First Bankers Trustshares, Inc.
Annual Report 2013

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building a future together 2013 ANNUAL REPORT PO Box 3566 | Quincy, IL 62305-3566 phone: (217) 228-8000 web: firstbankers.com email: fbti@firstbankers.com An Equal Opportunity Employer Building a Future Together First Bankers Trustshares, Inc. 2013 Annual Report Corporate Information ............................................................................. 1 Letter to Shareholders ............................................................................. 2 Select Financial Data ........................................................................ 3 – 4 Management’s Reports .................................................................... 5 – 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ............................. 8 – 12 Independent Auditor’s Report .............................................................. 13 Consolidated Financial Statements Balance Sheets ..................................................................................... 14 Statements of Income .......................................................................... 15 Statements of Comprehensive Income ............................................... 16 Statements of Changes in Stockholders’ Equity ................................. 17 Statements of Cash Flows ........................................................... 18 – 19 Notes to Consolidated Financial Statements ............................. 20 – 44 Board of Directors ................................................................................. 45 Officers .................................................................................................. 46 Corporate Information 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 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, Illinois and operates facilities in Chicago, IL, St. Peters, MO, Phoenix, AZ, Philadelphia, PA and Springfield, IL. FBIL Statutory Trust II and FBIL Statutory Trust III were capitalized in September 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: Common shares outstanding as of December 31, 2013: Stockholders of record: *As of December 31, 2013 6,000,000 3,079,521 254* Inquiries regarding transfer requirements, lost certificates, changes of address and account status should be directed to the corporation’s transfer agent: IST Shareholder Services 433 S. Carlton Avenue Wheaton, Illinois 60187 Corporate Address First Bankers Trustshares, Inc. 1201 Broadway P.O. Box 3566 Quincy, IL 62305 Independent Auditors McGladrey LLP 201 N. Harrison, Suite 300 Davenport, IA 52801 General Counsel Hunton & Williams, LLP 1445 Ross Ave., Suite 3700 Dallas, TX 75202 First Bankers Trustshares, Inc. Board of Directors David E. Connor Chairman Emeritus, First Bankers Trustshares, Inc. Carl Adams, Jr. President, Illinois Ayers Oil Company Scott A. Cisel Executive Adviser to Accenture’s North America Energy Practice 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 John E. Laverdiere Laverdiere Construction, Inc., President LCI Concrete, Inc., Vice President/Manager Steven E. Siebers Secretary of the Board, First Bankers Trustshares, Inc. Secretary of the Board, First Bankers Trust Company, N.A. Secretary of the Board, First Bankers Trust Services, Inc. Attorney at Law, Scholz, Loos, Palmer, Siebers & Duesterhaus Merle L. Tieken T-C Building Corporation, President M&M Developments Corporation, Owner 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; share data restated for a 3-for-2 stock split that occurred on August 26, 2013) Market Value High Low Period End Close 12/31/13 $19.50 $18.60 $19.00 09/30/13 $22.00 $17.50 $19.50 06/30/13 $23.33 $18.00 $18.67 03/31/13 $19.33 $17.43 $19.33 12/31/12 $17.67 $14.03 $17.43 The following companies make a market in FBTI common stock: Raymond James 225 S. Riverside Plaza, 7th Floor Chicago, IL 60606 (800) 800-4693 Wells Fargo Advisors 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 2013 1 Letter to Shareholders Dear Shareholders of First Bankers Trustshares, Inc., The year 2013 was a challenging yet successful year for your Company. Earnings, while not a record, were good. The Company split its stock and increased its dividend. We paid off a $5 million issue of expensive Trust Preferred Securities which will help our earnings in the future. We remain well capitalized, with solid earnings, good asset quality, and plans for growth in the future. As the economy continues to improve and higher interest rates allow widening interest margins, the future remains bright. We currently maintain a leading market share within our Quincy, Illinois market territory. We have brought in many new customers to our businesses within the last several years. In our northern market (Macomb, Illinois), the additional branch office in that area has helped to increase our market share. The investment office that was opened in that market in late 2012 has also been an asset to Macomb’s market. We expect to see continued growth in future years from this market place. Our eastern office, (Springfield, Illinois) has made great strides in increasing its footprint in their market place, and we look for more good things from them in the upcoming years. We are currently looking at plans to open a loan office in the St. Louis market. Donald K. Gnuse Chairman of the Board The addition of key personnel in our Trust Company aided in our goal to increase our personal trust business this past year. This included more resources to our Chicago, Illinois market as well as entry into the Trust business in the St. Louis, Missouri market. Our assets under management in our Trust Company increased to $5.0 billion from $4.7 billion during 2013. Arthur E. Greenbank President/CEO We continue to look for profitable business within our existing markets, as well as new markets that may make sense for our Company. We are optimistic about our prospects for the future. We look forward to talking with you at our annual meeting on Tuesday, May 13, 2014 at our Corporate Headquarters building, located at 12th & Broadway Streets in Quincy, Illinois. The meeting will begin at 9:00 a.m. Sincerely, Donald K. Gnuse Chairman of the Board First Bankers Trustshares, Inc. Arthur E. Greenbank President/CEO First Bankers Trustshares, Inc. 2 Annual Report 2013 | Letter to Shareholders Select Financial Data Select Financial Data | Annual Report 2013 3 (Amount in thousands of dollars, except per share data statistics)Year Ended December 31,201320122011201020092008PERFORMANCENet income5,695 $ 6,840 $ 6,057 $ 6,440 $ 5,885 $ 4,729 $ Common stock cash dividends paid1,325 $ 1,232 $ 944 $ 943 $ 942 $ 942 $ Common stock cash dividend payout ratio 123.27% 18.26% 17.67% 16.28% 17.90% 19.93% Return on average assets 10.70% 0.87% 0.75% 0.88% 0.89% 1.01% Return on average common stockholders’ equity 29.79% 12.84% 11.26% 13.54% 13.79% 13.77% PER COMMON SHAREEarnings, basic and diluted1.82 $ 2.19 $ 1.73 $ 1.89 $ 1.71 $ 1.54 $ Dividends (paid) on common stock0.43 $ 0.41 $ 0.31 $ 0.31 $ 0.31 $ 0.31 $ Book value 319.22 $ 17.84 $ 16.05 $ 14.65 $ 13.08 $ 11.67 $ Stock priceHigh23.33 $ 17.67 $ 14.73 $ 14.67 $ 12.17 $ 14.50 $ Low17.43 $ 14.03 $ 12.00 $ 10.73 $ 8.00 $ 10.40 $ Close19.00 $ 17.43 $ 14.03 $ 13.40 $ 10.73 $ 12.00 $ Price/Earnings per share (at period end)10.4 8.0 8.1 7.1 6.3 7.8 Market price/Book value (at period end)0.99 0.98 0.87 0.91 0.82 1.03 Weighted average number of shares outstanding3,079,521 3,079,521 3,079,037 3,076,278 3,072,843 3,072,843 AT DECEMBER 31,Assets775,640 $ 804,568 $ 721,854 $ 690,644 $ 623,896 $ 498,028 $ Investment securities274,227 327,325 281,635 278,729 282,135 146,908 Loans held for sale88 499 454 - 183 187 Loans442,498 406,803 375,390 337,558 292,344 288,412 Deposits627,789 658,498 584,499 570,436 511,769 400,844 Short-term borrowings and Federal HomeLoan Bank advances60,934 51,985 48,769 43,104 38,717 40,545 Junior subordinated debentures10,310 15,465 15,465 15,465 15,465 15,465 Preferred stock10,000 10,000 10,000 10,200 10,100 - Stockholders’ equity 469,193 $ 64,933 $ 59,446 $ 55,286 $ 50,287 $ 35,866 $ Total equity to total assets 48.92% 8.07% 8.24% 8.00% 8.06% 7.20% Tier 1 capital ratio (risk based)13.59% 14.60% 14.68% 14.70% 15.44% 12.44% Total capital ratio (risk based)14.66% 15.60% 15.54% 15.43% 16.60% 14.36% Leverage ratio9.39% 9.44% 9.99% 9.83% 9.88% 8.96% Note: A 3-for-2 common stock split occurred on August 26, 2013. All common shares reported, including per share data, in this annual reporthave been retroactively adjusted for this split as if it occurred at the beginning of the earliest period presented. 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. 4 Annual Report 2013 | Select Financial Data 1.01%0.89%0.88%0.75%0.87%0.70%0.00%0.20%0.40%0.60%0.80%1.00%1.20%200820092010201120122013Return on Average Assets13.77%13.79%13.54%11.26%12.84%9.79%0.00%2.00%4.00%6.00%8.00%10.00%12.00%14.00%200820092010201120122013Return on Average Common Equity$1.54 $1.71 $1.89 $1.73 $2.19 $1.82 $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 200820092010201120122013Earnings Per Share1.03X0.82X0.91X0.87X0.98X0.99X0.250.450.650.851.051.251.45200820092010201120122013Market Price to Book Value$288 $292 $338 $375 $407 $442 $401 $512$570 $584$658 $628 -100 200 300 400 500 600 700 200820092010201120122013Loan/Deposit Growth7.8X6.3X7.1X8.1X8.0X10.4X024681012200820092010201120122013Price/Earnings Multiples Management’s Report on Internal Controls over Financial Reporting 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 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 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 Arthur E. Greenbank President/CEO Brian A . Ippensen Treasurer Management’s Report | Annual Report 2013 5 Management’s Report on First Bankers Trust Company First Bankers Trust Company, National Association Corporate Statement First Bankers Trust Company, N. A. (the Bank) is a community-oriented financial institution that provides banking services in six communities, including five county seats through ten branches in West Central Illinois, to meet the needs of the communities served. We have diversified our business through many thousands of customers including many individuals and numerous small businesses within these communities. The Bank attracts deposits from the general public and uses such deposits, along with other borrowings and funds to originate mortgage loans, consumer loans, small business loans and agricultural loans for these markets. We provide value to these relationships through our cutting edge banking products and high level services. We simultaneously manage our costs in order to stay competitive with our pricing. The Bank has been providing these services for nearly seven decades and prides itself on the success achieved. Arthur E. Greenbank President/CEO Arthur E. Greenbank President/CEO First Bankers Trust Company, N. A. 6 Annual Report 2013 | Management’s Report Management’s Report on First Bankers Trust Services, Inc. First Bankers Trust Services, Inc. Corporate Statement First Bankers Trust Services, Inc. provides fiduciary services to individuals and corporate clients. We have clients in 45 states and offer a multitude of custodial and trust support to individual retirement accounts, personal trusts, farm management relationships and employee benefit trusts. In 2013, we surpassed $5 billion in assets under management. This past year also marked our first full year of expanding our personal trust and farm management services; both efforts have exceeded expectations and the integration of staff, processes and systems has been smooth. We continue to grow our employee benefit clientele with many new clients this past year. For 2013 we will have again distributed more that $100 million in employee benefits to participants for our clientele. Brian A. Ippensen President/CEO We look forward to the opportunity and challenges of 2014 and beyond. Brian A. Ippensen President/CEO First Bankers Trust Services, Inc. Management’s Report | Annual Report 2013 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations Introduction The following discussion of the financial condition and results of operations of First Bankers Trustshares, Inc. provides an analysis of the consolidated financial statements included in this annual report and focuses upon those factors which had a significant influence on the overall 2013 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. Consolidated Assets (Amounts in Thousands of Dollars) 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, business loans and agricultural loans in its primary market area. The Company also invests in investment securities consisting primarily of U.S. government or agency obligations, mortgage- backed securities, 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. 8 Annual Report 2013 | Management’s Discussion and Analysis 5 Year2013Change2012Change2011201020092008ChangeAssetsCash and due from banks:Non-interest bearing10,677 $ (25.13%) 14,261 $ 17.82%12,104 $ 9,363 $ 9,119 $ 9,923 $ 7.60%Interest bearing6,543 (53.60) 14,102 55.43 9,073 25,681 8,497 18,544 (64.72) Securities274,227 (16.22) 327,325 16.22 281,635 278,729 282,135 146,908 86.67 Federal funds sold1,817 (11.84) 2,061 (36.35) 3,238 2,167 293 6,483 (71.97) Loans held for sale88 (82.36) 499 9.91 454 - 183 187 (52.94) Net loans435,247 8.67 400,525 8.19 370,203 332,538 287,700 284,375 53.05 Other assets47,041 2.72 45,795 1.44 45,147 42,166 35,969 31,608 48.83 TOTAL775,640 $ (3.60%) 804,568 $ 11.46%721,854 $ 690,644 $ 623,896 $ 498,028 $ 55.74%Deposits627,789 $ (4.66%) 658,498 $ 12.66%584,499 $ 570,436 $ 511,769 $ 400,844 $ 56.62%Short-term borrowings60,934 17.21 51,985 6.59 48,769 37,604 30,217 22,045 176.41 Federal Home Loan Bank advances- - - - - 5,500 8,500 18,500 (100.00) Junior Subordinated Debentures10,310 (33.33) 15,465 - 15,465 15,465 15,465 15,465 (33.33) Other liabilities6,641 (29.80) 9,460 5.65 8,954 5,057 5,269 4,900 35.53 Stockholders’ equity69,966 1.17 69,160 7.78 64,167 56,582 52,676 36,274 92.88 TOTAL775,640 $ (3.60%) 804,568 $ 11.46%721,854 $ 690,644 $ 623,896 $ 498,028 $ 55.74%Liabilities & Stockholders' Equity At December 31, 2013, the company had assets of $775,640,000 compared to $804,568,000 at December 31, 2012. The decline in assets is primarily made up of a $53,098,000 (16.22%) decrease in securities. The cash provided by these securities, plus an increase in short term borrowing of $8,949,000, and an increase in non- maturing deposits of $12,874,000 funded an increase in net loans of $34,722,000 and a $43,583,000 pay-down of certificates of deposits. The growth in the net loan portfolio was primarily made up of growth in commercial real estate loans of $26,937,000 and agricultural loans of $16,620,000. Approximately $49,907,000 of fixed rate long-term residential real estate loans were sold in the secondary market during 2013 while $102,562,000 were sold in 2012. Agricultural real estate loans totaling $1,336,000 were sold in the secondary market during 2013, while $3,403,000 were sold in 2012. Management continues to place emphasis on the quality versus the quantity of the credits placed in the portfolio. In addition to lending, the Company has focused on maintaining and enhancing high levels of fee income for its existing services and new services. Generation of fee income will be a goal of the Company and should be a source of continued revenues in the future. Results of Operations Summary The Company’s earnings are primarily dependent on net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans, securities and other interest earning assets outstanding during the period and the yield earned on such assets. Interest expense is a function of the balances of deposits and borrowings outstanding during the same period and the rates paid on such deposits and borrowings. The Company’s earnings are also affected by provisions for loan losses, service charges, trust income, other non-interest Consolidated Income Summary (Amounts in Thousands of Dollars) income and expense and income taxes. Non-interest expense consists primarily of employee compensation and benefits, occupancy and equipment expenses and general and administrative expenses. Prevailing economic conditions as well as federal regulations concerning monetary and fiscal policies as they pertain to financial institutions significantly affect the Company. Deposit balances are influenced by a number of factors including interest rates paid on competing personal investments and the level of personal income and savings within the institution’s market. In addition, growth of deposit balances is influenced by the perceptions of customers regarding the stability of the financial services industry. Lending activities are influenced by the demand for housing, competition from other lending institutions, as well as lower interest rate levels, which may stimulate loan refinancing. The primary sources of funds for lending activities include deposits, loan payments, borrowings and funds provided from operations. For the year ended December 31, 2013, the Company reported consolidated net income of $5,695,000, a $1,145,000 (16.74%) decrease from 2012. Net interest income after provision for loan losses for the periods being compared increased $138,000 or 0.76%. Other expenses increased $2,402,000 (10.89%) from 2012. 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 $745,363,000 for the year ended December 31, 2013. A combination of interest bearing and non-interest bearing deposits, securities sold under agreement to repurchase, other borrowings and capital funds are employed to finance these assets. Management’s Discussion and Analysis | Annual Report 2013 9 5 Year2013Change2012Change2011201020092008Growth RateInterest income25,219 $ (3.79%) 26,212 $ (3.47)% 27,155 $ 25,930 $ 26,153 $ 25,711 $ (1.91%) Interest expense(5,525) (16.99) (6,656) (15.62) (7,888) (8,932) (9,663) (11,009) (49.81) Net interest income19,694 $ 0.71% 19,556 $ 1.50% 19,267 $ 16,998 $ 16,490 $ 14,702 $ 33.95% Provision for loan losses(1,440) - (1,440) (12.20) (1,640) (1,080) (1,080) (1,330) 8.27 Net interest income after provision for loan losses18,254 $ 0.76% 18,116 $ 2.77% 17,627 $ 15,918 $ 15,410 $ 13,372 $ 36.51% Other income13,814 0.04 13,808 29.74 10,643 11,164 9,093 7,835 76.31 Other expenses(24,466) 10.89 (22,064) 10.94 (19,889) (17,899) (16,116) (14,419) 69.68 Income before taxes7,602 $ (22.90)% 9,860 $ 17.65% 8,381 $ 9,183 $ 8,387 $ 6,788 $ 11.99% Income tax expense(1,907) (36.85) (3,020) 29.95 (2,324) (2,743) (2,502) (2,059) (7.38) NET INCOME5,695 $ (16.74)% 6,840 $ 12.93% 6,057 $ 6,440 $ 5,885 $ 4,729 $ 20.43% Management’s Discussion and Analysis of Financial Condition and Results of Operations The yield on average earning assets for the year ended 2013 was 3.38% while the average cost of funds for the same period was 0.87% on average interest bearing liabilities of $635,614,000. The yield on average earning assets for the year ended 2012 was 3.63%, while the average cost of funds for the same period was 1.07% on average interest bearing liabilities of $623,528,000. The increase in the net interest income of $138,000 can be attributed to the 3.28% increase in average earning assets and the 0.20% decrease in average cost of funds, which was partially offset by the 0.25% decrease in yield on earning assets. Provision for Loan Losses The allowance for loan losses as a percentage of gross loans outstanding is 1.64% as of December 31, 2013, compared to 1.54% as of December 31, 2012. Net loan charge-offs totaled $467,000 for the year ended December 31, 2013 compared to $349,000 in 2012. 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 as of December 31, 2013. 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, 2013 was $13,814,000, an increase of $6,000 (0.04%) from 2012. This is attributed to an increase in trust services income of $297,000, an increase in security gains of $101,000, and an increase of $546,000 in other income. Other Expense Other expense for the period ended December 31, 2013 totaled $24,466,000, an increase of $2,402,000 (10.89%) from 2012 year-end totals. Salaries and employee benefits expense aggregated 58.71% and 58.20% of total other expense for the years ended December 31, 2013 and 2012, respectively. Non-Accrual and Past Due Loans, Leases and Other Real Estate Owned (Amounts in Thousands of Dollars) 10 Annual Report 2013 | Management’s Discussion and Analysis As of December 31,201320122011201020092008Non-accrual loans and leases8,279 $ 4,511 $ 5,218 $ 5,856 $ 3,449 $ 3,023 $ Other real estate owned (OREO)203 105 210 1,757 230 1,370 Total non-accrual loans and OREO8,482 $ 4,616 $ 5,428 $ 7,613 $ 3,679 $ 4,393 $ Loans and leases past due 90 days or more and still accruing interest332 147 186 591 199 717 TOTAL8,814 $ 4,763 $ 5,614 $ 8,204 $ 3,878 $ 5,110 $ Years Ended December 31,201320122011(Amounts in Thousands of Dollars)Interest income24,601 $ 25,485 $ 26,620 $ Loan fees618 727 535 Interest expense(5,525) (6,656) (7,888) NET INTEREST INCOME19,694 $ 19,556 $ 19,267 $ Average earning assets745,363 $ 721,709 $ 662,207 $ Net interest margin2.64% 2.71% 2.91% Income Taxes The Company files its federal income tax return on a consolidated basis with the Bank. See Note 13 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, 2013, these categories totaled $27,848,000 or 3.59% of assets, compared to $36,257,000 or 4.51% the previous year. As of December 31, 2013, securities held to maturity included $182,000 of gross unrealized gains and no 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 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 2014, 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: Effects of Inflation Until recent years, the economic environment in which the Company operates has been one of significant increases in the prices of most goods and services and a corresponding decline in the purchasing power of the dollar. Banks are affected differently than other commercial enterprises by the effects of inflation. Some reasons for these disparate effects are: a) premises and equipment for banks represent a relatively small proportion of total assets; b) a bank’s assets 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. Management’s Discussion and Analysis | Annual Report 2013 11 Repricing Period as of December 31, 2013Through One YearAfter One Year through Five YearsAfter Five Years(Amounts in Thousands of Dollars)Interest-earning assets209,246 $ 220,993 $ 294,934 $ Interest-bearing liabilities489,051 116,955 10,310 Repricing gap (repricing assets minus repricing liabilities)(279,805) $ 104,038 $ 284,624 $ Repricing Period as of December 31, 2012Through One YearAfter One Year through Five YearsAfter Five Years(Amounts in Thousands of Dollars)Interest-earning assets202,517 $ 226,993 $ 321,280 $ Interest-bearing liabilities495,690 135,021 15,465 Repricing gap (repricing assets minus repricing liabilities)(293,173) $ 91,972 $ 305,815 $ Management’s Discussion and Analysis of Financial Condition and Results of Operations 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%. 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. The Company’s capital, as defined by the regulations, was 14.66% of risk-weighted assets as of December 31, 2013. In addition, a leverage ratio of at least 4.00% is to be maintained. As of December 31, 2013, the Company’s leverage ratio was 9.39%. Common Stock Information and Dividends The Company’s common stock is held by 254 shareholders as of December 31, 2013, and is traded in a limited over-the-counter market. On December 31, 2013 the market price of the Company’s common stock was $19.00. Market price is based on stock transactions in the market. Dividends on common stock of approximately $1,335,000 were declared by the Board of Directors of the Company for the year ended December 31, 2013. Financial Report Upon written request of any shareholder of record on December 31, 2013, the Company will provide, without charge, a copy of its 2013 Annual Report including financial statements and schedules. Notice of Annual Meeting of Stockholders The annual meeting of stockholders will be May 13, 2014 at 9:00 a.m. at the corporate headquarters, 1201 Broadway, Quincy, Illinois. 12 Annual Report 2013 | Management’s Discussion and Analysis 14.36%16.38%15.43%15.54%15.60%14.66%0.00%5.00%10.00%15.00%20.00%200820092010201120122013Risk Based Capital Ratios$12.00 $10.73 $13.40 $14.03 $17.43 $19.00 $0.00 $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 200820092010201120122013Closing Share Price Data Independent Auditor’s Report To the Board of Directors First Bankers Trustshares, Inc. Quincy, Illinois Report on the Financial Statements We have audited the accompanying consolidated financial statements of First Bankers Trustshares, Inc. and subsidiaries which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, changes in stockholder’s equity and cash flows for the years then ended and the related notes to consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Bankers Trustshares, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Davenport, Iowa March 13, 2014 Independent Auditor’s Report | Annual Report 2013 13 Consolidated Financial Statements 14 Annual Report 2013 | Consolidated Financial Statements Consolidated Balance Sheets(Amounts in Thousands of Dollars, Except Share and Per Share Data)December 31,20132012ASSETSCash and due from banksNon-interest bearing10,677 $ 14,261 $ Interest bearing6,543 14,102 Total Cash and Due from Banks17,220 $ 28,363 $ Securities held to maturity1,596 $ 1,929 $ Securities available for sale272,631 325,396 Federal funds sold1,817 2,061 Loans held for sale88 499 Loans442,498 406,803 Less allowance for loan losses(7,251) (6,278) Net loans435,247 $ 400,525 $ Premises, furniture and equipment, net20,076 $ 19,711 $ Accrued interest receivable3,305 3,479 Life insurance contracts13,290 12,870 Intangibles4,384 4,197 Prepaid FDIC insurance assessment- 838 Other assets5,986 4,700 TOTAL ASSETS775,640 $ 804,568 $ LIABILITIES AND STOCKHOLDERS' EQUITYLiabilitiesDepositsNon-interest bearing demands82,717 $ 79,772 $ Interest bearing demand259,166 254,478 Savings47,979 42,738 Time237,927 281,510 Total deposits627,789 658,498 Securities sold under agreements to repurchase60,934 51,985 Junior subordinated debentures10,310 15,465 Accrued interest payable636 955 Other liabilities6,005 8,505 Total Liabilities705,674 $ 735,408 $ Commitments and Contingencies (Note 10) Stockholders’ EquitySeries C preferred stock; no par value; shares authorized, issued and outstanding: 2013 and 2012 - 10,00010,000 10,000 Common stock, $1 par value; shares authorized 6,000,000; shares issued 3,605,725 and outstanding: 2013 and 2012 - 3,079,5213,606 2,580 Additional paid in capital1,243 2,269 Retained earnings61,711 57,451 Accumulated other comprehensive income773 4,227 Treasury stock, at cost: 2013 and 2012 - 526,204 shares(7,367) (7,367) Total Stockholders’ Equity69,966 $ 69,160 $ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY775,640 $ 804,568 $ See Notes to Consolidated Financial Statements. Consolidated Financial Statements Consolidated Financial Statements | Annual Report 2013 15 Consolidated Statements of Income(Amounts in Thousands of Dollars, Except Per Share Data)Year Ended December 31,20132012INTEREST INCOMELoans, including fee income: Taxable19,830 $ 19,626 $ Non-taxable498 475 Securities: Taxable2,7533,855Non-taxable2,0322,131Other106125Total interest income25,219 $ 26,212 $ INTEREST EXPENSE Deposits:Interest bearing demand and savings1,071 $ 1,228 $ Time3,365 4,300 Total interest on deposits4,436 $ 5,528 $ Junior subordinated debentures988 986 Other101 142 Total interest expense5,525 $ 6,656 $ Net interest income19,694 $ 19,556 $ Provision for loan losses1,440 $ 1,440 $ Net interest income after provision for loan losses18,254 $ 18,116 $ OTHER INCOME Trust services6,894 $ 6,597 $ Service charges on deposit accounts1,261 1,266 Gain on sale of loans768 1,701 Investment securities gains (losses), net:Total other-than-temporary impairment gains (losses)278 (83) Portion of gain (loss) recognized in other comprehensive income before taxes(278) 83 Net impairment losses recognized in earnings- - Realized securities gains, net632 531 Investment securities gains, net632 531 Other4,259 3,713 Total other income13,814 $ 13,808 $ OTHER EXPENSESSalaries and employee benefits14,364 $ 12,841 $ Occupancy expense, net1,393 1,391 Equipment expense1,256 1,245 Computer processing1,898 1,695 Professional services885 818 Other4,670 4,074 Total other expenses24,466 $ 22,064 $ Income before income taxes7,602 $ 9,860 $ Income taxes1,907 3,020 NET INCOME5,695 $ 6,840 $ Earnings per share of common stock, basic and diluted1.82 $ 2.19 $ See Notes to Consolidated Financial Statements. Consolidated Financial Statements 16 Annual Report 2013 | Consolidated Financial Statements Consolidated Statements of Comprehensive Income(Amounts In Thousands of Dollars, Except Share and Per Share Data)Year Ended December 31,20132012Net income5,695 $ 6,840 $ Other comprehensive income:Unrealized (losses) on securities available for sale:Unrealized holding (losses) arising during the year before tax(6,304) (1,394) Less reclassification adjustment for gains included in net income before tax 632 531 (5,672) (863) Tax (benefit)(2,154) (328) (3,518) (535) Interest rate swap before tax 103 66 Tax expense 39 25 64 41 Other comprehensive (loss), net of tax(3,454) (494) Comprehensive income 2,241 $ 6,346 $ See Notes to Consolidated Financial Statements. Consolidated Financial Statements Consolidated Financial Statements | Annual Report 2013 17 Consolidated Statements of Changes in Stockholders' Equity(Amounts in Thousands of Dollars, Except Share and Per Share Data)Years Ended December 31, 2013 and 2012Series CPreferredStockCommonStockAdditionalPaid-in CapitalRetainedEarningsAccumulatedOtherComprehensiveIncome (Loss)TreasuryStockTotalBalance, December 31, 201110,000 $ 2,580 $ 2,269 $ 51,964 $ 4,721 $ (7,367) $ 64,167 $ Net income- - - 6,840 - - 6,840 Other comprehensive (loss),net of tax- - - - (494) - (494) Preferred stock dividends declared- - - (100) - - (100) Common stock dividends declared(amount per share $ .407)- - - (1,253) - - (1,253) Balance, December 31, 201210,000 $ 2,580 $ 2,269 $ 57,451 $ 4,227 $ (7,367) $ 69,160 $ Net income- - - 5,695 - - 5,695 3-for-2 stock split- 1,026 (1,026) - - - - Other comprehensive (loss),net of tax- - - - (3,454) - (3,454) Preferred stock dividends declared- - - (100) - - (100) Common stock dividends declared(amount per share $ .433)- - - (1,335) - - (1,335) Balance, December 31, 201310,000 $ 3,606 $ 1,243 $ 61,711 $ 773 $ (7,367) $ 69,966 $ See Notes to Consolidated Financial Statements. Consolidated Financial Statements 18 Annual Report 2013 | Consolidated Financial Statements Consolidated Statements of Cash Flows(Amounts in Thousands of Dollars)Year Ended December 31,20132012CASH FLOWS FROM OPERATING ACTIVITIESNet income5,695 $ 6,840 $ Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses1,440 1,440 Depreciation1,739 1,716 Amortization of intangibles263 45 Amortization/accretion of premiums/discounts on securities, net5,346 4,988 Investment securities (gains), net(632) (531) Loans originated for sale(51,243) (105,965) Proceeds from loans sold52,422 107,621 Gain on sale of loans(768) (1,701) Deferred income taxes(723) (384) (Increase) decrease in accrued interest receivable and other assets(472) 1,733 (Increase) in cash surrender value of life insurance contracts(420) (403) Decrease in prepaid FDIC insurance assessment838 429 (Decrease) increase in accrued interest payable and other liabilities(516) 614 Net cash provided by operating activities12,969 $ 16,442 $ CASH FLOWS FROM INVESTING ACTIVITIESActivity in securities portfolio:Purchases(58,048) $ (161,235) $ Sales of securities available for sale10,399 10,065 Calls, maturities and paydowns90,361 100,160 (Increase) in loans, net(36,634) (31,878) Decrease in federal funds sold244 1,177 Purchases of premises, furniture and equipment(2,104) (2,128) Purchase of life insurance contracts- (1,000) Purchase of intangible assets(145) (300) Net cash provided by (used in) investing activities4,073 $ (85,139) $ CASH FLOWS FROM FINANCING ACTIVITIESNet (decrease) increase in deposits(30,709) $ 73,999 $ Cash dividends paid to preferred shareholders(100) (100) Cash dividends paid to common shareholders(1,325) (1,232) Payment of junior subordinated debentures(5,000) - Increase in securities sold under agreement to repurchase8,949 3,216 Net cash (used in) provided by financing activities(28,185) $ 75,883 $ Net (decrease) increase in cash and due from banks(11,143) $ 7,186 $ CASH AND DUE FROM BANKSBeginning28,363 $ 21,177 $ Ending17,220 $ 28,363 $ (Continued) Consolidated Financial Statements Consolidated Financial Statements | Annual Report 2013 19 Consolidated Statements of Cash Flows (Continued)(Amounts in Thousands of Dollars)Year Ended December 31,20132012Supplemental disclosure of cash flow information, cash payments for: Interest5,844 $ 6,811 $ Income taxes2,464 $ 2,618 $ Supplemental schedule of non-cash investing and financing activities: Net change in accumulated other comprehensive income(3,454) $ (494) $ Transfer of loans to other real estate owned364 $ 116 $ Effects of common and preferred dividends payable10 $ 21 $ Liability incurred in purchase of intangible assets305 $ 624 $ See Notes to Consolidated Financial Statements. Notes to Consolidated Financial Statements 1. Nature of Business and Summary of Significant Accounting Policies Nature of Business First Bankers Trustshares, Inc. (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). FBIL Statutory Trust I was dissolved on September 7, 2013. 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, St. Peters, MO, 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 consolidating. All significant intercompany accounts and transactions have been eliminated in consolidation. Presentation of Cash Flows For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks, including cash items in process of clearing. Cash flows from federal funds sold, loans to customers, deposits and securities sold under agreements to repurchase are reported net. Trust Services Fiduciary Activities and Assets Trust Services provides fiduciary related services, including asset management and custodial services to individual and corporate clients. Assets held by Trust Services are not assets of the Company, except for cash deposits held by the Bank, and accordingly, are not included in the consolidated financial statements. During the course of discharging its respective 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. 20 Annual Report 2013 | Notes to Consolidated Financial Statements Securities Securities held to maturity are those for which the Company has the ability and intent to hold to maturity. Securities meeting such criteria at the date of purchase and as of the balance sheet date are carried at amortized cost, adjusted for amortization of premiums and accretion of discounts, computed by the interest method over their contracted lives. Securities available for sale are accounted for at fair value and the unrealized holding gains or losses, net of their deferred income tax effect, are presented as increases or decreases in accumulated other comprehensive income, as a separate component of equity. 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 as of December 31, 2013 and 2012. 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. Loans and 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 statements 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 statements of cash flows. Notes to Consolidated Financial Statements Allowance for credit losses and fair value are disclosed by portfolio segment, while credit quality information, impaired financing receivables, nonaccrual status and troubled debt restructurings are presented by class of financing receivable. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. A class of financing receivable is defined as a further disaggregation of a portfolio segment based on risk characteristics and the entity’s method for monitoring and assessing credit risk. The disclosures are presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance. Troubled debt restructures: Troubled debt restructuring exists when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession (either imposed by court order, law or agreement between the borrower and the Company) to the borrower that it would not otherwise consider. These concessions could include forgiveness of principal, extension of maturity dates and reduction of stated interest rates or accrued interest. The Company is attempting to maximize its recovery of the balances of the loans through these various concessionary restructurings. See Note 3 for disclosure of the Company’s troubled debt restructurings. The Company’s portfolio segments are as follows:        Commercial operating Commercial real estate Agricultural operating Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family Consumer Given the risk characteristics and the Company’s method for monitoring and assessing credit risk, further disaggregation of the loan portfolio is not warranted, and therefore, the Company’s classes equal their segments. Generally, for all classes of loans, loans are considered past due when contractual payments are delinquent for 31 days or greater. For all classes of loans, loans will generally be placed on nonaccrual status when the loan has become 90 days past due (unless the loan is well secured and in the process of collection); or if any of the following conditions exist: It becomes evident that the borrower will not make payments, or will not or cannot meet the terms for renewal of a matured loan,   When full repayment of principal and interest is not expected,  When the loan is graded “substandard” and the future accrual of interest is not protected by sound collateral values,  When the loan is graded “doubtful”,  When the borrower files bankruptcy and an approved plan of reorganization or liquidation is not anticipated in the near future, or  When foreclosure action is initiated. When a loan is placed on nonaccrual status, payments received will be applied to the principal balance. However, interest may be taken on a cash basis in the event the loan is fully secured and the risk of loss is minimal. Previously recorded but uncollected interest on a loan placed in nonaccrual status is accounted for as follows: if the previously accrued but uncollected interest and the principal amount of the loan is protected by sound collateral value based upon a current, independent qualified appraisal, such interest may remain on the Company’s books. If such interest is not protected, it is considered a loss with the amount thereof recorded in the current year being reversed against current earnings, and the amount recorded in the prior year being charged against the allowance for possible loan losses. For all classes of loans, nonaccrual loans may be restored to accrual status provided the following criteria are met:    The loan is current, and all principal and interest amounts contractually due have been made, The loan is well secured and in the process of collection, and Prospects for future principal and interest payments are not in doubt. Allowance for loan losses: For all portfolio segments, the allowance for loan losses is maintained at the level considered adequate by management to provide for losses that are probable. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In determining the adequacy of the allowance balance, the Company makes continuous evaluations of the loan portfolio and related off-balance sheet commitments, considered current economic conditions, historical loan loss experience, reviews of specific problem loans and other factors. A discussion of the risk characteristics and the allowance for loan losses by each portfolio segment follows: For commercial operating loans, the Company focuses on small and mid- sized businesses with primary operations in transportation, warehousing and manufacturing, as well as serving as building contractors, business services companies, health care providers, financial organizations and retailers. The Company provides a wide range of commercial loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of real estate, facilities, equipment and other purposes. Approval is generally based on the following factors:       Sufficient cash flow to support debt repayment; Ability and stability of current management of the borrower; Positive earnings and financial trends; Earnings projections based on reasonable assumptions; Financial strength of the industry and business; and Value and marketability of collateral. Collateral for commercial loans generally includes accounts receivable, inventory, equipment and real estate. The lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans typically exceeds the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash. The lending policy specifies maximum term limits for commercial operating loans. For term loans, the maximum term is 7 years. The lending policy references compliance with the interagency appraisal and evaluation guidelines effective December 2010. Where the purpose of the loan is to finance depreciable equipment, the term loan generally does not exceed the estimated useful life of the asset. For lines of credit, the typical maximum term is 365 days. However, longer maturities may be approved if the loan is secured by readily marketable collateral. Notes to Consolidated Financial Statements | Annual Report 2013 21 Notes to Consolidated Financial Statements In addition, the Company often takes personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Commercial real estate loans, construction and land development loans and real estate second by multi-family loans are subject to underwriting standards and processes similar to commercial operating loans and to real estate loans including the factors regarding approval of the loan noted previously. Collateral for these loans generally includes the underlying real estate and improvements, and may include additional assets of the borrower. The lending policy specifies maximum loan-to-value limits based on the category of commercial real estate (commercial real estate loans on improved property, raw land, land development and commercial construction). The lending policy also references compliance with the interagency appraisal and evaluation guidelines effective December 2010. In addition, the Company often takes personal guarantees to help assure repayment. Agricultural operating and real estate loans are subject to underwriting standards and processes similar to commercial loans including the approval factors noted previously. The Company provides a wide range of agriculture loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of real estate, facilities, equipment and other purposes. Collateral for agricultural loans generally includes accounts receivable, inventory (typically grain or livestock), equipment and real estate. The lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans typically exceeds the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash. The lending policy specifies maximum term limits for agricultural loans. For term loans, the maximum term is 7 years. The lending policy references compliance with the interagency appraisal and evaluation guidelines effective December 2010. Where the purpose of the loan is to finance depreciable equipment, the term loan generally does not exceed the estimated useful life of the asset. For lines of credit, the typical maximum term is 365 days. However, longer maturities may be approved if the loan is secured by readily marketable collateral. In addition, the Company often takes personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. In some instances for all loans, it may be appropriate to originate or purchase loans that are exceptions to the guidelines and limits established within the lending policy described above and below. In general, exceptions to the lending policy do not significantly deviate from the guidelines and limits established within the lending policy and, if there are exceptions, they are clearly noted as such and specifically identified in loan approval documents. For loans categorized as “commercial,” which would include the following segments: commercial operating, commercial real estate, agricultural real estate, agricultural operating, construction and land development and real estate secured by multi-family, the allowance for estimated losses on loans consist of specific and general components. The specific component relates to loans that are classified as impaired, as defined below. For those loans that are classified as impaired, an allowance is established when the collateral value (or discounted cash flows or observable market price) of the impaired loan is lower than the carrying value of that loan. These loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a case-by-case basis by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The general components consist of quantitative and qualitative factors and covers non-impaired loans. The quantitative factors are based on historical charge-offs experience and expected loss given default derived from the Company’s internal risk rating process. See below for a detailed description of the Company’s internal risk rating scale. The qualitative factors are determined based on an assessment of internal and/or external influences on credit quality that are not fully reflected in the historical loss or risk rating data. 22 Annual Report 2013 | Notes to Consolidated Financial Statements The Company utilizes the following internal risk rating scale: Type 1 (Substantially Risk Free) General Statement: This rating should be assigned to loans with virtually no credit risk, such as loans fully secured by certificates of deposit and other deposit accounts. It may be assigned to other loans to businesses or individuals with little or no risk. Business Loans: A loan to a business may be rated 1 if it exhibits enough of these characteristics to make it substantially risk free:         Bank has a high regard for the character, competence and diligence of management. Earnings are strong and well-assured. There is ample liquidity. Loans have paid as agreed. Abundant collateral which is liquid and has well-defined market value. Capital position well above industry averages. Loan structure is appropriate and documentation complete. No adverse trends. Loans to Individuals: Loans to individuals may be assigned a 1 rating if the following conditions are met:    The primary source of repayment is strong and is considered likely to remain strong throughout the life of the loan, The loan is secured by collateral with a loan to value (LTV) of less than 50% provided that the collateral must have well-defined market-value, must have satisfactory liquidity and should retain most of its value if the primary source of repayment falters. The individual has significant liquidity and is considered likely to remain liquid over the life of the loan. Type 2 (Low Risk) General Statement: This rating should be assigned to loans that have little credit risk. Borrowers in this category have strong earnings and capital and a secondary source of repayment that is sufficient to fully repay the loan. The business is considered to be highly resistant to adverse changes in economic or industry conditions. Business Loans: Following are some characteristics of loans that should be rated 2. A 2 loan may not exhibit all of the following characteristics, but its strengths – primarily the sufficiency/reliability of the sources of repayment – result in a loan with little credit risk. To the extent that a loan is not characterized by one or more of the factors listed below, the deficiency is not considered to adversely affect the likelihood of repayment in any material way.  Bank has a high regard for the character, competence and diligence of management. Consistent record of earnings; the earnings stream is considered resistant to changes in economic conditions. Liquidity at or above industry norms. Loans have paid as agreed. Collateral margin is well within policy guidelines with satisfactory liquidity and well-defined market value. Capital position above industry averages. Loan structure appropriate and documentation complete. No adverse trends.        Notes to Consolidated Financial Statements Loans to Individuals: Loans to individuals may be rated 2 if the individual’s earnings stream is considered strong and reliable and the individual maintains a conservative financial posture. The income may be from any source, including business income, passive income, or professional income. Individuals are considered to maintain a conservative financial posture if they consistently leave themselves a wide margin of safety in terms of their ability to repay debt. This margin typically manifests itself in the form of significant liquidity, strong debt service coverage (DSC) ratios and/or quick repayment of loans. Type 3 (Normal Risk) General Statement: Borrowers in this category have satisfactory earnings and net worth. In most cases, there is collateral or guarantor support which provides a satisfactory secondary source of repayment. The business is considered to be capable of operation profitably throughout the normal business cycle. Business Loans: Loans to businesses should be rated 3 if financial strength is typical for the industry and there is no significant adverse trends. Following are some characteristics of 3 loans. A loan may not exhibit all of the following characteristics, but its strengths – primarily the sufficiency/reliability of the sources of repayment – result in a loan with normal levels of risk.  Management is considered to be capable and diligent.  The earnings stream is satisfactory under present conditions and is considered likely to continue. Satisfactory liquidity. Loans have paid as agreed. Collateral is considered sufficient to repay the loan in full within a reasonable marketing time. Capital position within a reasonable range above or below industry average. No material deficiencies in loan structure or documentation. Trends typically flat or positive. No material adverse trends.       Loans to Individuals: Loans may be unsecured and still rated 3 if the individual’s earnings stream is both strong and reliable. If earnings are not as strong, loans should be rated 3 if the bank’s collateral is considered sufficient to repay the loans. Type 4 (Above Average Risk) General Statement: Borrowers in this category are not as strong financially as the typical business in the same industry. There may be discernible weakness in management, earnings, capital or the bank’s secondary sources of repayment. The business is considered to be susceptible to adverse changes in economic or industry conditions. Business Loans: Loans to businesses should be rated 4 if financial strength is somewhat below industry averages, but the loans are expected to repay as agreed if the company’s current financial conditions stays the same or strengthens. Following are some examples of weaknesses which may cause a loan to have above average levels of risk. A 4 loan will not have all of these weaknesses, but will have one or more:     There is some question as to the strength of management. The company is profitable in most years, but earnings are typically below industry averages. Liquidity may be limited as evidenced by occasional delinquencies. There may be a less than desirable margin in collateral; the collateral may be difficult to market; or the value of collateral may vary significantly depending on economic conditions. Notes to Consolidated Financial Statements | Annual Report 2013 23 Notes to Consolidated Financial Statements Capital position is below industry average.   May have deficiencies in loan structure, incomplete legal documentation or missing financial information.  May have an adverse trend in sales or earnings; may be capital account withdrawals in excess of earnings. Loans to Individuals: Loans to individual should be rated 4 if the bank appears to have a satisfactory source of repayment for the loan, but there is concern about the individual’s earnings stream, leverage or tolerance for risk. Type 5 (Watch Loan) General Statement: Borrowers in this category have readily apparent weaknesses in their financial condition. There may be weak earnings, thin capital or an adverse trend that is expected to continue. The borrower currently has the capacity to repay, but is of marginal strength and is considered to have little ability to overcome economic events that would adversely affect the business. Loans with material documentation or structural deficiencies may also be rated Watch at the discretion of bank or loan review personnel. Business Loans: Following are examples of weaknesses which may warrant a Watch rating. Loans rated Watch will typically have several of the following weaknesses:       There is often a question about the ability of management to operate the business successfully over time. The earnings stream is weak, with possible periods of loss. Liquidity may be a problem as evidenced by delinquencies or amortization periods longer than is typical for the type of collateral securing the loan. There may be reasonable doubt as to whether the loan would be repaid in full from the sale of collateral. Possible issues include: third party claims to the collateral, difficulty in obtaining possession, condition, marketing time and value under current market conditions. Capital position less than half of industry average. Common to have deficiencies in loan structure, incomplete legal documentation or missing financial information. Trends are flat or negative. It is common for there to be a decline in sales, earnings and/or capital. Loans to Individuals: See “General Statement” for Watch loans. Type 6 (Substandard) General Statement: These loans have one or more pronounced weaknesses which jeopardize their timely liquidation. Neither the earnings of the business nor its realistic net worth adequately protect the bank from possible loss. There is a distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Business Loans: Following are examples of weaknesses which may warrant a substandard rating. Loans rated Substandard will typically have several of the following weaknesses:  Management often considered to have made incorrect strategic     decisions or to be weak or inattentive. Earnings stream is insufficient to repay loans on a timely basis. Business normally has periods of loss, sometimes large. Liquidity usually strained by operating losses. Loans usually renegotiated or past-due. It may be unlikely that the loan would be repaid in full from the sale of collateral. Possible issues include: third party claims to the collateral; difficulty in obtaining possession, condition, marketing time and value under current market conditions. 24 Annual Report 2013 | Notes to Consolidated Financial Statements    Typical reliance upon guarantors or other secondary sources of repayment that was not originally anticipated. Documentation deficiencies – including lack of important financial information – are common. In most cases that are negative trends, such as declines in sales, earnings and/or capital. Loans to Individuals: Loans to individual borrowers should be rated Substandard if there is a pronounced weakness in income, liquidity or collateral that is likely to affect the ability of the bank to collect the debt in full. Debt levels may be significantly above accepted guidelines relative to income. Type 7 (Doubtful) General Statement: Loans with well-defined weaknesses that make collection or liquidation of the debt in full improbable based on current information. Business Loans: Typical characteristics of a doubtful loan include the following:    Large operating losses. Collateral insufficient to repay loan. Typical to have little or no capital. Continued viability of business is doubtful. Unreliable or no alternative sources of repayment. Loss anticipated, exact loss figure cannot be determined at present.   Loans to Individuals: Borrower’s ability or willingness to repay makes collection of the debt in full unlikely. Loans may be unsecured or have an obvious collateral deficiency. Type 8 (Loss) General Statement: Loans with pervasive weaknesses so great that principal is considered uncollectible under current circumstances. This classification does not mean that the loan has absolutely no recovery value, but simply that it is no longer practical to defer writing it off. Recovery is dependent on favorable future events. Normal characteristics:   Business has failed or is near failure. No reliable source of repayment. For these loans categorized as commercial or credit relationships with aggregate exposure greater than $500,000, a loan review will be required within 15 months of the most recent credit review. The reviews shall be completed in enough detail to, at a minimum, validate the risk rating. Additionally, the reviews shall determine whether any documentation exceptions exist, appropriate written analysis is included in the loan file and whether credit policies have been properly adhered to. An ongoing independent review is conducted of a sampling of residential real estate as well to assess underwriting quality and adherence to policy. Many of the residential real estate loans underwritten by the Company conform to the underwriting requirements of MPF, Fannie Mae or other secondary market aggregators to allow the bank to resell loans in the secondary market. Servicing rights are retained on many, but not all, of the residential real estate loans sold in the secondary market. The lending policy references compliance with the interagency appraisal and evaluation guidelines effective December 2010. The Company provides many types of consumer and other loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The lending policy addresses specific credit guidelines by consumer loan type. For residential real estate loans, and consumer loans, these large groups of smaller balance homogenous loans are collectively evaluated for impairment. The Company applies a quantitative factor based on historical charge-off experience in total for each of these segments. Accordingly, the Company generally does not separately identify individual residential real estate loans and/or consumer loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower or it has been identified for another specific reason. Troubled debt restructures are considered impaired loans and are subject to the same allowance methodology as described above for impaired loans by portfolio segment. As of December 31, 2013 and 2012, the Bank had loan concentrations in agribusiness of 14.48 % and 11.66%, 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, 2013 and 2012. Notes to Consolidated Financial Statements 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, 2013 and 2012. Repurchase Agreements Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature either daily or within one year from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The underlying securities are held by the Company’s safekeeping agent. The Company may be required to provide additional collateral based on the fair value of the underlying securities. 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 ended December 31, 2013 and 2012. See Note 9 for discussion of stock split. 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. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in the tax laws and rates on the date of enactment. Credit Related Financial Instruments In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under lines of credit and standby letters of credit. Such financial instruments are recorded when they are funded. Premises, Furniture and Equipment Premises, furniture and equipment are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the assets. Other Real Estate Owned Other real estate owned (OREO), which is included with other assets, represents properties acquired through foreclosure, in-substance foreclosure or other proceedings. 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. When the tax returns are filed, it is highly certain that some positions taken would be sustained upon examinations 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 2010. Notes to Consolidated Financial Statements | Annual Report 2013 25 Notes to Consolidated Financial Statements Accounting for Derivatives 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 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. 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. As of December 31, 2013 accumulated other comprehensive income on the consolidated balance sheets includes $773,000 as a result of unrealized gains on securities available for sale and none as a result of the interest rate swap. As of December 31, 2012, accumulated other comprehensive income on the consolidated balance sheets includes $4,291,000 as a result of unrealized gains on securities available for sale and $(64,000) as a result of the interest rate swap. Subsequent Events The Company has evaluated all subsequent events through March 13, 2014, the date that the financial statements were available to be issued. 2. Securities The amortized cost and fair values of securities as of December 31, 2013 and 2012 are as follows. Included in gross unrealized losses is an OTTI loss of $892,000 and $1,171,000 as of December 31, 2013 and 2012, respectively, relating to two corporate securities, which represent the non-credit related portion of the overall impairment. (Amounts in Thousands of Dollars): 26 Annual Report 2013 | Notes to Consolidated Financial Statements GrossGross2013UnrealizedUnrealizedAmortized CostGains(Losses)Fair ValueSECURITIES HELD TO MATURITYState and political subdivisions1,596 $ 182 $ -$ 1,778 $ SECURITIES AVAILABLE FOR SALEU.S. government agency bonds71,089 $ 367 $ (2,169) $ 69,287 $ U.S. government agency mortgage backed securities117,695 2,456 (498) 119,653 State and political subdivisions56,735 2,026 (515) 58,246 Corporate securities1,213 - (892) 321 Collateralized mortgage obligations24,650 482 (8) 25,124 271,382 $ 5,331 $ (4,082) $ 272,631 $ GrossGross2012UnrealizedUnrealizedAmortized CostGains(Losses)Fair ValueSECURITIES HELD TO MATURITYU.S. government agency bonds254 $ 7 $ -$ 261 $ State and political subdivisions1,675 307 - 1,982 1,929 $ 314 $ -$ 2,243 $ SECURITIES AVAILABLE FOR SALEU.S. government agency bonds66,873 $ 873 $ (64) $ 67,682 $ U.S. government agency mortgage backed securities151,545 3,611 (370) 154,786 State and political subdivisions57,212 3,687 (69) 60,830 Corporate securities1,334 2 (1,171) 165 Collateralized mortgage obligations41,511 538 (116) 41,933 318,475 $ 8,711 $ (1,790) $ 325,396 $ 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, 2013 and 2012 are summarized as follows. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements As of December 31, 2013, the investment portfolio included 361 securities. Of this number, 80 securities have current unrealized losses and 6 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 of these debt securities are temporary except for the two corporate securities discussed previously. 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. In regards to the two corporate securities that are considered to be other than temporarily impaired, for the years ended December 31, 2013 and 2012, there was no credit related loss recognized in earnings. Notes to Consolidated Financial Statements | Annual Report 2013 27 2013UnrealizedUnrealizedUnrealizedFair ValueLossesFair ValueLossesFair ValueLossesSECURITIES AVAILABLE FOR SALEU.S. government agency bonds45,689 $ (1,966) $ 2,799 $ (203) $ 48,488 $ (2,169) $ U.S. government agency mortgage backed securities36,859 (498) - - 36,859 (498) State and political subdivisions7,266 (449) 457 (66) 7,723 (515) Corporate securities- - 321 (892) 321 (892) Collateralized mortgage obligations1,203 (8) - - 1,203 (8) 91,017 $ (2,921) $ 3,577 $ (1,161) $ 94,594 $ (4,082) $ 2012UnrealizedUnrealizedUnrealizedFair ValueLossesFair ValueLossesFair ValueLossesSECURITIES AVAILABLE FOR SALEU.S. government agency bonds11,252 $ (64) $ -$ -$ 11,252 $ (64) $ U.S. government agency mortgage backed securities47,472 (370) - - 47,472 (370) State and political subdivisions2,020 (17) 992 (52) 3,012 (69) Corporate securities- - 42 (1,171) 42 (1,171) Collateralized mortgage obligations5,243 (23) 7,967 (93) 13,210 (116) 65,987 $ (474) $ 9,001 $ (1,316) $ 74,988 $ (1,790) $ Less than 12 Months12 Months or MoreTotalLess than 12 Months12 Months or MoreTotal Notes to Consolidated Financial Statements The amortized cost and fair value of securities as of December 31, 2013 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 summarizes. (Amounts in Thousands of Dollars): Information on sales of securities available for sale during the years ended December 31, 2013 and 2012 follows (Amounts in Thousands of Dollars): In addition, gains related to calls of investment securities were $11,000 and $7,000 for the years ended December 31, 2013 and 2012, respectively. As of December 31, 2013 and 2012, securities with a carrying value of approximately $233,471,000 and $220,057,000, respectively, were pledged to collateralize deposits and securities sold under agreements to repurchase and for other purposes as required or permitted by law. 28 Annual Report 2013 | Notes to Consolidated Financial Statements Amortized CostFair ValueSECURITIES HELD TO MATURITY Due in one year or less79 $ 79 $ Due after one year through five years316 344 Due after five years through ten years569 636 Due after ten years632 719 1,596 $ 1,778 $ SECURITIES AVAILABLE FOR SALE Due in one year or less8,649 $ 8,732 $ Due after one year through five years28,098 28,924 Due after five years through ten years82,805 81,706 Due after ten years125,967 127,824 245,519 247,186 Corporate securities1,213 321 Collateralized mortgage obligations24,650 25,124 271,382 $ 272,631 $ 20132012Proceeds from sales10,399 $ 10,065 $ Gross gains621 524 Gross losses- - 3. Loans The composition of net loans outstanding as of December 31, 2013 and 2012 are as follows. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements The aging of the loan portfolio, by classes of loans, as of December 31, 2013 and 2012 is summarized as follows. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements | Annual Report 2013 29 20132012Commercial operating54,812 $ 56,773 $ Commercial real estate176,647 149,710 Agricultural operating32,631 22,676 Agricultural real estate31,435 24,770 Construction and land development26,317 21,339 Real estate secured by 1-4 and multi-family82,410 94,406 Consumer38,246 37,129 442,498 $ 406,803 $ Less allowance for loan losses(7,251) (6,278) NET LOANS435,247 $ 400,525 $ 2013Current30-59 Days Past Due60-89 Days Past DueAccruing Past Due 90 Days or MoreNonaccrualLoansTotalCLASSES OF LOANSCommercial operating52,598 $ 182 $ 183 $ 15 $ 1,834 $ 54,812 $ Commercial real estate169,965 410 204 63 6,005 176,647 Agricultural operating32,617 14 - - - 32,631 Agricultural real estate31,347 49 39 - - 31,435 Construction and land development26,217 100 - - - 26,317 Real estate secured by 1-4 and multi-family78,981 2,478 262 249 440 82,410 Consumer37,390 623 228 5 - 38,246 429,115 $ 3,856 $ 916 $ 332 $ 8,279 $ 442,498 $ 2012Current30-59 Days Past Due60-89 Days Past DueAccruing Past Due 90 Days or MoreNonaccrualLoansTotalCLASSES OF LOANSCommercial operating56,487 $ 257 $ 22 $ 4 $ 3 $ 56,773 $ Commercial real estate145,801 483 126 - 3,300 149,710 Agricultural operating22,605 46 - - 25 22,676 Agricultural real estate24,634 50 - - 86 24,770 Construction and land development20,791 299 - - 249 21,339 Real estate secured by 1-4 and multi-family90,982 1,943 514 119 848 94,406 Consumer36,560 439 106 24 - 37,129 397,860 $ 3,517 $ 768 $ 147 $ 4,511 $ 406,803 $ Notes to Consolidated Financial Statements Nonperforming loans, by classes of loans as of December 31, 2013 and 2012 are summarized as follows. (Amounts in Thousands of Dollars): ** Nonaccrual loans as of December 31, 2013 and 2012 include $5,767,000 and $3,044,000, respectively, of troubled debt restructures which are included in commercial real estate. 30 Annual Report 2013 | Notes to Consolidated Financial Statements AccruingPast DueTroubled DebtTotal90 DaysNonaccrualRestructures-Nonperformingor MoreLoans **AccruingLoansCLASSES OF LOANSCommercial operating15 $ 1,834 $ -$ 1,849 $ Commercial real estate63 6,005 1,954 8,022 Agricultural operating- - - - Agricultural real estate- - - - Construction and land development- - - - Real estate secured by 1-4 and multi-family249 440 141 830 Consumer5 - - 5 332 $ 8,279 $ 2,095 $ 10,706 $ AccruingPast DueTroubled DebtTotal90 DaysNonaccrualRestructures-Nonperformingor MoreLoans **AccruingLoansCLASSES OF LOANSCommercial operating4 $ 3 $ -$ 7 $ Commercial real estate- 3,300 327 3,627 Agricultural operating- 25 - 25 Agricultural real estate- 86 - 86 Construction and land development- 249 - 249 Real estate secured by 1-4 and multi-family119 848 - 967 Consumer24 - - 24 147 $ 4,511 $ 327 $ 4,985 $ 20132012 Changes in the allowance for loan losses, by portfolio segment, during the years ended December 31, 2013 and 2012 are summarized as follows. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements The allowance for loan losses, by impairment evaluation and by portfolio segment, as of December 31, 2013 and 2012 are summarized as follows. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements | Annual Report 2013 31 Real EstateConstructionSecuredCommercialCommercialAgriculturalAgriculturaland Landby 1 - 4 andOperatingReal EstateOperatingReal EstateDevelopmentMulti-FamilyConsumerTotalBalance, beginning664 $ 3,168 $ 216 $ 239 $ 498 $ 1,061 $ 432 $ 6,278 $ Provision for loan losses26 896 126 70 127 81 114 1,440 Recoveries of loans charged off1 - - - - 38 35 74 691 4,064 342 309 625 1,180 581 7,792 Loans charged off(31) (30) (11) - (140) (186) (143) (541) Balance, ending660 $ 4,034 $ 331 $ 309 $ 485 $ 994 $ 438 $ 7,251 $ Real EstateConstructionSecuredCommercialCommercialAgriculturalAgriculturaland Landby 1 - 4 andOperatingReal EstateOperatingReal EstateDevelopmentMulti-FamilyConsumerTotalBalance, beginning593 $ 2,568 $ 140 $ 169 $ 425 $ 880 $ 412 $ 5,187 $ Provision for loan losses52 602 76 70 184 311 145 1,440 Recoveries of loans charged off25 - - - - 14 31 70 670 3,170 216 239 609 1,205 588 6,697 Loans charged off(6) (2) - - (111) (144) (156) (419) Balance, ending664 $ 3,168 $ 216 $ 239 $ 498 $ 1,061 $ 432 $ 6,278 $ 20132012Real EstateConstructionSecuredCommercialCommercialAgriculturalAgriculturaland Landby 1 - 4 andOperatingReal EstateOperatingReal EstateDevelopmentMulti-FamilyConsumerTotalAllowance for loans individually evaluated for impairment14 $ 948 $ -$ -$ -$ 53 $ -$ 1,015 $ Allowance for loans collectively evaluated for impairment646 3,086 331 309 485 941 438 6,236 660 $ 4,034 $ 331 $ 309 $ 485 $ 994 $ 438 $ 7,251 $ Loans individually evaluated for impairment1,834 $ 7,959 $ -$ -$ -$ 581 $ -$ 10,374 $ Loans collectively evaluated for impairment52,978 168,688 32,631 31,435 26,317 81,829 38,246 432,124 54,812 $ 176,647 $ 32,631 $ 31,435 $ 26,317 $ 82,410 $ 38,246 $ 442,498 $ 2013 Notes to Consolidated Financial Statements Loans, by classes of loans, considered to be impaired as of December 31, 2013 and 2012 are summarized as follows. (Amounts in Thousands of Dollars): 32 Annual Report 2013 | Notes to Consolidated Financial Statements Real EstateConstructionSecuredCommercialCommercialAgriculturalAgriculturaland Landby 1 - 4 andOperatingReal EstateOperatingReal EstateDevelopmentMulti-FamilyConsumerTotalAllowance for loans individually evaluated for impairment-$ 796 $ -$ -$ 151 $ 105 $ -$ 1,052 $ Allowance for loans collectively evaluated for impairment664 2,372 216 239 347 956 432 5,226 664 $ 3,168 $ 216 $ 239 $ 498 $ 1,061 $ 432 $ 6,278 $ Loans individually evaluated for impairment3 $ 3,627 $ 25 $ 86 $ 249 $ 848 $ -$ 4,838 $ Loans collectively evaluated for impairment56,770 146,083 22,651 24,684 21,090 93,558 37,129 401,965 56,773 $ 149,710 $ 22,676 $ 24,770 $ 21,339 $ 94,406 $ 37,129 $ 406,803 $ 2012UnpaidAverage2013RecordedPrincipalRelated Recorded Investment Balance Allowance Investment CLASSES OF LOANSImpaired loans with no specific allowance recorded:Commercial operating1,717 $ 1,771 $ -$ 1,766 $ Commercial real estate4,418 4,420 - 4,352 Real estate secured by 1-4 and multi-family379 411 - 383 6,514 $ 6,602 $ -$ 6,501 $ Impaired loans with specific allowance recorded:Commercial operating117 $ 117 $ 14 $ 117 $ Commercial real estate3,541 3,624 948 3,455 Real estate secured by 1-4 and multi-family202 230 53 208 3,860 $ 3,971 $ 1,015 $ 3,780 $ Total impaired loans:Commercial operating1,834 $ 1,888 $ 14 $ 1,883 $ Commercial real estate7,959 8,044 948 7,807 Real estate secured by 1-4 and multi-family581 641 53 591 10,374 $ 10,573 $ 1,015 $ 10,281 $ Notes to Consolidated Financial Statements Interest income and cash basis interest income recognized on impaired loans during the years ended December 31, 2013 and 2012 was not significant. Impaired loans, for which no allowance has been provided, as of December 31, 2013 and 2012, have adequate collateral, based on management’s current estimates. For each class of loans, the following summarized the recorded investment by credit quality indicator as of December 31, 2013 and 2012. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements | Annual Report 2013 33 UnpaidAverage2012RecordedPrincipalRelated Recorded Investment Balance Allowance Investment CLASSES OF LOANSImpaired loans with no specific allowance recorded:Commercial operating3 $ 6 $ -$ 4 $ Commercial real estate582 592 - 665 Agricultural operating25 26 - 24 Agricultural real estate86 86 - 85 Real estate secured by 1-4 and multi-family521 551 - 533 1,217 $ 1,261 $ -$ 1,311 $ Impaired loans with specific allowance recorded:Commercial real estate3,045 $ 3,380 $ 796 $ 3,309 $ Construction and land development249 354 151 249 Real estate secured by 1-4 and multi-family327 344 105 328 3,621 $ 4,078 $ 1,052 $ 3,886 $ Total impaired loans:Commercial operating3 $ 6 $ -$ 4 $ Commercial real estate3,627 3,972 796 3,974 Agricultural operating25 26 - 24 Agricultural real estate86 86 - 85 Construction and land development249 354 151 249 Real estate secured by 1-4 and multi-family848 895 105 861 4,838 $ 5,339 $ 1,052 $ 5,197 $ Real EstateConstructionSecuredCommercialCommercialAgriculturalAgriculturaland Landby 1 - 4 andOperatingReal EstateOperatingReal EstateDevelopmentMulti-FamilyTotalInternally assigned risk rating:Pass (ratings 1 through 4) 52,421 $ 153,183 $ 32,418 $ 31,435 $ 13,023 $ 7,153 $ 289,633 $ Special mention (rating 5) 1,576 12,266 174 - 1,865 367 16,248 Substandard (rating 6)765 9,611 39 - - 1,010 11,425 Doubtful (rating 7)50 1,587 - - - 191 1,828 54,812 $ 176,647 $ 32,631 $ 31,435 $ 14,888 $ 8,721 $ 319,134 $ Real EstateConstructionSecuredand Landby 1 - 4 andDevelopmentMulti-FamilyConsumerTotalDelinquency status:* Performing11,429 $ 73,570 $ 38,244 $ 123,243 $ Nonperforming- 119 2 121 11,429 $ 73,689 $ 38,246 $ 123,364 $ 2013 Notes to Consolidated Financial Statements *Performing loans are those which are accruing and less than 90 days past due. Nonperforming loans are those on nonaccrual, accruing loans that are greater than or equal to 90 days past due, and accruing TDR’s. For commercial operating, commercial real estate, agricultural operating, agricultural real estate, real estate secured by multifamily and a portion of the construction and land development loans, the Company’s credit quality indicator is internally assigned risk ratings. Each of these loans is assigned a risk rating upon origination. The risk rating is reviewed every 12 months, at a minimum, and on an as needed basis depending on the specific circumstances of the loan. Some classes of loans contain loans that are risk rated and loans that are not as loans of a more homogeneous nature are not risk rated. See Note 1 for further discussion on the Company’s risk ratings. For residential real estate loans and consumer loans, the Company’s credit quality indicator is performance determined by delinquency status. Delinquency status is updated daily by the Company’s loan system. 34 Annual Report 2013 | Notes to Consolidated Financial Statements Real EstateConstructionSecuredCommercialCommercialAgriculturalAgriculturaland Landby 1 - 4 andOperatingReal EstateOperatingReal EstateDevelopmentMulti-FamilyTotalInternally assigned risk rating:Pass (ratings 1 through 4) 54,902 $ 127,412 $ 21,820 $ 24,591 $ 13,474 $ 17,331 $ 259,530 $ Special mention (rating 5) 645 12,574 340 93 753 664 15,069 Substandard (rating 6)1,226 7,953 516 86 216 831 10,828 Doubtful (rating 7)- 1,771 - - 249 359 2,379 56,773 $ 149,710 $ 22,676 $ 24,770 $ 14,692 $ 19,185 $ 287,806 $ Real EstateConstructionSecuredand Landby 1 - 4 andDevelopmentMulti-FamilyConsumerTotalDelinquency status:* Performing6,647 $ 75,102 $ 37,105 $ 118,854 $ Nonperforming- 119 24 143 6,647 $ 75,221 $ 37,129 $ 118,997 $ 2012 As of December 31, 2013 and 2012, troubled debt restructurings (TDRs) total $7,862,000 and $3,371,000, respectively. For each class of loans, the following summarizes the number and investment in troubled debt restructuring, by type of concession, that were restructured during the years ended December 31, 2013 and 2012. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements There was no financial impact for charge-offs, principal forgiveness or foregone interest for the troubled debt restructurings. The financial impact for specific reserves was not significant for the troubled debt restructurings. For the years ended December 31, 2013 and 2012, none of the Company’s TDRs have redefaulted subsequent to restructure, where a default is defined as a delinquency of 90 days or more and/or placement on nonaccrual status. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans totaled $193,160,000 and $178,384,000 as of December 31, 2013 and 2012, 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 $8,789,000 and $6,272,000 as of December 31, 2013 and 2012, respectively. 4. Premises, Furniture and Equipment The cost, accumulated depreciation and net book value of premises, furniture and equipment as of December 31, 2013 and 2012 is summarized as follows. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements | Annual Report 2013 35 Pre-ModificationPost-ModificationNumberRecordedRecordedof TDRsInvestmentInvestmentCONCESSION-EXTENSION OF MATURITYReal estate secured by 1-4 and multi-family1 139 $ 141 $ CONCESSION-SIGNIFICANT PAYMENT DELAYCommercial real estate1 4,180 $ 4,180 $ Pre-ModificationPost-ModificationNumberRecordedRecordedof TDRsInvestmentInvestmentCONCESSION-EXTENSION OF MATURITYCommercial real estate1 327 $ 327 $ 2013201220132012Land4,609 $ 3,091 $ Building and improvements16,535 16,350 Furniture and equipment9,439 10,120 30,583 29,561 Less accumulated depreciation(10,507) (9,850) 20,076 $ 19,711 $ Notes to Consolidated Financial Statements 5. Intangibles Goodwill and intangible assets are summarized as follows. (Amounts in Thousands of Dollars): 6. Time Deposits The aggregate amount of time deposits, each with a minimum denomination of $100,000, was approximately $95,250,000 and $119,697,000 as of December 31, 2013 and 2012, respectively. Brokered deposits were $29,277,000 and $38,590,000 at December 31, 2013 and 2012, respectively. At December 31, 2013, the scheduled maturities of time deposits are as follows. (Amounts in Thousands of Dollars): 36 Annual Report 2013 | Notes to Consolidated Financial Statements As of December 31,20132012Intangible assets:Goodwill3,050 $ 3,050 $ Core deposit intangible1,380 1,380 Other intangible assets1,855 1,405 6,285 5,835 Less accumulated amortization on certain intangible assets(1,901) (1,638) Total intangible assets4,384 $ 4,197 $ ESTIMATED FUTURE AMORTIZATION EXPENSEFor the year ended December 31:2013149 $ 2014199 $ 149 2015195 145 2016173 123 2017173 123 2018173 123 Thereafter421 335 2014121,231 $ 201552,487 201639,314 201718,533 20186,362 237,927 $ 7. 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. FBIL Trust I was dissolved on September 7, 2013. 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, 2013 and 2012, the Company is allowed, for regulatory purposes, to include the entire $10,000,000 and $15,000,000, respectively, 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 (2.89% and 2.96% as of December 31, 2013 and 2012, respectively). 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 was utilized to manage variable interest rate exposure and was designated as a highly effective cash flow hedge. The swap agreement expired in 2013. It essentially fixed the rate to be paid at 5.02%. As of December 31, 2012, the notional amount of the swap was $5,000,000 with a fair value of $(103,000) recorded in other liabilities, and as a reduction to accumulated other comprehensive income in the consolidated balance sheets. 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 (3.19% and 3.26% as of December 31, 2013 and 2012, 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. Notes to Consolidated Financial Statements 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 were paid semi- annually. Cumulative cash distributions were calculated at a 10.60% annual rate. The capital securities were to be redeemed on September 7, 2030; however, the Company had the option to redeem at any time. The redemption price began at 105.300% to par and was reduced by 53 basis points each year until September 7, 2020 when the capital securities could be redeemed at par. On September 7, 2013, the junior subordinated debentures related to FBIL Statutory Trust I were paid in full at a redemption price of 103.71% to par for a total of $5,185,500 plus any remaining distributions, interest and fees owed. No financing was obtained as the source of funds was the Company’s cash. 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. 8. Preferred Stock, Series A, B and C In October 2008, Congress passed the Emergency Economic Stabilization Act of 2008 (EESA). One of the provisions resulting from the Act was the Treasury Capital Purchase Program (CPP) which provided 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 Preferred Stock, Series B, for an aggregate purchase price of $10,000,000 in cash. The warrant had 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 qualified as Tier 1 capital and paid 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 qualified as Tier 1 capital and paid cumulative dividends at a rate of 9% per annum. The Series A and B Preferred Stock could have been redeemed by the Company at any time, subject to approval of the Federal Reserve. On September 8, 2011, the Company issued 10,000 shares of Senior Non- Cumulative Perpetual Preferred Stock, Series C (Series C Preferred Stock) to the U.S. Department of the Treasury (Treasury) for an aggregate purchase price of $10,000,000. The sale of Series C Preferred Stock is the result of an investment from the Small Business Lending Fund (SBLF), a fund established under the Small Business Jobs Act of 2010 that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. As a requirement of the SBLF, simultaneously, the Company redeemed the 10,500 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A and B (Series A or B Preferred Stock), at an aggregate price of $10,500,000 plus accrued and unpaid dividends to the date of redemption of $35,000. The Series A and B Preferred Stock was issued as a result of the Company’s participation in the Treasury’s voluntary Capital Purchase Program (CCP) discussed previously. Notes to Consolidated Financial Statements | Annual Report 2013 37 Notes to Consolidated Financial Statements The Series C Preferred Stock qualifies as Tier 1 capital for the Company. Non-cumulative dividends are payable quarterly on the Series C Preferred Stock, and the dividend rate is based on changes in the level of “Qualified Small Business Lending” or “QSBL” by the Company. Based upon the change in the bank’s level of QSBL over the baseline level (as defined by SBLF, the baseline average of QSBL for the last two quarters of 2009 and the first two quarters of 2010), the dividend rate for the initial dividend period, which was from the date of issuance through September 30, 2011, was set at 2%, and the dividend rate for the fourth quarter of 2011 was set at 1%. For the 2nd through 10th calendar quarters, the annual dividend rate may be adjusted to between 1% and 5%, to reflect the amount of change in the banks’ level of QSBL. For the 11th calendar quarter through 4.5 years after issuance, the dividend rate will be fixed between 1% and 5%, based upon the increase in QSBL from the baseline level to the level as of the end of the ninth dividend period (i.e., as of September 30, 2013), or will be fixed at 7% if there is no increase or there is a decrease in QSBL during such period. As of September 30, 2013, the rate has been fixed at 1%. In addition, beginning on April 1, 2014 and ending on April 1, 2016, if there is no increase or there is a decrease in QSBL from the baseline level to the level as of the end of the ninth dividend period (i.e., as of September 30, 2013), because of the Company’s participation in the CPP, the Company will be subject to an additional lending incentive fee of 2% per year. After 4.5 years from the issuance, the dividend rate will increase to 9%. The Series C Preferred Stock may be redeemed at any time at the option of the Company, subject to the approval of the Company’s primary federal banking regulator. All redemptions must be in amounts equal to at least 25% of the number of originally issued shares at $1,000 per share, or 100% of the then outstanding shares (if less than 25% of the originally issued shares). In accordance with the SBLF, the Company may pay dividends on all stock assuming Tier 1 capital levels remain at least 90% of the level existing upon the date of issuance, September 8, 2011. This threshold is subject to reduction depending on increases in the Company’s QSBL. The Series C Preferred Stock is nonvoting, other than for consent rights granted to Treasury with respect to (i) an authorization or issuance of shares ranking senior to the Series C Preferred Stock, (ii) any amendment to the rights of the Series C Preferred Stock, (iii) any merger, exchange, dissolution, or similar transaction that would affect the rights of the Series C Preferred Stock and (iv) any sale of all, or any material portion of, the Company’s assets if in conjunction with such sale, the Series C Preferred Stock will not be redeemed in full. If the Company misses five dividend payments, whether or not consecutive, the holder of the Series C Preferred Stock will have the right, but not the obligation, to appoint a representative as an observer on the Company’s Board of Directors. 9. Common Stock Split For common stock shareholders of record on July 31, 2013, the Company issued the 1,026,495 additional shares necessary to effect a three-for-two common stock split on August 26, 2013. Par value was not adjusted and there were 18 fractional shares paid out. All common shares reported in these financial statements including the earnings per common share have been retroactively adjusted for this split as if it occurred at the beginning of the earliest period presented. 38 Annual Report 2013 | Notes to Consolidated Financial Statements Commitments and Contingencies 10. 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 as of December 31, 2013 and 2012 is as follows. (Amounts in Thousands of Dollars): Unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. The agreements generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the agreements are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based upon management’s credit evaluation of the counter-party. Collateral varies but may include accounts receivable, inventory, property, equipment and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year, or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral, as detailed above, supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the previous summary. If the commitment is funded, the Bank would be entitled to seek recovery from the customer. As of December 31, 2013 and 2012, 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 $830,000 and $5,040,000 as of December 31, 2013 and 2012, respectively. These amounts include loans held for sale of $88,000 and $499,000 as of December 31, 2013 and 2012, respectively, and loan commitments, included in the summary in this Note, of $742,000 and $4,541,000 as of December 31, 2013 and 2012, respectively. 20132012Commitments to extend credit:Unused lines of credit69,461 $ 72,092 $ Standby letters of credit1,225 1,648 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, 2013 and 2012. 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 $11,678,000 and $14,383,000 as of December 31, 2013 and 2012, respectively. In the opinion of management, no material risk of loss exists due to the financial condition of the institutions. Contingencies In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on these consolidated financial statements. Benefits 11. 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 their respective Employee Incentive Compensation Plans, the Bank and Trust Services are authorized at their discretion, pursuant to the provisions of their plans, to establish on an annual basis, a bonus fund, which will be distributed to certain employees, based on their performance. The Employee Incentive Compensation Plans do not become effective unless the Bank and Trust Services exceed established income levels. Contributions to the 401(k) plan for the years ended December 31, 2013 and 2012 totaled $555,000 and $462,000, respectively. Contributions made to the incentive compensation plan for the years ended December 31, 2013 and 2012 were $253,000 and $283,000, respectively. Notes to Consolidated Financial Statements Dividends and Regulatory Capital 12. 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 statues. 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, see Note 8, for other potential dividend restriction. 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 action 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 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, 2013, 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. Trust Services maintains its capital level in excess of the required minimum as established by the Illinois Department of Financial and Professional Regulation. Notes to Consolidated Financial Statements | Annual Report 2013 39 Notes to Consolidated Financial Statements The Company and Bank’s actual capital amounts and ratios are also presented in the table. (Amounts in Thousands of Dollars): In July 2013, the U.S. federal banking authorities approved the implementation of the Basel III regulatory capital reforms and issued rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rules”). The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies” (generally bank holding companies with consolidated assets of less than $500 million). The Basel III Rules not only increase most of the required minimum regulatory capital ratios, but they introduce a new Common Equity Tier 1 Capital ratio and the concept of a capital conservation buffer. The Basel III Rules also expand the definition of capital in effect currently by establishing criteria that instruments must meet to be considered Additional Tier 1 Capital (Tier 1 Capital in addition to Common Equity) and Tier 2 Capital. A number of instruments that now qualify as Tier 1 Capital will not qualify, or their qualifications will change. The Basel III Rules also permit smaller banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income, which currently does not affect regulatory capital. The Basel III Rules have maintained the general structure of the current prompt corrective action framework, while incorporating the increased requirements and adding the Common Equity Tier 1 Capital ratio. In order to be “well-capitalized” under the new rules a bank and holding company must maintain a Common Equity Tier 1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8% or more; a Total Capital ratio of 10% or more; and a leverage ratio of 5% or more. Generally, financial institutions become subject to the new Basel III Rules on January 1, 2015. Management is in the process of assessing the effect the Basel III Rules may have on the Company’s and the Bank’s capital positions. At present, management believes that its current capital structure will be more than sufficient to meet the revised regulatory capital ratios as required by the new Basel III Rules. 40 Annual Report 2013 | Notes to Consolidated Financial Statements To Be Well Capitalized under PromptAs of December 31, 2013ActualFor Capital Adequacy PurposesCorrective Action ProvisionsAmountRatioAmountRatioAmountRatioTotal Capital (to Risk-Weighted Assets)Company80,751 $ 14.66% 44,069 $ >8.00% N/AN/ABank70,708 $ 12.91% 43,814 $ >8.00% 54,768 $ >10.00% Tier I Capital (to Risk-Weighted Assets)Company74,876 $ 13.59% 22,035 $ >4.00% N/AN/ABank63,857 $ 11.66% 21,907 $ >4.00% 32,861 $ >6.00% Tier I Capital (to Average Assets)Company74,876 $ 9.39% 31,890 $ >4.00% N/AN/ABank63,857 $ 8.08% 31,596 $ >4.00% 39,495 $ >5.00% To Be Well Capitalized under PromptAs of December 31, 2012ActualFor Capital Adequacy PurposesCorrective Action ProvisionsAmountRatioAmountRatioAmountRatioTotal Capital (to Risk-Weighted Assets)Company81,120 $ 15.60% 41,591 $ >8.00% N/AN/ABank67,397 $ 13.05% 41,327 $ >8.00% 51,658 $ >10.00% Tier I Capital (to Risk-Weighted Assets)Company75,894 $ 14.60% 20,796 $ >4.00% N/AN/ABank61,119 $ 11.83% 20,663 $ >4.00% 30,995 $ >6.00% Tier I Capital (to Average Assets)Company75,894 $ 9.44% 32,147 $ >4.00% N/AN/ABank61,119 $ 7.68% 31,838 $ >4.00% 39,798 $ >5.00% Income Tax Matters 13. The components of income tax expense are as follows for the years ended December 31, 2013 and 2012. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements 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): Net deferred tax assets consist of the following components as of December 31, 2013 and 2012. (Amounts in Thousands of Dollars): Net deferred tax assets are included in other assets and net deferred tax liabilities are included in other liabilities on the accompanying consolidated balance sheets. The net change in deferred income taxes is reflected in the financial statements as follows. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements | Annual Report 2013 41 Year Ended December 31,20132012Current2,630 $ 3,404 $ Deferred(723) (384) 1,907 $ 3,020 $ % of Pretax% of PretaxYear Ended December 31,2013Income2012IncomeFederal income tax at statutory rate2,585 $ 34.0% 3,352 $ 34.0% Changes from statutory rate resulting from:State tax, net of federal benefit437 5.7 522 5.3 Tax exempt interest income, net(830) (10.9) (847) (8.6) Increase in cash surrender value(154) (2.0) (128) (1.3) Over (under) accrual of provision and other, net(131) (1.7) 121 1.2 Income tax expense1,907 $ 25.1% 3,020 $ 30.6% Year Ended December 31,20132012Deferred tax assets:Allowance for loan losses2,825 $ 2,433 $ Other-than-temporary impairment308 308 Accrued expenses497 338 Interest rate swap- 39 3,630 $ 3,118 $ Deferred tax liabilities:Premises, furniture and equipment(1,701) $ (2,017) $ Stock dividends(107) (107) Prepaid expenses(128) (85) Unrealized gains on securities available for sale, net(476) (2,630) Intangibles(730) (629) Other(165) (165) (3,307) $ (5,633) $ NET DEFERRED TAX ASSETS (LIABILITIES)323 $ (2,515) $ Year Ended December 31,20132012Provision for income taxes(723) $ (384) $ Statement of changes in stockholders' equity, accumulated other comprehensive income (loss),unrealized gains (losses) on securities available for sale, net(2,154) (328) Interest rate swap39 25 (2,838) $ (687) $ Notes to Consolidated Financial Statements Fair Value Measurements 14. 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 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 state and political subdivisions and certain corporate, asset based 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. Other real estate owned: Other real estate owned is carried at fair value less selling costs at the time of acquisition. Subsequent write downs are based on the lower of carrying value or fair value, less selling 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 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 years ended December 31, 2013 and 2012. 42 Annual Report 2013 | Notes to Consolidated Financial Statements ASSETS AND LIABILITES RECORDED AT FAIR VALUE ON A RECURRING BASIS The following table summarizes assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value: Notes to Consolidated Financial Statements There were no transfers of assets or liabilities between levels 1, 2 and 3 of the fair value hierarchy during the years ended December 31, 2013 and 2012. ASSETS AND LIABILITIES RECORDED AT FAIR VALUE ON A NONRECURRING BASIS The Company may be required, from time to time, to measure certain assets and liabilities at fair value on a nonrecurring basis such as when there is evidence of impairment. Assets measured at fair value on a nonrecurring basis are included in the table below: Notes to Consolidated Financial Statements | Annual Report 2013 43 Quoted Prices inSignificantActive MarketsOtherSignificantFair Value Measurementsfor IdenticalObservableUnobservableas of December 31, 2013 Using:AssetsInputsInputsFair Value(Level 1)(Level 2)(Level 3)Investment securities available for sale:U.S. government agency bonds69,287 $ -$ 69,287 $ -$ U.S. government agency mortgage backed securities119,653 - 119,653 - State and political subdivisions58,246 - 58,246 - Corporate securities321 - 321 - Collateralized mortgage obligations25,124 - 25,124 - 272,631 $ -$ 272,631 $ -$ Quoted Prices inSignificantActive MarketsOtherSignificantFair Value Measurementsfor IdenticalObservableUnobservableas of December 31, 2012 Using:AssetsInputsInputsFair Value(Level 1)(Level 2)(Level 3)Investment securities available for sale:U.S. government agency bonds67,682 $ -$ 67,682 $ -$ U.S. government agency mortgage backed securities154,786 - 154,786 - State and political subdivisions60,830 - 60,830 - Corporate securities165 - 165 - Collateralized mortgage obligations41,933 - 41,933 - 325,396 $ -$ 325,396 $ -$ Interest rate swap(103) $ -$ (103) $ -$ Quoted Prices inSignificantActive MarketsOtherSignificantFair Value Measurementsfor IdenticalObservableUnobservableas of December 31, 2013 Using:AssetsInputsInputsFair Value(Level 1)(Level 2)(Level 3)Impaired loans3,130 $ -$ -$ 3,130 $ Other real estate owned224 $ -$ -$ 224 $ Quoted Prices inSignificantActive MarketsOtherSignificantFair Value Measurementsfor IdenticalObservableUnobservableas of December 31, 2012 Using:AssetsInputsInputsFair Value(Level 1)(Level 2)(Level 3)Impaired loans2,696 $ -$ -$ 2,696 $ Other real estate owned110 $ -$ -$ 110 $ Notes to Consolidated Financial Statements 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 rate loans fair values are equal to carrying values. The fair values for all other types of loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. The fair value of loans held for sale is based on quoted market prices of similar loans sold in the secondary market. Accrued interest receivable and payable: The fair value of accrued interest receivable and payable is equal to its carrying value. Deposits: The fair values for demand and savings deposits equal their carrying amounts, which represent the amount payable on demand. Fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on time deposits to a schedule of aggregated expected monthly maturities on time deposits. Securities sold under agreements to repurchase: The fair value of securities sold under agreements to repurchase is considered to equal carrying value due to the borrowings short-term nature. 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, 2013 and 2012 are as follows. (Amounts in Thousands of Dollars): 44 Annual Report 2013 | Notes to Consolidated Financial Statements Fair ValueHierarchyCarrying ValueFair ValueLevel2013201220132012Financial assets:Cash and due from banks117,220 $ 28,363 $ 17,220 $ 28,363 $ Securities held to maturity21,596 1,929 1,778 2,243 Securities available for sale2272,631 325,396 272,631 325,396 Federal funds sold11,817 2,061 1,817 2,061 Loans, net2432,490 398,456 431,321 400,431 Impaired loans, net32,845 2,569 3,130 2,696 Accrued interest receivable13,305 3,479 3,305 3,479 Financial liabilities:Non-interest bearing demand deposits182,717 $ 79,772 $ 82,717 $ 79,772 $ Interest bearing demand deposits1259,166 254,478 259,166 254,478 Savings deposits147,979 42,738 47,979 42,738 Time deposits2237,927 281,510 240,180 283,215 Securities sold under agreements to repurchase160,934 51,985 60,934 51,985 Accrued interest payable1636 955 636 955 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 Scott A. Cisel Executive Adviser to Accenture’s North America Energy Practice Scott A. Cisel Executive Adviser to Accenture’s North American Energy Practice Carl W. Adams, Jr. Illinois Ayers Oil Company, President Phyllis J. Hofmeister Robert Hofmeister Farm, Secretary William D. Daniels Harborstone Group, LLC, Member William D. Daniels Harborstone Group, LLC, Member 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 John E. Laverdiere Laverdiere Construction, Inc., President LCI Concrete Inc., Vice President/Manager John E. Laverdiere Laverdiere Construction, Inc., President LCI Concrete Inc., Vice President/Manager Merle L. Tieken T-C Building Corporation, President M&M Developments Corporation, Owner Merle L.Tieken T-C Building Corporation, President M&M Developments Corporation, Owner Dennis R. Williams Quincy Newspapers, Inc., Chairman Dennis R.Williams Quincy Newspapers, Inc., Chairman Board of Directors | Annual Report 2012 45 Officers First Bankers Trust Company, N. A. First Bankers Trust Services, Inc. INFORMATION TECHNOLOGY OFFICERS Nicole R. Allen-Cain Ronald W. Fairley Terry J. Hanks Andrew W. Marner John K. Predmore Linda D. Reinold RETAIL OFFICERS Jason T. Cale W. Kay Divan Susan L. Farlow Janna L. Lockman Hilary J. Lucke Debora A. McClelland Jeremy W. Melvin Kimberly M. Neal Eric L. Roon Dennis L. Royalty Rachel Y. St. Clair Kelly R. Seifert Sally E. Vigezzi ACCOUNTING OFFICER Brooke C. Venvertloh COMPLIANCE OFFICER Kristen E. Lowman CREDIT OFFICER Dan J. Brink HUMAN RESOURCES OFFICER Laura J. Maas PRESIDENT/CEO Brian A. Ippensen VICE PRESIDENTS Merri E. Ash Steven P. Eckert Michele R. Foster Julie E. Kenning Danielle C. Montesano Larry E. Shepherd TRUST OFFICERS Paul R. Edwards, III Robin L. Fitzgibbons Patricia D. Goestenkors Joseph E. Harris John H. Jaynes Susan D. Knoche Teresa F. Kuchling Marilyn H. Marchetti W. Diane McHatton Ashley Melton Blake R. Mock Mary A. Schmidt Kimberly A. Serbin Linda J. Shultz Deborah J. Staff Martha E. Wert ASSISTANT VICE PRESIDENT John P. Shelton ASSISTANT TRUST OFFICERS Christine A. Baker John T. Cifaldi Emily J. Coniglio Marilyn J. Crim Teresa L. Dagget Jennifer L. Gordley Brenda K. Martin Sherri A. Zuspann PRESIDENT/CEO Arthur E. Greenbank REGIONAL PRESIDENTS Gregory A. Curl East Region Jason L. Duncan North Region David J. Rakers West Region SENIOR VICE PRESIDENTS Thomas J. Frese (CFO/COO) Dennis R. Iversen Gretchen A. McGee VICE PRESIDENTS Timothy W. Corrigan (Auditor) Mark A. DiMarzio Pamela L. Eftink Steven K. Fryman Jennifer M. Gilker Charles D. Grace Ryan G. Goestenkors Kathleen D. McNay James R. Obert Marvin E. Rabe Douglas R. Reed Nancy S. Richards Hugh K. Roderick Sherry R. Schaffnit Jeanette L. Schinderling Linda K. Tossick (Controller) Brent R. Voth Patricia J. Westerman Randal S. Westerman James D. Whitaker David A. Young ASSISTANT VICE PRESIDENTS John T. Armstrong Sherry A. Bryson Maria D. Eckert James M. Farmer David J. Garner Lisa K. Hoffman Ryne R. Lubben Karen J. Koehn Jayson E. Martin Afton R. Mast Michelle M. Shortridge Michele Walgren Leslie A. Westen Joan M. Whitlow 46 Annual Report 2013 | Officers Notes building a future together 2013 ANNUAL REPORT PO Box 3566 | Quincy, IL 62305-3566 phone: (217) 228-8000 web: firstbankers.com email: fbti@firstbankers.com An Equal Opportunity Employer

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