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