EX-13 5 princeton021452_ex-13.txt ANNUAL REPORT OF CITIZENS FIRST NATIONAL BANK [LOGO] KPMG The Board Of Directors and Stockholders Princeton National Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of Princeton National Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Chicago, Illinois January 25, 2002 9 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31 2001 2000 ------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks (note 2) $ 16,740 $ 16,693 Interest bearing deposits with financial institutions 6,586 86 Federal funds sold 10,400 2,200 Investment securities (note 3): Available-for-sale, at fair value 128,605 105,440 Held-to-maturity, at amortized cost 16,055 13,677 Loans held-for-sale, at lower of cost or market 8,490 3,912 Loans (notes 4 and 7): Gross loans, net of unearned interest 333,399 347,147 Allowance for loan losses (2,300) (2,660) -------- -------- Net loans 331,099 344,487 Interest receivable 5,799 6,781 Premises and equipment, net of accumulated depreciation (note 5) 13,766 12,952 Goodwill and intangible assets, net of accumulated amortization of $3,419 and $2,985 at December 31, 2001 and 2000 3,886 4,082 Other assets 13,899 4,870 -------- -------- TOTAL ASSETS $555,325 $515,180 ======== ======== ------------------------------------------------------------------------------------------------------------------ LIABILITIES Deposits (note 6): Demand $ 58,378 $ 49,140 Interest-bearing demand 116,587 92,690 Savings 51,966 47,079 Time 254,807 236,395 -------- -------- Total deposits 481,738 425,304 Borrowings (note 7): Customer repurchase agreements 12,217 20,166 Advances from the Federal Home Loan Bank 6,451 12,216 Interest-bearing demand notes issued to the U.S. Treasury 377 2,086 Notes payable 1,550 1,850 -------- -------- Total borrowings 20,595 36,318 Other liabilities 5,492 6,082 -------- -------- TOTAL LIABILITIES 507,825 467,704 -------- -------- STOCKHOLDERS' EQUITY (notes 5, 9, and 12) Common stock: $5 par value, 7,000,000 shares authorized: 4,139,841 shares issued at December 31, 2001 and 2000 20,699 20,699 Surplus 6,416 6,364 Retained earnings 31,937 28,963 Accumulated other comprehensive income, net of tax 537 580 Less: Cost of 835,831 and 650,070 treasury shares at December 31, 2001 and 2000, respectively (12,089) (9,130) -------- -------- TOTAL STOCKHOLDERS' EQUITY 47,500 47,476 -------- -------- Commitments & contingencies (note 13) TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $555,325 $515,180 ======== ======== ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 10 CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------- INTEREST INCOME: Interest and fees on loans $ 29,536 $ 29,189 $ 24,684 Interest and dividends on investment securities: Taxable 5,009 4,867 5,082 Tax-exempt 2,109 1,861 1,844 Interest on federal funds sold 200 104 268 Interest on interest-bearing time deposits in other banks 156 94 247 --------- -------- --------- Total interest income 37,010 36,115 32,125 --------- -------- --------- INTEREST EXPENSE: Interest on deposits (note 6) 16,914 15,529 14,025 Interest on borrowings 1,352 1,935 1,385 --------- -------- --------- Total interest expense 18,266 17,464 15,410 --------- -------- --------- NET INTEREST INCOME 18,744 18,651 16,715 Provision for loan losses (note 4) 795 880 651 --------- -------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 17,949 17,771 16,064 --------- -------- --------- NON-INTEREST INCOME: Trust & farm management fees 1,177 1,193 1,197 Service charges on deposit accounts 2,387 1,934 1,583 Other service charges 1,037 890 696 Loss on sale of loans -0- (259) -0- Gain on sales of securities available-for-sale (note 3) 586 38 41 Brokerage fee income 481 271 162 Loan servicing fees and other charges 414 92 201 Settlement of trust litigation (note 14) -0- 6,235 -0- Other operating income 261 164 126 --------- -------- --------- Total non-interest income 6,343 10,558 4,006 --------- -------- --------- NON-INTEREST EXPENSE: Salaries and employee benefits 9,471 8,767 7,829 Occupancy 1,192 1,002 1,000 Equipment expense 1,272 1,223 1,174 Federal insurance assessments 197 188 188 Goodwill and intangible assets amortization 434 434 448 Data processing 637 579 514 Loan administrative expense 324 571 550 Other operating expense 3,356 3,294 2,957 --------- -------- --------- Total non-interest expense 16,883 16,058 14,660 --------- -------- --------- INCOME BEFORE INCOME TAXES 7,409 12,271 5,410 Income tax expense (note 8) 2,002 4,085 1,556 --------- -------- --------- Net income $ 5,407 $ 8,186 $ 3,854 ========= ======== ========= NET INCOME PER SHARE: Basic $ 1.62 $ 2.33 $ 1.02 Diluted $ 1.62 $ 2.33 $ 1.02 Basic weighted average shares outstanding 3,330,769 3,519,134 3,768,055 Diluted weighted average shares outstanding 3,340,169 3,519,815 3,781,299 -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 11 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------ NET INCOME $ 5,407 $ 8,186 $ 3,854 Other comprehensive income (loss), net of tax Unrealized holding gains (losses) arising during the year 316 1,634 (1,866) Less: Reclassification adjustment for net realized gains included in net income (359) (23) (27) -------- -------- ------- Other comprehensive income (loss) (43) 1,611 (1,893) -------- -------- ------- Comprehensive income $ 5,364 $ 9,797 $ 1,961 ======== ======== ======= ------------------------------------------------------------------------------------------------------------------
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, 1999 $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) $47,476 Net income 5,407 5,407 Sale of 5,239 shares of treasury stock 52 32 84 Purchase of 191,000 shares of treasury stock (2,991) (2,991) Cash dividends ($.73 per share) (2,433) (2,433) Other comprehensive loss, net of $27 tax effect (43) (43) ------- ------- -------- ------- ------- ------- BALANCE, DECEMBER 31, 2001 $20,699 $ 6,416 $ 31,937 $ 537 $(12,089) $47,500 ======= ======= ======== ======= ========= ======= ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 12 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income $ 5,407 $8,186 $ 3,854 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 1,209 1,156 1,153 Provision for loan losses 795 880 651 Deferred income taxes (benefit) expense 184 (118) (282) Amortization of goodwill and other intangible assets 434 434 448 Amortization of premiums on investment securities, net of accretion 151 48 206 Gain on securities transactions, net (586) (38) (41) Gain on sale of premises and equipment (122) -0- -0- FHLB stock dividends (107) (80) -0- Loans originated for sale (40,143) (5,153) (14,208) Proceeds from sales of loans originated for sale 35,565 10,146 10,925 Loss on sale of loans -0- (259) -0- (Decrease) increase in accrued interest payable (81) 539 71 Decrease (increase) in accrued interest receivable 982 (982) (195) Increase in other assets (9,662) (781) (899) (Decrease) increase in other liabilities (482) 918 582 -------- -------- ------- Net cash (used in) provided by operating activities (6,456) 14,896 2,265 -------- -------- ------- INVESTING ACTIVITIES: Proceeds from sales of investment securities available-for-sale 28,604 4,758 4,054 Proceeds from maturities of investment securities available-for-sale 32,122 32,796 39,788 Purchase of investment securities available-for-sale (86,962) (40,209) (33,689) Proceeds from maturities of investment securities held-to-maturity 2,815 3,035 15,489 Purchase of investment securities held-to-maturity (1,650) (2,792) (11,715) Proceeds from sale of premises and equipment 175 -0- -0- Proceeds from sales of other real estate owned 136 173 375 Net decrease (increase) in loans 12,593 (38,970) (43,374) Purchase of premises and equipment (2,001) (1,981) (2,653) -------- -------- ------- Net cash used in investing activities (14,168) (43,190) (31,725) -------- -------- ------- FINANCING ACTIVITIES: Net increase (decrease) in deposits 56,434 20,496 (3,030) Proceeds from borrowings -0- 4,503 10,244 Payments for borrowings (15,723) (1,684) (1,041) Dividends paid (2,433) (1,341) (1,324) Purchase of treasury stock (2,991) (1,990) (2,356) Sale of treasury stock 84 64 59 -------- -------- ------- Net cash provided by financing activities 35,371 20,048 2,552 -------- -------- ------- Increase (decrease) in cash and cash equivalents 14,747 (8,246) (26,908) Cash and cash equivalents at beginning of year 18,979 27,225 54,133 -------- -------- ------- Cash and cash equivalents at end of year $ 33,726 $ 18,979 $27,225 ======== ======== ======= Cash paid during the year for: Interest $ 18,347 $ 16,925 $15,339 Income taxes $ 2,244 $ 3,255 $ 1,609 Supplemental disclosure of noncash investing activities: Loans transferred to other real estate owned $ -0- $ 177 $ 200 ----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands except per share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in conformity with 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. The Corporation, through the subsidiary bank, operates in a single segment engaging in general retail and commercial banking. 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). Any security for which there has been other than temproary impairment of value is written down to its estimated market value through a change to earnings. 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. Loan origination fees are recognized to income and loan origination costs are charged to expense as incurred. It is the subsidiary bank's policy to discontinue the accrual of interest on any loan when, in the opinion of management, full and timely payment of principal and interest is not expected, or principal and interest is due and remains unpaid for 90 days or more, unless the loan is both well-secured and in the process of collection. 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. 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. Loan servicing fees are recognized to income and 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, 2001 and 2000, the amount of originated mortgage servicing rights was $590 and $353, respectively, and is included in goodwill and intangible assets in the consolidated balance sheets. The fair value of mortgage servicing rights approximates the carrying value at December 31, 2001 and 2000. 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 consolidated 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, 2001, 2000, and 1999 of approximately $71,984, $59,608, and $58,870, 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; and 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. CASH FLOWS - For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, interest-bearing deposits in financial institutions, and federal funds sold. Generally, federal funds are sold for one-day periods. 14 RECLASSIFICATION - Certain amounts in the 2000 and 1999 consolidated financial statements have been reclassified to conform to the 2001 presentation. IMPACT OF NEW ACCOUNTING STANDARDS - In July 2001, the FASB issued Statement 141, "Business Combinations" (FAS 141) and Statement 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 required that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. FAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. FAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. FAS 142 is effective January 1, 2002 for calendar year companies, however, any acquired goodwill or intangible assets recorded in transactions closed subsequent to June 30, 2001 will be subject immediately to the non-amortization and amortization provisions of FAS 142. As required under FAS 142, the Company adopted FAS 142 effective January 1, 2002 and will discontinue the amortization of goodwill, which had a net carrying value of $1,355 as of December 31, 2001 and annual amortization of $226 that resulted from business combinations prior to the adoption of FAS 141. NET INCOME PER SHARE - The following table sets forth the computation for basic and diluted earnings per share for the years ended December 31, 2001, 2000, and 1999 (in thousands, except share data):
2001 2000 1999 --------- --------- --------- Numerator: Net income $5,407 $8,186 $3,854 Denominator: Basic earnings per share-weighted average shares 3,330,769 3,519,134 3,768,055 Effect of dilutive securities-stock options 9,400 681 13,244 --------- --------- --------- Diluted earnings per share-adjusted weighted average shares 3,340,169 3,519,815 3,781,299 Earnings per share: Basic $ 1.62 $2.33 $1.02 Diluted 1.62 2.33 1.02
2. CASH AND DUE FROM BANKS The average compensating balances held at correspondent banks during 2001 and 2000 were $2,975 and $2,977, 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 2001 or 2000. 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:
2001 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------- ------- ------ -------- Available-for-sale: United States Government Agencies $ 29,893 $ 499 $ (47) $ 30,345 State and Municipal 36,122 732 (388) 36,466 Collateralized mortgage obligations 59,245 508 (276) 59,477 Other securities 2,317 -0- -0- 2,317 -------- ------- ------ -------- Total 127,577 1,739 (711) 128,605 -------- ------- ------ -------- Held-to-maturity: Commercial paper 3,983 8 -0- 3,991 State and Municipal 12,072 250 (70) 12,252 -------- ------- ------ -------- Total 16,055 258 (70) 16,243 -------- ------- ------ -------- Total $143,632 $ 1,997 $ (781) $144,848 ======== ======= ====== ======== 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 ========= ======= ====== ========
15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollar amounts in thousands except per share data) Maturities of investment securities classified as available-for-sale and held-to-maturity were as follows at December 31, 2001: ESTIMATED AMORTIZED FAIR COST VALUE ---- ----- Available-for-sale: Due in one year or less $ 17,111 $ 17,411 Due after one year through five years 11,902 12,152 Due after five years through ten years 520 510 Due after ten years 33,231 33,529 --------- -------- 62,764 63,602 --------- -------- Mortgage-backed securities 3,251 3,209 Collateralized mortgage obligations 59,245 59,477 Other securities 2,317 2,317 --------- -------- $127,577 $128,605 ======== ======== Held-to-maturity: Due in one year or less $ 5,840 $ 5,874 Due after one year through five years 3,050 3,119 Due after five years through ten years 3,053 3,118 Due after ten years 4,112 4,132 --------- -------- $ 16,055 $ 16,243 ========= ======== Other securities consist of Federal Home Loan Bank and Federal Reserve Bank stock held totaling $1,622 and $695 at December 31, 2001 and $1,515 and $695 at December 31, 2000, respectively. Proceeds from sales of investment securities available-for-sale during 2001, 2000, and 1999 were $28,604, $4,758, and $4,054, respectively. Gross gains of $586 in 2001, $124 in 2000, and $41 in 1999, and gross losses of $0 in 2001, $86 in 2000, and $0 in 1999, were realized on those sales. There were no sales of investment securities classified as held-to-maturity during 2001, 2000, and 1999. 4. LOANS The composition of the loan portfolio as of December 31 was as follows: Gross loans 2000 2001 Commercial $56,137 $59,456 Agricultural 37,282 41,404 Real estate-construction 10,069 11,442 Real estate-mortgage 189,111 188,838 Installment 40,800 46,007 -------- -------- Total $333,399 $347,147 ======== ======== Changes in the allowance for loan losses for the years ended December 31 were as follows: 2001 2000 1999 Balance, January 1 $ 2,660 $ 1,950 $ 1,800 Provision for loan losses 795 880 651 Recoveries of loans previously charged off 323 389 333 Loans charged off (1,478) (559) (834) ------- ------- ------- Balance, December 31 $ 2,300 $ 2,660 $ 1,950 ======= ======= ======= Non-accrual loans at December 31, 2001, 2000, and 1999 were $5,676, $897, and $1,274, respectively. Interest income that would have been recorded on these loans had they remained current was approximately $358, $98, and $126, respectively. Impaired loans at December 31, 2001, 2000, and 1999 totaled $4,821, $513, and $845, respectively. Of these totals, $0, $487, and $637 of loans had valuation reserves totaling $0, $190, and $0 at December 31, 2001, 2000, and 1999, respectively. For the years ended December 31, 2001, 2000, and 1999, the average recorded investment in impaired loans was approximately $2,055, $729, and $933, respectively. Interest recognized on impaired loans during the portion of the year that they were impaired was not considered material. The subsidiary bank had loans outstanding to directors, executive officers, and their related interests (related parties) of the Corporation and its subsidiary of approximately $2,122, $2,483, and $1,368, at December 31, 2001, 2000, and 1999, 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 2001 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, 2001 is as follows: Balance Balance January 1, 2001 Additions Payments December 31, 2001 --------------- --------- -------- ----------------- $2,483 $1,140 $1,501 $2,122 16 5. PREMISES AND EQUIPMENT As of December 31, the components of premises and equipment (at cost), less accumulated depreciation, were as follows: 2001 2000 Land $ 3,019 $ 3,019 Buildings 14,022 11,031 Furniture and Equipment 9,883 9,149 Construction-in-progress -0- 2,168 ------- ------- 26,924 25,367 Less accumulated depreciation 13,158 12,415 ------- ------- Total $13,766 $12,952 ======= ======= Depreciation expense charged to operating expense for 2001, 2000, and 1999 was $1,209, $1,156, and $1,153, 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: 2001 2000 1999 Amount $49,585 $54,106 $57,229 Interest expense for the year 2,665 3,346 2,462 Total interest expense on deposits for the years ending December 31, was as follows: 2001 2000 1999 Interest-bearing demand $ 2,197 $ 2,349 $ 2,161 Savings 1,066 1,027 1,143 Time 13,651 12,153 10,721 ------- ------- ------- Total $16,914 $15,529 $14,025 ======= ======= ======= At December 31, 2001, the scheduled maturities of time deposits are as follows: 2002 $195,703 2003 45,281 2004 8,742 Thereafter 5,081 -------- Total $254,807 ======== 7. BORROWINGS As of December 31, borrowings consisted of the following:
2001 2000 WEIGHTED Weighted AVERAGE Average AMOUNT RATE Amount Rate ------- ---- ------- ---- Customer repurchase agreements $12,217 1.07% $20,166 5.93% Advances from the Federal Home Loan Bank of Chicago due: October 10, 2001 -0- -- 5,000 6.70 June 18, 2002 101 6.46 266 6.46 March 7, 2004 1,350 5.94 1,950 5.94 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 377 1.40 2,086 4.52 Note payable 1,550 3.75 1,850 7.50 ------- ---- ------- ---- Total $20,595 2.68% $36,318 6.07% ======= ==== ======= ====
The subsidiary bank has adopted a collateral pledge agreement whereby the bank has agreed to keep on hand at all times, free of all other pledges, liens, and encumbrances, first mortgages with unpaid principal balances aggregating no less than 167% of the outstanding secured advances from the Federal Home Loan Bank of Chicago (FHLB). All advances from the FHLB have fixed interest rates. The advance maturing in June, 2008 has a one-time callable feature in June, 2003, while the advance maturing in February, 2008 also has a callable feature beginning in February, 2003 and quarterly thereafter. All stock in the FHLB is also pledged as additional collateral for these advances. The Corporation has a note payable with a balance of $1,550 and $1,850 at December 31, 2001 and 2000, respectively. The note payable is a demand note that carries a floating interest rate equal to the lender's prime rate less one percent (3.75% at December 31, 2001). The note, which is unsecured, has a maturity of March 31, 2003. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (dollar amounts in thousands except per share data) 8. INCOME TAXES Income tax expense (benefit) consisted of the following: CURRENT DEFERRED TOTAL ------- -------- ------- YEAR ENDED DECEMBER 31, 2001: FEDERAL $1,459 $ 148 $1,607 STATE OF ILLINOIS 359 36 395 ------- ------- ------- TOTAL $1,818 $ 184 $2,002 ======= ======= ======= 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 ======= ======= ======= 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:
2001 2000 1999 Computed "expected" tax expense $2,519 $4,172 $1,839 Increase (decrease) in income taxes resulting from: Tax-exempt income (740) (674) (673) Non-deductible interest expense 102 95 89 State income taxes, net of federal tax benefit 234 459 174 Goodwill amortization 87 88 88 Life insurance earnings, net (134) (35) (26) Other, net (66) (20) 65 ------ ------ ------ Total $2,002 $4,085 $1,556 ====== ====== ======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000 are presented below: 2001 2000 Deferred tax assets: Deferred compensation $ 100 $ 108 Provision for loan losses 137 193 Other, net 169 -0- ------- ------- Total gross deferred tax assets 406 301 ------- ------- Deferred tax liabilities: Buildings and equipment, principally due to differences in depreciation (314) (209) Accretion (100) (88) Unrealized gain on investment securities available-for-sale (501) (528) Purchase accounting adjustments (23) (23) FHLB stock dividends (84) (31) Mortgage servicing rights (152) -0- Other, net -0- (32) ------- ------- Total gross deferred tax liabilities (1,174) (911) ------- ------- Net deferred tax liabilities $ (768) $ (610) ======= ======= 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, 2001 and 2000. 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 classifications 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, 2001 and 2000, the Corporation and its subsidiary bank were categorized as well-capitalized under the regulatory framework. The most recent notifications from the federal banking agencies, as of December 31, 2001, and 2000, 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 those notifications that have changed the Corporation's or the subsidiary bank's category. 18 The Corporation's and the subsidiary banks actual capital amounts and ratios as of December 31, 2001 and 2000 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, 2001: TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): PRINCETON NATIONAL BANCORP, INC. $45,908 12.29% $29,849 8.00% $37,311 10.00% CITIZENS FIRST NATIONAL BANK 46,063 12.35% 29,810 8.00% 37,263 10.00% TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS): PRINCETON NATIONAL BANCORP, INC. $43,608 11.69% $14,924 4.00% $22,386 6.00% CITIZENS FIRST NATIONAL BANK 43,763 11.74% 14,905 4.00% 22,358 6.00% TIER 1 CAPITAL (TO AVERAGE ADJUSTED ASSETS): PRINCETON NATIONAL BANCORP, INC. $43,608 8.31% $20,983 4.00% $26,228 5.00% CITIZENS FIRST NATIONAL BANK 43,763 8.35% 20,971 4.00% 26,214 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, 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% --------------------------------------------------------------------------------------------------------------------
10. EMPLOYEE, OFFICER, AND DIRECTOR BENEFIT PLANS The subsidiary bank has a defined contribution investment 401(k) 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 401(k) plan for 2001, 2000, and 1999 was $158, $151, and $141, 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 $259 in 2001, $500 in 2000, and $196 in 1999. Additionally, the Corporation has a non-qualified stock option plan for the benefit of employees and directors of the subsidiary bank, as well as directors of the Corporation. 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 2001, 2000, and 1999: 2001 2000 1999 Dividend yield 2.96% 3.55% 3.22% Risk-free interest rate 5.04% 5.02% 6.40% Weighted average expected life 10 YRS. 10 yrs. 10 yrs. Expected volatility 40.00% 32.00% 33.00% 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 2001 2000 1999 AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price ------ ----- ------ ----- ------ ----- Beginning of year 73,950 $12.64 34,450 $13.45 12,950 $17.19 Granted 53,800 16.21 39,500 11.94 21,500 $11.19 Exercised/forfeited 2,500 13.86 -0- - -0- - ------ ----- ------ ----- ------ ----- End of year 125,250 $14.17 73,950 $12.64 34,450 $13.45 Options exercisable 23,817 15,801 4,317 Fair value of options granted during period $6.77 $3.61 $3.99
19 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 2001 2000 1999 Net Income As Reported $5,407 $8,186 $3,854 Pro Forma 5,306 8,129 3,826 Basic Earnings Per Share As Reported $ 1.62 $ 2.33 $ 1.02 Pro Forma 1.59 2.31 1.01 Diluted Earnings Per Share As Reported $ 1.62 $ 2.33 $ 1.02 Pro Forma 1.59 2.31 1.01
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-sale 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, 2001 and 2000, were as follows:
2001 2000 -------------------------- -------------------------- CARRYING FAIR Carrying Fair VALUE VALUE Value Value ---------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and due from banks $16,740 $ 16,740 $16,693 $ 16,693 Interest-bearing deposits in financial institutions 6,586 6,586 86 86 Federal funds sold 10,400 10,400 2,200 2,200 Investment securities 144,660 144,848 119,117 119,180 Loans, net 339,589 339,570 348,399 346,189 Accrued interest receivable 5,799 5,799 6,781 6,781 -------- -------- -------- -------- Total Financial Assets $523,774 $523,943 $493,276 $491,129 FINANCIAL LIABILITIES: Non-interest-bearing demand deposits $58,378 $ 58,378 $49,140 $ 49,140 Interest-bearing deposits 423,360 427,222 376,164 377,459 Borrowings 20,595 20,595 36,318 36,318 Accrued interest payable 2,868 2,868 2,949 2,949 -------- -------- -------- -------- Total Financial Liabilities $505,201 $509,063 $464,571 $465,866 ----------------------------------------------------------------------------------------------------------
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 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. 20 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, 2001, the subsidiary bank had $4,786 available for dividends. Additionally, according to the guidelines, at January 1, 2002, the subsidiary bank had $3,514 available 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, 2001, commitments to extend credit and standby letters of credit were approximately $72,814 and $2,269, 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 or results of operations. 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 its 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 2001, 2000, and 1999 net periodic post-retirement benefit cost are shown below: 2001 2000 1999 Service cost $ 38 $ 35 $ 31 Interest cost 34 30 29 Net amortization of transition obligation 16 16 16 ---- ----- ---- Net periodic post-retirement benefit cost $ 88 $ 81 $ 76 ==== ===== ==== As of December 31, 2001, 2000, and 1999, the accumulated post-retirement benefit obligation totaled $484, $427, and $413, respectively. For measurement purposes, a 10% annual rate of increase in the cost of covered benefits (health care cost trend rate) was assumed for 2001, 2000, and 1999 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, 2001, 2000, and 1999. 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 128 (106) 21 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 2001 2000 ASSETS Cash $ 27 $ 14 Interest-bearing deposits in subsidiary bank 1,121 2,687 Other assets 470 423 Investment in subsidiary bank 47,466 46,112 ------- ------- TOTAL ASSETS $49,084 $49,236 ======= ======= LIABILITIES Borrowings $1,550 $ 1,850 Other liabilities 34 (90) ------- ------- TOTAL LIABILITIES 1,584 1,760 ------- ------- STOCKHOLDERS' EQUITY Common stock 20,699 20,699 Surplus 6,416 6,364 Retained earnings 31,937 28,963 Accumulated other comprehensive income, net of tax 537 580 Less: Cost of treasury shares (12,089) (9,130) ------- ------- TOTAL STOCKHOLDERS' EQUITY 47,500 47,476 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $49,084 $49,236 ======= =======
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31 2001 2000 1999 INCOME Dividends received from subsidiary bank $4,200 $6,300 $2,800 Interest income 22 31 11 Other income 25 104 20 ------ ------ ------ TOTAL INCOME 4,247 6,435 2,831 ------ ------ ------ EXPENSES Interest expense 105 170 96 Amortization and depreciation 60 63 63 Other expenses 138 221 169 TOTAL EXPENSES 303 454 328 ------ ------ ------ Income before income taxes and equity in undistributed income of subsidiary bank 3,944 5,981 2,503 Applicable income taxes (benefit) (67) (87) (80) ------ ------ ------ Income before equity in undistributed income of subsidiary bank 4,011 6,068 2,583 Equity in undistributed income of subsidiary bank 1,396 2,118 1,271 ------ ------ ------ NET INCOME $5,407 $8,186 $3,854 ====== ====== ======
22 CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31 2001 2000 1999 Operating activities: Net income $5,407 $8,186 $3,854 Adjustments to reconcile net income to net cash provided by operating activities Equity in undistributed income of subsidiary bank (1,396) (2,118) (1,271) Amortization of goodwill and other intangible assets 60 63 63 (Increase) decrease in other assets (107) 33 (32) Increase (decrease) in other liabilities 124 (46) (102) ------ ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 4,088 6,118 2,512 ------ ------ ------ Financing activities: Payments for borrowings (300) (300) (250) Proceeds from borrowings -0- -0- 1,200 Sale of treasury stock 84 64 59 Purchase of treasury stock (2,992) (1,990) (2,356) Dividends paid (2,433) (1,341) (1,324) ------ ------ ------ NET CASH USED IN FINANCING ACTIVITIES (5,641) (3,567) (2,671) ------ ------ ------ Increase (decrease) in cash and cash equivalents (1,553) 2,551 (159) Cash and cash equivalents at beginning of year 2,701 150 309 ------ ------ ------ CASH AND CASH EQUIVALENTS AT END OF YEAR $1,148 $2,701 $ 150 ====== ====== ======
23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollar amounts in thousands except per share data) The following discussion and analysis provides information about the Corporation's financial condition and results of operations for the years ended December 31, 2001, 2000, and 1999. 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 Even with declining loan demand and balances, total assets increased 7.8% to $555,325 at December 31, 2001 from December 31, 2000. The balances of investment securities and total cash and cash equivalents increased, by $25.5 million, to $144.6 million, and by $14.7 million, to $33.7 million, respectively. Total deposits increased by $56.4 million in 2001, with the new Huntley facility contributing approximately $20 million. Net income was $5,407 in 2001, which is lower than the $8,186 for 2000, but represents an increase of 11.2% excluding the insurance settlement received in the first quarter of 2000. Total non-interest income of $6,343 in 2001 (1.20% of average total assets) increased 38.7% compared to $4,573 in 2000 ($10,558 including the insurance settlement received). Although the net interest margin rebounded to 4.10% in the fourth quarter from 4.03% in third quarter of 2001, for the full year it was 4.12%, down from 4.38% for 2000. Total stockholders' equity of $47,500 stayed virtually the same at December 31, 2001 as compared to the $47,476 at December 31, 2000. The Corporation's capital was managed through a stock repurchase plan in 2001, as well as a special dividend of $0.30 paid in May, 2001.
ASSETS AT PERCENT EQUITY AT PERCENT NET PERCENT YEAR-END CHANGE YEAR-END CHANGE INCOME CHANGE -------- ------ -------- ------ ------ ------ 2001 $555,325 7.79% $47,500 0.05% $5,407 (33.95)% 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)
ANALYSIS OF RESULTS OF OPERATIONS NET INTEREST INCOME. Net interest income increased slightly to $19,861 (on a taxable equivalent basis) in 2001, from $19,673 in 2000. This increase is due entirely to an increase in average interest-earning assets during 2001 from $426,777 in 2000 to $449,303 (an increase of $22.5 million, or 5.3%). This more than offset the declines in interest rates during 2001, which caused the average interest rate earned on these assets to drop from 8.27% in 2000 to 7.91% in 2001. Additionally, along with an increase in interest-bearing liabilities of $32.9 million (or 8.3%) over the past year, the average rate paid on these liabilities also decreased from 4.42% in 2000 to 4.27% in 2001. As a result, the net yield on interest-earning assets decreased from 4.38% in 2000 to 4.12% in 2001. 24 The following table sets forth details of average balances, interest income and expense, and resulting rates for the past three years, reported on a taxable equivalent basis using a tax rate of 34%.
FOR THE YEARS ENDING DECEMBER 31 ---------------------------------------------------------------------------------- 2001 2000 1999 ---------------------------------------------------------------------------------- AVERAGE YIELD/ Average Yield/ Average Yield/ BALANCE INTEREST COST Balance Interest Cost Balance Interest Cost ------------------------- ------------------------- ---------------------------- AVERAGE INTEREST-EARNING ASSETS Interest-bearing deposits $ 5,034 $ 156 3.09% $ 1,659 $ 94 5.67% $ 5,260 $ 247 4.70% Taxable investment securities 83,870 5,009 5.97 79,656 4,867 6.11 89,818 5,082 5.66 Tax-exempt investment securities (a) 42,066 3,196 7.60 36,608 2,820 7.70 37,262 2,794 7.50 Federal funds sold 5,875 200 3.40 1,788 104 5.82 5,664 268 4.73 Net loans (a) (b) 345,301 29,566 8.56 329,592 29,252 8.88 288,773 24,751 8.57 ------- ------ ------- ------ ------- ------ Total interest-earning assets 482,146 38,127 7.91 449,303 37,137 8.27 426,777 33,142 7.77 ------- ------ ------- ------ ------- ------ Average non-interest-earning assets 45,983 40,145 37,945 ------- ------- ------- Total average assets $528,129 $489,448 $464,722 ======== ======== ======== AVERAGE INTEREST-BEARING LIABILITIES Interest-bearing demand deposits $ 98,294 2,197 2.23% $ 94,168 2,349 2.49% $ 92,448 2,161 2.34% Savings deposits 49,085 1,066 2.17 49,365 1,027 2.08 54,998 1,143 2.08 Time deposits 251,626 13,651 5.43 219,131 12,153 5.55 203,365 10,721 5.27 Interest-bearing demand notes issued to the U. S. Treasury 1,155 37 3.22 1,192 71 5.95 1,093 52 4.76 Federal funds purchased and customer repurchase agreements 15,481 559 3.61 16,537 945 5.71 15,053 667 4.43 Advances from Federal Home Loan Bank 10,854 651 6.00 12,917 749 5.80 10,008 570 5.70 Other borrowings 1,734 105 6.08 2,055 170 8.27 1,342 96 7.15 ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities 428,229 18,266 4.27 395,365 17,464 4.42 378,307 15,410 4.07 ------- ------ ------- ------ ------- ------ Net yield on average interest-earning assets $19,861 4.12% $19,673 4.38% $17,732 4.15% ======= ==== ======= ==== ======= ==== Average non-interest-bearing liabilities 53,283 50,287 44,536 Average stockholders' equity 46,617 43,796 41,879 -------- -------- -------- Total average liabilities and stockholders' equity $528,129 $489,448 $464,722 ======== ======== ========
(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 taxable equivalent basis. (b) Includes $77 in 2001, $99 in 2000, and $63 in 1999 attributable to interest from non-accrual loans. In 2000, net interest income improved by 11.0% to $19,673 (on a taxable equivalent basis) from $17,732 in 1999. This increase resulted from not only an increase in the volume of interest-earnings assets, but also from 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. 25 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 ------------------------------------------------------------------------------------ 2001 AS COMPARED TO 2000 2000 as compared to 1999 1999 as compared to 1998 VOLUME(a) RATE (a) NET Volume(a) Rate (a) Net Volume(a) Rate (a) Net ------------------------------------------------------------------------------------ INTEREST FROM INTEREST-EARNING ASSETS Interest-bearing time deposits $ 148 $ (86) $ 62 $ (187) $ 34 $ (153) $ (57) $ (31) $ (88) Taxable investment securities 256 (113) 143 (597) 382 (215) (164) (248) (412) Tax-exempt investment securities (b) 416 (41) 375 (49) 75 26 221 (47) 174 Federal funds sold 188 (92) 96 (204) 40 (164) (86) (34) (120) Net loans (c) 1,382 (1,068) 314 3,552 949 4,501 1,280 (1,290) (10) ----- ------ --- ----- --- ----- ----- ------ --- Total income from interest- earning assets 2,390 (1,400) 990 2,515 1,480 3,995 1,194 (1,650) (456) ----- ------ --- ----- ----- ----- ----- ------ ---- EXPENSE OF INTEREST-BEARING LIABILITIES Interest-bearing demand deposits 97 (249) (152) 45 143 188 144 (475) (331) Savings deposits (6) 45 39 (116) -0- (116) 32 (425) (393) Time deposits 1,782 (284) 1,498 846 586 1,432 98 (646) (548) Interest-bearing demand notes issued to the U.S. Treasury (2) (32) (34) 6 13 19 4 (7) (3) Federal funds purchased and customer repurchase agreements (49) (337) (386) 76 202 278 97 (56) 41 Advances from Federal Home Loan Bank (122) 24 (98) 167 12 179 174 (16) 158 Other borrowings (23) (42) (65) 55 19 74 (4) (14) (18) --- --- --- -- -- -- -- --- --- Total expense from interest- bearing liabilities 1,677 (875) 802 1,079 975 2,054 545 (1,639) (1,094) ----- ---- --- ----- --- ----- --- ------ ------ Net difference $ 713 $ (525) $ 188 $1,436 $ 505 $1,941 $ 649 $ (11) $ 638 ====== ====== ===== ====== ===== ====== ===== ====== =====
(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 38.74% in adjusting interest on tax-exempt securities to a taxable equivalent basis. (c)Includes loan fees of $1,671 in 2001, $985 in 2000, and $1,048 in 1999. Interest income on loans includes the effect of taxable equivalent adjustments for non-taxable loans using a tax rate of 34% in adjusting interest on tax-exempt loans to a taxable equivalent basis. Includes non-accrual loans, with year-end balances of $5,676 in 2001, $897 in 2000, and $1,274 in 1999. NON-INTEREST INCOME. Although non-interest income decreased in total (from $10,558 in 2000) to $6,343 in 2001, removing the settlement received in 2000 from the trust litigation indicates an increase of $1.6 million, or 36.0%, from a year ago. The Corporation continued to see substantial increases in service charges on deposit accounts. Income of $2,387 in 2001 represents a 23.4% increase from 2000, which had increased 22.2% over 1999. During 2001, the Corporation recorded net gains from the sale of investment securities of $586, compared to $38 in 2000, which helped to offset the decrease in the net interest margin. Additionally, with interest rates being lower, mortgage activity increased, especially with regard to refinancings. As a result, loan servicing fees and other charges increased to $414, an increase of $322 (or 350%) from a year ago. Other operating income also increased, from $164 in 2000 to $261 in 2001 (an increase of $97 or 59.1%), largely the result of a $209 increase in brokerage fee income. 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: FOR THE YEARS ENDED DECEMBER 31 ------------------------------- 2001 2000 1999 Trust and farm management fees $1,177 $ 1,193 $1,197 Service charges on deposit accounts 2,387 1,934 1,583 Other service charges 1,037 890 696 Loss on sale of loans -0- (259) -0- Net gain on securities transactions 586 38 41 Brokerage fee income 481 271 162 Loan servicing fees and other charges 414 92 201 Settlement of trust litigation -0- 6,235 -0- Other operating income 261 164 126 ------ ------- ------ Total non-interest income $6,343 $10,558 $4,006 ====== ======= ====== Non-interest income to average total assets 1.20% 2.16% 0.86% 26 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 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% as mentioned above). 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 ($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: NON-INTEREST EXPENSE. Non-interest expense increased in 2001 by $825 to $16,883. This represents an increase of 5.1%, from $16,058 in 2000. However, as a percentage of average total assets, non-interest expense decreased to 3.20% in 2001, compared to 3.28% in 2000. The majority of the increase was seen in the category of salaries and benefits, which increased $704 (or 8.0%) over the past year. This increase is a result of not only normal salary increases, but also increased commissions paid to mortgage loan originators and brokerage investment executives in 2001 due to the increases in loan volume and brokerage fee income (as mentioned in the preceding paragraphs on non-interest income). The remaining categories of non-interest expense collectively increased by $121, or 1.7%, from a year ago. The following table provides non-interest expense, and non-interest expense to average total assets for the periods indicated.
FOR THE YEARS ENDED DECEMBER 31 2001 2000 1999 ------- ------- ------- Salaries and employee benefits $ 9,471 $8,767 $ 7,829 Equipment 1,272 1,223 1,174 Occupancy 1,192 1,002 1,000 Data processing 637 579 514 Loan administrative expenses 324 571 550 Goodwill and intangible assets amortization 434 434 448 Advertising 412 300 317 Postage 351 320 335 Supplies 243 249 269 FDIC/OCC assessments 197 188 188 Trust administrative expenses 26 62 141 Consulting services -0- 351 -0- Other operating expense 2,324 2,012 1,895 ------- ------- ------- Total non-interest expense $16,883 $16,058 $14,660 ======= ======= ======= Non-interest expense to average total assets 3.20% 3.28% 3.15%
Non-interest expenses 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. INCOME TAXES. Income tax expense totaled $2,002 in 2001, $4,085 in 2000, and $1,556 in 1999. The effective tax rates were 27.0%, 33.3%, and 28.8% for the respective years then ended. The primary cause for the higher effective tax rate for 2000 was the impact of the insurance settlement proceeds received from the trust litigation in the first quarter of 2000. NET INCOME. Net income for 2001 was $5,407 (or $1.62 per basic and diluted share), a decrease of $2.8 million (or 33.9%) from $8,186 (or $2.33 per basic and diluted share) in 2000. This decrease is largely a result of the receipt of the settlement proceeds from the trust litigation in February, 2000. The Corporation continued to make significant progress in building a strong non-interest income base to supplement the net interest margin, which decreased from 4.38% in 2000, to 4.12% in 2001. Net income for 2000 increased by $4.3 million (or 112.4%) from $3,854 (or $1.02 per basic and diluted share) in 1999. This increase is, again, a result of the receipt of the settlement proceeds from the trust litigation in February, 2000. Also contributing to the higher net income was the Corporation's net interest margin of 4.38% compared to 4.15% in 1999. 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 -------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 % of % of % of % of % of AMOUNT TOTAL Amount Total Amount Total Amount Total Amount Total ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Agricultural $ 37,282 11.2% $ 41,404 11.9% $ 37,891 12.3% $ 37,520 14.1% $ 38,991 14.3% Commercial 56,137 16.9 59,456 17.1 47,963 15.6 44,147 16.6 41,241 15.1 Real Estate 1-4 family residences 64,011 19.2 70,778 20.4 67,936 22.0 66,243 24.9 75,607 27.8 Agricultural 37,354 11.2 41,487 11.9 41,641 13.5 33,491 12.6 30,434 11.2 Construction 10,069 3.0 11,442 3.3 13,316 4.3 6,299 2.4 6,030 2.2 Commercial 87,746 26.3 76,573 22.1 57,260 18.6 42,005 15.8 42,617 15.7 -------- -------- -------- -------- -------- Real Estate Total 199,180 59.7 200,280 57.7 180,153 58.4 148,038 55.7 154,688 56.9 Installment 40,800 12.2 46,009 13.3 42,349 13.7 35,950 13.6 37,480 13.7 -------- -------- -------- -------- -------- Total loans $333,399 100.0% $347,149 100.0% $308,356 100.0% $265,655 100.0% $272,400 100.0% ======== ======== ======== ======== ======== Total assets $555,325 $515,180 $482,820 $478,911 $449,660 Loans to total assets 60.0% 67.4% 63.9% 55.5% 60.6%
27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (dollar amounts in thousands except per share data) Total loans decreased $13.8 million (or 4.0%) in 2001 as compared to an increase of $38.8 million (12.6%) in 2000. This decrease reflects changing economic conditions in the market area served by the subsidiary bank in 2001. It also follows two years of rapid loan growth totaling over $80 million. Commercial loans deceased $3.3 million (or 5.6%) in 2001, which compares to an increase of $11.5 million (or 24.0%) in 2000. Building relationships with commercial businesses has been the largest component of loan growth in recent years. While overall business activity was slower in 2001, several markets served by the subsidiary bank continued to show commercial growth. Competition for high-quality commercial and agricultural customers remains strong. Loans to agricultural operations decreased $4.1 million (or 10.0%) in 2001, which compares to an increase of $3.5 million (or 9.3%) in 2000. Short-term agricultural loans are seasonal in nature, with paydown from grain sales occurring at year-end 2001. Agricultural commodity prices remain low. This has been somewhat balanced by strong levels of government support payments. 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 11.2% at year-end 2001, compared to 11.9% at year-end 2000. Real estate loans decreased $1.1 million (or .5%) in 2001 compared to an increase of $20.1 million (or 11.2%) in 2000. Commercial real estate loans continued to grow with an increase of $11.2 million in 2001. This growth reflects continued activity in the northern and eastern markets served by the subsidiary bank, even with a slower national economy. Residential real estate loans decreased $6.8 million from 2000. Most residential mortgage loans held in the portfolio are adjustable rate loans. In a lower interest rate environment such as was experienced in 2001, many adjustable rate loans are refinanced into fixed rate loans which the Corporation generally sells in the secondary market, thus reducing portfolio balances. Overall, residential mortgage activity was at a record level with over $60 million of loans closed, most of which were sold. Servicing of these loans is retained by the bank, maintaining customer relationships and generating servicing fee income. Consumer installment loans decreased $5.2 million (or 11.3%) in 2001 from 2000. This follows an increase of $3.7 million (or 8.6%) in 2000. Within this category, home equity financing has increased while auto financing has been reduced due to aggressive pricing by the finance companies owned by auto manufacturers. Although the risk of non-payment for any reason exists with respect to all loans, certain other more specific risks are associated with each type of loan. The primary risks associated with commercial loans are quality of the borrower's management and the impact of national economic factors. With respect to agricultural loans, the primary risks are weather and, like commercial loans, 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 Committees, (vi) developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each loan category, and (vii) ensuring that each loan is properly documented and, if appropriate, secured or guaranteed by government agencies, and that insurance coverage is adequate, especially with respect to certain agricultural loans because of the risk of poor weather. NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED. Non-performing loans amounted to 1.72% of total loans at year-end 2001 compared to .26% at year-end 2000. The current economic environment has created repayment difficulties with several larger credits. Action plans are formulated with these credits to correct or work out of each specific situation. 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. The allowance for loan losses was 40.0% and 293.0% of non-performing loans at year-end 2001 and 2000, 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, 2001 was $0. The Corporation had $100 in other real estate owned as of December 31, 2000. The following table provides information on the Corporation's non-performing loans since 1997:
DECEMBER 31 ----------------------------------------------------------------- 2001 2000 1999 1998 1997 Non-accrual $5,676 $ 897 $1,274 $1,390 $810 90 days past due and accruing 42 12 111 16 27 Restructured -0- -0- -0- -0- -0- ------ ----- ------ ------ ---- Total non-performing loans $5,718 $ 909 $1,385 $1,406 $837 ====== ===== ====== ====== ==== Non-performing loans to total loans (net of unearned interest) 1.72% .26% .44% .52% .31%
As of December 31, 2001 and 2000, 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 $67 (or .02% of the total loan portfolio), and $270 (or .08% of the total loan portfolio), respectively. 28 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 -------------------------------------------------------- 2001 2000 1999 1998 1997 Amount of loans outstanding at end of year (net of unearned interest) $333,399 $347,147 $308,347 $265,474 $272,111 Average amount of loans outstanding for the year (net of unearned interest) $343,175 $326,372 $283,845 $274,076 $265,756 Allowance for loan losses at beginning of year $ 2,660 $ 1,950 $ 1,800 $ 1,830 $ 1,630 Charge-offs: Agricultural -0- -0- -0- 84 -0- Commercial 726 20 155 279 171 Real estate-mortgage 29 44 74 26 1 Installment 723 495 605 629 834 -------- -------- -------- -------- -------- Total charge-offs 1,478 559 834 1,018 1,006 -------- -------- -------- -------- -------- Recoveries: Agricultural -0- 8 6 243 66 Commercial 4 79 28 28 65 Real estate-mortgage -0- 43 1 1 -0- Installment 319 259 298 379 485 Total recoveries 323 389 333 651 616 -------- -------- -------- -------- -------- Net loans charged off 1,155 170 501 367 390 Provision for loan losses 795 880 651 337 590 -------- -------- -------- -------- -------- Allowance for loan losses at end of year $ 2,300 $ 2,660 $ 1,950 $ 1,800 $ 1,830 ======== ======== ======== ======== ======== Net loans charged off to average loans .34% .05% .18% .13% .15% Allowance for loan losses to non-performing loans 40.22% 292.63% 140.79% 128.02% 218.64% Allowance for loan losses to total loans at end of year (net of unearned interest) .69% .77% .63% .68% .67%
The allowance for loan losses is considered by management to be a critical accounting policy. The allowance for loan losses is increased by provisions charged to operating expense and decreased by charge-offs, net of recoveries. The allowance 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. 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 a weaker economic environment, net charge-offs were .34% of average total loans in 2001. Charge-offs were concentrated in the commercial and installment areas. The allowance for loan losses at year-end 2001 was $2,300, .69% of total loans, net of unearned interest, and 40% of non-performing loans. Although non-performing loans have increased from the level of prior years, the total is concentrated to a few credits that management believes will not result in any losses to the Corporation. In fact, there are no specific loan loss reserves for any of the non-performing or impaired loans as of December 31, 2001. Accordingly, management considers the allowance for loan losses adequate to meet probable losses as of December 31, 2001. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (dollar amounts in thousands except per share data) INVESTMENT SECURITIES. The objectives of the investment portfolio are to provide the 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 ------------------------- 2001 2000 U.S. Government Agencies $ 30,345 $ 50,936 State and Municipal 48,538 38,142 Collateralized mortgage obligations 59,477 27,829 Commercial paper 3,983 -0- Other securities 2,317 2,210 --------- --------- Total $ 144,660 $ 119,117 ========= ========= Total investment securities increased by $25.5 million during 2001 to $144.7 million at December 31, 2001. The decrease in loan demand, along with the growth of deposits, was responsible for this increase. A program to shift securities from U.S. Government Agencies to CMO's and municipals was implemented to take advantage of the return of slope to the yield curve. In addition, the Corporation realized gains from the sale of securities in the amount of $586 in 2001. This also reduced excess liquidity over the short term and resulted in an increase in income over the long term. The overall result was an increase of $31.6 million, and $10.3 million in CMO's and municipals, respectively. Excess liquidity at year-end resulted in the addition of commercial paper to the investment portfolio. DEPOSITS. Total deposits increased in 2001 by approximately $56.4 million, a 13.3% increase over 2000. Total time deposits accounted for $18.4 million of the increase (up 7.8% over the prior year). Interest-bearing demand accounts increased $23.9 million, a 25.8% increase over 2001, due primarily to the successful introduction of our Select Checking account. This product was introduced to attract maturing Certificates of Deposit accounts in a down-trending rate market. Non-interest bearing demand accounts showed an increase of $9.2 million, an 18.8% increase over the prior year, largely due to account restructuring. Regular savings account balances grew by approximately $4.9 million, a 10.4% increase over the prior year. The increases in deposit accounts results were largely a result of growing customer relationships, as well as uneasiness in the stock market, with customers looking for more secure investments. The average cost of overall deposits decreased 0.21% in 2001 from 2000 as a result of higher-rate certificates of deposit maturing and repricing, as well as consumers investing in shorter-term products. These factors represented a change in the past trend of customers seeking higher returns in the stock market and moving to FDIC-insured investments. Over the last three years, the subsidiary bank has seen overall deposits increase 18.1%. The increase in all areas of consumer deposits reflects our continued focus on investing in offices in high growth areas and continued focus of officers calling on customers and potential customers through our officer call program to develop deposit relationships. This growth also reflects the well-trained staff that looks to assist customers by identifying needs and providing sound solutions. 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 peace of mind by dealing safely and securely with only one financial institution. Due to the diversity within our various market areas, these delivery mechanisms continue to 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 ENDED DECEMBER 31 -------------------------------------------------------------- 2001 2000 1999 BALANCE RATE Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- Non-interest-bearing demand $ 58,378 N/A $ 49,140 N/A $ 45,514 N/A Interest-bearing demand 116,587 2.23% 92,690 2.49% 93,521 2.34% Savings 51,966 2.17% 47,079 2.08% 52,277 2.08% Time deposits 254,807 5.43% 236,395 5.55% 213,496 5.27% -------- -------- -------- Total $481,738 3.65% $425,304 3.86% $404,808 3.59% ======== ======== ========
The following table summarizes time deposits in amounts of $100 or more by time remaining until maturity as of December 31, 2001. These time deposits are made by individuals, corporations, and public entities. Three months or less $17,362 Over three months through six months 11,698 Over six months through one year 16,669 Over one year 3,856 ------- Total $49,585 ======= 30 LIQUIDITY. Liquidity is measured by a financial institution's ability to raise funds through deposits, borrowed funds, capital, or the sale of assets. Additional sources of liquidity, including cash flow from both the repayment of loans and the securitization of assets, are also considered in determining whether liquidity is satisfactory. The funds are used to meet deposit withdrawals, maintain reserve requirements, fund loans, purchase treasury shares, and operate the organization. Liquidity is achieved through growth of core funds (defined as core deposits, 50% of non-public entity certificates of deposit over $100, and repurchase agreements issued to commercial customers) and liquid assets, and accessibility to the money and capital markets. The Corporation and the subsidiary bank have 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 72.4% at December 31, 2001 and 58.0% at December 31, 2000, 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 86.0 % of total deposits at December 31, 2001 and 84.8% of total deposits at December 31, 2000. Money market accounts of approximately $38.1 million at December 31, 2001 are classified by the Corporation as core deposits. In 2001, the Corporation had a net increase of $14.8 million in cash and cash equivalents. Financing activities, mostly a net increase in deposits of $56.4 million offset by a $15.7 million decrease in borrowings, provided $35.4 million in net cash. Investing activities consisting of the purchase of investment securities, net of maturities and sales, of $25.1 were offset by a net decrease in loans of $12.6 million. Cash and cash equivalents of $33.7 million at December 31, 2001 are deemed more than adequate to meet short-term liquidity needs. A net decrease of $8.2 million in cash and cash equivalents was experienced by the Corporation in 2000. 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. 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 the instrument 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 of difference between rate sensitive assets and rate sensitive liabilities within a given time period (GAP). A GAP ratio is determined by dividing rate sensitive assets by rate sensitive liabilities. A ratio of 1.0 indicates a perfectly matched position, in which case the effect on net interest income due to interest rate movements would be zero. The Corporation's strategy with respect to asset-liability management is to maximize net interest income while limiting the Corporation's exposure to risks associated with volatile interest rates. The subsidiary bank's 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 analysis at December 31, 2001 resulted in no material change to net interest income or net income of the Corporation. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS. As disclosed in the Notes to Consolidated Financial Statements, the Corporation has certain obligations and commitments to make future payments under contracts. At December 31, 2001, the aggregate contracted obligations (excluding bank deposits) and commercial commitments are as follows:
------------------------------------------------------------------------------------------------------------------ LESS THAN TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS OVER 5 YEARS ------ --------- --------- ------------ Contractual Obligations: Total borrowings $20,595 $14,045 $ 6,550 $ -0- $ -0- Other Commercial Components: Commitments to lend $72,814 $72,814 $ -0- $ -0- $ -0- Standby letters of credit 2,269 2,269 -0- -0- -0- Total $75,083 $75,083 $ -0- $ -0- $ -0- ======= ======= ======= ======== =======
31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (dollar amounts in thousands except per share data)
DECEMBER 31, 2001 -------------------------------------------------------------------- 0-3 MO. 4-12 MO. 1-3 YRS. OVER 3 YRS. TOTAL -------- --------- -------- -------- -------- Interest-earning assets: Interest-bearing deposits $ 6,586 $ -0- $ -0- $ -0- $ 6,586 Taxable investment securities 12,310 18,457 31,442 32,533 94,742 Tax-exempt investment securities 1,518 2,069 2,754 41,844 48,185 Federal funds sold 10,400 -0- -0- -0- 10,400 Loans 105,175 75,886 106,013 48,886 335,960 -------- --------- -------- -------- -------- Total rate sensitive assets ("RSA") $135,989 $ 96,412 $140,209 $123,263 $495,873 ======== ========= ======== ======== ======== Interest-bearing liabilities: Interest-bearing demand deposits $116,587 $ -0- $ -0- $ -0- $116,587 Savings deposits 51,966 -0- -0- -0- 51,966 Time deposits 75,454 120,224 54,023 5,106 254,807 Customer repurchase agreements 11,818 199 200 -0- 12,217 Advances from Federal Home Loan Bank -0- 101 6,350 -0- 6,451 Interest-bearing demand notes issued to the U.S. Treasury 377 -0- -0- -0- 377 Note payable 1,550 -0- -0- -0- 1,550 --------- --------- -------- -------- -------- Total rate sensitive liabilities ("RSL") $ 257,752 $ 120,524 $ 60,573 $ 5,106 $443,955 ========= ========= ======== ======== ======== Interest rate sensitivity GAP (RSA less RSL) $(121,763) $ (24,112) $ 79,636 $118,157 Cumulative GAP (121,763) (145,875) (66,239) 51,918 RSA/RSL 52.76% 79.99% 231.47% 2414.08% Cumulative RSA/RSL 52.76 61.44 84.91 111.69
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 $19.1 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, 2001, savings deposits totaled approximately $52.0 million. If that amount, along with the $40 million of interest-bearing checking account balances and $19.1 million in money market account balances reflected in the 0-3 month time frame, are adjusted to exclude these amounts (consistent with the consideration mentioned in the paragraph above), rate sensitive liabilities would be approximately $147.9 million for a negative GAP of approximately $11.9 million. RSA as a percent of RSL would be 92.0%. 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 $36.0 million, and 86.6%, respectively. 32 EFFECTS OF INFLATION. The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America 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, 2001, and the tax equivalent yields of such securities. (amortized cost).
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 $17,163 6.55% $10,678 4.65% $ 2,051 6.55% $ -0- -- State and Municipal 2,992 7.77 4,401 7.33 40,792 7.58 -0- -- Collateralized mortgage obligations -0- -- 2,495 5.03 56,750 5.66 -0- -- Commercial paper 3,983 2.74 -0- -- -0- -- -0- -- Other (no stated maturity) -0- -- -0- -- -0- -- 2,317 -- ------- ------- ------- ------- Total $24,138 6.07% $17,574 5.38% $99,593 6.46% $ 2,317 -- ======= ======= ======= =======
LOAN MATURITIES. The following table sets forth scheduled loan repayments on agricultural, commercial, and real estate construction loans at December 31, 2001. 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 NON-ACCRUAL TOTAL ---------- ----------------- ---------- ----------- ----- Agricultural $26,961 $ 6,851 $ 663 $2,807 $37,282 Commercial 43,538 10,462 123 2,014 56,137 Real Estate-Construction 9,927 142 -0- -0- 10,069 ------- ------- ----- ------ -------- Total $80,426 $17,455 $ 786 $4,821 $103,488 ======= ======= ===== ====== ========
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, 2001 FIXED RATE VARIABLE RATE TOTAL ---------- ------------- ----- Due after one year $10,872 $7,369 $ 18,241 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 --------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 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 $ 466 11.2% $ 591 11.9% $ 293 12.3% $ 311 14.1% $ 342 14.3% Commercial 537 16.9 695 17.1 428 15.6 454 16.6 453 15.1 Real estate-mortgage 361 59.7 322 57.7 333 58.4 175 55.7 156 56.9 Installment 645 12.2 822 13.3 709 13.7 628 13.6 623 13.7 Unallocated 291 N/A 230 N/A 187 N/A 232 N/A 256 N/A ------ ------ ------ ------ ------ Total $2,300 100.0% $2,660 100.0% $1,950 100.0% $1,800 100.0% $1,830 100.0% ====== ====== ====== ====== ======
33 QUARTERLY RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 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, 2001 ------------------------------------------------------------ 1ST QTR 2ND QTR 3RD QTR 4TH QTR Interest income $9,544 $9,330 $9,265 $8,871 Interest expense 4,900 4,629 4,606 4,131 ------ ------ ------ ------ Net interest income 4,644 4,701 4,659 4,740 Provision for loan losses 50 25 360 360 ------ ------ ------ ------ Net interest income after provision for loan losses 4,594 4,676 4,299 4,380 Non-interest income 1,458 1,410 1,532 1,943 Non-interest expense 4,067 4,197 4,154 4,465 ------ ------ ------ ------ Income before income taxes 1,985 1,889 1,677 1,858 Income tax expense 506 580 401 515 ------ ------ ------ ------ Net income $1,479 $1,309 $1,276 $1,343 ====== ====== ====== ====== Earnings per share: Basic $ 0.44 $ 0.40 $0.39 $ 0.41 Diluted $ 0.44 $ 0.39 $0.38 $ 0.40 Cash dividends declared per share $ 0.10 $ 0.40 $0.11 $ 0.12 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
34 SELECTED CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31 ------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------------------------------------------------------------------- SUMMARY OF INCOME Interest income $ 37,010 $ 36,115 $ 32,125 $ 32,651 $ 31,312 Interest expense 18,266 17,464 15,410 16,504 15,541 Net interest income 18,744 18,651 16,715 16,147 15,771 Provision for loan losses 795 880 651 337 590 Non-interest income 6,343 10,558 4,006 3,843 3,365 Non-interest expense 16,883 16,058 14,660 13,974 12,662 Income before income taxes 7,409 12,271 5,410 5,679 5,884 Income tax expense 2,002 4,085 1,556 1,420 1,525 Net income 5,407 8,186* 3,854 4,259 4,359 PER SHARE DATA(a) Basic net income $ 1.62 $ 2.33* $ 1.02 $ 1.08 $ 1.07 Diluted net income 1.62 2.33* 1.02 1.08 1.07 Book value (at end of year) 14.38 13.60 11.16 11.13 10.62 Cash dividends declared 0.73 0.38 0.35 0.31 0.28 Dividend payout ratio 45.0% 16.4% 34.4% 29.1% 26.2% Cash earnings(b) $ 1.70 $ 2.40* $ 1.10 $ 1.16 $ 1.15 SELECTED BALANCES (AT END OF YEAR) Total assets $ 555,325 $ 515,180 $ 482,820 $ 478,911 $ 449,660 Earning assets 509,494 469,802 438,760 435,789 412,974 Investments 144,660 119,117 113,966 130,926 122,034 Gross loans 341,889 351,061 317,002 271,018 276,301 Allowance for loan losses 2,300 2,660 1,950 1,800 1,830 Deposits 481,738 425,304 404,808 407,838 385,940 Borrowings 20,595 36,318 33,499 24,296 16,987 Stockholders equity 47,500 47,476 40,946 42,606 42,668 SELECTED FINANCIAL RATIOS Net income to average stockholders equity 11.60% 18.69% 9.20% 9.94% 10.56% Cash earnings to average tangible stockholders equity(b)(c) 13.28 21.43 11.21 12.18 12.95 Net income to average assets 1.02 1.67 0.83 0.95 1.02 Average stockholders equity to average assets 8.83 8.95 9.01 9.54 9.66 Average earning assets to average assets 92.12 91.80 91.83 92.36 91.64 Non-performing loans to total loans at end of year (net of unearned interest) 1.72 0.26 0.44 0.52 0.31 Tier 1 capital to average adjusted assets 8.10 8.60 8.10 8.35 8.78 Risk based capital to risk adjusted assets 12.29 12.71 12.31 13.68 13.88 Net loans charged off to average loans 0.34 0.05 0.18 0.13 0.15 Allowance for loan losses to total loans at end of year (net of unearned interest) 0.69 0.77 0.63 0.68 0.67 Average interest-bearing deposits to average deposits 89.47 89.06 89.70 90.13 90.00 Average non-interest-bearing deposits to average deposits 10.53 10.94 10.30 9.87 10.00 -----------------------------------------------------------------------------------------------------------------------
(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. (*) Includes insurance settlement received in February, 2000. Net income without this settlement and related transactions would have been $4,862, basic and