EX-13 4 princeton010571-ex13.txt EXHIBIT 13-2000 ANNUAL REPORT Exhibit 13. Portions of 2000 Annual Report to Shareholders. KPMG [LETTERHEAD] The Board Of Directors and Stockholders Princeton National Bancorp, Inc. Princeton, Illinois: We have audited the accompanying consolidated balance sheets of Princeton National Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Chicago, Illinois January 26, 2001 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31 2000 1999 -------------------------------------------------------------------------------------------- ASSETS Cash and due from banks (note 2) $ 16,779 $ 19,325 Federal funds sold 2,200 7,900 Investment securities (note 3): Available-for-sale, at fair value 105,440 100,043 Held-to-maturity, at amortized cost 13,677 13,923 Loans held-for-sale, at lower of cost or market 3,912 8,646 Loans (notes 4 and 7): Gross loans, net of unearned interest 347,147 308,347 Allowance for loan losses (2,660) (1,950) -------- -------- Net loans 344,487 306,397 Interest receivable 6,781 5,799 Premises and equipment, net of accumulated depreciation (note 5) 12,952 12,127 Goodwill and intangible assets, net of accumulated amortization of $2,985 and $2,551 at December 31, 2000 and 1999 4,082 4,600 Other assets 4,870 4,060 -------- -------- TOTAL ASSETS $515,180 $482,820 ======== ======== -------------------------------------------------------------------------------------------- LIABILITIES Deposits (note 6): Demand $ 49,140 $ 45,514 Interest-bearing demand 92,690 93,521 Savings 47,079 52,277 Time 236,395 213,496 -------- -------- Total deposits 425,304 404,808 Borrowings (note 7): Customer repurchase agreements 20,166 15,663 Advances from the Federal Home Loan Bank 12,216 13,320 Interest-bearing demand notes issued to the U.S. Treasury 2,086 2,366 Notes payable 1,850 2,150 -------- -------- Total borrowings 36,318 33,499 Other liabilities 6,082 3,567 -------- -------- TOTAL LIABILITIES 467,704 441,874 -------- -------- STOCKHOLDERS' EQUITY (notes 9 and 12) Common stock: $5 par value, 7,000,000 shares authorized at December 31, 2000 and 1999; 4,139,841 shares issued at December 31, 2000 and 1999 20,699 20,699 Surplus 6,364 6,335 Retained earnings 28,963 22,118 Accumulated other comprehensive income (loss), net of tax 580 (1,031) Less: Cost of 650,070 and 472,112 treasury shares at December 31, 2000 and 1999, respectively (9,130) (7,175) -------- -------- TOTAL STOCKHOLDERS' EQUITY 47,476 40,946 -------- -------- Commitments & contingencies (note 13) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $515,180 $482,820 ======== ======== --------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31 2000 1999 1998 ------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $ 29,189 $ 24,684 $ 24,705 Interest and dividends on investment securities: Taxable 4,867 5,082 5,494 Tax-exempt 1,861 1,844 1,729 Interest on federal funds sold 104 268 388 Interest on interest-bearing time deposits in other banks 94 247 335 ----------- --------------- ----------- Total interest income 36,115 32,125 32,651 ----------- --------------- ----------- INTEREST EXPENSE: Interest on deposits (note 6) 15,529 14,025 15,297 Interest on borrowings 1,935 1,385 1,207 ----------- --------------- ----------- Total interest expense 17,464 15,410 16,504 ----------- --------------- ----------- NET INTEREST INCOME 18,651 16,715 16,147 Provision for loan losses (note 4) 880 651 337 ----------- --------------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 17,771 16,064 15,810 ----------- --------------- ----------- NON-INTEREST INCOME: Trust & farm management fees 1,193 1,197 1,119 Service charges on deposit accounts 1,934 1,583 1,498 Other service charges 890 696 515 Loss on sale of loans held-for-sale (259) -0- -0- Gain on sales of securities available-for-sale (note 3) 38 41 96 Loan servicing fees and other charges 92 201 374 Settlement of trust litigation (note 14) 6,235 -0- -0- Other operating income 435 288 241 ----------- --------------- ----------- Total non-interest income 10,558 4,006 3,843 ----------- --------------- ----------- NON-INTEREST EXPENSE: Salaries and employee benefits 8,767 7,829 7,479 Occupancy 1,002 1,000 1,007 Equipment expense 1,223 1,174 822 Federal insurance assessments 188 188 185 Goodwill and intangible assets amortization 434 448 467 Data processing 579 514 609 Loan administrative expense 571 550 586 Other operating expense 3,294 2,957 2,819 ----------- --------------- ----------- Total non-interest expense 16,058 14,660 13,974 ----------- --------------- ----------- INCOME BEFORE INCOME TAXES 12,271 5,410 5,679 Income tax expense (note 8) 4,085 1,556 1,420 ----------- --------------- ----------- NET INCOME $ 8,186 $ 3,854 $ 4,259 =========== =============== =========== NET INCOME PER SHARE: Basic $ 2.33 $ 1.02 $ 1.08 Diluted $ 2.33 $ 1.02 $ 1.08 Basic weighted average shares outstanding 3,519,134 3,768,055 3,950,771 Diluted weighted average shares outstanding 3,519,815 3,781,299 3,951,374 -------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31 2000 1999 1998 --------------------------------------------------------------------------------------------------------------- NET INCOME $ 8,186 $ 3,854 $ 4,259 Other comprehensive income (loss), net of tax Unrealized holding gains (losses) arising during the period 1,634 (1,866) 365 Less: Reclassification adjustment for net realized gains included in net income (23) (27) (63) -------- ------- -------- Other comprehensive income (loss) 1,611 (1,893) 302 -------- ------- -------- COMPREHENSIVE INCOME $ 9,797 $ 1,961 $ 4,561 ======== ======= ======== ---------------------------------------------------------------------------------------------------------------
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, 1998 $ 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 Net income 8,186 8,186 Sale of 5,428 shares of treasury stock 29 35 64 Purchase of 183,386 shares of treasury stock (1,990) (1,990) Cash dividends ($.38 per share) (1,341) (1,341) Other comprehensive income, net of $1,019 tax effect 1,611 1,611 --------- --------- --------- --------- ------- -------- BALANCE, DECEMBER 31, 2000 $ 20,699 $ 6,364 $ 28,963 $ 580 $(9,130) $ 47,476 ========= ========= ========= ========= ======= ======== ---------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. Consolidated Statements of Cash Flows (dollars in thousands)
FOR THE YEARS ENDED DECEMBER 31 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net income $ 8,186 $ 3,854 $ 4,259 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,156 1,153 822 Provision for loan losses 880 651 337 Deferred income taxes (benefit) expense (118) (282) 191 Amortization of goodwill and other intangible assets 434 448 467 Amortization of premiums on investment securities, net of accretion 48 206 187 Gain on securities transactions, net (38) (41) (96) Loans originated for sale (5,153) (14,208) (32,742) Proceeds from sales of loans originated for sale 10,146 10,925 28,955 Loss on sale of loans (259) -0- -0- Increase (decrease) in accrued interest payable 539 71 (12) (Increase) decrease in accrued interest receivable (982) (195) 204 (Increase) in other assets (781) (899) (727) Increase (decrease) in other liabilities 918 582 (39) --------- -------- ---------- Net cash provided by operating activities 14,976 2,265 1,806 --------- -------- ---------- INVESTING ACTIVITIES: Proceeds from sales of investment securities available-for-sale 4,758 4,054 7,440 Proceeds from maturities of investment securities available-for-sale 32,796 39,788 35,749 Purchase of investment securities available-for-sale (40,289) (33,689) (45,864) Proceeds from maturities of investment securities held-to-maturity 3,035 15,489 14,611 Purchase of investment securities held-to-maturity (2,792) (11,715) (21,015) Proceeds from sales of other real estate owned 173 375 79 Net (increase) decrease in loans (38,970) (43,374) 6,270 Purchase of premises and equipment (1,981) (2,653) (2,697) --------- -------- ---------- Net cash used in investing activities (43,270) (31,725) (5,427) --------- -------- ---------- FINANCING ACTIVITIES: Net increase (decrease) in deposits 20,496 (3,030) 21,898 Proceeds from borrowings 4,503 10,244 10,650 Payments for borrowings (1,684) (1,041) (3,341) Dividends paid (1,341) (1,324) (1,241) Purchase of treasury stock (1,990) (2,356) (3,496) Sale of treasury stock 64 59 116 --------- -------- ---------- Net cash provided by financing activities 20,048 2,552 24,586 --------- -------- ---------- Increase (decrease) in cash and cash equivalents (8,246) (26,908) 20,965 Cash and cash equivalents at beginning of year 27,225 54,133 33,168 -------- -------- ---------- Cash and cash equivalents at end of year $ 18,979 $ 27,225 $ 54,133 ======== ======== ========== Cash paid during the year for: Interest $ 16,925 $ 15,339 $ 16,516 Income taxes $ 3,255 $ 1,609 $ 1,454 Supplemental disclosure of noncash investing activities: Loans transferred to other real estate owned $ 177 $ 200 $ 375 ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America 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 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 fair value of the collateral. Non-refundable loan fees and direct costs of loan originations are deferred at the time a loan is originated. Net deferred loan fees or costs are recognized as yield adjustments over the contractual life of the loan using the interest method. ALLOWANCE FOR LOAN LOSSES - The allowance for 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 loan losses. Such agencies may require the subsidiary bank to recognize additions to the allowance for 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, 2000 and 1999, the amount of originated mortgage servicing rights was $353 and $438, respectively, and is included in other assets in the consolidated balance sheets. The fair value of mortgage servicing rights approximates the carrying value at December 31, 2000 and 1999. Mortgage servicing rights are amortized 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. The Corporation services loans for others with unpaid principal balances at December 31, 2000, 1999, and 1998 of approximately $59,608, $58,870, and $56,267, respectively. 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 Disposed Of." OTHER REAL ESTATE - Other real estate, which is included in other assets in the consolidated balance sheets, represents assets to which the subsidiary bank has acquired legal title in satisfaction of indebtedness. Such real estate is recorded at the lower of cost or fair market value at the date of acquisition, less estimated selling costs. Any deficiency is charged to the allowance for loan losses. Subsequent declines in value, based on changes in market conditions, are recorded to expense as incurred. Gains or losses on the disposition of other real estate are recorded to expense in the period in which they are realized. INCOME TAXES - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. NET INCOME PER SHARE - Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding during the year, which were 3,519,134, 3,768,055, and 3,950,771 for 2000, 1999, and 1998, respectively. Diluted weighted average shares outstanding includes potential common stock relating to outstanding dilutive stock options. Diluted weighted average shares outstanding were 3,519,815, 3,781,299, and 3,951,374 for 2000, 1999, and 1998, respectively. 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. RECLASSIFICATION - Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassified to conform to the 2000 presentation. IMPACT OF NEW ACCOUNTING STANDARDS - In September, 2000, the FASB issued Statement 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" (FAS 140). FAS 140 supercedes and replaces Statement 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". Accordingly, FAS 140 is now the authoritative accounting literature for transfers and servicing of financial assets and extinguishment of liabilities. FAS 140 also includes several additional disclosure requirements in the area of securitized financial assets and collateral arrangements. The provisions of FAS 140 related to transfers of financial assets are to be applied to all transfers of financial assets occurring after March 31, 2001. The collateral recognition and disclosure provisions in FAS 140 are effective for fiscal years ending after December 15, 2000. The Corporation anticipates that the adoption of FAS 140 will not have a material impact on the financial condition or results of operations of the Corporation. FAS 133, "Accounting for Derivative Instruments and hedging Activities", as amended by FAS 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement 133", and FAS 138, "Accounting for Certain Derivative Instruments and certain Hedging Activities", was adopted by the Corporation on January 1, 2001. this standard establishes new rules for the recognition and measurement of derivatives, including derivative instruments embedded in other contracts. It requires all derivatives to be recorded as either assets of liabilities in the balance sheet at fair value. 2. CASH AND DUE FROM BANKS The average compensating balances held at correspondent banks during 2000 and 1999 were $2,977 and $7,857, 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 2000 or 1999. 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:
2000 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ----------- ---------- ---------- Available-for-sale: United States Government Agencies $ 50,662 $ 332 $ (58) $ 50,936 State and Municipal 23,800 743 (78) 24,465 Collateralized mortgage obligations 27,661 264 (96) 27,829 Other securities 2,210 -0- -0- 2,210 ----------- -------- ------- ---------- Total 104,333 1,339 (232) 105,440 ----------- -------- ------- ---------- Held-to-maturity: State and Municipal 13,677 164 (101) 13,740 ----------- -------- ------- ---------- Total $ 118,010 $ 1,503 $ (333) $ 119,180 =========== ======== ======= ========== 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 =========== ======== ======= ==========
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, 2000:
ESTIMATED AMORTIZED FAIR COST VALUE ---------- --------- Available-for-sale: Due in one year or less $ 25,312 $ 25,323 Due after one year through five years 28,232 28,567 Due after ten years 19,308 19,926 --------- --------- 72,852 73,816 --------- --------- Mortgage-backed securities 1,610 1,585 Collateralized mortgage obligations 27,661 27,829 Other securities 2,210 2,210 --------- --------- $ 104,333 $ 105,440 ========= ========= Held-to-maturity: Due in one year or less $ 2,408 $ 2,415 Due after one year through five years 3,775 3,812 Due after five years through ten years 4,039 4,054 Due after ten years 3,455 3,459 --------- --------- $ 13,677 $ 13,740 ========= =========
Other securities included Federal Home Loan Bank and Federal Reserve Bank stock held totaling $1,515 and $695 at December 31, 2000 and $1,435 and $695 at December 31, 1999, respectively. Proceeds from sales of investment securities available-for-sale during 2000, 1999, and 1998 were $4,758, $4,054, and $7,440, respectively. Gross gains of $124 in 2000, $41 in 1999, and $96 in 1998, and gross losses of $86 in 2000, $0 in 1999, and $0 in 1998, were realized on those sales. There were no sales of investment securities classified as held-to-maturity during 2000, 1999, and 1998. 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, 2000 and 1999 was $75,856 and $88,039, respectively. 4. LOANS The composition of the loan portfolio as of December 31 was as follows: 2000 1999 Gross loans Commercial $ 59,456 $ 47,963 Agricultural 41,404 37,891 Real estate-construction 11,442 13,316 Real estate-mortgage 188,838 166,837 Installment 46,007 42,340 -------- -------- Total $347,147 $308,347 ======== ======== Changes in the allowance for loan losses for the years ended December 31 were as follows:
2000 1999 1998 Balance, January 1 $ 1,950 $ 1,800 $ 1,830 Provision for loan losses 880 651 337 Recoveries of loans previously charged off 389 333 651 Loans charged off (559) (834) (1,018) -------- -------- -------- Balance, December 31 $ 2,660 $ 1,950 $ 1,800 ======== ======== ========
Non-accrual loans at December 31, 2000, 1999, and 1998 were $897, $1,274, and $1,390, respectively. Interest income that would have been recorded on these loans had they remained current was approximately $98, $126, and $85, respectively. Impaired loans at December 31, 2000, 1999, and 1998 totaled $513, $845, and $957, respectively. Of these totals, $487, $637, and $730 of loans had valuation reserves totaling $190, $0, and $0 at December 31, 2000, 1999, and 1998, respectively. For the years ended December 31, 2000, 1999, and 1998, the average recorded investment in impaired loans was approximately $729, $933, and $537, 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 $1,879, $1,368, and $1,786, at December 31, 2000, 1999, and 1998, 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 2000 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 at December 31, 2000 is as follows: Balance Balance January 1, 2000 Additions Payments December 31, 2000 --------------- --------- -------- ----------------- $1,368 $1,456 $945 $1,879 5. PREMISES AND EQUIPMENT As of December 31, the components of premises and equipment (at cost), less accumulated depreciation, were as follows: 2000 1999 Land $ 3,019 $ 3,210 Buildings 11,031 10,984 Furniture and Equipment 9,149 9,110 Construction-in-progress 2,168 278 --------- -------- 25,367 23,582 Less accumulated depreciation 12,415 11,455 --------- -------- Total $ 12,952 $ 12,127 ========= ======== Depreciation expense charged to operating expense for 2000, 1999, and 1998 was $1,156, $1,153, and $822, 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: 2000 1999 1998 Amount $54,106 $57,229 $50,578 Interest expense for the year 3,346 2,462 2,207 Total interest expense on deposits for the years ending December 31, was as follows: 2000 1999 1998 Interest-bearing demand $ 2,349 $ 2,161 $ 2,492 Savings 1,027 1,143 1,536 Time 12,153 10,721 11,269 ------- ------- ------- Total $15,529 $14,025 $15,297 ======= ======= ======= At December 31, 2000, the scheduled maturities of time deposits are as follows: 2001 $ 172,170 2002 50,012 2003 6,478 Thereafter 7,735 --------- Total $ 236,395 ========= 7. BORROWINGS As of December 31, borrowings consisted of the following:
2000 1999 WEIGHTED Weighted AVERAGE Average AMOUNT RATE Amount Rate ------ ---- ------- ---- Customer repurchase agreements $ 20,166 5.93% $ 15,663 4.57% Advances from the Federal Home Loan Bank of Chicago due: September 22, 2000 -0- -- 351 6.21 October 10, 2001 5,000 6.70 -0- -- June 18, 2002 266 6.46 419 6.46 March 7, 2004 1,950 5.94 2,550 5.94 October 7, 2004 -0- -- 5,000 5.55 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 2,086 5.50 2,366 4.52 Notes payable 1,850 8.50 2,150 7.50 -------- ---- --------- ---- Total $ 36,318 6.07% $ 33,499 5.17% ======== ==== ========= ====
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 has a callable feature beginning in February, 2003 and quarterly thereafter. All stock in the FHLB is also pledged as additional collateral for these advances. The Corporation had notes payable totaling $1,850 and $2,150 at December 31, 2000 and 1999, respectively. The note payable at December 31, 2000 is a demand note that carries a floating interest rate equal to the lender's prime rate less one percent (8.50% at December 31, 2000). The note, which is unsecured, has a maturity of March 31, 2001. 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, 2000: FEDERAL $ 3,420 $ (96) $ 3,324 STATE OF ILLINOIS 783 (22) 761 -------- -------- -------- TOTAL $ 4,203 $ (118) $ 4,085 Year ended December 31, 1999: Federal $ 1,516 $ (247) $ 1,269 State of Illinois 322 (35) 287 -------- -------- -------- Total $ 1,838 $ (282) $ 1,556 Year ended December 31, 1998: Federal $ 1,229 $ 191 $ 1,420 The Corporation was not liable for state income taxes for 1998. 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: 2000 1999 1998 -------- -------- ------ Computed "expected" tax expense $ 4,172 $ 1,839 $1,931 Increase (decrease) in income taxes resulting from: Tax-exempt income (674) (673) (630) Non-deductible interest expense 95 89 86 State income taxes, net of federal 459 174 -0- tax benefit Goodwill amortization 88 88 88 Other, net (55) 39 (55) -------- -------- ------ $ 4,085 $ 1,556 $1,420 ======== ======== ====== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are presented below: 2000 1999 ------- ------- Deferred tax assets: Deferred directors' fees $ 108 $ 116 Provision for loan losses 193 -0- Unrealized loss on investment securities available-for-sale -0- 531 Other, net -0- 13 ------- ------- Total gross deferred tax assets 301 660 ------- ------- Deferred tax liabilities: Buildings and equipment, principally due to differences in depreciation (209) (202) Provision for loan losses -0- (82) Accretion (88) (21) Unrealized gain on investment securities available-for-sale (387) -0- Purchase accounting adjustments (23) (24) Other, net (63) -0- ------- ------- Total gross deferred tax liabilities (770) (329) ------- ------- Net deferred tax assets (liabilities) $ (469) $ 331 ======= ======= Management believes it is more likely than not that the deferred tax assets will be realized. Therefore, no valuation allowance has been recorded at December 31, 2000 and 1999. 9. REGULATORY MATTERS The Corporation and its subsidiary bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and its subsidiary bank must meet specific capital guidelines that involve quantitative measures of each entity's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Corporation's and its subsidiary bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and its subsidiary bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average adjusted assets. As of December 31, 2000 and 1999, the Corporation and its subsidiary bank were categorized as well capitalized under the regulatory framework. The most recent notification, as of December 15, 2000, from the federal banking agencies categorized the Corporation and the subsidiary bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Corporation and the subsidiary bank must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table that follows. There are no conditions or events since that notification that have changed the Corporation's or the subsidiary bank's category. The Corporation's and the subsidiary bank's actual capital amounts and ratios as of December 31, 2000 and 1999 are as follows:
TO BE WELL CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 2000: TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): PRINCETON NATIONAL BANCORP, INC. $ 45,793 12.71% $ 28,830 8.00% $ 36,037 10.00% CITIZENS FIRST NATIONAL BANK 44,655 12.40 28,808 8.00 36,010 10.00 TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS): PRINCETON NATIONAL BANCORP, INC. $ 43,133 11.97% $ 14,415 4.00% $ 21,622 6.00% CITIZENS FIRST NATIONAL BANK 41,995 11.66 14,404 4.00 21,606 6.00 TIER 1 CAPITAL (TO AVERAGE ADJUSTED ASSETS): PRINCETON NATIONAL BANCORP, INC. $ 43,133 8.89% $ 19,418 4.00% $ 24,272 5.00% CITIZENS FIRST NATIONAL BANK 41,995 8.66 19,407 4.00 24,259 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, 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 --------------------------------------------------------------------------------------------------------------------
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 2000, 1999, and 1998 was $151, $141, and $136, respectively. The subsidiary bank also has a stock purchase program in which the employee contributes through payroll deductions. These amounts are pooled and used to purchase shares of the Corporation's common stock on a quarterly basis at the market price on the last business day of the quarter. The subsidiary bank also has a profit sharing plan. Annual contributions to the subsidiary bank's plan are based on a formula. The total contribution is at the discretion of the Board of Directors. The cost of the profit sharing plan charged to operating expense was $500 in 2000, $196 in 1999, and $193 in 1998. Additionally, in 1998, the Corporation's shareholders approved a non-qualifying stock option plan for the benefit of employees and directors of the subsidiary bank. The Corporation applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for its stock option plans. The fair value of each option grant was estimated using the Black-Scholes option-pricing model. The following assumptions were used in estimating the fair value for options granted in 2000, 1999, and 1998: 2000 1999 1998 -------- -------- -------- Dividend yield 3.55% 3.22% 1.80% Risk-free interest rate 5.02% 6.40% 4.56% Weighted average expected life 10 yrs. 10 yrs. 10 yrs. Expected volatility 32.00% 33.00% 29.95% The number of shares of common stock authorized under the stock option plan is 202,500. The option exercise price must be at least 100% of the fair market value of the common stock on the date of grant, and the option term cannot exceed ten years. A summary of the stock option activity and related information follows:
FOR THE YEARS ENDED DECEMBER 31 2000 1999 1998 -------- -------- --------- AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price ------ -------- ------- -------- ------- -------- Beginning of period 34,450 $ 13.45 12,950 $ 17.19 -0- -- Granted 39,500 11.94 21,500 11.19 12,950 $ 17.19 Exercised -0- -- -0- -- -0- -- ------ ------- ------ -------- ------ -------- End of period 73,950 $12.64 34,450 $ 13.45 12,950 $ 17.19 Options exercisable 15,801 4,317 -0- Fair value of options granted during period $3.61 $3.99 $ 6.49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollar amounts in thousands except per share data) Had the Corporation determined the compensation cost based on the fair value at grant date for its stock options under FAS 123, the Corporation's net income and net income per share would have been as summarized below:
FOR THE YEARS ENDED DECEMBER 31 2000 1999 1998 ------- ------- -------- Net Income As Reported $ 8,186 $ 3,854 $ 4,259 Pro Forma 8,129 3,826 4,259 Basic Earnings Per Share As Reported $ 2.33 $ 1.02 $ 1.08 Pro Forma 2.31 1.01 1.08 Diluted Earnings Per Share As Reported $ 2.33 $ 1.02 $ 1.08 Pro Forma 2.31 1.01 1.08
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 their 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, 2000 and 1999, were as follows:
2000 1999 ---------------------------- --------------------------- CARRYING FAIR Carrying Fair VALUE VALUE Value Value ---------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and due from banks $ 16,779 $ 16,779 $ 19,325 $ 19,325 Federal funds sold 2,200 2,200 7,900 7,900 Investment securities 119,117 119,180 113,966 113,655 Loans, net 348,399 346,189 315,043 313,359 Accrued interest receivable 6,781 6,781 5,799 5,799 --------- --------- --------- --------- Total Financial Assets $ 493,276 $ 491,129 $ 462,033 $ 460,038 ---------------------------------------------------------------------------------------------------------------- FINANCIAL LIABILITIES: Non-interest-bearing demand deposits $ 49,140 $ 49,140 $ 45,514 $ 45,514 Interest-bearing deposits 376,164 377,459 359,294 359,833 Borrowings 36,318 36,318 33,499 33,499 Accrued interest payable 2,949 2,949 2,423 2,423 --------- --------- --------- --------- Total Financial Liabilities $ 464,571 $ 465,866 $ 440,730 $ 441,269 ----------------------------------------------------------------------------------------------------------------
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. 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 taxes, property, plant, equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. Management is concerned that reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. 12. UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY National banking regulations and capital guidelines limit the amount of dividends that may be paid by banks. At December 31, 2000, the subsidiary bank had $1,657 available to pay for dividends. Additionally, according to the guidelines, at January 1, 2001, the subsidiary bank had $3,390 available to pay for dividends. Future dividend payments by the subsidiary bank would be dependent upon 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. 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, 2000, commitments to extend credit and standby letters of credit were approximately $69,821 and $662, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the subsidiary bank upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies, but may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing properties. Standby letters of credit are conditional commitments issued by the subsidiary bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The subsidiary bank secures the standby letters of credit with the same collateral used to secure the loan. There are various claims pending against the Corporation's subsidiary bank, arising in the normal course of business. Management believes, based upon consultation with counsel, that liabilities arising from these proceedings, if any, will not be material to the Corporation's financial position. 14. SUBSIDIARY BANK TRUST DEPARTMENT LITIGATION A ruling was received during the third quarter of 1998 on the Corporation's subsidiary bank's lawsuit, stemming from the 1995 Trust Department issue, against Cincinnati Insurance Company. The case was heard in the United States District Court for the Northern District of Illinois, Eastern Division, in Chicago, Illinois. The judge ruled in favor of the subsidiary bank on all issues and awarded $4,900 in damages, pre-judgment interest, post-judgment interest, and reasonable attorneys' fees and costs. Cincinnati Insurance Company 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 was therefore entitled to $5,000 under the policy, prejudgment 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. This amount is reflected in the 2000 Consolidated Statement of Income. 15. 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 2000, 1999, and 1998 net periodic post-retirement benefit cost are shown below: 2000 1999 1998 Service cost $ 35 $ 31 $ 29 Interest cost 30 29 26 Net amortization of transition obligation 16 16 16 ------ ------ ------ Net periodic post-retirement benefit cost $ 81 $ 76 $ 71 ====== ====== ====== As of December 31, 2000, 1999, and 1998, the accumulated post-retirement benefit obligation totaled $427, $413, and $371, respectively. For measurement purposes, a 10% annual rate of increase in the cost of covered benefits (health care cost trend rate) was assumed for 2000, 1999, and 1998 and the rate was further assumed to decline to 5% after six years. The weighted average discount rate used in determining the accumulated post-retirement benefit obligation was 7% at December 31, 2000, 1999, and 1998. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects: 1-PERCENTAGE- 1-PERCENTAGE- POINT INCREASE POINT DECREASE Effect on total of service and interest cost components $ 5 $ (4) Effect on post-retirement benefit obligation 44 (38) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollar amounts in thousands except per share data) 16. 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 2000 1999 -------- -------- ASSETS Cash $ 14 $ 14 Interest-bearing deposits in subsidiary bank 2,687 136 Other assets 423 519 Investment in subsidiary bank 46,112 42,384 -------- -------- TOTAL ASSETS $ 49,236 $ 43,053 ======== ======== LIABILITIES Borrowings $ 1,850 $ 2,150 Other liabilities (90) (43) -------- -------- TOTAL LIABILITIES 1,760 2,107 -------- -------- STOCKHOLDERS' EQUITY Common stock 20,699 20,699 Surplus 6,364 6,335 Retained earnings 28,963 22,118 Accumulated other comprehensive income (loss), net of tax 580 (1,031) Less: Cost of treasury shares (9,130) (7,175) -------- -------- TOTAL STOCKHOLDERS' EQUITY 47,476 40,946 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 49,236 $ 43,053 ======== ========
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31 2000 1999 1998 ------- -------- -------- INCOME Dividends received from subsidiary bank $ 6,300 $ 2,800 $ 6,200 Interest income 31 11 18 Other income 104 20 36 -------- -------- ------- TOTAL INCOME 6,435 2,831 6,254 -------- -------- ------- EXPENSES Interest expense 170 96 114 Amortization and depreciation 63 63 63 Other expenses 221 169 161 -------- -------- ------- TOTAL EXPENSES 454 328 338 -------- -------- ------- Income before income taxes and equity in undistributed income of subsidiary bank 5,981 2,503 5,916 Applicable income taxes (benefit) (87) (80) (75) -------- -------- ------- Income before equity in undistributed income of subsidiary bank 6,068 2,583 5,991 Equity in undistributed income (loss) of subsidiary bank 2,118 1,271 (1,732) -------- -------- ------- NET INCOME $ 8,186 $ 3,854 $ 4,259 ======== ======== =======
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 2000 1999 1998 ------- ------- ------- Operating activities: Net income $ 8,186 $ 3,854 $ 4,259 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income (2,118) (1,271) 1,732 Amortization of goodwill and other intangible assets 63 63 63 Decrease (increase) in other assets 33 (32) (101) (Decrease) increase in other liabilities (46) (102) 983 ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,118 2,512 6,936 ------- ------- ------- Financing activities: Payments for borrowings (300) (250) (4,750) Proceeds from borrowings -0- 1,200 2,200 Sale of treasury stock 64 59 116 Purchase of treasury stock (1,990) (2,356) (3,496) Dividends paid (1,341) (1,324) (1,241) ------- ------- ------- NET CASH USED BY FINANCING ACTIVITIES (3,567) (2,671) (7,171) ------- ------- ------- Increase (decrease) in cash and cash equivalents 2,551 (159) (235) Cash and cash equivalents at beginning of year 150 309 544 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,701 $ 150 $ 309 ======= ======= =======
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, 2000, 1999, and 1998. 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 6.7% to $515,180 at December 31, 2000. Loans continued to increase throughout 2000 with total net loans (including those held-for-sale) increasing $33.4 million, closing the year at $348,399. Investments also increased, by $5.2 million, to $119,117. The balance sheet was further strengthened with the loan portfolio (higher yielding asset) increasing more rapidly than the investment portfolio (lower yielding asset). The net interest margin improved to 4.43% in the fourth quarter and was 4.38% for the year. This compared favorably to 4.15% for 1999, and 4.12% for 1998. Total stockholders' equity increased 15.9% during 2000 and closed the year at $47,476. Equity was positively impacted by the insurance settlement and strong operational income throughout the year. The dividend was increased twice during 2000 to improve shareholder return and help in the management of the level of capital. The stock repurchase program in the first quarter and the one announced in the fourth quarter were also steps taken to employ capital at its best and highest use. ASSETS AT PERCENT EQUITY AT PERCENT NET PERCENT YEAR-END CHANGE YEAR-END CHANGE INCOME CHANGE -------- ------ -------- ------ ------ ------ 2000 $515,180 6.70% $47,476 15.95% $8,186 112.40% 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) ANALYSIS OF RESULTS OF OPERATIONS NET INTEREST INCOME. Net interest income improved by 11.0% to $19,673 (on a taxable equivalent basis) in 2000 from $17,732 in 1999. This increase resulted from not only 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. As a result, the net yield on interest- earning assets increased to 4.38% in 2000, from 4.15% in 1999. The yield on average earning assets increased to 8.27% in 2000 from 7.77% in 1999. However, the cost of interest-bearing liabilities also increased to 4.42% in 2000, from 4.07% in 1999. The following table sets forth details of average balances, interest income and expense, and resulting rates for the past three years, reported on a fully-taxable equivalent basis using a tax rate of 34%.
------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------------- AVERAGE YIELD/ Average Yield/ Average Yield/ BALANCE INTEREST COST Balance Interest Cost Balance Interest Cost ------------------------------ --------------------------- ---------------------------- AVERAGE INTEREST-EARNING ASSETS Interest-bearing deposits $ 1,659 $ 94 5.67% $ 5,260 $ 247 4.70% $ 6,401 $ 335 5.23% Taxable investment securities 79,656 4,867 6.11 89,818 5,082 5.66 92,643 5,494 5.93 Tax-exempt investment securities (a) 36,608 2,820 7.70 37,262 2,794 7.50 34,340 2,620 7.63 Federal funds sold 1,788 104 5.82 5,664 268 4.73 7,380 388 5.26 Net loans (a) (b) 329,592 29,252 8.88 288,773 24,751 8.57 274,272 24,761 9.03 --------- -------- --------- -------- ---------- -------- Total interest-earning assets 449,303 37,137 8.27 426,777 33,142 7.77 415,036 33,598 8.10 --------- -------- --------- -------- ---------- -------- Average non-interest-earning assets 40,145 37,945 34,343 --------- --------- ---------- Total average assets $ 489,448 $ 464,722 $ 449,379 ========= ========= ========== AVERAGE INTEREST-BEARING LIABILITIES Interest-bearing demand deposits $ 94,168 2,349 2.49% $ 92,448 2,161 2.34% $ 86,874 2,492 2.87% Savings deposits 49,365 1,027 2.08 54,998 1,143 2.08 53,630 1,536 2.86 Time deposits 219,131 12,153 5.55 203,365 10,721 5.27 201,598 11,269 5.59 Interest-bearing demand notes issued to the U. S. Treasury 1,192 71 5.95 1,093 52 4.76 1,015 55 5.42 Federal funds purchased and customer repurchase agreements 16,537 945 5.71 15,053 667 4.43 12,963 626 4.83 Advances from Federal Home Loan Bank 12,917 749 5.80 10,008 570 5.70 7,011 412 5.88 Other borrowings 2,055 170 8.27 1,342 96 7.15 1,397 114 8.16 --------- -------- --------- -------- ---------- -------- Total interest-bearing liabilities 395,365 17,464 4.42 378,307 15,410 4.07 364,488 16,504 4.53 --------- -------- --------- -------- ---------- -------- Net yield on average interest-earning assets $ 19,673 4.38% $ 17,732 4.15% $ 17,094 4.12% ======== ==== ======== ==== ======== ==== Average non-interest-bearing liabilities 50,287 44,536 41,999 Average stockholder's equity 43,796 41,879 42,892 --------- --------- ---------- Total average liabilities and stockholder' equity $ 489,448 $ 464,722 $ 449,379 ========= ========= ==========
(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 $99 in 2000, $63 in 1999, and $329 in 1998 attributable to interest from non-accrual loans. In 1999, net interest income increased by $638 (on a taxable equivalent basis) to $17,732, an increase of 3.7% from $17,094 in 1998. This increase was also due to a change in the composition of interest-earning assets, with a higher percentage being in loans. The net yield on interest-earning assets increased from 4.12% in 1998, to 4.15% in 1999. 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (dollar amounts in thousands except per share data) The following table describes changes in net interest income attributable to changes in the volume of interest-earning assets and interest-bearing liabilities compared to changes in interest rates.
YEAR ENDED DECEMBER 31 -------------------------------------------------------------------------------------- 2000 AS COMPARED TO 1999 1999 as compared to 1998 1998 as compared to 1997 VOLUME (a) RATE (a) NET Volume (a) Rate (a) Net Volume (a) Rate (a) Net -------------------------- --------------------------- -------------------------- INTEREST FROM INTEREST-EARNING ASSETS Interest-bearing time deposits $ (187) $ 34 $ (153) $ (57) $ (31) $ (88) $ 79 $ (11) $ 68 Taxable investment securities (597) 382 (215) (164) (248) (412) 624 (106) 518 Tax-exempt investment securities (b) (49) 75 26 221 (47) 174 274 (112) 162 Federal funds sold (204) 40 (164) (86) (34) (120) 102 (11) 91 Net loans (c) 3,552 949 4,501 1,280 (1,290) (10) 576 -0- 576 ------- ------ ------ ------- ------- ------- ------ ----- ------ Total income from interest- earning assets 2,515 1,480 3,995 1,194 (1,650) (456) 1,655 (240) 1,415 ------- ------ ------ ------- ------- ------- ------ ----- ------ EXPENSE OF INTEREST-BEARING LIABILITIES Interest-bearing demand deposits 45 143 188 144 (475) (331) 72 -0- 72 Savings deposits (116) -0- (116) 32 (425) (393) (26) (69) (95) Time deposits 846 586 1,432 98 (646) (548) 523 81 604 Interest-bearing demand notes issued to the U.S. Treasury 6 13 19 4 (7) (3) (6) (3) (9) Federal funds purchased and customer repurchase agreements 76 202 278 97 (56) 41 250 1 251 Advances from Federal Home Loan Bank 167 12 179 174 (16) 158 397 (18) 379 Other borrowings 55 19 74 (4) (14) (18) (228) (11) (239) ------- ------ ------ ------- ------- ------- ------ ----- ------ Total expense from interest- bearing liabilities 1,079 975 2,054 545 (1,639) (1,094) 982 (19) 983 ------- ------ ------ ------- ------- ------- ------ ----- ------ Net difference $ 1,436 $ 505 $1,941 $ 649 $ (11) $ 638 $ 673 $(221) $ 452 ======= ====== ====== ======= ======= ======= ====== ===== ======
(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 $985 in 2000, $1,048 in 1999, and $986 in 1998. 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 $897 in 2000, $1,274 in 1999, and $1,390 in 1998. NON-INTEREST INCOME. Total non-interest income of $10,558 in 2000 represents an increase of $6.6 million (or 163.6%) from 1999's total of $4,006. As a percentage of average assets, non-interest income increased to 2.16% in 2000, from .86% in 1999. This significant increase is due to the settlement received from the trust litigation (see note 14) of $6,235. One of the largest increases in 2000 was in the category of service charges on deposit accounts, which increased $351 (or 22.2%). During 2000, the Corporation contracted a third-party to review and make suggestions to improve the efficiency ratio, specifically relating to changes to the service charges on deposit accounts. This effort was largely responsible for the aforementioned increase. Other areas showing significant improvement in 2000 were other operating income (increasing $147 or 51.0%) and other service charges (increasing $194 or 27.9%). Other operating income increased due to refunds received from amending prior years' tax returns, while the increase in other service charges was mainly the result of a 67.3% increase in brokerage fee income, (or $109). Offsetting these increases was the loss on sale of loans of $259. In March, the subsidiary bank sold loans that had interest rates below current market rates. With commercial loan demand very strong throughout the year, the Corporation believed these funds could be better utilized by loaning to customers at higher interest rates, having a positive future impact on net interest income. There was also a decrease in loan servicing fees of $109 (or 54.2%), a result of higher interest rates, which slowed activity 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 ---------------------------------------- 2000 1999 1998 Trust and farm management fees $ 1,193 $ 1,197 $ 1,119 Service charges on deposit accounts 1,934 1,583 1,498 Other service charges 890 696 515 Loss on sale of loans (259) -0- -0- Net gain on securities transactions 38 41 96 Loan servicing fees and other charges 92 201 374 Settlement of trust litigation 6,235 -0- -0- Other operating income 435 288 241 -------- -------- -------- Total non-interest income $ 10,558 $ 4,006 $ 3,843 ======== ======== ======== Non-interest income to average total assets 2.16% .86% .86%
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 income from loan servicing fees of $173 (or 46.3%), a result of higher interest rates which slowed activity in the secondary market. NON-INTEREST EXPENSE. Non-interest expense increased in 2000 by $1,398 (or 9.5%) to $16,058 compared to $14,660 in 1999. As a percentage of average assets, non-interest expense was 3.28% in 2000 as compared to 3.15% in 1999. Two categories accounted for the majority of the increase: salaries and employee benefits, and consulting services. Salaries and employee benefits increased by $938 (or 12.0%), due to normal salary increases ($411) and, due to the increased net income in 2000, an increased profit sharing contribution ($304). The consulting services of $351 represent amounts paid to the third-party contracted to review and make suggestions to improve the efficiency ratio. Although the majority of the focus was on fee income opportunities, there were operational efficiencies realized that will provide benefit in future years. Collectively, all other categories of non-interest expense increased by only $109. The following table provides non-interest expense, and non-interest expense to average total assets for the periods indicated.
YEAR ENDED DECEMBER 31 --------------------------------- 2000 1999 1998 Salaries and employee benefits $ 8,767 $ 7,829 $ 7,479 Equipment 1,223 1,174 822 Occupancy 1,002 1,000 1,007 Loan administrative expenses 571 550 586 Data processing 579 514 609 Goodwill and intangible assets amortization 434 448 467 Postage 320 335 326 Supplies 249 269 242 FDIC/OCC assessments 188 188 185 Trust litigation expenses 62 141 256 Consulting services 351 -0- -0- Other operating expense 2,312 2,212 1,995 --------- -------- -------- Total non-interest expense $ 16,058 $ 14,660 $ 13,974 ========= ======== ======== Non-interest expense to average total assets 3.28% 3.15% 3.11%
In 1999, non-interest expense 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. NET INCOME. Net income for 2000 was $8,186 (or $2.33 per basic and diluted share), an increase of $4,332 (or 112.4%) from $3,854 (or $1.02 per basic and diluted share) in 1999. This increase is largely a result of the receipt of the settlement proceeds from the trust litigation. The Corporation also made significant improvements in the net interest margin, increasing from 4.15% in 1999 to 4.38% in 2000, and in non-interest income. Net income for 1999 decreased by $405 (or 9.5%) from $4,259 (or $1.08 per basic and 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 expense. 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 consumer installment. The Corporation has no foreign loans. The following table summarizes the Corporation's loan portfolio:
DECEMBER 31 ---------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 % OF % of % of % of % of AMOUNT TOTAL Amount Total Amount Total Amount Total Amount Total --------------- ----------------- ----------------- ---------------- ---------------- Agricultural $ 41,404 11.9% $ 37,891 12.3% $ 37,520 14.1% $ 38,931 14.3% $ 36,030 14.0% Commercial 59,456 17.1 47,963 15.6 44,147 16.6 41,241 15.1 38,410 14.8 Real Estate 1-4 family residences 70,778 20.4 67,936 22.0 66,243 24.9 75,607 27.8 72,460 28.1 Agricultural 41,487 11.9 41,641 13.5 33,491 12.6 30,434 11.2 28,374 11.0 Construction 11,442 3.3 13,316 4.3 6,299 2.4 6,030 2.2 4,160 1.6 Commercial 76,573 22.1 57,260 18.6 42,005 15.8 42,617 15.7 41,170 16.0 -------- -------- -------- -------- -------- Real Estate Total 200,280 57.7 180,153 58.4 148,038 55.7 154,688 56.9 146,164 56.7 Installment 46,009 13.3 42,349 13.7 35,950 13.6 37,480 13.7 37,514 14.5 -------- -------- -------- -------- -------- Total loans $347,149 100.0% $308,356 100.0% $265,655 100.0% $272,400 100.0% $258,118 100.0% ======== ======== ======== ======== ======== Total assets $515,180 $482,820 $478,911 $449,660 $420,407 Loans to total assets 67.4% 63.9% 55.5% 60.6% 61.4%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (dollar amounts in thousands except per share data) Total loans increased $38.8 million (or 12.6%) in 2000 as compared to an increase of $42.7 million (16.1%) in 1999. 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 $11.5 million (or 24.0%) in 2000, which compares to an increase of $3.8 million (or 8.6%) in 1999. 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. Loans to agricultural operations increased $3.5 million (or 9.3%) in 2000, which compares to an increase of $0.4 million (or 1.0%) in 1999. Short-term agricultural loans are seasonal in nature with paydown from grain sales occurring after year-end 2000. Agricultural commodity prices remain low. Crop yields in the Corporation's market area were generally good. The highly experienced agricultural staff continues to effectively manage risk in this portfolio. Agricultural loans as a percentage of total loans were 11.9% at year-end 2000, compared to 14% at year-end 1996. Real estate loans increased $20.1 million (or 11.2%) in 2000 compared to an increase of $32.1 million (or 21.7%) in 1999, primarily the result of an increase in commercial real estate loans of $19.3 million. This increase reflects the growth of business throughout the Corporation's market area, particularly in the northern and eastern markets. Construction loans are primarily commercial projects. Real estate loans as a percentage of total loans has been consistent during the past five years, ranging between 55.7% and 58.4%. Consumer installment loans increased $3.7 million (or 8.6%) in 2000 from 1999. This follows an increase of $6.4 million (or 17.8%) in 1999. Most of the increase is in home equity 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, the 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 stockholders 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 that primary and secondary sources of repayment are adequate in relation to the amount of the loan, (v) administering loan policies through a Directors' Loan Committee and Officers' Loan 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 that each loan is properly documented and, if appropriate, secured or guaranteed by government agencies, and that insurance coverage is adequate, especially with respect to certain agricultural loans because of the risk of poor weather. NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED. Non-performing loans amounted to .26% of total loans at year-end 2000 compared to .44% at year-end 1999. 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 loan losses was 293% and 141% of non-performing loans at year-end 2000 and 1999, 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, 2000 was $100. The Corporation had $92 in other real estate owned as of December 31, 1999. The following table provides information on the Corporation's non-performing loans since 1996:
DECEMBER 31 ----------------------------------------------------------- 2000 1999 1998 1997 1996 Non-accrual $ 897 $ 1,274 $ 1,390 $ 810 $ 1,157 90 days past due and accruing 12 111 16 27 -0- Restructured -0- -0- -0- -0- -0- ------ ------- ------- ----- -------- Total non-performing loans $ 909 $ 1,385 $ 1,406 $ 837 $ 1,157 ====== ======= ======= ===== ======== Non-performing loans to total loans (net of unearned interest) .26% .44% .52% .31% .45%
As of December 31, 2000 and 1999, 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 $270 (or .08% of the total loan portfolio), and $235 (or .08% of the total loan portfolio), respectively. ALLOWANCE FOR LOAN LOSSES. The allowance shown in the following table represents the allowance available to absorb probable losses within the entire portfolio:
FOR THE YEARS ENDED DECEMBER 31 ------------------------------------------------------------------ 2000 1999 1998 1997 1996 Amount of loans outstanding at end of period (net of unearned interest) $ 347,147 $ 308,347 $ 265,474 $ 272,111 $ 257,931 Average amount of loans outstanding for the period (net of unearned interest) $ 326,372 $ 283,845 $ 274,076 $ 265,756 $ 244,027 Allowance for loan losses at beginning of period $ 1,950 $ 1,800 $ 1,830 $ 1,630 $ 2,034 Charge-offs: Agricultural -0- -0- 84 -0- -0- Commercial 20 155 279 171 140 Real estate-mortgage 44 74 26 1 4 Installment 495 605 629 834 1,221 --------- --------- --------- --------- --------- Total charge-offs 559 834 1,018 1,006 1,365 --------- --------- --------- --------- --------- Recoveries: Agricultural 8 6 243 66 351 Commercial 79 28 28 65 31 Real estate-mortgage 43 1 1 -0- 4 Installment 259 298 379 485 534 --------- --------- --------- --------- --------- Total recoveries 389 333 651 616 920 --------- --------- --------- --------- --------- Net loans charged off 170 501 367 390 445 Provision for loan losses 880 651 337 590 41 --------- --------- --------- --------- --------- Allowance for loan losses at end of period $ 2,660 $ 1,950 $ 1,800 $ 1,830 $ 1,630 ========= ========= ========= ========= ========= Net loans charged off to average loans .05% .18% .13% .15% .18% Allowance for loan losses to non-performing loans 292.63% 140.79% 128.02% 218.64% 140.88% Allowance for loan losses to total loans at end of period (net of unearned interest) .77% .63% .68% .67% .63%
The allowance for 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 loan losses. The adequacy of the allowance for 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 staff, management and its Board of Directors. More specifically, the Corporation calculates the appropriate level of the allowance for loan losses on a monthly basis using historical charge-offs for each loan type, substandard loans, and losses with respect to specific 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 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 .05% of average total loans in 2000, and the allowance for loan losses at year-end 2000 was $2.66 million, .77% of total loans, net of unearned interest, and 293% of non-performing loans. Management considers the allowance for loan losses adequate as of December 31, 2000. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Continue) (dollar amounts in thousands except per share data) INVESTMENT SECURITIES. The objectives of the investment portfolio are to provide the subsidiary bank 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 ------------------- 2000 1999 U.S. Treasury Notes $ -0- $ 2,003 U.S. Government Agencies 50,936 44,740 State and Municipal 38,142 36,390 Collateralized mortgage obligations 27,829 28,703 Other securities 2,210 2,130 -------- -------- Total 119,117 $113,966 ======== ======== Total investment securities increased by $5.1 million (or 4.7%) to $119.1 million at December 31, 2000, compared to December 31, 1999. A shift of $2 million from U.S. Treasuries to U.S. Government Agencies was due to the attractive spreads in U.S. Government Agencies over Treasuries. The $6.1 million increase in U.S. Government Agencies provided securities for pledging to local public entities. Attractive spreads and restructuring of the State and Municipal portfolio was the major reason for the $1.7 million increase in this category. DEPOSITS. Total deposits increased in 2000 by approximately $21.0 million, a 5.1% increase over 1999. Time deposits represented the largest incremental increase, up $22.9 million, a 10.7% increase over the prior year. This increase confirmed a trend in consumer investment activity toward secure, higher yielding time deposits during a period of uneasiness in the stock market. The average rate for overall deposits went up 0.27% in 2000 and balances in savings accounts and interest-bearing checking accounts declined, as investors took advantage of rising certificate of deposit rates. These depositor trends represented a reversal of the trends seen in late 1998 and 1999, when depositors were seeking the high returns being realized in the stock market. Over the last three years, the subsidiary bank has seen overall deposits increase 4.28%. However, the declines seen in both regular savings and interest-bearing checking account balances suggest consumers are watching their investments more closely and taking advantage of technology in order to maximize their returns. In anticipation of these changing consumer dynamics, the subsidiary bank has aggressively pursued alternative delivery mechanisms, such as Internet Banking, as a convenient means for customers to better manage their money, maximize return, and have the peace of mind of dealing safely and securely with only one financial institution. Due to the diversity within our various market areas, such delivery mechanisms will position us well for the future. The following table sets forth the classification of deposits with year-end balances and the average rates paid for the periods indicated:
FOR THE YEARS ENDING DECEMBER 31 ----------------------------------------- 2000 1999 1998 BALANCE RATE Balance Rate Balance Rate -------- ---- ------- ---- ------- ---- Non-interest-bearing demand $ 49,140 N/A $ 45,514 N/A $ 47,355 N/A Interest-bearing demand 92,690 2.49% 93,521 2.34% 93,982 2.87% Savings 47,079 2.08% 52,277 2.08% 54,378 2.86% Time deposits 236,395 5.55% 213,496 5.27% 212,123 5.59% -------- -------- -------- Total $425,304 3.86% $404,808 3.59% $407,838 3.59% ======== ======== ========
The following table summarizes time deposits in amounts of $100 or more by time remaining until maturity as of December 31, 2000. These time deposits are made by individuals, corporations, and public entities. Three months or less $23,345 Over three months through six months 18,954 Over six months through one year 8,050 Over one year 3,757 ------- Total $54,106 ======= 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 customer 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 banks 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 58.0% at December 31, 2000 and 62.7% at December 31, 1999, 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 84.8% of total deposits at December 31, 2000 and 81.9% of total deposits at December 31, 1999. Money market accounts of approximately $42.2 million at December 31, 2000 are classified by the Corporation as core deposits. In 2000, the Corporation had a net decrease of $8.2 million in cash and cash equivalents. This decrease was the result of net cash used in investing activities of $43.2 million. A net increase in loans of $38.9 million, plus $2.7 million for the purchase of premises and equipment were the major components of cash used in investing activities. Financing activities, mostly a net increase in deposits, provided $20.0 million in net cash, while operating activities provided $15.0 million in net cash. Cash and cash equivalents of $19.0 million at December 31, 2000 are deemed adequate to meet short-term liquidity needs. A net decrease of $26.9 million in cash and cash equivalents was experienced by the Corporation in 1999. This decrease was primarily the result of net cash used in investing activities of $31.7 million. A net increase in loans of $43.4 million, plus $2.0 million for the purchase of premises and equipment were major components of cash used in 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. 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 instruments that can be repriced within 180 days, either because they will mature during the period or because they carry 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 Funds Management Committee is responsible for monitoring the 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 monthly basis, on the assets and liabilities of the subsidiary bank. This analysis applies an immediate shift in interest rates of up to +300 basis points and -300 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. Applying these analyses at December 31, 2000 resulted in no material change to net interest income or net income of the Corporation. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (dollar amounts in thousands except per share data)
DECEMBER 31, 2000 ------------------------------------------------------------------ 0-3 MO. 4-12 MO. 1-3 YRS. OVER 3 YRS. TOTAL -------- --------- --------- ------------ -------- Interest-earning assets: Interest-bearing deposits $ 86 $ -0- $ -0- $ -0- $ 86 Taxable investment securities 10,255 19,112 33,921 16,910 80,198 Tax-exempt investment securities 3,032 3,114 4,884 26,467 37,497 Federal funds sold 2,200 -0- -0- -0- 2,200 Loans 110,342 68,767 110,248 61,033 350,390 -------- --------- --------- ------------ -------- Total rate sensitive assets ("RSA") $125,915 $ 90,993 $ 149,053 $ 104,410 $470,371 ======== ========= ========= ============ ======== Interest-bearing liabilities: Interest-bearing demand deposits $ 95,376 $ -0- $ -0- $ -0- $ 95,376 Savings deposits 47,079 -0- -0- -0- 47,079 Time deposits 61,288 110,883 56,490 7,681 236,342 Customer repurchase agreements 19,777 189 200 -0- 20,166 Advances from Federal Home Loan Bank -0- 5,000 5,266 1,950 12,216 Interest-bearing demand notes issued to the U.S. Treasury 2,086 -0- -0- -0- 2,086 -------- --------- --------- ------------ -------- Total rate sensitive liabilities ("RSL") $225,606 $ 116,072 $ 61,956 $ 9,631 $413,265 ======== ========= ========= ============ ======== Interest rate sensitivity GAP (RSA less RSL) $(99,691) $ (25,079) $ 87,097 $ 94,779 Cumulative GAP (99,691) (124,770) (37,673) 57,106 RSA/RSL 55.81% 78.39% 240.58% 1084.10% Cumulative RSA/RSL 55.81 63.48 90.67 113.82
In the table above, interest-bearing demand deposits and savings deposits are included as rate sensitive in the amounts reflected in the 0-3 month time frame, as such interest-bearing liabilities are subject to immediate withdrawal. Management of the Corporation considers $40 million of the interest-bearing checking account balances and $21.1 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, 2000, savings deposits totaled approximately $47.1 million. If that amount, along with the $40 million of interest-bearing checking account balances and $21.1 million in money market account balances reflected in the 0-3 month time frame, are adjusted to exclude these amounts (consistent with the considerations mentioned in the paragraph above), rate sensitive liabilities would be approximately $117.4 million for a positive GAP of approximately $8.5 million. RSA as a percent of RSL would be 107.2%. Adjusting the cumulative GAP and GAP ratio for the 4-12 month time frame would result in a negative cumulative GAP and GAP ratio of $16.6 million, and 92.9%, respectively. 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 condition and operating results in terms of historical dollars without considering the 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, 2000, 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. Government Agencies $ 24,873 5.86% $ 25,794 .48% $ 19 7.23% $ 250 -- State and Municipal 4,480 7.15 6,215 7.62 26,802 7.77 645 -- Collateralized mortgage obligations -0- -- 218 6.62 27,421 8.05 190 -- Other (no stated maturity) -0- -- -0- -- -0- -- 2,210 -- -------- -------- ------- ------ Total $ 29,353 6.06% $ 32,227 6.70% $54,242 7.91% $3,295 -- ======== ======== ======= ======
LOAN MATURITIES. The following table sets forth scheduled loan repayments on agricultural, commercial, and real estate construction loans at December 31, 2000. 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 $ 30,904 $ 10,434 $ 66 $ 41,404 Commercial 43,437 14,262 1,757 59,456 Real Estate-Construction 11,442 -0- -0- 11,442 ----------- ---------- -------- ---------- Total $ 85,783 $ 24,696 $ 1,823 $ 112,302 =========== ========== ======== ==========
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, 2000.
Fixed rate Variable rate Total ---------- ------------- ----- Due after one year $ 17,599 $ 8,920 $ 26,519
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The subsidiary bank has allocated the allowance for 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 -------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 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 $ 591 11.9% $ 293 12.3% $ 311 14.1% $ 342 14.3% $ 325 14.0% Commercial 695 17.1 428 15.6 454 16.6 453 15.1 422 14.8 Real estate-mortgage 322 57.7 333 58.4 175 55.7 156 56.9 151 56.7 Installment 822 13.3 709 13.7 628 13.6 623 13.7 608 14.5 Unallocated 230 N/A 187 N/A 232 N/A 256 N/A 124 N/A ---------- -------- --------- -------- --------- -------- --------- -------- --------- -------- Total $ 2,660 100.0% $ 1,950 100.0% $ 1,800 100.0% $ 1,830 100.0% $ 1,630 100.0% ========== ======== ========= ======== ========= ======== ========= ======== ========= ========
QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited income and expense and per share data on a quarterly basis for the three-month periods indicated: YEAR ENDED DECEMBER 31, 2000 ------------------------------------------------------------- 1ST QTR 2ND QTR 3RD QTR 4TH QTR Interest income $ 8,459 $ 8,808 $ 9,200 $ 9,648 Interest expense 3,987 4,164 4,552 4,761 ------- ------- ------- ------- Net interest income 4,472 4,644 4,648 4,887 Provision for loan losses 515 205 50 110 ------- ------- ------- ------- Net interest income after provision for loan losses 3,957 4,439 4,598 4,777 Non-interest income 7,006 1,091 1,234 1,227 Non-interest expense 3,907 3,953 4,093 4,105 ------- ------- ------- ------- Income before income taxes 7,056 1,577 1,739 1,899 Income tax expense 2,604 454 509 518 ------- ------- ------- ------- Net income $ 4,452 $ 1,123 $ 1,230 $ 1,381 ======= ======= ======= ======= Earnings per share: Basic $ 1.23 $ 0.32 $ 0.35 $ 0.40 Diluted $ 1.23 $ 0.32 $ 0.35 $ 0.40 Cash dividends declared per share $ 0.09 $ 0.095 $ 0.095 $ 0.10
Year Ended December 31, 1999 ------------------------------------------------------------- 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Interest income $ 7,982 $ 7,898 $ 7,971 $ 8,273 Interest expense 3,895 3,761 3,825 3,929 ------- ------- ------- ------- Net interest income 4,087 4,137 4,146 4,344 Provision for loan losses 10 175 200 266 ------- ------- ------- ------- Net interest income after provision for loan losses 4,077 3,962 3,946 4,078 Non-interest income 1,028 982 1,038 959 Non-interest expense 3,579 3,673 3,731 3,677 ------- ------- ------- ------- Income before income taxes 1,526 1,271 1,253 1,360 Income tax expense 391 300 526 339 ------- ------- ------- ------- Net income $ 1,135 $ 971 $ 727 $ 1,021 ======= ======= ======= ======= Earnings per share: Basic $ 0.30 $ 0.26 $ 0.19 $ 0.28 Diluted $ 0.30 $ 0.26 $ 0.19 $ 0.27 Cash dividends declared per share $ 0.08 $ 0.09 $ 0.09 $ 0.09
SELECTED CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31 ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------------ SUMMARY OF INCOME Interest income $ 36,115 $ 32,125 $ 32,651 $ 31,312 $ 29,114 Interest expense 17,464 15,410 16,504 15,541 14,596 Net interest income 18,651 16,715 16,147 15,771 14,518 Provision for loan losses 880 651 337 590 41 Non-interest income 10,558 4,006 3,843 3,365 2,860 Non-interest expense 16,058 14,660 13,974 12,662 12,864 Income before income taxes 12,271 5,410 5,679 5,884 4,473 Income tax expense 4,085 1,556 1,420 1,525 1,046 Net income 8,186 3,854 4,259 4,359 3,427 PER SHARE DATA (a) Basic net income $ 2.33 $ 1.02 $ 1.08 $ 1.07 $ 0.84 Diluted net income 2.33 1.02 1.08 1.07 0.84 Book value (at end of period) 13.60 11.16 11.13 10.62 9.84 Cash dividends declared 0.38 0.35 0.31 0.28 0.25 Dividend payout ratio 16.4% 34.4% 29.1% 26.2% 30.2% Cash earnings (b) $ 2.40 $ 1.10 $ 1.16 $ 1.15 $ 0.92 SELECTED BALANCES (AT END OF PERIOD) Total assets $ 515,180 $ 482,820 $ 478,911 $ 449,660 $ 420,407 Earning assets 469,802 438,760 435,789 412,974 379,278 Investments 119,117 113,966 130,926 122,034 117,028 Gross loans 351,061 317,002 271,018 276,301 260,967 Allowance for loan losses 2,660 1,950 1,800 1,830 1,630 Deposits 425,304 404,808 407,838 385,940 358,701 Borrowings 36,318 33,499 24,296 16,987 17,887 Stockholders' equity 47,476 40,946 42,606 42,668 40,197 SELECTED FINANCIAL RATIOS Net income to average stockholders' equity 18.69% 9.20% 9.94% 10.56% 8.91% Cash earnings to average tangible stockholders' equity (b) (c) 21.43 11.21 12.18 12.95 10.76 Net income to average assets 1.67 0.83 0.95 1.02 0.84 Average stockholders' equity to average assets 8.95 9.01 9.54 9.66 9.48 Average earning assets to average assets 91.80 91.83 92.36 91.64 91.37 Non-performing loans to total loans at end of period 0.26 0.44 0.52 0.31 0.45 Tier 1 capital to average adjusted assets 8.60 8.10 8.35 8.78 8.59 Risk based capital to risk adjusted assets 12.71 12.31 13.68 13.88 13.88 Net loans charged off to average loans 0.05 0.18 0.13 0.15 0.18 Allowance for loan losses to total loans at end of period 0.77 0.63 0.68 0.67 0.63 Average interest-bearing deposits to average deposits 89.06 89.70 90.13 90.00 90.07 Average non-interest-bearing deposits to average deposits 10.94 10.30 9.87 10.00 9.93 ------------------------------------------------------------------------------------------------------------------------------------
(a) Per share data prior to 1998 has been restated to reflect the stock dividend (3 for 2 split) declared in 1998. (b) Cash earnings is defined as net income excluding the effects of amortization of goodwill and core deposit intangibles, net of any related tax effects. (c) Tangible stockholders' equity consists of total stockholders' equity less any intangible assets. Tangible book value is determined by dividing the total number of outstanding common shares into tangible stockholders' equity.