First Bankers Trustshares, Inc.
Annual Report 2010

Plain-text annual report

continuing to build on our strength FIRST BANKERS TRUSTSHARES, INC. 2010 Annual Report First Bankers Trustshares, Inc. QUINCY CARTHAGE MACOMB MENDON PALOMA RUSHVILLE SPRINGFIELD progression, growth, strength . progression, growth, strength . 2010 AnnUAL RePoRt contents corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Letter to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 - 6 Management’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Management’s Discussion and Analysis of Financial condition and Results of operations . . . . . . . . . . . . . . . 8 - 13 Independent Auditor’s Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 consolidated Financial statements Balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 statements of changes in stockholders’ equity . . . . . . . . . . . . . . . . . . . 17 statements of cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 - 19 notes to consolidated Financial statements . . . . . . . . . . . . . . . . . . 20 - 39 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 CoRpoRA te InFoRMA tIon 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 10 banking facilities in Adams, Hancock, McDonough, sangamon, 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, Philadelphia, PA, and springfield, IL . 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 . (217) 228-8000 stoCkholDer information common shares authorized: 6,000,000 common shares outstanding as of December 31, 2010: stockholders of record: *As of December 31, 2010 2,051,476 350* first Bankers trustshares, inC. BoarD of DireCtors 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 & Freiburg Development 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/CEO, First Bankers Trust Company, N.A. President/CEO, First Bankers Trustshares, Inc. Phyllis J. Hofmeister Secretary, Robert Hofmeister Farm Steven E. Siebers Secretary of the Board, First Bankers Trustshares, Inc. Attorney at Law, Scholz, Loos, Palmer, Siebers & Duesterhaus Dennis R. Williams Chairman of the Board, Quincy Newspapers, Inc. eXeCutiVe offiCers Arthur E. Greenbank President and CEO Brian A. Ippensen Treasurer Steven E. Siebers Secretary first Bankers trustshares, inC. stoCk priCes (For the three months period ended) Market Value 12/31/10 09/30/10 06/30/10 03/31/10 12/31/09 Inquiries regarding transfer requirements, lost certificates, changes of address and account status should be directed to the corporation’s transfer agent: High Low $ 22 .01 $ 19 .00 $ 19 .25 $ 18 .00 $ 17 .10 $ 18 .43 $ 18 .25 $ 17 .25 $ 16 .10 $ 15 .41 Illinois stock transfer, Inc . 209 West Jackson Blvd ., suite 903 chicago, IL 60606 Corporate aDDress First Bankers Trustshares, Inc. 1201 Broadway P .o . Box 3566 Quincy, IL 62305 inDepenDent auDitors McGladrey & Pullen, LLP 201 n . Harrison, suite 300 Davenport, IA 52801 General Counsel Hunton & Williams, LLP 1445 Ross Ave ., suite 3700 Dallas, tX 75202 Period End Close $ 20.10 $ 18.43 $ 19.00 $ 17.25 $ 16.10 The following companies make a market in FBTI common stock: Howe Barnes Hoefer & Arnett, Inc. Wells Fargo Advisors 225 s . Riverside Plaza, 7th Floor chicago, IL 60603 (800) 800-4693 510 Maine, 9th Floor Quincy, IL 62301 (800) 223-1037 Stifel Nicolas & Co. Inc 227 W . Monroe, suite 1850 chicago, IL 60606 (800) 745-7110 Monroe Securities, Inc. 100 n . Riverside Plaza, suite 1620 chicago, IL 60606 (312) 327-2530 Corporate Information | AnnuAl RepoRt 2010 3 letteR to ShAReholDeRS Dear shareholders, Your company, once again, achieved record results in earnings and growth during 2010 . these results were achieved in a challenging, but improving, economic environment . We are fortunate that most of our markets in which we compete seem to have held up better than some other parts of the country . In reviewing last year’s letter to shareholders, we mentioned our recently completed acquisitions of an office in springfield, Illinois and our purchase of some ground in Macomb to construct our eleventh branch office . As an update, our office in springfield has exceeded our most optimistic expectations . We have a team of experienced bankers that have been a large driver of our growth in 2010 . Also, we completed our purchase of a premier location for our office in Macomb and expect to have this branch in operation by the end of this year . our financial services industry is changing rapidly, due to the challenging marketplace and a regulatory environment driven from Washington, D . c . which will create very real challenges for all of us . the more we hear about the recently passed Dodd-Frank financial reform and the regulations being passed to implement it, the more our expenses increase and the more controls are being put on our revenues . Both of these are very problematic for your company . We will stay on top of these developments over the next few years . Last year we lost a friend, officer, and director of our trust company, norman Rosson . norman joined us in 1997 and was one of the driving forces in growing our trust company into a national competitor in the trust services business throughout 40 states . norman was a representative based in our chicago office . We want to honor our friend and remember all he did for us over the last years . norman is being further memorialized on another page in our report . Lastly, we would like to thank you, our stockholders, for your continued faith and trust in us . Without your investment and support, none of our achievements would be possible . We look forward to talking with you at our annual meeting on May 24, 2011 at our bank’s new 12th & Broadway facility in Quincy, Illinois . the meeting will begin at 9:00 a .m . Donald K. Gnuse Chairman of the Board Arthur e. Greenbank President/CEO Donald K . Gnuse Chairman of the Board Arthur e . Greenbank President/CEO 4 AnnuAl RepoRt 2010 | letter to Shareholders SeleCt FInAnCIAl D AtA (Amount in thousands of dollars, except per share data statistics) Year ended December 31, 2010 2009 2008 2007 2006 2005 performanCe net income $ 6,440 $ 5,885 $ 4,729 $ 4,243 $ 3,763 $ 3,635 common stock cash dividends paid $ 943 $ 942 $ 942 $ 860 $ 778 698 common stock cash dividend payout ratio 1 16.28 % 17 .90 % 19 .93 % 20 .28 % 20 .69 % 19 .20 % Return on average assets 1 .88 % .89 % 1 .01 % .97 % .91 % .89 % Return on average common stockholders’ equity 2 13.54 % 13 .79 % 13 .77 % 13 .90 % 13 .68 % 14 .86 % per Common share earnings, basic and diluted Dividends (paid) on common stock Book value3 stock price High Low close $ $ 2.83 .46 $ $ 2 .57 .46 $ $ 2 .31 .46 $ $ 2 .07 .42 $ $ 1 .84 $ 1 .77 .38 $ .34 $ 21.98 $ 19 .62 $ 17 .51 $ 15 .66 $ 14 .02 $ 12 .57 $ 22.01 $ 18 .25 $ 21 .75 $ 20 .00 $ 23 .25 $ 24 .00 $ 16.10 $ 12 .00 $ 15 .60 $ 18 .00 $ 18 .05 $ 18 .00 $ 20.10 $ 16 .10 $ 18 .00 $ 19 .70 $ 19 .00 $ 22 .00 Price/earnings per share (at period end) Market price/Book value (at period end) 7.1 0.91 6 .3 0 .82 7 .8 1 .03 9 .5 1 .26 10 .3 1 .36 12 .4 1 .75 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 Preferred stock stockholders’ equity 4 total equity to total assets 4 tier 1 capital ratio (risk based) total capital ratio (risk based) Leverage ratio 2,050,864 2,048,574 2,048,574 2 ,048,574 2,048,574 2,048,574 $ 690,644 $ 623,896 $ 498,028 $ 438,878 $ 423,674 $ 418,248 278,729 282,135 146,908 114,616 - 183 187 835 95,773 599 96,981 1,110 337,558 292,344 288,412 279,915 275,974 260,682 570,436 511,769 400,844 359,345 355,955 357,876 43,104 - 15,465 10,200 38,717 - 15,465 10,100 40,545 - 15,465 - 27,088 - 15,465 - 19,537 - 15,465 - 13,626 2,667 15,465 - $ 55,286 $ 50,287 $ 35,866 $ 32,079 $ 28,717 $ 25,752 8.00 % 8 .06 % 7 .20 % 7 .31 % 6 .78 % 14.70 % 15 .44 % 12 .44 % 11 .78 % 10 .39 % 6 .16 % 9 .58 % 15.43 % 16 .60 % 14 .36 % 14 .05 % 12 .93 % 12 .53 % 9.83 % 9 .88 % 8 .96 % 8 .89 % 8 .21 % 7 .32 % 1 Excludes preferred stock dividends/accretion. 2 Return on average common stockholders’ equity is calculated by dividing net income, excluding preferred stock dividends/accretion, by average common stockholders’ equity. Common stockholders’ equity is defined as equity less preferred stock and accumulated other comprehensive income or loss. 3 Book value per share is calculated by dividing stockholders’ equity, excluding preferred stock and accumulated other comprehensive income or loss, by outstanding common shares. 4 Stockholders’ equity includes preferred stock and excludes accumulated other comprehensive income or loss. Select Financial Data | AnnuAl RepoRt 2010 5 12 10 8 6 4 2 0 1 6 AnnuAl RepoRt 2010 | Select Financial Data MAnAGeMent’S RepoR t of Internal Controls over Financial Reporting Arthur e. Greenbank President/CEO Brian A. 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 action 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/CEO Brian A . Ippensen Treasurer Management’s Report | AnnuAl RepoRt 2010 7 MAnAGeMent’S DISCuSSIon AnD AnAly SIS 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 2010 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 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 . ConsoliDateD assets (Amounts in thousands of dollars) 2010 Change 2009 change 2008 2007 2006 2005 5 Year Growth Rate assets cash and due from banks: non-interest bearing $ 9,363 2.68 % $ 9,119 (8 .10) % $ 9,923 $ 13,668 $ 10,738 $ 11,464 (18 .33) % Interest bearing 25,681 202.24 8,497 (54 .18) 18,544 1,658 1,443 12,388 107 .31 securities 278,729 (1.21) 282,135 92 .05 146,908 114,616 95,773 96,981 187 .41 Federal funds sold 2,167 639.59 Loans held for sale - (100.00) 293 (95 .48) 183 (2 .14) 6,483 187 5,035 14,485 13,620 (84 .09) 835 599 1,110 (100 .00) net loans other assets totAL 332,538 15.58 287,700 1 .17 284,375 276,605 272,835 257,522 29 .13 42,166 17.23 35,969 13 .80 31,608 26,461 27,801 25,163 67 .57 $ 690,644 10.70 % $ 623,896 25 .27 % $ 498,028 $ 438,878 $ 423,674 $ 418,248 65 .13 % liaBilities & stoCkholDers’ equity Deposits $ 570,436 11.46 % $ 511,769 27 .67 % $ 400,844 $ 359,345 $ 355,955 $ 357,876 59 .39 % short-term borrowings 37,604 24.45 30,217 37 .07 22,045 15,088 14,037 2,626 1,331 .99 Federal Home Loan Bank advances note payable Junior subordinated Debentures other liabilities 5,500 (35.29) 8,500 (54 .05) 18,500 12,000 5,500 11,000 (50 .00) - - - 15,465 5,057 - (4.02) 15,465 - - - - - 2,667 (100 .00) 15,465 15,465 15,465 15,465 - 5,269 7 .53 4,900 4,574 4,535 3,500 44 .49 stockholders’ equity 56,582 7.42 52,676 45 .22 36,274 32,406 28,182 25,114 125 .30 totAL $ 690,644 10.70 % $ 623,896 25 .27 % $ 498,028 $ 438,878 $ 423,674 $ 418,248 65 .13 % 8 AnnuAl RepoRt 2010 | Management’s Discussion and Analysis MAnAGeMent’S DISCuSSIon AnD AnAly SIS of Financial Condition and Results of operations At December 31, 2010, the company had assets of $690,644,000 compared to $623,896,000 at December 31, 2009 . the growth in assets is primarily made up of a 202 .24% growth in interest bearing deposits and a 15 .58% growth in net loans . the growth was primarily funded by an 11 .46% growth in deposits . the growth in the net loan portfolio was primarily made up of growth in commercial loans of $35,966,000 and tax exempt loans of $8,961,000 . consumer loans also increased $1,682,000 . Approximately $91,274,000 of fixed rate long- term residential real estate loans were sold in the secondary market during 2010 while $73,392,000 were sold in 2009 . Agricultural real estate loans totaling $3,284,000 were sold in the secondary market during 2010, while $1,616,000 were sold in 2009 . Management continues to place emphasis on the quality versus the quantity of the credits placed in the portfolio . 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 . 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 For the year ended December 31, 2010, the company reported consolidated net income of $6,440,000, a $555,000 (9 .43%) increase from 2009 . net interest income after provision for loan losses for the periods being compared increased $508,000 or 3 .30% . other operating income increased $2,071,000 (22 .78%) and other expenses increased $1,783,000 (11 .06%) from 2009 . 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 $611,482,000 for the year ended December 31, 2010 . A combination of interest bearing and non-interest bearing deposits, long term debt, federal funds purchased, securities sold under agreement to repurchase, other borrowings and capital funds are employed to finance these assets . Management’s Discussion and Analysis | AnnuAl RepoRt 2010 9 ConsoliDateD inCome summary (Amounts in thousands of dollars) 2010 Change 2009 change 2008 2007 2006 2005 5 Year Growth Rate Interest income $ 25,930 (0.85) % $ 26,153 1 .72 % $ 25,711 $ 26,912 $ 24,618 $ 21,768 19 .12 % Interest expense (8,932) (7.56) (9,663) (12 .23) (11,009) (14,027) (11,944) (8,843) 1 .01 net interest income $ 16,998 3.08 % $ 16,490 12 .16 % $ 14,702 $ 12,885 $ 12,674 $ 12,925 31 .51 % Provision for loan losses (1,080) - (1,080) (18 .80) (1,330) (1,080) (1,080) (2,250) (52 .00) net interest income after provision for loan losses $ 15,918 3.30 % $ 15,410 15 .24 % $ 13,372 $ 11,805 $ 11,594 $ 10,675 49 .11 % other income other expenses 11,164 22.78 9,093 (17,899) 11.06 (16,116) 16 .06 11 .77 7,835 7,415 6,977 7,058 (14,419) (13,377) (13,503) (13,036) 48 .18 37 .30 Income before taxes $ 9,183 9.49 % $ 8,387 23 .56 % $ 6,788 $ 5,843 $ 5,068 $ 4,697 95 .51 % Income tax expense (2,743) 9.63 (2,502) 21 .52 (2,059) (1,600) (1,305) (1,062) 158 .29 net IncoMe $ 6,440 9.43 % $ 5,885 24 .44 % $ 4,729 $ 4,243 $ 3,763 $ 3,635 77 .17 % Years ended December 31, 2010 2009 2008 (Amounts in thousands of dollars) Interest Income Loan Fees Interest expense $ 25,375 $ 25,607 $ 25,111 555 (8,932) 546 (9,663) 600 (11,009) net InteRest IncoMe $ 16,998 $ 16,490 $ 14,702 Average earning Assets $ 611,482 $ 553,127 $ 437,682 net Interest Margin 2.78 % 2 .98 % 3 .36 % the amounts recorded in the provision for loan losses are determined from management’s quarterly evaluation of the quality of the loan portfolio . In this review, such factors as the volume and character of the loan portfolio, general economic conditions and past loan loss experience are considered . Management believes that the allowance for loan losses is adequate to provide for possible losses in the portfolio at December 31, 2010 . the yield on average earning assets for the year ended 2010 was 4 .24% while the average cost of funds for the same period was 1 .67% on average interest bearing liabilities of $535,405,000 . the yield on average earning assets for the year ended 2009 was 4 .73%, while the average cost of funds for the same period was 2 .03% on average interest bearing liabilities of $476,526,000 . the increase in the net interest income of $508,000 can be attributed to the 10 .55% increase in average earning assets and the 0 .36% decrease in average cost of funds, which was partially offset by the 0 .49% decrease in yield on earning assets . 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, 2010 was $11,164,000, an increase of $2,071,000 (22 .78%) from 2009 . An increase in trust services income of $782,000 and security gains of $888,000 primarily accounted for the increase . proVision for loan losses the allowance for loan losses as a percentage of net loans outstanding is 1 .49% at December 31, 2010, compared to 1 .59% at December 31, 2009 . net loan charge-offs totaled $704,000 for the year ended December 31, 2010 compared to $473,000 in 2009 . other expenses for the period ended December 31, 2010 totaled $17,899,000, an increase of $1,783,000 (11 .06%) from 2009 year end totals . salaries and employee benefits expense aggregated 55 .02% and 53 .73% of total other expense for the years ended December 31, 2010 and 2009, respectively . other eXpense 10 AnnuAl RepoRt 2010 | Management’s Discussion and Analysis non-aCCrual, restruCtureD anD p ast Due loans, 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 2010 2009 2008 2007 2006 2005 $ 5,856 $ 3,449 $ 3,023 $ 2,152 $ 236 $ 267 1,757 230 1,370 90 1,327 1,363 $ 7,613 $ 3,679 $ 4,393 $ 2,242 $ 1,563 $ 1,630 Loans and leases past due 90 days or more and still accruing interest 591 199 717 301 578 1,119 total non-performing assets and 90-day past due loans and leases $ 8,204 $ 3,878 $ 5,110 $ 2,543 $ 2,141 $ 2,749 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 $ 315 $ 205 $ 228 $ 93 $ 39 $ 30 - - - - - - $ 315 $ 205 $ 228 $ 93 $ 39 $ 30 $ .10 $ .07 $ 07 $ .04 $ .01 $ .01 inCome t aXes 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 . Bank liquidity is provided from both assets and liabilities . the asset side provides liquidity through regular maturities of investment securities and loans . Investment securities with maturities of one year or less, deposits with banks and federal funds sold are a primary source of asset liquidity . on December 31, 2010, these categories totaled $38,987,000 or 5 .65% of assets, compared to $21,727,000 or 3 .48% the previous year . As of December 31, 2010, securities held to maturity included $23,000 of gross unrealized gains and $6,000 in 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 responsibility of prudently managing the volumes and mixes of assets and liabilities of the subsidiary Bank . Management believes that it has structured its pricing mechanisms such that the net interest margin should maintain acceptable levels in 2011, 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): repriCinG perioD as of December 31, 2010 through one Year After one Year through Five Years After Five Years Interest-earning assets $ 167,720 $ 222,207 $ 254,208 Interest-bearing liabilities Repricing gap (repricing assets minus repricing liabilities) 435,690 107,722 15,466 $ (267,970) $ 114,485 $ 238,742 REPRICING PERIod As of december 31, 2009 through one Year After one Year through Five Years After Five Years Interest-earning assets $ 123,650 $ 220,034 $ 239,768 Interest-bearing liabilities Repricing gap (repricing assets minus repricing liabilities) 399,000 85,368 16,782 $ (275,350) $ 134,666 $ 222,986 Management’s Discussion and Analysis | AnnuAl RepoRt 2010 11 effeCts of inflation asset liaBility manaGement since changes in interest rates may have a significant impact on operations the company has implemented, and currently maintains, an asset liability management committee at the Bank to monitor and react to the changes in interest rates and other economic conditions . Research concerning interest rate risk is supplied by the company from information received from a third party source . the committee acts upon this information by adjusting pricing, fee income parameters, and/or marketing emphasis . Common stoCk information anD DiViDenDs the company’s common stock is held by 350 shareholders as of December 31, 2010, and is traded in a limited over-the- counter market . on December 31, 2010 the market price of the company’s common stock was $20 .10 . Market price is based on stock transactions in the market . cash dividends on common stock of $943,000 were declared by the Board of Directors of the company for the year ended December 31, 2010 . Until recent years, the economic environment in which the company operates has been one of significant increases in the prices of most goods and services and a corresponding decline in the purchasing power of the dollar . Banks are affected differently than other commercial enterprises by the effects of inflation . some reasons for these disparate effects are: a) premises and equipment for banks represent a relatively small proportion of total assets; b) a bank’s asset and liability structure is substantially monetary in nature, which can be converted into a fixed number of dollars regardless of changes in prices, such as loans and deposits; and c) the majority of a bank’s income is generated through net interest income and not from goods or services rendered . Although inflation may impact both interest rates and volume of loans and deposits, the major factor that affects net interest income is how well a bank is positioned to cope with changing interest rates . Capital the ability to generate and maintain capital at adequate levels is critical to the company’s long term success . A common measure of capitalization for financial institutions is primary capital as a percent of total assets . Regulations also require the company to maintain certain minimum capital levels in relation to consolidated company assets . Regulations require a ratio of capital to risk-weighted assets of 8 .00 percent . the company’s capital, as defined by the regulations, was 15 .43 percent of risk-weighted assets at December 31, 2010 . In addition, a leverage ratio of at least 4 .00 percent is to be maintained . At December 31, 2010, the company’s leverage ratio was 9 .83 percent . 12 AnnuAl RepoRt 2010 | Management’s Discussion and Analysis finanCial report Upon written request of any shareholder of record on December 31, 2010, the company will provide, without charge, a copy of its 2010 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 24, 2011 at 9:00 A .M . at the corporate headquarters, 1201 Broadway, Quincy, Illinois . Management’s Discussion and Analysis | AnnuAl RepoRt 2010 13 InDepenDent A uDItoR’S RepoR t 14 AnnuAl RepoRt 2010 | Independent Auditor’s Report ConSolIDA teD FInAnCIAl St AteMentS ConsoliDateD BalanCe sheets (Amounts in thousands of dollars, except share and per share data) December 31, assets cash and due from banks non-interest bearing Interest bearing securities held to maturity (note 3) securities available for sale (note 3) Federal funds sold Loans held for sale Loans (note 4 and 8) Less allowance for loan losses net loans Premises, furniture and equipment, net (note 5) Accrued interest receivable Life insurance contracts Intangibles (note 6) Prepaid FDIc insurance assessment other assets totAL Assets liaBilities anD stoCkholDers’ equity liabilities Deposits non-interest bearing demand Interest bearing demand savings time (note 7) total Deposits securities sold under agreements to repurchase Federal Home Loan Bank advances (note 8) Junior subordinated debentures (note 9) Accrued interest payable other liabilities total Liabilities commitments and contingencies (note 11) stockholders’ equity (Note 13) series A Preferred stock, no par value; shares authorized issued and outstanding 10,000; (note 10) series B Preferred stock; no par value; shares authorized issued and outstanding 500; (note 10) common stock, $1 par value; shares authorized 6,000,000; shares issued 2,579,230 and outstanding: 2010 - 2,051,476; 2009 - 2,048,574 Additional paid in capital Retained earnings Accumulated other comprehensive income treasury stock, at cost: 2010 - 527,754 shares; 2009 - 530,656 shares total stockholders’ equity totAL LIABILItIes AnD stocKHoLDeRs’ eQUItY See notes to consolidated financial statements 2010 2009 $ $ $ $ $ $ $ $ $ $ $ 9,363 25,681 35,044 1,481 277,248 2,167 - 337,558 (5,020) 332,538 16,303 3,289 9,118 3,385 1,798 8,273 690,644 70,127 184,727 33,705 281,877 570,436 37,604 5,500 15,465 1,321 3,736 634,062 9,645 555 2,580 2,258 47,637 1,296 (7,389) 56,582 690,644 $ $ $ $ $ 9,119 8,497 17,616 2,066 280,069 293 183 292,344 (4,644) 287,700 12,380 3,399 8,779 3,607 2,506 5,298 $ 623,896 $ $ $ $ $ 64,801 136,315 33,333 277,320 511,769 30,217 8,500 15,465 1,313 3,956 571,220 9,526 574 2,580 2,251 42,785 2,389 (7,429) 52,676 623,896 Consolidated Financial Statements | AnnuAl RepoRt 2010 15 ConsoliDateD statements of inCome (Amounts in thousands of dollars, except per share data) Years ended December 31, interest inCome: Loans, including fee income: taxable non-taxable securities: taxable non-taxable Federal funds sold Interest bearing deposits in banks other Total interest income interest eXpense: Deposits: Interest bearing demand and savings time total interest on deposits securities sold under agreements to repurchase Federal Home Loan Bank advances Junior subordinated debentures total interest expense net interest income Provision for loan losses (Note 4) net interest income after provision for loan losses other inCome: trust services service charges on deposit accounts Gain on sale of loans Investment securities gains (losses), net: total other-than-temporary impairment losses Portion of loss recognized in other comprehensive income before taxes net impairment losses recognized in earnings Realized securities gains, net Investment securities gains, net other Total other income other eXpenses: salaries and employee benefits occupancy expense, net equipment expense computer processing Professional services other Total other expenses Income before income taxes Income taxes (note 14) net IncoMe earnings per share of common stock, basic and diluted See notes to consolidated financial statements 16 AnnuAl RepoRt 2010 | Consolidated Financial Statements 2010 2009 $ 16,758 301 $ 16,510 236 6,858 1,916 6 41 50 7,780 1,523 7 61 36 $ 25,930 $ 26,153 $ $ $ $ $ $ $ $ $ $ $ $ 1,564 5,880 7,444 115 396 977 8,932 16,998 1,080 15,918 4,837 1,261 1,046 - (81) (81) 1,163 1,082 2,938 11,164 9,848 1,168 894 1,271 565 4,153 17,899 9,183 2,743 6,440 2.83 $ $ $ $ $ $ $ $ $ $ $ $ 1,434 6,554 7,988 95 565 1,015 9,663 16,490 1,080 15,410 4,055 1,243 771 (1,930) 1,277 (653) 847 194 2,830 9,093 8,659 1,017 811 1,184 403 4,042 16,116 8,387 2,502 5,885 2 .57 ConsoliDateD statements of ChanGes in stoCkholDers’ equity (Amounts in thousands of dollars, except share and per share data) Years Ended December 31, 2010 and 2009 series A Preferred stock series B Preferred stock common stock Additional Paid in capital Retained earnings Accumulated other comprehensive Income (Loss) treasury stock comprehensive Income total Balance, December 31, 2008 $ - $ - $ 2,580 $ 2,251 $ 38,464 $ 408 $ (7,429) $ 36,274 Issuance of 10,000 shares of series A preferred stock Issuance of 500 shares of series B preferred stock comprehensive income: net income other comprehensive income, net of tax, (note 2) comprehensive income Preferred stock dividends declared Discount accretion on preferred stock, net common stock dividends declared (amount per share $ .46) 9,408 - - 592 - - - - - - 118 (18) - - - - - - - - - - - - - - - - - - - - - - 9,408 592 5,885 - - 5,885 5,885 - 1,981 - 1,981 1,981 $ 7,866 (522) - - (100) (942) - - - - (522) - (942) Balance, December 31, 2009 $ 9,526 $ 574 $ 2,580 $ 2,251 $ 42,785 $ 2,389 $ (7,429) $ 52,676 Restricted stock compensation, 2,902 shares of treasury stock comprehensive income: net income other comprehensive (loss), net of tax, (note 2) comprehensive income Preferred stock dividends declared Discount accretion on preferred stock, net common stock dividends declared (amount per share $ .46) - - - - - - - - 119 (19) - - - - - - - - 7 - - - - - - - 40 47 6,440 - - 6,440 6,440 - (1,093) - (1,093) (1,093) $ 5,347 (545) - - (100) (943) - - - - (545) - (943) $ 56,582 Balance, December 31, 2010 $ 9,645 $ 555 $ 2,580 $ 2,258 $ 47,637 $ 1,296 $ (7,389) See notes to consolidated financial statements Consolidated Financial Statements | AnnuAl RepoRt 2010 17 ConsoliDateD statements of Cash flows (Amounts in thousands of dollars) Years ended December 31, 2010 2009 Cash flows from operatinG aCtiVities net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Depreciation Amortization of intangibles Amortization/accretion of premiums/discounts on securities, net Investment securities (gains), net: Loans originated for sale Proceeds from loans sold Gain on sale of loans Restricted stock compensation Deferred income taxes (Increase) decrease in accrued interest receivable and other assets (Increase) decrease in prepaid FDIc insurance assessment Increase (decrease) in accrued interest payable and other liabilities net cash provided by operating activities Cash flows from inVestinG aCtiVities Activity in securities portfolio: Purchases sales of securities available for sale calls, maturities and paydowns (Increase) in loans, net (Increase) decrease in federal funds sold Purchases of premises, furniture and equipment (Increase) in cash surrender value life insurance contracts cash effect of acquisition Gain on acquisition net cash (used in) investing activities Cash flows from finanCinG aCtiVities net increase in deposits cash dividends paid to preferred shareholders cash dividends paid to common shareholders Increase in securities sold under agreement to repurchase Repayments of Federal Home Loan Bank advances Issuance of preferred stock net cash provided by financing activities net increase (decrease) in cash and due from banks Cash anD Due from Banks: Beginning ending (continued) 18 AnnuAl RepoRt 2010 | Consolidated Financial Statements $ 6,440 $ 5,885 1,080 1,181 222 2,667 (1,082) (94,558) 95,787 (1,046) 47 186 (627) 708 196 $ 11,201 $ 1,080 1,004 218 1,344 (194) (75,004) 75,779 (771) - (253) 92 (2,506) (209) 6,465 $ (121,537) $ (209,853) 27,903 93,888 (48,276) (1,874) (5,104) (339) - - 20,520 56,126 (3,664) 6,190 (1,184) (319) 17,786 (491) $ (55,339) $ (114,889) $ 58,667 $ 90,796 (545) (943) 7,387 (3,000) - 61,566 17,428 17,616 35,044 (453) (942) 8,172 (10,000) 10,000 97,573 (10,851) 28,467 17,616 $ $ $ $ $ $ $ $ Years ended December 31, 2010 2009 Supplemental disclosure of cash flow information, Cash payments for: Interest Income taxes Supplemental schedule of non-cash investing and financing activities: net change in accumulated other comprehensive income transfer of loans to other real estate owned The fair value of assets acquired and liabilities assumed in acquisition (Note 16) Loans Accrued interest receivable Premises, furniture, and equipment, net core deposit intangible Deposits Accrued interest payable other liabilities Less cash received Gain recognized from purchase See notes to consolidated financial statements $ $ $ $ $ $ $ 8,924 3,082 (1,093) 2,358 - - - - - - - - - - $ $ $ $ $ 9,796 2,268 1,981 140 881 4 1,834 157 (20,129) (17) (25) $ (17,295) 17,786 491 $ Consolidated Financial Statements | AnnuAl RepoRt 2010 19 noteS to ConSolIDA teD FInAnCIAl St AteMentS 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, sangamon, 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, IL with sales offices in chicago and springfield, IL, Philadelphia, PA and Phoenix, AZ . 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 instruments 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 ser ViCes 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 responsibilities 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 . Realized gains and losses on sales of securities are based upon the adjusted book value of the specific securities sold and are included in earnings . there were no trading securities at December 31, 2010 or 2009 . All securities are evaluated to determine whether declines in fair value below their amortized cost are other-than-temporary . In estimating other-than-temporary impairment losses on debt securities, management considers a number of factors including, but not limited to, (1) the length of time and extent to which the fair value has been less than amortized cost, (2) the financial condition and near-term prospects of the issuer, (3) the current market conditions and, (4) the intent of the company to not sell the security prior to recovery and whether it is not more-likely-than-not that it will be required to sell the security prior to recovery . If the company does not intend to sell the security, and it is unlikely the entity will be required to sell the security before recovery of its amortized cost basis, the company will recognize the credit component of an other- than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income . For held to maturity debt securities, the amount of an other- than-temporary impairment recorded in other comprehensive income for the noncredit portion would be amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security . 20 AnnuAl RepoRt 2010 | notes to Consolidated Financial Statements loans allowanCe for loan losses Loans held for sale: Residential real estate and agricultural 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 on the accrual basis 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, 2010 and 2009, the Bank had loan concentrations in agribusiness of 12 .22% and 13 .90%, 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, 2010 and 2009 . 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 . 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 . notes to Consolidated Financial Statements | AnnuAl RepoRt 2010 21 1. nature of Business and summary of significant inCome t aXes accounting policies (Continued) 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 . Property is recorded at fair value less cost to sell when acquired . 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, 2010 and 2009 . prepaiD fDiC insuranCe assessment In november 2009, the Federal Deposit Insurance corporation (FDIc) adopted a final rule amending the assessment regulations to require insured depository institutions to prepay their quarterly risk-based assessment for all of 2010, 2011, and 2012 . the payment, which was made in December 2009, was recorded as a prepaid asset and is being amortized over the assessment period . earninGs per share of Common stoCk Basic earnings per share of common stock is computed by dividing net income, after deducting preferred stock dividends and accretion, 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 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, 2010 and 2009 . Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards 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 . When the tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others could be subject to uncertainty about the merits of the position taken . the company may recognize the tax benefit from an uncertain tax-position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position . the tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement . Management evaluated the company’s tax positions and concluded that the company had taken no uncertain tax positions that require adjustment to the financial statements . the company recognizes interest and penalties on income taxes as a component of income tax expense . With few exceptions, the company is no longer subject to U .s . federal or state and local income tax examinations by tax authorities for years before 2007 . aCCountinG for DeriV atiVes anD heDGinG aCtiVities Interest rate swaps are derivatives that are recognized on the balance sheet at their fair value . changes in the fair value of a derivative that is highly effective and that is designed and qualifies as a cash flow hedge, are recorded in other comprehensive income, until earnings are affected by the variability of cash flows (e .g ., when periodic settlements on a variable rate liability are recorded in earnings) . the company formally documents all relationships between hedging instruments and hedged items as well as its risk-management objective and strategy for undertaking various hedged transactions . the company also formally assesses both at the hedge’s inception and, on an ongoing basis, whether 22 AnnuAl RepoRt 2010 | notes to Consolidated Financial Statements the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items . When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the company discontinues hedge accounting prospectively, as discussed below . the company discontinues hedge accounting prospectively when: (1) it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item; (2) the derivative expires or is sold, terminated and exercised; or (3) management determines that designation of the derivative as a hedge instrument is no longer appropriate . If hedge accounting is discontinued, the derivative is carried at fair value on the balance sheet, with changes in its fair value recognized in current-period earnings . suBsequent eVents the company has evaluated all subsequent events through March 11, 2011, the date that the financial statements were available to be issued . Current aCCountinG DeVelopments In July 2010, the FAsB issued Accounting standards Update (AsU) 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. AsU 2010-20 requires more robust and disaggregated disclosures about the credit quality of loans and allowances for loan losses, including disclosure about credit quality indicators, past due information and modifications of loans . this AsU is effective for the company for annual reporting periods ending after December 15, 2011 . the adoption of this guidance will significantly expand the existing disclosure requirements but will not have an impact on the company’s financial position, results of operation and cash flows . notes to Consolidated Financial Statements | AnnuAl RepoRt 2010 23 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 of unrealized gains and losses on securities available for sale and the interest rate swap . other comprehensive income (loss) is comprised as follows (Amounts in thousands of dollars): year ended December 31, 2010 Unrealized (losses) on securities available for sale: Unrealized holding (losses) arising during the year Less reclassification adjustment for gains included in net income Interest rate swap other comprehensive (loss) Year ended december 31, 2009 Unrealized gains on securities available for sale: Unrealized holding gains arising during the year Less reclassification adjustment for gains included in net income Interest rate swap other comprehensive income $ $ $ Before tax tax expense (Benefit) net of tax (2,649) 1,082 (196) (1,763) $ $ (1,007) $ (1,642) 411 (74) 671 (122) (670) $ (1,093) 3,364 $ 1,278 $ 194 24 74 9 $ 3,194 $ 1,213 $ 2,086 120 15 1,981 As of December 31, 2010, accumulated other comprehensive income on the consolidated balance sheet includes $1,403,000 as a result of unrealized gains on securities available for sale and ($107,000) as a result of the interest rate swap . As of December 31, 2009, accumulated other comprehensive income on the consolidated balance sheet includes $2,374,000 as a result of unrealized gains on securities available for sale and $15,000 as a result of the interest rate swap . 24 AnnuAl RepoRt 2010 | notes to Consolidated Financial Statements 3. securities the amortized cost and fair values of securities as of December 31, 2010 and 2009 are as follows . Included in gross unrealized losses is an ottI loss of $1,193,000 and $1,277,000 as of December 31, 2010 and 2009 respectively, relating to two corporate securities, which represent the non-credit related portion of the overall impairment . (Amounts in thousands of dollars): 2010 seCurities helD to maturity: U .s . Government agency bonds state and political subdivisions seCurities aVailaBle for sale: U .s . Government agency bonds U .s . Government agency mortgage backed securities state and political subdivisions corporate securities collateralized mortgage obligations 2009 SECuRITIES HELd To MATuRITY: U .s . Government agency bonds state and political subdivisions SECuRITIES AvAILABLE FoR SALE: U .s . Government agency bonds U .s . Government agency mortgage backed securities state and political subdivisions corporate securities collateralized mortgage obligations other Amortized cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value $ $ 264 1,217 1,481 $ $ $ 78,909 $ 79,233 55,003 1,696 60,144 12 11 23 1,009 3,656 447 3 262 $ $ $ - (6) (6) $ $ 276 1,222 1,498 (78) (74) (1,586) (1,193) (183) $ 79,840 82,815 53,864 506 60,223 $ 274,985 $ 5,377 $ (3,114) $ 277,248 Amortized cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value $ $ 269 1,797 2,066 $ $ 5 25 30 $ 101,425 $ 124,564 44,464 2,098 3,686 2 731 4,390 702 - 194 - $ $ $ - - - $ $ 274 1,822 2,096 (145) (33) (675) (1,334) - - $ 102,011 128,921 44,491 764 3,880 2 $ 276,239 $ 6,017 $ (2,187) $ 280,069 notes to Consolidated Financial Statements | AnnuAl RepoRt 2010 25 3. 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, 2010 and 2009 are summarized as follows (Amounts in thousands of dollars): 2010 seCurities helD to maturity: Less tHAn 12 MontHs 12 MontHs oR MoRe Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value totAL Unrealized Losses state and political subdivisions $ 167 $ (6) seCurities aVailaBle for sale: U .s . Government agency bonds $ 10,114 $ U .s . Government agency mortgage backed securities 2,914 state and political subdivisions corporate securities collateralized mortgage obligations 25,040 - 24,449 $ (78) (74) (989) - (183) - - - $ - - - $ 167 $ (6) $ 10,114 $ 2914 (78) (74) 2,644 (597) 27,684 (1,586) 50 - ( 1,193) 50 (1,193) - 24,449 (183) $ 62,517 $ (1,324) $ 2,694 $ (1,790) $ 65,211 $ (3,114) 2009 SECuRITIES AvAILABLE FoR SALE: Less tHAn 12 MontHs 12 MontHs oR MoRe Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value totAL Unrealized Losses U .s . Government agency bonds $ 13,095 $ (145) $ U .s . Government agency mortgage backed securities 2,177 state and political subdivision corporate securities 13,209 - (33) (368) - 1,584 764 $ - - - - $ 13,095 $ (145) 2,177 (307) 14,793 (33) (675) (1,334) 764 (1,334) $ 28,481 $ (546) $ 2,348 $ (1,641) $ 30,829 $ (2,187) At December 31, 2010, the investment portfolio included 375 securities . of this number, 101 securities have current unrealized losses and 13 of them have current unrealized losses which have existed for longer than one year . All of the debt securities with unrealized losses 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 debt securities are temporary . In addition, the company does not have the intent to sell these debt securities and it is unlikely that the company will be required to sell these debt securities prior to their anticipated recovery . For the year ended December 31, 2009, the company recognized other-than-temporary impairment of $1,930,000 on two securities of which $653,000 was associated with credit loss and was, therefore, recognized in income with the remaining non-credit related portion of $1,277,000 being recognized in other comprehensive income . For the year ended December 31, 2010, an additional $81,000 of credit loss was recognized in earnings . 26 AnnuAl RepoRt 2010 | notes to Consolidated Financial Statements the amortized cost and fair value of securities as of December 31, 2010 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 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 Fair Value $ $ $ $ 945 363 173 951 380 167 1,481 $ 1,498 825 $ 831 50,365 70,150 91,805 51,046 70,892 93,750 $ 213,145 $ 216,519 1,696 60,144 506 60,223 $ 274,985 $ 277,248 Information on sales of securities available for sale during the years ended December 31, 2010 and 2009 follows (Amounts in thousands of dollars): Proceeds from sales Gross gains Gross losses 2010 2009 $ 27,903 $ 20,520 1,126 - 740 - As of December 31, 2010 and 2009 securities with a carrying value of approximately $179,779,000 and $161,110,000 respectively, were pledged to collateralize deposits and securities sold under agreements to repurchase and for other purposes as required or permitted by law . 4. loans the composition of net loans outstanding as of December 31, 2010 and 2009 are as follows (Amounts in thousands of dollars): commercial Agricultural tax exempt Real estate, mortgage consumer Less: Allowance for loan losses net LoAns 2010 2009 $ 199,568 $ 163,602 41,261 13,509 43,170 40,050 40,624 4,548 45,202 38,368 $ 337,558 $ 292,344 (5,020) (4,644) $ 332,538 $ 287,700 notes to Consolidated Financial Statements | AnnuAl RepoRt 2010 27 4. loans (Continued) As of December 31, 2010 and 2009, impaired loans were $5,506,000 and $2,878,000, respectively . Impaired loans of $3,251,000 and $912,000 as of December 31, 2010 and 2009, respectively, have a specific allowance provided for them included in the allowance for loan losses of $1,600,000 and $687,000, respectively . the average recorded investment in impaired loans was $4,192,000 and $2,938,000 for the years ended December 31, 2010 and 2009, respectively . Impaired loans for which a specific allowance has not been provided are $2,255,000 and $1,966,000 as of December 31, 2010 and 2009, respectively . Interest income and cash basis interest income recognized on impaired loans during the years ended December 31, 2010 and 2009 were not significant . nonaccrual loans totaled $5,856,000 and $3,449,000 as of December 31, 2010 and 2009, respectively . Loans past due 90 days or more and still accruing interest were $591,000 and $199,000 at December 31, 2010 and 2009, respectively . Activity in the allowance for loan losses during the years ended December 31, 2010 and 2009 is summarized below (Amounts in thousands of dollars): Balance, beginning of year Provision for loan losses Loan charge-offs Recoveries of loans charged off Balance, end of year 2010 2009 $ 4,644 $ 4,037 1,080 (826) 122 1,080 (622) 149 $ 5,020 $ 4,644 Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets . the unpaid principal balances of these loans totaled $133,763,000 and $109,771,000 at December 31, 2010 and 2009, respectively . In the ordinary course of business, the Bank has granted loans to directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders amounting to $8,021,000 and $7,047,000 as of December 31, 2010 and 2009 respectively . 5. premises, furniture and equipment the cost, accumulated depreciation and net book value of premises, furniture and equipment as of December 31, 2010 and 2009 is summarized as follows (Amounts in thousands of dollars): Land Building and improvements Furniture and equipment Less accumulated depreciation 2010 2009 $ 3,108 $ 2,673 14,208 8,002 10,738 7,247 $ 25,318 $ 20,658 (9,015) (8,278) $ 16,303 $ 12,380 28 AnnuAl RepoRt 2010 | notes to Consolidated Financial Statements 6. intangibles Goodwill and intangible assets are summarized as follows (Amounts in thousands of dollars): As of December 31, Intangible assets: Goodwill core deposit intangible other intangible assets Less accumulated amortization on certain intangible assets total intangible assets estimateD future amortization eXpense: For the year ended December 31: 2010 2011 2012 2013 2014 2015 2010 2009 $ 3,050 1,380 481 (1,526) $ 3,050 1,380 481 (1,304) $ 3,385 $ 3,607 68 68 68 68 63 $ 222 68 68 68 68 63 7. time Deposits the aggregate amount of time deposits, each with a minimum denomination of $100,000, was approximately $101,874,000 and $107,698,000 at December 31, 2010 and 2009, respectively . this includes brokered deposits of $9,663,000 at December 31, 2010 and 2009 . At December 31, 2010, the scheduled maturities of time deposits are as follows (Amounts in thousands of dollars): 2011 2012 2013 2014 2015 thereafter $ 174,413 52,182 23,270 13,004 19,007 1 $ 281,877 8. federal home loan Bank advances Federal Home Loan Bank (FHLB) advances are summarized as follows at December 31, 2010 and 2009 (Amounts in thousands of dollars): Maturity in year ending December 31: 2010 Maturity in year ending December 31: 2011 Weighted Average Interest Rate Balance Due Weighted Average Interest Rate Balance Due 2010 2009 4.95 % $ 5,500 4 .95 5,500 $ 5,500 $ 8,500 4 .81 % $ 3,000 notes to Consolidated Financial Statements | AnnuAl RepoRt 2010 29 8. federal home loan Bank advances (Continued) First mortgage loans of approximately $7,333,000 and $11,333,000 as of December 31, 2010 and 2009, respectively, are pledged as collateral on FHLB advances . 9. 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, 2010 and 2009, the company is allowed, for regulatory purposes, to include the entire $15,000,000 of the capital securities issued by the trusts in tier I capital . 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 (2 .95% and 2 .90% as of December 31, 2010 and 2009) . 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 at par plus any accrued and unpaid distributions to the date of the redemption; however, the trust has the option to redeem at any time . the redemption may be in whole or in part, but in all cases in a principal amount with integral multiples of $1,000 . effective January 2009, 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% . As of December 31, 2010 and 2009, the notional amount of the swap is $5,000,000 with a fair value of $(172,000) recorded in other liabilities and $24,000 recorded in other assets, respectively, and as a (reduction) addition to accumulated other comprehensive income in the consolidated balance sheet . 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 (3 .25% and 3 .20% as of December 31, 2010 and 2009, 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 at par plus any accrued and unpaid distributions to the date of the redemption; however, the company has the option to redeem at any time . 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 redeem at any time . 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 . 30 AnnuAl RepoRt 2010 | notes to Consolidated Financial Statements 10. preferred stock, series a and B 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 . For accounting purposes, the proceeds of the $10,000,000 were allocated between the preferred stock and the warrant based on their relative fair values . the entire discount on the preferred stock, created from the initial value assigned to the warrant, will be accreted over a five year period in a manner that produces a level preferred stock dividend yield . At the end of the fifth year, the carrying amount of the preferred stock will equal its liquidation value . 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, 2010 and 2009 is as follows (Amounts in thousands of dollars): 2010 2009 commitments to extend credit and unused lines of credit $ 59,406 $ 59,574 standby letters of credit 2,091 1,262 Unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract . the agreements generally have fixed expiration dates or other termination clauses and may require payment of a fee . since many of the agreements are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements . the Bank evaluates each customer’s credit worthiness on a case- by-case basis . the amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based upon management’s credit evaluation of the counter-party . collateral varies but may include accounts receivable, inventory, property, equipment, and income-producing commercial properties . notes to Consolidated Financial Statements | AnnuAl RepoRt 2010 31 11. Commitments and Contingencies (Continued) 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 previous summary . If the commitment is funded, the Bank would be entitled to seek recovery from the customer . At December 31, 2010 and 2009, 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 $847,000 and $1,801,000 at December 31, 2010 and 2009, respectively . these amounts include loans held for sale of none and $183,000 as of December 31, 2010 and 2009, respectively and loan commitments, included in the summary in this note, of $847,000 and $1,618,000 as of December 31, 2010 and 2009, 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, 2010 and 2009 . 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 company’s cash is maintained at various correspondent banks . the total amount of cash on deposit and federal funds sold exceeded federal insurance limits at four institutions by a total of approximately $11,450,000 as of December 31, 2010 . 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 subsidiaries, a contribution may be made by the subsidiaries . employees are 100% vested in the subsidiaries’ contribution to the plan after five years of service . employee contributions and vested subsidiaries contributions may be withdrawn only on termination of employment, retirement, death or hardship withdrawal . Under the employee Incentive compensation Plan, the Bank and trust services are authorized at their 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 and trust services exceeds established income levels . contributions to the 401(k) plan for the years ended December 31, 2010 and 2009 totaled $383,000 and $370,000 respectively . contributions made to the incentive compensation plan for the years ended December 31, 2010 and 2009 were $185,000 and $317,000 respectively . 32 AnnuAl RepoRt 2010 | notes to Consolidated Financial Statements 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 10, 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 following table) 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, 2010, 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 | AnnuAl RepoRt 2010 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, 2010 Amount Ratio Amount Ratio Amount Total Capital (to Risk Weighted Assets) company $ 70,165 15.43 % ≥ $ 36,380 ≥ 8.00 % n/a Ratio n/a Bank $ 58,779 13.02 % ≥ $ 36,121 ≥ 8.00 % ≥ $ 45,152 ≥ 10.00 % Tier I Capital (to Risk Weighted Assets) company $ 66,827 14.70 % ≥ $ 18,190 ≥ 4.00 % n/a n/a Bank $ 53,759 11.91 % ≥ $ 18,061 ≥ 4.00 % ≥ $ 27,091 ≥ 6.00 % Tier I Capital (to Average Assets) company $ 66,827 9.83 % ≥ $ 27,191 ≥ 4.00 % n/a n/a Bank $ 53,759 7.98 % ≥ $ 26,961 ≥ 4.00 % ≥ $ 33,701 ≥ 5.00 % As of december 31, 2009 Amount Ratio Amount Ratio Amount Total Capital (to Risk Weighted Assets) company $ 66,508 16 .60 % ≥ $ 32,050 ≥ 8 .00 % n/A Ratio n/A Bank $ 54,350 13 .67 % ≥ $ 31,803 ≥ 8 .00 % ≥ $ 39,753 ≥ 10 .00 % Tier I Capital (to Risk Weighted Assets) company $ 61,864 15 .44 % ≥ $ 16,025 ≥ 4 .00 % n/A n/A Bank $ 49,706 12 .50 % ≥ $ 15,901 ≥ 4 .00 % ≥ $ 23,852 ≥ 6 .00 % Tier I Capital (to Average Assets) company $ 61,864 9 .88 % ≥ $ 25,038 ≥ 4 .00 % n/A n/A Bank $ 49,706 8 .03 % ≥ $ 24,767 ≥ 4 .00 % ≥ $ 30,959 ≥ 5 .00 % 34 AnnuAl RepoRt 2010 | notes to Consolidated Financial Statements 14. income tax matters the components of income tax expense are as follows for the years ended December 31, 2010 and 2009 (Amounts in thousands of dollars): Years ended December 31, current Deferred 2010 2009 $ 2,557 $ 2,755 186 (253) $ 2,743 $ 2,502 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 $ 3,122 34.0 % $ 2,852 34 .0 % 2010 amount % of pretax income 2009 Amount % of Pretax Income 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 333 (701) (104) 93 3.6 (7.6) (1.1) 1.0 354 (548) (107) (49) 4 .2 (6 .5) (1 .3) (0 .6) Income tax expense $ 2,743 29.9 % $ 2,502 29 .8 % net deferred tax assets consist of the following components as of December 31, 2010 and 2009 (Amounts in thousands of dollars): deferred tax assets: Allowance for loan losses other-than-temporary impairment Accrued expenses Interest rate swap deferred tax liabilities: Premises, furniture and equipment stock dividends Prepaid expenses Unrealized gains on securities available for sale, net Intangibles Interest rate swap other net DeFeRReD tAX Assets (LIABILItIes) 2010 2009 $ 1,854 $ 1,708 279 223 65 248 174 - $ 2,421 $ 2,130 $ (790) (140) (78) (860) (371) - (165) (2,404) 17 $ $ $ (440) (140) (72) (1,456) (319) (9) (161) $ $ (2,597) (467) net deferred tax assets (liabilities) are included in other assets (liabilities) on the accompanying consolidated balance sheets . notes to Consolidated Financial Statements | AnnuAl RepoRt 2010 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): Years ended December 31, Provision for income taxes statement of changes in stockholders’ equity, accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale, net Interest rate swap 2010 2009 $ 186 $ (253) (596) (74) 1,204 9 $ (484) $ 960 15. fair Value measurements the Fair Value Measurements and Disclosures topic of the FAsB Accounting standards codification defines fair value, establishes a framework for measuring fair value using a hierarchy system, and requires disclosure of fair value measurements . the hierarchy is intended to maximize the use of observable inputs and minimize the use of unobservable inputs and includes three levels based upon the valuation techniques used . the three levels are 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 . 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 . Loan impairment may be measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral dependent . collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable . Fair value is determined based upon appraisals by qualified licensed appraisers hired by the company, and are, generally, considered level 2 measurements . In some cases, adjustments are 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 are based on unobservable inputs, the resulting fair value measurement has been categorized as a level 3 measurement . 36 AnnuAl RepoRt 2010 | notes to Consolidated Financial Statements other real estate owned: other real estate owned is carried at the lower of the principal amount of the loan outstanding at the time of acquisition, plus any acquisition costs, or the estimated fair value of the property, less disposal costs . the fair value of the property is determined based upon appraisals . As with impaired loans, if significant adjustments are made to the appraised value, based upon unobservable inputs, the resulting fair value measurement is categorized as a level 3 measurement . interest rate swap: the fair value is estimated by a third party using inputs that are observable or that can be corroborated by observable market data, and therefore, are classified within level 2 of the valuation hierarchy . there have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the year ended December 31, 2010 . assets anD liaBilities reCorDeD at fair V alue on a reCurrinG Basis: the following table summarizes assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009, 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, 2010 using: Investment securities available for sale: U .s . Government agency bonds U .s . Government agency mortgage backed securities state and political subdivisions corporate securities collateralized mortgage obligations Interest rate swap Fair value Measurements as of december 31, 2009 using: Investment securities available for sale: U .s . Government agency bonds U .s . Government agency mortgage backed obligations state and political subdivisions corporate securities collateralized mortgage obligations other Interest rate swap Fair Value Quoted Prices in Active Markets for Identical Assets significant other observable Inputs significant Unobservable Inputs (Level 1) (Level 2) (Level 3) $ 79,840 82,815 53,864 506 60,223 $ $ 277,248 (172) $ $ $ - - - - - - - $ 79,840 $ 82,815 53,864 506 60,223 $ $ 277,248 (172) $ $ - - - - - - - Fair Value Quoted Prices in Active Markets for Identical Assets significant other observable Inputs significant Unobservable Inputs (Level 1) (Level 2) (Level 3) $ 102,011 $ - $ 102,011 $ 128,921 44,491 764 3,880 2 $ $ 280,069 24 - - - - - - - $ $ 128,921 44,491 764 3,880 2 $ $ 280,069 24 $ $ - - - - - - - - there were no transfers of assets or liabilities between levels 1, 2, and 3 of the fair value hierarchy during the year ended December 31, 2010 . notes to Consolidated Financial Statements | AnnuAl RepoRt 2010 37 15. fair Value measurements (Continued) assets anD liaBilities reCorDeD at fair V alue 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 such as when there is evidence of impairment . Assets measured at fair value on a nonrecurring basis are included in the table below: fair Value measurements as of December 31, 2010 using: Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) significant other observable Inputs significant Unobservable Inputs (Level 2) $ - $ - (Level 3) $ 1,731 $ 1,845 $ - $ - Impaired loans other real estate owned Fair value Measurements as of december 31, 2009 using: Impaired loans other real estate owned $ 1,731 $ 1,845 Fair Value $ 259 $ 242 Quoted Prices in Active Markets for Identical Assets (Level 1) $ - $ - significant other observable Inputs significant Unobservable Inputs (Level 2) $ - $ - (Level 3) $ 259 $ 242 the Financial Instruments topic of the FAsB Accounting standards codification, 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 . certain financial instruments and all non-financial instruments are excluded from these 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 . 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 . 38 AnnuAl RepoRt 2010 | notes to Consolidated Financial Statements 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: the fair value of Federal Home Loan Bank advances are estimated using discounted cash flow analyses, using interest rates currently being offered for similar borrowings . Junior subordinated debentures: It is not practicable to estimate the fair value of junior subordinated debentures as instruments with similar terms are not available in the market place . Commitments to extend credit: the fair value of these commitments is not material . the carrying values and estimated fair values of the company’s financial instruments as of December 31, 2010 and 2009 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: 2010 Carrying Value 2010 fair Value 2009 carrying Value 2009 Fair Value $ 35,044 $ 35,044 $ 17,616 $ 17,616 1,481 277,248 2,167 332,538 3,289 1,498 277,248 2,167 334,274 3,289 2,066 280,069 293 287,883 3,399 2,096 280,069 293 289,068 3,399 non-interest-bearing demand deposits $ 70,127 $ 70,127 $ 64,801 $ 64,801 Interest-bearing demand deposits savings deposits time deposits securities sold under agreements to repurchase Federal Home Loan Bank advances Accrued interest payable 184,727 33,705 281,877 37,604 5,500 1,321 184,727 33,705 284,233 37,604 5,686 1,321 136,315 33,333 277,320 30,217 8,500 1,313 136,315 33,333 278,504 30,217 8,967 1,313 16. acquisition In november 2009, the company entered into a purchase and assumption agreement with First Bank to acquire a branch banking office in springfield, Illinois in order to expand the market area . Assets with a fair value of $2,876,000 were purchased, liabilities with a fair value of $20,171,000 were assumed, and net cash received was $17,786,000 . the transaction resulted in a bargain purchase with a gain of $491,000 recognized in other income for the year ended December 31, 2009 in the consolidated statement of income . the gain was the result of the fair value of certain assets acquired exceeding agreed to values in the purchase agreement . the acquisition was accounted for in accordance with the Business combinations topic of the Accounting standards codification . notes to Consolidated Financial Statements | AnnuAl RepoRt 2010 39 BoARD oF DIReCtoRS First Bankers Trustshares, Inc. First Bankers Trust Company, N. A. First Bankers Trust Services, Inc. Donald K. Gnuse Chairman of the Board Arthur E. Greenbank President/CEO Donald K. Gnuse Chairman of the Board Arthur E. Greenbank President/CEO Donald K. Gnuse Chairman of the Board Brian A. Ippensen President Steven E. Siebers Secretary Scholz, Loos, Palmer, Siebers, & Duesterhaus, Attorney at Law Steven E. Siebers Secretary Scholz, Loos, Palmer, Siebers, & Duesterhaus, Attorney at Law Steven E. Siebers Secretary Scholz, Loos, Palmer, Siebers, & Duesterhaus, Attorney at Law Carl W. Adams, Jr. Illinois Ayers Oil Company, President Carl W. Adams, Jr. Illinois Ayers Oil Company, President Carl W. Adams, Jr. Illinois Ayers Oil Company, President William D. Daniels Harborstone Group, LLC, Member William D. Daniels Harborstone Group, LLC, Member Phyllis J. Hofmeister Robert Hofmeister Farm, Secretary Mark E. Freiburg Freiburg Insurance Agency & Freiburg Development, Owner Freiburg, Inc., President Mark E. Freiburg Freiburg Insurance Agency & Freiburg Development, Owner Freiburg, Inc., President Phyllis J. Hofmeister Robert Hofmeister Farm, Secretary Phyllis J. Hofmeister Robert Hofmeister Farm, Secretary Dennis R. Williams Quincy Newspapers, Inc., Chairman John E. Laverdiere Laverdiere Construction, Inc., President LCI Concrete, Inc., Vice President/Mgn. Merle L.Tieken Gem City Electric, President Dennis R. Williams Quincy Newspapers, Inc., Chairman 40 AnnuAl RepoRt 2010 | Board of Directors oFFICeRS First Bankers Trust Company, N. A. First Bankers Trust Services, Inc. presiDent Brian A. Ippensen ViCe presiDents Merri e. Ash Steven p. eckert Michele R. Foster Julie e. Kenning Danielle C. Montesano trust offiCers Kjersti l. Cory patricia D. Goestenkors John h. Jaynes W. Diane Mchatton Ashley Melton linda J. Shultz Kimberly A. Serbin Deborah J. Staff assistant trust offiCers John t. Cifaldi Marilyn J. Crim leslie n. McGinley Blake R. Mock Sherri A. Zuspann assistant ViCe presiDent John p. Shelton information teChnoloGy offiCers Ronald W. Fairley terry J. hanks John K. predmore linda D. Reinold retail offiCers Susan lynn Allen Judy A. Fairchild Susan l. Farlow Jennifer l. Gordley Ryne R. lubben Andrew W. Marner Afton R. Mast James e. Moore Dianna S. orr Kimberly M. neal Kelly R. Seifert auDit offiCer Christine A. Baker Business DeVelopment offiCer Dennis l. Royalty marketinG offiCer Maria D. eckert loan operations offiCers Amy J. Goehl Karen J. Koehn operations offiCer Michelle M. Shortridge presiDent Arthur e. Greenbank reGional presiDents Gregory A. Curl East Region Jason l. Duncan North Region David J. Rakers West Region senior ViCe presiDents Dennis R. Iversen Gretchen A. McGee ViCe presiDents timothy W. Corrigan Mark A. DiMarzio Daron D. Duke Susan A. Dunseth thomas J. Frese Charles D. Grace Ryan G. Goestenkors Kevin M. Koetters Kathleen D. Mcnay James R. obert Marvin e. Rabe Douglas R. Reed hugh K. Roderick Jeanette l. Schinderling Scott l. thoele linda K. tossick Brent R. Voth David A. young assistant ViCe presiDents John t. Armstrong Sherry A. Bryson pamela l. eftink James M. Farmer Jennifer M. Gilker lucas C. Johnson Jayson e. Martin leslie A. Westen patricia J. Westerman Randal S. Westerman Joan M. Whitlow officers | AnnuAl RepoRt 2010 41 R mr. norman t. rosson, Jr. January 15, 1938 - September 6, 2010 First Bankers trust services lost a beloved member of our family on september 6, 2010, with the passing of norman Rosson . norman had recently retired as senior Vice President this past spring and was a current member of our Board of Directors . He joined First Bankers trust in 1997 and was instrumental in the growth and success of our employee benefit business . norman received a Bachelor of science in Accounting from Howard University and a Jurist Doctorate from DePaul University school of Law . Prior to joining First Bankers trust, he served for 17 years as senior Vice President of trust at Lasalle Bank . His extensive banking career was in the realm of corporate Law, and his expertise was invaluable . Based out of our chicago office, norman traveled extensively, building esoP relationships with our clients and professional partners nationwide . In his spare time norman enjoyed jazz, blues, and pop music and was an avid collector of LPs and 45s . every sunday morning, he tutored his grandchildren as they practiced their music lessons . He never missed a sunday visit with them and attended every one of their music recitals, concerts, parades, and sporting events . together they shared a love for magic, and norman enjoyed entertaining them with his latest tricks . our heartfelt condolences go out to norman’s wife Gloria, his three children, and his grandchildren . norman was a true asset to our organization . He was a mentor and inspiration to our team, and he will be missed greatly . R noteS noteS FIRST BANKERS TRUSTSHARES, INC. PO Box 3566 | Quincy, IL 62301-3566 phone: (217) 228-8000 web: fi rstbankers.com email: fbti@fi rstbankers.com An Equal Opportunity Employer 

Continue reading text version or see original annual report in PDF format above