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2 0 13 A N N U A L R E P O R T

Letter to Shareholders

Financial Summary

Management’s Discussion and Analysis

Board of Directors and Executive Officers

Year in Review

Technology Profiles


1 LETTER TO SHAREHOLDERS

6 FINANCIAL SUMMARY

8 MANAGEMENT’S DISCUSSION AND ANALYSIS

12 BOARD OF DIRECTORS AND EXECUTIVE OFFICERS

14 YEAR IN REVIEW

17 INDEPENDENT AUDITOR’S REPORT

TECHNOLOGY PROFILES 5 401K Employer Partnership 8 Community Mortgage Partners 11 Mobile Banking App 16 Peoples Prosperity Bank Customer Profiles


Letter to Shareholders

David E. Kirschner (L) and Micah R. Bartlett

WE ARE PROUD TO REPORT ON ANOTHER YEAR OF SOLID PROGRESS.

STRONG VISION & STRATEGY HIGH-PERFORMING TEAM

Dear Fellow Shareholders,

A ROADMAP TO SUCCESS

To deliver results in today’s highly complex and competitive banking industry, we believe a company must have (1) a strong vision and strategy, (2) skilled people to deliver the vision, and (3) the products, services, tools, and solutions demanded by customers. In 2013, we advanced our vision, further developed our people, and enhanced our offerings. GOING VIRAL Word is getting out about the Town and Country difference! Consider the following results: • We exceeded $500 million in assets for the first time in history. • We grew our total customer relationships by $108 million or 10%, to exceed $1.2 billion. • We had our best year ever in commercial banking, with a 23% growth in loans outstanding. • Our trust and investment assets grew 23%, while revenues increased 40%. THE SIGNAL IS STRONG Our reported net income has increased for five years in a row. Mortgage interest rates saw a sharp increase during the second quarter, which was sooner than we expected and led to a precipitous decline in mortgage refinance revenue. Despite a 24% decline in mortgage volume from the prior year, we earned $3.1 million in 2013, up 2.4% from 2012 and yet lower than our plan. Earnings per share in 2013 were $1.08 and our dividend per share was $0.12, allowing us to further build our strong capital position, and support future growth. Our book value grew nearly 8% from $13.18 per share at December 31, 2012 to $14.20 per share at December 31, 2013. Even with asset growth of 11%, we were able to maintain a 14.1% total risk-based capital ratio, well in excess of the 10% threshold for banks to be considered “well capitalized” by regulatory standards. Our net charge-offs for the year were a modest 0.08%, our non-performing assets ratio was 0.79% at year-end, and our allowance for loan losses as a percentage of non-performing loans stood at a healthy 286%. YOUR DOWNLOAD IS COMPLETE In our prior year annual report, we laid out an 18-month plan to further improve the structure and infrastructure of our company, products, and technology. We are happy to report on the successful completion of our 2013 initiatives and that we remain on track with our plan. During 2013, we consoli­

Town and Country Financial Corporation

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Letter to Shareholders (continued)

dated our two remaining bank charters — Logan County Bank and Town and Country Bank — with minimal customer inconvenience. This more focused platform allows us to improve efficiency while enhancing our product offerings to all customers served. Throughout the year, we implemented multiple technology upgrades to improve both the customers’ online and mobile banking solutions while also improving our own internal systems and core processing platforms. We enhanced our product offerings to align them better with evolving customer demand. We also completed a significant phase of training and development with our staff to improve our customer relationship management practices. THERE’S AN APP FOR THAT We often say technology exists to automate the transactional aspects of our business so that it frees our people to truly connect and engage with our customers. Of course, what do our customers think of our new technology? In a word: Cool! In this year’s report we feature a few of these technologies and how they help our customers connect with their finances and life goals. While we do not imagine technology will ever replace human inter­ action, we believe that as technology becomes more integrated into our customers’ day-to-day activities, we become even more connected to our customers. With a full array of online banking technologies — including Person-to-Person payments, Businessto-Business payments, Bank-to-Bank transfers, Online Financial Management, Mobile Deposits, Online account opening, enhanced bill payment and other features — our customers get the best of both worlds: the technology solutions of a large bank, but delivered with a purpose-based community approach by real people. YOUR BATTERY IS CHARGED In addition to the results mentioned above, we continue to invest and grow within our lines of business. We originated and processed nearly $260 million in our mortgage banking unit, with a strong focus on purchase business and government product specialization. We re-branded our mortgage program for our correspondent bank clients under the moniker “Community Mortgage Partners” and added new correspondent bank clients. We also further developed our Retirement Plan specialization, and saw an overall growth in our trust and investment unit of 23% based on assets and 40% based on revenue. Several years back, we indicated that one of our financial goals was to grow our revenue at twice the rate of our expenses. While many banks, at the time, were focusing solely on cutting expenses to improve profits, we believed to be successful in the long-term we would need to be prudent with our resources while also making investments to grow our business in the future. When we compare our 2013 results to 2007, we have grown our annual revenue by approximately $10 million while we have grown our expenses by roughly $5 million. We hit our goal! In 2012, we made a significant investment to expand into the Quincy market under the brand Peoples Prosperity Bank. In addition to acquiring a retail branch location with seasoned bankers, we were also able to recruit a team of local commercial bankers to round out our strategy. We are happy to report that this investment has produced results very much in line with our expectations — with total customer relationships having grown organically by $30 million or 40% in just 18 months. 3D: ADVANCING THE VISION. FOCUSED. So, what are our future plans? In short: to keep doing what we’ve been doing, but with even greater focus. We have three pillars that define our strategy moving forward: Differentiation, Diversification, and Delivering Results. Differentiation. We will continue to set our bank apart through a strategy of differentiation. We have built a strong culture based on establishing real and mutually beneficial relationships with our customers. For far too many banks, relationship management is just a buzz word, followed by practices of product pushing and transaction-based selling. During 2013, we took relationship management to the next level. In the second half of 2013 alone, our retail bankers reached out 2,600 times to our

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14% 14% 12% 12% 10% 10% 8% 8% 6% simply to foster our relationship and let them know how we can help them improve their customers ‘09 ‘10 ‘12 ‘13 6%well-being. financial As you‘11 can imagine, our customers really appreciate a fresh approach from a bank ‘09 ‘10 ‘11 ‘12 ‘13

not simply trying to sell them something.

Another example of the way we differentiate is through our PERKS Financial Wellness program. PERKS stands for Providing Employer-based Resources, Knowledge, and Solutions for Financial Wellness. While we saw success during 2013 with this program, we are taking PERKS to the next level during 2014 and beyond. Many banks MORTGAGE VOLUMES have a “Bank at Work” program in which they Dollars in thousands sell checking accounts and other bank $400,000 products at various employer locations, but $400,000 our program is quite different. We engage $300,000 $300,000 with our employer-clients to improve the $200,000 financial wellness of their employees. Similar $200,000 to a health wellness program, our financial $100,000 wellness program embodies many facets, all $100,000 with the belief that the better off employees $0 are with their own finances, the better lives ‘09 ‘10 ‘11 ‘12 ‘13 $0 they live and the better employees they ‘09Retail originations ‘10 ‘11 Community ‘12Partners‘13 become. Retail originations

Community Partners

LOANS TO BUSINESSES Balance outstanding in thousands and % change from prior year-end

$275,000 $275,000 $206,250 $206,250 $137,500 $137,500 $68,750 $68,750 $0 $0

+6% +6%

+3% +3%

‘09 ‘09

‘10 ‘10

+16% +16%

+12% +12%

‘11 ‘11

‘12 ‘12

+23% +23%

‘13 ‘13

Diversification. As the banking landscape continues to increase in complexity and competitiveness, we believe it will be increasingly important that our business and revenue models be diverse. Our company already compares favorably to our peers with regard to the level of our non-interest income. And yet, we will seek to further diversify our mix of revenue sources. This will involve continuing to grow our Community Mortgage Partners and Employee Benefit programs, enhancing other existing revenue sources, increasing emphasis on other specialty finance areas in which we already have strengths, while developing and/or acquiring potential new business lines.

Delivering Results. As we continue to grow our customer relationships in a mutually beneficial fashion, we are focused on delivering improved profitability to our shareholders. By main­ taining our goal of growing revenue at twice the rate of expense, we seek to further improve our profits while also continuing to expand our business. Our primary financial goals over the next several years are as follows: • Improve Return on Equity (ROE) • $1.20 Increase and deepen customer relationships • $1.20 Diversify our business and revenue mix •$0.90 Improve efficiency $0.90 $0.60 INCREASING OUR BANDWIDTH $0.60 During 2014, our plan is to finish what we have started — to stay focused on fully implementing the $0.30 investments we have made in both technology and people. In addition to fully leveraging the tech­ $0.30 nology we have already implemented, we will also be completing the remaining pieces of our planned $0 technology upgrade. This includes systems ‘09 ‘10 ‘11 ‘12 ‘13 that improve efficiency (such as our document imaging $0 ‘09 ‘10 ‘11 ‘12 ‘13

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Letter to Shareholders (continued)

solution) as well as those that help us deliver a better customer experience (such as our customer relationship management solution, automated lending system, and relationship rewards program). We have also been planning for a new branch facility in Quincy, and we are excited about bringing a unique physical representation of our approach to banking to life in that market. We will seek to make other changes to our branch network to further align our physical space with our core strategy. OUR OWN SOCIAL NETWORK The significant growth results that we presented above didn’t come easily. We have a team of professionals that go above and beyond every day — year in and year out — to deliver the type of customer experience and client engagement that leads to business results. We want to make a special point to thank all of the folks in our organization who worked tirelessly behind the scenes to implement the core improvements to our company’s infrastructure. It takes both a strong front office and a strong back office to achieve the accomplishments we saw in 2013. THE FINAL INTERFACE We’re tremendously proud of the hard work and accomplishments of the Town and Country team. 2013 was a pivotal year for our company as we exceeded $500 million in assets, navigated through the sudden end to a long-term mortgage refinance boom, and saw double-digit growth in our lending and trust lines of business. We managed to contain expenses even while we significantly upgraded our customer delivery channels and banker systems. And, we maintained our high quality balance sheet with strong capital, liquidity, and credit quality metrics. Perhaps most importantly, we continued to challenge ourselves to be better, to think like entrepreneurs, and earn the business. We believe this is what it takes to be a successful community bank. For yet another year, we thank you, our loyal shareholders, for your continued confidence and invest­ ment in this, your company. Sincerely,

Micah R. Bartlett President & CEO

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David E. Kirschner Executive Chairman

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TECHNOLOGY PROFILE

401K EMPLOYER PARTNERSHIP STATE-OF-THE-ART TECHNOLOGY TURNKEY SERVICE THE PERFECT BALANCE

401K PLATFORM HELPS EMPLOYERS EDUCATE AND EXCITE THEIR TEAMS TO CREATE FINANCIAL LIFE PLANS Life is about choices. Unfortunately, decisions aren’t always black and white. Through our Trust and Investment Services 401K Employer Partnership, businesses now have access to state-of-the-art technology that allows their employees to make good invest­ment choices based on their personal Financial Life Plan. The foundation of the SmartPlan platform is built around each participating company’s own benefit package. Then the employee enrollment occurs virtually. Each employee starts the enrollment process online through the SmartPlan Education Module. Here, the employee answers a set of questions that helps Town and Country assess their financial situation and goals. The questions take into account the employee’s risk tolerance for investing and the age in which they plan to retire. With built-in risk based modules, an employee never has to select their own funds, unless it is something they choose to do. When the employee is enrolled, they can monitor their funds online and even on the go through the program’s mobile app. This turnkey service provided by Town and Country’s Trust and Investment Services lets companies and their employees know that Financial Planning is not only for those with money to spare. It is for everyone who wants to be better prepared for the various roads they will travel through life.

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Did you know: Our Trust and Investment Services Team serve as discretionary trustee.

They continually monitor the mutual funds and ensure the options are diversified across all levels.

All the funds meet the scrutiny of investment policy statement as required by Department of Labor.

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$15,000

$7.50 $200,000 $425,000

$10,000

$3.75 $100,000 $362,500

Financial Summary

$5,000

‘09

‘10

‘11

‘12

Net Interest Income

Mortgage Banking

Service Charges

Other

$0.00 $0 $300,000

‘13

‘09 ‘09 ‘09

‘10 ‘10 ‘10

Retail originations

‘11 ‘11 ‘11

‘12 ‘12 ‘12

‘13 ‘13 ‘13

Community Partners

Trust/Investments

In thousands except per share and ratio data

REVENUE COMPONENTS

TIER 1 LEVERAGE

$25,000 $25,000 $550,000

14% $275,000 4%

$20,000 $20,000 $487,500

12% $206,250 3.5%

$15,000 $15,000 $425,000

10% $137,500 3%

$10,000 $10,000 $362,500

8% $68,750 2.5%

$5,000 $5,000 $300,000

‘09 ‘10 ‘09 ‘10 ‘09Net Interest ‘10 Income

Net Interest Income Service Charges Service Charges

‘11 ‘12 ‘13 ‘11 ‘12 ‘13 ‘11 ‘12 ‘13 Mortgage Banking Trust/Investments Mortgage Banking Other Other

6% $0 2%

$400,000 $1.20 $4,000

$487,500 $487,500 3.5%

$300,000 $0.90 $3,000

$425,000 $425,000 3%

$200,000 $0.60 $2,000

$362,500 $362,500 2.5%

$100,000 $0.30 $1,000 ‘10 ‘10 ‘10

‘11 ‘11 ‘11

‘12 ‘12 ‘12

+3%

‘09 ‘09 ‘09

‘10 ‘10 ‘10

‘11 ‘11 ‘11

‘13 ‘13 ‘13

$0 $0 $0

‘09 ‘09 ‘09

‘10 ‘10 ‘10

Retail originations

‘11 ‘11 ‘11

NONPERFORMING ASSETS AND NET CHARGE OFFS $275,000 $15.00

3.5% 3.5% $3,000

$206,250 $11.25

3% 3% $2,000

$137,500 $7.50

2.5% 2.5% $1,000

$68,750 $3.75 ‘10 ‘10 ‘10

Nonperforming Assets

$4,000 6 $4,000 <$15.00

‘11 ‘11 ‘11

‘12 ‘12 ‘12

‘13 ‘13 ‘13

‘13 ‘13 ‘13

‘12 ‘12 ‘12

‘13 ‘13 ‘13

Net Charge Offs

BOOK VALUE PER SHARE

4% 4% $4,000

‘09 ‘09 ‘09

‘12 ‘12 ‘12

Community Partners

Nonperforming Assets

2% 2% $0

+12%

BASIC EARNINGS PER SHARE

$550,000 $550,000 4%

‘09 ‘09 ‘09

+6%

+16%

Trust/Investments

TOTAL ASSETS

$300,000 $300,000 2%

+23%

$0 $0.00

+23%

+6%

+3%

‘09 ‘09

‘10 ‘10

+16%

‘11 ‘11

+12%

‘12 ‘12

‘13 ‘13

Net Charge Offs

$1.20 www.townandcountrybank.com 14%

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SUMMARY OF CONSOLIDATED FINANCIAL HIGHLIGHTS in thousands except per share, shares outstanding, and ratio data 2013

2012

2011

2010

2009

As of or for the year ended December 31, Selected income statement items Other non-interest income Income from mortgage banking activities Net Interest income Total net revenue Provision for credit losses Noninterest expense Income before income tax expense and nonrecurring items Income tax expense Net income before nonrecurring items Net income from nonrecurring items Net Income Preferred stock dividend Net income available to common stockholders

$

Detail nonrecurring items (after tax) Gain on sale of assets Asset valuation adjustments (impairment)

$ $

383 $ – $

83 $ 61 $

117 $ – $

46 $ (188) $

74 (291)

Per common share Basic earnings per share Cash dividends declared per share Book value per share

$ $ $

1.08 $ 0.12 $ 14.20 $

1.04 $ 0.12 $ 13.18 $

0.95 $ 0.12 $ 11.90 $

0.75 $ 0.12 $ 11.13 $

0.36 0.14 10.47

$

Weighted-average common shares outstanding (net of treasury shares)

2,792,704 2,792,704 2,792,704 2,792,704 2,792,704

Selected ratios Return on common equity Return on assets Tier 1 leverage ratio as of 12/31/13 Total risk-based capital ratio as of 12/31/13 Selected balance sheet data (period-end) Total assets Securities Net Loans including loans available for sale Mortgage loans sold with servicing retained Deposits Total stockholders’ equity Credit quality Allowance for loan loss Nonperforming loans OREO Allowance for loan loss to total loans, excluding loans held for sale Coverage (Allowance for loan loss to nonperforming loans) Net charge-offs Net charge-off rate (to average loans)

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3,344 $ 2,913 $ 2,618 $ 2,730 $ 3,075 4,451 5,975 2,875 3,026 3,391 14,071 13,299 12,641 11,788 11,317 21,866 22,187 18,135 17,544 17,783 566 700 – 672 2,951 17,221 17,161 14,251 13,709 13,664 4,080 4,326 3,884 3,163 1,168 1,384 1,462 1,265 920 (63) 2,696 2,864 2,619 2,243 1,231 383 144 117 (142) (217) 3,079 3,008 2,736 2,101 1,014 50 102 78 – – 3,029 $ 2,906 $ 2,657 $ 2,101 $ 1,014

7.92% 0.63% 10.6% 14.1%

8.36% 0.68% 10.8% 16.0%

8.23% 0.72% 12.8% 16.9%

7.00% 0.58% 10.9% 15.1%

3.53% 0.27% 10.1% 14.9%

$ 508,018 $ 456,298 $ 380,277 $ 362,247 $ 375,141 113,623 121,162 95,196 95,961 107,826 344,481 280,560 248,398 226,470 220,331 394,137 383,212 357,172 341,771 324,484 411,615 383,037 313,548 297,581 305,462 39,678 36,795 33,240 31,093 29,250

$ $ $

3,508 $ 1,228 $ 1,440 $

3,194 $ 2,320 $ 567 $

2,899 1,558 971

$ $ $

2,918 $ 890 $ 1,718 $

2,633 2,727 796

1.04% 1.16% 1.19% 1.32% 1.20% 285.6% 137.7% 186.1% 327.9% 96.6% $ 252 $ 405 $ 19 $ 387 $ 3,420 0.08% 0.16% 0.01% 0.18% 1.53%

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Managementâ&#x20AC;&#x2122;s Discussion and Analysis

This section presents managementâ&#x20AC;&#x2122;s discussion and analysis of the financial condition and results of operations of Town and Country Financial Corporation for 2013 and 2012. Any forward-looking statements are based on current beliefs and expectations of management and subject to uncertainty. These statements are not a guarantee of future performance and actual results could differ materially. This section should be read in conjunction with the accompanying Annual Report. OVERVIEW Town and Country Financial Corporation (the Company) is a financial holding company conducting operations through its affiliates, Town and Country Bank and Town & Country Banc Mortgage Services, Inc. The Company offers loan, investment, trust, deposit and cash management services to businesses and families through electronic delivery and its 12 banking offices in the Central Illinois communities of Buffalo, Decatur, Forsyth, Lincoln, Mt. Zion, Quincy, and Springfield. Approximately 155 individuals are engaged in providing these services. INCOME STATEMENT Net income was $3.1 million on net revenue of $21.9 million compared with $3.0 million and net revenue of $22.2 million in 2012. Preferred dividends of $50 thousand in 2013 and $102 thousand in 2012 were paid to the US Treasury based on our September 2011 participation in their Small Business Lending Fund program. As a result, net income available to common stockholders was $1.08 per share compared to $1.04 in 2012. The return on common equity was 7.9%, down from 8.4% in the prior year. Net interest income was $14.1 million in 2013, up 6% compared to $13.3 million in 2012. The most significant driver of the change was a 19% increase in average commercial loans outstanding followed by a reduction in deposit interest expense as consumers continued to migrate from term to nonmaturity deposits. Despite higher absolute dollars of net interest income, the fully tax equivalent net interest margin declined to 3.23% from 3.41%. This was primarily due to robust current year mortgage

TECHNOLOGY PROFILE

COMMUNITY MORTGAGE PARTNERS BACK OFFICE SUPPORT SEAMLESSLY INTEGRATED THE VIRTUAL CHOICE

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Year ended December 31, $s in 000s 2013 2012 Change 2011 21,866 22,187 -1.4% 18,135 17,221 17,161 0.3% 14,251 4,646 5,026 -7.6% 3,884 566 700 NA 383 144 166.7% 117 3,079 3,008 2.4% 2,736

Selected income statement Total net revenue Total noninterest expense Pre-tax, pre-provision income Provision for credit losses Security gains (loss) Net income Net income available to common stockholders

and commercial loan growth at rates significantly below the year-ago offering rates and below their respective historical portfolio yields.

Non-interest income decreased $1.1 million, or 12%, to $7.8 million 3,029 2,906 4.2% 2,657 driven by a reduction in fees from mortgage Return on common equity 7.9% 8.4% 8.2% banking activities. Basic earnings per share $ 1.08 $ 1.04 $ 0.95 Mortgage fees declined Book equity $39,678 $36,795 $33,240 26% on a 24% reduction in loans originated and Past due and nonperforming loans 0.8% 1.1% 0.5% processed for ourselves and our Community Mortgage Partners and narrower margins on loans sold. Other fees increased by 15% from loan-related fees and a 13% increase in trust and brokerage assets managed and administered. The provision for credit losses was $566 thousand in 2013 based upon 23% end of period loan growth, improving delinquency trends, and a stabilizing housing market. Net charge offs totaled $252 thousand, or 0.08% of average loans. The 2012 provision was $700 thousand based on 13% growth and $405 thousand in net charge offs.

Continued on the next page.

KEEPING FINANCIAL INSTITUTIONS IN THE MORTGAGE BUSINESS Increasing government regulations have forced many financial institutions to evaluate their Mortgage lines of business. Stricter budgets, staff invest­ ments and changes in technology have also made many banks question whether or not to maintain their Mortgage offerings. Town & Country Banc Mortgage Services’ Community Mortgage Partners (CMP) grants participating banks the opportunity to maintain their Mortgage Services to their customers while CMP provides the back office support.

Testimonial from a Current CMP Partnering Bank

“Like many banks, we experienced strong growth in our mortgage portfolio when rates dropped to historic lows.

Seamlessly integrated into the partnering bank’s Web site, customers submit their mortgage applications online. Through the same portal, the lending team accesses the state-of-the-art technology platform for application management and document preparation. The difference occurs when the team of experienced underwriting, processing and closing staff from CMP manage processing the loan. They are an extension of the partnering bank, a phone call and email away from any of their lending questions.

However, we had no online presence and knew we needed to make some very quick changes. We needed a solid partner and determined that working with CMP would be our best option.

Through Community Mortgage Partners, partnering financial institutions increase their lending volume, lower their overhead, all while reducing the regulatory burden.

We couldn’t be more pleased.”

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Management’s Discussion and Analysis (continued)

Non-interest expense was $17.2 million, up $60 thousand, or 0.3%, from its 2012 level. Higher expenses in 2013 were the result of the full year’s operation of a branch acquired in May 2012 and a new commercial loan production office established in July 2012. Additionally, the Company incurred costs in 2013 to merge two bank charters and convert to a new technology platform. Largely offsetting the higher expense was a 12% decline in mortgage banking costs, the absence of the cost to acquire the previously referenced branch in 2012, the recovery of certain legal fees, and other expense reductions. The Company recorded after-tax income of $383 thousand from the sale of securities compared to $144 thousand in 2012 from the sale of securities and other than temporary impairment recoveries. Preferred dividends totaling $50 thousand were paid to the US Treasury, representing a 1% dividend on their $5 million SBLF investment in the preferred securities of the Company. BALANCE SHEET Total assets were $508 million at December 31, 2013, an increase of $52 million, or 11%, from December 31, 2012. The year’s growth was driven by an increase in loans to businesses, up $47 million, and residential first mortgage loans, up $15 million. Mortgage loans sold with servicing retained were also up $11 million, or 3%, due to growth in the Community Mortgage Partners’ serviced portfolio. Asset quality remained strong and past due and nonperforming loans were 0.77% of total loans compared to 1.14% at the prior year-end. The allowance for loan loss increased to $3.5 million and the coverage ratio (allowance to nonperforming loans) improved to 286% of nonperforming loans. Nonperforming assets (nonperforming loans plus other real estate) decreased to $2.7 million compared to $2.9 million at December 31, 2012. The Company maintained its investment in pooled trust preferred securities, which securities generally represent the preferred securities of small and mid-sized bank holding companies. There was no impairment charge recorded in 2013 or 2012 although one security was paid in full in 2012 with a resulting recovery of $101 thousand (pretax). The assets were valued at $6.3 million at December 31, 2013 with an amortized cost of $9.3 million. Total deposits were $412 million on December 31, 2013 and $29 million, or 7%, higher than the year-ago. Brokered deposits and other wholesale funding sources, including reciprocal deposits exchanged through the CDARs network and FHLB advances, were 14% of total assets, up from 9% at the end of the prior year. Common equity capital was $39.7 million with a book value per share of $14.20 compared to $36.8 million and $13.18 at December 31, 2012. Tier one common equity capital was $51 million, or 10.6% of total assets while total risk-based capital was $57 million and 14.1% of total risk-based assets. Both metrics declined from the previous year-end due to loan growth that is generally assigned a 100% risk weighting.

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TECHNOLOGY PROFILE

MOBILE BANKING APP DEPOSIT CHECKS REMOTELY

MOBILE TECHNOLOGY ALLOWS BUSY PEOPLE TO LIVE APP-ILY EVER AFTER The team at Town and Country Bank love to see their customers when they stop in for a cup of coffee and to conduct their financial matters. But in today’s hectic world, we understand that can’t always happen. That is why it is important for us to offer a great virtual experience as well.

PAY BILLS ANYTIME, ANYWHERE GREAT VIRTUAL EXPERIENCE

Don’t worry. You can be App-y too. Download today by visiting your App store.

In 2013, Town and Country Bank launched its enhanced mobile app and customers Grant and Jennifer Hammer downloaded it right away. With two young children, Grant and Jennifer are working professionals and very active in the community. Grant works for the Office of the Illinois Treasurer and is an elected member of the Springfield Park District Board of Trustees and Vice President of the Springfield Youth Hockey Association. Jennifer is the Associate Vice President of Government Affairs for the Illinois Chamber of Commerce and elected Governor for the Illinois State Bar Association. Downtime is a luxury and eliminating extra trips to the bank would help fit more of that time in.

Same great functionality is available on Windows phones. Visit www.airteller.com/ townandcountrybank from your device.

Through the new mobile app, not only does the Hammer Family have access to account information, they can take pictures of their checks and deposit them by phone, pay their babysitter and other important bills directly, and even transfer money to other accounts — all from the palm of their hands with their Smartphones.

Send money to family or pay your friends back through Person-to-Person Payments.

“I can be sitting on the couch enjoying family time or as I head out the door for work, conduct my banking business with a few taps from my phone,” said Jennifer. “It is nice to know I bank with a community bank that is right down the street and I can stop in whenever, yet still have access to all the great conveniences and technology of a national financial institution.”

Text Banking allows you to quickly request and receive account info via text message without the need to sign in.

L to R: Jennifer, Josephine, Cam, Grant

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Board of Directors and Executive Officers

BOARD OF DIRECTORS

MICAH R. BARTLETT

JOHN S. COBB

LOUIS H. DIXON

DONALD H. EVANS

President & CEO, Town and Country Financial Corporation; Chairman, President & CEO, Town and Country Bank

Attorney, Samuels, Miller, Schroeder, Jackson & Sly

Engineer & Senior Vice President, Crawford, Murphy & Tilly, Inc.

Owner, Evans Construction Company

LARRY D. ANDERSON

BRIAN K. ASH

NANCY J. BAHRE

JASON BARTH

Executive Vice President, Community Bank President

Executive Vice President, Community Bank President

Executive Vice President & CFO, Town and Country Financial Corporation

Senior Vice President, HR, Marketing, Retail

DAVID E. KIRSCHNER

KELLIE R. KURRE

JOHN E. STAUDT

Executive Chairman, Town and Country Financial Corporation

Executive Vice President, Community Bank President

Vice Chairman, Town and Country Financial Corporation

EXECUTIVE OFFICERS

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DAVID E. KIRSCHNER

MARK O. ROBERTS, JR.

JOHN E. STAUDT

DEWEY R. YAEGER

Executive Chairman, Town and Country Financial Corporation

President & Chairman of the Board, Standard Mutual Insurance Company

Vice Chairman, Town and Country Financial Corporation

Retired

MICAH R. BARTLETT

BOB COTNER

DANA M. DOW

THOMAS M. GALLAGHER

President & CEO, Town and Country Financial Corporation; Chairman, President & CEO, Town and Country Bank

Senior Vice President, Director of IT

Chairman, President & CEO, Town & Country Banc Mortgage Services, Inc.

Senior Vice President, Trust & Investment Services

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Year in Review

OUR TIMELINE RECAP FEBRUARY With the impacts to Healthcare Reform, Town and Country Bank hosted a seminar for local businesses to learn more about these changes, how to assess their own situation and make strate­gically sound business decisions for their company and their employees. Created in remembrance of Henry Kirschner, and presented to an individual who implemented innovation for the bank, Town and Country Financial Corporation presented Jennifer Stice with the 2012 Innovator of the Year Award. Jennifer was recognized for her work in creating and designing the “Connection Rooms” at the 3601 Wabash location. She transformed tradi­tional banker rooms into home-inspired places that provide a unique and comfortable setting for customers to ask questions, open accounts, review information and close on their loans.

MARCH Logan County Bank and Town and Country Bank connected to form one, strong community bank charter under the Town and Country Bank name.

APRIL In partnership with Terry Farmer Photography and the Animal Protective League (APL), Town and Country Bank hosted the Dog Days of Spring photo collection, featuring local celebrities and their animal best friends. The bank displayed the photos for two weeks before the display moved to other local venues. Town and Country Financial Corporation reported first-quarter net income of $686 thousand or $0.24 per share, as compared to $675 thousand, or $0.23 per share, in the first quarter of 2012. Our mortgage professionals hosted a FirstTime Homebuyer Seminar for area residents. Attendees learned about the home buying process including information about selecting a home; calculating their price range; choosing the right financing option; and what to expect during the loan process.

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C U LV E R -ST OC K T O N W I L DC AT S

SO U T H E A ST S PA R TA N S L I N C O L N R A I LS P L I T T E R S

S A C R E D H E A RT-GR I F F I N C Y C LON ES

Peoples Prosperity Bank, a division of Town and Country Bank, hosted its inaugural Financial Scholars Awards Ceremony, honoring 125 Quincy High School students who completed the financial literacy program sponsored by the bank.

M A C A R T H U R G E N E R A LS

MAY The Bank’s new Mobile App launched. The mobile functionality included depositing checks, transferring money between accounts at the bank and accounts customers own at other financial institutions, person-to-person payments and text banking.

SEPTEMBER The Bank launched its Personalized Debit Card program which included a partnership with local schools in creating School Spirit Cards. Participating schools within the Bank markets have access to their own Debit/ATM card design, giving parents and students the ability to show their school pride whenever and wherever they make their purchases.

OCTOBER Town and Country Financial Corporation successfully upgraded their core backend account management system, improving staff efficiencies and technology when managing various customer and vendor relationships.

JULY Town and Country Financial Corporation reported second-quarter 2013 net income of $710 thousand, or $0.25 per share, as compared to $693 thousand, or $0.24 per share in the second quarter of 2012.

Town and Country Financial Corporation reported third-quarter 2013 net income of $714 thousand, or $0.25 per share, as compared to $825 thousand, or $0.29 per share in the second quarter of 2012. 

NOVEMBER Town and Country Bank hosted a Meet and Greet with Santa and Mrs. Claus at the 3601 Wabash location. The afternoon was complete with family photos with Santa, holiday music and children’s activities.

AUGUST Peoples Prosperity Bank announced the open­ing of a new full-service location at 3215 Maine Street. The new bank is slated to open late 2014. Bank retail team members partici­pated in Involvement Days at area colleges and universities. Staff engaged with college students at John Wood Community College, Milikin University and University of Illinois Springfield during their orientation weeks.

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PEOPLES PROSPERITY BANK CUSTOMER PROFILES

CONNECTING BUSINESSES ONLINE AND IN PERSON IMPROVED EFFICIENCY Technology changes how we do our day-to-day business. But it will never eliminate what our business is about — the people. At the core of what we do is to empower our clients about their finances and their money, and not feel bogged down in the stress and anxiety that comes with it.

COMPETITIVE SOLUTIONS EMPOWERING CLIENTS

The following two stories come from our Peoples Prosperity Bank location in Quincy, IL. Each story is about the people and the services that make their business succeed.

QUINCY TRACTOR, LLC Quincy Tractor LLC’s story began in 1962 when Everett Carlson, a long-time farmer and mechanic, with his wife, Elva, and son, Roger opened a Minneapolis-Moline Implement Dealership in Dow, IL. In an effort to grow their company and locate themselves in the heart of a growing agriculture market, the Carlson family moved the dealership to Quincy, Illinois in 1978 where the corporate headquarters remain. Now having the distinction of being Illinois’ oldest New Holland dealership, for over 50 years the Carlson family’s hard work, vision, dedication to the agricultural community, and doing right by their customers and neighbors has led to the expansion into four markets by the multi-generation family business. Lance and Zachary Carlson, Everett’s grandson and great-grandson, make their customers their priority. Peoples Prosperity Bank provides remote deposit capability making daily trips to the bank and traditional bank deposit cut off deadlines a thing of the past. Quincy Tractor also utilizes enhanced online cash management services that enable Lance and Zach to manage their sales force at their satellite locations with current financial reporting from the Quincy headquarters. In 2008 Lance began to focus on ways to grow Quincy Tractor, LLC efficiently. “It is over 120 miles round trip to our furthest location. With the remote deposit tool from Peoples Prosperity Bank, it feels like we have a bank inside our stores. We can make as many deposits as we want, as frequently as we want, all from a desktop. We speed up our cash collections and spend more time with our customers and growing our business.” Zach’s passion for business development and marketing require him to travel frequently to represent the flagship brands of New Holland and Kinze. “As a leading New Holland dealer, our brand can have us traveling across the country and internationally. It gives us great peace of mind that the technology provided by Peoples Prosperity Bank allows us to monitor our business and personal account activity and protect against fraud. The mobile app keeps me informed any time day or night of our business cash position. I enjoy having the same technology conveniences on my personal accounts by using the remote deposit app on my smart phone.”

SUNSET HOME For over 125 years, the vision of Sunset Home has been to offer a positive, respectful, and compassionate place for seniors to reside. As a testament to their dedication to this mission, in 2013, the organization was ranked as one of the Best Nursing Homes by U.S. News & World Report. As a Christian-based non-profit organization, part of Sunset’s mission is to assist those who have exhausted their means for quality care through their Volunteer Auxiliary and Foundation. In order to complete this mission, it is vital to keep costs low, be as efficient as possible, and have secure investments that earn a competitive rate. With extensive long-term care experience and a passion for assisting residents, Assistant Administrator Dawn Davis wanted to spend more time with residents and less time on paperwork, “Collecting payments for over 240 residents from a variety of sources at two different campuses can be a real challenge. Our partnership with Peoples Prosperity Bank has opened up a world of banking tech­nology making our lives much easier. We utilize a remote deposit solution allowing us to make deposits at our desk top as well as online Cash Management tools which help to make our accounting and operations much more efficient, giving us more time to focus on resident care and programs.” Jerry Neal, Administrator, has over 30 years of experience in senior care administration and is dedicated to compassionate service starting with leadership and staff. “Peoples Prosperity Bank is the only bank that has been able to offer us a solution for full FDIC insurance at a competitive rate. Our board and management’s focus is to provide a quality of life for our residents and keep our facilities relevant. We need the ability to manage cash flow, achieve financial security, and provide personal service to our organization, its employees, and its residents. Peoples Prosperity Bank has been a valued partner in that endeavor.”

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Independent Auditor’s Report

Board of Directors Town and Country Financial Corporation Springfield, Illinois We have audited the accompanying consolidated financial statements of Town and Country Financial Corporation and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Town and Country Financial Corporation and its subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Decatur, Illinois March 6, 2014

Town and Country Financial Corporation

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Independent Auditor’s Report (continued)

CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2013 AND 2012 2013 Assets Cash and due from banks Interest-bearing demand deposits in banks Cash and cash equivalents Interest-bearing time deposits in banks Available-for-sale securities Held-to-maturity securities Loans held for sale

$

2012

9,849,762 5,614,110 15,463,872 996,000 82,926,977 30,696,422 10,868,459

$

6,261,540 18,070,751 24,332,291 3,489,000 88,312,398 32,849,781 9,044,597

Loans, net of allowance for loan losses of $3,508,130 and $3,194,445 at December 31, 2013 and 2012

333,612,419

271,514,952

Premises and equipment, net of accumulated depreciation of $10,722,108 and $10,914,044 at December 31, 2013 and 2012 Federal Reserve and Federal Home Loan Bank stock Foreclosed assets held for sale, net Cash surrender value of life insurance

11,757,590 2,578,600 1,439,865 9,047,275

10,856,004 2,376,706 566,869 3,810,694

Mortgage servicing rights, net of valuation allowance of $1,456,119 and $1,891,119 at December 31, 2013 and 2012 Goodwill Core deposit intangibles Other Total assets $ Liabilities and Stockholders’ Equity Deposits Demand Savings, NOW and money market Time Brokered time deposits Total deposits

$

Federal funds purchased Federal Home Loan Bank advances Junior subordinated debt owed to unconsolidated parties Deferred income taxes Other liabilities Total liabilities

3,151,958 1,988,631 816,451 2,673,057 508,017,576

$

2,624,960 1,988,631 999,564 3,532,008 456,298,455

73,077,784 218,037,123 97,042,538 23,457,553 411,614,998

$

3,000,000 34,000,000 11,856,000 27,745 2,840,661 463,339,404

54,265,836 201,644,683 113,174,594 13,951,737 383,036,850 — 17,000,000 11,856,000 227,680 2,382,962 414,503,492

Stockholders’ Equity Preferred stock, no par value; $1,000 liquidation value; authorized 1,000,000 shares; issued and outstanding 5,000 shares

Common stock, no par value; authorized 5,000,000 shares; issued – 2,983,608 shares Additional paid-in capital Retained earnings Accumulated other comprehensive income

Treasury stock, at cost Common; 190,904 shares Total stockholders’ equity Total liabilities and stockholders’ equity

$

5,000,000 1,657,560 9,935,098 27,342,198 1,879,826 45,814,682 1,136,510 44,678,172 508,017,576

5,000,000

1,657,560 9,935,098 24,648,531 1,690,284 42,931,473

$

1,136,510 41,794,963 456,298,455

See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2013 AND 2012 2013 Interest and Dividend Income Loans Securities Taxable Tax-exempt Other Dividends on Federal Home Loan and Federal Reserve Bank stock Deposits with financial institutions Total interest and dividend income

$

Interest Expense Deposits Other borrowings Total interest expense Net Interest Income Provision for Loan Losses Net Interest Income After Provision for Loan Losses Noninterest Income Fiduciary activities Customer service fees Other service charges and fees Realized gains on sales of available-for-sale securities Mortgage banking income, net Recovery (loss) on impairment of mortgage servicing rights Other-than-temporary recoveries Other Total noninterest income Noninterest Expense Salaries and employee benefits Net occupancy expense Equipment expense Other Total noninterest expense Income Before Income Taxes Provision for Income Taxes Net Income Preferred stock dividend

13,527,928

2012 $

12,863,600

2,013,063 162,836 387,937 38,119 58,918 16,188,801

2,266,944 346,932 409,338 36,623 72,586 15,996,023

1,423,213 694,211 2,117,424 14,071,377 566,000 13,505,377

1,926,910 770,354 2,697,264 13,298,759 700,000 12,598,759

541,117 1,096,667 1,153,870 642,091 4,015,555 435,000 â&#x20AC;&#x201C; 551,302 8,435,602

365,586 1,073,273 1,081,386 139,007 6,629,657 (655,000) 101,262 392,995 9,128,166

$

10,235,082 1,373,567 747,606 4,864,332 17,220,587 4,720,392 1,641,600 3,078,792 50,000

$

9,978,644 1,329,550 581,024 5,271,109 17,160,327 4,566,598 1,559,000 3,007,598 101,739

Net Income Available to Common Stockholders

$

3,028,792

$

2,905,859

Basic Earnings Per Share

$

1.08

$

1.04

Weighted Average Shares Outstanding

2,792,704

2,792,704

See Notes to Consolidated Financial Statements

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Independent Auditor’s Report (continued)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2013 AND 2012 Net Income Other Comprehensive Income

$

2013 3,078,792

2012 3,007,598

$

Unrealized appreciation on available-for-sale securities, net of taxes of $386,359 and $634,752, for 2013 and 2012, respectively

573,063

941,489

Less: reclassification adjustment for realized gains included in net income, net of taxes of $258,570 and $55,978, for 2013 and 2012, respectively

383,521

83,029

Unrealized appreciation on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income, net of taxes of $0 and $84,951, for 2013 and 2012, respectively Comprehensive Income

— 189,542 3,268,334 $

$

126,002 984,462 3,992,060

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY YEARS ENDED DECEMBER 31, 2013 AND 2012 Preferred Stock

Common Stock

Shares Issued

Amount

Shares Issued

Amount

Balance, January 1, 2012 Net income Other comprehensive income Dividends on preferred stock Dividends on common stock, $0.12 per share

5,000 — — —

$5,000,000 — — —

2,983,608 — — —

$1,657,560 — — —

Balance, December 31, 2012 Net income Other comprehensive income Dividends on preferred stock Dividends on common stock, $0.12 per share

5,000

$5,000,000

2,983,608

$1,657,560

Balance, December 31, 2013

5,000

$5,000,000

2,983,608

$1,657,560

Additional Paid-in Capital

Accumulated Other CompreRetained hensive Earnings Income

$9,935,098 $22,077,796 — 3,007,598 — — — (101,739) —

(335,124)

$9,935,098 $24,648,531 3,078,792 — (50,000) —

(335,125)

$9,935,098 $27,342,198

Treasury Stock

Total

$705,822 ($1,136,510) $38,239,766 — — 3,007,598 984,462 — 984,462 — — (101,739) —

(335,124)

$1,690,284 ($1,136,510) $41,794,963 3,078,792 189,542 — 189,542 (50,000) —

(335,125)

$1,879,826 ($1,136,510) $44,678,172

See Notes to Consolidated Financial Statements

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CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2013 AND 2012 Operating Activities Net income Items not requiring (providing) cash Depreciation Provision for loan losses Amortization of premiums and discounts on securities Amortization of mortgage-servicing rights Loss (recovery) on impaired mortgage servicing rights Deferred income taxes Net realized gains on available-for-sale securities Other-than-temporary impairment recoveries Gains on loan sales Net loss on foreclosed assets Amortization of intangibles Increase in cash surrender value of life insurance Loans originated for sale Proceeds from sales of loans originated for sale Changes in Other assets Other liabilities Net cash provided by (used in) operating activities

2013 $

Investing Activities Net cash received in branch acquisition Net change in interest-bearing time deposits in banks Purchases of available-for-sale securities Proceeds from maturities of available-for-sale securities Proceeds from the sales of available-for-sale securities Purchases of held-to-maturity securities Proceeds from maturities of held-to-maturity securities Net change in loans Purchase of premises and equipment Cost from the capitalization of foreclosed asset Proceeds from the sale of foreclosed assets Purchase of Federal Home Loan Bank Stock Purchase of life insurance policies Net cash provided by (used in) investing activities Financing Activities Net increase in demand deposits, money market, NOW and savings accounts Net decrease in certificates of deposit Net increase in short-term borrowings Proceeds from Federal Home Loan Bank advance Repayment of Federal Home Loan Bank advances Dividends paid on preferred stock Dividends paid on common stock Net cash provided by (used in) financing activities Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year Supplemental Cash Flows Information Decrease in preferred stock dividends payable Interest paid Income taxes paid (net of refunds) Real estate acquired in settlement of loans

$

3,078,792

2012 $

3,007,598

1,011,360 566,000 1,362,007 739,148 (435,000) (327,724) (642,091) – (2,731,525) 12,998 183,113 (236,581) (139,542,189) 121,247,506

860,945 700,000 1,429,305 785,430 655,000 (130,973) (139,007) (101,262) (3,132,777) 9,146 121,583 (122,343) (215,446,586) 211,353,186

859,954 457,699 (14,396,533)

186,615 743,097 778,957

– 2,493,000 (18,076,312) 23,006,718 642,893 (6,221,850) 7,784,746 (45,593,819) (1,913,949) (37,378) 452,936 (201,894) (5,000,000) (42,664,909)

45,905,388 44,000 (15,490,235) 22,933,418 139,221 (39,415,838) 6,325,986 (15,133,846) (2,319,858) – 633,192 – – 3,621,428

35,204,388 (6,626,240) 3,000,000 83,900,000 (66,900,000) (50,000) (335,125) 48,193,023

$

25,954,097 (17,647,101) – 44,400,000 (42,400,000) (151,739) (335,124) 9,820,133

$

(8,868,419) 24,332,291 15,463,872

$

14,220,518 10,111,773 24,332,291

$ $ $ $

– 2,191,676 1,445,717 1,301,552

$ $ $ $

(50,000) 2,730,202 1,259,539 237,683

The Company acquired the branch assets, deposits and related operations of an Associated Bank, NA branch located in Quincy, Illinois In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired Liabilities assumed Cash received for the branch

$ $

15,451,868 61,238,337 (45,786,469)

See Notes to Consolidated Financial Statements

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Independent Auditor’s Report (continued)

NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations Town and Country Financial Corporation (“Company”) is a single bank holding company, which through its subsidiary provides a full range of banking and financial services to individual and corporate customers in Central Illinois. The Company is subject to competition from other financial institutions. The Company and its bank subsidiary are subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Town and Country Bank and its wholly-owned subsidiaries Town & Country Banc Mortgage Services, Inc. and Haley, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company merged Logan County Bank and Town and Country Bank with the resulting bank operating under the name Town and Country Bank. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the 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 relate to the determination of the allowance for loan losses and other-than-temporary impairment of investments. Cash Equivalents The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2013 and 2012, cash equivalents consisted primarily of noninterest bearing deposits and interest bearing demand deposits. At December 31, 2013, the Company’s cash accounts exceeded federally insured limits by approximately $34,411. Interest-bearing Time Deposits in Banks Interest-bearing time deposits in banks mature within 5 years and are carried at cost. Securities Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. For debt securities with fair value below amortized cost when the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. The Company’s consolidated statements of income reflect impairment (that is, the difference between the security’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available-for-sale and held-to-maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections. For equity securities, when the Company has decided to sell an impaired available-for-sale security and the entity does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made. Loans Held for Sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Gains and losses on loan sales are recorded in noninterest income.

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Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, and any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and amortized as a level yield adjustment over the respective term of the loan. The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered uncollectible. All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income if accrued in the current year. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Discounts and premiums on purchased loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. 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 income. 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 and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the collateral value of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. 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. Impairment is measured on a loan-by-loan basis for commercial, construction, and residential loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Groups of loans with similar risk characteristics, including individually evaluated loans not determined to be impaired, are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not generally separately identify individual consumer loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower. Premises and Equipment Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and depreciated using the straight-line method over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured. The estimated useful lives for each major depreciable classification of premises and equipment are as follows: • Buildings and improvements 35-40 years • Leasehold improvements 5-10 years • Equipment 3-5 years

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Independent Auditorâ&#x20AC;&#x2122;s Report (continued)

Federal Reserve and Federal Home Loan Bank Stock Federal Reserve and Federal Home Loan Bank stock are required investments for institutions that are members of the Federal Reserve and Federal Home Loan Bank systems. The required investment in the common stock is based on a predetermined formula, carried at cost and evaluated for impairment. Foreclosed Assets Held for Sale Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, 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 and changes in the valuation allowance are included in net income or expense from foreclosed assets. Goodwill Goodwill is evaluated annually for impairment or more frequently if impairment indicators are present. A qualitative assessment is performed to determine whether the existence of events or circumstances leads to a determination that it is more likely than not the fair value is less than the carrying amount, including goodwill. If, based on the evaluation, it is determined to be more likely than not that the fair value is less than the carrying value, then goodwill is tested further for impairment. If the implied fair value of goodwill is lower than its carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the financial statements. Intangible Assets Intangible assets are being amortized on the straight-line basis over a period of 7 years. Such assets are periodically evaluated as to the recoverability of their carrying value. Derivatives Derivatives are recognized as assets and liabilities on the consolidated balance sheet and measured at fair value. For exchangetraded contracts, fair value is based on quoted market prices. For nonexchange traded contracts, fair value is based on dealer quotes, pricing models, discounted cash flow methodologies or similar techniques for which the determination of fair value may require significant management judgment or estimation. Mortgage Servicing Rights Mortgage servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance (ASC 860-50), servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. The Company has elected to initially and subsequently measure the mortgage servicing rights for consumer mortgage loans using the amortization method. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment or increased obligation based on fair value at each reporting date. Each class of separately recognized servicing assets subsequently measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Changes in valuation allowances are reported with noninterest income on the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. Treasury Stock Common stock shares repurchased are recorded at cost. Cost of shares retired or reissued is determined using the first-in, first-out method. Transfers of Financial Assets Transfers of financial assets 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 Companyâ&#x20AC;&#x201D;put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

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Trust Assets and Fees Assets held in fiduciary or agency capacities are not included in the consolidated balance sheets, since such items are not assets of the Company. Fees from trust activities are recorded on the cash basis, for the period in which the service is provided. Fees are a function of the market value of assets managed and administered and the volume of transactions and fees for other services rendered, as set forth in the underlying trust agreements. The Company manages or administers trust accounts with assets totaling approximately $113,034,155 and $91,460,637 as of December 31, 2013 and 2012, respectively. Income Taxes The Company accounts for income taxes in accordance with income tax accounting guidance (ASC 740, Income Taxes). The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likelythan-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to the managementâ&#x20AC;&#x2122;s judgment. The Company recognizes interest and penalties on income taxes as a component of income tax expense. The Company files consolidated income tax returns with its subsidiaries. Earnings Per Share Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during each period. Treasury stock shares are not deemed outstanding for earnings per share calculations. Comprehensive Income Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized appreciation (depreciation) on available-for-sale securities and unrealized appreciation (depreciation) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recognized in income.

NOTE 2: RESTRICTION ON CASH AND DUE FROM BANKS

The Company is required to maintain reserve funds in cash and/or on deposit with MoneyGram. The reserve required at December 31, 2012 was $430,566. The MoneyGram account was closed in November 2013.

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Independent Auditorâ&#x20AC;&#x2122;s Report (continued)

NOTE 3: SECURITIES

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows: Gross Unrealized Gains

Amortized Cost Available-for-sale Securities: December 31, 2013: U.S. government agencies Mortgage-backed securities State and political subdivisions Equity securities Trust preferred securities Corporates

$

$ December 31, 2012: U.S. government agencies Mortgage-backed securities State and political subdivisions Equity securities Trust preferred securities Corporates

$

$ Held-to-maturity Securities: December 31, 2013: Mortgage-backed securities State and political subdivisions Trust preferred security

$

$ December 31, 2012: Mortgage-backed securities State and political subdivisions Trust preferred security

$

$

19,349,633 45,575,598 3,195,793 24,998 9,164,120 2,469,635 79,779,777

$

17,722,070 52,148,265 3,735,925 25,799 9,387,469 2,462,997 85,482,525

$

30,506,215 68,500 121,707 30,696,422 32,633,074 95,000 121,707 32,849,781

$

$

$

$ $

$

Gross Unrealized Losses

323,405 1,299,717 46,350 4,351,682 208,338 346,139 6,575,631

$

642,784 2,253,771 136,077 3,318,771 142,554 441,489 6,935,446

$

71,507 71,507 566,167 566,167

$

$

$

$ $

$

Approximate Fair Value

(29,689) (168,674) (3,230,068) (3,428,431)

$

(1,947) (1,752) (4,101,874) (4,105,573)

$

(554,857) (554,857)

$

(20,383) (20,383)

$

$

$

$

$

19,643,349 46,706,641 3,242,143 4,376,680 6,142,390 2,815,774 82,926,977 18,364,854 54,400,089 3,872,002 3,342,818 5,428,149 2,904,486 88,312,398

30,022,865 68,500 121,707 30,213,072 33,178,858 95,000 121,707 33,395,565

Available-for-sale equity securities consist of investments in SLM Corp. (SLMA) stock and corporate stock. The Company held 163,361 and 193,361 shares of SLMA stock with a carrying value of $4,293,127 and $3,306,893 at December 31, 2013 and 2012, respectively. During 2013 and 2012, the Company sold 30,000 and 8,000 shares of SLMA stock resulting in a gain of $640,742 and $139,007, respectively. As of December 31, 2013 and 2012, the Company held an investment in FNMA common stock, included in equity securities with an amortized cost of $5,733 for both years. The FNMA common stock has an unrealized gain of $42,198 and unrealized loss of $1,752 and a fair value of $47,931 and $3,981 as of December 31, 2013 and 2012, respectively. Available-for-sale corporate securities consist of investments in corporate bonds rated AA+ as of December 31, 2013. As of December 31, 2013 and 2012, the Companyâ&#x20AC;&#x2122;s amortized cost in available-for-sale TruPSs was $9,164,120 and $9,387,469, respectively. The TruPSs had a net unrealized loss of $3,021,730 and $3,959,320 and a fair value of $6,142,390 and $5,428,149 as of December 31, 2013 and 2012, respectively. During 2012, the company received final settlement on one of the TruPSs and recognized a recovery of $101,262 on previously recorded other-than-temporary impairment. Management performed an analysis, which included assistance by an independent valuation specialist, and deemed the remaining balance of the available-for-sale TruPSs were not other than temporarily impaired as of December 31, 2013. As of December 31, 2013 and 2012, the Companyâ&#x20AC;&#x2122;s amortized cost and fair value in the held-to-maturity TruPS was $121,707 for both years. Management performed an analysis, which included assistance by an independent valuation specialist, and deemed the remaining balance of the held-to-maturity TruPS was not other than temporarily impaired as of December 31, 2013. The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at December 31, 2013, by contrac-

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tual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Available-for-sale Amortized Fair Cost Value Within one year One to five years Five to ten years After ten years

$

Mortgage-backed securities Trust preferred securities Equity securities Totals

$

6,477,333 15,588,835 2,948,893 25,015,061 45,575,598 9,164,120 24,998 79,779,777

$

$

Held-to-maturity Amortized Cost

6,838,102 15,910,851 2,952,313 25,701,266

$

46,706,641 6,142,390 4,376,680 82,926,977

30,506,215 121,707 $ 30,696,422

29,000 39,500 68,500

$

Fair Value 29,000 39,500 68,500

30,022,865 121,707 30,213,072

$

The carrying value of securities pledged as collateral, to secure public deposits and for other purposes, was $17,485,578 at December 31, 2013 and $20,307,104 at December 31, 2012. Gross gains of $642,091 and $139,007 resulting from sales of available-for-sale securities were realized for 2013 and 2012, respectively. There were no gross losses resulting from the sales of available-for-sale securities realized in 2013 or 2012. Certain investments in debt and equity securities are reported in the consolidated financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2013 and 2012, was $44,450,596 and $6,840,138, which is approximately 39% and 6% respectively, of the Company’s available-for-sale and held-to-maturity investment portfolio. These declines primarily resulted from recent changes in market interest rates and failure of certain investments to maintain consistent credit quality ratings. Except as discussed above, management believes the declines in fair value for these securities are temporary. The following table shows the Company’s investments’ gross unrealized losses and fair value of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2013 and 2012: December 31, 2013 Less than 12 Months 12 Months or More Unrealized Unrealized Losses Losses Fair Value Fair Value

Description of Securities Available-for-sale securities: US Government federal agency and Governmentsponsored $ 3,921,000 Mortgage-backed securities 12,327,309 Trust preferred securities Total temporarily impaired securities $ 16,248,309

$ (198,363)

Held-to-maturity securities: Mortgage-backed securities $ 22,304,117

$ (554,621)

$

(29,689) (168,674)

$

5,832,674

Unrealized Losses

Fair Value

(3,230,068)

$ 3,921,000 12,327,309 5,832,674

$

(29,689) (168,674) (3,230,068)

$ 5,832,674

$ (3,230,068)

$ 22,080,983

$

(3,428,431)

$

$

(236)

$ 22,369,613

$

(554,857)

$

(1,752) (4,101,874)

$ 1,202,118 3,981 5,023,578

$

(1,947) (1,752) (4,101,874)

65,496

$

Total

December 31, 2012 Available-for-sale securities: Mortgage-backed securities $ 1,202,118 Equity securities Trust preferred securities Total temporarily impaired securities $ 1,202,118

$

(1,947) -

$

$

(1,947)

$ 5,027,559

$(4,103,626)

$ 6,229,677

$

(4,105,573)

Held-to-maturity securities: Mortgage-backed securities $

$

(20,383)

$

$

$

$

(20,383)

610,461

Town and Country Financial Corporation

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2013 Annual Report

3,981 5,023,578

-

-

610,461

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Independent Auditor’s Report (continued)

Trust Preferred Securities (TruPSs) The unrealized loss on TruPSs was primarily caused by the long-term nature of the pooled trust preferred securities, a lack of demand or inactive market for these securities, and concerns regarding the financial institutions that have issued the underlying trust preferred securities. The Company currently expects certain issuing financial institutions to settle the securities at a price less than the amortized cost basis of the investment (that is, the Company expects to recover less than the entire amortized cost basis of the security). The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. Because the Company does not intend to sell the investment and it is not more likely than not the Company will be required to sell the investment before recovery of its new, lower amortized cost basis, which may be maturity, it does not consider the remainder of the investment in TruPSs to be other-than-temporarily impaired at December 31, 2013. Other-than-temporary Impairment Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or will be evaluated for impairment under the accounting guidance for investments in debt and equity securities. The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities. For securities where the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities where the security is not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment model. The Company routinely conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred. Economic models are used to determine whether an other-than-temporary impairment has occurred on these securities. While all securities are considered, the securities primarily impacted by other-than-temporary impairment testing are pooled trust preferred securities. For each pooled trust preferred security in the investment portfolio (including but not limited to those whose fair value is less than their amortized cost basis), an extensive, regular review is conducted to determine if an other-than-temporary impairment has occurred. Various inputs to the economic models are used to determine if an unrealized loss is other-than-temporary. The most significant inputs are the following: • Prepayments • Default rates • Loss severity The pooled trust preferred securities relate to trust preferred securities issued by financial institutions. The pools typically consist of financial institutions throughout the United States. Other inputs may include performance indicators of the underlying financial institutions including profitability, capital ratios, and asset quality. To determine if the unrealized losses for pooled trust preferred securities is other-than-temporary, the Company projects total estimated defaults of the underlying assets (financial institutions) and multiplies that calculated amount by an estimate of realizable value upon sale in the marketplace (severity) in order to determine the projected collateral loss. If the Company determines that a given pooled trust preferred security position will be subject to a write-down or loss, the Company records the expected credit loss as a charge to earnings. For those securities for which a review for other-than-temporary impairment was completed as of December 31, 2013 and 2012 (that is, a determination was made that the entire amortized cost bases will not likely be recovered), the following assumptions were used to measure the amount of credit loss recognized in earnings. The Company’s assumptions for the pooled trust preferred securities included default rates of 2% annually for two years and 36 basis points for the remaining life of the securities, 10% recovery with a 2 year lag, and prepayments of 5% every 5 years. Credit Losses Recognized on Investments Certain debt securities have experienced fair value deterioration due to credit losses and other market factors, but are not otherwise other-than-temporarily impaired.

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The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income. Accumulated credit losses 2013 2012 Credit losses on debt securities held Beginning of year $ 1,105,802 $ 1,207,064 Reducation due to final settlement – (101,262) End of year $ 1,105,802 $ 1,105,802

NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES Classes of loans at December 31, include:

2013 Mortgage loans on real estate Residential 1-4 family Commercial Construction Agriculture Total mortgage loans on real estate Commercial Agriculture Consumer Installment loans Less Allowance for loan losses Net loans

$

$

94,406,379 154,847,200 22,053,695 7,248,130 278,555,404 45,322,890 10,704,724 2,537,531 337,120,549 3,508,130 333,612,419

2012 $

$

76,966,574 126,535,846 16,269,646 4,731,614 224,503,680 40,225,083 7,202,219 2,778,415 274,709,397 3,194,445 271,514,952

The loan portfolio includes a concentration of loans secured by commercial real estate properties amounting to $154,847,200 and $126,535,846 as of December 31, 2013 and 2012, respectively. Generally, these loans are collateralized by assets of the borrower. The loans are expected to be repaid from cash flows or from proceeds from the sale of selected assets of the borrower. The loan portfolio includes a concentration of loans for construction and land development amounting to $22,053,695 and $16,269,646 as of December 31, 2013 and 2012, respectively. Generally, these loans are collateralized by building or land being developed. The loans are expected to be repaid from cash flows or from proceeds from the sale of selected assets of the borrower. The Company maintains lending policies and procedures designed to focus lending efforts on the type, location and duration of loans most appropriate for its business model and markets. The Company’s principal lending activity is the origination of residential and commercial investor real estate loans, commercial loans, agricultural, and consumer loans. The primary lending market is where the Company’s branches are located in Central Illinois and the surrounding counties. Generally, loans are collateralized by assets of the borrower and guaranteed by the principals of the borrowing entity. The Board of Directors reviews and approves the Company’s lending policy on an annual basis. Quarterly, the Board of Directors reviews the allowance for loan losses and reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. The Company does not accrue interest on any asset which is maintained on a cash basis because of deterioration in the financial position of the borrower, any asset for which payment in full of interest or principal is not expected, or any asset upon which principal or interest has been in default for a period of ninety days or more unless it is both well secured and in the process of collection. A non-accrual asset may be restored to an accrual status when none of its principal and interest is due and unpaid, or when it otherwise becomes well secured and in the process of collection. The Company’s third party loan review conducts periodic independent loan reviews of outstanding loans. The primary objective of the independent loan review function is to ensure the maintenance of a quality loan portfolio and minimize the potential for loan losses. The third party loan review is responsible for reviewing a sample of existing loans for compliance with internal policies and procedures.

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Independent Auditor’s Report (continued)

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2013 and 2012: Year Ended December 31, 2013 Mortgage Loans on Real Estate Residential 1-4 Family

Commercial

Construction

Agriculture

Commercial

Agriculture

Consumer

Unallocated

Total

774,228

985,529

224,494

19,675

759,252

31,527

73,240

326,500

3,194,445

Provision charged to expense 565,547 Losses charged off (131,305) Recoveries 7,937 Balance, end of year $ 1,216,407

91,375 59,549 $ 1,136,453

86,278 10,250 $ 321,022

$

23,093 42,768

(230,038) (189,889) 13,888 $ 333,213

(31,527) $ -

(2,867) (47,149) 24,405 $ 47,629

64,134 $ 390,639

$

566,000 (368,343) 116,029 3,508,131

$

$

$

-

$

20,000

$

-

$

37,950

$

$

315,015

333,213 353,213

$ $

-

$ $

9,679 47,629

$ 390,639 $ 390,639

$ 3,193,116 $ 3,508,131

$

$ 337,120,549

Allowance for loan losses: Balance, beginning of year

Ending balance: individually evaluated for impairment $

257,065

Ending balance: collectively evaluated for impairment $ 959,342 Ending balance $ 1,216,407

-

-

$ 1,136,453 $ 1,136,453

$ 321,022 $ 321,022

$ 42,768 $ 42,768

$ $

$94,406,379

$154,847,200

$22,053,695

$7,248,130

$45,322,890

$10,704,724

$ 2,537,531

Ending balance: individually evaluated for impairment $ 1,449,229

$ 1,264,491

$ 1,400,145

$

$

$

$

Ending balance: collectively evaluated for impairment

$153,582,709

$20,653,550

$7,248,130

-

Loans: Ending balance

$92,957,150

-

341,061

$44,981,829

-

-

39,643

$10,704,724

$ 2,497,888

Agriculture

$ 4,494,569 $

-

$ 332,625,980

Consumer

Unallocated

Total

Year Ended December 31, 2012 Mortgage Loans on Real Estate Residential 1-4 Family Allowance for loan losses: Balance, beginning of year

$

606,539

Commercial

Construction

Agriculture $

13,672

$

622,265

$

$

361,804 (5,571) 7,031 985,529

231,883 (200,000) 5,139 $ 224,494

191,551

$

70,000

$

-

Ending balance: collectively evaluated for impairment $ 582,677

$

915,529

$

Provision charged to expense 356,982 Losses charged off (211,621) Recoveries 22,328 Balance, end of year $ 774,228 Ending balance: individually evaluated for impairment $

Loans: Ending balance

187,472

Commercial $

796,898

$

31,527

$

69,095

$ 571,870

$ 2,899,338

$

6,003 19,675

$

31,527

29,472 (41,891) 16,564 $ 73,240

(245,370)

$

(40,774) 3,128 759,252

$ 326,500

700,000 (459,083) 54,190 $ 3,194,445

$

-

$

10,000

$

-

$

37,950

$

$

224,494

$ 19,675

$

749,252

$

31,527

$

35,290

$ 326,500

$ 2,884,944

-

309,501

$ 76,966,574

$ 126,535,846

$ 16,269,646

$ 4,731,614

$ 40,225,083

$ 7,202,219

$ 2,778,415

$

-

$ 274,709,397

Ending balance: individually evaluated for impairment $ 1,592,868

$ 1,298,385

$ 1,483,037

$

$

$

$

45,813

$

-

$ 4,783,459

Ending balance: collectively evaluated for impairment $ 75,373,706

$ 125,237,461

$ 14,786,609

$ 4,731,614

$ 2,732,602

$

-

$ 269,925,938

-

363,356

$ 39,861,727

-

$ 7,202,219

Management’s opinion as to the ultimate collectability of loans is subject to estimates regarding future cash flows from operations and the value of property, real and personal, pledged as collateral. These estimates are affected by changing economic conditions and the economic prospects of borrowers. Allowance for Loan Losses The allowance for loan and lease losses (“allowance”) represents management’s estimate of the reserve necessary to adequately account for probable losses that could ultimately be realized from current loan exposures. In determining the adequacy of the allowance, management relies predominantly on a disciplined credit review and approval process. The review process is directed by overall lending policy and is intended to identify, at the earliest possible stage, borrowers who might be facing financial difficulty.

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Loans for which it is probable that the Company will not collect all principal and interest due according to the contractual terms are identified as impaired. The impairment for each applicable loan is quantified, and specific loss exposures are allocated within the allowance. Loans that are in non-accrual status are generally considered impaired. A detailed analysis is performed on each loan that is not impaired, but poses sufficient risk to warrant in-depth review. These are loans that have been classified as substandard or are on the Company’s internal watch list. Due to the elevated risk inherent in these loans, management has determined that it is appropriate to quantify the potential loss within the pool of classified loans by estimating each loan’s collateral shortfall. These collateral shortfall estimates are incorporated in the determination of the adequacy of the allowance, based on the range of collateral shortfalls, expressed as a percentage of the aggregate principal balance within the pool, identified each calendar quarter over the past twelve quarters. Beginning January 1, 2013, the Company began using a five-year average of historical losses for the general component of the allowance for loan loss calculation. The Company had previously used a three-year average. In estimating the risk of loss in the remaining portion of the loan portfolio identified as non-classified, management establishes base loss estimations which are derived from the historical loss experience over the past three calendar years. These base loss estimations are then adjusted after consideration of several qualitative factors. Credit Quality Indicators The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on commercial loans at origination. In addition, significant lending relationships, new commercial and commercial real estate loans, and watch list credits are reviewed annually by an independent third party in order to verify risk ratings. The Company uses the following definitions for risk ratings: •

Pass – Loans classified as pass are well protected by the ability of the borrower to pay or by the value of the asset or underlying collateral.

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss – Loans classified as loss are the portion of the loan that is considered uncollectible so that its continuance as an asset is not warranted. The amount of the loss determined will be charged-off.

Risk characteristics applicable to each segment of the loan portfolio are described as follows. •

Residential 1-4 Family and Equity Lines of Credit Real Estate: The residential 1-4 family real estate are generally secured by owner-occupied 1-4 family residences. Repayment of these loans is primarily dependent on the personal income and credit rating of the borrowers. Credit risk in these loans can be impacted by economic conditions within the Company’s market areas that might impact either property values or a borrower’s personal income. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Commercial Real Estate: Commercial real estate loans typically involve larger principal amounts, and repayment of these loans is generally dependent on the successful operations of the property securing the loan or the business conducted on the property securing the loan. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.

Construction and Land Development Real Estate: Construction and land development real estate loans are usually based upon estimates of costs and estimated value of the completed project and include independent appraisal reviews and a financial analysis of the developers and property owners. Sources of repayment of these loans may include permanent loans, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are considered to be higher risk than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, general economic conditions and the availability of long-term financing. Credit risk in these loans may be impacted by the creditworthiness of a borrower, property values and the local economies in the Company’s market areas.

Agricultural and Agricultural Real Estate Loans: Agricultural loans are generally comprised of seasonal operating lines to grain farmers to plant and harvest corn and soybeans and term loans to fund the purchase of equipment. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Specific underwriting standards have been established for agricul-

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2013 Annual Report

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Independent Auditor’s Report (continued)

tural-related loans including the establishment of projections for each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop. Loan-to-value ratios on loans secured by farmland generally do not exceed 75% and have amortization periods limited to twenty five years. Federal government-assistance lending programs through the Farm Service Agency and U.S. Department of Agriculture are used to mitigate the level of credit risk when deemed appropriate. •

Commercial: The commercial portfolio includes loans to commercial customers for use in financing working capital needs, equipment purchases and expansions. The loans in this category are repaid primarily from the cash flow of a borrower’s principal business operation. Credit risk in these loans is driven by creditworthiness of a borrower and the economic conditions that impact the cash flow stability from business operations.

Consumer: The consumer loan portfolio consists of various term and line of credit loans such as automobile loans and loans for other personal purposes. Repayment for these types of loans will come from a borrower’s income sources that are typically independent of the loan purpose. Credit risk is driven by consumer economic factors (such as unemployment and general economic conditions in the Company’s market area) and the creditworthiness of a borrower.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2013 and 2012: Mortgage Loans on Real Estate December 31, 2013: Pass Special Mention (5) Substandard (6) Doubtful (7) Loss (8) Total

Residential 1-4 Family $ 92,471,171 485,979 1,416,980 32,249 $ 94,406,379

December 31, 2012: Pass $ 75,169,367 Special Mention 337,265 Substandard 1,459,942 Doubtful Loss Total $ 76,966,574

Commercial Construction $150,419,969 $ 20,653,550 3,162,740 1,264,491 1,400,145 $154,847,200 $ 22,053,695

Agriculture Commercial $ 7,248,130 $44,957,465 24,364 341,061 $ 7,248,130 $45,322,890

Agriculture $10,704,724 $ 10,704,724

Consumer $ 2,497,888 39,643 $ 2,537,531

Total $ 328,952,897 3,673,083 4,462,320 32,249 $ 337,120,549

$122,614,299 1,870,197 2,051,350 $126,535,846

$ 4,731,614 $ 4,731,614

$ 7,202,219 $ 7,202,219

$ 2,732,602 45,813 $ 2,778,415

$ 265,398,138 3,173,959 6,137,300 $ 274,709,397

$ 13,628,185 601,544 2,039,917 $ 16,269,646

$ 39,319,852 364,953 540,278 $40,225,083

The following tables present the Company’s loan portfolio aging analysis as of December 31, 2013 and 2012: December 31, 2013: Mortgage loans on real estate Residential 1-4 family Commercial Construction Agriculture Commercial Agriculture Consumer Installment loans Total December 31, 2012: Mortgage loans on real estate Residential 1-4 family Commercial Construction Agriculture Commercial Agriculture Consumer Installment loans Total

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30-89 Days Past Due $

$

$

$

769,714 620,929 24,982 24,364 4,604 1,444,593

Greater Than 90 Days $

$

842,563 $ 26,593 28,199 60,366 11,523 969,244 $

Total Past Due

547,952 $ 260,169 20,396 2,045 830,562 $

856,792 606,128 2,908 1,465,828

$

$

Total Loans Receivable

Current

1,317,666 881,098 24,982 44,760 6,649 2,275,155

$

93,088,713 $ 94,406,379 153,966,102 154,847,200 22,028,713 22,053,695 7,248,130 7,248,130 45,278,130 45,322,890 10,704,724 10,704,724 2,530,882 2,537,531 $ 334,845,394 $ 337,120,549

1,699,355 632,721 28,199 60,366 14,431 2,435,072

$

75,267,219 125,903,125 16,241,447 4,731,614 40,164,717 7,202,219 2,763,984 $ 272,274,325

www.townandcountrybank.com

Greater than 90 Days & Accruing

$

6,708 20,396 2,045 29,149

76,966,574 $ 126,535,846 16,269,646 4,731,614 40,225,083 7,202,219 2,778,415 $ 274,709,397 $

2,908 2,908

$

$

www.peoplesprosperity.com


A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. At December 31, 2013 and 2012, impaired loans include $546,562 and $603,175 of the troubled debt restructurings outstanding, respectively. The following tables present impaired loans for the years ended December 31, 2013 and 2012: Unpaid Principal Balance

Recorded Balance December 31, 2013: Loans without a specific valuation allowance Mortgage Loans on Real Estate: Residential 1-4 Family $ 731,211 Commercial 1,264,491 Construction 1,400,145 Agriculture Commercial 308,027 Agriculture Consumer Loans with a specific valuation allowance Mortgage Loans on Real Estate: Residential 1-4 Family 718,018 Commercial Construction Agriculture Commercial 33,034 Agriculture Consumer 39,643 Total: Mortgage Loans on Real Estate: Residential 1-4 Family 1,449,229 Commercial 1,264,491 Construction 1,400,145 Agriculture Commercial 341,061 Agriculture Consumer 39,643 $ 4,494,569 December 31, 2012: Loans without a specific valuation allowance Mortgage Loans on Real Estate: Residential 1-4 Family $ 1,155,955 Commercial 896,920 Construction 1,483,037 Agriculture Commercial 334,095 Agriculture Consumer Loans with a specific valuation allowance Mortgage Loans on Real Estate: Residential 1-4 Family 436,913 Commercial 401,465 Construction Agriculture Commercial 29,261 Agriculture Consumer 45,813 Total: Mortgage Loans on Real Estate: Residential 1-4 Family 1,592,868 Commercial 1,298,385 Construction 1,483,037 Agriculture Commercial 363,356 Agriculture Consumer 45,813 $ 4,783,459

Town and Country Financial Corporation

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$

731,211 1,264,491 1,584,867 308,027 -

Specific Allowance

$

-

Average Investment in Impaired Loans

$

741,136 1,281,020 1,406,602 329,591 -

Interest Income Recognized Cash Basis

Interest Income Recognized

$

13,458 62,438 76,120 8,195 -

$

15,933 62,763 76,165 7,919 -

718,018 33,034 39,643

257,065 20,000 37,950

728,974 36,173 42,728

11,210 239 -

16,541 360 -

1,449,229 1,264,491 1,584,867 341,061 39,643 $ 4,679,291

257,065 20,000 37,950 315,015

1,470,110 1,281,020 1,406,602 365,764 42,728 $ 4,566,224

24,668 62,438 76,120 8,434 171,660

32,474 62,763 76,165 8,279 179,681

-

$ 1,044,593 1,859,855 1,475,608 331,806 -

436,913 401,465 29,261 45,813

191,551 70,000 10,000 37,950

44,126 546,442 29,258 47,115

3,841 18,352 -

14,018 20,350 -

1,592,868 1,298,385 1,683,037 363,356 45,813 $ 4,783,459

191,551 70,000 10,000 37,950 309,501

1,088,719 2,406,297 1,475,608 361,064 47,115 $ 5,378,803

25,816 141,398 57,816 7,982 233,012

47,023 142,646 57,796 7,771 255,236

$ 1,155,955 896,920 1,683,037 334,095 -

2013 Annual Report

$

$

$

$

$

$

21,975 123,046 57,816 7,982 -

$

$

$

33,005 122,296 57,796 7,771 -

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Independent Auditor’s Report (continued)

Interest income recognized on impaired loans includes interest accrued and collected on the outstanding balances of accruing impaired loans as well as interest cash collections on non-accruing impaired loans for which the ultimate collectability is not certain. The following table presents the Company’s nonaccrual loans at December 31, 2013 and 2012. This table excludes performing troubled debt restructurings of $734,986 and $443,435. 2013 Mortgage loans on real estate Residential 1-4 family $ Commercial Construction Agriculture Commercial Agriculture Consumer Installment loans Total $

693,765 260,169 205,422 39,643 1,198,999

2012 $

1,144,937 632,722 1,777,659

$

When economic concessions have been granted to borrowers who have experienced financial difficulties, the loan is considered a troubled debt restructuring. These concessions typically result from our loss mitigation activities and could include: reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Troubled debt restructurings are considered impaired at the time of restructuring and typically are returned to accrual status after considering the borrower’s sustained repayment performance, as agreed, for a reasonable period of at least six months or once the granted concessions have ended or are no longer applicable. The following table presents the recorded balance, at original cost, of troubled debt restructurings as of December 31, 2013 and 2012:

December 31, 2013: Mortgage loans on real estate Residential 1-4 family Commercial Construction Agriculture Commercial Agriculture Consumer Total December 31, 2012: Mortgage loans on real estate Residential 1-4 family Commercial Construction Agriculture Commercial Agriculture Consumer Total

Total Troubled Debt Restructuring $

$

$

$

569,134 236,045 204,043 39,643 1,048,865

425,916 240,001 274,375 45,813 986,105

Troubled debt restructurings not performing in accordance with modified

Troubled debt restructurings performing in accordance with modified terms Accruing $

$

$

$

Nonaccrual

490,821 236,045 8,120 734,986

$

133,625 240,001 69,809 -

$

443,435

$

$

78,313 195,923 39,643 313,879

245,284 204,566 45,813 495,663

$

$

$

$

-

47,007 47,007

At December 31, 2013 and 2012, ten and seven loans designated as TDR were on accrual status, respectively. Performing troubled debt restructuring had performed in accordance with modified terms for a period of 6 months or more.

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Newly classified troubled debt restructurings during 2013 and 2012: 2013: Mortgage loans on real estate Residential 1-4 family Commercial Construction Agriculture Commercial Agriculture Consumer Total

Number of Loans

2012: Mortgage loans on real estate Residential 1-4 family Commercial Construction Agriculture Commercial Agriculture Consumer Total

Pre-Modification Recorded Balance

2 2

$

3 1 3 7

$

$

$

179,998 179,998

94,094 240,001 142,612 476,707

Post-Modification Recorded Balance $

$

$

$

179,998 179,998

94,094 240,001 142,612 476,707

The troubled debt restructurings described above increased the allowance for loan losses by $10,000 in 2012 and resulted in $104,239 in charge offs for 2013. Newly restructured loans by type of modification during 2013 and 2012: 2013: Mortgage loans on real estate Residential 1-4 family Commercial Construction Agriculture Commercial Agriculture Consumer Total 2012: Mortgage loans on real estate Residential 1-4 family Commercial Construction Agriculture Commercial Agriculture Consumer Total

Interest only $

-

$

$

32,645 240,001 62,953 335,599

$

Term $

$

$

$

-

47,233 29,693 76,926

Combination $

$

$

$

179,998 179,998

14,216 49,966 64,182

Total Modification $

$

$

$

179,998 179,998

94,094 240,001 142,612 476,707

During the year ended December 31, 2013 and 2012, there were no defaults on loans that had been modified as a troubled debt restructuring in the 12 month period prior to default.

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2013 Annual Report

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Independent Auditorâ&#x20AC;&#x2122;s Report (continued)

NOTE 5: PREMISES AND EQUIPMENT

Major classifications of premises and equipment, stated at cost, are as follows: Land Buildings and improvements Construction in progress Equipment Leasehold improvements

2013 3,676,616 10,020,109 129,652 7,161,891 1,491,430 22,479,698 10,722,108 11,757,590

$

Less accumulated depreciation Net premises and equipment

$

2012 2,662,940 10,033,263 400 7,597,482 1,475,963 21,770,048 10,914,044 10,856,004

$

$

NOTE 6: GOODWILL

The changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012, were: Balance as of January 1 Goodwill related to acquisition of branch Balance as of December 31

2013 1,988,631 1,988,631

$ $

2012 1,988,631 1,988,631

$ $

All goodwill is allocated to the banking segment of the business.

NOTE 7: OTHER INTANGIBLE ASSETS

The carrying basis and accumulated amortization of recognized intangible assets included in other assets on the consolidated balance sheets, at December 31, 2013 and 2012 were: 2013

Core deposits

Gross Carrying Amount $ 1,651,313

2012

Accumulated Amortization $ 834,862

Gross Carrying Amount $ 1,651,313

$

Accumulated Amortization 651,749

Amortization expense for the years ended December 31, 2013 and 2012 was $183,113 and $121,583 for 2013 and 2012, respectively. Estimated amortization expense for each of the following five years is: 2014 2015 2016 2017 2018 Thereafter

$

$

182,103 146,398 142,815 142,815 142,815 59,505 816,451

NOTE 8: MORTGAGE SERVICING

Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The unpaid principal balances of mortgage loans serviced for others was $394,137,246 and $383,211,862 at December 31, 2013 and 2012, respectively. The following summarizes the activity pertaining to mortgage servicing rights measured using the amortization method, along with the aggregate activity in related valuation allowances: 2013 2012 Mortgage Servicing Rights Balance, beginning of year $ 4,516,079 $ 3,735,120 Additions 831,146 1,566,389 Amortization (739,148) (785,430) Balance, end of year $ 4,608,077 $ 4,516,079 Valuation Allowances Balance at beginning of year $ 1,891,119 $ 1,236,119 Additions (Recoveries) (435,000) 655,000 Balance at end of year 1,456,119 1,891,119 Mortgage Servicing assets, net $ 3,151,958 $ 2,624,960 Fair value disclosures Fair value at the beginning of period $ 2,624,960 $ 2,499,001 Fair value as of the end of the period $ 3,151,958 $ 2,624,960

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During 2013 and 2012, a valuation allowance of $1,456,119 and $1,891,119 respectively, was necessary to adjust the aggregate cost basis of the mortgage servicing right asset to fair value.

NOTE 9: INTEREST-BEARING DEPOSITS

Interest-bearing deposits in denominations of $100,000 or more were $70,910,749 on December 31, 2013 and $47,364,482 on December 31, 2012. At December 31, 2013, the scheduled maturities of time and brokered time deposits are as follows: 2014 2015 2016 2017 2018 Thereafter

$ 70,035,750 22,103,502 12,502,047 8,779,147 7,041,796 37,849 $ 120,500,091

NOTE 10: JUNIOR SUBORDINATED DEBENTURES The Company has $4,124,000 of junior subordinated debt owed to Statutory Trust II (“Trust II”) as of December 31, 2013 and 2012. Trust II is a wholly-owned unconsolidated subsidiary, which was formed on March 17, 2004, to issue cumulative preferred securities. The Company owns all of the securities of Trust II that possess general voting powers. The Company issued shares of the preferred securities through a private placement offering on March 17, 2004, through the trust. Trust II invested the proceeds in the Company’s junior subordinated debentures. The junior subordinated debentures have an interest rate based on a floating rate equal to 3 month LIBOR plus 279 basis points which adjusts quarterly on March 15, June 15, September 15, and December 15. The rate at December 31, 2013 was 3.034%. The junior subordinated debentures mature on March 17, 2034. Trust II’s sole asset is the holding company’s junior subordinated debt. The Company has $7,732,000 of junior subordinated debt owed to Statutory Trust III (“Trust III”) as of December 31, 2013 and 2012. Trust III is a wholly-owned unconsolidated subsidiary, which was formed on March 22, 2007, to issue cumulative preferred securities. The Company owns all of the securities of Trust III that possess general voting powers. The Company issued shares of the preferred securities through a private placement offering on March 22, 2007, through the trust. Trust III invested the proceeds in the Company’s junior subordinated debentures. Commencing March 22, 2012, the rate is equal to 3 month LIBOR plus 168 basis points. This rate was 1.923% as of December 31, 2013. The junior subordinated debentures mature on March 22, 2037, which the date may be shortened to a date not earlier than March 22, 2012, if certain conditions are met. Trust III’s sole asset is the holding company’s junior subordinated debt. The Company’s obligations with respect to the issuance of the preferred securities constitute a full and unconditional guarantee of Trust II and III’s obligations with respect to the preferred securities. Interest on the junior subordinated debentures and distributions on the preferred securities are payable quarterly in arrears. Distributions on the preferred securities are cumulative. The Company has the right, at any time, so long as no event of default has occurred and is continuing, to defer payments of interest on the junior subordinated debentures, which will require deferral of distribution of the preferred securities, for a period not exceeding 20 consecutive quarterly periods, provided that such deferral may not extend beyond the stated maturity of the junior subordinated debentures. The preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the junior subordinated debentures at maturity or their earlier redemption. Interest expense on the junior subordinated debt was $281,885 and $369,466 for the years ended December 31, 2013 and 2012, respectively.

NOTE 11: FEDERAL HOME LOAN BANK ADVANCES The Federal Home Loan Bank advances totaled $34,000,000 and $17,000,000 as of December 31, 2013 and 2012, respectively. The Federal Home Loan Bank advances are secured by mortgage loans and investment securities totaling $68,085,423 at December 31, 2013. Advances, at interest rates from 0.12 to 4.50 percent are subject to restrictions or penalties in the event of prepayment. Aggregate annual maturities of Federal Home Loan Bank advances at December 31, 2013, are: 2014 2015 2016 2017 2018 Thereafter

Town and Country Financial Corporation

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2013 Annual Report

$ 25,000,000 7,000,000 2,000,000 $ 34,000,000

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Independent Auditor’s Report (continued)

NOTE 12: SMALL BUSINESS LENDING FUND

On September 8, 2011, as part of the Small Business Lending Fund (SBLF) of the United States Department of the Treasury (Treasury), the Company entered into a Small Business Lending Fund-Securities Purchase Agreement (Purchase Agreement) with the Secretary of the Treasury, pursuant to which the Company sold 5,000 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series A (SBLF Preferred Stock) to the Secretary of the Treasury for a purchase price of $5,000,000. The SBLF Preferred Stock was issued pursuant to the SBLF program, a $30 billion fund established under the Small Business Jobs Act of 2010 that was created to encourage lending to small business by providing capital to qualified community banks with assets of less than $10 billion. The SBLF Preferred Stock qualifies as Tier 1 capital. The SBLF Preferred Stock is entitled to receive non-cumulative dividends, payable quarterly, on each January 1, April 1, July 1 and October 1, beginning October 1, 2011. The dividend rate, as a percentage of the liquidation amount, can fluctuate on a quarterly basis during the first 10 quarters during which the SBLF Preferred Stock is outstanding, based upon changes in the Company’s subsidiary Town and Country Bank’s level of Qualified Small Business Lending (QBSL), as defined in the Purchase Agreement. Based upon the increase in the Bank’s level of QBSL over the baseline level calculated under the terms of the Purchase Agreement, the dividend rate for the initial dividend period was set at 5.0%. For the second through ninth calendar quarters, the dividend rate may be adjusted to between 1.0% and 5.0% per annum, to reflect the amount of change in the Bank’s level of QBSL. For the tenth calendar quarter through four and one half years after issuance, the dividend rate will be fixed at between 1.0% and 7.0% based upon the increase in QBSL as compared to the baseline. After four and one half years from issuance, the dividend rate will increase to 9.0%. The interest rate at December 31, 2013 was 1.00%. The SBLF Preferred Stock is non-voting, except in limited circumstances. In the event that the Company misses five dividend payments, the holder of the SBLF Preferred Stock will have the right to appoint a representative as an observer on the Company’s Board of Directors. In the event that the Company misses six dividend payments, then the holder of the SBLF Preferred Stock will have the right to designate two directors to the Board of Directors of the Company. The SBLF Preferred Stock may be redeemed at any time at the Company’s option, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends to the date of redemption for the current period, subject to the approval of its federal banking regulator. Dividends paid on the SBLF Preferred Stock was $ 50,000 and $151,739 for the years ended December 31, 2013 and 2012, respectively.

NOTE 13: INCOME TAXES

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and State of Illinois. The Company is no longer subject to U.S. federal or Illinois income tax examinations by tax authorities for years before 2010. During the years ended December 31, 2013 and December 31, 2012, the Company recognized no expense for interest or penalties. The income tax expense includes these components: Taxes currently payable Deferred income taxes Income tax expense

$ $

2013 1,969,324 (327,724) 1,641,600

$ $

2012 1,689,973 (130,973) 1,559,000

A reconciliation of income tax expense at the statutory rate to the Company’s actual income tax credit is shown below: 2013 2012 Computed at the statutory rate (34%) $ 1,604,933 $ 1,552,643 Increase (decrease) resulting from Tax exempt interest (156,639) (217,476) State income taxes 243,558 234,748 Dividends received (24,513) (23,731) Cash surrender value of life insurance (80,438) (41,597) 54,699 54,413 Other Actual tax expense $ 1,641,600 $ 1,559,000

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The tax effects of temporary differences related to deferred taxes shown on the consolidated balance sheets were: 2013 Deferred tax assets Allowance for loan losses $ Deferred compensation Alternative minimum tax credits Loss on other-than-temporary impairment of securities Other Deferred tax liabilities Depreciation Mortgage servicing rights Deferred loan fees Unrealized gains on available-for-sale securities Other Net deferred tax liability

$

1,319,693 105,163 236,321 1,606,157 3,267,334 (316,116) (1,269,294) (65) (1,267,378) (442,226) (3,295,079) (27,745)

2012 $

$

1,210,185 119,404 456,915 445,306 376,100 2,607,910 (213,608) (1,057,071) (118) (1,139,589) (425,204) (2,835,590) (227,680)

NOTE 14: ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows: Net unrealized gain on AFS securities

$

2013 3,658,872

$

(511,668) 3,147,204 1,267,378 1,879,826

Net unrealized loss on AFS securities for which a portion of an OTTI has been recognized in income Tax Effect Net-of-tax amount

$

2012 3,037,319

$

(207,446) 2,829,873 1,139,589 1,690,284

NOTE 15: REGULATORY MATTERS

The Company and Banks 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 financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company and Banks’ capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Company’s regulators could require adjustments to regulatory capital not reflected in these financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2013 and 2012, that the Company and Banks meet all capital adequacy requirements to which they are subject. As of December 31, 2013, the most recent notification from the Banks’ regulators categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Company’s or Banks’ category.

Town and Country Financial Corporation

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2013 Annual Report

39

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Independent Auditor’s Report (continued)

The Company’s and Banks’ actual capital amounts (in thousands) and ratios are also presented in the table.

Actual Amount

Ratio

For Capital Adequacy Purposes Amount Ratio

As of December 31, 2013 Total capital (to risk-weighted assets) Consolidated Town and Country Bank

$56,876 51,325

14.1% 12.8

$32,341 32,169

8.0% 8.0

Tier I capital (to risk-weighted assets) Consolidated Town and Country Bank

51,166 45,624

12.7 11.4

16,171 16,084

Tier I capital (to average assets) Consolidated Town and Country Bank

51,166 45,624

10.6 9.5

As of December 31, 2012 Total capital (to risk-weighted assets) Consolidated Town and Country Bank Logan County Bank

$53,375 40,535 9,060

Tier I capital (to risk-weighted assets) Consolidated Town and Country Bank Logan County Bank Tier I capital (to average assets) Consolidated Town and Country Bank Logan County Bank

To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio

$

N/A 40,211

% 10.0

4.0 4.0

N/A 24,127

6.0

19,251 19,228

4.0 4.0

N/A 24,034

5.0

16.0% 14.2 18.8

$26,638 22,776 3,859

8.0 8.0 8.0

N/A 28,470 4,824

% 10.0 10.0

48,354 35,940 8,638

14.5 12.6 17.9

13,319 11,388 1,930

4.0 4.0 4.0

N/A 17,082 2,894

6.0 6.0

48,354 35,940 8,638

10.8 10.2 9.0

17,952 14,165 3,829

4.0 4.0 4.0

N/A 17,707 4,786

5.0 5.0

$

The Company and Bank are subject to certain restrictions on the amount of dividends that they may declare without prior regulatory approval.

NOTE 16: RELATED PARTY TRANSACTIONS At December 31, 2013 and 2012, the Company had loans outstanding to executive officers, directors, significant stockholders and their affiliates (related parties), in the amount of $4,119,259 and $4,125,947, respectively. In management’s opinion, such loans and other extensions of credit were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time for comparable transactions with other persons. Further, in management’s opinion, these loans did not involve more than normal risk of collectibility or present other unfavorable features.

NOTE 17: EMPLOYEE BENEFITS The Company has an Employee Stock Ownership Plan (ESOP) to provide retirement benefits for substantially all employees. All full time employees who meet certain age and length of service requirements are eligible to participate in the ESOP. Dividends on allocated shares of common stock are allocated directly to the participant’s account. All shares held by the ESOP have been allocated to the Plan participants and are included in the computation of weighted average common shares outstanding. The Plan owned 81,400 and 91,400 shares of the Company’s common stock as of December 31, 2013 and 2012. The fair value of those shares totaled $897,842 and $840,880 as of December 31, 2013 and 2012. In the event a terminated Plan participant desires to sell his or her shares of the Company’s stock, the Company may choose to purchase the shares from the participant at their fair market value as determined by an independent appraiser. The Bank’s contribution for the Plan was $417 for the year ended December 31, 2012. No contribution was made to the Plan for year ended December 31, 2013.

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The Company makes contributions to a savings investment plan established for the benefit of substantially all of the Company’s employees. A portion of the Company’s contribution is based upon the employees’ contributions and another portion of the Company’s contribution is at the discretion of the Board of Directors. Contributions by the Company to the plan were $223,106 and $215,501 for the years ended December 31, 2013 and 2012, respectively. Also, the Company has a non-qualified executive incentive retirement plan (Plan) that covers select members of management. Contributions to the Plan are based upon the Company meeting certain financial performance measures and are deferred until the employee reaches the normal retirement age of 65. Retirement benefits are paid out of the general assets of the Company. The retirement benefit is paid out in monthly installments for a 13 year period and equals the deferral account balance. The liability recorded was $79,591 and $130,013 at December 31, 2013 and 2012, respectively. The Company’s expense for the plan was $4,196 and $5,398 for 2013 and 2012, respectively.

NOTE 18: OPERATING LEASES

The Company has one noncancellable operating lease, for a branch office, that expires in 2015. This lease contains a renewal option for a period ranging from 2 to 5 years and requires the Company to pay all executory costs such as taxes, maintenance and insurance. Rental expense for this lease and equipment was $183,498 and $137,591 for the years ended December 31, 2013 and 2012, respectively. Future minimum lease payments under operating leases are: 2014 2015 Total minimum lease payments

125,692 4,190 $129,882

NOTE 19: BUSINESS COMBINATIONS

On January 24, 2012, the Company entered into an agreement with Associated Bank, NA to acquire the branch assets, deposits, and related operations located in Quincy, Illinois. The transaction was consummated with an effective date of May 18, 2012 and the branch was merged into Town and Country Bank (as a branch) on May 18, 2012. The acquisition was to expand the Company’s financial service offerings in the Quincy area. The Company received $45,786,469 in cash in the transaction as the liabilities assumed were more than the assets acquired. In 2013 and 2012, the Company incurred $57,159 and $144,339, respectively, of third-party acquisition-related costs. The expenses are included in noninterest expense in the Company’s consolidated statements of income for years ended December 31, 2013 and 2012. The goodwill of $1,988,631 arising from the acquisition consists largely of the synergies and economies of scale expected from the combining of the operations. All of the goodwill was assigned to the banking segment of the business and is expected to be deductible for tax purposes. The following table summarizes the consideration received for the branch and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date. Fair Value of Consideration Transferred Cash Recognized amounts of identifiable assets acquired and liabilities assumed Cash and cash equivalents

$

45,786,469

$

118,919

Loans Premises equipment Interest receivable Identifiable intangible assets

12,305,668 9,799 29,148 999,703

Deposits Other liabilities Total identifiable net liabilities Goodwill

Town and Country Financial Corporation

(61,182,193) (56,144) (47,775,100) $

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2013 Annual Report

1,988,631

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Independent Auditorâ&#x20AC;&#x2122;s Report (continued)

NOTE 20: DERIVATIVE FINANCIAL INSTRUMENTS

In the normal course of business, the Company uses various derivative financial instruments to manage its interest rate risk and market risks in accommodating the needs of its customers. These instruments carry varying degrees of credit, interest rate and market or liquidity risks. Derivative instruments are recognized as either assets or liabilities in the accompanying financial statements and are measured at fair value. As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, the Company enters into interest rate swap agreements from time to time. The Company currently has outstanding aggregate interest rate swaps of $8,350,000. One agreement provides for the Company to receive interest from the counterparty at a fixed rate of 4.50% on the notional amount of $4,175,000 and to pay interest at one month LIBOR plus 250 basis points. The Company also has an agreement with a counterparty whereby the Company receives interest at a rate of one month LIBOR plus 250 basis points and pays interest to the counterparty at a fixed rate of 4.50% on the notional amount of $4,175,000. Under all agreements, the net interest paid or received is included in interest income. The two interest rate swap agreements are economic hedges and are not considered accounting hedges. The following table presents the fair value of derivative instruments as of December 31, 2013: 2013 Derivatives not designated as hedging instruments Interest rate swaps Total derivatives

Balance Sheet Location Other Assets

$ $

Fair Value 75,051 75,051

Balance Sheet Location Other liabilities

$ $

Fair Value 75,051 75,051

The following tables present the effect of derivative instruments on the statement of financial performance for the year ended December 31, 2013: Fair Value Hedges Interest rate swaps Interest rate swaps Total

Location of Gain (Loss) Recognized in Income Interest income â&#x20AC;&#x201C; Loans Interest income â&#x20AC;&#x201C; Loans

Amount of Gain (Loss) Recognized in Income 2013 $ 75,051 (75,051) $ -

NOTE 21: DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

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. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

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Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

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Recurring Measurements The following table presents the fair value measurements of assets recognized in the accompanying consolidated balance sheets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2013 and 2012: 2013 Fair Value Measurements Using

Available-for sale securities U.S. government agencies Mortgage-backed securities State and political subdivisions Equity securities Trust preferred securities Corporates Total available-for sale securities Interest rate swap agreement Interest rate swap agreement

$

$ $

Fair Value

Quoted Prices in Active Markets for Identical Assets (Level 1)

19,643,349 46,706,641

-

3,242,143 4,376,680 6,142,390 2,815,774 82,926,977

4,376,680 4,376,680

$

75,051 (75,051)

-

Significant Other Observable Inputs (Level 2) $

$ $

Significant Unobservable Inputs (Level 3)

19,643,349 46,706,641

-

3,242,143 2,815,774 72,407,907

6,142,390 6,142,390

$

75,051 (75,051)

-

2012 Available-for sale securities U.S. government agencies Mortgage-backed securities State and political subdivisions Equity securities Trust preferred securities Corporates Total available-for sale securities

$

$

18,364,854 54,400,089

-

3,872,002 3,342,818 5,428,149 2,904,486 88,312,398

3,342,818 3,342,818

$

$

$

18,364,854 54,400,089

-

3,872,002 2,904,486 79,541,431

5,428,149 5,428,149

$

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a recurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the year ended December 31, 2013. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Available-for-sale Securities Where quoted market prices are available in an active market, securities are classified within Level I of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including. but not limited to, yield curves, interest rates, volatilities, prepayments, defaults. cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level I or Level 2 inputs are not available. securities are classified within Level 3 of the hierarchy. See the table below for inputs and valuation techniques used for Level 3 securities. Fair value determinations for Level 3 measurements of securities are the responsibility of management. Management contracts with a pricing specialist to generate fair value estimates on a monthly or quarterly basis. Management challenges the reasonableness of the assumptions used and reviews the methodology to ensure the estimated fair value complies with accounting standards generally accepted in the United States. Interest Rate Swap Agreements The fair value is estimated using forward-looking interest rate curves and is calculated using discounted cash flows that arc observable or that can be corroborated by observable market data and. therefore. arc classified within Level 2 of the valuation hierarchy.

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Independent Auditorâ&#x20AC;&#x2122;s Report (continued)

Level 3 Reconciliation The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying consolidated balance sheets using significant unobservable (Level 3) inputs: Pooled Trust Preferred Securities 2013 2012 $5,428,149 $4,252,020

Beginning balance January 1 Total realized and unrealized gains and losses Included in net income Included in other comprehensive income Settlements Ending balance, December 31

937,592 (223,351)

101,262 1,373,816 (298,949)

$6,142,390

$5,428,149

Realized and unrealized gains and losses for items reflected in the table above are included in net income in the consolidated statements of income as follows: Years Ended December 31 2013 2012 Change in unrealized gains or losses relating to assets sill held at the balance sheet date $ - $ Nonrecurring Measurements The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2013 and 2012:

Impaired loans Mortgage servicing rights

$

Impaired loans Mortgage servicing rights

$

Fair Value 426,912 3,151,958

2013 Fair Value Measurements Using Quoted Prices in Active Markets for Significant Other Significant Identical Assets Observable Inputs Unobservable Inputs (Level 1) (Level 2) (Level 3) $ - $ - $ 426,912 3,151,958 2012

1,139,593 2,624,960

$

-

$

-

$

1,139,593 2,624,960

Following is a description of the valuation methodologies and inputs used for assets measured at fair value on a nonrecurring basis and recognized in the accompanying consolidated balance sheets, as well as the general classification of such assets pursuant to the valuation hierarchy. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below. Collateral-dependent Impaired Loans, Net of ALL The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy. The Bank considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by management. Appraisals are reviewed for accuracy and consistency by management. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by management by comparison to historical results. Fair value adjustments on impaired loans were $83,000 at December 31, 2013 compared to $(320,098) at December 31, 2012.

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Mortgage Servicing Rights Mortgage servicing rights do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using discounted cash flow models having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy. Mortgage servicing rights are tested for impairment on a quarterly basis. Management measures mortgage servicing rights through the completion of a proprietary model. Inputs to the model are developed by staff that work in mortgage servicing and are reviewed by management. The model is tested quarterly using baseline data to check its accuracy. On a semi-annual basis, the Company obtains a third party valuation to test for impairment. Unobservable (Level 3) Inputs The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements. Unobservable (Level 3) Inputs

Fair Value at December 31, 2013

Valuation Technique

Unobservable Inputs

Range (Weighted Average)

$6,142,390

Discounted cash flow

Constant prepayment rate Probability of default

5% every 5 years

Pooled Trust Preferred Securities

Collateral-dependent impaired loans

426,912

Mortgage servicing rights

3,151,958

Market comparable properties Discounted cash flow

Loss severity Marketability Discount Discount rate PSA standard prepayment

Unobservable (Level 3) Inputs

2% for 2 years and 0.36% for the remaining life 90% with a 2 year lag 5%–30% (15%) 3.60% - 4.624% (4.187%) 159 - 538 (176)

Fair Value at December 31, 2012

Valuation Technique

Unobservable Inputs

Range (Weighted Average)

$5,428,149

Discounted cash flow

Constant prepay­­ment rate Probability of default

5% every 5 years

Pooled Trust Preferred Securities

Collateral-dependent impaired loans

1,139,593

Mortgage servicing rights

2,624,960

Market comparable properties Discounted cash flow

Loss severity Marketability Discount Discount rate PSA standard prepayment

Town and Country Financial Corporation

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2013 Annual Report

2% for 2 years and 0.36% for the remaining life 90% with a 2 year lag 5% - 30% (15%) 2.32% - 3.03% (2.697%) 306 - 332 (332)

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Independent Auditorâ&#x20AC;&#x2122;s Report (continued)

Fair Value of Other Financial Instruments The following table presents estimated fair values of the Companyâ&#x20AC;&#x2122;s other financial instruments and the level within the fair value hierarchy in which the fair value measurements fall at December 31, 2013 and 2012. December 31, 2013 Carrying Amount Financial assets Cash and cash equivalents Interest bearing time deposits Held-to-maturity securities Loans held for sale Loans, net of allowance for loan losses Federal Reserve and Federal Home Loan Bank stock Interest receivable Financial liabilities Deposits Junior subordinated debentures Federal Home Loan Bank advances Interest payable Unrecognized financial instruments (net of contract amount) Commitments to originate loans Letters of credit Lines of credit

$

15,463,872 996,000 30,696,422 10,868,459 333,612,419

December 31, 2012 Carrying Amount

Fair Value $

15,463,872 996,000 30,213,072 10,868,459 340,428,357

$

24,332,291 3,489,000 32,849,781 9,044,597 271,514,952

Fair Value $

24,332,291 3,489,000 33,395,565 9,044,597 280,223,543

2,578,600 1,419,928

2,578,600 1,419,928

2,376,706 1,444,460

2,376,706 1,444,460

411,614,998 11,856,000 34,000,000 164,676

412,218,647 6,698,904 34,259,944 164,676

383,036,850 11,856,000 17,000,000 238,928

384,128,532 6,606,140 17,440,280 238,928

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 0

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying consolidated balance sheets at amounts other than fair value. Cash and Cash Equivalents, Interest-bearing Time Deposits in Banks, Federal Reserve and Federal Home Loan Bank Stock, Interest Receivable and Interest Payable The carrying amounts approximate fair value. Held-to-maturity Securities Fair values equal quoted market prices, if available. If quoted market prices are not available, fair value is estimated based on quoted market prices of similar securities. Loans Held for Sale For homogeneous categories of loans, such as mortgage loans held for sale, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. Loans The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. Deposits Deposits include demand deposits, savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. Long-term Debt and Federal Home Loan Bank Advances Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. Commitments to Originate Loans, Letters of Credit and Lines of Credit The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements,

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taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.

NOTE 22: SIGNIFICANT ESTIMATES AND CONCENTRATIONS

Accounting principles generally accepted in the United States of America require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the note regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the note on commitments and credit risk. Other significant estimates and concentrations not discussed in those footnotes include: Foreclosed Assets Held For Sale Foreclosed assets held for sale had a carrying value of $1,439,865 and $566,869 as of December 31, 2013 and 2012, respectively. As of December 31, 2013, foreclosed assets held for sale include residential 1-4 family and commercial real estate in Springfield, Illinois and surrounding communities. The carrying value reflects management’s best estimate of the amount to be realized from the sale of the property. The amount that the Company realizes from the sale of the property could differ materially in the near term from the carrying value reflected in these financial statements due to the recent declines in residential and commercial real estate. Investments The Company invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such change could materially affect the amounts reported in the accompanying consolidated balance sheets. Current Economic Conditions At December 31, 2013 and 2012, the Company held $154,847,200 and $126,535,846, respectively, in commercial real estate loans and $22,053,695 and $16,269,646 in commercial and residential real estate development loans located primarily in Central Illinois. Due to national, state and local economic conditions, values for commercial and development real estate have declined significantly, and the market for these properties is depressed. The accompanying consolidated financial statements have been prepared using values and information currently available to the Company.

NOTE 23: COMMITMENTS AND CREDIT RISK

The Company grants commercial, mortgage and consumer loans and receives deposits from customers primarily located within Central Illinois. The Company’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Company has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon the economic conditions within Central Illinois. Commitments to Originate Loans Commitments to originate loans 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. Since a portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. At December 31, 2013 and 2012, the Company had outstanding commitments to originate loans aggregating approximately $4,081,045 and $26,758,442, respectively. The commitments extended over varying periods of time with the majority being disbursed within a one-year period. Loan commitments at fixed rates of interest amounted to $4,031,045 and $25,538,442 at December 31, 2013 and 2012, respectively, with the remainder at floating market rates. Standby Letters of Credit Standby letters of credit are irrevocable conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Financial standby letters of credit are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. Performance standby letters of credit are issued to guarantee performance of certain customers under non-financial contractual obligations. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. Should the Company be obligated to perform under the standby letters of credit, the Company may seek recourse from the customer for reimbursement of amounts paid. The Company had total outstanding standby letters of credit amounting to $2,900,060 and $958,344, at December 31, 2013 and 2012, respectively, with terms ranging from 1 day to 25 months. At December 31, 2013 and 2012, the Company’s deferred revenue under standby letter of credit agreements was nominal.

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Independent Auditor’s Report (continued)

Lines of Credit Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate and residential real estate. Management uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments. At December 31, 2013, the Company had granted unused lines of credit to borrowers aggregating approximately $46,435,545 and $24,042,919 for commercial lines and open-end consumer lines, respectively. At December 31, 2012, unused lines of credit to borrowers aggregated approximately $35,781,953 for commercial lines and $21,843,711 for open-end consumer lines.

NOTE 24: SUBSEQUENT EVENTS

Subsequent events have been evaluated through the date of the Independent Auditor’s Report, which is the date the consolidated financial statements were available to be issued.

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CORPORATE INFORMATION Town and Country Financial Corporation is the parent holding company for Town and Country Bank with offices in Buffalo, Decatur, Forsyth, Lincoln, Mt. Zion, Quincy and Springfield and Town & Country Banc Mortgage Services, Inc. STOCK TRADING Town and Country Financial Corporation shares are traded under the symbol TWCF. TRANSFER AGENT Town and Country Financial Corporation acts as its own Transfer Agent. Contact us by calling 866.770.3100 with questions on registrations or stock transfer instructions. Mail requests to our Corporate Office at the following address: Town and Country Financial Corporation 3601 Wabash Avenue Springfield, IL 62711 www.townandcountrybank.com


TOWN AND COUNTRY FINANCIAL CORPORATION 866.770.3100 W W W.TOWNANDCOUNTRYBANK.COM


2013%20annual%20report%20final