-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wd+dhe7M4HMMo1u3KQ8HNJI5a7AIF1GfV0VJJwJAOJeear0ylErwZmQEOOsmtckR bQVmEVXi28y0chkWqJV7vg== 0000897101-99-000282.txt : 19990330 0000897101-99-000282.hdr.sgml : 19990330 ACCESSION NUMBER: 0000897101-99-000282 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRINCETON NATIONAL BANCORP INC CENTRAL INDEX KEY: 0000707855 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 363210283 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20050 FILM NUMBER: 99575504 BUSINESS ADDRESS: STREET 1: 606 S MAIN ST CITY: PRINCETON STATE: IL ZIP: 61356 BUSINESS PHONE: 8158754444 10-K 1 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission File Number 0-20050 PRINCETON NATIONAL BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 36-32110283 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 606 South Main Street Princeton, Illinois 61356-2080 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (815) 875-4444 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Name of each exchange on Title of each class which registered -------------- ---------------- The Nasdaq Common Stock Stock Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At March 15, 1999, 3,817,781 shares of Common Stock, $5.00 Par Value, were outstanding, and the aggregate market value of the common stock (based upon the closing representative bid price of the common stock on March 10, 1998, as reported by NASDAQ) held by nonaffiliates was approximately $66,811,168. Determination of stock ownership by nonaffiliates was made solely for the purpose of responding to this requirement and the registrant is not bound by this determination for any other purpose. Portions of the following documents are incorporated by reference: 1999 Notice and Proxy Statement for the Annual Meeting of Stockholders April 13, 1999 - Part III - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS Princeton National Bancorp, Inc. ("PNB" or the "Corporation") is a single-bank holding company which operates in one business segment and conducts a full service commercial banking and trust business through its subsidiary bank, Citizens First National Bank ("Citizens Bank" or "the Bank"). At December 31, 1998, the Corporation had consolidated total assets of $478,911,000 and stockholders' equity of $42,606,000. PNB was incorporated as a Delaware corporation in 1981 in contemplation of the acquisition of all of the outstanding common stock of Citizens Bank and other future acquisitions. Since the formation of the holding company, PNB has made five acquisitions. In 1986, PNB acquired Genoa State Bank (subsequently merged into Citizens Bank), located approximately 90 miles from Princeton and just outside the western suburbs of Chicago. In 1988, PNB acquired First National Bank of Oglesby when it acquired all of the outstanding stock of USA Firstrust, Inc. (subsequently merged into Citizens Bank), which gave PNB a market presence in Oglesby and the Peru/LaSalle area, 27 and 22 miles from Princeton, respectively. In 1992, PNB acquired all of the outstanding capital stock of Illinois Valley Bancshares, Inc. ("Illinois Valley"). Through the acquisition of Illinois Valley, PNB acquired Colonial Bank and Trust Company of Bureau County, located in Princeton, with a branch in DePue (subsequently merged into Citizens Bank) and Colonial Bank and Trust Company of LaSalle County, located in Peru (subsequently converted into a national bank, renamed Citizens First National Bank of Peru, and subsequently merged into Citizens Bank). In 1994, PNB acquired Heart of Illinois Investment Corp. and its subsidiary, Heart of Illinois Bank, F.S.B., with branches in Spring Valley, Henry, Plano and Princeton (subsequently merged into Citizens Bank). In 1996, PNB acquired all of the deposits, equipment and the facility of the Sandwich branch of Superior Bank, FSB (subsequently merged into Citizens Bank), located approximately 50 miles to the northeast of Princeton. PNB operates the Bank as a community bank -- with offices located for convenience with professional, highly motivated, progressive employees who know the Bank's customers and are able to provide individualized, quality service. As part of its community banking approach, PNB requires officers of the Bank to actively participate in community organizations. In addition, within certain credit and rate of return parameters, PNB attempts to ensure that the Bank meets the lending needs of the communities in which offices are located, and that the Bank invests in local and municipal securities. Corporate policy, strategy, and goals are established by the Board of Directors of PNB. Pursuant to PNB's holding company philosophy, operational and administrative policies for the Bank are also established at the holding company level. Within this framework, the Bank focuses on providing personalized services and quality products to its customers to meet the needs of the communities in which offices are located. In 1998, the majority of the directors of PNB also served as the directors of Citizens Bank. This assists PNB in directly implementing its policies at Citizens Bank. ACQUISITION AND EXPANSION STRATEGY PNB seeks to diversify both its market area and asset base and increase profitability through acquisitions and expansion. PNB's goal, as reflected by its acquisition policy, is to expand through the acquisition of established financial service organizations, primarily commercial banks to the extent suitable candidates may be identified and by expanding into potential high growth areas. In integrating acquisitions, PNB focuses on, among other actions, implementing the policies established at Citizens Bank, improving asset quality and the net interest margin and encouraging community involvement. Generally, PNB seeks to acquire banks or other financial institutions with assets of $15 million to $60 million, located on the fringe of metropolitan or potential high growth areas and within 100 miles of Princeton. In addition to price and terms, the other factors considered by PNB in determining the desirability of an acquisition candidate are the general financial condition, earnings potential and quality of the management of the institution. There is no assurance that any further acquisitions will be made. PNB will also consider establishing branch facilities as a means of expanding its presence into new market areas. PNB opened new branch facilities in the Peru/LaSalle/Oglesby area in 1994, in Minooka in 1994, in Hampshire in 1995, and will be opening a new branch facility in Henry during 1999. CITIZENS FIRST NATIONAL BANK Citizens Bank was organized in 1865 as a national bank under the National Bank Act. Currently in its one hundred and thirty-fourth year, Citizens Bank has fourteen offices in ten different communities in north central Illinois: Princeton, DePue, Genoa, Hampshire, Henry, Minooka, Oglesby, Peru, Sandwich and Spring Valley. Citizens Bank serves individuals, businesses and governmental bodies in Bureau, LaSalle, Marshall, Grundy, Kane, Kendall, DeKalb and contiguous counties. Citizens Bank operates a full-service community commercial bank and trust business that offers a broad range of financial services to customers. Their services consist primarily of commercial, real estate and agricultural lending, consumer deposit and financial services, and trust and farm management services. COMMERCIAL, REAL ESTATE AND AGRICULTURAL LENDING Citizens Bank's commercial loan department provides secured and unsecured loans, including real estate loans, to companies and individuals for business purposes and to governmental units within the Bank's market area. As of December 31, 1998, Citizens Bank had commercial loans of $44.1 million (16.6% of the Bank's total loan portfolio) and commercial real estate loans of $42.0 million (15.8% of the Bank's total loan portfolio). Citizens Bank does not have a concentration of commercial loans in any single industry or business. Citizens Bank is one of the largest agricultural lenders in the State of Illinois with all of its outstanding agricultural and agricultural real estate loans primarily related to ventures within 30 miles of branch locations. As of December 31, 1998, Citizens Bank had agricultural loans of $37.5 million and agricultural real estate loans of $33.5 million, which represent approximately 14.1% and 12.6%, respectively, of the Bank's total loan portfolio. Agricultural loans, many of which are secured by crops, machinery and real estate, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. The agricultural loan department, which has the equivalent of four lending officers, works closely with all agricultural customers, including companies and individual farmers, and assists in the preparation of budgets and cash flow projections for the ensuing crop year. These budgets and cash flow projections are monitored closely during the year. In addition, Citizens Bank works closely with governmental agencies, including the Farm Service Agency, to assist agricultural customers in obtaining credit enhancement products such as loan guaranties. In accordance with its loan policy, Citizens Bank maintains a diversified loan portfolio. One of Citizens Bank's goals is to further diversify its loan portfolio. Further diversification will be accomplished through loans made by the Bank and through loans acquired as a result of PNB's acquisition strategy. As part of its loan policy and community banking approach, Citizens Bank does not actively buy loans from or participate its non- consumer loans to other lending institutions, particularly institutions outside its market area. In connection with its credit relationships, Citizens Bank encourages commercial and agricultural borrowers to maintain deposit accounts at the Bank. PERSONAL FINANCIAL SERVICES The principal consumer services offered by Citizens Bank are demand, savings and time deposit accounts, home mortgage loans, installment loans, credit card loans, and brokerage services. One of the strengths of Citizens Bank is the stability of its retail deposit base. This is due primarily to the Bank's service oriented competitive strategy and the economically diverse population of the counties encompassing the fourteen banking offices. These locations provide convenience for customers and visibility for Citizens Bank. A variety of marketing strategies are used to attract and retain stable depositors, the most important of which is the officer call program. All officers of the Bank call on customers and potential customers of the Bank to maintain and develop deposit relationships. In 1998, 2,875 calls were completed with customers and non-customers. Citizens Bank is active in consumer and mortgage lending with approximately $66.2 million in home mortgage loans (24.9% of the Bank's total loan portfolio) and $36.0 million in consumer installment loans (13.6% of the Bank's total loan portfolio) as of December 31, 1998. To better serve its retail customers, Citizens Bank is active in the secondary residential mortgage market. As a matter of policy, Citizens Bank does not hold long-term, fixed rate loans. However, servicing of those loans is maintained, with approximately $56,267,000 of unpaid balances being serviced as of December 31, 1998. Customers receive a higher level of quality service with this arrangement. Citizens Bank maintains fourteen automated teller machines. The Bank is a member of Magic Line which encompasses all of the major nationwide networks such as CIRRUS, PLUS, and STAR. To enhance customer service and convenience, Citizens Bank introduced its new ATM & Check Card in the second quarter of 1998. The check card can be used anywhere that accepts VISA and has been a tremendous benefit to our customers. Citizens Bank continues to implement intensive sales training, which includes team coaching, goals and measurements, and rewards and recognition. In 1998, the Bank maintained the prior year's level of product referrals, product sales, and total incentives paid to the employees. TRUST DEPARTMENT AND FARM MANAGEMENT SERVICES Gross revenue from Trust and Farm Management services in 1998 totaled approximately $1,119,000, an increase of $52,000 (or 4.9%), compared to $1,067,000 in 1997. Trust income alone amounted to $853,000 in 1998 compared to $817,000 in 1997, while farm management fees were $266,000 in 1998 as compared to $250,000 in 1997. Total trust assets as of December 31, 1998 were $153,758,000, representing a decrease of approximately $13,500,000 (or 8.1%) over the total at December 31, 1997. This decrease is due primarily to the closing of a large corporate account. The increase in fee income resulted from a combination of new business development, increased market value fees due to higher equity values, and increases in equity investment as a percentage of total Trust assets. The Trust Department currently has 683 total accounts and has 16,346 acres of farm land under management. COMPETITION PNB is committed to community banking and to providing quality products and services at competitive loan rates and deposit pricing in order to remain competitive in its north central Illinois market. Citizens Bank competes with both small, locally owned banks as well as regional financial institutions which have numerous offices. The Bank competes with these organizations, as well as with savings and loan associations, credit unions, mortgage companies, insurance companies and other local financial institutions, for deposits, loans and other business. The principal methods of competition include loan and deposit pricing, the types and quality of services provided, and advertising and marketing programs. SUPERVISION AND REGULATION Bank holding companies and banks are extensively regulated under federal and state law. The following information describes certain statutes and regulations affecting PNB and the Bank, and such discussion is qualified in its entirety by reference to such statutes and regulations. Any change in applicable law or regulations may have a material effect on the business of PNB and the Bank. PNB is registered as a "bank holding company" with the Federal Reserve System (the "FRB"), and is subject to supervision by the FRB under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). PNB is required to file with the FRB periodic reports and such additional information as the FRB may require pursuant to the BHC Act. The FRB examines PNB, and may examine the Bank. The BHC Act requires prior FRB approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. With certain exceptions, the BHC Act prohibits a bank holding company from acquiring direct or indirect ownership or control of voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in any activity other than banking or managing or controlling banks or performing services for its authorized subsidiaries. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities which the FRB has determined by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. PNB is a legal entity separate and distinct from the Bank. The major source of PNB's revenue is dividends PNB receives from the Bank. The right of PNB to participate as a stockholder in any distribution of assets of the Bank upon its liquidation or reorganization or otherwise is subject to the prior claims of creditors of the Bank. The Bank is subject to claims by creditors for long-term and short-term debt obligations, including substantial obligations for federal funds purchased and securities sold under repurchase agreements, as well as deposit liabilities. The Bank may declare dividends out of undivided profits, except that until the surplus fund of the Bank is equal to its common capital, no dividend can be declared until one-tenth of the Bank's net income for the applicable period has been carried to the surplus fund. The Bank, however, cannot declare or pay a dividend, if after making the dividend, the Bank would be undercapitalized. In addition, prior approval of the Office of the Comptroller of the Currency (the "OCC") is required if dividends declared by the Bank in any calendar year will exceed its net income for that year combined with its retained net income for the preceding two years. As of December 31, 1998, national banking regulations and capital guidelines will permit the Bank to distribute approximately $557,000 plus any 1999 net income of the Bank as dividends without prior approval from the national banking regulators. Future payments of dividends by the Bank will be dependent on individual regulatory capital requirements and levels of profitability. The ability of the Bank to pay dividends may be further restricted as a result of regulatory policies and guidelines relating to dividend payments and capital adequacy. Federal laws limit certain transactions between the Bank and its affiliates, including PNB. Such transactions include loans or extensions of credit by the Bank to PNB, the purchase of assets or securities of PNB, the acceptance of PNB's securities as collateral for any loans, and the issuance of a guaranty, acceptance or letter of credit on behalf of PNB. Transactions of this kind are limited to 10%, in the aggregate, of the Bank's capital and surplus, and are also subject to certain collateral requirements. These transactions, as well as other transactions between the Bank and PNB, must also be on terms substantially the same as, or at least as favorable as, those prevailing at the time for comparable transactions with nonaffiliated companies or, in the absence of comparable transactions, on terms, or under circumstances, including credit standards, that would be offered to, or would apply to, nonaffiliated companies. It is the policy of the FRB that PNB is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank. The FRB takes the position that in implementing this policy, it may require PNB to provide such support when PNB otherwise would not consider itself able to do so. The various federal bank regulators, including the FRB and the OCC, have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards establish minimum capital standards in relation to assets and off-balance sheet exposures, as adjusted for credit risks. Capital is classified into two tiers. For bank holding companies, Tier 1 or "core" capital consists of common shareholders' equity, perpetual preferred stock (subject to certain limitations) and minority interests in the equity accounts of consolidated subsidiaries, and is reduced by goodwill and certain other intangible assets ("Tier 1 Capital"). Tier 2 capital consists of (subject to certain conditions and limitations) the allowance for possible credit losses, perpetual preferred stock, "hybrid capital instruments," perpetual debt and mandatory convertible debt securities, and term subordinated debt and intermediate-term preferred stock ("Tier 2 Capital"). Total capital is the sum of Tier 1 Capital and Tier 2 Capital (limited to 100% of Tier 1 Capital). Components of Tier 1 and Tier 2 capital for national banks are similar, but not identical, to those for holding companies. Under the risk-adjusted capital standards, a minimum ratio of total capital to risk-weighted assets of 8% is required and, Tier l Capital to risk-weighted assets of 4% are required. The FRB and OCC also have adopted a minimum leverage ratio of Tier 1 Capital to total assets of 3% for banks rated "1" under the Uniform Financial Institutions Rating System or bank holding companies rated "1" under the rating system of bank holding companies. All other banks and bank holding companies must maintain a leverage ratio of 4%. In addition, all banks and bank holding companies are expected to have capital commensurate with the level and nature all risks to which they are exposed. At December 31, 1998, PNB had a total capital risk-based assets ratio of 13.68%, a Tier 1 capital to risk-based assets ratio of 13.05%, and a leverage ratio of 8.35%. At December 31, 1998, the Bank had a total capital to risk-based assets ratio of 13.68%, a Tier 1 capital to risk-based assets ratio of 13.05%, and a leverage ratio of 8.35%. The FDIC has a risk-based assessment system for the deposit insurance provided to depositors at depository institutions whereby assessments to each institution are calculated upon the probability that the insurance fund will incur a loss with respect to the institution, the likely amount of such loss, and the revenue needs of the insurance fund. The system utilizes nine separate assessment classifications based on an entity's capital level and supervisory evaluation. Risk classifications of all insured institutions are made by the FDIC for each quarterly assessment period. The Bank's deposits are predominantly insured through the Bank Insurance Fund (the "BIF") and certain deposits held by the Bank are insured through the Savings Association Insurance Fund (the "SAIF"). The BIF and SAIF are both administered by the FDIC. The BIF semi-annual assessment rate currently ranges from 0 to 27 cents per $1,000 of domestic deposits. The FDIC may increase or decrease the assessment rate schedule on a semiannual basis. An increase in the rate assessed on the Bank subsidiary could have an adverse effect on the earnings of PNB and the Bank, depending on the amount of the increase. Deposits insured by SAIF are currently assessed semi-annually at the BIF rate of zero to 27 cents per $1,000 of domestic deposits. The SAIF assessment rate may increase or decrease as is necessary to maintain the designated SAIF reserve ratio of 1.25% of SAIF insured deposits. All FDIC-insured depository institutions must pay a quarterly assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds (commonly referred to as FICO bonds) were issued to capitalize the Federal Savings and Loan Insurance Corporation. Until December 31, 1999 or when the last savings and loan association ceases to exist, whichever occurs first, the assessment on BIF insured deposits will be 20% of the assessment on SAIF insured deposits. Thereafter, the same assessment will be charged on all deposits. Since September 29, 1995, federal law has permitted adequately capitalized and adequately managed bank holding companies to acquire banks across state lines, without regard to whether the transaction is prohibited by state law. Any state law relating to the minimum age of target banks (not to exceed five years) or limits on the amount of deposits that may be controlled by a single bank or bank holding company applies. The FRB is not permitted to approve any acquisition if, after the acquisition, the bank holding company would control more than 10% of the deposits of insured depository institutions nationwide or 30% or more of the deposits in the state where the target bank is located. The FRB could approve an acquisition, notwithstanding the 30% limit, if the state waives the limit either by state regulation or order of the appropriate state official. Beginning on June 1, 1997, banks were permitted to merge with one another across state lines and thereby create a main bank with branches in separate states. Any state could, however, by adoption of a non-discriminatory law elect to opt-out of this provision. Only Texas opted out of the interstate merger provision. After establishing branches in a state through an interstate merger transaction, a bank can establish and acquire additional branches at any location in the state where any bank involved in the merger could have established or acquired branches under applicable federal or state law. PNB does not have any current plans to acquire any banking organization located outside the state of Illinois. EMPLOYEES PNB presently has no employees. However, certain of the employees and executive officers of Citizens Bank provide their services to PNB. A monthly fee for these services is paid by PNB to Citizens Bank. This fee is computed annually and is based upon an average of the number of hours worked during the year. As of December 31, 1998, Citizens Bank employed 193 full-time and 36 part-time employees. The Bank offers a variety of employee benefits. Citizens Bank employees are not represented by a union or a collective bargaining agreement. The management of PNB considers its employee relations to be excellent. PNB believes one of its strengths is its ability to attract and retain experienced and well-trained personnel who have a knowledge of the market areas in which it operates. Management believes that PNB generally has an easier time attracting and retaining quality employees than other banks in north central Illinois primarily because its size and management style affords greater opportunities to employees and allows direct participation and development of management and banking skills. In order to implement PNB's community banking philosophy and to promote themselves as community oriented organizations, the Bank has a formal officer call program. Each officer of the Bank calls on existing or potential customers and is expected to become actively involved in leadership positions in community organizations. As of December 31, 1998, employees of the Bank participated in approximately 160 community organizations, serving over 16,000 hours of community service in 1998. ITEM 2. PROPERTIES PNB's headquarters and Citizens Bank's principal offices are located at 606 South Main Street, Princeton, Illinois. Also located at this address is an annex completed in 1991 that contains, among others, the trust and farm management departments. The two buildings at this location are owned by Citizens Bank and contain approximately 36,000 square feet of space, all of which is occupied by PNB and Citizens Bank. Citizens Bank also has two drive-up facilities in Princeton and branch offices in DePue, Genoa, Hampshire, Henry, Minooka, Oglesby, Peru, Sandwich and Spring Valley. Citizens Bank is the owner of each of these facilities. None of the facilities owned by the Bank are subject to a mortgage. For additional information regarding these properties, see footnote 5 of Item 8 of this report. ITEM 3. LEGAL PROCEEDINGS The Bank is subject to legal proceedings and claims that arise in the ordinary course of business. Although management of the Corporation cannot predict the ultimate outcome of such matters, it believes that the ultimate resolution of these matters will not have a material adverse effect on the Corporation or the Bank, or the Corporation's consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. SUPPLEMENTAL ITEM - EXECUTIVE OFFICERS Tony J. Sorcic, Age 45 President & Chief Executive Officer James B. Miller, Age 43 Executive Vice-President Mr. Sorcic has been President and Chief Executive Officer of PNB since January, 1997, and first became a director of PNB in 1986. He joined Citizens Bank in 1981 as Assistant Vice-President of Operations, became Executive Vice-President in 1986, and was named President in 1995. Mr. Miller joined Citizens Bank in 1979 as an agricultural loan officer and has been the Executive Vice- President of PNB since 1996. He currently is the Executive Vice-President and Senior Loan Manager of Citizens Bank. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Since May 15, 1992, PNB's Common Stock has been listed on The NASDAQ Stock Market under the symbol PNBC. The table below indicates the high and low bid prices, and the dividends declared per share for the Common Stock during the periods indicated. The prices shown reflect interdealer prices and include retail markups, markdowns or commissions and may not necessarily represent actual transactions. Cash Prices Dividends High Low Declared --------- ----------- ------------- 1997 - ---------------------- First Quarter $ 13.33 $ 11.67 $ .07 Second Quarter 13.00 12.00 .07 Third Quarter 16.50 12.33 .07 Fourth Quarter 17.67 15.67 .08 1998 - ---------------------- First Quarter $ 20.50 $ 15.25 $ .08 Second Quarter 22.50 17.50 .08 Third Quarter 21.00 16.50 .08 Fourth Quarter 17.75 16.00 .08 On February 26, 1999, PNB had 573 holders of record of its Common Stock. The holders of the Common Stock are entitled to receive such dividends as are declared by the Board of Directors of PNB, which considers payment of dividends quarterly. The ability of PNB to pay dividends is dependent upon its receipt of dividends from the Bank. In determining cash dividends, the Board of Directors considers the earnings, capital requirements, debt servicing requirements, financial ratio guidelines established by the Board, the financial condition of PNB, and other relevant factors. The Bank's ability to pay dividends to PNB is subject to regulatory restrictions. See "Supervision and Regulation." PNB has paid regular cash dividends on the Common Stock since it commenced operations in 1982. PNB currently anticipates that cash dividends comparable to those that have been paid in the past will continue to be paid in the future. There can be no assurance, however, that any such dividends will be paid by PNB or that such dividends will not be reduced or eliminated in the future. The timing and amount of dividends will depend upon the earnings, capital requirements and financial condition of PNB and the Bank as well as the general economic conditions and other relevant factors affecting PNB and the Bank. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31 - ----------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- SUMMARY OF INCOME Interest income $ 32,651 $ 31,312 $ 29,114 $ 27,645 $ 25,765 Interest expense 16,504 15,541 14,596 14,518 12,851 Net interest income 16,147 15,771 14,518 13,127 12,914 Provision (credit) for possible loan losses 337 590 41 (101) (286) Non-interest income 3,843 3,365 2,860 2,553 2,574 Non-interest expense 13,974 12,662 12,864 16,247 11,035 Income (loss) before federal income tax 5,679 5,884 4,473 (466) 4,739 Federal income tax (benefit) 1,420 1,525 1,046 (824) 981 Net income 4,259 4,359 3,427 358 3,758 Per Share Data (a) Basic net income $ 1.08 $ 1.07 $ 0.84 $ 0.09 $ 0.93 Diluted net income 1.08 1.07 0.84 0.09 0.93 Book value (at end of period) 11.13 10.62 9.84 9.23 8.52 Cash dividends declared 0.31 0.28 0.25 0.24 0.22 Dividend payout ratio 29.1% 26.2% 30.2% 272.9% 23.8% Selected Balances (at end of period) Total assets $ 478,911 $ 449,660 $ 420,407 $ 402,393 $ 400,531 Earning assets 435,789 412,974 379,278 364,177 364,726 Investments 130,926 122,034 117,028 127,094 154,957 Gross loans 265,655 272,400 258,118 232,693 204,672 Allowance for possible loan losses 1,800 1,830 1,630 2,034 2,100 Deposits 407,838 385,940 358,701 346,285 352,987 Long-term debt 1,200 3,750 4,350 4,700 5,300 Stockholders' equity 42,606 42,668 40,197 37,646 34,636 Selected Financial Ratios Net income to average stockholders' equity 9.94% 10.56% 8.91% 1.01% 10.77% Net income to average assets 0.95 1.02 0.84 0.09 0.94 Average stockholders' equity to average assets 9.54 9.66 9.48 9.03 8.74 Average earning assets to average assets 92.36 91.64 91.37 91.90 92.24 Non-performing loans to total loans at end of period (net of unearned interest) 0.52 0.31 0.45 0.39 0.47 Tier 1 capital to average adjusted assets 8.35 8.78 8.59 8.96 8.87 Risk based capital to risk adjusted assets 13.68 13.88 13.88 15.17 16.81 Net loans charged off (recovered) to average loans 0.13 0.15 0.18 (0.02) 0.06 Allowance for possible loan losses to total loans at end of period (net of unearned interest) 0.68 0.67 0.63 0.87 1.03 Average interest-bearing deposits to average deposits 90.13 90.00 90.07 90.32 91.04 Average non-interest-bearing deposits to average deposits 9.87 10.00 9.93 9.68 8.96 - -----------------------------------------------------------------------------------------------------------------------
(a) Each period's per share data has been restated to reflect the stock dividend (3 for 2) split declared in 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amounts in thousands except per share data) The following discussion and analysis provides information about the Corporation's financial condition and results of operations for the years ended December 31, 1998, 1997, and 1996. This discussion and analysis should be read in conjunction with "Selected Statistical Data", and the Corporation's Consolidated Financial Statements and the Notes thereto included in this report (dollar amounts in thousands unless otherwise indicated). OVERVIEW Assets at year-end reached a record level of $478,911 versus $449,660 at the prior year-end. Strong sales efforts by the staff and the market's demand of the subsidiary bank's products contributed to the asset growth. Equity of $42,606 is comparable to the 1997 level. Efforts were made to hold the dollar amount of capital steady for the year to improve financial leverage. This was accomplished through a dividend increase and the stock repurchase program. Net income for the year was $4,259, slightly lower than the $4,359 for 1997. Net interest income and non-interest income increased and were offset by increasing operating expenses. Higher employee costs and legal fees contributed to the higher operating expenses. The table below summarizes the changes in the Corporation's assets, equity, and net income during the period 1996 through 1998.
ASSETS AT PERCENT EQUITY AT PERCENT NET PERCENT YEAR-END CHANGE YEAR-END CHANGE INCOME CHANGE -------- ------ -------- ------ ------ ------ 1998 $478,911 6.51% $42,606 (.15)% $4,259 (2.29)% 1997 449,660 6.96 42,668 6.15 4,359 27.20 1996 420,407 4.48 40,197 6.78 3,427 857.26
ANALYSIS OF RESULTS OF OPERATIONS NET INTEREST INCOME. Net interest income improved by 2.7% to $17,094 in 1998 resulting from an increase in the volume of interest-earning assets, offset by falling interest rates and a flattening yield curve throughout 1998 reducing the net yield on interest-earning assets and the average cost of interest-bearing liabilities. The net yield on interest-earning assets decreased to 8.10% from 8.22% in 1997. The average rate on interest-bearing liabilities increased to 4.53% from 4.51%. The resulting net yield on average interest-earning assets on a fully taxable equivalent basis decreased to 4.12% from 4.25% in 1997. The following table sets forth details of average balances, interest income, and expense, and resulting rates for the Corporation for the past three years, reported on a fully taxable equivalent basis using a tax rate of 34%.
------------------------------------------------------------------------------------------ 1998 1997 1996 ------------------------------------------------------------------------------------------ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST -------------------------- ------------------------------ -------------------------- AVERAGE INTEREST-EARNING ASSETS Interest-bearing deposits $ 6,401 $ 335 5.23% $ 4,911 $ 267 5.44% $ 412 $ 23 5.58% Taxable investment securities 92,643 5,494 5.93 82,200 4,976 6.05 92,313 5,135 5.56 Tax-exempt investment securities (a) 34,340 2,620 7.63 30,824 2,458 7.97 30,049 2,473 8.23 Federal funds sold 7,380 388 5.26 5,465 297 5.43 2,654 140 5.28 Net loans (a) (b) 274,272 24,761 9.03 267,918 24,185 9.03 245,324 22,211 9.05 ------- ------ ------- ------ ------- ------ Total interest-earning assets 415,036 33,598 8.10 391,318 32,183 8.22 370,752 29,982 8.09 ------- ------ ------- ------ ------- ------ Average non-interest-earning assets 34,343 35,696 35,035 ------ ------ ------ Total average assets $449,379 $427,014 $405,787 ======== ======== ======== AVERAGE INTEREST-BEARING LIABILITIES Interest-bearing demand $ 86,874 2,492 2.87 $ 84,424 2,420 2.87 $ 76,736 2,016 2.63 Savings 53,630 1,536 2.86 54,543 1,631 2.99 53,101 1,587 2.99 Time 201,598 11,269 5.59 192,250 10,665 5.55 186,054 10,170 5.47 Interest-bearing demand notes issued to the U. S. Treasury 1,015 55 5.42 1,117 64 5.73 1,059 52 4.91 Federal funds purchased and securities repurchase agreements 19,974 1,038 5.20 8,262 408 4.94 6,975 350 5.02 Long-term borrowings 1,397 114 8.16 4,120 353 8.57 4,998 421 8.42 ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities 364,488 16,504 4.53 344,716 15,541 4.51 328,923 14,596 4.44 ------- ------ ------- ------ ------- ------ Net yield on average interest-earning assets $17,094 4.12% $16,642 4.25% $15,386 4.15% ======= ==== ======= ==== ======= ==== Average non-interest-bearing liabilities 41,999 41,039 38,412 Average stockholders' equity 42,892 41,259 38,452 ------ ------ ------ Total average liabilities and stockholders' equity $449,379 $427,014 $405,787 ======== ======== ========
(a) Interest income on non-taxable investment securities and non-taxable loans includes the effects of taxable equivalent adjustments using a tax rate of 34% in adjusting interest on tax-exempt securities and tax-exempt loans to a fully taxable basis. (b) Includes $329 attributable to interest from non-accrual loans. In 1997, the net yield on interest-earning assets increased to 8.22% from 8.09% in 1996. However, the average rate on interest-bearing liabilities also increased from 4.44% in 1996, to 4.51% in 1997. The resulting net yield on interest-earning assets on a fully taxable equivalent basis increased from 4.15% in 1996, to 4.25% in 1997. This 10 basis point increase resulted from the increase in loans outstanding and an improvement in the yield on the investment portfolio. Both had a positive impact on net income. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amounts in thousands except per share data) The following table describes changes in net interest income attributable to changes in the volume of interest-earning assets and interest-bearing liabilities compared to changes in interest rates.
YEAR ENDED DECEMBER 31 ------------------------------------------------------------------------------------------ 1998 COMPARED TO 1997 1997 COMPARED TO 1996 VOLUME (a) RATE (a) NET VOLUME (a) RATE (a) NET ----------- ----------- ----------- ----------- ----------- ----------- INTEREST FROM INTEREST-EARNING ASSETS Interest-bearing time deposits $ 79 $ (11) $ 68 $ 251 $ (7) $ 244 Taxable investment securities 624 (106) 518 (587) 428 (159) Tax-exempt investment securities (b) 274 (112) 162 63 (78) (15) Federal funds sold 102 (11) 91 151 6 157 Net loans (c) 576 0 576 2,034 (60) 1,974 ----------- ----------- ----------- ----------- ----------- ----------- Total income from interest- earning assets 1,655 (240) 1,415 1,912 289 2,201 ----------- ----------- ----------- ----------- ----------- ----------- EXPENSE OF INTEREST-BEARING LIABILITIES Interest-bearing demand deposits 72 0 72 211 193 404 Savings deposits (26) (69) (95) 44 0 44 Time deposits 523 81 604 343 152 495 Interest-bearing demand notes issued to the U.S. Treasury (6) (3) (9) 3 9 12 Federal funds purchased and securities repurchase agreements 593 37 630 64 (6) 58 Long-term borrowings (228) (11) (239) (75) 7 (68) ----------- ----------- ----------- ----------- ----------- ----------- Total expense from interest- bearing liabilities 928 35 963 590 355 945 ----------- ----------- ----------- ----------- ----------- ----------- Net difference $ 727 $ (275) $ 452 $ 1,322 $ (66) $ 1,256 =========== =========== =========== =========== =========== ===========
[WIDE TABLE CONTINUED FROM ABOVE]
YEAR ENDED DECEMBER 31 ----------------------------------------- 1996 COMPARED TO 1995 VOLUME (a) RATE (a) NET ----------- ----------- ----------- INTEREST FROM INTEREST-EARNING ASSETS Interest-bearing time deposits $ 1 $ (1) $ 0 Taxable investment securities (1,221) 416 (805) Tax-exempt investment securities (b) 454 (158) 296 Federal funds sold 36 (8) 28 Net loans (c) 2,546 (501) 2,045 ----------- ----------- ----------- Total income from interest- earning assets 1,816 (252) 1,564 ----------- ----------- ----------- EXPENSE OF INTEREST-BEARING LIABILITIES Interest-bearing demand deposits (73) (221) (294) Savings deposits 105 (15) 90 Time deposits 304 (40) 264 Interest-bearing demand notes issued to the U.S. Treasury (7) (9) (16) Federal funds purchased and securities repurchase agreements 101 (34) 67 Long-term borrowings (6) (27) (33) ----------- ----------- ----------- Total expense from interest- bearing liabilities 424 (346) 78 ----------- ----------- ----------- Net difference $ 1,392 $ 94 $ 1,486 =========== =========== ===========
(a) The change in interest due to both rate and volume has been allocated equally. (b) Interest income on non-taxable investment securities includes the effects of taxable equivalent adjustments using a tax rate of 34% in adjusting interest on tax-exempt securities to a fully taxable basis. (c) Includes loan fee income of $986 in 1998, $787 in 1997, and $823 in 1996. Interest income on loans includes the effect of tax equivalent adjustments for non-taxable loans using a tax rate of 34% in adjusting interest on tax-exempt loans to a fully taxable basis. Includes non-accrual loans, with year-end balances of $1,390 in 1998, $810 in 1997, and $1,157 in 1996. NON-INTEREST INCOME. In 1998, non-interest income increased by $478 to $3,843, up 14.2% from 1997's total of $3,365. Likewise, non-interest income as a percentage of average assets increased from .79% to .86% over the same period. With the exception of securities transactions, which decreased only $1 from a year ago, all categories showed increases in 1998 when compared to 1997. The biggest increase was seen in loan servicing fees which increased by $197 (or 111.3%) due to heavy refinancing activity in the real estate market. Service charges on deposit accounts also showed a healthy increase of $130 (or 9.5%) due to an increase in the number of deposit accounts at the subsidiary bank. The following table provides non-interest income by category, total non-interest income, and non-interest income to average total assets for the periods indicated.
YEAR ENDED DECEMBER 31 ------------------------------------------- 1998 1997 1996 Trust income $ 853 $ 817 $ 735 Farm management fees 266 250 199 Service charges on deposit accounts 1,498 1,368 1,176 Other service charges 515 445 427 Securities transactions, net 96 97 (24) Other operating income 241 211 144 Loan servicing fees and other charges 374 177 203 ------ ------ ------ Total non-interest income $3,843 $3,365 $2,860 ====== ====== ====== Non-interest income to average total assets .86% .79% .70%
In 1997, the Corporation continued to experience strong growth in non-interest income, with all categories of non-interest income except for loan servicing fees increasing when compared to 1996. Total non-interest income was up $505, or 17.7%, over 1996 performance. Service charges on deposit accounts increased by $192 (16.3%), the result of overdraft charges and the growth in fee-based checking account programs. Trust and farm management fees were both up significantly from 1996, as more customers utilized these specialized services. During 1997, the Corporation also realized $97 in net gains on securities transactions, compared to a net loss of $24 in 1996. NON-INTEREST EXPENSE. Non-interest expenses increased in 1998 by $1,312 (or 10.4%) to $13,974 from $12,662 in 1997. Salaries and employee benefits increased by $613 (or 8.9%), a result of an increase in the number of full-time equivalent employees in 1998, which has been required as the subsidiary bank continues to grow. Trust litigation expenses also increased from $73 in 1997 to $256 in 1998, due to an increase in fees paid surrounding the litigation process of the Trust matter (see note 14 in the Notes to Consolidated Financial Statements). FDIC/OCC assessments were up 28.5% from a year ago, this due to the fact that the Corporation received a refund in the first quarter of 1997. Other operating expenses also increased by 20.4% during 1998, the result of several smaller accounts such as postage, advertising, supplies, etc. showing marginal increases. Data processing expenses decreased by $68 (or 10.0%), partially a result of the subsidiary bank changing to in-house item processing. The following table provides non-interest expense, and non-interest expense to average total assets for the periods indicated.
YEAR ENDED DECEMBER 31 ------------------------------------------ 1998 1997 1996 Salaries and employee benefits $ 7,479 $ 6,866 $ 6,422 Occupancy 1,007 964 955 Equipment 822 858 851 FDIC/OCC assessments 185 144 580 Goodwill and intangible assets amortization 467 464 356 Data processing 609 677 595 Trust litigation expenses 256 73 382 ------- ------- ------- Other operating expense 3,149 2,616 2,723 ======= ======= ======= Total non-interest expense $13,974 $12,662 $12,864 Non-interest expense to average total assets 3.11% 2.97% 3.17%
Non-interest expense decreased by $202 (or 1.6%) in 1997 to $12,662 from $12,864 in 1996. Salaries and benefits were up $444 (6.9%) from 1996, with a full year of salaries and benefits for the Sandwich staff representing most of the increase. Goodwill and intangible assets amortization also increased in 1997, up $108 (or 30.3%), the direct result of a full year's goodwill amortization related to the Sandwich acquisition. FDIC/OCC assessments were down $436 (or 75.2%) from 1996, when the Corporation paid a one-time SAIF assessment of $336. NET INCOME. Net income for 1998 was $4,259 (or $1.08 per diluted share), a decrease of 2.3% from $4,359 (or $1.07 per diluted share) in 1997. The decrease is attributable to a narrowing of the net interest margin as well as an increase in operating expenses, which more than offset an increase in non-interest income. Net income for 1997 increased by $932 (or 27.2%) from $3,427 in 1996. This increase was attributable to continued improvement in the net interest margin, increased other operating income, and a decrease in other operating expenses. ANALYSIS OF FINANCIAL CONDITION LOANS. The Corporation's loan portfolio largely reflects the profile of the communities in which it operates. The Corporation essentially makes four types of loans: agricultural, commercial, real estate, and installment. The Corporation has no foreign loans. The following table summarizes the Corporation's loan portfolio.
DECEMBER 31 -------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 % OF % of % of % of % of AMOUNT TOTAL Amount Total Amount Total Amount Total Amount Total ----------------- ---------------- ---------------- ---------------- --------------- Agricultural $37,520 14.1% $38,991 14.3% $36,030 14.0% $33,106 14.2% $30,977 15.1% Commercial 44,147 16.6 41,241 15.1 38,410 14.8 34,687 14.9 35,863 17.5 Real Estate 1-4 family residences 66,243 24.9 75,607 27.8 72,460 28.1 63,824 27.4 59,470 29.1 Agricultural 33,491 12.6 30,434 11.2 28,374 11.0 23,148 10.0 20,808 10.2 Construction 6,299 2.4 6,030 2.2 4,160 1.6 3,116 1.3 853 0.4 Commercial 42,005 15.8 42,617 15.7 41,170 16.0 37,378 16.1 31,272 15.3 -------- -------- -------- -------- -------- Real Estate Total 148,038 55.7 154,688 56.9 146,164 56.7 127,466 54.8 112,403 55.0 Installment 35,950 13.6 37,480 13.7 37,514 14.5 37,434 16.1 25,429 12.4 -------- -------- -------- -------- -------- Total loans $265,655 100.0% $272,400 100.0% $258,118 100.0% $232,693 100.0% $204,672 100.0% ======== ======== ======== ======== ======== Total assets $478,911 $449,660 $420,407 $402,393 $400,531 Loans to total assets 55.5% 60.6% 61.4% 57.8% 51.1%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amounts in thousands except per share data) Total loans decreased $6.7 million or 2.5% in 1998 as compared to an increase of $14.3 million or 5.5% in 1997. Significant declines in interest rates resulted in a substantial volume of residential real estate loans refinancing, some of which are with the subsidiary bank, which the subsidiary bank then may sell in the secondary market while retaining servicing. This volume offset increased business in other categories. The agricultural loan portfolio decreased $1.5 million or 3.8% in 1998 from 1997. The agricultural portfolio declined seasonally due to customers' sale of grain. From 1996 to 1997, the portfolio increased $3.0 million in volume. Grain farmers experienced a generally favorable year in 1998 through a combination of above average yields and government assistance in the form of Loan Deficiency Payments (LDPs) and general subsidy. Livestock producers experienced a very difficult year. Burdensome supplies of pork, reduced kill capacity, and reduced export demand temporarily drove the price of pork to the lowest level in nearly 50 years. Commercial loans increased $2.9 million or 7.1% in 1998. This compares to an increase of $2.8 million or 7.4% in 1997. While business activity remains strong in markets served by the Corporation, a large share of the commercial loan demand has been for the acquisition or construction of longer term assets, such as real estate loans. Competition for high quality commercial and agricultural customers remains strong. Real estate loan balances declined in 1998, a $6.7 million or 4.3% decrease over 1997. Residential real estate loans dropped as consumers took advantage of the subsidiary bank's fixed rate products which may be sold in the secondary markets. Activity levels were at record levels for both new loan customers and refinancing of existing loans. These loans comprise 24.9% of the total portfolio. Agricultural real estate loans increased $3.1 million or 10%. This real estate segment of our market continues to be extremely competitive. Direct and indirect installment loans (loans to consumers) reflect a slight decline in volume in the portfolio in 1998 and 1997. The Corporation implemented new products and marketing programs during the past few years to increase penetration into its market areas. Long term, these products and programs are expected to provide increased diversification of risk and enhanced profitability. Increased focus on underwriting quality and awareness of general consumer debt levels has tempered growth in this area of the subsidiary bank's portfolio over the past three years. Although the risk of non-payment for any reason exists with respect to all loans, certain other more specific risks are associated with each type of loan. The primary risks associated with commercial loans are quality of the borrower's management and the impact of national economic factors. With respect to agricultural loans, the primary risks are weather and, like commercial loans, quality of borrower's management. Risks associated with real estate loans include concentrations of loans in a loan type, such as commercial or agricultural, and fluctuating land values. Installment loans also have risks associated with concentrations of loans in a single type of loan. Installment loans additionally carry the risk of a borrower's unemployment as a result of deteriorating economic conditions. The Corporation's strategy with respect to addressing and managing these types of risks, whether loan demand is weak or strong, is for the subsidiary bank to follow its conservative loan policies and underwriting practices, which include (i) granting loans on a sound and collectible basis, (ii) investing funds profitably for the benefit of the stockholders and the protection of depositors, (iii) serving the needs of the community and the subsidiary bank's general market area while obtaining a balance between maximum yield and minimum risk, (iv) ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan, (v) administering loan policies through a Directors' Loan Committee and Officers' Loan Committees, (vi) developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each loan category, and (vii) ensuring that each loan is properly documented and, if appropriate, secured or guaranteed by government agencies, and that insurance coverage is adequate, especially with respect to certain agricultural loans because of the risk of poor weather. NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED. Non-performing loans amounted to .52% of total loans at year-end 1998 compared to .30% at year-end 1997. The overall low level of non-performing loans is a reflection of the subsidiary bank's lending staff, credit policies, and management's emphasis on asset quality. Potential problem credits are closely monitored by the lending staff, and an independent loan review staff provides further assistance in identifying problem situations. Loans over 90 days past due are normally either charged off or, if well secured and in the process of collection, placed on a non-accrual status. Reflecting the Corporation's sound credit policies, the allowance for possible loan losses was 128.0% and 218.6% of nonperforming loans at year-end 1998 and 1997, respectively. The Corporation does not have any significant concentration of commercial real estate loans or commitments in areas which are experiencing deteriorating economic conditions. Total other real estate owned as of December 31, 1998 was $217. The Corporation had $50 in other real estate owned as of December 31, 1997. The following table provides information on the Corporation's non-performing loans since 1994.
DECEMBER 31 ------------------------------------------------------------------ 1998 1997 1996 1995 1994 Non-accrual $1,390 $ 810 $1,157 $ 808 $ 573 90 days past due and accruing 16 27 0 109 13 Restructured 0 0 0 0 384 ------ ----- ------ ----- ----- Total non-performing loans $1,406 $ 837 $1,157 $ 917 $ 970 ====== ===== ====== ===== ===== Non-performing loans to total loans (net of unearned interest) .52% .31% .45% .39% .47%
As of December 31, 1998 and 1997, loans which the Corporation's management had serious doubts as to the ability of borrowers to comply with loan repayment terms that were not carried as non-performing loans totaled approximately $279 (or .10% of the total loan portfolio), compared to $396 (or .14% of the total loan portfolio), respectively. ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance shown in the following table represents the allowance available to absorb losses within the entire portfolio:
YEAR ENDED DECEMBER 31 -------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Amount of loans outstanding at end of period (net of unearned interest) $ 265,474 $ 272,111 $ 257,931 $ 232,471 $ 204,154 Average amount of loans outstanding for the period (net of unearned interest) $ 274,076 $ 265,756 $ 244,027 $ 218,091 $ 199,911 Allowance for possible loan losses at beginning of period $ 1,830 $ 1,630 $ 2,034 $ 2,100 $ 2,218 Allowance of bank acquired 0 0 0 0 280 Charge-offs: Agricultural 84 0 0 0 23 Commercial 279 171 140 6 55 Real estate-mortgage 26 1 4 0 22 Installment 629 834 1,221 557 268 --------- --------- --------- --------- --------- Total charge-offs 1,018 1,006 1,365 563 368 --------- --------- --------- --------- --------- Recoveries: Agricultural 243 66 351 321 79 Commercial 28 65 31 23 11 Real estate-mortgage 1 0 4 10 5 Installment 379 485 534 244 161 --------- --------- --------- --------- --------- Total recoveries 651 616 920 598 256 --------- --------- --------- --------- --------- Net loans charged off (recovered) 367 390 445 (35) 112 Provision (credit) for possible loan losses 337 590 41 (101) (286) --------- --------- --------- --------- --------- Allowance for possible loan losses at end of period $ 1,800 $ 1,830 $ 1,630 $ 2,034 $ 2,100 ========= ========= ========= ========= ========= Net loans charged off (recovered) to average loans .13% .15% .18% (.02)% .06% Allowance for possible loan losses to non-performing loans 128.02% 218.64% 140.88% 221.81% 216.49% Allowance for possible loan losses to total loans at end of period (net of unearned interest) .68% .67% .63% .87% 1.03%
The allowance for possible loan losses is based on factors that include the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful loans, and such other factors that, in management's best judgment, deserve evaluation in estimating possible loan losses. The adequacy of the allowance for possible loan loss is monitored monthly during the ongoing, systematic review of the loan portfolio by the loan review staff of the audit department of the subsidiary bank. The results of these reviews are reported to the Board of Directors of the subsidiary bank on a monthly basis and to the Board of Directors of the Corporation on a quarterly basis. Monitoring and addressing problem loan situations are primarily the responsibility of the subsidiary bank's management and its Board of Directors. More specifically, the Corporation calculates the appropriate level of the allowance for possible loan losses on a monthly basis using historical charge-offs for each loan type, substandard loans, and anticipated losses with respect to specific loans. The amount in the allowance is based on the amount of outstanding loans for each loan type multiplied by the ratio of actual charge-offs to total loans for each loan type for the preceding five years, plus the amount of anticipated losses with respect to specific loans, plus a percentage of loans classified substandard or delinquent for each loan type. In addition to management's assessment of the portfolio, the Corporation and the subsidiary bank are examined periodically by regulatory agencies. Although the regulatory agencies do not determine whether the subsidiary bank's allowance for possible loan losses is adequate, such agencies do review the procedures and policies followed by management of the subsidiary bank in establishing the allowance. Reflecting the Corporation's emphasis on asset quality, net charge-offs were .13% of average total loans in 1998, and the allowance for possible loan losses at year-end 1998 was $1.8 million, .68% of total loans, net of unearned interest, and 128% of non-performing loans. Management considers the allowance for possible loan losses adequate to meet potential losses as of December 31, 1998. During 1998, the subsidiary bank had gross charge-offs of $629 in installment loans versus $834 during 1997 and $1,221 in 1996. Recoveries were $379 in 1998, $485 in 1997, and $534 in 1996. While charge-offs in installment loans were reduced, the amount exceeds the subsidiary bank's historic average. Continued adherence to more stringent underwriting guidelines is expected to reduce charge-offs even further in the future. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amounts in thousands except per share data) INVESTMENT SECURITIES. The objectives of the investment portfolio are to provide the Corporation with a source of earnings and liquidity. The following table provides information on the book value of investment securities as of the dates indicated: DECEMBER 31 -------------------------- 1998 1997 U.S. Treasury Notes $ 16,203 $ 34,770 U.S. Government Agencies 32,052 29,369 State and municipal 36,075 32,633 Collateralized mortgage obligations 35,657 20,605 Other securities 10,939 4,657 -------- -------- Total $130,926 $122,034 ======== ======== Total investment securities increased by $ 8.9 million (or 7.3%) to $130.9 million, at December 31, 1998, compared to $122.0 at December 31, 1997. The major reason for the increase is due to an increase in deposits. Decreases totaling $18.6 million occurred in the U. S. Treasury category while increases totaling $2.7 and $15.0 million, respectively, occurred in the U. S. Government Agencies and Collateralized Mortgage Obligations categories. The shift from U. S. Treasuries to the U. S. Government Agency and Collateralized Mortgage Obligations will provide a higher total return and enhance the performance of the overall securities portfolio. Other Securities increased $6.3 million. This increase was due to Commercial Paper purchased to offset large short-term certificates of deposit. DEPOSITS. Total deposits increased by $21.9 million (or 5.7%). This increase was lower than the 7.6% in 1997, but represents the second highest increase in the past four years. Continued sales efforts have contributed to this growth over the past two years. Time deposits recorded the largest increase, ending at $212.1 million, a 4.0% increase over 1997. Interest-bearing demand deposits increased 7.6%, from $87.4 million to $94.0 million. The smallest percentage increase, which was 4.2%, was in savings deposits. Over the last two years, the subsidiary bank has experienced growth of 14.8% in demand accounts compared to 11.7% in time and savings. This continues to represent the Corporation's efforts to grow through core deposit relationships. The following table sets forth the classification of deposits with year-end balances and the average rates paid for the indicated periods.
FOR THE YEAR ENDING DECEMBER 31 ---------------------------------------------------------------- 1998 1997 1996 BALANCE RATE Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- Non-interest-bearing demand $ 47,355 N/A $ 42,333 N/A $ 41,258 N/A Interest-bearing demand 93,982 2.87% 87,364 2.87% 78,883 2.63% Savings 54,378 2.86% 52,193 2.99% 55,077 2.99% Time deposits 212,123 5.59% 204,050 5.55% 183,483 5.47% -------- -------- -------- Total $407,838 3.95% $385,940 3.99% $358,701 3.84% ======== ======== ========
The following table summarizes time deposits in amounts of $100 or more by time remaining until maturity as of December 31, 1998. These time deposits are made by individuals, corporations, and public entities. Three months or less $27,290 Over three months through six months 13,210 Over six months through one year 6,167 Over one year 3,911 ------- Total $50,578 ======= LIQUIDITY. Liquidity is measured by a financial institution's ability to raise funds through deposits, borrowed funds, capital, or the sale of assets. Additional sources of liquidity, including cash flow from both the repayment of loans and the securitization of assets, are also considered in determining whether liquidity is satisfactory. The funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans, and operate the organization. Liquidity is achieved through growth of core funds (defined as core deposits, 50% of non-public entity certificates of deposit over $100,000, and repurchase agreements issued to commercial customers) and liquid assets, and accessibility to the money and capital markets. The Corporation's subsidiary bank has access to short-term funds through its correspondent banks, as well as access to the Federal Home Loan Bank of Chicago, which can provide longer-term funds to help meet liquidity needs. The ratio of temporary investments (those maturing within one year plus twelve months' projected payments on mortgage-backed securities and collateralized mortgage obligations) to volatile liabilities (50% of non-public entity certificates of deposit over $100,000, repurchase agreements issued to public entities, and deposits of public entities) was 127.8% at December 31, 1998 and 104.1% at December 31, 1997, respectively. Core deposits, defined as demand deposits, interest-bearing checking accounts, total savings, and certificates of deposit less than $100,000, were 84.8% of total deposits at December 31, 1998 and 85.2% of total deposits at December 31, 1997. Money market accounts of approximately $37.2 million at December 31, 1998 are classified by the Corporation as core deposits. A net increase of $21.4 million in cash and cash equivalents was experienced by the Corporation in 1998. Financing activities provided net cash of $24.6 million. Increases of $21.9 million in net deposits and $9.9 million in short-term borrowings were offset by $3.5 million used to buy back stock of the Corporation and a decrease of $2.5 million in long-term borrowings. Funds used by investing activities of $4.4 million partially offset the funds provided by financing activities. Major components of the investing activities were net cash of $1.7 million used for securities transactions and $2.7 million used for the purchase of premises and equipment. Cash and cash equivalents of $54.6 million at December 31, 1998 are deemed adequate to meet short-term liquidity needs. The Corporation experienced a net increase in cash and cash equivalents of $12.0 million in 1997. Net cash provided by operating activities of $7.3 million provided a degree of liquidity. Financing activities provided net cash of $24.2 million. A net increase of $27.2 million in deposits, the result of successful programs offered on certificates of deposit and the introduction of the Money Market Gold product, were the major components of the financing activities. Increases in the operating and financing activities were offset by net cash used for investing activities of $19.4 million. Net loan growth of $17.1 million in 1997 was the major component of this decrease, with net cash used of $2.1 million by securities transactions ($6.6 million in proceeds from sales of securities and $47.5 million from maturities of securities, less $56.2 million in purchases of securities) representing the balance of net cash used for investing activities. The long-term liquidity needs of the Corporation will be driven by the necessity to grow and change in the marketplace to meet the needs of its customers and to offset strategies of its competitors. The Corporation's equity base, along with its low debt level and common stock available for issuance, provide several options for future financing. ASSET-LIABILITY MANAGEMENT. The Corporation actively manages its assets and liabilities through coordinating the levels of interest rate sensitive assets and liabilities to minimize changes in net interest income despite changes in market interest rates. The Corporation defines interest rate sensitive assets and liabilities as any instrument that can be repriced within 180 days, either because the instrument will mature during the period or because it carries a variable interest rate. Changes in net interest income occur when interest rates on loans and investments change in a different time period from that of changes in interest rates on liabilities, or when the mix and volume of earning assets and interest-bearing liabilities change. The interest rate sensitivity gap represents the dollar amount of difference between rate sensitive assets and rate sensitive liabilities within a given time period (GAP). A GAP ratio is determined by dividing rate sensitive assets by rate sensitive liabilities. A ratio of 1.0 indicates a perfectly matched position, in which case the effect on net interest income due to interest rate movements would be zero. The Corporation's strategy with respect to asset-liability management is to maximize net interest income while limiting the Corporation's exposure to risks associated with volatile interest rates. The subsidiary bank's Asset/Liability Management Committee is responsible for monitoring the subsidiary bank's GAP position. As a general rule, the subsidiary bank's policy is to maintain GAP as a percent of total assets within a range from +20% to -20% in any given time period. Based on the simulation of various rising or falling interest rate scenarios in comparison to one considered to be the most likely interest rate scenario, management seeks to operate with net interest income within a range of +10% to -10% of budgeted net interest income during any twelve month period. The Corporation also performs an interest rate risk analysis, on a quarterly basis, on the assets and liabilities of the subsidiary bank. This analysis applies an immediate shift in interest rates of +200 basis points and -200 basis points to the assets and liabilities to determine the impact on the net interest income and net income of the subsidiary bank, when compared to a flat rate scenario. The subsidiary bank strives to maintain the net interest income variance within a range of +10% to -10% and net income variance within a range of +5% to -5%. Applying these analyses at December 31, 1998 resulted in no material change to net interest income or net income of the Corporation. The Asset/Liability Management Committee monitors the effect of changes in yield and rates paid on a monthly basis. The Committee considers the subsidiary bank's current and anticipated positions during the next twelve months and the effect of rising and falling interest rate scenarios on net income. The Committee considers various contingency plans if the results of this analysis with regard to the following key ratios indicate a deviation from the asset/liability management policy: loans to assets, net loans to core funds, net loans to total deposits, equity capital to total assets, rate sensitive assets to rate sensitive liabilities, GAP, temporary investments to total assets, and temporary investments to volatile liabilities. The contingency plans considered by the Committee include generating funds through internal and external sources, adjusting maturities within the investment portfolio, repricing of assets, purchasing or selling loans, secondary mortgage activity, and liability rate adjustment. The Committee reports the results of their meetings to the subsidiary bank's Board of Directors on a monthly basis. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amounts in thousands except per share data)
DECEMBER 31, 1998 ---------------------------------------------------------------- 0-3 MO. 4-12 MO. 1-5 YRS. OVER 5 YRS. TOTAL --------- --------- --------- --------- --------- Interest-earning assets: Taxable investment securities $ 13,567 $ 21,267 $ 21,251 $ 38,766 $ 94,851 Tax-exempt investment securities 735 1,766 11,042 22,532 36,075 Fed funds sold 23,000 0 0 0 23,000 Loans 92,419 48,864 111,825 16,134 269,242 --------- --------- --------- --------- --------- Total rate sensitive assets ("RSA") $ 129,721 $ 71,897 $ 144,118 $ 77,432 $ 423,168 ========= ========= ========= ========= ========= Interest-bearing liabilities: Interest-bearing demand deposits $ 93,982 $ 0 $ 0 $ 0 $ 93,982 Savings deposits 54,378 0 0 0 54,378 Time deposits 66,732 100,385 44,759 247 212,123 Short-term debt 13,985 0 5,961 3,150 23,096 Long-term debt 1,200 0 0 0 1,200 --------- --------- --------- --------- --------- Total rate sensitive liabilities ("RSL") $ 230,277 $ 100,385 $ 50,720 $ 3,397 $ 384,779 ========= ========= ========= ========= ========= Interest rate sensitivity GAP (RSA less RSL) $(100,556) $ (28,488) $ 93,398 $ 74,035 $ 0 Cumulative GAP $(100,556) $(129,044) $ (35,646) $ 38,389 $ 0 RSA/RSL .56% .72% 2.84% 22.79% 0 Cumulative RSA/RSL .56% .61% .91% 1.10% 0
In the table above interest-bearing demand deposits and savings deposits are included as rate sensitive in the amounts reflected in the 0-3 month time frame, as such interest-bearing liabilities are subject to immediate withdrawal. Management of the Corporation considers $40 million of the interest-bearing checking account balances (one of the components of interest-bearing demand deposits) and all savings deposits as core, or non-rate sensitive deposits, primarily since interest-bearing demand and savings deposits historically have not been rate sensitive. As a general rule, the subsidiary bank's policy is to maintain RSA as a percent of RSL within a range of +70% to +120% within a 182 day time period. At December 31, 1998, savings deposits totaled approximately $54.4 million. If that amount along with the $40 million of interest-bearing checking account balances, reflected in the 0-3 month time frame, are adjusted to exclude these amounts (consistent with the consideration mentioned in the paragraph above), rate sensitive liabilities would be approximately $135.9 million for a negative GAP of approximately $6.1 million. RSA as a percent of RSL would be 95.5%. Adjusting the cumulative GAP and GAP ratio for the 4-12 month time frame would result in a negative cumulative GAP and GAP ratio of $34.6 million, and 85.4%, respectively. YEAR 2000 COMPLIANCE. The Corporation, through its subsidiary bank, has undertaken an initiative to address the year 2000 issue and has developed a comprehensive plan to prepare, as appropriate, the Corporation's computer systems to recognize the date change on January 1, 2000. If not remedied, potential risks include business interruption, financial loss, reputation loss, and/or legal liability. An assessment of the readiness of third parties with whom the Corporation interfaces, such as vendors, counter-parties, customers, payment systems, and others, is ongoing to mitigate the potential risks the year 2000 poses to the Corporation. The Corporation's objective is to ensure that all aspects of the year 2000 issue affecting the Corporation, including those related to the efforts of third parties, will be fully resolved in time. The Corporation has consistently maintained contingency plans for vital systems and business processes to protect the Corporation's assets against unplanned events that would prevent normal operations. The millennium changeover presents unique risks, some of which would not be effectively addressed by existing plans. The Corporation has examined these risks and developed additional plans to mitigate the effect of potential impacts and ensure continuity of operation throughout the year 2000 and beyond. The use of the existing contingency planning infrastructure will ensure optimum coverage and reusability of existing arrangements and responsibility assignments. A year 2000 committee, comprised of representatives from all areas of the subsidiary bank, has overall responsibility for ensuring that both the technical and the business risks imposed by the year 2000 issue are addressed. This committee regularly monitors the progress toward year 2000 compliance and provides periodic reporting to the subsidiary bank's Executive Officers' Committee and Board of Directors. The process for year 2000 compliance is following four major steps: inventory, impact assessment, validation, and implementation. The Corporation had substantially completed the implementation of the Corporation's critical systems by the end of 1998. It is anticipated that the implementation of all systems will be achieved by June 30, 1999. The Corporation expects that the principal costs will be those associated with the replacement of non-compliant computer equipment, which was fully depreciated and scheduled for replacement. These costs, which will be capitalized and amortized over the equipment's useful lives, will be met from existing resources. As a result, management of the Corporation does not anticipate significant cost savings to occur after the year 2000 issue is satisfactorily remedied. In total, the Corporation expects the cost of solving the year 2000 issue, and the regular replacement of equipment, to be approximately $1.3 million, consisting of the following: Estimated capital costs of technology upgrades $1.2 million Estimated testing costs .1 million ------------ Total estimated spending $1.3 million As of December 31, 1998, the subsidiary bank has successfully met all critical time frames established by federal regulatory agencies. At this point, management does not believe there will be a material impact on the Corporation's results of operations, liquidity, or capital resources. EFFECTS OF INFLATION. The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with generally accepted accounting principles and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. INVESTMENT MATURITIES AND YIELDS. The following table sets forth the contractual maturities of investment securities at December 31, 1998, and the tax equivalent yields of such securities.
DUE WITHIN DUE AFTER ONE BUT DUE AFTER FIVE BUT DUE AFTER TEN OTHER ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS YEARS (NO STATED MATURITY) ----------------- ------------------ ------------------ ----------------- ------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD U.S. Treasury $14,139 6.05% $ 2,064 5.80% $ 0 -- $ 0 -- $ 0 -- U.S. Government Agencies 7,944 5.83 20,279 6.15 902 8.63% 2,927 7.05% 0 -- State and municipal 2,511 5.19 11,212 5.25 3,165 4.70 19,187 4.87 0 -- Collateralized mortgage obligations 0 -- 347 6.11 19,471 6.97 15,839 7.28 0 -- Other securities 8,888 5.75 0 -- 0 -- 0 -- 0 -- Other (no stated maturity) 0 -- 0 -- 0 -- 0 -- 2,051 -- ------- ------- ------- ------- ------- Total $33,482 5.85% $33,902 5.83% $23,538 6.73% $37,953 6.04% $ 2,051 -- ======= ======= ======= ======= =======
LOAN MATURITIES. The following table sets forth scheduled loan repayments on agricultural, commercial, and real estate construction loans at December 31, 1998. See note 4 in the Notes to Consolidated Financial Statements.
DUE WITHIN DUE AFTER ONE BUT DUE AFTER ONE YEAR WITHIN FIVE YEARS FIVE YEARS TOTAL ----------- ----------------- ----------- ----------- Agricultural $ 33,514 $ 3,597 $ 409 $ 37,520 Commercial 35,870 7,032 1,245 44,147 Real Estate-Construction 6,299 0 0 6,299 ----------- ----------- ----------- ----------- Total $ 75,683 $ 10,629 $ 1,654 $ 87,966 =========== =========== =========== ===========
Of the loans shown above, the following table sets forth loans due after one year which have predetermined (fixed) interest rates or adjustable (variable) interest rates at December 31,1998. FIXED RATE VARIABLE RATE TOTAL ---------- ------------- ----- Due after one year $10,514 $1,769 $12,283 ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES. The subsidiary bank has allocated the allowance for possible loan losses to provide for the possibility of losses being incurred within the categories of loans set forth in the table below. The allocation of the allowance and the ratio of loans within each category to total loans at December 31 are as follows:
DECEMBER 31 -------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 PERCENT Percent Percent Percent Percent OF LOANS of loans of loans of loans of loans IN EACH in each in each in each in each CATEGORY category category category category ALLOWANCE TO TOTAL Allowance to total Allowance to total Allowance to total Allowance to total AMOUNT LOANS amount loans amount loans amount loans amount loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Agricultural $ 311 14.1% $ 342 14.3% $ 325 14.0% $ 632 14.2% $ 650 15.1% Commercial 454 16.6 453 15.1 422 14.8 470 14.9 500 17.5 Real estate-mortgage175 55.7 156 56.9 151 56.7 227 54.8 267 55.0 Installment 628 13.6 623 13.7 608 14.5 305 16.1 213 12.4 Unallocated 232 N/A 256 N/A 124 N/A 400 N/A 470 N/A ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total $1,800 100.0% $1,830 100.0% $1,630 100.0% $2,034 100.0% $2,100 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by Item 305 of Regulation S-K is contained in Item 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) of this Report on Form 10-K under the heading "Asset Liability Management" on pages 20 and 21, which information is incorporated herein by reference. Additionally, as mentioned in the section referred to above, the Corporation performs an interest rate risk analysis on a quarterly basis applying an immediate shift in interest rates of +200 basis points and -200 basis points to determine the impact on net interest income and net income. As of December 31, 1998, if interest rates were to increase 200 basis points, net interest income would decrease approximately $123,000 (or 0.8%) and net income would decrease approximately $91,000 (or 2.1%). However, if interest rates were to decrease 200 basis points, net interest income would increase approximately $123,000 (or 0.8%) and net income would increase approximately $91,000 (or 2.1%). The Corporation considers the effects of said increase or decrease in interest rates to be immaterial. ITEM 8. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31 1998 1997 - ----------------------------------------------------------------------------------------------- ASSETS Cash and due from banks (note 2) $ 31,133 $ 21,268 Federal funds sold 23,000 11,900 Investment securities (note 3): Available-for-sale, at fair value 109,530 107,042 Held-to-maturity, at amortized cost 21,396 14,992 Loans held for sale, at lower of cost or market 5,363 1,576 Loans (note 4): Gross loans 265,655 272,400 Less: Unearned interest (181) (289) Allowance for possible loan losses (1,800) (1,830) --------- --------- Net loans 263,674 270,281 Interest receivable 5,604 5,808 Premises and equipment (note 5) 10,627 8,752 Goodwill and intangible assets, net of accumulated amortization of $2,103 and $1,636, at December 31, 1998 and 1997 5,023 5,272 Other assets 3,561 2,769 --------- --------- TOTAL ASSETS $ 478,911 $ 449,660 ========= ========= - ----------------------------------------------------------------------------------------------- LIABILITIES Deposits (note 6): Demand $ 47,355 $ 42,333 Interest-bearing demand 93,982 87,364 Savings 54,378 52,193 Time 212,123 204,050 --------- --------- Total deposits 407,838 385,940 Borrowings (note 7) 24,296 16,987 Other liabilities 4,171 4,065 --------- --------- TOTAL LIABILITIES 436,305 406,992 --------- --------- STOCKHOLDERS' EQUITY Common stock: $5 par value, 7,000,000 shares authorized at December 31, 1998 and 1997; 4,139,841 shares issued at December 31, 1998 and 4,139,918 shares issued at December 31, 1997 20,699 20,700 Surplus 6,305 6,235 Retained earnings 19,588 16,569 Accumulated other comprehensive income, net of tax 862 560 Less: Cost of 312,061 and 123,605 treasury shares at December 31, 1998 and 1997, respectively (4,848) (1,396) --------- --------- TOTAL STOCKHOLDERS' EQUITY 42,606 42,668 --------- --------- Commitments & contingencies TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 478,911 $ 449,660 ========= ========= - -----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996 - -------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $ 24,705 $ 24,150 $ 22,184 Interest and dividends on investment securities: Taxable 5,494 4,976 5,135 Tax-exempt 1,729 1,622 1,632 Interest on federal funds sold 388 297 140 Interest on interest-bearing deposits in other banks 335 267 23 ----------- ----------- ----------- Total interest income 32,651 31,312 29,114 ----------- ----------- ----------- INTEREST EXPENSE: Interest on deposits (note 6) 15,297 14,716 13,773 Interest on borrowings 1,207 825 823 ----------- ----------- ----------- Total interest expense 16,504 15,541 14,596 ----------- ----------- ----------- NET INTEREST INCOME 16,147 15,771 14,518 Provision for possible loan losses (note 4) 337 590 41 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 15,810 15,181 14,477 ----------- ----------- ----------- OTHER INCOME: Trust & farm management fees 1,119 1,067 934 Service charges on deposit accounts 1,498 1,368 1,176 Other service fees 515 445 427 Gain (loss) on securities transactions, net (note 3) 96 97 (24) Loan servicing fees and other charges 374 177 203 Other operating income 241 211 144 ----------- ----------- ----------- Total other income 3,843 3,365 2,860 ----------- ----------- ----------- OTHER EXPENSES: Salaries and employee benefits 7,479 6,866 6,422 Occupancy 1,007 964 955 Equipment expense 822 858 851 FDIC/OCC assessments 185 144 580 Goodwill and intangible assets amortization 467 464 356 Data processing 609 677 595 Trust litigation expenses (note 14) 256 73 382 Other operating expense 3,149 2,616 2,723 ----------- ----------- ----------- Total other expenses 13,974 12,662 12,864 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 5,679 5,884 4,473 Income tax expense (note 8) 1,420 1,525 1,046 ----------- ----------- ----------- NET INCOME $ 4,259 $ 4,359 $ 3,427 =========== =========== =========== NET INCOME PER SHARE: Basic $ 1.08 $ 1.07 $ 0.84 Diluted $ 1.08 $ 1.07 $ 0.84 Basic weighted average shares outstanding 3,950,771 4,063,820 4,080,767 Diluted weighted average shares outstanding 3,951,374 4,063,820 4,080,767 - --------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996 - ---------------------------------------------------------------------------------------------- NET INCOME $ 4,259 $ 4,359 $ 3,427 Other comprehensive income, net of tax Unrealized holding gains arising during the period 365 324 41 Less: Reclassification adjustment for realized (gains) losses included in net income (63) (64) 16 ------- ------- ------- Other comprehensive income 302 260 57 ------- ------- ------- COMPREHENSIVE INCOME $ 4,561 $ 4,619 $ 3,484 ======= ======= ======= - ----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) - --------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE COMMON RETAINED INCOME, TREASURY STOCK SURPLUS EARNINGS NET OF TAX EFFECT STOCK TOTAL ------- ------- -------- ----------------- ------- ------- Balance, January 1, 1996 $13,800 $ 6,148 $ 17,857 $ 243 $ (402) $37,646 1998 Stock dividend (3 for 2 split, note 17), retroactively applied 6,900 (6,900) 0 ------- ------- -------- ------- ------- ------- Adjusted balance, January 1, 1996 $20,700 $ 6,148 $ 10,957 $ 243 $ (402) $37,646 Net income 3,427 3,427 Sale of 8,490 shares of treasury stock 45 56 101 Cash dividends ($.25 per share) (1,034) (1,034) Other comprehensive income, net of $30 tax effect 57 57 ------- ------- -------- ------- ------- ------- Balance, December 31, 1996 $20,700 $ 6,193 $ 13,350 $ 300 $ (346) $40,197 Net income 4,359 4,359 Sale of 5,364 shares of treasury stock 42 34 76 Purchase of 75,000 shares of treasury stock (1,084) (1,084) Cash dividends ($.28 per share) (1,140) (1,140) Other comprehensive income, net of $133 tax effect 260 260 ------- ------- -------- ------- ------- ------- Balance, December 31, 1997 $20,700 $ 6,235 $ 16,569 $ 560 $(1,396) $42,668 Net income 4,259 4,259 Sale of 6,700 shares of treasury stock 72 44 116 Purchase of 195,156 shares of treasury stock (3,496) (3,496) Cash dividends ($.31 per share) (1,241) (1,241) Effect of fractional shares retired (77 shares) related to 1998 stock dividend (1) (2) 1 (2) Other comprehensive income, net of $156 tax effect 302 302 ------- ------- -------- ------- ------- ------- BALANCE, DECEMBER 31, 1998 $20,699 $ 6,305 $ 19,588 $ 862 $(4,848) $42,606 ======= ======= ======== ======= ======= =======
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 4,259 $ 4,359 $ 3,427 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 822 876 908 Provision for possible loan losses 337 590 41 Deferred income taxes (benefit) 191 (208) 18 Amortization of goodwill and other intangible assets 467 464 356 Amortization of premiums on investment securities, net of accretion 187 76 340 (Gain) loss on securities transactions, net (96) (97) 24 Loans originated for sale (32,742) (7,431) (12,155) Proceeds from sales of loans originated for sale 28,955 8,704 10,252 (Decrease) increase in accrued interest payable (12) 420 73 Decrease (increase) in accrued interest receivable 204 (83) (220) Increase in other assets (727) (481) (763) (Decrease) increase in other liabilities (39) 98 483 -------- -------- -------- Net cash provided by operating activities 1,806 7,287 2,784 -------- -------- -------- INVESTING ACTIVITIES: Proceeds from sales of investment securities available-for-sale 7,440 6,586 2,318 Proceeds from maturities of investment securities available-for-sale 35,749 46,080 66,593 Purchase of investment securities available-for-sale (45,864) (55,191) (59,531) Proceeds from maturities of investment securities held-to-maturity 14,611 4,385 1,144 Purchase of investment securities held-to-maturity (21,015) (6,452) (736) Proceeds from sales of other real estate owned 79 200 11 Net decrease (increase) in loans 6,270 (14,570) (25,905) Purchase of premises and equipment (2,697) (481) (959) Payment related to acquisitions, net of cash and cash equivalents acquired 0 0 (2,947) -------- -------- -------- Net cash used by investing activities (5,427) (19,443) (20,012) -------- -------- -------- FINANCING ACTIVITIES: Net increase in deposits 21,898 27,239 12,416 Proceeds from borrowings 13,347 1,200 1,000 Repayments of borrowings (6,038) (2,100) 1,444 Dividends paid (1,241) (1,140) (1,034) Purchase of treasury stock (3,496) (1,084) 0 Sale of treasury stock 116 76 101 -------- -------- -------- Net cash provided by financing activities 24,586 24,191 13,927 -------- -------- -------- Increase (decrease) in cash and cash equivalents 20,965 12,035 (3,301) Cash and cash equivalents at beginning of year 33,168 21,133 24,434 -------- -------- -------- Cash and cash equivalents at end of year $ 54,133 $ 33,168 $ 21,133 ======== ======== ======== Cash paid during the year for: Interest $ 16,516 $ 15,121 $ 14,525 Income taxes $ 1,454 $ 1,600 $ 944 Supplemental disclosure of non-cash investing activities: Loans transferred to other real estate owned $ 375 $ 158 $ 109 - -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and conform with general practices within the banking industry. A description of the significant accounting policies follows: BASIS OF CONSOLIDATION - The consolidated financial statements of Princeton National Bancorp, Inc. ("Corporation") include the accounts of the Corporation and its wholly-owned subsidiary, Citizens First National Bank ("subsidiary bank"). Significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES - In order to prepare the Corporation's financial statements in conformity with generally accepted accounting principles, management is required to make certain estimates that affect the amounts reported in the financial statements and accompanying notes. These estimates may differ from actual results. INVESTMENT SECURITIES - Investment securities which the Corporation has the positive intent and ability to hold to maturity are classified as held-to-maturity and recorded at amortized cost. The Corporation does not have a trading portfolio. All other investment securities that are not classified as held-to-maturity are classified as available-for-sale. Investment securities available-for-sale are recorded at fair value with any changes in fair value reflected as a separate component of stockholders' equity, net of related tax effects. Gains and losses on the sale of securities are determined using the specific identification method. Premiums and discounts on investment securities are amortized or accreted over the contractual lives of those securities. The method of amortization or accretion results in a constant effective yield on those securities (the interest method). LOANS - Loans are stated at the principal amount outstanding, net of unearned interest and allowance for possible loan losses. Interest on commercial, real estate, and certain installment loans is credited to operations as earned, based upon the principal amount outstanding. Interest on other installment loans is credited to operations using a method which approximates the interest method. It is the subsidiary bank's policy to discontinue the accrual of interest on any loan when, in the opinion of management, there is reasonable doubt as to the collectibility of interest or principal. Interest on these loans is credited to income only when the collection of principal has been assured and only to the extent interest payments are received. Impaired loans are measured based on current information and events, if it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Certain groups of small-balance homogenous loans, which are collectively evaluated for impairment and are generally represented by consumer and residential mortgage loans or loans which are measured at the lower of cost or market, are not analyzed individually for impairment. The Corporation generally identifies impaired loans within the non-accrual and restructured commercial and commercial real estate portfolios on an individual loan-by-loan basis. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Non-refundable loan fees and direct costs of loan originations are deferred at the time a loan is originated. Net deferred loan fees or costs are recognized as yield adjustments over the contractual life of the loan using the interest method. ALLOWANCE FOR POSSIBLE LOAN LOSSES - The allowance for possible loan losses is increased by provisions charged to operating expense and decreased by charge-offs, net of recoveries, and is available to absorb losses on loans. The allowance is based on factors that include overall composition of loan portfolio, types of loans, past loss experience, loan delinquencies, watchlist, substandard and doubtful credits, and such other factors that, in management's best judgment, deserve evaluation in estimating potential loan losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the subsidiary bank's allowance for possible loan losses. Such agencies may require the subsidiary bank to recognize additions to the allowance for possible loan losses based on their judgments of information available to them at the time of their examination. SALES OF FIRST MORTGAGE LOANS AND LOAN SERVICING - The subsidiary bank sells first mortgage loans on a non-recourse basis. The total cost of these loans is allocated between loans and servicing rights based on the relative fair value of each. A gain or loss on the sale is recorded which reflects the difference between the cash received and the loan value. Loan servicing fees are recognized over the lives of the related loans. Loan servicing costs are charged to expense as incurred. Loans held for sale are stated at the lower of aggregate cost or market. Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. At December 31, 1998 and 1997, the fair value of the originated mortgage servicing rights was $414 and $197, respectively, and is amortized in future periods in proportion to, and over the period of, estimated net servicing income similar to the interest method using an accelerated amortization method. The amortization of capitalized mortgage servicing rights is reflected in the statements of income as a reduction to loan servicing fees and other charges. PREMISES AND EQUIPMENT - Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets, as follows: buildings, fifteen to forty years; furniture and equipment, three to fifteen years. The carrying amounts of assets sold or retired and the related accumulated depreciation are eliminated from the accounts, and any resulting gains or losses are reflected in income. COST IN EXCESS OF FAIR VALUE OF NET ASSETS - The cost in excess of the fair value (goodwill) of net assets acquired is being amortized over a fifteen-year period using the straight-line method. Long lived assets, including premises and goodwill, are evaluated for impairment using the guidance provided by Statement of Financial Accounting Standard 121 (FAS 121) "Accounting for the Impairment of Long Lived Assets and Long Lived Assets to be Impaired". OTHER REAL ESTATE - Other real estate, which is included in other assets in the consolidated balance sheets, represents assets to which the Corporation's subsidiary bank has acquired legal title in satisfaction of indebtedness. Such real estate is recorded at cost or its fair market value at the date of acquisition, less estimated selling costs, whichever is lower. Any deficiency is recorded through the allowance. Subsequent declines in value, based on changes in market conditions, are recorded in expense as incurred. Gains or losses on the disposition of other real estate are recorded in expense in the period in which they are realized. INCOME TAXES - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. NET INCOME PER SHARE - Basic income per share is computed by dividing net income by the weighted average number of shares outstanding during the year, which were 3,950,771, 4,063,820, and 4,080,767 for 1998, 1997, and 1996, respectively. The 12,950 options issued on December 14, 1998 increased the diluted weighted average shares outstanding to 3,951,374 for 1998. There was no potential common stock in 1997 or 1996. CASH FLOWS - For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. RECLASSIFICATIONS - Certain amounts in the 1997 and 1996 consolidated financial statements have been reclassified to conform to their 1998 presentation. IMPACT OF NEW ACCOUNTING STANDARDS - In June 1997, the FASB issued Statement 130, "Reporting Comprehensive Income". This statement establishes standards for reporting the components of comprehensive income and requires that all items that are required to be recognized under accounting standards as components of comprehensive income be included in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes net income as well as certain items that are reported directly within a separate component of stockholders' equity and bypass net income. The Corporation adopted the provisions of this statement in 1998, and has applied the statement to all years presented. These disclosure requirements had no impact on financial position or results of operations. In June 1997, the FASB issued Statement 131, "Disclosures about Segments of an Enterprise and Related Information". The provisions of this statement require disclosure of financial and descriptive information about an enterprise's operating segments in annual and interim financial reports issued to shareholders. The statement defines an operating segment as a component of an enterprise that engages in business activities that generate revenue and incur expense, whose operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance, and for which discrete financial information is available. The Corporation has determined that it does not have separate operating segments and, therefore, the disclosure requirements under this statement do not apply to the Corporation. In June 1998, the FASB issued Statement 133, "Accounting for Derivatives and Hedging Transactions" (FAS 133). FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. FAS 133 will not be effective for the Corporation until 2000, and is not anticipated to have a material effect on the financial statements of the Corporation. In October 1998, the FASB issued Statement 134, "Accounting for Mortgage-Backed-Securities Retained after the Securitization of Mortgage Loans Held-for-Sale by a Mortgage Banking Enterprise" (FAS 134). FAS 134 requires that after the securitization of mortgage loans held-for-sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments, as described in FAS 115, "Accounting for Certain Investments in Debt and Equity Securities". FAS 134 shall be effective for fiscal years beginning after December 15, 1998 and is not expected to have a material effect on financial statements of the Corporation. 2. CASH AND DUE FROM BANKS The average compensating balances held at correspondent banks during 1998 and 1997 were $9,066 and $7,869, respectively. The subsidiary bank maintains such compensating balances with correspondent banks to offset charges for services rendered by those banks. In addition, the Federal Reserve Bank required the subsidiary bank to maintain an average balance of approximately $1,602 in 1997 as a reserve requirement. There was no such requirement in 1998. 3. INVESTMENT SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair value of available-for-sale and held-to-maturity securities by major security type at December 31 were as follows:
1998 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ----------- ----------- ----------- Available-for-sale: United States Treasury $ 16,099 $ 104 $ 0 $ 16,203 United States Government Agencies 31,771 304 (23) 32,052 State and municipal 22,685 929 (47) 23,567 Collateralized mortgage obligations 35,618 158 (119) 35,657 Other securities 2,051 0 0 2,051 ----------- ----------- ----------- ----------- Total 108,224 1,495 (189) 109,530 ----------- ----------- ----------- ----------- Held-to-maturity: State and municipal 12,508 238 (3) 12,743 Other securities 8,888 12 0 8,900 ----------- ----------- ----------- ----------- Total $ 129,620 $ 1,745 $ (192) $ 131,173 =========== =========== =========== =========== 1997 Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ----------- ----------- ----------- Available-for-sale: United States Treasury $ 34,651 $ 120 $ (1) $ 34,770 United States Government Agencies 29,331 95 (57) 29,369 State and municipal 19,371 764 0 20,135 Collateralized mortgage obligations 20,677 39 (111) 20,605 Other securities 2,164 0 (1) 2,163 ----------- ----------- ----------- ----------- Total 106,194 1,018 (170) 107,042 ----------- ----------- ----------- ----------- Held-to-maturity: State and municipal 12,498 187 (24) 12,661 Other securities 2,494 0 0 2,494 ----------- ----------- ----------- ----------- Total $ 121,186 $ 1,205 $ (194) $ 122,197 =========== =========== =========== ===========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollar amounts in thousands except per share data) Maturities of investment securities classified as available-for-sale and held-to-maturity were as follows at December 31, 1998:
ESTIMATED AMORTIZED FAIR COST VALUE -------- -------- Available-for-sale: Due in one year or less $ 22,504 $22,643 Due after one year through five years 27,221 27,616 Due after ten years 16,917 17,620 -------- -------- 66,642 67,879 -------- -------- Mortgage-backed securities 3,913 3,943 Collateralized mortgage obligations 35,618 35,657 Other (no stated maturity) 2,051 2,051 -------- ------- $108,224 $109,530 ======== ======== Held-to-maturity: Due in one year or less $ 10,838 $10,862 Due after one year through five years 5,826 5,942 Due after five years through ten years 3,165 3,280 Due after ten years 1,567 1,559 -------- -------- $ 21,396 $21,643 ======== =======
Proceeds from sales of investment securities available-for-sale during 1998,1997, and 1996 were $7,440, $6,586, and $2,318, respectively. Gross gains of $96 in 1998, $108 in 1997, and $15 in 1996, and gross losses of $0 in 1998, $11 in 1997, and $39 in 1996, were realized on those sales. Certain investment securities are pledged to secure public and trust deposits, and for other purposes required or permitted by law. The fair value of these pledged assets at December 31, 1998, 1997, and 1996 was $78,682, $77,273, and $68,072, respectively. 4. LOANS The composition of the loan portfolio as of December 31 was as follows: Gross Loans: 1998 1997 Commercial $ 44,147 $ 41,241 Agricultural 37,520 38,991 Real estate-construction 6,299 6,030 Real estate-mortgage 141,739 148,658 Installment 35,950 37,480 -------- -------- Total $265,655 $272,400 ======== ======== Changes in the allowance for possible loan losses for the years ended December 31 were as follows: 1998 1997 1996 Balance, January 1 $ 1,830 $ 1,630 $ 2,034 Provision for possible loan losses 337 590 41 Recoveries of loans previously charged off 651 616 920 Loans charged off (1,018) (1,006) (1,365) ------- ------- ------- Balance, December 31 $ 1,800 $ 1,830 $ 1,630 ======= ======= ======= Loans on non-accrual status at December 31, 1998, 1997, and 1996 were $1,390, $810, and $1,157, respectively. Interest income that would have been recorded on these loans had they not been placed on non-accrual status, was approximately $85, $75, and $93, respectively. At December 31, 1998, 1997, and 1996, the recorded investment in loans classified as impaired in accordance with FAS 114 totaled $957, $489, and $624, respectively, all of which related to impaired loans which do not require a related allowance for possible loan losses as the carrying value of the loans is less than the discounted present value of expected future cash flows. For the years ended December 31, 1998, 1997, and 1996, the average recorded investment in impaired loans was approximately $537, $596, and $380, respectively. Interest recognized on impaired loans during the portion of the year that they were impaired was not considered material. The Corporation's subsidiary bank had loans outstanding to directors, executive officers and their related interests (related parties) of the Corporation and its subsidiary of approximately, $1,786, $1,639, and $1,735, at December 31, 1998, 1997, and 1996, respectively. These loans were made in the ordinary course of business on the same terms and conditions, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers and did not involve more than the normal risk of collectibility. An analysis of the activity in 1998 for loans made to directors, executive officers or principal holders of common stock or to any associate of such persons for which the aggregate to any such person exceeds $60 is as follows: Balance Balance January 1, 1998 Additions Payments December 31, 1998 --------------- --------- -------- ----------------- $1,639 $1,202 $1,055 $1,786 The Corporation services loans for others with unpaid principal balances at December 31, 1998, 1997, and 1996 of approximately $56,267, $42,399, and $36,649, respectively. 5. PREMISES AND EQUIPMENT As of December 31, the components of premises and equipment (at cost), less accumulated depreciation, were as follows: 1998 1997 Land $ 2,280 $ 2,040 Buildings 10,488 10,184 Furniture and Equipment 8,166 6,013 ------- ------- 20,934 18,237 Less accumulated depreciation 10,307 9,485 ------- ------- Total $10,627 $ 8,752 ======= ======= Depreciation expense charged to operating expense for 1998, 1997, and 1996 was $822, $876, and $908, respectively. 6. DEPOSITS As of December 31, the aggregate amounts of time deposits in denominations of $100 or more and related interest expense were as follows:
1998 1997 1996 Amount $50,578 $40,420 $34,712 Interest expense for the year 2,207 2,162 2,078 Total interest expense on deposits was as follows: 1998 1997 1996 Interest-bearing demand $ 2,492 $ 2,420 $2,016 Savings 1,536 1,631 1,587 Time 11,269 10,665 10,170 ------- ------- ------- Total $15,297 $14,716 $13,773 ======= ======= =======
7. BORROWINGS As of December 31, borrowings consisted of the following:
1998 1997 WEIGHTED Weighted AVERAGE Average AMOUNT RATE Amount Rate ------- ---- ------- ---- Customer repurchase agreements $13,768 4.20% $9,771 4.90% Advances from the Federal Home Loan Bank of Chicago due: September 22, 2000 399 6.21 443 6.21 June 18, 2002 562 6.46 697 6.46 March 7, 2004 3,150 5.94 0 -- February 27, 2008 2,500 5.37 0 -- June 19, 2008 2,500 5.44 0 -- Interest-bearing demand notes issued to the U.S. Treasury 217 4.11 2,326 5.53 Notes payable 1,200 6.75 3,750 8.75 ------- ---- ------- ---- Total $24,296 4.89% $16,987 5.94% ======= ==== ======= ====
The subsidiary bank has adopted a collateral pledge agreement whereby the bank has agreed to keep on hand at all times, free of all other pledges, liens, and encumbrances, first mortgages with unpaid principal balances aggregating no less than 167% of the outstanding secured advances from the Federal Home Loan Bank of Chicago (FHLB). All advances from the FHLB have fixed interest rates. The advance maturing in June, 2008 has a one-time callable feature in June, 2003. The advance maturing in February, 2008 also has a callable feature, beginning in February, 2003 and quarterly thereafter. All stock in the FHLB is also pledged as additional collateral for these advances. The Corporation had notes payable totaling $1,200 and $3,750 at December 31, 1998 and 1997, respectively. The note payable at December 31, 1997 was paid off in 1998. A new demand note was issued on October 7, 1998. This demand note carries a floating interest rate equal to the lender's prime rate less one percent (6.75% at December 31, 1998). The note, which is unsecured, had an original balance of $2,200 and has a maturity of March 31, 1999. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollar amounts in thousands except per share data) 8. INCOME TAXES Income tax expense (benefit) consisted of the following:
CURRENT DEFERRED TOTAL ------- -------- ----- Year ended December 31, 1998: U.S. Federal $1,229 $ 191 $1,420 Year ended December 31, 1997: U.S. Federal $1,733 $ (208) $1,525 Year ended December 31, 1996: U.S. Federal $1,028 $ 18 $1,046
The Corporation was not liable for state income taxes for 1998, 1997 or 1996. Income tax expense differed from the amounts computed by applying the U.S. Federal income tax rate of 34 percent to pretax income as a result of the following:
1998 1997 1996 ------ ------ ------ Computed "expected" tax expense $1,931 $2,000 $1,521 Increase (decrease) in income taxes resulting from: Tax-exempt income (630) (582) (554) Non-deductible interest expense 86 77 68 Goodwill amortization 88 87 75 Other, net (55) (57) (64) ------ ------ ------ $1,420 $1,525 $1,046 ====== ====== ======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below: Deferred tax assets: 1998 1997 ------ ----- Deferred directors' fees $ 125 $ 124 State NOL carryforwards 7 161 Other, net 0 13 ------ ----- Total gross deferred tax assets 132 298 Less: Valuation allowance 0 (13) ------ ----- Net deferred tax assets 132 285 ------ ----- Deferred tax liabilities: Building and equipment, principally due to differences in depreciation (216) (197) Provision for possible loan losses (301) (282) Accretion (73) (73) Unrealized gain on investment securities available-for-sale (444) (288) Purchase accounting adjustments (24) (24) ------ ----- Total gross deferred tax liabilities (1,058) (864) ------ ----- Net deferred tax liabilities $ (926) $(579) ====== ===== At December 31, 1998, the Corporation had net operating loss carryforwards for state income tax purposes of approximately $140 which expire in the years 2008-2010 and are available to offset future state taxable income. The valuation allowance for deferred tax assets at December 31, 1998 was $0. The net change in the total valuation allowance for the year ended December 31, 1998 was a decrease of $13. Management believes that it is more likely than not that the deferred tax assets, net of the valuation allowance, will be realized. 9. REGULATORY MATTERS The Corporation and its subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its subsidiary bank must meet specific capital guidelines that involve quantitative measures of each entity's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and its subsidiary bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and its subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average adjusted assets. As of December 31, 1998 and 1997, the Corporation and its subsidiary bank were categorized as well capitalized under the regulatory framework. The most recent notification, as of February 19,1998, from the federal banking agencies categorized the Corporation and the subsidiary bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Corporation and the subsidiary bank must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table that follows. There are no conditions or events since that notification that have changed the Corporation's or the subsidiary bank's category. The Corporation's and the subsidiary bank's actual capital amounts and ratios as of December 31, 1998 and 1997 are as follows:
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------------------ As of December 31, 1998: Total Capital (to risk-weighted assets): Princeton National Bancorp, Inc. $38,894 13.68% $22,745 8.00% $28,431 10.00% Citizens First National Bank 39,593 13.94 22,721 8.00 28,401 10.00 Tier 1 Capital (to risk-weighted assets): Princeton National Bancorp, Inc. $37,094 13.05% $11,373 4.00% $17,059 6.00% Citizens First National Bank 37,793 13.31 11,360 4.00 17,040 6.00 Tier 1 Capital (to average adjusted assets): Princeton National Bancorp, Inc. $37,094 8.35% $17,771 4.00% $22,213 5.00% Citizens First National Bank 37,793 8.51 17,762 4.00 22,202 5.00 - ------------------------------------------------------------------------------------------------------------ TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - ------------------------------------------------------------------------------------------------------------ As of December 31, 1997: Total Capital (to risk-weighted assets): Princeton National Bancorp, Inc. $38,843 13.88% $22,384 8.00% $27,980 10.00% Citizens First National Bank 40,948 14.66 22,347 8.00 27,934 10.00 Tier 1 Capital (to risk-weighted assets): Princeton National Bancorp, Inc. $37,013 13.23% $11,192 4.00% $16,788 6.00% Citizens First National Bank 39,118 14.00 11,174 4.00 16,760 6.00 Tier 1 Capital (to average adjusted assets): Princeton National Bancorp, Inc. $37,013 8.78% $16,863 4.00% $21,078 5.00% Citizens First National Bank 39,118 9.30 16,832 4.00 21,040 5.00 - ------------------------------------------------------------------------------------------------------------
10. EMPLOYEE, OFFICER, AND DIRECTOR BENEFIT PLANS The subsidiary bank has a defined contribution investment (401k) plan. Under this plan, employees may elect to contribute, on a tax-deferred-basis, up to ten percent of their salary. In addition, the subsidiary bank will match employees' contributions up to three percent of each employee's salary. The subsidiary bank's contribution to the defined contribution investment (401k) plan for 1998, 1997, and 1996 was $136, $124, and $129, respectively. The subsidiary bank also has a stock purchase program in which the employee contributes through payroll deductions. These amounts are pooled and used to purchase shares of the Corporation's common stock on a quarterly basis at the market price on the last business day of the quarter. The subsidiary bank also has a profit sharing plan. Annual contributions to the subsidiary bank's plan are based on a formula. The total contribution is at the discretion of the Board of Directors. The cost of the profit sharing plan charged to operating expense was $193 in 1998, $222 in 1997, and $162 in 1996. Additionally, in 1998, the Corporation's shareholders approved a non-qualifying stock option plan for the benefit of employees and directors of the subsidiary bank. The Corporation applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock options plans. The fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 1.80%; expected volatility of 29.95%; risk-free interest rate of 4.56%; expected life of ten years. The number of shares of common stock authorized under the stock option plan is 202,500. The option exercise price must be at least 100% of the fair market value of the common stock on the date of grant, and the option term cannot exceed ten years. A summary of the stock option activity and related information follows: Year Ended December 31, 1998 ---------------------------- Average Exercise Shares Price ------ ------ Beginning of period 0 -- Granted 12,950 $17.19 Exercised 0 -- ------ ------ End of period 12,950 $17.19 Options exercisable 0 -- Fair value of options granted during period $6.49 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. There is no difference between the stated and pro forma earnings per share in 1998. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 ("FAS 107"), "Disclosures about Fair Value of Financial Instruments", requires all entities to disclose the estimated fair value of its financial instrument assets and liabilities. For the Corporation, as for most financial institutions, the majority of its assets and liabilities are considered financial instruments as defined in FAS 107. Many of the Corporation's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Corporation's general practice and intent to hold its financial instruments to maturity and not to engage in trading or sales activities except for loans held-for-resale and available-for-sale securities. Therefore, significant estimations and assumptions, as well as present value calculations, were used by the Corporation for the purposes of this disclosure. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollar amounts in thousands except per share data) Estimated fair values have been determined by the Corporation using the best available data and an estimation methodology suitable for each category of financial instruments. For those loans and deposits with floating interest rates it is presumed that estimated fair values generally approximate the recorded book balances. The estimation methodologies used, the estimated fair values, and the recorded book balances at December 31, 1998 and 1997, were as follows:
1998 1997 ------------------------- -------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE - ---------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and due from banks $31,133 $ 31,133 $21,268 $ 21,268 Federal funds sold 23,000 23,000 11,900 11,900 Investment securities 129,620 131,173 121,186 122,197 Loans, net 269,037 269,349 271,857 271,856 Accrued interest receivable 5,604 5,604 5,808 5,808 -------- -------- -------- -------- Total Financial Assets $458,394 $460,259 $432,019 $433,029 - ---------------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES: Non-interest-bearing demand deposits $47,355 $ 47,355 $42,333 $ 42,333 Interest-bearing deposits 360,483 362,159 343,607 345,087 Borrowings 24,296 24,296 16,987 16,987 Accrued interest payable 2,345 2,345 2,357 2,357 -------- -------- -------- -------- Total Financial Liabilities $434,479 $436,155 $405,284 $406,764 - ----------------------------------------------------------------------------------------------------------
Financial instruments actively traded in a secondary market have been valued using quoted available market prices. Cash and due from banks, interest-bearing time deposits in other banks, federal funds sold, loans held-for-sale and interest receivable are valued at book value which approximates fair value. Financial liability instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar liabilities. Interest payable is valued at book value which approximates fair value. Financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance. The net loan portfolio has been valued using a present value discounted cash flow. The discount rate used in these calculations is the current rate at which similar loans would be made to borrowers with similar credit ratings, same remaining maturities, and assumed prepayment risk. Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Corporation's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Corporation's core deposit base is required by FAS 107. Because the Corporation's 1998 cost of funds compares favorably with alternative funding sources available to the Corporation, the relationship value of these liabilities is believed by management to be significant. There is no material difference between the notional amount and the estimated fair value of off-balance-sheet items which total $64,102 and $62,555 at December 31, 1998 and December 31, 1997, respectively, and are primarily comprised of unfunded loan commitments which are generally priced at market at the time of funding. Fair value estimates are based on existing on and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the subsidiary bank has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include the mortgage banking operation, brokerage network, deferred tax liabilities, property, plant, equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. Management is concerned that reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. 12. UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY National banking regulations and capital guidelines limit the amount of dividends that may be paid by banks. During 1999, these regulations and guidelines will permit the subsidiary bank of the Corporation to distribute approximately $557 plus the 1999 income of the bank, without prior approval from the national banking regulators. Future dividend payments by the subsidiary bank would be dependent on individual regulatory capital requirements and levels of profitability. Since the Corporation is a legal entity, separate and distinct from the subsidiary bank, the dividends of the Corporation are not subject to such bank regulatory guidelines. At December 31, 1998, the subsidiary bank had $1,987 available to pay for dividends. 13. COMMITMENTS AND CONTINGENCIES The subsidiary bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the subsidiary bank has in particular classes of financial instruments. The subsidiary bank's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The subsidiary bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments. At December 31, 1998, commitments to extend credit and standby letters of credit were approximately $63,378 and $724, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the subsidiary bank upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies, but may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing properties. Standby letters of credit are conditional commitments issued by the subsidiary bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The subsidiary bank secures the standby letters of credit with the same collateral used to secure the loan. There are various claims pending against the Corporation's subsidiary bank, arising in the normal course of business. Management believes, based upon consultation with counsel, that liabilities arising from these proceedings, if any, will not be material to the Corporation's financial position. 14. SUBSIDIARY BANK TRUST DEPARTMENT LITIGATION A ruling was received during the third quarter of 1998 on the Corporation's subsidiary bank's lawsuit, stemming from the 1995 Trust Department issue, against Cincinnati Insurance Company. The case was heard in the United States District Court for the Northern District of Illinois, Eastern Division, in Chicago, Illinois. The judge ruled in favor of the subsidiary bank on all issues and awarded $4,900 in damages, pre-judgment interest, post-judgment interest, and reasonable attorneys' fees and costs. Cincinnati Insurance Company has filed an appeal to the ruling. The subsidiary bank has not recognized any of the judgment amount as income and continues to expense any legal fees incurred. If the appeal is denied and judgment upheld, the majority of such expenses would be reimbursed through the insurance coverage. 15. ACQUISITION On June 7, 1996, the Corporation acquired all of the deposits ($24.6 million), equipment, and facility of the Sandwich branch of Superior Bank, FSB (Sandwich). The acquisition of Sandwich was accounted for under the purchase method of accounting and accordingly, the assets acquired were adjusted to their fair market values as of the acquisition date. Goodwill and prepaid acquisition costs in connection with this acquisition in the amount of $3,002 are being amortized over fifteen years on a straight-line basis. Additionally, a three-year covenant not-to-compete was established in the amount of $100, and is being amortized on a straight-line basis. 16. STOCK DIVIDEND In April, 1998, the Corporation announced a 3-for-2 stock split which was paid on May 15, 1998 to shareholders of record as of April 24, 1998. All amounts for all periods have been adjusted to reflect this stock split. 17. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS The Corporation offers their retirees the opportunity to continue benefits in the subsidiary bank's Employee Health Benefit Plan provided the retiree agrees to pay a portion of their monthly premiums. The Corporation's level of contribution is based upon an age and service formula and will provide benefits to active participants until age 65. The components of the 1998, 1997, and 1996 net periodic post-retirement benefit cost are shown below: 1998 1997 1996 Service cost $ 29 $ 27 $ 26 Interest cost 26 25 23 Net amortization of transition obligation 16 16 16 ---- ----- ---- Net periodic post-retirement benefit cost $ 71 $ 68 $ 65 ==== ===== ==== As of December 31, 1998, 1997, and 1996, the accumulated post-retirement benefit obligation totaled $371, $349, and $328, respectively. For measurement purposes, a 10% annual rate of increase in the cost of covered benefits (health care cost trend rate) was assumed for 1998, 1997, and 1996 and the rate was further assumed to decline to 5% after six years. The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 7% at December 31, 1998, 1997, and 1996. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects: 1-Percentage 1-Percentage Point Increase Point Decrease Effect on total of service and interest cost components $ 5 $ (4) Effect on post-retirement benefit obligation 43 (36) 18. CONDENSED FINANCIAL INFORMATION OF PRINCETON NATIONAL BANCORP, INC. The following condensed financial statements are presented for the Corporation on a stand alone basis. CONDENSED BALANCE SHEETS
DECEMBER 31 1998 1997 ----------------------- ASSETS Cash $ 14 $ 14 Interest-bearing deposits in subsidiary bank 295 530 Other assets 552 516 Investment in subsidiary bank 43,005 44,435 ------- ------- TOTAL ASSETS $43,866 $45,495 ======= ======= LIABILITIES Borrowings $1,200 $3,750 Other liabilities 60 (923) ------- ------- TOTAL LIABILITIES 1,260 2,827 ------- ------- STOCKHOLDERS' EQUITY Common stock 20,699 20,700 Surplus 6,305 6,235 Retained earnings 19,588 16,569 Accumulated other comprehensive income, net of tax 862 560 Less: Cost of treasury shares (4,848) (1,396) ------- ------- TOTAL STOCKHOLDERS' EQUITY 42,606 42,668 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $43,866 $45,495 ======= =======
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31 ------------------------------- 1998 1997 1996 INCOME Dividends received from subsidiary bank $6,200 $2,400 $2,350 Interest income 18 62 145 Gain on sale of investment securities 0 2 1 Other income 36 1 0 ------ ------ ------ TOTAL INCOME 6,254 2,465 2,496 ------ ------ ------ EXPENSES Interest expense 114 353 421 Amortization of goodwill and other intangible assets 63 63 63 Loss on purchase of investment securities 0 0 26 Other expenses 161 118 137 ------ ------ ------ TOTAL EXPENSES 338 534 647 ------ ------ ------ Income before income taxes and equity in undistributed income of subsidiary bank 5,916 1,931 1,849 ------ ------ ------ Applicable income taxes (benefit) (75) (138) (149) ------ ------ ------ Income before equity in undistributed income of subsidiary bank 5,991 2,069 1,998 Equity in undistributed income (loss) of subsidiary bank (1,732) 2,290 1,429 ------ ------ ------ NET INCOME $4,259 $4,359 $3,427 ====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 ------------------------------- 1998 1997 1996 Operating activities: Net income $ 4,259 $ 4,359 $ 3,427 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of investment securities, net of accretion 0 (1) (4) (Gain) loss on securities transactions, net 0 (2) 26 Equity in undistributed income 1,732 (2,290) (1,429) Amortization of goodwill and other intangible assets 63 63 63 (Increase) decrease in other assets (101) 261 (987) Increase (decrease) in other liabilities 983 (1,056) 7 ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,936 1,334 1,103 ------- ------- ------- Investing activities: Proceeds from sales of investment securities available-for-sale 0 925 1,067 Proceeds from maturities of investment securities available-for-sale 0 8 196 Purchase of investment securities available-for-sale 0 0 (373) ------- ------- ------- NET CASH PROVIDED BY INVESTING ACTIVITIES 0 933 890 ------- ------- ------- Financing activities: Repayments of borrowings (4,750) (600) (1,350) Proceeds from borrowings 2,200 0 1,000 Sale of treasury stock 116 76 101 Purchase of treasury stock (3,496) (1,084) 0 Dividends paid (1,241) (1,140) (1,034) ------- ------- ------- NET CASH USED BY FINANCING ACTIVITIES (7,171) (2,748) (1,283) ------- ------- ------- (Decrease) increase in cash and cash equivalents (235) (481) 710 Cash and cash equivalents at beginning of year 544 1,025 315 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 309 $ 544 $ 1,025 ======= ======= =======
[LOGO] KPMG The Board Of Directors and Stockholders Princeton National Bancorp, Inc. Princeton, Illinois We have audited the accompanying consolidated balance sheets of Princeton National Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Princeton National Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois January 29, 1999 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in and disagreements with accountants on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Certain information regarding executive officers of the Corporation is included as a Supplementary Item at the end of Part I of this Form 10-K. Information regarding executive officers and directors of the Corporation is included in the Corporation's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 13, 1999 (the "Proxy Statement" under the caption "Proposal 1-Election of Directors"), which information is incorporated by reference herein. Information regarding compliance with Section 16(a) of the Exchange Act is included in the Proxy Statement under the caption "Section 16(a) Beneficial Ownership Compliance Reporting", which information is incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is included in the Proxy Statement under the captions "Proposal 1-Election of Directors--Board of Directors Meetings and Committees", and "Executive Compensation -- Summary; -- Summary Compensation Table; and Employment Agreements," which information is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding security ownership is included in the Proxy Statement under the captions "Election of Directors" and "Security Ownership of Certain Beneficial Owners," which information is incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding relationships and transactions is included in the Proxy Statement under the caption "Certain Transactions," which information is incorporated by reference herein. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following is a list of the Financial Statements included in Part II, Item 8 of this report: Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, 1997, and 1996. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997, and 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997, and 1996. Notes to Consolidated Financial Statements. Independent Auditors' Report (a)(2) Financial Statement Schedules No consolidated financial statement schedules are required to be included in this Report on Form 10-K. (a)(3) Exhibits The exhibits filed herewith are listed on the Exhibit Index filed as part of this report on Form 10-K. Each management contract or compensatory plan or arrangement of the Corporation listed on the Exhibit Index is separately identified by an asterisk. (b) Reports on Form 8-K No reports on Form 8-K were filed by the Corporation for the quarter ended December 31, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registration has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PRINCETON NATIONAL BANCORP, INC. By: ___/s/ Tony J. Sorcic____________ Tony J. Sorcic President and Chief Executive Officer Date: March 25, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ _____ Tony J. Sorcic________ President and Chief Executive March 25, 1999 Tony J. Sorcic Officer and Director (Principal Executive Officer) /s/ ____ Todd D. Fanning_______ Chief Financial Officer March 25, 1999 Todd D. Fanning (Principal Accounting and Financial Officer) /s/ ____ Thomas R. Lasier_____ Chairman of the Board March 25, 1999 Thomas R. Lasier /s/ ____ Don S. Browning______ Director March 25, 1999 Don S. Browning /s/ __________________________ Director John R. Ernat /s/ ____ Donald E. Grubb______ Director March 25, 1999 Donald E. Grubb /s/ ___ Dr. Harold C. Hutchinson, Jr. Director March 25, 1999 Dr. Harold C. Hutchinson, Jr. /s/ __________________________ Director Thomas M. Longman /s/ _____Stephen W. Samet_____ Director March 25, 1999 Stephen W. Samet /s/ __________________________ Director Ervin I. Pietsch /s/ _____Craig O. Wesner______ Director March 25, 1999 Craig O. Wesner
INDEX TO EXHIBITS EXHIBIT NUMBER EXHIBIT - ------ ------- 3.1 Amended and Restated Certificate of Incorporation of Princeton National Bancorp, Inc. ("PNB") (incorporated by reference to Exhibit 3.1 to the PNB Registration Statement on Form S-1 (Registration No. 33-46362) (the "S-1 Registration Statement")). 3.2 By-Laws of PNB (as amended through January 23, 1995), (incorporated by reference to Exhibit 3.2 to the PNB Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K")). 10.1* Employment Agreement, dated as of October 16, 1995, between PNB and Tony J. Sorcic (incorporated by reference to Exhibit 10.1 to the 1995 Form 10-K). 10.2* Employment Agreement, dated as of July 10, 1995, between PNB and D. E. Van Ordstrand (incorporated by reference to Exhibit 10.2 to the 1995 Form 10-K). 10.3* Citizens First National Bank Profit Sharing Plan, as amended and restated January 1, 1989 (incorporated by reference to Exhibit 10.4 to the S-1 Registration Statement). 10.4* Citizens First National Bank Defined Contribution Plan and Trust, as amended and restated January 1, 1989 (incorporated by reference to Exhibit 10.5 to the S-1 Registration Statement). 10.5* Princeton National Bancorp, Inc. Stock Option Plan (incorporated by reference to the Proxy Statement for the annual meeting of stockholders held on April 14, 1998). 21 Subsidiaries of PNB. 23 Consent of KPMG LLP. 27 Financial Data Schedule. * Management contract or compensatory plan. EX-21 2 SUBSIDIARY EXHIBIT 21. SUBSIDIARY OF PRINCETON NATIONAL BANCORP, INC. Citizens First National Bank Princeton National Bancorp, Inc. owns 100 percent of the shares Citizens First National Bank. EX-23.1 3 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS EXHIBIT 23.1 CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Princeton National Bancorp, Inc. We consent to incorporation by reference in the registration statements (No.'s 333-62643, 333-10641, 333-69010) on Form S-8 of Princeton National Bancorp, Inc., of our report dated January 29, 1999, relating to the consolidated balance sheets of Princeton National Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the related statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 annual report on Form 10-K of Princeton National Bancorp, Inc. /s/ KPMG LLP Chicago, Illinois March 25, 1999 EX-27 4 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1998 DEC-31-1998 31,133 360,483 23,000 0 109,530 21,396 21,643 270,837 1,800 478,911 407,838 24,296 4,171 0 0 0 20,699 21,907 478,911 24,705 7,223 723 32,651 15,297 16,504 16,147 337 96 13,974 5,679 5,679 0 0 4,259 1.08 1.08 4.12 1,390 16 0 279 1,830 1,018 651 1,800 1,568 0 232
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