First Bankers Trustshares, Inc.
Annual Report 2003

Plain-text annual report

Table of Contents 2 Corporate Information Letters To Shareholders Selected Financial Data Company Profile Management’s Report Management’s Discussion and Analysis of Financial Condition and Results of Operations Page 3 Pages 4 Pages 5 - 6 Pages 7 - 11 Page 12 Pages 13 - 18 Independent Auditor’s Report Page 19 Consolidated Financial Statements: Balance Sheets Statements of Income Statements of Changes in Stockholders’ Equity Statements of Cash Flows Notes to Consolidated Financial Statements First Bankers Trust Company, N.A. Directors and Officers Page Page 20 21 Page 22 Pages 23 - 24 Pages 25 - 40 Page 41 3 CORPORATE INFORMATION Corporate Description First Bankers Trustshares, Inc. (FBTI) is a bank holding company for First Bankers Trust Company, N.A., FBIL Statutory Trust I and FBIL Statutory Trust II. The company was incorporated on August 25, 1988 and is headquartered in Quincy, Illinois. Board of Directors First Bankers Trustshares, Inc. David E. Connor Chairman Emeritus, First Bankers Trustshares, Inc. First Bankers Trustshares’ mission, through its subsidiaries, is to provide compre- hensive financial products and services to its retail, institutional, and corporate customers in the Tri-State area of West Central Illinois and Northeastern Missouri. Carl Adams, Jr. President, Illinois Ayers Oil Company As a community oriented financial institution, the Bank, which traces its begin- nings to 1946, operates five banking facilities located in Quincy, Illinois, one facil- ity in Mendon, Illinois in northern Adams County and facilities located in Chicago, Illinois, Philadelphia, Pennsylvania and Phoenix, Arizona that provide trust servic- es. FBIL Statutory Trust I and FBIL Statutory Trust II were capitalized in September 2000 and 2003, respectively, for the purpose of issuing Company Obligated Mandatorily Redeemable Preferred Securities. For additional financial information contact: Joe J. Leenerts, Senior Vice President/Treasurer First Bankers Trustshares, Inc. Telephone (217) 228-8000 Stockholder Information Common shares authorized: 6,000,000 Common shares outstanding: 2,048,574 Stockholders of record: *As of December 31, 2003 260* William D. Daniels Chairman of the Board, First Bankers Trustshares, Inc. Member, Harborstone Group, LLC. Mark E. Freiburg Owner, Freiburg Insurance Agency and Freiburg Development Company, President, Freiburg, Inc. Donald K. Gnuse President & Chief Executive Officer, First Bankers Trustshares, Inc. Chairman of the Board, First Bankers Trust Company, N.A. Arthur E. Greenbank President & Chief Executive Officer, First Bankers Trust Company, N.A. Phyllis J. Hofmeister Secretary/Treasurer, Robert Hofmeister, Inc. Steven E. Siebers Secretary of the Board, First Bankers Trustshares, Inc. Attorney, Scholz, Loos, Palmer, Siebers & Duesterhaus Dennis R. Williams Chairman of the Board, Quincy Newspapers, Inc. Inquiries regarding transfer requirements, lost certificates, changes of address and account status should be directed to the corporation’s transfer agent: EXECUTIVE OFFICERS First Bankers Trust Company, N.A. (Attn: Julie Kenning) 1201 Broadway P.O. Box 3566 Quincy, IL 62305-3566 Corporate Address First Bankers Trustshares, Inc. P.O. Box 3566 Quincy, IL 62305-3566 Independent Auditors McGladrey & Pullen, LLP 220 N. Main, Suite 900 Davenport, IA 52801 General Counsel Jenkens & Gilchrist A Professional Corporation 1445 Ross Avenue Suite 3200 Dallas, Texas 75202 Donald K. Gnuse President and CEO Steven E. Siebers Secretary Joe J. Leenerts Senior Vice President/Treasurer FIRST BANKERS TRUSTSHARES, INC. Stock Prices (For the Three Months Period Ended) Market Value High Low Period End Close 12/31/03 $ 15.80 $ 15.00 $ 15.40 09/30/03 $ 17.00 $ 14.80 $ 15.75 06/30/03 $ 16.00 $ 14.50 $ 15.25 03/31/03 $ 16.00 $ 14.00 $ 14.00 12/31/02 $ 14.75 $ 14.00 $ 14.75 The following companies make a market in FBTI common stock: Wachovia Securities Maine Center, 535 Maine Quincy, IL 62301 Phone (800) 223-1037 Monroe Securities, Inc. 47 State Street Rochester, NY 14614 Phone (585) 546-5560 Howe Barnes Investments, Inc. 135 South LaSalle Street Chicago, IL 60603 Phone (800) 800-4693 Stifel Nicolas & Co. Inc Sears Tower 233 Wacker Drive, Suite 850 Chicago, IL 60606-6300 Phone (800) 745-7110 Baird Patrick Co. 20 Exchange Place New York, NY 10005 Phone (800) 421-0123 LETTER TO SHAREHOLDERS 4 William D. Daniels, Chairman Donald K. Gnuse, President and Chief Executive Officer Dear Shareholders, The Year 2003, as in previous years, proved to be a rewarding The commercial lending department also continued to gener- year for shareholders. Return on average stockholders’ equity of 16.31% was again a strong financial return for your investment portfolio. Stated on a per share basis, each share earned $1.52 for the year, compared to $1.49 for the previous year 2002. Due to this continued strong earnings performance your Board of Directors, at their December board meeting, voted to increase the cash dividend for the tenth year in a row. While many of our employees are shareholders, we would like to focus for a moment on the “investment” in our employees and the communities we serve. As recorded in our financial report, $8,218,000 was expended during 2003 to generate over $20,281,000 in gross revenue. Approximately 54% of that expense was related to employee salary and benefit costs. Those earnings flow from employees through to their families and in turn support their budgets for homes, automobiles, children’s edu- cation, and support for their churches and charities to name but a few recipients. In summary, a profitable enterprise like First Bankers Trustshares, benefits everyone – shareholders, employees and the communities in which we all live. Looking at what made the Year 2003 such a good year we simply point to the increase in our trust and mortgage services revenue. Trust revenue increased over 20% when compared to last year’s revenue. The increase in new markets and the delivery of new product offerings provided the emphasis for this growth. Our mortgage lending department was stellar in its efforts to maintain quality customer service while managing the dramatic increase in new home and refinanced loans during 2003. We wish to express special thanks to our Home Loan Center staff members for dedicating long, and late hours of work, to meet our cus- tomers’ request to refinance or purchase their homes and in fact, help many of them to become first-time homebuyers. ate new opportunities with enhanced loan income while at the same time assisting in developing additional commercial business- es within our community. In summary, our diversification of financial services continues to exhibit resiliency in generating strong earnings while building our capital base for more opportu- nities in the future. Turning to the Year 2004, our outlook continues to be opti- mistic. After two years of intensive planning and preparation of volumes of documents and regulatory filings, only one regulator approval remains a necessary action to form our new Trust Company, First Bankers Trust Services, Inc. Upon final regulato- ry approval, your holding company will own two subsidiaries – a trust company and a bank. Both of these companies will be oper- ating with separate boards of directors and staff members. In closing, we would point out that due to the ever increasing financial services competition in our local marketplace we contin- ue to be very active in seeking acquisitions and merger opportuni- ties to enhance our earnings and shareholder value. Should we recommend a purchase or merger opportunity, you, as sharehold- ers, will be the first to be advised and turned to for support. Thank you for your continued investment in First Bankers Trustshares, Inc. William D. Daniels Chairman Donald K. Gnuse President/CEO 5 SELECTED FINANCIAL DATA (Amount in thousands of dollars, except per share data statistics) PERFORMANCE Net income Preferred stock cash dividends paid Common stock cash dividends paid Common stock cash dividend payout ratio Return on average assets Return on common stockholders’ equity1 PER COMMON SHARE2 Earnings, basic and diluted Dividends (Paid) Book value3 Stock price High Low Close Price/Earnings per share (at period end) Market price/Book value (at period end) Weighted average number of shares outstanding AT DECEMBER 31, Assets Investment securities Loans held for sale Loans Deposits Short-term borrowings and Federal Home Loan Bank advances Note payable Company obligated mandatorily redeemable preferred securities Stockholders’ equity4 Total equity to total assets4 Tier 1 capital ratio (risk based) Total capital ratio (risk based) Leverage ratio YEAR ENDED DECEMBER 31, 2003 2002 2001 2000 1999 1998 $ 3,123 $ 3,242 $ 3,457 $ 3,007 $ 2,710 $ 2,618 $ - $ - $ - $ - $ - $ 32 $ 533 $ 510 $ 464 $ 361 309 $ 204 7.89% 1.21% 20.27% 13.42% 1.15% 16.40% 12.01% 1.11% 16.43% 11.40% 1.14% 17.23% 15.73% 1.06% 17.81% 17.07% .97% 16.31% $ 1.52 $ 1.49 $ 1.34 $ 1.17 $ 1.05 $ 1.02 $ .26 $ .22 $ .18 $ .14 $ .12 $ .08 $ 9.86 $ 8.61 $ 8.66 $ 7.51 $ 6.49 $ 5.62 $ 17.00 $ 16.50 $ 20.00 $ 19.00 $ 13.75 $ 11.50 $ 14.00 $ 14.00 $ 14.00 $ 13.13 $ 11.50 $ 8.50 $ 15.40 $ 14.75 $ 14.25 $ 19.00 $ 13.13 $ 11.50 10.1 9.9 10.6 11.3 1.56 1.71 1.65 2.53 2.02 2.05 12.5 16.2 2,048,574 2,175,059 2,579,230 2,579,230 2,579,230 2,545,358 $ 315,670 $ 311,920 $ 310,668 $ 298,497 $ 258,503 $ 236,323 72,680 68,884 53,582 74 841 453 156,439 125,867 221,808 199,477 187,721 258,413 54,567 76,062 1,175 2,178 201,931 189,531 258,170 256,609 71,897 417 176,455 244,362 24,114 - 23,200 4,500 23,473 - 26,828 - 38,436 2,780 27,495 3,980 - 10,000 $ 20,206 $ 17,636 $ 22,324 $ 19,357 $ 16,737 $ 14,349 - 5,000 5,000 5,000 6.40% 10.90% 13.14% 8.12% 5.65% 10.05% 10.98% 7.18% 7.19% 13.06% 14.03% 8.68% 6.48% 12.31% 13.25% 8.84% 6.47% 9.43% 10.53% 6.45% 6.07% 9.70% 10.92% 6.03% 1.40% 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% $1.60 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 SELECTED FINANCIAL DATA 6 Return On Average Assets Return On Average Common Equity 1.21% 1.14% 1.11% 1.15% 1.06% 0.97% 20.27% 17.23% 16.43% 16.40% 17.81% 16.31% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003 Earnings Per Share Price/Earnings Multiples $1.49 $1.52 $1.34 $1.02 $1.05 $1.17 1998 1999 2000 2001 2002 2003 Market Price To Book Value 2.53X 2.05X 2.02X 1.65X 1.71X 1.56X 3.0X 2.5X 2.0X 1.5X 1.0X 0.5X 0.0X 18.0 X 16.0 X 14.0 X 12.0 X 10.0 X 8.0 X 6.0 X 4.0 X 2.0 X 0.0 X 16.2 X 12.5 X 11.3 X 10.6 X 9.9 X 10.1 X 1998 1999 2000 2001 2002 2003 Loan/Deposit Growth Loans Deposits $199 $156 $188 $126 $300 $250 $200 $150 $100 $50 $0 $244 $176 $257 $258 $258 $190 $202 $222 1998 1999 2000 2001 2002 2003 1998 1999 2000 2001 2002 2003 7 COMPANY PROFILE First Bankers Trust believes in developing a quality relationship with each of the bank’s customers. This can only be achieved by offering quality products through a highly effective delivery system of services. Trust means quality relationships, quality products and quality services. Trust is our first priority in all areas: Consumer Lending, Business Lending, Mortgage Lending, Deposit and Customer Services and the Trust Department itself. Trusted by Customers Consumer Lending Individual consumers have many choices available to satisfy their car, truck, boat and RV loan needs within the regional marketplace. Nationwide consumer credit services are also avail- able over the Internet and with the manufacturers themselves. Hugh Roderick This places a great deal of impor- tance on making good credit decisions in a very short period of time at competi- tive rates and terms. To remain competitive in the market, gain the confidence of local dealers and consumers, and enjoy the benefits of repeat business, the bank strives to maintain a high level of customer satisfaction with its prod- uct and service. At First Bankers Trust customers are more than a credit score. A qualified loan specialist reviews the merits of each individual borrower to ensure the terms and conditions of the loan meet the financial needs of the customer. License and title services are also provided to assist the cus- tomer in the purchase of their vehicle. First Bankers Trust offers credit life and vehicle warranty insurance to protect the customer’s new investment. Hugh Roderick, Consumer Lending Manager, and his staff have developed an excellent rapport with area dealers and a growing base of repeat business by being responsive to and meeting the needs of each dealer and individual. After retirement, Ron and Betty Bryan wanted to hit the open road. They purchased a 35-foot Winnebago with the idea of travel in mind, and First Bankers Trust assisted them with their purchase. When Mona Pyatt’s three children no longer required the services of car seats in a huge minivan, she wanted to get a smaller and more easily maneuverable car. She was able to get a car with a smaller turning radius through a quick turn- around on a loan. COMPANY PROFILE 8 decision authority allows the department to focus on meet- ing the credit needs of our business and farming customers quickly and efficiently. This focus on customer service has helped First Bankers Trust to become one of the largest commercial banks in the market. Trusted in the Local Economy Commercial Lending The Commercial Lending depart- ment of First Bankers Trust supports the financing needs of some of the largest corporations in the tri-state area. The Commercial Lending Department has the knowledge and experience to handle any type of busi- ness and agricultural lending situation: small business start-ups, major renova- tions to existing businesses, operational line of credit, letters of credit, equipment purchases or lease financing, inventory purchases, real estate purchases, indus- try-specific loans and major construction loans. David Rakers Senior Vice President David Rakers directs a growing Commercial loan and Agricultural loan service. Dave and his staff of ten lending professionals take the time to meet with each customer, at his or her convenience, to discuss the customer’s credit needs and to design a financing plan that meets the customer’s cash flow requirements. Local loan Dale Koontz has been building on trust for over 30 years. When his sons Scott and Tim returned to live in Quincy after graduating from college, Dale expanded the building business to include them with help from First Bankers Trust. Tim adds: “From our customer’s point of view it is a real benefit to have a local bank that can make the lending decisions locally too.” Dr. Richard Shatz also learned that getting help from a bank to establish a new medical practice wasn’t difficult. He asked about local banks: “Everyone said to go to First Bankers Trust. So I did. They were great.” 9 COMPANY PROFILE Trusted in the Community Mortgage Lending The purchase of a home is one of the most rewarding and at the same time one of the most stressful of times. Lanse Tomlinson, Senior Vice President of Mortgage Lending, with the eleven employees of the Home Loan Center, has made the ability to finance a home easier. First Bankers Trust has an array of home financing alternatives that can meet the needs of almost any home buying situation. First time homebuyer programs, VA/FHA financing, and 15 to 30 year fixed rate financing are some of the financing alternatives that are available. Lanse Tomlinson During 2003, First Bankers Trust assisted over 1,300 families in the purchase or refinancing of their most valu- able asset, their home. The Home Loan Center staff went the extra mile to ensure the customers received the funding they requested in the time frame they required. Communication is the key. First Bankers Trust Home Loan Center staff of professionals kept the customer informed during each step of the funding process. This commitment to customer service is one of the major reasons First Banker Trust is one of the leading home financing sources in the local market. Customers concerned with problems associated with mailing their mortgage loan payment to a service provider outside the local area can take advantage of First Bankers Trust local servicing alternative. First Bankers Trust offers competitive long term fixed rate financing while allowing the customer to make a payment at any of First Bankers Trust’s six locations. Customers who are looking to refinance their home or who would like to use the equity in their existing home to make improvements, buy a car or take a vacation trust First Bankers Trust to provide the financing to achieve their dream. Eric and Marsha Lundberg had planned their dream home in Hull, Illinois, for a long time. The Bank helped them complete the rural home on two acres of land where the Lundberg’s also have a straw business. Eric says that he would someday like to buy a farm and that First Bankers Trust would be part of that dream too. James and Peggy Genenbacher did buy a farm, and First Bankers Trust made their 540-acre dream come true. James grew up in farming, and he was impressed that the Bank understood what we need and the background of farming. COMPANY PROFILE 10 Trusted for Reputation and Services Customer Services Gretchen McGee, Vice President of Retail Banking, and her staff of dedi- cated customer service oriented profes- sionals at five branch locations in Quincy and one in Mendon, provide service for the deposit needs of our consumer and business customers. Our products include accounts for checking, interest bearing checking, money mar- ket, savings and certificate of deposits, and a full array of deposit products and services to meet the needs of every customer. Gretchen McGee First Bankers Trust deposit customers can take advan- tage of the bank’s many product delivery methods: lobby banking, drive-up banking, ATM banking, telephone bank- ing, bank-by-mail, night drop service and on-line banking. Additional services complete the array of conveniences available to our customers: automatic transfers, loan pay- ments, deposit interest payments along with electronic bill payment, check image statements, debit card, overdraft pro- tection, personal line of credit and credit cards. Business customers can take advantage of state of the art on-line banking and cash management services. Check image statements, placed on a CD-Rom with a file of all checks paid for each account the customer has with the bank, are included in the service offerings. Business cus- tomers can go on-line to make their federal and state income tax payment, review items to be posted to the account, and transfer monies between accounts, thereby maximizing the use of their available cash. Many of the deposit services offered in the market pro- vide the same functionality; what sets First Bankers Trust apart from its competition is our focus on providing the very best in customer service. For Art and Susan Pierson, the services of a bank are a mat- ter of trust, especially for a creative business like Media Development and Andrew Whitney Productions. Art became accustomed to effective online services when he lived in Chicago, and both he and Susan appreciate the any- time day or night, home or office, features of express inter- net service. “We trust First Bankers Trust to take care of us and our banking needs.” For David and Angela Wedding, www.firstbankers.com, the online banking service, means that paying bills and review- ing accounts is a lot easier. They can download information into their accounting software and handle the activity of their two businesses in a way that’s easy and convenient as well as trustworthy. 11 COMPANY PROFILE Trust in People, Product and Systems The Trust Department The banking system in this country has undergone countless changes over the past 50 years, and the majority of banking regulations have been written in an effort to protect the consumer. This has meant a more complicated sys- tem of compliance through economic cycles and changes in business manage- ment and technology. Arthur E. Arthur E. Greenback Greenbank, President and CEO of First Bankers Trust Company, a native of Quincy who has been with the Bank since 1992 and who brought 15 years of managerial experi- ence from his work at Harris Bank in Chicago, develops the bank’s vision of the future and leads the bank in the com- pletion of its strategic plan. Joe J. Leenerts, Executive Vice President, Chief Operations Officer and Chief Financial Officer of the bank, joined the bank in 1986 and uses his 27 years of experience in the financial service industry to manage the day-to- day operations of the Bank. The bank serves over 9,000 consumer and busi- ness deposit customers and provides for the credit needs of over 8,000 business, Joe J. Leenerts consumer and mortgage customers. These customers gener- ate over 1,500,000 transaction requests annually. Over 5,000,000 checks were processed for the customer with over 130,000 statements produced. Each of these customers entrusts us with his or her most vital financial information. How do we meet the customer’s service standards? We earn this trust each and every day by providing the best in confidential quality customer service to each and every customer. This commitment to customer service excellence begins with the bank’s Board of Directors and is embraced by each member of the staff. Meeting the financial services needs of our customers is not our job; it is our profession. The Trust Department is an integral part of the bank’s financial success and has passed the $1.2 billion dollar threshold in total assets under management and administra- tion. The department provides traditional trust services for estates, trusts created under a will and guardianships. Nearly 15 years ago, the Trust Department began providing Employee Benefit Trust Services as trustee for Employee Stock Ownership Plans (ESOPs). ESOPs are qualified retirement plans, like a 401(k), but invested primarily in the stock of the plan sponsor. This benefit plan provides a form of ownership to the employee. Additionally, the department also manages 401(k), profit sharing, pension, stock incen- tive plans, and self directed IRAs to plan sponsors and indi- viduals in more than 30 states across the nation, with sales offices in Chicago, Phoenix, and Philadelphia. Brian Ippensen, Vice President and Trust Officer, leads the administrative staff in handling the complex issues surrounding its many trust services. Brian’s training as a Certified Public Accountant and his experience in employee benefits has made him a sought out speaker on this topic. A current trust customer, Bill Donius, President and CEO of Pulaski Brian Ippensen Bank had this to say about the Trust Department: “We’re delighted with the excellent service that we have received from First Bankers Trust. They are certainly on top of their business and produce a high quality result with a reasonable price.” The Trust department services the needs of Pulaski Bank’s Employee Stock Ownership Plan and a Deferred Compensation Plan. Pulaski Bank is a $430 million bank serving the customers of metropolitan St. Louis and Kansas City, Missouri. In 2004 the Trust Department will become a wholly owned subsidiary of First Bankers Trustshares, Inc. The department’s success, with the focus on trust services for its traditional customers and on its employee benefit trust serv- ices, made the decision an easy one. The Trust Company can better focus on its strength and market potential as a stand-alone entity. MANAGEMENT’S REPORT 12 To The Stockholders: Management of First Bankers Trustshares, Inc. has pre- pared and is responsible for the integrity and consisten- cy of the financial statements and other related infor- mation contained in this Annual Report. In the opinion of Management, the financial statements, which neces- sarily include amounts based on Management esti- mates and judgements, have been prepared in conform- ity with accounting principles generally accepted in the United States of America and appropriate to the cir- cumstances. In meeting its responsibility, First Bankers Trustshares maintains a system of internal controls and procedures designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with established policies and practices, and that transactions are properly recorded so as to permit preparation of financial statements that fairly present financial position and results of operations in conform- ity with accounting principles generally accepted in the United States of America. Internal controls and proce- dures are augmented by written policies covering stan- dards of personal and business conduct and an organi- zation structure providing for division of responsibility and authority. The effectiveness of, and compliance with, established control systems are monitored through a continuous program of internal audit and credit examinations. In recognition of cost-benefit relationships and inherent control limitations, some features of the control sys- tems are designed to detect rather than prevent errors, irregularities and departures from approved policies and practices. Management believes the system of controls has prevented or detected, on a timely basis, any occurrences that could be material to the financial statements and that timely corrective actions have been initiated when appropriate. First Bankers Trustshares engaged the firm of McGladrey & Pullen, LLP, Independent Auditors, to render an opinion on the consolidated financial state- ments. To the best of our knowledge, the Independent Auditors were provided with access to all information and records necessary to render their opinion. The Board of Directors exercises its responsibility for the financial statements and related information through the Audit Committee, which is composed entirely of outside directors. The Audit Committee meets regularly with Management, the internal auditing staff and the Independent Auditors to assess the scope of the annual audit plan and to discuss audit, internal control and financial reporting issues, including major changes in accounting policies and reporting practices. The Independent Auditors also meet with the Audit Committee, without Management being present, to afford them the opportunity to discuss the adequacy of compliance with established policies and procedures and the quality of financial reporting. Donald K. Gnuse President and Chief Executive Officer Joe J. Leenerts Senior Vice President/Treasurer and Chief Financial Officer 13 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULT OF OPERATIONS Management’s Discussion and Analysis of Financial Condition and Results of Operations Introduction The following discussion of the financial condition and results of operations of First Bankers Trustshares, Inc. pro- vides an analysis of the consolidated financial statements included in this annual report and focuses upon those fac- tors which had a significant influence on the overall 2003 performance. The discussion should be read in conjunction with the Company’s consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. The Company was incorporated on August 25, 1988, and acquired First Midwest Bank/ M.C.N.A. (the Bank) on June 30, 1989. The Bank acquisition was accounted for using purchase accounting. Prior to the acquisition of the Bank, the Company did not engage in any significant business activities. Financial Management The primary business of the Company is that of a communi- ty-oriented financial institution offering a variety of finan- cial services to meet the needs of the communities it serves. The Company attracts deposits from the general public and uses such deposits, together with borrowings and other funds, to originate one-to-four family residential mortgage loans, consumer loans, small business loans and agricultural loans in its primary market area. The Company also invests in mortgage-backed securities, investment securities consist- ing primarily of U.S. government or agency obligations, financial institution certificates of deposit, and other liquid assets. The Company’s goal is to achieve consistently high levels of earning assets and loan/deposit ratios while maintaining effective expense control and high customer service levels. The term “high level” means the ability to profitably increase earning assets. As deposits have become fully deregulated, sustained earnings enhancement has focused on “earning asset” generation. The Company will focus on lending money profitably, controlling credit quality, net interest margin, operating expenses and on generating fee income from services. Consolidated Assets (Amounts in thousands of dollars) Assets Cash and due from banks: Non-interest bearing Interest bearing Securities Federal funds sold Loans held for sale Net loans Other assets Total Assets Liabilities & Stockholders’ Equity Deposits Short-term borrowings Federal Home Loan Bank advances Note payable Company obligated manditorily redeemable preferred securities Other liabilities Stockholders’ equity Total Liabilities & Stockholders’ Equity 2003 Change 2002 Change 2001 2000 1999 1998 5 Year Growth Rate $ 9,586 (14.79)% $ 11,250 30.34 % $ 8,631 $ 7,555 $ 6,964 $ 5,710 67.88 % 5,424 (76.08) 7,274 (25.43) 53,582 (1.81) 13,500 - 453 (61.45) 219,545 9.98 13,580 48.77 17,228 16,163 76,062 71,897 72,680 68,884 (22.21) 9,500 18,700 13,425 20,600 (34.47) 74 841 (46.14) 174,504 154,520 124,007 77.04 9,359 9,007 50.77 22,674 31.61 54,567 (28.26) 13,500 42.11 1,175 (46.05) 199,626 6.63 9,128 (7.33) 2,178 187,219 9,850 981 9,261 417 $ 315,670 1.20% $ 311,920 .40 % $ 310,668 $ 298,497 $ 258,503 $ 236,323 33.58 % $ 258,413 .09 % $ 258,170 .61 % $ 256,609 $ 244,362 $ 199,477 $ 187,721 37.66 % 10,473 17,828 26,436 13,495 (62.10) 5,114 21.76 4,200 (59.90) 19,000 - - (100.00) 19,000 46.15 4,500 - 13,000 9,000 12,000 14,000 35.71 2,780 3,980 - - - 10,000 100.00 2,139 (13.12) 21,004 13.00 5,000 - 2,462 (13.64) 18,588 (18.24) 5,000 5,000 - 100.00 2,851 2,972 2,538 2,641 (19.01) 22,735 19,335 15,272 14,486 45.00 - $ 315,670 1.20 % $ 311,920 .40 % $ 310,668 $ 298,497 $ 258,503 $ 236,323 33.58 % MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULT OF OPERATIONS 14 At December 31, 2003, the Company had assets of $315,670,000 compared to $311,920,000 at December 31, 2002. The reduction in cash and due from banks (55.75%), securities (1.81%) and the increase in deposits (.09%) were the primary sources used to fund the increase in gross loan outstanding (9.84%) and the purchase of $4,000,000 in Bank Owned Life Insurance. In addition, the Company’s long term debt position was extinguished with the funds generated by the issuance of $5,000,000 of Trust Preferred Securities. Demand for the Bank’s lending products, including com- mercial lines of credit, residential real estate, and consumer loans have traditionally been moderately strong. Commercial (9.32%), consumer (18.35%), residential real estate (6.36) and tax exempt (28.20%) lending experienced growth during 2003. Approximately $10,768,000 of fixed rate long-term residential real estate loans were sold in the secondary market during 2003 while $13,294,000 was sold in 2002. Agricultural real estate loans totaling $1,414,000 were sold in the secondary market during 2003, while $385,000 was sold in 2002. In addition, under the Company’s student loan program, approximately $341,000 in student loans was sold to Sallie Mae during 2003 com- pared to $298,000 sold in 2002. Management continues to place emphasis on the quality versus the quantity of the credits placed in the portfolio. In addition to lending, the Company has focused on main- taining and enhancing high levels of fee income for its existing services and new services. Generation of fee income will be a goal of the Company and should be a source of continued revenues in the future. Results of Operations Summary The Company’s earnings are primarily dependent on net interest income, the difference between interest income and interest expense. Interest income is a function of the bal- ances of loans, securities and other interest earning assets outstanding during the period and the yield earned on such assets. Interest expense is a function of the balances of deposits and borrowings outstanding during the same period and the rates paid on such deposits and borrowings. The Company’s earnings are also affected by provisions for loan losses, service charges, trust income, other non-interest income and expense and income taxes. Non-interest expense consists primarily of employee com- pensation and benefits, occupancy and equipment expenses, amortization and general and administrative expenses. Prevailing economic conditions as well as federal regula- tions concerning monetary and fiscal policies as they pertain to financial institutions significantly affect the Company. Deposit balances are influenced by a number of factors including interest rates paid on competing personal invest- ments and the level of personal income and savings within the institution’s market. In addition, growth of deposit bal- ances is influenced by the perceptions of customers regard- ing the stability of the financial services industry. Lending activities are influenced by the demand for housing, compe- tition from other lending institutions, as well as lower inter- est rate levels, which may stimulate loan refinancing. The primary sources of funds for lending activities include deposits, loan payments, borrowing and funds provided from operations. For the year ended December 31, 2003, the Company reported consolidated net income of $3,123,000, a $119,000 (3.67%) decrease from 2002. Net interest income for the periods being compared decreased $385,000 or 3.83%. Other income increased $645,000 (18.70%) and other expenses increased $88,000 (1.08%) over 2002 totals. Analysis of Net Income The Company’s assets are primarily comprised of interest earning assets including commercial, agricultural, consumer and real estate loans, as well as federal funds sold, interest bearing deposits in banks and securities. Average earning assets equaled $303,538,000 for the year ended December 31, 2003. A combination of interest bearing and non-inter- est bearing deposits, long term debt, federal funds pur- chased, securities sold under agreement to repurchase, other borrowings and capital funds are employed to finance these assets. 15 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULT OF OPERATIONS Consolidated Income Summary (Amounts in thousands of dollars) Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Other income Other expense Income before taxes Income tax expense Net income 2003 Change 2002 Change 2001 2000 1999 1998 5 Year Growth Rate $ 16,187 ( 9.02)% $ 17,792 (12.16)% $ 20,255 $ 19,839 $ 16,414 $ 15,414 (10,967) (11,059) (8,204) (7,884) (6,530) (15.74) $ 9,288 $ 8,780 $ 9,657 (3.83) $ 8,210 $ 7,530 (660) (240) (240) (144) (1,285) 29.80 (7,750) (29.33) $ 10,042 8.12% (990) 50.00 5.01 % (17.17)% 28.25 % 792.36 3,449 (11.50) (8,130) 7.51 $ 8,372 (7.51)% $ 9,052 4.91 % $ 8,628 $ 8,540 $ 7,970 $ 7,386 3,897 2,700 2,552 2,231 4,094 18.70 (7,562) (6,951) (6,474) (5,795) (8,218) 1.08 $ 4,248 (2.81)% $ 4,371 (11.93)% $ 4,963 $ 4,289 $ 4,048 $ 3,822 (1,125) (.35) (1,506) (1,282) (1,338) (1,204) $ 3,123 (3.67)% $ 3,242 (6.22)% $ 3,457 $ 3,007 $ 2,710 $ 2,618 (1,129) (25.03) 13.35 % 83.51 41.81 11.15 % (6.56) 19.29 % For the Years Ended December 31, (Amounts in thousands of dollars) 2002 $ 17,270 522 (7,750) 2001 $ 19,980 275 (10,967) 2003 $ 15,186 1,001 (6,530) $ 9,657 $ 10,042 $ 9,288 $ 303,538 $ 289,637 $ 285,259 3.18% 3.47% 3.26% Interest Income Loan Fees Interest Expense Net Interest Income Average Earning Assets Net Interest Margin The yield on average earning assets for the year ended 2003 was 5.33% while the average cost of funds for the same period was 2.59% on average interest bearing liabilities of $251,845,000. The yield on average earning assets for the year ended 2002 was 6.14%, while the average cost of funds for the same period was 3.17% on average interest bearing liabilities of $244,760,000. The decrease in net interest income of $385,000 can be attributed to the 81 basis points decline in earning asset yield. The increase in net average earning assets of $6,816,000 and the decrease in cost of funds of 58 basis points was not enough to off set the decrease in net interest income caused by the reduction in earning asset yields. Provision for Loan Losses The allowance for loan losses as a percentage of net loans outstanding is 1.02% at December 31, 2003, compared to 1.14% at December 31, 2002. Net loan charge-offs totaled $1,327,000 for the year ended December 31, 2003 com- pared to $997,000 in 2002. The amounts recorded in the provision for loan losses are determined from management’s quarterly evaluation of the The amounts recorded in the provision for loan losses are quality of the loan portfolio. In this review, such factors as determined from management’s quarterly evaluation of the quality of the loan portfolio. In this review, such the volume and character of the loan portfolio, general eco- factors as the volume and character of the loan portfolio, nomic conditions and past loan loss experience are consid- general economic conditions and past loan loss ered. Management believes that the allowance for loan experience are considered. Management believes that the losses is adequate to provide for possible losses in the port- allowance for loan losses is adequate to provide for folio at December 31, 2003. possible losses in the portfolio at December 31, 2003. Other Income Other Income Other income may be divided into two broad categories - recurring and non-recurring. Trust fees and service charges on deposit accounts are the major sources of recurring other income. Investment securities gains and other income vary annually. Other income for the period ended December 31, 2003 was $4,094,000, an increase of $645,000 (18.70%) from 2002. The securities gains of $192,000 were generat- ed from the implementation of an investment strategy that was directed to the enhancement of earnings for future peri- ods. Other Expense Other expenses for the period ended December 31, 2003 totaled $8,218,000, an increase of $88,000 (1.08%) from 2002 year end totals. Salaries and employee benefits expense aggregated 53.95% and 53.86% of total other expense for the year ended December 31, 2003 and 2002 respectively. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULT OF OPERATIONS 16 Non-accrual, Restructured and Past Due Loans and Leases and Other Real Estate Owned (Amounts in thousands of dollars) At December 31, Non-accrual loans and leases Other real estate owned Total non-performing assets Loans and leases past due 90 days or more and still accruing interest Total non-performing assets and 90-day past due loans and leases Interest income as originally contracted on non-accrual and restructured loans and leases Interest income recognized on non-accrual and restructured loans and leases Reduction of interest income due to non-accrual and restructured loans and leases Reduction in basic and diluted earnings per share due to non-accrual and restructured loans and leases Income Taxes The Company files its Federal income tax return on a con- solidated basis with the Bank. See Note 16 to the consoli- dated financial statements for detail of income taxes. Liquidity The concept of liquidity comprises the ability of an enterprise to maintain sufficient cash flow to meet its needs and obliga- tions on a timely basis. Bank liquidity must thus be consid- ered in terms of the nature and mix of the institution’s sources and uses of funds. Bank liquidity is provided from both assets and liabilities. The asset side provides liquidity through regular maturities of investment securities and loans. Investment securities with maturities of one year or less, deposits with banks and feder- al funds sold are a primary source of asset liquidity. On December 31, 2003, these categories totaled $34,656,000 or 10.98% of assets, compared to $49,366,000 or 15.83% the previous year. As of December 31, 2003, securities held to maturity includ- ed $298,000 of gross unrealized gains and $1,000 of gross unrealized losses on securities which management intends to hold until maturity. Such amounts are not expected to have a material effect on future earnings beyond the usual amortiza- tion of premium and accretion of discount. 2003 2002 2001 2000 1999 1998 206 $ 189 $ 104 $ 148 $ 242 $ 147 $ 88 - $ 395 $ 145 $ 317 $ 242 $ 260 $ 88 31 $ 596 $ 203 $ 746 $ 731 $ 518 $ 119 169 - 429 489 113 41 201 58 258 $ 9 $ 7 $ 16 $ 26 $ 10 $ 9 - - - - - - $ 9 $ 7 $ 16 $ 26 $ 10 $ 9 $ .00 $ .00 $ .00 .01 $ .00 $ .00 Closely related to the management of liquidity is the man- agement of rate sensitivity (management of variable rate assets and liabilities), which focuses on maintaining a stable net interest margin, an important factor in earnings growth and stability. Emphasis is placed on maintaining an evenly balanced rate sensitivity position to avoid wide swings in margins and minimize risk due to changes in interest rates. The Company’s Asset/Liability Committee is charged with the responsibility of prudently managing the volumes and mixes of assets and liabilities of the subsidiary Bank. Management believes that it has structured its pricing mech- anisms such that the net interest margin should maintain acceptable levels in 2003, regardless of the changes in inter- est rates that may occur. The following table shows the repricing period for interest-earning assets and interest-bear- ing liabilities and the related repricing gap (Amounts in thou- sands of dollars): Interest-earning assets Interest-bearing liabilities Repricing gap (repricing assets minus repricing liabilities) Interest-earning assets Interest-bearing liabilities Repricing gap (repricing assets minus repricing liabilities) As of December 31, 2003 Repricing Period After one Year through Five years $ 129,738 65,631 Through One year $ 130,474 170,662 After Five years $ 40,291 5,000 $ (40,188) $ 64,107 $ 35,291 As of December 31, 2002 Repricing Period After one Year through Five years $ 124,085 78,448 Through One year $ 126,442 163,444 After Five years $ 44,865 5,000 $ (37,002) $ 45,637 $ 39,865 17 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULT OF OPERATIONS Asset Liability Management Since changes in interest rates may have a significant impact on operations the Company has implemented, and currently maintains, an asset liability management committee at the Bank to monitor and react to the changes in interest rates and other economic conditions. Research concerning interest rate risk is supplied by the Company from information received from a third party source. The committee acts upon this information by adjusting pricing, fee income parameters, and/or marketing emphasis. Common Stock Information and Dividends The Company’s common stock is held by 260 shareholders as of December 31, 2003, and is traded in a limited over-the- counter market. On December 31, 2003 the market price of the Company’s common stock was $15.40. Market price is based on stock transactions in the market. Cash dividends on common stock of $553,000 were declared by the Board of Directors of the Company for the year ended December 31, 2003. Closing Share Price Data $19.00 $14.25 $14.75 $15.40 $13.13 $11.50 1998 1999 2000 2001 2002 2003 $20.00 $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 Effects of Inflation Until recent years, the economic environment in which the Company operates has been one of significant increases in the prices of most goods and services and a corresponding decline in the purchasing power of the dollar. Banks are affected differently than other commercial enter- prises by the effects of inflation. Some reasons for these dis- parate effects are a) premises and equipment for banks repre- sent a relatively small proportion of total assets; b) a bank’s asset and liability structure is substantially monetary in nature, which can be converted into a fixed number of dollars regardless of changes in prices, such as loans and deposits; and c) the majority of a bank’s income is generated through net interest income and not from goods or services rendered. Although inflation may impact both interest rates and volume of loans and deposits, the major factor that affects net inter- est income is how well a bank is positioned to cope with changing interest rates. Capital The ability to generate and maintain capital at adequate lev- els is critical to the Company’s long term success. A common measure of capitalization for financial institutions is primary capital as a percent of total assets. Regulations also require the Company to maintain certain minimum capital levels in relation to consolidated Company assets. Regulations require a ratio of capital to risk-weighted assets of 8.00 percent. The Company’s capital, as defined by the regulations, was 13.14 percent of risk-weighted assets at December 31, 2003. In addition, a leverage ratio of at least 4.00 percent is to be maintained. At December 31, 2003, the Company’s leverage ratio was 8.12 percent. Risked Based Capital Ratios 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 14.03% 13.25% 13.14% 10.92% 10.53% 10.98% 1998 1999 2000 2001 2002 2003 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND THE RESULT OF OPERATIONS 18 Financial Report Upon written request of any shareholder of record on December 31, 2003, the Company will provide, without charge, a copy of its 2003 Annual Report including financial statements and schedules. The Company filed a Form 15 with the Securities and Exchange Commission to discontinue the filing of quarterly (10-Q) and annual (10-K) reports based on the Company’s number of stockholders, however, the Company does pre- pare similar reports to those required under the Securities Exchange Act of 1934. Notice of Annual Meeting of Stockholders The annual meeting of stockholders will be May 11, 2004 at 9:00 A.M. at the Quincy Holiday Inn, 201 South 3rd Street, Quincy, Illinois. 19 INDEPENDENT AUDITOR’S REPORT To the Board of Directors First Bankers Trustshares, Inc. Quincy, Illinois We have audited the accompanying consolidated balance sheets of First Bankers Trustshares, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended December 31, 2003, 2002 and 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial state- ments 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall finan- cial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Bankers Trustshares, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years ended December 31, 2003, 2002 and 2001, in con- formity with accounting principles generally accepted in the United States of America. Davenport, Iowa February 13, 2004 McGladrey & Pullen, LLP is a member firm of RSM International – an affiliation of separate and independent legal entities FINANCIAL SUMMARY 20 FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands of dollars, except share and per share data) Assets Cash and due from banks (Note 3) Non-interest bearing Interest bearing Securities held to maturity (Note 4) Securities available for sale (Note 4) Federal funds sold Loans held for sale Loans (Note 5 and 9) Less allowance for loan losses Net loans Premises, furniture and equipment, net (Note 6) Accrued interest receivable Life insurance contracts Other assets TOTAL ASSETS Liabilities and Stockholders’ Equity Liabilities: Deposits: Non-interest bearing demand Interest bearing demand Savings Time (Note 7) Total Deposits Short-term borrowings (Note 8) Federal Home Loan Bank advances (Note 9) Note payable (Note 10) Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures (Note 11) Accrued interest payable Other liabilities TOTAL LIABILITIES Commitments and Contingencies (Note 12) Stockholders’ Equity (Note 14) Preferred stock, Series A, nonvoting, variable rate, cumulative, no par value, $50 stated value; authorized 50,000 shares; issued and outstanding none Common stock, $1 par value; shares authorized 6,000,000; Shares issued 2,579,230 and outstanding 2,048,574 Additional paid in capital Retained earnings Accumulated other comprehensive income Treasury stock, at cost - 530,656 shares TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY December 31, 2003 2002 $ 9,586 5,424 $ 15,010 $ 7,231 46,351 13,500 453 221,808 (2,263) $ 219,545 $ 3,727 1,364 4,100 4,389 $ 315,670 $ 11,250 22,674 $ 33,924 $ 8,700 45,867 13,500 1,175 201,931 (2,305) $ 199,626 $ 4,082 1,632 - 3,414 $ 311,920 $ 51,234 66,978 30,407 109,794 $ 258,413 5,114 19,000 - $ 43,978 72,824 29,267 112,101 $ 258,170 4,200 19,000 4,500 10,000 834 1,305 $ 294,666 5,000 1,002 1,460 $ 293,332 - - 2,580 2,251 22,804 798 (7,429) $ 21,004 2,580 2,251 20,234 952 (7,429) $ 18,588 $ 315,670 $ 311,920 See notes to consolidated financial statements 21 FINANCIAL SUMMARY FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands of dollars, except per share data) Interest income: Loans, including fee income: Taxable Non-taxable Securities: Taxable Non-taxable Federal funds sold Interest bearing deposits in banks Other Total interest income Interest expense: Deposits: Interest bearing demand and savings Time Total interest on deposits Short-term borrowings Federal Home Loan Bank advances Note payable Company obligated mandatorily redeemable preferred securities Total interest expense Net interest income 2003 Years Ended December 31, 2002 2001 $ 13,651 171 $ 13,897 198 $ 14,874 138 1,270 737 130 132 96 $ 16,187 2,460 822 146 188 81 $ 17,792 3,275 854 468 557 89 $ 20,255 $ 887 3,955 $ 4,842 83 912 102 591 $ 6,530 $ 9,657 $ 1,440 4,609 $ 6,049 158 854 159 530 $ 7,750 $ 10,042 $ 2,646 6,714 $ 9,360 553 528 - 526 $ 10,967 $ 9,288 Provision for loan losses (Note 5) Net interest income after provision for loan losses $ 1,285 $ 990 $ 660 $ 8,372 $ 9,052 $ 8,628 Other income: Trust department Service charges on deposit accounts Gain on sale of loans Investment securities gains, net Other Total other income Other expenses: Salaries and employee benefits Occupancy expense, net Equipment expense Computer processing Professional services Amortization of goodwill Other Total other expenses Income before income taxes Income taxes (Note 16) Net income Earnings per share of common stock, basic and diluted $ 1,671 1,079 154 192 998 $ 4,094 $ 4,434 535 636 454 273 - 1,886 $ 8,218 $ 4,248 1,125 3,123 $ 1.52 $ 1,387 880 135 85 962 $ 3,449 $ 4,379 551 699 391 197 - 1,913 $ 8,130 $ 4,371 1,129 3,242 $ 1.49 $ 1,445 863 155 446 988 $ 3,897 $ 4,069 519 633 351 132 134 1,724 $ 7,562 $ 4,963 1,506 3,457 $ 1.34 See notes to consolidated financial statements FINANCIAL SUMMARY 22 FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Amounts in thousands of dollars, except share and per share data) Years Ended December 31, 2003, 2002 and 2001 Preferred Stock $ - Common Stock $ 2,580 Additional Paid In Capital $ 2,251 Retained Earnings $ 14,526 Accumulated Other Comprehensive Income (Loss) $ (22) Treasury Stock $ - Comprehensive Income Total $ 19,335 - - - 3,457 - - 3,457 3,457 - - - - 433 - - 433 $ 3,890 433 - $ - - $ 2,580 - $ 2,251 (490) $ 17,493 - $ 411 - $ - (490) $ 22,735 - - - 3,242 - - 3,242 3,242 - - - - 541 - 541 $ 3,783 541 - - - - - (7,429) - $ - - $ 2,580 - $ 2,251 (501) $ 20,234 - $ 952 - $ (7,429) (7,429) (501) $ 18,588 - - - 3,123 - - 3,123 3,123 - - - - (154) - (154) $ 2,969 (154) - $ - - $ 2,580 - $ 2,251 (553) $ 22,804 - $ 798 - $ (7,429) (553) $ 21,004 Balance, December 31, 2000 Comprehensive income: Net income Other comprehensive income, net of tax, (Note 2) Comprehensive income Dividends declared on common stock (amount per share $.19) Balance, December 31, 2001 Comprehensive income: Net income Other comprehensive income, net of tax, (Note 2) Comprehensive income Purchase of 530,656 shares of common stock for the treasury Dividends declared on common stock (amount per share $.23) Balance, December 31, 2002 Comprehensive income: Net income Other comprehensive (loss), net of tax, (Note 2) Comprehensive income Dividends declared on common stock (amount per share $.27) Balance, December 31, 2003 See notes to consolidated financial statements 23 FINANCIAL SUMMARY FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of dollars) Cash Flows From Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Amortization of goodwill Depreciation Amortization/accretion of premiums/discounts on securities, net Investment securities (gains), net Loans originated for resale Proceeds from loans sold Gain on sale of loans Deferred income taxes (Increase) decreas e in accrued interest receivable and other assets (Decrease) in accrued interest payable and other liabilities Net cash provided by operating activities Cash Flows From Investing Activities Activity in securities portfolio: Purchases Sales of securities available for sale Calls, maturities and paydowns Increase in loans, net (Increase) decrease in federal funds sold Purchases of premises, furniture and equipment Purchase of life insurance contracts Increase in cash value of life insurance contracts Net cash provided by (used in) investing activities 2003 $ 3,123 Years Ended December 31, 2002 $ 3,242 2001 $ 3,457 1,285 - 662 990 - 748 660 134 673 1,069 (192) (11,801) 12,677 (154) (119) 445 (85) (12,974) 14,112 (135) (64) 154 (446) (18,472) 16,866 (155) (118) (101) 743 (308) (343) $ 6,106 (380) $ 6,642 (147) $ 2,298 $ (81,079) 5,345 75,595 (21,495) - (307) (4,000) (100) $ (26,041) $ (4,626) 7,998 18,632 (13,696) (4,000) (734) - - $ 3,574 $ (34,315) 3,856 27,286 (13,544) 9,200 (1,068) - - $ (8,585) Cash Flows From Financing Activities Net increase in deposits Issuance of note payable Principal payments on note payable Purchase of treasury stock Cash dividends paid on common stock Increase (decrease) in short-term borrowings Proceeds from Federal Home Loan Bank advances Repayments of Federal Home Loan Bank advances Proceeds from issuance of preferred securities of subsidiary trust Net cash provided by (used in) financing activities Net increase (decrease) in cash and due from banks Cash and Due From Banks: Beginning Ending $ 243 - (4,500) - (533) 914 - - $ 1,561 6,000 (1,500) (7,429) (510) (6,273) 6,000 - $ 12,247 - - (464) (7,355) 8,000 (4,000) 4,897 $ 1,021 $ (18,914) - $ (2,151) $ 8,065 - $ 8,428 $ 2,141 $ 33,924 $ 15,010 $ 25,859 $ 33,924 $ 23,718 $ 25,859 (continued) FINANCIAL SUMMARY 24 FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of dollars) Supplemental disclosure of cash flow information, Cash payments for: Interest Income taxes Supplemental schedule of noncash investing and financing activities: Net change in accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale, net Transfer of loans to other real estate owned Years Ended December 31, 2003 $ 6,698 $ 1,090 2002 $ 8,182 $ 1,433 2001 $ 11,485 $ 1,544 $ (154) $ 291 $ 541 $ 299 $ 433 $ 169 See notes to consolidated financial statements 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business First Bankers Trustshares, Inc. (the “Company”) is a bank holding company providing bank and bank related services through its wholly-owned subsidiaries, First Bankers Trust Company, N.A. (Bank), FBIL Statutory Trust I, and FBIL Statutory Trust II, to a market area consisting primarily of Adams and adjacent Illinois counties, and Marion, Lewis and Shelby counties in Missouri. Trust services are provided through trust offices located in Quincy and Chicago, Illinois, Philadelphia, Pennsylvania and Phoenix, Arizona. Significant Accounting Policies The accounting and reporting policies of First Bankers Trustshares, Inc. and its subsidiaries conform to generally accepted accounting principles and general practices within the banking industry. The following is a summary of the more significant of these policies. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount 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. The allowance for loan losses is inherently subjective as it requires material estimates that are susceptible to significant change. The fair value disclosure of financial statements is an estimate that can be computed within a range. Basis of Consolidation The consolidated financial statements include the accounts of First Bankers Trustshares, Inc. and its wholly-owned sub- sidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Presentation of Cash Flows For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks, includ- ing cash items in process of clearing. Cash flows from federal funds sold, loans to customers, deposits, and short-term bor- rowings are reported net. Trust Department Assets Trust assets, other than cash deposits held by the Bank, are not assets of the Bank and, accordingly are not included in these consolidated financial statements. Securities Securities held to maturity are those for which the Bank has the ability and intent to hold to maturity. Securities meeting such criteria at the date of purchase and as of the balance sheet date are carried at amortized cost, adjusted for amortization of premiums and discounts, computed by the interest method over their contracted lives. Securities available for sale are accounted for at fair value and the unrealized holding gains or losses, net of their deferred income tax effect, are presented as increases or decreases in accumulated other comprehensive income, as a separate compo- nent of equity. Realized gains and losses on sales of securities are based upon the adjusted book value of the specific securities sold and are included in earnings. There were no trading securities at December 31, 2003 and 2002. Loans Loans are stated at the principal amount outstanding, net of an allowance for loan losses. Interest on loans is credited to operations as earned, based upon the principal amount outstanding. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) It is the Bank’s policy to discontinue the accrual of interest income on any loan when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Interest on these loans is credited to income only when the loan is removed from nonaccrual status. Nonaccrual loans are returned to an accrual status when, in the opinion of man- agement, the financial position of the borrower and other relevant factors indicate there is no longer any reasonable doubt as to the timely payment of principal or interest. The Bank grants agribusiness, commercial, residential, and consumer loans to customers throughout the Bank’s market area. The Bank’s policy for requiring collateral is consistent with prudent lending practices and anticipates the potential for eco- nomic fluctuations. Collateral varies but may include accounts receivable, inventory, property, equipment and income-pro- ducing commercial properties. It is the Bank’s policy to file financing statements and mortgages covering collateral pledged. As of December 31, 2003 and 2002, the Bank had loan concentrations in agribusiness of 7.07% and 8.13%, hotel and motel industry of 3.76% and 4.66% and senior housing industry of 2.91% and 2.46%, respectively of outstanding loans. The Bank had no additional industry loan concentrations, which, in management’s judgment, were considered to be significant. The Bank had no foreign loans outstanding as of December 31, 2003 and 2002. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans and commit- ments to extend loans based on evaluations of the collectibility and prior loss experience. The evaluations take into consid- eration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, spe- cific problem loans and commitments, and current and anticipated economic conditions that may affect the borrower’s ability to pay. Loans are considered impaired when, based on current information and events, it is probable the Bank will not be able to collect all amounts due under the loan agreement. The portion of the allowance for loan losses applicable to impaired loans is computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan’s effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. The Bank recognizes interest income on impaired loans on a cash basis. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, 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. Credit Related Financial Instruments In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under lines of credit and standby letters of credit. Such financial instruments are recorded when they are funded. Sale of Loans As part of its management of assets and liabilities, the Company periodically sells residential real estate, agricultural and stu- dent loans. Loans which are expected to be sold in the foreseeable future are classified as held for sale and are recorded at the lower of aggregate cost or market value. At December 31, 2003 and 2002, loans held for sale consist of residential real estate loans. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Premises, Furniture and Equipment Premises, furniture and equipment are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the assets. Other Real Estate Owned Other real estate owned (OREO), which is included with other assets, represents properties acquired through foreclosure, in- substance foreclosure or other proceedings. Any write-down to fair value at the time of the transfer to OREO is charged to the allowance for loan losses. Property is evaluated regularly to ensure that the recorded amount is supported by the current fair value. Subsequent write-downs to fair value are charged to earnings. Intangibles Goodwill equal to $334,000 at December 31, 2003 and 2002 represents the unamortized cost of the investment in the Bank in excess of the fair value of net assets acquired. In July 2001, the Financial Accounting Standards Board issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142 eliminates the amortization of goodwill and other intan- gibles that are determined to have an indefinite life; and requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. For the Company, the provisions of the Statement were effective January 1, 2002. Implementation of Statement No. 142 has impacted the Company’s consolidated financial state- ments in that yearly goodwill amortization of $134,000 is no longer recorded. Earnings Per Share of Common Stock Basic earnings per share of common stock is computed by dividing net income, after deducting preferred stock dividends, by the weighted average number of shares outstanding during each reporting period. Diluted earnings per share of common stock assumes the conversion, exercise or issuance of all potential common stock (common stock equivalents) unless the effect is to reduce the loss or increase the income per common share from continuing operations. The Company had no common stock equivalents as of and for the years ending December 31, 2003, 2002, and 2001. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differ- ences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differ- ences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in the tax laws and rates on the date of enactment. Current Accounting Developments FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, (FIN 46) establishes accounting guidance for consolidation of variable interest entities (VIE) that function to support the activities of the primary beneficiary. Prior to the implementation of FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. The provisions of FIN 46 were effective immediately for all arrangements entered into after January 31, 2003. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) which clarified certain implementation issues and revised implementation dates for VIEs created before January 31, 2003. Under the new guidance, special effective date provisions apply to enterpris- es that have fully or partially applied FIN 46 prior to issuance of the revised Interpretation. Otherwise, application of FIN 46R (or FIN 46) is required in financial statements of entities that have interests in special purpose entities effective for the first annual period beginning after December 15, 2004. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) An unintended consequence of this standard is requiring some companies to conclude deconsolidation is necessary for cer- tain transactions involving the issuance of trust preferred securities. Based upon its interpretation of FIN 46, the Company continues to consolidate its wholly-owned subsidiary trust entities involved with the issuance of its trust preferred securities, but will deconsolidate for the year ending December 31, 2005. Such deconsolidation will have no effect on reported earn- ings or stockholders’ equity. A portion of these securities currently qualify for treatment as Tier 1 capital for the Company. In July 2003, the Board of Governors of the Federal Reserve System issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in Tier 1 capital for regulatory capital purposes until notice is given to the contrary. There can be no assurance that the Federal Reserve will continue to permit institutions to include trust preferred securities in Tier 1 capital for regulatory capital purposes. As of December 31, 2003, assuming the Company was not permitted to include the trust preferred securities issued by the trusts in its Tier 1 capital, the Company would still exceed the regulatory required minimums for capital adequacy purposes (see Note 11 of Notes to Consolidated Financial Statements). The interpretations of FIN 46 and its application to various transaction types and structures are evolving. Management con- tinuously monitors emerging issues related to FIN 46, some of which could potentially impact the Company’s financial state- ments. 2. COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity during a period from transactions and other events from non- owner sources. Comprehensive income is the total of net income and other comprehensive income, which for the Company is comprised entirely of unrealized gains and losses on securities available for sale. Other comprehensive income is comprised as follows (Amounts in thousands of dollars): Year ended December 31, 2003 Unrealized gains (losses) on securities available for sale: Unrealized holding (losses) arising during the year Less reclassification adjustment for gains included in net income Other comprehensive loss Before tax Tax expense (benefit) Net of tax $ (55) $ 20 $ (35) 192 $ (247) 73 $ (93) 119 $ ( 154) Year ended December 31, 2002 Unrealized gains on securities available for sale: Unrealized holding gains arising during the year Less reclassification adjustment for gains included in net income Other comprehensive income Year ended December 31, 2001 Unrealized gains on securities available for sale: Unrealized holding gains arising during the year Less reclassification adjustment for gains included in net income Other comprehensive income $ 954 $ 360 $ 594 85 $ 869 32 $ 328 53 $ 541 $ 1,146 $ 437 $ 709 446 $ 700 170 $ 267 276 $ 433 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. RESTRICTIONS ON CASH AND DUE FROM BANKS The Bank is required to maintain a reserve balance with the Federal Reserve Bank of St. Louis. The total of the reserve bal- ance was approximately $327,000 and $3,357,000 at December 31, 2003 and 2002, respectively. 4. SECURITIES The amortized cost and fair values of securities held to maturity as of December 31, 2003 and 2002 are as follows (Amounts in thousands of dollars): U.S. Government agencies and corporations State and political subdivisions U.S. Government agencies and corporations State and political subdivisions Amortized Cost $ 111 7,120 $ 7,231 Amortized Cost $ 160 8,540 $ 8,700 2003 Gross Unrealized Gains $ 4 294 $ 298 2002 Gross Unrealized Gains $ 8 245 $ 253 Gross Unrealized (Losses) $ - (1) $ (1) Gross Unrealized (Losses) $ - - $ - Fair Value $ 115 7,413 $ 7,528 Fair Value $ 168 8,785 $ 8,953 The amortized cost and fair values of securities available for sale as of December 31, 2003 and 2002 are as follows (Amounts in thousands of dollars): U.S. Government agencies and corporations State and political subdivisions Corporate securities Collateralized mortgage obligations U.S. Government agencies and corporations State and political subdivisions Corporate securities Collateralized mortgage obligations Amortized Cost $ 34,108 8,014 435 2,507 $ 45,064 Amortized Cost $ 30,922 8,334 1,434 3,643 $ 44,333 2003 Gross Unrealized Gains $ 790 505 15 - $ 1,310 2002 Gross Unrealized Gains $ 1,118 349 26 44 $ 1,537 Gross Unrealized (Losses) $ (7) - - (16) $ (23) Gross Unrealized (Losses) $ - (2) - (1) $ (3) Fair Value $ 34, 891 519 8, 450 2, 491 $ 46,351 Fair Value $ 32,040 8,681 1,460 3,686 $ 45,867 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 4. SECURITIES (Continued) All securities which have unrealized losses as of December 31, 2003 have been in the unrealized loss position for less than 12 months. Those securities are summarized as follows: Securities held to maturity: State and political subdivisions Securities available for sale: U.S. Government agencies and Corporations Collateralized mortgage obligations Gross Fair Value Unrealized Losses $ 307 $ (1) $ (7) $ 1,928 2,334 (16) $ 4,262 $ (23) For all the above investment securities, the unrealized losses are generally due to changes in interest rates and, as such, are considered to be temporary, by the Company. The amortized cost and fair value of securities as of December 31, 2003 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the corporate securities and mortgages underlying the collateral- ized mortgage obligations may be called or prepaid without penalties. Therefore, these securities are not included in the maturity categories in the following summaries (Amounts in thousands of dollars): Securities held to maturity: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Securities available for sale: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Corporate securities Collateralized mortgage obligations Amortized Cost $ 1,041 2,019 1,949 2,222 $ 7,231 Amortized Cost $ 4,996 20,952 8,397 7,777 $ 42,122 435 2,507 $ 45,064 Fair Value $ 1,056 2,105 2,047 2,320 $ 7,528 Fair Value $ 5,105 21,338 8,704 8,263 $ 43,410 450 2,491 $ 46,351 Information on securities sold during the years ended December 31, 2003, 2002 and 2001 follows (Amounts in thousands of dollars): Proceeds from sales: Securities available for sale Securities held to maturity Gross gains Gross losses 2003 $ 5,345 - $ 192 $ - 2002 $ 7,998 - $ 104 $ 19 2001 $ 3,856 - $ 219 $ - 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. SECURITIES (Continued) As of December 31, 2003 and 2002 securities with a carrying value of approximately $47,390,000 and $37,274,000 respec- tively, were pledged to collateralize deposits and securities sold under agreements to repurchase and for other purposes as required or permitted by law. 5. LOANS The composition of net loans outstanding as of December 31, 2003 and 2002 are as follows (Amounts in thousands of dol- lars): Commercial Agricultural Tax exempt Real estate, mortgage Consumer Other Less: Allowance for loan losses Net loans 2003 $ 115,229 15,680 4,237 40,727 45,353 582 $ 221,808 2002 $ 105,405 16,416 3,305 38,290 38,321 194 $ 201,931 (2,263) $ 219,545 (2,305) $ 199, 626 Nonaccrual, impaired loans and loans past due 90 days or more and still accruing interest were not material at December 31, 2003 and 2002. Activity in the allowance for loan losses during the years ended December 31, 2003, 2002 and 2001 is summarized below (Amounts in thousands of dollars): Balance, beginning of year Provision for loan losses Loan charge-offs Recoveries of loans charged off Balance, end of year 2003 $ 2,305 1,285 (1,370) 43 $ 2,263 2002 $ 2,312 990 (1,045) 48 $ 2,305 2001 $ 1,951 660 (337) 38 $ 2,312 Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans totaled $76,449,000 and $46,534,000 at December 31, 2003 and 2002, respec- tively. In the ordinary course of business, the Bank has loans with directors, principal officers, their immediate families and affiliat- ed companies in which they are principal stockholders (hereafter referred to as related parties). The Bank believes that all such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with other persons and that such loans do not present more than a normal risk of collectibility or pres- ent other unfavorable features. An analysis of the changes in the aggregate amount of these loans during 2003 and 2002 is as follows (Amounts in thousands of dollars): Balance, beginning of year Advances Repayments Balance, end of year 2003 $ 2,639 4,060 (3,333) $ 3,366 2002 $ 3,320 4,959 (5,640) $ 2,639 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32 6. PREMISES, FURNITURE AND EQUIPMENT The cost, accumulated depreciation and net book value of premises, furniture and equipment as of December 31, 2003 and 2002 is summarized as follows (Amounts in thousands of dollars): Land Building and improvements Furniture and equipment Less accumulated depreciation 7. TIME DEPOSITS 2003 $ 942 3,635 4,565 $ 9,142 ( 5,415) $ 3,727 2002 $ 926 3,555 4,884 $ 9,365 (5,283) $ 4,082 The aggregate amount of time deposits, each with a minimum denomination of $100,000, was approximately $27,420,000 and $23,540,000 at December 31, 2003 and 2002, respectively. At December 31, 2003, the scheduled maturities of time deposits are as follows (Amounts in thousands of dollars): 2004 2005 2006 2007 2008 $ 55,918 26,808 14,958 9,146 2,964 $ 109,794 8. SHORT TERM BORROWINGS Short-term borrowings outstanding consist of securities sold under agreements to repurchase in the amount of $5,114,000 and $4,120,000 as of December 31, 2003 and 2002, respectively. These borrowings generally mature within 180 days from the date of issuance. Other information concerning securities sold under agreements to repurchase is summarized as follows (Amounts in thou- sands of dollars): Average daily balance during the year Average interest rate during the year Average interest rate at year end Maximum month end balance during the year Securities underlying the agreements at year end: Carrying value Fair value 2003 $ 2,747 3.02% 2.14% $ 5,114 2002 $ 4,423 3.50% 2.50% $ 6,173 $ 7,286 $ 7,342 $ 6,255 $ 6,572 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. FEDERAL HOME LOAN BANK ADVANCES Federal Home Loan Bank (FHLB) advances are summarized as follows at December 31, 2003 and 2002: Maturity in year ending December 31: 2004 2006 2008 2003 2002 Weighted Average Interest Rate 4.90% 4.55 4.89 Balance Due (Amount in thousands) $ 8,000 9,000 2,000 $ 19,000 Weighted Average Interest Rate 4.90% 4.55 4.89 Balance Due (Amount in thousands) $ 8,000 9,000 2,000 $ 19,000 At December 31, 2003, the advances maturing in 2008 have call features that could be implemented in 2004. First mortgage loans of approximately $31,317,000 and $31,667,000 as of December 31, 2003 and 2002, respectively, are pledged as collat- eral on FHLB advances. 10. NOTE PAYABLE At December 31, 2002, the Company had a note payable due to a Bank with quarterly payments at LIBOR plus 175 basis points, which was due March 27, 2005. Principal was payable in 2 installments of $500,000 each, beginning March 27, 2003, and annually thereafter, plus a final payment equal to all unpaid principal and interest at maturity. The note was secured by 170,000 shares of common stock of the Bank. At December 31, 2003, the Company has repaid this note payable. 11. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBENTURES During 2003 the Company issued 5,000 shares of Company Obligated Mandatorily Redeemable (COMR) Preferred Securities of FBIL Statutory Trust II Holding Solely Subordinated Debentures. Distributions are paid quarterly. Cumulative cash distributions are calculated at a variable annual rate that is 295 basis points above the 3 month LIBOR rate (4.11% as December 31, 2003). The Company may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond September 17, 2033. At the end of the deferral period, all accumulated and unpaid distributions will be paid. The capital securities will be redeemed on September 17, 2033; however, the Company has the option to shorten the maturity date to a date not earlier than September 17, 2008 at par plus any accrued and unpaid distributions to the date of the redemption. If a special event occurs prior to September 17, 2008, providing the Company the right of redemption in whole, but not in part, the redemption price will vary depending on how close to the issue date the redemption occurs. The redemption price is a maximum of 104.3% of the principal amount of the debentures at March 17, 2004 declining by approximately 30 basis points each quarter until September 17, 2007 and thereafter at which time the redemption price will be at par. Any accrued and unpaid distributions to the date of redemption must also be paid. During 2000 the Company issued 5,000 shares of Company Obligated Mandatorily Redeemable (COMR) Preferred Securities of FBIL Statutory Trust I Holding Solely Subordinated Debentures. Distributions are paid semi-annually. Cumulative cash distributions are calculated at a 10.60% annual rate. The Company may, at one or more times, defer inter- est payments on the capital securities for up to 10 consecutive semi-annual periods, but not beyond September 7, 2030. At the end of the deferral period, all accumulated and unpaid distributions will be paid. The capital securities will be redeemed on September 7, 2030; however, the Company has the option to shorten the maturity date to a date not earlier than September 7, 2010. The redemption price begins at 105.300% to par and is reduced by 53 basis points each year until September 7, 2020 when the capital securities can be redeemed at par. Any accrued and unpaid distributions to the date of the redemption must also be paid. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34 11. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBENTURES (Continued) Holders of the capital securities have no voting rights, are unsecured and rank junior in priority of payment to all of the Company’s indebtedness and senior to the Company’s capital stock. The debentures are included on the balance sheet at December 31, 2003 and 2002 as liabilities. For regulatory purposes, approximately $6,735,000 and $5,000,000 of the capital securities were allowed in the calculation of Tier I capital with the remainder allowed as Tier II capital as of December 31, 2003 and 2002, respectively. See discussion in Note 1 of Notes to Consolidated Financial Statements regarding current accounting developments relating to the inclusion of trust preferred securities in Tier I capital for regulatory purposes. 12. COMMITMENTS AND CONTINGENCIES Financial instruments with off-balance sheet risk: The Bank, in the normal course of business, is a party to financial instruments with off-balance sheet risk to meet the financ- ing needs of its customers. These financial instruments include unused lines of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and market risk in excess of the amount recognized in the consol- idated balance sheets. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for unused lines of credit and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank’s commitments at December 31, 2003 and 2002 is as follows (Amounts in thousands of dollars): Unused lines of credit Standby letters of credit 2003 $ 35,684 1,863 2002 $ 28,809 883 Unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The agreements generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the agreements are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customers’ credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based upon manage- ment’s credit evaluation of the counter-party. Collateral varies but may include accounts receivable, inventory, property, equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year, or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral, as detailed above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded the Bank would be entitled to seek recovery from the customer. At December 31, 2003 and 2002 no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees. The Company has executed contracts for the sale of mortgage loans in the secondary market in the amount of $453,000 and $1,175,000 at December 31, 2003 and 2002, respectively. These amounts are included in loans held for sale at the respective balance sheet dates. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. COMMITMENTS AND CONTINGENCIES (Continued) A portion of residential mortgage loans sold to investors in the secondary market are sold with recourse. Specifically, certain loan sales agreements provide that if the borrower becomes 60 days or more delinquent during the first six months following the first payment due, and subsequently becomes 90 days or more delinquent during the first 12 months of the loan, the Bank must repurchase the loan from the subject investor. In the opinion of management, the risk of recourse to the Bank is not significant and, accordingly, no liability has been established. Concentration of credit risk: Aside from cash on hand and in-vault, the majority of the Company’s cash is maintained at US Bank, N.A., Commerce Bank, N.A., and the Federal Home Loan Bank of Chicago. The total amount of cash on deposit and federal funds sold exceeded federal insurance limits at the respective institutions by approximately $8,363,000, $6,997,000, and $3,256,000, respectively as of December 31, 2003. In the opinion of management, no material risk of loss exists due to the financial condition of the institu- tions. 13. BENEFITS The Bank’s retirement plan, which covered substantially all full time employees (working over 20 hours per week) after comple- tion of one year of service and attaining the age of 21 was terminated effective December 31, 2001. Monies associated with the plan were transferred into the Company’s 401K plan. The Bank contributed an amount adequate to fund the Target Benefit as determined by various plan assumptions. The Target Benefit was 17.5% of total compensation and is based on the employee’s highest consecutive five years of compensation while a participant. The Bank has a 401K plan, which is a tax qualified savings plan, to encourage its employees to save for retirement purposes or other contingencies. Substantially all full time (working over 1000 hours per year) employees of the Bank are eligible to partici- pate in the Plan on the later of January 1st or July 1st after completion of one year of service and attaining the age of 21. The employee may elect to contribute up to 15% of their compensation before taxes. Based upon profits, as determined by the Bank, a contribution may be made by the Bank. Employees are 100% vested in the Bank’s contribution to the plan after five years of service. Employee contributions and vested Bank contributions may be withdrawn only on termination of employment, retire- ment, or death. Under the Employee Incentive Compensation Plan, the Bank is authorized at its discretion, pursuant to the provisions of the plan, to establish on an annual basis, a bonus fund, which will be distributed to certain employees, based on their performance. The Employee Incentive Compensation Plan does not become effective unless the Bank exceeds established income levels. Contributions to the target benefit plan for the years ended December 31, 2001 totaled $63,000. Contributions to the 401(k) plan for the years ended December 31, 2003 and 2002 totaled $180,000 and $204,000, respectively. No contributions to the 401K Plan were made in 2001. There were no contributions made to the incentive compensation plan for the years ended December 31, 2003 or 2002. Contributions made to the incentive compensation plan for the year ended December 31, 2001 was $143,000. 14. DIVIDENDS AND REGULATORY CAPITAL The Company’s stockholders are entitled to receive such dividends as are declared by the Board of Directors. The ability of the Company to pay dividends in the future is dependent upon its receipt of dividends from the Bank. The Bank’s ability to pay divi- dends is regulated by banking statutes. The timing and amount of dividends will depend on earnings, capital requirements and financial condition of the Company and the Bank as well as general economic conditions and other relevant factors affecting the Company and the Bank. Under the provisions of the National Bank Act the Bank may not, without prior approval of the Comptroller of the Currency, declare dividends in excess of the total of the current and past two year’s earnings less any dividends already paid from those earnings. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 36 14. DIVIDENDS AND REGULATORY CAPITAL (Continued) The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital ade- quacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific cap- ital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as cal- culated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also sub- ject to qualitative judgments by the regulators and components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain mini- mum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weight- ed assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2003, that the Company and Bank meet all capital adequacy requirements to which they are subject. The most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately or well capitalized the Bank 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 Bank’s category. The Company’s and Bank’s actual capital amounts and ratios are also presented in the table. (Amounts in thousands of dol- lars): dollars): Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions As of December 31, 2003 Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets) Company Bank Tier I Capital (to Risk Weighted Assets) Company Bank Tier I Capital (to Average Assets) Company Bank $32,072 $29,661 13.14% 12.19% >$19,531 >$19,460 >8.00% >8.00% N/A >$24,324 N/A >10.00% $26,607 $27,461 10.90% 11.29% >$9,765 >$9,730 >4.00% >4.00% N/A >$14,595 N/A >6.00% $26,607 $27,461 8.12% 8.43% >$13,113 >$13,032 >4.00% >4.00% N/A >$16,290 N/A >5.00% As of December 31, 2002 Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets) Company Bank Tier I Capital (to Risk Weighted Assets) Company Bank Tier I Capital (to Average Assets) Company Bank $24,360 $27,879 10.98% 12.61% >$17,744 >$17,690 >8.00% >8.00% N/A >$22,112 N/A >10.00% $22,302 $25,821 10.05% 11.68% >$8,873 >$8,845 >4.00% >4.00% N/A >$13,267 N/A >6.00% $22,302 $25,821 7.18% 8.35% >$12,429 >$12,377 >4.00% >4.00% N/A >$15,471 N/A >5.00% 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. PARENT COMPANY ONLY FINANCIAL STATEMENTS PARENT COMPANY ONLY BALANCE SHEETS (Amounts in thousands of dollars) Assets Cash Investment in First Bankers Trust Company Investment in FBIL Statutory Trust I Investment in FBIL Statutory Trust II Other assets Total assets Liabilities and stockholders’ equity Liabilities: Subordinated debentures Note payable Other Total liabilities Total stockholders’ equity TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY December 31, 2003 $ 2,118 28,988 160 155 399 $ 31,820 2002 $ 828 27,516 160 - 138 $ 28,642 $ 10,310 - 506 $ 10,816 $ 21,004 $ 5,155 4,500 399 $ 10,054 $ 18,588 $ 31,820 $ 28,642 PARENT COMPANY ONLY STATEMENTS OF INCOME (Amounts in thousands of dollars) Income: Dividends received from First Bankers Trust Company Dividends received from FBIL Statutory Trust I Dividends received from FBIL Statutory Trust II Interest Total income Expenses: Interest Salary and benefits Other Total expenses Income (loss) before income tax benefits and equity in undistributed earnings of subsidiaries Income tax (benefit) Income (loss) before equity in undistributed earnings of subsidiaries Equity in undistributed earnings of First Bankers Trust Company Net income 2003 $ 1,900 16 2 5 $ 1,923 $ 710 90 125 $ 925 Years Ended December 31, 2002 $ 2,125 16 - 16 $ 2,157 2001 $ - 16 - 99 $ 115 $ 705 51 128 $ 884 $ 547 22 134 $ 703 $ 998 (499) $ 1,273 (335) $ (588) (235) $ 1,497 $ 1,608 $ (353) 1,626 $ 3,123 1,634 $ 3,242 3,810 $ 3,457 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 38 15. PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued) PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS (Amounts in thousands of dollars) Cash flows from operating activities Net income Adjustments: Equity in undistributed earnings of subsidiaries Changes in assets and liabilities (Increase) decrease in other assets Increase (decrease) in other liabilities Net cash provided by (used in) operating activities Cash flows from investing activities Capital infusion, FBIL Statutory Trust II Cash flows from financing activities Proceeds from issuance of notes payable Principal payments on note payable Purchase of treasury stock Cash dividends paid on common stock Proceeds from issuance of subordinated debentures Net cash provided by (used in) financing activities Net increase (decrease) in cash Cash beginning Cash ending 16. INCOME TAX MATTERS 2003 Years Ended December 31, 2002 2001 $ 3,123 $ 3,242 $ 3,457 (1,626) (1,634) (3,810) (261) 87 $ 1,323 6 (98) $ 1,516 (45) (151) $ (247) $ (155) $ - $ - $ - (4,500) - (533) 5,155 $ 122 $ 1,290 828 $ 2,118 $ 6,000 (1,500) (7,429) (510) - $ (3,439) $ (1,923) 2,751 $ 828 $ - - - (464) - $ (464) $ (711) 3,462 $ 2,751 The components of income tax expense are as follows for the years ended December 31, 2003, 2002 and 2001 (Amounts in thousands of dollars): Current Deferred 2003 $ 1,244 (119) $ 1,125 Years Ended December 31 2002 $ 1,193 (64) $ 1,129 2001 $ 1,624 (118) $ 1,506 A reconciliation between income tax expense in the statements of income and the amount computed by applying the statuto- ry federal income tax rate to income before income taxes is as follows (Amounts in thousands of dollars): Federal income tax at statutory rate Changes from statutory rate resulting from: State tax, net of federal benefit Amortization of goodwill Tax exempt interest income, net State income tax refund, net of federal income tax benefit (Under) accrual of provision and other, net Income tax expense 2003 Amount % of Pretax Income 2002 Amount % of Pretax Income 2001 Amount $ 1,444 34.0 % $ 1,483 34.0 % $ 1,687 % of Pretax Income 34.0 % 112 - (281) 2.6 - ( 6.6) 114 - (314) 2.6 - (7.2) 116 45 (291) 2.3 .9 (5.9) (145) ( 3.4) (143) (3.3) - - (5) $ 1,125 (14) (0.1) 26.5 % $ 1,129 (0.3) (51) 25.8 % $ 1,506 (1.0) 30.3 % 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. INCOME TAX MATTERS (Continued) Net deferred tax assets consist of the following components as of December 31, 2003 and 2002 (Amounts in thousands of dollars): Deferred tax assets: Allowance for loan losses Accrued expenses Deferred tax liabilities: Premises, furniture and equipment Unrealized gains on securities available for sale, net Stock dividends Net deferred tax assets 2003 $ 905 144 $ 1,049 $ (139) (489) (115) $ (743) $ 306 2002 $ 894 140 $ 1,034 $ (278) (582) (80) $ (940) $ 94 Net deferred tax assets are included in other assets on the accompanying consolidated balance sheets. The net change in deferred income taxes is reflected in the financial statements as follows (Amounts in thousands of dol- lars): Provision for income taxes Statement of changes in stockholders equity, accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale, net 17. FAIR VALUE OF FINANCIAL INSTRUMENTS 2003 $ (119) Years Ended December 31, 2002 $ (64) 2001 $ (118) (93) $ (212) 328 $ 264 267 $ 149 FASB Statement No. 107 “Disclosures about Fair Value of Financial Instruments” requires disclosure of fair value informa- tion about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets, and in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented are not intended to represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash and due from banks and federal funds sold: The carrying amounts reported in the balance sheets for cash and due from banks and federal funds sold equal their fair values. Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans and loans held for sale: For variable loans fair values are equal to carrying values. The fair values for all other types of loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of loans held for sale is based on quoted market prices of simi- lar loans sold in the secondary market. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 40 17. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Accrued interest receivable and payable: The fair value of accrued interest receivable and payable is equal to its carrying value. Deposits: The fair values for demand and savings deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits. Short-term borrowings: The fair value of short-term borrowings is considered to equal carrying value due to the borrowings short-term nature. Federal Home Loan Bank advances and Company obligated mandatorily redeemable preferred securities: The fair value of Federal Home Loan Bank advances and fixed rate Company obligated mandatorily redeemable preferred securities is esti- mated using discounted cash flow analyses, using interest rates currently being offered for similar borrowings. The fair value of variable rate Company obligated mandatorily redeemable preferred securities equals their carrying value. Note payable: The fair value for the variable rate note payable is equal to its carrying value. Commitments to extend credit: The fair value of these commitments is not material. The carrying values and estimated fair values of the Company’s financial instruments as of December 31, 2003 and 2002 are as follows (Amounts in thousands of dollars): Financial assets: Cash and due from banks Securities held to maturity Securities available for sale Federal funds sold Loans Accrued interest receivable Financial liabilities: Non-interest-bearing demand deposits Interest-bearing demand deposits Savings deposits Time deposits Short-term borrowings Federal Home Loan Bank advances Note payable Company obligated mandatorily redeemable preferred securities of subsidiary trust holding soley subordinated debentures Accrued interest payable Carrying Value $ 15,010 7,231 46,351 13,500 222,261 1,364 $ 51,234 66,978 30,407 109,794 5,114 19,000 - 2003 2002 Fair Value Carrying Value Fair Value $ 15,010 7,528 46,351 13,500 222,852 1,364 $ 51,234 66,978 30,407 111,674 5,114 19,904 - $ 33,924 8,700 45,867 13,500 203,106 1,632 $ 43,978 72,824 29,267 112,101 4,200 19,000 4,500 $ 33,924 8,953 45,867 13,500 203,930 1,632 $ 43,978 72,824 29,267 114,133 4,200 20,347 4,500 10,000 834 11,014 834 5,000 1,002 5,625 1,002 41 FIRST BANKERS TRUST COMPANY, N.A. DIRECTORS & OFFICERS BOARD OF DIRECTORS – FIRST BANKERS TRUST COMPANY, N.A. William D. Daniels, Chairman Member Harborstone Group, LLC. Donald K. Gnuse President & Chief Executive Officer First Bankers Trustshares, Inc. Steven E. Siebers, Secretary Attorney Scholz, Loos, Palmer, Siebers, & Duesterhaus Carl Adams, Jr. President Illinois Ayers Oil Company Mark E. Freiburg Owner Freiburg Insurance Agency & Freiburg Development Merri E. Ash Trust Officer Director of Marketing Trust Patricia A. Brink Vice President Cashier Sherry A. Bryson Assistant Vice President Branch Manager Timothy W. Corrigan Assistant Director Information Services Kjersti L. Cory Trust Officer Daron D. Duke Vice President Business / Ag Lending Jane A. Fischer Vice President Sales Development Thomas J. Frese Manager - Internal Audit Donald K. Gnuse Chairman of the Board Arthur E. Greenbank President Chief Executive Officer Marcia L. Hardin Assistant Vice President Business Lending Brian A. Ippensen Vice President General Manager Trust Arthur E. Greenbank President & Chief Executive Officer First Bankers Trust Company, N.A. Merle Tieken President Gem City Electric Phyllis J. Hofmeister Secretary/Treasurer Hofmeister Farms OFFICERS Peggy J. Junk Vice President Residential Lending James M. Keller Consumer Lending Officer Julie E. Kenning Trust Operations Officer Lois J. Knapp Branch Manager Joe J. Leenerts Executive Vice President Chief Operating and Financial Officer David J. McCaughey Assistant Vice President Manager - Fixed Asset / Security Gretchen A. McGee Vice President Retail Banking Manager Kathleen D. McNay Vice President Human Resources Janiece M. Neiswender Branch Manager James R. Obert Vice President Business Lending Dianna S. Orr Branch Manager Pamela K. Pfanner Deposit Account Officer Manager - Deposit Accounting Dennis R. Williams Chairman of the Board Quincy Newspapers, Inc. Marvin E. Rabe Vice President Business / Ag Lending David J. Rakers Senior Vice President Manager - Business Lending Douglas R. Reed Vice President Business Lending Linda D. Reinold Customer Service Officer Hugh R. Roderick Assistant Vice President Manager - Consumer Lending Norman E. Rosson Senior Vice President Trust Officer Jeanette L. Schinderling Branch Manager Kimberly A. Serbin Trust Officer Linda J. Shultz Trust Officer Deborah J. Staff Trust Officer Lansing M. Tomlinson Senior Vice President Manager - Residential Lending Linda K. Tossick Assistant Controller Brent R. Voth Vice President Information Services First Bankers Trustshares, Inc. P.O. Box 3566 Quincy, Illinois 62305-3566 Phone: 217-228-8000 Internet: http://www.firstbankers.com E-Mail: fbti@firstbankers.com An Equal Opportunity Employer 

Continue reading text version or see original annual report in PDF format above