

There were outstanding 17,814,270 shares of the Registrant’s common stock as of May 1, 2017

FIRST COMMUNITY FINANCIAL PARTNERS, INC.

FORM 10-Q

March 31, 2017

INDEX

		Page
PART I	FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets at March 31, 2017 (Unaudited) and December 31, 2016	2
	Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (Unaudited)	3
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016 (Unaudited)	4
	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2017 and 2016 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (Unaudited)	6
	Notes to Unaudited Consolidated Financial Statements	7
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3	Quantitative and Qualitative Disclosures about Market Risk	45
Item 4	Controls and Procedures	47
PART II	OTHER INFORMATION
Item 1	Legal Proceedings	48
Item 1A	Risk Factors	48
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3	Defaults Upon Senior Securities	48
Item 4	Mine Safety Disclosures	60
Item 5	Other Information	60
Item 6	Exhibits	60
	Signatures	49
	Exhibit Index	50

1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Balance Sheets
	March 31, 2017			December 31, 2016
Assets	(dollars in thousands, except per share data) (March 31, 2017 data is unaudited)
Cash and due from banks	$	12,740		$	16,225
Interest-bearing deposits in banks	13,494			8,548
Securities available for sale	200,758			202,198
Non-marketable equity securities	3,067			3,297
Mortgage loans held for sale	78			1,230
Loans held for sale	—			1,085
Loans and leases, net of allowance for loan losses of $11,951 in 2017; $11,684 in 2016	1,051,881			979,934
Premises and equipment, net	21,948			22,214
Foreclosed assets	915			725
Cash surrender value of life insurance	19,627			19,476
Deferred tax asset, net	5,653			6,613
Accrued interest receivable and other assets	6,608			6,665
Total assets	$	1,336,769		$	1,268,210
Liabilities and Shareholders’ Equity
Liabilities
Deposits
Noninterest bearing	$	261,532		$	247,856
Interest bearing	846,714			835,300
Total deposits	1,108,246			1,083,156
Other borrowed funds	89,298			51,153
Subordinated debt	15,300			15,300
Accrued interest payable and other liabilities	3,161			4,886
Total liabilities	1,216,005			1,154,495
Concentrations, Commitments and Contingencies (Note 10)
First Community Financial Partners, Inc. Shareholders’ Equity
Common stock, $1.00 par value; 60,000,000 shares authorized; 17,774,886 issued and outstanding at March 31, 2017 and 17,242,645 issued and outstanding at December 31, 2016	17,775			17,243
Additional paid-in capital	85,867			83,777
Retained earnings	17,313			13,907
Accumulated other comprehensive loss	(191		)	(1,212		)
Total shareholders' equity	120,764			113,715
Total liabilities and shareholders' equity	$	1,336,769		$	1,268,210
See Notes to Unaudited Consolidated Financial Statements.

2

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Operations
	Three months ended March 31,
	2017		2016
Interest income:	(dollars in thousands, except per share data)(unaudited)
Loans, including fees	$	11,032	$	8,508
Securities	1,134		1,101
Federal funds sold and other	39		19
Total interest income	12,205		9,628
Interest expense:
Deposits	1,211		940
Federal funds purchased and other borrowed funds	69		93
Subordinated debentures	297		297
Total interest expense	1,577		1,330
Net interest income	10,628		8,298
Provision for loan losses	375		—
Net interest income after provision for loan losses	10,253		8,298
Noninterest income:
Service charges on deposit accounts	309		204
Mortgage fee income	116		78
Other	532		273
	957		555
Noninterest expenses:
Salaries and employee benefits	4,222		3,256
Occupancy and equipment expense	475		437
Data processing	420		257
Professional fees	734		392
Advertising and business development	210		215
Losses on sale and writedowns of foreclosed assets, net	—		16
Foreclosed assets expenses, net of rental income	19		53
Other expense	1,358		1,310
	7,438		5,936
Income before income taxes	3,772		2,917
Income taxes	366		889
Net income	$	3,406	$	2,028
Common share data
Basic earnings per common share	$	0.19	$	0.12
Diluted earnings per common share	0.19		0.12
Weighted average common shares outstanding for basic earnings per common share	17,533,867		17,125,928
Weighted average common shares outstanding for diluted earnings per common share	18,213,720		17,451,354
See Notes to Unaudited Consolidated Financial Statements.

3

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
	Three months ended March 31,
	2017			2016
	(in thousands)(unaudited)
Net income	$	3,406		$	2,028
Unrealized holding gains on investment securities	1,673			2,116
Tax effect of realized and unrealized gains and losses on investment securities	(652		)	(824		)
Other comprehensive income, net of tax	1,021			1,292
Comprehensive income	$	4,427		$	3,320
See Notes to Unaudited Consolidated Financial Statements.

4

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
Three months ended March 31, 2017 and 2016
	Common Stock		Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
	(in thousands, except share data)(unaudited)
Balance, December 31, 2015	$	17,027	$	82,211		$	2,800	$	1,003		$	103,041
Net income	—		—			2,028		—			2,028
Other comprehensive income, net of tax	—		—			—		1,292			1,292
Issuance of 129,573 shares of common stock for restricted stock awards and amortization	129		(143		)	—		—			(14		)
Issuance of 3,750 shares of common stock for exercise of warrants	4		4			—		—			8
Reclass of warrants upon redemption of preferred stock, net of amortization	16		83			—		—			99
Tax windfall benefit	—		88			—		—			88
Stock based compensation expense	—		248			—		—			248
Balance, March 31, 2016	$	17,176	$	82,491		$	4,828	$	2,295		$	106,790
Balance, December 31, 2016	$	17,243	$	83,777		$	13,907	$	(1,212	)	$	113,715
Net income	—		—			3,406		—			3,406
Other comprehensive income, net of tax	—		—			—		1,021			1,021
Issuance of 123,801 shares of common stock for restricted stock awards and amortization	124		(233		)	—		—			(109		)
Issuance of 69,539 shares of common stock for exercise of warrants	69		1,823			—		—			1,892
Issuance of 338,901 shares of common stock for exercise of stock options	339		172			—		—			511
Stock based compensation expense	—		328			—		—			328
Balance, March 31, 2017	$	17,775	$	85,867		$	17,313	$	(191	)	$	120,764
See Notes to Unaudited Consolidated Financial Statements.

5

First Community Financial Partners, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
	Three months ended March 31,
	2017			2016
	(in thousands)(unaudited)
Cash Flows From Operating Activities
Net income	$	3,406		$	2,028
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of securities	553			539
Provision for loan losses	375			—
Losses on sales of foreclosed assets	—			16
Net accretion of deferred loan fees	27			87
Depreciation and amortization of premises and equipment	297			336
Increase in cash surrender value of life insurance	(151		)	(142		)
Amortization of core deposit intangible	51			—
Deferred income taxes	308			793
Decrease in mortgage loans held for sale	1,152			267
Net decrease in loans held for sale	1,085			—
Increase (decrease) in accrued interest receivable and other assets	6			(220		)
Increase (decrease) increase in accrued interest payable and other liabilities	569			(269		)
Restricted stock compensation expense	221			203
Stock option compensation expense	107			45
Net cash provided by operating activities	8,006			3,683
Cash Flows From Investing Activities
Net change in interest bearing deposits in banks	(4,946		)	(23,152		)
Activity in available for sale securities:
Purchases	(780		)	—
Maturities, prepayments and calls	3,340			—
Sales	—			3,307
Purchases of non-marketable equity securities	230			—
Net increase in loans	(72,539		)	(2,447		)
Purchases of premises and equipment	(31		)	(109		)
Proceeds from sale of foreclosed assets	—			240
Net cash used in investing activities	(74,726		)	(22,161		)
Cash Flows From Financing Activities
Net increase in deposits	25,090			12,989
Net increase in other borrowings	38,145			3,922
Net cash provided by financing activities	63,235			16,911
Net change in cash and due from banks	(3,485		)	(1,567		)
Cash and due from banks:
Beginning	16,225			10,699
Ending	$	12,740		$	9,132

Supplemental Disclosures of Cash Flow Information
Cash payments for interest	$	1,738	$	1,507
Supplemental Schedule of Noncash Investing and Financing Activities
Transfer of loans to foreclosed assets	190		—
See Notes to Unaudited Consolidated Financial Statements.

6

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 months ended March 31, 2017 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, 2016.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods.  Actual results could differ from those estimates.

Certain prior period amounts have been reclassified to conform to current period presentation.  These reclassifications did not result in any changes to previously reported net income or shareholders’ equity.

Emerging Growth Company Critical Accounting Policy Disclosure

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

Management anticipates that the Company will no longer be considered an emerging growth company, and thus will no longer be eligible to use this extended transition period, after the fiscal year ending December 31, 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 Federal Accounting Standards Board (“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 ASU 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.

7

In March 2016, the FASB issued ASU No. 2016-09, which changes several aspects of the accounting for share-based payment award transactions, including: (1) accounting and cash flow classification for excess tax benefits and deficiencies, (2) forfeitures, and (3) tax withholding requirements and cash flow classification. The standard is effective for public business entities in annual and interim periods in fiscal years beginning after December 15, 2016. The Company adopted ASU 2016-09 during the three months ended March 31, 2017. As a result of the adoption, the Company recognized a $936,000 tax benefit in the Consolidated Statements of Operations for the three months ended March 31, 2017. The impact of the income tax benefit related to ASU No. 2016-09 is treated as a discrete item in the calculation of the year-to-date income tax expense.

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 its consolidated financial statements.

Note 2. Plan of Merger

On February 6, 2017, First Community entered into an Agreement and Plan of Merger with First Busey Corporation (“First Busey”), pursuant to which First Community will merge into First Busey, with First Busey as the surviving corporation (the “Merger”). It is anticipated that the Bank will be merged with and into First Busey’s bank subsidiary, Busey Bank, at a date following the completion of the Merger. At the time of the bank merger, the Bank’s banking offices will become branches of Busey Bank. The Merger is anticipated to be completed in mid-2017, and is subject to the satisfaction of customary closing conditions contained in the Agreement and Plan of Merger, including the approval of the appropriate regulatory authorities and the stockholders of First Community. First Busey has received approval of the Merger from the Board of Governors of the Federal Reserve System (the “Federal Reserve”), contingent on First Busey receiving all other regulatory approvals, including approval from the bank regulators of the bank merger. First Community’s special meeting of stockholders to approve the Merger is scheduled for June 7, 2017. More information about the Merger can be found in First Community’s proxy statement for the special meeting filed with the SEC on May 1, 2017, which will be sent to stockholders of First Community.

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 March 31,
	2017		2016
Net income	$	3,406	$	2,028
Weighted average shares outstanding for basic earnings per common share	17,533,867		17,125,928
Dilutive effect of stock-based compensation and warrants	679,853		325,426
Weighted average shares outstanding for diluted earnings per common share	18,213,720		17,451,354
Basic income per common share	$	0.19	$	0.12
Diluted income per common share	0.19		0.12

8

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):

March 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Residential collateralized mortgage obligations	$	61,206	$	116	$	400	$	60,922
Residential mortgage backed securities	32,751		73		413		32,411
State and political subdivisions	107,115		1,018		708		107,425
	$	201,072	$	1,207	$	1,521	$	200,758
December 31, 2016
Residential collateralized mortgage obligations	$	62,081	$	45	$	709	$	61,417
Residential mortgage backed securities	33,701		97		557		33,241
State and political subdivisions	108,403		515		1,378		107,540
	$	204,185	$	657	$	2,644	$	202,198

Securities with a fair value of $115.3 million and $121.1 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 March 31, 2017 and December 31, 2016, respectively.

The amortized cost and fair value of debt securities available for sale as of March 31, 2017, 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	$	4,060	$	4,082
Over 1 year through 5 years	33,166		33,290
Over 5 years through 10 years	25,012		25,097
Over 10 years	44,877		44,956
Residential collateralized mortgage obligations and mortgage backed securities	93,957		93,333
	$	201,072	$	200,758

There were no realized gains on the sales of securities during the three months ended March 31, 2017 and 2016, respectively.

9

There were $89.2 million and $140.9 million in securities with unrealized losses at March 31, 2017 and December 31, 2016, respectively, and no securities with 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 March 31, 2017 and December 31, 2016 are as follows (in thousands):

	Less than 12 Months				12 Months or More				Total
March 31, 2017	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Residential collateralized mortgage obligations	$	33,242	$	400	$	—	$	—	$	33,242	$	400
Residential mortgage backed securities	19,230		413		—		—		19,230		413
State and political subdivisions	36,683		708		—		—		36,683		708
	$	89,155	$	1,521	$	—	$	—	$	89,155	$	1,521
	Less than 12 Months				12 Months or More				Total
December 31, 2016	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Residential collateralized mortgage obligations	$	52,811	$	709	$	—	$	—	$	52,811	$	709
Residential mortgage backed securities	16,217		557		—		—		16,217		557
State and political subdivisions	71,904		1,378		—		—		71,904		1,378
	$	140,932	$	2,644	$	—	$	—	$	140,932	$	2,644

10

Note 5. Loans and Leases

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

	March 31, 2017			December 31, 2016
Construction and Land Development	$	51,085		$	47,338
Farmland and Agricultural Production	11,892			12,628
Residential 1-4 Family	181,426			175,978
Multifamily	36,040			36,703
Commercial Real Estate	474,035			425,985
Commercial and Industrial	296,309			281,804
Leases, net	3,381			3,290
Consumer and other	9,852			7,967
	1,064,020			991,693
Net deferred loan fees	(188		)	(75		)
Allowance for loan losses	(11,951		)	(11,684		)
	$	1,051,881		$	979,934

The following table presents the contractual aging of the recorded investment in past due and non-accrual loans by class of loans as of March 31, 2017 and December 31, 2016 (in thousands):

March 31, 2017	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	$	51,085	$	—	$	—	$	—	$	51,085	$	—	$	51,085
Farmland and Agricultural Production	11,892		—		—		—		11,892		—		11,892
Residential 1-4 Family	180,756		16		—		—		180,772		654		181,426
Multifamily	36,040		—		—		—		36,040		—		36,040
Commercial Real Estate
Retail	100,650		—		—		—		100,650		3,316		103,966
Office	63,101		—		—		—		63,101		183		63,284
Industrial and Warehouse	81,355		—		—		—		81,355		—		81,355
Health Care	29,322		—		—		—		29,322		—		29,322
Other	191,066		4,411		—		—		195,477		631		196,108
Commercial and Industrial	295,298		349		5		—		295,652		657		296,309
Leases, net	3,381		—		—		—		3,381		—		3,381
Consumer and other	9,783		69		—		—		9,852		—		9,852
Total	$	1,053,729	$	4,845	$	5	$	—	$	1,058,579	$	5,441	$	1,064,020

11

December 31, 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	$	47,338	$	—	$	—	$	—	$	47,338	$	—	$	47,338
Farmland and Agricultural Production	12,628		—		—		—		12,628		—		12,628
Residential 1-4 Family	175,178		27		—		—		175,205		773		175,978
Multifamily	36,703		—		—		—		36,703		—		36,703
Commercial Real Estate
Retail	89,525		—		—		—		89,525		3,525		93,050
Office	62,876		—		—		—		62,876		—		62,876
Industrial and Warehouse	75,351		—		—		—		75,351		—		75,351
Health Care	30,232		—		—		—		30,232		—		30,232
Other	163,732		92		584		—		164,408		68		164,476
Commercial and Industrial	280,282		32		—		—		280,314		1,490		281,804
Leases, net	3,290		—		—		—		3,290		—		3,290
Consumer and other	7,957		10		—		—		7,967		—		7,967
Total	$	985,092	$	161	$	584	$	—	$	985,837	$	5,856	$	991,693

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 March 31, 2017 and December 31, 2016.

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

12

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 March 31, 2017 and December 31, 2016 (in thousands):

March 31, 2017	Pass		Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	50,888	$	197	$	—	$	—	$	51,085
Farmland and Agricultural Production	11,892		—		—		—		11,892
Multifamily	35,400		640		—		—		36,040
Commercial Real Estate
Retail	92,998		—		9,142		1,826		103,966
Office	59,826		—		3,458		—		63,284
Industrial and Warehouse	80,685		670		—		—		81,355
Health Care	29,322		—		—		—		29,322
Other	188,006		2,699		5,397		6		196,108
Commercial and Industrial	285,409		6,480		3,836		584		296,309
Leases, net	3,381		—		—		—		3,381
Total	$	837,807	$	10,686	$	21,833	$	2,416	$	872,742

March 31, 2017	Performing		Non-performing(*)		Total
Residential 1-4 Family	$	180,772	$	654	$	181,426
Consumer and other	9,852		—		9,852
Total	$	190,624	$	654	$	191,278

December 31, 2016	Pass		Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	44,862	$	2,476	$	—	$	—	$	47,338
Farmland and Agricultural Production	12,628		—		—		—		12,628
Multifamily	35,934		769		—		—		36,703
Commercial Real Estate
Retail	81,821		—		9,148		2,081		93,050
Office	59,384		—		3,492		—		62,876
Industrial and Warehouse	74,669		682		—		—		75,351
Health Care	30,232		—		—		—		30,232
Other	157,618		2,898		3,953		7		164,476
Commercial and Industrial	274,578		2,321		3,503		1,402		281,804
Lease, net	3,290		—		—		—		3,290
Total	$	775,016	$	9,146	$	20,096	$	3,490	$	807,748

December 31, 2016	Performing		Non-performing*		Total
Residential 1-4 Family	$	175,205	$	773	$	175,978
Consumer and other	7,967		—		7,967
Total	$	183,172	$	773	$	183,945

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

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The following table provides additional detail of the activity in the allowance for loan losses, by portfolio segment, for the three months ended March 31, 2017 and 2016 (in thousands):

March 31, 2017	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	$	1,549		$	43		$	948		$	254		$	4,496		$	4,343		$	17	$	34		$	11,684
Provision for loan losses	(1,265		)	7			126			157			1,118			221			1		10			375
Loans charged-off	—			—			(26		)	—			(177		)	—			—		(3		)	(206		)
Recoveries of loans previously charged-off	20			—			5			—			6			66			—		1			98
Ending balance	$	304		$	50		$	1,053		$	411		$	5,443		$	4,630		$	18	$	42		$	11,951
March 31, 2016
Allowance for loan losses:
Beginning balance	$	813		$	43		$	1,370		$	141		$	4,892		$	4,286		$	—	$	196		$	11,741
Provision for loan losses	(449		)	(6		)	(126		)	(15		)	(376		)	1,054			—		(82		)	—
Loans charged-off	—			—			(9		)	—			—			(496		)	—		(1		)	(506		)
Recoveries of loans previously charged-off	17			—			27			—			8			48			—		—			100
Ending balance	$	381		$	37		$	1,262		$	126		$	4,524		$	4,892		$	—	$	113		$	11,335

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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 March 31, 2017 and December 31, 2016 (in thousands):

March 31, 2017	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	$	—	$	—	$	29	$	—	$	—	$	38	$	—	$	—	$	67
Collectively evaluated for impairment	304		50		1,024		411		5,443		4,592		18		42		11,884
Ending balance	$	304	$	50	$	1,053	$	411	$	5,443	$	4,630	$	18	$	42	$	11,951
Loans:
Individually evaluated for impairment	$	—	$	—	$	1,161	$	—	$	7,788	$	2,973	$	—	$	—	$	11,922
Collectively evaluated for impairment	51,085		11,892		180,265		36,040		466,247		293,336		3,381		9,852		1,052,098
Ending balance	$	51,085	$	11,892	$	181,426	$	36,040	$	474,035	$	296,309	$	3,381	$	9,852	$	1,064,020
December 31, 2016
Period-ended amount allocated to:
Individually evaluated for impairment	$	—	$	—	$	27	$	—	$	—	$	417	$	—	$	—	$	444
Collectively evaluated for impairment	1,549		43		921		254		4,496		3,926		17		34		11,240
Ending balance	$	1,549	$	43	$	948	$	254	$	4,496	$	4,343	$	17	$	34	$	11,684
Loans:
Individually evaluated for impairment	$	—	$	—	$	1,285	$	—	$	7,267	$	3,912	$	—	$	—	$	12,464
Collectively evaluated for impairment	47,338		12,628		174,693		36,703		418,718		277,892		3,290		7,967		979,229
Ending balance	$	47,338	$	12,628	$	175,978	$	36,703	$	425,985	$	281,804	$	3,290	$	7,967	$	991,693

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The following tables present additional detail regarding impaired loans, segregated by class, as of and for the three months ended March 31, 2017 and the year ended December 31, 2016 (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.

March 31, 2017
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Residential 1-4 Family	$	743	$	704	$	—	$	766	$	1
Commercial Real Estate
Retail	3,963		3,316		—		3,420		—
Office	183		183		—		92		—
Other	4,354		4,289		—		4,016		26
Commercial and Industrial	3,364		2,935		—		2,995		32
With an allowance recorded:
Residential 1-4 Family	457		457		29		458		5
Commercial and Industrial	38		38		38		448		—
Total	$	13,102	$	11,922	$	67	$	12,195	$	64

December 31, 2016
	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	$	—	$	—	$	—	$	217	$	—
Residential 1-4 Family	865		826		—		1,278		61
Commercial Real Estate
Retail	3,995		3,524		—		1,362		—
Other	3,808		3,743		—		3,808		127
Commercial and Industrial	4,504		3,054		—		3,532		130
With an allowance recorded:
Residential 1-4 Family	459		459		27		463		23
Commercial Real Estate
Commercial and Industrial	1,058		858		417		1,319		—
Total	$	14,689	$	12,464	$	444	$	11,979	$	341

During the three months ended March 31, 2017 and 2016, there were no troubled debt restructurings added.

Troubled debt restructurings that were accruing were $2.2 million as of March 31, 2017 and December 31, 2016. Troubled debt restructurings that were non-accruing were $1.9 million and $2.2 million as of March 31, 2017 and December 31, 2016, respectively.

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

	Three months ended March 31,
	2017
	Recorded Investment			Number of Loans
Balance, beginning	$	4,377		7
Additions to troubled debt restructurings	—			—
Removal of troubled debt restructurings	—			—
Charge-off related to troubled debt restructurings	(119		)	—
Transfers to other real estate owned	—			—
Repayments and other reductions	(154		)	—
Balance, ending	$	4,104		7

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

Note 6. Deposits

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

	March 31, 2017		December 31, 2016
NOW and money market accounts	$	459,695	$	443,727
Savings	69,295		64,695
Time deposit certificates of $250,000 or more	82,169		96,421
Time deposit certificates of $100,000 to $250,000	130,491		125,807
Other time deposit certificates	105,064		104,650
	$	846,714	$	835,300

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

	March 31, 2017		December 31, 2016
NOW and money market accounts	$	65,048	$	54,971
Time deposit certificates	31,720		41,169
	$	96,768	$	96,140

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Note 7. Other Borrowed Funds

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

	March 31, 2017		December 31, 2016
Securities sold under agreements to repurchase	$	22,298	$	24,153
Federal Home Loan Bank Advances
Maturity dates, fixed interest rate
Matures January 20, 2017, 0.70%	—		17,000
Matures January 23, 2017, 0.70%	—		10,000
Matures April 3, 2017, 0.75%	12,000		—
Matures April 17, 2017, 0.72%	10,000		—
Matures April 27, 2017, 0.95%	5,500		—
Matures May 11, 2017, 0.96%	3,000		—
Matures May 24, 2017, 0.72%	5,000		—
Matures May 30, 2017, 0.95%	10,500		—
Matures June 7, 2017, 0.96%	15,200		—
Matures June 23, 2017, 0.97%	5,800		—
Total Federal Home Loan Bank Advances	67,000		27,000
	$	89,298	$	51,153

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 $420.2 million and $409.4 million of loans pledged as collateral for FHLB advances as of March 31, 2017 and December 31, 2016, respectively. There were $67.0 million and $27.0 million in advances outstanding at March 31, 2017 and December 31, 2016, respectively. All FHLB borrowings which have matured were repaid on their maturity dates.

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 $212.6 million and $203.7 million of loans pledged as collateral under these agreements as of March 31, 2017 and December 31, 2016, respectively. There were no borrowings outstanding at March 31, 2017 and December 31, 2016.

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Note 8. Income Taxes

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

	Three months ended March 31,
	2017		2016
Current	$	58	$	96
Deferred	308		793
	$	366	$	889

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):

	Three months ended March 31,
	2017			2016
Federal income tax at statutory rate	$	1,320		$	1,021
Increase (decrease) due to:
Federal tax exempt	(215		)	(189		)
State income tax, net of federal benefit	193			149
Benefit of income taxed at lower rate	(38		)	(29		)
Tax exempt income	(2		)	(6		)
Cash surrender value of life insurance	(51		)	(48		)
Excess tax benefit - stock based compensation	(936		)	—
Other	95			(9		)
	$	366		$	889

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

	March 31, 2017			December 31, 2016
Deferred tax assets:
Allowance for loan losses	$	4,675		$	4,570
Merger expenses	178			182
Organization expenses	190			198
Net operating losses	5			5
Contribution carryforward	5			5
Restricted stock	122			362
Non-qualified stock options	525			726
Foreclosed assets	282			282
Other	990			945
	6,972			7,275
Deferred tax liabilities:
Depreciation	(1,156		)	(1,140		)
Core deposit intangible	(286		)	(297		)
Unrealized gains on securities available for sale	123			775
	(1,319		)	(662		)
Net deferred tax asset	$	5,653		$	6,613

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 March 31, 2017, the Company did not have a valuation allowance against the net deferred tax assets.

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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):

	Three months ended,						Year ended,
	March 31, 2017						December 31, 2016
	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value		Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding at beginning of year	1,796,934		$	7.28	$	7,942	1,305,504		$	6.69	$	1,308
Granted	217,500		11.70		250		539,950		8.68		1,629
Exercised	(355,755	)	6.71		2,159		(48,520	)	7.12		222
Canceled	—		—		—		—		—		—
Expired	—		—		—		—		—		—
Forfeited	(1,500	)	10.35		—		—		—		—
Outstanding at end of period	1,657,179		$	7.98	$	7,992	1,796,934		$	7.28	$	7,942
Exercisable at end of period	1,027,679		$	7.05	$	7,063	1,238,434		$	7.05	$	5,764

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 March 31, 2017. There was $8.0 million and $7.9 million in intrinsic value of the stock options outstanding at March 31, 2017 and December 31, 2016. 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 $107,000 and $45,000, respectively, of compensation expense related to the stock options for the three months ended March 31, 2017 and 2016. At March 31, 2017, there was $820,000 in compensation expense to be recognized related to outstanding stock options.

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Information pertaining to options outstanding at March 31, 2017 is as follows:

Exercise Prices	Number Outstanding	Weighted Average Remaining Life (yrs)	Number Exercisable
$5.00	229,376	2.29	229,376
$5.20	197,500	7.76	125,000
$5.53	6,000	3.09	6,000
$6.25	25,000	3.53	25,000
$7.24	207,500	8.76	62,500
$7.50	300,300	0.37	300,300
$8.00	4,000	2.46	4,000
$8.58	46,839	9.26	46,839
$9.25	228,664	1.14	228,664
$10.35	194,500	9.63	—
$11.70	217,500	9.76	—
	1,657,179		1,027,679

217,500 of options vested during the three months ended March 31, 2017.

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 2015 and 2017, 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 were expected to be met by the end of 2017 and the expense related to these awards was recognized over the year.

The Company recognized compensation expense of $221,000 and $203,000, respectively, for the three months ended March 31, 2017 and 2016, related to the restricted stock units. Total unrecognized compensation expense related to restricted stock grants was approximately $700,000 as of March 31, 2017.

The following is a summary of nonvested restricted stock units:

	March 31, 2017
	Number of Shares	Weighted Average Grant Date Fair Value
Nonvested shares, at beginning of year	13,334	$	5.50
Granted	—	—
Vested	—	—
Canceled	—	—
Forfeited	—	—
Nonvested shares, end of period	13,334	$	5.50

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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):

	March 31, 2017		December 31, 2016
Commitments to extend credit	$	301,169	$	262,408
Standby letters of credit	11,556		12,164
Performance letters of credit	2,253		2,253
	$	314,978	$	276,825

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.

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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 March 31, 2017, 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 March 31, 2017 and December 31, 2016, the Company and the Bank met all capital adequacy requirements to which they were subject.

							As of March 31, 2017
	March 31, 2017			December 31, 2016			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	12.21	%	140,967	12.77	%	138,772	9.25	%	106,815	10.00	%	115,476
Tier 1 capital to risk weighted assets	11.17	%	129,016	11.69	%	127,088	7.25	%	83,720	8.00	%	92,381
Tier 1 common equity to risk-weighted assets	11.17	%	129,016	11.69	%	127,088	5.75	%	66,399	6.50	%	75,060
Tier 1 leverage to average assets	10.00	%	129,016	10.10	%	127,088	4.00	%	51,582	5.00	%	64,478
Company capital ratios:
Total capital to risk-weighted assets	12.68	%	146,738	12.99	%	141,451	9.25	%	94,821	N/A		N/A
Tier 1 capital to risk weighted assets	10.33	%	119,487	10.51	%	98,276	7.25	%	74,319	N/A		N/A
Tier 1 common equity to risk-weighted assets	10.33	%	119,487	10.51	%	98,276	5.75	%	58,943	N/A		N/A
Tier 1 leverage to average assets	9.26	%	119,487	9.10	%	98,276	4.00	%	48,593	N/A		N/A

23

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

24

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 March 31, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

March 31, 2017	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	$	60,922	$	—	$	60,922	$	—
Residential mortgage backed securities	32,411		—		32,411		—
State and political subdivisions	107,425		—		105,923		1,502
Derivative financial instruments	143		—		143		—
Financial Liabilities
Derivative financial instruments	143		—		143		—
December 31, 2016
Financial Assets
Securities Available for Sale:
Residential collateralized mortgage obligations	$	61,417	$	—	$	61,417	$	—
Residential mortgage backed securities	33,241		—		33,241		—
State and political subdivisions	107,540		—		106,036		1,504
Derivative financial instruments	62		—		62		—
Financial Liabilities
Derivative financial instruments	62		—		62		—

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 three months ended March 31, 2017. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.

25

The following tables present additional information about assets and liabilities measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value (in thousands):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	State and political subdivisions
Beginning balance, December 31, 2016	$	1,504
Total gains or losses (realized/unrealized) included in other comprehensive income	(2		)
Included in earnings	—
Purchases	—
Paydowns and maturities	—
Transfers in and/or out of Level 3	—
Ending balance, March 31, 2017	$	1,502
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, March 31, 2016	$	1,504

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:

March 31, 2017	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	$	78	$	—	$	—	$	78
Impaired loans	11,855		—		—		11,855
Foreclosed assets	915		—		—		915
December 31, 2016
Financial Assets
Mortgage loans held for sale	$	1,230	$	—	$	—	$	1,230
Impaired loans	12,020		—		—		12,020
Loans held for sale	1,085		—		—		1,085
Foreclosed assets	725		—		—		725

26

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

	Quantitative Information about Level 3 Fair Value Measurements
	Fair Value Estimate		Valuation Techniques	Unobservable Input	Discount Range
Assets
March 31, 2017
Mortgage loans held for sale	$	78	Secondary market pricing	Selling costs	���
Impaired loans	11,855		Appraisal of Collateral	Appraisal adjustments Selling costs	10% to 25%
Foreclosed assets	915		Appraisal of Collateral	Selling costs	10.00%
December 31, 2016
Mortgage loans held for sale	1,230		Secondary market pricing	Selling costs	—
Impaired loans	12,020		Appraisal of Collateral	Appraisal adjustments Selling costs	10% to 25%
Loans held for sale	1,085		Appraisal of Collateral	Selling costs	10% to 25%
Foreclosed assets	725		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 March 31, 2017 and December 31, 2016, approximately $4.6 million, or 38%, 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.

27

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 March 31, 2017 (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	$	12,740	$	12,740	$	12,740	$	—	$	—
Interest-bearing deposits in banks	13,494		13,494		13,494		—		—
Securities available for sale	200,758		200,758		—		199,256		1,502
Nonmarketable equity securities	3,067		3,067		—		—		3,067
Mortgage loans held for sale	78		78		—		—		78
Loans, net	1,051,881		1,049,702		—		—		1,049,702
Accrued interest receivable	3,543		3,543		3,543		—		—
Derivative financial instruments	143		143		—		143		—
Financial liabilities:
Non-interest bearing deposits	261,532		261,532		261,532		—		—
Interest-bearing deposits	846,714		847,449		528,990		—		318,459
Other borrowed funds	89,298		89,133		89,133		—		—
Subordinated debt	15,300		16,185		—		—		16,185
Accrued interest payable	405		405		405		—		—
Derivative financial instruments	143		143		—		143		—

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The estimated fair values of the Company’s financial instruments are as follows as of December 31, 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	$	16,255	$	16,255	$	16,255	$	—	$	—
Interest-bearing deposits in banks	8,548		8,548		8,548		—		—
Securities available for sale	202,198		202,198		—		200,694		1,504
Nonmarketable equity securities	3,297		3,297		—		—		3,297
Mortgage loans held for sale	1,230		1,230		—		—		1,230
Loans held for sale	1,085		1,085		—		—		1,085
Loans, net	979,934		980,290		—		—		980,290
Accrued interest receivable	3,521		3,521		3,521		—		—
Derivative financial instruments	62		62		—		62		—
Financial liabilities:
Non-interest bearing deposits	247,856		247,856		247,856		—		—
Interest-bearing deposits	835,300		836,103		508,422		—		327,681
Other borrowed funds	51,153		51,110		—		—		51,110
Subordinated debt	15,300		16,182		—		—		16,182
Accrued interest payable	566		566		566		—		—
Derivative financial instruments	62		62		—		62		—

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 March 31, 2017 and December 31, 2016, there were $26.8 million and $1.2 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 $143,000 and $62,000 as of March 31, 2017 and December 31, 2016, 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 $81,000 and $0 during the three months ended March 31, 2017 and March 31, 2016, respectively.

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

The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this report. This report may contain certain forward-looking statements, such as discussions of the Company’s pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties, including those described in Item 1A. Risk Factors and other sections of the Company’s December 31, 2016 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 including 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 Federal Reserve, 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 the Merger, including possible termination of the Agreement and Plan of Merger. 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.

On February 6, 2017, First Community entered into an Agreement and Plan of Merger with First Busey, pursuant to which First Community will merge into First Busey, with First Busey as the surviving corporation. It is anticipated that the Bank will be merged with and into First Busey’s bank subsidiary, Busey Bank, at a date following the completion of the Merger. At the time of the bank merger, the Bank’s banking offices will become branches of Busey Bank. The Merger is anticipated to be completed in mid-2017, and is subject to the satisfaction of customary closing conditions contained in the Agreement and Plan of Merger, including the approval of the appropriate regulatory authorities and the stockholders of First Community. First Busey has received approval of the Merger from the Board of Governors of the Federal Reserve, contingent on First Busey receiving all other regulatory approvals, including approval from the bank regulators of the bank merger. First Community’s special meeting of stockholders to approve the Merger is scheduled for June 7, 2017. More information about the Merger can be found in First Community’s proxy statement for the special meeting filed with the SEC on May 1, 2017, which will be sent to stockholders of First Community.

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FINANCIAL SUMMARY
	March 31, 2017		December 31, 2016		September 30, 2016		June 30, 2016		March 31, 2016
Period-End Balance Sheet
(In thousands)(Unaudited)
Assets
Cash and due from banks	$	12,740	$	16,225	$	21,622	$	13,777	$	9,132
Interest-bearing deposits in banks	13,494		8,548		33,349		19,335		30,558
Securities available for sale	200,758		202,198		188,062		179,517		203,874
Mortgage loans held for sale	78		1,230		1,331		711		133
Loans held for sale	—		1,085		—		—		—
Leases, net	3,381		3,290		739		448		—
Commercial real estate	474,035		425,910		419,958		410,461		378,304
Commercial	296,309		281,804		274,889		239,038		181,142
Residential 1-4 family	181,426		175,978		167,388		143,908		139,208
Multifamily	36,040		36,703		31,880		30,809		31,511
Construction and land development	51,085		47,338		39,836		30,834		27,798
Farmland and agricultural production	11,892		12,628		12,985		9,235		9,060
Consumer and other	9,664		7,967		9,280		7,924		7,250
Total loans	1,063,832		991,618		956,216		872,209		774,273
Allowance for loan losses	11,951		11,684		12,284		12,044		11,335
Net loans	1,051,881		979,934		943,932		860,165		762,938
Other assets	57,818		58,990		57,563		51,409		54,227
Total Assets	$	1,336,769	$	1,268,210	$	1,246,598	$	1,125,362	$	1,060,862
Liabilities and Shareholders' Equity
Noninterest bearing deposits	$	261,532	$	247,856	$	246,262	$	203,258	$	204,414
Savings deposits	69,295		64,695		61,399		40,603		38,481
NOW accounts	165,696		160,862		151,243		103,324		104,136
Money market accounts	293,999		282,865		267,667		238,229		237,873
Time deposits	317,724		326,878		338,680		311,416		294,076
Total deposits	1,108,246		1,083,156		1,065,251		896,830		878,980
Total borrowings	104,598		66,419		61,879		114,701		72,237
Other liabilities	3,161		4,920		4,304		2,722		2,855
Total Liabilities	1,216,005		1,154,495		1,131,434		1,014,253		954,072
Shareholders’ equity	120,764		113,715		115,164		111,109		106,790
Total Shareholders’ Equity	120,764		113,715		115,164		111,109		106,790
Total Liabilities and Shareholders’ Equity	$	1,336,769	$	1,268,210	$	1,246,598	$	1,125,362	$	1,060,862

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FINANCIAL SUMMARY
	Three months ended,
Period-End Income Statement	March 31, 2017		December 31, 2016		September 30, 2016			June 30, 2016		March 31, 2016
Interest income:	(In thousands, except per share data)(Unaudited)
Loans, including fees	$	11,032	$	10,663	$	10,229		$	9,024	$	8,508
Securities	1,134		1,033		1,041			1,042		1,101
Federal funds sold and other	39		53		43			21		19
Total interest income	12,205		11,749		11,313			10,087		9,628
Interest expense:
Deposits	1,211		1,150		1,081			957		940
Federal funds purchased and other borrowed funds	69		61		112			119		93
Subordinated debentures	297		297		297			297		297
Total interest expense	1,577		1,508		1,490			1,373		1,330
Net interest income	10,628		10,241		9,823			8,714		8,298
Provision for loan losses	375		183		383			500		—
Net interest income after provision for loan losses	10,253		10,058		9,440			8,214		8,298
Noninterest income:
Service charges on deposit accounts	309		285		289			207		204
Gain on sale of loans	—		9		—			7		—
Gain on sale of securities	—		—		14			603		—
Mortgage fee income	116		214		169			109		78
Bargain purchase gain	—		—		1,920			—		—
Other	532		390		381			315		273
Total noninterest income	957		898		2,773			1,241		555
Noninterest expenses:
Salaries and employee benefits	4,222		4,309		3,812			3,311		3,256
Occupancy and equipment expense	475		548		568			429		437
Data processing	420		267		700			690		257
Professional fees	734		286		369			375		392
Advertising and business development	210		245		328			262		215
Losses on sale and writedowns of foreclosed assets, net	—		—		1			31		16
Foreclosed assets expenses, net of rental income	19		26		(99		)	60		53
Other expense	1,358		1,237		1,380			974		1,310
Total noninterest expense	7,438		6,918		7,059			6,132		5,936
Income before income taxes	3,772		4,038		5,154			3,323		2,917
Income taxes	366		1,358		1,019			1,058		889
Net income applicable to common shareholders	$	3,406	$	2,680	$	4,135		$	2,265	$	2,028
Basic earnings per share	$	0.19	$	0.16	$	0.24		$	0.13	$	0.12
Diluted earnings per share	$	0.19	$	0.15	$	0.24		$	0.13	$	0.12

32

COMMON STOCK DATA
	2017		2016
	First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter
	(Unaudited)
Market value (1):
End of period	$	12.75	$	11.70	$	9.52	$	8.80	$	8.70
High	13.65		12.15		9.55		9.10		8.84
Low	10.70		9.10		8.35		8.18		7.00
Book value (end of period)	6.79		6.59		6.68		6.47		6.22
Tangible book value (end of period)	6.73		6.53		6.62		6.47		6.22
Shares outstanding (end of period)	17,774,886		17,242,645		17,237,845		17,183,780		17,175,864
Average shares outstanding	17,533,867		17,239,897		17,189,113		17,182,197		17,125,928
Average diluted shares outstanding	18,213,720		17,860,017		17,565,667		17,550,547		17,451,354

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

ASSET QUALITY DATA
	March 31, 2017			December 31, 2016			September 30, 2016			June 30, 2016			March 31, 2016
(Dollars in thousands)(Unaudited)
Loans identified as nonperforming	$	5,441		$	5,856		$	8,385		$	2,622		$	2,146
Other nonperforming loans	—			—			91			—			—
Total nonperforming loans	5,441			5,856			8,476			2,622			2,146
Foreclosed assets	915			725			725			2,211			5,231
Total nonperforming assets	$	6,356		$	6,581		$	9,201		$	4,833		$	7,377
Allowance for loan losses	$	11,951		$	11,684		$	12,284		$	12,044		$	11,335
Nonperforming assets to total assets	0.48		%	0.52		%	0.74		%	0.43		%	0.70		%
Nonperforming loans to total assets	0.41		%	0.46		%	0.68		%	0.23		%	0.20		%
Allowance for loan losses to nonperforming loans	219.65		%	199.52		%	144.93		%	459.34		%	528.19		%

ALLOWANCE FOR LOAN LOSSES ROLLFORWARD
(Dollars in thousands)(Unaudited)	Three months ended,
	March 31, 2017			December 31, 2016			September 30, 2016			June 30, 2016			March 31, 2016
Beginning balance	$	11,684		$	12,284		$	12,044		$	11,335		$	11,741
Charge-offs	206			1,363			340			193			506
Recoveries	98			580			197			402			100
Net charge-offs (recoveries)	108			783			143			(209		)	406
Provision for loan losses	375			183			383			500			—
Ending balance	$	11,951		$	11,684		$	12,284		$	12,044		$	11,335
Net charge-offs (recoveries)	$	108		$	783		$	143		$	(209	)	$	406
Net charge-offs (recoveries) percentage annualized	0.04		%	0.32		%	0.06		%	(0.11		)%	0.21		%

33

OTHER DATA
(Unaudited)
	Three months ended,
	March 31, 2017		December 31, 2016		September 30, 2016		June 30, 2016		March 31, 2016
Return on average assets	1.05	%	0.85	%	1.36	%	0.84	%	0.78	%
Return on average equity	11.61	%	9.44	%	14.50	%	8.36	%	7.68	%
Net interest margin	3.50	%	3.42	%	3.44	%	3.39	%	3.36	%
Average loans to assets	78.40	%	77.20	%	75.50	%	76.55	%	73.63	%
Average loans to deposits	92.08	%	90.49	%	90.92	%	94.16	%	88.00	%
Average noninterest bearing deposits to total deposits	23.52	%	23.44	%	22.51	%	22.75	%	23.35	%
COMPANY CAPITAL RATIOS
(Unaudited)	March 31, 2017		December 31, 2016		September 30, 2016		June 30, 2016		March 31, 2016
Tier 1 leverage ratio	9.26	%	9.10	%	9.15	%	9.77	%	9.72	%
Common equity tier 1 capital ratio	10.33	%	10.51	%	10.83	%	11.26	%	11.94	%
Tier 1 capital ratio	10.33	%	10.51	%	10.83	%	11.26	%	11.94	%
Total capital ratio	12.68	%	12.99	%	13.52	%	14.14	%	14.99	%
Tangible common equity to tangible assets	8.95	%	8.88	%	9.24	%	10.47	%	10.26	%

NON-GAAP MEASURES
Pre-tax pre-provision core income (1)
(In thousands)(Unaudited)
	For the three months ended,
	March 31, 2017		December 31, 2016		September 30, 2016			June 30, 2016			March 31, 2016
Pre-tax net income	$	3,772	$	4,038	$	5,154		$	3,323		$	2,917
Provision for loan losses	375		183		383			500			—
Gain on sale of securities	—		—		(14		)	(603		)	—
Merger related employee retention payments	232		—		—			—			—
Merger related expenses included in professional fees	417		—		24			26			100
Merger related expenses included in data processing fees	—		14		363			410			—
Severances paid in relation to the merger	—		—		92			—			—
Stock options included in other expense	—		—		165			—			—
Bargain purchase option	—		—		(1,920		)	—			—
Losses on sale and writedowns of foreclosed assets, net	—		—		1			31			16
Foreclosed assets expense, net of rental income	19		26		(99		)	60			53
Pre-tax pre-provision core income	$	4,815	$	4,261	$	4,149		$	3,747		$	3,086

⁽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.

34

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 months ended March 31, 2017 and 2016:

	Three months ended March 31,
	2017						2016
(Dollars in thousands)	Average Balances		Income/ Expense		Yields/ Rates		Average Balances		Income/ Expense		Yields/ Rates
Assets
Loans (1)	$	1,013,044	$	11,032	4.42	%	$	768,983	$	8,508	4.45	%
Investment securities (2)	203,886		1,134		2.26	%	206,535		1,101		2.14	%
Interest-bearing deposits with other banks	13,566		39		1.17	%	13,690		19		0.56	%
Total earning assets	$	1,230,496	$	12,205	4.02	%	$	989,208	$	9,628	3.91	%
Other assets	61,583						55,124
Total assets	$	1,292,079					$	1,044,332
Liabilities
NOW accounts	$	163,922	$	117	0.29	%	$	104,467	$	71	0.27	%
Money market accounts	284,043		270		0.39	%	234,455		162		0.28	%
Savings accounts	65,882		16		0.10	%	37,194		11		0.12	%
Time deposits	325,690		808		1.01	%	292,491		696		0.96	%
Total interest bearing deposits	839,537		1,211		0.58	%	668,607		940		0.57	%
Securities sold under agreements to repurchase	23,543		10		0.17	%	23,902		9		0.15	%
Secured borrowings	—		—		—	%	10,528		74		2.83	%
FHLB borrowings	31,398		59		0.76	%	12,067		10		0.33	%
Subordinated debentures	15,300		297		7.87	%	15,300		297		7.81	%
Total interest bearing liabilities	909,778		$	1,577	0.70	%	730,404		1,330		0.73	%
Noninterest bearing deposits	260,632						205,215
Other liabilities	4,370						3,051
Total liabilities	$	1,174,780					$	938,670
Total shareholders' equity	$	117,299					$	105,662
Total liabilities and equity	$	1,292,079					$	1,044,332
Net interest income			$	10,628					$	8,298
Interest rate spread					3.32	%					3.18	%
Net interest margin					3.50	%					3.37	%

Footnotes:

⁽¹⁾  Average loans include nonperforming loans

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

First quarter 2017 net interest income was up $2.3 million, or 28.08%, from the first quarter 2016. The increase was primarily attributable to an increase in average loan balances and higher net interest margin. The Company’s net interest margin was 3.50% for the first quarter of 2017, compared to 3.37% in the first quarter of 2016. The increase was primarily attributable to two prime rate increases since mid December 2016 in response to the Federal Reserve increasing the targeted Federal Funds rate by 25 basis points in December 2016 and again in March 2017.

35

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 March 31,
	2017 compared to 2016
	Average Volume			Average Rate			Mix			Net Increase (Decrease)
Interest Income
Loans	$	2,599		$	(57	)	$	(18	)	$	2,524
Investment securities	(14		)	48			(1		)	33
Interest bearing deposits with other banks	—			20			—			20
Total interest income	2,585			11			(19		)	2,577
Interest expense
NOW accounts	38			5			3			46
Money market accounts	35			59			14			108
Savings accounts	8			(2		)	(1		)	5
Time deposits	72			36			4			112
Secured borrowings	(74		)	—			—			(74		)
Securities sold under agreements to repurchase	—			1			—			1
FHLB borrowings	16			13			20			49
Subordinated debentures	—			—			—			—
Total interest expense	95			112			40			247
Change in net interest income	$	2,490		$	(101	)	$	(59	)	$	2,330

Provision for Loan Losses

The Company recorded a provision for loan losses of $375,000 and $0 for the three months ended March 31, 2017 and 2016, respectively. The Company had net charge-offs of $108,000 and net recoveries of $406,000 for the three months ended March 31, 2017 and 2016, respectively. Nonperforming loans decreased 7.09% from $5.9 million at December 31, 2016 to $5.4 million at March 31, 2017 as a result of charge-offs and the return of one nonaccrual relationship to accrual status.

Noninterest Income

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

	Three months ended March 31,
(Dollars in thousands)	2017		2016		$ Change		% Change
Service charges on deposit accounts	$	309	$	204	$	105	51	%
Mortgage fee income	116		78		38		49	%
Other	532		273		259		95	%
Total noninterest income	$	957	$	555	$	402	72	%

Service charges on deposits increased by $105,000 for the three months ended March 31, 2017 compared to the three months ended 2016 which was primarily due to an increase in account analysis fees during the first quarter of 2017 in addition to fees charged on deposit accounts as a result of the third quarter 2016 acquisition of Mazon State Bank.

Mortgage fee income increased by $38,000 for the three months ended March 31, 2017 as compared to the same period in 2016 as a result of increased mortgage sale volumes since the completion of the Mazon acquisition in 2016 in addition to increased loan originations during the first quarter of 2017.

The increase in other non-interest income of $259,000 was primarily the result of a $144,000 fee earned on a swap transaction that closed in the first quarter of 2017 offset by lower income related to letter of credit fees, lease referral income and other miscellaneous income.

Noninterest Expense

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

	Three months ended March 31,
(Dollars in thousands)	2017		2016		$ Change			% Change
Salaries and employee benefits	$	4,222	$	3,256	$	966		30	%
Occupancy and equipment expense	475		437		38			9	%
Data processing	420		257		163			63	%
Professional fees	734		392		342			87	%
Advertising and business development	210		215		(5		)	(2	)%
Losses on sale and writedowns of foreclosed assets, net	—		16		(16		)	(100	)%
Foreclosed assets, net of rental income	19		53		(34		)	64	%
Other expense	1,358		1,310		$	48		4	%
Total noninterest expense	$	7,438	$	5,936	$	1,502		25	%

Salaries and employee benefit expenses were higher for the three months ended March 31, 2017 compared to the same period in 2016. This was due to the acquisition of Mazon State Bank during the third quarter of 2016 along with retention payments made in 2017 as a result of the pending Merger with First Busey.

Occupancy and equipment expense was higher for the three months ended March 31, 2017 compared to the same period in 2016 as we saw an increase in purchases and depreciation and amortization as a result the acquisition of Mazon State Bank.

Data processing expense increased $163,000 for the three months ended March 31, 2017 as compared to the same periods in 2016 as a part of the costs related to the acquisition of Mazon State Bank which took place in 2016.

36

Professional fees increased for the three months ended March 31, 2017 compared to the same period in 2016 was primarily due to legal payments during 2017 related to the merger with First Busey.

Advertising and business development expenses remained relatively flat during the three months ended March 31, 2017 compared to the three months ended March 31, 2016.

Losses on sale and writedowns of foreclosed assets, net, were lower in the current year for the first three months, as there have been no properties sold or written down during the first three months of 2017.

Foreclosed asset expenses were lower for the three months ended March 31, 2017 compared to the same period in 2016 as a result of less properties being held during 2017, resulting in lower maintenance costs.

Income Taxes

The Company recorded income tax expense of $0.4 million and $0.9 million for the three months ended March 31, 2017 and 2016, respectively. The decrease in income tax expense was largely related to $936,000 in excess tax benefit on stock-based compensation, which is recognized as a credit to income tax expense by way of the adoption of ASU 2016-09. Net deferred tax assets were $5.7 million and $6.6 million at March 31, 2017 and December 31, 2016, 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 March 31, 2017, the Company did not have a valuation allowance against the net deferred tax assets.

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):

	March 31, 2017				December 31, 2016				March 31, 2016
	Amount		% of Total		Amount		% of Total		Amount		% of Total
Construction and Land Development	$	51,085	4	%	$	47,338	5	%	$	27,798	4	%
Farmland and Agricultural Production	11,892		1	%	12,628		1	%	9,060		1	%
Residential 1-4 Family	181,426		17	%	175,978		18	%	139,208		18	%
Multifamily	36,040		3	%	36,703		4	%	31,511		4	%
Commercial Real Estate	474,035		45	%	425,985		43	%	378,304		49	%
Commercial and Industrial	296,309		29	%	281,804		28	%	181,142		23	%
Leases, net	3,381		—	%	3,290		—	%	—		—	%
Consumer and other	9,852		1	%	7,967		1	%	7,318		1	%
Total Loans	$	1,064,020	100	%	$	991,693	100	%	$	774,341	100	%

Total loans increased by $289.7 million, or 37.41% year-over-year. New loans originated year-over-year were primarily in the commercial real estate and commercial and industrial categories and are a combination of new production and loans acquired from Mazon State Bank during 2016.

The contractual maturity distributions of our loan portfolio as of March 31, 2017 are indicated in the tables below:

37

	Loans Maturities March 31, 2017
(Dollars in thousands)	Within One Year		One Year to Five Years		After Five Years		Total
Construction and Land Development	$	28,425	$	18,995	$	3,665	$	51,085
Farmland and Agricultural Production	2,359		8,654		879		11,892
Residential 1-4 Family	25,339		97,345		58,742		181,426
Multifamily	2,536		30,486		3,018		36,040
Commercial Real Estate	73,303		245,087		155,645		474,035
Commercial and Industrial	106,561		162,578		27,170		296,309
Leases, net	174		3,207		—		3,381
Consumer and other	2,792		6,973		87		9,852
Total	$	241,489	$	573,325	$	249,206	$	1,064,020

	March 31, 2017
(Dollars in thousands)	Due After One Year
Loans with:
Predetermined interest rates	$	627,061
Floating or adjustable rates	195,470
	$	822,531

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.

38

At March 31, 2017 and December 31, 2016, the allowance for loan losses was $12.0 million and $11.7 million, respectively. The allowance to total loan percentage declined from 1.46% at March 31, 2016, to 1.12% at March 31, 2017. 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 528.19% at March 31, 2016, to 219.65% at March 31, 2017 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
	March 31,
(Dollars in thousands)	2017			2016
Balance at beginning of period	$	11,684		$	11,741
Charge-offs:
Construction and Land Development	—			—
Residential 1-4 Family	26			9
Commercial Real Estate	177			—
Commercial and Industrial	—			496
Consumer and other	3			1
Total charge-offs	$	206		$	506
Recoveries:
Construction and Land Development	20			17
Residential 1-4 Family	5			27
Commercial Real Estate	6			8
Commercial and Industrial	66			48
Consumer and other	1			—
Total recoveries	$	98		$	100
Net charge-offs (recoveries)	108			406
Provision for loan losses	375			—
Allowance for loan losses at end of period	$	11,951		$	11,335
Selected loan quality ratios:
Net charge-offs (recoveries) to average loans	0.01		%	0.05		%
Allowance to total loans at end of period	1.12		%	1.46		%
Allowance to nonperforming loans at end of period	219.65		%	528.19		%

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

(Dollars in thousands)	March 31, 2017				December 31, 2016
Balance at end of period applicable to:	Amount		% of Total Loans		Amount		% of Total Loans
Construction and Land Development	$	304	3	%	$	1,549	13	%
Farmland and Agricultural Production	50		—	%	43		—	%
Residential 1-4 Family	1,053		9	%	948		8	%
Multifamily	411		3	%	254		2	%
Commercial Real Estate	5,443		46	%	4,496		39	%
Commercial	4,630		39	%	4,343		38	%
Leases, net	18		—	%	17		—	%
Consumer and other	42		—	%	34		—	%
Total	$	11,951	100	%	$	11,684	100	%

39

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 $5.4 million of nonperforming loans (loans with a nonaccrual status or past due 90 days or more) at March 31, 2017, which was lower than the $5.9 million of nonperforming loans at December 31, 2016.

There were $2.2 million in troubled debt restructurings accruing interest at March 31, 2017 and December 31, 2016.

Impaired loans were $11.9 million and $12.5 million at March 31, 2017 and December 31, 2016, respectively. Included in impaired loans at March 31, 2017 were $495,000 in loans with valuation allowances totaling $67,000, and $11.4 million in loans without valuation allowances. Included in impaired loans at December 31, 2016 were $1.3 million in loans with valuation allowances totaling $444,000 and $11.1 million in loans without valuation allowances.

The following presents the recorded investment in impaired loans:

	March 31, 2017		December 31, 2016		March 31, 2016
Nonaccrual loans	$	5,441	$	5,856	$	2,146
Accruing loans delinquent 90 days or more	—		—		—
Nonperforming loans	$	5,441	$	5,856	$	2,146
Troubled debt restructurings accruing interest	$	2,216	$	2,228	$	2,207

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 March 31, 2017 and December 31, 2016 were approximately $20.2 million and $19.1 million, respectively.  Management believes it has established an adequate allowance for probable loan losses, as appropriate under U.S. GAAP and applicable regulatory guidance.

40

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:

	March 31, 2017				December 31, 2016
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Residential collateralized mortgage obligations	$	61,206	$	60,922	$	62,081	$	61,417
Residential mortgage backed securities	32,751		32,411		33,701		33,241
State and political subdivisions	107,115		107,425		108,403		107,540
Total securities available for sale	$	201,072	$	200,758	$	204,185	$	202,198

The decrease in available for sale securities during the three months ended March 31, 2017 was the result of maturities during the quarter.

Securities with a fair value of $115.3 million and $121.1 million were pledged as collateral on public funds, securities sold under agreements or for other purposes as required or permitted by law, as of March 31, 2017 and December 31, 2016, 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):

	March 31, 2017				December 31, 2016
	Amount		Percent		Amount		Percent
Noninterest-bearing demand deposits	$	261,532	24	%	$	247,856	23	%
NOW and money market accounts	459,695		41	%	443,727		41	%
Savings	69,295		6	%	64,695		6	%
Time deposit certificates of $250,000 or more	82,169		7	%	96,421		9	%
Time deposit certificates, $100,000 to $250,000	130,491		12	%	125,807		11	%
Other time deposit certificates	105,064		10	%	104,650		10	%
Total	$	1,108,246	100	%	$	1,083,156	100	%

Total deposits increased $25.1 million, or 2.32%, since December 31, 2016. Noninterest bearing demand deposits increased $13.7 million, or 5.52%, since December 31, 2016. There was a decrease in time deposits of $9.2 million, or 2.80%, to $317.7 million at March 31, 2017, from $326.9 million at December 31, 2016. The ratio of time deposits to total deposits decreased from 30.18% at December 31, 2016 to 28.67% at March 31, 2017 as we have seen a shift toward more core funding.

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

	March 31, 2017		December 31, 2016
NOW and money market accounts	$	65,048	$	54,971
Time deposit certificates	31,720		41,169
	$	96,768	$	96,140

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

	March 31, 2017
	Time Deposits $250 and Greater		Time Deposits of $100 - $250		Time Deposits of Less than $100		Total
Months to maturity:
Three or less	$	23,598	$	22,967	$	16,389	$	62,954
Over Three to Six	13,717		15,609		16,331		45,657
Over Six to Twelve	20,548		33,415		26,682		80,645
Over Twelve	24,306		58,500		45,662		128,468
Total	$	82,169	$	130,491	$	105,064	$	317,724

Off-Balance Sheet Arrangements

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

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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:

	March 31, 2017			December 31, 2016
(Dollars in thousands)
Securities sold under agreements to repurchase:
Balance:
Average daily outstanding	$	23,543		$	22,966
Outstanding at end of period	22,298			24,153
Maximum month-end outstanding	23,957			25,488
Rate:
Weighted average interest rate during the year	0.17		%	0.17		%
Weighted average interest rate at end of the period	0.16		%	0.16		%
FHLB borrowings:
Balance:
Average daily outstanding	$	31,398		$	33,058
Outstanding at end of period	67,000			27,000
Maximum month-end outstanding	67,000			72,100
Rate:
Weighted average interest rate during the year	0.76		%	0.38		%
Weighted average interest rate at end of the period	0.87		%	0.70		%

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 March 31, 2017, the Bank was permitted to pay dividends due to having retained earnings of $6.4 million. Dividends of $2.8 million were paid by the Bank to the Company during the three months ended March 31, 2017.

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 March 31, 2017 and December 31, 2016, 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.

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Critical Accounting Policies and Estimates

Allowance for Loan Losses

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

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

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

Foreclosed Assets

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

Income taxes

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

The Company follows the accounting guidance related to accounting for uncertainty in income taxes, which sets out a consistent framework to determine the appropriate level of tax reserves to maintain for uncertain tax positions. There were no uncertain tax positions as of March 31, 2017 and December 31, 2016.

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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.

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The table below does not include unrealized losses on investment securities of $314,000 at March 31, 2017, in rate sensitive assets.

	March 31, 2017
	0-3 Months			3-12 Months			12-60 Months			> 60 Months			Total
Rate Sensitive Assets
Interest-Bearing Deposits with Bank	$	13,494		$	—		$	—		$	—		$	13,494
Investment Securities	2,923			13,021			89,689			95,439			201,072
Loans	419,938			170,834			398,019			70,090			1,058,881
Non-Marketable Equity Securities	3,067			—			—			—			3,067
Total Rate Sensitive Assets	$	439,422		$	183,855		$	487,708		$	165,529		$	1,276,514
Rate Sensitive Liabilities
NOW Accounts	$	5,848		$	17,544		$	87,722		$	54,582		$	165,696
Money Market Accounts	85,820			85,164			123,015			—			293,999
Savings	8,315			24,946			36,034			—			69,295
Time Deposits	63,146			126,110			126,940			1,528			317,724
Total Interest Bearing Deposits	163,129			253,764			373,711			56,110			846,714
Borrowed Funds	67,787			2,636			19,560			14,615			104,598
Total Rate Sensitive Liabilities	$	230,916		$	256,400		$	393,271		$	70,725		$	951,312
Cumulative Gap Report Summary Information
Rate Sensitive Assets (RSA)	$	439,422		$	623,277		$	1,110,985		$	1,276,514		$	1,276,514
Rate Sensitive Liabilities (RSL)	230,916			487,316			880,587			951,312			951,312
Cumulative Gap (GAP=RSA-RSL)	208,506			135,961			230,398			325,202			325,202
Total Assets	$	1,336,769
RSA/RSL	190.30		%	127.90		%	126.16		%	134.18		%	134.18		%
RSA/Assets	32.87		%	46.63		%	83.11		%	95.49		%	95.49		%
RSL/Assets	17.27		%	36.45		%	65.87		%	71.17		%	71.17		%
Gap/Assets	15.60		%	10.17		%	17.24		%	24.33		%	24.33		%
Gap/RSA	47.45		%	21.81		%	20.74		%	25.48		%	25.48		%

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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 March 31, 2017. Based upon that evaluation, the chief executive officer along with the chief financial officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report were effective.

Changes in Internal Control over Financial Reporting

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

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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 2016 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.

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

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

See Exhibit Index

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SIGNATURES

Pursuant to the requirements of 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: May 9, 2017	/s/ Glen L. Stiteley
	Glen L. Stiteley
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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Exhibit Index

2.1	Agreement and Plan of Merger by and between First Busey Corporation and First Community Financial Partners, Inc., dated February 6, 2017* (incorporated herein by reference to Exhibit 2.1 to First Community Financial Partners, Inc.’s Form 8-K filed February 6, 2017)
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016; (ii) Consolidated Statements of Operations for the three months ended March 31, 2017 and March 31, 2016; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and March 31, 2016; (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2017 and March 31, 2016; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and March 31, 2016; and (vi) Notes to Unaudited Consolidated Financial Statements.
*	First Community has omitted schedules and similar attachments to the subject agreement pursuant to Item 601(b) of Regulation S-K. First Community will furnish a copy of any omitted schedule or similar attachment to the SEC upon request.

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