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Westamerica BancorporationFirst Bankers Trustshares, Inc. 2020 Annual Report Table of Contents Corporate Information ............................................................................. 1 Board of Director Committees ................................................................ 2 Letter to Shareholders ............................................................................. 3 Selected Financial Data (unaudited) .................................................. 4-5 Management’s Report on Internal Controls Over Financial Reporting .......................................................... 6 Management’s Discussion and Analysis of Financial Condition and Results of Operations (unaudited) ........... 7-11 Independent Auditor’s Report .............................................................. 12 Consolidated Financial Statements Balance Sheets ..................................................................................... 13 Statements of Income .......................................................................... 14 Statements of Comprehensive Income ............................................... 15 Statements of Changes in Stockholders’ Equity ................................. 16 Statements of Cash Flows ............................................................... 17-18 Notes to Consolidated Financial Statements ................................. 19-42 Board of Directors ................................................................................. 43 Officers .................................................................................................. 44 Corporate Description First Bankers Trustshares, Inc. (FBTI) is a bank holding company for First Bankers Trust Company, N.A., 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. 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: Allen W. Shafer, President and CEO First Bankers Trustshares, Inc. (217) 228-8000 Stockholder Information Common shares authorized: Common shares outstanding as of December 31, 2020: Certificate holders of record: *As of December 31, 2020 6,000,000 3,094,598 218* 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 62301 Independent Auditors RSM US LLP 4650 E. 53rd St. Davenport, IA 52807 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 Donald K. Gnuse Board Member Emeritus, First Bankers Trustshares, Inc. Carl Adams, Jr. Chairman, Illinois Ayers Oil Company Scott A. Cisel Former President/Chairman/CEO Ameren Illinois Strategic Advisor to Energy Internet Corporation President of Cisel Consulting, LLC 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 Charles M. Gnuse President/CEO, United State Bank Lewistown, MO. Arthur E. Greenbank Former President/CEO, First Bankers Trust Company, N.A. and First Bankers Trustshares, Inc. Phyllis J. Hofmeister Secretary, Robert Hofmeister Inc. Kemia M. Sarraf, M. D., M.P.H. President & Founder of genHKids Inc. CEO, Lodestar Consulting and Executive Coaching Richard W. Schulte Wright & Schulte, Attorney at Law Allen W. Shafer President/CEO, First Bankers Trust Company, N.A. President/CEO, First Bankers Trustshares, Inc. Steven E. Siebers Secretary of the Board, First Bankers Trustshares, Inc. Secretary of the Board, First Bankers Trust Company, N.A. Attorney at Law, Scholz, Loos, Palmer, Siebers & Duesterhaus Executive Officers Allen W. Shafer, President and CEO Steven E. Siebers, Secretary First Bankers Trustshares, Inc. Stock Prices (For the three months period ended) 12/31/20 9/30/20 6/30/20 3/31/20 12/31/19 Market Value High Low $29.89 $26.45 $27.99 $33.00 $31.20 $24.75 $25.35 $24.75 $27.09 $30.25 Period End Close $27.75 $25.35 $26.45 $27.99 $31.20 The following companies make a market in FBTI common stock: Raymond James 225 S. Riverside Plaza 7th Floor Chicago, IL 60606 (800) 800-4693 Janney Montgomery Scott LLC 1475 Peachtree St. NE. Suite 800 Atlanta, GA 30309 (844) 273-2189 Stifel Nicolas & Co., Inc. 501 N. Broadway St. Louis, MO 63102 (800) 679-5446 Monroe Financial Partners 100 N. Riverside Plaza, Suite 1620 Chicago, IL 60606 (312) 327-2530 D.A. Davidson & Co. 75 West Front St. Suite 5 Red Bank, NJ 07701 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. THE COMMITTEES 1. Audit Committee Chair: Charles M. Gnuse Board Members: Arthur E. Greenbank, Phyllis J. Hofmeister and Kemia M. Sarraf, M.D., M.P.H. The Audit Committee is comprised of independent Directors and assists the Board with its oversight of the systems and procedures relating to the Company’s financial reporting process, internal accounting and financial controls, and risk management program. The Committee also assists with the administration and monitoring of the internal audit process, the annual independent audit of the Company’s annual financial statements, and the Company’s compliance with legal and regulatory requirements. The qualification, independence and performance of the Company’s independent, registered public accounting firm, are also monitored by the Committee. 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 with the following responsibilities: address corporate governance matters; establish qualifications and independence requirements for Directors; recommend nominees for election to the Board; approve a management succession policy and review the identified candidates; oversee employee compensation and benefit plans; approve incentive compensation arrangements; and assess the contributions of current Directors. This committee will meet at least four times a year. 2 Letter to Stockholders Dear Stockholders of First Bankers Trustshares, Inc., 2020 has been a year like no other in our lifetime. We are extremely proud and thankful for the exceptional work and dedication performed by our team in this challenging year. At the start of the pandemic, we established three goals: Keep our employees safe Keep our customers safe Meet the banking needs of our customers We successfully met these goals and generated a reasonable return. We are proud to say that our bankers made a positive difference in the communities we serve. Hundreds of businesses and home owners were assisted with PPP loans, home loans refinances and payment deferrals. By in large, our customers have successfully navigated this challenging period with our support. William D. Daniels Chairman of the Board Even with the challenges of the pandemic, we achieved significant financial results. Total assets set a record at over $1.1 billion Total stockholders’ equity set a record at over $109 million Net income for ongoing operations improved 18% in 2020 compared to 2019 In addition, we accelerated our implementation and utilization of technology. Much of the technology adoption was driven by the pandemic, but these technology improvements will benefit us for years to come. As the pandemic is not fully behind us, we will again this year be conducting a virtual annual meeting. Instructions for participation are included in your proxy statement. We hope you will be able to join us virtually on Tuesday, May 11, 2021 at 9:00 a.m. Thank you for your ongoing investment and support of First Bankers Trustshares, Inc. 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 (unaudited) (Amounts in Thousands of Dollars, Except Per Share Data Statistics) * Year Ended December 31, 2020 2019 2018 2017 2016 2015 PE R F OR MANCE Net income $ 7,843 $ 8,319 $ 8,382 $ 7,392 $ 9,145 $ 8,983 Common stock cash dividends paid $ 2,101 $ 1,977 $ 1,852 $ 1,728 $ 1,602 $ 1,478 Common stock cash dividend payout ratio 1 Return on average assets 1 26.79% 0.75% 23.77% 0.90% 22.10% 0.89% 23.38% 0.80% 17.55% 1.01% 16.64% 1.02% Return on average common stockholders’ equity 2 8.24% 8.99% 9.40% 8.88% 11.95% 12.95% PE R COMM ON SHAR E Ea r n i ngs, ba si c a nd d i l ute d Dividends (paid) on common stock Book value 3 Stock price High Low Close $ 2.54 $ 2.69 $ 2.72 $ 2.40 $ 2.96 $ 2.89 $ 0.68 $ 0.64 $ 0.60 $ 0.56 $ 0.52 $ 0.48 $ 31.54 $ 29.68 $ 29.79 $ 27.67 $ 25.87 $ 23.49 $ 33.00 $ 36.00 $ 37.95 $ 31.00 $ 30.00 $ 24.60 $ 24.75 $ 30.25 $ 30.01 $ 25.95 $ 23.00 $ 22.61 $ 27.75 $ 31.20 $ 32.00 $ 30.75 $ 30.00 $ 23.65 Price/Earnings per share (at period end) Market price/Book value (at period end) 10.9 0.88 11.6 1.05 11.8 1.07 12.8 1.11 10.1 1.16 8.2 1.01 Weighted average number of shares outstanding 3,093,398 3,089,247 3,087,488 3,086,805 3,079,556 3,079,521 AT DECEM B 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 1 Excludes preferred stock dividends/accretion. $ 1,117,675 $ 922,579 $ 930,044 $ 942,949 $ 930,935 $ 906,672 542,170 345,140 357,311 371,168 329,796 301,795 - 485,153 853,302 137,904 10,310 - 169 500,599 727,656 81,572 10,310 - 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 $ 97,606 $ 91,711 $ 91,968 $ 85,438 $ 79,839 $ 82,326 8.73% 15.78% 17.45% 18.71% 9.34% 9.94% 14.98% 16.67% 17.93% 10.79% 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% 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. * This table includes results of discontinued operations (See Note 2). 4 Selected Financial Data (unaudited) 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 1.02% 1.01% 0.89% 0.90% 0.80% 0.75% 10.00% 12.95% 11.95% 15.00% 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 8.88% 9.40% 8.99% 8.24% 5.00% 0.00% Earnings Per Share Price/Earnings Multiples $2.89 $2.96 $2.72 $2.69 $2.54 $2.40 12.80x 11.80x 11.60x 10.90x 10.10x 8.20x 14.00x 12.00x 10.00x 8.00x 6.00x 4.00x 2.00x 0.00x 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 Market Price to Book Value Loan/Deposit Growth 1.16x 1.11x 1.07x 1.05x 1.01x 0.88x 2015 2016 2017 2018 2019 2020 900 800 700 600 500 400 300 200 100 $717 Deposits $727 Deposits $757 Deposits $733 Deposits $728 Deposits $853 Deposits Loans $512 Loans $514 Loans $506 Loans $481 Loans $501 Loans $485 2015 2016 2017 2018 2019 2020 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 First Bankers Trustshares, Inc. 6 Management’s Discussion and Analysis of Financial Condition and Results of Operations (unaudited) Introduction The following discussion of the financial condition and results of operations of First Bankers Trustshares, Inc. provides an analysis of the consolidated financial statements and focuses upon those factors which had a significant influence on the overall 2020 performance. The discussion should be read in conjunction with the Company’s consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. The Company was incorporated on August 25, 1988, and acquired First Midwest Bank/M.C.N.A. (the Bank) on June 30, 1989. The Bank acquisition was accounted for using purchase accounting. Prior to the acquisition of the Bank, the Company did not engage in any significant business activities. Financial Management The business of the Company is that of a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. Consolidated Assets (Amounts in Thousands of Dollars) The Company attracts deposits from the general public and uses such deposits, together with borrowings and other funds, to originate one-to-four family residential mortgage loans, consumer loans, business loans and agricultural loans in its primary market area. The Company also invests in investment securities consisting primarily of U.S. government or agency obligations, mortgage-backed securities, financial institution certificates of deposit, and other liquid assets. 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 banking operations. * 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 2 0 C ha nge 2019 Change 2018 2017 2016 2015 5 Year Change $ 9 ,6 0 2 3 .5 4 % $ 9,274 2.88% $ 9,014 $ 12,725 $ 14,922 $ 10,582 (9.26%) 4 3 ,0 7 8 5 4 2 ,17 0 9 1.0 2 5 7 .0 9 22,551 345,140 (21.19) (3.41) 7 ,3 8 2 ( 4 3 .3 5 ) 13,031 (22.00) - ( 10 0 .0 0 ) 169 344.74 28,616 357,311 16,706 38 12,854 371,168 2,608 42 22,308 329,796 9,994 107 36,748 301,795 17.23 79.65 8,421 (12.34) 118 (100.00) 4 7 2 ,9 9 6 4 2 ,4 4 7 ( 3 .2 4 ) ( 2 .6 5 ) 488,811 4.45 467,993 497,238 505,444 503,267 43,603 (13.43) 50,366 46,314 48,364 45,741 (6.01) (7.20) $ 1,117 ,6 7 5 2 1.15 % $ 922,579 (0.80%) $ 930,044 $ 942,949 $ 930,935 $ 906,672 23.27% 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 $ 8 5 3 ,3 0 2 17 .2 7 % $ 727,656 (0.79%) $ 733,435 $ 756,833 $ 727,445 $ 717,464 18.93% 13 2 ,5 8 1 5 ,3 2 3 10 ,3 10 7 ,0 8 4 10 9 ,0 7 5 6 4 .6 3 4 12 .3 2 - 2 3 .8 0 12 .0 8 80,533 (9.06) 88,559 80,394 1,039 10,310 5,722 97,319 100.00 - (33.42) 9.17 - 10,310 8,594 89,146 - 10,310 9,146 86,266 69,407 35,000 10,310 8,856 79,917 83,278 - 10,310 9,385 86,235 59.20 100.00 0.00 (24.52) 26.49 $ 1,117 ,6 7 5 2 1.15 % $ 922,579 (0.80%) $ 930,044 $ 942,949 $ 930,935 $ 906,672 23.27% * This table includes disco ntinued o peratio ns fo r 2015 thro ugh 2018 (See No te 2). 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations (unaudited) At December 31, 2020, the Company had assets of $1,117,675,000 compared to $922,579,000 at December 31, 2019. The increase in assets is primarily made up of an increase in securities of $197,030,000 (57.09%) and an increase in cash due from banks of $20,855,000 (65.53%). This was partially offset by a $15,815,000 (3.24%) decrease in net loans, a decrease in federal funds sold of $5,649,000 (43.35%), and a decline in other assets of $1,156,000 (2.65%). The decline in net loans and federal funds sold, as well as deposit growth of $125,646,000 (17.27%), and short-term borrowings growth of $52,048,000 (64.63%) funded the growth in securities and cash due from banks. 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. Approximately $153,928,000 of fixed rate long-term residential real estate loans were sold in the secondary market during 2020, while $31,629,000 were sold in 2019. Agricultural real estate loans totaling approximately $1,238,000 were sold in the secondary market during 2020, while $310,000 were sold in 2019. Management continues to place emphasis on the quality versus the quantity of the credits placed in the portfolio. Results of Operations Summary The Company’s earnings are primarily dependent on net interest income, the difference between interest income and interest expense. Interest income is a function of the balances of loans, securities and other interest earning assets outstanding during the period and the yield earned on such assets. Interest expense is a function of the balances of deposits and borrowings outstanding during the same period and the rates paid on such deposits and borrowings. The Company’s earnings are also affected by provisions for loan losses, service charges, 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. Consolidated Income Summary (Amounts in Thousands of Dollars) * For the year ended December 31, 2020, the Company reported consolidated net income of $7,843,000, a $476,000 (5.72%) decrease from 2019. Net interest income decreased $411,000 (1.56%), other non-interest income decreased $5,634,000 (42.83%), other non-interest expenses decreased $5,529,000 (20.83%), and income tax expense decreased $40,000 (1.80%). The provision for loan losses was unchanged in 2020 at $2,400,000. 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 $990,625,000 for the year ended December 31, 2020. 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. 5 Year 2020 Change 2019 Change 2018 2017 2016 2015 Growth Rate Interest income Interest expense $ 30, 534 (6. 80)% $ 32,761 2.14% $ 32,075 $ 30,141 $ 29,257 $ 28,098 8.67% (4, 616) (28. 23)% (6,432) 20.58% (5,334) (4,141) (4,037) (4,058) 13.75% Net interest income 25, 918 (1. 56)% 26,329 (1.54)% 26,741 26,000 25,220 24,040 7.81% Provision for loan losses (2, 400) - % (2,400) (63.36)% (6,550) (2,250) (600) (675) 255.56% Net interest income after provision for loan losses 23, 518 (1. 72)% 23,929 18.51% 7, 519 (42. 83)% 13,153 (24.94)% Other income Other expenses 20,191 17,524 23,750 17,179 24,620 23,365 0.65% 17,747 16,995 (55.76)% (21, 009) (20. 83)% (26,538) (2.97)% (27,349) (29,790) (28,485) (27,600) (23.88)% Income before taxes 10, 028 (4. 89)% 10,544 1.72% 10,366 11,139 13,882 12,760 (21.41)% Income tax expense (2, 185) (1. 80)% (2,225) 12.15% (1,984) (3,747) (4,737) (3,777) (42.15)% NET INCOME $ 7, 843 (5. 72)% $ 8,319 (0.75)% $ 8,382 $ 7,392 $ 9,145 $ 8,983 (12.69)% * This table includes results of discontinued operations through June 30, 2019. 8 Management’s Discussion and Analysis of Financial Condition and Results of Operations (unaudited) Years Ended December 31, 2020 2019 2018 (Amounts in Thousands of Dollars) Interest income $ 28, 794 $ 32,194 $ 31,463 Loan fees Interest expense 1, 740 567 612 (4,616) (6,432) (5,334) NET INTEREST INCOME $ 25, 918 $ 26,329 $ 26,741 Average earning assets $ 990, 625 $ 876,003 $ 898,214 Net interest margin 2. 62% 3.01% 2.98% for the year ended December 31, 2020 compared to $3,411,000 in 2019. The amounts recorded in the provision for loan losses are determined from management’s quarterly evaluation of the quality of the loan portfolio. In this review, such factors as the volume and character of the loan portfolio, general economic conditions and past loan loss experience are considered. Management believes that the allowance for loan losses is adequate to provide for possible losses in the portfolio as of December 31, 2020. * This table includes results of discontinued operations through June 30, 2019. The yield on average earning assets for the year ended December 31, 2020 was 3.08%, while the average cost of funds for the same period was 0.58% on average interest bearing liabilities of $789,294,000. The yield on average earning assets for the year ended December 31, 2019 was 3.74%, while the average cost of funds for the same period was 0.92% on average interest bearing liabilities of $699,644,000. The decrease in net interest income of $411,000 can be attributed to the 0.66% decrease in the yield on average earning assets, and an increase of $89,650,000 in average interest bearing liabilities, which was partially offset by the 0.34% decrease in the cost of funds, and the $114,622,000 increase in average earning assets. Provision for Loan Losses The allowance for loan losses as a percentage of gross loans outstanding is 2.51% as of December 31, 2020, compared to 2.35% as of December 31, 2019. Net loan charge-offs totaled 2,031,000 Other Income Other income may be divided into two broad categories – recurring and non-recurring. Service charges on deposit accounts is a major source of recurring other income. Investment securities gains and other income vary annually. Other income for the year ended December 31, 2020 was $7,519,000, a decrease of $5,634,000 (42.83%) from 2019. This is primarily attributed to the spin-off of First Bankers Trust Services, Inc. at June 30, 2019. Other Expense Other expense for the year ended December 31, 2020 totaled $21,009,000, a decrease of $5,529,000 (20.83%) from 2019. Salaries and employee benefits expense aggregated 60.47% and 58.15% of total other expense for the years ended December 31, 2020 and 2019, respectively. Non-Accrual and Past Due Loans, Leases and Other Real Estate Owned (Amounts in Thousands of Dollars) As of December 31, 2020 2019 2018 2017 2016 2015 Non-accrual loans and leases $ 12, 063 $ 6,503 $ 12,568 $ 8,092 $ 3,386 $ 2,920 Other real estate owned (OREO) - 377 681 32 147 - Total non-accrual loans and OREO $ 12, 063 $ 6,880 $ 13,249 $ 8,124 $ 3,533 $ 2,920 Loans and leases past due 90 days or more and still accruing interest 447 11 - 22 11 82 TOTAL $ 12, 510 $ 6,891 $ 13,249 $ 8,146 $ 3,544 $ 3,002 9 Management’s Discussion and Analysis of Financial Condition and Results of Operations (unaudited) Income Taxes The Company files its federal income tax return on a consolidated basis with the Bank. See Note 13 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 2020, 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, 2020, these categories totaled $94,535,000 or 8.61% of assets, compared to $69,372,000 or 6.01% the previous year. As of December 31, 2020 and 2019, securities held to maturity included $177,000 and $161,000, respectively, 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, 2020 After One Year Through through After One Year Five Years Five Years (Amounts in Thousands of Dollars) Interest-earning assets $ 219, 083 $ 457, 967 $ 410, 334 Interest-bearing liabilities $ 805, 652 $ 28, 337 $ 10, 310 Repricing gap (repricing assets minus repricing liabilities) $ (586, 569) $ 429, 630 $ 400, 024 Repricing Period as of December 31, 2019 After One Year Through through After One Year Five Years Five Years (Amounts in Thousands of Dollars) Interest-earning assets $ 213,117 $ 378,186 $ 305,884 Interest-bearing liabilities $ 649,194 $ 28,553 $ 10,310 Repricing gap (repricing assets minus repricing liabilities) $ (436,077) $ 349,633 $ 295,574 10 Management’s Discussion and Analysis of Financial Condition and Results of Operations (unaudited) Capital The ability to generate and maintain capital at adequate levels is critical to the Company’s long-term success. A common measure of capitalization for financial institutions is primary capital as a percent of total assets. Regulations also require the Company to maintain certain minimum capital levels in relation to consolidated Company assets. Regulations require a minimum ratio of capital to risk-weighted assets of 8%. The Company’s capital, as defined by the regulations, was 18.71% of risk-weighted assets as of December 31, 2020. In addition, a leverage ratio of at least 4.00% is to be maintained. As of December 31, 2020, the Company’s leverage ratio was 9.34%. Total Risk Based Capital Ratio 15.30% 15.24% 16.16% 17.84% 17.93% 18.71% 20.00% 15.00% 10.00% 5.00% 0.00% 2015 2016 2017 2018 2019 2020 Asset Liability Management Since changes in interest rates may have a significant impact on operations, the Company has implemented, and currently maintains, an asset liability management committee at the Bank to monitor and react to the changes in interest rates and other economic conditions. Research concerning interest rate risk is supplied by the Company from information received from a third-party source. The committee acts upon this information by adjusting pricing, fee income parameters and/or marketing emphasis. Common Stock Information and Dividends The Company’s common stock is held by 218 certificate holders as of December 31, 2020, and is traded in a limited over-the-counter market. On December 31, 2020 the market price of the Company’s common stock was $27.75. Market price is based on stock transactions in the market. Dividends on common stock of approximately $2,133,000 were declared by the Board of Directors of the Company for the year ended December 31, 2020. Closing Share Price Data $30.00 $30.75 $32.00 $31.20 $27.75 $23.65 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 2015 2016 2017 2018 2019 2020 Financial Report Upon written request of any stockholder of record on December 31, 2020, the Company will provide, without charge, a copy of its 2020 Annual Report. Notice of Annual Meeting of Stockholders The annual meeting of stockholders will be held virtually on Tuesday, May 11, 2021 at 9:00 a.m. 11 Independent Auditor’s Report 12 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 FHLB Advances Junior subordinated debentures Accrued interest payable Other liabilities Total Liabilities Commitments and Contingencies (Note 10) Stockholders’ Equity Common stock, $1 par value; shares authorized 6,000,000; shares issued 3,605,725 and outstanding: 2020 3,094,598 and 2019 3,089,773 shares Additional paid in capital Retained earnings Accumulated other comprehensive income Treasury stock, at cost: 2020 511,127 and 2019 515,952 shares Total Stockholders’ Equity Total Liabilities And Stockholders' Equity See Notes to Consolidated Financial Statements. 13 2020 2019 $ 9,602 43,078 52,680 2,113 $ 9,274 22,551 31,825 2,809 540,057 7,382 - 485,153 (12,157) 472,996 13,232 4,088 17,728 3,134 4,265 342,331 13,031 169 500,599 (11,788) 488,811 13,974 4,239 17,251 3,299 4,840 $ 1,117,675 $ 922,579 $ $ 157,217 417,246 97,317 181,522 853,302 132,581 5,323 10,310 340 6,744 1,008,600 3,606 1,448 99,708 11,469 (7,156) 109,075 131,481 304,158 88,925 203,092 727,656 80,533 1,039 10,310 787 4,935 825,260 3,606 1,330 93,998 5,608 (7,223) 97,319 $ 1,117,675 $ 922,579 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 Service charges on deposit accounts Gain on sale of loans Investment securities (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 from continuing operations before income taxes Income taxes from continuing operations Income from continuing operations Income from discontinued operations, net of income taxes 2020 2019 $ 22,264 569 $ 23,058 620 6,790 712 199 30,534 1,284 2,434 3,718 370 528 4,616 25,918 2,400 23,518 905 1,508 (4) 5,110 7,519 12,705 1,177 636 1,778 783 3,930 21,009 10,028 2,185 7,843 - 7,178 890 892 32,638 1,861 3,463 5,324 548 560 6,432 26,206 2,400 23,806 1,208 419 (55) 5,205 6,777 12,267 1,233 785 2,334 1,858 3,898 22,375 8,208 1,562 6,646 1,673 Net income $ 7,843 $ 8,319 Earnings per share - continuing operations Earnings per share - discontinued operations Earnings per share of common stock, basic and diluted See Notes to Consolidated Financial Statements. $ 2.54 $ 2.15 $ - $ 0.54 $ 2.54 $ 2.69 14 Consolidated Statements of Comprehensive Income (Amounts In Thousands of Dollars, Except Share and Per Share Data) Year Ended December 31, Net income Other comprehensive income: Unrealized gains on securities available for sale: Unrealized holding gains arising during the year before tax Reclassification adjustment for (losses) included in net income before tax Tax expense Other comprehensive income, net of tax Comprehensive income See Notes to Consolidated Financial Statements. Consolidated Financial Statements 2020 2019 $ 7,843 $ 8,319 8,195 11,704 (4) 8,199 2,338 5,861 (55) 11,759 3,329 8,430 $ 13,704 $ 16,749 15 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, 2020 and 2019 Balance, December 31, 2018 Net income Other comprehensive income, net of tax Restricted stock award Common stock dividends declared (amount per share $ .65) Spin-off of First Bankers Trust Services, Inc. Balance, December 31, 2019 Net income Other comprehensive income, net of tax Restricted stock award Common stock dividends declared (amount per share $ .69) Balance, December 31, 2020 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total $ 3,606 $ 1,259 $ 94,358 $ (2,822) $ (7,255) $ 89,146 - - - - - - 71 - 8,319 - - - (2,008) 8,430 - - - - 32 8,319 8,430 103 - (2,008) - 3,606 $ - 1,330 $ (6,671) 93,998 $ - 5,608 $ - (7,223) $ (6,671) 97,319 $ - - - - - 118 7,843 - - - 5,861 - - - 67 7,843 5,861 185 - 3,606 $ - 1,448 $ (2,133) 99,708 $ - 11,469 $ - (7,156) $ (2,133) 109,075 $ See Notes to Consolidated Financial Statements. 16 Consolidated Statements of Cash Flows (Amounts in Thousands of Dollars) Year Ended December 31, CASH FLOWS FROM OPERATING ACTIVITIES Net income (Income) from discontinued operations, net of income taxes Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Depreciation Amortization of intangibles Restricted stock award Amortization/accretion of premiums/discounts on securities, net Investment securities losses, net Loans originated for sale Proceeds from loans sold Gain on sale of loans Deferred income taxes Decrease in accrued interest receivable and other assets (Increase) in cash surrender value of life insurance contracts (Decrease) increase in accrued interest payable and other liabilities Net cash provided by continuing operating activities Net cash provided by discontinued operating activities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Activity in securities portfolio: Purchases Sales of securities available for sale Calls, maturities and paydowns (Increase) decrease in loans, net Decrease in federal funds sold, net Purchases of premises, furniture and equipment Net cash (used in) continuing investing activities Net cash (used in) discontinued investing activities Net cash (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in deposits, net Cash dividends paid to common shareholders Increase (decrease) in securities sold under agreement to repurchase, net Proceeds from FHLB Advances Repayments of FHLB Advances Net cash provided by (used in) continuing financing activities Net cash (used in) discontinued financing activities Net cash provided by (used in) financing activities Net increase (decrease) in cash and due from banks CASH AND DUE FROM BANKS Beginning cash Ending cash (Continued) 17 Consolidated Financial Statements 2020 2019 $ 7,843 - 2,400 1,093 165 185 4,240 4 (155,217) 156,894 (1,508) (419) 310 (477) (540) 14,973 - 14,973 (283,897) - 90,822 13,782 5,649 (351) (173,995) - (173,995) 125,646 (2,101) 52,048 4,284 - 179,877 - 179,877 20,855 $ 8,319 (1,673) 2,400 1,218 173 103 2,208 55 (33,454) 33,742 (419) 290 322 (473) 749 13,560 2,472 16,032 (32,997) 15,296 33,744 (23,434) 3,675 (118) (3,834) (60) (3,894) (5,779) (1,977) (8,026) 74,039 (73,000) (14,743) (3,200) (17,943) (5,805) 31,825 37,630 $ 52,680 $ 31,825 Consolidated Financial Statements Consolidated Statements of Cash Flows (Continued) (Amounts in Thousands of Dollars) Year Ended December 31, 2020 2019 Supplemental disclosure of cash flow information, cash payments for: Interest Income taxes Supplemental schedule of non-cash investing and financing activities: Net change in accumulated other comprehensive income Transfer of loans to other real estate owned Effects of common dividends payable See Notes to Consolidated Financial Statements. $ 5,063 $ 6,322 2,100 1,535 5,861 367 32 8,430 216 31 18 1. Nature of Business and Summary of Significant Accounting Policies Nature of Business First Bankers Trustshares, Inc. (Company) is a bank holding company which owns 100% of the outstanding common stock of First Bankers Trust Company, N.A. (Bank), FBIL Statutory Trust II (Trust II) and FBIL Statutory Trust III (Trust III). Prior to July 1, 2019 the Company also owned 100% of First Bankers Trust Services, Inc. (Trust Services). The Bank is engaged in banking and bank related services and serves a market area consisting primarily of Adams, McDonough, Schuyler, Hancock and Sangamon counties in west central Illinois. On July 1, 2019, the Company completed the distribution of 100% of the outstanding common stock of First Bankers Trust Services, Inc. (Trust Services) to the stockholders (the “Distribution”), pursuant to which Trust Services became an independent company. These financial statements reflect Trust Services’ financial results in the consolidated statements of income as discontinued operations (See Note 2). Pursuant to the terms of the agreement entered into on June 5, 2019, assets related to Trust Services were transferred to, and liabilities related to Trust Services were retained or assumed by Trust Services. See Note 2, Discontinued Operations, for additional information. 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 in intercompany accounts and consolidation. The results of discontinued operations have been reported separately in the consolidated financial statements. transactions have been eliminated 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. Securities Securities held to maturity are those for which the Company has the ability and intent to hold to maturity. Securities meeting such criteria at the date of purchase and as of the balance sheet date are carried at amortized cost, adjusted for amortization of premiums and accretion of discounts, computed by the interest method over their contracted lives. Securities available for sale are accounted for at fair value and the unrealized holding gains or losses, net of their deferred income tax effect, are presented as increases or decreases in accumulated other comprehensive income, as a separate component of equity. Realized gains and losses on sales of securities are based upon the adjusted book value of the specific securities sold and are included in earnings. Notes to Consolidated Financial Statements There were no trading securities as of December 31, 2020 and 2019. 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 $7,382 and $13,031 at December 31, 2020 and 2019, 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. 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. The Company’s portfolio segments are as follows: Commercial operating Commercial real estate Agricultural operating Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family Consumer 19 Notes to Consolidated Financial Statements 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. services companies, health care providers, financial organizations and retailers. The Generally, for all classes of loans, loans are considered past due when contractual payments are delinquent for 31 days or greater. For all classes of loans, loans will generally be placed on nonaccrual status when the loan has become 90 days past due (unless the loan is well secured and in the process of collection); or if any of the following conditions exist: It becomes evident that the borrower will not make payments, or will not or cannot meet the terms for renewal of a matured loan, When full repayment of principal and interest is not expected, When the loan is graded “substandard” and the future accrual of interest is not protected by sound collateral values, When the loan is graded “doubtful”, When the borrower files bankruptcy and an approved plan of reorganization or liquidation is not anticipated in the near future, or When foreclosure action is initiated. When a loan is placed on nonaccrual status, payments received will be applied to the principal balance. However, interest may be taken on a cash basis in the event the loan is fully secured and the risk of loss is minimal. Previously recorded but uncollected interest on a loan placed in nonaccrual status is accounted for as follows: if the previously accrued but uncollected interest and the principal amount of the loan is protected by sound collateral value based upon a current, independent qualified appraisal, such interest may remain on the Company’s books. If such interest is not protected, it is considered a loss with the amount thereof recorded in the current year being reversed against current earnings, and the amount recorded in the prior year being charged against the allowance for possible loan losses. For all classes of loans, nonaccrual loans may be restored to accrual status provided the following criteria are met: The loan is current, and all principal and interest amounts contractually due have been made, The loan is well secured and in the process of collection, and Prospects for future principal and interest payments are not in doubt. 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 4 for disclosure of the Company’s troubled debt restructurings. Allowance for loan losses: For all portfolio segments, the allowance for loan losses is maintained at the level considered adequate by management to provide for losses that are probable. The allowance is increased by provisions charged to expense and reduced by net charge-offs. In determining the adequacy of the allowance balance, the Company makes continuous evaluations of the loan portfolio and related off-balance sheet commitments, considered current economic conditions, historical loan loss experience, reviews of specific problem loans and other factors. A discussion of the risk characteristics and the allowance for loan losses by each portfolio segment follows: For commercial operating loans, the Company focuses on small and mid-sized businesses with primary operations in transportation, warehousing and manufacturing, as well as serving as building contractors, business Company provides a wide range of commercial loans, including lines of credit for working capital and operational purposes, and term loans for the acquisition of real estate, facilities, equipment and other purposes. Approval is generally based on the following factors: Sufficient cash flow to support debt repayment; Ability and stability of current management of the borrower; Positive earnings and financial trends; Earnings projections based on reasonable assumptions; Financial strength of the industry and business; and Value and marketability of collateral. Collateral for commercial loans generally includes accounts receivable, inventory, equipment and real estate. The lending policy specifies approved collateral types and corresponding maximum advance percentages. The value of collateral pledged on loans typically exceeds the loan amount by a margin sufficient to absorb potential erosion of its value in the event of foreclosure and cover the loan amount plus costs incurred to convert it to cash. The lending policy specifies maximum term limits for commercial operating loans. For term loans, the maximum term is 7 years. The lending policy references compliance with the interagency appraisal and evaluation guidelines effective December 2010. Where the purpose of the loan is to finance depreciable equipment, the term loan generally does not exceed the estimated useful life of the asset. For lines of credit, the typical maximum term is 365 days. However, longer maturities may be approved if the loan is secured by readily marketable collateral. In addition, the Company often takes personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Commercial real estate loans, construction and land development loans and real estate 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 20 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. 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. Notes to Consolidated Financial Statements In addition, the Company often takes personal guarantees to help assure repayment. Loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. 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, the repayment of the loans generally is dependent, in large part, on the borrower’s continuing financial stability, and is therefore more likely to be affected by adverse personal circumstances. 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. These loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s 21 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. The Company utilizes the following internal risk rating scale: Type 1 (Substantially Risk Free) General Statement: This rating should be assigned to loans with virtually no credit risk, such as loans fully secured by certificates of deposit and other deposit accounts. It may be assigned to other loans to businesses or individuals with little or no risk. Business Loans: A loan to a business may be rated 1 if it exhibits enough of these characteristics to make it substantially risk free: Bank has a high regard for the character, competence and diligence of management. Earnings are strong and well-assured. There is ample liquidity. Loans have paid as agreed. Abundant collateral which is liquid and has well-defined market value. Capital position well above industry averages. Loan structure is appropriate and documentation complete. No adverse trends. Loans to Individuals: Loans to individuals may be assigned a 1 rating if the following conditions are met: The primary source of repayment is strong and is considered likely to remain strong throughout the life of the loan. The loan is secured by collateral with a loan to value (LTV) of less than 50% provided that the collateral must have well-defined market-value, must have satisfactory liquidity and should retain most of its value if the primary source of repayment falters. The individual has significant liquidity and is considered likely to remain liquid over the life of the loan. Type 2 (Low Risk) General Statement: This rating should be assigned to loans that have little credit risk. Borrowers in this category have strong earnings and capital and a secondary source of repayment that is sufficient to fully repay the loan. The business is considered to be highly resistant to adverse changes in economic or industry conditions. Business Loans: Following are some characteristics of loans that should be rated 2. A 2 loan may not exhibit all of the following characteristics, but its strengths -- primarily the sufficiency/reliability of the sources of repayment -- result in a loan with little credit risk. To the extent that a loan is not characterized by one or more of the factors listed below, the deficiency is not considered to adversely affect the likelihood of repayment in any material way. Bank has a high regard for the character, competence and diligence of management. Consistent record of earnings; the earnings stream is considered resistant to changes in economic conditions. Liquidity at or above industry norms. Loans have paid as agreed. Notes to Consolidated Financial Statements 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. 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 following characteristics, but its strengths -- primarily the sufficiency/reliability of the sources of repayment -- result in a loan with normal levels of risk. Management is considered to be capable and diligent. The earnings stream is satisfactory under present conditions and is considered likely to continue. Satisfactory liquidity Loans have paid as agreed. Collateral is considered sufficient to repay the loan in full within a reasonable marketing time. Capital position within a reasonable range above or below industry average. No material deficiencies in loan structure or documentation. Trends typically flat or positive. No material adverse trends. Loans to Individuals: Loans may be unsecured and still rated 3 if the individual’s earnings stream is both strong and reliable. If earnings are not as strong, loans should be rated 3 if the Bank’s collateral is considered sufficient to repay the loans. Type 4 (Above Average Risk) General Statement: Borrowers in this category are not as strong financially as the typical business in the same industry. There may be discernible weakness in management, earnings, capital or the Bank’s secondary sources of repayment. The business is considered to be susceptible to adverse changes in economic or industry conditions. Business Loans: Loans to businesses should be rated 4 if financial strength is somewhat below industry averages, but the loans are expected to repay as agreed if the company’s current financial conditions stay the same or strengthen. Following are some examples of weaknesses which may cause a loan to have above average levels of risk. A 4 loan will not have all of these weaknesses, but will have one or more: There is some question as to the strength of management. The company is profitable in most years, but earnings are typically below industry averages. Liquidity may be limited as evidenced by occasional delinquencies. There may be a less than desirable margin in collateral; the collateral may be difficult to market; or the value of collateral may vary significantly depending on economic conditions. Capital position is below industry average. 22 May have deficiencies loan structure, documentation or missing financial information. in incomplete legal 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. Type 5 (Watch Loan) General Statement: Borrowers in this category have readily apparent weaknesses in their financial condition. There may be weak earnings, thin capital or an adverse trend that is expected to continue. The borrower currently has the capacity to repay, but is of marginal strength and is considered to have little ability to overcome economic events that would adversely affect the business. Loans with material documentation or structural deficiencies may also be rated Watch at the discretion of bank or loan review personnel. Business Loans: Following are examples of weaknesses which may warrant a Watch rating. Loans rated Watch will typically have several of the following weaknesses: There is often a question about the ability of management to operate the business successfully over time. The earnings stream is weak, with possible periods of loss. Liquidity may be a problem as evidenced by delinquencies or amortization periods longer than is typical for the type of collateral securing the loan. There may be reasonable doubt as to whether the loan would be repaid in full from the sale of collateral. Possible issues include: third-party claims to the collateral, difficulty in obtaining possession, condition, marketing time and value under current market conditions. Capital position less than half of industry average. Common to have deficiencies in loan structure, incomplete legal documentation or missing financial information. Trends are flat or negative. It is common for there to be a decline in sales, earnings and/or capital. Loans to Individuals: See “General Statement” for Watch loans. Type 6 (Substandard) General Statement: These loans have one or more pronounced weaknesses which jeopardize their timely liquidation. Neither the earnings of the business nor its realistic net worth adequately protect the Bank from possible loss. There is a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Business Loans: Following are examples of weaknesses which may warrant a substandard rating. Loans rated Substandard will typically have several of the following weaknesses: Management often considered to have made incorrect strategic decisions or to be weak or inattentive. Earnings stream is insufficient to repay loans on a timely basis. Business normally has periods of loss, sometimes large. Liquidity usually strained by operating losses. Loans usually renegotiated or past-due. It may be unlikely that the loan would be repaid in full from the sale of collateral. Possible issues include: third party claims to the collateral; difficulty in obtaining possession, condition, marketing time and value under current market conditions. 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: Large operating losses. Collateral insufficient to repay loan. Typical to have little or no capital. Continued viability of business is doubtful. Unreliable or no alternative sources of repayment. Loss anticipated, exact loss figure cannot be determined at present. Loans to Individuals: Borrower’s ability or willingness to repay makes collection of the debt in full unlikely. Loans may be unsecured or have an obvious collateral deficiency. Type 8 (Loss) General Statement: Loans with pervasive weaknesses so great that principal is considered uncollectible under current circumstances. This classification does not mean that the loan has absolutely no recovery value, but simply that it is no longer practical to defer writing it off. Recovery is dependent on favorable future events. Normal characteristics: Business has failed or is near failure. No reliable source of repayment. For these loans categorized as commercial or credit relationships with aggregate exposure greater than $500,000, a loan review will be required within 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 compliance with the interagency appraisal and evaluation guidelines effective December 2010. Mortgage servicing rights are not considered significant as of December 31, 2020 and 2019. The Company provides many types of consumer and other loans including motor vehicle, home improvement, home equity, signature loans and small personal credit lines. The lending policy addresses specific credit guidelines by consumer loan type. For residential real estate loans, and consumer loans, these large groups of smaller balance homogenous loans are collectively evaluated for impairment. The Company applies a quantitative factor based on historical charge-off experience in total for each of these segments. Accordingly, the Company generally does not separately identify individual residential real estate loans 23 Notes to Consolidated Financial Statements 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, 2020 and 2019, the Bank had loan concentrations in agribusiness of 15.55% and 17.88%, respectively, of outstanding loans. The Bank had no additional industry loan concentrations which, in management’s judgment, were considered to be significant. The Bank had no foreign loans outstanding as of December 31, 2020 and 2019. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, only when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the assets it received, and no condition both constrains the transferee from taking advantage of its right to pledge or exchange and provides more than a modest benefit to the transferor and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets. Credit Related Financial Instruments In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under lines of credit and standby letters of credit. Such financial instruments are recorded when they are funded. Premises, Furniture and Equipment Premises, furniture and equipment are stated at cost less accumulated depreciation. Depreciation is determined using the straight-line method over the estimated useful lives of the assets. Other Real Estate Owned Other real estate owned (OREO), which is included with other assets, represents properties acquired through foreclosure, in-substance foreclosure or other proceedings. 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. 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. 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, 2020 and 2019. Goodwill is included on the consolidated balance sheets in intangibles. See Note 6. Repurchase Agreements Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature either daily or within one year from the Notes to Consolidated Financial Statements 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. 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. Earnings Per Share of Common Stock Basic earnings per share of common stock is computed by dividing net income 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, 2020 and 2019. Service Charge Income 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. Other Income 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. 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 Comprehensive Income Comprehensive income is defined as the change in equity during a period from transactions and other events from non-owner sources. Comprehensive income is the total of net income and other comprehensive income, which for the Company, is comprised of unrealized gains and losses on securities available for sale. Subsequent Events The Company has evaluated all subsequent events through March 4, 2021, the date the financial statements were available to be issued. Current Accounting Developments 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, 2022. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU was effective upon its issuance. The guidance provides optional expedients and exceptions for applying existing guidance to contract modifications, hedging relationships and other transactions to ease the burden of accounting for such contract modifications. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. Risks And Uncertainties On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a ”Public Health Emergency of International Concern” and on March 11, 2020, declared it to be a pandemic. Actions taken to mitigate the spread of COVID-19 including restrictions on travel, quarantines in certain areas, and forced closures for certain public places and businesses have had, and may continue to have, an adverse impact on the economies in which the Company operates. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was enacted to, amongst other provisions, provide emergency assistance for individuals and businesses affected by the coronavirus pandemic. The CARES Act authorized the Small Business Administration (SBA) to create the Paycheck Protection Program (PPP), a loan guarantee program that helps certain affected businesses meet payroll and utilities needs resulting from the COVID-19 pandemic. During the year ended December 31, 2020, the Company originated approximately $33,070,000 in PPP loans. In most cases, the program provides for forgiveness up to the full principal amount of the loan, and may include accrued interest. During the year ended December 31, 2020, the SBA forgave approximately $10,891,000 of the PPP loans originated by the Company, leaving a balance of approximately $22,179,000 as of December 31, 2020. These loans are included in commercial operating 24 loans within Note 4 of the consolidated financial statements, and there are $241,000 in related allowance for loan losses included for these. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to troubled 2. Discontinued Operations Notes to Consolidated Financial Statements debt restructurings (TDRs) for a limited period of time to account for the effects of COVID-19. This guidance was recently extended under the Consolidated Appropriations Act, enacted on December 27, 2020. Under this TDR guidance, the Company modified loans with an outstanding balance of approximately $61,791,000 during the year ended December 31, 2020, which were not classified as TDRs within Note 4 of the consolidated financial statements. On June 5, 2019, the Company’s Board of Directors approved the spin-off, or distribution, of Trust Services. To consummate the distribution, the Company’s Board of Directors declared a pro rata dividend of Trust Services common stock to the Company’s stockholders of record as of the close of business on June 17, 2019. Each Company stockholder received a distribution of one (1) share of Trust Services common stock for every share of Company common stock held on July 1, 2019. Immediately after the Distribution, Trust Services became an independent company. We have classified the results of Trust Services as discontinued operations in our consolidated statements of income for all periods presented. The financial results of Trust Services are presented as income from discontinued operations, net of income taxes, on the consolidated statements of income. There was no gain or loss recognized as a result of the spin-off. The following table presents financial results of Trust Services: Interest income Noninterest income Noninterest expense Income from discontinued operations before income taxes Income tax expense Income from discontinued operations net of taxes * 2019 includes results of Trust Services through June 30, 2019 Y e ar Ende d De ce mbe r 31 2019 * $ 123 6,376 4,163 $ 2,336 663 $ 1,673 25 Notes to Consolidated Financial Statements 3. Securities The amortized cost and fair values of securities as of December 31, 2020 and 2019 are as follows. Included in securities available for sale gross unrealized losses is an OTTI loss of $46,000 and $73,000 as of December 31, 2020 and 2019, respectively, relating to two corporate securities, which represent the non- credit related portion of the overall impairment. (Amounts in Thousands of Dollars): 2020 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 2019 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 $ 2,113 $ 177 $ - $ 2,290 $ 220,770 268,737 19,036 979 $ 6,506 8,070 1,487 - 14,493 524,015 $ 377 16,440 $ $ $ (22) (282) $ 227,254 276,525 - (46) (48) (398) 20,523 933 14,822 540,057 $ Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair Value $ 2,809 $ 161 $ - $ 2,970 $ (4) - (4) $ 170,071 126,677 (73) (59) (140) $ $ 25,973 964 18,646 342,331 $ $ 167,811 122,319 24,706 1,037 18,615 334,488 $ $ 2,264 4,358 1,271 - 90 7,983 26 Notes to Consolidated Financial Statements 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, 2020 and 2019 are summarized as follows. (Amounts in Thousands of Dollars): 2020 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 $ 4,983 $ (22) $ - $ - $ 4,983 $ (22) U.S. government agency mortgage backed securities 60,838 (282) - - 60,838 (282) Corporate securities - - 933 (46) 933 (46) Collateralized mortgage obligations 4,428 (48) - - 4,428 (48) $ 70,249 $ (352) $ 933 $ (46) $ 71,182 $ (398) 2019 SECURITIES AVAILABLE FOR SALE U.S. government agency bonds State and political subdivisions Corporate securities Collateralized mortgage obligations Less than 12 Months 12 Months or More Total Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses $ - $ - $ 518 $ (4) $ 518 $ (4) - - 185 (4) 185 (4) - - 964 (73) 964 (73) 4,855 (37) 7,127 (22) 11,982 (59) $ 4,855 $ (37) $ 8,794 $ (103) $ 13,649 $ (140) As of December 31, 2020, the investment portfolio included 307 securities. Of this number, 21 securities have current unrealized losses and 2 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, 2020 and 2019, none of the credit related losses were recognized in earnings. The amortized cost and fair value of securities as of December 31, 2020 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): SECURITIES HELD TO MATURITY Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years SECURITIES AVAILABLE FOR SALE Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Corporate securities Collateralized mortgage obligations Amortized Cost Fair Value $ 455 1,263 395 - $ 463 1,337 490 - $ 2,113 $ 2,290 $ 34,018 189,413 21,053 264,059 $ 34,419 195,335 23,080 271,468 $ 508,543 $ 524,302 979 14,493 933 14,822 $ 524,015 $ 540,057 27 Notes to Consolidated Financial Statements Information on sales, including calls and maturities, of securities available for sale during the years ended December 31, 2020 and 2019 follows, (Amounts in Thousands of Dollars): Proceeds from sales Gross gains Gross losses 2020 2019 $ - $ 15,296 - (4) - (55) As of December 31, 2020 and 2019, securities with a carrying value of approximately $399,380,000 and $322,558,000, respectively, were pledged to collateralize deposits and securities sold under agreements to repurchase and for other purposes as required or permitted by law. 4. Loans The composition of net loans outstanding as of December 31, 2020 and 2019 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 2020 2019 $ 95,111 $ 78,966 175,351 32,794 42,647 8,741 92,235 38,274 178,546 35,680 53,851 7,720 102,038 43,798 $ 485,153 $ 500,599 (12,157) (11,788) $ 472,996 $ 488,811 28 Notes to Consolidated Financial Statements The aging of the loan portfolio, by classes of loans, as of December 31, 2020 and 2019 is summarized as follows. (Amounts in Thousands of Dollars): 2020 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 2019 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 $ 94,971 $ - $ - $ - $ 140 $ 95,111 167,988 395 31,945 42,193 6,640 89,366 37,983 - - - 590 195 - - - - 285 92 - - - - 443 4 6,968 175,351 849 454 2,101 1,551 - 32,794 42,647 8,741 92,235 38,274 $ 471,086 $ 1,180 $ 377 $ 447 $ 12,063 $ 485,153 Current 30-59 Days Past Due 60-89 Days Past Due Accruing Past Due 90 Days or More Nonaccrual Loans Total $ 77,972 $ 469 $ - $ - $ 525 $ 78,966 175,730 35,680 53,851 5,424 97,979 43,473 35 - - 30 1,008 221 - - - 1,819 301 93 - - - - - 11 2,781 178,546 - - 447 2,750 - 35,680 53,851 7,720 102,038 43,798 $ 490,109 $ 1,763 $ 2,213 $ 11 $ 6,503 $ 500,599 Nonperforming loans, by classes of loans as of December 31, 2020 and 2019 are summarized as follows. (Amounts in Thousands of Dollars): 2020 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 2019 CLASSES OF LOANS Commercial operating Commercial 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 $ - $ 140 $ - $ 140 - - - - 443 4 6,968 849 454 2,101 1,551 - - - - - - - 6,968 849 454 2,101 1,994 4 $ 447 $ 12,063 $ - $ 12,510 Accruing Past Due 90 Days or More Nonaccrual Loans ** Troubled Debt Restructures- Accruing Total Nonperforming Loans $ - $ 525 $ - $ 525 - - - 11 2,781 447 2,750 - 1,238 - - - 4,019 447 2,750 11 $ 11 $ 6,503 $ 1,238 $ 7,752 ** Nonaccrual loans as of December 31, 2020 and 2019 include $6,360,000 and $1,170,000, respectively, of troubled debt restructures which are included in commercial real estate, real estate secured by 1-4 and multi-family, and commercial operating. 29 Notes to Consolidated Financial Statements Changes in the allowance for loan losses, by portfolio segment, during the years ended December 31, 2020 and 2019 are summarized as follows. (Amounts in Thousands of Dollars): 2020 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 $ 991 $ 5,188 $ 563 $ 793 $ 1,903 $ 1,898 $ 452 $ 11,788 673 1,993 (56) (159) 42 (434) 341 2,400 Provision for loan losses Recoveries of loans charged off Provision for loan losses Recoveries of loans charged off Loans charged off (282) (1,156) 7 1,671 - 7,181 10 517 - - 634 - - 1,945 - 21 1,485 (462) 37 830 75 14,263 (206) (2,106) Balance, ending $ 1,389 $ 6,025 $ 517 $ 634 $ 1,945 $ 1,023 $ 624 $ 12,157 2019 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 $ 1,346 $ 7,143 $ 611 $ 836 $ 727 $ 1,537 $ 599 $ 12,799 (336) 1,177 84 (43) 1,167 318 33 2,400 Loans charged off (19) (3,134) - 1,010 2 8,322 - 695 (132) - 793 - 9 1,903 - 291 2,146 (248) 17 649 319 15,518 (197) (3,730) Balance, ending $ 991 $ 5,188 $ 563 $ 793 $ 1,903 $ 1,898 $ 452 $ 11,788 30 The allowance for loan losses, by impairment evaluation and by portfolio segment, as of December 31, 2020 and 2019 are summarized as follows. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements 2020 Allowance for loans individually evaluated for impairment Allowance for loans collectively evaluated for impairment Loans individually evaluated for impairment Loans collectively evaluated for impairment 2019 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 $ 19 $ 2,195 $ - $ - $ 1,484 $ 454 $ - $ 4,152 1,370 1,389 $ 3,830 6,025 $ 517 517 $ 634 634 $ 461 1,945 $ 569 1,023 $ 624 624 $ 8,005 12,157 $ $ 148 $ 6,977 $ 555 $ 454 $ 2,101 $ 1,551 $ - $ 11,786 94,963 95,111 $ 168,374 175,351 $ 32,239 32,794 $ 42,193 42,647 $ 6,640 8,741 $ 90,684 92,235 $ 38,274 38,274 $ 473,367 485,153 $ 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 $ 628 $ 1,313 $ - $ - $ 1,530 $ 961 $ - $ 4,432 $ 363 991 3,875 5,188 $ 563 563 $ 793 793 $ 373 1,903 $ 937 1,898 $ 452 452 $ 7,356 11,788 $ $ 804 $ 4,814 $ - $ 104 $ 2,266 $ 2,862 $ - $ 10,850 78,162 78,966 $ 173,732 178,546 $ 35,680 35,680 $ 53,747 53,851 $ 5,454 7,720 $ 99,176 102,038 $ 43,798 43,798 $ 489,749 500,599 $ 31 Notes to Consolidated Financial Statements Loans, by classes of loans, considered to be impaired as of December 31, 2020 and 2019 are summarized as follows. (Amounts in Thousands of Dollars): 2020 CLASSES OF LOANS Impaired loans with no specific allowance recorded: Commercial operating Commercial real estate Agricultural operating 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 operating Agricultural real estate Construction and land development Real estate secured by 1-4 and multi-family 2019 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 7 $ 761 555 454 $ 7 1,212 850 454 - $ - - - $ 24 1,446 278 279 - 409 - 517 - - 224 959 $ 2,186 $ 3,040 $ - $ 3,210 $ 141 6,216 $ 162 6,315 $ 19 2,195 $ 453 4,450 2,101 1,142 2,101 1,251 1,484 454 1,960 1,248 $ 9,600 $ 9,829 $ 4,152 $ 8,111 $ 148 6,977 $ 169 7,527 $ 19 2,195 $ 477 5,896 555 454 2,101 1,551 850 454 2,101 1,768 - - 1,484 454 278 279 2,184 2,207 $ 11,786 $ 12,869 $ 4,152 $ 11,321 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment $ 40 2,131 $ 40 2,524 - $ - $ 20 3,138 104 447 1,508 104 447 1,617 - - - 98 555 1,314 $ 4,230 $ 4,732 $ - $ 5,125 $ 764 2,683 $ 792 2,715 $ 628 1,313 $ 755 7,326 1,819 1,354 1,819 1,422 1,530 961 909 890 $ 6,620 $ 6,748 $ 4,432 $ 9,880 $ 804 4,814 $ 832 5,239 $ 628 1,313 $ 775 10,464 104 2,266 2,862 104 2,266 3,039 - 1,530 961 98 1,464 2,204 $ 10,850 $ 11,480 $ 4,432 $ 15,005 32 Interest income and cash basis interest income recognized on impaired loans during the years ended December 31, 2020 and 2019 was not significant. Impaired loans, for which no allowance has been provided, as of December 31, 2020 and 2019, have adequate collateral, based on management’s current estimates. For each class of loans, the following summarizes the recorded investment by credit quality indicator as of December 31, 2020 and 2019. (Amounts in Thousands of Dollars): Notes to Consolidated Financial Statements 2020 Internally assigned risk rating: Pass (ratings 1 through 4) Special mention (rating 5) Substandard (rating 6) Doubtful (rating 7) Delinquency status:* Performing Nonperforming 2019 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 $ 83,327 $ 156,070 $ 28,826 $ 39,542 $ 4,086 $ 13,951 $ 325,802 11,013 771 - 8,963 10,318 - 266 3,702 - 1,223 1,882 - 28 1,653 447 2,007 2,095 24 23,500 20,421 471 $ 95,111 $ 175,351 $ 32,794 $ 42,647 $ 6,214 $ 18,077 $ 370,194 Construction and Land Development Real Estate Secured by 1-4 and Multi-Family Consumer Total $ 2,527 $ 74,158 $ 38,274 $ 114,959 - - - - $ 2,527 $ 74,158 $ 38,274 $ 114,959 Commercial Operating Commercial Real Estate Agricultural Operating Agricultural Real Estate Construction and Land Real Estate Secured by 1-4 and Development Multi-Family Total $ 66,562 $ 156,420 $ 30,086 $ 49,816 $ 2,246 $ 19,067 $ 324,197 11,037 998 14,216 6,219 1,571 4,023 3,345 690 30 1,819 2,367 2,165 32,566 15,914 369 78,966 $ 1,691 178,546 $ - 35,680 $ - 53,851 $ 447 4,542 $ 1,226 24,825 $ 3,733 376,410 $ Construction and Land Development Real Estate Secured by 1-4 and Multi-Family Consumer Total $ 3,178 $ 77,213 $ 43,798 $ 124,189 - - - - $ 3,178 $ 77,213 $ 43,798 $ 124,189 *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 TDRs. 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. 33 Notes to Consolidated Financial Statements As of December 31, 2020 and 2019, TDRs total $6,360,000 and $2,408,000, respectively. For each class of loans, the following summarizes the number and investment in troubled debt restructurings, by type of concession, that were restructured during the years ended December 31, 2020 and 2019. (Amounts in Thousands of Dollars): 2020 CONCESSION-SIGNIFICANT PAYMENT DELAY Commercial real estate 2019 CONCESSION-SIGNIFICANT PAYMENT DELAY Commercial real estate Number of TDRs Pre-Modification Recorded Investment Post-Modification Recorded Investment 1 $ 5,361 $ 5,361 Number of TDRs Pre-Modification Recorded Investment Post-Modification Recorded Investment 2 $ 1,238 $ 1,238 There was no financial impact for charge-offs, principal forgiveness or foregone interest for the troubled debt restructurings. For the years ended December 31, 2020 and 2019, 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 $199,849,000 and $190,430,000 as of December 31, 2020 and 2019, 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 $9,411,000 and $9,248,000 as of December 31, 2020 and 2019, respectively. 5. Premises, Furniture and Equipment The cost, accumulated depreciation and net book value of premises, furniture and equipment as of December 31, 2020 and 2019 is summarized as follows. (Amounts in Thousands of Dollars): Land Building and improvements Furniture and equipment Less accumulated depreciation 2020 2019 $ 4,536 $ 4,536 15,376 11,280 31,192 15,376 11,316 31,228 (17,960) (17,254) $ 13,232 $ 13,974 34 Notes to Consolidated Financial Statements 6. Intangibles Goodwill and intangible assets are summarized as follows. (Amounts in Thousands of Dollars): As of December 31, Intangible assets: Goodwill Other intangible assets: Core deposit intangible Other intangible assets Less accumulated amortization on certain intangible assets 2020 2019 $ 3,050 $ 3,050 1,380 1,855 3,235 (3,151) 84 1,380 1,855 3,235 (2,986) 249 Total intangible assets $ 3,134 $ 3,299 ESTIMATED FUTURE AMORTIZATION EXPENSE For the years ending December 31 (Amounts in thousands of dollars): 2021 2022 2023 2024 2025 Thereafter 7. Time Deposits $ 34 12 12 12 12 2 $ 84 The aggregate amount of time deposits, each with a minimum denomination of $250,000, was approximately $31,511,000 and $33,926,000 as of December 31, 2020 and 2019, respectively. Brokered deposits were $38,926,000 and $32,349,000 at December 31, 2020 and 2019, respectively. At December 31, 2020, the scheduled maturities of time deposits are as follows. (Amounts in Thousands of Dollars): $ $ 160,160 18,715 1,214 892 539 2 181,522 2021 2022 2023 2024 2025 Thereafter 35 Notes to Consolidated Financial Statements 8. Federal Home Loan Bank Advances and Letters of Credit 10. Commitments and Contingencies The Bank advances funds from and repays them to the Federal Home Loan Bank (FHLB) as considered necessary for liquidity purposes. Outstanding advances as of December 31, 2020 and 2019 were $5,323,000 and $1,039,000, respectively. As of December 31, 2020, the amounts are due as follows: $4,000,000 in 2021, $1,039,000 in 2024 and $284,000 in 2030. 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. At December 31, 2020 and 2019, the Bank had $10,000,000 and $20,000,000 in letters of credit outstanding with Federal Home Loan Bank, respectively. These letters were pledged to two customers. 9. Junior Subordinated Debentures and Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Subordinated Debentures Junior subordinated debentures are due to FBIL Statutory Trusts 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 with each Trust’s issuance of 5,000 shares of Company Obligated Mandatorily Redeemable Preferred Securities. The debentures all bear the same interest rate and terms as the preferred securities, detailed following. The debentures are included on the consolidated balance sheets as liabilities; however, in accordance with Federal Reserve Board regulations in effect at December 31, 2020 and 2019, 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 three-month LIBOR rate (2.86% and 4.54% as of December 31, 2020 and 2019, 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 three-month LIBOR rate (3.16% and 4.84% as of December 31, 2020 and 2019, 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. 36 The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for unused lines of credit and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank’s commitments as of December 31, 2020 and 2019 is as follows. (Amounts in Thousands of Dollars): 2020 2019 Commitments to extend credit: Unused lines of credit Standby letters of credit $ 96,625 442 $ 83,392 580 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, 2020 and 2019, 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 $1,002,000 and $1,027,000 as of December 31, 2020 and 2019, respectively. These amounts include loans held for sale of none and $169,000 as of December 31, 2020 and 2019, respectively, and loan commitments, included in the summary in this Note, of $1,002,000 and $858,000 as of December 31, 2020 and 2019, respectively. A portion of residential mortgage loans sold to investors in the secondary market are sold with recourse. Specifically, certain loan sales agreements Notes to Consolidated Financial Statements 12. 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 I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). The Bank would be subject to limitations on certain activities including payment of dividends and discretionary bonuses to executive officers if its capital level is below the buffered ratio. Management believes, as of December 31, 2020, 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. 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, 2020 and 2019. In the opinion of management, the risk of recourse to the Bank is not significant and, accordingly, no liability has been established. Concentration of Credit Risk Aside from cash on hand and in-vault, the Company’s cash is maintained at various correspondent banks. The total amount of cash on deposit and federal funds sold exceeded federal insurance limits at five institutions by a total of approximately $13,490,000 and $19,761,000 as of December 31, 2020 and 2019, 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. 11. Benefits The Company has a 401(k) plan, which is a tax qualified savings plan, to encourage its employees to save for retirement purposes or other contingencies. All employees, working over 1,000 hours per year, of the Company and its subsidiaries are eligible to participate in the Plan after completion of one year of service and attaining the age of 21. The employee may elect to contribute a percentage of their compensation before taxes in a traditional 401(k) and/or a percentage of their compensation after taxes using the 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 is authorized at its discretion, pursuant to the provisions of the plan, to establish on an annual basis, a bonus fund, which will be distributed to certain employees, based on Incentive Compensation Plan does not become effective unless the Bank exceeds established income levels and goals. For the years ended December 31, 2020 and 2019, the bank met those goals. One plan, a Deferred Incentive Compensation Plan, maintained by the Bank has been discontinued. their performance. The Employee The financial statements include expense related to the 401(k) Plan of $477,000 and $456,000 for the years ended December 31, 2020 and 2019, respectively. The financial statements include expense related to the incentive compensation plan of $794,000 and $747,000 for the years ended December 31, 2020 and 2019, respectively. 37 Notes to Consolidated Financial Statements The Company and Bank’s actual capital amounts and ratios are also presented in the table. (Amounts in Thousands of Dollars): As of December 31, 2020 Actual Minimum Regulatory Requirement Minimum Regulatory Requirement With Capital Conservation Buffer To Be Well Capitalized under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk-Weighted Assets) $ Company $ Bank 112,060 100,881 Tier I Capital (to Risk-Weighted Assets) $ Company $ Bank 104,515 93,338 18.71% 16.85% $ $ 47,922 47,908 > 8.00% > 8.00% $ $ 62,897 62,879 > 10.500% > 10.500% N/A 59,885 $ N/A > 10.00% 17.45% 15.59% $ $ 35,941 35,931 > 6.00% > 6.00% $ $ 50,917 50,902 > 8.500% > 8.500% N/A 47,908 $ N/A > 8.00% Common Equity Tier I Capital (to Risk-Weighted Assets) Company Bank 94,515 93,338 $ $ 15.78% 15.59% $ $ 26,956 26,948 > 4.50% > 4.50% $ $ 41,932 41,919 > 7.000% > 7.000% N/A 38,925 $ N/A > 6.50% Tier I Capital (to Average Assets) Company Bank $ $ 104,515 93,338 9.34% 8.23% $ $ 44,743 45,372 > 4.00% > 4.00% $ $ 44,743 45,372 > 4.000% > 4.000% As of December 31, 2019 Actual Minimum Regulatory Requirement Minimum Regulatory Requirement With Capital Conservation Buffer N/A 56,715 $ N/A > 5.00% To Be Well Capitalized under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk-Weighted Assets) Company Bank $ $ 105,898 95,384 Tier I Capital (to Risk-Weighted Assets) Company Bank $ $ 98,461 87,950 17.93% 16.16% $ $ 47,246 47,228 16.67% 14.90% $ $ 35,434 35,421 Common Equity Tier I Capital (to Risk-Weighted Assets) Company Bank 88,461 87,950 $ $ 14.98% 14.90% $ $ 26,576 26,566 Tier I Capital (to Average Assets) Company Bank $ 98,461 10.79% $ 36,505 $ 87,950 9.74% $ 36,110 13. Income Tax Matters > > > > > > > > 8.00% 8.00% $ $ 62,010 61,986 > 10.500% > 10.500% N/A 59,035 $ N/A > 10.00% 6.00% 6.00% $ $ 50,199 50,179 4.50% 4.50% $ $ 41,340 41,324 4.00% $ 36,505 4.00% $ 36,110 > > > > > > 8.500% 8.500% N/A 47,228 $ 7.000% 7.000% N/A 38,372 $ N/A 8.00% N/A 6.50% > > 4.000% N/A N/A 4.000% $ 45,138 > 5.00% The components of income tax expense (benefit) from continuing operations are as follows for the years ended December 31, 2020 and 2019. (Amounts in Thousands of Dollars): Year Ended December 31, Current Deferred 2020 2019 $ 2,604 $ 1,272 (419) 290 $ 2,185 $ 1,562 38 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): Notes to Consolidated Financial Statements Year Ended December 31, 2020 % of Pretax Income 2019 % of Pretax Income Federal income tax at statutory rate $ 2,106 21.0% $ 1,724 21.0% Changes from statutory rate resulting from: State tax, net of federal benefit Tax exempt interest income, net Increase in cash surrender value Deferred trust revenue Other, net Income tax expense 437 (262) (100) - 4 4.4 (2.6) (1.0) - - 283 (304) (97) (50) 6 $ 2,185 21.8% $ 1,562 3.4 (3.7) (1.2) (0.6) 0.1 19.0% Net deferred tax assets (liabilities) consist of the following components as of December 31, 2020 and 2019. (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 (Liabilities) 2020 2019 $ 3,396 $ 3,291 - 563 23 560 $ 3,959 $ 3,874 $ (612) $ (739) (13) (108) (4,573) (523) - (13) (333) (2,235) (523) 18 $ (5,829) $ (3,825) $ (1,870) $ 49 Net deferred tax liabilities as of December 31, 2020 are included in other liabilities, and net deferred tax assets as of December 31, 2019 are included in other assets on the accompanying consolidated balance sheets. The net change in deferred income taxes is reflected in the financial statements as follows. (Amounts in Thousands of Dollars): Provision for income taxes $ (419) $ 290 Statement of changes in stockholders' equity, accumulated other comprehensive income, unrealized gains on securities available for sale, net 2,338 3,329 $ 1,919 $ 3,619 14. Fair Value Measurements The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification defines fair value, establishes a framework for measuring fair value using a hierarchy system, and requires disclosure of fair value measurements. The hierarchy is intended to maximize the use of observable inputs and minimize the use of unobservable inputs and includes three levels based upon the valuation techniques used. The three levels are as follows: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. 39 Notes to Consolidated Financial Statements Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. Investment securities available for sale: Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of state and political subdivisions and certain corporate, asset based and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy. Impaired loans: The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loan impairment may be measured based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral dependent. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. Fair value is determined based upon appraisals by qualified licensed appraisers hired by the Company, and are, generally, considered level 2 measurements. In some cases, adjustments are made to the appraised values due to various factors including age of the appraisal, age of 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 owned: Other real estate owned is carried at the estimated fair value of the property, less disposal costs at the time of acquisition. The fair value of the property is determined based upon appraisals or internal evaluations. Subsequent write-downs are bases on the lower of carrying value or fair value, less disposal costs. There have been no changes in valuation techniques used for any assets or liabilities measured at fair value during the years ended December 31, 2020 and 2019. 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, 2020 and 2019, 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, 2020 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, 2019 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 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Fair Value $ $ 227,254 276,525 20,523 933 14,822 540,057 - $ - - - - $ - 227,254 276,525 20,523 933 14,822 540,057 $ $ Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Fair Value $ $ 170,071 126,677 25,973 964 18,646 342,331 - $ - - - - $ - 170,071 126,677 25,973 964 18,646 342,331 $ $ Significant Unobservable Inputs (Level 3) - $ - - - - $ - Significant Unobservable Inputs (Level 3) - $ - - - - $ - 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, 2020 and 2019. 40 Notes to Consolidated Financial Statements 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, 2020 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 $ 5,829 $ - $ - $ 5,829 Fair Value Measurements as of December 31, 2019 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 $ 2,341 $ - $ - $ 2,341 $ 377 $ - $ - $ 377 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 approximates the carrying value. 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. 41 Notes to Consolidated Financial Statements The carrying values and estimated fair values of the Company’s financial instruments as of December 31, 2020 and 2019 are as follows. (Amounts in Thousands of Dollars): Financial assets: Cash and due from banks Securities held to maturity Securities available for sale Federal funds sold Loans, net 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 FHLB Advances Accrued interest payable Fair Value Hierarchy Level Carrying Value Fair Value 2020 2019 2020 2019 1 2 2 1 2 3 3 1 1 1 1 2 1 2 1 $ 52,680 $ 31,825 $ 52,680 $ 31,825 2,113 2,809 2,290 540,057 342,331 540,057 7,382 13,031 7,382 467,548 486,792 463,054 5,448 - 4,088 2,188 377 4,239 5,829 - 4,088 2,970 342,331 13,031 476,533 2,341 377 4,239 $ 157,217 $ 131,481 $ 157,217 $ 131,481 417,246 97,317 181,522 132,581 5,323 340 304,158 417,246 88,925 203,092 80,533 1,039 787 97,317 182,058 132,581 5,323 340 304,158 88,925 203,651 80,533 1,039 787 42 Board of Directors First Bankers Trustshares, Inc. William D. Daniels Chairman of the Board Member, Harborstone Group, LLC Allen W. Shafer President/CEO First Bankers Trust Company, N. A. William D. Daniels Chairman of the Board Member, Harborstone Group, LLC Allen W. Shafer President/CEO 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, Chairman Scott A. Cisel Former President/Chairman/CEO Ameren Illinois Strategic Adviser to Energy Internet Corporation President of Cisel Consulting, Inc. 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, Chairman Scott A. Cisel Former President/Chairman/CEO Ameren Illinois Strategic Adviser to Energy Internet Corporation President of Cisel Consulting, Inc. 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 Mark E. Freiburg Freiburg Insurance Agency & Freiburg Development, Owner Phyllis J. Hofmeister Robert Hofmeister Inc., Secretary Phyllis J. Hofmeister Robert Hofmeister Inc., Secretary Kemia M. Sarraf, M.D., M.P.H. CEO, Lodestar Consulting and Executive Coaching genHKids, Inc., President & Founder Southern Illinois University School of Medicine Kemia M. Sarraf, M.D., M.P.H. genHKids, Inc., President & Founder CEO, Lodestar Consulting and Executive Coaching Southern Illinois University School of Medicine Richard W. Schulte Wright & Schulte, LLC Attorney At Law Richard W. Schulte Wright & Schulte, LLC Attorney At Law 43 Officers First Bankers Trust Company, N.A. PRESIDENT/CEO Allen W. Shafer REGIONAL PRESIDENTS Jason L. Duncan North Region David J. Rakers West Region SENIOR VICE PRESIDENTS Thomas J. Frese (CFO/COO) Douglas R. Reed Scott Thoele James D. Whitaker (CCO) MARKET PRESIDENT Darren Jones VICE PRESIDENTS Nicole R. Allen-Cain (ISO) John T. Armstrong Melinda Boyer Nathan J. Frese Jennifer M. Gilker Tony R. Gross Devan D. Hitt Ashley J. Meadows James R. Obert Sherry R. Schaffnit Michelle M. Shortridge Bernie J. Venvertloh Brooke C. Venvertloh Michele M. Walgren Randal S. Westerman David A. Young ASSISTANT VICE PRESIDENTS Amy E. Bruenger James M. Farmer David J. Garner Chase M. Hildebrand Lisa K. Hoffman Karen J. Koehn Ryne R. Lubben Laura J. Maas Cynthia A. MacKenzie Lauryn K. Oshner John K. Predmore Zachary Reed Brenda S. Seals Kelly R. Seifert Leslie A. Westen Joan M. Whitlow April D. Willey INFORMATION TECHNOLOGY OFFICERS Ronald W. Fairley Terry J. Hanks Andrew W. Marner RETAIL OFFICERS Kaitlyn Anderson Rachel E. Ayalew Pamela Curtis W. Kay Divan Susan L. Farlow Kelly B. Freeman Kelli Gooding April Griffin Leigh A. Holstein Krystal N. Jackson Julie L. McElhiney Shannon M. Orris Eric L. Roon CREDIT ANALYST OFFICER Megan Cheek ERM LOAN COMPLIANCE OFFICER Lisa Palmer LOAN ADMINISTRATION OFFICER Cherie Sherfy LOAN OPERATIONS OFFICER Melisa G. Heimann MARKETING OFFICER Kyle W. Beckman MORTGAGE UNDERWRITING OFFICER Kim Neal 44 Notes
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