First Bankers Trustshares, Inc.
Annual Report 2018

Plain-text annual report

2018 ANNUAL REPORT building solid foundations First Bankers Trustshares, Inc. 2018 Annual Report Table of Contents Corporate Information ............................................................................. 1 Board of Director Committees ................................................................ 2 Letter to Shareholders ............................................................................. 3 Selected Financial Data....................................................................... 4-5 Management’s Reports ....................................................................... 6-8 Management’s Discussion and Analysis of Financial Condition and Results of Operations ................................ 9-13 Independent Auditor’s Report .............................................................. 14 Consolidated Financial Statements Balance Sheets ..................................................................................... 15 Statements of Income .......................................................................... 16 Statements of Comprehensive Income ............................................... 17 Statements of Changes in Stockholders’ Equity ................................. 18 Statements of Cash Flows ............................................................... 19-20 Notes to Consolidated Financial Statements ................................. 21-44 Board of Directors ................................................................................. 45 Officers .................................................................................................. 46 CCorporate 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. , 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 Hinsdale, IL, St. Peters, MO, Phoenix, AZ, Philadelphia, PA and Atlanta, GA. 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, 2018: Certificate holders of record: *As of December 31, 2018 6,000,000 3,087,488 221* Inquiries regarding transfer requirements, lost certificates, changes of address and account status should be directed to the corporation’s transfer agent: AST Shareholder Services 6201 15th Avenue Brooklyn, NY 11219 Corporate Address First Bankers Trustshares, Inc. 1201 Broadway P.O. Box 3566 Quincy, IL 62305 Independent Auditors RSM US LLP 201 First Street, Suite 800 Cedar Rapids, IA 52401 General Counsel Norton Rose Fulbright US LLP 2200 Ross Avenue, Suite 3600 Dallas, TX 75201-2784 Corporate Information First Bankers Trustshares, Inc. Board of Directors David E. Connor Chairman Emeritus, First Bankers Trustshares, Inc. Donald K. Gnuse Board Member Emeritus, First Bankers Trustshares, Inc. Carl Adams, Jr. President, Illinois Ayers Oil Company Scott A. Cisel Retired, President/Chairman/CEO Ameren Illinois William D. Daniels Chairman of the Board, First Bankers Trustshares, Inc. Chairman of the Board, First Bankers Trust Company, N.A. Member, Harborstone Group, LLC Mark E. Freiburg Owner, Freiburg Insurance Agency & Freiburg Development President, Freiburg, Inc. Charles M. Gnuse President/CEO, United State Bank Lewistown, MO. Arthur E. Greenbank Retired; Former President/CEO, First Bankers Trust Company, N.A. and First Bankers Trustshares, Inc. Phyllis J. Hofmeister Secretary, Robert Hofmeister Farm John E. Laverdiere President, Laverdiere Construction, Inc. Vice President/Manager, LCI Concrete, Inc. 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 Kemia M. Sarraf, M. D., M.P.H. President & Founder of genHKids Inc. CEO, Lodestar Consulting and Executive Coaching Allen W. Shafer President/CEO, First Bankers Trust Company, N.A. President/CEO, First Bankers Trustshares, Inc. Dennis R. Williams Chairman of the Board, Quincy Media, Inc. Executive Officers Allen W. Shafer, President and CEO Brian A. Ippensen, Treasurer Steven E. Siebers, Secretary First Bankers Trustshares, Inc. Stock Prices (For the three months period ended) 12/31/18 9/30/18 6/30/18 3/31/18 12/31/17 Market Value High Low $35.80 $37.95 $37.05 $36.00 $31.00 $30.01 $35.00 $35.50 $31.25 $28.00 Period End Close $32.00 $35.79 $37.00 $35.50 $30.75 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 FIG Partners, LLC 510 Maine, 9th Floor 628 Shrewsbury Ave. Quincy, IL 62301 (800) 223-1037 Tinton, NJ 07701 (844) 273-2189 Suite F 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 1 Board of Director Committees The Audit and the Governance Compensation Committees are chaired by a board member. They are given the necessary resources to lead their committees, monitor the committee actions, and report to the full Board the committee’s activities. The committees are staffed with employees who have been carefully chosen to support the Board member chairperson and provide the expertise and support to allow the committee to accomplish its objective. TTHE COMMITTEES 1. Audit Committee Chair: Dennis R. Williams Board Members: Arthur E. Greenbank, Phyllis J. Hofmeister and Kemia M. Sarraf, M.D., M.P.H. This committee is a Holding Company committee. The Audit Committee reaches into the entire organization in its purpose to ensure policies, procedures, and regulations are appropriately being carried out. This committee monitors the accuracy of financial reporting and the implementation of controls designed to mitigate risks inherent in financial institutions. The committee meets bi- monthly or more frequently if need be. The committee provides oversight throughout all the companies including the Bank, the Trust Company and the Holding Company. This is only one of two committees with this breadth of reach. The committee reports to Board of Directors of all three companies. 2. Governance And Compensation Committee (HR) Chair: Scott A. Cisel Board Members: Carl Adams, Jr., William D. Daniels and Steven E. Siebers This is a Holding Company committee. This committee exists to provide governance and uniformity to personnel related issues, where possible. They review compensation, benefits and all other human resource policies applicable to the three companies. This committee meets twice a year, unless otherwise needed. 2 Letter to Shareholders Dear Shareholders of First Bankers Trustshares, Inc., In 2018, First Bankers Trustshares, Inc. produced the third largest net income in its history earning $8,382,000. The following pages will show contributions made by both companies. First Bankers Trust Services, Inc. (Trust) ended the year with assets under management of over $9.8 billion and serves clients nationwide. First Bankers Trust Company, N.A. (Bank) ended 2018 with $918 million in assets and serves customers in West Central Illinois. Both of these companies provide state of the art products and services which enables our customers to efficiently conduct their business. We continuously strive to make the customer experience better, faster, and easier. With great people supported by strong systems and technology, we are confident that First Bankers Trustshares, Inc. will continue to grow and flourish. The Bank and the Trust Company will continue to be a vital part of the communities we serve, building and strengthening relationships with new and existing customers. We look forward to talking with you at the annual meeting on Tuesday, May 14, 2019. The meeting will be held at the Corporate Headquarters at 1201 Broadway, Quincy, Illinois. The meeting will begin at 9:00 a.m. In closing, we want to take this opportunity to thank you for your continued confidence in First Bankers Trustshares, Inc. William D. Daniels Chairman of the Board Allen W. Shafer President and CEO William D. Daniels Chairman of the Board First Bankers Trustshares, Inc. Allen W. Shafer President and CEO First Bankers Trustshares, Inc. 3 Selected Financial Data (Amount in thousands of dollars, except per share data statistics) Year Ended December 31, 22018 2017 2016 2015 2014 2013 PPER F OR MA NCE Net income Common stock cash dividends paid Common stock cash dividend payout ratio 1 Return on average assets 1 $ 8,382 $ 7,392 $ 9,145 $ 8,983 $ 7,245 $ 5,695 $ 1,852 $ 1,728 $ 1,602 $ 1,478 $ 1,355 $ 1,325 22.10% 0.89% 23.38% 0.80% 17.55% 1.01% 16.64% 1.02% 18.96% 0.87% 23.27% 0.70% Return on average common stockholders’ equity 2 9.40% 8.88% 11.95% 12.95% 11.48% 9.79% . . PPER COMMON SHA R E EEa r ni ngs, ba si c a nd di l ute d Dividends (paid) on common stock Book value 3 Stock price High Low Close $ 2.72 $ 2.40 $ 2.96 $ 2.89 $ 2.32 $ 1.82 $ 0.60 $ 0.56 $ 0.52 $ 0.48 $ 0.44 $ 0.43 $ 29.79 $ 27.67 $ 25.87 $ 23.49 $ 21.09 $ 19.22 $ 37.95 $ 31.00 $ 30.00 $ 24.60 $ 24.00 $ 23.33 $ 30.01 $ 25.95 $ 23.00 $ 22.61 $ 18.90 $ 17.43 $ 32.00 $ 30.75 $ 30.00 $ 23.65 $ 22.76 $ 19.00 Price/Earnings per share (at period end) Market price/Book value (at period end) 11.8 1.07 12.8 1.11 10.1 1.16 8.2 1.01 9.8 1.08 10.4 0.99 Weighted average number of shares outstanding 3,087,488 3,086,805 3,079,556 3,079,521 3,079,521 3,079,521 AA T DECEMB ER 31, Assets Investment securities Loans held for sale Loans (prior to allowance) Deposits Short-term borrowings and Federal Home Loan Bank advances Junior subordinated debentures Preferred stock Stockholders’ equity 4 Total equity to total assets 4 Common Equity Tier 1 capital ratio (risk based) 5 Tier 1 capital ratio (risk based) Total capital ratio (risk based) Leverage ratio $ 930,044 $ 942,949 $ 930,935 $ 906,672 $ 842,305 $ 775,640 357,311 371,168 329,796 301,795 298,042 274,227 38 480,792 733,435 88,559 10,310 - 42 506,341 756,833 80,394 10,310 - 107 513,798 727,445 104,407 10,310 - 118 511,932 717,464 83,278 10,310 10,000 87 475,534 667,668 77,048 10,310 10,000 88 442,498 627,789 60,934 10,310 10,000 $ 91,968 $ 85,438 $ 79,839 $ 82,326 $ 74,952 $ 69,193 9.89% 14.89% 16.58% 17.84% 10.50% 9.06% 13.28% 14.90% 16.16% 9.94% 8.58% 12.37% 13.98% 15.24% 9.34% 9.08% 10.89% 14.05% 15.30% 10.11% 8.90% 8.92% - 13.90% 14.97% 9.67% - 13.59% 14.66% 9.39% Note: A 3-for-2 common stock split occurred on August 26, 2013. All common shares reported, including per share data, in this annual report have 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. 5 Common Equity Tier 1 ratio was created by BASEL III regulatory changes, which went into effect in January 2015. 4 Selected Financial Data 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% 0.00% $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 1.45x 1.25x 1.05x 0.85x 0.65x 0.45x 0.25x Return on Average Assets Return on Average Common Equity 0.87% 0.70% 1.02% 1.01% 0.89% 0.80% 11.48% 12.95% 11.95% 9.79% 8.88% 9.40% 15.00% 10.00% 5.00% 0.00% 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 Earnings Per Share Price/Earnings Multiples $2.89 $2.96 $2.72 $2.40 $2.32 $1.82 10.40x 9.80x 10.10x 8.20x 12.80x 11.80x 14.00x 12.00x 10.00x 8.00x 6.00x 4.00x 2.00x 0.00x 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 Market Price to Book Value Loan/Deposit Growth 0.99x 1.08x 1.01x 1.16x 1.11x 1.07x 800 700 600 500 400 300 200 100 $628 $668 $717 $727 $757 $733 $442 $476 $512 $514 $506 $481 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 5 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 has been initiated when appropriate. First Bankers Trustshares, Inc. engaged the accounting firm of RSM US 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. Allen W. Shafer President/CEO Brian A . Ippensen Treasurer 6 Management’s Report on First Bankers Trust Company First Bankers Trust Company, National Association Corporate Statement First Bankers Trust Company, N. A. is a leader in the financial industry offering services to the people, farmers, businesses, and public entities of West Central Illinois. We do this through our state of the art electronic services and our ten branch locations. Through deposits from the general public and other borrowing and funds, we provide home mortgages, consumer, business, and agriculture loans. This past year has been rewarding and challenging. We have invested in the infrastructure to support our business for the future. We conducted a complete evaluation of our core computer system in order to better serve our customers and bankers. We have developed performance scorecards and detailed branch budgets to better measure our progress. We have addressed isolated credit problems, and more importantly we have strengthened our credit process to reduce the likelihood of similar credit problems in the future. We have emphasized cross training and the use of cross functional teams to increase productivity and be more responsive to the market place. Many of our actions will not produce immediate results, but they do positon us for future success. We are blessed with an outstanding team who are dedicated to serving our customers and communities. I am thankful to be working with such a great group of people. First Bankers Trust Company has a very bright and exciting future. Thank you for your support and continued confidence in First Bankers Trust Company. Allen W. Shafer President/CEO Allen W. Shafer President/CEO First Bankers Trust Company, N. A. 7 Management’s Report on First Bankers Trust Services, Inc. First Bankers Trust Services, Inc. Corporate Statement First Bankers Trust Services, Inc. is a leading, national provider of custody and fiduciary services to individuals and corporate clients. We specialize in trustee services for employee benefit and personal trust accounts, custody services for individual retirement and savings accounts, and farm services and management for land owners. As of December 31, 2018, assets under management were $9.8 billion from our 1700+ client relationships. Our Farm Services division managed nearly 26,000 acres in the Midwest. In 2018, FBTS returned to solid financial results as we saw increased activities from Employee Benefits, Personal Trust and Farm Services groups. For more than 6 decades, FBTS and its staff have worked with thousands of clients, with great pride and loyalty. We are committed to providing services nationally and meeting our clients at their locale. We look forward to the challenges of a new year and continued success of our organization. Brian A. Ippensen President/CEO Brian A. Ippensen President/CEO First Bankers Trust Services, Inc. 8 Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. IIntroduction The following discussion of the financial condition and results of operations of First Bankers Trustshares, Inc. provides an analysis of the consolidated financial statements and focuses upon those factors which had a significant influence on the overall 2018 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) A s s e t s Cash and due fro m banks: No n-interest bearing Interest bearing Securities Federal funds so ld Lo ans held fo r sale Net lo ans Other assets TOTA L 2 0 18 C ha nge 2017 Change 2016 2015 2014 2013 5 Year Change $ 9 ,0 14 ( 2 9 .16 %) $ 12,725 (14.72%) $ 14,922 $ 10,582 $ 11,307 $ 10,677 (15.58%) 2 8 ,6 16 12 2 .6 2 12,854 (42.38) 3 5 7 ,3 11 ( 3 .7 3 ) 371,168 12.54 16 ,7 0 6 5 4 0 .5 7 3 8 4 6 7 ,9 9 3 5 0 ,3 6 6 ( 9 .5 2 ) ( 5 .8 8 ) 8 .7 5 2,608 42 497,238 46,314 (73.90) (60.75) (1.62) (4.24) 14,548 6,543 337.35 22,308 329,796 9,994 107 36,748 301,795 8,421 118 298,042 274,227 5,006 87 1,817 88 505,444 503,267 467,357 435,247 48,364 45,741 45,958 47,041 30.30 819.43 (56.82) 7.52 7.07 $ 9 3 0 ,0 4 4 ( 1.3 7 %) $ 942,949 1.29% $ 930,935 $ 906,672 $ 842,305 $ 775,640 19.91% Lia bilit ie s & S t o c k ho lde rs ' E quit y Depo sits Sho rt-term bo rro wings Federal Ho me Lo an B ank advances Junio r Subo rdinated Debentures Other liabilities Sto ckho lders’ equity TOTA L $ 7 3 3 ,4 3 5 ( 3 .0 9 %) $ 756,833 4.04% $ 727,445 $ 717,464 $ 667,668 $ 627,789 16.83% 8 8 ,5 5 9 10 .16 80,394 15.83 - 10 ,3 10 8 ,5 9 4 8 9 ,14 6 - - ( 6 .0 4 ) 3 .3 4 - (100.00) 10,310 9,146 86,266 - 3.27 7.94 69,407 35,000 10,310 8,856 79,917 83,278 77,048 60,934 45.34 - 10,310 9,385 86,235 - 10,310 8,229 79,050 - 10,310 6,641 69,966 - 0.00 29.41 27.41 $ 9 3 0 ,0 4 4 ( 1.3 7 %) $ 942,949 1.29% $ 930,935 $ 906,672 $ 842,305 $ 775,640 19.91% 9 Management’s Discussion and Analysis of Financial Condition and Results of Operations At December 31, 2018, the company had assets of $930,044,000 compared to $942,949,000 at December 31, 2017. The decrease in assets is primarily made up of a decline in net loans of $29,245,000 (5.88%) and a decrease in securities of $13,857,000 (3.73%). This was partially offset by a $12,051,000 (47.11%) increase in cash and due from banks and a $14,098,000 (540.57%) increase in fed funds sold. The excess cash funded a $23,398,000 decrease in deposits. Approximately $23,755,000 of fixed rate long-term residential real estate loans were sold in the secondary market during 2018 while $32,206,000 were sold in 2017. Agricultural real estate loans totaling approximately $2,741,000 were sold in the secondary market during 2018, while $3,347,000 were sold in 2017. 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. RResults of Operations Summary The Company’s earnings are primarily dependent on net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans, securities and other interest earning assets outstanding during the period and the yield earned on such assets. Interest expense is a function of the balances of deposits and borrowings outstanding during the same period and the rates paid on such deposits and borrowings. The Company’s earnings are also affected by provisions for loan losses, service charges, trust income, other non-interest income and expense and income taxes. Non-interest expense consists primarily of employee compensation and benefits, occupancy and equipment expenses 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 interest rate levels. The primary sources of funds for lending activities include deposits, loan payments, borrowings and funds provided from operations. For the year ended December 31, 2018, the Company reported consolidated net income of $8,382,000, a $990,000 (13.39%) increase from 2017. Net interest income increased $741,000 (2.85%), other non-interest income increased $345,000 (2.01%), other non-interest expenses decreased $2,441,000 (8.19%), and income tax expense decreased $1,763,000 (47.05%). This helped offset the increase in provision for loan losses of $4,300,000 (191.11%). 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 securities. Average earning assets equaled banks and $898,214,000 for the year ended December 31, 2018. 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. Consolidated Income Summary (Amounts in Thousands of Dollars) 2018 Change 2017 Change 2016 2015 2014 2013 Growth Rate Interest income Interest expense $ 332, 075 6. 42% $ 30,141 3.02% $ 29,257 $ 28,098 $ 26,947 $ 25,219 27.19% ((5, 334) 28. 81% (4,141) 2.58% (4,037) (4,058) (4,145) (5,525) (3.46)% Net interest income $ 226, 741 2. 85% $ 26,000 3.09% $ 25,220 $ 24,040 $ 22,802 $ 19,694 35.78% Provision for loan losses ((6, 550) 191. 11% (2,250) 275.00% (600) (675) (1,170) (1,440) 354.86% 5 Year Net interest income after provision for loan losses $ 20, 191 (14. 99)% $ 23,750 (3.53)% $ 24,620 $ 23,365 $ 21,632 $ 18,254 Other income Other expenses 117, 524 2. 01% 17,179 (3.20)% 17,747 16,995 14,432 13,814 ((27, 349) (8. 19)% (29,790) 4.58% (28,485) (27,600) (25,707) (24,466) 11.78% Income before taxes $ 110, 366 (6. 94)% $ 11,139 (19.76)% $ 13,882 $ 12,760 $ 10,357 $ 7,602 36.36% Income tax expense ((1, 984) (47. 05)% (3,747) (20.90)% (4,737) (3,777) (3,112) (1,907) 4.04% NET INCOME $ 88, 382 13. 39% $ 7,392 (19.17)% $ 9,145 $ 8,983 $ 7,245 $ 5,695 47.18% 10 10.61% 26.86% Management’s Discussion and Analysis of Financial Condition and Results of Operations loan in the provision for The amounts recorded 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, 2018. Other Income Other income may be divided into two broad categories – recurring and non-recurring. Trust fees and service charges on deposit income. accounts are the major sources of recurring other Investment securities gains and other income vary annually. Other income the period ended December 31, 2018 was $17,524,000, an increase of $345,000 (2.01%) from 2017. This is primarily attributed to an increase in other income of $348,000. for Other Expense Other expense for the period ended December 31, 2018 totaled $27,349,000, a decrease of $2,441,000 (8.19%) from 2017. Salaries and employee benefits expense aggregated 65.30% and 58.97% of total other expense for the years ended December 31, 2018 and 2017, respectively. Years Ended December 31, 22018 2017 2016 (Amounts in Thousands of Dollars) Interest income $ 331, 463 $ 29,475 $ 28,724 Loan fees Interest expense 6612 666 533 ((5, 334) (4,141) (4,037) NET INTEREST INCOME $ 226, 741 $ 26,000 $ 25,220 Average earning assets $ 8898, 214 $ 872,309 $ 853,908 Net interest margin 22. 98% 2.98% 2.95% The yield on average earning assets for the year ended 2018 was 3.57% while the average cost of funds for the same period was 0.74% on average interest bearing liabilities of $724,612,000. The yield on average earning assets for the year ended 2017 was 3.46%, while the average cost of funds for the same period was 0.58% on average interest bearing liabilities of $719,893,000. The increase in the net interest income of $741,000 can be attributed to the 2.97% increase in average earning assets. Net interest margin remained the same year over year. PProvision for Loan Losses The allowance for loan losses as a percentage of gross loans outstanding is 2.66% as of December 31, 2018, compared to 1.80% as of December 31, 2017. Net loan charge-offs totaled $2,854,000 for the year ended December 31, 2018 compared to $1,501,000 in 2017. Non-Accrual and Past Due Loans, Leases and Other Real Estate Owned (Amounts in Thousands of Dollars) As of December 31, 22018 2017 2016 2015 2014 2013 Non-accrual loans and leases $ 112, 568 $ 8,092 $ 3,386 $ 2,920 $ 2,679 $ 8,279 Other real estate owned (OREO) 6681 32 147 - - 203 Total non-accrual loans and OREO $ 113, 249 $ 8,124 $ 3,533 $ 2,920 $ 2,679 $ 8,482 Loans and leases past due 90 days or more and still accruing interest - 22 11 82 157 332 TOTAL $ 113, 249 $ 8,146 $ 3,544 $ 3,002 $ 2,836 $ 8,814 11 Management’s Discussion and Analysis of Financial Condition and Results of Operations Income Taxes The Company files its federal income tax return on a consolidated basis with the Bank. See Note 12 for detail of income taxes. Management believes that it has structured its pricing mechanisms such that the net interest margin should maintain acceptable levels in 2019, regardless of the changes in interest rates that may occur. 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, 2018, these categories totaled $64,952,000 or 6.98% of assets, compared to $34,385,000 or 3.65% the previous year. As of December 31, 2018 and 2017, securities held to maturity included $84,000 and $127,000 of gross unrealized gains and no 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. The following table shows the repricing period for interest-earning assets and interest-bearing liabilities and the related repricing gap: Repricing Period as of December 31, 2018 After One Year Through through After One Year Five Years Five Years (Amounts in Thousands of Dollars) Interest-earning assets $ 2213, 643 $ 375, 230 $ 294, 590 Interest-bearing liabilities $ 6614, 432 $ 75, 857 $ 10, 310 Repricing gap (repricing assets minus repricing liabilities) $ (400, 789) $ 299, 373 $ 284, 280 Repricing Period as of December 31, 2017 After One Year Through through After One Year Five Years Five Years (Amounts in Thousands of Dollars) Interest-earning assets $ 219,515 $ 310,785 $ 362,713 Interest-bearing liabilities $ 649,927 $ 71,854 $ 10,310 Repricing gap (repricing assets minus repricing liabilities) $ (430,412) $ 238,931 $ 352,403 12 CCapital 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 minimum ratio of capital to risk-weighted assets of 8%. The Company’s capital, as defined by the regulations, was 17.84% of risk-weighted assets as of December 31, 2018. In addition, a leverage ratio of at least 4.00% is to be maintained. As of December 31, 2018, the Company’s leverage ratio was 10.50%. Total Risk Based Capital Ratio 20.00% 15.00% 10.00% 5.00% 0.00% 14.66% 14.97% 15.30% 15.24% 17.84% 16.16% 2013 2014 2015 2016 2017 2018 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 income parameters and/or marketing emphasis. information by adjusting pricing, this fee Management’s Discussion and Analysis of Financial Condition and Results of Operations Common Stock Information and Dividends The Company’s common stock is held by 221 certificate holders as of December 31, 2018, and is traded in a limited over-the-counter market. On December 31, 2018 the market price of the Company’s common stock was $32.00. Market price is based on stock transactions in the market. Dividends on common stock of approximately $1,884,000 were declared by the Board of Directors of the Company for the year ended December 31, 2018. Closing Share Price Data $30.00 $30.75 $32.00 $22.76 $23.65 $19.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 2013 2014 2015 2016 2017 2018 Financial Report Upon written request of any shareholder of record on December 31, 2018, the Company will provide, without charge, a copy of its 2018 Annual Report. Notice of Annual Meeting of Stockholders The annual meeting of stockholders will be May 14, 2019 at 9:00 a.m. at the corporate headquarters, 1201 Broadway, Quincy, Illinois. 13 Independent Auditor’s Report 14 Consolidated Balance Sheets (Amounts in Thousands of Dollars, Except Share and Per Share Data) Consolidated Financial Statements December 31, ASSETS Cash and due from banks Non-interest bearing Interest bearing Total Cash and Due from Banks Securities held to maturity Securities available for sale Federal funds sold Loans held for sale Loans Less allowance for loan losses Net loans Premises, furniture and equipment, net Accrued interest receivable Life insurance contracts Intangibles Other assets TOTAL ASSETS LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Non-interest bearing demands Interest bearing demand Savings Time Total deposits Securities sold under agreements to repurchase Junior subordinated debentures Accrued interest payable Other liabilities Total Liabilities Commitments and Contingencies (Note 9) Stockholders’ Equity Common stock, $1 par value; shares authorized 6,000,000; shares issued 3,605,725 and outstanding: 2018 and 2017 - 3,087,488 shares Additional paid in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock, at cost: 2018 and 2017 518,237 shares Total Stockholders’ Equity 2018 2017 $ $ 9,014 28,616 37,630 1,044 356,267 16,706 38 480,792 (12,799) 467,993 16,654 4,593 16,778 3,472 8,869 12,725 12,854 25,579 1,122 370,046 2,608 42 506,341 (9,103) 497,238 17,116 4,167 16,315 3,645 5,071 $ 930,044 $ 942,949 $ $ 131,705 292,665 112,196 196,869 733,435 88,559 10,310 677 7,917 840,898 3,606 1,259 94,358 (2,822) (7,255) 89,146 115,446 341,103 94,510 205,774 756,833 80,394 10,310 549 8,597 856,683 3,606 1,227 87,860 828 (7,255) 86,266 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 930,044 $ 942,949 See Notes to Consolidated Financial Statements. 15 Consolidated Financial Statements Consolidated Statements of Income (Amounts in Thousands of Dollars, Except Per Share Data) Year Ended December 31, INTEREST INCOME Loans, including fee income: Taxable Non-taxable Securities: Taxable Non-taxable Other Total interest income INTEREST EXPENSE Deposits: Interest bearing demand and savings Time Total interest on deposits Junior subordinated debentures Other Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses OTHER INCOME Trust services Service charges on deposit accounts Gain on sale of loans Investment securities gains (losses), net Other Total other income OTHER EXPENSES Salaries and employee benefits Occupancy expense, net Equipment expense Computer processing Professional services Other Total other expenses Income before income taxes Income taxes NET INCOME Earnings per share of common stock, basic and diluted See Notes to Consolidated Financial Statements. 2018 2017 $ 22,615 600 $ 22,154 496 6,993 1,040 827 32,075 1,969 2,404 4,373 518 443 5,334 26,741 6,550 20,191 10,554 1,265 381 9 5,315 17,524 17,860 1,401 1,008 2,384 372 4,324 27,349 10,366 1,984 5,793 1,349 349 30,141 1,330 2,114 3,444 418 279 4,141 26,000 2,250 23,750 10,336 1,330 574 (19) 4,958 17,179 17,567 1,465 1,067 2,350 1,098 6,243 29,790 11,139 3,747 $ 8,382 $ 7,392 $ 2.72 $ 2.40 16 Consolidated Financial Statements Consolidated Statements of Comprehensive Income (Amounts In Thousands of Dollars, Except Share and Per Share Data) Year Ended December 31, 2018 2017 Net income Other comprehensive income (loss): Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during the year before tax Reclassification adjustment for gains (losses) included in net income before tax Tax expense (benefit) Other comprehensive income (loss), net of tax Comprehensive income See Notes to Consolidated Financial Statements. $ 8,382 $ 7,392 (5,096) 9 (5,105) (1,455) (3,650) 1,013 (19) 1,032 392 640 $ 4,732 $ 8,032 17 Consolidated Financial Statements Consolidated Statements of Changes in Stockholders' Equity (Amounts in Thousands of Dollars, Except Share and Per Share Data) Years Ended December 31, 2018 and 2017 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total $ 3,606 $ 1,171 $ 82,338 $ 78 $ (7,276) $ 79,917 - - - - - - - 7,392 - (110) 56 - - 640 110 - - - - 21 7,392 640 - 77 - 3,606 $ - 1,227 $ (1,760) 87,860 $ - $ 828 - (7,255) $ (1,760) 86,266 $ - - - - - 32 - 8,382 - - - (3,650) - - - - 8,382 (3,650) 32 - 3,606 $ - 1,259 $ (1,884) 94,358 $ - (2,822) $ - (7,255) $ (1,884) 89,146 $ Balance, December 31, 2016 Net income Other comprehensive income, net of tax Reclassification impact of adoption of ASU 2018-02 (see Footnote 1) Restricted stock award Common stock dividends declared (amount per share $ .57) Balance, December 31, 2017 Net income Other comprehensive loss, net of tax Restricted stock award Common stock dividends declared (amount per share $ .61) Balance, December 31, 2018 See No tes to Co nso lidated Financial Statements. 18 Consolidated Statements of Cash Flows (Amounts in Thousands of Dollars) Year Ended December 31, CASH FLOWS FROM OPERATING ACTIVITIES Consolidated Financial Statements 2018 2017 Net income Adjustments to reconcile net income to net cash provided by operating activities: $ 8,382 $ 7,392 6,550 1,413 173 32 2,544 (9) (28,243) 28,628 (381) (1,143) (821) (463) (584) 2,250 1,534 171 77 2,819 19 (34,446) 35,085 (574) (165) 1,262 (475) (134) 16,078 14,815 (31,369) 262 37,324 21,890 (14,098) (951) 13,058 (23,398) (1,852) 8,165 55,000 (55,000) (17,085) 12,051 (100,900) 24,970 32,752 6,016 7,386 (337) (30,113) 29,388 (1,728) 10,987 146,000 (181,000) 3,647 (11,651) 25,579 37,630 $ $ 37,230 25,579 Provision for loan losses Depreciation Amortization of intangibles Restricted stock award Amortization/accretion of premiums/discounts on securities, net Investment securities (gains) losses, net Loans originated for sale Proceeds from loans sold Gain on sale of loans Deferred income taxes (Increase) decrease in accrued interest receivable and other assets Increase in cash surrender value of life insurance contracts (Decrease) in accrued interest payable and other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Activity in securities portfolio: Purchases Sales of securities available for sale Calls, maturities and paydowns Decrease in loans (Increase) decrease in federal funds sold, net Purchases of premises, furniture and equipment Net cash provided by (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in deposits, net Cash dividends paid to common shareholders Increase in securities sold under agreement to repurchase, net Proceeds from FHLB Advances Repayments of FHLB Advances Net cash provided by (used in) financing activities Net increase (decrease) in cash and due from banks CASH AND DUE FROM BANKS Beginning Ending (Continued) 19 Consolidated Financial Statements Consolidated Statements of Cash Flows (Continued) (Amounts in Thousands of Dollars) Year Ended December 31, Supplemental disclosure of cash flow information, cash payments for: Interest Income taxes Supplemental schedule of non-cash investing and financing activities: Net change in accumulated other comprehensive income (loss) Transfer of loans to other real estate owned Effects of common and preferred dividends payable See Notes to Consolidated Financial Statements. 2018 2017 $ 5,206 $ 4,088 3,645 4,138 (3,650) 805 32 640 48 32 20 Notes to Consolidated Financial Statements Securities available for sale are accounted for at fair value and the unrealized holding gains or losses, net of their deferred income tax effect, in accumulated other are presented as comprehensive income, as a separate component of equity. increases or decreases 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, 2018 and 2017. 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. Federal Funds Sold Federal funds sold consist of excess bank reserves lent in the federal funds market. The Company’s balance sheet includes federal funds sold of $16,706 and $2,608 at December 31, 2018 and 2017, respectively. 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. 11. 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 II (Trust II) and FBIL Statutory Trust III (Trust III). The Bank is engaged in banking and bank related services and serves a market area consisting primarily of Adams, McDonough, Schuyler, Hancock, Sangamon and adjacent Illinois counties, and Marion, Lewis and Shelby counties in Missouri. Trust Services provides asset and custodial management for clients throughout the country. All administration is conducted in Quincy, IL, with sales offices in Hinsdale, IL, St. Peters, MO, Philadelphia, PA, Atlanta, GA and Phoenix, AZ. Trusts 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 II and III, which do not meet the criteria for consolidation. All significant intercompany accounts and transactions have been eliminated in consolidation. Presentation of Cash Flows For purposes of reporting cash flows, cash and due from banks includes cash on hand and amounts due from banks, including cash items in process of clearing. Cash flows from federal funds sold, loans to customers, deposits and securities sold under agreements to repurchase are reported net. fiduciary related services, Trust Services Fiduciary Activities and Assets Trust Services provides 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. Assets under management totaled $9,800,000,000 and $9,200,000,000 as of December 31, 2018 and 2017, respectively. During the course of discharging its respective responsibilities for each client, Trust Services is subject to a number of federal and state regulatory bodies and associated rules governing each type of account. Trust Services is regulated by the Federal Reserve Bank of St. Louis and the Illinois Department of Financial and Professional Regulation. Securities Securities held to maturity are those for which the Company has the ability and intent to hold to maturity. Securities meeting such criteria at the date of purchase and as of the balance sheet date are carried at amortized cost, adjusted for amortization of premiums and accretion of discounts, computed by the interest method over their contracted lives. 21 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: (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) Commercial operating Commercial real estate Agricultural operating Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family Consumer 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. 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. A discussion of the risk characteristics and the allowance for loan losses by each portfolio segment follows: 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: (cid:2) It becomes evident that the borrower will not make payments, or will not or cannot meet the terms for renewal of a matured loan, (cid:2) When full repayment of principal and interest is not expected, (cid:2) When the loan is graded “substandard” and the future accrual of interest is not protected by sound collateral values, (cid:2) When the loan is graded “doubtful”, (cid:2) When the borrower files bankruptcy and an approved plan of reorganization or liquidation is not anticipated in the near future, or (cid:2) 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: (cid:2) (cid:2) (cid:2) 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. 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: (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 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. 22 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. continuing financial stability, and is therefore more likely to be affected by adverse personal circumstances. Notes to Consolidated Financial Statements Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than real estate-related loans. Consumer loan collections are dependent on the borrower’s continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. Collateral for these loans generally includes automobiles, boats, recreational vehicles and real estate. However, depending on the overall financial condition of the borrower, some loans are made on an unsecured basis. The collateral securing these loans may depreciate over time, may be difficult to recover and may fluctuate in value based on condition. In addition, a decline in the United States economy could result in reduced employment, impacting the ability of customers to repay their obligations. 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. the terms of 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 loan agreement. Factors considered by contractual 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. Commercial real estate loans, construction and land development loans and real estate secured 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. 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. 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. The Company generally retains short-term residential mortgage loans that are originated for its own portfolio but sells most long-term loans to other parties while retaining servicing rights on the majority of those loans. The market value of real estate securing residential real estate loans can fluctuate as a result of market conditions in the geographic area in which the real estate is located. Adverse developments affecting real estate values in one or more of the Company’s markets could increase the credit risk associated with its loan portfolio. Additionally, real estate lending typically involves higher loan principal amounts than other loans, and the repayment of the loans generally is dependent, in large part, on the borrower’s 23 Notes to Consolidated Financial Statements The Company utilizes the following internal risk rating scale: TType 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: (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 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: (cid:2) (cid:2) (cid:2) 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. (cid:2) 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. (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 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 operating 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 the sufficiency/reliability of the sources of repayment – result in a loan with normal levels of risk. following characteristics, but its strengths – primarily (cid:2) Management is considered to be capable and diligent. (cid:2) 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. (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 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: (cid:2) (cid:2) (cid:2) (cid:2) 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. 24 Capital position is below industry average. (cid:2) (cid:2) May have deficiencies loan structure, documentation or missing financial information. in incomplete legal (cid:2) May have an adverse trend in sales or earnings; may be capital account withdrawals in excess of earnings. Loans to Individuals: Loans to individuals 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. TType 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: (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) (cid:2) 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: in obtaining third party claims to the collateral, difficulty 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: (cid:2) Management often considered to have made incorrect strategic (cid:2) (cid:2) (cid:2) (cid:2) 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. Notes to Consolidated Financial Statements (cid:2) (cid:2) (cid:2) 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 there 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: (cid:2) (cid:2) (cid:2) 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. (cid:2) (cid:2) 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: (cid:2) (cid:2) 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 12 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 Mortgage Partnership Finance (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 interagency appraisal and evaluation guidelines compliance with the 25 Notes to Consolidated Financial Statements effective December 2010. Mortgage servicing rights are not considered significant as of December 31, 2018 and 2017. 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. loans are collectively evaluated For residential real estate loans, and consumer loans, these large groups of smaller balance homogenous 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, 2018 and 2017, the Bank had loan concentrations in agribusiness of 17.78 % and 17.88%, respectively, of outstanding loans. The Bank had no additional in management’s judgment, were considered to be significant. The Bank had no foreign loans outstanding as of December 31, 2018 and 2017. loan concentrations, which industry TTransfers of Financial Assets Transfers of financial assets are accounted for as sales, only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Credit Related Financial Instruments In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under lines of credit and standby letters of credit. Such financial instruments are recorded when they are funded. Premises, Furniture and Equipment Premises, furniture and equipment are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the assets. Other Real Estate Owned Other real estate owned (OREO), which is included with other assets, in-substance represents properties acquired 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. foreclosure, through Life Insurance Contracts Bank-owned life insurance is carried at cash surrender value, net of surrender and other charges, with increases/decreases reflected as income/expense in the consolidated statements of operations. 26 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, 2018 and 2017. Goodwill is included on the balance sheet in intangibles. See Footnote 5. 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, 2018 and 2017. 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. 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 2015. CComprehensive 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. Subsequent Events The Company has evaluated all subsequent events through March 6, 2019, the date that the financial statements were available to be issued. Current Accounting Developments In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 was extended by one year by ASU 2015-14, which was issued by the FASB in August 2015. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. The updated standard will be effective for annual reporting periods beginning after December 15, 2017. The standard was adopted by the Company on January 1, 2018, and adoption had no significant impact on the consolidated financial statements. In January 2016 FASB issued ASU 2016-01, Financial Instruments - Recognition and Measurement of Financial Assets and Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments by requiring: equity investments (other than equity method or consolidation) to be measured at fair value with changes in fair value recognized in net income; public business entities must use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; and eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities. The new guidance is effective for fiscal years beginning after December 15, 2017. The standard was adopted by the Company on 2. Securities Notes to Consolidated Financial Statements January 1, 2018, and adoption had no significant consolidated financial statements. impact on the In June 2016, the FASB issued ASU 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The underlying premise of the ASU is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. This is in contrast to existing guidance whereby credit losses generally are not recognized until they are incurred. Under the standard, impairment of the Company’s loans will be measured using the current expected credit loss model, which will entail day-one recognition of life-of-asset expected losses. The standard will be effective for the Company for the fiscal year beginning after December 15, 2020. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. In February 2018, the FASB issued ASU 2018-02 Income Statement- Reporting Comprehensive Income (Topic 220). The FASB issued this standard to allow a one-time reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017. The standard is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The Company has early adopted the standard effective December 31, 2017 and the effect of adoption of $110,000 on Other Comprehensive Income and Retained Earnings is shown in the Consolidated Statement of Changes in Stockholders’ Equity. In March 2017, the FASB issued ASU 2017-08 Receivables-Nonrefundable Fees And Other Costs Subtopic 310-20: Premium Amortization on Purchased Callable Debt Securities. The Board issued the Standard to amend the amortization period for certain purchased callable debt securities held at a premium. The standard shortens the amortization period for the premium to the earliest call date. The Company has adopted the standard effective March 2017 and adoption had no significant impact on the consolidated financial statements. The amortized cost and fair values of securities as of December 31, 2018 and 2017 are as follows. Included in securities available for sale gross unrealized losses is an OTTI loss of $123,000 and $100,000 as of December 31, 2018 and 2017, respectively, relating to two corporate securities, which represent the non-credit related portion of the overall impairment. (Amounts in Thousands of Dollars): 2018 SECURITIES HELD TO MATURITY State and political subdivisions SECURITIES AVAILABLE FOR SALE U.S. government agency bonds U.S. government agency mortgage backed securities State and political subdivisions Corporate securities Collateralized mortgage obligations Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value $ 1,044 $ 84 $ - $ 1,128 $ 186,872 128,986 $ 39 1,256 $ (3,616) (1,837) $ 183,295 128,405 30,284 1,078 873 - (132) (93) 31,025 985 12,963 360,183 $ - 2,168 (406) (6,084) $ 12,557 356,267 $ $ 27 Notes to Consolidated Financial Statements 2017 SECURITIES HELD TO MATURITY State and political subdivisions SECURITIES AVAILABLE FOR SALE U.S. government agency bonds U.S. government agency mortgage backed securities State and political subdivisions Corporate securities Collateralized mortgage obligations Other Investments Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value $ 1,122 $ 127 $ - $ 1,249 $ 155,849 155,616 $ 314 2,427 $ (1,438) (877) $ 154,725 157,166 39,291 1,093 15,930 1,108 368,887 $ 1,170 - 6 (66) (100) (277) - 3,917 - (2,758) $ $ $ 40,395 993 15,659 1,108 370,046 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, 2018 and 2017 are summarized as follows. (Amounts in Thousands of Dollars): 2018 SECURITIES AVAILABLE FOR SALE U.S. government agency bonds Less than 12 Months 12 Months or More Total Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses $ 79,348 $ (956) $ 95,932 $(2,660) $175,280 $(3,616) U.S. government agency mortgage backed securities 24,593 (492) 61,696 (1,345) 86,289 (1,837) State and political subdivisions Corporate securities Collateralized mortgage obligations 2017 SECURITIES AVAILABLE FOR SALE U.S. government agency bonds 6,267 (41) 6,593 (91) 12,860 (132) - - 985 (93) 985 (93) 8,491 (323) 4,086 (83) 12,577 (406) $118,699 $(1,812) $169,292 $(4,272) $287,991 $(6,084) Less than 12 Months 12 Months or More Total Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses $ 87,386 $ (992) $ 14,282 $ (446) $ 101,668 $ (1,438) U.S. government agency mortgage backed securities 31,395 (251) 45,658 (626) 77,053 (877) State and political subdivisions Corporate securities Collateralized mortgage obligations Other Investments 6,816 (38) 1,002 (27) 7,818 (65) - - 993 (100) 993 (100) 9,432 (204) 3,263 (73) 12,695 (277) 1,108 (1) - - 1,108 (1) $ 136,137 $ (1,486) $ 65,198 $ (1,272) $ 201,335 $ (2,758) As of December 31, 2018, the investment portfolio included 294 securities. Of this number, 159 securities have current unrealized losses and 83 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 two corporate securities which are considered to be other than temporarily impaired. 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, 2018 and 2017, none of the credit related loss were recognized in earnings. 28 The amortized cost and fair value of securities as of December 31, 2018 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 summary. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements SECURITIES HELD TO MATURITY Due after one year through five years Due after five years through ten years Due after ten years SECURITIES AVAILABLE FOR SALE Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Corporate securities Collateralized mortgage obligations Amortized Cost Fair Value $ 491 395 158 $ 510 439 179 $ 1,044 $ 1,128 $ 10,625 160,945 53,717 120,855 $ 10,616 159,037 52,949 120,123 $ 346,142 $ 342,725 1,078 12,963 985 12,557 $ 360,183 $ 356,267 Information on sales, including calls and maturities, of securities available for sale during the years ended December 31, 2018 and 2017 follows (Amounts in Thousands of Dollars): Proceeds from sales Gross gains Gross losses 2018 2017 $ 262 $ 24,970 9 - 36 (55) As of December 31, 2018 and 2017, securities with a carrying value of approximately $322,778,000 and $333,959,000, respectively, were pledged to collateralize deposits and securities sold under agreements to repurchase and for other purposes as required or permitted by law. 33. Loans The composition of net loans outstanding as of December 31, 2018 and 2017 are as follows. (Amounts in Thousands of Dollars): Commercial operating Commercial real estate Agricultural operating Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family Consumer Less allowance for loan losses NET LOANS 2018 2017 $ 53,872 $ 48,622 178,506 39,750 45,754 11,304 108,135 43,471 191,393 39,477 51,096 13,671 118,580 43,502 $ 480,792 $ 506,341 (12,799) (9,103) $ 467,993 $ 497,238 29 Notes to Consolidated Financial Statements The aging of the loan portfolio, by classes of loans, as of December 31, 2018 and 2017 is summarized as follows. (Amounts in Thousands of Dollars): 2018 CLASSES OF LOANS Commercial operating Commercial real estate Agricultural operating Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family Consumer Current 30-59 Days Past Due 60-89 Days Past Due Accruing Past Due 90 Days or More Nonaccrual Loans Total $ 52,566 $ 776 $ - $ - $ 530 $ 53,872 168,252 39,750 45,602 10,642 105,319 43,012 100 - 61 - 929 397 415 - - - 341 62 - - - - - - 9,739 178,506 - 91 662 1,546 - 39,750 45,754 11,304 108,135 43,471 $ 465,143 $ 2,263 $ 818 $ - $ 12,568 $ 480,792 2017 CLASSES OF LOANS Commercial operating Commercial real estate Agricultural operating Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family Consumer Current 30-59 Days Past Due 60-89 Days Past Due Accruing Past Due 90 Days or More Nonaccrual Loans Total $ 48,479 $ 57 $ 8 $ - $ 78 $ 48,622 187,281 39,444 50,109 11,244 116,590 42,983 45 13 - - 912 464 - 20 43 162 340 33 - - - - - 22 4,067 191,393 - 944 2,265 738 - 39,477 51,096 13,671 118,580 43,502 $ 496,130 $ 1,491 $ 606 $ 22 $ 8,092 $ 506,341 30 Nonperforming loans, by classes of loans as of December 31, 2018 and 2017 are summarized as follows. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements 2018 CLASSES OF LOANS Commercial operating Commercial real estate Agricultural operating Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family Consumer 2017 CLASSES OF LOANS Commercial operating Commercial real estate Agricultural operating Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family Consumer Accruing Past Due 90 Days or More Nonaccrual Loans ** Troubled Debt Restructures- Accruing Total Nonperforming Loans $ - $ 530 $ - $ 530 - - - - - - 9,739 - 91 662 1,546 - 6,375 16,114 - - - - - - 91 662 1,546 - $ - $ 12,568 $ 6,375 $ 18,943 Accruing Past Due 90 Days or More Nonaccrual Loans ** Troubled Debt Restructures- Accruing Total Nonperforming Loans $ - $ 78 $ - $ 78 - - - - - 22 4,067 - 944 2,265 738 - - - - - - - 4,067 - 944 2,265 738 22 $ 22 $ 8,092 $ - $ 8,114 ** Nonaccrual loans as of December 31, 2018 and 2017 include $1,296,000 and $999,000, respectively, of troubled debt restructures which are included in commercial real estate, real estate secured by 1-4 and multi-family, and commercial operating. Changes in the allowance for loan losses, by portfolio segment, during the years ended December 31, 2018 and 2017 are summarized as follows. (Amounts in Thousands of Dollars): 2018 Commercial Operating Commercial Real Estate Agricultural Operating Real Estate Secured Construction Agricultural by 1 - 4 and and Land Real Estate Development Multi-Family Consumer Total Balance, beginning $ 691 $ 3,477 $ 601 $ 914 $ 1,399 $ 1,437 $ 584 $ 9,103 Provision for loan losses Recoveries of loans charged off Loans charged off 687 4,094 25 (78) 1,034 567 221 6,550 2 1,380 (34) - 7,571 (428) - 626 (15) - 836 - - 2,433 (1,706) 48 2,052 (515) 59 864 109 15,762 (265) (2,963) Balance, ending $ 1,346 $ 7,143 $ 611 $ 836 $ 727 $ 1,537 $ 599 $ 12,799 2017 Commercial Operating Commercial Real Estate Agricultural Operating Real Estate Secured Construction Agricultural by 1 - 4 and and Land Real Estate Development Multi-Family Consumer Total Balance, beginning $ 626 $ 3,543 $ 560 $ 964 $ 268 $ 1,746 $ 647 $ 8,354 Provision for loan losses 224 (66) Recoveries of loans charged off Loans charged off 2 852 (161) - 3,477 - 41 - 601 - (50) 2,118 (134) 117 2,250 - 914 - - 2,386 (987) 55 1,667 (230) 36 800 (216) 93 10,697 (1,594) Balance, ending $ 691 $ 3,477 $ 601 $ 914 $ 1,399 $ 1,437 $ 584 $ 9,103 31 Notes to Consolidated Financial Statements The allowance for loan losses, by impairment evaluation and by portfolio segment, as of December 31, 2018 and 2017 are summarized as follows. (Amounts in Thousands of Dollars): 2018 Allowance for loans individually evaluated for impairment Allowance for loans collectively evaluated for impairment Loans individually evaluated for impairment Loans collectively evaluated for impairment 2017 Allowance for loans individually evaluated for impairment Allowance for loans collectively evaluated for impairment Loans individually evaluated for impairment Loans collectively evaluated for impairment Commercial Operating Commercial Real Estate Agricultural Operating Agricultural Real Estate Real Estate Secured by 1 - 4 and Development Multi-Family Construction and Land Consumer Total $ 589 $ 4,138 $ - $ - $ - $ 164 $ - $ 4,891 757 1,346 $ 3,005 7,143 $ 611 611 $ 836 836 $ 727 727 $ 1,373 1,537 $ 599 599 $ 7,908 12,799 $ $ 746 $ 16,114 $ - $ 91 $ 662 $ 1,545 $ - $ 19,158 53,126 53,872 $ 162,392 178,506 $ 39,750 39,750 $ 45,663 45,754 $ 10,642 11,304 $ 106,590 108,135 $ 43,471 43,471 $ 461,634 480,792 $ Commercial Operating Commercial Real Estate Agricultural Operating Agricultural Real Estate Real Estate Secured by 1 - 4 and Development Multi-Family Construction and Land Consumer Total $ 13 $ 140 $ - $ - $ 1,060 $ 21 $ - $ 1,234 678 691 $ 3,337 3,477 $ 601 601 $ 914 914 $ 339 1,399 $ 1,416 1,437 $ 584 584 $ 7,869 9,103 $ $ 117 $ 4,345 $ - $ 944 $ 2,427 $ 836 $ - $ 8,669 48,505 48,622 $ 187,048 191,393 $ 39,477 39,477 $ 50,152 51,096 $ 11,244 13,671 $ 117,744 118,580 $ 43,502 43,502 $ 497,672 506,341 $ 32 Loans, by classes of loans, considered to be impaired as of December 31, 2018 and 2017 are summarized as follows. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements 2018 CLASSES OF LOANS Impaired loans with no specific allowance recorded: Commercial operating Commercial real estate Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family Impaired loans with specific allowance recorded: Commercial operating Commercial real estate Construction and land development Real estate secured by 1-4 and multi-family Total impaired loans: Commercial operating Commercial real estate Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family 2017 CLASSES OF LOANS Impaired loans with no specific allowance recorded: Commercial operating Commercial real estate Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family Impaired loans with specific allowance recorded: Commercial operating Commercial real estate Construction and land development Real estate secured by 1-4 and multi-family Total impaired loans: Commercial operating Commercial real estate Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment - $ 4,145 $ - 4,689 - $ - $ 51 4,106 91 662 1,119 105 3,044 1,198 - - - 517 412 933 $ 6,017 $ 9,036 $ - $ 6,019 $ 746 11,969 $ 757 12,034 $ 589 4,138 $ 381 6,123 - 426 - 450 - 164 1,133 258 $ 13,141 $ 13,241 $ 4,891 $ 7,895 $ 746 16,114 $ 757 16,723 $ 589 4,138 $ 432 10,229 91 662 1,545 105 3,044 1,648 - - 164 517 1,545 1,191 $ 19,158 $ 22,277 $ 4,891 $ 13,914 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment $ 101 4,068 $ 153 4,508 - $ - $ 68 6,658 944 162 747 952 305 881 - - - 523 81 770 $ 6,022 $ 6,799 $ - $ 8,100 $ 16 277 $ 17 51 $ 13 140 $ 40 139 2,265 89 2,965 90 1,060 21 1,483 231 $ 2,647 $ 3,123 $ 1,234 $ 1,893 $ 117 4,345 $ 170 4,559 $ 13 140 $ 108 6,797 944 2,427 836 952 3,270 971 - 1,060 21 523 1,564 1,001 $ 8,669 $ 9,922 $ 1,234 $ 9,993 33 Notes to Consolidated Financial Statements Interest income and cash basis interest income recognized on impaired loans during the years ended December 31, 2018 and 2017 was not significant. Impaired loans, for which no allowance has been provided, as of December 31, 2018 and 2017, 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, 2018 and 2017. (Amounts in Thousands of Dollars): 2018 Internally assigned risk rating: Pass (ratings 1 through 4) Special mention (rating 5) Substandard (rating 6) Doubtful (rating 7) Delinquency status:* Performing Nonperforming 2017 Internally assigned risk rating: Pass (ratings 1 through 4) Special mention (rating 5) Substandard (rating 6) Doubtful (rating 7) Delinquency status:* Performing Nonperforming Commercial Operating Commercial Real Estate Agricultural Operating Agricultural Real Estate Construction and Land Real Estate Secured by 1 - 4 and Development Multi-Family Total $ 50,099 $ 144,967 $ 34,704 $ 41,834 $ 5,097 $ 18,647 $ 295,348 2,413 1,036 324 16,394 9,421 7,724 4,713 333 - 2,970 950 - 3,203 447 215 1,793 2,712 57 31,486 14,899 8,320 $ 53,872 $ 178,506 $ 39,750 $ 45,754 $ 8,962 $ 23,209 $ 350,053 Construction and Land Development Real Estate Secured by 1 - 4 and Multi-Family Consumer Total $ 2,342 $ 84,926 $ 43,471 $ 130,739 - - - - $ 2,342 $ 84,926 $ 43,471 $ 130,739 Commercial Operating Commercial Real Estate Agricultural Operating Agricultural Real Estate Construction and Land Real Estate Secured by 1 - 4 and Development Multi-Family Total $ 44,882 $ 171,594 $ 33,709 $ 45,665 $ 4,667 $ 21,010 $ 321,527 2,317 1,229 5,976 12,089 4,425 1,343 3,025 2,406 3,276 - 1,800 2,928 20,819 19,995 194 48,622 $ 1,734 191,393 $ - 39,477 $ - 51,096 $ 2,427 10,370 $ 214 25,952 $ 4,569 366,910 $ Construction and Land Development Real Estate Secured by 1 - 4 and Multi-Family Consumer Total $ 3,301 $ 92,628 $ 43,480 $ 139,409 - - 22 22 $ 3,301 $ 92,628 $ 43,502 $ 139,431 *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 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, consumer loans and a portion of the construction and land development 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 As of December 31, 2018 and 2017, troubled debt restructurings (TDRs) total $7,671,000 and $999,000, 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 year ended December 31, 2018. There were no loans restructured during the year ended December 31, 2017 (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements 2018 CONCESSION-EXTENSION OF MATURITY Pre-Modification Post-Modification Number Recorded Recorded of TDRs Investment Investment Commercial real estate 3 $ 6,375 $ 6,375 CONCESSION-SIGNIFICANT PAYMENT DELAY Commercial operating Real estate secured by 1-4 and multi family 5 6 $ 207 $ 207 $ 209 $ 209 There was no financial impact for charge-offs, principal forgiveness or foregone interest for the troubled debt restructurings. The financial impact for specific reserves for the troubled debt restructurings was $2,800,000 for commercial real estate, $100,000 for real estate secured by multifamily and $50,000 for commercial operating. For the years ended December 31, 2018 and 2017, none of the Company’s TDRs have re-defaulted 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 $191,388,000 and $193,882,000 as of December 31, 2018 and 2017, respectively. In the ordinary course of business, the Bank has granted loans to directors, principal officers, and affiliated companies in which they are principal stockholders amounting to $8,570,000 and $4,715,000 as of December 31, 2018 and 2017, respectively. 44. Premises, Furniture and Equipment The cost, accumulated depreciation and net book value of premises, furniture and equipment as of December 31, 2018 and 2017 is summarized as follows. (Amounts in Thousands of Dollars): Land Building and improvements Furniture and equipment Less accumulated depreciation 2018 2017 $ 4,635 $ 4,635 17,059 12,682 34,376 16,991 11,831 33,457 (17,722) (16,341) $ 16,654 $ 17,116 35 Notes to Consolidated Financial Statements 55. Intangibles Goodwill and intangible assets are summarized as follows. (Amounts in Thousands of Dollars): As of December 31, Intangible assets: Goodwill Other intangible assets: Core deposit intangible Other intangible assets Less accumulated amortization on certain intangible assets 2018 2017 $ 3,050 $ 3,050 1,380 1,855 3,235 (2,813) 422 1,380 1,855 3,235 (2,640) 595 Total intangible assets $ 3,472 $ 3,645 ESTIMATED FUTURE AMORTIZATION EXPENSE For the year ended December 31 (Amounts in thousands of dollars): 2019 2020 2021 2022 2023 Thereafter 6. Time Deposits $ 173 164 34 12 12 27 $ 422 The aggregate amount of time deposits, each with a minimum denomination of $250,000, was approximately $23,021,000 and $21,739,000 as of December 31, 2018 and 2017, respectively. Brokered deposits were $22,290,000 and $14,113,000 at December 31, 2018 and 2017, respectively. At December 31, 2018, the scheduled maturities of time deposits are as follows. (Amounts in Thousands of Dollars): $ $ 121,012 71,525 3,262 760 310 196,869 2019 2020 2021 2022 2023 36 77. Federal Home Loan Bank Advances and Letters of Credit 9. Commitments and Contingencies Notes to Consolidated Financial Statements The Bank advances funds from and repays them to the Federal Home Loan Bank (FHLB) as considered necessary for liquidity purposes. There were no outstanding advances as of December 31, 2018 and 2017. At December 31, 2018, the Bank had $30,000,000 in letters of credit outstanding with Federal Home Loan Bank. These letters were pledged to two customers. There were no outstanding letters of credit at December 31, 2017. 8. 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 II and III, which are both 100% owned non-consolidated subsidiaries of the Company. The debentures were issued in 2003 and 2004, respectively, in conjunction issuance of 5,000 shares of Company Obligated with each Trust’s Mandatorily Redeemable Preferred Securities. The debentures all bear the same interest rate and terms as the preferred securities, detailed following. The debentures are included on the consolidated balance sheets as liabilities; however, in accordance with Federal Reserve Board regulations in effect at December 31, 2018 and 2017, the Company is allowed, for regulatory purposes, to include the entire $10,000,000 of the capital securities issued by the Trusts in Tier I capital. During 2004 FBIL Statutory Trust III issued 5,000 shares of Company Obligated Mandatorily Redeemable (COMR) Preferred Securities. Distributions are paid quarterly. Cumulative cash distributions are calculated at a variable annual rate that is 265 basis points above the 3 month LIBOR rate (5.44% and 4.24% as of December 31, 2018 and 2017, 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 at par. The redemption may be in whole or in part, but in all cases in a principal amount with integral multiples of $1,000. 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 (5.74% and 4.55% as of December 31, 2018 and 2017, 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 at par. The redemption may be in whole or in part, but in all cases in a principal amount with integral multiples of $1,000. 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. 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 in making commitments and conditional obligations as it does for on-balance sheet instruments. the same credit policies A summary of the Bank’s commitments as of December 31, 2018 and 2017 is as follows. (Amounts in Thousands of Dollars): 2018 2017 Commitments to extend credit: Unused lines of credit Standby letters of credit $ 88,138 947 $ 79,698 883 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, 2018 and 2017, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees. The Company has executed contracts for the sale of mortgage loans in the secondary market in the amount of $1,072,000 and $2,189,000 as of December 31, 2018 and 2017, respectively. These amounts include loans held for sale of $38,000 and $42,000 as of December 31, 2018 and 2017, respectively, and loan commitments, included in the summary in this Note, of $1,034,000 and $2,147,000 as of December 31, 2018 and 2017, respectively. 37 11. Dividends and Regulatory Capital The Company’s stockholders are entitled to receive such dividends as are declared by the Board of Directors. The ability of the Company to pay dividends in the future is dependent upon its receipt of dividends from its subsidiaries. The subsidiaries’ ability to pay dividends is regulated by financial regulatory statutes. The timing and amount of dividends will depend on earnings, capital requirements and financial condition of the Company and its subsidiaries as well as general economic conditions and other relevant factors affecting the Company and the subsidiary. Under the provisions of the National Bank Act, the Bank may not, without prior approval of the Comptroller of the Currency, declare dividends in excess of the total of the current and past two year’s earnings less any dividends already paid from those earnings. 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, Tier I, and common equity Tier 1 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, 2018, 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, common equity Tier I, 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 categories. 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 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, 2018 and 2017. In the opinion of management, the risk of recourse to the Bank is not significant and, accordingly, no liability has been established. CConcentration 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 five institutions by a total of approximately $27,971,000 and $13,727,000 as of December 31, 2018 and 2017, 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. 10. Benefits The Company has a 401(k) plan, which is a tax qualified savings plan, to its employees to save for retirement purposes or other encourage 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 subsidiaries’ Roth 401(k) option. Based upon profits, as determined by the subsidiaries, a contribution may be made by the subsidiaries. Employees are 100% vested in the subsidiaries’ contribution to the plan after five years of service. Employee contributions and vested subsidiaries contributions may be withdrawn only on termination of employment, retirement, death or hardship withdrawal. Under the various Employee Incentive Compensation Plans, the Bank and Trust Services are authorized at their discretion, pursuant to the provisions of their individual 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 and goals. For the year ended December 31, 2018, the Bank’s Board of Directors has authorized a bonus of 50% of the bonus pool which is included as an expense in the financial statements even though certain criteria have not been met. One plan, a Deferred Incentive Compensation Plan, maintained by the Bank has been discontinued. The financial statements include expense related to the 401(k) Plan of $711,000 and $690,000 for the years ended December 31, 2018 and 2017, respectively. The financial statements include expense related to the incentive compensation plan of $510,000 and $236,000, for the years ended December 31, 2018 and 2017, respectively. 38 The Company and Bank’s actual capital amounts and ratios are also presented in the table. (Amounts in Thousands of Dollars): As of December 31, 2018 Actual Minimum Regulatory Requirement Amount Ratio Amount Ratio Minimum Regulatory Requirement With Capital Conservation Buffer Ratio Amount To Be Well Capitalized under Prompt Corrective Action Provisions Amount Ratio Notes to Consolidated Financial Statements Total Capital (to Risk-Weighted Assets) Company Bank Tier I Capital (to Risk-Weighted Assets) Company Bank Common Equity Tier I Capital (to Risk-Weighted Assets) Company Bank Tier I Capital (to Average Assets) Company Bank $ $ 106,046 90,501 17.84% 15.35% $ $ 47,562 47,172 > 8.00% > 8.00% $ $ 58,709 58,227 > 9.875% > 9.875% N/A 58,965 $ N/A > 10.00% $ $ 98,548 83,063 16.58% 14.09% $ $ 35,671 35,379 > 6.00% > 6.00% $ $ 46,819 46,435 > 7.875% > 7.875% N/A 47,172 $ N/A > 8.00% $ $ 88,548 83,063 14.89% 14.09% $ $ 26,754 26,534 > 4.50% > 4.50% $ $ 37,901 37,590 > 6.375% > 6.375% N/A 38,327 $ N/A > 6.50% As of December 31, 2017 Actual Minimum Regulatory Requirement Amount Ratio Amount Ratio Minimum Regulatory Requirement With Capital Conservation Buffer Ratio Amount $ $ 98,548 83,063 10.50% 9.05% $ $ 37,559 36,722 > 4.00% > 4.00% $ $ 37,559 36,722 > 4.000% > 4.000% N/A 45,903 $ N/A > 5.00% To Be Well Capitalized under Prompt Corrective Action Provisions Amount Ratio Total Capital (to Risk-Weighted Assets) Company Bank Tier I Capital (to Risk-Weighted Assets) Company Bank $ $ 99,685 88,359 16.16% 14.43% $ $ 49,362 48,995 $ $ 91,955 80,686 14.90% 13.17% $ $ 37,022 36,746 Common Equity Tier I Capital (to Risk-Weighted Assets) Company Bank $ $ 81,955 80,686 13.28% 13.17% $ $ 27,766 27,559 Tier I Capital (to Average Assets) Company Bank $ 91,955 9.94% $ 37,014 $ 80,686 8.85% $ 36,449 > > > > > > > > 8.00% 8.00% $ $ 57,075 56,648 > 9.250% > 9.250% N/A 61,241 $ N/A > 10.00% 6.00% 6.00% $ $ 44,734 44,400 > 7.250% > 7.250% N/A 48,993 $ 4.50% 4.50% $ $ 35,479 35,214 > 5.750% > 5.750% N/A 39,807 $ N/A 8.00% N/A 6.50% > > 4.00% $ 37,014 4.00% $ 36,449 > 4.000% > 4.000% N/A N/A $ 45,561 > 5.00% * The Basel III Rules, effective January 1, 2015 for the Company and Bank, included new risk-based and leverage capital ratio requirements and refined the definition of what constitutes “capital” for purposes of calculating those ratios. The minimum capital level requirements applicable to the Company and the Bank under the Basel III Rules include: (i) a new common equity Tier I risk-based capital ratio of 4.5%; (ii) a Tier I risk-based capital ratio of 6%; (iii) a total risk- based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4% for all institutions. Common equity Tier I capital will consist of retained earnings and common stock instruments, subject to certain adjustments. The Basel III Rules also established a “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements. The conservation buffer, when added to the capital requirements, will result in the following minimum ratios: (i) a common equity Tier I risk-based capital ratio of 7%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The new capital conservation buffer requirement is phased in beginning January 2016 at 0.625% of risk-weighted assets and will increase by 0.625% each year until fully implemented at 2.5% in January 2019. The new capital conservation buffer requirement is reflected in the table above as of December 31, 2018. An institution would be subject to limitations on certain activities including payment of dividends, share repurchases, and discretionary bonuses to executive officers if its capital level is below the buffered ratio. Although these new capital ratios do not become fully phased in until 2019, the banking regulators will expect bank holding companies and banks to meet these requirements well ahead of that date. 112. Income Tax Matters The components of income tax expense (benefit) are as follows for the years ended December 31, 2018 and 2017. (Amounts in Thousands of Dollars): Year Ended December 31, Current Deferred 2018 2017 $ 3,127 $ 3,912 (1,143) (165) $ 1,984 $ 3,747 39 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): Year Ended December 31, 2018 % of Pretax Income 2017 % of Pretax Income Federal income tax at statutory rate $ 2,177 21.0% $ 3,787 34.0% Changes from statutory rate resulting from: State tax, net of federal benefit Tax exempt interest income, net Increase in cash surrender value Expenses related to insurance settlement Re-evaluation of net deferred tax assets due to reduction in tax rate Other, net Income tax expense 410 (331) (95) (188) - 11 4.0 (3.2) (0.9) (1.8) - 0.1 457 (609) (158) - 468 (198) $ 1,984 19.2% $ 3,747 4.1 (5.5) (1.4) - 4.2 (1.8) 33.6% Net deferred tax assets (liabilities) consist of the following components as of December 31, 2018 and 2017. (Amounts in Thousands of Dollars): Year Ended December 31, Deferred tax assets: Allowance for loan losses Other real estate Accrued expenses Deferred tax liabilities: Premises, furniture and equipment Stock dividends Prepaid expenses Unrealized gains on securities available for sale, net Intangibles Other NET DEFERRED TAX ASSETS 2018 2017 $ 3,580 $ 2,526 29 553 - 499 $ 4,162 $ 3,025 $ (965) $ (664) (26) (154) 1,125 (472) (2) (26) (119) (330) (811) (5) $ (494) $ (1,955) $ 3,668 $ 1,070 Net deferred tax assets are included in other assets on the accompanying consolidated balance sheets. On December 22, 2017 Congress passed the Tax Cuts and Jobs Act (TCJA) which reduced the corporate income tax rate from 34.0% to 21.0% effective January 1, 2018 and future years. Accounting standards require the effect of this impact on deferred income tax assets and liabilities to be recorded in the year of enactment. The Company has recorded a reduction in its net deferred tax assets as a result of this change during the year ended December 31, 2017. The net change in deferred income taxes is reflected in the financial statements as follows. (Amounts in Thousands of Dollars): Year Ended December 31, Provision for income taxes 2018 2017 $ (1,143) $ (165) Statement of changes in stockholders' equity, accumulated other comprehensive income (loss), unrealized gains (losses) on securities available for sale, net (1,455) 392 $ (2,598) $ 227 113. Fair Value Measurements The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification defines fair value, establishes a framework for measuring fair value using a hierarchy system, and requires disclosure of fair value measurements. The hierarchy is intended to maximize the use of observable inputs and minimize the use of unobservable inputs and includes three levels based upon the valuation techniques used. The three levels are as follows: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. 40 Notes to Consolidated Financial Statements Level 2: Significant other observable inputs other than level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. IInvestment 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 comparable 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: Other real estate owned is carried at the lower of the principal amount of the loan outstanding at the time of acquisition, plus any acquisition costs, or the estimated fair value of the property, less disposal costs. The fair value of the property is determined based upon appraisals or internal evaluations. There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the years ended December 31, 2018 and 2017. 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, 2018 and 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. (Amounts in Thousands of Dollars): Fair Value Measurements as of December 31, 2018 Using: Investment securities available for sale: U.S. government agency bonds U.S. government agency mortgage backed securities State and political subdivisions Corporate securities Collateralized mortgage obligations Fair Value Measurements as of December 31, 2017 Using: Investment securities available for sale: U.S. government agency bonds U.S. government agency mortgage backed securities State and political subdivisions Corporate securities Collateralized mortgage obligations Other investments Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Fair Value $ $ 183,295 128,405 31,025 985 12,557 356,267 - $ - - - - $ - 183,295 128,405 31,025 985 12,557 356,267 $ $ Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Fair Value $ $ - $ - - - - - $ - 154,725 157,166 40,395 993 15,659 1,108 370,046 41 154,725 157,166 40,395 993 15,659 1,108 370,046 $ $ Significant Unobservable Inputs (Level 3) - $ - - - - $ - Significant Unobservable Inputs (Level 3) - $ - - - - - $ - 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, 2018 and 2017. 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. (Amounts in Thousands of Dollars): Fair Value Measurements as of December 31, 2018 Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value Impaired loans Other real estate owned $ 8,828 $ - $ - $ 8,828 $ 681 $ - $ - $ 681 Fair Value Measurements as of December 31, 2017 Using: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value Impaired loans Other real estate owned $ 1,512 $ - $ - $ 1,512 $ 32 $ - $ - $ 32 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. Impaired loans, net: Impaired loans fair value is equal to book value minus the related allowance plus estimated selling costs. 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 be equal to the carrying value due to the borrowings’ short-term nature. FHLB Advances: The fair value of FHLB Advances is considered to be equal to the 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. 42 The carrying values and estimated fair values of the Company’s financial instruments as of December 31, 2018 and 2017 are as follows. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements Financial assets: Cash and due from banks Securities held to maturity Securities available for sale Federal funds sold Loans, net Impaired loans, net Other real estate owned Accrued interest receivable Financial liabilities: Non-interest bearing demand deposits Interest bearing demand deposits Savings deposits Time deposits Securities sold under agreements to repurchase Accrued interest payable 114. Revenue Recognition Fair Value Hierarchy Level Carrying Value Fair Value 2018 2017 2018 2017 1 2 2 1 2 3 3 1 1 1 1 2 1 1 $ 37,630 $ 25,579 $ 37,630 $ 25,579 1,044 356,267 16,706 459,781 8,250 681 4,593 1,249 1,128 1,249 370,046 356,267 370,046 2,608 16,706 2,608 495,587 449,971 488,514 1,413 32 4,167 8,828 681 4,593 1,512 32 4,167 $ 131,705 $ 115,446 $ 131,705 $ 115,446 292,665 112,196 196,869 88,559 677 341,103 94,510 205,774 80,394 549 292,665 112,196 197,147 88,559 677 341,103 94,510 205,774 80,394 549 On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 1 Summary of Significant Accounting Policies, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives and certain credit card fees are also not in the scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust services, deposit related fees, interchange fees and other. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below. Trust Services Trust services income is primarily comprised of fees earned from the management and administration of trusts and other assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally either prepaid or paid at the end of a specified period and can be paid through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered. Service Charges Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the revenue recognized, over the period in which the service is provided. Check orders, and other deposit account related fees are largely transactional-based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. 43 Notes to Consolidated Financial Statements Other Other noninterest income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, investment advisor fees from the Company’s wealth management products, safe deposit box rental fees and other miscellaneous revenue streams. Commissions from sales of mutual funds and other investments and investment advisor fees are recognized monthly as the sales occur. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, as follows. (Amounts in Thousands of Dollars): Year Ended December 31, Noninterest Income In-scope of Topic 606: Trust Services Services Charges Gain on sale of loans Investment securities gains (losses), net Other Noninterest income (in-scope of topic 606) Noninterest income (out-of-scope of topic 606) Total Noninterest Income Contract Balances 2018 2017 $ 10,554 $ 10,336 1,265 1,330 381 9 574 (19) 5,315 4,958 $ 17,524 $ 17,179 - - $ 17,524 $ 17,179 A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2018 and December 31, 2017, the Company did not have any significant contract balances. Contract Acquisition Costs In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost. 44 Board of Directors First Bankers Trustshares, Inc. William D. Daniels Chairman of the Board First Bankers Trust Company, N. A. William D. Daniels Chairman of the Board First Bankers Trust Services, Inc. Donald K. Gnuse Chairman of the Board Allen W. Shafer President/CEO Allen W. Shafer President/CEO 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 Phyllis J. Hofmeister Robert Hofmeister Farm, Secretary Carl W. Adams, Jr. Illinois Ayers Oil Company, President Scott A. Cisel Retired President/Chairman/CEO Ameren Illinois Charles M. Gnuse President/CEO, United State Bank Lewistown, Missouri Arthur E. Greenbank Former President/CEO First Bankers Trust Company, N. A. Carl W. Adams, Jr. Illinois Ayers Oil Company, President Scott A. Cisel Retired President/Chairman/CEO Ameren Illinois Charles M. Gnuse President/CEO, United State Bank Lewistown, Missouri Arthur E. Greenbank Former President/CEO First Bankers Trust Company, N. A. 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 Kemia M. Sarraf, M.D., M.P.H. genHKids, Inc., President & Founder CEO, Lodestar Consulting and Executive Coaching Kemia M. Sarraf, M.D., M.P.H. genHKids, Inc., President & Founder CEO, Lodestar Consulting and Executive Coaching Dennis R. Williams Quincy Media, Inc., Chairman Richard W. Schulte Wright & Schulte, LLC Attorney At Law Dennis R. Williams Quincy Media, Inc., Chairman 45 Officers First Bankers Trust Company, N.A. First Bankers Trust Services, Inc. PPRESIDENT/CEO Allen W. Shafer REGIONAL PRESIDENTS Jason L. Duncan North Region David J. Rakers West Region MARKET PRESIDENT Ronald E. Wenger SENIOR VICE PRESIDENTS Jay C. Barnes Thomas J. Frese (CFO/COO) Douglas R. Reed Scott Thoele James D. Whitaker (CCO) VICE PRESIDENTS Nicole R. Allen-Cain (ISO) John T. Armstrong Joshua G. Chaplin Pamela L. Eftink Nathan J. Frese Jennifer M. Gilker Ryan G. Goestenkors Tony R. Gross Darren W. Jones Kathleen D. McNay James R. Obert Hugh K. Roderick Sherry R. Schaffnit Michelle M. Shortridge Linda K. Tossick (Controller) Michele M. Walgren Randal S. Westerman David A. Young ASSISTANT VICE PRESIDENTS Christine A. Baker Daniel J. Brink Maria D. Eckert James M. Farmer David J. Garner Devan D. Hitt Lisa K. Hoffman Karen J. Koehn Ryne R. Lubben Laura J. Maas Cynthia A. MacKenzie Afton R. Mast Ashley Meadows Lauryn K. Oshner John K. Predmore Debora A. Rabe Brenda S. Seals Kelly R. Seifert Bernie J. Venvertloh Brooke C. Venvertloh Leslie A. Westen Joan M. Whitlow INFORMATION TECHNOLOGY OFFICERS Ronald W. Fairley Terry J. Hanks Andrew W. Marner RETAIL OFFICERS Rachel E. Ayalew Pamela Curtis W. Kay Divan Susan L. Farlow Kelly B. Freeman Leigh A. Holstein Krystal N. Jackson Julie L. McElhiney Kimberly M. Neal Shannon M. Orris Eric L. Roon Rachel Y. St. Clair AG BANKER/CREDIT ANALYST OFFICER Spencer L. McKeown CREDIT ANALYST OFFICER Megan Cheek COLLECTIONS OFFICER April Willey COMMERCIAL/AG OFFICER Amy E. Bruenger LOAN OPERATIONS OFFICER Melisa G. Heimann PRESIDENT/CEO Brian A. Ippensen EXECUTIVE VICE PRESIDENTS Steven P. Eckert Michele R. Foster P. Dawn Goestenkors Julie E. Kenning Jayson E. Martin Larry E. Shepherd SENIOR VICE PRESIDENTS Merri E. Ash Frank Brown Joseph E. Harris Ashley Melton Mary A. Schmidt Kimberly A. Serbin Linda J. Shultz VICE PRESIDENTS Timothy W. Corrigan (Auditor) Teresa L. Daggett Paul R. Edwards, III Robin L. Fitzgibbons Susan D. Knoche Brenda K. Martin Blake R. Mock John P. Shelton SENIOR TRUST OFFICERS Teresa F. Kuchling W. Diane McHatton Jacob E. Newton Deborah J. Staff TRUST OFFICERS Craig Baker Marilyn J. Crim Marissa J. Ermeling Jennifer L. Gordley Betsy Gustison Kelly M. Ponce ADMINISTRATIVE OFFICERS Holly Allen John T. Cifaldi Sherri A. Zuspann 46 Notes 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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