First Bankers Trustshares, Inc.
Annual Report 2006

Plain-text annual report

First Bankers Trustshares, Inc. 2006 Annual Report TABLE OF CONTENTS 2 Corporate Information Letter To Shareholders Selected Financial Data Management’s Report Page 3 Page 4 Pages 5 - 6 Page 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 8 - 13 Independent Auditor's Report Page 14 Consolidated Financial Statements: Balance Sheets Statements of Income Statements of Changes in Stockholders’ Equity Statements of Cash Flows Notes to Consolidated Financial Statements First Bankers Trustshares, Inc. First Bankers Trust Company, N.A. Directors and Officers First Bankers Trust Services, Inc. Directors and Officers Page 15 Page 16 Page 17 Pages 18 - 19 Pages 20 - 36 Pages 37 - 38 Page 39 CORPORATE INFORMATION 3 Corporate Description First Bankers Trustshares, Inc. (FBTI) is a bank holding company for First Bankers Trust Company, N.A., First Bankers Trust Services, Inc., FBIL Statutory Trust I, FBIL Statutory Trust II, and FBIL Statutory Trust III. 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. First Bankers Trust Company, N.A. is a community oriented financial institution, which traces its beginnings to 1946, operates 10 banking facilities in Adams, Hancock, McDonough, and Schuyler counties in west-central Illinois. First Bankers Trust Services, Inc. is a national provider of fiduciary services to individual retirement accounts, personal trusts, and employee benefit trusts. The Trust Company is headquartered in Quincy, IL and operates facilities in Chicago, IL, Phoenix, AZ, and Philadelphia, PA. 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. Member, Harborstone Group, LLC. Mark E. Freiburg Owner, Freiburg Insurance Agency and Freiburg Development Company, President, Freiburg, Inc. Donald K. Gnuse Chairman of the Board, First Bankers Trustshares, Inc. Chairman of the Board, First Bankers Trust Company, N.A. Chairman of the Board, First Bankers Trust Services, Inc. Arthur E. Greenbank President & Chief Executive Officer, First Bankers Trustshares, Inc. President & Chief Executive Officer, First Bankers Trust Company, N.A For additional financial information contact: Brian A. Ippensen, 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, 2006 229 * Inquiries regarding transfer requirements, lost certificates, changes of address and account status should be directed to the corporation's transfer agent: Illinois Stock Transfer, Inc. 209 West Jackson Blvd. Suite 903 Chicago, IL 60606-6905 Corporate Address First Bankers Trustshares, Inc. 1201 Broadway P.O. Box 3566 Quincy, IL 62305-3566 Independent Auditors McGladrey & Pullen, LLP 201 N. Harrison St., Suite 300 Davenport, IA 52801 General Counsel Jenkens & Gilchrist, P.C. 1445 Ross Avenue, Suite 3700 Dallas, TX 75202-2799 Phyllis J. Hofmeister Secretary, Robert Hofmeister Farm Steven E. Siebers Secretary of the Board, First Bankers Trustshares, Inc. Secretary of the Board, First Bankers Trust Company, N.A. Attorney, Scholz, Loos, Palmer, Siebers & Duesterhaus Dennis R. Williams Chairman of the Board, Quincy Newspapers, Inc. EXECUTIVE OFFICERS Arthur E. Greenbank President and CEO Brian A. Ippensen Treasurer Steven E. Siebers Secretary FIRST BANKERS TRUSTSHARES, INC. Stock Prices (For the Three Months Period Ended) Market Value High Low Period End Close 12/31/06 $ 19.75 $ 18.05 $ 19.00 09/30/06 $ 22.00 $ 18.35 $ 18.35 06/30/06 $ 23.25 $ 20.00 $ 22.85 03/31/06 $ 22.85 $ 20.00 $ 20.00 12/31/05 $ 22.75 $ 21.00 $ 22.00 The following companies make a market in FBTI common stock: Wachovia Securities 510 Maine, 9th Floor 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 4 Donald K. Gnuse, Chairman Arthur E. Greenbank, President/CEO Dear Shareholders, 2006 was a year of celebration and achievement for your company, First Bankers Trustshares, Inc. The Bank celebrated its 60th anniversary while our Trust Company celebrated 50 years of trust powers through its affiliations with its sister company, First Bankers Trust Company, N. A. In celebrating these milestones, it brought to light why we have remained a strong and viable Company -your employees. These employees have maintained valuable client relationships already in place, and built significant new relationships that will most definitely be profitable for your company in the years to come. Both our Trust Company, First Bankers Trust Services, Inc. and our Bank, First Bankers Trust Company, N. A. posted record results in revenues, income and assets for 2006. The economy remained strong during 2006. Our customers prospered due to this strong economy, which allowed for your Bank to prosper as well. With ten (10) branches well positioned in the West Central Illinois region, we are able to offer the financial services and products needed by the citizens who reside in these communities. Our Trust Company competes on a national level with trust customers throughout the country. Our personnel located in Chicago, Philadelphia, Phoenix, and Quincy have made a name for themselves in providing sophisticated trust services. They too are well positioned for significant future growth. Our Trust Company has provided a large and steadily increasing stream of fee income helping to offset decreasing interest margins; a problem which has affected our industry. 2007 will be a challenging year. Lending institutions are finding it more difficult every day to maintain their margins which in turn affects profitability. This is due primarily to there being little difference between short term and long term interest rates. A reduction in short term interest rates to a more “normal” curve will positively impact our profit margin. Your management will closely monitor interest rates and react in ways to positively impact margins and profits. We will remain flexible in our strategies in order to deliver the financial results, you, our stockholders, deserve, while running a business in which you can be proud. Sincerely, Donald K. Gnuse Chairman of the Board Arthur E. Greenbank President/CEO SELECTED FINANCIAL DATA 5 (Amount in thousands of dollars, except per share data statistics) YEAR ENDED DECEMBER 31, PERFORMANCE 2006 2005 2004 2003 2002 2001 Net income Common stock cash dividends paid Common stock cash dividend payout ratio Return on average assets Return on common stockholders' equity1 PER COMMON SHARE Earnings, basic and diluted Dividends (Paid) Book value2 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' equity3 Total equity to total assets3 Tier 1 capital ratio (risk based) Total capital ratio (risk based) Leverage ratio $ 3,763 $ 3,635 $ 3,264 $ 3,123 $ 3,242 $ 3,457 $ 778 $ 698 $ 615 $ 533 510 $ 464 15.73% 13.42% 1.06% 1.15% 16.40% 20.69% .91% 13.68% 18.84% .94% 15.03% 17.07% .97% 16.31% 19.20% .89% 14.86% 17.81% $ 1.34 $ 1.84 $ 1.77 $ 1.59 $ 1.52 $ 1.49 $ .38 $ .34 $ .30 $ .26 $ .22 $ .18 $ 14.02 $ 12.57 $ 11.15 $ 9.86 $ 8.61 $ 8.66 $ 23.25 $ 24.00 $ 24.10 $ 17.00 $ 16.50 $ 20.00 $ 18.05 $ 18.00 $ 15.40 $ 14.00 $ 14.00 $ 14.00 $ 19.00 $ 22.00 $ 24.00 $ 15.40 $ 14.75 $ 14.25 10.6 10.3 12.4 15.1 1.65 1.36 9.9 1.71 10.1 1.56 1.75 2.15 2,048,574 2,048,574 2,048,574 2,048,574 2,175,059 2,579,230 $ 423,674 95,773 599 275,974 355,955 $ 418,248 $ 407,367 96,981 83,942 1,110 663 260,682 268,192 357,876 340,555 $ 315,670 53,582 453 221,808 258,413 $ 311,920 $ 310,068 54,567 76,062 1,175 2,178 201,931 189,531 258,170 256,609 19,537 - 15,465 13,626 2,667 15,465 20,762 4,000 15,465 24,114 - - 23,200 4,500 - 23,473 - - - - - 10,000 5,000 5,000 $ 28,717 $ 25,752 $ 22,835 $ 20,206 $ 17,636 $ 22,324 6.78% 10.39% 12.93% 8.21% 6.16% 9.58% 12.53% 7.32% 5.61% 8.54% 11.82% 6.52% 6.40% 5.65% 10.90% 10.05% 13.14% 10.98% 8.12% 7.18% 7.19% 13.06% 14.03% 8.68% 1 Return on common stockholders’ equity is calculated by dividing net income by average common stockholders’ equity. Common stockholders’ equity is defined as equity plus or minus accumulated other comprehensive income or loss. 2 Book value per share is calculated by dividing stockholders’ equity, excluding accumulated other comprehensive income or loss, by outstanding shares. Stockholders’ equity does not include accumulated other comprehensive income or loss. 3 SELECTED FINANCIAL DATA 6 Return On Average Assets Return On Average Common Equity 1.15% 1.06% 20.00% 0.97% 0.94% 0.89% 0.91% 15.00% 16.40% 17.81% 16.31% 15.03% 14.86% 13.68% 2001 2002 2003 2004 2005 2006 Earnings Per Share $1.49 $1.52 $1.59 $1.34 $1.77 $1.84 10.00% 5.00% 0.00% 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 2001 2002 2003 2004 2005 2006 Price/Earnings Multiples 10.6 X 9.9 X 10.1 X 15.1 X 12.4 X 10.3 X 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% $2.00 $1.80 $1.60 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006 Market Price To Book Value 2.15X 1.65X 1.71X 1.56X 1.75X 1.36X 2.5X 2.0X 1.5X 1.0X 0.5X 0.0X Loan/Deposit Growth Loans Deposits $358 $356 $341 $268 $261 $276 $257 $190 $258 $202 $258 $222 $400 $350 $300 $250 $200 $150 $100 $50 $0 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006 MANAGEMENT’S REPORT 7 Arthur E. Greenbank, President/CEO Brian Ippensen, Treasurer To The Stockholders: the is responsible for Management of First Bankers Trustshares, Inc. has prepared and 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 include amounts based on management necessarily estimates and in judgments, have been prepared conformity with accounting principles generally accepted in the United States of America and appropriate to the circumstances. In meeting its responsibilities, First Bankers Trustshares, internal controls and Inc. maintains a system of 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 Internal controls and United States of America. procedures are augmented by written policies covering standards of personal and business conduct and an organizational structure providing for division of accountability and authority. The effectiveness of, and compliance with, established control systems are monitored through a continuous program of internal audit, credit examinations, and outside audits. In recognition of the cost-benefit relationships and inherent control limitations, some features of the control systems are designated 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, Inc. engaged the accounting firm of McGladrey & Pullen, LLP as 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 manager and staff, and the Independent Auditors to assess the scope of the annual audit plan and to discuss audit, internal control and financial reporting issues. Among the many items discussed are major changes in accounting policies and reporting practices. The Independent Auditors also meet with the Audit Committee, without Management present, to afford them the opportunity to discuss adequacy of compliance with established policies and procedures and the quality of financial reporting. Arthur E. Greenbank President and Chief Executive Officer Brian A. Ippensen Treasurer MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 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 2006 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 business of the Company is that of a community- oriented financial institution offering a variety of Consolidated Assets (Amounts in thousands of dollars) 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. In addition, the Company conducts Trust Operations Nationwide through its sales representatives. 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 trust and banking operations. 5 Year Growth Rate Assets 2006 Change 2005 Change 2004 2003 2002 2001 Cash and due from banks: Non-interest bearing $ 10,738 (6.33) % $ 11,464 32.36 % $ 8,661 $ 9,586 $ 11,250 $ 8,631 24.41 % Interest bearing 1,443 (88.35) 12,388 (22.16) 15,915 5,424 22,674 17,228 (91.62) Securities 95,773 (1.25) 96,981 15.53 83,942 53,582 54,567 71,062 34.77 Federal funds sold 14,485 6.35 13,620 40.41 9,700 13,500 13,500 9,500 52.47 Loans held for sale 599 (46.04) 1,110 67.42 663 453 1,175 2,178 (72.50) Net loans Other assets 272,835 5.95 257,522 (2.98) 265,428 219,545 199,626 187,219 45.73 27,801 10.48 25,163 9.13 23,058 13,580 9,128 9,850 182.24 Total Assets $ 423,674 1.30 % $ 418,248 2.67 % $ 407,367 $ 315,670 $ 311,920 $ 310,668 36.38 % Liabilities & Deposits $ 355,955 (0.54) % $ 357,876 5.09% $ 340,555 $ 258,413 $ 258,170 $ 256,609 38.71 % 14,037 434.54 2,626 49.04 1,762 5,114 4,200 10,473 34.03 Short-term borrowings Federal Home Loan Bank advances Note payable Junior Subordinated Debentures Company obligated manditorily redeemable preferred securities Other liabilities 5,500 (50.00) - (100.00) 2,667 (33.33) 4,000 11,000 (42.11) 19,000 19,000 19,000 13,000 (57.69) - - 4,500 - - - - 100.00 15,465 - 15,465 - 15,465 - - - - - 10,000 5,000 5,000 (100.00) 4,535 (29.57) 3,500 6.74 3,279 2,139 2,462 2,851 59.07 Stockholders' equity 28,182 12.22 25,114 7.76 23,306 21,004 18,588 22,735 23.96 Total Liabilities & Stockholders’ Equity $ 423,674 1.30 % $ 418,248 2.67 % $ 407,367 $ 315,670 $ 311,920 $ 310,668 36.38 % MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 At December 31, 2006, the Company had assets of $423,624,000 compared to $418,248,000 at December 31, 2005. The growth in assets is primarily made up of a 5.95% growth in net loans. This offsets a decrease in interest bearing cash deposits of 88.35%. The increase in loan portfolio was primarily made up of growth in commercial loans of $7,699,000 and agricultural loans of $3,688,000. Real estate loans also increased $2,471,000. Approximately $25,037,000 of fixed rate long-term residential real estate loans were sold in the secondary market during 2006 while $21,673,000 were sold in 2005. Agricultural real estate loans totaling $1,452,000 were sold in the secondary market during 2006, while $1,840,000 were sold in 2005. 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, 2006, the Company reported consolidated net income of $3,763,000, a $128,000 (3.52%) increase from 2005. Net interest income after provision for loan losses for the periods being compared increased $919,000 or 8.61%. Other expenses increased $467,000 (3.58%) over 2005 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 $381,472,000 for the year ended December 31, 2006. 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. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 Consolidated Income Summary (Amounts in thousands of dollars) 5 Year Growth 2006 Change 2005 Change 2004 2003 2002 2001 Rate Interest income Interest expense $ 24,618 13.09 % $ 21,768 24.21 % $ 17,525 $ 16,187 $ 17,792 $ 20,255 21.54 % (11,944) 35.07 (8,843) 36.05 (6,500) (6,530) (7,750) (10,967) 8.91 Net interest income $ 12,674 (1.94) % $ 12,925 17.23 % $ 11,025 $ 9,657 $ 10,042 $ 9,288 36.46 % Provision for loan losses Net interest income after provision for loan losses Other income Other expenses Income before taxes Income tax expense Net income (1,080) (52.00) (2,250) 93.13 (1,165) (1,285) (990) (660) 63.64 $ 11,594 8.61 % $ 10,675 8.27 % $ 9,860 $ 8,372 $ 9,052 $ 8,628 34.38 % 6,977 (1.15) 7,058 32.54 5,325 4,094 3,449 3,897 79.04 (13,503) 3.58 (13,036) 26.18 (10,331) (8,218) (8,130) (7,562) 78.56 $ 5,068 7.90% $ 4,697 (3.23) % $ 4,854 $ 4,248 $ 4,371 $ 4,963 2.12 % (1,305) 22.88 (1,062) (32.21) (1,590) (1,125) (1,129) (1,506) (13.35) $ 3,763 3.52 % $ 3,635 11.37 % $ 3,264 $ 3,123 $ 3,242 $ 3,457 8.85 % 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, 2006 was $6,977,000, a decrease of $81,000 (1.15%) from 2005. An increase in Trust Services income of $437,000 (13.76%) was offset by a decrease in other income of $533,000 (24.12%). Other income was positively impacted by a one time transaction in 2005 associated with an investment held at the Bank subsidiary. Other Expense Other expenses for the period ended December 31, 2006 totaled $13,503,000, an increase of $467,000 (3.58%) from 2005 year end totals. Salaries and employee benefits expense aggregated 55.07% and 54.85% of total other expense for the years ended December 31, 2006 and 2005 respectively. For the Years Ended December 31, (Amounts in thousands of dollars) 2005 $ 21,184 584 (8,843) 2004 $ 16,962 563 (6,500) 2006 $ 24,084 534 (11,944) $ 12,674 $ 12,925 $ 11,025 $ 381,472 $ 379,546 $ 325,334 3.32% 3.41 % 3.39 % 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 2006 was 6.45% while the average cost of funds for the same period was 3.68% on average interest bearing liabilities of $324,722,000. The yield on average earning assets for the year ended 2005 was 5.74%, while the average cost of funds for the same period was 2.77% on average interest bearing liabilities of $319,808,000. The decrease in the net interest of $251,000 can be attributed to the 0.91% increase in average cost of funds, which was partially offset by an increase in yield on earning assets of 0.71%. Provision for Loan Losses The allowance for loan losses as a percentage of net loans outstanding is 1.14% at December 31, 2006, compared to 1.21% at December 31, 2005. Net loan charge-offs totaled $1,101,000 for the year ended December 31, 2006 compared to $1,854,000 in 2005. The amounts recorded in the provision for loan losses are determined from management's quarterly evaluation of the quality of the loan portfolio. In this review, such factors as the volume and character of the loan portfolio, general economic conditions and past loan loss experience are considered. Management believes that the allowance for loan losses is adequate to provide for possible losses in the portfolio at December 31, 2006. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 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 2006 2005 2004 2003 2002 2001 $ 236 $ 267 $ 405 $ 189 $ 104 $ 148 204 206 41 169 1,327 1,363 $ 1,563 $ 1,630 $ 609 $ 394 $ 145 $ 317 578 1,119 980 201 58 429 $ 2,141 $ 2,749 $ 1,589 $ 596 $ 203 $ 746 $ 39 $ 30 $ 14 $ 9 $ 7 $ 16 - - - - - - $ 39 $ 30 $ 14 $ 9 $ 7 $ 16 $ .01 $ .01 $ .00 $ .00 $ .00 $ .00 Income Taxes The Company files its Federal income tax return on a consolidated basis with the Bank. See Note 16 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. liquidity Bank liquidity is provided from both assets and liabilities. The asset side provides 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, 2006, these categories totaled $38,014,000 or 8.97% of assets, compared to $41,943,000 or 10.03% the previous year. As of December 31, 2005, securities held to maturity included $214,000 of gross unrealized gains and $4,000 of gross unrealized 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. losses on 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 the responsibility of prudently managing 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 2006, 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): 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, 2006 Repricing Period After one Year through Five years $ 209,867 35,076 Through One year $ 135,787 282,595 After Five years $ 42,620 15,465 $ (146,808) $ 174,791 $ 27,155 As of December 31, 2005 Repricing Period After one Year through Five years $ 209,036 54,602 Through One year $ 142,098 249,880 After Five years $ 33,647 15,465 $ (107,782) $ 154,434 $ 18,182 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 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, income parameters, and/or marketing emphasis. fee Common Stock Information and Dividends The Company's common stock is held by 229 shareholders as of December 31, 2006, and is traded in a limited over-the-counter market. the market price of On December 31, 2006 the Company’s common stock was $19.00. Market price is based on stock transactions in the market. Cash dividends on common stock of $798,000 were declared by the Board of Directors of the Company for the year ended December 31, 2006. Closing Share Price Data $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 $24.00 $22.00 $19.00 $14.25 $14.75 $15.40 2001 2002 2003 2004 2005 2006 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 financial institutions is primary capital as a percent of total assets. for 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 12.93 percent of risk-weighted assets at December 31, 2006. In addition, a leverage ratio of at least 4.00 percent is to be maintained. At December 31, 2006, the Company's leverage ratio was 8.21 percent. Risked Based Capital Ratios 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 14.03% 13.14% 11.82% 12.53% 12.93% 10.98% 2001 2002 2003 2004 2005 2006 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 Financial Report Upon written request of any shareholder of record on December 31, 2006, the Company will provide, without charge, a copy of its 2006 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. Notice of Annual Meeting of Stockholders The annual meeting of stockholders will be May 8, 2007 at 9:00 A.M. at the Stoney Creek Inn, 3809 Broadway, Quincy, Illinois. INDEPENDENT AUDITOR’S REPORT 14 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, 2006 and 2005, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years ended December 31, 2006, 2005 and 2004. 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, 2006 and 2005, and the results of their operations and their cash flows for the years ended December 31, 2006, 2005 and 2004, in conformity with accounting principles generally accepted in the United States of America. Davenport, Iowa March 9, 2007 FINANCIAL SUMMARY 15 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’ Equity Liabilities: Deposits: Non-interest bearing demand Interest bearing demand Savings Time (Note 9) Total Deposits Federal Home Loan Bank advances (Note 10) Note payable (Note 11) Junior subordinated debentures (Note 12) Other liabilities TOTAL LIABILITIES Commitments and Contingencies (Note 13) 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 (loss) Treasury stock, at cost - 530,656 shares TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY December 31, 2006 2005 $ 10,738 1,443 $ 12,181 $ 5,280 90,493 14,485 599 275,974 (3,139) $ 272,835 $ 6,956 2,618 7,778 4,113 6,336 $ 423,674 $ 57,821 70,684 54,886 172,564 $ 355,955 14,037 5,500 - 15,465 1,858 2,677 $ 395,492 $ 11,464 12,388 $ 23,852 $ 6,890 90,091 13,620 1,110 260,682 (3,160) $ 257,522 $ 7,555 2,085 4,539 4,368 6,616 $ 418,248 $ 69,687 109,750 43,603 134,836 $ 357,876 2,626 11,000 2,667 15,465 1,223 2,277 $ 393,134 - - 2,580 2,251 31,315 (535) (7,429) $ 28,182 2,580 2,251 28,350 (638) (7,429) $ 25,114 $ 423,674 $ 418,248 See notes to consolidated financial statements FINANCIAL SUMMARY 16 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 Deposits: Interest bearing demand and savings Time Total interest on deposits Federal Home Loan Bank advances Note payable Junior subordinated debentures Total interest expense Net interest income Provision for loan losses (Note 6) Net interest income after provision for loan Losses Other income: Trust services Gain on sale of loans Investment securities gains, net Other Total other income Salaries and employee benefits Occupancy expense, net Equipment expense Computer processing Professional services Other Total other expenses Income before income taxes Income taxes (Note 16) Net income Earnings per share of common stock, basic and diluted 2006 Years Ended December 31, 2005 2004 $ 19,650 297 $ 16,944 241 $ 14,655 196 3,192 801 486 118 74 $ 24,618 2,876 750 490 371 96 $ 21,768 1,624 695 180 76 99 $ 17,525 $ 3,466 6,310 $ 9,776 303 451 44 1,370 $ 11,944 $ 12,674 $ 2,534 4,372 $ 6,906 65 521 168 1,183 $ 8,843 $ 12,925 $ 933 3,737 $ 4,670 98 811 62 859 $ 6,500 $ 11,025 $ 1,080 $ 2,250 $ 1,165 $ 11,594 $ 10,675 $ 9,860 $ 3,614 1,279 334 73 1,677 $ 6,977 $ 7,436 810 1,084 892 368 2,913 $ 13,503 $ 5,068 1,305 3,763 $ 1.84 $ 3,177 1,344 306 21 2,210 $ 7,058 $ 7,150 826 1,078 885 304 2,793 $ 13,036 $ 4,697 1,062 3,635 $ 1.77 $ 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 See notes to consolidated financial statements FINANCIAL SUMMARY 17 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, 2006, 2005 and 2004 Preferred Stock $ - Common Stock $ 2,580 Additional Paid In Retained $ 2,251 $ 22,804 Accumulated Other Comprehensive Income (Loss) $ 798 Treasury Stock $ (7,429) Comprehensive Income Total $ 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 - - - 3,635 - - 3,635 3,635 - - - - (1,109) - (1,109) $ 2,526 (1,109) - $ - - $ 2,580 - $ 2,251 (718) $ 28,350 - $ (638) - $ (7,429) (718) $ 25,114 - - - 3,763 - - 3,763 3,763 - - - - 103 - 103 $ 3,866 103 - $ - - $ 2,580 - $ 2,251 (798) $ 31,315 - $ (535) - $ (7,429) (798) $ 28,182 Balance, December 31, 2003 Comprehensive income: Net income Other comprehensive (loss), net of tax, (Note 3) Comprehensive income Dividends declared (amount per share $.31) Balance, December 31, 2004 Comprehensive income: Net income Other comprehensive (loss), net of tax, (Note 3) Comprehensive income Dividends declared (amount per share $.35) Balance, December 31, 2005 Comprehensive income: Net income Other comprehensive income, net of tax, (Note 3) Dividends declared (amount per share $.39) Balance, December 31, 2006 See notes to consolidated financial statements FINANCIAL SUMMARY 18 FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of dollars) 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 sale Proceeds from loans sold Gain on sale of loans Deferred income taxes (Increase) decrease in accrued interest receivable and other assets Increase in accrued interest payable and other liabilities Net cash provided by operating activities 2006 $ 3,763 Years Ended December 31, 2005 $ 3,635 2004 $ 3,264 1,080 1,122 255 2,250 1,074 272 216 (73) (25,978) 26,823 (334) (101) 445 (21) (24,156) 24,015 (306) (290) 1,165 710 97 445 (92) (13,231) 13,172 (151) 53 348 85 (363) 1,015 $ 8,136 201 $ 7,204 820 $ 5,889 Activity in securities portfolio: Purchases Sales of securities available for sale Calls, maturities and paydowns (Increase) decrease in loans, net (Increase) decrease in federal funds sold Purchases of premises, furniture and equipment Purchase of life insurance contracts (Increase) decrease in cash surrender value life insurance contracts Capital infusion, FBIL Statutory Trust III Cash effect of Union acquisition Net cash provided by (used in) investing activities $ (20,190) 8,089 13,333 (16,957) (865) (523) (3,000) $ (34,966) 962 18,753 4,231 (3,920) (1,220) - $ (71,162) 4,592 35,329 (7,598) 3,800 (1,424) - (239) - - $ (20,352) 78 - - $ (16,082) (215) (155) 41,527 $ 4,694 Net increase (decrease) in deposits Issuance of note payable Principal payments on note payable Cash dividends paid Increase (decrease) in securities sold under agreement to repurchase Proceeds from Federal Home Loan Bank advances Proceeds from junior subordinated debentures Net cash provided by (used in) financing activities Net increase (decrease) in cash and due from banks Cash and Due From Banks: Beginning Ending $ (1,921) - (2,667) (778) $ 17,321 - (1,333) (698) $ (6,205) 4,000 - (615) 11,411 46,000 (51,500) - $ 545 $ (11,671) 864 - (8,000) - $ 8,154 $ (724) (3,352) 8,000 (8,000) 5,155 $ (1,017) $ 9,566 $ 23,852 $ 12,181 $ 24,576 $ 23,852 $ 15,010 $ 24,576 (continued) FINANCIAL SUMMARY 19 FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of dollars) Supplemental disclosure of cash flow information, Interest Income taxes Supplemental schedule of noncash investing and 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 Cash and due from banks Loans, net Premises, furniture, and equipment, net Accrued interest receivable Intangibles Other assets Deposits Accrued interest payable Other liabilities Years Ended December 31, 2006 $ 11,309 $ 1,587 2005 $ 8,692 $ 1,341 2004 $ 6,262 $ 1,167 $ 103 $ 564 $ (1,109) $ 1,425 $ (327) $ 245 $ - - - - - - - - - $ - - $ - $ - - - - - - - - - $ - - $ - $ 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 20 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. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses is inherently subjective as it requires material estimates that are susceptible to significant change. The fair value disclosure of financial statements is an estimate that can be computed within a range. Basis of Consolidation The accompanying consolidated financial statements include the accounts of First Bankers Trustshares, Inc. and its wholly- owned subsidiaries, except Trusts I, II, and III, which do not meet the criteria for consolidation. 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 accretion of 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 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, 2006 or 2005. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans Loans held for sale: Residential real estate, agricultural, and student loans, which are originated and intended for resale in the secondary market in the foreseeable future, are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows. Loans held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the allowance for estimated losses on loans, and any deferred fees and/or costs on originated loans. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans is classified as an investing activity in the statement of cash flows. 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, 2006 and 2005, the Bank had loan concentrations in agribusiness of 11.31% and 10.56%, hotel and motel industry of 2.59% and 3.11% and senior housing industry of 1.91% and 2.02%, 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, 2006 and 2005. 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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. Goodwill Goodwill represents the excess of cost over fair value of net assets acquired in connection with business combinations described in Note 2. Goodwill is evaluated for impairment annually or whenever events or changes in circumstances indicate that it is more likely than not that an impairment loss has occurred. The Company has completed its annual goodwill impairment test and has determined that goodwill was not impaired at December 31, 2006 and 2005. 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 assume 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, 2006, 2005, and 2004. 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 In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” This interpretation applies to all tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the application of SFAS No. 109 by defining the criteria that an individual tax position must meet in order for the position to be recognized within the financial statements and provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition for tax positions. This interpretation is effective for fiscal years beginning after December 15, 2006, with earlier adoption permitted. The Company does not expect that the adoption of this interpretation will have a material impact on its financial position, results of operation and cash flows. At its September 2006 meeting, the Emerging Issues Task Force (“EITF”) reached a final consensus on Issue 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The consensus stipulates that an agreement by an employer to share a portion of the proceeds of a life NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) insurance policy with an employee during the postretirement period is a postretirement benefit arrangement required to be accounted for under SFAS No. 106 or Accounting Principles Board Opinion (“APB”) No. 12, “Omnibus Opinion – 1967.” The consensus concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement under SFAS No. 106 and, therefore, a liability for the postretirement obligation must be recognized under SFAS No. 106 if the benefit is offered under an arrangement that constitutes a plan or under APB No. 12 if it is not part of a plan. Issue 06-04 is effective for annual or interim reporting periods beginning after December 15, 2007. The Company has endorsement split- dollar life insurance policies and is currently assessing the financial statement impact of implementing EITF 06-04. In February 2007, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”, which provides all entities, including not for profit organinzations, with an option to report selected selected financial assets and liabilities at fair value. The objective of the Statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in earnings caused by measuring related assets and liabilities differently without having to apply the complex provisions of hedge accounting. Certain specified items are eligible for the irrevocable fair value measurement option as established by Statement No. 159. Statement No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007 provided the entity also elects to apply the provisions of Statement No. 157, “Fair Value Measurements”. The Company is currently evaluating the impact that the adoption of this Statement will have on its financial position, results of operation, and cash flows. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24 3. COMPREHENSIVE INCOME (LOSS) 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 (loss) is comprised as follows (Amounts in thousands of dollars): Year ended December 31, 2006 Unrealized gains on securities available for sale: Unrealized holding gains arising during the year Less reclassification adjustment for gains included in net income Year ended December 31, 2005 Unrealized (losses) on securities available for sale: Unrealized holding (losses) arising during the year Less reclassification adjustment for gains included in net income Year ended December 31, 2004 Unrealized (losses) on securities available for sale: Unrealized holding (losses) arising during the year Less reclassification adjustment for gains included in net income Other comprehensive loss Before tax Tax expense (benefit) Net of tax $ 240 $ 92 $ 148 73 $ 167 28 $ 64 45 $ 103 $ (1,767) $ (671) $ (1,096) 21 $ (1,788) 8 $ (679) 13 $ (1,109) $ (436) $ (166) $ (270) 92 $ (528) 35 $ (201) 57 $ (327) 4. RESTRICTIONS ON CASH AND DUE FROM BANKS The Bank is required to maintain a reserve balance with the Federal Reserve Bank of St. Louis. The total of the reserve balance was approximately $449,000 and $279,000 at December 31, 2006 and 2005, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 5. SECURITIES The amortized cost and fair values of securities as of December 31, 2006 and 2005 are as follows (Amounts in thousands of dollars): Securities Held to Maturity: Amortized Cost 2006 Gross Unrealized Gains Gross Unrealized (Losses) Fair Value State and political subdivisions $ 5,280 $ 214 $ (4) $ 5,490 Securities Available for Sale: U.S. Government agencies and corporations State and political subdivisions Collaterized mortgage oblgations Other Securities Held to Maturity: Amortized Cost $ 66,152 18,385 6,156 662 $ 91,355 2006 Gross Unrealized Gains $ 88 186 - - $ 274 Gross Unrealized (Losses) $ (917) (97) (107) (15) $ (1,136) Fair Value $ 65,323 18,474 6,049 647 $ 90,493 Amortized Cost 2005 Gross Unrealized Gains Gross Unrealized (Losses) Fair Value State and political subdivisions $ 6,890 $ 247 $ (11) $ 7,126 Securities Available for Sale: U.S. Government agencies and corporations State and political subdivisions Collateralized mortgage obligations Other Amortized Cost $ 72,337 11,918 6,283 582 $ 91,120 2005 Gross Unrealized Gains $ 103 259 - - $ 362 Gross Unrealized (Losses) $ (1,230) (38) (115) (8) $ (1,391) Fair Value $ 71,210 12,139 6,168 574 $ 90,091 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 26 5. SECURITIES (Continued) 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, 2006 and 2005 are summarized as follows (Amounts in thousands of dollars): 2006 Less than 12 months Unrealized Losses Fair Value 12 months or more Fair Value Unrealized Losses Total Fair Value Unrealized Losses 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 Other Investments $ - $ - $ 451 $ (4) $ 451 $ (4) $ 3,037 5,261 1,823 - $ 10,121 $ 51,918 $ (917) $ - (39) 3,187 (58) (99) 4,226 (8) - (15) 581 $ (66) $ 59,912 $ (1,070) $ 54,955 $ (917) 8,448 6,049 581 $ 70,033 $ (1,136) (97) (107) (15) 2005 Less than 12 months Fair Value Unrealized Losses 12 months or more Fair Value Unrealized Losses Total Fair Value Unrealized Losses Securities held to maturity: State and political subdivisions Securities available for sale: U.S. Government agencies and Corporations State and political subdivision Collateralized mortgage obligations Other Investments $ 1,331 $ (9) $ 126 $ (2) $ 1,457 $ (11) $ 37,178 $ (541) $ 27,271 866 (9) 1,914 2,667 (46) 2,509 (8) 562 - $ (604) $ 30,804 $ 42,163 $ (689) (29) (69) - $ (787) $ 64,449 2,780 5,176 562 $ 72,967 $ (1,230) (38) (115) (8) $ (1,391) At December 31, 2006, the investment portfolio included 181 securities. Of this number, 87 securities have current unrealized losses which have existed for longer than one year. All of these securities are considered to be acceptable credit risks. Based upon an evaluation of the available evidence, including recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. In addition, the Company has the intent and ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net earnings in the period in which the other-than-temporary impairment is identified. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27 5. SECURITIES (Continued) The amortized cost and fair value of securities as of December 31, 2006 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 $ 1,223 1,720 658 1,679 $ 5,280 Amortized Cost $ 10,125 53,137 10,027 11,910 $ 85,199 6,156 $ 91,355 Fair Value $ 1,219 1,739 672 1,860 $ 5,490 Fair Value $ 9,954 52,493 10,103 11,894 $ 84,444 6,049 $ 90,493 Information on sales of securities available for sale during the years ended December 31, 2006, 2005 and 2004 follows (Amounts in thousands of dollars): Proceeds from sales Gross gains Gross losses 2006 $ 8,089 103 (30) 2005 $ 962 22 (1) 2004 $ 4,592 92 - As of December 31, 2006 and 2005 securities with a carrying value of approximately $65,177,000 and $53,542,000 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 The composition of net loans outstanding as of December 31, 2006 and 2005 are as follows (Amounts in thousands of dollars): Commercial Agricultural Tax exempt Real estate, mortgage Consumer Less: Allowance for loan losses Net loans 2006 $ 151,639 31,220 6,459 47,155 39,501 $ 275,974 2005 $ 143,940 27,532 5,182 44,684 39,344 $ 260,682 (3,139) $ 272,835 (3,160) $ 257,522 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28 6. LOANS (Continued) Nonaccrual and impaired loans were not material at December 31, 2006 and 2005. Loans past due 90 days or more and still accruing interest were $578,000 and $1,119,000 at December 31, 2006 and 2005, respectively. Activity in the allowance for loan losses during the years ended December 31, 2006, 2005 and 2004 is summarized below (Amounts in thousands of dollars): Allowance acquired in acquisition Provision for loan losses Loan charge-offs Recoveries of loans charged off Balance, end of year 2006 $ 3,160 - 1,080 (1,249) 148 $ 3,139 2005 $ 2,764 - 2,250 (1,972) 118 $ 3,160 2004 $ 2,263 441 1,165 (1,175) 70 $ 2,764 Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans totaled $78,831,000 and $82,979,000 at December 31, 2006 and 2005, respectively. 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 2006 and 2005 is as follows (Amounts in thousands of dollars): Advances Repayments Change in related parties Balance, end of year 2006 $ 4,372 25,243 (24,858) 11 $ 4,768 2005 $ 3,879 2,683 (2,217) 27 $ 4,372 7. PREMISES, FURNITURE AND EQUIPMENT The cost, accumulated depreciation and net book value of premises, furniture and equipment as of December 31, 2006 and 2005 is summarized as follows (Amounts in thousands of dollars): Land Furniture and equipment Less accumulated depreciation 2006 $ 1,867 6,029 6,570 $ 14,466 (7,510) $ 6,956 2005 $ 1,839 5,963 6,308 $ 14,110 (6,555) $ 7,555 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29 8. INTANGIBLES Goodwill and intangible assets are summarized as follows (Amounts in thousands of dollars): Amortized intangible assets: Goodwill Core deposit intangible Other intangible assets Less accumulated amortization on intangible assets As of December 31, 2006 As of December 31, 2005 $ 3,050 1,223 481 (641) $ 4,113 $ 3,050 1,223 481 (386) $ 4,368 For the year ended December 31: 2006 2007 2008 2009 2010 2011 Thereafter 9. TIME DEPOSITS $ 223 223 213 197 42 165 $ 255 223 223 213 197 42 165 The aggregate amount of time deposits, each with a minimum denomination of $100,000, was approximately $35,217,000 and $29,950,000 at December 31, 2006 and 2005, respectively. At December 31, 2006, the scheduled maturities of time deposits are as follows (Amounts in thousands of dollars): 2007 2008 2009 2010 2011 $ 142,988 17,089 6,533 2,782 3,172 $ 172,564 10. FEDERAL HOME LOAN BANK ADVANCES Federal Home Loan Bank (FHLB) advances are summarized as follows at December 31, 2006 and 2005 (Amounts in thousands of dollars): Maturity in year ending December 31: 2006 2007 2008 2011 2006 2005 Weighted Average Interest Rate - 5.55% 5.42 4.98 Balance Due - $ 1,500 1,000 3,000 $ 5,500 Weighted Average Interest Rate 4.55% - 4.89 - Balance Due $ 9,000 - 2,000 - $ 11,000 First mortgage loans of approximately $7,333,000 and $14,667,000 as of December 31, 2006 and 2005, respectively, are pledged as collateral on FHLB advances. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 30 11. NOTE PAYABLE As of December 31, 2005, the Company had a note payable with a balance of $2,667,000 due to a Bank with quarterly interest payments at LIBOR plus 125 basis points (5.78% at December 31, 2005). On April 13, 2006, the Company paid the note in full. 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 Trust’s 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, 2006 and 2005, the Company is allowed, for regulatory purposes, to include $9,572,000 and $8,584,000 respectively of the capital securities issued by the Trusts 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, 2006 and 2005, the Company would have been allowed to include approximately $8,294,000 and $7,243,000, respectively, 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, 2006 and 2005. 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 (8.01% and 7.18% as of December 31, 2006 and 2005). 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. Cumulative cash distributions are calculated at a variable annual rate that is 295 basis points above the 3 month LIBOR rate (8.31% and 7.48% as of December 31, 2006 and 2005, 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31 12. JUNIOR SUBORDINATED DEBENTURES AND COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBENTURES (Continued) 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, 2006 and 2005 is as follows (Amounts in thousands of dollars): Unused lines of credit Standby letters of credit 2006 $ 49,789 1,617 2005 $ 50,069 1,477 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 customer’s 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, 2006 and 2005, 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 $2,804,000 and $2,328,000 at December 31, 2006 and 2005, respectively. These amounts include loans held for sale of $599,000 and $1,110,000 as of December 31, 2006 and 2005, respectively and loan commitments, included in the summary in this Note, of $2,205,000 and $1,218,000 as of December 31, 2006 and 2005, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 32 13. COMMITMENTS AND CONTINGENCIES (Continued) A portion of residential mortgage loans sold to investors in the secondary market are sold with recourse. Specifically, certain loan sales agreements provide that if the borrower becomes 60 days or more delinquent during the first six months following the first payment due, and subsequently becomes 90 days or more delinquent during the first 12 months of the loan, the Bank must repurchase the loan from the subject investor. The Bank did not repurchase any loans from secondary market investors under the terms of these loan sales agreements during the years ended December 31, 2006, 2005, and 2004. In the opinion of management, the risk of recourse to the Bank is not significant and, accordingly, no liability has been established. Concentration of credit risk: Aside from cash on hand and in-vault, the majority of the Company’s cash is maintained at US Bank, N.A., Commerce Bank, N.A., and the Federal Home Loan Bank of Chicago. The total amount of cash on deposit and federal funds sold exceeded federal insurance limits at the respective institutions by approximately $8,967,000, $6,976,000, and $498,000 respectively as of December 31, 2006. In the opinion of management, no material risk of loss exists due to the financial condition of the institutions. 14. BENEFITS The Company 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 Company and its subsidiaries 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 subsidiary, a contribution may be made by the subsidiary. Employees are 100% vested in the subsidiaries’ contribution to the plan after five years of service. Employee contributions and vested subsidiary 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, 2006, 2005 and 2004 totaled $293,000, $239,000 and $197,000, respectively. Contributions made to the incentive compensation plan for the years ended December 31, 2006, 2005, and 2004 were $195,000, $40,000 and $200,000 respectively. 15. DIVIDENDS AND REGULATORY CAPITAL The Company's stockholders are entitled to receive such dividends as are declared by the Board of Directors. The ability of the Company to pay dividends in the future is dependent upon its receipt of dividends from its subsidiaries. The subsidiaries’ 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 its subsidiaries as well as general economic conditions and other relevant factors affecting the Company and the subsidiary. 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 its subsidiaries 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33 15. DIVIDENDS AND REGULATORY CAPITAL (Continued) 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, 2006, 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, 2006 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 $42,895 $34,811 12.93% 10.58% >$26,535 >$26,334 >8.00% >8.00% N/A >$32,918 N/A >10.00% $34,455 $31,799 10.39% 9.66% >$13,267 >$13,167 >4.00% >4.00% N/A >$19,751 N/A >6.00% $34,455 $31,799 8.21% 7.69% >$16,784 >$16,540 >4.00% >4.00% N/A >$20,675 N/A >5.00% As of December 31, 2005 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 $39,657 $35,803 12.53% 11.42% >$25,312 >$25,083 >8.00% >8.00% N/A >$31,353 N/A >10.00% $30,314 $32,876 9.58% 10.49% >$12,656 >$12,541 >4.00% >4.00% N/A >$18,812 N/A >6.00% $30,314 $32,876 7.32% 8.08% >$16,564 >$16,265 >4.00% >4.00% N/A >$20,332 N/A >5.00% NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 34 16. INCOME TAX MATTERS The components of income tax expense are as follows for the years ended December 31, 2006, 2005 and 2004 (Amounts in thousands of dollars): Current Deferred 2006 $ 1,406 (101) $ 1,305 Years Ended December 31 2005 $ 1,352 (290) $ 1,062 2004 $ 1,537 53 $ 1,590 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): 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 2006 Amount % of Pretax Income 2005 Amount % of Pretax Income 2004 Amount $ 1,723 34.0 % $ 1,597 34.0 % $ 1,650 % of Pretax Income 34.0 % 139 (334) (82) 2.7 (6.6) (1.6) 160 (570) (64) 3.4 (12.1) (1.4) 154 (277) (73) 3.2 (5.7) (1.5) (141) (2.8) (61) (1.3) 136 2.8 Income tax expense $ 1,305 25.7 % $ 1,062 22.6 % $ 1,590 32.8 % Net deferred tax assets consist of the following components as of December 31, 2006 and 2005 (Amounts in thousands of dollars): Deferred tax assets: Allowance for loan losses Accrued expenses Unrealized losses on securities available for sale, net Deferred tax liabilities: Premises, furniture and equipment Stock dividends Prepaid expenses Other Net deferred tax assets 2006 $ 1,218 192 327 $ 1,737 $ (80) (140) (89) (35) $ (344) $ 1,393 2005 $ 1,240 168 391 $ 1,799 $ (197) (164) (66) (16) $ (443) $ 1,356 Net deferred tax assets are included in other assets on the accompanying consolidated balance sheets. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 16. INCOME TAX MATTERS (Continued) 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’ equity, accumulated other comprehensive gain (loss), unrealized gains (losses) on securities available for sale, net 2006 Years Ended December 31, 2005 $ (101) $ (290) 2004 $ 53 64 $ (37) (679) $ (969) (201) $ (148) 17. FAIR VALUE OF FINANCIAL INSTRUMENTS 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. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash and due from banks and federal funds sold: The carrying amounts reported in the balance sheets for cash and due from banks and federal funds sold equal their fair values. Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Federal Home Loan Bank Stock: The fair value of Federal Home Loan Bank Stock is equal to its carrying value. 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 and junior subordinated debentures: The fair value of Federal Home Loan Bank advances and fixed rate 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 junior subordinated debentures equals their carrying value. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 36 17. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Note payable: The fair value for the variable rate note payable is equal to its carrying value. Commitments to extend credit: The fair value of these commitments is not material. The carrying values and estimated fair values of the Company's financial instruments as of December 31, 2006 and 2005 are as follows (Amounts in thousands of dollars) Financial assets: Cash and due from banks 2006 Carrying Value Fair Value 2005 Carrying Value Fair Value $ 12,181 $ 12,181 $ 23,852 $ 23,852 Securities held to maturity 5,280 5,490 6,890 Securities available for sale 90,493 90,493 90,091 Federal funds sold 14,485 14,485 13,620 7,126 90,091 13,620 Loans 276,573 276,114 261,792 262,659 Accrued interest receivable 2,618 2,618 2,085 2,085 Financial liabilities: Non-interest-bearing demand deposits $ 57,821 $ 57,821 $ 69,687 $ 69,687 Interest-bearing demand deposits 70,684 70,684 109,750 109,750 Savings deposits Time deposits 54,886 54,886 43,603 43,603 172,564 172,083 134,836 133,692 Securities sold under agreements to repurchase 14,037 14,037 2,626 2,626 Federal Home Loan Bank advances 5,500 5,532 11,000 11,030 Note payable - - 2,667 2,667 Junior Subordinated Debentures 15,465 16,596 15,465 16,779 Accrued interest payable 1,858 1,858 1,223 1,223 BOARD OF DIRECTORS FIRST BANKERS TRUSTSHARES, INC. 37 Donald K. Gnuse, Chairman Arthur E. Greenbank, President First Bankers Trustshares, Inc. First Bankers Trust Company, N. A. First Bankers Trust Services, Inc. First Bankers Trustshares, Inc. First Bankers Trust Company, N.A. Steven E. Siebers, Secretary Carl Adams, Jr. Attorney At Law Scholz, Loos, Palmer, Siebers, & Duesterhaus President Illinois Ayers Oil Company William D. Daniels Mark E. Freiburg Member Harborstone Group, LLC Owner Freiburg Insurance Agency Freiburg Development Phyllis J. Hofmeister Dennis R. Williams Secretary Robert Hofmeister Farm Chairman, Quincy Newspapers, Inc. BOARD OF DIRECTORS FIRST BANKERS TRUST COMPANY, N. A. Donald K. Gnuse, Chairman Arthur E. Greenbank, President First Bankers Trustshares, Inc. First Bankers Trust Company, N. A. First Bankers Trust Services, Inc. First Bankers Trustshares, Inc. First Bankers Trust Company, N. A. Steven E. Siebers, Secretary Attorney At Law Scholz, Loos, Palmer, Siebers, & Duesterhaus Carl Adams, Jr. President Illinois Ayres Oil Company William D. Daniels Mark E. Freiburg Member Harborstone Group, LLC Owner Freiburg Insurance Agency Freiburg Development Phyllis J. Hofmeister Merle Tieken Secretary Robert Hofmeister Farm President T-C Building Corp. Dennis R. Williams Chairman, Quincy Newspapers, Inc. COMPANY OFFICERS FIRST BANKERS TRUST COMPANY, N. A. Arthur E. Greenbank, President 38 Audit Officer Tim Corrigan Collections Officer Mike Baker IT Officers Ron Fairley Linda Reinold Loan Officers Christy Foster Patti Westerman Retail Officers John Armstrong Susan Farlow Jim Keller Lois Knapp Jim Moore Dianna Orr Matt Poulter Senior Vice Presidents Dennis Iversen Gretchen McGee Dave Rakers Vice Presidents Daron Duke Jason Duncan Sue Dunseth Janie Fischer Tom Frese Ryan Goestenkors Peggy Junk Kathy McNay Jim Obert Marvin Rabe Doug Reed Hugh Roderick Jim Schaller Scott Thoele Brent Voth Assistant Vice Presidents Sherry Bryson Steve Eckert Pam Eftink Josh Hamm Linda Tossick Jeanette Schinderling Joan Whitlow David Young BOARD OF DIRECTORS FIRST BANKERS TRUST SERVICES, INC. 39 Donald K. Gnuse Chairman First Bankers Trustshares, Inc. First Bankers Trust Company, N. A. First Bankers Trust Services, Inc. Brian Ippensen President First Bankers Trust Services, Inc. Steven E. Siebers Attorney At Law Scholz, Loos, Palmer, Siebers, & Duesterhaus Norman Rosson Senior Vice President Trust Officer Carl Adams, Jr. President Illinois Ayers Oil Company Phyllis J. Hofmeister Secretary Robert Hofmeister Farm COMPANY OFFICERS FIRST BANKERS TRUST SERVICES, INC. Brian Ippensen, President Norman Rosson, Senior Vice President Officers Merri Ash Kjersti Cory Michelle Foster Julie Kenning Jay Martin W. Diane McHatten Ashley Melton William Ryan Kimberly Serbin Linda Shultz Deborah Staff  

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