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Illustrative Bancorp, Inc. and SubsidiaryConsolidated Financial Statements

For the Years Ended December 31, 2017 and 2016

L E A D C O N T A C T

Jeff Skaggs, CPAPrincipal & Practice [email protected]

www.bnncpa.com

© 2018 Baker Newman Noyes LLC www.bnncpa.com

About The financial institution illustrative financial statements presented hereafter are intended for general information purposes only and contain examples of common disclosures as required under Generally Accepted Accounting Principles (GAAP) and U.S. Securities and Exchange Commission (SEC) regulations. These illustrative financial statements should not be used as a replacement for professional accounting, legal, or tax advice and may not address all possible scenarios. This publication is intended to provide general information only. The form and content of financial statements remain the responsibility of management. Key For all entities that are non-SEC filers or are an SEC filer, but a smaller reporting company, only a two year presentation is required for non-balance sheet items. For SEC filers that are not smaller reporting companies, three years of information is generally required for all non-balance sheet items. Immaterial items do not require presentation or disclosure within the financial statements. Green shaded text illustrates disclosures specific to SEC filers. Blue shaded text illustrates disclosures specific to public business entities (PBE). Yellow shaded text illustrates disclosures specific to both PBEs and SEC filers.

© 2018 Baker Newman Noyes LLC www.bnncpa.com

ILLUSTRATIVE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017 and 2016

TABLE OF CONTENTS Consolidated Financial Statements: Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Stockholders’ Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements

1


CONSOLIDATED BALANCE SHEETS

December 31, 2017 and 2016 2017 2016 (In Thousands)

ASSETS Cash and cash equivalents: Cash and due from banks $ $ Federal funds sold Total cash and cash equivalents Interest-bearing time deposits with other banks Trading securities Available-for-sale securities Held-to-maturity securities (fair value $_____ as of December 31, 2017 and $_____ as of December 31, 2016) Federal Home Loan Bank stock, at cost Federal Reserve Bank stock, at cost Loans held-for-sale Loans, net of allowance for loan losses of $___________ as of December 31, 2017 and $__________ as of December 31, 2016 Premises and equipment, net Other real estate owned Bank-owned life insurance Accrued interest receivable Deferred tax asset, net Other assets Total assets $ $

2


CONSOLIDATED BALANCE SHEETS (CONTINUED)

December 31, 2017 and 2016 2017 2016 (In Thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Deposits: Non-interest bearing $ $ Interest-bearing Total deposits Short-term borrowings Federal Home Loan Bank advances Subordinated debentures Capital lease obligation Accrued expenses and other liabilities Total liabilities Commitments and contingencies Stockholders’ equity: Preferred stock, $______ par value; _______ shares authorized; none issued Common stock, $____ par value; _______ shares authorized; ____ shares issued at December 31, 2017 and 2016 Additional paid-in capital Retained earnings Unearned Employee Stock Ownership Plan (ESOP) shares Unearned compensation – restricted stock Accumulated other comprehensive income (loss) Treasury stock, at cost (2017 – _______ shares; 2016 – ________ shares) Total stockholders’ equity Total liabilities and stockholders’ equity $ $ See accompanying notes to consolidated financial statements.

3


CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2017, 2016 and 2015 2017 2016 2015 (In Thousands) Interest and dividend income: Interest and fees on loans $ $ $ Interest on debt securities: Taxable Tax-exempt Other interest Trading securities Dividends Total interest and dividend income Interest expense: Interest on deposits Interest on Federal Home Loan Bank advances Interest on short-term debt Interest on subordinated debentures Interest on capital lease obligation Total interest expense Net interest and dividend income Provision for loan losses Net interest and dividend income after provision for loan losses Noninterest income: Customer service fees Income from bank-owned life insurance Mortgage banking income, net Other-than-temporary impairment loss Total impairment loss Loss recognized in other comprehensive income Net impairment loss recognized in earnings Gain on sale of securities, net Net gain on trading securities Gain on sale of premises and equipment Other income Total noninterest income Noninterest expenses: Salaries and employee benefits Occupancy and equipment, net Data processing Deposit insurance Professional fees Marketing and advertising

4


CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)

Years Ended December 31, 2017, 2016 and 2015 2017 2016 2015 (In Thousands) Other real estate owned $ $ $ Other Total noninterest expenses Income before income taxes Income tax expense $ $ $ Net income $ $ $ Earnings per share Basic $ $ $ Diluted $ $ $ See accompanying notes to consolidated financial statements.

5


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2017, 2016 and 2015 2017 2016 2015 (In Thousands) Net income $ $ $ Other comprehensive income (loss), net of tax: Net change in unrealized holding gain (loss) on securities available-for-sale Change in unrecognized defined benefit pension plan costs Change in net unrecognized gain (loss) on derivatives Other comprehensive income (loss) Comprehensive income $ $ $ See accompanying notes to consolidated financial statements.

6


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2017, 2016 and 2015 (Dollars in Thousands)

Additional Unearned Unearned Accumulated Other Total Common Stock Paid-In Retained ESOP Compensation - Comprehensive Treasury Stockholders’ Shares Amount Capital Earnings Shares Restricted Stock Income (Loss) Stock Equity Balance at December 31, 2014 $ $ $ $ $ $ $ $ Net income Release of ESOP stock Stock based compensation - restricted stock Stock based compensation - options Other comprehensive income, net of tax effect Shares purchased or retired Exercise of stock options, including tax benefit Cash dividends declared per share ($_____) Balance at December 31, 2015 Net income

7


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)


Additional Unearned Unearned Accumulated Other Total Common Stock Paid-In Retained ESOP Compensation - Comprehensive Treasury Stockholders’ Shares Amount Capital Earnings Shares Restricted Stock Income (Loss) Stock Equity Release of ESOP stock $ $ $ $ $ $ $ $ Stock based compensation - restricted stock Stock based compensation - options Other comprehensive income, net of tax effect Shares purchased or retired Exercise of stock options, including tax benefit Cash dividends declared per share ($_____) Balance at December 31, 2016 Net income Release of ESOP stock Stock based compensation - restricted stock

8


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)


Additional Unearned Unearned Accumulated Other Total Common Stock Paid-In Retained ESOP Compensation - Comprehensive Treasury Stockholders’ Shares Amount Capital Earnings Shares Restricted Stock Income (Loss) Stock Equity Stock based compensation - options $ $ $ $ $ $ $ $ Other comprehensive income, net of tax effect Shares purchased or retired Exercise of stock options, including tax benefit(A) Cash dividends declared per share ($_____) Balance at December 31, 2017 $ $ $ $ $ $ $ See accompanying notes to consolidated financial statements. (A) Excess tax benefits included in income tax expense upon adoption of ASU 2016-09. [This is not a disclosure item; for information only]

9


CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2017, 2016 and 2015 2017 2016 2015 (In Thousands) Cash flows from operating activities: Net income $ $ $ Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of securities, net Write down of securities Amortization of securities, net Change in net deferred loan origination fees Provision for loan losses Loss on sale of other real estate owned Increase in bank-owned life insurance Gain on sale of loans Loans originated for sale Proceeds from loans sold ESOP expense Stock based compensation expense Amortization of mortgage servicing rights Valuation allowance on mortgage servicing rights Depreciation and amortization Gain on sale of premises and equipment Deferred income tax benefit Net change in: Accrued interest receivable Other assets and current income taxes receivable Accrued expenses and other liabilities Trading securities Net cash provided by operating activities Cash flows from investing activities: Activity in interest-bearing time deposits with other banks: Purchases Maturities Activity in available-for-sale securities: Sales Maturities, calls and principal paydowns Purchases Activity in held-to-maturity securities: Purchases Maturities, calls and principal paydowns Redemption of Federal Home Loan Bank stock Purchases of Federal Home Loan Bank stock Loan originations and principal collections, net Purchases of loans

10


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years Ended December 31, 2017, 2016 and 2015 2017 2016 2015 (In Thousands) Purchases of premises and equipment, net $ $ $ Proceeds from sale of premises and equipment Purchase of bank owned life insurance Proceeds from sales of other real estate owned Net cash used by investing activities Cash flows from financing activities: Net increase in deposits Advances from Federal Home Loan Bank Repayment of advances from Federal Home Loan Bank Change in short-term borrowings Proceeds from issuance of subordinated debt Payments on capital lease obligations Proceeds from exercise of stock options, net Purchase of treasury stock Cash dividends paid Excess tax benefit from stock-based compensation* Net cash provided by financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ $ $ Supplemental cash flow information: Interest paid $ $ $ Income taxes paid Supplemental noncash disclosures: Loans originated from the sale of other real estate owned Loans transferred to other real estate owned Loans receivable transferred to loans held-for-sale Noncash changes related to available-for-sale securities: Available-for-sale securities unrealized (loss) gain $ $ $ Deferred income tax Net unrealized gain (loss) on available-for-sale securities Noncash changes related to defined benefit pension liability: Defined benefit pension liability $ $ $ Deferred income tax Net unrecognized benefit (cost) related to defined benefit plan

11


CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

Years Ended December 31, 2017, 2016 and 2015 2017 2016 2015 (In Thousands) Non-cash changes related to derivatives: Derivatives $ $ $ Deferred income tax Net unrealized gain (loss) related to derivatives Net gain (loss) reflected in accumulated other comprehensive income $ $ $ See accompanying notes to consolidated financial statements. * If ASU 2016-09 is adopted (Topic 718), excess tax benefits should be presented with “other income tax” in

the operating activity section of the statement of cash flows. Further, cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity. [This is not a disclosure item; for information only.]

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2017 and 2016 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of Illustrative Bancorp, Inc. (the Company)

and its wholly-owned subsidiary, XYZ Bank (the Bank). All significant intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company and its subsidiary conform to accounting principles generally accepted in the United States of America (GAAP) and predominant practices within the industry. The consolidated financial statements of the Company were prepared using the accrual basis of accounting. The significant accounting policies of the Company are summarized below to assist the reader in better understanding the consolidated financial statements.

Nature of Operations The Company provides a variety of financial services to individuals and small businesses. Its primary

deposit products are checking, savings and term certificate accounts and its primary lending products are residential and commercial mortgage loans. The Company also engages in mortgage banking, including the origination, sale and servicing of mortgage loans.

Use of Estimates In preparing consolidated financial statements in conformity with accounting principles generally

accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the determination of whether declines in fair value below the cost of investments are temporary.

Significant Group Concentrations of Credit Risk Most of the Company's business activity is with customers located within New England. There are no

concentrations of credit to borrowers that have similar economic characteristics. The majority of the Company's loan portfolio is comprised of loans collateralized by real estate located in New England.

Cash and Cash Equivalents Cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold with

original maturities of less than ninety days. The Company is required to maintain certain reserve balances in the form of cash or deposits for the

Federal Reserve Bank. At December 31, 2017 and 2016, the required reserve balances were approximately $________________ and $_____________, respectively.

Interest-Bearing Time Deposits with Other Banks Interest-bearing time deposits with other banks mature within five years and are carried at cost.

13



December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) Securities Investments in debt securities are adjusted for amortization of premiums and accretion of discounts

computed so as to approximate the interest method. Gains or losses on sales of investment securities are recorded on the trade date and are computed on a specific identification basis.

The Company classified debt and equity securities into one of three categories: held-to-maturity,

available-for-sale or trading. These security classifications may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale.

Held-to-maturity securities are measured at amortized cost. Unrealized gains and losses are not

included in earnings or in a separate component of stockholders’ equity; they are merely disclosed in the notes to the consolidated financial statements.

Available-for-sale securities are carried at fair value. Unrealized holding gains and losses are not

included in earnings, but are reported as a net amount (less expected taxes) in a separate component of stockholders’ equity until realized.

Trading securities are carried at fair value. Unrealized holding gains and losses on trading securities

are included in earnings. For any debt security with a fair value less than its amortized cost basis, the Company will determine

whether it has the intent to sell the debt security or whether it is more likely than not it will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, the Company will recognize a full impairment charge to earnings. For all other debt securities that are considered other-than-temporarily impaired and do not meet either condition, the credit loss portion of impairment will be recognized in earnings as realized losses. The other-than-temporary impairment related to all other factors will be recorded in other comprehensive income.

Declines in marketable equity securities below their cost that are deemed other-than-temporary are

reflected in earnings as realized losses. Federal Reserve Bank (FRB) Stock The Bank is a member of its regional Federal Reserve Bank. FRB stock is carried at cost, classified as a

restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Federal Home Loan Bank Stock The Company, as a member of the Federal Home Loan Bank (FHLB), is required to maintain an

investment in capital stock of the FHLB. Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. The Company reviews its investment in capital stock of the FHLB for impairment based on the ultimate recoverability of the cost basis in the FHLB stock. Based on the most recent analysis of the FHLB as of December 31, 2017, management deems its investment in FHLB stock to not be other-than-temporarily impaired.

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December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of

aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of

mortgage loans sold is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

<Loans held for sale, for which the fair value option has been elected, are recorded at fair value as of each

balance sheet date. The fair value includes the servicing value of the loans as well as any accrued interest.> *This assumes the fair value option has been elected.

Loans The loan portfolio consists of mortgage, commercial and consumer loans to the Company’s customers.

The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or

pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and net deferred loan origination costs and fees. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method over the terms of the loans.

The accrual of interest on loans is discontinued at the time a loan is 90 days past due. Past due status is

based on the contractual terms of the loan. Loans are placed on non-accrual at an earlier date if collection of principal or interest is considered doubtful. Interest income previously accrued on such loans is reversed against interest income. The interest paid on these loans is accounted for on the cash basis if the remaining net carrying amount of the loan is deemed fully collectible or cost-recovery method to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan, until qualifying for return to accrual. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to

eliminate doubt as to the collectability of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

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December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) 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.

The allowance for loan losses is evaluated on a regular basis by management. This evaluation is

inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below.

General Component: The general component of the allowance for loan losses is based on historical loss experience adjusted

for qualitative factors stratified by the following loan segments: residential real estate (conventional), commercial real estate, home equity lines of credit, construction, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during 2017 or 2016.

The qualitative factors are determined based on the various risk characteristics of each loan segment.

Risk characteristics relevant to each portfolio segment are as follows: Residential real estate (conventional) and home equity lines of credit – The Company generally does not

originate or purchase loans with a loan-to-value ratio greater than 80 percent and does not grant subprime loans. Loans in this segment are generally collateralized by owner-occupied residential real estate and repayment is primarily dependent on the credit quality of the individual borrower and secondarily, liquidation of the collateral. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial real estate – Loans in this segment are primarily income-producing properties. The

underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management generally obtains rent rolls annually and continually monitors the cash flows of these borrowers.

Construction loans – Loans in this segment primarily include speculative real estate development loans

for which payment is derived from sale and/or lease up of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

Commercial loans – Loans in this segment are made to businesses and are generally secured by assets of

the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and business spending, will have an effect on the credit quality in this segment.

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December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) Consumer loans – Loans in this segment include secured and unsecured consumer loans including

passbook loans, consumer lines of credit, overdraft protection and consumer unsecured loans. Repayment is dependent on the credit quality and the cash flow of the individual borrower.

Allocated Component: The allocated component relates to loans that are classified as impaired. 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 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.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified

and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (TDR). All TDRs are classified as impaired and therefore are subject to a specific review for impairment.

Impaired loans are measured based on the present value of expected future cash flows discounted at the

loan’s effective interest rate at the time of impairment or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. Generally, impairment on TDRs is measured using the discounted cash flow method by discounting expected cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification. Loans that have been classified as TDRs and which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In such an instance, any shortfall between the value of the collateral and the book value of the loan is determined by measuring the recorded investment in the loan against the fair value of the collateral less costs to sell. Generally, all other impaired loans are collateral dependent and impairment is measured through the collateral method. All loans on non-accrual status are considered to be impaired. When the measurement of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through the allowance for loan losses. The Company charges off the amount of any confirmed loan loss in the period when the loans, or portion of loans, are deemed uncollectible.

Unallocated Component: An unallocated component is maintained to cover uncertainties that could affect management’s estimate

of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

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December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) In the ordinary course of business, the Company enters into commitments to extend credit, commercial

letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or become payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses. The reserve for off-balance sheet commitments is included in other liabilities in the balance sheet. At December 31, 2017 and 2016, the reserve for unfunded loan commitments was $______ and $_______, respectively. The related provision for off-balance sheet credit losses is included in non-interest expense in the consolidated income statement.

Loan Servicing The Company services mortgage loans for others. Mortgage servicing assets are recognized at fair value

when rights are acquired through sale of financial assets. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income, giving consideration to prepayment speeds. Capitalized servicing rights are reported in other assets and are amortized into loan servicing fee income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rates and terms. Fair value is determined based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Changes in the valuation allowance are reported in income from mortgage banking activities.

Derivative Financial Instruments Derivative financial instruments are recognized as net assets or liabilities on the consolidated balance

sheet and measured at fair value. If material, balances are reported as gross assets and gross liabilities. Derivative financial instruments consist of interest rate swaps, derivative loan commitments, investor loan sales commitments and forward loan sales commitments.

Interest Rate Swaps – The Company is party to interest rate swap transactions that are not designated as

hedging instruments. These transactions relate to interest rate swaps that the Company has entered into with commercial lending customers to effectively convert their loans from a variable rate to a fixed rate. The Company pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate on the same notional amount. Concurrently, the Company pays another financial institution interest at the same fixed rate on the same notional amount as the swap entered into with the commercial lending customer and receives interest from the financial institution for the same floating rate on the same notional amount. Accordingly, changes in the fair value of the interest rate swaps, which offset each other, are recognized in current earnings. Derivative assets and liabilities are recorded within other assets and other liabilities in the consolidated financial statements.

Derivative Loan Commitments – Mortgage loan commitments are referred to as derivative loan

commitments if the loan that will result from exercise of the commitment will he held for sale upon funding. Loan commitments that are derivatives are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in income from mortgage banking activities. Changes in the fair value of the loan commitment are recognized based on changes in the fair value of the underlying mortgage loan due to interest rate changes, changes in the probability the derivative loan commitment will be exercised, and the passage of time. In estimating fair value, the Company assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded.

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December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) Investor Loan Sale Commitments – Investor loan sale commitments represent agreements to sell specific

loans to investors at a predetermined price. If the individual loan is not available-for-sale (i.e. the loan does not close), the Company may fill the commitment with a similar loan, or pay a fee to terminate the contract. Accordingly, investor loan sale commitments are recognized at fair value in the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in income from mortgage banking activities, if material. The Company estimates the fair value of its investor loan sale commitments using a methodology similar to that used for derivative loan commitments.

Forward Loan Sale Commitments – To protect against the price risk inherent in derivative loan

commitments, the Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery contracts are accounted for as derivative instruments. Generally, the Company’s best efforts contracts meet the definition of derivative instruments when the loans to the underlying borrowers close, and are accounted for as derivative instruments at that time. Accordingly, forward loan sale commitments are recognized at fair value on the consolidated balance sheet in other assets and other liabilities with changes in their fair values recorded in income from mortgage banking activities. The Company estimates the fair value of its forward loan sale commitments using a methodology similar to that used for derivative loan commitments.

Transfers of Financial Assets Transfers of an entire financial asset, a group of entire financial assets, or a participating interest in an

entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.

During the normal course of business, the Company may transfer a portion of a financial asset, for

example, a participation loan or the government-guaranteed portion of a loan. In order to be eligible for sales treatment, the transfer of the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.

Premises and Equipment Land is carried at cost. Buildings and equipment are stated at cost, less accumulated depreciation,

computed on the straight-line method over the estimated useful lives of the assets. It is general practice to charge the cost of maintenance and repairs to earnings when incurred; major expenditures for betterments are capitalized and depreciated over the shorter of the lease term for leasehold improvements or their estimated useful lives. The cost and related accumulated depreciation of assets sold, or otherwise disposed of, are removed from the related accounts and any gain or loss is included in earnings.

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December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) Other Real Estate Owned Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair

value, less estimated costs to sell, at the date of foreclosure or when control is established, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations, changes in the valuation allowance and any direct writedowns are included in other noninterest expense.

The Company classifies commercial loans as in-substance repossessed or foreclosed if the Company

receives physical possession of the debtor’s assets regardless of whether formal foreclosure proceedings take place. The Company classifies residential real estate loans as in-substance repossessed or foreclosed upon either obtaining legal title to the residential real estate property upon completion of a foreclosure or when the borrower conveys all interest in the property to the Company to satisfy the loan through a completion of a deed in lieu of foreclosure or through a similar legal agreement.

Employee Stock Ownership Plan Compensation expense for the Employee Stock Ownership Plan (ESOP) is recorded at an amount equal

to the shares allocated by the ESOP multiplied by the average fair value of the shares during the period. The Company recognizes compensation expense ratably over the year based upon the Company’s estimate of the number of shares expected to be allocated by the ESOP. Unearned compensation applicable to the ESOP is reflected as a reduction of stockholders’ equity in the consolidated balance sheets. The difference between the average fair value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital.

Illustrative Bank Supplemental Executive Retirement Plan The compensation cost of an employee’s retirement benefit is recognized on the projected unit credit

method over the employee’s approximate service period. The aggregate cost method is utilized for funding purposes.

The Company accounts for its supplemental executive retirement plan using an actuarial model that

allocates benefit costs over the service period of employees in the plan. The Company accounts for the over-funded or under-funded status of the plan as an asset or liability in its consolidated balance sheets and recognizes changes in the funded status in the year in which the changes occur through other comprehensive income or loss.

Stock Based Compensation The Company recognizes stock-based compensation based on the grant-date fair value of the award

adjusted for expected forfeitures. The Company values share-based stock option awards granted using the Black-Scholes option-pricing model. The Company recognizes compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time.

Treasury Stock Common stock shares repurchased are recorded as treasury stock at cost. [Please note that some states

do not allow the use of treasury stock or may use different terminology such as “Cost of Stock Reacquired.”]

20



December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) Earnings Per Share (EPS) Basic earnings per share is calculated using the two-class method. The two-class method is an earnings

allocation formula under which earnings per share is calculated from common stock and participating securities considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if all such earnings had been distributed during the period. Under this method, all earnings distributed and undistributed, are allocated to participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain nonforfeitable rights to dividends are considered participating securities (i.e. unvested restricted stock), not subject to performance based measures. Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share have been calculated in a manner similar to that of basic earnings per share except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares (such as those resulting from the exercise of stock options or the attainment of performance measures) were issued during the period, computed using the treasury stock method. (See note 21)

Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other

assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these estimates.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included

in net income. Although certain changes in assets and liabilities are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income.

Pension Plan

The Company sponsors a non-contributory defined benefit pension plan covering substantially all employees hired prior to December 31, ______ meeting certain requirements as to age and length of service. The compensation cost of an employee’s pension benefit is recognized using the project unit credit method over the employee’s approximate service period. The aggregate method is utilized for funding purposes.

Income Taxes Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.

Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.

21



December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) Upon exercise or vesting of a share-based award, if the tax deduction exceeds compensation cost that was

previously recorded for financial statement purposes this will result in an excess tax benefit. Accounting Standards Update (ASU) 2016-09, “Compensation-Stock Compensation (718)” requires the Company to recognize all excess tax benefits/deficiencies through the income statement as income tax expense/benefit. Under previous GAAP, any excess tax benefits were recognized in additional paid-in capital to offset current-period and subsequent-period tax deficiencies. The Company (early) adopted ASU 2016-09 using the modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the standard was adopted. A tax expense/benefit of $_____ was recorded during the year ended as result of share awards vesting/exercised during the year. [This disclosure is only applicable if ASU 2016-09 was adopted or early adopted in 2017.]

The Company does not have any uncertain tax positions at December 31, 2017 or 2016 which require

accrual or disclosure. The Company accounts for interest and penalties related to uncertain tax positions as part of its provision

for income taxes. No interest or penalties were recorded for the years ended December 31, 2017, 2016 and 2015.

Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are

recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there currently are such matters that will have a material effect on the consolidated financial statements.

Advertising Costs Advertising costs are expensed as incurred and were approximately $_________, $__________ and

$__________ in 2017, 2016 and 2015, respectively. Operating Segments While senior management monitors profitability of several segments and services, operations are

managed and financial performance is evaluated on a Company-wide basis. Operating results are not reviewed by senior management to make resource allocation or performance decisions. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

22



December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued amendments to Accounting

Standards Codification (ASC) section 606 “Revenue from Contracts with Customers” through issuance of ASU 2014-09, “Revenue from Contracts with Customers.” In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606)”, which deferred the effective date by one year. The guidance in these updates affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in these updates are effective for interim and annual reporting periods beginning after December 15, 2017. The amendments in these updates are effective for interim reporting periods beginning after December 15, 2018 and annual reporting periods beginning after December 15, 2019. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

In May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820) – Disclosures for

Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” The objective of this update is to address the diversity in practice related to how certain investments measured at net asset value with redemption dates in the future are categorized within the fair value hierarchy. The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The amendments in this update are effective for the Company for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The amendments in this update did not have a material impact on the Company’s consolidated financial statements.

23



December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10):

Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and for interim periods within fiscal years beginning after December 15, 2019. 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 2016-02, “Leases (Topic 842).” Under the new guidance, a

lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current 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. However, unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new ASU will require both types of leases to be recognized on the balance sheet. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods therein. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact of adopting the new guidance on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU 2016-05 “Derivatives and Hedging (Topic 815)-Effect of

Derivative Contract Novations on Existing Hedge Accounting Relationships.” The amendments in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) continue to be met. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For all other entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018.

24



December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) In March 2016, the FASB issued ASU 2016-06 “Derivatives and Hedging (Topic 815)-Contingent Put

and Call Options in Debt Instruments.” The amendments in this Update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this Update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. For public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. For entities other than public business entities, the amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. An entity should apply the amendments in this Update on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective.

In March 2016, the FASB issued ASU 2016-07 “Investments- Equity Method and Joint Ventures (Topic

323)-Simplifying the Transition to Equity Method of Accounting.” The amendments in this Update eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments in this Update require that an entity that has an available-for sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted.

In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718):

Improvements to Employee Share-Based Payment Accounting.” This update makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016. This standard is effective for annual reporting periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. We are currently evaluating the impact of adopting the new guidance on the Company’s consolidated financial statements.

25



December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.” The update changes the impairment model for most financial assets and sets forth a “current expected credit loss” (CECL) model which will require the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This method is forward-looking and will generally result in earlier recognition of allowances for losses. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and also applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. This ASU is effective for fiscal years beginning after December 31, 2020 and for interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted. We are currently evaluating the impact of adopting the new guidance on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification

of Certain Cash Receipts and Cash Payments.” The update provides guidance on the classification of certain cash receipts and cash payments for presentation in the statement of cash flows. The amendment is effective for the Company for fiscal years beginning after December 15, 2017 and interim periods within those years. The amendment is effective for the Company for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The amendments will be applied using a retrospective transition method to each period presented unless impracticable. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted

Cash.” The update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments are effective for the Company for fiscal years beginning after December 15, 2017 and interim periods within those years. The amendments are effective for the Company for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

26



December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) In January 2017, the FASB issued ASU 2017-01 “Business Combinations (Topic 805)-Clarifying the

Definition of a Business.” The amendments in this Update provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this Update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the Board has developed more stringent criteria for sets without outputs. Lastly, the amendments in this Update narrow the definition of the term output so that the term is consistent with how outputs are described in Topic 606. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

In January 2017, the FASB issued ASU 2017-04 “Intangibles – Goodwill and Other (Topic 35):

Simplifying the Test for Goodwill Impairment.” This ASU is meant to simplify the subsequent measurement of goodwill. The amendments in this ASU require an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for any amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill loss. The Update also eliminates the requirement to perform a qualitative assessment for an entity with negative carrying amounts. The amendments in this Update are effective for public business entities that are SEC filers for annual periods beginning after December 15, 2019. The amendments in this Update are effective for public business entities that are non SEC filers for annual periods beginning after December 15, 2020. The amendments in this Update are effective for all other entities for annual periods beginning after December 15, 2021.

In February 2017, the FASB issued ASU 2017-05, “Other Income-Gains and Losses from the

Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” This ASU is meant to clarify the scope of ASC Subtopic 610-20. The guidance is to be applied using a full retrospective method or a modified retrospective method and is effective at the same time as the amendments in update 2014-09. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

27



December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) In March 2017, the FASB issued ASU 2017-07, “Compensation-Retirement Benefits (Topic 715):

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU is meant to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments in this ASU require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately. The amendments in this Update are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. For other entities, the amendments in this Update are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs

(Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09 “Compensation – Stock Compensation (Topic 718); Scope

of Modification Accounting.” The amendments in this ASU provide that an entity should account for the effects of a modification unless all the following are met:

1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method

is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification.

2. The vesting conditions of the modified award are the same as the vesting conditions of the

original award immediately before the original award is modified.

3. The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.

The amendments in this update are effective for all entities for annual periods, and interim periods within

those annual periods beginning after December 15, 2017. Early adoption is permitted.

28



December 31, 2017 and 2016 1. Summary of Significant Accounting Policies (Continued) In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities

from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” The amendments in Part I of this ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments in Part II of this ASU recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. For public business entities, the amendments in Part I of this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the amendments in Part 1 of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, including adoption in an interim period for which financial statements (interim or annual) have not been issued or have not been made available for issuance. The amendments in Part II of this ASU do not require any transition guidance because those amendments do not have an accounting effect. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12 “Derivatives and Hedging (Topic 815); Targeted

Improvements to Accounting for Hedging Activities.” the Board has issued this Update with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition to that main objective, the amendments in this Update make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP based on the feedback received from preparers, auditors, users, and other stakeholders. For public business entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the Update.

2. Interest-Bearing Time Deposits with Other Banks At December 31, 2017, the Company’s interest-bearing time deposits in other banks mature as follows: (In Thousands) Due in one year or less $

Due in one year through three years Due in three years through five years $

Balances in interest-bearing time deposits with other banks are fully insured at December 31, 2017 and

2016.

29



December 31, 2017 and 2016 3. Trading Securities At December 31, 2017 and 2016, trading securities, at fair value, consist of the following: 2017 2016 (In Thousands) Debt securities:

U.S. Government and agency securities $ $ Mortgage-backed securities Marketable equity securities:

For the years ended December 31, 2017, 2016 and 2015, the net gain (loss) on trading securities

held at the reporting date was $_______, $_______ and $________, respectively. 4. Investment in Securities The amortized cost and fair value of securities, with gross unrealized gains and losses, at December 31,

2017 and 2016 is as follows: Available-for-sale securities: Amortized Gross Gross

Cost Unrealized Unrealized Fair Basis Gains Losses Value

(In Thousands) 2017

Debt securities: U.S. Government and agency securities $ $ $ $ Residential mortgage-backed securities Municipal bonds Total debt securities Equity securities: Common stock $ $ $ $ Mutual funds Total equity securities Total available-for-sale securities $ $ $ $

30



December 31, 2017 and 2016 4. Investment in Securities (Continued) Amortized Gross Gross

Cost Unrealized Unrealized Fair Basis Gains Losses Value

(In Thousands) 2016

Debt securities: U.S. Government and agency securities $ $ $ $ Residential mortgage-backed securities Municipal bonds Total debt securities Equity securities: Common stock Mutual funds Total equity securities Total available-for-sale securities $ $ $ $

Held-to-maturity securities: 2017

Debt securities: U.S. Government and agency securities $ $ $ $ Residential mortgage-backed securities Municipal bonds Total debt securities Total held-to-maturity securities $ $ $ $ 2016 Debt securities: U.S. Government and agency securities $ $ $ $ Residential mortgage-backed securities Municipal bonds Total debt securities Total held-to-maturity securities $ $ $ $

31



December 31, 2017 and 2016 4. Investment in Securities (Continued) The amortized cost and fair value of debt securities by contractual maturity at December 31, 2017 follows: Available-

for-Sale Held to Maturity Fair Amortized Fair

Value Cost Basis Value (In Thousands) Within 1 year $ $ $

After 1 year through 5 years After 5 years through 10 years Over 10 years Mortgage-backed securities $ $ $

Expected maturities may differ from contractual maturities because the issuer, in certain instances, has

the right to call or prepay obligations with or without call or prepayment penalties. For the years ended December 31, 2017, 2016 and 2015, proceeds from sales of securities available-for-

sale amounted to $_______, $________ and $_________, respectively. Gross realized gains from sales of securities available-for-sale amounted to $__________, __________ and $___________, respectively; gross realized losses amounted to $_________, __________ and $_________, respectively. The tax benefit (provision) applicable to these net realized gains and losses amounted to $_________, $________ and $__________, respectively.

At December 31, 2017 and 2016, certain debt securities with a carrying value of $___________ and

$___________, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.

At December 31, 2017 and 2016, there were no holdings of securities or any issuer, other than U.S.

Government and agency securities, in an amount greater than 10% of stockholders’ equity. [or there were holdings of $_________ in securities issued by……..]

32



December 31, 2017 and 2016 4. Investment in Securities (Continued) Information pertaining to securities with gross unrealized losses at December 31, 2017 and 2016 aggregated by investment category and length of time that

individual securities have been in a continuous loss position, follows: Available-for-sale securities: Less Than Twelve Months Twelve Months or Longer Total Number Gross Number Gross Number Gross

of Unrealized Fair of Unrealized Fair of Unrealized Fair Securities Losses Value Securities Losses Value Securities Losses Value

2017 (Dollars In Thousands) Debt securities: U.S. Government and

agency securities $ $ $ $ $ $ Residential mortgage- backed securities Municipal bonds Total debt securities Equity securities: Common stock Mutual funds Total equity securities $ $ $ $ $ $

33



December 31, 2017 and 2016 4. Investment in Securities (Continued) Held-to-maturity securities: Less Than Twelve Months Twelve Months or Longer Total Number Gross Number Gross Number Gross


2017 (Dollars In Thousands) Debt securities: U.S. Government and agency securities $ $ $ $ $ $

Residential mortgage- backed securities Municipal bonds $ $ $ $ $ $

Available-for-sale securities: 2016

Debt securities: Residential mortgage- backed securities $ $ $ $ $ $ Municipal bonds Total debt securities

34



December 31, 2017 and 2016 4. Investment in Securities (Continued) Available-for-sale securities (continued): Less Than Twelve Months Twelve Months or Longer Total Number Gross Number Gross Number Gross


(Dollars In Thousands) Equity securities:

Common stock $ $ $ $ $ $ Mutual funds Total equity securities $ $ $ $ $ $

Held-to-maturity securities: 2016 Debt securities: U.S. Government and agency securities $ $ $ $ $ $

Residential mortgage- backed securities Municipal bonds $ $ $ $ $ $

35



December 31, 2017 and 2016 4. Investment in Securities (Continued) As of December 31, 2017, there were ______ debt securities with unrealized losses representing aggregate

depreciation of ________% from the current amortized cost basis. These unrealized losses were primarily caused by changes in interest rates as compared to the underlying yields on the securities. Accordingly, it is expected that the securities would not be settled at a price less than the par value of the investment. Because the decline in fair value is attributable to changes other than credit quality, and because the Company does not intend to sell the securities nor is it likely the Company will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2017.

As of December 31, 2017, there were _______ equity securities with unrealized losses representing

aggregate depreciation of ___________% from the current cost basis. Management is actively monitoring these and other equity investments and does not consider these investments to be other-than-temporarily impaired. No credit or other issues have been identified that cause management to believe the declines in fair value are other than temporary, and the Company has the ability and intent to hold these investments until a recovery of fair value. In analyzing the issuer’s financial condition, management considers industry analysts’ reports, financial performance and projected target prices of investment analysts within a one-year time frame.

For the years ended December 31, 2017 and 2016, debt securities with other-than-temporary impairment

losses related to credit quality that were recognized in earnings consisted of ______ non-agency mortgage-backed securities. The Company estimated the credit component portion of loss for the non-agency mortgage backed securities using a discounted cash flow model. Significant inputs for the non-agency mortgage-backed securities included estimated cash flows of the underlying collateral based on key assumptions such as default rate, loss severity and prepayment rate. The present value of the expected cash flows were compared to the Company’s holdings to determine the credit-related impairment loss. Based on the expected cash flows derived from the model, the Company expects to recover the remaining unrealized losses on non-agency mortgage-backed securities.

The following table presents a roll-forward of the amount of credit losses on debt securities for which a

portion of an other-than-temporary impairment was recognized in other comprehensive income (in thousands):

Balance as of December 31, 2015 $

Credit losses for which other-than-temporary impairment was not previously recorded Reductions for securities sold during the period Additional credit losses for which an other-than-temporary impairment charge was previously recognized Reductions for securities intended to be sold or for which it is more likely than not the security will be required to be sold, for which the amount was previously recognized in other comprehensive income (loss) Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security Balance as of December 31, 2016

36



December 31, 2017 and 2016 4. Investment in Securities (Continued) Credit losses for which other-than-temporary impairment was not previously recorded $

Reductions for securities sold during the period Additional credit losses for which an other-than-temporary impairment charge was previously recognized Reductions for securities intended to be sold or for which it is more likely than not the security will be required to be sold, for which the amount was previously recognized in other comprehensive income (loss) Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security Balance as of December 31, 2017 $

(Note: See ASC 320-10-50-8B for other items to be included in this schedule that are not as common as

above items.) 5. Loans and Allowance for Loan Losses A summary of the balances of loans at December 31, 2017 and 2016 follows: 2017 2016 (In Thousands) Real estate loans:

Conventional $ $ Commercial Home equity lines of credit (HELOC) Construction

Non-real estate loans:

Commercial loans Consumer loans Total loans Allowance for loan losses Net deferred loan origination (fees) costs Loans, net $ $

37



December 31, 2017 and 2016 5. Loans and Allowance for Loan Losses (Continued) The following table presents the activity in the allowance for loan losses by portfolio segment for each of

the years ending December 2017, 2016 and 2015 and select loan information by portfolio segment at December 31, 2017 and 2016 (amounts in thousands):

Real Estate Loans Non-Real Estate Loans Conven- Com- Con- Com- Unallo-

tional mercial HELOCs struction mercial Consumer cated Total 2017

Allowance for loan losses activity

Balance, December 31, 2016 $ $ $ $ $ $ $ $ Provision Charge-offs Recoveries Balance, December 31, 2017 $ $ $ $ $ $ $ $ Allowance for loan losses balance, end of year Individually evaluated for impairment $ $ $ $ $ $ $ $ Collectively evaluated for impairment $ $ $ $ $ $ $ $ Loan balance, end of year Ending balance individually evaluated for impairment $ $ $ $ $ $ $ $ Ending balance collectively evaluated for impairment Loans ending balance $ $ $ $ $ $ $ $ 2016 Allowance for loan losses activity

Balance, December 31, 2015 $ $ $ $ $ $ $ $ Provision Charge-offs Recoveries Balance, December 31, 2016 $ $ $ $ $ $ $ $ Allowance for loan losses balance, end of year Individually evaluated for impairment $ $ $ $ $ $ $ $ Collectively evaluated for impairment $ $ $ $ $ $ $ $ Loan balance, end of year Ending balance individually evaluated for impairment $ $ $ $ $ $ $ $ Ending balance collectively evaluated for impairment Loans ending balance $ $ $ $ $ $ $ $

38



December 31, 2017 and 2016 5. Loans and Allowance for Loan Losses (Continued) 2015

Allowance for loan losses activity

Balance, December 31, 2014 $ $ $ $ $ $ $ $ Provision Charge-offs Recoveries Balance, December 31, 2015 $ $ $ $ $ $ $ $

Despite the above allocations, the allowance for loan losses is general in nature and therefore available to

absorb losses from any loan type. The following table presents an aged analysis of current, past due and nonaccrual loans by class of loans

as of December 31, 2017 and 2016 (amounts in thousands), based on contractual terms: Past Due

30-59 60-89 Past 90 Days Days Days Due 90 or More Past Past Days or Total Total Total and Still Non- Due Due More Past Due Current Loans Accruing Accrual

2017 Real estate loans: Conventional $ $ $ $ $ $ $ $ Commercial HELOC Construction Non-real estate loans: Commercial Consumer Totals $ $ $ $ $ $ $ $ 2016 Real estate loans: Conventional $ $ $ $ $ $ $ $ Commercial HELOC Construction Non-real estate loans: Commercial Consumer Totals $ $ $ $ $ $ $ $

The Company works actively with many of its borrowers who experience financial problems by

modifying loan terms. These modifications are considered to be troubled debt restructurings (TDRs) if the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. These concessions may include, but are not limited to, capitalization of interest, deferral of payments, temporary or permanent reduction of the interest rate, extension of the loan’s contractual maturity at an interest rate lower than the current market rate for a new loan with similar risk, or forgiveness of interest or principal. The concessions made on TDRs that occurred during 2017, 2016 and 2015 consisted primarily of the extension of loan terms and interest rate reductions.

39



December 31, 2017 and 2016 5. Loans and Allowance for Loan Losses (Continued) The following table presents the December 31, 2017 number of accounts, pre-modification outstanding

unpaid principal balance, and post-modification outstanding unpaid principal balance that were modified as TDRs during the year ended December 31, 2017 (dollar amounts in thousands):

Pre- Post-

Modification Modification Unpaid Unpaid Change in Number Principal Principal Allowance of Contracts Balance Balance at Modification

Troubled debt restructurings: C&I $ $ $

Commercial real estate Conventional $ $ $

The following table provides information on how loans were modified as TDRs during the year ended

December 31, 2017: Extended Reduced Rate Reduction and

Maturity Interest Rate Forgiveness of Debt (Dollars in Thousands) December 31, 2017: C&I $ $ $


During the year ended December 31, 2017, one commercial real estate loan that was modified as a TDR

in 2017 subsequently defaulted. The total balance of the loan was approximately $___________, and the default did not have a material impact on the allowance for loan losses.

None of the loans modified in 2017 were on nonaccrual as of December 31, 2017. TDRs were

individually evaluated for impairment. As of December 31, 2017, there were no specific allocations included in the allowance for loan losses related to TDRs that were restructured during the year ended December 31, 2017.

40





Pre- Post-








During the year ended December 31, 2016, one commercial real estate loan and one residential loan that

were modified as TDRs in 2016 subsequently defaulted. The total combined balance of the loans was approximately $_____________, and the defaults did not have a material impact on the allowance for loan losses.



41





Pre- Post-








During the year ended December 31, 2015, one commercial real estate loan and one residential loan that

were modified as TDRs in 2015 subsequently defaulted. The total combined balance of the loans was approximately $_____________, and the defaults did not have a material impact on the allowance for loan losses.



At December 31, 2017 and 2016, the book balance of TDRs was approximately $____________ and

$___________, respectively. Consumer residential real estate loans in process of foreclosure totaled $__________ and $_________ at

December 31, 2017 and 2016, respectively, and are reported in loans.

42



December 31, 2017 and 2016 5. Loans and Allowance for Loan Losses (Continued) The following table provides information with respect to impaired loans with no related allowance and

with an allowance recorded at December 31, 2017 and 2016 (amounts in thousands): Unpaid

Recorded Principal Related Investment Balance Allowance

2017 With no allowance recorded: Real estate loans: Conventional $ $ $ Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total With related allowance recorded: Real estate loans: Conventional Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total Total impaired loans: Real estate loans: Conventional Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total impaired loans $ $ $

43



December 31, 2017 and 2016 5. Loans and Allowance for Loan Losses (Continued) Unpaid

Recorded Principal Related Investment Balance Allowance

2016

With no allowance recorded: Real estate loans: Conventional $ $ $ Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total With related allowance recorded: Real estate loans: Conventional Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total Total impaired loans: Real estate loans: Conventional Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total impaired loans $ $ $

44



December 31, 2017 and 2016 5. Loans and Allowance for Loan Losses (Continued) The following table provides information with respect to impaired loans with no related allowance and

with an allowance recorded for the years ended December 31, 2017, 2016 and 2015 (amounts in thousands):

Average Interest

Recorded Income Investment Recognized

2017 With no allowance recorded: Real estate loans: Conventional $ $ Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total With related allowance recorded: Real estate loans: Conventional Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total Total impaired loans: Real estate loans: Conventional Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total impaired loans $ $

45



December 31, 2017 and 2016 5. Loans and Allowance for Loan Losses (Continued) Average Interest


2016 With no allowance recorded: Real estate loans: Conventional $ $ Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total With related allowance recorded: Real estate loans: Conventional Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total Total impaired loans: Real estate loans: Conventional Commercial HELOC Construction

Non-real estate loans: Commercial Consumer Total impaired loans $ $

46



December 31, 2017 and 2016 5. Loans and Allowance for Loan Losses (Continued) Average Interest


2015 With no allowance recorded: Real estate loans: Conventional $ $ Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total With related allowance recorded: Real estate loans: Conventional Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total Total impaired loans: Real estate loans: Conventional Commercial HELOC Construction Non-real estate loans: Commercial Consumer Total impaired loans $ $

47



December 31, 2017 and 2016 5. Loans and Allowance for Loan Losses (Continued) Loan principal and interest payments on impaired loans are recorded as principal reductions, if the

remaining loan balance is not expected to be repaid in full. No additional funds are committed to be advanced in connection with impaired loans. The Company uses risk rating definitions for its commercial, commercial real estate and construction real

estate loan portfolios which are generally consistent with regulatory and banking industry norms. Loans are assigned a credit quality grade which is based upon management’s on-going assessment of risk based upon an evaluation of the quantitative and qualitative aspects of each credit. This assessment is a dynamic process and risk ratings are adjusted as each borrower’s financial situation changes. This process is designed to provide timely recognition of a borrower’s financial condition and appropriately focus management resources. Risk ratings on loans within the consumer, conventional real estate and HELOC loan portfolios are based upon payment performance or other knowledge of information or events that call into question the borrower’s repayment ability.

Pass rated loans exhibit acceptable risk to the Company in terms of financial capacity to repay their loans

as well as possessing acceptable fallback repayment sources, typically collateral and personal guarantees. These loans are subject to a formal annual review process according to the scope and parameters established by management. Additionally, management reviews the risk rating when there are signs of deterioration in the interim.

Loans rated Special Mention possess potential weakness that may expose the Company to some risk of

loss in the future. These loans have a history of generally paying as agreed, but require more frequent monitoring and formal reporting to management. These loans do not demonstrate sufficient risk to warrant adverse classification.

Substandard loans reflect well-defined weaknesses in the current repayment capacity, collateral or net

worth of the borrower with the possibility of some loss to the Company if these weaknesses are not corrected. Action plans are required for these loans to address the inherent weakness in the credit and are formally reviewed.

Doubtful loans have all the weaknesses inherent in classified Substandard loans with the added

characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following table summarizes loan portfolios by risk rating as of December 31, 2017 and 2016 (amounts

in thousands): Real Estate Loans Non-Real Estate Loans Conven- Com- Con- Com-

tional mercial HELOC struction mercial Consumer Total 2017

Pass $ $ $ $ $ $ $ Special Mention Substandard Doubtful $ $ $ $ $ $ $

48



December 31, 2017 and 2016 5. Loans and Allowance for Loan Losses (Continued) Real Estate Loans Non-Real Estate Loans Conven- Com- Con- Com-

tional mercial HELOC struction mercial Consumer Total 2016

Pass $ $ $ $ $ $ $ Special Mention Substandard Doubtful $ $ $ $ $ $ $

6. Loan Servicing (use this when amortization method is used) The risks inherent in mortgage servicing rights, included in other assets, relate primarily to changes in

prepayments that result from shifts in mortgage interest rates. The unpaid principal balance of mortgage loans sold and serviced for others amounted to $_____________, $_____________ and $____________ at December 31, 2017, 2016 and 2015, respectively. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.

The following summarizes the activity pertaining to mortgage servicing rights for the years ended

December 31, 2017, 2016 and 2015: 2017 2016 2015 (In Thousands) Mortgage servicing rights:

Balance at beginning of year $ $ $ Additions Disposals Amortization Balance at end of year Valuation allowances: Balance at beginning of year $ $ $ Additions Recoveries Write-downs Balance at end of year Mortgage servicing rights, net $ $ $ Fair value of mortgage servicing rights $ $ $

For the years ended December 31, 2017 and 2016, the fair value of mortgage servicing rights was

determined using a discount rate of _____% and _____%, respectively and a prepayment speed of _____% and _____%, respectively.

49



December 31, 2017 and 2016 6. Loan Servicing (Continued) For the years ended December 31, 2017, 2016 and 2015, contractually specified mortgage servicing fees

included in income from mortgage banking activities amounted to $________, $________ and $_________, respectively.

6A. Loan Servicing (use this when fair value method is used) The risks inherent in mortgage servicing rights, included in other assets, relate primarily to changes in

prepayments that result from shifts in mortgage interest rates. The unpaid principal balance of mortgage loans sold and serviced for others amounted to $_____________, $_____________ and $____________ at December 31, 2017, 2016 and 2015, respectively. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.

Mortgage loans serviced for others are not reported as assets. The principal balances of these loans at

December 31 are as follows: 2017 2016 Mortgage loan portfolios serviced for:

Wells Fargo $ $ Escrow balances maintained in connection with serviced loans were $______ and $______ at

December 31, 2017 and 2016, respectively. Activity for mortgage servicing rights and the related valuation allowance follows: 2017 2016 2015 (In Thousands) Mortgage servicing rights:

Balance, beginning of year $ $ $ Additions Disposals Change in fair value due to changes in assumptions Other changes in fair value Balance, end of year $ $ $

Fair value at December 31, 2017 was determined using discount rates ranging from _____% to _____%,

prepayment speeds ranging from _____% to _____%, and a weighted average default rate of _____%. Fair value at December 31, 2016 was determined using discount rates ranging from _____% to _____%, prepayment speeds ranging from _____% to _____%, and a weighted average default rate of _____%.

50



December 31, 2017 and 2016 7. Premises and Equipment A summary of premises and equipment at December 31, 2017 and 2016 follows: 2017 2016 (In Thousands) Premises:

Land $ $ Building and improvements Capital leases Equipment Construction in progress Less accumulated depreciation and amortization $ $

Depreciation and amortization expense for the years ended December 31, 2017, 2016 and 2015 amounted

to $________, $____________ and $________, respectively. 8. Other Real Estate Owned Other real estate owned (OREO) is presented net of an allowance for losses. An analysis of the

allowance for losses on OREO is as follows: Years Ended December 31, 2017 2016 2015 (In Thousands) Balance at beginning of year $ $ $

Provision for losses Charge-offs Recoveries Balance at end of year $ $ $

51



December 31, 2017 and 2016 8. Other Real Estate Owned (Continued) OREO (income) and expense are comprised of the following: 2017 2016 2015 (In Thousands) Write-downs $ $ $

Rental income Gain on sales Loss on sales Other real estate owned holding expenses $ $ $

[The disclosures in Footnote 8 above are optional, however, should be considered where material.] 9. Deposits Time deposits that meet or exceed the FDIC insurance limit of $250,000 at December 31, 2017 and 2016

were $__________ and $_________, respectively. The aggregate amount of brokered time deposits as of December 31, 2017 and 2016 was $_________ and

$__________, respectively. For time deposits as of December 31, 2017, the scheduled maturities for each of the following five years

ended December 31, and thereafter, are: (Dollars in Thousands) 2018 $

2019 2020 2021 2022 Thereafter $

10. Short-term Borrowings Federal Reserve Bank Discount Window The Company has pledged commercial real estate, commercial and home equity loans to the Federal

Reserve Bank of Boston for access to the discount window advances. The available borrowing capacity at December 31, 2017 and 2016 amounted to $_____________ and $___________, respectively, based on pledged loans in the amount of $_____________ and $______________, respectively. At December 31, 2017 and 2016, no advances were outstanding.

52



December 31, 2017 and 2016 10. Short-term Borrowings (Continued) Securities Sold Under Agreements to Repurchase The securities sold under agreements to repurchase as of December 31, 2017 and 2016 are securities sold

on a short-term basis by the Company that have been accounted for not as sales but as borrowings. The securities consisted of mortgage-backed securities issued by U.S. government sponsored entities. The securities were held in the Company’s safekeeping account at the Federal Home Loan Bank of Boston under the control of the Company. The securities are pledged to the purchasers of the securities. The purchasers have agreed to sell to the Company identical securities at the maturity of the agreements. The balance of securities sold under agreements to repurchase as of December 31, 2017 and 2016 was $_________ million and $______ million, respectively.

Repurchase agreements are secured borrowings. The Company pledges investment securities to secure

those borrowings. Information concerning repurchase agreements is summarized as follows: Note: The table below is not required by GAAP, thus there is not a requirement to include this disclosure

in the footnotes; however, it is common practice to include this disclosure. This table is a Guide 3 requirement. If this information is disclosed in the MD&A or Description of Business (Item 1 of Form 10-K), it is not necessary to include disclosure in the footnotes as well.

2017 2016 2015 Average daily balance during the year $ $ $

Average interest rate during the year % % % Maximum month-end balance during the year $ $ $ Weighted average interest rate at year-end % % %

Other Borrowed Funds The Company has short-term borrowing arrangements with correspondent banks. Under the

arrangements, the Company has unsecured discretionary federal funds lines of credit in the combined amount of $____________ at interest rates that adjust daily. Advances made under these lines of credit are payable on demand or, in the absence of demand, the day following the date of the advances. At December 31, 2017 and 2016, no advances were outstanding.

53



December 31, 2017 and 2016 11. Federal Home Loan Bank Advances Federal Home Loan Bank Advances A summary of FHLB advances at December 31, 2017 and 2016, by maturity, is as follows: Amount Weighted Average Rate 2017 2016 2017 2016 (Dollars in Thousands) Fixed-rate advances maturing during

the year ending December 31: 2018 $ $ – % % 2019 2020 2021 2022 Thereafter Amortizing advances maturing: December 2018 Total FHLB advances $ $ % %

At December 31, 2017, the Company had $____________ in callable advances from the FHLB. These

advances are callable at the discretion of the FHLB on the call date. These advances are callable continuously on a quarterly basis after the initial call date.

The Company also has a $______________ available line of credit with the FHLB at an interest rate that

adjusts daily. No amounts have been drawn on the line of credit. At December 31, 2017 and 2016, the interest rates on FHLB advances ranged from ____% and ____%

and ____% and ____%, respectively. All borrowings from the FHLB are secured by a blanket lien on qualified collateral consisting primarily

of loans with first mortgages secured by one to four family properties. 12. Subordinated Debentures Subordinated debentures as of December 31, 2017 and 2016 amounted to $_____ and $_______,

respectively, consisting of the following issues: Debentures 2017 2016 Rate (In Thousands) Debenture I $ $

Debenture II Debenture III $ $

54



December 31, 2017 and 2016 12. Subordinated Debentures In _______, affiliate of the Company, sold capital securities to the public. The capital securities sold

consisted of ________ Capital Securities with a $______ liquidation amount for each capital security, for a total of $________. The capital securities are fully guaranteed by the Company. Each capital security pays a cumulative quarterly distribution at a rate per annum equal to the three-month LIBOR plus _____%. As of December 31, 2017, the three month LIBOR was ____%. These debentures mature on _______. The subordinated debentures have the same financial terms as the capital securities. The Company makes interest payments and other payments under the subordinated debentures to an affiliate of the Company. The Company’s obligations under the subordinated debentures are unsecured and rank senior to all of the Company’s other borrowings, except borrowings that by their terms rank equal or junior to the subordinated debentures.

13. Income Taxes Allocation of federal and state income taxes between current and deferred portions for the years ended

December 31, 2017, 2016 and 2015 is as follows: 2017 2016 2015 (In Thousands) Current tax provision:

Federal $ $ $ State Deferred tax benefit: Federal State $ $ $

The reasons for the differences between the statutory federal income tax rate and the effective tax rates

for the years ended December 31, 2017, 2016 and 2015 are summarized as follows: 2017 2016 2015 Statutory federal tax rate % % %

Increase (decrease) resulting from: State taxes, net of federal benefit Municipal income Other, net Effective tax rate % % %

[Note, it is also permissible to disclose the table above in dollars]

55



December 31, 2017 and 2016 13. Income Taxes (Continued) The Company had gross deferred tax assets and gross deferred tax liabilities as follows: 2017 2016 (In Thousands) Deferred tax assets:

Allowance for loan losses $ $ Securities capital loss carryforwards Writedown of securities Interest on nonaccrual loans Net unrealized holding loss on available-for-sale securities Charitable contribution carryover Stock expense ESOP expense Pension and retirement incentive expense Deferred compensation Other Gross deferred tax assets Valuation allowance Gross deferred tax assets after valuation allowance Deferred tax liabilities: Book basis in excess of tax basis of premises and equipment Gross deferred tax liabilities $ $

As of December 31, 2017 and 2016, the Company had no operating loss and tax credit carryovers for tax

purposes. As of December 31, 2017, the Company had capital loss carryovers of $___________, which are due to expire in ________. The capital losses can only be utilized against realized capital gains; therefore, as of December 31, 2017, a valuation allowance in the amount of $___________ exists against the deferred tax benefit to the extent management deems it probable the deferred tax benefits will not be fully realized.

The Company’s income tax returns are subject to review and examination by federal and state taxing

authorities. The Company is currently open to audit under the applicable statutes of limitations by the Internal Revenue Service for the years ended December 31, 2013 through 2016. The years open to examination by state taxing authorities vary by jurisdiction; no years prior to 2013 are open.

Thrift bad debt reserve deduction (if applicable): Federal income tax laws provided additional bad debt deductions through 1987, totaling $_________.

Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would total $___________ at December 31, 20_____. If the Bank were liquidated or otherwise ceases to be a bank or if tax laws were to change, this amount would be expensed.

56



December 31, 2017 and 2016 13. Income Taxes (Continued) The valuation reserve has been established for the income tax effects attributable to the deferred tax assets

to limit the federal tax benefit related to impairment losses on securities to the amount of capital gains available to offset the losses.

14. Minimum Regulatory Capital Requirements The Company (on a consolidated basis) and the 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 the Bank’s financial statements. 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 their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Their capital amounts and classification 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.

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the

Company became subject to capital regulations adopted by the Board of Governors of the Federal Reserve System (FRB) and the FDIC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The regulations require a common equity Tier 1 (CET1) capital ratio of 4.5%, a minimum Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8.0%, and a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under prompt corrective action regulations, in order to be considered “well capitalized,” the Company and the Bank must maintain a CET1 capital ratio of 6.5%, a Tier 1 risk based capital ratio of 8.0%, a total risk based capital ratio of 10.0% and a Tier 1 leverage ratio of 5.0%. In addition, the regulations establish a capital conservation buffer above the required capital ratios that phases in beginning January 1, 2016 at 0.625% of risk-weighted assets and increases each year by 0.625% until it is fully phased in at 2.5% effective January 1, 2019. Failure to maintain the capital conservation buffer will limit the ability of the Company and the Bank to pay discretionary bonuses and dividends. At December 31, 2017, the Company and the Bank exceeded the fully phased in regulatory requirement for the capital conservation buffer.

As of December 31, 2017 and 2016, the most recent notifications from the Federal Deposit Insurance

Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category.

57



December 31, 2017 and 2016 14. Minimum Regulatory Capital Requirements (Continued) The Company’s and the Bank’s actual capital amounts and ratios are presented in the following table: To Be Well

Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions

Amount Ratio Amount Ratio Amount Ratio (Dollars in Thousands) December 31, 2017 Total Capital to Risk-Weighted Assets:

Company $ % $ % $ N/A N/A% Bank Common Equity Tier 1 Capital to Risk Weighted Assets: Company N/A N/A Bank Tier 1 Capital to Risk Weighted Assets: Company N/A N/A Bank Tier 1 Capital to Average Assets: Company N/A N/A Bank December 31, 2016 Total Capital to Risk-Weighted Assets: Company $ % $ % $ N/A N/A % Bank Common Equity Tier 1 Capital to Risk Weighted Assets: Company N/A N/A Bank Tier 1 Capital to Risk Weighted Assets: Company N/A N/A Bank Tier 1 Capital to Average Assets: Company N/A N/A Bank

15. Employee Benefits Defined Benefit Pension Plan The Company has a funded noncontributory defined benefit pension plan that covers substantially all of

its employees. The plan provides defined benefits based on years of service and final average salary. The Company uses December 31 as the measurement date for its pension plan.

58



December 31, 2017 and 2016 15. Employee Benefits (Continued) The following tables set forth information about the plan as of December 31 and the years then ended: 2017 2016 (In Thousands) Change in benefit obligation:

Benefit obligation at beginning of year $ $ Interest cost Actuarial (gain) loss Benefits paid Settlement payments Benefit obligation at end of year Change in plan assets: Fair value of plan assets at beginning of year Actual (loss) return on plan assets Benefits and settlements paid Fair value of plan assets at end of year Funded status $ $ Accumulated benefit obligation at end of year $ $

[Note that reduced disclosure of the information above is available to nonpublic entities (refer to

ASC 715-20-50-5, Expenses-Disclosure-General)] Amounts recognized in accumulated other comprehensive income as of December 31, before tax effect,

consist of: 2017 2016 (In Thousands) Unrecognized transition obligation $ $

Unrecognized net actuarial loss $ $

At December 31, the assumptions used to determine the benefit obligation are as follows: 2017 2016 Discount rate % %

Rate of compensation increase

59



December 31, 2017 and 2016 15. Employee Benefits (Continued) Net periodic pension cost (benefit) and other comprehensive (income) loss consist of the following for

the years ended December 31: 2017 2016 2015 (In Thousands) Interest cost $ $ $

Expected return on assets Amortization of transition obligation Amortization of loss/gain Settlement loss Net periodic pension cost (benefit) Amortization of loss/gain Amortization of transition obligation Actuarial (gain) loss during the year Other comprehensive (income) loss Net periodic pension cost (benefit) and other comprehensive (income) loss $ $ $

[Note that reduced disclosure of the information above is available to nonpublic entities (refer to

ASC 715-20-50-5, Expenses-Disclosure-General)] The estimated transition obligation and net actuarial loss that will be amortized from accumulated other

comprehensive income into net periodic cost over the year ending December 31, 2018 is approximately $_______ and $________, respectively.

For the years ended December 31, 2017, 2016 and 2015, the assumptions used to determine net periodic

pension cost are as follows: 2017 2016 2015 Discount rate % % %

Expected long-term rate of return on plan assets Rate of compensation increase

The expected long-term rate of return assumption is based on prevailing yields on high quality fixed

income investments, increased by a premium of __% to ___% for equity investments.

60



December 31, 2017 and 2016 15. Employee Benefits (Continued) The Company groups its pension plan assets in three levels, based on the markets in which the assets are

traded and the reliability of the assumptions used to determine fair value. Level 1 – The plan assets measured at fair value in level 1 are based on quoted market prices in an active

exchange market. Level 2 – Plan assets measured at fair value in level 2 are based on pricing models that consider standard

input factors, such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

Level 3 – Plan assets measured at fair value in level 3 are based on unobservable inputs, which includes

assumptions and estimates. The asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of

any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. Below is a description of the valuation methodologies used for assets measured at fair value.

Investments Collective funds, equity securities, mutual funds and short-term investments: These securities, measured

at fair value in Level 1, are based on quoted market prices in an exchange market. Securities measured at fair value in Level 2 are based on independent unadjusted market-based prices received from a third party pricing service that utilizes pricing models that consider standard input factors, such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

Hedge funds: These securities, measured at fair value in Level 3, are valued based on management

estimates as observable market data is not readily available. The funds are valued at net asset value, as calculated by the Fund’s manager based upon the terms and conditions of the organizational documents of the underlying funds, with further consideration to portfolio risks.

61



December 31, 2017 and 2016 15. Employee Benefits (Continued) The fair value of the Company’s pension plan assets are as follows: Fair Value Measurements at Reporting Date Using: Quoted

Prices in Significant Active Other Significant Markets for Observable Unobservable Identical Inputs Inputs Asset Category Allocation Total Assets Level 1 Level 2 Level 3

(Dollars in Thousands) December 31, 2017:

Collective funds % $ $ $ $ Equity securities Mutual funds Hedge funds Short-term investments % $ $ $ $ December 31, 2016: Collective funds % $ $ $ $ Equity securities Mutual funds Hedge funds Short-term investments % $ $ $ $

The following is a reconciliation of level 3 investments for which significant unobservable inputs were

used to determine fair value (in thousands): Beginning balance, January 1, 2016 $

Purchases Investment income Redemptions Ending balance, December 31, 2016 Beginning balance, January 1, 2017 Redemptions Ending balance, December 31, 2017 $

62



December 31, 2017 and 2016 15. Employee Benefits (Continued) The defined benefit plan offers a common and collective trust as the underlying investment structure for

the pension plan. The target allocation mix for the common and collective trust portfolio calls for an equity-based investment deployment range of ____% to ____% of total portfolio assets. The remainder of the portfolio is allocated to fixed income securities with a target range of ____% to ____% and other investments, including global asset allocation and hedge funds, from ____% to ____%. The overall investment objective is to diversify investments across a spectrum of investment types to limit risks from large market swings.

The Company expects to contribute $___________ to its pension plan in 2018. Estimated future benefit payments to employees are as follows: Year Ended

December 31 Amount (In Thousands) 2018 $

2019 2020 2021 2022 2023 through 2027

Employee Stock Ownership Plan The Company maintains an Employee Stock Ownership Plan (ESOP) to provide eligible employees the

opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of all Company employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax law limits.

The Company contributed funds to a subsidiary to enable it to grant a loan to the ESOP for the purchase

of ____________ shares of the Company’s common stock at a price of $_____ per share. The loan obtained by the ESOP from the Company’s Subsidiary to purchase Company common stock is payable annually over ___ years at a rate per annum equal to the Prime Rate (_____% at December 31, 20_____). Loan payments are principally funded by cash contributions from the Company. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. Cash dividends paid on allocated shares are distributed to participants and cash dividends paid on unallocated shares are used to repay the outstanding debt of the ESOP. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid.

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December 31, 2017 and 2016 15. Employee Benefits (Continued) At December 31, 2017, the remaining principal balance on the ESOP debt is payable as follows: Year Ended

December 31 Amount (In Thousands) 2018 $

2019 2020 2021 2022 Thereafter

Shares held by the ESOP include the following: 2017 2016 Unallocated

Committed to be allocated Allocated

The fair value of unallocated shares was approximately $______ million at December 31, 2017 and

$______ million at December 31, 2016. Total compensation expense recognized in connection with the ESOP for the years ended December 31, 2017, 2016 and 2015 was $______, $________ and $________, respectively.

Split Dollar Life Plan In ____, the Company adopted ASC 715, “Compensation – Retirement Benefits”, and recognized a

liability for the Company’s future postretirement benefit obligations under its endorsement split-dollar life insurance arrangements. The total liability for the arrangements included in other liabilities was $______ and $______ at December 31, 2017 and 2016, respectively. Expense for the years ended December 31, 2017, 2016 and 2015 was $______, $______ and $_____, respectively.

401(k) Plan The Company maintains a savings and retirement plan which qualifies under Section 401(k) of the

Internal Revenue Code. The plan provides for voluntary contributions by participating employees ranging from one percent to twelve percent of their compensation, subject to certain limitations. The Company will match the employee’s voluntary contribution up to five percent of their compensation. Expense attributable to the 401(k) plan for the years ended December 31, 2017, 2016 and 2015 amounted to $_________, $___________ and $__________, respectively.

Performance Incentive Plan The Company has a performance incentive plan in which employees are eligible to participate. The Plan

provides for awards based upon a combination of Company and individual performance measured against predetermined annual goals. The Plan is administered by the Company’s President under the direction of the Board of Directors. Incentive compensation expense for the years ended December 31, 2017, 2016 and 2015 amounted to $____________, $___________ and $____________, respectively.

64



December 31, 2017 and 2016 15. Employee Benefits (Continued) Director and Officer Retirement Arrangements The Company has deferred compensation arrangements with certain directors and officers. Under the

arrangements, the participants defer agreed-upon amounts of compensation. The participants earn a market rate of return on these deferrals. Should the participant die while serving the Company, his or her designated beneficiary would receive a death benefit. The related liabilities for 2017 and 2016 were approximately $____________ and $____________, respectively. In addition, the 2017, 2016 and 2015 expenses related to these plans were approximately $____________, $____________ and $____________, respectively.

Illustrative Bank Supplemental Executive Retirement Plan Effective ____________, the Company established the Illustrative Bank Supplemental Executive

Retirement Plan (the Plan). The purpose of the Plan is to remain competitive with our peers in our compensation arrangements and to help us retain certain executive officers of the Company. At December 31, 2017 and 2016, there were __________ participants in the Plan. Participants are fully vested after completion of between five and ten years of service. The Plan is unfunded. Information pertaining to the activity in the Plan is as follows:

[Note that reduced disclosure of the information below is available to nonpublic entities (refer to

ASC 715-20-50-5, Expenses-Disclosure-General)] Years Ended

December 31, 2017 2016 Change in benefit obligation:

Benefit obligation at beginning of year $ $ Service cost Interest cost Actuarial (gain) loss Benefit obligation at end of year Funded status at end of year $ $ Accrued pension benefit $ $ Accumulated benefit obligation $ $

The assumptions used to determine the benefit obligation are as follows: December 31, 2017 2016 Discount rate % %

Rate of compensation increase

65



December 31, 2017 and 2016 15. Employee Benefits (Continued) The components of net periodic pension cost are as follows: Years Ended December 31, 2017 2016 2015 Service cost $ $ $

Interest cost Amortization of prior service cost Net periodic cost $ $ $

Other changes in benefit obligation recognized in other comprehensive income are as follows: Years Ended December 31, 2017 2016 2015 Amortization of prior service cost $ $ $

Net actuarial (gain) loss Total recognized in other comprehensive income $ $ $

The assumptions used to determine net periodic pension cost are as follows: Years Ended December 31, 2017 2016 2015 Discount rate % % %

Rate of compensation increase Amounts recognized in accumulated other comprehensive income, before tax effects, consist of the

following: December 31, 2017 2016 Unrecognized prior service cost $ $

Unrealized net gain $ $

The estimated prior service cost that will be accreted from accumulated other comprehensive income into

net periodic pension expense during the year ending December 31, 2018 is $___________. The Company does not expect to contribute to the Plan in 2018.

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December 31, 2017 and 2016 15. Employee Benefits (Continued) Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows: Year Ending

December 31 Amount 2018 $

2019 2020 2021 2022 Years 2023-2027

16. Stock Based Compensation On _____________, the stockholders of the Company approved the Illustrative Bancorp, Inc. ________

Equity Incentive Plan. The following table presents the amount of cumulatively granted stock options and restricted stock

awards, net of forfeitures, through December 31, 2017 under the Illustrative Bancorp, Inc. ______ Equity Incentive Plan:

Authorized Cumulative Granted Net of Forfeitures Stock Authorized Stock

Option Restricted Authorized Option Restricted Outstanding Awards Stock Awards Total Awards Stock Awards Total

The following table presents the pre-tax expense associated with stock options and restricted stock awards

and the related tax benefits recognized: For the Year Ended December 31 2017 2016 2015 (In Thousands) Stock based compensation expense:

Stock options $ $ $ Restricted stock awards Total stock based award expense $ $ $ Related tax benefits recognized in earnings $ $ $

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December 31, 2017 and 2016 16. Stock Based Compensation (Continued) The following table presents relevant information relating to the Company’s stock options for the periods

indicated: For the Year Ended December 31 2017 2016 2015 (In Thousands) Weighted average grant date fair value of

options granted $ $ $ Intrinsic value of stock options exercised Cash paid to settle equity instruments granted under stock based compensation arrangements

Total compensation cost related to non-vested awards not yet recognized and the weighted average period

(in years) over which it is expected to be recognized is as follows: As of December 31, 2017 Weighed

Amount Average Period (In Thousands) Stock options $

Restricted stock $

The Company granted the awards presented in the table below. The fair value of the stock options granted

was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions used:

Expected volatility is based on the standard deviation of the historical volatility of the daily

adjusted closing price of the Company’s shares. Expected term represents the period of time that the option is expected to be outstanding. The

Company determined the expected life using the “Simplified Method.” Expected dividend yield is determined based on management’s expectations regarding issuing

dividends in the foreseeable future. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant

for a period equivalent to the expected life of the option. The stock-based compensation expense recognized in earnings is based on the amount of

awards ultimately expected to vest, therefore a forfeiture assumption is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in 2017, 2016 and 2015 has been reduced for annualized estimated forfeitures of _____%, _____% and _____%, respectively for grants to employees, based on historical experience.

68



December 31, 2017 and 2016 16. Stock Based Compensation (Continued) Date of grant ___ / ___ / ___

Options granted Exercise price $ Vesting period (1) _____ years Expiration date ___ / ___ / ___

Expected volatility ____% Expected term ____ years Expected dividend yield ____% Risk free interest rate ____%

Fair value $ (1) – Vesting is ratably and the period begins on the date of grant. The option exercise price is derived from trading value on the date of grant. A summary of the status of the Company’s Stock Option and Restricted Stock Awards for the year ended

December 31, 2017 is presented in the tables below: Weighted

Weighted Average Stock Average Contractual Aggregate Option Exercise Term Intrinsic Awards Price (in Years) Value

Balance at January 1, 2017 $ $

Granted Exercised Forfeited Balance at December 31, 2017 $ $ Exercisable $ $

Nonvested Weighted

Restricted Average Stock Grant Awards Price

Balance at January 1, 2017 $ $

Granted Vested Balance at December 31, 2017 $ $

For the years ended December 31, 2017, 2016 and 2015, the fair value of shares vested during the year

amounted to $____________, $___________ and $___________, respectively.

69



December 31, 2017 and 2016 17. Commitments and Contingencies Leases As of December 31, 2017, the Company was obligated under non-cancelable operating leases for certain

premises and equipment. The total minimum rental due in future periods under these existing agreements as of December 31, 2017 is as follows:

(In Thousands) 2018 $

2019 2020 2021 2022 Thereafter Total minimum lease payments $

The leases contain options to extend for periods from _______ to _______ years. The cost of such is not

included above. Certain leases contain provisions for escalation of minimum lease payments contingent upon increases in real estate taxes and percentage increases in the consumer price index. Total rental expense amounted to $_____________, $____________ and $__________ for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company entered into a sublease agreement with a third party for office space as of __________.

The present value of the lease payments discounted at the Company’s incremental borrowing rate was recorded as an asset and a liability (capital lease obligation). The amount of the capital lease obligation is $___________ as of December 31, 2017 and $__________ as of December 31, 2016. The asset is being depreciated and the capital lease obligation is being amortized over 25 years. After the 25 years, the Company has the option to extend the sublease for up to three additional terms; the first two for a period of ten years each and the third for a period of six years, unless the sublease is terminated sooner. The following is a schedule of years of future minimum lease payments under the capital lease obligation with the present value of the net minimum lease payments as of December 31, 2017:

(In Thousands) 2018 $

2019 2020 2021 2022 Thereafter Total minimum lease payments Less amount representing interest Present value of net minimum lease payments $

70



December 31, 2017 and 2016 17. Commitments and Contingencies (Continued) Credit-Related Financial Instruments The Company is a party to 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. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the accompanying consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments.

The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments.

At December 31, 2017 and 2016, the following financial instruments were outstanding whose contract

amounts represent credit risk: 2017 2016 (In Thousands) Commitments to grant loans $ $

Unadvanced construction funds Unadvanced home equity lines of credit Unadvanced cash reserve lines of credit Unadvanced commercial lines of credit Letters of credit

Commitments to grant loans and unadvanced construction funds 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. The commitments for lines of credit may expire without being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case by case basis. Mortgage loans, construction loans, and home equity lines of credit are collateralized by real estate. Commercial lines of credit are generally secured by real estate or business assets or may be unsecured, and cash reserve lines of credit are unsecured.

Standby letters of credit are conditional commitments issued by the Company to guarantee the

performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of December 31, 2017 and 2016, the maximum potential amount of the Company’s obligation was $_______ and $________, respectively, for financial and performance and standby letters of credit. The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit.

Loans Sold With Recourse Obligations The Company sells certain loans on both a servicing-released and servicing-retained basis to the Federal

Home Loan Bank pursuant to contracts which include limited recourse provisions in the event a loss is incurred on the loan. At December 31, 2017 and 2016, the maximum contingent liability associated with loans sold with recourse and derecognized from the financial statements under the Federal Home Loan Bank MPF program is $______________ and $______________, respectively.

71



December 31, 2017 and 2016 17. Commitments and Contingencies (Continued) The Company also sells certain loans on both a servicing-released and servicing-retained basis to other

investors pursuant to contracts which include limited recourse provisions whereby the Company would be required to repurchase loans and/or refund premiums in the event a borrower defaults on any of the first four payments due. At December 31, 2017 and 2016, the principal balance of loans sold subject to such recourse provisions was $_____________ and $_____________, respectively, and premiums received on loans sold that were subject to refund provisions amounted to $____________ and $___________, respectively. The contracts also include repurchase obligation provisions for the life of the loan for fraud or misrepresentation.

The Company accrues credit losses related to off-balance sheet loan commitments and recourse

obligations. Potential losses are estimated using similar risk factors used to determine the allowance for loan losses. The Company has recorded a liability of $___________ and $___________ at December 31, 2017 and 2016, respectively, related to these loan commitments and recourse obligations.

At December 31, 2017, there are no significant delinquencies related to loans sold with recourse. 18. On-Balance Sheet Derivative Instruments and Hedging Activities (A) Certain derivative instruments do not meet the requirements to be accounted for as hedging instruments.

Accordingly, these undesignated derivative instruments are recognized on the consolidated balance sheets at fair value, with changes in fair value recorded in income from mortgage banking activities on the consolidated statements of income.

Fair Value Hedges The Company generally applies hedge accounting to its derivatives used for interest rate risk

management purposes. Hedge accounting is permitted only if specific criteria are met, including a requirement that a highly effective relationship exists between the derivative instrument and the hedged item, both at inception of the hedge and on an ongoing basis. The hedge accounting method depends upon whether the derivative instrument is classified as a fair value hedge (i.e. hedging an exposure related to a recognized asset or liability) or a cash flow hedge (i.e. hedging an exposure related to the variability of future cash flows associated with a recognized asset or liability, or a forecasted transaction). Changes in the fair value of effective fair value hedges are recognized in current earnings (with the change in fair value of the hedged asset or liability also recorded in earnings). Changes in the fair value of effective cash flow hedges are recognized in other comprehensive income or loss until earnings are affected by the variability in cash flows of the designated hedged item. Ineffective portions of hedge results are recognized in current earnings. Changes in the fair value of derivatives for which hedge accounting is not applied are recognized in current earnings.

72



December 31, 2017 and 2016

18. On-Balance Sheet Derivative Instruments and Hedging Activities (Continued) Cash Flow Hedges The Company has entered into interest rate swap agreements (excluding interest rate swap agreements

related to commercial lending transactions) with a total notional amount of $_____ million as of December 31, 2017 and a total notional amount of $_____ million as of December 31, 2016. The notional amounts are the amounts on which calculations, payments and the value of the swaps are based. Notional amounts do not represent direct credit exposures. Direct credit exposures are limited to the net difference between the calculated amounts to be received and paid, if any. Such differences, which represent the fair value of the swaps, are reflected on the Company’s consolidated balance sheet as derivative assets or derivative liabilities.

(A) Early adoption of ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, will

enhance the required disclosures about hedging activities and their effect on the consolidated financial statements. Please refer to ASU 2017-12.

All of the interest rate swap agreements have been designated as cash flow hedges (excluding interest

rate swap agreements related to commercial lending transactions). The purpose of $______ million of the swaps is to protect the Company from the risk of variability in payments arising from the variable interest rates on its junior subordinated debentures. This hedging strategy effectively converts the LIBOR-based interest rate on the junior subordinated debentures to a fixed rate of interest for a seven year period starting on the effective dates of the swaps. The purpose of the remaining swaps is to protect the Company from the risk of variability in payments arising from short-term FHLB borrowings. The Company is using rolling one month FHLB borrowings combined with pay fixed swaps to effectively convert the short-term FHLB borrowings to a fixed rate for a defined period of time.

Information about the interest rate swap agreements used to hedge variable rate junior subordinated

debentures at December 31, 2017 and 2016 follows: 2017 2016 (Dollars in Thousands) Notional amount $ $ Weighted-average pay rate % % Weighted-average receive rate Weighted-average maturity in years Estimated fair value of (liability) asset Information about the interest rate swap agreements used to hedge short-term FHLB borrowings at

December 31, 2017 and 2016 follows: 2017 2016 (Dollars in Thousands) Notional amount $ $ Weighted-average pay rate % % Weighted-average receive rate Weighted-average maturity in years Estimated fair value of (liability) asset

73



December 31, 2017 and 2016 18. On-Balance Sheet Derivative Instruments and Hedging Activities (Continued)

The effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges are reported in other comprehensive income / loss and subsequently reclassified to earnings when the forecasted transaction affects earnings. Each quarter, the Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The ineffective portion of changes in the fair value of the derivatives, if any, is recognized directly in earnings. During the years ended December 31, 2017 and 2016, the Company recognized $_______ and $________, respectively, in other expense related to the ineffective portion of changes in the fair value of the derivatives.

Amounts included in the Consolidated Statements of Income, Comprehensive Income and Changes

in Stockholders’ Equity related to interest rate derivatives designated as cash flow hedges were as follows for the years ending December 31:

2017 2016 (In Thousands) Net unrealized holding losses on derivatives $ $

Reclassification adjustment for realized losses in net income Tax benefit recognized in other comprehensive loss Other comprehensive loss recorded in accumulated other comprehensive loss, net of tax effect $ $

Derivative Loan Commitments The Company enters into commitments to fund residential mortgage loans at specified times in the future,

with the intention that these loans will subsequently be sold in the secondary market. A mortgage loan commitment binds the Company to lend funds to a potential borrower within a specified period of time, generally up to 60 days after inception of the commitment.

Outstanding derivative loan commitments expose the Company to the risk that the price of the loan arising

from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease the value of these loan commitments increases. The notional amount of undesignated mortgage loan commitments was $__________ and $__________ and the fair value of such commitments was an asset of $____________ and $____________, at December 31, 2017 and 2016, respectively.

Investor Loan Sale Commitments The Company had $____________ and $_____________, in outstanding investor loan sale commitments

and the fair value of such commitments was a net liability of $_________ and $_________, at December 31, 2017 and 2016, respectively.

74



December 31, 2017 and 2016 18. On-Balance Sheet Derivative Instruments and Hedging Activities (Continued) Forward Loan Sale Commitments With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of

mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.

The Company expects that forward loan sale commitments will experience changes in fair value opposite

to the interest component of the change in fair value of derivative loan commitments. The notional amount of undesignated forward loan sale commitments was $____________ and $____________ and fair value of such commitments was a liability of $____________ and an asset of $____________ at December 31, 2017 and 2016, respectively.

The following table presents the fair values of derivative financial instruments included in the

consolidated balance sheets at December 31, 2017 and 2016: Assets Balance

Sheet Fair Location Value

(In Thousands) 2017

Derivative loan commitments Other assets $ Investor loan sale commitments Other assets Forward loan sale commitments Other assets Total derivatives $ 2016 Derivative loan commitments Other assets $ Investor loan sale commitments Other assets Forward loan sale commitments Other assets Total derivatives $

The impact of netting the fair values of derivative financial instruments is not material to the consolidated

balance sheets at December 31, 2017 and 2016.

75



December 31, 2017 and 2016 18. On-Balance Sheet Derivative Instruments and Hedging Activities (Continued) The following table presents information pertaining to derivative instruments included in the consolidated

statements of income for the years ended December 31, 2017 and 2016: 2017 2016 Amount

Derivative Instruments Location of Gain/Loss of Gain (Loss) (In Thousands) Derivative loan commitments Mortgage banking activities, net $ $

Investor loan sale commitments Mortgage banking activities, net Forward loan sale commitments Mortgage banking activities, net Total $ $

Interest Rate Swaps Related to Commercial Lending Transactions The Company is also a party to interest rate swap transactions that are not designated as hedging

instruments. These transactions relate to interest rate swaps that the Company has entered into with commercial lending customers to effectively convert their loans from a variable rate to a fixed rate. The Company pays interest to the customer at a floating rate on the notional amount and receives interest from the customer at a fixed rate on the same notional amount. Concurrently, the Company enters into an identical offsetting interest rate swap with a third-party financial institution. In the offsetting swap, the Company pays the other financial institution at the same fixed rate on the same notional amount as the swap entered into with the commercial lending customer, and receives interest from the financial institution for the same floating rate on the same notional amount. Hedge accounting has not been applied for these derivatives. Accordingly, changes in the fair value of the interest rate swaps, which offset each other, are recognized in current earnings. Derivative assets and liabilities are recorded within other assets and other liabilities in the consolidated financial statements.

Information about interest rate swaps related to commercial lending transactions is as follows as of

December 31: Weighted Estimated Notional Average Weighted Average Rate Fair Value Net Amount Maturity Received Paid Asset (Liability) 2017 (In Thousands) (In Years) (In Thousands) Interest rate swaps on loans

with commercial lending customers $ % % $ Interest rate swaps with counterparties that offset swaps with commercial lending customers

76



December 31, 2017 and 2016 18. On-Balance Sheet Derivative Instruments and Hedging Activities (Continued) Weighted Estimated Notional Average Weighted Average Rate Fair Value Net Amount Maturity Received Paid Asset (Liability) 2016 (In Thousands) (In Years) (In Thousands) Interest rate swaps on loans

with commercial lending customers $ % % $ Interest rate swaps with counterparties that offset swaps with commercial lending customers

As of December 31, 2017 and 2016, the Company has pledged cash collateral to derivative counterparties

totaling $____________ and $___________, respectively. The Company may need to post additional collateral or may receive collateral in return in the future in proportion to potential changes in the overall unrealized gain/loss position.

19. Other Comprehensive (Loss) Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included

in net income. Although certain changes in assets and liabilities are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items along with net income, are components of comprehensive income.

The following table presents the components of other comprehensive income (loss) for the years ended

December 31: 2017 2016 2015 (In Thousands) Unrealized investment gains (losses) arising during the period $ $ $

Reclassification adjustment for realized gains in net income(1) Income tax (expense) benefit Unrealized actuarial losses and prior service costs on defined benefit pension plan Reclassification adjustment for amortization of prior service costs(1) Reclassification adjustment for amortization of net actuarial loss(1) Other comprehensive loss related to defined benefit pension plan

77



December 31, 2017 and 2016 19. Other Comprehensive (Loss) Income (Continued) 2017 2016 2015 (In Thousands) Income tax (expense) benefit $ $ $

Net unrealized holding gains (losses) on derivatives Reclassification adjustment for realized (gains) losses in net income(1) Income tax (expense) benefit Other comprehensive income (loss), net of tax $ $ $

(1) Reclassification adjustments are comprised of realized securities gains and losses, the amortization of

unrecognized defined benefit pension plan costs, and the ineffective portion of interest rate swaps. The realized securities gains and losses have been reclassified out of accumulated other comprehensive

income and have affected certain lines in the consolidated statements of income as follows: the pre-tax amount is included in net gain on sales and calls of securities; the tax expense in the amounts of $_______, $_______ and $_____ for the years ended December 31, 2017, 2016 and 2015, respectively, is included in income tax expense; and the after-tax amount is included in net income.

The amortization of unrecognized defined benefit pension plan costs has been reclassified out of

accumulated other comprehensive income and has affected certain lines in the consolidated statements of income as follows: the pre-tax amount is included in salaries and employee benefits; the tax benefit in the amounts of $______, $_______ and $______ for the years ended December 31, 2017, 2016 and 2015, respectively, is included in income tax expense; and the after-tax amount is included in net income.

The ineffective portion of interest rate swaps has been reclassified out of accumulated other

comprehensive income and has affected certain lines in the consolidated statements of income as follows: the pre-tax amount is included in other expense; the tax expense (benefit) in the amounts of $_____, $__________ and $_____ for the years ended December 31, 2017, 2016 and 2015, respectively, is included in income tax expense; and the after-tax amount is included in net income.

Accumulated other comprehensive income consists of the following as of December 31: 2017 2016 (In Thousands) Net unrealized holding gains on securities available-for-sale, net of tax $ $

Unrecognized defined benefit pension plan costs, net of tax Net unrealized gain on derivatives, net of tax

Accumulated other comprehensive income $ $

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December 31, 2017 and 2016 20. Fair Value Measurements The Company utilizes a framework for measuring fair value under generally accepted accounting

principles for all financial instruments that are being measured and reported on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New

York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets.

Valuations are obtained from third party pricing services for identical or similar assets or liabilities.

Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

In determining the appropriate levels, the Company performs a detailed analysis of the assets and

liabilities that are subject to fair value measurements. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

For the years ended December 31, 2017 and 2016, the application of valuation techniques applied to

similar assets and liabilities has been consistent. The following is a description of the valuation methodologies used for instruments measured at fair value:

Securities – Fair value measurements for Level l and Level 2 securities are obtained from a third-party

pricing service and are not adjusted by management. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

Loans held for sale – Fair values of loans held for sale are based on commitments on hand from investors

or prevailing market prices. [This presentation is only for those loans held for sale for which the fair value option has been elected.]

Derivative financial instruments – Fair values for derivative financial instruments are based on prices

currently charged to enter into similar agreements, taking into account the probability that the commitment will be exercised.

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December 31, 2017 and 2016 20. Fair Value Measurements (Continued) Fair Value on a Recurring Basis Assets measured at fair value on a recurring basis at December 31, 2017 and 2016 are summarized below. Level 1 Level 2 Level 3 Fair Value (In Thousands) 2017

Debt securities: U.S. Government Agencies $ $ $ $ Residential mortgage-backed securities Municipal bonds Equity securities: Common stock: Automobile Telecommunications Computers/Software & Office Equipment Consumer & Household Products Consumer Discretionary Food & Beverage Chemicals & Fertilizer Broadcasting & Communications Financial Institutions Healthcare & Pharmaceutical Industrial Insurance Integrated Utilities Oil & Gas Specialty Finance Technology Transportation Mutual funds: Short-Term Bonds Loans held for sale Derivative loan commitments, net Total $ $ $ $

80



December 31, 2017 and 2016 20. Fair Value Measurements (Continued) Level 1 Level 2 Level 3 Fair Value (In Thousands) 2016

Debt securities: U.S. Government Agencies $ $ $ $ Residential mortgage-backed securities Municipal bonds Equity securities: Common stock: Automobile Telecommunications Computers/Software & Office Equipment Consumer & Household Products Consumer Discretionary Food & Beverage Chemicals & Fertilizer Broadcasting & Communications Financial Institutions Healthcare & Pharmaceutical Industrial Insurance Integrated Utilities Oil & Gas Specialty Finance Technology Transportation Mutual funds: Short-Term Bonds Loans held for sale Derivative loan commitments, net Total $ $ $ $

There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the

years ended December 31, 2017 and 2016

or The following transfers between Level 1 and Level 2 occurred during 2017 and 2016: 2017 2016 Transfers from Level 1 to Level 2: Mortgage-backed securities $ $

Transfers from Level 2 to Level 1: Mortgage-backed securities $ $

Describe the reasons for the transfer.

81



December 31, 2017 and 2016 20. Fair Value Measurements (Continued) The table below presents a reconciliation of all assets measured at fair value on a recurring basis using

significant unobservable inputs (Level 3) for the years ended December 31: Residential

Mortgage- Backed Securities

2017 2016 Balance of recurring Level 3 assets at January 1 $ $

Total gains or losses for the period: Included in earnings (provide f/s/ line item) Included in other comprehensive income Purchases Sales Issuances Settlements Transfers into Level 3 Transfers out of Level 3 Balance of recurring Level 3 assets at December 31 $ $

Fair Value on a Non-Recurring Basis The Company may also be required, from time to time, to measure certain other financial assets on a non-

recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets at December 31, 2017 and 2016. Losses represent the amount of write-down or provision for loss recorded during 2017 and 2016 on the assets held as of December 31, 2017 and 2016, respectively.

Year Ended

December 31, 2017 December 31, 2017 Level 1 Level 2 Level 3 Total Gains/(Losses) (In Thousands) Impaired loans $ $ $ $

Mortgage servicing rights $ $ $ $

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December 31, 2017 and 2016 20. Fair Value Measurements (Continued) Year Ended

December 31, 2016 December 31, 2016 Level 1 Level 2 Level 3 Total Gains/(Losses) (In Thousands) Impaired loans $ $ $ $

Mortgage servicing rights $ $ $ $

Financial assets measured at fair value on a non-recurring basis during the reported periods include certain

impaired loans reported at fair value of the underlying collateral. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting or projected cash flows, which relies inherently on unobservable data. Therefore, real estate collateral related nonrecurring fair value measurement adjustments have generally been classified as Level 3. Losses on certain impaired loans were based on the fair value, less costs to sell, of the underlying collateral securing these loans and were recorded during the years ended December 31, 2017 and 2016. The losses are reflected as components of the allowance for loan losses and are not recorded directly as an adjustment to current earnings.

Losses applicable to mortgage servicing rights are based on fair values as determined using a present

value cash flow model and assumptions about loan prepayment speeds. Losses on mortgage servicing rights are charged to operations.

There are no liabilities measured at fair value on a recurring or non-recurring basis at December 31, 2017

or 2016. The table below presents the carrying value and estimated fair value of the Company’s financial

instruments. December 31, 2017 Carrying Fair Value Value Level 1 Level 2 Level 3 Total (In Thousands) Financial assets:

Cash and cash equivalents $ $ $ $ $ Interest-bearing time deposits with other banks Trading securities Available-for-sale securities Held-to-maturity securities Federal Home Loan Bank stock Federal Reserve Bank stock Loans held-for-sale Loans Bank owned life insurance Accrued interest receivable Mortgage servicing rights

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December 31, 2017 and 2016 20. Fair Value Measurements (Continued) December 31, 2017 Carrying Fair Value Value Level 1 Level 2 Level 3 Total (In Thousands) Financial liabilities:

Deposits Short-term borrowings Federal Home Loan Bank advances Subordinated debt Capital lease obligation Accrued interest payable

December 31, 2016 Carrying Fair Value Value Level 1 Level 2 Level 3 Total (In Thousands) Financial assets:

Cash and cash equivalents $ $ $ $ $ Interest-bearing time deposits with other banks Trading securities Available-for-sale securities Held-to-maturity securities Federal Home Loan Bank stock Federal Reserve Bank stock Loans held-for-sale Loans Bank owned life insurance Accrued interest receivable Mortgage servicing rights

Financial liabilities:

Deposits Short-term borrowings Federal Home Loan Bank advances Subordinated debt Capital lease obligation Accrued interest payable

The following methods and assumptions were used by the Company to estimate the fair value of financial

instruments: Cash and Cash Equivalents The fair value of cash and cash equivalents approximates their relative book values, as these financial

instruments have short maturities.

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December 31, 2017 and 2016 20. Fair Value Measurements (Continued) Interest-bearing Time Deposits with Other Banks Fair values for interest-bearing time deposits with other banks are based upon quoted market price. Securities The fair value of these securities is estimated based on bid prices publicly available or bid quotations

received from securities dealers at or near year end. Loans and Loans Held for Sale Fair values are estimated for portfolios of loans with similar financial characteristics. The fair value of

loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimates of maturity are based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions, and the effects of estimated prepayments.

The fair value of loans held for sale is not materially different from book value.

Accrued Interest Receivable The fair market value of this financial instrument approximates book value. Federal Home Loan Bank Stock This financial instrument does not have a ready market; however it may be redeemed at par. Therefore,

the fair market value approximates cost. Federal Reserve Bank Stock This financial instrument does not have a ready market; however, it may be redeemed at par. Therefore,

the fair market value approximates cost. Bank Owned Life Insurance The fair value of this financial instrument approximates its book value due to the nature of the asset. Mortgage Servicing Rights Mortgage servicing rights (MSRs) do not trade in an active, open market with readily observable prices.

While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, the Company estimates the fair value of MSRs using discounted cash flow models incorporating numerous assumptions from the perspective of market participants including servicing income, servicing costs, market discount rates, prepayment speeds, and default rates.

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December 31, 2017 and 2016 20. Fair Value Measurements (Continued) Deposits The fair value of deposits, with no stated maturity, such as noninterest-bearing demand deposits, savings,

NOW accounts and money market accounts, is equal to the amount payable on demand. The fair values of certificates of deposit and brokered time deposits are based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

The fair value estimates do not include the benefit that results from the low-cost funding provided by the

deposit liabilities compared to the cost of borrowing funds in the market. If that value was considered the fair value of the Company’s net assets could increase.

Short-Term Borrowings The fair value of short-term borrowings approximates the carrying value due to the short-term nature of

the instrument. Borrowed Funds (Including Federal Loan Bank advances, Subordinated debentures, and Capital lease

obligations) The fair value of the Company’s borrowings is estimated by discounting the cash flows through maturity

or the next repricing date based on current rates available to the Company for borrowings with similar maturities.

Accrued Interest Payable The fair value of accrued interest payable approximates carrying value. The table below presents, for the years ended December 31, 2017 and 2016, the changes in Level 3 assets

that are measured at fair value on a recurring basis. Derivative, Investor

and Forward Loan Sale Commitments, Net

(In Thousands) Balance as of December 31, 2015 $

Total realized and unrealized gain included in net income Balance as of December 31, 2016 Total realized and unrealized loss included in net income Balance as of December 31, 2017 $ Total unrealized gains relating to instruments held at December 31, 2017 $

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December 31, 2017 and 2016 21. Earnings Per Share Earnings per share consisted of the following components for the years ended December 31, 2017, 2016

and 2015: (using treasury stock method) 2017 2016 2015 (Dollars in Thousands) Basic: Net income $ $ $

Weighted average common shares outstanding Average unallocated ESOP shares Average shares Basic earnings per common share $ $ $ Diluted:

Net income $ $ $ Weighted average common shares outstanding for basic earnings per common share Dilutive effects of assumed exercises of stock Average shares and dilutive potential common shares Diluted earnings per share $ $ $

Stock options for _________, _________, and _________ shares of common stock were not considered

in computing diluted earnings per common share for 2017, 2016 and 2015, respectively, because they were antidilutive.

Earnings per share consisted of the following components for the years ended December 31, 2017, 2016

and 2015: (using two-class method) 2017 2016 2015 (Dollars in Thousands) Net income $ $ $

Undistributed earnings attributable to participating securities Net income available to common stockholders $ $ $ Weighted average shares outstanding, basic Effect of dilutive shares Weighted average shares outstanding, assuming dilution

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December 31, 2017 and 2016 21. Earnings Per Share 2017 2016 2015 (Dollars in Thousands) Basic EPS $ $ $

Effect of dilutive shares Diluted EPS $ $ $

For 2017, 2016 and 2015, average options to purchase _________, ___________ and ________ shares

of common stock were outstanding, respectively, but not included in the computation of EPS because they were antidilutive under the treasury stock method.

22. Related Party Transactions In the ordinary course of business, the Company has granted loans to principal officers and directors and

their affiliates amounting to $_______ at December 31, 2017 and $_______ at December 31, 2016. During the year ended December 31, 2017, total principal additions were $______ and total principal payments were $_______.

Deposits from related parties held by the Bank at December 31, 2017 and 2016 amounted to $__________

and $_________, respectively. 23. Restrictions on Dividends, Loans and Advances Banking regulations require maintaining certain capital levels and may limit the dividends paid by the

bank to the holding company or by the holding company to stockholders.

or Federal and state banking regulations place certain restrictions on dividends paid and loans or advances

made by the Bank to the Company. The total amount for dividends which may be paid in any calendar year cannot exceed the Bank’s net income for the current year, plus the Bank’s net income retained for the two previous years, without regulatory approval. Loans or advances are limited to 10 percent of the Bank’s capital stock and surplus on a secured basis.

In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would

cause the Bank’s capital to be reduced below applicable minimum capital requirements.

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December 31, 2017 and 2016 24. Condensed Financial Statements of Parent Company The following condensed financial statements (in thousands) are for the Parent Company only and should

be read in conjunction with the consolidated financial statements of the Company:

Condensed Balance Sheets December 31 2017 2016 Assets Cash and cash equivalents held at Illustrative Bancorp, Inc. $ $

Investment in Illustrative Bank Investment in Illustrative Security Corp. Deferred tax asset Other assets Total assets $ $ Liabilities and Stockholders’ Equity Accrued expenses $ $ Other liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity $ $

Condensed Statements of Income

Years Ended December 31 2017 2016 2015 Interest and dividend income:

Interest on cash equivalents $ $ $ Dividends from subsidiaries Total interest and dividend income Interest expense: Net interest and dividend income Non-interest income Non interest expense Loss before income taxes and equity in undistributed earnings of subsidiaries Income tax benefit Loss before equity in income of subsidiaries Equity in undistributed earnings of Illustrative Bank Equity in undistributed earnings of Illustrative Security Corp Net income $ $ $

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December 31, 2017 and 2016 24. Condensed Financial Statements of Parent Company (Continued)

Condensed Statements of Cash Flows Years Ended December 31 2017 2016 2015 Cash flows from operating activities:

Net income $ $ $ Adjustments to reconcile net income to net cash (used in) provided by operating activities: Equity in undistributed earnings of Illustrative Bank Equity in undistributed earnings of Illustrative Security Corp. Deferred income tax expense Change in deferred tax expense Other, net Net cash (used in) provided by operating activities Cash flows from investing activities: Return of capital from Illustrative Security Corp. Investment in Illustrative Bank Net cash used in investing activities Cash flows from financing activities: Repurchase of common stock $ $ $ Proceeds from exercise of stock options, net of cash paid Dividends paid Restricted stock awards issued, net of awards surrendered Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year $ $ $

25. Subsequent Events Management has evaluated subsequent events through ________________, 2018, which is the date the

consolidated financial statements were available to be issued [replace with “were issued” for SEC]. There were no subsequent events that require adjustment to or disclosure in the consolidated financial statements.

26. Reclassifications Certain amounts in the prior year statements have been reclassified to be consistent with the current year’s

presentation. These reclassifications had no impact on the reported net income.

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December 31, 2017 and 2016 27. Quarterly Data (Unaudited) Quarterly results of operations are as follows: Years Ended December 31 2017 2016 Fourth Third Second First Fourth Third Second First Interest and dividend income $ $ $ $ $ $ $ $

Interest expense Net interest income Provision for loan losses Net interest income, after provision for loan losses Non-interest income Non-interest expense Interest before taxes Income tax expense Net income $ $ $ $ $ $ $ $ Earnings per common share: Basic $ $ $ $ $ $ $ $ Diluted

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December 31, 2017 and 2016 28. Segment Information The reportable segments are determined by the products and services offered, primarily distinguished

between banking and trust services. They are also distinguished by the level of information provided to senior management, who uses such information to review performance of various components of the business, which are then aggregated if operating performance, products/services, and customers are similar. Loans, investments, and deposits provide the revenues in the banking operation, and fees provide the revenues in trust services. All operations are domestic.

Accounting policies for segments are the same as those described in Note 1 except that pension expense

for each segment is determined based on cash paid. Segment performance is evaluated using operating income. Income taxes are allocated and indirect expenses are allocated on revenue. Transactions among segments are made at fair value. Information reported internally for performance assessment follows:

Trust Total

Banking Services Other Segments 2017 Net interest income $ $ $ $

Other revenue Noncash items: Depreciation Provision for loan loss Amortization of intangibles Goodwill impairment Income tax expense Segment profit Segment assets

2016 Net interest income $ $ $ $




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December 31, 2017 and 2016 28. Segment Information (Continued) Significant segment totals are reconciled to the financial statements as follows: Reportable Other Consolidated

Segments Segments Other Totals 2017 Net interest income $ $ $ $

Other revenue Provision for loan loss Net gain on loan sale Profit Assets


Other revenue Provision for loan loss Net gain on loan sale Profit Assets


Other revenue Provision for loan loss Net gain on loan sale Profit

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