-----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, GBH0RMvfsi3f2h//2gcA7oHKyE0OZPOfEVNrjm3mIKnOAztOlQcag6cB3YgU3Ck8 PLx9TO7FbtP7GBbyceLUeg== 0000897101-00-000322.txt : 20000331 0000897101-00-000322.hdr.sgml : 20000331 ACCESSION NUMBER: 0000897101-00-000322 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: 588853 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, 1999 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 16, 2000, 3,484,343 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 15, 2000, as reported by NASDAQ) held by nonaffiliates was approximately $36,585,602. 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: 2000 Notice and Proxy Statement for the Annual Meeting of Stockholders April 11, 2000 (the "Proxy Statement") - Part III and portions of the Corporation's 1999 Annual Report (the "Annual Report") - Parts II and III - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS Princeton National Bancorp, Inc. ("PNBC" 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", "the Bank", or the "subsidiary bank"). PNBC 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. At December 31, 1999, the Corporation had consolidated total assets of $482,820,000 and stockholders' equity of $40,946,000. PNBC operates the Bank as a community bank with offices located for convenience and 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, PNBC requires officers of the Bank to actively participate in community organizations. In addition, within certain credit and rate of return parameters, PNBC 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 PNBC. Pursuant to PNBC'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 its offices are located. In 1999, the majority of the directors of PNBC also served as the directors of Citizens Bank, which further assists PNBC to directly implement its policies at Citizens Bank. ACQUISITION AND EXPANSION STRATEGY PNBC seeks to diversify both its market area and asset base and increase profitability through acquisitions and expansion. PNBC'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, PNBC focuses on, among other actions, implementing the policies established at Citizens Bank, improving asset quality, the net interest margin, and encouraging community involvement. PNBC will also consider establishing branch facilities as a means of expanding its presence into new market areas. PNBC opened new branch facilities in the Peru/LaSalle/Oglesby area in 1994, in Minooka in 1994, in Hampshire in 1995, in Henry in 1999, and will be opening a new branch facility in Huntley during 2000. 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-fifth 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. Citizens Bank's 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 to a much lesser extent 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, 1999, Citizens Bank had commercial loans of $48.0 million (15.6% of the Bank's total loan portfolio) and commercial real estate loans of $57.3 million (18.6% of the Bank's total loan portfolio). Citizens Bank does not have a concentration of commercial loans in any single industry or business, except for loans to the agricultural industry as more fully disclosed below. Citizens Bank is one of the largest agricultural lenders in the State of Illinois with its outstanding agricultural and agricultural real estate loans primarily related to ventures within 30 miles of branch locations. As of December 31, 1999, Citizens Bank had agricultural loans of $37.9 million and agricultural real estate loans of $41.6 million, which represent approximately 12.3% and 13.5%, 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 by the Bank 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. 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 stability 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. Citizens Bank is active in consumer and mortgage lending with approximately $67.9 million in home mortgage loans (22.0% of the Bank's total loan portfolio) and $42.3 million in consumer installment loans (13.7% of the Bank's total loan portfolio) as of December 31, 1999. 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, in portfolio, long-term, fixed-rate, single-family, home mortgage loans. However, servicing of those loans is maintained, with approximately $58,870,000 of unpaid balances being serviced as of December 31, 1999. Management believes customers receive a higher level of quality service with this arrangement. Citizens Bank maintains eighteen 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 offers an ATM & Check Card, which can be used anywhere that accepts VISA, and has been a tremendous benefit to our customers. Citizens Bank continues to implement an intensive sales training program, which includes team coaching, setting goals, measuring results, and reward recognition. In 1999, the Bank achieved record levels 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 1999 totaled approximately $1,197,000, an increase of $78,000 (or 7.0%), compared to $1,119,000 in 1998. Trust income alone amounted to $943,000 in 1999, compared to $853,000 in 1998, while farm management fees were $254,000 in 1999, as compared to $266,000 in 1998. Total trust assets as of December 31, 1999 were $166,331,000, representing an increase of approximately $12,573,000 (or 8.2%) over the total at December 31, 1998. This increase is due primarily to an overall increase in the number of accounts and corresponding increases in market value. The Trust Department currently has 781 total accounts (compared to 683 total accounts at December 31, 1998) and has 15,858 acres of farm land under management (compared to 16,346 acres at December 31, 1998). COMPETITION PNBC 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 PNBC 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 PNBC and the Bank. PNBC is registered as a bank holding company with the Board of Governors of 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"). PNBC 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 PNBC, 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. PNBC is a legal entity separate and distinct from the Bank. The major source of PNBC's revenue is dividends received from the Bank. The right of PNBC 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, 1999, national banking regulations and capital guidelines will permit the Bank to distribute approximately $1,829,000 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 PNBC. Such transactions include loans or extensions of credit by the Bank to PNBC, the purchase of assets or securities of PNBC, the acceptance of PNBC's securities as collateral for loans, and the issuance of a guaranty, acceptance or letter of credit on behalf of PNBC. Transactions of this kind are limited to 10% of the Bank's capital and surplus for transactions with one affiliate, and 20% of the Bank's capital and surplus for transactions with all affiliates. Such transactions are also subject to certain collateral requirements. These transactions, as well as other transactions between the Bank and PNBC, 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. FRB policy requires PNBC to act as a source of financial strength to the Bank and commit resources to support the Bank. The FRB takes the position that in implementing this policy, it may require PNBC to provide such support when PNBC 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 (the latter being 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 qualifying total capital to risk-weighted assets of 8% and of 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, 1999, PNBC had a total capital to risk-based assets ratio of 12.31%, a Tier 1 capital to risk-based assets ratio of 11.71%, and a leverage ratio of 8.21%. At December 31, 1999, the Bank had a total capital to risk-based assets ratio of 12.85%, a Tier 1 capital to risk-based assets ratio of 12.25%, and a leverage ratio of 8.59%. 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. 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 $100 of domestic deposits. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. An increase in the rate assessed on the Bank could have an adverse effect on the earnings of PNBC and the Bank depending on the amount of the increase. Deposits insured by SAIF are currently assessed semi-annually at the BIF rate of 0 to 27 cents per $100 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. Since January 1, 2000, the same assessment rate has applied to 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. PNBC does not have current plans to acquire banking organizations located outside the state of Illinois. On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act ("GLB Act"). Under the GLB Act, bank holding companies that meet certain standards are permitted to engage in a wider range of activities than has been permitted up to now, including securities and insurance activities. Specifically, a bank holding company that elects to become a "financial holding company" may engage in any activity that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines is (i) financial in nature or incidental thereto, or (ii) complementary to any such financial-in-nature activity, PROVIDED that such complementary activity does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. A bank holding company may elect to become a financial holding company only if each of its depository institution subsidiaries are well-capitalized, well-managed, and have a Community Reinvestment Act rating of "satisfactory" or better at their most recent examination. This new law specifies many activities that are financial in nature, including lending, exchanging, transferring, investing for others, or safeguarding money or securities; underwriting and selling insurance; providing financial, investment, or economic advisory services; underwritng, dealing in, or making a market in securities; and those activities currently permitted for bank holding companies that are so closely related to banking or managing or controlling banks, as to be a proper incident thereto. The GLB Act changes federal laws to facilitate affiliation between banks and entities engaged in securities and insurance activities. The law also establishes a system of functional regulation under which banking activities, securities activities, and insurance activities conducted by financial holding companies and their subsidiaries and affiliates will be separately regulated by banking, securities, and insurance regulators, respectively. National banks are also authorized by the GLB Act to engage, through "financial subsidiaries," in activities that are permissible for financial holding companies, and activities that the Secretary of the Treasury, in consultation with the FRB, determines is financial in nature or incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company portfolio investments, and (iv) merchant banking. A national bank's authority to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank be well-managed and well-capitalized (after deducting from capital the bank's outstanding investment in financial subsidiaries). The GLB Act affects many other changes to federal law applicable to PNBC and the Bank. One of these changes is a requirement that financial institutions take steps to protect customers' "nonpublic personal information." The new law requires the promulgation of several new regulations, which are expected to be finalized by November 12, 2000 (i.e., one year after passage of the law). At present, we are unable to predict the impact the Gramm-Leach-Bliley Act will have on PNBC or the Bank. EMPLOYEES PNBC presently has no employees. However, certain of the employees and executive officers of Citizens Bank provide their services to PNBC. A monthly fee for these services is paid by PNBC 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, 1999, Citizens Bank employed 190 full-time and 42 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, and employee relations are considered to be excellent. Citizens Bank 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 PNBC generally has an easier time attracting and retaining quality employees than other banks in north central Illinois. This is due primarily to its size and management style, which affords greater opportunities to employees for direct participation and development of managerial and banking skills. In order to implement PNBC'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, 1999, employees of the Bank participated in approximately 137 community organizations, serving over 13,500 hours of community service in 1999. ITEM 2. PROPERTIES PNBC'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 PNBC 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. Citizens Bank also owns property in Huntley (Kane county) on which a full-service branch facility is being constructed. It is anticipated that this facility will open in the summer of 2000. For additional information regarding these properties, see Footnote 5 of Item 8 of this report. ITEM 3. LEGAL PROCEEDINGS A ruling was received during the third quarter of 1998 on the 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 $4,900,000 in damages, pre-judgment interest, post-judgment interest, and reasonable attorney fees and costs. Cincinnati Insurance Company filed an appeal to the ruling. In January, 2000, the Seventh Circuit Court of Appeals issued its decision on the appeal, affirming the Federal Division Court Award and increasing the recovery under the policy by $100,000 though setting aside the award of attorneys' fees. The subsidiary bank is therefore entitled to $5,000,000 under the policy, pre-judgment interest of approximately $730,000, and post-judgment interest accruing at the statutory rate from the date of the original judgment in the lower court of approximately $400,000. On February 17, 2000, the subsidiary bank received the settlement from Cincinnati Insurance Company in the amount of $6,235,000, bringing the matter to a conclusion. 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, the Bank, or the Corporation's financial position, liquidity, and results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders during the fourth quarter of 1999. SUPPLEMENTAL ITEM - EXECUTIVE OFFICERS The following table sets forth information regarding the executive officers: Name Age Position ---- --- -------- Tony J. Sorcic 46 President & Chief Executive Officer James B. Miller 44 Executive Vice-President Tony J. Sorcic has been President and Chief Executive Officer of PNBC since January, 1997, and first became a director of PNBC in 1986. He joined Citizens Bank in 1981 as Assistant Vice-President of Operations and became Executive Vice-President in 1986. Mr. Sorcic was named President in 1995. James B. Miller joined Citizens Bank in 1979 as an agricultural loan officer and has been the Executive Vice-President of PNBC since 1996. Mr. Miller currently is the Executive Vice-President and Commercial Banking Manager of Citizens Bank. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Since May 15, 1992, PNBC'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 ---- --- -------- 1999 - ----------------- First Quarter 17.75 $16.38 $ .09 Second Quarter 17.38 14.63 .09 Third Quarter 15.38 10.75 .09 Fourth Quarter 13.13 10.75 .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 .07 On March 16, 2000, PNBC had 588 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 PNBC, which considers payment of dividends quarterly. The ability of PNBC 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 PNBC, and other relevant factors. The Bank's ability to pay dividends to PNBC is subject to regulatory restrictions set forth under "Item 1. Business - Supervision and Regulation" which is incorporated herein by reference. PNBC has paid regular cash dividends on the Common Stock since it commenced operations in 1982. PNBC 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 PNBC 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 PNBC and the Bank, as well as the general economic conditions and other relevant factors affecting PNBC and the Bank. Information concerning the Bank analysis of financial condition is set forth under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" which is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Information regarding the Corporation's selected financial data is included on page 35 of the Corporation's Annual Report, which information is incorporated by reference herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information regarding the Corporation's management's discussion and analysis of financial condition and results of operations is included on pages 24-33 in the Corporation's Annual Report, which information is incorporated by reference herein. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by Item 305 of Regulation S-K is contained in the Corporation's Annual Report on pages 31 and 32, under the heading "Asset Liability Management," 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, 1999, if interest rates were to increase 200 basis points, net interest income would decrease approximately $259,000 (or 1.6%) and net income would decrease approximately $179,000 (or 4.6%). However, if interest rates were to decrease 200 basis points, net interest income would increase approximately $259,000 (or 1.6%) and net income would increase approximately $179,000 (or 4.6%). ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information regarding the Corporation's consolidated financial statements and supplementary data is included on pages 9-23 in the Corporation's Annual Report, which information is incorporated by reference herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or 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 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. Neither the Corporation nor the Bank is aware of any arrangements, including any pledge by any person of securities of the Corporation or the Bank, the operation of which may at a subsequent date result in a change in control of the Corporation or Bank. 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: Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997. Consolidated Statements of Comprehensive Income for the years ended December 31, 1999, 1998, and 1997. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998, and 1997. Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997. Notes to Consolidated Financial Statements. (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, 1999. 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 27, 2000 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 27, 2000 - --------------------------------- Officer and Director Tony J. Sorcic (Principal Executive Officer) /s/ Todd D. Fanning Chief Financial Officer - --------------------------------- (Principal Accounting and Financial Officer) Todd D. Fanning Chairman of the Board March 27, 2000 - --------------------------------- Thomas R. Lasier /s/Don S. Browning Director - --------------------------------- Don S. Browning Director March 27, 2000 - --------------------------------- John R. Ernat /s/ Donald E. Grubb Director - --------------------------------- Donald E. Grubb /s/ Dr. Harold C. Hutchinson, Jr. Director - --------------------------------- Dr. Harold C. Hutchinson, Jr. /s/ Thomas M. Longman Director - --------------------------------- Thomas M. Longman /s/ Stephen W. Samet Director - --------------------------------- Stephen W. Samet Director March 27, 2000 - --------------------------------- Ervin I. Pietsch /s/ Craig O. Wesner Director - --------------------------------- Craig O. Wesner
INDEX TO EXHIBITS EXHIBIT NUMBER EXHIBIT - ------ ------- 3.1 Amended and Restated Certificate of Incorporation of Princeton National Bancorp, Inc. ("PNBC") (incorporated by reference to Exhibit 3.1 to the PNBC Registration Statement on Form S-1 (Registration No. 33-46362) (the "S-1 Registration Statement")). 3.2 By-Laws of PNBC (as amended and restated January 17, 2000). 10.1* Employment Agreement, dated as of February 22, 1999, between PNBC and James B. Miller. 10.2* Employment Agreement, dated as of October 16, 1995, between PNBC and Tony J. Sorcic (incorporated by reference to Exhibit 10.1 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). 13 1999 Annual Report to Shareholders 21 Subsidiaries of PNBC. 23 Consent of KPMG LLP. 27 Financial Data Schedule. * Management contract or compensatory plan. EX-3.2 2 BY-LAWS OF PNBC BYLAWS OF PRINCETON NATIONAL BANCORP, INC. AMENDED AND RESTATED JANUARY 17, 2000 ARTICLE I: MEETINGS OF STOCKHOLDERS SECTION 1: The annual meeting of the stockholders of the Corporation shall be held in Princeton, Illinois at a time and place to be determined by the Board of Directors for the election of Directors and such other business as may properly come before the meeting. SECTION 2: Except as otherwise specifically provided by statute, special meetings of the stockholders may be called for any purpose at any time by the Board of Directors only. Every such special meeting, unless otherwise provided by law, shall be called by mailing, postage prepaid, not less than ten days prior to the date fixed for such meeting, to each stockholder at his address appearing on the books of the Corporation a notice stating the place, date, hour and purpose of the meeting. SECTION 3: It shall be the duty of the President to give proper notice of the place, day and hour of and other matters with respect to each meeting as may be called pursuant to these Bylaws in the form and manner required or permitted by the laws relating to the business for which such meeting is called. SECTION 4: The Board of Directors may designate any place as the place of meeting for any annual meeting. In the case of a special meeting, the meeting shall be held at such place within Princeton, Illinois as may be designated in the call. SECTION 5: In lieu of closing the stock transfer books for the purpose of determining stockholder entitled to notice of or to vote at any meeting of stockholders, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination. In the absence of specific action by the Board closing the stock transfer books or fixing a different record date, at each annual meeting of the stockholders, and at each special meeting, each stockholder of record at the close of business on the fifteenth (15th) day preceding the day of such meeting shall be entitled to vote, in person or by proxy, the number of shares of stock registered in his name on the stock books as of said record date. Notwithstanding the foregoing, the record date with respect to a meeting of stockholders to consider a merger or consolidation shall not be less than twenty (20) days prior to such meeting. SECTION 6: The Secretary shall make a record of the stockholders represented in person or by proxy, giving the names of the stockholders present and the number of shares of stock held by each; the names of stockholders represented by proxy; the number of shares held by each and the names of the proxies. The record shall show the number of shares voted, in person or by proxy, for each resolution and for each candidate for Director and shall be filed with the minutes of the Corporation. SECTION 7: A majority of the outstanding shares of the capital stock of the Corporation, represented either by the holders thereof or by duly authenticated proxies, shall constitute a quorum for the transaction of business at any meeting of the stockholders, but in the absence of a quorum a meeting may be adjourned from time to time without notice to the stockholders. SECTION 8: (a) Business to be considered by the stockholders shall be brought before an annual meeting (i) pursuant to the Corporation's notice of meeting, (ii) by or at the direction of the Board or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in this Section, who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation and such proposed business must otherwise be a proper matter for stockholder action. To be timely, a stockholder's notice must be delivered to or mailed to and received by the Secretary at the principal executive offices of the Corporation not later than the close of business on the 120th day nor earlier than the close of business on the 150th day prior to the anniversary of the mailing date of the proxy statement for the preceding year's annual meeting. In no event shall the public or other announcement of an adjournment of an annual meeting or the adjournment thereof commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice to the Secretary of the Corporation shall set forth (i) as to any business the stockholder proposed to bring before the annual meeting, (A) a brief description of the business desired to be brought before the annual meeting, (B) the reasons for conducting such business at the annual meeting, (C) any material interest in such business of such stockholder and (D) the beneficial owner, if any, on whose behalf the proposal is made, and (ii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposed business is to be brought, (A) the name and address of such stockholder as they appear on the Corporation's books, and the name and address of such beneficial owner and (B) the class and number of shares of the Corporation's capital stock that are owned beneficially and of record by such stockholder and such beneficial owner. (b) At any special meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. (c) Notwithstanding anything in these Bylaws of the Corporation to the contrary, only such business shall be brought before or conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section. The officer of the Corporation or other person presiding over the meeting shall, if the facts so warrant, determine and declare to the meeting that business was not brought before the meeting in accordance with the provisions of this Section and, if such person should so determine, such person shall so declare to the meeting and any such business so determined not to be properly before the meeting shall be disregarded. SECTION 9: (a) Nominations of candidates for election as directors at any meeting of stockholders may be made: (i) by, or at the direction of, a majority of the Board, or (ii) by any stockholder of 2 record entitled to vote at such meeting; provided that only persons nominated in accordance with procedures set forth in this Section shall be eligible for election as directors. (b) Nominations, other than those made by, or at the direction of, the Board, may only be made pursuant to timely notice in writing to the Secretary of the Corporation as set forth in this Section. To be timely, a stockholder's notice shall be delivered to, or mailed and received by the Secretary of the Corporation, for an annual meeting, not later than the close of business on the 120th day nor earlier than the close of business on the 150th day prior to the anniversary of the mailing date of the proxy statement for the previous year's annual meeting. Such stockholder notice shall set forth: (i) as to each person whom the stockholder proposes to nominate for election as a director: (A) the name, age, business address and residential address of such person; (B) the principal occupation or employment of such person; (C) the class and number of shares of the Corporation's stock which are beneficially owned by such person on the date of such stockholder notice; and (D) any other information relating to such person that would be required to be disclosed on Schedule 13D pursuant to Regulation 13D-G under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in connection with the solicitation of proxies with respect to nominees for election as directors, regardless of whether such person is subject to the provisions of such regulations, including, but not limited to, information required to be disclosed by Items 4(b) and 6 of Schedule 14A of Regulation 14A with the Securities and Exchange Commission; and (ii) as to the stockholder giving the notice: (A) the name and address, as they appear on the Corporation's books, of such stockholder and the name and principal business or residential address of any other beneficial stockholders known by such stockholder to support such nominees; and (B) the class and number of shares of the Corporation's stock which are beneficially owned by such stockholder on the date of such stockholder notice and the number of shares owned beneficially by any other record or beneficial stockholders known by such stockholder to be supporting such nominees on the date of such stockholder notice. At the request of the Board, any person nominated by, or at the request of, the Board for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. (c) The Board may reject any nomination by a stockholder not timely made in accordance with the requirements of this Section. If the Board, or a committee designated by the Board, determines that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section in any material respect, the Secretary of the Corporation shall promptly notify such stockholder of the deficiency in the notice. The stockholder may cure the deficiency by providing additional information to the Secretary within such period of time, not less than five days from the date such deficiency notice is given to the stockholder, as the Board or such committee shall determine. If the deficiency is not cured within such period, or if the Board or such committee determines that the additional information provided by the stockholder, together with information previously provided, does not satisfy the requirements of this Section in any material respect, then the Board may reject such stockholder's notice and the proposed nominations shall not be accepted if presented at the stockholder meeting to which the notice relates. The Secretary of the Corporation shall notify a stockholder in writing whether his or her nomination has been made in accordance with the time and informational requirements of this Section. Notwithstanding the procedure set forth in this 3 Section, if neither the Board nor such committee makes a determination as to the validity of any nominations by a stockholder, the presiding officer of the stockholder's meeting shall determine and declare at the meeting whether a nomination was not made in accordance with the terms of this Section. If the presiding officer determines that a nomination was not made in accordance with the terms of this Section, he or she shall so declare at the meeting and the defective nomination shall not be accepted. ARTICLE II: DIRECTORS SECTION 1: The business and affairs of the Corporation shall be managed by the Board of Directors. Except as expressly limited by law, all corporate powers of the Corporation shall be vested in and may be exercised by said Board. SECTION 2: The number of directors of the Corporation and the term of office of each director shall be as set forth in the Amended and Restated Certificate of Incorporation. Any director may resign at any time upon written notice to the Corporation. SECTION 3: (a) The Board of Directors may adopt such rules and regulations for the conduct of its meeting and the management of the affairs of the Corporation as it may deem proper, not inconsistent with the law of the United States, of the state of Delaware, or these Bylaws; and all officers and employees shall strictly adhere to and be bound by such rules and regulations. (b) The Board of Directors shall have power to appoint such committees as it may deem necessary, and from time to time, suspend or continue the powers and duties of any committee. SECTION 4: A meeting for the organization of the Board of Directors shall be held immediately after adjournment of the annual stockholder meeting for the election of Directors at such hour and at such place as shall be announced by the President at such annual meeting as soon as the result of the election is known. Regular meetings of the Board of Directors shall be held without other notice than this Bylaw on the second Monday of each month at the main office of the Citizens First National Bank, Princeton, Illinois, unless such day be a legal holiday, in which case, the regular meeting shall be held at the same time on the next business day, or at such other time as the Board of Directors may determine. Special meetings may be called by the President or by or at the written request of any three or more Directors. Except to the extent the time or method of giving notice is regulated by statute, twenty-four hours' notice of any special meeting shall be given by telegram, letter, or in person to each Director, stating the time and place of each special meeting. Any Director may waive notice of any meeting, by waiver signed either before or after such meeting. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting with the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at nor the purpose of any meeting need be specified in the notice or waiver. 4 SECTION 5: (a) A majority of the members of the Board of Directors shall constitute a quorum for the transaction of business. If, at any time fixed for the meeting, a quorum is not present, the directors in attendance may adjourn the meeting from time to time until a quorum is obtained. (b) Except as otherwise provided herein, the majority of those Directors present and voting at any meeting of the Board of Directors shall decide each matter considered. A Director cannot vote by proxy, or otherwise act by proxy, at a meeting of the Board of Directors. SECTION 6: The Board of Directors may appoint a Secretary of the Board of Directors who may or may not be a member of the Board and who shall keep the minutes of the meeting of the Board of Directors and perform such other duties as the Board of Directors shall from time to time prescribe. SECTION 7: Unless otherwise restricted by the Certificate of Incorporation or Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or any committee thereof, may be taken without a meeting if all members of the Board or Committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or Committee. ARTICLE III: OFFICERS AND MANAGERS SECTION 1: The officers of the Corporation shall be a Chairman of the Board of Directors, a President, one or more vice Presidents, a Secretary, a Treasurer and any other officers designated by the Board. Said officers shall be elected by the Board of Directors and shall hold their respective offices until the next organizational meeting of the board of Directors, or until their successors are elected and qualified. The President and Chairman of the Board of Directors shall be persons who are duly elected members of the Board of Directors. Election or appointment of an officer or agent shall not of itself create contract rights. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any two or more offices may be held by the same person. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. SECTION 2: All officers shall be subject to the supervision and direction of the Board of Directors. SECTION 3: (a) CHAIRMAN OF THE BOARD OF DIRECTORS - The Chairman of the Board of Directors shall participate in the supervision of the policies of the Corporation and shall have such other duties as shall be assigned to him by the Board of Directors. He shall preside at meetings of the stockholders and at meetings of the Board of Directors. (b) PRESIDENT - The President shall be the chief executive officer of the Corporation and as such, shall have, subject to the supervision and direction of the Board of Directors, general supervision of the business, property and affairs of the Corporation and all of 5 the powers vested in him by law or by these Bylaws, or which usually attach or pertain to such office. He shall be an EX OFFICIO member of all committees. He shall have power on behalf of the Corporation to execute any and all contracts, and sign certificates, checks, drafts, orders, receipts or other instruments or documents not required by the Bylaws or by any resolution of the Board of Directors or by law to be signed by another officer or officers. He shall have power on behalf of the Corporation to accept any office, duty or position of trust or confidence which the Corporation may be by law authorized to accept. He shall have power to declare defaults, employ counsel and direct the taking of any legal action in reference to any matter or thing touching the interests of the Corporation. He shall make a report at each regular meeting of the Board of Directors of such matters as the Board of Directors may request or he determines. (c) VICE PRESIDENTS - The Vice President, or each of the Vice Presidents if there is more than one, shall have and perform such duties as the President may delegate, and is authorized, subject to the supervision and direction of the President and within the limits authorized by the Board of Directors, to execute contracts and agreements in relation to loans and other borrowings incurred in the ordinary course of business, sign authentications and certificates in connection with certificates of stock and sign or countersign checks, drafts, and all similar instruments or obligations issued by this Corporation. (d) TREASURER - The Treasurer hall have the custody of the corporate funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the Corporation. The Treasurer shall deposit all monies and other valuables in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse such funds of the Corporation as may be ordered by the Board of Directors, or the President, taking proper vouchers for such disbursements. The Treasurer shall render to the President and Board of Directors at the regular meetings of the Board of Directors, or whenever they may request it, an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond for the faithful discharge of their duties in such amount and with such surety as the Board shall prescribe. (e) SECRETARY - The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notice required by law or by these Bylaws, and in case of the Secretary's absence or refusal or neglect to do so, any such notice may be given by any person thereunto directed by the President, or by the Directors, or stockholders, upon whose requisition the meeting is called as provided in these Bylaws. The Secretary shall record all the proceedings of the meetings of the Corporation and of the Directors in a book to be kept for that purpose, and shall perform such other duties as may be assigned to the Secretary by the Directors or the President. The Secretary shall have the custody of the seal of the Corporation and shall affix the same to all instruments requiring it, when authorized by the Directors or the President and attest the same. (f) OTHER OFFICERS - The Board of Directors may appoint one or more Assistant Treasurers, one or more Assistant Secretaries, and such other officers as from time to time may 6 appear to the Board of Directors to be required or desirable to transact the business of the Corporation. Such officers shall respectively exercise such powers and perform such duties as may be delegated to the several offices, or as may be conferred upon, or assigned to them, by the Board of Directors or by the President. ARTICLE IV: COMMITTEES The Board of Directors may appoint from time to time such committees of Directors for such purpose and with such powers as the Board may determine. ARTICLE V: SEAL The Board of Directors shall provide a seal for the Corporation, which shall be in the charge of the Secretary or any other officer designated by them or by the President, such seal or a facsimile thereof to be affixed to or otherwise reproduced on certificates of stock and any other documents in accordance with the directions of the Board of Directors, the President, any Vice President or the Secretary. ARTICLE VI: CAPITAL STOCK SECTION 1: Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chairman of the Board of Directors or by the President or a Vice President and the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by them in the Corporation. Where a certificate is countersigned (1) by a transfer agent other than the Corporation or its employee, or (2) by a registrar other than the Corporation or its employee, any other signature on the certificate may be facsimile. In case of any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if they were such officer, transfer agent or registrar at the date of issue. SECTION 2: If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preference and/or rights shall be as determined by the Board of Directors in accordance with then applicable provisions of the General Corporation Law of the State of Delaware. SECTION 3: A new certificate of stock may be issued in the place of any certificate theretofore issued by the Corporation, alleged to have been lost or destroyed, and the Directors may in their discretion, require the owner of the lost or destroyed certificate, or their legal representative, to give the Corporation a bond, in such sum as they may direct, not exceeding double the value of the stock to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of any such certificate, or the issuance of any such new certificate. 7 SECTION 4: The shares of stock of the Corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the Corporation by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other person as the directors may designate, by whom they shall be canceled, and new certificates shall thereupon be issued. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer, if when the certificates are presented for transfer, both the transferor and the transferee request the Corporation to do so. ARTICLE VII: PROHIBITED LOANS This Corporation shall make no loans in whole or in part upon the stock of this Corporation as collateral. ARTICLE VIII: INDEMNIFICATION OF DIRECTORS OR OFFICERS SECTION 1: The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation, or is or was a director, officer, employee or agent of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. SECTION 2: The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director, officer, employee or agent of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to 8 the extent that the Delaware Court of Chancery of the court in which such action or suit was brought shall determine upon application that, despite the adjudication of 1iability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. SECTION 3: Any indemnification under Sections (1) and (2) of this ARTICLE VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such person has met the applicable standard of conduct set forth in Sections (1) and (2) of this ARTICLE VIII. Such determination shall be made (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (iii) by the stockholders. SECTION 4: Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this ARTICLE VIII. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deem appropriate. SECTION 5: The indemnification and advancement of expenses provided by, or granted pursuant to, the other Sections of this ARTICLE VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. SECTION 6: The Corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under this ARTICLE VIII or otherwise. SECTION 7: For purposes of this ARTICLE VIII, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent or a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this ARTICLE VIII with respect to the resulting 9 or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. SECTION 8: For purposes of this ARTICLE VIII, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this ARTICLE VIII. SECTION 9: The indemnification and advancement of expenses provided by, or granted pursuant to this ARTICLE VIII shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 10: The Delaware Court of Chancery is vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this ARTICLE VIII. The Delaware Court of Chancery may summarily determine the Corporation's obligation to advance expenses (including attorneys' fees). SECTION 11: Notwithstanding any other Article of these Bylaws, no amendment, modification, restatement or repeal of the Bylaws shall limit or impair in any manner the rights of any person to indemnification or advancement of expenses under this ARTICLE VIII in respect of any action or failure to act occurring prior to such amendment, modification, restatement or repeal. SECTION 12: The provisions of this ARTICLE VIII shall be deemed to be a contract between the Corporation and each person who serves as such officer or director in any such capacity at any time while this ARTICLE III and the relevant provisions of the General Corporation Law of Delaware or other applicable laws, if any, are in effect, and any repeal or modification of any such law or this ARTICLE III shall not affect any rights or obligations then existing with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of fact. ARTICLE IX MISCELLANEOUS SECTION 1: The registered office shall be established and maintained at 606 South Main Street, in the City of Princeton, in Bureau County, in the State of Illinois. SECTION 2: The Corporation may have other offices, either within or without the State of Illinois, at such place or places as the Board of Directors may from time to time appoint or the business of the Corporation may require. 10 SECTION 3: The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. ARTICLE X AMENDMENT OR REPEAL These Bylaws may be amended, altered or repealed, at any regular meeting of the Board of Directors by vote of a majority of the total number of Directors. Adopted by unanimous vote of the Board of Directors of Princeton National Bancorp, Inc. this 17th day of January, A.D., 2000. /s/ Lou Ann Birkey ---------------------------------------- Lou Ann Birkey, Secretary 11 EX-10.1 3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of this February 22, 1999 by and between Princeton National Bancorp, Inc., a Delaware corporation ("Bancorp"), and James Miller ("Executive"). WITNESSETH: WHEREAS, Executive is currently employed by Bancorp, as its Executive Vice President; WHEREAS, Executive is currently employed by Citizens First National Bank, a national banking association (the "Bank"), as its Executive Vice President; and WHEREAS, the Bank is a wholly-owned subsidiary of Bancorp; and WHEREAS, Executive and Bancorp desire to enter into this Agreement pertaining to the terms of the continued employment of Executive with Bancorp and the Bank and the security Bancorp is providing to Executive with respect to his employment; NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 1. Employment. Bancorp hereby agrees to continue to employ Executive as its Executive Vice President, and to cause the Bank to continue to employ Executive as its Executive Vice President until December 31, 2000, and Executive hereby accepts such continued employment by Bancorp and the bank upon the terms and conditions herein set forth. The primary place of employment shall be at Bancorp's and the Bank's principal offices, located at 606 South Main Street, Princeton, Illinois 61356. 2. Term. The initial term of this Agreement shall commence on February 22, 1999 and shall expire on December 31, 2000 unless sooner terminated as hereinafter set forth in Paragraphs 7, 8 and 9. After expiration of the initial term, and subject to the termination provisions hereinafter contained, this Agreement shall be automatically renewed for a period of one year as of each anniversary date of this Agreement; provided that neither Bancorp nor Executive has not given written notice to the other party of its or his intent not to renew at least ninety (90) days prior to the automatic renewal date. If this Agreement is not renewed beyond the initial expiration date due to written notice from Bancorp to Executive for any reason other than Good Cause (as defined in Paragraph 7) or due to written notice from Executive to Bancorp for Good Reason (as defined in Paragraph 7), Executive shall receive severance benefits from Bancorp in accordance with its customary practice then in effect, in addition to all other amounts payable from Bancorp or under any Incentive, Retirement or Page 1 Welfare Plan (as defined in Paragraph 6). 3. Duties. Executive will, during the term hereof: (a) faithfully and diligently do and perform all such acts and duties and furnish such services as the Boards of Directors of Bancorp or the Bank shall direct; (b) do and perform any acts in the ordinary course of Bancorp's or the Bank's businesses (with such limits as the Boards of Directors of Bancorp or the Bank may prescribe) necessary and conducive to Bancorp's and the Bank's best interests; (c) execute all duties attendant to his office; and (d) devote his full time, energy, and skill to the business of Bancorp and the Bank and to the promotion of Bancorp's and the Bank's best interests, except for vacations, absences made necessary because of illness, authorized leaves of absence, holidays, professional meetings, and seminars. During the term of this Agreement, Executive shall not, without the consent of the Boards of Directors of Bancorp or the Bank, accept other employment or perform other services for compensation, or have any direct or indirect ownership interest in any business in competition with the Bank. Notwithstanding anything to the contrary contained herein, the expenditure of reasonable amounts of time on personal investments and charitable activities shall not be deemed a breach of this Agreement, provided that such activities do not materially interfere with the performance by Executive of his obligations under this Agreement. The Board of Directors of the Bank shall not unreasonably withhold consent to Executive's service as a member of the board of directors of other companies. 4. Compensation. Bancorp shall cause the Bank to pay to Executive for all services to be performed by Executive during the term of this Agreement: (a) a base salary at the rate of $110,240 Per annum, payable in substantially equal periodic monthly payments in accordance with Bancorp's and the Bank's practices for other executives, managerial, and supervisory employees, as such practices may be determined from time to time (the "Base Salary"); and (b) any annual increase in Base Salary, additional or special compensation, such as incentive pay or other bonuses, based upon Executive's performance, as the Board of Directors of the Bank, in its discretion, may from time to time determine, based upon annual incentive opportunities made available to Executive by the Bank and upon other discretionary criteria Page 2 deemed appropriate by the Board of Directors of the Bank. All such payments will be subject to such deductions as may be required to be made pursuant to law, government regulation or order, or by agreement with, or consent of, Executive. 5. Fringe Benefits. During the term of this Agreement: (a) MEMBERSHIPS. Bancorp will cause the Bank to pay or reimburse Executive for the following: (i) all reasonable annual dues and membership expenses in one club selected and joined by Executive in which memberships are used for or necessary to the performance of Executive's duties hereunder and all reasonable expenses incurred in furtherance of or in connection with the transaction of the business of Bancorp or the Bank hereunder at such club; and (ii) all reasonable annual dues and membership expenses in such civic and lunch clubs selected by Executive as are necessary or useful to the performance of Executive's duties hereunder and all reasonable expenses incurred in furtherance of or in connection with the transaction of the business of Bancorp or the Bank hereunder at such civic and lunch clubs. All of the aforementioned amounts subject to reimbursement by the Bank to Executive shall be subject to an accounting by Executive and approval by the Bank. 6. Additional Benefits. Bancorp shall cause the Bank to provide the following additional benefits to Executive during the term of this Agreement: (a) Executive shall be eligible to participate in any incentive plans or arrangements ("Incentive Plans") that Bancorp or the Bank may establish or practices it may follow for the benefit of its executives as in effect from time to time, and shall be entitled to receive any other bonus or discretionary compensation payments as Bancorp or the Bank may determine from time to time. (b) Executive shall be entitled to paid vacations in accordance with the Bank's customary vacation practice. Executive shall also be entitled to all paid holidays given by the Bank to its other executives. Page 3 (c) Executive and his dependents shall be entitled to participate in and receive benefits under any qualified or supplemental employee pension plan, including any defined benefit retirement plan or defined contribution retirement plan ("Retirement Plans"), health and dental plan, disability plan, survivor income plan, and life insurance plan, or arrangement ("Welfare Plans") made available by the Bank in which Executive is currently eligible to participate, and any additional or substitute Retirement or Welfare Plans Bancorp or the Bank may make available in the future to its executives, subject to and on a basis consistent with the terms, conditions, and overall administration of such Retirement or Welfare Plans. 7. Termination. (a) GOOD CAUSE. The Board of Directors of Bancorp may terminate the employment of Executive with Bancorp and the Bank at any time for "Good Cause". For purposes of the preceding sentence, "Good Cause" shall be deemed to exist if: (i) Executive shall engage in an act or omission constituting dishonesty, willful misconduct, intentional breach of fiduciary obligation or intentional wrongdoing or malfeasance; (ii) Executive shall be convicted of a felony; or (iii) Executive shall continue to substantially non-perform his assigned duties for a period of thirty (30) days after the Bank has given written notice to Executive of such non-performance and its intention to terminate the employment of Executive with Bancorp and the Bank because of such non-performance. Without limiting the generality of the foregoing, the following shall not constitute cause for the termination of employment of Executive or the modification or diminution of any of his authority hereunder: (i) any personal or policy disagreement between Executive and Bancorp or the Bank or any member of the board of Directors of Bancorp or Bank; or (ii) any action taken by Executive in connection with his duties hereunder if Executive acted in good faith and in a manner he reasonably believed to be in, and not opposed to, the best interest of Bancorp or the Bank and had no reasonable cause Page 4 to believe this conduct was unlawful. Notwithstanding anything herein to the contrary, in the event Bancorp shall terminate the employment of Executive for cause hereunder, Bancorp shall give at least thirty (30) days prior written notice to Executive. (b) VOLUNTARY TERMINATION. Executive shall have the right at any time during the term of this Agreement to terminate his employment with Bancorp upon giving ninety (90) days written notice of said termination to Bancorp. In the event of termination of this Agreement by Executive for any reason prior to December 31, 2000 , Bancorp shall have no further liability hereunder from and after the date of termination other than the payment of all compensation (including payments under Incentive, Retirement, and Welfare Plans) to Executive or his beneficiary for all periods prior to such termination. (c) GOOD REASON. Executive may terminate his employment with Bancorp and the Bank at any time for "Good Reason". "Good Reason" shall be deemed to exist if Executive terminates his employment because, without his express written consent: (i) Bancorp breaches any of the terms of this Agreement; (ii) He is assigned duties materially inconsistent with the duties and responsibilities stated in the by-laws of Bancorp and the Bank for his positions; (iii) The duties and responsibilities for the Executive Vice President stated in the by-laws of Bancorp and the Bank, respectively, are amended to be materially inconsistent with the duties and responsibilities that would typically be expected of an Executive Vice President of Bancorp and the Bank, respectively; or (iv) Bancorp or the Bank changes by 50 miles or more the principal location in which Executive is required to perform services. (d) CHANGE IN CONTROL. At the option of Executive, the employment of Executive hereunder shall terminate upon the effective date of a Change in Control. A "Change in Control" shall be deemed to occur on the earliest of: (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership, as that term is defined in rule 13d-3 under the Exchange Act, of capital stock of Bancorp entitled to exercise more than twenty-five percent (25%) or more of the outstanding voting power of all capital stock of Bancorp entitled to vote for the election of directors ("Voting Page 5 Stock"); (ii) the commencement by any entity, person, or group (other than Bancorp or a subsidiary of Bancorp) of a tender offer or an exchange offer for more than twenty percent (20%) of the outstanding Voting Stock of Bancorp; (iii) the effective time of (A) a merger or consolidation of Bancorp with one or more other corporations as a result of which the holders of the outstanding Voting Stock of Bancorp immediately prior to such merger or consolidation hold less than twenty-five percent (25%) of the Voting Stock of the surviving or resulting corporation or (B) a transfer of twenty-five percent (25%) or more of the Voting Stock, or substantially all of the property of Bancorp, other than to an entity of which Bancorp owns at least fifty percent (50%) of the Voting Stock; or (iv) the effective time of (A) a merger or consolidation of the Bank with one or more other corporations as a result of which the holders of the outstanding Voting Stock of the Bank immediately prior to such merger or consolidation hold less than twenty-five percent (25%) of the Voting Stock of the surviving or resulting corporation or (B) a transfer of twenty-five percent (25%) or more of the Voting Stock, or substantially all of the property of the Bank, other than to an entity of which Bancorp or the Bank owns at least fifty percent (50%) of the Voting Stock. (e) BENEFITS UPON TERMINATION. The following provisions will apply during the initial or any renewal term of this agreement: (i) if the employment of Executive with Bancorp or the Bank is terminated by Bancorp or the Bank for any reason other than Good Cause, (ii) if Executive terminates his employment with Bancorp or the Bank for Good Reason, (iii) if Executive terminates his employment following a Change in Control, or (iv) if the employment of Executive with Bancorp or the Bank is terminated by Bancorp or the Bank during the twenty-four month period following a Change in Control: (i) An amount equal to Executive's aggregate Base Salary (at the rate most recently determined) for a period equal to the greater of (x) twelve months or (y) the balance of the term of this Agreement pursuant to Paragraph 2 (the "Severance Period"), shall be paid to Executive in a lump sum within thrity (30) days after the date of termination. Page 6 (ii) Executive or any other person entitled to receive benefits with respect to Executive under any Incentive Plan, Retirement Plan, or any other plan or program maintained by Bancorp or the Bank shall receive any and all benefits accrued under such Plan or other plan or program, to the date of termination of employment, the amount, form and time of payment of such benefits to be determined by the terms of such Incentive Plan and Retirement Plan and other plan or program, the Executive's employment shall be deemed to have terminated by reason of retirement under each such Plan or other plan or program under circumstances that have the most favorable result for Executive thereunder. Payment shall be made at the earliest date permitted under any such Plan or other plan or program. (iii) During the Severance Period, Executive and his spouse and other dependents will continue to be covered by all Welfare Plans in which he and his spouse and other dependants were participating immediately prior to the date of his termination as if he continued to be an employee of Bancorp or the Bank, and Bancorp will, or will cause the Bank to, continue to pay the costs of coverage of Executive and his spouse and other dependents under such Welfare Plans on the same basis as is applicable to active employees covered thereunder; provided that, if participation in any one or more of such Welfare Plans is not possible under the terms thereof, Bancorp will, or will cause the Bank to, provide substantially identical benefits. (iv) If the employment of Executive with Bancorp or the Bank is terminated by Bancorp or the Bank for Good Cause or by the voluntary action of Executive without Good Reason, other than due to a Change in Control, Executive's Base Salary (at the rate most recently determined) and a bonus (a pro-rata portion of the bonus paid for the most recent calendar year) shall be paid through the date of his termination, and Bancorp shall have no obligation to Executive or any other person under this Agreement. Such termination shall have no effect upon Executive's other rights, including but not limited to rights under any Incentive, Retirement or Welfare Plan. (8) Death. If Executive dies during the term of this Agreement, Bancorp agrees to cause the Bank: Page 7 (a) during the Death Benefit Period, to cover the spouse and other dependants of Executive under all Welfare Plans in which Executive and his spouse and other dependents were participating immediately prior to the date of his death as if he continued to be an employee of Bancorp or the Bank; provided that, if participation in any one or more of such plans and arrangements is not possible under the terms thereof, Bancorp will, or will cause the Bank to, provide substantially identical benefits; and (b) for a period of twenty-four (24) months following the Death Benefit Period, to cover the spouse and other dependents of Executive under all Welfare Plans in which Executive and his spouse and other dependents were participating immediately prior to the date of his death as if he were a retired employee of Bancorp or the Bank; provided that, if participation in any one or more of such plans and arrangements is not possible under the terms thereof, Bancorp will, or will cause the Bank to, provide substantially identical benefits. Any death benefits payable under this Paragraph 8 are in addition to any other benefits due to Executive or his beneficiary or dependents from Bancorp, including, but not limited to, payments under any of the Incentive, Retirement, and Welfare Plans. 9. Disability. If Executive incurs a Disability during the term of this Agreement, Executive's obligation to perform such services hereunder will terminate and in such event Bancorp agrees to cause the Bank: (a) to continue to pay Executive his aggregate Base Salary (at the rate most recently determined) from the date of onset of such Disability until such time as Executive is eligible to receive disability benefits under the Bank's disability plan, as presently or hereafter in effect (the "Disability Period"); and (b) during the Disability Period and such period of time as Executive is eligible to receive disability benefits under the Bank's disability plan, to continue to cover Executive and his dependents under all Welfare Plans in which Executive and his spouse and other dependents were participating immediately prior to the date of onset of such Disability as if Executive continued to be an employee of Bancorp or the Bank; provided that, if participating in any one or more of such plans and arrangements is not possible under the terms thereunder, Bancorp will provide, or cause the Bank to provide, substantially Page 8 identical benefits. Notwithstanding the foregoing, any payments to Executive pursuant to this Paragraph 9 shall be reduced by the amount of any disability benefits otherwise payable to Executive under any disability program maintained by Bancorp or the Bank. Amounts payable to Executive under this Paragraph 9 shall continue to be paid to a beneficiary designated in writing by him if he dies during the Disability Period. If Executive is receiving benefits hereunder and his disability ceases, his benefits under this Paragraph 9 shall terminate, provided that if his employment with Bancorp and the Bank does not recommence (because no offer of re-employment in the same position is made), the benefits he is then receiving under this Paragraph 9 shall continue for a period of twelve (12) additional months. For purposes of this Agreement, the term "Disability" shall mean a physical or mental disability, as determined by an independent physician selected with the approval of both Bancorp and Executive, which will render Executive incapable of performing his duties under this Agreement for six consecutive months. 10. Indemnity. Bancorp shall indemnify Executive to the extent provided in Article VIII, Sections 1, 2, 3, 4 and 5 of the by-laws of Bancorp, as restated March 10, 1992. 11. Setoff. The payments or benefits payable to or with respect to Executive or his spouse or beneficiary pursuant to this Agreement shall not be reduced by the amount of any claim, counterclaim, recoupment defense or other right of Bancorp or the Bank against Executive or his spouse or other beneficiary or obligation of Executive or his spouse or other beneficiary owing to Bancorp or the Bank. The payment of benefits payable to or with respect to Executive or his spouse or other beneficiary after termination of employment as a result of a change in control shall be absolute and unconditional. No payments or benefits payable to or with respect to Executive pursuant to this Agreement shall be reduced by any amount Executive or his spouse or other beneficiary may earn or receive from employment with another employer or from any other source. All amounts so payable by Bancorp or the Bank shall be paid without notice or demand. Each and every such payment made by Bancorp or the Bank shall be final, and Bancorp and the Bank will not seek to recover all or any part of such payment from Executive or from whomsoever may be entitled thereto, for any reason whatsoever. 12. Confidentiality. Executive acknowledges that preservation of a continuing business relationship between Bancorp, the Bank and their respective customers, representatives and employees is of Page 9 critical importance to the continued business success of Bancorp and the Bank and that it is the active policy of Bancorp and the Bank to guard as confidential certain information not available to the public and relating to the business affairs of Bancorp and the Bank. In view of the foregoing, Executive agrees that he shall not during the term of this Agreement and at any time thereafter, without the prior written consent of Bancorp, disclose to any person or entity any such confidential information that was obtained by Executive in the course of his employment with Bancorp or the Bank. This section shall not be applicable if and to the extent Executive is required to testify in a legislative, judicial, or regulatory proceeding pursuant to an order of Congress, any state or local legislature, a judge, or an administrative law judge or is otherwise required by law to disclose such information. 13. Bancorp Assignment. Neither, Bancorp nor Executive may assign this Agreement without the other party's prior written consent, except that Bancorp's obligations hereunder shall be binding legal obligations of any successor to all or substantially all of Bancorp's business by purchase, merger, consolidation, or otherwise. 14. Executive Assignment. No interest of Executive or his spouse or other beneficiary under this Agreement, or any right to receive any payment or distribution hereunder, shall be subject in any manner to sale, transfer, assignment, pledge, attachment, garnishment or other alienation or encumbrance of any kind, nor may such interest or right to receive payment or distribution be taken, voluntarily or involuntarily, for the satisfaction of the obligations or debts of, or other claims against, Executive or his spouse or other beneficiary, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. 15. Benefits Unfunded. All rights under this Agreement of Executive and his spouse or other beneficiary, shall at all times be entirely unfunded, and no provision shall at any time be made with respect to segregating any assets of Bancorp or the Bank for payment of any amounts due hereunder. Neither Executive nor his spouse or other beneficiary, shall have any interest in or rights against any specific assets of Bancorp or the Bank, and Executive and his spouse and other beneficiary shall have only the rights of a general unsecured creditor of Bancorp and the Bank. 16. Waiver. No waiver by any party at any time of any breach by the other party of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of any other provisions or conditions at the same time or at any prior or Page 10 subsequent time. 17. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original. 18. Severability. In the event any provision of this Agreement is held illegal or invalid, the remaining provisions of this Agreement shall not be affected thereby. 19. Successors. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, representatives, and successors. 20. Notice. Notices required under this Agreement shall be in writing and sent by registered mail, return receipt requested, to the following addresses or to such address as the party being notified may have previously furnished to the other party by written notice. If to Bancorp: Princeton National Bancorp, Inc. 606 South Main Street Princeton, Illinois 61356 Attention: Chairman of the Board If to Executive: James Miller C/O Princeton National Bancorp, Inc. 606 South Main Street Princeton, Illinois 61356 21. Applicable Law. This Agreement shall be construed and interpreted pursuant to the laws of the State of Illinois. 22. Entire Agreement. This Agreement contains the entire agreement between Bancorp and Executive and supersedes any and all previous agreements, written or oral, between the parties relating to the subject matter hereof. No amendment or modification of the terms of this Agreement shall be binding upon the parties hereto unless reduced to writing and signed by Bancorp and Executive. 23. Withholding. Bancorp or the Bank may withhold from any payment that is required to make under this Agreement amounts sufficient to satisfy applicable withholding requirements under any federal, state or local law. 24. Headings. The headings contained herein are for reference purposes only and shall not in any way affect the meaning or interpretation of any provision of this Agreement. Page 11 IN WITNESS WHEREOF, Executive has hereunto set his hand, and Bancorp has caused this Agreement to be executed in its name and on its behalf, all as of the day and year first above written. PRINCETON NATIONAL BANCORP, INC. /s/ Thomas R. Lasier ---------------------------------------- Thomas R. Lasier Chairman of the Board of Directors /s/ James Miller ---------------------------------------- James Miller, Executive Page 12 EX-13 4 1999 ANNUAL REPORT EXHIBIT 13 [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 (Corporation) as of December 31, 1999 and 1998, 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, 1999. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ KPMG LLP Chicago, Illinois January 28, 2000, except for Note 14, which is as of February 17, 2000 9 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31 1999 1998 - --------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks (note 2) $ 19,325 $ 31,133 Federal funds sold 7,900 23,000 Investment securities (note 3): Available-for-sale, at fair value 100,043 109,530 Held-to-maturity, at amortized cost 13,923 21,396 Loans held for sale, at lower of cost or market 8,646 5,363 Loans (note 4): Gross loans 308,356 265,655 Less: Unearned interest (9) (181) Allowance for possible loan losses (1,950) (1,800) --------- --------- Net loans 306,397 263,674 Interest receivable 5,799 5,604 Premises and equipment, net of accumulated depreciation (note 5) 12,127 10,627 Goodwill and intangible assets, net of accumulated amortization of $2,551 and $2,103, at December 31, 1999 and 1998 4,600 5,023 Other assets 4,060 3,561 --------- --------- TOTAL ASSETS $ 482,820 $ 478,911 ========= ========= - --------------------------------------------------------------------------------------------------- LIABILITIES Deposits (note 6): Demand $ 45,514 $ 47,355 Interest-bearing demand 93,521 93,982 Savings 52,277 54,378 Time 213,496 212,123 --------- --------- Total deposits 404,808 407,838 Borrowings (note 7): Customer repurchase aggreements 15,663 13,768 Advances from Federal Home Loan Bank 13,320 9,111 Interest-bearing demand notes issued to the U.S. Treasury 2,366 217 Notes payable 2,150 1,200 --------- --------- Total Borrowings 33,499 24,296 Other liabilities 3,567 4,171 --------- --------- TOTAL LIABILITIES 441,874 436,305 --------- --------- STOCKHOLDERS' EQUITY Common stock: $5 par value, 7,000,000 shares authorized at December 31, 1999 and 1998; 4,139,841 shares issued at December 31, 1999 and 1998 20,699 20,699 Surplus 6,335 6,305 Retained earnings 22,118 19,588 Accumulated other comprehensive income (loss), net of tax (1,031) 862 Less: Cost of 472,112 and 312,061 treasury shares at December 31, 1999 and 1998, respectively (7,175) (4,848) --------- --------- TOTAL STOCKHOLDERS' EQUITY 40,946 42,606 Commitments & contingencies --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 482,820 $ 478,911 ========= =========
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 10 CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31 1999 1998 1997 - ------------------------------------------------------------------------------------------ INTEREST INCOME: Interest and fees on loans $24,684 $24,705 $24,150 Interest and dividends on investment securities: Taxable 5,082 5,494 4,976 Tax-exempt 1,844 1,729 1,622 Interest on federal funds sold 268 388 297 Interest on interest-bearing time deposits in other banks 247 335 267 ------- ------- ------- Total interest income 32,125 32,651 31,312 ------- ------- ------- INTEREST EXPENSE: Interest on deposits (note 6) 14,025 15,297 14,716 Interest on borrowings 1,385 1,207 825 ------- ------- ------- Total interest expense 15,410 16,504 15,541 ------- ------- ------- NET INTEREST INCOME 16,715 16,147 15,771 Provision for possible loan losses (note 4) 651 337 590 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 16,064 15,810 15,181 ------- ------- ------- NON-INTEREST INCOME: Trust & farm management fees 1,197 1,119 1,067 Service charges on deposit accounts 1,583 1,498 1,368 Other service fees 696 515 445 Net gain on securities transactions (note 3) 41 96 97 Loan servicing fees and other charges 201 374 177 Other operating income 288 241 211 ------- ------- ------- Total non-interest income 4,006 3,843 3,365 ------- ------- ------- NON-INTEREST EXPENSE: Salaries and employee benefits 7,829 7,479 6,866 Occupancy 1,000 1,007 964 Equipment expense 1,174 822 858 FDIC/OCC assessments 188 185 144 Goodwill and intangible assets amortization 448 467 464 Data processing 514 609 677 Trust litigation expenses (note 14) 141 256 73 Other operating expense 3,366 3,149 2,616 ------- ------- ------- Total non-interest expense 14,660 13,974 12,662 ------- ------- ------- INCOME BEFORE INCOME TAXES 5,410 5,679 5,884 Income tax expense (note 8) 1,556 1,420 1,525 ------- ------- ------- NET INCOME $ 3,854 $ 4,259 $ 4,359 ======= ======= ======= NET INCOME PER SHARE: Basic $ 1.02 $ 1.08 $ 1.07 Diluted $ 1.02 $ 1.08 $ 1.07 Basic weighted average shares outstanding 3,768,055 3,950,771 4,063,820 Diluted weighted average shares outstanding 3,781,299 3,951,374 4,063,820
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 11 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- NET INCOME $ 3,854 $ 4,259 $ 4,359 Other comprehensive income (loss), net of tax Unrealized holding gains (losses) arising during the period (1,866) 365 324 Less: Reclassification adjustment for net realized (gains) losses included in net income (27) (63) (64) ------- ------- ------- Other comprehensive income (loss) (1,893) 302 260 ------- ------- ------- COMPREHENSIVE INCOME $ 1,961 $ 4,561 $ 4,619 ======= ======= =======
- -------------------------------------------------------------------------------- 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 (LOSS) TREASURY STOCK SURPLUS EARNINGS NET OF TAX EFFECT STOCK TOTAL ------ ------- -------- ----------------- -------- ----- Balance, January 1, 1997 $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) $42,606 Net income 3,854 3,854 Sale of 4,378 shares of treasury stock 30 29 59 Purchase of 164,429 shares of treasury stock (2,356) (2,356) Cash dividends ($.35 per share) (1,324) (1,324) Other comprehensive loss, net of $975 tax effect (1,893) (1,893) ------- ------- -------- ------- ------- ------- BALANCE, DECEMBER 31, 1999 $20,699 $ 6,335 $ 22,118 $(1,031) $(7,175) $40,946 ======= ======= ======== ======= ======= =======
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 12 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 3,854 $ 4,259 $ 4,359 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,153 822 876 Provision for possible loan losses 651 337 590 Deferred income tax (benefit) expense (282) 191 (208) Amortization of goodwill and other intangible assets 448 467 464 Amortization of premiums on investment securities, net of accretion 206 187 76 Gain on securities transactions, net (41) (96) (97) Loans originated for sale (14,208) (32,742) (7,431) Proceeds from sales of loans originated for sale 10,925 28,955 8,704 Increase (decrease) in accrued interest payable 71 (12) 420 (Increase) decrease in accrued interest receivable (195) 204 (83) Increase in other assets (899) (727) (481) Increase (decrease) in other liabilities 582 (39) 98 -------- -------- -------- Net cash provided by operating activities 2,265 1,806 7,287 -------- -------- -------- INVESTING ACTIVITIES: Proceeds from sales of investment securities available-for-sale 4,054 7,440 6,586 Proceeds from maturities of investment securities available-for-sale 39,788 35,749 46,080 Purchase of investment securities available-for-sale (33,689) (45,864) (55,191) Proceeds from maturities of investment securities held-to-maturity 15,489 14,611 4,385 Purchase of investment securities held-to-maturity (11,715) (21,015) (6,452) Proceeds from sales of other real estate owned 375 79 200 Net (increase) decrease in loans (43,374) 6,270 (14,570) Purchase of premises and equipment (2,653) (2,697) (481) -------- -------- -------- Net cash used by investing activities (31,725) (5,427) (19,443) -------- -------- -------- FINANCING ACTIVITIES: Net (decrease) increase in deposits (3,030) 21,898 27,239 Proceeds from borrowings 10,244 10,650 1,200 Payments for borrowings (1,041) (3,341) (2,100) Dividends paid (1,324) (1,241) (1,140) Purchase of treasury stock (2,356) (3,496) (1,084) Sale of treasury stock 59 116 76 -------- -------- -------- Net cash provided by financing activities 2,552 24,586 24,191 -------- -------- -------- Increase (decrease) in cash and cash equivalents (26,908) 20,965 12,035 Cash and cash equivalents at beginning of year 54,133 33,168 21,133 -------- -------- -------- Cash and cash equivalents at end of year $ 27,225 $ 54,133 $ 33,168 ======== ======== ======== Cash paid during the year for: Interest $ 15,339 $ 16,516 $ 15,121 Income taxes $ 1,609 $ 1,454 $ 1,600 Supplemental disclosure of non-cash investing activities: Loans transferred to other real estate owned $ 200 $ 375 $ 158
- -------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. 13 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"). Intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES - In order to prepare the Corporation's consolidated financial statements in conformity with generally accepted accounting principles, management is required to make certain estimates that affect the amounts reported in the consolidated 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 certain 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, 1999 and 1998, the amount of originated mortgage servicing rights was $438 and $414, 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 value at the date of acquisition, less estimated selling costs, whichever is lower. Any deficiency is charged to the allowance for possible loan losses. 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. 14 NET INCOME PER SHARE - Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding during the year, which were 3,768,055, 3,950,771, and 4,063,820 for 1999, 1998, and 1997, respectively. Diluted weighted average shares outstanding included potential common stock relating to outstanding stock options. Diluted weighted average shares outstanding were 3,781,299 for 1999 and 3,951,374 for 1998. There was no potential common stock in 1997. 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. RESTATEMENT AND RECLASSIFICATION - Certain amounts in the 1998 and 1997 consolidated financial statements have been reclassified to conform to the 1999 presentation. IMPACT OF FUTURE NEW ACCOUNTING STANDARDS - In June 1998, the FASB issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities" (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. In June 1999, the FASB issued Statement 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement 133, an Amendment of FASB Statement 133" (FAS 137). FAS 137 defers the effective date to no later than January 1, 2001. Management, at this time, does not anticipate the adoption of this statement will have a material effect on the consolidated financial statements of the Corporation. 2. CASH AND DUE FROM BANKS The average compensating balances held at correspondent banks during 1999 and 1998 were $7,875 and $9,066, respectively. The subsidiary bank maintains such compensating balances with correspondent banks to offset charges for services rendered by those banks. In addition, the subsidiary bank was not required to maintain reserve requirement balances at the Federal Reserve Bank in either 1999 or 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:
1999 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---- ----- ------ ----- Available-for-sale: United States Treasury $ 2,003 $ -0- $ -0- $ 2,003 United States Government Agencies 45,143 2 (405) 44,740 State and Municipal 22,878 182 (593) 22,467 Collateralized mortgage obligations 29,451 7 (755) 28,703 Other securities 2,130 -0- -0- 2,130 -------- ------ -------- -------- Total 101,605 191 (1,753) 100,043 -------- ------ -------- -------- Held-to-maturity: State and Municipal 13,923 56 (367) 13,612 -------- ------ -------- -------- Total $115,528 $ 247 $(2,120) $113,655 ======== ====== ======== ======== 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 ======== ====== ======== ========
15 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, 1999: ESTIMATED AMORTIZED FAIR COST VALUE -------- -------- Available-for-sale: Due in one year or less $ 20,381 $ 20,500 Due after one year through five years 29,757 29,341 Due after ten years 17,930 17,452 -------- -------- 68,068 67,293 -------- -------- Mortgage-backed securities 1,956 1,917 Collateralized mortgage obligations 29,451 28,703 Other securities 2,130 2,130 -------- -------- $101,605 $100,043 ======== ======== Held-to-maturity: Due in one year or less $ 2,598 $ 2,604 Due after one year through five years 4,914 4,909 Due after five years through ten years 3,914 3,815 Due after ten years 2,497 2,284 -------- -------- $ 13,923 $ 13,612 ======== ======== Proceeds from sales of investment securities available-for-sale during 1999, 1998, and 1997 were $4,054, $7,440, and $6,586, respectively. Gross gains of $41 in 1999, $96 in 1998, and $108 in 1997, and gross losses of $ 0 in 1999, $0 in 1998, and $11 in 1997, were realized on those sales. There were no sales of investment securities classified as held-to-maturity during 1999, 1998, and 1997. 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, 1999, 1998, and 1997 was $88,039, $78,682, and $77,273, respectively. 4. LOANS The composition of the loan portfolio as of December 31 was as follows: Gross loans: 1999 1998 Commercial $ 47,963 $ 44,147 Agricultural 37,891 37,520 Real estate-construction 13,316 6,299 Real estate-mortgage 166,837 141,739 Installment 42,349 35,950 -------- -------- Total $308,356 $265,655 ======== ======== Changes in the allowance for possible loan losses for the years ended December 31 were as follows: 1999 1998 1997 Balance, January 1 $ 1,800 $ 1,830 $ 1,630 Provision for possible loan losses 651 337 590 Recoveries of loans previously charged off 333 651 616 Loans charged off (834) (1,018) (1,006) ------- ------- ------- Balance, December 31 $ 1,950 $ 1,800 $ 1,830 ======= ======= ======= Non-accrual loans at December 31, 1999, 1998, and 1997 were $1,274, $1,390, and $810, respectively. Interest income that would have been recorded on these loans had they remained current was approximately $126, $85, and $75, respectively. At December 31, 1999, 1998, and 1997, the recorded investment in impaired loans totaled $845, $957, and $489, 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, 1999, 1998, and 1997, the average recorded investment in impaired loans was approximately $933, $537, and $596, 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 to their related interests (related parties) of the Corporation and its subsidiary of approximately $1,540, $1,865, and $1,639, at December 31, 1999, 1998, and 1997, 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 1999 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, 1999 Additions Payments December 31, 1999 --------------- --------- -------- ----------------- $1,865 $797 $1,122 $1,540 The Corporation services loans for others with unpaid principal balances at December 31, 1999, 1998, and 1997 of approximately $58,870, $56,267, and $42,399, respectively. 16 5. PREMISES AND EQUIPMENT As of December 31, the components of premises and equipment (at cost), less accumulated depreciation, were as follows: 1999 1998 Land $ 2,280 $ 2,280 Buildings 12,192 10,488 Furniture and Equipment 9,110 8,166 ------- ------- 23,582 20,935 Less accumulated depreciation 11,455 10,307 ------- ------- Total $12,127 $10,627 ======= ======= Depreciation expense charged to operating expense for 1999, 1998, and 1997 was $1,153, $822, and $876, 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: 1999 1998 1997 Amount $57,229 $50,578 $40,420 Interest expense for the year 2,462 2,207 2,162 Total interest expense on deposits for the years ending December 31, was as follows: 1999 1998 1997 Interest-bearing demand $ 2,161 $ 2,492 $2,420 Savings 1,143 1,536 1,631 Time 10,721 11,269 10,665 ------- ------- ------- Total $14,025 $15,297 $14,716 ======= ======= ======= 7. BORROWINGS As of December 31, borrowings consisted of the following: 1999 1998 WEIGHTED Weighted AVERAGE Average AMOUNT RATE Amount Rate ------ ---- ------ ---- Customer repurchase agreements $15,663 4.57% $13,768 4.20% Advances from the Federal Home Loan Bank of Chicago due: September 22, 2000 351 6.21 399 6.21 June 18, 2002 419 6.46 562 6.46 March 7, 2004 2,550 5.94 3,150 5.94 October 7, 2004 5,000 5.55 -0- -- February 27, 2008 2,500 5.37 2,500 5.37 June 19, 2008 2,500 5.44 2,500 5.44 Interest-bearing demand notes issued to the U.S. Treasury 2,366 4.52 217 4.11 Notes payable 2,150 7.50 1,200 6.75 ------- ---- ------- ---- Total $33,499 5.17% $24,296 4.89% ======= ==== ======= ==== 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, while the advance maturing in February, 2008 also has a callable feature beginning in February, 2003 and quarterly thereafter. The advance maturing in October, 2004 also has a callable feature, beginning in October, 2000 and quarterly thereafter. All stock in the FHLB is also pledged as additional collateral for these advances. The Corporation had notes payable totaling $2,150 and $1,200 at December 31, 1999 and 1998, respectively. There are three notes, all of which are demand notes that carry a floating interest rate equal to the lender's prime rate less one percent (7.50% at December 31, 1999). The notes, which are unsecured, have various maturities in 2000. 17 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, 1999: U.S. Federal $1,516 $ (247) $1,269 State 322 (35) 287 ------ ------ ------ Total $1,838 $ (282) $1,556 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 The Corporation was not liable for state income taxes for 1998 or 1997. 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: 1999 1998 1997 ------ ------ ------ Computed "expected" tax expense $1,839 $1,931 $2,000 Increase (decrease) in income taxes resulting from: Tax-exempt income (673) (630) (582) Non-deductible interest expense 89 86 77 State income taxes, net of federal tax benefit 174 -0- -0- Goodwill amortization 88 88 87 Other, net 39 (55) (57) ------ ------ ------ $1,556 $1,420 $1,525 ====== ====== ====== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are presented below: Deferred tax assets: 1999 1998 ------ ----- Deferred directors' fees $ 116 $ 125 State NOL carryforwards -0- 7 Unrealized loss on investment securities available-for-sale 531 -0- Other, net 13 -0- ------ ----- Total gross deferred tax assets 660 132 ------ ----- Deferred tax liabilities: Building and equipment, principally due to differences in depreciation (202) (216) Provision for possible loan losses (82) (301) Accretion (21) (73) Unrealized gain on investment securities available-for-sale -0- (444) Purchase accounting adjustments (24) (24) ------ ----- Total gross deferred tax liabilities (329) (1,058) ------ ----- Net deferred tax assets (liabilities) $ 331 $(926) ====== ===== Management believes it is more likely than not the deferred tax assets 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 regulations 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, 1999 and 1998, the Corporation and its subsidiary bank were categorized as well capitalized under the regulatory framework. The most recent notification, as of June 7, 1999, 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 which have changed the Corporation's or the subsidiary bank's category. 18 The Corporation's and the subsidiary bank's actual capital amounts and ratios at December 31, 1999 and 1998 were 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, 1999: Total Capital (to risk-weighted assets): Princeton National Bancorp, Inc. $39,721 12.31% $25,810 8.00% $32,263 10.00% Citizens First National Bank 41,422 12.85 25,787 8.00 32,234 10.00 Tier 1 Capital (to risk-weighted assets): Princeton National Bancorp, Inc. $37,771 11.71% $12,905 4.00% $19,358 6.00% Citizens First National Bank 39,472 12.25 12,893 4.00 19,340 6.00 Tier 1 Capital (to average adjusted assets): Princeton National Bancorp, Inc. $37,771 8.21% $18,395 4.00% $22,994 5.00% Citizens First National Bank 39,472 8.59 18,384 4.00 22,980 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, 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 - -----------------------------------------------------------------------------------------------------------------
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 1999, 1998, and 1997 was $141, $136, and $124, 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 opening bid 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 $196 in 1999, $193 in 1998, and $222 in 1997. Additionally, in 1998, the Corporation's shareholders approved a non-qualifying stock option plan for the benefit of employees and directors of the Bank. The Corporation applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for its stock option plans. The fair value of each option grant in 1999 was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 3.22%; expected volatility of 33%; risk-free interest rate of 6.40%; 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 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:
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 --------------- --------------- AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ------ ----- ------ ----- Beginning of period 12,950 $17.19 -0- -- Granted 21,500 11.19 12,950 $17.19 Exercised -0- -- -0- ------ ------ ------ ------ End of period 34,450 $13.45 12,950 $17.19 Options exercisable 4,317 -0- Fair value of options granted during period $3.99 $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 net income per share in 1998. Proforma diluted earnings would be $.01 less than stated in 1999 and the same in 1998. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollar amounts in thousands except per share data) 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 to not 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. 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, 1999 and 1998, were as follows:
1999 1998 -------------------- --------------------- AMORTIZED FAIR Amortized Fair COST VALUE Cost Value - ------------------------------------------------------------------------------------ FINANCIAL ASSETS: Cash and due from banks $ 19,325 $ 19,325 $ 31,133 $ 31,133 Federal funds sold 7,900 7,900 23,000 23,000 Investment securities 115,528 113,655 129,620 131,173 Loans, net 315,043 313,359 269,037 269,349 Accrued interest receivable 5,799 5,799 5,604 5,604 -------- -------- -------- -------- Total Financial Assets $463,595 $460,038 $458,394 $460,259 - ------------------------------------------------------------------------------------ FINANCIAL LIABILITIES: Non-interest-bearing demand deposits $ 45,514 $ 45,514 $ 47,355 $ 47,355 Interest-bearing deposits 359,294 359,833 360,483 362,159 Borrowings 33,499 33,499 24,296 24,296 Accrued interest payable 2,423 2,423 2,345 2,345 -------- -------- -------- -------- Total Financial Liabilities $440,730 $441,269 $434,479 $436,155 - ------------------------------------------------------------------------------------
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 1999 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 $70,342 and $64,102 at December 31, 1999 and 1998 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 large 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 and 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 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. At December 31, 1999, the subsidiary bank had $1,829 available for dividends. 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 bank, the dividends of the Corporation are not subject to such bank regulatory guidelines. 20 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, 1999, commitments to extend credit and standby letters of credit were approximately $69,177 and $1,165, 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, 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 attorney fees and costs. Cincinnati Insurance Company filed an appeal to the ruling. In January, 2000, the Seventh Circuit Court of Appeals issued its decision on the appeal, affirming the Federal District Court Award and increasing the recovery under the policy by $100 though setting aside the award of attorneys' fees. The subsidiary bank is therefore entitled to $5,000 under the policy, pre-judgment interest of approximately $730, and post-judgment interest accruing at the statutory rate from the date of the original judgment in the lower court of approximately $400. On February 17, 2000, the subsidiary bank received the settlement from Cincinnati Insurance Company in the amount of $6,235, bringing the matter to a conclusion. Due to the uncertainty of the litigation, none of these amounts had been accrued for at December 31,1999. 15. 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 1998 and 1997 have been adjusted to reflect this stock split. 16. 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 1999, 1998, and 1997 net periodic post-retirement benefit cost are shown below: 1999 1998 1997 Service cost $ 31 $ 29 $ 27 Interest cost 29 26 25 Net amortization of transition obligation 16 16 16 ---- ----- ---- Net periodic post-retirement benefit cost $ 76 $ 71 $ 68 ==== ===== ==== At December 31, 1999, 1998, and 1997, the accumulated post-retirement benefit obligation totaled $413, $371, and $349, respectively. For measurement purposes, a 10% annual rate of increase in the cost of covered benefits (healthcare cost trend rate) was assumed for 1999, 1998, and 1997 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 7.0% at December 31, 1999, 1998, and 1997. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage point change in assumed healthcare 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 44 (38) 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollar amounts in thousands except per share data) 17. 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 --------------------- 1999 1998 ASSETS Cash $ 14 $ 14 Interest-bearing deposits in subsidiary bank 136 295 Other assets 519 552 Investment in subsidiary bank 42,384 43,005 -------- -------- TOTAL ASSETS $ 43,053 $ 43,866 ======== ======== LIABILITIES Borrowings $ 2,150 $ 1,200 Other liabilities (43) 60 -------- -------- TOTAL LIABILITIES 2,107 1,260 -------- -------- STOCKHOLDERS' EQUITY Common stock 20,699 20,699 Surplus 6,335 6,305 Retained earnings 22,118 19,588 Accumulated other comprehensive income (loss), net of tax (1,031) 862 Less: Cost of treasury shares (7,175) (4,848) -------- -------- TOTAL STOCKHOLDERS' EQUITY 40,946 42,606 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,053 $ 43,866 ======== ========
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31 ---------------------------------- 1999 1998 1997 INCOME Dividends received from subsidiary bank $ 2,800 $ 6,200 $ 2,400 Interest income 11 18 62 Gain on sale of investment securities -0- -0- 2 Other income 20 36 1 -------- -------- -------- TOTAL INCOME 2,831 6,254 2,465 -------- -------- -------- EXPENSES Interest expense 96 114 353 Amortization of goodwill and other intangible assets 63 63 63 Other expenses 169 161 118 -------- -------- -------- TOTAL EXPENSES 328 338 534 -------- -------- -------- Income before income taxes and equity in undistributed income of subsidiary bank 2,503 5,916 1,931 Applicable income taxes (benefit) (80) (75) (138) -------- -------- -------- Income before equity in undistributed income of subsidiary bank 2,583 5,991 2,069 Equity in undistributed income (loss) of subsidiary bank 1,271 (1,732) 2,290 -------- -------- -------- NET INCOME $ 3,854 $ 4,259 $ 4,359 ======== ======== ========
22 CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 ------------------------------- 1999 1998 1997 Operating activities: Net income $ 3,854 $ 4,259 $ 4,359 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of investment securities, net of accretion -0- -0- (1) Gain on securities transactions, net -0- -0- (2) Equity in undistributed income (1,271) 1,732 (2,290) Amortization of goodwill and other intangible assets 63 63 63 (Increase) decrease in other assets (32) (101) 261 Increase (decrease) in other liabilities (102) 983 (1,056) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,512 6,936 1,334 ------- ------- ------- Investing activities: Proceeds from sales of investment securities available-for-sale -0- -0- 925 Proceeds from maturities of investment securities available-for-sale -0- -0- 8 ------- ------- ------- NET CASH PROVIDED BY INVESTING ACTIVITIES -0- -0- 933 ------- ------- ------- Financing activities: Payments for borrowings (250) (4,750) (600) Proceeds from borrowings 1,200 2,200 -- Sale of treasury stock 59 116 76 Purchase of treasury stock (2,356) (3,496) (1,084) Dividends paid (1,324) (1,241) (1,140) ------- ------- ------- NET CASH USED BY FINANCING ACTIVITIES (2,671) (7,171) (2,748) ------- ------- ------- Decrease in cash and cash equivalents (159) (235) (481) Cash and cash equivalents at beginning of year 309 544 1,025 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 150 $ 309 $ 544 ======= ======= =======
23 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, 1999, 1998, and 1997. 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 increased to $482,820 at year-end. The structure of the balance sheet changed significantly throughout 1999. Loans increased and short-term funds decreased. This had a positive effect on net interest income. The net interest margin improved to 4.27% in the fourth quarter as compared to 4.15% for all of 1999 and 4.12% for 1998. The decrease in equity resulted from a negative fair market value adjustment of the subsidiary bank's investment portfolio, which was caused by an increase in interest rates during 1999. The stock repurchase plan increased treasury shares and also contributed to the decrease in capital. The balance sheet leverage did improve as a result of this change in capital. Net income decreased 9.51% during 1999. Operating expenses were negatively impacted by increases in equipment depreciation, provision for loan loss expense, and salary expenses. Additionally, income tax expense increased as a result of the Company's increase in pre-tax income and utilizing all available state net operating loss carryforwards in 1998 and becoming taxable for state income tax purposes in 1999. Loan growth contributed to the improvement in net interest income in 1999. ASSETS AT PERCENT EQUITY AT PERCENT NET PERCENT YEAR-END CHANGE YEAR-END CHANGE INCOME CHANGE -------- ------ -------- ------ ------ ------ 1999 $482,820 0.82% $40,946 (3.90)% $3,854 (9.51)% 1998 478,911 6.51 42,606 (0.15) 4,259 (2.29) 1997 449,660 6.96 42,668 6.15 4,359 27.20 ANALYSIS OF RESULTS OF OPERATIONS NET INTEREST INCOME. Net interest income increased by $638 (on a taxable equivalent basis) to $17,732 in 1999 from $17,094 in 1998, an increase of 3.7%. This increase is not only a result of an increase in the volume of interest-earning assets, but, more importantly, a change in the composition of interest-earning assets with a higher percentage being in net loans, which earns the highest return. As a result, the net yield on interest-earning assets increased to 4.15% in 1999, from 4.12% in 1998. The yield on average earning assets decreased from 8.10% in 1998 to 7.77% in 1999. However, the cost of interest-bearing liabilities also dropped from 4.53% in 1998 to 4.07% in 1999. 24 The following table sets forth certain unaudited income and expense and per share data on a quarterly basis for the three-month periods indicated:
1999 1998 1997 --------------------------- ---------------------------- --------------------------- AVERAGE YIELD/ Average Yield/ Average Yield/ BALANCE INTEREST COST Balance Interest Cost Balance Interest Cost --------------------------- ---------------------------- --------------------------- AVERAGE INTEREST-EARNING ASSETS Interest-bearing deposits $ 5,260 $ 247 4.70% $ 6,401 $ 335 5.23% $ 4,911 $ 267 5.44% Taxable investment securities 89,818 5,082 5.66 92,643 5,494 5.93 82,200 4,976 6.05 Tax-exempt investment securities (a) 37,262 2,794 7.50 34,340 2,620 7.63 30,824 2,458 7.97 Federal funds sold 5,664 268 4.73 7,380 388 5.26 5,465 297 5.43 Net loans (a) (b) 288,773 24,751 8.57 274,272 24,761 9.03 267,918 24,185 9.03 -------- -------- -------- -------- -------- -------- Total interest-earning assets 426,777 33,142 7.77 415,036 33,598 8.10 391,318 32,183 8.22 -------- -------- -------- -------- -------- -------- Average non-interest-earning assets 37,945 34,343 35,696 -------- -------- -------- Total average assets $464,722 $449,379 $427,014 ======== ======== ======== AVERAGE INTEREST-BEARING LIABILITIES Interest-bearing demand deposits $ 92,448 2,161 2.34% $ 86,874 2,492 2.87% $ 84,424 2,420 2.87% Savings deposits 54,998 1,143 2.08 53,630 1,536 2.86 54,543 1,631 2.99 Time deposits 203,365 10,721 5.27 201,598 11,269 5.59 192,250 10,665 5.55 Interest-bearing demand notes issued to the U. S. Treasury 1,093 52 4.76 1,015 55 5.42 1,117 64 5.73 Federal funds purchased and customer repurchase agreements 15,053 667 4.43 12,963 626 4.83 7,741 375 4.84 Advances from Federal Home Loan Bank 10,008 570 5.70 7,011 412 5.88 521 33 6.33 Borrowings 1,342 96 7.15 1,397 114 8.16 4,120 353 8.57 -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities 378,307 15,410 4.07 364,488 16,504 4.53 344,716 15,541 4.51 -------- -------- -------- -------- -------- -------- Net yield on average interest-earning assets $ 17,732 4.15% $ 17,094 4.12% $ 16,642 4.25% ======== ==== ======== ==== ======== ==== Average non-interest-bearing liabilities 44,536 41,999 41,039 Average stockholders' equity 41,879 42,892 41,259 -------- -------- -------- Total average liabilities and stockholders' equity $464,722 $449,379 $427,014 ======== ======== ========
(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 $63 in 1999, $329 in 1998, and $116 in 1997, attributable to interest from non-accrual loans. In 1998, net interest income improved by 2.7% to $17,094, a result of an increase in the volume of interest-earning assets, offset by falling interest rates and a flattening yield curve throughout 1998, which reduced 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. 25 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.
FOR THE YEARS ENDED DECEMBER 31 ------------------------------------------------------------------------------------------ 1999 COMPARED TO 1998 1998 COMPARED TO 1997 1997 COMPARED TO 1996 VOLUME(a) RATE(a) NET VOLUME(a) RATE(a) NET VOLUME(a) RATE(a) NET INTEREST FROM INTEREST-EARNING ASSETS Interest-bearing time deposits $ (57) $ (31) $ (88) $ 79 $ (11) $ 68 $ 251 $ (7) $ 244 Taxable investment securities (164) (248) (412) 624 (106) 518 (587) 428 (159) Tax-exempt investment securities (b) 221 (47) 174 274 (112) 162 63 (78) (15) Federal funds sold (86) (34) (120) 102 (11) 91 151 6 157 Net loans (c) 1,280 (1,290) (10) 576 -0- 576 2,034 (60) 1,974 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total income from interest- earning assets 1,194 (1,650) (456) 1,655 (240) 1,415 1,912 289 2,201 ------- ------- ------- ------- ------- ------- ------- ------- ------- EXPENSE OF INTEREST-BEARING LIABILITIES Interest-bearing demand deposits 144 (475) (331) 72 -0- 72 211 193 404 Savings deposits 32 (425) (393) (26) (69) (95) 44 -0- 44 Time deposits 98 (646) (548) 523 81 604 343 152 495 Interest-bearing demand notes issued to the U.S. Treasury 4 (7) (3) (6) (3) (9) 3 9 12 Federal funds purchased and customer repurchase agreements 97 (56) 41 250 1 251 31 (6) 25 Advances from Federal Home Loan Bank 174 (16) 158 397 (18) 379 33 -0- 33 Borrowings (4) (14) (18) (228) (11) (239) (75) 7 (68) ------- ------- ------- ------- ------- ------- ------- ------- ------- Total expense from interest- bearing liabilities 545 (1,639) (1,094) 982 (19) 963 590 355 945 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net difference $ 649 $ (11) $ 638 $ 673 $ (221) $ 452 $ 1,322 $ (66) $ 1,256 ======= ======= ======= ======= ======= ======= ======= ======= =======
(a) The change in interest due both to 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 fees of $1,048 in 1999, $986 in 1998, and $787 in 1997. 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 $1,274 in 1999, $1,390 in 1998, and $810 in 1997. NON-INTEREST INCOME. Non-interest income increased in 1999 by $163 to $4,006, up 4.2% from 1998's total of $3,843. As a percentage of average assets, non-interest income remained at .86% for 1999, the same level as in 1998. The biggest increase was in other service charges, which increased by $181 (or 35.2%). This was a result of income generated by the subsidiary bank's new debit card product and a 168% increase in brokerage fee income. Notable increases were also seen in trust income (up $90 or 10.6%) as a result of the increase in trust accounts and assets, and in service charges on deposit accounts (up $85 or 5.7%) as a result of an increase in the number of deposit accounts at the subsidiary bank. There was a decrease in loan servicing fees and other charges of $173 (or 46.3%), a result of higher interest rates which reduced loan originations and related sales in the secondary market. 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 -------------------------------- 1999 1998 1997 Trust income $ 943 $ 853 $ 817 Farm management fees 254 266 250 Service charges on deposit accounts 1,583 1,498 1,368 Other service charges 696 515 445 Securities transactions, net 41 96 97 Other operating income 288 241 211 Loan servicing fees and other charges 201 374 177 ------ ------ ------ Total non-interest income $4,006 $3,843 $3,365 ====== ====== ====== Non-interest income to average total assets .86% .86% .79% 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, all categories showed increases in 1998 when compared to 1997. The biggest increase was seen in loan servicing fees and other charges 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 overall increase in the number of deposit accounts at the subsidiary bank. 26 NON-INTEREST EXPENSE. In 1999, non-interest expenses increased by $686, or 4.9%, to $14,660 compared to $13,974 in 1998. As a percentage of average assets, non-interest expense was 3.15% in 1999, up just slightly from 3.11% in 1998. Two categories accounted for the majority of the increase: salaries and employee benefits, and equipment. Salaries and employee benefits increased by $350 (or 4.7%), due to normal salary increases and a slight increase in the number of employees. Equipment expense increased by $352 (or 42.8%), due to the installation of new computer systems in the latter part of 1998 and the resulting depreciation expense beginning in 1999. In 1998, the older equipment became fully depreciated, thereby lowering depreciation expense. Collectively, all other categories of non-interest expense decreased by $16. The following table provides non-interest expense, and non-interest expense to average total assets for the periods indicated.
YEAR ENDED DECEMBER 31 ---------------------------------- 1999 1998 1997 Salaries and employee benefits $ 7,829 $7,479 $ 6,866 Equipment 1,174 822 858 Occupancy 1,000 1,007 964 Loan administrative expenses 550 586 451 Data processing 514 609 677 Goodwill and intangible assets amortization 448 467 464 Postage 335 326 316 Supplies 269 242 203 FDIC/OCC assessments 188 185 144 Trust litigation expenses 141 256 73 Other operating expense 2,212 1,995 1,646 ------- ------- ------- Total non-interest expense $14,660 $13,974 $12,662 ======= ======= ======= Non-interest expense to average total assets 3.15% 3.11% 2.97%
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 in 1998 to $256 from $73 in 1997. FDIC/OCC assessments were up 28.5% from 1997, due to the fact that the Corporation received a refund in the first quarter of 1997. Other operating expenses also increased 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 as a result of the subsidiary bank changing to in-house item processing. NET INCOME. Net income for 1999 was $3,854 (or $1.02 per diluted share), a decrease of $405 (or 9.5%) from $4,259 (or $1.08 per diluted share) in 1998. This decrease is a result of the subsidiary bank becoming state taxable in 1999 and an increase in the provision for loan losses as well as the aforementioned increases in non-interest expenses. Net income for 1998 decreased by $100 (or 2.3%) from $4,359 in 1997. This decrease was attributable to a narrowing of the net interest margin as well as increases in non-interest expenses, which more than offset increases in non-interest income. ANALYSIS OF FINANCIAL CONDITION LOANS. The Corporation's loan portfolio largely reflects the profile of the communities in which it operates. The Corporation essentially offers 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 --------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 % OF % of % of % of % of AMOUNT TOTAL Amount Total Amount Total Amount Total Amount Total ----------------- ----------------- ----------------- ---------------- ---------------- Agricultural $ 37,891 12.3% $ 37,520 14.1% $ 38,991 14.3% $ 36,030 14.0% $ 33,106 14.2% Commercial 47,963 15.6 44,147 16.6 41,241 15.1 38,410 14.8 34,687 14.9 Real Estate 1-4 family residences 67,936 22.0 66,243 24.9 75,607 27.8 72,460 28.1 63,824 27.4 Agricultural 41,641 13.5 33,491 12.6 30,434 11.2 28,374 11.0 23,148 10.0 Construction 13,316 4.3 6,299 2.4 6,030 2.2 4,160 1.6 3,116 1.3 Commercial 57,260 18.6 42,005 15.8 42,617 15.7 41,170 16.0 37,378 16.1 -------- -------- -------- -------- -------- Real Estate Total 180,153 58.4 148,038 55.7 154,688 56.9 146,164 56.7 127,466 54.8 Installment 42,349 13.7 35,950 13.6 37,480 13.7 37,514 14.5 37,434 16.1 -------- -------- -------- -------- -------- Total loans $308,356 100.0% $265,655 100.0% $272,400 100.0% $258,118 100.0% $232,693 100.0% ======== ======== ======== ======== ======== Total assets $482,820 $478,911 $449,660 $420,407 $402,393 Loans to total assets 63.9% 55.5% 60.6% 61.4% 57.8%
27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (dollar amounts in thousands except per share data) Total loans increased $42.7 million (or 16.1%) in 1999, as compared to a decrease of $6.7 million (or 2.5%) in 1998. This substantial increase reflects the overall strong economy of the market area served by the subsidiary bank and successful efforts of the staff to build profitable relationships with customers. Commercial loans increased $3.8 million (or 8.6%) in 1999. This compares to an increase of $2.9 million (or 7.1%) in 1998. Commercial growth remains particularly active in the eastern and northeastern markets. More established areas posted increases also, largely due to the success of relationship building with customers. Competition for high quality commercial and agricultural customers remains strong. The agricultural loan portfolio was virtually unchanged in 1999 compared to 1998. This is after a decrease of $1.5 million (or 3.8%) in 1998. During 1999 and 1998, a number of short-term agricultural credits were converted to well secured agricultural real estate loans. Agriculture commodity prices remain low, causing reduced cash flow for many farmers; however, increased yields and cash injected from the government have helped mitigate the low commodity prices. The largest area of growth in the portfolio was in real estate loans. These loans increased $32.1 million (or 21.7%) from 1998 compared to a decrease of $6.7 million (or 4.3%) in 1998. The decrease in 1998 was due to heavy refinancing of residential real estate loans into fixed rate loans that were sold into the secondary market. Due to increasing interest rates, such refinancing did not occur in 1999. All types of real estate loans increased in 1999 with commercial and agricultural real estate loans showing the largest gains. Construction loans are primarily commercial projects. Consumer installment loans increased $6.4 million (or 17.8%) in 1999 from 1998. This follows a slight decline in 1998. Most of the increase is in home equity loans and auto financing. 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 the 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 the 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 shareholders and the protection of depositors, (iii) serving the legitimate needs of the community and the subsidiary bank's general market area while obtaining a balance between maximum yield and minimum risk, (iv) ensuring 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 an Officers' Loan Committee, (vi) developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each loan category, and (vii) ensuring each loan is properly documented and, if appropriate, secured or guaranteed by government agencies, and 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 .44% of total loans at year-end 1999 compared to .52% at year-end 1998. 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 141% and 128% of nonperforming loans at year-end 1999 and 1998, 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 31,1999 was $92. The Corporation had $217 in other real estate owned as of December 31, 1998. The following table provides information on the Corporation's non-performing loans since 1995:
DECEMBER 31 -------------------------------------------------------------- 1999 1998 1997 1996 1995 Non-accrual $1,274 $1,390 $ 810 $1,157 $ 808 90 days past due and accruing 111 16 27 -0- 109 Restructured -0- -0- -0- -0- -0- ------ ------ ------ ------ ------ Total non-performing loans $1,385 $1,406 $ 837 $1,157 $ 917 ====== ====== ====== ====== ====== Non-performing loans to total loans (net of unearned interest) .44% .52% .31% .45% .39%
As of December 31, 1999 and 1998, loans which the Corporation's management had serious doubts as to the ability of borrowers to comply with loan repayment terms not carried as non-performing loans totaled approximately $235 (or .08% of the total loan portfolio), compared to $279 (or .10% of the total loan portfolio), respectively. 28 ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance shown in the following table represents the allowance available to absorb losses within the entire portfolio:
FOR THE YEARS ENDED DECEMBER 31 ------------------------------------------------------------- 1999 1998 1997 1996 1995 Amount of loans outstanding at end of period (net of unearned interest) $308,347 $265,474 $272,111 $257,931 $ 232,471 Average amount of loans outstanding for the period (net of unearned interest) $283,845 $274,076 $265,756 $244,027 $ 218,091 Allowance for possible loan losses at beginning of period $ 1,800 $ 1,830 $ 1,630 $ 2,034 $ 2,100 Charge-offs: Agricultural -0- 84 -0- -0- -0- Commercial 155 279 171 140 6 Real estate-mortgage 74 26 1 4 -0- Installment 605 629 834 1,221 557 -------- -------- -------- -------- --------- Total charge-offs 834 1,018 1,006 1,365 563 -------- -------- -------- -------- --------- Recoveries: Agricultural 6 243 66 351 321 Commercial 28 28 65 31 23 Real estate-mortgage 1 1 -0- 4 10 Installment 298 379 485 534 244 -------- -------- -------- -------- --------- Total recoveries 333 651 616 920 598 -------- -------- -------- -------- --------- Net loans charged off (recovered) 501 367 390 445 (35) Provision (credit) for possible loan losses 651 337 590 41 (101) -------- -------- -------- -------- --------- Allowance for possible loan losses at end of period $ 1,950 $ 1,800 $ 1,830 $ 1,630 $ 2,034 ======== ======== ======== ======== ========= Net loans charged off (recovered) to average loans .18% .13% .15% .18% (.02)% Allowance for possible loan losses to non-performing loans 140.79% 128.02% 218.64% 140.88% 221.81% Allowance for possible loan losses to total loans at end of period (net of unearned interest) .63% .68% .67% .63% .87%
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 losses 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, and other factors such as the historical loan loss experience by loan type, specific loan loss reserves, and the level of substandard and delinquent loans. 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 .18% of average total loans in 1999, and the allowance for possible loan losses at year-end 1999 was $1.95 million, .63% of total loans, net of unearned interest, and 141% of non-performing loans. Management considers the allowance for possible loan losses adequate to meet potential losses as of December 31, 1999. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (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 ------------------------ 1999 1998 U.S. Treasury Notes $ 2,003 $ 16,203 U.S. Government Agencies 44,740 32,052 State and Municipal 36,390 36,075 Collateralized mortgage obligations 28,703 35,657 Commercial paper -0- 8,888 Other securities 2,130 2,051 -------- -------- Total $113,966 $130,926 ======== ======== Total investment securities decreased by $17.0 million (or 12.9%) to $114.0 million, at December 31, 1999, compared to December 31, 1998. The major reason for the decrease was an increase in loan demand. A decrease of $14.2 million occurred in the U.S. Treasury category, while an increase totaling $12.7 million occurred in the U.S. Government Agency category. The return of an attractive spread in the U.S. Government Agencies over Treasuries was responsible for the shift from Treasuries to Agencies. Maturing investments of $6.2 million and $8.9 million, respectively, in Collateralized mortgage obligations and Commercial paper were used to fuel the increase in loan demand. DEPOSITS. Total deposits declined slightly in 1999 by $3.0 million from 1998. However, total deposits remain up from 1997 by $18.9 million (or 4.9%). 1999's decline was less than 1%. The average rate for deposits in 1999 was 3.59%, down from 3.95% in 1998. While this had a positive impact on the subsidiary bank's interest margin, it precipitated the deposit decline as investors seeking higher returns continued to look outside the subsidiary bank. With rates declining and the stock market surging, the slight decline in total deposits is not alarming to management. The decrease in deposits occurred primarily in savings and non-interest-bearing demand accounts. This reflects the customers' continued desire for higher rates while maintaining liquidity. Time deposits increased slightly over 1998, by $1.4 million. Over the last three years, the subsidiary bank has seen consistent growth in most deposit categories. Total deposits have increased 12.9% ( $46.1 million) with the largest increase coming in the interest-bearing demand accounts, 18.6% ($14.6 million). The following table sets forth the classification of deposits with year-end balances and the average rates paid for the indicated periods:
FOR THE YEARS ENDING DECEMBER 31 --------------------------------------------------------------------- 1999 1998 1997 BALANCE RATE Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- Non-interest-bearing demand $ 45,514 N/A $ 47,355 N/A $ 42,333 N/A Interest-bearing demand 93,521 2.34% 93,982 2.87% 87,364 2.87% Savings 52,277 2.08% 54,378 2.86% 52,193 2.99% Time deposits 213,496 5.27% 212,123 5.59% 204,050 5.55% -------- -------- -------- Total $404,808 3.59% $407,838 3.95% $385,940 3.99% ======== ======== ========
The following table summarizes time deposits in amounts of $100 or more by time remaining until maturity as of December 31, 1999. These time deposits are made by individuals, corporations, and public entities: Three months or less $30,233 Over three months through six months 13,359 Over six months through one year 9,759 Over one year 3,878 ------- Total $57,229 ======= 30 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, 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 and other short-term available funds (those investments maturing within one year plus twelve months' projected payments on mortgage-backed securities and collateralized mortgage obligations, cash and due from bank balances) to volatile liabilities (50% of non-public entity certificates of deposit over $100, repurchase agreements issued to public entities, Treasury tax and loan deposits, short-term borrowings from banks, and deposits of public entities) was 62.67% at December 31, 1999 and 138.8% at December 31, 1998, respectively. The reduction in this ratio is reflective of the shift in assets from investments to loans during the course of the year. Core deposits, defined as demand deposits, interest-bearing checking accounts, total savings, and certificates of deposit less than $100, were 81.9% of total deposits at December 31, 1999 and 84.8% of total deposits at December 31, 1998. Money market accounts of approximately $36.7 million at December 31, 1999 are classified by the Corporation as core deposits. The Corporation experienced a net decrease of $26.9 million in cash and cash equivalents in 1999. This decrease was primarily the result of net cash used by investing activities of $31.7 million. A net increase in loans of $43.4 million, plus $2.7 million for the purchase of premises and equipment were major components of cash used by investing activities. These were partially offset by net funds of $13.9 million provided by securities transactions. Financing activities provided $2.6 million in net cash, while operating activities provided $2.3 million in net cash. Cash and cash equivalents of $27.2 million at December 31, 1999 are deemed adequate to meet short-term liquidity needs. A net increase of $21.0 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 $5.4 million partially offset the funds provided by financing activities. Major components of the investing activities were net cash used of $9.1 million for securities transactions and $2.7 million for the purchase of premises and equipment, offset by a $6.3 million reduction in loans. 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 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, 1999 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, net loans to total assets, 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. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (dollar amounts in thousands except per share data)
DECEMBER 31, 1999 ------------------------------------------------------------------------ 0-3 MO. 4-12 MO. 1-5 YRS. OVER 5 YRS. TOTAL --------- --------- --------- ----------- --------- Interest-earning assets: Interest-bearing deposits $ 1,851 $ -0- $ -0- $ -0- $ 1,851 Taxable investment securities 7,844 20,606 35,244 14,337 78,031 Tax-exempt investment securities 723 2,192 8,957 24,928 36,800 Federal funds sold 7,900 -0- -0- -0- 7,900 Loans 96,539 48,184 152,642 18,227 315,592 --------- --------- --------- --------- --------- Total rate sensitive assets ("RSA") $ 114,857 $ 70,982 $ 196,843 $ 57,492 $ 440,174 ========= ========= ========= ========= ========= Interest-bearing liabilities: Interest-bearing demand deposits $ 93,521 $ -0- $ -0- $ -0- $ 93,521 Savings deposits 52,277 -0- -0- -0- 52,277 Time deposits 66,261 93,144 53,985 106 213,496 Customer repurchase agreements 15,663 -0- -0- -0- 15,663 Advances from Federal Home Loan Bank -0- 5,351 7,969 -0- 13,320 Interest-bearing demand notes issued to the U.S. Treasury 2,366 -0- -0- -0- 2,366 Borrowings 2,150 -0- -0- -0- 2,150 --------- --------- --------- --------- --------- Total rate sensitive liabilities ("RSL") $ 232,238 $ 98,495 $ 61,954 $ 106 $ 392,793 ========= ========= ========= ========= ========= Interest rate sensitivity GAP (RSA less RSL) $(117,381) $ (27,513) $ 134,889 $ 57,386 Cumulative GAP $(117,381) $(144,894) $ (10,005) $ 47,381 RSA/RSL .49% .72% 3.18% 542.38% Cumulative RSA/RSL .49% .56% .97% 1.12%
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 timeframe, as such interest-bearing liabilities are subject to immediate withdrawal. Management of the Corporation considers $40.0 million of the interest-bearing checking account balances and $18.4 million (one-half) of the money market account balances (both being 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 six-month time period. At December 31, 1999, savings deposits totaled approximately $52.3 million. If that amount, along with the $40.0 million of interest-bearing checking account balances and $18.4 million in money market account balances reflected in the 0-3 month timeframe, are adjusted to exclude these amounts (consistent with the consideration mentioned in the paragraph above), rate sensitive liabilities would be approximately $121.5 million for a negative GAP of approximately $6.7 million. RSA as a percent of RSL would be 94.5%. Adjusting the cumulative GAP and GAP ratio for the 4-12 month timeframe would result in a negative cumulative GAP and GAP ratio of $34.2 million, and 84.5%, respectively. YEAR 2000 COMPLIANCE. The Corporation, under the direction of the subsidiary bank's Year 2000 Committee, continued to address the four major steps outlined by the committee (and regulators) that must be accomplished to achieve a position of year 2000 readiness. During the course of 1999, the committee successfully completed the testing of all systems deemed mission-critical by the Corporation. The year was also spent verifying the readiness of third-party vendors, counter-parties, customers, and payment systems. As of June 30, 1999, the subsidiary bank had successfully met the last of the critical timeframes established by federal regulatory agencies. The remainder of the year involved the review and retesting of any systems that had received upgrades since the performance of the testing (clean management). During the course of 1999, contingency plans were also reviewed and tested for reasonableness. The Corporation has not incurred any significant operational issues relating to the Year 2000 change, nor is it aware of any significant Year 2000 issues relating to its customers or vendors used by the Corporation. The Corporation completed the replacement of non-compliant computer equipment, which was fully depreciated and scheduled for replacement, during the first half of 1999. These costs, which were capitalized and amortized over the equipment's useful lives, were met from existing resources. In total, the Corporation incurred the following costs in solving the year 2000 issue, including the regular replacement of equipment: Capital costs of technology upgrades $1.43 million Testing costs .03 million ------------- Total spending $1.46 million 32 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, 1999, and the tax equivalent yields of such securities:
DUE WITHIN DUE AFTER ONE BUT DUE AFTER OTHER ONE YEAR WITHIN FIVE YEARS FIVE YEARS (NO STATED MATURITY) ------------------ ------------------ ----------------- -------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD U.S. Treasury $ 2,003 5.80% $ -0- -- $ -0- -- $ -0- -- U.S. Government Agencies 19,856 5.79 25,260 5.68 27 7.23% (403) -- State and Municipal 2,915 7.03 8,957 7.34 24,928 7.65 (410) -- Collateralized mortgage obligations -0- -- 109 5.56 29,341 6.08 (747) -- Other (no stated maturity) -0- -- -0- -- -0- -- 2,130 -- ------- ------ ------- ------- Total $24,774 5.94% $34,326 6.11% $54,296 6.80% $ 570 -- ======= ======= ======= =======
LOAN MATURITIES. The following table sets forth scheduled loan repayments on agricultural, commercial, and real estate construction loans at December 31, 1999. 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 $30,098 $ 7,126 $ 367 $37,891 Commercial 33,952 12,194 1,817 47,963 Real Estate-Construction 11,510 1,806 -0- 13,316 ------- ------- ------ ------- Total $75,860 $21,126 $2,184 $99,170 ======= ======= ====== =======
Of the loans shown above, the following table sets forth loans due after one year which have predetermined (fixed) interest rates and adjustable (variable) interest rates at December 31,1999.
FIXED RATE VARIABLE RATE TOTAL ---------- ------------- ----- Due after one year $ 15,291 $ 8,021 $23,312
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 ----------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 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 $ 293 12.3% $ 311 14.1% $ 342 14.3% $ 325 14.0% $ 632 14.2% Commercial 428 15.6 454 16.6 453 15.1 422 14.8 470 14.9 Real estate-mortgage 333 58.4 175 55.7 156 56.9 151 56.7 227 54.8 Installment 709 13.7 628 13.6 623 13.7 608 14.5 305 16.1 Unallocated 187 N/A 232 N/A 256 N/A 124 N/A 400 N/A ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Total $1,950 100.0% $1,800 100.0% $1,830 100.0% $1,630 100.0% $2,034 100.0% ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
33 SELECTED CONSOLIDATED FINANCIAL INFORMATION (dollars in thousands except per share data)
For the Years Ended December 31 - -------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- SUMMARY OF INCOME Interest income $ 32,125 $ 32,651 $ 31,312 $ 29,114 $ 27,645 Interest expense 15,410 16,504 15,541 14,596 14,518 Net interest income 16,715 16,147 15,771 14,518 13,127 Provision (credit) for possible loan losses 651 337 590 41 (101) Non-interest income 4,006 3,843 3,365 2,860 2,553 Non-interest expense 14,660 13,974 12,662 12,864 16,247 Income (loss) before income tax expense 5,410 5,679 5,884 4,473 (466) Income tax expense (benefit) 1,556 1,420 1,525 1,046 (824) Net income 3,854 4,259 4,359 3,427 358 PER SHARE DATA (a) Basic net income $ 1.02 $ 1.08 $ 1.07 $ 0.84 $ 0.09 Diluted net income 1.02 1.08 1.07 0.84 0.09 Book value (at end of period) 11.16 11.13 10.62 9.84 9.23 Cash dividends declared 0.35 0.31 0.28 0.25 0.24 Dividend payout ratio 34.4% 29.1% 26.2% 30.2% 272.9% SELECTED BALANCES (AT END OF PERIOD) Total assets $ 482,820 $ 478,911 $ 449,660 $ 420,407 $ 402,393 Earning assets 438,760 435,789 412,974 379,278 364,177 Investments 113,966 130,926 122,034 117,028 127,094 Gross loans 308,356 265,655 272,400 258,118 232,693 Allowance for possible loan losses 1,950 1,800 1,830 1,630 2,034 Deposits 404,808 407,838 385,940 358,701 346,285 Borrowings 33,499 24,296 16,987 17,887 5,443 Stockholders' equity 40,946 42,606 42,668 40,197 37,646 SELECTED FINANCIAL RATIOS Net income to average stockholders' equity 9.20% 9.94% 10.56% 8.91% 1.01% Net income to average assets 0.83 0.95 1.02 0.84 0.09 Average stockholders' equity to average assets 9.01 9.54 9.66 9.48 9.03 Average earning assets to average assets 91.83 92.36 91.64 91.37 91.90 Non-performing loans to total loans at end of period (net of unearned interest) 0.44 0.52 0.31 0.45 0.39 Tier 1 capital to average adjusted assets 8.10 8.35 8.78 8.59 8.96 Risk based capital to risk adjusted assets 12.31 13.68 13.88 13.88 15.17 Net loans charged off (recovered) to average loans 0.18 0.13 0.15 0.18 (0.02) Allowance for possible loan losses to total loans at end of period (net of unearned interest) 0.63 0.68 0.67 0.63 0.87 Average interest-bearing deposits to average deposits 89.70 90.13 90.00 90.07 90.32 Average non-interest-bearing deposits to average deposits 10.30 9.87 10.00 9.93 9.68 - --------------------------------------------------------------------------------------------------------------------
(a) Per share data prior to 1998 has been restated to reflect the stock dividend (3 for 2) split declared in 1998. 35 EX-21 5 SUBSIDIARY OF PRINCETON NATIONAL BANCORP, INC. 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 6 CONSENT OF KPMG LLP. Exhibit 23. Consent of KPMG LLP. [KPMG LETTERHEAD] 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 28, 2000, except for Note 14, which is as of February 17, 2000, relating to the consolidated balance sheets of Princeton National Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, 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, 1999, which report appears in the December 31, 1999 annual report on Form 10-K of Princeton National Bancorp, Inc. /s/ KPMG LLP Chicago, Illinois March 27, 2000 EX-27 7 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-31-1999 DEC-31-1999 19,325 359,294 7,900 0 100,043 13,923 13,612 316,993 1,950 482,820 404,808 33,499 3,567 0 0 0 20,699 20,247 482,820 24,684 6,926 515 32,125 14,025 15,410 16,715 651 41 14,660 5,410 5,410 0 0 3,854 1.02 1.02 4.15 1,274 111 0 235 1,800 834 333 1,950 1,763 0 187
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