First Bankers Trustshares, Inc.
Annual Report 2004

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Quincy, Illinois • 25th & Broadway Macomb Rushville Paloma Carthage Table of Contents Table of Contents Corporate Information ................................................................Page 3 Letters To Shareholders ..............................................................Page 4 Selected Financial Data ..............................................................Pages 5 - 6 Company Profile ..........................................................................Pages 7 - 18 Management’s Report ..................................................................Page 19 Management's Discussion and Analysis of Financial Condition and Results of Operations ..........................................................Pages 20 - 25 Independent Auditor's Report ....................................................Page 26 Consolidated Financial Statements: Balance Sheets ..............................................................................Page 27 Statements of Income ..................................................................Page 28 Statements of Changes in Stockholders’ Equity ....................................................................Page 29 Statements of Cash Flows ............................................................Pages 30 - 31 Notes to Consolidated Financial Statements ....................................................................Pages 32 - 51 First Bankers Trust Company, N.A. Directors and Officers ................................................................Page 52 First Bankers Trust Services, Inc. Directors and Officers ..................................................................Page 53 2 Corporate Information Corporate Information Letter To Shareholders Letter To Shareholders Corporate Description First Bankers Trustshares, Inc. (FBTI) is a bank holding company for First Bankers Trust Company, N.A., FBIL Statutory Trust I, FBIL Statutory Trust II, FBIL Statutory Trust III, and First Bankers Trust Services, Inc.. 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 comprehensive financial products and services to its retail, institutional, and corporate customers in the Tri-State area of West Central Illinois, Northeastern Missouri, and Southeastern Iowa. As a community oriented financial institution, the Bank, which traces its beginnings to 1946, operates five banking facilities located in Quincy, Illinois, one facility in Mendon, Illinois, one facility in Paloma, Illinois in northern Adams County, one facility in Macomb, Illinois in McDonough County, one facility in Carthage, Illinois in Hancock County, one facility in Rushville, Illinois in Schuyler County, and facilities located in Chicago, Illinois, Philadelphia, Pennsylvania and Phoenix, Arizona that provide trust services. FBIL Statutory Trust I, FBIL Statutory Trust II, and FBIL Statutory Trust III were capitalized in September 2000 and 2003 and August 2004, respectively, for the purpose of issuing Company Obligated Mandatorily Redeemable Preferred Securities. Carl Adams, Jr. President, Illinois Ayers Oil Company 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. 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, 2004 245 * Inquiries regarding transfer requirements, lost certificates, changes of address and account status should be directed to the corporation’s transfer agent: 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 201 N. Harrison St., Suite 300 Davenport, IA 52801 General Counsel Hinshaw and Culbertson 222 N. LaSalle, Suite 300 Chicago, IL 60601-1081 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. EXECUTIVE OFFICERS 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 12/31/04 $ 24.10 $ 21.03 $ 24.00 09/30/04 $ 22.00 $ 19.05 $ 21.45 06/30/04 $ 21.00 $ 17.00 $ 19.00 03/31/04 $ 18.00 $ 15.40 $ 18.00 12/31/03 $ 15.80 $ 15.00 $ 15.40 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 William D. Daniels, Chairman Donald K. Gnuse, President and Chief Executive Officer Dear Shareholder: 2004 proved to be a banner year for First Bankers Trustshares, Inc. Both our bank, First Bankers Trust Company, N.A., and our trust company, First Bankers Trust Services, Inc., turned in solid earnings performances for shareholders. Those performances resulted in a rise in net earnings per share of $1.59 compared to $1.52 for the year 2003. Strategically, the acquisition of five offices of Union Bank in West Central Illinois represented a major step in our goal of increasing market share of customers and bank assets in our trade area. Your company now offers more wholly-owned banking offices to citizens in West Central Illinois than any other bank. This action should, over time, substantially increase the number of households that use the financial services of the First Bankers family. While acquiring new offices in Carthage, Macomb, Paloma, Rushville, and Quincy was important, we also acquired some very talented and dedicated employees, who represent a major asset that is not recorded on our balance sheet. This talent and dedication stood out during the integration and conversions of financial data to our banking system. We wish to thank our Quincy and Mendon staff, who gave up weekends, postponed vacations, and worked incredibly long hours to make this conversion a success. They met deadlines, identified and resolved problems, and made certain that the proper systems were tested and in place to provide the service to many new customers. Now that the “boot camp”, on-site training phase of acquisition conversions is history, the bank is ready and very capable of handling the next acquisition that comes down the road. As if completing a major acquisition was not enough, during 2004 our company also transformed itself from a traditional bank with a trust department into becoming an untraditional bank and selling its trust department to a newly chartered trust company, First Bankers Trust Services, Inc. This has enabled a separate management team to devote 100% of its time to management and strategic planning for a dynamic company, focused primarily on Employee Benefit Plans. The new trust company was capitalized with $3,500,000 of capital from its shareholder, First Bankers Trustshares, Inc. with a separate Board of Directors. The development of a trust “niche” that was started some fifteen years ago, has grown from one office in Quincy with fifty million dollars in assets under management and administration, to a one billion three hundred million dollar operation with sales offices in Chicago, Phoenix, Philadelphia, and Quincy. During 2005 your company will be arming its staff in each of its service that we are offering to business clients is called “Express Business Banking”, an excellent cash management service allowing small and large business clients to enjoy greater functionality without jeopardizing security. We will continue to offer the latest internet banking products to our customers keeping in step with changes in technology. It has been said that any banking enterprise worth its salt, is one that serves its community through high performance service, provides its employees with stable employment and career growth opportunities, while also returning a fair reward to its stockholders. We have already addressed our customer service and appreciation to our staff members. Now lets focus on you as shareholders. Nowhere is the success of First Bankers Trustshares, Inc. more evident than in its investment return to shareholders. The focus of this company from its formation has been on performance-based strategies. Eleven consecutive years of increased cash dividends to you, our shareholder, confirms that the company is sharing this prosperity with you each year. The balance of the retained earnings has helped make it possible to acquire additional banking offices and acquire and retain a talented and dedicated staff. The market- makers perception as indicated in our fourth quarter report, has boosted our market value some 55% from the previous year. This is especially gratifying to our Board of Directors who are committed to enhancing shareholder value. We have benefited from the ongoing counsel and wisdom of our Board of Directors throughout the history of our company. As we move through 2005 we continue to be excited about future prospects and opportunities to profitably grow our franchise. This will be accomplished through internal growth as well as seeking that growth through additional acquisitions and merger of equals. A special thanks to you, our shareholders, for continuing your investment and faith in First Bankers Trustshares, Inc. William D. Daniels Chairman 3 4 offices with additional financial services to offer both its faithful customers of many years and recently-welcomed customers. A new Donald K. Gnuse President/CEO Selected Financial Data Selected Financial Data S E LE CTE D FINAN C IAL DA TA (Amount in thousands of dollars, except per share data statistics) Selected Financial Data Selected Financial Data 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 Junior subordinated debentures 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, 2004 2003 2002 2001 2000 1999 $ 3,264 $ 3,123 $ 3,242 $ 3,457 $ 3,007 $ 2,710 $ - $ - $ - $ - $ - $ - $ 615 $ 533 $ 510 $ 464 361 $ 309 12.01% 11.40% 1.11% 1.14% 16.43% 17.23% 18.84% .94% 15.03% 17.07% .97% 16.31% 13.42% 1.15% 16.40% 15.73% 1.06% 17.81% $ 1.59 $ 1.52 $ 1.49 $ 1.34 $ 1.17 $ 1.05 $ .30 $ .26 $ .22 $ .18 $ .14 $ .12 $ 11.15 $ 9.86 $ 8.61 $ 8.66 $ 7.51 $ 6.49 $ 24.10 $ 17.00 $ 16.50 $ 20.00 $ 19.00 $ 13.75 $ 15.40 $ 14.00 $ 14.00 $ 14.00 $ 13.13 $ 11.50 $ 24.00 $ 15.40 $ 14.75 $ 14.25 $ 19.00 $ 13.13 16.2 15.1 10.1 9.9 12.5 2.53 2.02 1.56 1.71 2.15 10.6 1.65 2,048,574 2,048,574 2,175,059 2,579,230 2,579,230 2,579,230 $ 407,367 $ 315,670 $ 311,920 $ 310,668 $ 298,497 $ 258,503 71,897 72,680 83,942 417 74 663 176,455 156,439 268,192 244,362 199,477 340,555 53,582 54,567 453 1,175 221,808 201,931 258,413 258,170 76,062 2,178 189,531 256,609 20,762 4,000 15,465 24,114 - - 23,200 4,500 - 23,473 - - 26,828 - - 38,436 2,780 - - - $ 22,835 $ 20,206 $ 17,636 $ 22,324 $ 19,357 $ 16,737 10,000 5,000 5,000 5,000 5.61% 8.54% 11.82% 6.52% 6.40% 10.90% 13.14% 8.12% 5.65% 10.05% 10.98% 7.18% 6.48% 7.19% 13.06% 12.31% 14.03% 13.25% 8.68% 8.84% 6.47% 9.43% 10.53% 6.45% 1 Return on common stockholders’(cid:31) equity is calculated by dividing net income by average common stockholders’(cid:31) equity. Common stockholders’(cid:31) equity is defined as equity plus or minus accumulated other comprehensive income or (loss). 2 Previous year per share data has been adjusted to reflect the two-for-one stock split effective June 30, 2000. 3 Book value per share is calculated by dividing stockholders’ equity, excluding accumulated other comprehensive income or (loss), by outstanding shares. 4 Stockholders’ equity does not include accumulated other comprehensive income or (loss). 5 Return On Average Assets Return On Average Common Equity 1.14% 1.11% 1.15% 1.06% 0.97% 0.94% 17.23% 17.81% 16.43% 16.40% 16.31% 15.03% 18.00% 17.00% 16.00% 15.00% 14.00% 13.00% 1999 2000 2001 2002 2003 2004 1999 2000 2001 2002 2003 2004 Earnings Per Share Price/Earnings Multiples 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 $1.49 $1.52 $1.59 $1.34 $1.17 $1.05 1999 2000 2001 2002 2003 2004 Market Price To Book Value 3.0X 2.5X 2.0X 1.5X 1.0X 0.5X 0.0X 2.53X 2.02X 2.15X 1.65X 1.71X 1.56X 1999 2000 2001 2002 2003 2004 16.2 X 12.5 X 15.1 X 10.6 X 9.9 X 10.1 X 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 1999 2000 2001 2002 2003 2004 Loan/Deposit Growth Loans Deposits $244 $176 $199 $156 $257 $258 $258 $202 $222 $190 $341 $268 1999 2000 2001 2002 2003 2004 $350 $300 $250 $200 $150 $100 $50 $0 6 First Bankers Trustshares, Inc. – Corporate Structure First Bankers Trustshares, Inc. – Corporate Structure First Bankers Trustshares, Inc. – Corporate Structure First Bankers Trustshares, Inc. – Corporate Structure First Bankers Trustshares, Inc. is the holding company for First Bankers Trust Company, N.A. and First Bankers Trust Services, Inc. The Company was incorporated on August 25, 1988 and is headquartered in Quincy, Illinois. First Bankers Trustshares, Inc. is a publicly held company whose common stock is traded over-the-counter. Though the Company's stock is not listed on the major stock exchanges, a price quote for the Company's common stock can be received by using the symbol FBTT.PK when using most stock quote services. The next several pages divulge some of First Bankers Trustshares strategic growth and select product offerings that contribute to the overall growth and success of First Bankers Trustshares, Inc. The primary business of the Company is that of a community-oriented financial institution offering a variety of financial 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. Since First Bankers Trust Company's founding in 1946, the bank has always focused on meeting our customers' changing financial needs. First Bankers Trust Company serves the communities of Carthage, Macomb, Mendon, Paloma, Quincy and Rushville, Illinois and the surrounding areas with traditional banking products such as checking, savings, certificate of deposits, IRAs and various types of personal and business loans. Internet Banking allows customers to manage their accounts any where any time and Online Bill Payment services allow customers to pay bills electronically through the use of a personal computer. The next several pages of our annual report review some of the strategic growth, products and services offered by First Bankers Trustshares' subsidiaries that contribute to the overall success of the company. The products and services offered by its subsidiaries play a vital role in the success of First Bankers Trustshares, Inc. The following pages offer detail of specific products within each subsidiary. In addition to current products, First Bankers Trustshares, Inc. prides itself on its many innovative products and services recently introduced, as discussed in the next several pages. Checking Accounts First Bankers Trust Company has checking accounts for a variety of individual needs. Whether our customers need an account for everyday transactions or need an account to keep their funds liquid while it gains interest, First Bankers Trust Company offers a wealth of choices for checking account needs. Savings Accounts We have savings accounts for your first baby or your first retirement deposit. Our savings accounts offer the right type of savings plan for all different stages in life or financial positions. Mortgage Loans At First Bankers Trust Company, our Mortgage Lenders are ready to make your dreams of a new home come true. Whether you are looking for a new home or refinancing your first home, we will find the loan option that will best fit your needs. Not sure about the process of buying a home? Contact us and let our lenders review your purchasing power. Use the equity in your home to finance that fantasy vacation or to pay for your child's college education. Certificates of Deposit In times of financial investment uncertainty, certificates of deposit (cd's) offer peace of mind in knowing what your rate of return is going to be. As they are always backed by the bank and FDIC insured, Certificates of Deposit are a no risk, fixed rate alternative to other investing options. Consumer Loans Available for vehicles, boats, home improvements, vacations, or any other reason you may need money. First Bankers Trust Company offers: Competitive Interest Rates, Liberal down payment requirements, Flexible collateral requirements, Prompt approval and Professional service from experienced lenders. Commercial Loans Getting financing for your business is important. Finding the right financing can be the difference between a temporary solution and long term success. First Bankers Trust Company offers different types of financing for your business. Our financing includes competitive rates and terms and courteous, professional service. Whether you need to finance a new business, raise capital for an expansion, or manage your cash flow, we invite you to talk with one of our experienced lending officers. All lending decisions are made locally, by people familiar with you and your business. Internet Banking & Online Bill Payment With Internet Banking, you can: View Account Balances, View actual statements, View account history, Transfer funds between accounts, Pay bills electronically, Reorder checks, and download information directly into Microsoft Money or Quicken. First Bankers Trust Company's internet banking is real- time so you see transaction immediately. Our online bill payment offers a faster and cheaper way to pay your bills all through the convenience of the internet! 7 8 First Bankers Trustshares, Inc. – Corporate Structure First Bankers Trustshares, Inc. – Corporate Structure First Bankers Trustshares, Inc. – Corporate Structure First Bankers Trustshares, Inc. – Corporate Structure In 1946, a group of Quincy businessmen decided to establish a new bank on Quincy s North side. This new bank s mission was to provide quality banking services to residents in the area. By 1953, the bank was doing well and received trust powers to broaden its commitment of service. Like most trust departments, it provided traditional trust services for estate settlement and trust established by a will or other agreements. In 1989, the bank saw an opportunity to expand its trust services by serving as trustee for Employee Stock Ownership Plans. In that year and several years to follow, the mutual savings institutions were converting to stock based banks and thrifts. As part of those conversions, ESOP s were established to provide the institution s employees with ownership in the new organization. In 1993, the trust department managed over $50 million in personal trust and employee benefit assets. On July 1, 2004, the trust department became a separate company, First Bankers Trust Services, Inc. This new company is owned by First Bankers Trustshares, Inc., the parent company of the bank, First Bankers Trust Company, N.A. Today, using our past experiences and with an eye toward the future, we have grown the trust services to over $1.2 billion in assets under management by expanding our personal trust, IRA, and employee benefit account administration. We now offer to our clients more options, including 401(k) investment platforms, and deferred compensation trust arrangements that are tailored to your needs. successful investment returns, high quality personalized service, and assurance of permanent management of your assets. First Bankers Trust Services provides quality service to our clients by: Investing assets according to your financial objective, Distributing income and/or principal to the beneficiaries, Preparing statements of your account and paying monthly bills, We can serve you in a variety of ways depending on your financial needs. You decide how much control you want to retain. First Bankers Trust Services can serve as Sole Trustee, Co-Trustee, Investment Manager and Successor Trustee. IRA's Our Self Directed IRA Program allows you to choose the IRA Investment that best suits your financial retirement plan. You may choose from not only a wide range of First Bankers Trust Services Certificate of Deposit product offerings, but can select stocks, bonds, mutual funds, and other investment instruments that match your retirement planning goals. As Custodian, our experienced staff will help you decide which IRA meets your retirement planning goals. Compliance with all government regulations for IRA s is of utmost importance. Our qualified staff of professionals has an in-depth knowledge of all applicable Internal Revenue Service laws and regulations. Employee Benefits 401 (k) - A 401(k) Plan, named after section 401(k) of the Internal Revenue Code, is a qualified defined contribution plan that permits employees of qualifying companies to set aside tax-deferred funds each pay period. The 401(k) Plan is very flexible and is the most popular choice of employees. First Bankers Trust Services has made the commitment to provide clients with the 401(k) plan that best meets the needs of the company. We have access to over 700 mutual funds and the ability to hold company stock. Our flexibility enables us to effectively service your start-up or your multi- million dollar 401(k) Plan. Clients can rely on our up-to- date knowledge and experience for practical advice on retirement plan issues. We can serve you in a variety of ways depending on the needs of your company. ESOP - An Employee Owned Stock Ownership Plan (ESOP) is a qualified, defined contribution employee benefit plan that is required to invest primarily in employer securities with the investments growing tax-free. An ESOP allows employees to share in the ownership of the company and rewards them with retirement benefits that are tied directly to company performance, which can lead to profitability through higher employee morale and productivity. We s er ve as ESOP trustee nationwide and pride ourselves on the quality of client service that we provide. We can serve you in a variety of ways depending on the needs of the company. The company decides on how First Bankers Trust Services can serve such as: Directed Trustee, Independent Trustee or Custodian. Nonqualified Plans -A nonqualified plan is generally an agreement by an employer to compensate certain employees or directors, at some future date, for services performed currently. They also permit more design flexibility to fit each company s needs and do not have to meet the many requirements that must be met under qualified plans, which are governed under ERISA. We can serve you in a variety of ways, depending on your plan design and the needs of your company as well as provide access to a variety of investment vehicles Private Trust A trust is a legal arrangement that you create, with assistance from your attorney, to allow a trustee to hold and manage the property you place in the trust. A trust, simply stated, is a set of instructions that may be enacted during and/or after your lifetime, and like a will, disperse assets at the time of your death. A trust is a private document and is not subject to the constraints of probate. A trust offers management of your assets and offers privacy for the disposition of your assets. First Bankers Trust s efforts are indeed focused on 9 10 First Bankers Trustshares, Inc. – Strategic Growth First Bankers Trustshares, Inc. – Strategic Growth First Bankers Trustshares, Inc. – Strategic Growth First Bankers Trustshares, Inc. – Strategic Growth Strategic Growth First Bankers Trustshares, Inc. continually seeks out profitable opportunities to expand its banking operations for consumers and businesses through planned and controlled growth. After nearly two years of due diligence and analysis, First Bankers Trustshares, Inc., through it's First Bankers Trust Company subsidiary, acquired certain assets of Union Bank - West Region on September 10, 2004. With the acquisition, First Bankers Trust Company acquired a new location in Quincy, Illinois at 2442 Broadway giving it a stronger geographic presence of six total locations. In addition, First Bankers Trust Company acquired locations in Paloma, Carthage, Rushville and Macomb, Illinois. At the time of the acquisition,First Bankers Trust Company's assets under management went from approximately $300 million to $400 million. “We’re excited about returning to Macomb” said Don Gnuse,“this is home to us.” First Bankers Trust Company targeted the transaction with Union Bank for the growth opportunities offered in Macomb and the surrounding area. 5 In 2004, First Bankers Trust Company acquired new locations and was welcomed by new communities, offering them more financial solutions to their banking and financial needs. 4 Today, First Bankers Trust Company’s strategic growth has developed current locations to serve our midwest customers. 11 CARTHAGE CARTHAGE MACOMB MACOMB “Macomb is a solid city with a great university, strongly supported by both an agri-business base and a strong business climate,” said Gnuse. “The transaction is the result of a strategic assessment completed during the last two years by First Bankers’ Board of Directors, (which) regularly evaluates potential acquisition candidates as part of our ongoing search that will both enhance earnings performance and leverage the effectiveness of our existing banking franchise,” said Gnuse. First Bankers Trustshares received a warm welcome into the new communities of its banking operations and looks forward to each of the new facilities' future contributions. Carthage Rushville RUSHVILLE RUSHVILLE MENDON MENDON PALOMA PALGMA QUINCY QUINCY Macomb Paloma 11 12 First Bankers Trustshares, Inc. – Strategic Growth First Bankers Trustshares, Inc. – Strategic Growth First Bankers Trustshares, Inc. – Strategic Growth First Bankers Trustshares, Inc. – Strategic Growth Strategic Growth Brian Ippensen Vice President, Chief Financial Officer First Bankers Trust Services, Inc. As we reported in the 2003 Annual Report to Shareholders, First Bankers Trustshares, Inc. announced its intention to have the trust department of First Bankers Trust Company become a wholly owned stand-alone subsidiary of First Bankers Trustshares, Inc. On July 1, 2004, the Bank completed the task and handed the reigns over to the holding company's newest entity, First Bankers Trust Services, Inc. as the provider of trust services. The establishment of a separate company has been very exciting for our staff and well received by our clients and professional partners. On behalf of the Board of Directors, management and the staff, we would like to take this opportunity to thank all of customers for their dedication and commitment. The creation of a new entity provided many interesting challenges. A multitude of decisions, from the selection of Board members to stationary, needed to be considered and concluded. Any difficulties we encountered, though, were tempered by the past 58 years of providing trust services to our clients. The selection of the name, First Bankers Trust Services, Inc. and the adoption of using the familiar "diamond and one" logo, were deemed important to maintain the well respected name of First Bankers and simultaneously identifying trust services. As to be expected, the new entity incurred a number of expenses for its establishment. While we have completed many of those tasks in 2004, a few items remain in 2005 which have been appropriately incorporated into the 2005 plan. Unexpectedly, though, we saw a dramatic increase of employee benefit inquiries and fee revenue from new clients as 2004 came to a close. The rules and complexities of employee benefit plans are ever changing, and the election of 2004 brought forth comments of an ownership society by both parties. As this report goes to press, Washington DC is debating changes to social security and the need of individuals to plan for financial independence. FBTS, Inc. is well positioned to serve in those capacities. More than ever, we are encouraged and excited by the prospects and opportunities that trust services will play as an integral part of serving our customers in assisting them in accomplishing their financial goals. First Bankers Trust Services associated state. First Bankers Trust Services offices. 13 14 First Bankers Trust Company – Internet Banking First Bankers Trust Company – Internet Banking First Bankers Trust Company – Internet Banking First Bankers Trust Company – Internet Banking Speeding along the Internet Highway of the future Internet Banking is no longer a new concept, yet the challenge facing financial institutions today is keeping abreast of changes in the technology available to consumers. First Bankerst Trust Company has offered internet banking since 2002. From the first log-in to our secure site, we have have constantly maintained a level of evolving quality and service to offer our customers the latest in technology. In 2004, First Bankers Trust Company maintained the driving role in internet banking for our customers by offering an improved version of Express Internet Banking. Our new Express Internet Banking offers an impressive advantage to our customers in it's very user friendly interface. Today, Express Internet Banking customers can check account balances, immediately transfer funds between accounts, schedule reoccuring transfers, schedule a future transfer for a certain date, view and print past statements in .pdf format, view electronic versions of current and past month's statements, see items for the current or previous business day, schedule a stop payment, find a check or specific transaction, view the front and back of a check that has been written and export all transactions from the current or past month's statement to Microsoft Money, Quicken, Quick Books or in Comma Separated File that can be used to pull the information into everyday programs like Microsoft Excel. Another big advantage of our new Express Internet Banking is that all the information is REAL-TIME. With traditional internet banking systems, you may have to wait a business day or two to see transactions on your account. The new Express Internet Banking from First Bankers Trust Company shows you transactions on your account as they happen - so you get an immediate, REAL-TIME view of the activities! If you were to use our ATM, for example, you could see the transaction on Express Internet Banking as soon as the ATM completes the transaction. This is also very beneficial as you can see debits and deposits presented to your account for the business day. All of this information is available to you with the new Express Internet Banking. Simply log in to our secure internet banking web portal via our website at www.firstbankers.com to have complete access to your account! Internet Banking will most likely evolve even more in the future. First Bankers Trust Company embraces the ever evoloving changes so that we can continue to offer our customers the latest in internet baning technology. Pay 10 bills in 15 seconds. Yeah, it’s amazing! In the third quarter of 2004, First Bankers Trust Company launched a new online bill payment system - Express Bill Payment. Express Bill Payment offers the latest in online bill payment technology. The new product is very customer friendly and easy to navigate. It offers a wealth of features that a wide array of demographics appreciates. Breaking the mold... Technology has offered us great strides in our lifestyles. It seems to constantly make things easier for us, or perhaps speed things up for us. In the world of bill payment, traditional systems offer customers convenience at a cost. This cost, traditionally, has been the loss of float when in comes to writing a check. Traditional bill payment systems would require a customer to schedule a payment approximately five days in advance of the required payment date. In addition, traditional bill payment systems would immediately deduct the required funds to pay the scheduled bill. If the customer was writing a check, those funds would not be taken out until the check cleared. So why technology made it easier for the customer, it was at the cost of the laxed time of deduction some customers needed to depend on. With First Bankers Trust Company's Express Bill Payment, the customer needs to schedule the payment five days in advance at first, however, as the customer continues to use the bill payment function, funds are eventually wired to the payee (if accepted by the payee) rather than delivering an actual check. In addition, with Express Bill Payment, funds are deducted from the customers account on the day the bill is scheduled to be paid. This way, the customer continues to have the "float", continues to earn interest on the funds (if they possess an interest bearing account), and no longer has to give up their money today just to pay a bill in the future. Express Bill Pay is just that...EXPRESS! There are several payments that customers make each month whether it be a phone bill, utility bill, car payment, etc. Express Bill Payment offers the ability to pay 10 bills (or more) in as little as 15 seconds or less. Once you have your payments recipients in the system, you can make several payments just by entering in the dollar amount for each. With one click, you can pay several bills at once. Also, with it being electronic, you can have full history of all the payments you've made by date, payee, etc., all within a click of your mouse! Convenient Convenient Fast Safe Fast Safe Accurate Accurate Secure Secure 15 16 First Bankers Trust Company – Express Business Banking First Bankers Trust Company – Express Business Banking First Bankers Trust Company – Agriculture First Bankers Trust Company – Agriculture You can focus on your business with Express Business Banking A high yield of products for a diverse customer base Express Business Banking is an excellent cash management tool for current business customers as well as prospects. With access to the Internet a business customer can do everything from reviewing account balances to transferring funds, from requesting stop payments to reviewing corporate cash handling. Sophisticated and flexible funds management capabilities allow employees to make controlled disbursements, transfers including: ACH and internal transfers, domestic and foreign wire transfers, and payments such as tax and loan payments. Corporate clients enjoy greater functionality without jeopardizing security and can establish controls at either the client level or at the bank. A review function also allows employees to access and approve transfers based on permission controls in the specifications. An increasing number of business customers are finding this product to be very beneficial to them. Security is extremely important when it comes to your financial matters. Complete privacy, controlled through encryption and passwords, ensures only authorized access to your accounts. general activities: Summarizing Account Information, Performing Fund Management Activities, Performing File Management Activities, Setting up New Employees and Reviewing Fund and File Transfers. Our browser-based Express Business Banking product is designed for five For Summarizing Account Information, a client can view a list of all applicable accounts at our financial institution by clicking on the "Accounts" drop-down menu. From the account list, a specific account can be selected to view account detail and to perform research functions. For File Management Activities, a client can review assigned file transfer templates, issue file transfers and inquire into file transfers that have already been issued. For Administration Activities, a client can, but are not limited to, add new employees, designate employee account access and establish fund transfer templates. For Reviewing Fund and File Transfers, an assigned corporate administrator can review issued fund and file transfers before they even reach the bank. For Fund Management Activities, a client can review assigned fund transfer templates, issue fund transfers and inquire into fund transfers that have already been issued. You can also select transactions, sort transactions and export transactions to personal financial management applications (such as Microsoft Money or Intuit's Quicken). with Express Business Banking. First Bankers Trust Company now offers a wealth of new options for farmers and country home residents. Our farmers have different needs when it comes to financing. Cash flow can be a major concern as well as options available for real-estate. First Bankers Trust Company helps our friends in the farming and country home community through new financing options to include Country Home Mortgages, Agriculture Overlines, Leases and Farm Real Estate Mortgages. Below is a brief explanation of each that should strongly contribute to First Bankers Trustshares overall profitability in the new markets acquired by First Bankers Trust Company. Country Home Mortgages - Whether a country home sits on 1 acre or 100 acres, or if it hasn t been built yet, we offer flexible country home mortgages to fit the property. Financing is available with 15, 20 and 30 year fixed rates for qualifying rural residents and hobby farms. Now our customers' home and land can all be under one loan! Agriculture Overlines - Long term fixed loans for new farming ventures or expansions. Customers can apply for the financing they need and know what their payments will be for the life of the loan. Leases - If a customer is looking to improve cash flow, realize large tax benefits or fulfill a special need, our lease program offers him the resources to meet his individual needs. All types of agricultural equipment including specialty equipment, vehicles, trucks and trailers can be leased. Our customer benefits from flexible lease structures that offer 100% financing, a savings on his working capital and increased flexibility. Farm Real Estate Mortgages - We offer competitive rates with 10, 15 and 20 year long term fixed rates. Variable rate financing is also available. First Bankers Trust Company pledges prompt decision making and answers to customer loan questions and applications by experienced Ag Loan Specialists. While First Bankers Trustshares, Inc. has greatly benefited by offering Agriculture related products and services in the past through First Bankers Trust Company, the new options for our Agriculture customers open up new avenues to better fit their individual needs. 17 18 Management’s Report Management’s Report Management’s Discussion and Analysis of Financial Condition and the Result of Operations Management’s Discussion and Analysis of Financial Condition and the Result of Operations To The Stockholders: Management of First Bankers Trustshares, Inc. has prepared and is responsible for the integrity and consistency of the financial statements and other related information contained in this Annual Report. In the opinion of Management, the financial statements, which necessarily include amounts based on Management estimates and judgements, have been prepared in conformity with accounting principles generally accepted in the United States of America and appropriate to the circumstances. 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 conformity with accounting principles generally accepted in the United States of America. Internal controls and procedures are augmented by written policies covering standards of personal and business conduct and an organization 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 systems 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 statements. 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. 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. provides an analysis of the consolidated financial statements included in this annual report and focuses upon those factors which had a significant influence on the overall 2004 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 community-oriented financial institution offering a variety of financial 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 consisting 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. Donald K. Gnuse President and Chief Executive Officer Joe J. Leenerts Senior Vice President/Treasurer and Chief Financial Officer 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(cid:213) Equity Deposits Short-term borrowings Federal Home Loan Bank advances Note payable JuniorSubordinated Debentures Company obligated manditorily redeemable preferred securities Other liabilities Stockholders’ equity Total Liabilities & Stockholders(cid:213) Equity 2004 Change 2003 Change 2002 2001 2000 1999 5 Year Growth Rate $ 8,661 (9.65)% $ 9,586 (14.79) % $ 11,250 $ 8,631 $ 7,555 $ 6,964 24.37 % 15,915 193.42 981 1,522.32 22,674 54,567 76,062 71,897 72,680 15.50 83,942 56.66 9,500 18,700 13,425 (27.75) 9,700 (28.15) 13,500 74 795.95 663 46.36 187,219 174,504 154,520 71.78 265,428 20.90 9,261 9,359 146.37 23,058 69.79 $ 407,367 29.05% $ 315,670 1.20 % $ 311,920 $ 310,668 $ 298,497 $ 258,503 57.59 % 5,424 (76.08) 53,582 (1.81) 13,500 - 453 (61.45) 219,545 9.98 13,580 48.77 17,228 16,163 199,626 9,128 2,178 9,850 1,175 417 $ 340,555 31.79% 1,762 (65.55) $ 258,413 .09 % $ 258,170 $ 256,609 $ 244,362 $ 199,477 70.72 % 4,200 10,473 17,828 26,436 (93.33) 5,114 21.76 19,000 - 4,000 100.00 19,000 - - (100.00) 19,000 13,000 4,500 15,465 100.00 - - - 9,000 12,000 58.33 - 2,780 43.88 - - 100.00 - - - (100.00) 3,279 53.30 23,306 10.96 10,000 100.00 2,139 (13.12) 21,004 13.00 5,000 5,000 - - 2,462 2,851 2,972 2,538 29.20 18,588 22,735 19,335 15,272 52.61 5,000 $ 407,367 29.05 % $ 315,670 1.20 % $ 311,920 $ 310,668 $ 298,497 $ 258,503 57.59 % 19 20 Management’s Discussion and Analysis of Financial Condition and the Result of Operations Management’s Discussion and Analysis of Financial Condition and the Result of Operations Management’s Discussion and Analysis of Financial Condition and the Result of Operations Management’s Discussion and Analysis of Financial Condition and the Result of Operations At December 31, 2004, the Company had assets of $407,367,000 compared to $315,670,000 at December 31, 2003. The acquisition of five banks from Union Bank – Streator is the primary factor in the growth of cash and due from banks (63.73%), securities (56.66%), loans (20.90%), and deposits (31.79%). In addition, the Company issued $5,000,000 of Junior Subordinated Debentures in order to capitalize First Bankers Trust Services, Inc. Demand for the Bank’s lending products, including commercial lines of credit, residential real estate, and consumer loans have traditionally been moderately strong. Commercial (24.45%), consumer (4.10%), residential real estate (12.78%) and tax exempt (10.38%) lending experienced growth during 2004. Approximately $11,615,000 of fixed rate long-term residential real estate loans were sold in the secondary market during 2004 while $10,768,000 was sold in 2003. Agricultural real estate loans totaling $1,032,000 were sold in the secondary market during 2004, while $1,414,000 was sold in 2003. In addition, under the Company’s student loan program, approximately $374,000 in student loans were sold to Sallie Mae during 2004 compared to $341,000 sold in 2003. 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 maintaining 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 balances 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 compensation and benefits, occupancy and equipment expenses, amortization and general and administrative expenses. Prevailing economic conditions as well as federal regulations 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 investments and the level of personal income and savings within the institution’s market. In addition, growth of deposit balances is influenced by the perceptions of customers regarding the stability of the financial services industry. Lending activities are influenced by the demand for housing, competition from other lending institutions, as well as lower interest 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, 2004, the Company reported consolidated net income of $3,264,000, a $141,000 (4.51%) increase from 2003. Net interest income for the periods being compared increased $1,368,000 or 14.17%. Other income increased $1,231,000 (30.07%) and other expenses increased $2,113,000 (25.71%) over 2003 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 $325,314,000 for the year ended December 31, 2004. A combination of interest bearing and non-interest bearing deposits, long term debt, federal funds purchased, securities sold under agreement to repurchase, other borrowings and capital funds are employed to finance these assets. 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 2004 Change 2003 Change 2002 2001 2000 1999 $ 17,525 8.27% $ 16,187 (9.02)% $ 17,792 $ 20,255 $ 19,839 $ 16,414 (7,750 ) (10,967) (11,059) (8,204) (6,530) (15.74) (6,500) (0.46) $ 9,657 (3.83)% $ 10,042 $ 9,288 $ 8,780 $ 8,210 $ 11,025 14.17 (660) (240) (240) (1,285) 29.80 (1,165) (9.34) (990) 4,094 18.70 (8,218) 1.08 (7.51) % $ 9,052 $ 8,628 $ 8,540 $ 7,970 $ 9,860 17.77% $ 8,372 3,897 2,700 2,552 5,325 30.07 (10,331) 25.71 (7,562) (6,951) (6,474) $ 4,854 14.27% $ 4,248 (2.81)% $ 4,371 $ 4,963 $ 4,289 $ 4,048 (1,590) 41.33 (1,506) (1,282) (1,338) (3.67)% $ 3,242 $ 3,457 $ 3,007 $ 2,710 $ 3,264 4.51% $ 3,123 (1,125) (.35) 3,449 (1,129) (8,130) 5 Year Growth Rate 6.77 % (20.77)% 34.29 % 385.42 23.71 % 108.66 59.58 19.91 % 18.83 20.44% For the Years Ended December 31, (Amounts in thousands of dollars) 2003 $ 15,186 1,001 (6,530) 2002 $ 17,270 522 (7,750 ) 2004 $ 16,962 563 (6,500) $ 11,025 $ 9,657 $ 10,042 $ 325,314 $ 303,538 $ 289,637 3.39% 3.18% 3.47% 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 2004 was 5.39% while the average cost of funds for the same period was 2.41% on average interest bearing liabilities of $269,867,000. 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 increase in the net interest of $1,368,000 can be attributed to the $21,796,000 growth in average earning assets. The corresponding growth of $18,022,000 of interest bearing liabilities is offset by an 18 basis point drop in the cost of funds. Provision for Loan Losses The allowance for loan losses as a percentage of net loans outstanding is 1.03% at December 31, 2004, compared to 1.02% at December 31, 2003. Net loan charge-offs totaled $1,105,000 for the year ended December 31, 2004 compared to $1,327,000 in 2003. The amounts recorded in the provision for loan losses are allowance for loan losses is adequate to provide for determined from management’s quarterly evaluation of the possible losses in the portfolio at December 31, 2004. quality of the loan portfolio. In this review, such factors as the volume and character of the loan portfolio, general Other Income economic conditions and past loan loss experience are Other income may be divided into two broad categories - considered. Management believes that the allowance for loan recurring and non-recurring. Trust fees and service losses is adequate to provide for possible losses in the charges on deposit accounts are the major sources of portfolio at December 31, 2004. recurring other income. Investment securities gains and other income vary annually. Other income for the period ended December 31, 2004 was $5,325,000, an increase of 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, 2004 was $5,325,000, an increase of $1,231,000 (30.07%) from 2003. Trust Department income accounts for $788,000 (64.01%) of the increase. Other Expense Other expenses for the period ended December 31, 2004 totaled $10,331,000, an increase of $2,113,000 (25.71%) from 2003 year end totals. Salaries and employee benefits expense aggregated 56.62% and 53.95% of total other expense for the year ended December 31, 2004 and 2003 respectively. 21 22 Management’s Discussion and Analysis of Financial Condition and the Result of Operations Management’s Discussion and Analysis of Financial Condition and the Result of Operations Management’s Discussion and Analysis of Financial Condition and the Result of Operations Management’s Discussion and Analysis of Financial Condition and the Result of Operations 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 consolidated basis with the Bank. See Note 17 to the consolidated 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 obligations on a timely basis. Bank liquidity must thus be considered 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 federal funds sold are a primary source of asset liquidity. On December 31, 2004, these categories totaled $40,519,000 or 9.95% of assets, compared to $34,656,000 or 10.98% the previous year. As of December 31, 2004, securities held to maturity included $286,000 of gross unrealized gains and $3,000 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 amortization of premium and accretion of discount. 2004 2003 2002 2001 2000 1999 $ 405 $ 189 $ 104 $ 148 $ 242 $ 147 - 113 204 206 41 169 $ 609 $ 394 $ 145 $ 317 $ 242 $ 260 980 201 58 429 489 258 $ 1,589 $ 596 $ 203 $ 746 $ 731 $ 518 $ 14 $ 9 $ 7 $ 16 $ 26 $ 10 - - - - - - $ 14 $ 9 $ .00 $ .00 $ 7 $ .00 $ 16 $ 26 $ 10 .00 $ .01 $ .00 Closely related to the management of liquidity is the management 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 mechanisms such that the net interest margin should maintain acceptable levels in 2004, regardless of the changes in interest rates that may occur. The following table shows the repricing period for interest-earning assets and interest-bearing liabilities and the related repricing gap (Amounts in thousands of dollars): p g g p ( ) 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, 2004 Repricing Period After one Year through Five years $ 189,852 81,321 Through One year $ 153,946 221,796 After Five years $ 40,610 15,466 $ (67,850) $ 108,531 $ 25,144 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 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 245 shareholders as of December 31, 2004, and is traded in a limited over-the- counter market. On December 31, 2004 the market price of the Company’s common stock was $24.00. Market price is based on stock transactions in the market. Cash dividends on common stock of $635,000 were declared by the Board of Directors of the Company for the year ended December 31, 2004. Closing Share Price Data $24.00 $19.00 $14.25 $14.75 $15.40 $25.00 $20.00 $15.00 $10.00 $13.13 $5.00 $0.00 1999 2000 2001 2002 2003 2004 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 enterprises by the effects of inflation. Some reasons for these disparate effects are a) premises and equipment for banks represent 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 interest income is how well a bank is positioned to cope with changing interest rates. Capital The ability to generate and maintain capital at adequate levels 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 11.82 percent of risk-weighted assets at December 31, 2004. In addition, a leverage ratio of at least 4.00 percent is to be maintained. At December 31, 2004, the Company’s leverage ratio was 6.52 percent. Risked Based Capital Ratios 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 13.25% 14.03% 13.14% 11.82% 10.53% 10.98% 1999 2000 2001 2002 2003 2004 23 24 Management’s Discussion and Analysis of Financial Condition and the Result of Operations Management’s Discussion and Analysis of Financial Condition and the Result of Operations Independent Auditor’s Report Independent Auditor’s Report Financial Report Upon written request of any shareholder of record on December 31, 2004, the Company will provide, without charge, a copy of its 2004 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 prepare 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 10, 2005 at 9:00 A.M. at the Stoney Creek Inn, 3809 Broadway, Quincy, Illinois. 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, 2004 and 2003, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years ended December 31, 2004, 2003 and 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 financial 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, 2004 and 2003, and the results of their operations and their cash flows for the years ended December 31, 2004, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America. Davenport, Iowa February 11, 2005 25 26 Financial Summary Financial Summary 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 4) Non-interest bearing Interest bearing Securities held to maturity (Note 5) Securities available for sale (Note 5) Federal funds sold Loans held for sale Loans (Note 6 and 10) Less allowance for loan losses Net loans Premises, furniture and equipment, net (Note 7) Accrued interest receivable Life insurance contracts Intangibles (Note 8) Other assets TOTAL ASSETS Liabilities and Stockholders(cid:213) Equity Liabilities: Deposits: Non-interest bearing demand Interest bearing demand Savings Time (Note 9) Total Deposits Securities sold under agreements to repurchase Federal Home Loan Bank advances (Note 10) Note payable (Note 11) Junior subordinated debentures (Note 12) Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely subordinated debentures (Note 12) Accrued interest payable Other liabilities TOTAL LIABILITIES Commitments and Contingencies (Note 13) Stockholders(cid:213) Equity (Note 15) 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(cid:213) EQUITY TOTAL LIABILITIES AND STOCKHOLDERS(cid:213) EQUITY December 31, 2004 2003 $ 8,661 15,915 $ 24,576 $ 6,910 77,032 9,700 663 268,192 (2,764) $ 265,428 $ 7,409 1,739 4,617 4,640 4,653 $ 407,367 $ 9,586 5,424 $ 15,010 $ 7,231 46,351 13,500 453 221,808 (2,263) $ 219,545 $ 3,727 1,364 4,402 569 3,518 $ 315,670 $ 62,199 86,466 40,772 151,118 $ 340,555 1,762 19,000 4,000 15,465 $ 51,234 66,978 30,407 109,794 $ 258,413 5,114 19,000 - - - 1,072 2,207 $ 384,061 10,000 834 1,305 $ 294,666 - - 2,580 2,251 25,433 471 (7,429) $ 23,306 2,580 2,251 22,804 798 (7,429) $ 21,004 $ 407,367 $ 315,670 See notes to consolidated financial statements 27 Financial Summary 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 Securities sold under agreements to repurchase Federal Home Loan Bank advances Note payable Junior subordinated debentures Company obligated mandatorily redeemable preferred securities Total interest expense Net interest income 2004 Years Ended December 31, 2003 2002 $ 14,655 196 $ 13,651 171 $ 13,897 198 1,624 695 180 76 99 $ 17,525 1,270 737 130 132 96 $ 16,187 2,460 822 146 188 81 $ 17,792 $ 933 3,737 $ 4,670 98 811 62 859 - $ 6,500 $ 11,025 $ 887 3,955 $ 4,842 83 912 102 $ 1,440 4,609 $ 6,049 158 854 159 591 $ 6,530 $ 9,657 530 $ 7,750 $ 10,042 Provision for loan losses (Note 6) Net interest income after provision for loan Losses $ 1,165 $ 1,285 $ 990 $ 9,860 $ 8,372 $ 9,052 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 Other Total other expenses Income before income taxes Income taxes (Note 17) Net income Earnings per share of common stock, basic and diluted $ 2,459 1,259 151 92 1,364 $ 5,325 $ 5,849 621 723 504 360 2,274 $ 10,331 $ 4,854 1,590 3,264 $ 1.59 $ 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 See notes to consolidated financial statements 28 Financial Summary Financial Summary 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, 2004, 2003 and 2002 Balance, December 31, 2001 Comprehensive income: Net income Other comprehensive income, net of tax, (Note 3) 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 3) Comprehensive income Dividends declared on common stock (amount per share $.27) Balance, December 31, 2003 Comprehensive income: Net income Other comprehensive (loss), net of tax, (Note 3) Comprehensive income Dividends declared on common stock (amount per share $.31) Balance, December 31, 2004 Preferred Stock $ - Common Stock $ 2,580 Additional Paid In Capital $ 2,251 Retained Earnings $ 17,493 Accumulated Other Comprehensive Income $ 411 Treasury Stock $ - Comprehensive Income Total $ 22,735 - - - 3,242 - - 3,242 3,242 - - - - 541 - - 541 $ 3,783 541 - $ - - $ 2,580 - $ 2,251 (501) $ 20,234 - $ 952 - $ (7,429) (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 - - - 3,264 - - 3,264 3,264 - - - - (327 ) - (327) $ 2,937 (327) - $ - - $ 2,580 - $ 2,251 (635) $ 25,433 - $ 471 - $ (7,429) (635) $ 23,306 See notes to consolidated financial statements 29 Financial Summary 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 Depreciation Amortization of intangibles 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) decrease in accrued interest receivable and other assets (Decrease) in accrued interest payable and other liabilities Net cash provided by operating activities 2004 $ 3,264 Years Ended December 31, 2003 $ 3,123 2002 $ 3,242 1,165 710 97 1,285 662 6 990 748 5 445 (92) (13,231) 13,172 (151) 53 1,069 (192) (11,801) 12,677 (154) (119) 445 (85) (12,974) 14,112 (135) (64) (363) 195 738 820 $ 5,889 (343) $ 6,408 (380) $ 6,642 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 Capital infusion, FBIL Statutory Trust III Cash effect of Union acquisition Net cash provided by (used in) investing activities $ (71,162) 4,592 35,329 (7,598) 3,800 (1,424) - (215) (155) 41,527 $ 4,694 $ (81,079) 5,345 75,595 (21,495) - (307) (4,000) (402) - - $ (26,343) $ (4,626) 7,998 18,632 (13,696) (4,000) (734) - - - - $ 3,574 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 securities sold under agreement to repurchase Proceeds from Federal Home Loan Bank advances Repayments of Federal Home Loan Bank advances Proceeds from junior subordinated debentures 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 $ (6,205) 4,000 - - (615) $ 243 - (4,500) - (533) $ 1,561 6,000 (1,500) (7,429) (510) (3,352) 8,000 (8,000) 5,155 914 - - - - $ (1,017) $ 9,566 4,897 $ 1,021 $ (18,914) (6,273) 6,000 - - - $ (2,151) $ 8,065 $ 15,010 $ 24,576 $ 33,924 $ 15,010 $ 25,859 $ 33,924 (continued) 30 Financial Summary Financial Summary 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, unrealized gains (losses) on securities available for sale, net Transfer of loans to other real estate owned Assets and (liabilities) received in conjunction with acquisition (Note 2): Cash and due from banks Loans, net Premises, furniture, and equipment, net Accrued interest receivable Intangibles Other assets Deposits Accrued interest payable Other liabilities Less cash acquired Net cash provided Years Ended December 31, 2004 $ 6,262 $ 1,167 2003 $ 6,698 $ 1,090 2002 $ 8,182 $ 1,433 $ (327) $ 245 $ (154) $ 291 $ 541 $ 299 $ 675 39,695 2,968 219 4,168 70 (88,347) (244) (56) $ (40,852) (675) $ (41,527) $ - - - - - - - - - $ - - $ - $ - - - - - - - - - $ - - $ - See notes to consolidated financial statements Notes to Consolidated Financial Statements 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 which owns 100% of the outstanding common stock of, First Bankers Trust Company, N.A. (Bank), First Bankers Trust Services, Inc., FBIL Statutory Trust I (Trust I), FBIL Statutory Trust II (Trust II), and FBIL Statutory Trust III (Trust III). The Bank is engaged in banking and bank related services and serves a market area consisting primarily of Adams, McDonough, Schuyler, Hancock 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. Trusts I, II, and III were capitalized for the purpose of issuing company obligated mandatory redeemable preferred securities. 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 As of and for the year ended December 31, 2004, the accompanying consolidated financial statements include the accounts of First Bankers Trustshares, Inc. and its wholly-owned subsidiaries, except Trusts I, II, and III, which under current accounting rules, no longer meet the criteria for consolidation. See further discussion in “Current Accounting Developments” section of this note. For prior periods presented, the accompanying consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. 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, including cash items in process of clearing. Cash flows from federal funds sold, loans to customers, deposits, and securities sold under agreements to repurchase are reported net. Trust Company Assets Trust assets, other than cash deposits held by the Bank, are not assets of the Trust Company and, accordingly are not included in these consolidated financial statements. Securities Securities held to maturity are those for which the Company 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 component of equity. Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of 31 32 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. 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, 2004 or 2003. 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. 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 management, 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 economic fluctuations. Collateral varies but may include accounts receivable, inventory, property, equipment and income-producing commercial properties. It is the Bank’s policy to file financing statements and mortgages covering collateral pledged. As of December 31, 2004 and 2003, the Bank had loan concentrations in agribusiness of 9.85% and 7.07%, hotel and motel industry of 3.05% and 3.76% and senior housing industry of 2.67% and 2.91%, 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, 2004 and 2003. 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 commitments to extend loans based on evaluations of the collectibility and prior loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, loan concentrations, specific 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 student 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, 2004 and 2003, loans held for sale consist of residential real estate loans. 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. 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, 2004, 2003, and 2002. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax 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 enterprises 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, but earlier adoption is permitted. The Company early adopted FIN 46 and FIN 46R on a prospective basis as of January 1, 2004 which resulted in the Company no longer consolidating its wholly-owned subsidiaries, FBIL Statutory Trust I and FBIL Statutory Trust II, and not consolidating from inception date FBIL Statutory Trust III and recording them on the equity method. The Interpretation and the revision had no material effect on the Company’s consolidated financial statements. The 2004 balance sheet includes $10,310,000 of junior subordinated debentures which, for prior periods presented, are classified in the balance 33 34 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACOUNTING POLICIES (Continued) 3. COMPREHENSIVE INCOME sheet as $10,000,000 of Company Obligated Mandatorily Redeemable Preferred Securities, after a consolidation elimination of $310,000. Additionally, the 2004 income statement includes interest expense on junior subordinated debentures which for the prior period presented, the year ended December 31, 2003, is classified as interest expense on Company Obligated Mandatorily Redeemable Preferred Securities, after a consolidation elimination. On September 30, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) Issue No. 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1,“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”, which provides guidance for determining the meaning of “other-than-temporarily impaired” and its application to certain debt and equity securities within the scope of SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities”, and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value to or beyond the cost of the investment which might mean maturity. Management continues to closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect the Company. 2. ACQUISITION On September 7, 2004, the Company entered into a purchase and assumption agreement with Union Bank to acquire branch banking offices located in various cities in Illinois, primarily in the Macomb area, and related deposit liabilities, loans, and other assets associated with the business of those branches. In total the Company purchased five community banking offices. The acquisition included the purchase of fully functioning business units, with the necessary management, relationship officer, support staff, and other infrastructure for the acquired loans and deposits to be fully serviced. Total consideration was approximately 5.2% of acquired deposits, less agreed upon reductions. The premium was approximately $4.2 million and resulted in approximately $2.7 million in goodwill, $1.2 million in a core deposit intangible and other various insignificant intangible assets. See Note 8 for a discussion of the Company’s accounting policies with regards to goodwill and core deposit intangible assets. 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 (loss) is comprised as follows (Amounts in thousands of dollars): Year ended December 31, 2004 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 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 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 4. RESTRICTIONS ON CASH AND DUE FROM BANKS Before tax Tax expense (benefit) Net of tax $ (436) $ (166) $ (270) 92 $ (528) 35 $ (201) 57 $ (327) $ (55) $ 20 $ (35) 192 $ (247) 73 $ (93) 119 $ (154) $ 954 $ 360 $ 594 85 $ 869 32 $ 328 53 $ 541 The Bank is required to maintain a reserve balance with the Federal Reserve Bank of St. Louis. The total of the reserve balance was approximately $419,000 and $327,000 at December 31, 2004 and 2003, respectively. 35 36 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 5. SECURITIES 5. SECURITIES (Continued) The amortized cost and fair values of securities held to maturity as of December 31, 2004 and 2003 are as follows (Amounts in thousands of dollars): Fair value and unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2004 are summarized as follows: U.S. Government agencies and corporations State and political subdivisions U.S. Government agencies and corporations State and political subdivisions Amortized Cost $ 30 6,880 $ 6,910 Amortized Cost $ 111 7,120 $ 7,231 2004 2003 Gross Unrealized Gains $ - 286 $ 286 Gross Unrealized Gains $ 4 294 $ 298 Gross Unrealized (Losses) $ - (3) $ (3) Gross Unrealized (Losses) $ - (1) $ (1) Fair Value $ 30 7,163 $ 7,193 Fair Value $ 115 7,413 $ 7,528 The amortized cost and fair values of securities available for sale as of December 31, 2004 and 2003 are as follows (Amounts in thousands of dollars): ( ) U.S. Government agencies and corporations State and political subdivisions Collateralized mortgage obligations Other U.S. Government agencies and corporations State and political subdivisions Corporate securities Collateralized mortgage obligations Amortized Cost $ 63,125 9,989 3,144 15 $ 76,273 Amortized Cost $ 34,108 8,014 435 2,507 $ 45,064 2004 2003 Gross Unrealized Gains $ 476 473 2 - $ 951 Gross Unrealized Gains $ 790 505 15 - $ 1,310 Gross Unrealized (Losses) $ (171) (4) (17) - $ (192) Gross Unrealized (Losses) $ (7) - - (16) $ (23) Fair Value $ 63,430 10,458 3,129 15 $ 77,032 Fair Value $ 34,891 8,519 450 2,491 $ 46,351 37 Securities held to maturity: State and political subdivisions Securities available for sale: U.S. Government agencies and Corporations State and political subdivisions Collateralized mortgage obligations Less than 12 months Unrealized Losses Fair Value 12 months or more Fair Value Unrealized Losses Total Fair Value Unrealized Losses $ 724 $ (3) $ - $ - $ 724 $ (3) $ - $ - $ 28,827 - - 454 1,993 $ 165 $ (2) $ 31,274 $ (190) $ 165 $ (2) $ (171) (4) (15) $ 28,827 454 2,158 $ 31,439 $ (192) $ (171) (4) (17) All securities which had unrealized losses as of December 31, 2003 had been in the unrealized loss position for less than 12 months. Those securities are summarized as followed: 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) $ 1,928 2,334 $ 4,262 $ (23) $ (16) (7) 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, 2004 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the mortgages underlying the collateralized 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 Collateralized mortgage obligations Amortized Cost $ 1,773 1,379 1,626 2,132 $ 6,910 Amortized Cost $ 4,310 52,103 10,882 5,834 $ 73,129 3,144 $ 76,273 Fair Value $ 1,778 1,430 1,705 2,280 $ 7,193 Fair Value $ 4,470 52,114 11,185 6,134 $ 73,903 3,129 $ 77,032 38 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 5. SECURITIES (Continued) 6. LOANS (Continued) Information on sales of securities available for sale during the years ended December 31, 2004, 2003 and 2002 follows (Amounts in thousands of dollars): Proceeds from sales Gross gains Gross losses 2004 $ 4,592 $ 92 $ - 2003 $ 5,345 $ 192 $ - 2002 $ 7,998 $ 104 $ 19 In the ordinary course of business, the Bank has loans with directors, principal officers, their immediate families and affiliated 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 present other unfavorable features. An analysis of the changes in the aggregate amount of these loans during 2004 and 2003 is as follows (Amounts in thousands of dollars): As of December 31, 2004 and 2003 securities with a carrying value of approximately $59,741,000 and $47,390,000 respectively, were pledged to collateralize deposits and securities sold under agreements to repurchase and for other purposes as required or permitted by law. 6. LOANS Balance, beginning of year Advances Repayments Change in related parties Balance, end of year 2004 $ 3,366 4,054 (3,511) (30) $ 3,879 2003 $ 2,639 4,060 (3,333) - $ 3,366 The composition of net loans outstanding as of December 31, 2004 and 2003 are as follows (Amounts in thousands of dollars): 7. PREMISES, FURNITURE AND EQUIPMENT Commercial Agricultural Tax exempt Real estate, mortgage Consumer Other Less: Allowance for loan losses Net loans 2004 $ 143,398 26,420 4,677 45,933 47,211 553 $ 268,192 2003 $ 115,229 15,680 4,237 40,727 45,353 582 $ 221,808 (2,764) $ 265,428 (2,263) $ 219,545 The cost, accumulated depreciation and net book value of premises, furniture and equipment as of December 31, 2004 and 2003 is summarized as follows (Amounts in thousands of dollars): Land Building and improvements Furniture and equipment Less accumulated depreciation 2004 $ 1,823 5,593 5,692 $ 13,108 (5,699) $ 7,409 2003 $ 942 3,635 4,565 $ 9,142 (5,415) $ 3,727 Nonaccrual and impaired loans were not material at December 31, 2004 and 2003. Loans past due 90 days or more and still accruing interest were $980,000 and $201,000 at December 31, 2004 and 2003, respectively. 8. INTANGIBLES Activity in the allowance for loan losses during the years ended December 31, 2004, 2003 and 2002 is summarized below (Amounts in thousands of dollars): Balance, beginning of year Allowance acquired in acquisition (Note 2) Provision for loan losses Loan charge-offs Recoveries of loans charged off Balance, end of year 2004 $ 2,263 441 1,165 (1,175) 70 $ 2,764 2003 $ 2,305 - 1,285 (1,370) 43 $ 2,263 2002 $ 2,312 - 990 (1,045) 48 $ 2,305 Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of these loans totaled $82,499,000 and $76,449,000 at December 31, 2004 and 2003, respectively. On January 1, 2002, the Company implemented Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Under the provisions of SFAS 142, goodwill is no longer subject to amortization over its estimated useful life, but instead will be subject to at least annual assessments for impairment by applying a fair value based test. SFAS 142 also requires that an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer’s intent to do so. The Company performs tests for impairment on an annual basis and has determined no impairment exists. 39 40 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 8. INTANGIBLES (Continued) 10. FEDERAL HOME LOAN BANK ADVANCES Goodwill and intangible asset disclosures are as follows (in thousands of dollars): Federal Home Loan Bank (FHLB) advances are summarized as follows at December 31, 2004 and 2003: As of December 31, 2004 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization $ 1,223 481 $ 1,704 $ 62 52 $ 114 $ - 252 $ 252 $ - 17 $ (cid:0) 17 $ 97 $ 6 Maturity in year ending December 31: 2004 2005 2006 2008 2004 2003 Weighted Average Interest Rate - 2.53% 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 Amortized intangible assets: Core deposit intangible Other intangibles Total Amortized intangible assets Aggregate amortization expense: For the year ended December 31, 2004 Estimated amortization expense: For the year ended: 2005 2006 2007 2008 2009 Thereafter Goodwill: 9. TIME DEPOSITS $ 243 243 243 243 216 402 $ 3,050 $ 334 The aggregate amount of time deposits, each with a minimum denomination of $100,000, was approximately $38,967,000 and $27,420,000 at December 31, 2004 and 2003, respectively. At December 31, 2004, the scheduled maturities of time deposits are as follows (Amounts in thousands of dollars): 2005 2006 2007 2008 2009 2010 $ 85,144 45,434 13,199 4,274 3,066 1 $ 151,118 First mortgage loans of approximately $31,046,000 and $31,317,000 as of December 31, 2004 and 2003, respectively, are pledged as collateral on FHLB advances. 11. NOTE PAYABLE At December 31, 2004, the Company has a note payable with a balance of $ 4,000,000 due to a Bank with quarterly payments at LIBOR plus 125 basis points (3.81% at December 31, 2004), which is due June 30, 2007. Principal is payable in 2 installments of $333,000 each, beginning June 30, 2005, and annually thereafter, plus a final payment equal to all unpaid principal and interest at maturity. The note is secured by 170,000 shares of common stock of the Bank. 12. JUNIOR SUBORDINATED DEBENTURES AND COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBENTURES Junior subordinated debentures are due to FBIL Statutory Trusts I, II, and III, which are all 100% owned non-consolidated subsidiaries of the Company. The debentures were issued in 2000, 2003, and 2004, respectively, in conjunction with each Trusts’ issuance of 5,000 shares of Company Obligated Mandatorily Redeemable Preferred Securities. The debentures all bear the same interest rate and terms as the preferred securities, detailed following. The debentures are included on the consolidated balance sheets as liabilities; however, in accordance with Federal Reserve Board regulations in effect at December 31, 2004, the Company is allowed, for regulatory purposes, to include $7,612,000 of the capital securities issued by the Trust in Tier I capital, with the remainder included in Tier II capital. In March 2005, the Federal Reserve Board issued final regulations, which become effective March 31, 2009. If those regulations had been in effect at December 31, 2004, the Company would have been allowed to include approximately $6,208,000 of the securities in Tier I capital and the remainder in Tier II capital. The Company would exceed all regulatory minimum capital ratios if the regulations that are to take effect were in place as of December 31, 2004. During 2004 FBIL Statutory Trust III issued 5,000 shares of Company Obligated Mandatorily Redeemable (COMR) Preferred Securities. Distributions are paid quarterly. Cumulative cash distributions are calculated at a variable annual rate that is 265 basis points above the 3 month LIBOR rate (5.21% as December 31, 2004). The Trust may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond September 15, 2034. At the end of the deferral period, all accumulated and unpaid distributions will be paid. The capital securities will be redeemed on September 15, 2034; however, the Trust has the option to shorten the maturity date to a date not earlier than September 15, 2009 at par plus any accrued and unpaid distributions to the date of the redemption. The redemption may be in whole or in part, but in all cases in a principal amount with integral multiples of $1,000. If a special event occurs prior to September 15, 2009, providing the Trust 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 15, 2005 declining by approximately 30 basis points each quarter until September 15, 2008 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 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. 41 42 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 12. JUNIOR SUBORDINATED DEBENTURES AND COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBENTURES (Continued) 13. COMMITMENTS AND CONTINGENCIES (Continued) Cumulative cash distributions are calculated at a variable annual rate that is 295 basis points above the 3 month LIBOR rate (5.51% and 4.11% as of December 31,2004 and 2003, respectively). 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 interest 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. Holders of the capital securities have no voting rights, are unsecured and rank junior in priority of payment to all of the Trust’s indebtedness and senior to the Trust’s capital stock. 13. 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 financing 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 consolidated 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, 2004 and 2003 is as follows (Amounts in thousands of dollars): Unused lines of credit Standby letters of credit 2004 $ 38,115 1,104 2003 $ 35,684 1,863 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 management’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, 2004 and 2003 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 $663,000 and $453,000 at December 31, 2004 and 2003, respectively. These amounts are included in loans held for sale at the respective balance sheet dates. 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 $6,098,000, $6,061,000, and $13,039,000 respectively as of December 31, 2004. In the opinion of management, no material risk of loss exists due to the financial condition of the institutions. 14. BENEFITS The Bank’s retirement plan, which covered substantially all full time employees (working over 20 hours per week) after completion 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 participate 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, retirement, 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 401(k) plan for the years ended December 31, 2004, 2003 and 2002 totaled $197,000, $180,000 and $204,000, respectively. Contributions made to the incentive compensation plan for the year ended December 31, 2004 were $200,000. There were no contributions to the incentive compensation plan for years ended December 31, 2003 or 2002. 43 44 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 15. DIVIDENDS AND REGULATORY CAPITAL 15. DIVIDENDS AND REGULATORY CAPITAL (continued) 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 dividends 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. 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 adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject 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 minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk- weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2004, 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 dollars): ) Actual For Capital Adequacy Purposes To Be Well Capitalized Under Prompt Corrective Action Provisions As of December 31, 2004 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 $36,308 $33,953 11.82% 11.15% >$24,583 >$24,351 >8.00% >8.00% N/A >$30,439 N/A >10.00% $26,236 $31,189 8.54% 10.25% >$12,291 >$12,176 >4.00% >4.00% N/A >$18,263 N/A >6.00% $26,236 $31,189 6.52% 7.89% >$16,084 >$15,815 >4.00% >4.00% N/A >$19,768 N/A >5.00% 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% 45 46 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 16. PARENT COMPANY ONLY FINANCIAL STATEMENTS 16. PARENT COMPANY ONLY FINANCIAL STATEMENTS (Continued) PARENT COMPANY ONLY BALANCE SHEETS (Amounts in thousands of dollars) 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 operating activities Cash flows from investing activities Capital infusion, First Bankers Trust Company Capital infusion, First Bankers Trust Services Capital infusion, FBIL Statutory Trust III Net cash (used in) investing activities 2004 Years Ended December 31, 2003 2002 $ 3,264 $ 3,123 $ 3,242 (1,931) (1,626) 171 (107) $ 1,397 (261) 87 $ 1,323 (1,634) 6 - (98) $ 1,516 $ (6,000) (3,500) (155) $ (9,655) $ - - (155) $ (155) $ - - - $ - 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 $ 4,000 - - (615) 5,155 $ 8,540 $ 282 2,118 $ 2,400 $ - (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 Assets Cash Investment in First Bankers Trust Company Investment in FBIL Statutory Trust I Investment in FBIL Statutory Trust II Investment in FBIL Statutory Trust III Investment in First Bankers Trust Services Other assets Total assets Liabilities and stockholders(cid:213) equity Liabilities: Junior subordinated debentures Note payable Other Total liabilities Total stockholders(cid:213) equity TOTAL LIABILITIES AND STOCKHOLDER(cid:213)S EQUITY December 31, 2004 $ 2,400 36,252 155 155 155 3,840 233 $ 43,190 2003 $ 2,118 28,988 160 155 399 $ 31,820 $ 15,465 4,000 419 $ 19,884 $ 23,306 $ 10,310 - 506 $ 10,816 $ 21,004 $ 43,190 $ 31,820 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 Dividends received from FBIL Statutory Trust III 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 2004 $ 2,100 16 7 2 11 $ 2,136 $ 921 109 137 $ 1,167 Years Ended December 31, 2003 2002 $ 1,900 16 2 - 5 $ 1,923 $ 710 90 125 $ 925 $ 2,125 16 - - 16 $ 2,157 $ 705 51 128 $ 884 $ 969 (364) $ 998 (499) $ 1,273 (335) $ 1,333 $ 1,497 $ 1,608 1,931 $ 3,264 1,626 $ 3,123 1,634 $ 3,242 47 48 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 17. INCOME TAX MATTERS 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The components of income tax expense are as follows for the years ended December 31, 2004, 2003 and 2002 (Amounts in thousands of dollars): Current Deferred 2004 $ 1,537 53 $ 1,590 Years Ended December 31 2003 $ 1,244 (119) $ 1,125 2002 $ 1,193 (64) $ 1,129 A reconciliation between income tax expense in the statements of income and the amount computed by applying the statutory federal income tax rate to income before income taxes is as follows (Amounts in thousands of dollars): FASB Statement No. 107 “Disclosures about Fair Value of Financial Instruments” requires disclosure of fair value information 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. 2004 Amount % of Pretax Income 2003 Amount % of Pretax Income 2002 Amount $ 1,650 34.0 % $ 1,444 34.0 % $ 1,483 % of Pretax Income 34.0 % 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. Federal income tax at statutory rate Changes from statutory rate resulting from: State tax, net of federal benefit Tax exempt interest income, net Increase in cash surrender value Over (under) accrual of provision and other, net 154 (277) (73) 3.2 (5.7) (1.5) 112 (281) (137) 2.6 (6.6) (3.2) 114 (314) - 2.6 (7.2) - 136 2.8 (13) (0.3) (154) (3.6) Income tax expense $ 1,590 32.8 % $ 1,125 26.5 % $ 1,129 25.8 % Net deferred tax assets consist of the following components as of December 31, 2004 and 2003 (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 Prepaid expenses Net deferred tax assets 2004 $ 1,048 160 $ 1,208 $ (322) (288) (144) (67) $ (821) $ 387 2003 $ 905 144 $ 1,049 $ (139) (489) (115) (67) $ (810) $ 239 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 dollars): Provision for income taxes Statement of changes in stockholders(cid:213) equity, accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale, net 2004 $ 53 Years Ended December 31, 2003 $ (119) 2002 $ (64) (201) $ (148) (93) $ (212) 328 $ 264 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 similar loans sold in the secondary market. 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. Securities sold under agreements to repurchase: The fair value of securities sold under agreements to repurchase is considered to equal carrying value due to the borrowings short-term nature. Federal Home Loan Bank advances, Company obligated mandatorily redeemable preferred securities, and junior subordinated debentures: The fair value of Federal Home Loan Bank advances and fixed rate Company obligated mandatorily redeemable preferred securities/junior subordinated debentures is estimated 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/junior subordinated debentures 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. 49 50 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements First Bankers Trust Company, N.A. Directors & Officers First Bankers Trust Company, N.A. Directors & Officers 18. FAIR VALUE OF FINANCIAL INSTRUMENTS - Continued The carrying values and estimated fair values of the Company’s financial instruments as of December 31, 2004 and 2003 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 Securities sold under agreements to repurchase Federal Home Loan Bank advances Note payable Junior Subordinated Debentures Company obligated mandatorily redeemable preferred securities of subsidiary trust holding soley subordinated debentures Accrued interest payable Carrying Value $ 24,576 6,910 77,032 9,700 268,855 1,739 $ 62,199 86,466 40,772 151,118 1,762 19,000 4,000 15,465 2004 2003 Fair Value Carrying Value Fair Value $ 24,576 7,193 77,032 9,700 269,199 1,739 $ 62,199 86,466 40,772 151,495 1,762 19,296 4,000 16,040 $ 15,010 7,231 46,351 13,500 222,261 1,364 $ 51,234 66,978 30,407 109,794 5,114 19,000 - - $ 15,010 7,528 46,351 13,500 222,852 1,364 $ 51,234 66,978 30,407 111,674 5,114 19,904 - - - 1,072 - 1,072 10,000 834 11,014 834 BOARD OF DIRECTORS – FIRST BANKERS TRUST COMPANY, N.A. William D. Daniels Member Harborstone Group, LLC. Carl Adams, Jr. President Illinois Ayers Oil Company Phyllis J. Hofmeister Secretary/Treasurer Robert Hofmeister, Inc. Donald K. Gnuse President & Chief Executive Officer First Bankers Trustshares, Inc. Arthur E. Greenbank President Chief Executive Officer Joe J. Leenerts Executive Vice President Chief Operating and Financial Officer Katie J. Bloom Mortgage Lending Officer Macomb Patricia A. Brink Vice President Cashier Sherry A. Bryson Assistant Vice President Branch Manager – Mendon/Paloma Timothy W. Corrigan Assistant Director Information Services Daron D. Duke Vice President Business / Ag Lending Susan A. Dunseth Vice President Operations Macomb Susan Farlow Branch Manager 25th & Broadway / 34th & Broadway Jane A. Fischer Vice President Direct Sales Christy L. Foster Consumer Lending Officer/Collector Macomb Thomas J. Frese Controller Joshua J. Hamm Commercial Lending Officer Macomb Marcia L. Hardin Assistant Vice President Business / Ag Lending Merle Tieken President Gem City Electric Dennis R. Williams Chairman of the Board Quincy Newspapers, Inc. Steven E. Siebers, Secretary Attorney Scholz, Loos, Palmer, Siebers, & Duesterhaus OFFICERS Dennis R. Iversen Senior Vice President Business Development - Macomb Peggy J. Junk Vice President Residential Mortgage Lending James M. Keller Consumer Lending Officer Lois J. Knapp Branch Manager 24th & State David J. McCaughey Assistant Vice President Fixed Asset Manager / Security Gretchen A. McGee Senior Vice President Retail Banking Manager Kathleen D. McNay Vice President Human Resources James E. Moore Branch Manager Rushville Brenda Naylor Branch Manager Macomb James R. Obert Vice President Business Lending Dianna S. Orr Branch Manager 24th & Kochs Lane Pamela K. Pfanner Assistant Vice President Deposit Accounting Manager Marvin E. Rabe Vice President Business / Ag Lending Mark E. Freiburg Owner Freiburg Insurance Agency & Freiburg Development President, Freiburg, Inc. Secretary, Freiburg Farm Corporation Arthur E. Greenbank President & Chief Executive Officer First Bankers Trust Company, N.A. David J. Rakers Senior Vice President Chief Lending Officer Douglas R. Reed Vice President Business Lending Linda D. Reinold Customer Services Officer Hugh R. Roderick Assistant Vice President Consumer Loan Dept. Manager James R. Schaller Vice President Business / Ag Lending Jeanette L. Schinderling Assistant Vice President Branch Manager 12th & Broadway Heather K. Taute Consumer Lending Officer Scott L. Thoele Vice President Compliance Officer Lansing M. Tomlinson Senior Vice President Residential Loan Dept. Manager Linda K. Tossick Assistant Controller Leslie Vermillion Branch Manager Carthage Brent R. Voth Vice President Operations Patricia J. Westerman Mortgage Lending Officer Joan M. Whitlow Assistant Vice President Residential/Consumer Lending - Rushville 51 52 First Bankers Trust Services, Inc., Directors & Officers First Bankers Trust Services, Inc., Directors & Officers BOARD OF DIRECTORS – FIRST BANKERS TRUST SERVICES, INC. Donald K. Gnuse President & Chief Executive Officer First Bankers Trust Services, Inc. Norman Rosson Vice President Steven E. Siebers Secretary Deborah J. Staff Personal Trust Officer Jay Martin Investment Trust Officer Linda Shultz Employees Benefits Trust Officer Kimberly Serbin Employee Benefits Trust Officer Kjersti Cory Employee Benefits Trust Officer Carl Adams, Jr President Illinois Ayers Oil Company Phyllis Hofmeister Secretary/Treasurer Robert Hofmeister, Inc. OFFICERS Julie Kenning Trust Operations Officer Diane McHatton IRA Administrator, Assistant Trust Officer Merri Ash Trust Officer William Ryan Trust Officer Brian Ippensen VP & CFO 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 53 Mendon Quincy, Illinois • 34th & Broadway Quincy, Illinois • 24th & Kochs Lane Quincy, Illinois • 24th & State Street Quincy, Illinois • 12th & Broadway

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