First Bankers Trustshares, Inc.
Annual Report 2007

Plain-text annual report

Filings Services April 8, 2008 SNL Financial, LC 1-800-969-4121 First Bankers Trustshares, Inc. F I R ST B A N K E RS T R U S T S H A R E S, I N C. 2 0 07 A N N U AL R E P O RT T A B LE OF CONTENTS Corporate Information Letter To Shareholders Selected Financial Data Management's Report Management's Discussion and Analysis ofFinancial Condition and Results of Operations Independent Auditor's Report Consolidated Financial Statements: Balance Sheets Statements of Income Statements ofChanges 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 Page 3 4 Pages 5 -6 Page 7 Pages 8-13 Page 14 Page Page 15 16 17 Page Pages 18-19 Pages 20-37 Pages 38 - 39 Page 40 C O R P O R A TE INFORMATION Corporate Description First Bankers Trustshares, Inc. (FBTl) is a bank holding company for First Bankers Trust Company, N.A., First Bankers Trust Services, Inc., FBIL Statutory Trust I, FBIL Statutory Trust 11, and FBIL Statutory Trust III. The Company was incorporated on August 25, 1988 and is headquartered in Quincy, Illinois. 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. Board ofDirectors First Bankers Trustshares, Inc. David E. Connor Chairman Emeritus, First Bankers Trustshares, Inc. 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 ofthe Board, First Bankers Trustshares, Inc. Chairman ofthe Board, First Bankers Trust Company, N.A. Chairman ofthe Board, First Bankers Trust Services, Inc. Arthur E. Greenbank President & ChiefExecutive Offieer, First Bankers Trust Company, N.A. For additional fmancial 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, 2007 267* Phyllis J. Hofmeister Secretary, Robert Hofmeister Farm Steven E. Siebers Secretary ofthe Board, First Bankers Trustshares, Inc. Attorney, Scholz, Loos, Palmer, Siebers & Duesterhaus Dennis R. Williams Chairman ofthe Board, Quincy Newspapers, Inc. EXECUTIVE OFFICERS Arthur E. Greenbank President and CEO Brian A. Ippensen Treasurer Inquiries regarding transfer requirements, lost certificates, changes of address and account status should be directed to the corporation's transfer agent: Steven E. Siebers Secretary 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 Hunton & Williams, LLP 1445 Ross Avenue, Suite 3700 Dallas, TX 75202-2799 FIRST BANKERS TRUSTSHARES, INC. Stock Prices (For the Three Months Period Ended) 06/3o;or S 19 75 180C 18.1C '""S'Tf^T^ S IJ i, v.'/ 12/31/06 $ 19 75 S 1805 $ 19.00. The following companies make a market in FBTI common stock: Howe Barnes Hoefer & Arnett, Inc. 222 S. Riverside Plaza, 7"' Floor Chicago, IL 60603 Phone (800) 800-4693 Wachovia Securities 510 Maine, 9* Floor Quincy, IL 62301 Phone(800)223-1037 Stifel Nicolas & Co. Inc 227 W.Monroe, Suite 1850 Chicago, IL 60606-6300 Phone(800)745-7110) Monroe Securities, Inc. IOO North Riverside Plaza, Ste Suite 1620 Chicago, IL 60606 (312)327-2530 Donald K. Gnuse, Chairman Arthur E. Greenbank, President/CEO Dear Shareholders, How quickly things can change. Last year at this time, our focus was on a generally expanding national and world economy with the only real complaint being a reduction in our profit margin as a result of changes in interest rates and competition. Continued growth and expense controls were still permitting your Company, as well as most financial institutions, to turn in record years. Asset quality was not a problem with minor rumors of something called "subprime mortgages" barely on the horizon. However, the world today looks much different than last year. There is less focus in the financial press and among brother bankers on profit margin and growth and more talk about credit quality and capital ratios. The Federal Reserve's actions since last summer have steepened the yield curve by dramatically dropping short-term interest rates. The prevailing current opinion is that the United States and most of the world are in recession or at the very least, a much slower growth mode. Despite these world financial difficulties. First Bankers Trustshares, Inc. finished 2007 showing improvement in almost all categories measured. Both our Trust Company (First Bankers Trust Services, Inc.) and our Bank (First Bankers Trust Company, N.A.) turned in record financial performances. Your Company is well positioned to continue execution of its national growth plan at the Trast Company and its regional/local growth at the Bank. While your Company is not immune from national and global trends, we think our strategic plans can deliver further above average returns while accepting moderate risks. In summary, we are pleased with the results delivered for our shareholders during 2007. Unless the economy changes dramatically and unexpectedly downward, we are optimistic about 2008. Both subsidiaries of your Company, the Trust Company and the Bank, continue with their strategies to grow and deliver superior financial results. We have wonderful employees dedicated to taking care of our customers. We look forward to meeting and talking to many of you at our annual meeting on May 13, 2008 at the Stoney Creek Inn, in Quincy, Ilhnois. Sincerely, Donald K. Gnuse Chairman of the Board Arthur E. Greenbank President/CEO SELECTED FINANCIAL DATA (Amount in thousands ofdoilars, except per share data statistics) \T^ \ r, r xu M'r% r^rv^ijx ^ u r Tj rj i PERFORMANCF Net income Common stock cash dividends paid Cominon stock cash dividend payout ratio Retum on average assets ZUU/ z()u6 4,243 K6(l $ $ 3,763 $ 3,635 778 $ 698 $ $ 3,264 $ 3,123 615 533 20.28% 20.69 % 19.20% 18.84% 17.07 " ^Uu_ 3,242, 510^ .97% .91 % .89 »-„ .94 % .97" L 0 6 "i Retum on common stockholders' equity' 13.90% 13.68% 14.86 "o 15.03% 16.31 " PER COJVIMON SHARE Eamings, basic and di kited Dividends (Paid) Book value' Stock price High Low Close Price/Earnings per share (at period end) Market price/Book value (at period end) Weighted average number of pres outstanding AT DECEMBER 31, Assets Inv estment securities Loans held tbr sale Loans Deposits Short-term borrowings and Federal Home Loan Bank advances Note payable Junior subordinated debentures Company obligated mandatorily redeemable preferred securities Stockholders' equity' Total equity to total assets' Tier 1 capital ratio (risk based) Total capital ratio (risk based) 2.07 $ .42 $ 15.66 $ 1.84 S .38 S 14.02 S 1.77 $ .-"^4 $ 12.5:' $ 1.59 ,$ 1.52 S .30 $ .26 $ 11.15 $ 9.86 $ 20.00 $ 18.00 $ 19.70 $ 9.5 1.26 23.25 $ 18.05 S 19.00 S 10.3 1.36 24.00 $ 24.10 $ 18.00 $ 15.40 S 22.00 $ 24.00 S 12.4 1.75 15.1 2.15 17.00 $ 14.00 $ 15.40 S 10.1 1.56 16.5{ 14.0(1 14.71 2,048,574 2,048,574 2.048,574 2,048.574 2,048,574 2,171 438,878 114,616 835 279,915 359,345 $ 423,674 $ 418,248 96,98! 1,110 260,682 357,876 95,773 599 275,974 355,955 $ 407,367 83,942 663 268.192 340,555 $ 315,670 53.582 453 221.808 258,413 31H 54:? 1, 201 25S 27,088 19,537 15,465 15,465 13.626 2,667 15.465 20.762 4,000 15,465 24,114 23,200; 4,500? $ 32,079 7.31 % 11.78% 14.05 % 8 ^% , 28,717 S 25,752 $ 6.78% 10.39% 12.93% 6.16% 9.58% 12.53% 22,835 $ 5.61 % 8.54 % 11.82 % 10,000 20,206 $ 6.40 % 10.90% 13.14% 5,000 17,636 5.(-15 % 10.05 % 10.98 % 7.18%. Return on common stockholders' equity is calculated by dividing net income by average common stockholders' equity. Common stockholders' equity is defmed as equity plus or minus accumulated other comprehensive income or loss. • 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. SELECTED FINANCIAL DATA Return On Average Assets Return On Average Common Equity 2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007 Earnings Per Share Price/Earnings Multiples • 8.0 XY ^ 6.0 X -' / 4.0 X -' / 2.0 X- ' 0.0 X -' /• /'\ ' i 51 X r U . 4X - T' -^ 8.0 X -' myx 1 1). 1 \ iO.3 X '1.5 \ 2002 2003 2004 2005 2006 2007 6.0 X -' 4.0 X -' 2.0 X -' 0.0 X -' 1 ^ H 2003 2002 2004 i IH 2005 • 1 1 2006 2007 7|_ ^ Market Price To Book Value Loan/Deposit Growth 2.5X 2.0 X 1.5 X i .^ I.OX 0.5 X 0.0x4* 71 2002 2003 2004 2005 2006 2007 2002 2003 2004 2005 2006 2007 MANAGEMENT'S REPORT Arthur E. Greenbank, President/CEO Brian Ippensen, Treasurer To The Stockholders: Management of First Bankers Trustshares, Inc. has prepared and is responsible for the integrity and consistency of the financial statements and other related information contained in this Annual Report. In the opinion of Management, the financial statements, which necessarily include amounts based on management estimates and judgments, have been prepared in conformity with accounting principles generally accepted in the United States of America and appropriate to the circumstances. In meeting its responsibilities. First Bankers Tmstshares, Inc. maintains a system of internal controls and procedures designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with established policies and practices, and that transactions are properly recorded so as to permit preparation of financial statements that fairly present financial position and results of operations in conformity with accounting principles generally accepted in the United States of America. Internal controls and procedures are augmented by written policies covering standards of personal and business conduct and an 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 cortective 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 >'4^c6^i.t^ (^^;|^a^vt4^*^ Brian A. Ippensen Treasurer MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8 CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction The following discussion ofthe financial condition and results ofoperations ofFirst Bankers Trustshares, Inc. provides an analysis ofthe consolidated financial statements included in this annual report and focuses upon those factors which had a significant influence on the overall 2007 performance. The discussion should be read in conjunction with the Company's consolidated fmancial 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 acquisifion was accounted for using purchase accounting. Prior to the acquisition ofthe Bank, the Company did not engage in any significant business activities. Financial Management The business ofthe Company is that ofa community- oriented tinancial ms i H H H H W l iB Tne a variet-y tiU Ot i t i on OTiei llllil % ^^Wi '^^^^^^^m'^- 2007 I •NmDiint.s in thousarids t>r doliars I Assets Cash and due from banks: Noii-intcrcst bearing $ 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 fainily residential mortgage loans, consumer loans, small business loans and agricultural loans in its primary market area. The Company also invests in mortgage- backed securifies, investment securities consisfing priinarily of U.S. govemment or agency obligations, financial institution certificates of deposit, and other liquid assets. In addifion, the Company conducts Trust Operations nationwide through its sales representatives. The Company's goal is to achieve consistently high levels of eaming 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 eaming assets. As deposits have become fully deregulated, sustained earnings enhancement has focused on "eaming 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 Interestbearing Securities Federal funds sold Loans held for sale Net loans Olher assets l o t al Assets Liabilities & Stockholders' Equity Deposits Short-term borrowings Federal Home Loan Bank advances Note payable Junior Subordinated Debentures Company obligated manditorilv redeemable preferred securities Other liabilities Stockholders' equity Total Liabilities «& s $ 2006 Change 2005 2004 200.1 _uu2 • - . • ' .- . ' . -. • 1.3,668 27.29 % $ 10.73X (6.33) "•<, ,S 1 1.464 $ 8.661 S 9.5X6 S 11,250 21.49 »-„ 1,658 114,616 14.90 19.67 1.443 (88.35) 95."7 1 (1.25) 5,035 (65.24) 14.483 6.35 8.35 39.40 5Q9 (46.04) 276,605 1.38 26,461 (4.82) 272.835 27.801 5.95 10.48 12.388 96.981 13,620 i.no 15.9)5 83.942 9,700 663 5,424 53.582 13.500 453 22.674 (92.69) 54.567 110.05 13,500 (62.70) 1,175 (28.94) 257.522 265.428 219.545 199,626 38.56 25.163 23.058 13.580 9.128 189.89 438,878 3.59 "-;, $ 423.674 1.30% $ 4I8.24S $ 407.367 .S 315.670 s 311,920 40.70 % 359,345 0.95 % S 355.955 ( 0 . 5 4 )% S 35",87(i $ 340.555 S 258.413 s 258,170 39.19 "••„ 15,088 7.49 14.037 434.54 2.626 1.762 5.114 4,200 259.24 12,000 - 15.465 118.18 - - -:, 4.574 - 0.86 32,406 14.99 5.500 . (50.00) (100.00) 1 1.000 2,667 19.000 4.000 15.465 - 15,465 15.465 - 4.535 - (29.57) - 3.500 - 3.279 28.182 12.22 25.114 23.306 19,000 - - 10.000 2.134 2!.004 19,000 (36.84) 4,500 (100.00) - 100.00 5.000 (100.00) 2.462 85.78 18,588 74.34 _S_ 4 3 8 , 8 ? $ H ^ ^ ^ U » . ': $ 423.674 1 . 3 0 *. S 418.248 $ 407.367 S 315,670 i ^ ^ ^ ao 40.70 % MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS At Deceinber 31, 2007, the Company had assets of $438,878,000 compared to $423,674,000 at December 31, 2006. The growth in assets is primarily made up ofa 19.67% growth in securities and 1.38% growth in net loans. This offsets a decrease in federal funds sold of 65.24%. The increase in loan portfolio was primarily made up of growth in commercial loans of $4,553,000 and agricultural loans of $3,067,000. Real estate loans also increased $2,246,000. Approximately $19,605,000 of fixed rate long-term residenfial real estate loans were sold in the secondary market during 2007 while $25,037,000 were sold in 2006. Agricultural real estate loans totaling $2,014,000 were sold in the secondary market during 2007, while $1,452,000 were sold in 2006. Management continues to place emphasis on the quality versus the quantity ofthe 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. Generafion of fee income will be a goal ofthe Company and should be a source of confinued 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 ofthe balances of loans, securifies and other interest eaming assets outstanding during the period and the yield eamed on such assets. Interest expense is a funcfion ofthe balances of deposits and bomowings outstanding during the same period and the rates paid on such deposits and borrowings. The Company's eamings 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 ofemployee compensation and benefits, occupancy and equipment expenses, amortization and general and administrafive expenses. Prevailing economic conditions as well as federal regulations conceming 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 insfitution's market. In addifion, growth ofdeposit balances is influenced by the perceptions of customers regarding the stability ofthe financial services industry. Lending activities are influenced by the deinand for housing, competition from other lending insfitutions, as well as lower interest rate levels, which may stimulate loan refinancing. The primary sources of funds for lending activities include deposits, loan payments, borrowings and funds provided from operations. For the year ended December 31, 2007, the Company reported consolidated net income of $4,243,000, a $480,000 (12.76%) increase from 2006. Net interest income after provision for loan losses for the periods being compared increased $211,000 or 1.82%. Other operating income increased $438,000 (6.28%) and other expenses decreased $126,000 (0.93%.) from 2006. Analysis of Net Income The Company's assets are primarily comprised of interest eaming assets including commercial, agricultural, consumer and real estate loans, as well as federal funds sold, interest bearing deposits in banks and securities. Average eaming assets equaled $406,112,000 for the year ended December 31, 2007. A combinafion of interest bearing and non-interest bearing deposits, long term debt, federal funds purchased, securities sold under agreement to repurchase, other bortowings and capital funds are employed to finance these assets. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 10 CONDITION AND RESULTS OF OPERATIONS Net interest income Provision tbr loan losses Net interest income al'ler pros ision for ioan losses Other income Other e.xpenses Consolidated Income Summary (Amounts in thousands ofdoilars) ^K • Interest income Interesl expense ^ $ v H ^ Hi m. ^ ^M 2007 change 2006 Change 2005 i^ 2004 2003 2002 5 Year Growth Rate 26,912 9.32 % S 24,618 13.09?-'o S 21.768 Si I7,f525 S 16,187 $ 17,792 51.26% (14,027) 17.44 (11,944) 35.07 (8.843) (6.500) (6,530) (7,750) 80.99 $ 12,885 (1,080) 1.66% _ S 12.674 ( 1 . 9 4 )% S 12,925 i fc "•''25 S 9,657 S 10.042 28.31 % (l.O^Ol (52 00) (2,250) (1.165) (1,28.5) (990) 9.09 $ 11,805 1.82% % 1 1.594 8.6 1 Va S 10,675 S 9,860 S 8,372 $ ^^^^^^^^^^^^^^^^^^^^^^^ 7,415 6.28 6.9"7 (1 15) 7,058 5,325 4.094 9,052 3,449 30.41 % 114.99 ^ H H BI (13,377) (0.93) (13.50^1 3.58 (13,036) (10.331) (8.218) (8,130) 64.54 I p l c o me before taxes V ^ HH $ 5,843 15.29% S 5.OOX 7 . 9 0% S 4,697 .'$.-" 4,854 s 4,248 $ 4.371 33.68 % Income Ui\ expense (1,600) 22.61 (1.305) 22.88 (1,()(>2) (1,590) (1,125) (1.129) 41.72 - Vii. • $ 4,243 12.76 % s 3.763 3.52%. S 3,635 . S» 3-264 s 3,123 S 3.242 30.88 % allowance for loan losses is adequate to provide for possible losses in the portfolio at December 31, 2007. Other Income Other income may be divided into two broad categories - recurring and non-recurting. Tmst 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 Deceinber 31, 2007 was $7,415,000, an increase of $438,000 (6.28%) from 2006. An increase in Trust Services income of $261,000 (7.22%) and an increase of $287,000 (17.11%) in other income accounted for the increase. Other Expense Other expenses for the period ended December 31, 2007 totaled $13,377,000, a decrease of $126,000 (0.93%) from 2006 year end totals. Salaries and employee benefits expense aggregated 56.13% and 55.07% oftotal other expense for the years ended December 31, 2007 and 2006 respectively. gars Ended Dec s in thou.'vaiKis o 2006 S 24.0X4 534 (11,944) mmm 21105 S 21,184 584 (8.843) S 2()()7 26,482 430 (14.027) $ 12.885 $ 12.674 S 12,925 S 406,112 $381,472 $ 379,546 3.17% • \ m ^ ^m 3.41 % interest income Loan Fees Interest Fxpense Net Interest Income A\eragc Earning Assets Net Inters Margin | The yield on average earning assets for the year ended 2007 was 6.63% while the average cost of funds for the same period was 4.06%o on average interest bearing liabilities of $345,549,000. The yield on average earning assets for the year ended 2006 was 6.45''/o, while the average cost of funds for the same period was 3.68% on average interest bearing liabilities of $324,722,000. The increase in the net interest of $211,000 can be attributed to the 6.46% increase in average earning assets and the .18%) increase in yield on eaming assets, which was partially offset by an increase in average cost of funds of .38%. Provision for Loan Losses The allowance for loan losses as a percentage ofnet loans outstanding is 1.18% at December 31, 2007, compared to 1.14%) at December 31, 2006. Net loan charge-offs totaled $909,000 for the year ended December 31, 2007 compared to $1,101,000 in 2006. The amounts recorded in the provision for loan losses are determined from management's quarterly evaluation of the quality ofthe loan portfolio. In this review, such factors as the volume and character ofthe loan portfolio, general economic conditions and past loan loss experience are considered. Management believes that the MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS T 1 fon-accrual, Restnictiired and Fast Due Loans a na Leases and Otfier Keal Estate •:...^'^^'^?^.^.- vhel'"" (.Amounts in thousands ofdoilars) K\ 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 inlerest Tota! non-performing assels and 90-day past due loans and leases Interest inconie as originally contracted on non-accrual and restructured loans and leases Interest inconie 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 eamings per share due to ., non-accrual and restructured loans and leases Income Taxes The Company files its Federal income tax retura on a consolidated basis with the Bank. See Note 14 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 obligafions 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. 2007 2006 2005 2004 2(10 2002 s s s 2,152 $ 236 $ 267 $ 90 1.327 1.363 405 \ 204 1X9 $ 206 2.242 $ 1,563 \ 1.630 <• 609 X 395 $ .301 578 1.11" 9X0 201 104 41 145 58 2..543 S 2.141 $ 2.^4" 1,5X9 S 596 S 203 93 S 39 S 30 5; 14 $ 9S 93 39 S 30 $ 14 S 9 $ .01 $ .00 $ .00 : Closely related to the management of liquidity is the management of rate sensitivity (management of variable rate assets and liabilities), which focuses on maintaining a stable net interest margin, an important factor in earaings 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 The Company's Asset/Liability Committee with volumes and mixes of assets and subsidiary Bank. responsibility of pmdently managing liabilities of is charged the the through liquidity side provides Bank liquidity is provided from both assets and liabilifies. The asset regular maturities of investment securifies and loans. Investment securifies with maturifies of one year or less, deposits with banks and federal funds sold are a primary source of asset liquidity. On December 31, 2007, these categories totaled $37,504,000 or 8.55% of assets, compared to $38,014,000 or 8.97% the previous year. Management believes that it has stmctured its pricing mechanisms such that the net interest margin should maintain acceptable levels in 2008, regardless of the changes in interest rates that may occur. The following interest-earaing table shows related the assets and repricing gap (Amounts in thousands ofdoilars): the repricing period for interest-bearing liabilities and As of December 31, 2007, securities held to maturity included $171,000 of gross unrealized gains and $1,000 securities which of losses gross management Such amounts are not expected to have a material effect on future eamings beyond the usual amortizafion of premium and accretion of discount. on to hold unfil maturity. unrealized intends $ 54,498 '1^ '•"' --is i,rnivo:iiiv "i,2an(! K. :; I ', . vi Ttirougti One yeai $ 135,787 282,595 Year through Five years I 209,867 35,076 After Five years $ 42,620 15,465 $ (146,808) aJTafi.'f.'ifMIBlgj $ 27,155 1 M A N A G E M E N T 'S D I S C U S S I ON A ND ANALYSIS OF FINANCIAL CONDITION A ND R E S U L TS OF O P E R A T I O NS 12 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 differenfiy than other commercial enterprises by the effects of inflafion. 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 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 ofa bank's income is generated through net interest income and not from goods or services rendered. liability structure Although inflation may impact both interest rates and volume ofloans 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 crifical to the Company's long term success. A common measure of financial institutions is primary capital as a percent oftotal assets. capitalization for Regulafions also require the Company to maintain certain minimum capital to consolidated Company assets. Regulations require a rafio of capital to risk-weighted assets of 8.00 percent. in relation levels Asset Liability Management Since changes in interest rates may have a significant impact on operations the Company has implemented, and liability management curtently maintains, an asset committee at the Bank to monitor and react to the changes in interest rates and other economic conditions. Research conceming 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 is held by 267 shareholders as of December 31, 2007, and is traded in a limited over-the-counter market. stock the market price of On December 31, 2007 the Company's common stock was $19.70. Market price is based on stock transactions in the market. Cash dividends on common stock of $881,000 were declared by the Board of Directors of the Company for the year ended December 31, 2007. Closing Share Price Data The Company's capital, as defined by the regulafions, was 14.05 percent of risk-weighted assets at December 31, 2007. In addifion, a leverage ratio of at least 4.00 percent is to be maintained. At December 31, 2007, the Company's leverage rafio was 8.89 percent. Risked Based Capital Ratios ^ 16.00%i SO.OO 2002 2003 2004 2005 2006 2007 vmm • I4.I.5",. i ^B ./ 14.00%- .^ 12.00%- 10.00%- 8.00%- \m-h M b« i 6.00%- 4.00%- 2.00%- 0.00%- 2002 u u 2004 2003 m ^ m ^ ' 2006 2007 2005 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 Financial Report Upon written request ofany shareholder ofrecord on December 31, 2007, the Company will provide, without charge, a copy ofits 2007 Annual Report including financial statements and schedules. The Company filed a Form 15 with the Securifies 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 13, 2008 at 9:00 A.M. at the Stoney Creek Inn, 3809 Broadway, Quincy, Illinois. McGladrey&Pullen Certified Public Accountants 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, 2007 and 2006, and the related consolidated statements of income, changes in stockholders! equity and cash flows for the years ended December 31, 2007, 2006 and 2005. These financial statements are the responsibility ofthe Companyis managemenf 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, 2007 and 2006, and the results of their operations and their cash flows for the years ended December 31, 2007, 2006 and 2005, in conformity with accounting principles generally accepted in the United States of America. MeJ^!kM^/^^e£^^^^ ^ ^^ Davenport, Iowa March 13,2008 McGladrey & Pullen, LLP is a member firm of RSM International ri an affiliation of separate and independent legal entities. F I N A N C I AL SUMMARY 15 FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands ofdoilars, except share and per share data) Assets Cash and due froiu banks (Note 3) Non-interest bearing Interest bearing Securities held to maturity (Note 4) Securities available for sale (Note 4) Federal funds sold Loans held for sale Loans (Note 5 and 9) Less allowance for loan losses Net loans Preniises, furniture and equipment, net (Note 6) Accrued interest receivable Life insurance contracts Intangibles (Note 7) Other assets TOTAL ASSETS Liabilities and Stockholders' Equity Liabilities: Deposits: Non-interest bearing demand Interest bearing demand Savings Time (Note 8) Total Deposits Securities sold under agreements to repurchase Federal Home Loan Bank advances (Note 9) Junior subordinated debentures (Note 10) Accrued interest payable Other liabilities TOTAL LIABILITIES Commitments and Contingencies (Note 11) Stockholders' Equity (Note 13) 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 eamings Accumulated other comprehensive income (loss) Treasury stock, at cost - 530,656 shares TOTAL STOCKHOLDERS' EQUITY TOTAL LIABILITIES AND STOCKHOLDERS'EQUITYl December 31. 2007 2006 •3 13,668 1,658 15,326 5,223 109,393 5,035 835 279,915 (3,310) 276,605 7,465 2,769 8,085 3,890 4,252 438,878 66,166 82,455 62,150 148,574 359,345 15,088 12,000 15,465 1,606 2,968 406,472 2,580 2,251 34,677 327 (7,429) 32,406 $ $ $ $ 10,738 1,443 181 5,280 90,493 14,485 599 275,974 (3.139)' 272,835 423,674 $ & li s $ 0- ^ $ 57,821 • 70,684 '• 54,886 ' 172,564 355,955 14,037 - 5,500 m 15,465 m 1,858 • 2,677 395,492 31,315 (535) (7.429) 28,182 438,878 t 423,6743 See notes to consolidated financial statements 16 FINANCIAL SUMMARY FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands ofdoilars, except per share data) Interest income: Loans, including fee income^ Taxable Non-taxable Securities: Ta.xable Non-taxable Federal funds sold Inieresi bearing deposits in banks Other Total interest income Interest expense: Deposits: Inlerest bearing demand and savings Time Total interesl on deposits Securities sold under agreements to repurchase Federal Home Loan Bank advances Note payable Junior subordinated debentures Total interest expense Nel interest income Provision for loan losses (Note 5) Net interest income after provision for loan losses Other income: Trust services Service charges on deposit accounts Gain on sale of loans Investment securities gains (losses), net Olher Total other income Other expenses: Salaries and employee benefits Occupancy expense, net Equipment expense Computer processing Professionai services Other Total other expenses Income before income taxes Income taxes (Note 14) Net incoine $ $ $ $ $ $ 4,(»39 7,726 11,765 523 333 1,406 14,027 12,885 1,080 11,805 3,875 1,256 339 (19) 1,964 7,415 7,509 902 827 950 365 2,824 13,377 5,843 1,600 4,243 2.07 12,674 1,080 1.594 $ s s $ $ 8,843 12.925 2.250 10,675 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 See notes to consolidated fmancial statements F I N A N C I AL SUMMARY 17 FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Amounts in thousands ofdoilars, except share and per share data) Years Ended December 31, 2007, 2006 and 2005 Preferred Stock Common Stock Additional Paidin Capital 2,580 S 2,251 Retained Earnings $ 25,433 3,635 .\ccumulated Other Comprehensive Income (Loss) 471 (1,109) Tieasury Stock Comprehensive Income (7.429) $ 23.306 2,580 (718) S 28,350 $ i.763 2,5S0 $ 2.251 (798) S 31,315 4.243 (638) 17.429) 103 (535) (7,429) 862 2.580 $ 2,251 (881) S 34,677 327 (7,429) See notes to consolidated financial statements 3,635 3,635 (1.109) 2,526 11.109) 3,763 103 3.866 4,243 862 5,105 (718) $ 25,114 3,763 103 (79X) $ 2X.1N2 4,243 862 (881) 32.406 $ Comprehensive income; Net income Other comprehensive (loss). net oftax, (Note 2) Comprehensive income Dividends declared (amount per .share $.3.5) Balance, December 31. 2005 Comprehensive ineome: Net ineonie Other comprehensive income, nel oftax. (Note 2) Comprchensiv e income Dividends declared (amount per share &.39) Balance, December 31. 2006 Comprehensive income: Net income Other comprehensive income, net oftax, (Note 2) Comprehensive ineome Dividends declared (amount per share $.43) Balance, December 31,2007 18 F I N A N C I AL SUMMARY FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands ofdoilars) ^dju.stmenls lo reconcile nel income lo nel cash Provided by operaling aelivilies: Provision for ioan losses Depreciation Amortization of intangibles Amortization/accretion of premiums/discounts on securiiies, net Investment securities (gains) losses, net Loans originated for sale Proceeds from loans sold Gain on sale ofloans Deferred income taxes Decrease in accrued interest receivable and other assets Increase in accrued interest payable and other liabilities Net cash^^proyidedjbyjogeraiingjs^^ Rsh Flowsl stivity in \ urchases Sales ofsecurities available for sale Calls, maturilics and paydowns (Increase) decrease in loans, net (Increase) decrease in federal funds sold Purchases of preniises, fumiture and equipment Purchase of life insurance contracls (Increase) decrease in cash surrender value lilt insurance contracts 2007 4,243 2006 3,763 2005 3,635 1,080 920 223 (91) 19 (21,855) 21,958 (339) (24) 3,224 18 9.376 (41,669) 10,685 13,603 (6,645) 9,450 (1.429) (307) ,015 13,333 (16.957) (865) (523) (3.000) 2,250 1,074 272 445 (2!) (24,156) 24,015 (306) (290) 201 7,204 (34,966) 962 18,753 4,231 (3,920) (1.220) (16,312) (:u..v-^:i ; 16,082) ' Net iinjHaWBHttci .M -^-1 i -i deposits I'liucipal pa)nicnu. i;i! .:ote payable Cash dividends paid increase in securities sold under agreement lo repurchase Proceeds from Federal Home Loan Bank advances Repayments ofFederal Home Loan Bank advances Net cash provided by financing activities Net increase (decrease) in cash and due from banks Cash and Due From Banks: Beginning ,,, Ending 3,390 (860) 1,051 8.000 (1,500) 10.081 3,145 12.181 15,326 $ $ $ $ (continued) $ s $ s $ 17,32! (1.333) (698) 864 (8,000) 8,154 (724) 24,576 23,852 $ (11,671) F I N A N C I AL SUMMARY 19 FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands ofdoilars) Supplemental disclosure ofcash flow information. Cash payments for: Interesl Income taxes 2007 14,279 1,623 2006 T,309 1,587 2005 8,692 1,341 $ $ t Supplemental schedule of noncash investing and \ financing activities: '4 Net change in accumulated other comprehensive income, I f- unrealized gains (losses) on securities available for sale, net Transfer o f . | ^ M M i ^ M i l ^ ^ l W B i i i l l l l i l M B i ^ ^B 862 1,795 See notes to consolidated financial statements (1.109) 1,425 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business First Bankers Trustshares, Inc. (the "Company") is a bank holding company which owns 100% ofthe 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 ofthe 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 offinancial stateinents is an estimate that can be computed within a range. Basis ofConsolidation The accompanying consolidated financial statements include the accounts ofFirst 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 fiinds 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 ofthe 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 ofpurchase and as ofthe balance sheet date are carried at amortized cost, adjusted for amortization ofpremiums and accretion ofdiscounts, 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 oftheir 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 eamings 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 ofthe 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 ofsecurities are based upon the adjusted book value ofthe specific securities sold and are included in eamings. There were no trading securities at December 31, 2007 or 2006. 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 ofcash 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 eamings as eamed based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment ofthe related loan's yield. As assets held for and used in the production of services, the origination and collection ofthese loans is classified as an investing activity in the statement ofcash 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 retumed to an accmal status when, in the opinion of management, the financial position ofthe borrower and otber relevant factors indicate there is no longer any reasonable doubt as to the timely payment ofprincipal 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, 2007 and 2006, the Bank had loan concentrations in agribusiness of 12.25% and 11.31%), hotel and motel industry of 2.48% and 2.59% and senior housing industry of 3.46% and 1.91%, respectively of outstanding loans. The Bank had no additional industry loan concentrations, which, in management'sjudgment, were considered to be significant. The Bank had no foreign loans outstanding as of December 31, 2007 and 2006. 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 collectability ofthe 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 ofthe collectability 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 ofthe allowance for loan losses applicable to impaired loans is computed based on the present value ofthe estimated future cash flows of interest and principal discounted at the loan's effective interest rate or on the fair value ofthe 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 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) taking advantage ofits 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 retum specific assets. Credit Related Financial Instruments In the ordinary course ofbusiness, the Bank has entered into commitments to extend credit, including commitments under lines of credit and standby letters of credit. Such financial instmments are recorded when they are funded. Premises, Furniture and Equipment Premises, fumiture and equipment are stated at cost less accumulated depreciafion. Depreciafion is determined using the straight-line method over the esfimated useful lives ofthe 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 ofthe 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 eamings. Goodwill Goodwill represents the excess of cost over fair value ofnet assets acquired in connection with business combinations. 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, 2007 and 2006. Earnings Per Share ofCommon Stock Basic eamings per share of common stock is computed by dividing net income, after deducting preferred stock dividends, by the weighted average number ofshares outstanding during each reporting period. Diluted earnings per share of common stock assume the conversion, exercise or issuance ofall 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, 2007, 2006, and 2005. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deducfible 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 ofthe 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 Financial Accounfing Standards Board (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 penahies, accounting in interim periods, disclosure and transition for tax posifions. In Febmary 2008, the FASB issued FIN 48-2, "Effective Date ofFASB Interpretation No. 48 for Certain Nonpublic Enterprises" which delayed the effective date to annual fmancial statements for fiscal years beginning after December 15, 2007 for nonpublic enterprises. The Company does not expect that the adoption ofthis Interpretation will have a material impact on its fmancial statements. At its September 2006 meeting, the Emerging Issues Task Force ("EITF") reached a final consensus on Issue 06-04, "Accounfing for Deferred Compensation and Postrefirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements." The consensus stipulates that an agreement by an employer to share a portion ofthe proceeds ofa 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 ofa 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 ifthe benefit is offered under an arrangement that constitutes a plan or under APB No. 12 ifit 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 currenfiy assessing the financial statement impact of implementing EITF 06-04. The EITF reached a fmal consensus on Issue 06-10, "Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements." The consensus stipulates that an employer should recognize a liability for the postrefirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either FASB Statement No. 106 or APB Opinion No. 12, as appropriate, ifthe employer has agreed to maintain a life insurance policy during the employee's refirement or provide the employee with a death benefit based on the substanfive agreement with the employee. A consensus also was reached that an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. This is effective for annual or interim reporting periods beginning after December 15, 2007. The Company has collateral assignment split-dollar life insurance policies and is currently evaluating the impact that the adoption ofthis Statement will have on its financial statements. In September 2006, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 157, "Fair Value Measurements". This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. This Statement does not require any new fair value measurements, but rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. In February 2008, FASB issued FASB Staff Posifion (FSP) No. FAS 157-2, "Effective Date ofFASB Statement No. 157", to partially defer FASB Statement No. 157, "Fair Value Measurements". This FSP defers the effective date of Statement No. 157, for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. All other provisions ofthis Statement not within the scope of EPS-FAS 157-2 are effective for fiscal years beginning after November 15, 2007. The Company does not expect that the adoption ofthis Statement will have a material impact on its financial statements. 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 ofFASB Statement No. 115", which provides all entities, including not for profit organizafions, with an option to report selected financial assets and liabilifies at fair value. The objective ofthe Statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in eamings caused by measuring related assets and liabilities differenfiy without having to apply the complex provisions of hedge accounfing. Certain specified items are eligible for the irrevocable fair value measurement option as established by Statement No. 159. Statement No. 159 is effective as ofthe beginning ofan enfity's first fiscal year beginning after November 15, 2007. The Company does not expect that the adopfion ofthis Statement will have a material impact on its fmancial statements. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. 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 ofnet income and other comprehensive income, which for the Company is comprised entirely of unrealized gains and losses on securities available for sale. Other comprehensive income (loss) is comprised as follows (Amounts in thousands ofdoilars): Year ended December 31, 2007 Unrealized gains on securities available for sale: Unrealized holding gains arising during the year Less reclassification adjustment for (losses) included in net income Other comprehensive income 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 Other comprehensive income Year ended December 31, 2005 Unrealized (losses) on securities available for sale: Unrealized holding (losses) arising during tbe year Less reclassification adjustment for gains included in net income Other comprehensive loss SNIMI HM iiiiiiiiiwiiiiiiiaiiii^^ •I 1 1" $ $ $ ' $ $ $ Before tax Tax expense (beneflt) Net of tax 1,371 (19) 1,390 240 73 167 (1,767) 21 (1,788) $ $ $ $ $ $ 521 (7) 528 92 28 64 (671) 8 (679) $ $ S S $ S 850 (12) 862 148 '\ 45 103 (1,096) \ 13 (1,109) 3. RESTRICTIONS ON CASH AND DUE FROM BANKS The Bank is required to maintain a reserve balance with the Federal Reserve Bank of St. Louis. The total ofthe reserve balance was approximately $725,000 and $449,000 at December 31, 2007 and 2006, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 4. SECURITIES The amortized cost and fair values ofsecurities as of December 31, 2007 and 2006 are as follows (Amounts in thousands of dollars): Securities Held lo Matmity -State and poll ti.uil subdivisi m~""" .Amortized (ost 2007 r '^WSKtKM Gross Unrealized (Losses) Gross Unrealized Gains Fair \ alue S 5,223 • i —. M t : ^^ $ (1) S 5,393 Securities Availabie for Sale: U.S. Government agencies and corporation.'' Slate and polilica! subdiv isions Coiporate securiiies Collaterized mortgage obligations Other .Vmortized Cost S S 79,733 20,200 2,011 6,843 78^ 108,865" 2007 Gross I nrealized Gains (jross IJnrealized (Losses) S 922" 182 35 S (175) (182) (206) (48) Fair \ alue 80,480 ^ 20,2001 1,8051 6,830" 78 $ "Tn9" S (611) $ 109,393 { Securities Held lo Matiirilv: State and political subdiv isiuns Securities Available for Sale: U.S. Go\'crnnient agencies and corporations Slate and political subdivisions Collateralized morigage obligations Other Amortized Cost 2006 (Jross Unrealized Gains (Jross Unrealized (Losses) Fair \ alue $ 5,280 $ 214 S 14) 5,490 -t"i.'^,,,'T-1l>'*'/ $ Amortized Cost 66.152 18.385 6.156 662 91.355 S Gross Unrealized Gains Gross Unrealized (Losses) S 88 186 274 S (917) (97) (107) (15) (1.136) Fair Value 65.323 18.474; 6,049' 647 90,493 $ 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. 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, 2007 and 2006 are summarized as follows (Amounts in thousands ofdoilars): Securities held to maturity: State and political subdivisions Securities available for sale: U.S. Govemment agencies and Corporations State and political subdivisions Corporate securities Collateralized mortgage obligations 12 monlhs or more lotal Unrealized Fosses Fair Value Lnrealized Losses $ 825 $ (1) S_ $ 825 (I) S 8,205 3,363 1,805 VI63 $ 14,536 S $ (82) (95) (206) _(L3) (396) S 12.781 6,766 (93) (87) l,J)58 S 2L505 S (35) (215) $ 20,986 10,129 1,805 .3,121 $ 36,041 S (175) (182) (206) (48) (611) Less than Fair Value 12 months Unrealized Losses 2006 12 monlhs or more Fair Value Unrealized Losses Tolal 1 Unrealized Losses Fair Value securities held to maturity: State and political subdivisions Securities available for sale: U.S. Government agencies and Corporations Stale and political subdivision Collateralized morigage obligations Other Investmenls $ $ $ $ 3,037 5,261 1,823 mA 10,121 $ $ 451 $ (4) $ 451 $' (4) $51,918 3,187 4,226 581 $59,912 $ $ (917) (39) (99) (15) (1.070) $ 54,955 8,448 6,049 581 $ 70,033 $ $ (58) (8) (66) 1 (917) (97) (107) (15) (1,136) At December 31, 2007, the investment portfolio included 199 securifies. Ofthis number, 45 securifies have current unrealized losses wbich have existed for longer than one year. All ofthese securities are considered to be acceptable credit risks. Based upon an evaluation ofthe available evidence, including recent changes in market rates, credit rating information and information obtained from regulatory fllings, 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 anficipated 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 eamings in the period in which the other-than-temporary impairment is identified. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27 4. SECURITIES (Continued) The amorfized cost and fair value ofsecurities as of December 31, 2007 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because the mortgages underlying the collateralized mortgage obligations and the debt underlying the corporate securities may be called or prepaid without penalties. Therefore, these securities are not included in the maturity categories in the following summaries (Amounts in thousands ofdoilars): Securities held to maturity: Due in one year or less Due after one year through five years Due after fi\'e years ihrough ten years Due after ten years Securities available for sale: Due in one year i)r less Due after one year ihrough live years Due after five years through ten years Due after len years Corporate securities Collateralized mortgage obligations .Amortized Cost S $ 1,769 1,620 259 1,575 5,223 A mortized Cost 15,374 45,198 24,149 15,290 100,011 2,011 6,843 108,865 $ $ $ Fair Value 15,303 45,551 24,508 15,39(1 100,758 1.805 6.830 I09.3')3 S Information on sales ofsecurities available for sale during the years ended December 31, 2007, 2006 and 2005 follows (Amounts in thousands ofdoilars): Gross gains Gross losses 2007 10,685 29 (48) $ 2006 8,08^) 103 ....mi.. 2005 962 22 (1) As of December 31, 2007 and 2006 securities with a carrying value of approximately $97,005,000 and $65,177,000 respectively, were pledged to collateralize deposits and securities sold under agreements to repurchase and for other purposes as required or permitted by law. 5. LOANS The composition ofnet loans outstanding as ofDecember 31, 2007 and 2006 are as follows (Amounts in thousands of dollars): Commercial Agricultural Tax exempt Real estate, mortgage Consumer Less: Allowance for loan losses Net loans 2007 $ 156,192 34,287 5,685 49,401 34,350 $ 279,915 2006 M $ 151.639 m 31.220 1 6.459 1 47,155 ' 39,501 $ 275.974 M (3,310) $ 276,605 (3.139) S 272,835_^ 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LOANS (Continued) As ofDecember 31, 2007 and 2006, impaired loans were $2,143,000 and $236,000, respectively, with an allowance provided for them included in the allowance for loan losses of $111,000 and $80,000, respectively. The average recorded investment in impaired loans was $1,190,000 and $252,000 as of December 31, 2007 and 2006, respectively. There are no impaired loans for which an allowance has not been provided. Interest income and cash basis interest income recognized on impaired loans during the years ended December 31, 2007, 2006 and 2005 were not significant. Nonaccrual loans totaled $2,152,000 and $236,000 as of December 31, 2007 and 2006, respecfively. Foregone interest income and the interest collected on these loans for the years ended December 31, 2007, 2006 and 2005 was not significant. Loans past due 90 days or more and sfill accming interest were $301,000 and $578,000 at December 31, 2007 and 2006, respecfively. Activity in the allowance for loan losses during the years ended December 31, 2007, 2006 and 2005 is summarized below (Amounts in thousands ofdoilars): Baiani miance, beginning ofyear Provision for loan losses Loan charge-offs Recoveries of loans charged off ^„ _, Balajicej_end,ofj^ear _ 2007 3.139 1,080 (1,068) 159 3,310 $ S 3,139 2005 Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances ofthese loans totaled $72,571,000 and $78,831,000 at December 31, 2007 and 2006, respectively. In the ordinary course ofbusiness, 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 collectability or present other unfavorable features. An analysis ofthe changes in the aggregate amount ofthese loans during 2007 and 2006 is as follows (Amounts in thousands ofdoilars): Balance, beginning of year Advances Repayments Change in related parties Balance, end ofyear 2006 4. •572 25.243 (24,858) 11 4,768 •N S 6. PREMISES, FURNITURE AND E Q U I P M E NT The cost, accumulated depreciafion and net book value ofpremises, fumiture and equipment as of December 31, 2007 and 2006 is summarized as follows (Amounts in thousands ofdoilars): iing and improvements fumiiure and equipmeni I ess accumulated depreciaiion 2007 2,313 6,667 6,806 15,786 (8,321) 7,465 $ $ $ 6,029 6,570 14,466 (7,510) 6,956 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29 7. INTANGIBLES Goodwill and intangible assets are summarized as follows (Amounts in thousands ofdoilars): "C'ore depoS^^ffigiFle Olher intangible assets Less accumulated amortization on intangible assets Total intangible assets Estimated future amortization expense: For the year ended December 31: 2007 " 2008 2009 2010 2011 2012 8. TIMEDEPOSITS As of Decemher 31, 2007 2006 3.050 1.223 481 (641) 4.113 i 223 213 197 42 42 123 The aggregate amount of time deposits, each with a minimum denomination of $100,000, was approximately $36,693,000 and $35,217,000 at December 31, 2007 and 2006, respectively. At December 31, 2007, the scheduled maturifies of time deposits are as follows (Amounts in thousands ofdoilars): $ 123,520 13,647 3,340 3,469 4,598 _;$ 148,574 ' , 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. FEDERAL HOME LOAN BANK ADVANCES Federal Home Loan Bank (FHLB) advances are summarized as follows at December 31, 2007 and 2006 (Amounts in thousands ofdoilars): Maturity in year ending December 31: 2007 2008 2009 2010 2011 2007 2006 Weighted Average Interest Rate 5.42%, 4.81 4.81 4.95 Ba lance Due $ $ 1,000 2,500 3,000 5.500 12,000 Weighted Average Interesl Rale 5.55% 5.42 4.98 Balance Due $ $ 1,500 1,000 3,000 5.500 First mortgage loans of approximately $16,000,000 and $7,333,000 as of December 31, 2007 and 2006, respecfively, are pledged as collateral on FHLB advances. 10. 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 Tmsts I, II, and III, which are all 100% owned non-consolidated subsidiaries ofthe 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 Securifies. 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, 2007 and 2006, the Company is allowed, for regulatory purposes, to include $10,693,000 and $9,572,000 respectively ofthe capital securities issued by the Tmsts in Tier I capital, with the remainder included in Tier II capital. In March 2005, the Federal Reserve Board issued final regulations, which become effecfive March 31, 2009. If those regulations had been in effect at December 31, 2007 and 2006, the Company would have been allowed to include approximately $9,478,000 and $8,294,000, respecfively, ofthe securifies in Tier I capital and the remainder in Tier II capital. The Company would exceed all regulatory minimum capital ratios ifthe regulations that are to take effect were in place as of December 31, 2007 and 2006. During 2004 FBIL Statutory Tmst 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 (7.78% and 8.01% as of December 31, 2007 and 2006). The Tmst 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 ofthe deferral period, all accumulated and unpaid distributions will be paid. The capital securities will be redeemed on September 15, 2034; however, the Tmst has the option to shorten the maturity date to a date not earlier than September 15, 2009 at par plus any accmed and unpaid distributions to the date ofthe 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 Tmst the right ofredemption 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%) ofthe principal amount ofthe 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 accmed and unpaid distributions to the date ofredemption must also be paid. During 2003 the Company issued 5,000 shares of Company Obligated Mandatorily Redeemable (COMR) Preferred Securities of FBIL Statutory Tmst 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 (8.08% and 8.31%) as of December 31, 2007 and 2006, respectively). The Company may, at one or more times, defer NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31 10. JUNIOR SUBORDINATED DEBENTURES AND COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBENTURES (Continued) interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond September 17, 2033. At the end ofthe 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 accmed and unpaid distributions to the date ofthe redemption. If a special event occurs prior to September 17, 2008, providing the Company the right ofredemption 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% ofthe principal amount ofthe 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 ofredemption 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 fimes, defer interest payments on the capital securities for up to 10 consecufive semi-annual periods, but not beyond September 7, 2030. At the end ofthe deferral period, all accumulated and unpaid distributions will be paid. The capital securifies 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 unfil September 7, 2020 when the capital securifies can be redeemed at par. Any accrued and unpaid distributions to the date of the redemption must also be paid. Holders ofthe capital securities have no voting rights, are unsecured and rank junior in priority of payment to all ofthe Tmst's indebtedness and senior to the Trust's capital stock. 11. COMMITMENTS AND CONTINGENCIES Financial instruments with off-balance sheet risk: The Bank, in the normal course ofbusiness, is a party to financial instmments with off-balance sheet risk to meet the financing needs ofits customers. These financial instruments include unused lines of credit and standby letters of credit. Those instmments 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 instmment for unused lines of credit and standby letters of credit is represented by the contractual amounts of those instmments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary ofthe Bank's commitments at December 31, 2007 and 2006 is as follows (Amounts in thousands ofdoilars): Unused lines ofcrcdil « Standby letters of credit . ^1 mm^ L368 M $ 2007 49,700 2006 49,789 $ | B H H B H B B| Unused lines of credit are agreements to lend to a customer as long as there is no violation ofany 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 ofthe 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 managemenfs credit evaluation ofthe counter-party. Collateral varies but may include accounts receivable, inventory, property, equipment, and income-producing commercial properties. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. COMMITMENTS AND CONTINGENCIES (Continued) Standby letters of credit are condifional 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 ofthe agreement with the third party, the Bank would be required to fund the commitment. The maximum potenfial amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. Ifthe commitment is funded the Bank would be entitled to seek recovery from the customer. At December 31, 2007 and 2006, 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 $1,937,000 and $2,804,000 at December 31, 2007 and 2006, respectively. These amounts include loans held for sale of $835,000 and $599,000 as ofDecember 31, 2007 and 2006, respectively and loan commitments, included in the summary in this Note, of $1,102,000 and $2,205,000 as of December 31, 2007 and 2006, respectively. A portion of residential mortgage loans sold to investors in the secondary market are sold with recourse. Specifically, certain loan sales agreements provide that ifthe 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 tbe first 12 months ofthe 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 ofthese loan sales agreements during the years ended December 31, 2007, 2006, and 2005. 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 ofthe Company's cash is maintained at US Bank, N.A. and the Federal Home Loan Bank of Chicago. The total amount ofcash on deposit and federal funds sold exceeded federal insurance limits at the respective institufions by approximately $6,215,000 and $275,000 respectively as of December 31, 2007. In the opinion of management, no material risk of loss exists due to the financial condition of the institutions. 12. BENEFITS Tbe Company has a 401K plan, which is a tax qualified savings plan, to encourage its employees to save for refirement purposes or other contingencies. Substantially all full time (working over 1000 hours per year) employees ofthe Company and its subsidiaries are eligible to participate in the Plan on the later of January 1st or July Ist after complefion of one year of service and attaining the age of 21. The employee may elect to contribute up to 15% oftheir compensafion before taxes. Based upon profits, as determined by the subsidiary, a contribution may be made by the subsidiary. Employees are 100%o vested in the subsidiaries' contribution to the plan after five years of service. Employee contributions and vested subsidiary contribufions may be withdrawn only on terminafion of employment, refirement, or death. Under the Employee Incentive Compensation Plan, the Bank is authorized at its discretion, pursuant to the provisions ofthe 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, 2007, 2006, and 2005 totaled $295,000, $293,000 and $239,000, respectively. Contributions made to the incentive compensation plan for the years ended December 31, 2007, 2006, and 2005 were $247,000, $195,000 and $40,000 respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33 13. DIVIDENDS AND REGULATORY CAPITAL The Company's stockholders are entitled to receive such dividends as are declared by the Board ofDirectors. The ability of the Company to pay dividends in the future is dependent upon its receipt ofdividends from its subsidiaries. The subsidiaries' ability to pay dividends is regulated by financial regulatory statutes. The timing and amount ofdividends will depend on earnings, capital requirements and financial condition ofthe Company and its subsidiaries as well as general economic condifions 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 ofthe total ofthe current and past two year's eamings less any dividends already paid from those eamings. The Company and its subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet miniinum capital requirements can inifiate 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 ofthe Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounfing practices. The Company's and Bank's capital amounts and classification are also subject to qualitafive 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 defmed in the regulations) to risk- weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defmed). Management believes, as of December 31, 2007, that the Company and Bank meet all capital adequacy requirements to which they are subject. The most recent notificafion from the Office ofthe Comptroller ofthe 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 condifions or events since that notificafion that management believes have changed the Bank's category. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. DIVIDENDS AND REGULATORY CAPITAL (Continued) 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 IJnder Prompt Corrective Action Provisions 1 1 i | As ofDecember 31, 2007 .Amount Ratio Amount Ratio Amount Katio TotalCapital (to Risk Weighted Assets) Company Bank 1 Tier 1 Capital (to Risk Weighted Assets) Company Bank Tier 1 Capital (to Avetage Assets) Company Bank 1 S46,649 S36,996 14.05% 11.22% >S26,566 >$26,371 >8.00% >8.no% >S32,964 N'A] >IO.OO'/o -1 - J ^B 10 $39,126 S33,780 11.78% 10.25% >$13,283 >$13,186 >4.00% >4.00% N/A >$19,778 N/,\ >6.00'/o| S.39,126 S33,780 8.89% 7.79% >S17,598 >$17,350 >4.00% >4.00% N/A >S21,688 N,A >S.00% As ofDecember 31.2006 Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets) Company Bank 1 Tier i Capital (to Risk Weighted Assets) 1 Company Bank Tier 1 Capital (to Average Assets) Company Bank 1 $42,895 $34,8 1 12.93% 10.58% >$26,535 >$26,334 >8.00% >8.00%) >S32.9 S N/A >10.00"/o^ $34,455 $31,799 10.39% 9.66% >$13,267 >$13,167 • • K > 4 . 0 0% " >4.00% N A >S19,751 » $34,465 $31,799 8.21% 7.69% >$ 16,784 >$16,540 >4.00% >4.00% NA >$20,675 > N/A >6.00% 1 N/A >5.00%| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 14. INCOME TAX MATTERS The components of income tax expense are as follows for the years ended December 31, 2007, 2006, and 2005 (Amounts in thousands of dollars): Current Defei s $ _ 1,624 (24) 1,600 2006 1.406 (101) 1*305 ^ S .s 2005 1.352 (290) 1,062 S S 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 ofdoilars): federalincome lax at statutory rale (Changes from slatutory rate ••resulting from: State tax. net of federai benefit Tax exempt interest income, net Increase in cash surrender value 0\'er (under) accrual of provision and olher. net 2007 .\inount •" % of Pretax Income 2006 Amount % of Pretax Income 2005 Amount 1 Income • "s 1,987 34.0 % S 1,723 34.0 % S 1,597 34.0% •; 164 (405) (104) (42) 2.8 (6.9) (1.8) (.7) 139 (334) (82) 2.7 (6.6) (1.6) 160 (570) (64) 3.4 (12.1) (1.4) (141) (2.8) (61) (1.3) Income tax expense ' -' - J J - . / . . ' • • - . ' -• $ 1,600 27.4 "/o $ 1,305 25.7 % S 1,062 22.6 % Net deferred tax assets consist ofthe following components as of December 31, 2007 and 2006 (Amounts in thousands of dollars): Deferred tax assets: Allowance for loan losses Accrued expenses Lnrealized losses on securities available for sale, nel Deferred tax liabilities: Premises, furniture and equipment Stock dividends Prepaid expenses Unrealized gains on securiiies available for sale, nel Amortization Other Net deferred tax assets ^ 2007 1,223 152 - 1,375 (8) (140) (89) (201) (67) (161) (666) 709 S s s s s "n^i8 1 173 ! 327 L718 , (80) ; (140) .; (89) : - (35) ^ (161) (505) - U213__J -dSty $ $ $ $ Net deferred tax assets are included in other assets on the accompanying consohdated balance sheets. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. INCOME TAX MATTERS (Continued) The net change in deferred income taxes is reflected in the financial statements as follows (Amounts in thousands of dollars): 2007 (24) $ _—. 200^ — • 2 0m ' • •' $ (101) $ (290) Slalement ofchanges in stockholders' equity. K;.accumulated other comprehensive income (loss). ^unrealized gains (losses) on securities available for sale. a 528 504 _s_ ( $ 64 (37) (679) (969) $ 15. FAIR VALUE OF FINANCIAL INSTRUMENTS FASB Statement No. 107 "Disclosures about Fair Value of Financial Instmments" requires disclosure of fair value information about fmancial instmments, 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. StatementNo. 107 excludes certain financial instmments and all non-financial instmments 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 assumpfions were used by the Company in estimating the fair value ofits financial instmments: 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 ofFederal 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 ofloans held for sale is based on quoted market prices of similar loans sold in the secondary market. Accmed interest receivable and payable: The fair value of accmed 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 ofsecurities 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 ofFederal Home Loan Bank advances and fixed rate junior subordinated debentures is estimated using discounted cash flow analyses, using interest rates NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) currently being offered for similar borrowings. The fair value of variable rate junior subordinated debentures equals their carrying value. Commitments to extend credit: The fair value ofthese commitments is not material. The carrying values and esfimated fair values ofthe Company's financial instmments as of December 31, 2007 and 2006 are as follows (Amounts in thousands of dollars) i W/ Carrying Value Fair Value Cash and due from banks Securities held to maturity Securities available tbr sale Federal funds sold Loans Accrued interest receivable Financial liabilities: Non-interest-bearing demand deposits Inierest-bearing demand deposits Savings deposits Time deposits Securities sold under agreements to repurchase Federal Home Loan Bank advances Junior Subordinated Debentures m S $ 15,326 5,223 109,393 5,035 280,750 2,769 66,166 82,455 62,150 148,574 15,088 12,000 15,465 1,606 $ 15,326 lOyff^^P 5,035 •'- 282,810 i 2,769 ; •y. $ 66,166 82,455 62,150 148,945 ' 15,088 12,392 16,600 IHBHI ^Mz • Canying Value 12,181 5,280 90,^^93 14,^85 276,573 2,618 57,821 70,684 54,886 172,564 14,037 5,500 15,465 1,858 16.596ji 1,858' 38 BOARD OF DIRECTORS FIRST BANKERS TRUSTSHARES, INC. 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 Ayres Oil Company William D. Daniels Mark E. Freiburg Member Harborstone Group, LLC Owner Freiburg Insurance Agency Freiburg Development Company 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 Carl Adams, Jr. Attorney At Law Scholz, Loos, Palmer, Siebers, & Duesterhaus 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 Gem City Electric Dennis R. Williams Chairman, Quincy Newspapers, Inc. 39 COMPANY OFFICERS FIRST BANKERS TRUST COMPANY, N. A. Arthur E. Greenbank, President Dave Rakers, Executive Vice President IT Officers Ron Fairley Linda Reinold Loan Officers Leslie Westen Patti Westerman Loan Operations Officers Amy Goehl Karen Koehn Marketing Officer Maria Eckert RetaU Officers John Armstrong Judy Fairchild Susan Farlow Jennifer Gordley Jim Keller Lois Knapp Claire Korb Jim Moore Dianna Orr Senior Vice Presidents Dennis Iversen Gretchen McGee 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 Jeanette Schinderling Scott Thoele Brent Voth Assistant Vice Presidents Sherry Bryson Steve Eckert Pam Efiink Matt Poulter Lance Robertson Linda Tossick Joan Whitlow David Young Audit Officer Tim Corrigan Collections Officer Mike Baker 40 BOARD OF DIRECTORS FIRST BANKERS TRUST SERVICES, INC. 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 OU 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 McHatton Kimberly Ser bin Linda Shultz Deborah Staff First Bankers Trustshares, Inc. PO Box 3566 Quincy, Illinois 62301-3566 Phone: 217-228-8000 Internet: https://www.flrstbankers.com E-mail: fbti@firstbanl(ers.com An Equal Opportunity Employer 

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