First Bankers Trustshares, Inc.
Annual Report 2008

Plain-text annual report

First Bankers Trustshares, Inc. 2008 Annual Report  2 TABLE OF CONTENTS Corporate Information Letter To Shareholders Selected Financial Data Management’s Report Page 3 Page 4 Pages 5 - 6 Page 7 Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 8 - 13 Independent Auditor's Report Page 14 Consolidated Financial Statements: Balance Sheets Statements of Income Statements of Changes in Stockholders’ Equity Statements of Cash Flows Notes to Consolidated Financial Statements First Bankers Trustshares, Inc. First Bankers Trust Company, N.A. Directors and Officers First Bankers Trust Services, Inc. Directors and Officers Page 15 Page 16 Page 17 Pages 18 - 19 Pages 20 - 39 Pages 40 - 41 Page 42 CORPORATE INFORMATION 3 Corporate Description First Bankers Trustshares, Inc. (FBTI) is a bank holding company for First Bankers Trust Company, N.A., First Bankers Trust Services, Inc., FBIL Statutory Trust I, FBIL Statutory Trust II, and FBIL Statutory Trust III. The Company was incorporated on August 25, 1988 and is headquartered in Quincy, Illinois. 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 9 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. For additional financial information contact: Brian A. Ippensen, Treasurer First Bankers Trustshares, Inc. Telephone (217) 228-8000 Stockholder Information Common shares authorized: 6,000,000 Common shares outstanding as of December 31, 2008: Stockholders of record: *As of December 31, 2008 2,048,574 266 * Board of Directors 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 of the Board, First Bankers Trustshares, Inc. Chairman of the Board, First Bankers Trust Company, N.A. Chairman of the Board, First Bankers Trust Services, Inc. Arthur E. Greenbank President & Chief Executive Officer, First Bankers Trust Company, N.A. Phyllis J. Hofmeister Secretary, Robert Hofmeister Farm Steven E. Siebers Secretary of the Board, First Bankers Trustshares, Inc. Attorney, Scholz, Loos, Palmer, Siebers & Duesterhaus Dennis R. Williams Chairman of the Board, Quincy Newspapers, Inc. EXECUTIVE OFFICERS 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) Market Value High Low Period End Close 12/31/08 $ 21.75 $ 15.60 $ 18.00 09/30/08 $ 21.75 $ 17.85 $ 18.00 06/30/08 $ 21.75 $ 20.00 $ 20.35 03/31/08 $ 20.00 $ 18.00 $ 20.00 12/31/07 $ 20.00 $ 19.25 $ 19.70 The following companies make a market in FBTI common stock: Howe Barnes Hoefer & Arnett, Inc. 225 S. Riverside Plaza, 7th Floor Chicago, IL 60603 Phone (800) 800-4693 Wachovia Securities 510 Maine, 9th 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. 100 North Riverside Plaza Suite 1620 Chicago, IL 60606 (312) 327-2530 4 Donald K. Gnuse, Chairman Arthur E. Greenbank, President/CEO Dear Shareholders, First Bankers Trustshares, Inc. reported a record year in earnings and asset growth during a very difficult year for our economy and industry. We remain optimistic for 2009, recognizing the challenges we face within this same economy. Both the Bank (First Bankers Trust Company, N. A.) and the Trust Company (First Bankers Trust Services, Inc.) contributed to these record results. While we have seen some weakness in our local economies, and our Trust Companyʼs growth has slowed, we have positioned both companies well for whatever the future may hold. We continue to carefully execute our strategic growth plans. Both companies recently acquired and refurbished real estate to support our employees, customers and future growth of our business. We continue to study new markets for future expansion as well as expand in our existing markets. In November, our Company was invited to participate in the governmentʼs “Emergency Economic Stabilization Act of October 2008”, whereby the government purchases non-voting preferred stock in our Company. This invitation was extended to us because we are a strong, healthy community bank. This program allows us to continue our loan and investment activities in support of our local customers and communities. We accepted $10,000,000 in January, 2009 and have carefully grown our Company during the first quarter. This investment will assist us in accomplishing numerous goals for our Company including improving our capital ratios from already “well capitalized” to even better capitalized. Please refer to Note 17 for further details. It has allowed us to improve our liquidity position and will permit us to maintain our growth through this economic downturn. Our asset quality and earnings remain solid. We are well positioned to ride out this economic future take and opportunities when they present themselves. advantage of storm In conclusion, while 2008 was an extremely challenging year, it was a successful year for your Company. We will continue to work hard and strive to be as successful in the future. We look forward to talking to many of you at our annual meeting on May 12, 2009 at the Holiday Inn located at 4821 Oak Street in Quincy, Illinois at 9:00 a.m. Sincerely, Donald K. Gnuse Chairman of the Board Arthur E. Greenbank President/CEO SELECTED FINANCIAL DATA 5 (Amount in thousands of dollars, except per share data statistics) YEAR ENDED DECEMBER 31, PERFORMANCE Net income Common stock cash dividends paid Common stock cash dividend payout ratio Return on average assets Return on common stockholders' equity1 2008 2007 2006 2005 2004 2003 $ 4,729 $ 4,243 $ 3,763 $ 3,635 $ 3,264 $ 3,123 $ 942 $ 860 $ 778 $ 698 615 $ 533 19.93% 20.28 % 20.69 % 19.20 % 18.84 % 17.07 % 1.01% .97 % .91 % .89 % .94 % .97 % 14.86 % 15.03 % 16.31 % 13.77% 13.90 % 13.68 % PER COMMON SHARE Earnings, basic and diluted Dividends (Paid) Book value2 Stock price High Low Close Price/Earnings per share (at period end) Market price/Book value (at period end) Weighted average number of shares outstanding AT DECEMBER 31, Assets Investment securities Loans held for sale Loans Deposits Short-term borrowings and Federal Home Loan Bank advances Note payable Junior subordinated debentures Company obligated mandatorily redeemable preferred securities Stockholders' equity3 Total equity to total assets3 Tier 1 capital ratio (risk based) Total capital ratio (risk based) Leverage ratio $ 1.52 $ 2.31 $ 2.07 $ 1.84 $ 1.77 $ 1.59 $ .46 $ .42 $ .38 $ .34 $ .30 $ .26 $ 17.51 $ 15.66 $ 14.02 $ 12.57 $ 11.15 $ 9.86 $ 21.75 $ 20.00 $ 23.25 $ 24.00 $ 24.10 $ 17.00 $ 15.60 $ 18.00 $ 18.05 $ 18.00 $ 15.40 $ 14.00 $ 18.00 $ 19.70 $ 19.00 $ 22.00 $ 24.00 $ 15.40 10.1 7.8 9.5 10.3 1.56 1.36 1.26 1.03 12.4 1.75 15.1 2.15 2,048,574 2,048,574 2,048,574 2,048,574 2,048,574 2,048,574 $ 498,028 146,908 187 288,412 400,844 40,545 - 15,465 $ 438,878 $ 423,674 114,616 95,773 835 599 279,915 275,974 359,345 355,955 $ 418,248 96,981 1,110 260,682 357,876 $ 407.367 $ 315,670 83,942 53,582 663 453 268,192 221,808 340,555 258,413 27,088 19,537 - - 15,465 15,465 13,626 2,667 15,465 20,762 24,114 4,000 - - 15,465 - - - - - 10,000 $ 25,752 $ 32,079 $ 28,717 $ 35,866 7.20 % 7.31 % 6.78 % 6.16 % 5.61 % 6.40 % 12.44 % 11.78 % 10.39 % 9.58 % 8.54 % 10.90 % 14.36 % 14.05 % 12.93 % 12.53 % 11.82 % 13.14 % 7.32 % 6.52 % 8.12 % 8.96 % 8.89 % 8.21 % $ 22,835 $ 20,206 1 Return on common stockholders’ equity is calculated by dividing net income by average common stockholders’ equity. Common stockholders’ equity is defined as equity plus or minus accumulated other comprehensive income or loss. 2 Book value per share is calculated by dividing stockholders’ equity, excluding accumulated other comprehensive income or loss, by outstanding shares. Stockholders’ equity does not include accumulated other comprehensive income or loss. 3 6 1.05% 1.00% SELECTED FINANCIAL DATA Return On Average Assets Retur n On A verage C ommon Equity 1.01% 0.97% 0.95% 0.97% 0.94% 0.90% 0.85% 0.80% 0.91% 0.89% 2003 2004 2005 2006 2007 2008 16.50% 16.00% 15.50% 15.00% 14.50% 14.00% 13.50% 13.00% 12.50% 12.00% 16.31% 15.03% 14.86% 13.68% 13.90% 13.77% 2003 2004 2005 2006 2007 2008 Earnings Per Share Price /Earnings Multiples $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 2.5X 2.0X 1.5X 1.0X 0.5X 0.0X $2.31 $2.07 $1.52 $1.59 $1.77 $1.84 18.0 X 16.0 X 14.0 X 12.0 X 10.0 X 8.0 X 6.0 X 4.0 X 2.0 X 0.0 X 15.1 X 12.4 X 10.1 X 10.3 X 9.5 X 7.8 X 2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 Market Price To Book Value 2 .15X 1.56X 1.75X 1.36X 1.26 X 1.03X Loan/Deposit Growth Loans Deposits $341 $268 $258 $222 $358 $356 $359 $276 $280 $261 $401 $288 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 MANAGEMENT’S REPORT OF INTERNAL CONTROLS 7 OVER FINANCIAL REPORTING 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 Trustshares, 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, account review, and external audit. In recognition of the cost-benefit relationships and inherent control limitations, some features of the control systems are designated to detect rather than prevent errors, irregularities and departures from approved policies and practices. Management believes the system of controls has prevented or detected on a timely basis, any occurrences that could be material to the financial statements and that timely corrective actions have been initiated when appropriate. First Bankers Trustshares, Inc. engaged the accounting firm of McGladrey & Pullen, LLP as Independent Auditors to render an opinion on the consolidated financial statements. To the best of our knowledge, the Independent Auditors were provided with access to all information and records necessary to render their opinion. The Board of Directors exercises its responsibility for the financial statements and related information through the Audit Committee, which is composed entirely of outside directors. The Audit Committee meets regularly with Management, the internal auditing manager and staff, and the Independent Auditors to assess the scope of the annual audit plan and to discuss audit, internal control and financial reporting issues. Among the many items discussed are major changes in accounting policies and reporting practices. The Independent Auditors also meet with the Audit Committee, without Management present, to afford them the opportunity to discuss adequacy of compliance with established policies and procedures and the quality of financial reporting. Arthur E. Greenbank President and Chief Executive Officer Brian A. Ippensen Treasurer  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL 8 CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction The following discussion of the financial condition and results of operations of First Bankers Trustshares, Inc. provides an analysis of the consolidated financial statements included in this annual report and focuses upon those factors which had a significant influence on the overall 2008 performance. The discussion should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. The Company was incorporated on August 25, 1988, and acquired First Midwest Bank/ M.C.N.A. (the Bank) on June 30, 1989. The Bank acquisition was accounted for using purchase accounting. Prior to the acquisition of the Bank, the Company did not engage in any significant business activities. Financial Management The business of the Company is that of a community- oriented financial institution offering a variety of Consolidated Assets (Amounts in thousands of dollars) financial services to meet the needs of the communities it serves. The Company attracts deposits from the general public and uses such deposits, together with borrowings and other funds, to originate one-to-four family residential mortgage loans, consumer loans, small business loans and agricultural loans in its primary market area. The Company also invests in mortgage- backed securities, investment securities consisting primarily of U.S. government or agency obligations, financial institution certificates of deposit, and other liquid assets. In addition, the Company conducts Trust Operations nationwide through its sales representatives. The Company's goal is to achieve consistently high levels of earning assets and loan/deposit ratios while maintaining effective expense control and high customer service levels. The term "high level" means the ability to profitably increase earning assets. As deposits have become fully deregulated, sustained earnings enhancement has focused on "earning asset" generation. The Company will focus on lending money profitably, controlling credit quality, net interest margin, operating expenses and on generating fee income from trust and banking operations. 5 Year Growth Rate Assets 2008 Change 2007 Change 2006 2005 2004 2003 Cash and due from banks: Non-interest bearing $ 9,923 (27.40) % $ 13,668 27.29 % $ 10,738 $ 11,464 $ 8,661 $ 9,586 3.52 % Interest bearing 18,544 1,018.46 1,658 14.90 1,443 12,388 15,915 5,424 241.89 Securities 146,908 28.17 114,616 19.67 95,773 96,981 83,942 53,582 174.17 Federal funds sold 6,483 28.76 5,035 (65.24) 14,485 13,620 9,700 13,500 (51.98) Loans held for sale 187 (77.60) 835 39.40 599 1,110 663 453 (58.72) Net loans Other assets 284,375 2.81 276,605 1.38 272,835 257,522 265,428 219,545 29.53 31,608 19.45 26,461 (4.82) 27,801 25,163 23,058 13,580 132.75 Total Assets $ 498,028 13.48 % $ 438,878 3.59 % $ 423,674 $ 418,248 $ 407,367 $ 315,670 57.77 % Liabilities & Deposits $ 400,844 11.55 % $ 359,345 0.95 % $ 355,955 $ 357,876 $ 340,555 $ 258,413 55.12 % Short-term borrowings Federal Home Loan Bank advances Note payable Junior Subordinated Debentures Company obligated manditorily redeemable preferred securities Other liabilities 22,045 46.11 15,088 7.49 14,037 2,626 1,762 5,114 331.07 18,500 54.17 - - 12,000 118.18 5,500 11,000 19,000 19,000 (2.63) - - - 2,667 4,000 - - 15,465 - 15,465 - 15,465 15,465 15,465 - 100.00 - - - - - - - 10,000 (100.00) 4,900 7.13 4,574 0.86 4,535 3,500 3,279 2,139 129.08 Stockholders' equity 36,274 11.94 32,406 14.99 28,182 25,114 23,306 21,004 72.70 Total Liabilities & Stockholders’ Equity $ 498,028 13.48 % $ 438,878 3.59 % $ 423,674 $ 418,248 $ 407,367 $ 315,670 57.77 % MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 At December 31, 2008, the Company had assets of $498,028,000 compared to $438,878,000 at December 31, 2007. The growth in assets is primarily made up of a 85.74% growth in cash and due from banks and a 28.17% growth in securities. The net loan portfolio grew by 2.81% and was primarily made up of growth in commercial loans of $2,332,000 and agricultural loans of $3,331,000. Consumer loans also increased $3,712,000. Approximately $13,518,000 of fixed rate long-term residential real estate loans were sold in the secondary market during 2008 while $19,605,000 were sold in 2007. Agricultural real estate loans totaling $691,000 were sold in the secondary market during 2008, while $2,014,000 were sold in 2007. Management continues to place emphasis on the quality versus the quantity of the credits placed in the portfolio. In addition to lending, the Company has focused on maintaining and enhancing high levels of fee income for its existing services and new services. Generation of fee income will be a goal of the Company and should be a source of continued revenues in the future. Results of Operations Summary The Company's earnings are primarily dependent on net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans, securities and other interest earning assets outstanding during the period and the yield earned on such assets. Interest expense is a function of the balances of deposits and borrowings outstanding during the same period and the rates paid on such deposits and borrowings. The Company's earnings are also affected by provisions for loan losses, service charges, trust income, other non-interest income and expense and income taxes. Non-interest expense consists primarily of employee compensation and benefits, occupancy and equipment expenses, amortization and general and administrative expenses. Prevailing economic conditions as well as federal regulations concerning monetary and fiscal policies as they pertain to financial institutions significantly affect the Company. Deposit balances are influenced by a number of factors including interest rates paid on competing personal investments and the level of personal income and savings within the institution's market. In addition, growth of deposit balances is influenced by the perceptions of customers regarding the stability of the financial services industry. Lending activities are influenced by the demand for housing, competition from other lending institutions, as well as lower interest rate levels, which may stimulate loan refinancing. The primary sources of funds for lending activities include deposits, loan payments, borrowings and funds provided from operations. For the year ended December 31, 2008, the Company reported consolidated net income of $4,729,000, a $486,000 (11.45%) increase from 2007. Net interest income after provision for loan losses for the periods being compared increased $1,567,000 or 13.27%. Other operating income increased $420,000 (5.66%) and other expenses increased $1,042,000 (7.79%) from 2007. Analysis of Net Income The Company's assets are primarily comprised of interest earning assets including commercial, agricultural, consumer and real estate loans, as well as federal funds sold, interest bearing deposits in banks and securities. Average earning assets equaled $437,682,000 for the year ended December 31, 2008. A combination of interest bearing and non-interest bearing deposits, long term debt, federal funds purchased, securities sold under agreement to repurchase, other borrowings and capital funds are employed to finance these assets. 10 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Income Summary (Amounts in thousands of dollars) 5 Year Growth 2008 Change 2007 Change 2006 2005 2004 2003 Rate Interest income Interest expense $ 25,711 (4.46) % $ 26,912 9.32 % $ 24,618 $ 21,768 $ 17,525 $ 16,187 58.84 % (11,009) (21.52) (14,027) 17.44 (11,944) (8,843) (6,500) (6,530) 68.59 Net interest income $ 14,702 14.10 % $ 12,885 1.66 % $ 12,674 $ 12,925 $ 11,025 $ 9,657 52.24 % Provision for loan losses Net interest income after provision for loan losses Other income Other expenses Income before taxes Income tax expense Net income (1,330) 23.15 (1,080) - (1,080) (2,250) (1,165) (1,285) 3.50 13,372 13.27 % $ 11,805 1.82 % $ 11,594 $ 10,675 $ 9,860 $ 8,372 59.72 % 7,835 5.66 7,415 6.28 6,977 7,058 5,325 4,094 91.38 (14,419) 7.79 (13,377) (0.93) (13,503) (13,036) (10,331) (8,218) 75.46 $ 6,788 16.17 % $ 5,843 15.29 % $ 5,068 $ 4,697 $ 4,854 $ 4,248 59.79 % (2,059) 28.69 (1,600) 22.61 (1,305) (1,062) (1,590) (1,125) 83.02 $ 4,729 11.45 % $ 4,243 12.76 % $ 3,763 $ 3,635 $ 3,264 $ 3,123 51.42 % allowance for loan losses is adequate to provide for possible losses in the portfolio at December 31, 2008. Other Income Other income may be divided into two broad categories - recurring and non-recurring. Trust fees and service charges on deposit accounts are the major sources of recurring other income. Investment securities gains and other income vary annually. Other income for the period ended December 31, 2008 was $7,835,000, an increase of $420,000 (5.66%) from 2007. An increase in Trust Services income of $171,000 (4.41%) and an increase of $205,000 in security gains (losses), net primarily accounted for the increase. Other Expense Other expenses for the period ended December 31, 2008 totaled $14,419,000, an increase of $1,042,000 (7.79%) from 2007 year end totals. Salaries and employee benefits expense aggregated 55.36% and 56.13% of total other expense for the years ended December 31, 2008 and 2007 respectively. For the Years Ended December 31, (Amounts in thousands of dollars) 2007 $ 26,482 430 (14,027) 2006 $ 24,084 534 (11,944) 2008 $ 25,111 600 (11,009) $ 14,702 $ 12,885 $ 12,674 $ 437,682 $ 406,112 $ 381,472 3.36 % 3.17 % 3.32 % Interest Income Loan Fees Interest Expense Net Interest Income Average Earning Assets Net Interest Margin The yield on average earning assets for the year ended 2008 was 5.87% while the average cost of funds for the same period was 2.95% on average interest bearing liabilities of $372,932,000. 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% on average interest bearing liabilities of $345,549,000. The increase in the net interest income of $1,817,000 can be attributed to the 7.77% increase in average earning assets and the 1.11% decrease in average cost of funds, which was partially offset by the .76% decrease in yield on earning assets. Provision for Loan Losses The allowance for loan losses as a percentage of net loans outstanding is 1.40% at December 31, 2008, compared to 1.18% at December 31, 2007. Net loan charge-offs totaled $603,000 for the year ended December 31, 2008 compared to $909,000 in 2007. The amounts recorded in the provision for loan losses are determined from management's quarterly evaluation of the quality of the loan portfolio. In this review, such factors as the volume and character of the loan portfolio, general economic conditions and past loan loss experience are considered. Management believes that the MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL 11 CONDITION AND RESULTS OF OPERATIONS Non-accrual, Restructured and Past Due Loans and Leases and Other Real Estate Owned (Amounts in thousands of dollars) At December 31, Non-accrual loans and leases Other real estate owned Total non-performing assets Loans and leases past due 90 days or more and still accruing interest Total non-performing assets and 90-day past due loans and leases Interest income as originally contracted on non-accrual and restructured loans and leases Interest income recognized on non-accrual and restructured loans and leases Reduction of interest income due to non-accrual and restructured loans and leases Reduction in basic and diluted earnings per share due to non-accrual and restructured loans and leases 2008 2007 2006 2005 2004 2003 $ 3,023 $ 2,152 $ 236 $ 267 $ 405 $ 189 90 1,327 1,363 204 206 1,370 $ 4,393 $ 2,242 $ 1,563 $ 1,630 $ 609 $ 395 717 301 578 1,119 980 201 $ 5,110 $ 2,543 $ 2,141 2,749 $ 1,589 $ 596 $ 228 $ 93 $ 39 $ 30 $ 14 $ 9 - - - - - - $ 228 $ 93 $ 39 $ 30 $ 14 $ 9 $ .07 $ .04 $ .01 $ .01 $ .00 $ .00 Income Taxes The Company files its Federal income tax return 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 obligations on a timely basis. Bank liquidity must thus be considered in terms of the nature and mix of the institution's sources and uses of funds. liquidity Bank liquidity is provided from both assets and liabilities. The asset side provides through regular maturities of investment securities and loans. Investment securities with maturities of one year or less, deposits with banks and federal funds sold are a primary source of asset liquidity. On December 31, 2008, these categories totaled $37,240,000 or 7.48% of assets, compared to $37,504,000 or 8.55% the previous year. As of December 31, 2008, securities held to maturity included $32,000 of gross unrealized gains and $3,000 of gross unrealized losses on securities which management intends to hold until maturity. Such amounts are not expected to have a material effect on future earnings beyond the usual amortization of premium and accretion of discount. Closely related to the management of liquidity is the management of rate sensitivity (management of variable rate assets and liabilities), which focuses on maintaining a stable net interest margin, an important factor in earnings growth and stability. Emphasis is placed on maintaining an evenly balanced rate sensitivity position to avoid wide swings in margins and minimize risk due to changes in interest rates. The Company's Asset/Liability Committee is charged with the the responsibility of prudently managing volumes and mixes of assets and liabilities of the subsidiary Bank. Management believes that it has structured its pricing mechanisms such that the net interest margin should maintain acceptable levels in 2009, regardless of the changes in interest rates that may occur. The following table shows the repricing period for interest-earning assets and interest-bearing liabilities and the related repricing gap (Amounts in thousands of dollars): Interest-earning assets Interest-bearing liabilities Repricing gap (repricing assets minus repricing liabilities) Interest-earning assets Interest-bearing liabilities Repricing gap (repricing assets minus repricing liabilities) As of December 31, 2008 Repricing Period After one Year through Five years $ 163,530 28,227 Through One year $ 135,646 344,946 After Five years $ 161,368 15,467 $ (209,300) $ 135,303 $ 145,901 As of December 31, 2007 Repricing Period After one Year through Five years $ 200,019 36,054 Through One year $ 132,077 284,213 After Five years $ 69,963 15,465 $ (152,136) $ 163,965 $ 54,498 12 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Asset Liability Management Since changes in interest rates may have a significant impact on operations the Company has implemented, and currently maintains, an asset liability management committee at the Bank to monitor and react to the changes in interest rates and other economic conditions. Research concerning interest rate risk is supplied by the Company from information received from a third party source. The committee acts upon this information by adjusting pricing, income parameters, and/or marketing emphasis. fee Common Stock Information and Dividends The Company's common stock is held by 266 shareholders as of December 31, 2008, and is traded in a limited over-the-counter market. the market price of On December 31, 2008 the Company’s common stock was $18.00. Market price is based on stock transactions in the market. Cash dividends on common stock of $942,000 were declared by the Board of Directors of the Company for the year ended December 31, 2008. Closing Share Price Data $24.00 $22.00 $15.40 $19.00 $19.70 $18.00 2003 2004 2005 2006 2007 2008 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 Effects of Inflation Until recent years, the economic environment in which the Company operates has been one of significant increases in the prices of most goods and services and a corresponding decline in the purchasing power of the dollar. Banks are affected differently than other commercial enterprises by the effects of inflation. Some reasons for these disparate effects are a) premises and equipment for banks represent a relatively small proportion of total assets; b) a bank's asset and liability structure is substantially monetary in nature, which can be converted into a fixed number of dollars regardless of changes in prices, such as loans and deposits; and c) the majority of a bank's income is generated through net interest income and not from goods or services rendered. Although inflation may impact both interest rates and volume of loans and deposits, the major factor that affects net interest income is how well a bank is positioned to cope with changing interest rates. Capital The ability to generate and maintain capital at adequate levels is critical to the Company's long term success. A common measure of capitalization financial institutions is primary capital as a percent of total assets. for Regulations also require the Company to maintain certain minimum capital levels in relation to consolidated Company assets. Regulations require a ratio of capital to risk-weighted assets of 8.00 percent. The Company's capital, as defined by the regulations, was 14.36 percent of risk-weighted assets at December 31, 2008. In addition, a leverage ratio of at least 4.00 percent is to be maintained. At December 31, 2008, the Company's leverage ratio was 8.96 percent. Risked Based Capital Ratios 13.14% 11.82% 12.5 3% 12.93% 1 4.05 % 14.36% 2003 2004 2005 2006 2007 2008 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13 Financial Report Upon written request of any shareholder of record on December 31, 2008, the Company will provide, without charge, a copy of its 2008 Annual Report including financial statements and schedules. The Company filed a Form 15 with the Securities and Exchange Commission to discontinue the filing of quarterly (10-Q) and annual (10-K) reports based on the Company's number of stockholders. Notice of Annual Meeting of Stockholders The annual meeting of stockholders will be May 12, 2009 at 9:00 A.M. at the Holiday Inn, 4821 Oak Street, Quincy, Illinois. 14 INDEPENDENT AUDITOR’S REPORT FINANCIAL SUMMARY 15 FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED BALANCE SHEETS (Amounts in thousands of dollars, except share and per share data) Assets Cash and due from banks (Note 3) Non-interest bearing Interest bearing Securities held to maturity (Note 4) Securities available for sale (Note 4) Federal funds sold Loans held for sale Loans (Note 5 and 9) Less allowance for loan losses Net loans Premises, furniture and equipment, net (Note 6) Accrued interest receivable Life insurance contracts 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 Federal Home Loan Bank advances (Note 9) Junior subordinated debentures (Note 10) Accrued interest payable Other liabilities TOTAL LIABILITIES Commitments and Contingencies (Note 11) Common stock, $1 par value; shares authorized 6,000,000; Shares issued 2,579,230 and outstanding 2,048,574 Additional paid in capital Retained earnings Accumulated other comprehensive income Treasury stock, at cost - 530,656 shares TOTAL STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY December 31, 2008 2007 $ 9,923 18,544 $ 28,467 $ 3,455 143,453 6,483 187 288,412 (4,037) $ 284,375 $ 10,366 2,659 8,460 3,668 6,455 $ 498,028 $ 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 $ 68,214 100,031 43,724 188,875 $ 400,844 22,045 18,500 15,465 1,446 3,454 $ 461,754 $ 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 38,464 408 (7,429) $ 36,274 2,580 2,251 34,677 327 (7,429) $ 32,406 $ 498,028 $ 438,878 See notes to consolidated financial statements 16 FINANCIAL SUMMARY FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands of dollars, except per share data) Interest income: Loans, including fee income: Taxable Non-taxable Securities: Taxable Non-taxable Federal funds sold Interest bearing deposits in banks Other Total interest income Deposits: Interest bearing demand and savings Time Total interest on deposits Federal Home Loan Bank advances Note payable Junior subordinated debentures Total interest expense Net interest income 2008 Years Ended December 31, 2007 2006 $ 18,307 264 5,608 1,180 159 161 32 $ 25,711 $ 2,204 6,637 $ 8,841 187 804 - 1,177 $ 11,009 $ 14,702 $ 20,542 296 $ 19,650 297 4,021 1,068 774 152 59 $ 26,912 3,192 801 486 118 74 $ 24,618 $ 4,039 7,726 $ 11,765 523 333 - 1,406 $ 14,027 $ 12,885 $ 3,466 6,310 $ 9,776 303 451 44 1,370 $ 11,944 $ 12,674 Provision for loan losses (Note 5) Net interest income after provision for loan losses $ 1,330 $ 1,080 $ 1,080 $ 13,372 $ 11,805 $ 11,594 Other income: Trust services Gain on sale of loans Investment securities gains (losses), net Other Total other income Salaries and employee benefits Occupancy expense, net Equipment expense Computer processing Professional services Other Total other expenses Income before income taxes Income taxes (Note 14) Net income Earnings per share of common stock, basic and diluted $ 4,046 1,288 183 201 2,117 $ 7,835 $ 7,983 1,125 727 940 415 3,229 $ 14,419 $ 6,788 2,059 4,729 $ 2.31 $ 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 $ 3,614 1,279 334 73 1,677 $ 6,977 $ 7,436 810 1,084 892 368 2,913 $ 13,503 $ 5,068 1,305 3,763 $ 1.84 See notes to consolidated financial statements FINANCIAL SUMMARY 17 FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Amounts in thousands of dollars, except share and per share data) Years Ended December 31, 2008, 2007 and 2006 Preferred Stock $ - Common Stock $ 2,580 Additional Paid In Capital $ 2,251 Retained Earnings $ 28,350 Accumulated Other Comprehensive Income (Loss) $ (638) Treasury Stock $ (7,429) Comprehensive Income Total $ 25,114 - - - 3,763 - - 3,763 3,763 - - - - 103 - 103 $ 3,866 103 - $ - - $ 2,580 - $ 2,251 (798) $ 31,315 - $ (535) - $ (7,429) (798) $ 28,182 - - - 4,243 - - 4,243 4,243 - - - - 862 - 862 $ 5,105 862 - $ - - $ 2,580 - $ 2,251 (881) $ 34,677 - $ 327 - $ (7,429) (881) $ 32,406 - - - 4,729 - - 4,729 4,729 - - - - 81 - 81 $ 4,810 81 - $ - - $ 2,580 - $ 2,251 (942) $ 38,464 - $ 408 - $ (7,429) (942) $ 36,274 Balance, December 31, 2005 Comprehensive income: Net income Other comprehensive income, net of tax, (Note 2) Comprehensive income Dividends declared (amount per share $.39) Balance, December 31, 2006 Comprehensive income: Net income Other comprehensive income, net of tax, (Note 2) Comprehensive income Dividends declared (amount per share $.43) Balance, December 31, 2007 Comprehensive income: Net income Other comprehensive income, net of tax, (Note 2) Dividends declared (amount per share $.46) Balance, December 31, 2008 See notes to consolidated financial statements 18 FINANCIAL SUMMARY FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of dollars) Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Depreciation Amortization of intangibles Amortization/accretion of premiums/discounts on securities, net Investment securities (gains) losses, net Loans originated for sale Proceeds from loans sold Gain on sale of loans Deferred income taxes (Increase) decrease in accrued interest receivable and other assets Increase in accrued interest payable and other liabilities Net cash provided by operating activities Activity in securities portfolio: Purchases Sales of securities available for sale Calls, maturities and paydowns (Increase) in loans, net (Increase) decrease in federal funds sold Purchases of premises, furniture and equipment Purchase of life insurance contracts (Increase) in cash surrender value life insurance contracts 2008 $ 4,729 Years Ended December 31, 2007 $ 4,243 2006 $ 3,763 1,330 998 222 1,080 920 223 1,080 1,122 255 (330) (186) (13,561) 14,392 (183) 165 (91) 19 (21,855) 21,958 (339) (24) 216 (73) (25,978) 26,823 (334) (101) (1,029) 3,224 348 326 $ 6,873 18 $ 9,376 1,015 $ 8,136 $ (66,616) 11,303 23,669 (10,380) (1,448) (3,899) - $ (41,669) 10,685 13,603 (6,645) 9,450 (1,429) - $ (20,190) 8,089 13,333 (16,957) (865) (523) (3,000) (375) (307) (239) Net cash (used in) investing activities $ (47,746) $ (16,312) $ (20,352) Net increase (decrease) in deposits Principal payments on note payable Cash dividends paid Increase in securities sold under agreement to repurchase Proceeds from Federal Home Loan Bank advances Repayments of Federal 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 $ 41,499 - (942) $ 3,390 - (860) $ (1,921) (2,667) (778) 6,957 16,000 (9,500) $ 54,014 $ 13,141 1,051 8,000 (1,500) $ 10,081 $ 3,145 11,411 46,000 (51,500) $ 545 $ (11,671) $ 15,326 $ 28,467 $ 12,181 $ 15,326 $ 23,852 $ 12,181 (continued) FINANCIAL SUMMARY FIRST BANKERS TRUSTSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands of dollars) 19 Supplemental disclosure of cash flow information, Interest Income taxes Years Ended December 31, 2008 $ 11,169 $ 2,165 2007 $ 14,279 $ 1,623 2006 $ 11,309 $ 1,587 financing activities: Net change in accumulated other comprehensive income, unrealized gains on securities available for sale, net Transfer of loans to other real estate owned $ 81 $ 1,280 $ 862 $ 1,795 $ 103 $ 564 See notes to consolidated financial statements 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% of the outstanding common stock of, First Bankers Trust Company, N.A. (Bank), First Bankers Trust Services, Inc. (Trust Services), 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 provides asset and custodial management for clients throughout the country. All administration is conducted in Quincy with sales offices in Chicago, Philadelphia, and Phoenix. Trusts I, II, and III were capitalized for the purpose of issuing company obligated mandatory redeemable preferred securities. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses is inherently subjective as it requires material estimates that are susceptible to significant change. The fair value disclosure of financial statements is an estimate that can be computed within a range. Basis of Consolidation The accompanying consolidated financial statements include the accounts of First Bankers Trustshares, Inc. and its wholly- owned subsidiaries, except Trusts I, II, and III, which do not meet the criteria for consolidation. All significant intercompany accounts and transactions have been eliminated in consolidation. Presentation of Cash Flows For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks, including cash items in process of clearing. Cash flows from federal funds sold, loans to customers, deposits, and securities sold under agreements to repurchase are reported net. Trust Services Fiduciary Activities and Assets Trust Services provides fiduciary related services, including asset management and custodial services to individual and corporate clients. Assets held by Trust Services are not assets of the Company, except for cash deposits held by the Bank, and accordingly are not included in the consolidated financial statements. During the course of discharging its respective responsibilties for each client, Trust Services is subject to a number of Federal and State regulatory bodies and associated rules governing each type of account. Trust Services is regulated by the Federal Reserve Bank of St. Louis and the Illinois Department of Financial and Professional Regulation. Securities Securities held to maturity are those for which the Company has the ability and intent to hold to maturity. Securities meeting such criteria at the date of purchase and as of the balance sheet date are carried at amortized cost, adjusted for amortization of premiums and accretion of discounts, computed by the interest method over their contracted lives. Securities available for sale are accounted for at fair value and the unrealized holding gains or losses, net of their deferred income tax effect, are presented as increases or decreases in accumulated other comprehensive income, as a separate component of equity. Declines in the fair value of available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Realized gains and losses on sales of securities are based upon the adjusted book value of the specific securities sold and are included in earnings. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) There were no trading securities at December 31, 2008 or 2007. Loans Loans held for sale: Residential real estate, agricultural, and student loans, which are originated and intended for resale in the secondary market in the foreseeable future, are classified as held for sale. These loans are carried at the lower of cost or estimated market value in the aggregate. As assets specifically acquired for resale, the origination of, disposition of, and gain/loss on these loans are classified as operating activities in the statement of cash flows. Loans held for investment: Loans that management has the intent and ability to hold for the foreseeable future, or until pay-off or maturity occurs, are classified as held for investment. These loans are stated at the amount of unpaid principal adjusted for charge-offs, the allowance for estimated losses on loans, and any deferred fees and/or costs on originated loans. Interest is credited to earnings as earned based on the principal amount outstanding. Deferred direct loan origination fees and/or costs are amortized as an adjustment of the related loan’s yield. As assets held for and used in the production of services, the origination and collection of these loans is classified as an investing activity in the statement of cash flows. It is the Bank's policy to discontinue the accrual of interest income on any loan when, in the opinion of management, there is reasonable doubt as to the timely collection of interest or principal. Interest on these loans is credited to income only when the loan is removed from nonaccrual status. Nonaccrual loans are returned to an accrual status when, in the opinion of management, the financial position of the borrower and other relevant factors indicate there is no longer any reasonable doubt as to the timely payment of principal or interest. The Bank grants agribusiness, commercial, residential, and consumer loans to customers throughout the Bank's market area. The Bank's policy for requiring collateral is consistent with prudent lending practices and anticipates the potential for economic fluctuations. Collateral varies but may include accounts receivable, inventory, property, equipment and income- producing commercial properties. It is the Bank's policy to file financing statements and mortgages covering collateral pledged. As of December 31, 2008 and 2007, the Bank had loan concentrations in agribusiness of 13.04% and 12.25%, hotel and motel industry of 2.40% and 2.48% and senior housing industry of 3.93% and 3.46%, respectively of outstanding loans. The Bank had no additional industry loan concentrations, which, in management's judgment, were considered to be significant. The Bank had no foreign loans outstanding as of December 31, 2008 and 2007. 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 of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans and commitments to extend loans based on evaluations of the 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 of the allowance for loan losses applicable to impaired loans is computed based on the present value of the estimated future cash flows of interest and principal discounted at the loan's effective interest rate or on the fair value of the collateral for collateral dependent loans. The entire change in present value of expected cash flows of impaired loans is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. The Bank recognizes interest income on impaired loans on a cash basis. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Transfers of Financial Assets Transfers of financial assets are accounted for as sales, only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Credit Related Financial Instruments In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under lines of credit and standby letters of credit. Such financial instruments are recorded when they are funded. Premises, Furniture and Equipment Premises, furniture and equipment are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the assets. Other Real Estate Owned Other real estate owned (OREO), which is included with other assets, represents properties acquired through foreclosure, in-substance foreclosure or other proceedings. Any write-down to fair value at the time of the transfer to OREO is charged to the allowance for loan losses. Property is evaluated regularly to ensure that the recorded amount is supported by the current fair value. Subsequent write-downs to fair value are charged to earnings. Goodwill Goodwill represents the excess of cost over fair value of net assets acquired in connection with business combinations. 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, 2008 and 2007. Earnings Per Share of Common Stock Basic earnings per share of common stock is computed by dividing net income, after deducting preferred stock dividends, by the weighted average number of shares outstanding during each reporting period. Diluted earnings per share of common stock assume the conversion, exercise or issuance of all potential common stock (common stock equivalents) unless the effect is to reduce the loss or increase the income per common share from continuing operations. The Company had no common stock equivalents as of and for the years ending December 31, 2008, 2007, and 2006. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in the tax laws and rates on the date of enactment. Fair Value Measurements The Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements” (SFAS 157) effective January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS 157 also emphasizes that fair value is a market-based measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Under SFAS 157, fair value measurements are disclosed by level within that hierarchy. In accordance with Financial Accounting Standards Board Staff Position (FSP) No. 157-2, “Effective Date of FASB Statement No. 157”, the Company has delayed application of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis, such as goodwill, real estate owned, and repossessed assets, until January 1, 2009. See Note 15 for additional information. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Current Accounting Developments In July, 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109 (FIN 48).” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting, and disclosing in the financial statements, tax positions taken or expected to be taken on a tax return. If there are changes in net assets as a result of application of FIN 48, these will be accounted for as an adjustment to the opening balance of retained earnings. Additional disclosures about the amounts of such liabilities will be required also. In December 2008, the FASB delayed the effective date of FIN 48 for certain nonpublic enterprises to annual financial statements for fiscal years beginning after December 15, 2008. The Company will be required to adopt FIN 48 in its 2009 annual financial statements. Prior to adoption of FIN 48, the company will continue to evaluate uncertain tax positions and related income tax contingencies under Statement No. 5, “Accounting for Contingencies”, SFAS No. 5 requires an accrual for losses that are probable and can be reasonably estimated. The Company is currently evaluating the impact that the adoption of this statement will have on its financial position and results of operations. In March 2008, the FASB issued FAS 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133.” FAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities. This Statement is effective for annual financial statements issued for periods beginning after November 15, 2008, with early application encouraged. The Company will adopt the Standard as of January 1, 2009. FAS 161 requires only additional disclosures concerning derivatives and hedging activities, and therefore the adoption of FAS 161 will not have an impact on the Company’s financial position and results of operations. 2. COMPREHENSIVE INCOME Comprehensive income is defined as the change in equity during a period from transactions and other events from non- owner sources. Comprehensive income is the total of net income and other comprehensive income, which for the Company is comprised entirely of unrealized gains and losses on securities available for sale. Other comprehensive income is comprised as follows (Amounts in thousands of dollars): Year ended December 31, 2008 Unrealized gains on securities available for sale: Unrealized holding gains arising during the year Less reclassification adjustment for gains included in net income Year ended December 31, 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 Before tax Tax expense (benefit) Net of tax $ 318 $ 123 $ 195 186 $ 132 72 $ 51 114 $ 81 $ 1,371 $ 521 $ 850 (19) $ 1,390 (7) $ 528 (12) $ 862 $ 240 $ 92 $ 148 73 $ 167 28 $ 64 45 $ 103 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. RESTRICTIONS ON CASH AND DUE FROM BANKS The Bank is required to maintain a reserve balance with the Federal Reserve Bank of St. Louis. The total of the reserve balance was approximately $1,104,000 and $725,000 at December 31, 2008 and 2007, respectively. 4. SECURITIES The amortized cost and fair values of securities as of December 31, 2008 and 2007 are as follows (Amounts in thousands of dollars): Securities Held to Maturity: Amortized Cost 2008 Gross Unrealized Gains Gross Unrealized (Losses) Fair Value State and political subdivisions $ 3,455 $ 32 $ (3) $ 3,484 Securities Available for Sale: State and political subdivisions Corporate securities Collaterized mortgage obligations Other Securities Held to Maturity: Amortized Cost $ 103,929 28,511 4,731 5,534 88 $ 142,793 2008 Gross Unrealized Gains $ 3,500 155 - 123 - $ 3,778 Gross Unrealized (Losses) $ (8) (1,326) (1,782) (2) - $ (3,118) Fair Value $ 107,421 27,340 2,949 5,655 88 $ 143,453 Amortized Cost 2007 Gross Unrealized Gains Gross Unrealized (Losses) Fair Value State and political subdivisions $ 5,223 $ 171 $ (1) $ 5,393 Securities Available for Sale: State and political subdivisions Corporate securities Collateralized mortgage obligations Other Amortized Cost $ 79,733 20,200 2,011 6,843 78 $ 108,865 2007 Gross Unrealized Gains $ 922 182 - 35 - $ 1,139 Gross Unrealized (Losses) $ (175) (182) (206) (48) - $ (611) Fair Value $ 80,480 20,200 1,805 6,830 78 $ 109,393 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 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, 2008 and 2007 are summarized as follows (Amounts in thousands of dollars): 2008 Less than 12 months Unrealized Losses Fair Value 12 months or more Fair Value Unrealized Losses Total Fair Value Unrealized Losses Securities held to maturity: State and political subdivisions Securities available for sale: U.S. Government agencies and Corporations State and political subdivisions Corporate securities Collateralized mortgage obligations $ 170 $ (3) $ - $ - $ 170 $ (3) $ 507 16,212 1,575 - $ 18,294 $ - $ - $ (8) (399) 2,270 (927) ( 1,612) 374 (170) - (2) 477 $ (1,105) $ 3,121 $ (2,013) $ 507 $ (8) (1,326) 18,482 (1,782) 1,949 477 (2) $ 21,415 $ (3,118) Securities held to maturity: State and political subdivisions Securities available for sale: U.S. Government agencies and Corporations State and political subdivision Corporate securities Collateralized mortgage obligations 2007 Less than 12 months Fair Value Unrealized Losses 12 months or more Fair Value Unrealized Losses Total Fair Value Unrealized Losses $ 825 $ (1) $ - $ - $ 825 $ (1) $ 8,205 $ (82) $ 12,781 6,766 (95) 3,363 - (206) 1,805 (13) 1,163 1,958 $ (396) $ 21,505 $ 14,536 $ (93) (87) - (35) $ (215) $ 20,986 10,129 1,805 3,121 $ 36,041 $ (175) (182) (206) (48) $ (611) At December 31, 2008, the investment portfolio included 242 securities. Of this number, 66 securities have current unrealized losses and 12 of them have current unrealized losses which have existed for longer than one year. All of these securities are considered to be acceptable credit risks. Based upon an evaluation of the available evidence, including recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. In addition, the Company has the intent and ability to hold these investment securities for a period of time sufficient to allow for an anticipated recovery. Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net earnings in the period in which the other-than-temporary impairment is identified. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. SECURITIES (Continued) The amortized cost and fair value of securities as of December 31, 2008 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 of dollars): Securities held to maturity: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Securities available for sale: Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Corporate securities Collateralized mortgage obligations Amortized Cost $ 1,585 1,283 414 173 $ 3,455 Amortized Cost $ 702 9,527 35,103 87,196 $ 132,528 4,731 5,534 $ 142,793 Fair Value $ 1,588 1,300 426 170 $ 3,484 Fair Value $ 707 9,746 36,029 88,367 $ 134,849 2,949 5,655 $ 143,453 Information on sales of securities available for sale during the years ended December 31, 2008, 2007 and 2006 follows (Amounts in thousands of dollars): Proceeds from sales Gross gains Gross losses 2008 $ 11,303 116 - 2007 $ 10,685 29 (48) 2006 $ 8,089 70 (30) As of December 31, 2008 and 2007 securities with a carrying value of approximately $112,083,000 and $97,005,000 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 of net loans outstanding as of December 31, 2008 and 2007 are as follows (Amounts in thousands of dollars): Commercial Agricultural Tax exempt Real estate, mortgage Consumer Less: Allowance for loan losses Net loans 2008 $ 158,524 37,618 5,544 48,664 38,062 $ 288,412 2007 $ 156,192 34,287 5,685 49,401 34,350 $ 279,915 (4,037) $ 284,375 (3,310) $ 276,605 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27 5. LOANS (Continued) As of December 31, 2008 and 2007, impaired loans were $2,998,000 and $2,143,000, respectively, with a specific allowance provided for them included in the allowance for loan losses of $200,000 and $111,000, respectively. The average recorded investment in impaired loans was $2,571,000 and $1,190,000 for the years ended December 31, 2008 and 2007, respectively. Impaired loans for which a specific allowance has not been provided are $2,348,000 and $1,946,000 as of December 31, 2008 and 2007, respectively. Interest income and cash basis interest income recognized on impaired loans during the years ended December 31, 2008, 2007 and 2006 were not significant. Nonaccrual loans totaled $3,023,000 and $2,152,000 as of December 31, 2008 and 2007, respectively. Foregone interest income and the interest collected on these loans for the years ended December 31, 2008, 2007 and 2006 was not significant. Loans past due 90 days or more and still accruing interest were $717,000 and $301,000 at December 31, 2008 and 2007, respectively. Activity in the allowance for loan losses during the years ended December 31, 2008, 2007 and 2006 is summarized below (Amounts in thousands of dollars): Provision for loan losses Loan charge-offs Recoveries of loans charged off Balance, end of year 2008 $ 3,310 1,330 (686) 83 $ 4,037 2007 $ 3,139 1,080 (1,068) 159 $ 3,310 2006 $ 3,160 1,080 (1,249) 148 $ 3,139 Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans totaled $74,746,000 and $72,571,000 at December 31, 2008 and 2007, respectively. In the ordinary course of business, the Bank has loans with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (hereafter referred to as related parties). The Bank believes that all such loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with other persons and that such loans do not present more than a normal risk of collectability or present other unfavorable features. An analysis of the changes in the aggregate amount of these loans during 2008 and 2007 is as follows (Amounts in thousands of dollars): Advances Change in related parties Balance, end of year 2008 $ 4,747 12,965 (12,532) 4,435 $ 9,615 2007 $ 4,768 14,967 (14,970) (18) $ 4,747 6. PREMISES, FURNITURE AND EQUIPMENT The cost, accumulated depreciation and net book value of premises, furniture and equipment as of December 31, 2008 and 2007 is summarized as follows (Amounts in thousands of dollars): Land Furniture and equipment Less accumulated depreciation 2008 $ 2,313 8,783 7,638 $ 18,734 (8,368) $ 10,366 2007 $ 2,313 6,667 6,806 $ 15,786 (8,321) $ 7,465 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. INTANGIBLES Goodwill and intangible assets are summarized as follows (Amounts in thousands of dollars): Amortized intangible assets: Goodwill Core deposit intangible Other intangible assets Less accumulated amortization on intangible assets As of December 31, 2008 As of December 31, 2007 $ 3,050 1,223 481 (1,086) $ 3,668 $ 3,050 1,223 481 (864) $ 3,890 For the year ended December 31: 2008 2009 2010 2011 2012 2013 Thereafter 8. TIME DEPOSITS $ - 213 197 42 42 42 82 $ 222 213 197 42 42 42 82 The aggregate amount of time deposits, each with a minimum denomination of $100,000, was approximately $66,469,000 and $36,693,000 at December 31, 2008 and 2007, respectively. At December 31, 2008, the scheduled maturities of time deposits are as follows (Amounts in thousands of dollars): 2009 2010 2011 2012 2013 2014 $ 169,146 8,311 5,601 4,785 1,030 2 $ 188,875 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29 9. FEDERAL HOME LOAN BANK ADVANCES Federal Home Loan Bank (FHLB) advances are summarized as follows at December 31, 2008 and 2007 (Amounts in thousands of dollars): Maturity in year ending December 31: 2008 2009 2010 2011 2008 2007 Weighted Interest Rate - 3.25% 4.81 4.95 Balance Due - $ 10,000 3,000 5,500 $ 18,500 Weighted Average Interest Rate 5.42% 4.81 4.81 4.95 Balance Due $ 1,000 2,500 3,000 5,500 $ 12,000 First mortgage loans of approximately $24,667,000 and $16,000,000 as of December 31, 2008 and 2007, respectively, 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 Trusts I, II, and III, which are all 100% owned non-consolidated subsidiaries of the Company. The debentures were issued in 2000, 2003, and 2004, respectively, in conjunction with each Trust’s issuance of 5,000 shares of Company Obligated Mandatorily Redeemable Preferred Securities. The debentures all bear the same interest rate and terms as the preferred securities, detailed following. The debentures are included on the consolidated balance sheets as liabilities; however, in accordance with Federal Reserve Board regulations in effect at December 31, 2008 and 2007, the Company is allowed, for regulatory purposes, to include $11,955,000 and $10,693,000 respectively of the capital securities issued by the Trusts in Tier I capital, with the remainder included in Tier II capital. In March 2005, the Federal Reserve Board issued final regulations, which become effective March 31, 2009. If those regulations had been in effect at December 31, 2008 and 2007, the Company would have been allowed to include approximately $10,803,000 and $9,478,000, respectively, of the securities in Tier I capital and the remainder in Tier II capital. The Company would exceed all regulatory minimum capital ratios if the regulations that are to take effect were in place as of December 31, 2008 and 2007. During 2004 FBIL Statutory Trust III issued 5,000 shares of Company Obligated Mandatorily Redeemable (COMR) Preferred Securities. Distributions are paid quarterly. Cumulative cash distributions are calculated at a variable annual rate that is 265 basis points above the 3 month LIBOR rate (4.08% and 7.78% as of December 31, 2008 and 2007). The Trust may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond September 15, 2034. At the end of the deferral period, all accumulated and unpaid distributions will be paid. The capital securities will be redeemed on September 15, 2034; however, the Trust has the option to shorten the maturity date to a date not earlier than September 15, 2009 at par plus any accrued and unpaid distributions to the date of the redemption. The redemption may be in whole or in part, but in all cases in a principal amount with integral multiples of $1,000. If a special event occurs prior to September 15, 2009, providing the Trust the right of redemption in whole, but not in part, the redemption price will vary depending on how close to the issue date the redemption occurs. The redemption price is a maximum of 104.3% of the principal amount of the debentures at March 15, 2005 declining by approximately 30 basis points each quarter until September 15, 2008 and thereafter at which time the redemption price will be at par. As of December 31, 2008, this redemption price would be at par. Any accrued and unpaid distributions to the date of redemption must also be paid. Subsequent to year end, the Company entered into an interest rate swap agreement related to the Company Obligated Mandatorily Redeemable Preferred Securities issued in 2004 by FBIL Statutory Trust III. The swap agreement is utilized to manage variable interest rate exposure and is designated as a highly effective cash flow hedge. The swap agreement expires in 2013 and essentially fixes the rate to be paid at 5.02%. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. JUNIOR SUBORDINATED DEBENTURES AND COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY SUBORDINATED DEBENTURES (Continued) During 2003 the Company issued 5,000 shares of Company Obligated Mandatorily Redeemable (COMR) Preferred Securities of FBIL Statutory Trust II Holding Solely Subordinated Debentures. Distributions are paid quarterly. Cumulative cash distributions are calculated at a variable annual rate that is 295 basis points above the 3 month LIBOR rate (4.38% and 8.08% as of December 31, 2008 and 2007, respectively). The Company may, at one or more times, defer interest payments on the capital securities for up to 20 consecutive quarterly periods, but not beyond September 17, 2033. At the end of the deferral period, all accumulated and unpaid distributions will be paid. The capital securities will be redeemed on September 17, 2033; however, the Company has the option to shorten the maturity date to a date not earlier than September 17, 2008 at par plus any accrued and unpaid distributions to the date of the redemption. During 2000 the Company issued 5,000 shares of Company Obligated Mandatorily Redeemable (COMR) Preferred Securities of FBIL Statutory Trust I Holding Solely Subordinated Debentures. Distributions are paid semi-annually. Cumulative cash distributions are calculated at a 10.60% annual rate. The Company may, at one or more times, defer interest payments on the capital securities for up to 10 consecutive semi-annual periods, but not beyond September 7, 2030. At the end of the deferral period, all accumulated and unpaid distributions will be paid. The capital securities will be redeemed on September 7, 2030; however, the Company has the option to shorten the maturity date to a date not earlier than September 7, 2010. The redemption price begins at 105.300% to par and is reduced by 53 basis points each year until September 7, 2020 when the capital securities can be redeemed at par. Any accrued and unpaid distributions to the date of the redemption must also be paid. Holders of the capital securities have no voting rights, are unsecured and rank junior in priority of payment to all of the Trust’s indebtedness and senior to the Trust’s capital stock. 11. COMMITMENTS AND CONTINGENCIES Financial instruments with off-balance sheet risk: The Bank, in the normal course of business, is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include unused lines of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and market risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for unused lines of credit and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank's commitments at December 31, 2008 and 2007 is as follows (Amounts in thousands of dollars): Commitments to extend credit and unused lines of credit Standby letters of credit 2008 $ 59,316 1,517 2007 $ 49,700 1,368 Unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The agreements generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the agreements are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31 11. COMMITMENTS AND CONTINGENCIES (Continued) case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based upon management's credit evaluation of the counter-party. Collateral varies but may include accounts receivable, inventory, property, equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year, or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral, as detailed above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded the Bank would be entitled to seek recovery from the customer. At December 31, 2008 and 2007, 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 $7,013,000 and $1,937,000 at December 31, 2008 and 2007, respectively. These amounts include loans held for sale of $187,000 and $835,000 as of December 31, 2008 and 2007, respectively and loan commitments, included in the summary in this Note, of $6,826,000 and $1,102,000 as of December 31, 2008 and 2007, 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 if the borrower becomes 60 days or more delinquent during the first six months following the first payment due, and subsequently becomes 90 days or more delinquent during the first 12 months of the loan, the Bank must repurchase the loan from the subject investor. The Bank did not repurchase any loans from secondary market investors under the terms of these loan sales agreements during the years ended December 31, 2008, 2007, and 2006. In the opinion of management, the risk of recourse to the Bank is not significant and, accordingly, no liability has been established. Concentration of credit risk: Aside from cash on hand and in-vault, the majority of the Company’s cash is maintained at US Bank, N.A. and the Federal Home Loan Bank of Chicago. The total amount of cash on deposit and federal funds sold exceeded federal insurance limits at the respective institutions by approximately $6,483,000 and $3,748,000 respectively as of December 31, 2008. In the opinion of management, no material risk of loss exists due to the financial condition of the institutions. 12. BENEFITS The Company has a 401(k) plan, which is a tax qualified savings plan, to encourage its employees to save for retirement purposes or other contingencies. All employees working over 1,000 hours per year of the Company and its subsidiaries are eligible to participate in the Plan after completion of one year of service and attaining the age of 21. The employee may elect to contribute a percentage of their compensation before taxes in a traditional 401(k) and/or a percentage of their compensation after taxes using the subsidiary’s Roth 401(k) option. Based upon profits, as determined by the subsidiary, a contribution may be made by the subsidiary. Employees are 100% vested in the subsidiaries’ contribution to the plan after five years of service. Employee contributions and vested subsidiary contributions may be withdrawn only on termination of employment, retirement, death or hardship withdrawal. Under the Employee Incentive Compensation Plan, the Bank is authorized at its discretion, pursuant to the provisions of the plan, to establish on an annual basis, a bonus fund, which will be distributed to certain employees, based on their performance. The Employee Incentive Compensation Plan does not become effective unless the Bank exceeds established income levels. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. BENEFITS (Continued) Contributions to the 401(k) plan for the years ended December 31, 2008, 2007, and 2006 totaled $325,000, $295,000 and $293,000, respectively. Contributions made to the incentive compensation plan for the years ended December 31, 2008, 2007, and 2006 were $259,000, $247,000 and $195,000 respectively. 13. DIVIDENDS AND REGULATORY CAPITAL The Company's stockholders are entitled to receive such dividends as are declared by the Board of Directors. The ability of the Company to pay dividends in the future is dependent upon its receipt of dividends from its subsidiaries. The subsidiaries’ ability to pay dividends is regulated by financial regulatory statutes. The timing and amount of dividends will depend on earnings, capital requirements and financial condition of the Company and its subsidiaries as well as general economic conditions and other relevant factors affecting the Company and the subsidiary. Under the provisions of the National Bank Act the Bank may not, without prior approval of the Comptroller of the Currency, declare dividends in excess of the total of the current and past two year's earnings less any dividends already paid from those earnings. In addition, as described in Note 17, under provisions of the Treasury Capital Purchase Program, the consent of the Treasury will be required for the Company to increase the dividend paid on its common stock above the most recent quarterly dividend of $.115 per share. The Company and its subsidiaries are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators and components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk- weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2008, that the Company and Bank meet all capital adequacy requirements to which they are subject. The most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately or well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33 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 Under Prompt Corrective Action Provisions As of December 31, 2008 Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets) Company Bank Tier I Capital (to Risk Weighted Assets) Company Bank Tier I Capital (to Average Assets) Company Bank $51,212 $40,164 14.36% 11.37% >$28,526 >$28,256 >8.00% >8.00% N/A >$35,319 N/A >10.00% $44,363 $36,360 12.44% 10.29% >$14,263 >$14,128 >4.00% >4.00% N/A >$21,192 N/A >6.00% $44,363 $36,360 8.96% 7.45% >$19,799 >$19,531 >4.00% >4.00% N/A >$24,414 N/A >5.00% As of December 31, 2007 Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets) Company Bank Tier I Capital (to Risk Weighted Assets) Company Bank Tier I Capital (to Average Assets) Company Bank $46,649 $36,996 14.05% 11.22% >$26,566 >$26,371 >8.00% >8.00% N/A >$32,964 N/A >10.00% $39,126 $33,780 11.78% 10.25% >$13,283 >$13,186 >4.00% >4.00% N/A >$19,778 N/A >6.00% $39,126 $33,780 8.89% 7.79% >$17,598 >$17,350 >4.00% >4.00% N/A >$21,688 N/A >5.00% 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. INCOME TAX MATTERS The components of income tax expense are as follows for the years ended December 31, 2008, 2007, and 2006 (Amounts in thousands of dollars): Current Deferred 2008 $ 1,894 165 $ 2,059 Years Ended December 31 2007 $ 1,624 (24) $ 1,600 2006 $ 1,406 (101) $ 1,305 A reconciliation between income tax expense in the statements of income and the amount computed by applying the statutory federal income tax rate to income before income taxes is as follows (Amounts in thousands of dollars): Federal income tax at statutory rate Changes from statutory rate resulting from: State tax, net of federal benefit Tax exempt interest income, net Increase in cash surrender value Over (under) accrual of provision and other, net 2008 Amount % of Pretax Income 2007 Amount % of Pretax Income 2006 Amount $ 2,308 34.0 % $ 1,987 34.0 % $ 1,723 % of Pretax Income 34.0 % 291 (438) (110) 4.3 (6.5) (1.6) 164 (405) (104) 2.8 (6.9) (1.8) 139 (534) (82) 2.7 (6.6) (1.6) 8 .1 (42) (.7) (141) (2.8) Income tax expense $ 2,059 30.3 % $ 1,600 27.4 % $ 1,305 25.7 % Net deferred tax assets consist of the following components as of December 31, 2008 and 2007 (Amounts in thousands of dollars): Deferred tax assets: Allowance for loan losses Accrued expenses Deferred tax liabilities: Premises, furniture and equipment Stock dividends Prepaid expenses Unrealized gains on securities available for sale, net Amortization Other Net deferred tax assets 2008 $ 1,399 175 $ 1,574 $ (357) (140) (73) (252) (98) (161) $ (1,081) $ 493 2007 $ 1,223 152 $ 1,375 $ (8) (140) (89) (201) (67) (161) $ (666) $ 709 Net deferred tax assets are included in other assets on the accompanying consolidated balance sheets. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 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): Provision for income taxes Statement of changes in stockholders’ equity, accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale, net 2008 $ 165 Years Ended December 31, 2007 2006 $ (24) $ (101) 51 $ 216 528 $ 504 64 $ (37) 15. FAIR VALUE MEASUREMENTS As discussed in Note 1, on January 1, 2008, the Company adopted the provisions of SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Investment securities available for sale: Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage−backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. FAIR VALUE MEASUREMENTS (Continued) Impaired loans: The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. The specific reserves for collateral dependent impaired loans are based on the fair value of the collateral less estimated costs to sell. The fair value of collateral was determined based on appraisals. In some cases, adjustments were made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement. Assets and liabilities recorded at fair value on a recurring basis: The following table summarizes assets measured at fair value on a recurring basis as of December 31, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value: Fair Value Measurements as of December 31, 2008 using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Significant Unobservable (Level 2) (Level 3) Fair Value Investment securities available for sale $ 143,453 $ - $ 143,453 $ - Assets and liabilities recorded at fair value on a nonrecurring basis: The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with accounting principles generally accepted in the United States of America. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below: Fair Value Measurements as of December 31, 2008 using Quoted Prices in Active Markets for Identical Assets (Level 1) Fair Value Significant Other Significant Observable Inputs (Level 2) Unobservable Inputs (Level 3) Impaired loans $ 460 $ - $ - $ 460 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37 16. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS 107, “Disclosures about Fair Value of Financial Instruments”, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. Fair value is determined under the framework established by SFAS 157. (See Note 1.) SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Cash and due from banks and federal funds sold: The carrying amounts reported in the balance sheets for cash and due from banks and federal funds sold equal their fair values. Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Federal Home Loan Bank Stock: The fair value of Federal Home Loan Bank Stock is equal to its carrying value. Loans and loans held for sale: For variable loans fair values are equal to carrying values. The fair values for all other types of loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of loans held for sale is based on quoted market prices of similar loans sold in the secondary market. Accrued interest receivable and payable: The fair value of accrued interest receivable and payable is equal to its carrying value. Deposits: The fair values for demand and savings deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits. Securities sold under agreements to repurchase: The fair value of securities sold under agreements to repurchase is considered to equal carrying value due to the borrowings short-term nature. Federal Home Loan Bank advances and junior subordinated debentures: The fair value of Federal Home Loan Bank advances and junior subordinated debentures is estimated using discounted cash flow analyses, using interest rates currently being offered for similar borrowings. Commitments to extend credit: The fair value of these commitments is not material. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) The carrying values and estimated fair values of the Company's financial instruments as of December 31, 2008 and 2007 are as follows (Amounts in thousands of dollars) Financial assets: Cash and due from banks Securities held to maturity Securities available for sale Federal funds sold Loans, net Accrued interest receivable Financial liabilities: Non-interest-bearing demand deposits Savings deposits Time deposits Federal Home Loan Bank advances Junior Subordinated Debentures Accrued interest payable Carrying Value $ 28,467 3,455 143,453 6,483 284,562 2,659 $ 68,214 100,031 43,724 188,875 22,045 18,500 15,465 1,446 2008 2007 Fair Value Carrying Value Fair Value $ 28,467 3,484 143,453 6,483 288,254 2,659 $ 68,214 100,031 43,724 189,294 22,045 19,332 13,157 1,446 $ 15,326 5,223 109,393 5,035 277,440 2,769 $ 66,166 82,455 62,150 148,574 15,088 12,000 15,465 1,606 $ 15,326 5,393 109,393 5,035 279,500 2,769 $ 66,166 82,455 62,150 148,945 15,088 12,392 16,600 1,606 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 39 17. SUBSEQUENT EVENTS Treasury Capital Purchase Program In October 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA). One of the provisions resulting from the Act is the Treasury Capital Purchase Program (CPP) which provides direct equity investment of perpetual preferred stock by the U.S. Treasury in qualified financial institutions. In January 2009, the Company, pursuant to the CPP implemented under the EESA, issued and sold to the Treasury 10,000 shares of the Company’s Cumulative Perpetual Preferred Stock, Series A, together with a warrant to purchase 500 shares of the Company’s Cumulative Perpetual Perferred Stock, Series B, for an aggregate purchase price of $10 million in cash. The warrant has a ten-year term and was immediately exercised upon its issuance at the exercise price of $0.01 per share. The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series B Preferred Stock also qualifies as Tier 1 capital and pays cumulative dividends at a rate of 9% per annum. The Series A and B Preferred Stock may be redeemed by the Company at any time, subject to approval of the Federal Reserve. Any redemption of the Series A and B Preferred Stock will be at the per share liquidation amount of $1,000 per share, plus any accrued and unpaid dividends. Prior to the third anniversary of the Treasury’s purchase of the Series A Preferred Stock, unless the Series A Preferred Stock has been redeemed or the Treasury has transferred all of the Series A Preferred Stock to one or more third parties, the consent of the Treasury will be required for the Company to increase the dividend paid on its common stock above its most recent quarterly dividend of $0.115 per share or repurchase shares of its common stock. The Series A and B Preferred Stock are non-voting except for class voting rights on matters that would adversely affect the rights of the holders of the Series A and B Preferred Stock. FDIC Special Assessment As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. On February 27, 2009, the FDIC issued a proposed rule that would impose a significant “emergency special assessment” on all FDIC-insured depository institutions equal to 0.20% of deposits, regardless of their risk level. The FDIC has proposed this special assessment in an effort to increase the Deposit Insurance Fund (DIF). The proposed special assessment would be on total deposits as of June 30, 2009, to be collected on September 30, 2009. The rule proposing the special assessment has not been finalized and may change. It has been reported that the FDIC Chairman would consider reducing the special assessment rate to 0.10% if legislation is passed that allows it to borrow as much as $100 billion from Treasury. Although the proposed assessment is only a one-time assessment, the FDIC notes in the proposed rule that if the DIF’s reserve ratio were to fall below a level “that the Board believes would adversely affect public confidence or to a level which shall be close to zero or negative at the end of a calendar quarter,” an additional emergency special assessment of up to 0.10% may be imposed by a vote of the Board. Due to the uncertainty as to the outcome of the rule, the impact on the 2009 financial statements cannot be determined at the present time. . 40 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 Attorney At Law Scholz, Loos, Palmer, Siebers, & Duesterhaus Carl Adams, Jr. President Illinois Ayres Oil Company William D. Daniels Mark E. Freiburg Member Harborstone Group, LLC Owner Freiburg Insurance Agency Freiburg Development Phyllis J. Hofmeister Jack Laverdiere Secretary Robert Hofmeister Farm President, Laverdier Construction, Inc. Vice President/Mgn., LCI Concrete, Inc. Merle Tieken President Gem City Electric Dennis R. Williams Chairman Quincy Newspapers, Inc. 41 COMPANY OFFICERS FIRST BANKERS TRUST COMPANY, N. A. Arthur E. Greenbank, President Dave Rakers, Executive Vice President Senior Vice Presidents Dennis Iversen Gretchen McGee Vice Presidents Daron Duke Jason Duncan Sue Dunseth 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 John Armstrong Sherry Bryson Tim Corrigan Pam Eftink Matt Poulter Lance Robertson Linda Tossick Joan Whitlow David Young Collections Officer Mike Baker IT Officers Ron Fairley Linda Reinold Terry Hanks Loan Officers Leslie Westen Patti Westerman Nathan Frese Loan Operations Officers Amy Goehl Karen Koehn Marketing Officer Maria Eckert Retail Officers John Armstrong Judy Fairchild Susan Farlow Jennifer Gordley Lois Knapp Jim Moore Dianna Orr Ryne Lubben Lynn Allen Kim Neal Operations Officer Michelle Shortridge 42 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 Oil Company Phyllis J. Hofmeister Secretary Robert Hofmeister Farm COMPANY OFFICERS FIRST BANKERS TRUST SERVICES, INC. Brian Ippensen, President Norman Rosson, Senior Vice President Officers Merri Ash Kjersti Cory Steve Eckert Michelle Foster Julie Kenning Jay Martin W. Diane McHatton Ashley Melton Kimberly Serbin Linda Shultz Deborah Staff NOTES NOTES 

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