ADAMS BANK & TRUST Your Financial Services Center

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1 ADAMS BANK & TRUST Your Financial Services Center 4 th Quarter 2005 Six Rules for Effective Debt Management Nebraska Brule Chappell Grant Imperial Indianola Lodgepole Madrid North Platte Ogallala Sutherland Colorado Berthoud Colorado Springs Firestone Corporate Toll-Free Telebanc Toll-Free in Ogallala info@abtbank.com World Wide Web Some people think owing money is a bad thing. They avoid it at all cost. They have no mortgage, no car payments, no credit cards...no debt. These people are never in financial trouble. They put off getting the things they need and want until they have the full purchase price in cash. Other people think debt is almost like free money; it helps them get whatever they want when they want it and they don t have to pay until later. These people are often just a step or less away from financial disaster. An unexpected emergency or repair bill or a smaller-than-normal paycheck could be all it takes to push them over the edge of bankruptcy. The rest of us Most of us fall somewhere in between these two extremes. We understand that debt can be useful in making major purchases and covering emergencies, but we try to control our debt so the debt doesn t wind up controlling us. Still, with so many lending choices, credit card offers and payment options out there, it is hard to know if we are managing our debt in the most prudent way. To help keep things under control, here are a few rules of debt management to keep in mind: 1. Keep you total debt service under 33% of your gross income. Total debt service means the total loan payments (including both principal and interest) that you are obligated to make each month. If your total loan and credit card payments are nearing the 33% level, don t take on additional debt. 2. Always keep a liquid (cash) reserve. For many people experiencing financial difficulty, it is not the level of debt so much as the lack of liquidity and cash flow that gets them in trouble. If you have no cash reserve, you have no flexibility in dealing with debt, no cushion to absorb the bumps and glitches on the road of life. 3. Do not accelerate debt payments until you have built up an adequate cash reserve. This gets us back to rule 2. Increasing liquidity up to a satisfactory level is more important to your overall financial health than bringing down your current level of debt. A good rule of thumb is to never pay more than the minimum on any loan until you have a comfortable amount in savings and you have made your annual contribution to a retirement plan. 4. Avoid balloon loans. You want your debt service to be predictable and fairly constant each month. Therefore, try to avoid repayment schedules that require extra-large payments at some future date. If you are using adjustable-rate financing, try to negotiate a rate cap so the interest rate cannot rise too dramatically in any one year. 5. Use credit cards for convenience only. Credit cards carry higher rates than alternative consumer financing. Therefore, always pay your credit card bill in full each month to avoid interest charges. If you need to purchase a big-ticket item, try to use a more efficient method of financing. 6. Be proactive when problems occur. Contact your lender if you will have trouble meeting your current payment schedule. Lenders are more willing to work out alternate payment schedules if you contact them before a payment is missed rather than waiting for them to contact you after a payment is missed. A certain amount of debt can make good financial sense when it is used to even out the impact of abnormal expenses (like the purchase of a car). We just have to be sure we manage our debt effectively. Mel Adams Chairman

2 Does Your Estate Plan Need Updating to Account for Increasing Exclusion Amounts? by Todd Adams President of Adams Bank & Trust The purpose of this article is to alert people with net assets in the milliondollar range and more that an adjustment to your will and/or estate plan may be in order. The underlying reason is that the Tax Relief Act of 2001 instituted a schedule of increasing exclusion amounts applicable to estate values that are subject to estate taxes. The ways in which the estate tax exclusion amount can affect an estate can get rather complicated, but the following basic example should give an idea of the main issues involved. Unlimited marital deduction Estate tax law provides for an unlimited marital deduction, which means that one spouse can leave his or her entire estate to the surviving spouse without estate taxes becoming due when the first spouse dies. However, since the amount that is inherited by the surviving spouse then becomes part of the surviving spouse s estate, taxes could be due on that inherited amount when the surviving spouse dies. (The exception, of course is if the surviving spouse remarries and then leaves all of his or her estate to the new surviving spouse. But even then the chain of subsequent spouses eventually will run out and all of the passed down inheritances will become a part of the last spouse s estate and be subject to estate tax.) Example: John and Mary are married and have three grown children: Joan, George and Jack. John and Mary have a net worth of $6 million, all in joint ownership, so John s share, for estate purposes, is $3 million. If John leaves his entire estate to Mary (instead of bequeathing a portion of his estate to their children), there will be no tax due on John s estate at the time of his death. But now that Mary has inherited John s estate, her net worth has increased to $6 million. When she dies and leaves her estate to her children (assuming she has not remarried), the entire estate will be exposed to estate tax. So John didn t really avoid the estate tax altogether; he just deferred the taxes by transferring his estate to Mary. Exclusion amount However, the law provides for an exclusion amount a portion of an estate that is not taxed. For 2005, the exclusion amount is $1.5 million dollars. This means that Mary s estate can pass $1.5 million on to the children without estate tax, but the remaining $4.5 million that is also going to the children will be taxed. Using the exclusion wisely Suppose John had written into his will that each child was to receive $500,000 from his estate, with the balance of his estate going Mary. John s estate would still owe no tax because the total bequests going to Joan, George and Jack, did not exceed the exclusion amount and the remainder, all of which went to Mary, qualified for the marital deduction. When Mary subsequently dies, leaving her entire estate to the children, her estate will be valued at $4.5 million her own $3 million plus the half of John s estate that she inherited. (For simplicity, this example does not account for growth in value of Mary s estate during widowhood.) But Mary s estate also gets an exclusion amount, so $1.5 million goes to the children tax free and only the remaining $3 million is subject to estate tax. In other words, since all of the money was going to go to the children eventually, John and Mary s combined estates saved taxes on $1.5 million in assets just by John bequeathing his full exclusion amount directly to their children instead of having it go to Mary first. The effect of increasing exclusions As noted above, the exclusion amount is $1.5 million for It is scheduled to rise to $2 million for the three-year period of and to $3.5 million for (For the year 2010, there is no estate tax, but it remains to be seen what Congress will do for the years 2011 and beyond.) These increasing exclusions mean that a will bequeathing a specific dollar amount to a non-spouse will need to be adjusted in order to take full advantage of the increasing exclusion amounts. One good way to handle, once and for all, the problems posed by increasing exclusion amounts is to avoid stating a specific dollar amount for a non-spouse bequest; instead, include a formula that relates the amount of the bequest to the tax law in effect at the time of death. Consult your attorney If your net worth is such that it could reach and exceed $2 million sometime within the next three years, we suggest that you visit with an attorney to make sure that your will and estate plan remain properly structured to adequately fulfill your wishes. 2

3 We d Like You To Meet: Michele Malleck Assistant Vice President Indianola Branch 3 Smart things to do now to make your financial life easier or more rewarding Start, or continue, contributing to an Individual Retirement Arrangement. Evaluate your estate plan to see if it accounts for increasing exclusion amounts or otherwise needs updating. Michele Malleck is a 21-year veteran of the Adams Bank & Trust office in Indianola, Nebraska. She started here in 1984, when the office was operating as the Bank of Indianola. (The Bank of Indianola merged with Adams Bank & Trust in 1999.) I started work here the day after my high school graduation, explains Michele. I was a senior at Beaver Valley High School in Lebanon, Nebraska when I got a call from the owner of the bank asking if I would be interested in a job. I had no idea at the time that I would still be here 20 years later. Michele started out in bookkeeping and after four years moved to loan clerk. Today, as Branch Assistant Vice President, she is still involved in loan work, especially consumer loans, but also oversees the teller line and personal bankers. We re a fairly small office, Michele notes, so every body does a little bit of everything whatever needs to be done. I like it. It keeps things interesting. In addition to the diversity of her work, Michele particularly enjoys helping and working with the customers. Indianola is a small community, and I ve been here Make sure your investments are well-diversified and match your changing objectives. Visit the website and order your free credit report. Services Available at Adams Bank & Trust Transaction Accounts Bonus Checking Club 50 and Club 50 Gold SuperNOW Checking Premier Checking Transaction Services Direct Deposit Wire Transfer of Funds Visa Check Card Bank-by-Mail Insured Savings & CDs Money-Market Savings Certificates of Deposit (for any term from 1 60 months) Tax-Deferred Retirement Plans IRA and Roth IRA (Individual Retirement Accts.) SEP (Simplified Employee Pension accounts) Loan Services Overdraft Protection Business/Agricultural Loans Consumer Loans (home, auto, etc.) Home Improvement Loans Mortgage Loans Second Mortgages Construction Loans Trusts and more Complete Trust Services Safe Deposit Boxes Notary/Signature Guarantee Leasing Foreign Exchange Information and Convenience Services Automatic teller machines Internet Banking Internet Web Site Telebanc 24-hour banking Continued on back page. 3

4 Michele Malleck Continued from page 3. long enough that I know nearly all our customers, I know their families and I know the days many of them usually come into the bank and I miss them when they don t. Michele definitely has a fondness for small-town living. Born in Cambridge and raised in rural Lebanon (a few miles to the southeast of Indianola), she spent portions of her childhood on either side of the Kansas border but always within the Lebanon ZIP code. I really like small-town life, she says, getting together with family and friends, watching the Huskers play and also watching NASCAR races which I didn t care for much until the last couple of years but have come to appreciate as I ve learned the finer points of what s going on. Her biggest hobby is sport spectating, and a lot of that is due to the involvement of her three children in all sorts of sport activities. Michele and her husband, Shawn, who works for Gore Oil in McCook, Nebraska, have two daughters and a son: Ashley, 20, recently graduated from McCook Community college; Brandon is a junior at Southwest High School and Candace is a seventh-grader at Southwest Middle School. Michele belongs to the Rotary Club of Indianola and serves as treasurer of the Old Settlers Committee, the group that organizes the Indianola town celebration each August. Adams Bank & Trust Balance Sheet as of September 30, 2005 Cash On Hand And Due From Banks $8,604,468 Money on hand in our bank and money to our credit in other banks. Government and Agency Bonds 48,008,034 Marketable investments in bonds and other securities of the U.S. Government and its agencies. Federal Funds Sold 0 Excess funds loaned to other banks on a day-to-day basis. Loans 310,543,681 The total of all customer loans, including farm, business, auto, home, student, consumer, and personal loans, etc. Buildings, Furniture and Fixtures 14,416,899 The current book value, after depreciation, of our buildings, computers, equipment, etc. Other Assets 11,738,384 Includes interest on loans that has been earned but not yet collected, expenses that have been prepaid, etc. Total Assets $393,311,466 Deposits $275,798,788 Includes all customer funds held on deposit. Other Liabilities 81,602,164 Includes borrowings by the bank, interest on deposits and other expenses accrued but not yet paid, deferred taxes, etc. Capital 3,000,000 The amount paid by initial stockholders for bank stock. Surplus 12,863,288 Additional money contributed by stockholders for added strength. Undivided Profits and Reserves 20,047,226 provide added strength to meet possible future loan losses and to replace buildings and equipment as they wear out. Total Capital Accounts 35,910,514 The total capital available for the safe operation of Adams Bank & Trust. Total Liabilities & Capital Accounts $393,311,466 EQUAL HOUSING LENDER Inside 3 6 Rules of Effective Debt Mangement 3 The Second Rule of Successful Investing 3 Does Your Estate Plan Account for Increasing Exclusion Amounts? PRSRT STD U.S. Postage P A I D Lincoln, NE Permit No. 592 World Wide Web: info@abtbank.com Adams Bank & Trust Internet addresses: P.O. Box 720 Ogallala, NE Member FDIC ADAMS BANK & TRUST

5 4 th Quarter 2005 The Second Rule of Successful Investing Raymond James Investment Executives By Jim Prange and Stephen Zamborelli The second rule of successful investing is to balance your asset allocation with your personal situation. Before talking about this second rule, however, perhaps we should review the first rule. The first rule of successful investing is, of course, to diversify. Why were we taught as kids not to put all the eggs in one basket? Because if we do, and the basket drops, we lose all our eggs. Whereas if we distribute the eggs over several different baskets and one basket falls, we still have most of our eggs left. The analogy for investors is clear. Stock prices can go up or down. When an individual stock goes down, sometimes it can go down very fast. If all our money is invested in that single stock, we can quickly lose a big portion of our investment. Spreading our money out over several stocks tends to reduce the negative impact of one stock rapidly losing value. Diversification spreading our money out over several different investments is just common sense, and it is just the beginning of intelligent investing. The next step has to do with how we diversify our investing. If we buy an automobile stock say General Motors and we also buy Ford, we are diversifying, but not very much because Ford is also an automobile stock. It s true that the prices of individual stocks move independently; some can go up (if the company is doing well) while others go down (if the company is having troubles). However, it is also true that often all the stocks within a particular industry can tend to move in the same direction. So, it is possible that automobile stocks as a group could all move down at the same time if the economic outlook for automobile purchases turns unfavorable. Because of the possibility of whole industries and sectors of the economy moving down based on changing economic events, the smarter way to diversify is to invest in stocks of different industries instead of just different stocks in the same industry. In addition to automobile stocks, for example, a well-diversified portfolio may also own communication stocks, health care stocks, computer stocks, pharmaceutical stocks, and so on. (Please be aware, however, that diversification does not assure a profit and does not protect against loss in declining markets.) Continued overleaf. Securities offered exclusively through Raymond James Financial Services, Inc. (an independent broker/dealer, member NASD/SIPC), are NOT FDIC Insured NOT GUARANTEED by Adams Bank & Trust Subject to risk and may lose value.

6 The Second Rule of Successful Investing Continued Asset allocation This brings us to the concept of asset allocation. The main idea here is that different individuals have different overall investment objectives, depending on their time horizons and their comfort with different levels of risk. A couple in their 70s, for example, may be more interested in security of principal (i.e., less willing to accept a loss of value) and regular income from their investments. A couple in their 30s, on the other hand, may be more interest in growth potential even if there could be some temporary losses than current income since they won t be tapping into their investment nest egg for three or four decades. Asset categories There are many different ways to classify and analyze assets. For this basic discussion, we have chosen to lump various types of assets into the following broad categories: Cash and cash equivalents, including bank balances, certificates of deposit, money market accounts and money market mutual funds and other investments that are easily converted to cash and where the principal is not likely to suffer a loss of value. Fixed-income, including municipal bonds, corporate bonds, bond mutual funds, annuities and other investments that provide a definite income. Corporate equities. This category includes stocks and is generally broken into subcategories as follows: Large capitalization equities, meaning the stocks of very large and stable companies. Small capitalization equities, which generally aren t as stable as the larger companies but often offer the potential of faster growth. International equities. The economies of different nations grow at different rates and developing nations sometimes experience greater growth rates than the developed countries. Examples A younger investor who can afford some fluctuation in principal value in exchange for the possibility of greater long-term growth may be interested in what would be called an aggressive investment plan. Such a plan might involve the following allocation of assets: 50% Large Cap equities 25% Small Cap equities 20% International equities 5% cash and cash equivalents (for emergencies and also to take advantage of attractive investment opportunities that may occur) On the other hand, someone at a later stage of life who is more comfortable with a conservative approach might have the following asset allocation: 50% fixed income 30% cash and cash equivalents 20% large cap equities. The possibilities are nearly endless, as are individual needs. For help in sorting through the complexities of investment diversification and asset allocation, we recommend consulting with a competent investment advisor. A good advisor can help you structure an investment portfolio that is tailored specifically to your needs and comfort level. The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources we consider to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Stephen Zamborelli and Jim Prange and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Past performance may not be indicative of future results. For assistance in reviewing your investment plan (or in creating one), please call any Adams Bank & Trust office for an appointment with a Raymond James Investment Representative. All Nebraska offices and Berthoud, Colorado are served by Jan Acker, Chad Adams, Brandy Barrett and Jim Prange located at Adams Bank & Trust, 315 N. Spruce, Ogallala, NE or (toll-free). In Colorado Springs, see Stephen A. Zamborelli 1310 Garden of the Gods Road Colorado Springs, CO