<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-20050
PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-32110283
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
606 South Main Street
Princeton, Illinois 61356-2080
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (815) 875-4444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each
exchange on
Title of each class which registered
- ------------------- ----------------
The Nasdaq
Common Stock Stock Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X YES NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
---
At March 10, 1998, 2,672,542 shares of Common Stock, $5.00 Par Value,
were outstanding, and the aggregate market value of the common stock (based
upon the closing representative bid price of the common stock on March 10,
1998, as reported by NASDAQ) held by nonaffiliates was approximately
$80,176,260.
Determination of stock ownership by nonaffiliates was made solely for
the purpose of responding to this requirement and the registrant is not bound
by this determination for any other purpose.
Portions of the following documents are incorporated by reference:
Annual Report to Stockholders for the year ended December 31, 1997 -
Part II
1998 Notice and Proxy Statement for the Annual Meeting of Stockholders
April 14, 1998 - Part III
<PAGE> 2
PART I
ITEM 1. BUSINESS
Princeton National Bancorp, Inc. ("PNB" or the "Corporation") is a single-
bank holding company which conducts a full service commercial banking and trust
business through its subsidiary bank, Citizens First National Bank ("Citizens
Bank" or "the Bank"). At December 31, 1997, the Corporation had consolidated
total assets of $449,660,000 and stockholders' equity of $42,668,000.
PNB was incorporated as a Delaware corporation in 1981 in contemplation of
the acquisition of all of the outstanding common stock of Citizens Bank and
other future acquisitions. Since the formation of the holding company, PNB
has made five acquisitions. In 1986, PNB acquired Genoa State Bank
(subsequently merged into Citizens Bank), located approximately 90 miles from
Princeton and just outside the western suburbs of Chicago. In 1988, PNB
acquired First National Bank of Oglesby when it acquired all of the outstanding
stock of USA Firstrust, Inc. (subsequently merged into Citizens Bank), which
gave PNB a market presence in Oglesby and the Peru/LaSalle area, 27 and 22
miles from Princeton, respectively. In 1992, PNB acquired all of the
outstanding capital stock of Illinois Valley Bancshares, Inc. ("Illinois
Valley"). Through the acquisition of Illinois Valley, PNB acquired Colonial
Bank and Trust Company of Bureau County, located in Princeton, with a branch in
DePue (subsequently merged into Citizens Bank) and Colonial Bank and Trust
Company of LaSalle County, located in Peru (subsequently converted into a
national bank, renamed Citizens First National Bank of Peru, and subsequently
merged into Citizens Bank). In 1994, PNB acquired Heart of Illinois Investment
Corp. and its subsidiary, Heart of Illinois Bank, F.S.B., with branches in
Spring Valley, Henry, Plano and Princeton (subsequently merged into Citizens
Bank). In 1996, PNB acquired all of the deposits, equipment and the facility
of the Sandwich branch of Superior Bank, FSB (subsequently merged into Citizens
Bank), located approximately 50 miles to the northeast of Princeton.
PNB operates the Bank as a community bank -- with offices located for
convenience with professional, highly motivated, progressive employees who know
the Bank's customers and are able to provide individualized, quality service.
As part of its community banking approach, PNB requires officers of the Bank
to actively participate in community organizations. In addition, within
certain credit and rate of return parameters, PNB attempts to ensure that the
Bank meets the lending needs of the communities in which offices are located,
and that the Bank invests in local and municipal securities.
Corporate policy, strategy, and goals are established by the Board of
Directors of PNB. Pursuant to PNB's holding company philosophy, operational and
administrative policies for the Bank
<PAGE> 3
are also established at the holding company level. Within this framework, the
Bank focuses on providing personalized services and quality products to its
customers to meet the needs of the communities in which offices are located.
In 1997, the majority of the directors of PNB also served as the directors of
Citizens Bank. This assists PNB in directly implementing its policies at
Citizens Bank.
ACQUISITION AND EXPANSION STRATEGY
PNB seeks to diversify both its market area and asset base and increase
profitability through acquisitions and expansion. PNB's goal, as reflected by
its acquisition policy, is to expand through the acquisition of established
financial service organizations, primarily commercial banks to the extent
suitable candidates may be identified and by expanding into potential high
growth areas. In integrating acquisitions, PNB focuses on, among other
actions, implementing the policies established at Citizens Bank, improving
asset quality and the net interest margin and encouraging community
involvement.
Generally, PNB seeks to acquire banks or other financial institutions with
assets of $15 million to $60 million, located on the fringe of metropolitan or
potential high growth areas and within 100 miles of Princeton. In addition to
price and terms, the other factors considered by PNB in determining the
desirability of an acquisition candidate are the general financial condition,
earnings potential and quality of the management of the institution. There is
no assurance that any further acquisitions will be made.
PNB will also consider establishing branch facilities as a means of
expanding its presence into new market areas. PNB opened new branch facilities
in the Peru/LaSalle/Oglesby area in 1994, in Minooka in 1994, in Hampshire in
1995, and will be constructing a new branch facility in Henry during 1998.
CITIZENS FIRST NATIONAL BANK
Citizens Bank was organized in 1865 as a national bank under the National
Bank Act. Currently in its one hundred and thirty-third year, Citizens Bank
has fifteen offices in eleven different communities in north central
Illinois: Princeton, DePue, Genoa, Hampshire, Henry, Minooka, Oglesby, Peru,
Plano, Sandwich and Spring Valley.
Citizens Bank serves individuals, businesses and governmental bodies in
Bureau, LaSalle, Marshall, Grundy, Kane, Kendall, DeKalb and contiguous
counties. Citizens Bank operates a full-service community commercial bank and
trust business that offers a broad range of financial services to customers.
Their services consist primarily of commercial, real estate and
<PAGE> 4
agricultural lending, consumer deposit and financial services, and trust and
farm management services.
COMMERCIAL, REAL ESTATE AND AGRICULTURAL LENDING
Citizens Bank's commercial loan department provides secured and unsecured
loans, including real estate loans, to companies and individuals for business
purposes and to governmental units within the Bank's market area. As of
December 31, 1997, Citizens Bank had commercial loans of $43.6 million (15.9%
of the Bank's total loan portfolio) and commercial real estate loans of $42.6
million (15.5% of the Bank's total loan portfolio). Citizens Bank does not
have a concentration of commercial loans in any single industry or business.
Citizens Bank is one of the largest agricultural lenders in the State of
Illinois with all of its outstanding agricultural and agricultural real estate
loans primarily related to ventures within 30 miles of branch locations. As of
December 31, 1997, Citizens Bank had agricultural loans of $39.0 million and
agricultural real estate loans of $30.4 million, which represent approximately
14.2% and 11.1%, respectively, of the Bank's total loan portfolio.
Agricultural loans, many of which are secured by crops, machinery and real
estate, are provided to finance capital improvements and farm operations as
well as acquisitions of livestock and machinery. The agricultural loan
department, which has four lending officers, works closely with all
agricultural customers, including companies and individual farmers, and assists
in the preparation of budgets and cash flow projections for the ensuing crop
year. These budgets and cash flow projections are monitored closely during the
year. In addition, Citizens Bank works closely with governmental agencies,
including the Farm Service Agency, to assist agricultural customers in
obtaining credit enhancement products such as loan guaranties.
In accordance with its loan policy, Citizens Bank maintains a diversified
loan portfolio. One of Citizens Bank's goals is to further diversify its loan
portfolio. Further diversification will be accomplished through loans made by
the Bank and through loans acquired as a result of PNB's acquisition strategy.
As part of its loan policy and community banking approach, Citizens Bank does
not actively buy loans from or participate its non-consumer loans to other
lending institutions, particularly institutions outside its market area. In
connection with its credit relationships, Citizens Bank encourages commercial
and agricultural borrowers to maintain deposit accounts at the Bank.
PERSONAL FINANCIAL SERVICES
The principal consumer services offered by Citizens Bank are demand, savings
and time deposit accounts, home mortgage loans, installment loans, credit card
loans, and brokerage services.
<PAGE> 5
One of the strengths of Citizens Bank is the stability of its retail deposit
base. This is due primarily to the Bank's service oriented competitive
strategy and the economically diverse population of the counties encompassing
the fifteen banking offices. These locations provide convenience for customers
and visibility for Citizens Bank. A variety of marketing strategies are used
to attract and retain stable depositors, the most important of which is the
officer call program. All officers of the Bank call on customers and potential
customers of the Bank to maintain and develop deposit relationships. In 1997,
3,848 calls were completed with customers and non-customers. As a direct
result of those calls, 522 additional account relationships were added to the
Bank's retail base.
Marketing efforts in 1997 were highlighted by three deposit promotions,
two of which were Certificate of Deposits. A 21-month certificate was offered
midway through the year and generated $2.7 million in new deposits. It was
followed by a 24-month certificate of deposit promotion which was highly
successful generating in excess of $9.2 million in new deposits. The
Certificate of Deposit promotions were followed by a product developed
exclusively for the mature market and patterned after the Bank's highly
successful Advantage account. Classic 50 and Classic 50 Gold combine checking
accounts with many other money-saving features built around traveling. As of
December 31, there were approximately 1,500 accounts in this program of which
nearly 7% were brand new to the Bank. Total deposits in the Classic 50
checking program were $8.2 million as of December 31, 1997.
Citizens Bank is active in consumer and mortgage lending with approximately
$75.6 million in home mortgage loans (27.5% of the Bank's total loan portfolio)
and $37.5 million in consumer installment loans (13.6% of the Bank's total loan
portfolio) as of December 31, 1997. To better serve its retail customers,
Citizens Bank is active in the secondary residential mortgage market. As a
matter of policy, Citizens Bank does not hold long-term, fixed rate loans.
However, servicing of those loans is maintained, with approximately $42,399,000
of unpaid balances being serviced as of December 31, 1997. Customers receive a
higher level of quality service with this arrangement.
Citizens Bank maintains fourteen automated teller machines. The Bank is a
member of Magic Line which encompasses all of the major nationwide networks
such as CIRRUS, PLUS, and STAR. To enhance customer service and convenience,
Citizens Bank intends to introduce its new ATM & Check Card in the second
quarter of 1998.
Citizens Bank completed the first phase of an intensive sales training,
which included team coaching, goals and measurements, and rewards and
recognition. In 1997, the number of referrals increased over 200%, the
number of sales increased nearly 250% , and total incentives to the employees
exceeded $65,000, an increase of over 200%.
<PAGE> 6
TRUST DEPARTMENT AND FARM MANAGEMENT SERVICES
Gross revenue from Trust and Farm Management services in 1997 exceeded $1
million for the first time ever, at $1,066,886. Fees for trust services were
$816,897 in 1997, compared to $735,000 in 1996. Farm Management fees were
$249,989 in 1997 as compared to $199,000 in 1996. These increases represented
a 14.23% overall increase in fee income for the year ended December 31, 1997.
Total trust assets as of December 31 ,1997 exceeded $167,000,000,
representing an increase of $17,000,000 (or 11.33%) over the total at December
31, 1996. The increase in fee income and assets under management resulted
from a combination of new business development, increased market value fees due
to higher equity values, and increases in equity investment as a percentage of
total Trust assets. The Trust Department currently has 732 total accounts and
has more than 17,000 acres of farm land under management.
COMPETITION
PNB is committed to community banking and to providing quality products and
services at competitive loan rates and deposit pricing in order to remain
competitive in its north central Illinois market. Citizens Bank competes with
both small, locally owned banks as well as regional financial institutions
which have numerous offices. The Bank competes with these organizations, as
well as with savings and loan associations, credit unions, mortgage companies,
insurance companies and other local financial institutions, for deposits, loans
and other business. The principal methods of competition include loan and
deposit pricing, the types and quality of services provided, and advertising
and marketing programs.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under federal and
state law. The following information describes the material banking provisions
affecting PNB and the Bank, and such discussion is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulations may have a material effect on the business of PNB and the Bank.
PNB is registered as a "bank holding company" with the Federal Reserve,
and is subject to supervision by the Federal Reserve Board (the "FRB") under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"). PNB
is required to file with the FRB periodic reports and such additional
information as the FRB may require pursuant to the BHC Act. The FRB examines
PNB, and may examine the Bank.
<PAGE> 7
The BHC Act requires prior FRB approval for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or
control of more than 5% of the voting shares or substantially all the assets of
any bank, or for a merger or consolidation of a bank holding company with
another bank holding company. With certain exceptions, the BHC Act prohibits a
bank holding company from acquiring direct or indirect ownership or control of
voting shares of any company which is not a bank or bank holding company and
from engaging directly or indirectly in any activity other than banking or
managing or controlling banks or performing services for its authorized
subsidiaries. A bank holding company may, however, engage in or acquire an
interest in a company that engages in activities which the FRB has determined
by regulation or order to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
PNB is a legal entity separate and distinct from the Bank. The major source
of PNB's revenue is dividends PNB receives from the Bank. The right of PNB to
participate as a stockholder in any distribution of assets of the Bank upon its
liquidation or reorganization or otherwise is subject to the prior claims of
creditors of the Bank. The Bank is subject to claims by creditors for
long-term and short-term debt obligations, including substantial obligations
for federal funds purchased and securities sold under repurchase agreements, as
well as deposit liabilities.
For the Bank, prior approval of the Office of the Comptroller of the
Currency (the "OCC") is required if dividends declared by the Bank in any
calendar year will exceed its net profits for that year combined with its
retained profits for the preceding two years. In addition, a national bank may
not pay a dividend greater than its undivided profits then on hand less the
amount of any losses and the amount of statutory bad debts in excess of the
balance of the bank's allowance for possible credit losses. "Bad debts" are
generally defined to include the principal amounts of loans which are in
arrears with respect to interest by six months or more unless such loans are
well secured and in the process of collection. As of December 31, 1997,
national banking regulations and capital guidelines will permit the Bank to
distribute approximately $3,719,000 plus any 1998 income of the Bank as
dividends without prior approval from the national banking regulators.
Additionally, future payments of dividends by the Bank would be dependent on
individual regulatory capital requirements and levels of profitability. The
ability of the Bank to pay dividends may be further restricted as a result of
regulatory policies and guidelines relating to dividend payments and capital
adequacy.
Federal laws limit the transfer of funds by the Bank to PNB in the form of
loans or extensions of credit, investments or purchases of assets. Transfers
of this kind to PNB by the Bank are limited to 10% in the aggregate of the
Bank's capital and
<PAGE> 8
surplus, and are also subject to certain collateral requirements. These
transactions, as well as other transactions between the Bank and PNB, must also
be on terms substantially the same as, or at least as favorable as, those
prevailing at the time for comparable transactions with nonaffiliated companies
or, in the absence of comparable transactions, on terms, or under
circumstances, including credit standards, that would be offered to, or would
apply to, nonaffiliated companies.
It is the policy of the FRB that PNB is expected to act as a source of
financial strength to the Bank and to commit resources to support the Bank.
The FRB takes the position that in implementing this policy, it may require PNB
to provide such support when PNB otherwise would not consider itself able to do
so.
The various federal bank regulators, including the FRB and the OCC, have
adopted risk-based capital requirements for assessing bank holding company and
bank capital adequacy. These standards establish minimum capital standards in
relation to assets and off-balance sheet exposures, as adjusted for credit
risks. Capital is classified into two tiers. For bank holding companies, Tier
1 or "core" capital consists of common shareholders' equity, perpetual
preferred stock (subject to certain limitations) and minority interests in the
common equity accounts of consolidated subsidiaries, and is reduced by goodwill
and certain investments in other corporations ("Tier 1 Capital"). Tier 2
capital consists of (subject to certain conditions and limitations) the
allowance for possible credit losses, perpetual preferred stock, "hybrid
capital instruments," perpetual debt and mandatory convertible debt securities,
and term subordinated debt and intermediate-term preferred stock ("Tier 2
Capital"). Total capital is the sum of Tier 1 Capital and Tier 2 Capital
(limited to 100% of Tier 1 Capital).
Under the risk-adjusted capital standards, a minimum total capital to
risk-weighted assets ratio of 8% is required and Tier l Capital must be at
least 50% of total capital. The FRB and OCC also have adopted a minimum
leverage ratio of Tier 1 Capital to total assets of 3%. The 3% Tier 1 Capital
to total assets ratio constitutes the leverage standard for bank holding
companies and national banks, and is used in conjunction with the risk-based
ratio in determining the overall capital adequacy of banking organizations.
The FRB and the OCC have emphasized that the foregoing standards are
supervisory minimums and that an institution would be permitted to maintain
such minimum levels of capital only if it were rated in the highest category
under the regulatory rating systems for bank holding companies and banks. All
other bank holding companies and banks are required to maintain a leverage
ratio of 3% plus at least 1% to 2% of additional capital. These rules further
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to
<PAGE> 9
maintain capital positions substantially above the minimum supervisory levels
and comparable to peer group averages, without significant reliance on
intangible assets. At December 31, 1997, PNB had a risk-based total capital
ratio of 13.88% and a Tier 1 capital to risk-based assets ratio of 13.23%,
which exceeds the regulatory requirements for a well-capitalized bank of 10%
and 6%, respectively. Additionally, PNB had a leverage ratio of 8.78%, which
also compares favorably to the regulatory requirement for a well-capitalized
bank of 5%. Accordingly, PNB maintains a very strong capital position.
The FDIC has a risk-based assessment system for the deposit insurance
provided to depositors at depository institutions whereby assessments to each
institution are calculated upon the probability that the insurance fund will
incur a loss with respect to the institution, the likely amount of such loss,
and the revenue needs of the insurance fund. The system utilizes nine separate
assessment classifications based on an entity's capital level and supervisory
evaluation. Risk classifications of all insured institutions is made by the
FDIC for each quarterly assessment period. During 1997, the Bank was
classified as well-capitalized, affording it the lowest premium assessment. The
Bank's deposits are predominantly insured through the Bank Insurance Fund (the
"BIF") and certain deposits held by the Bank are insured through the Savings
Association Insurance Fund (the "SAIF"). The BIF and SAIF are both
administered by the FDIC.
As of September 30, 1996, PNB paid a one-time SAIF assessment of $336,000,
which was mandated by the Federal government to recapitalize that fund.
Accordingly, the SAIF fund reached its required reserve ratio of 1.25% of total
insured deposits, and a partial refund was issued for the first quarter of 1997
in the amount of $37,000.
The BIF assessment rate currently ranges from zero to 27 cents per $100 of
domestic deposits, with Citizens Bank assessed at a rate 3 cents. The FDIC may
increase or decrease the assessment rate schedule on a semiannual basis. An
increase in the rate assessed on PNB's banking subsidiary could have an adverse
effect on PNB's earnings, depending on the amount of the increase.
Deposits insured by SAIF are currently assessed at the BIF rate of zero to
27 cents per $100 of domestic deposits, with Citizens Bank assessed at a
rate of 16 cents. The SAIF assessment rate may increase or decrease as is
necessary to maintain the designated SAIF reserve ratio of 1.25% of SAIF
insured deposits.
All FDIC-insured depository institutions must pay an annual assessment to
provide funds for the payment of interest on bonds issued by the Financing
Corporation, a federal corporation chartered under the authority of the Federal
Housing Finance
<PAGE> 10
Board. The bonds (commonly referred to as FICO bonds) were issued to
capitalize the Federal Savings and Loan Insurance Corporation. Until December
31, 1999 or when the last savings and loan association ceases to exist,
whichever occurs first, depository institutions will pay approximately 6.4
cents per $100 of SAIF-assessable deposits and approximately 1.3 cents per $100
of BIF-assessable deposits.
Subject to certain conditions, BIF and SAIF will be merged into one
insurance fund effective January 1, 1999.
Since September 29, 1995, federal law has permitted adequately capitalized
and adequately managed bank holding companies to acquire banks across state
lines, without regard to whether the transaction is prohibited by state law;
however, they are required to maintain the acquired institutions as
separately chartered institutions. Any state law relating to the minimum age
of target banks (not to exceed five years) applies. The FRB is not permitted
to approve any acquisition if, after the acquisition, the bank holding company
would control more than 10% of the deposits of insured depository institutions
nationwide or 30% or more of the deposits in the state where the target bank is
located. The FRB could approve an acquisition, notwithstanding the 30% limit,
if the state waives the limit either by state regulation or order of the
appropriate state official.
Beginning in 1997, banks are now permitted to merge with one another across
state lines and thereby create a main bank with branches in separate states.
After establishing branches in a state through an interstate merger
transaction, the bank could establish and acquire additional branches at any
location in the state where any bank involved in the merger could have
established or acquired branches under applicable federal or state law.
PNB is currently permitted to acquire banks located in any state outside
Illinois and any organization located outside Illinois is permitted to acquire
PNB. These provisions should not materially affect PNB because PNB does not
have any current plans to acquire institutions located outside Illinois and
because Illinois law, for several years, has permitted institutions located in
any state of the United States to acquire banks and bank holding companies
within Illinois subject to the ability of Illinois institutions to acquire
banks and bank holding companies in such other state on similar conditions as
Illinois law. The fact that Illinois has decided to permit interstate
branching means that if PNB did acquire an institution outside Illinois, PNB
could, if it deemed it appropriate, convert such institution's offices into
branches of the Bank or any other banking subsidiary then in existence. PNB,
however, does not have any current plans to acquire any banking organization
located outside the state of Illinois.
<PAGE> 11
EMPLOYEES
PNB presently has no employees. However, certain of the employees and
executive officers of Citizens Bank provide their services to PNB. A monthly
fee for these services is paid by PNB to Citizens Bank. This fee is computed
annually and is based upon an average of the number of hours worked during the
year. As of December 31, 1997, Citizens Bank employed 181 full-time and 48
part-time employees. The Bank offers a variety of employee benefits. Citizens
Bank employees are not represented by a union or a collective bargaining
agreement. The management of PNB considers its employee relations to be
excellent.
PNB believes one of its strengths is its ability to attract and retain
experienced and well-trained personnel who have a knowledge of the market areas
in which it operates. Management believes that PNB generally has an easier
time attracting and retaining quality employees than other banks in north
central Illinois primarily because its size and management style affords
greater opportunities to employees and allows direct participation and
development of management and banking skills.
In order to implement PNB's community banking philosophy and to promote
themselves as community oriented organizations, the Bank has a formal officer
call program. Each officer of the Bank calls on existing or potential
customers and is expected to become actively involved in leadership positions
in community organizations. As of December 31, 1997, employees of the Bank
participated in approximately 100 community organizations, serving over 15,000
hours of community service in 1997.
ITEM 2. PROPERTIES
PNB's headquarters and Citizens Bank's principal offices are located at 606
South Main Street, Princeton, Illinois. Also located at this address is an
annex completed in 1991 that contains the trust and farm management
departments. The two buildings at this location are owned by Citizens Bank and
contain approximately 36,000 square feet of space, all of which is occupied by
PNB and Citizens Bank. Citizens Bank also has two drive-up facilities in
Princeton and branch offices in DePue, Genoa, Hampshire, Henry, Minooka,
Oglesby, Peru, Plano, Sandwich and Spring Valley. Citizens Bank is the owner
of each of these facilities, with the exception of Plano where the entire space
is rented. None of the facilities owned by the Bank are subject to a mortgage.
ITEM 3. LEGAL PROCEEDINGS
The Bank is subject to legal proceedings and claims that arise in the
ordinary course of business. Although management of
<PAGE> 12
the Corporation cannot predict the ultimate outcome of such matters, it
believes that the ultimate resolution of these matters will not have a material
adverse effect on the Corporation or the Bank, or the Corporation's
consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
SUPPLEMENTAL ITEM - EXECUTIVE OFFICERS
Tony J. Sorcic President & Chief Executive Officer
James B. Miller Executive Vice-President
Mr. Sorcic has been President and Chief Executive Officer of PNB since
January, 1997, and first became a director of PNB in 1986. He joined Citizens
Bank in 1981 as Assistant Vice-President of Operations, became Executive
Vice-President in 1986, and was named President in 1995.
Mr. Miller joined Citizens Bank in 1979 as an agricultural loan officer and
has been the Executive Vice-President of PNB since 1996. He currently is the
Executive Vice-President and Senior Loan Manager of Citizens Bank.
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND DIVIDENDS
Since May 15, 1992, PNB's Common Stock has been listed on The NASDAQ Stock
Market under the symbol PNBC.
The table below indicates the high and low bid prices, and the dividends
declared per share for the Common Stock during the periods indicated. The
prices shown reflect interdealer prices and include retail markups, markdowns
or commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Cash
Prices Dividends
High Low Declared
------- ------- ---------
<S> <C> <C> <C>
1995
- ----
First Quarter $ 13 1/4 $ 12 1/4 $.09
Second Quarter 14 1/4 12 1/4 .09
Third Quarter 16 1/4 13 1/2 .09
Fourth Quarter 17 1/4 13 1/2 .09
1996
- ----
First Quarter $ 18 $ 16 1/2 $.09
Second Quarter 19 1/4 18 .09
Third Quarter 19 1/4 18 1/4 .10
Fourth Quarter 19 1/2 18 1/2 .10
1997
- ----
First Quarter $ 20 $ 17 1/2 $.10
Second Quarter 19 1/2 18 .10
Third Quarter 24 3/4 18 1/2 .11
Fourth Quarter 26 1/2 23 1/2 .11
</TABLE>
On December 31, 1997, PNB had 569 holders of record of its Common Stock.
<PAGE> 14
The holders of the Common Stock are entitled to receive such dividends as
are declared by the Board of Directors of PNB, which considers payment of
dividends quarterly. The ability of PNB to pay dividends is dependent upon its
receipt of dividends from the Bank. In determining cash dividends, the Board
of Directors considers the earnings, capital requirements, debt servicing
requirements, financial ratio guidelines established by the Board, the
financial condition of PNB, and other relevant factors. The Bank's ability to
pay dividends to PNB is subject to regulatory restrictions. See "Supervision
and Regulation."
PNB has paid regular cash dividends on the Common Stock since it commenced
operations in 1982. PNB currently anticipates that cash dividends comparable
to those that have been paid in the past will continue to be paid in the
future. There can be no assurance, however, that any such dividends will be
paid by PNB or that such dividends will not be reduced or eliminated in the
future. The timing and amount of dividends will depend upon the earnings,
capital requirements and financial condition of PNB and the Bank as well as the
general economic conditions and other relevant factors affecting PNB and the
Bank. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<PAGE> 15
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME
Interest income $ 31,312 $ 29,114 $ 27,645 $ 25,765 $ 22,439
Interest expense 15,541 14,596 14,518 12,851 10,910
Net interest income 15,771 14,518 13,127 12,914 11,529
Provision (credit) for possible loan losses 590 41 (101) (286) (176)
Non-interest income 3,365 2,860 2,553 2,574 2,346
Non-interest expense 12,662 12,864 16,247 11,035 9,240
Income (loss) before federal income tax 5,884 4,473 (466) 4,739 4,811
Federal income tax (benefit) 1,525 1,046 (824) 981 1,061
Net income 4,359 3,427 358 3,758 3,750
Per Share Data (a)
Net income $ 1.61 $ 1.26 $ 0.13 $ 1.39 $ 1.38
Book value (at end of period) 15.94 14.76 13.85 12.78 13.07
Cash dividends declared 0.42 0.38 0.36 0.33 0.32
Dividend payout ratio 26.2% 30.2 272.9% 23.8% 23.1%
Selected Balances (at end of period)
Total assets $449,660 $420,407 $402,393 $400,531 $345,604
Earning assets 412,974 379,278 364,177 364,726 316,538
Investments 119,540 117,028 127,094 154,957 131,038
Gross loans 274,725 258,118 232,693 204,672 170,913
Allowance for possible loan losses 1,830 1,630 2,034 2,100 2,218
Deposits 385,940 358,701 346,285 352,987 302,208
Long-term debt 3,750 4,350 4,700 5,300 -0-
Stockholders' equity 42,668 40,197 37,646 34,636 35,424
Selected Financial Ratios
Net income to average
stockholders' equity 10.56% 8.91 1.01% 10.77% 11.24%
Net income to average assets 1.02 0.84 0.09 0.94 1.12
Average stockholders' equity
to average assets 9.66 9.48 9.03 8.74 10.00
Average earning assets
to average assets 91.64 91.37 91.90 92.24 91.78
Non-performing loans to total
loans at end of period
(net of unearned interest) 0.30 0.45 0.39 0.47 0.37
Tier 1 capital to average adjusted assets 8.78 8.59 8.96 8.87 10.20
Risk based capital to risk
adjusted assets 13.88 13.88 15.17 16.81 18.56
Net loans charged off (recovered) to
average loans 0.15 0.18 (0.02) 0.06 (0.10)
Allowance for possible loan losses
to total loans at end of period
(net of unearned interest) 0.67 0.63 0.87 1.03 1.30
Average interest-bearing deposits
to average deposits 90.00 90.07 90.32 91.04 90.27
Average non-interest-bearing deposits
to average deposits 10.00 9.93 9.68 8.96 9.73
</TABLE>
(a) Per share data prior to 1994 has been restated to reflect the stock
dividend (3 for 2) split declared in 1994.
<PAGE> 16
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands except per share data)
The following discussion and analysis provides information about the
Corporation's financial condition and results of operations for the years ended
December 31, 1997, 1996, and 1995. 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
Income for the year increased 27.2% to a record level of $4,359. This
resulted from a stronger net interest margin, continued growth in fee income
and an expanding asset base. Basic earnings per share increased to $1.61, which
compared favorably to $1.26 in 1996.
Net interest income also reached a record high of $15,771, an 8.6%
increase over the 1996 level of $14,518. Improving yields in the investment
portfolio and strong loan growth contributed to this increase.
Other income increased 17.7% to a record level of $3,365 from $2,860 in
1996. Service charges on deposit accounts experienced significant growth in
1997. Fee income of the trust and farm management department surpassed the
$1,000 level reaching $1,067. This is a 14.2% increase. Security gains of $97
compared favorably to security losses of $24 in 1996.
Assets at year-end reached $449,660 versus $420,407 at the prior year-end.
Strong sales efforts by the staff and new product acceptance by the market
areas contributed to asset growth which surpassed our expectations.
The table below summarizes the changes in the Corporation's assets,
equity, and net income during the period 1995 to 1997.
<TABLE>
<CAPTION>
ASSETS AT PERCENT EQUITY AT PERCENT NET PERCENT
YEAR-END CHANGE YEAR-END CHANGE INCOME CHANGE
--------- ------- --------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
1997 $449,660 6.96% $42,668 6.15% $4,359 27.20%
1996 420,407 4.48 40,197 6.78 3,427 857.26
1995 402,393 .46 37,646 8.69 358 (90.47)
</TABLE>
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income increased 8.6% in 1997 as
compared to an increase of 10.6% in 1996 and 1.5% in 1995. The net yield on
interest-earning assets increased from 8.09% in 1996 to 8.22% in 1997. The
average rate on interest-bearing liabilities increased to 4.51% from 4.44% in
1996. The resulting net yield on average interest-earning assets on a fully
taxable equivalent basis increased from 4.15% in 1996 to 4.25% in 1997. This 10
basis point increase resulted from the increase in loans outstanding and an
improvement in the yield on the investment portfolio. Both had a positive
impact on net income.
<PAGE> 17
The following table sets forth details of average balances, interest
income and expense, and resulting rates for the Corporation for the past three
years, reported on a fully taxable equivalent basis using a tax rate of 34%.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------------------------- -------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVERAGE INTEREST-EARNING ASSETS
Interest-bearing deposits $ 4,911 $ 267 5.44% $ 412 $ 23 5.58% $ 389 $ 23 5.91%
Taxable investment securities 82,806 4,976 6.01 92,313 5,135 5.56 115,124 5,940 5.16
Tax-exempt investment securities (a) 30,824 2,458 7.97 30,049 2,473 8.23 24,724 2,177 8.81
Federal funds sold 5,465 297 5.43 2,654 140 5.28 1,989 112 5.63
Net loans (a) (b) 267,312 24,185 9.05 245,324 22,211 9.05 217,617 20,166 9.27
-------- ------- -------- ------- -------- -------
Total interest-earning assets 391,318 32,183 8.22 370,752 29,982 8.09 359,843 28,418 7.90
-------- ------- -------- ------- -------- -------
Average non-interest-earning assets 35,696 35,035 31,706
-------- -------- --------
Total average assets $427,014 $405,787 $391,549
======== ======== ========
AVERAGE INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits $ 84,424 2,420 2.87 $ 76,736 2,016 2.63 $ 79,267 2,310 2.91
Savings deposits 54,543 1,631 2.99 53,101 1,587 2.99 49,624 1,497 3.02
Time deposits 192,250 10,665 5.55 186,054 10,170 5.47 180,424 9,906 5.49
Interest-bearing demand notes
issued to the U. S. Treasury 1,117 64 5.73 1,059 52 4.91 1,173 68 5.80
Federal funds purchased and
securities repurchase agreements 8,262 408 4.94 6,975 350 5.02 5,065 283 5.59
Long-term borrowings 4,120 353 8.57 4,998 421 8.42 5,066 454 8.96
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 344,716 15,541 4.51 328,923 14,596 4.44 320,619 14,518 4.53
-------- ------- -------- ------- -------- -------
Net yield on average
interest-earning assets $16,642 4.25% $15,386 4.15% $13,900 3.86%
======= ==== ======= ==== ======= ====
Average non-interest-bearing liabilities 41,039 38,412 35,565
Average stockholders' equity 41,259 38,452 35,365
-------- -------- --------
Total average liabilities and
stockholders' equity $427,014 $405,787 $391,549
======== ======== ========
</TABLE>
(a) Interest income on non-taxable investment securities and non-taxable loans
includes the effects of taxable equivalent adjustments using a tax rate of 34%
in adjusting interest on tax-exempt securities and tax-exempt loans to a fully
taxable basis.
(b) Includes $116 attributable to interest from non-accrual loans.
In 1996, the net yield on interest-earning assets increased to 8.09% from
7.90% in 1995, while the average rate on interest-bearing liabilities decreased
from 4.53% in 1995, to 4.44% in 1996. The resulting net yield on
interest-earning assets on a fully taxable equivalent basis increased from
3.86% in 1995, to 4.15% in 1996. This 29 basis point increase also resulted
from the increase in loans outstanding and improvements in product pricing, and
had a positive impact on net income. The increase is notable considering the
Sandwich acquisition included deposits only.
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands except per share data)
The following table describes changes in net interest income attributable
to changes in the volume of interest-earning assets and interest-bearing
liabilities compared to changes in interest rates.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------------
1997 COMPARED TO 1996 1996 COMPARED TO 1995 1995 COMPARED TO 1994
VOLUME(A) RATE(A) NET VOLUME(A) RATE(A) NET VOLUME(A) RATE(A) NET
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST FROM INTEREST-EARNING ASSETS
Interest-bearing deposits $ 251 $ (7) $ 244 $ 1 $ (1) $ -0- $ -0- $ 11 $ 11
Taxable investment securities (552) 393 (159) (1,221) 416 (805) (1,305) 127 (1,178)
Tax-exempt investment securities (b) 63 (78) (15) 454 (158) 296 75 (33) 42
Federal funds sold 151 6 157 36 (8) 28 (67) 53 (14)
Net loans (c) 1,974 -0- 1,974 2,546 (501) 2,045 1,611 1,397 3,008
------- ------ ------ ------ ------ ------ ------ ------ ------
Total income from interest-
earning assets 1,887 314 2,201 1,816 (252) 1,564 314 1,555 1,869
------- ------ ------ ------ ------ ------ ------ ------ ------
EXPENSE OF INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits 211 193 404 (73) (221) (294) (519) 12 (507)
Savings deposits 44 -0- 44 105 (15) 90 (74) (22) (96)
Time deposits 343 152 495 304 (40) 264 475 1,581 2,056
Interest-bearing demand notes issued
to the U.S. Treasury 3 9 12 (7) (9) (16) 6 20 26
Federal funds purchased and customer
repurchase agreements 64 (6) 58 101 (34) 67 80 60 140
Long-term borrowings (75) 7 (68) (6) (27) (33) (33) 81 48
------- ------ ------ ------ ------ ------ ------ ------ ------
Total expense from interest-
bearing liabilities 590 355 945 424 (346) 78 (65) 1,732 1,667
------- ------ ------ ------ ------ ------ ------ ------ ------
Net difference $1,297 $ (41) $1,256 $1,392 $ 94 $1,486 $ 379 $ (177) $ 202
======= ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
(a) The change in interest due to both rate and volume has been allocated
equally.
(b) Interest income on non-taxable investment securities includes the effects
of taxable equivalent adjustments using a tax rate of 34% in adjusting
interest on tax-exempt securities to a fully taxable basis.
(c) Includes loan fee income of $787 in 1997, $823 in 1996, and $707 in 1995.
Interest income on loans includes the effect of tax equivalent adjustments
for non-taxable loans using a tax rate of 34% in adjusting interest on
tax-exempt loans to a fully taxable basis. Includes non-accrual loans,
with year-end balances of $810 in 1997, $1,157 in 1996, and $808 in 1995.
NON-INTEREST INCOME. The Corporation continues to experience strong growth
in non-interest income, with all categories of non-interest income except for
loan servicing fees increasing in 1997 when compared to 1996. Total
non-interest income was up $505, or 17.7%, over 1996 performance. Service
charges on deposit accounts increased by $192 (16.3%), the result of overdraft
charges and the growth in fee-based checking account programs. Trust and farm
management fees were both up significantly from 1996, as more customers
utilized these specialized services. During 1997, the Corporation also realized
$97 in net gains on securities transactions, compared to a net loss of $24 in
1996. 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1997 1996 1995
<S> <C> <C> <C>
Trust income $ 817 $ 735 $ 709
Farm management fees 250 199 161
Service charges on deposit accounts 1,368 1,176 1,093
Other service charges 445 427 258
Securities transactions, net 97 (24) 29
Other operating income 211 144 121
Loan servicing fees and other charges 177 203 182
------ ------ ------
Total non-interest income $3,365 $2,860 $2,553
====== ====== ======
Non-interest income
to average total assets .79% .70% .65%
</TABLE>
<PAGE> 19
In 1996, non-interest income increased by $307 to $2,860, up 12.0% from
1995's total of $2,553. Likewise, non-interest income as a percentage of
average assets increased from .65% to .70% over the same period. With the
exception of a net loss from securities transactions, all categories showed
increases during 1996 when compared to 1995. The largest increase was in the
other service charges category which increased by $169 (or 65.5%), a result of
an increase in fee income generated during the first full year of the
subsidiary bank's credit card product. Service charges on deposits also had a
significant increase in 1996 ($83 or 7.6%).
NON-INTEREST EXPENSE. Non-interest expense decreased by $202 (or 1.6%) in
1997 to $12,662 from $12,864 in 1996. Salaries and benefits were up $444 (6.9%)
from 1996, with a full year of salaries and benefits for the Sandwich staff
representing most of the increase. Goodwill and intangible assets amortization
also increased in 1997, up $108 (30.3%), the direct result of a full year's
goodwill amortization related to the Sandwich acquisition. FDIC/OCC assessments
were down $436 (75.2%) from 1996, when the Corporation paid a one-time SAIF
assessment of $336. Trust customer charges were down $309 (80.9%) from 1996,
and represented primarily normal operating expenses in 1997, due to the
resolution of the trust matter (see Note 15 in the Notes to Consolidated
Financial Statements). The following table provides non-interest expense, and
non-interest expense to average total assets for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
<S> <C> <C> <C>
Salaries and employee benefits $ 6,866 $ 6,422 $ 5,932
Occupancy 964 955 911
Equipment 858 851 810
FDIC/OCC assessments 144 580 572
Goodwill and intangible assets amortization 464 356 213
Data processing 677 595 487
Trust customer charges 73 382 5,043
Other operating expense 2,616 2,723 2,279
------- ------- -------
Total non-interest expense $12,662 $12,864 $16,247
======= ======= =======
Total non-interest expense
to average total assets 2.97% 3.17% 4.15%
</TABLE>
Non-interest expense decreased by $3,383 (or 20.8%) in 1996 to $12,864
from $16,247 in 1995. Trust department expenses decreased by $4,661 due to the
vast majority of the subsidiary bank's trust department matter being settled in
1995 (see Note 15 in the Notes to Consolidated Financial Statements). However,
all other categories showed increases with the largest increases in salaries
and employee benefits (up $490 or 8.3%), other operating expenses (up $444 or
19.5%), and goodwill amortization (up $143 or 67.1%). The Sandwich acquisition
accounts for part of the increase in salaries and benefits, and all of the
increase in goodwill amortization. The increase in other operating expenses is
attributable to a full year of expenses associated with the subsidiary bank's
credit card product, increased loan administrative costs, and other increases
resulting from the Sandwich acquisition. Again, in 1996, the Corporation paid a
one-time SAIF assessment of $336. This assessment was mandated by the Federal
government to recapitalize that fund which helped offset lower premiums paid
during 1996 resulting in no increase in FDIC/OCC assessments for 1996 compared
to 1995.
NET INCOME. Net income for 1997 was $4,359 (or $1.61 per share), an
increase of 27.2% from $3,427 (or $1.26 per share) in 1996. The increase is
attributable to continued improvement in the net interest margin, increased
other operating income, and a decrease in other operating expenses. Net income
for 1996 increased by 857.3% from $358 in 1995 (or $.13 per share). The
increase is attributable to the decrease in expenses incurred in resolving the
trust matter of the subsidiary bank from $5,043 in 1995 to $382 in 1996.
ANALYSIS OF FINANCIAL CONDITION
LOANS. The Corporation's loan portfolio largely reflects the profile of
the communities in which it operates. The Corporation essentially makes four
types of loans: agricultural, commercial, real estate, and installment. The
Corporation has no foreign loans. The following table summarizes the
Corporation's loan portfolio:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
% OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------------- ----------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agricultural $ 38,991 14.2% $ 36,030 14.0% $ 33,106 14.2% $ 30,977 15.1% $ 30,696 18.0%
Commercial 43,566 15.9 38,410 14.8 34,687 14.9 35,863 17.5 41,973 24.5
Real Estate
1-4 family residences 75,607 27.5 72,460 28.1 63,824 27.4 59,470 29.1 30,225 17.7
Agricultural 30,434 11.1 28,374 11.0 23,148 10.0 20,808 10.2 17,309 10.1
Construction 6,030 2.2 4,160 1.6 3,116 1.3 853 0.4 2,594 1.5
Commercial 42,617 15.5 41,170 16.0 37,378 16.1 31,272 15.3 27,334 16.0
-------- -------- -------- -------- --------
Real Estate Total 154,688 56.3 146,164 56.7 127,466 54.8 112,403 55.0 77,462 45.3
Installment 37,480 13.6 37,514 14.5 37,434 16.1 25,429 12.4 20,782 12.2
-------- -------- -------- -------- --------
Total loans $274,725 100.0% $258,118 100.0% $232,693 100.0% $204,672 100.0% $170,913 100.0%
======== ======== ======== ======== ========
Total assets $449,660 $420,407 $402,393 $400,531 $345,604
Loans to total assets 61.1% 61.4% 57.8% 51.1% 49.5%
</TABLE>
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands except per share data)
Total loans increased $16.6 million or 6.4% in 1997 as compared to an
increase of $25.4 million or 10.9% in 1996. As in 1996, loan growth occurred
through demand in existing markets rather than through acquisitions.
The agricultural loan portfolio increased $3.0 million or 8.2% in 1997
from 1996. The agricultural portfolio grew as customers updated equipment,
purchased additional farmland, and borrowed additional operating funds due to
increased production costs. From 1995 to 1996, the portfolio increased $2.9
million in volume. As of year-end 1997, the Corporation had $1.6 million in
agricultural loans guaranteed by the Farm Service Agency (formerly Farmers Home
Administration). Grain farmers experienced a generally favorable year in 1997,
although dry weather in early summer limited corn yields. Prices were reduced
from 1996 extremes, but were generally profitable. Profitability in the
livestock sector varied. Strong pork prices early in the year offset later
declines, but cattle feeders experienced another difficult year.
While agricultural loan volume has continued to increase over the past few
years, the percentage of total loans in agricultural production and
agricultural real estate loans has decreased from 28.1% in 1993 to 25.3% in
1997. This reflects the increased diversification of the portfolio.
Short-term commercial loans increased $5.2 million or 13.4% in 1997. This
compares to an increase of $3.7 million or 10.7% in 1996. While business
activity remains strong in markets served by the Corporation, a large share of
the commercial loan demand has been for the acquisition or construction of
longer term assets, such as real estate loans. Competition for high quality
commercial and agricultural customers remains strong.
Real estate loan volume continued to increase in 1997, posting an $8.5
million or 5.8% increase over 1996. During 1997, residential loans increased
$3.1 million to $75.6 million. These loans comprise the largest single
component of the portfolio at 27.5%. Agricultural real estate loans posted an
increase of $2.0 million (or 7.2%) in a very competitive market. Commercial
real estate loans grew $1.5 million or 3.5%. Construction loans increased $2
million. Increased loan volumes reflect the high level of business expansion in
the Corporation's market areas and successful sales efforts on the part of the
staff.
Direct and indirect installment loans (loans to consumers) reflect little
change in volume in the portfolio in 1997 and 1996. The Corporation implemented
new products and marketing programs during the past few years to increase
penetration into its market areas. Long term, these products and programs are
expected to provide increased diversification of risk and enhanced
profitability. Increased focus on underwriting quality and awareness of general
consumer debt levels has tempered growth in this area of the subsidiary bank's
portfolio over the past two years.
Although the risk of non-payment for any reason exists with respect to all
loans, certain other more specific risks are associated with each type of loan.
The primary risks associated with commercial loans are quality of the
borrower's management and the impact of national economic factors. With respect
to agricultural loans, the primary risks are weather and, like commercial
loans, quality of borrower's management. Risks associated with real estate
loans include concentrations of loans in a loan type, such as commercial or
agricultural, and fluctuating land values. Installment loans also have risks
associated with concentrations of loans in a single type of loan. Installment
loans additionally face 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 .30% of total loans at year-end 1997 compared to .45% at year-end
1996. The overall low level of non-performing loans is a reflection of the
subsidiary bank's lending staff, credit policies, and management's emphasis on
asset quality. Potential problem credits are closely monitored by the lending
staff, and an independent loan review staff provides further assistance in
identifying problem situations. Loans over 90 days past due are normally either
charged off or, if well secured and in the process of collection, placed on a
non-accrual status. Reflecting the Corporation's sound credit policies, the
allowance for possible loan losses was 218.6% and 140.9% of non-performing
loans at year-end 1997 and 1996, 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, 1997 was $50. The Corporation had $93 in
other real estate owned as of December 31, 1996. The following table provides
information on the Corporation's non-performing loans since 1993:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Non-accrual $810 $1,157 $808 $573 $193
90 days past due and accruing 27 -0- 109 13 54
Restructured -0- -0- -0- 384 389
---- ------ ---- ---- ----
Total non-performing loans $837 $1,157 $917 $970 $636
==== ====== ==== ==== ====
Non-performing loans to total loans
(net of unearned interest) .30% .45% .39% .47% .37%
</TABLE>
<PAGE> 21
As of December 31, 1997 and 1996, loans which the Corporation's management
had serious doubts as to the ability of borrowers to comply with loan repayment
terms that were not carried as non-performing loans totaled approximately $396
(or .14% of the total loan portfolio), compared to $287 (or .11% of the total
loan portfolio), respectively.
ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance shown in the following
table represents a general allowance available to absorb future losses within
the entire portfolio:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding at end of
period (net of unearned interest) $274,605 $257,931 $232,471 $204,154 $170,168
Average amount of loans outstanding for
the period (net of unearned interest) $266,362 $244,027 $218,091 $199,911 $166,347
Allowance for possible loan
losses at beginning of period $ 1,630 $2,034 $ 2,100 $ 2,218 $ 2,233
Allowance of bank acquired -0- -0- -0- 280 -0-
Charge-offs:
Agricultural -0- -0- -0- 23 26
Commercial 171 140 6 55 19
Real estate-mortgage 1 4 -0- 22 -0-
Installment 834 1,221 557 268 123
-------- -------- -------- -------- --------
Total charge-offs 1,006 1,365 563 368 168
-------- -------- -------- -------- --------
Recoveries:
Agricultural 66 351 321 79 152
Commercial 65 31 23 11 24
Real estate-mortgage -0- 4 10 5 -0-
Installment 485 534 244 161 153
-------- -------- -------- -------- --------
Total recoveries 616 920 598 256 329
-------- -------- -------- -------- --------
Net loans charged off (recovered) 390 445 (35) 112 (161)
Provision (credit) for possible
loan losses 590 41 (101) (286) (176)
-------- -------- -------- -------- --------
Allowance for possible loan
losses at end of period $ 1,830 $ 1,630 $ 2,034 $ 2,100 $ 2,218
======== ======== ======== ======== ========
Net loans charged off
(recovered) to average loans .15% .18% (.02)% .06% (.10)%
Allowance for possible loan
losses to non-performing loans 218.64% 140.88% 221.81% 216.49% 348.74%
Allowance for possible loan
losses to total loans at end of
period (net of unearned interest) .67% .63% .87% 1.03% 1.30%
</TABLE>
The allowance for possible loan losses is based on factors that include
the overall composition of the loan portfolio, types of loans, past loss
experience, loan delinquencies, potential substandard and doubtful loans, and
such other factors that, in management's best judgment, deserve evaluation in
estimating possible loan losses. The adequacy of the allowance for possible
loan losses is monitored monthly during the ongoing, systematic review of the
loan portfolio by the loan review staff of the audit department of the
subsidiary bank. The results of these reviews are reported to the Board of
Directors of the subsidiary bank on a monthly basis and to the Board of
Directors of the Corporation on a quarterly basis. Monitoring and addressing
problem loan situations are primarily the responsibility of the subsidiary
bank's management and its Board of Directors.
More specifically, the Corporation calculates the appropriate level of the
allowance for possible loan losses on a monthly basis using historical
charge-offs for each loan type, substandard loans, and anticipated losses with
respect to specific loans. The amount in the allowance is based on the amount
of outstanding loans for each loan type multiplied by the ratio of actual
charge-offs to total loans for each loan type for the preceding five years,
plus the amount of anticipated losses with respect to specific loans, plus a
percentage of identified substandard or delinquent loans for each loan type. In
addition to management's assessment of the portfolio, the Corporation and the
subsidiary bank are examined periodically by regulatory agencies. Although the
regulatory agencies do not determine whether the subsidiary bank's allowance
for possible loan losses is adequate, such agencies do review the procedures
and policies followed by management of the subsidiary bank in establishing the
allowance.
Reflecting the Corporation's emphasis on asset quality, net charge-offs
were .15% of average total loans in 1997, and the allowance for possible loan
losses at year-end 1997 was $1.8 million, .67% of total loans, net of unearned
interest, and 218.6% of non-performing loans. Management considers the
allowance for possible loan losses adequate to meet potential losses as of
December 31, 1997.
During 1997, the bank charged off $834 in installment loans versus $1,221
during 1996. While charge-offs in installment loans were reduced, the amount
exceeds the subsidiary bank's historic average. Continued adherence to more
stringent underwriting guidelines is expected to reduce charge-offs even
further in the future. Charge-offs in 1997, continued loan growth overall, and
reduced potential recoveries of previous years' charge-offs have resulted in
the need to increase provisions for possible loan losses.
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands except per share data)
INVESTMENT SECURITIES. The objectives of the investment portfolio are to
provide the Corporation with a source of liquidity and a source of earnings.
The following table provides information on the book value of investment
securities as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1996
<S> <C> <C>
U.S. Treasury $ 34,770 $ 45,267
U.S. Government Agencies 29,369 28,175
State and municipal 32,633 30,776
Collateralized mortgage obligations 20,605 11,137
Other securities 2,163 1,673
-------- --------
Total $119,540 $117,028
======== ========
</TABLE>
Total investment securities increased by $2.5 million (or 2.1%) to $119.5
million, at December 31, 1997, compared to December 31, 1996. Decreases
totaling $10.5 million occurred in the U.S. Treasury category while increases
totaling $1.2 million occurred in the U.S. Government Agency category. The
shift from U.S. Treasuries to U.S. Government Agencies and collateralized
mortgage obligations will provide a higher total return and enhance the
performance of the overall securities portfolio.
DEPOSITS. Total average deposits increased 4.9% from $350.7 million to
$368.0 million. This increase was significantly higher than 1996 which was only
2.4% and a decrease in 1995 of 2.5%. Increased sales efforts along with active
deposit promotions contributed to this growth.
Interest-bearing demand deposits recorded the largest increase ending at
$84.4 million, a 10.0% increase over 1996. Non-interest-bearing demand deposits
increased 5.7% from $34.8 million in 1996 to $36.8 million in 1997. The
smallest percentage increases were in time deposits and savings which were 3.3%
and 2.7% respectively.
Over the last two years, total average deposits grew 7.4% led by
non-interest bearing demand deposits (11.0%) and savings deposits (9.9%). This
is significant because it represents lower cost deposit growth and the
Corporation's targeted efforts to increase core deposit relationships with its
customers.
The average interest rate paid on average deposits was 4.00%, up from
3.93% in 1996, but exactly the same, 4.00%, as in 1995.
The following table sets forth the classification of average deposits and
rates for the indicated periods:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING DECEMBER 31
----------------------------------------------------------------
1997 1996 1995
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing demand $ 36,811 N/A $ 34,824 N/A $ 33,165 N/A
Interest-bearing demand
(NOW and money market) 84,424 2.87% 76,736 2.63% 79,267 2.91%
Savings 54,543 2.99% 53,101 2.99% 49,624 3.02%
Time deposits 192,250 5.55% 186,054 5.47% 180,424 5.49%
-------- -------- --------
Total $368,028 4.00% $350,715 3.93% $342,480 4.00%
======== ======== ========
</TABLE>
The following table summarizes time deposits in amounts of $100 or more by
time remaining until maturity as of December 31, 1997. These time deposits are
made by individuals, corporations, and public entities.
<TABLE>
<S> <C>
Three months or less $23,817
Over three months through six months 6,707
Over six months through one year 5,090
Over one year 4,806
-------
Total $40,420
=======
</TABLE>
<PAGE> 23
LIQUIDITY. Liquidity is measured by a financial institution's ability to
raise funds through deposits, borrowed funds, capital, or the sale of assets.
Additional sources of liquidity, including cash flow from both the repayment of
loans and the securitization of assets, are also considered in determining
whether liquidity is satisfactory. The funds are used to meet deposit
withdrawals, maintain reserve requirements, fund loans, and operate the
organization. Liquidity is achieved through growth of core funds (defined as
core deposits, 50% of non-public entity certificates of deposit over $100,000,
and repurchase agreements issued to commercial customers) and liquid assets,
and accessibility to the money and capital markets. The Corporation's
subsidiary bank has access to short-term funds through its correspondent banks,
as well as access to the Federal Home Loan Bank of Chicago, which can provide
longer-term funds to help meet liquidity needs.
The ratio of temporary investments (those maturing within one year plus
twelve months' projected payments on mortgage-backed securities and
collateralized mortgage obligations) to volatile liabilities (50% of non-public
entity certificates of deposit over $100,000, repurchase agreements issued to
public entities, and deposits of public entities) was 104.1% at December 31,
1997 and at December 31, 1996. Core deposits, defined as demand deposits,
interest-bearing checking accounts, total savings, and certificates of deposit
less than $100,000, were 85.2% of total deposits at December 31, 1997, and
85.7% of total deposits at December 31, 1996. Money market accounts of
approximately $31.1 million at December 31, 1997 are classified by the
Corporation as core deposits.
The Corporation experienced a net increase in cash and cash equivalents of
$12.0 million in 1997. Net cash provided by operating activities of $7.3
million provided a degree of liquidity. Financing activities provided net cash
of $24.2 million. A net increase of $27.2 million in deposits, the result of
successful programs offered on certificates of deposit and the introduction of
the Money Market Gold product, were the major components of the financing
activities. Increases in the operating and financing activities were offset by
net cash used for investing activities of $19.4 million. Net loan growth of
$17.1 million in 1997 was the major component of this decrease, with net cash
used of $2.1 million by securities transactions ($6.6 million in proceeds from
sales of securities and $47.5 million from maturities of securities, less $56.2
million in purchases of securities) representing the balance of net cash used
for investing activities. Cash and cash equivalents of $33.2 million at
December 31, 1997 are deemed adequate to meet short-term liquidity needs.
A net decrease in cash and cash equivalents of $3.3 million was
experienced by the Corporation in 1996. Financing activities provided net cash
of $13.9 million, with a net increase of $12.4 million in deposits, the
Sandwich acquisition being the major component of that increase. Increases in
the operating and financing activities were offset by net cash used for
investing activities of $20.0 million. Net loan growth of $25.9 million in 1996
was the major component of this decrease, with payment for the Sandwich
acquisition representing another $2.9 million of the net cash used for
investing activities. Proceeds from the sales of securities of $2.3 million and
$67.7 million from maturities of securities, partially offset the $60.3 million
in purchases of securities and the aforementioned net loan growth.
The long-term liquidity needs of the Corporation will be driven by the
necessity to grow and change in the marketplace to meet the needs of its
customers and to offset strategies of its competitors. The Corporation's equity
base, along with its low debt level and common stock available for issuance,
provide several options for future financing.
ASSET-LIABILITY MANAGEMENT. The Corporation actively manages its assets
and liabilities through coordinating the levels of interest rate sensitive
assets and liabilities to minimize changes in net interest income despite
changes in market interest rates. The Corporation defines interest rate
sensitive assets and liabilities as any instrument that can be repriced within
180 days, either because the instrument will mature during the period or
because it carries a variable interest rate. Changes in net interest income
occur when interest rates on loans and investments change in a different time
period from that of changes in interest rates on liabilities, or when the mix
and volume of earning assets and interest-bearing liabilities change. The
interest rate sensitivity gap represents the dollar amount of difference
between rate sensitive assets and rate sensitive liabilities within a given
time period (GAP). A GAP ratio is determined by dividing rate sensitive assets
by rate sensitive liabilities. A ratio of 1.0 indicates a perfectly matched
position, in which case the effect on net interest income due to interest rate
movements would be zero.
The Corporation's strategy with respect to asset-liability management is
to maximize net interest income while limiting the Corporation's exposure to
risks associated with volatile interest rates. The subsidiary bank's
Asset/Liability Management Committee is responsible for monitoring the
subsidiary bank's GAP position. As a general rule, the subsidiary bank's policy
is to maintain GAP as a percent of total assets within a range from +20% to
- -20% in any given time period. Based on the simulation of various rising or
falling interest rate scenarios in comparison to one considered to be the most
likely interest rate scenario, management seeks to operate with net interest
income within a range of+10% to -10% of budgeted net interest income during any
twelve month period. The Corporation also performs an interest rate risk
analysis, on a quarterly basis, on the assets and liabilities of the subsidiary
bank. This analysis applies an immediate shift in interest rates of +200 basis
points and -200 basis points to the assets and liabilities to determine the
impact on the net interest income and net income of the subsidiary bank, when
compared to a flat rate scenario. The subsidiary bank strives to maintain the
net interest income variance within a range of + 10% to -10% and net income
variance within a range of +5% to -5%.
The Asset/Liability Management Committee monitors the effect of changes in
yield and rates paid on a monthly basis. The Committee considers the subsidiary
bank's current and anticipated positions during the next twelve months and the
effect of rising and falling interest rate scenarios on net income. The
Committee considers various contingency plans if the results of this analysis
with regard to the following key ratios indicate a deviation from the
asset/liability management policy: loans to assets, net loans to core funds,
net loans to total deposits, equity capital to total assets, rate sensitive
assets to rate sensitive liabilities, GAP, temporary investments to total
assets, and temporary investments to volatile liabilities. The contingency
plans considered by the Committee include generating funds through internal and
external sources, adjusting maturities within the investment portfolio,
repricing of assets, purchasing or selling loans, secondary mortgage activity
and liability rate adjustment. The Committee reports the results of their
meetings to the subsidiary bank's Board of Directors on a monthly basis.
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------
0-3 MO. 4-12 MO. 1-5 YRS. OVER 5 YRS. TOTAL
-------- -------- --------- ----------- -------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Taxable investment securities $ 10,785 $ 23,065 $ 30,18 $22,083 $ 86,115
Tax-exempt investment securities 616 3,730 12,081 15,444 31,871
Fed funds sold 11,900 -0- -0- -0- 11,900
Loans 93,547 53,260 116,681 11,804 275,292
-------- -------- -------- ------- --------
Total rate sensitive assets ("RSA") $116,848 $ 80,055 $158,944 $49,331 $405,178
======== ======== ======== ======= ========
Interest-bearing liabilities:
Interest-bearing demand deposits $87,364 $-0- $-0- $-0- $87,364
Savings deposits 52,193 -0- -0- -0- 52,193
Time deposits 54,337 71,463 77,948 302 204,050
Short-term debt 12,097 -0- 1,140 -0- 13,237
Long-term debt 3,750 -0- -0- -0- 3,750
-------- -------- -------- ------- --------
Total rate sensitive liabilities ("RSL") $209,741 $ 71,463 $ 79,088 $ 302 $360,594
======== ======== ======== ======= ========
Interest rate sensitivity GAP (RSA less RSL) $(92,893) $8,592 $ 79,856 $49,029 $ -0-
Cumulative GAP $(92,893) $(84,301) $ (4,445) $44,584 $ -0-
RSA/RSL .56% 1.12% 2.01% 163.35% --
Cumulative RSA/RSL .56% .70% .99% 1.12% --
</TABLE>
In the table above, NOW account balances and savings deposits are included
as rate sensitive in the amounts reflected in the 0-3 month timeframe, as such
interest-bearing liabilities are subject to immediate withdrawal.
Management of the Corporation considers one-half of the NOW account
balances (one of the components of interest-bearing demand deposits) and all
savings deposits as core, or non-rate sensitive deposits, primarily since
interest-bearing demand and savings deposits historically have not been rate
sensitive. As a general rule, the subsidiary bank's policy is to maintain RSA
as a percent of RSL within a range of +70% to +120% within a 182 day time
period.
At December 31, 1997, one-half of the NOW account balances totaled
approximately $28.4 million and savings deposits totaled approximately $52.2
million. If the amounts reflected in the 0-3 month timeframe are adjusted to
exclude these amounts, rate sensitive liabilities would be approximately $129.2
million for a negative GAP of approximately $12.3 million. RSA as a percent of
RSL would be 90.5%. Adjusting the cumulative GAP and GAP ratio for the 4-12
month timeframe would result in a negative cumulative GAP and GAP ratio of $3.7
million, and 98.2%, respectively.
YEAR 2000 COMPLIANCE. The Corporation utilizes and is dependent upon data
processing systems and software to conduct its business. The data processing
systems and software include those developed and maintained by the
Corporation's third-party data processing vendor and purchased software which
is run on in-house computer networks. In 1997, the Corporation initiated a
review and assessment of all hardware and software to confirm that it will
function properly in the year 2000. To date, those vendors which have been
contacted have indicated that their hardware or software is or will be Year
2000 compliant in timeframes that meet regulatory requirements. The costs
associated with the compliance efforts are not expected to have a significant
impact on the Corporation's ongoing results of operations.
EFFECTS OF INFLATION. The consolidated financial statements and related
consolidated financial data presented herein have been prepared in accordance
with generally accepted accounting principles and practices within the banking
industry which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation.
INVESTMENT MATURITIES AND YIELDS. The following table sets forth the
contractual maturities of investment securities at December 31, 1997, and the
tax equivalent yields of such securities.
<PAGE> 25
<TABLE>
<CAPTION>
DUE WITHIN DUE AFTER ONE BUT DUE AFTER FIVE BUT DUE AFTER TEN OTHER
ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS YEARS (NO STATED MATURITY)
----------------- ----------------- ------------------ --------------- --------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 17,508 6.03% $ 17,262 6.05% $ -0- -- $ -0- -- $ -0- --
U.S. Government
Agencies 10,370 5.48 13,992 5.97 686 8.19% 4,321 7.48% -0- --
State and municipal 4,368 5.51 12,262 4.69 2,452 5.40 13,551 5.16 -0- --
Collateralized
mortgage obligations -0- -- 537 6.68 8,513 6.56 11,554 7.46 -0- --
Other securities 201 8.90 -0- -- -0- -- -0- -- -0- --
Other
(no stated maturity) -0- -- -0- -- -0- -- -0- -- 1,963 --
-------- -------- ------- ------- -------
Total $ 32,447 5.80% $ 44,053 5.65% $11,651 6.41% $29,426 6.40% $ 1,963 --
======== ======== ======= ======= =======
</TABLE>
LOAN MATURITIES. The following table sets forth scheduled loan repayments
on agricultural, commercial, and real estate construction loans at December 31,
1997. See note 4 in the Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
DUE WITHIN DUE AFTER ONE BUT DUE AFTER
ONE YEAR WITHIN FIVE YEARS FIVE YEARS TOTAL
---------- ----------------- ---------- -------
<S> <C> <C> <C> <C>
Agricultural $35,068 $3,561 $ 362 $38,991
Commercial 38,285 4,017 1,264 43,566
Real Estate-Commercial 6,030 -0- -0- 6,030
------- ------ ------ -------
Total $79,383 $7,578 $1,626 $88,587
======= ====== ====== =======
</TABLE>
Of the loans shown above, the following table sets forth loans due after
one year which have predetermined (fixed) interest rates or adjustable
(variable) interest rates at December 31,1997.
<TABLE>
<CAPTION>
FIXED RATE VARIABLE RATE TOTAL
---------- ------------- -----
<S> <C> <C> <C>
Due after one year $6,799 $2,405 $9,204
</TABLE>
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES. The subsidiary bank has
allocated the allowance for possible loan losses to provide for the possibility
of losses being incurred within the categories of loans set forth in the table
below. The allocation of the allowance and the ratio of loans within each
category to total loans at December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
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
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agricultural $ 342 14.2% $ 325 14.0% $ 632 14.2% $ 650 15.1% $ 672 18.0%
Commercial 453 15.9 422 14.8 470 14.9 500 17.5 769 24.5
Real estate-mortgage 156 56.3 151 56.7 227 54.8 267 55.0 40 45.3
Installment 623 13.6 608 14.5 305 16.1 213 12.4 193 12.2
Unallocated 256 N/A 124 N/A 400 N/A 470 N/A 544 N/A
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $1,830 100.0% $1,630 100.0% $2,034 100.0% $2,100 100.0% $2,218 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
<PAGE> 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 305 of Regulation S-K is contained in Item
7 (Management's Discussion and Analysis of Financial Condition and Results of
Operations) of this Report on Form 10-K under the heading "Asset Liability
Management" on pages 23 and 24, which information is incorporated
herein by reference.
Additionally, as mentioned in the section referred to above, the
Corporation performs an interest rate risk analysis on a quarterly basis
applying an immediate shift in interest rates of + 200 basis points and - 200
basis points to determine the impact on net interest income an net income. As
of December 31, 1997, if interest rates were to increase 200 basis points, net
interest income would decrease $189,000 (or 1.15%) and net income would
decrease $99,000 (or 1.84%). However, if interest rates were to decrease 200
basis points, net interest income would increase $200,000 (or 1.21%) and net
income would increase $107,000 (or 1.99%).
The Corporation considers the effects of said increase or decrease in
interest rates to immaterial.
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (note 2) $ 21,268 $ 18,033
Federal funds sold 11,900 3,100
Investment securities (note 3):
Available-for-sale, at fair value 107,042 105,893
Held-to-maturity, at amortized cost 12,498 11,135
Loans held for sale, at lower of cost or market 1,576 2,849
Loans (note 4):
Gross loans 274,725 258,118
Less: Unearned interest (120) (187)
Allowance for possible loan losses (1,830) (1,630)
-------- --------
Net loans 272,775 256,301
Interest receivable 5,808 5,725
Premises and equipment (note 5) 8,752 9,147
Goodwill and intangible assets, net of accumulated
amortization of $1,636 and $1,172,
at December 31, 1997 and 1996 5,272 5,541
Other assets 2,769 2,683
-------- --------
TOTAL ASSETS $449,660 $420,407
======== ========
- ------------------------------------------------------------------------------------
LIABILITIES
Deposits (note 6):
Demand $ 42,333 $ 41,258
Interest-bearing demand 87,364 78,883
Savings 52,193 55,077
Time 204,050 183,483
-------- --------
Total deposits 385,940 358,701
Short-term borrowings (note 7) 13,237 13,537
Long-term borrowings (note 8) 3,750 4,350
Other liabilities 4,065 3,622
-------- --------
TOTAL LIABILITIES 406,992 380,210
-------- --------
STOCKHOLDERS' EQUITY
Common stock: $5 par value, 7,000,000 shares authorized at
December 31, 1997 and 4,000,000 shares authorized at
December 31, 1996; 2,759,945 shares issued at December 31,
1997 and 1996 13,800 13,800
Surplus 6,235 6,193
Retained earnings 23,469 20,250
Unrealized gain on investment securities available-for-sale,
net of tax effect 560 300
Less: Cost of 82,403 and 35,979 treasury shares (1,396) (346)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 42,668 40,197
-------- --------
Commitments & contingencies (note 14)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $449,660 $420,407
======== ========
- ------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 28
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 24,150 $ 22,184 $ 20,133
Interest and dividends on investment securities:
Taxable 4,976 5,135 5,940
Tax-exempt 1,622 1,632 1,437
Interest on federal funds sold 297 140 112
Interest on interest-bearing deposits in
other banks 267 23 23
--------- --------- ---------
Total interest income 31,312 29,114 27,645
--------- --------- ---------
INTEREST EXPENSE:
Interest on deposits (note 6) 14,716 13,773 13,713
Interest on short-term borrowings 472 402 351
Interest on long-term borrowings 353 421 454
--------- --------- ---------
Total interest expense 15,541 14,596 14,518
--------- --------- ---------
NET INTEREST INCOME 15,771 14,518 13,127
Provision (credit) for possible loan losses (note 4) 590 41 (101)
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION (CREDIT)
FOR POSSIBLE LOAN LOSSES 15,181 14,477 13,228
--------- --------- ---------
OTHER INCOME:
Trust & farm management fees 1,067 934 870
Service charges on deposit accounts 1,368 1,176 1,093
Other service charges 445 427 258
Securities transactions, net (note 3) 97 (24) 29
Loan servicing fees and other charges 177 203 182
Other operating income 211 144 121
--------- --------- ---------
Total other income 3,365 2,860 2,553
--------- --------- ---------
OTHER EXPENSES:
Salaries and employee benefits 6,866 6,422 5,932
Occupancy 964 955 911
Equipment expense 858 851 810
FDIC/OCC assessments 144 580 572
Goodwill and intangible assets amortization 464 356 213
Data processing 677 595 487
Trust customer charges (note 15) 73 382 5,043
Other operating expense 2,616 2,723 2,279
--------- --------- ---------
Total other expenses 12,662 12,864 16,247
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 5,884 4,473 (466)
Income tax expense (benefit) (note 9) 1,525 1,046 (824)
--------- --------- ---------
NET INCOME $ 4,359 $ 3,427 $ 358
========= ========= =========
NET INCOME PER SHARE:
Basic $ 1.61 $ 1.26 $ 0.13
Diluted $ 1.61 $ 1.26 $ 0.13
Weighted average shares outstanding 2,709,213 2,720,511 2,713,558
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 29
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
UNREALIZED GAIN
(LOSS) ON
INVESTMENT
SECURITIES
AVAILABLE
FOR-SALE,
COMMON RETAINED NET OF TREASURY
STOCK SURPLUS EARNINGS TAX EFFECT STOCK TOTAL
------- ------- -------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $13,800 $6,116 $18,476 $(3,277) $ (479) $ 34,636
Net income 358 358
Sale of 7,633 shares
of treasury stock 32 77 109
Cash dividends
($.36 per share) (977) (977)
Change in unrealized gain (loss)
on investment securities
available-for-sale, net
of $1,813 tax effect 3,520 3,520
------- ------- -------- ---------- --------- ------------
Balance, December 31, 1995 $13,800 $6,148 $17,857 $ 243 $ (402) $ 37,646
Net income 3,427 3,427
Sale of 5,660 shares
of treasury stock 45 56 101
Cash dividends
($.38 per share) (1,034) (1,034)
Change in unrealized gain (loss)
on investment securities
available-for-sale, net
of $30 tax effect 57 57
------- ------- -------- ---------- --------- ------------
Balance, December 31, 1996 $13,800 $6,193 $20,250 $ 300 $(346) $ 40,197
Net income 4,359 4,359
Sale of 3,576 shares
of treasury stock 42 34 76
Purchase of 50,000 shares of
treasury stock (1,084) (1,084)
Cash dividends
($.42 per share) (1,140) (1,140)
Change in unrealized gain (loss)
on investment securities
available-for-sale, net
of $133 tax effect 260 260
------- ------- -------- ---------- --------- ------------
BALANCE, DECEMBER 31, 1997 $13,800 $6,235 $23,469 $ 560 $(1,396) $ 42,668
======= ======= ======== ========== ========= ============
- ---------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 30
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,359 $ 3,427 $ 358
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 876 908 803
Provision (credit) for possible loan losses 590 41 (101)
Deferred income taxes (benefit) (208) 18 (409)
Amortization of goodwill and other intangible assets 464 356 213
Amortization of premiums on investment securities,
net of accretion 76 340 872
(Gain) loss on securities transactions, net (97) 24 (29)
Loans originated for sale (7,431) (12,155) (8,137)
Proceeds from sales of loans originated for sale 8,704 10,252 7,664
Increase in accrued interest payable 420 73 376
Increase in accrued interest receivable (83) (220) (123)
Increase in other assets (481) (763) (387)
Increase (decrease) in other liabilities 98 483 (747)
-------- ---------- ---------
Net cash provided by operating activities 7,287 2,784 353
-------- ---------- ---------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale 6,586 2,318 16,991
Proceeds from maturities of investment securities available-for-sale 46,080 66,593 33,522
Purchase of investment securities available-for-sale (55,191) (59,531) (16,855)
Proceeds from maturities of investment securities held-to-maturity 1,416 1,144 3,189
Purchase of investment securities held-to-maturity (989) (736) (4,294)
Proceeds from sales of other real estate owned 200 11 80
Net increase in loans (17,064) (25,905) (26,630)
Purchase of premises and equipment (481) (959) (619)
Payment related to acquisitions, net of cash and
cash equivalents acquired -0- (2,947) -0-
-------- ---------- ---------
Net cash (used) provided by investing activities (19,443) (20,012) 5,384
-------- ---------- ---------
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 27,239 12,416 (6,702)
Net (decrease) increase in short-term borrowings (300) 2,794 5,121
Proceeds from long-term borrowings -0- 1,000 -0-
Payments for long-term borrowings (600) (1,350) (600)
Dividends paid (1,140) (1,034) (977)
Purchase of treasury stock (1,084) -0- -0-
Sale of treasury stock 76 101 109
-------- ---------- ---------
Net cash provided (used) by financing activities 24,191 13,927 (3,049)
-------- ---------- ---------
Increase (decrease) in cash and cash equivalents 12,035 (3,301) 2,688
Cash and cash equivalents at beginning of year 21,133 24,434 21,746
-------- ---------- ---------
Cash and cash equivalents at end of year $33,168 $ 21,133 $ 24,434
======== ========== =========
Cash paid during the year for:
Interest $15,121 $ 14,525 $ 14,161
Income taxes $ 1,600 $ 944 $ 325
Supplemental disclosure of non-cash investing activities:
Loans transferred to other real estate owned $ 158 $ 109 $ 52
Investments transferred to available-for-sale $-0- $-0- $ 13,867
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and conform with general
practices within the banking industry. A description of the significant
accounting policies follows:
BASIS OF CONSOLIDATION - The consolidated financial statements of Princeton
National Bancorp, Inc. ("Corporation") include the accounts of the Corporation
and its wholly-owned subsidiary, Citizens First National Bank ("subsidiary
bank"). Significant intercompany accounts and transactions have been eliminated
in consolidation.
USE OF ESTIMATES - In order to prepare the Corporation's financial statements
in conformity with generally accepted accounting principles, management is
required to make certain estimates that affect the amounts reported in the
financial statements and accompanying notes. These estimates may differ from
actual results.
INVESTMENT SECURITIES - Investment securities which the Corporation has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and recorded at amortized cost. All other investment
securities that are not classified as held-to-maturity are classified as
available-for-sale. Investments 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.
LOANS - Loans are stated at the principal amount outstanding, net of unearned
interest and allowance for possible loan losses. Interest on commercial, real
estate, and certain installment loans is credited to operations as earned,
based upon the principal amount outstanding. Interest on the other installment
loans is credited to operations using a method which approximates the interest
method.
It is the subsidiary bank's policy to discontinue the accrual of interest
on any loan when, in the opinion of management, there is reasonable doubt as to
the collectibility of interest or principal. Interest on these loans is
credited to income only when the collection of principal has been assured and
only to the extent interest payments are received.
In addition, the terms and conditions of certain loans are restructured
with the borrower when it is deemed in the best interest of the subsidiary
bank. Restructured loans are loans on which interest is being accrued at less
than the original contractual rate of interest because of the inability of the
borrower to service the obligation under the original terms of the agreement.
Income is accrued at the lower rate so long as the borrower is current under
the revised terms and conditions of the agreement.
The Corporation follows Statement of Financial Accounting Standard No. 114
"Accounting by Creditors for Impairment of a Loan" (FAS 114) and Statement of
Financial Accounting Standard No. 118 "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures" (FAS 118). A loan is considered
impaired, 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. FAS
114 and FAS 118 do not apply to 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 fair value or at the lower of cost or market. The Corporation
generally identifies impaired loans within the non-accrual and restructured
commercial and commercial real estate portfolios on an individual loan-by-loan
basis. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral.
Certain non-refundable loan fees and direct costs of loan origination are
deferred at the time a loan is originated. Net deferred loan fees are
recognized as yield adjustments over the contractual life of the loan using the
interest method.
ALLOWANCE FOR POSSIBLE LOAN LOSSES - The allowance for possible loan losses is
increased by provisions charged to operating expense and decreased by
charge-offs, net of recoveries, and is available for losses incurred on loans.
The allowance is based on factors that include overall composition of loan
portfolio, types of loans, past loss experience, loan delinquencies, potential
substandard and doubtful credits, and such other factors that, in management's
best judgment, deserve evaluation in estimating potential loan losses.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the subsidiary bank's allowance for
possible loan losses. Such agencies may require the subsidiary bank to
recognize additions to the allowance for possible loan losses based on their
judgment 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 with yield rates to the buyer
based upon the current market rates which may differ from the contractual rate
on the loans sold. At the time that loans are sold (servicing retained), a gain
or loss is recorded which reflects the difference between the assumed cash flow
(prepayments are estimated) to be generated by the contractual interest rates
of the loans sold and the assumed cash flow resulting from the yield to be paid
to the purchaser, adjusted for servicing and discounted to reflect present
value. Loan servicing fees are recognized over the lives of the related loans.
Loan servicing costs are charged to expense as incurred. Loans held for sale
are stated at the lower of aggregate cost or market. Real estate loans serviced
for others are not included in the accompanying consolidated balance sheets.
At December 31, 1997 the fair value of the originated mortgage servicing
rights was $197 and is amortized in future periods in proportion to, and over
the period of, estimated net servicing income similar to the interest method
using an accelerated amortization method. The amortization of capitalized
mortgage servicing rights is reflected in the statements of income as a
reduction to loan servicing fees and other charges.
Effective January 1, 1997, the Corporation adopted Statement of Financial
Accounting Standard No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities", which requires an entity
to recognize the financial and servicing assets it controls and the liabilities
it has incurred and to derecognize financial assets when control has been
surrendered in accordance with the criteria provided in the Statement. The
application of this Statement did not have a material impact on the
consolidated financial statements.
PREMISES AND EQUIPMENT - Premises and equipment are carried at cost, less
accumulated depreciation. Depreciation is computed on the straight-line basis
over the estimated useful lives of the assets, as follows: buildings, fifteen
to forty years; furniture and equipment, three to fifteen years. The carrying
amounts of assets sold or retired and the related accumulated depreciation are
eliminated from the accounts, and the resulting gains or losses are reflected
in income.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED - The cost in excess of the
fair value (goodwill) of net assets acquired is being amortized over a
fifteen-year period.
OTHER REAL ESTATE - Other real estate, which is included in other assets in the
consolidated balance sheets, represents assets to which the Corporation's
subsidiary bank has acquired legal title in satisfaction of indebtedness. Such
real estate is recorded at cost or its fair market value at the date of
acquisition, less estimated selling costs, whichever is lower. Subsequent
declines in estimated fair market value, based on changes in market conditions,
are recorded as expenses as incurred. Gains or losses on the disposition of
other real estate are recorded in other expense in the period in which they are
realized.
EMPLOYEE BENEFIT PLANS - The subsidiary bank has a defined contribution
investment (401k) plan. Under this plan, employees may elect to contribute, on
a tax-deferred basis, up to ten percent of their salary. In addition, the
subsidiary bank will match employees' contributions up to three percent of each
employee's salary.
<PAGE> 32
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.
Additionally, the subsidiary bank 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.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
NET INCOME PER SHARE - In February 1997, the FASB issued Statement 128,
"Earnings Per Share" (FAS 128). FAS 128 supersedes APB Opinion No. 15,
"Earnings Per Share", and specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with publicly
held common stock or potential common stock. It replaces the presentation of
primary EPS with the presentation of basic EPS, and replaces fully diluted EPS
with diluted EPS.
Net income per share of common stock for the year ended December 31, 1997
has been calculated according to the guidelines of FAS 128 and earnings per
share of common stock for the years ended December 31, 1996 and 1995 have been
restated to conform with FAS 128.
Basic income per share is computed by dividing net income by the weighted
average number of shares outstanding during the year which were 2,709,213,
2,720,511, and 2,713,558 for 1997, 1996, and 1995, respectively. There were no
common stock equivalents during any of these years.
CASH FLOWS - For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods.
IMPACT OF NEW ACCOUNTING STANDARDS - In June 1997, the FASB issued Statement
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards
for reporting and presentation of comprehensive income and its components in a
full set of general purpose financial statements. FAS 130 is effective for both
interim and annual periods beginning after December 15, 1997, and is not
expected to have a material impact on the Corporation.
In June 1997, the FASB issued Statement 131, "Disclosures about Segments
of an Enterprise and Related Information" (FAS 131). FAS 131 establishes
standards for the way public business enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. FAS 131 is effective for financial
periods beginning after December 15, 1997, and is not expected to have a
material impact on the Corporation.
2. CASH AND DUE FROM BANKS
The average compensating balances held at correspondent banks during 1997,
1996, and 1995 were $7,869, $3,738, and $3,703, respectively. The subsidiary
bank maintains such compensating balances with correspondent banks to offset
charges for services rendered by those banks. In addition, the Federal Reserve
Bank required the subsidiary bank to maintain average balances of approximately
$1,602, $2,013, and $1,334, for 1997, 1996, and 1995, respectively, as a
reserve requirement.
3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair value for available-for-sale and held-to-maturity securities by
major security type at December 31 were as follows:
<TABLE>
<CAPTION>
1997
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
United States Treasury $ 34,651 $ 120 $ (1) $ 34,770
United States Government Agencies 29,331 95 (57) 29,369
State and municipal 19,371 764 -0- 20,135
Collateralized mortgage obligations 20,677 39 (111) 20,605
Other securities 2,164 -0- (1) 2,163
--------- ---------- ---------- ---------
Total 106,194 1,018 (170) 107,042
--------- ---------- ---------- ---------
Held-to-maturity:
State and Municipal 12,498 187 (24) 12,661
--------- ---------- ---------- ---------
Total $118,692 $1,205 $(194) $119,703
========= ========== ========== =========
<CAPTION>
1996
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
United States Treasury $ 45,150 $ 137 $ (20) $ 45,267
United States Government Agencies 28,249 112 (186) 28,175
State and municipal 19,221 434 (14) 19,641
Collateralized mortgage obligations 11,141 90 (94) 11,137
Other securities 1,677 2 (6) 1,673
--------- ---------- ---------- ---------
Total 105,438 775 (320) 105,893
--------- ---------- ---------- ---------
Held-to-maturity:
State and Municipal 11,135 94 (94) 11,135
--------- ---------- ---------- ---------
Total $116,573 $ 869 $(414) $117,028
========= ========== ========== =========
</TABLE>
<PAGE> 33
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, 1997:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
Available-for-sale:
Due in one year or less $ 28,669 $ 28,723
Due after one year through five years 35,774 36,023
Due after five years through ten years 1,023 1,045
Due after ten years 12,017 12,557
--------- ---------
77,483 78,348
--------- ---------
Mortgage-backed securities 6,071 6,126
Collateralized mortgage obligations 20,677 20,605
Other (no stated maturity) 1,963 1,963
--------- ---------
$106,194 $107,042
========= =========
Held-to-maturity:
Due in one year or less $ 2,793 $ 2,798
Due after one year through five years 7,258 7,323
Due after five years through ten years 1,407 1,459
Due after ten years 1,040 1,081
--------- ---------
$ 12,498 $ 12,661
========= =========
</TABLE>
Proceeds from sales of investment securities available-for-sale during
1997, 1996, and 1995 were $6,586, $2,318, and $16,991, respectively. Gross
gains of $108 in 1997, $15 in 1996, and $238 in 1995; and gross losses of $11
in 1997, $13 in 1996, and $209 in 1995, were realized on those sales. There
were no sales of investment securities held-to-maturity during 1997, 1996, and
1995.
As of December 31, 1997, 1996, and 1995, the Corporation had $5.3, $9.6,
and $11.8 million, respectively, in structured notes, as defined by regulatory
agencies. These securities are obligations of U.S. Government agencies and are
comprised primarily of step-up bonds and deleveraged bonds. Step-up bonds
initially pay an above-market yield for a short non-call period; if not called,
the security steps up to a higher coupon rate. The higher initial yield is
received because the investor has implicitly sold a call option. Deleveraged
bonds pay interest according to a formula based upon a fraction of an increase
of a specified index, such as the Constant Maturity Treasury Rate (CMT). The
deleveraging multiplier, for example 50% of the 10 year CMT, causes the coupon
to lag overall movements in market yields. These securities are carried in the
Corporation's available-for-sale portfolio and had unrealized losses of $25,
$119, and $295 at December 31, 1997, 1996, and 1995, respectively, and will
mature by March 31, 1999.
Certain investment securities are pledged to secure public and trust
deposits, and for other purposes required or permitted by law. The book value
of these pledged assets at December 31, 1997, 1996, and 1995 was $77,273,
$68,072, and $63,694, respectively.
The Corporation did not hold any securities of any one issuer, other than
United States Treasury and Agency obligations, for which the aggregate book
value exceeded 10% of stockholders' equity during any of the periods presented.
4. LOANS
The composition of the loan portfolio as of December 31 was as follows:
<TABLE>
<CAPTION>
Gross Loans: 1997 1996
<S> <C> <C>
Commercial $43,566 $ 38,410
Agricultural 38,991 36,030
Real estate-construction 6,030 4,160
Real estate-mortgage 148,658 142,004
Installment 37,480 37,514
-------- --------
Total $274,725 $258,118
======== ========
</TABLE>
Changes in the allowance for possible loan losses for the years ended
December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance, January 1 $ 1,630 $ 2,034 $ 2,100
Provision (credit) for
possible loan losses 590 41 (101)
Recoveries of loans
previously charged off 616 920 598
Loans charged off (1,006) (1,365) (563)
-------- --------- --------
Balance, December 31 $ 1,830 $ 1,630 $ 2,034
======== ========= ========
</TABLE>
Loans on non-accrual status at December 31, 1997, 1996, and 1995 were
$810, $1,157, and $808, respectively. Interest income that would have been
recorded on these loans had they remained current was approximately $75, $93,
and $49, respectively.
At December 31, 1997, 1996, and 1995, the recorded investment in loans for
which impairment has been recognized in accordance with FAS 114 totaled $489,
$624, and $189, respectively, all of which related to impaired loans which do
not require a related allowance for possible loan losses because the carrying
value of the loans exceeds the discounted present value of expected future cash
flows. For the year ended December 31, 1997, 1996, and 1995, the average
recorded investment in impaired loans was approximately $596, $380, and $195,
respectively. Interest recognized on impaired loans during the portion of the
year that they were impaired was not considered material.
<PAGE> 34
The Corporation's subsidiary bank had loans outstanding to directors,
executive officers and to their related interests (related parties) of the
Corporation and its subsidiary of approximately, $1,639, $1,735, and $1,180 at
December 31, 1997, 1996, and 1995, 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 1997 activity in 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 $60,000 is as
follows:
<TABLE>
<CAPTION>
Balance Balance
January 1, 1997 Additions Payments December 31, 1997
- --------------- --------- -------- -----------------
<S> <C> <C> <C>
$1,735 $866 $962 $1,639
</TABLE>
The Corporation services loans with unpaid principal balances at December
31, 1997, 1996, and 1995 of approximately $42,399, $36,649, and $33,072,
respectively. Additionally, the fair value of the originated mortgage servicing
rights was $197, $151, and $72 at December 31, 1997, 1996, and 1995,
respectively.
5. PREMISES AND EQUIPMENT
As of December 31, the components of premises and equipment (at cost),
less accumulated depreciation, were as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 2,040 $ 2,040
Buildings 10,184 10,051
Furniture and Equipment 6,013 5,665
------- -------
18,237 17,756
Less accumulated depreciation 9,485 8,609
------- -------
Total $ 8,752 $ 9,147
======= =======
</TABLE>
Depreciation expense charged to operating expense for 1997, 1996, and 1995
was $864, $908, and $803, respectively.
6. DEPOSITS
As of December 31, the aggregate amounts of time deposits in denominations
of $100 or more and the total interest expense for this category of time
deposits were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Amount $40,420 $34,712 $35,171
Interest expense for the year 2,162 2,078 1,978
Total interest expense on deposits was
as follows:
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Interest-bearing demand $ 2,420 $ 2,016 $ 2,310
Savings 1,631 1,587 1,497
Time 10,665 10,170 9,906
------- ------- -------
Total $14,716 $13,773 $13,713
======= ======= =======
</TABLE>
7. SHORT-TERM BORROWINGS
As of December 31, short-term borrowings consisted of the following:
<TABLE>
<CAPTION>
1997 1996
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------- -------- ------- --------
<S> <C> <C> <C> <C>
Customer repurchase agreements $ 9,771 4.90% $11,597 5.03%
Advances from the Federal Home Loan
Bank of Chicago due:
September 22, 2000 443 6.21 -0- --
June 18, 2002 697 6.46 -0- --
Interest-bearing demand notes issued
to the U.S. Treasury 2,326 5.53 1,940 5.83
------- -------- ------- --------
Total $13,237 5.14% $13,537 5.14%
======= ======== ======= ========
</TABLE>
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 stock in the FHLB is pledged as additional
collateral for these advances.
8. LONG-TERM BORROWINGS
The Corporation's long-term borrowings consisted of a note payable in the
amount of $3,750 and $4,350 at December 31, 1997 and 1996, respectively. The
demand note carries a floating interest rate equal to the lender's prime rate
(8.75% at December 31, 1997) and is secured by 100% of the stock of the
subsidiary bank. Scheduled payments are $600 annually through 2003, and $150 in
2004.
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands except per share data)
9. INCOME TAXES
Income tax expense (benefit) attributable to income from operations
consisted of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ---------
<S> <C> <C> <C>
Year ended December 31, 1997:
U.S. Federal $1,733 $(208) $1,525
Year ended December 31, 1996:
U.S. Federal $1,028 $ 18 $1,046
Year ended December 31, 1995:
U.S. Federal $(415) $(409) $ (826)
</TABLE>
There were no state income taxes for 1997, 1996 or 1995.
Income tax expense attributable to income from operations differed from
the amounts computed by applying the U.S. Federal income tax rate of 34 percent
to pretax income from operations as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense $2,000 $1,521 $(159)
Increase (decrease) in income
taxes resulting from:
Tax-exempt income (582) (554) (511)
Non-deductible interest expense 77 68 45
Goodwill amortization 87 75 84
Other, net (57) (64) (285)
------ ------ -----
$1,525 $1,046 $(826)
====== ====== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
Deferred tax assets: 1997 1996
----- -----
<S> <C> <C>
Deferred directors' fees $124 $120
State NOL carryforwards 161 349
Other, net 13 15
----- -----
Total gross deferred tax assets 298 484
Less: valuation allowance (13) (148)
----- -----
Net deferred tax assets 285 336
----- -----
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation (197) (157)
Provision for possible loan losses (282) (436)
Accretion (73) (76)
Core deposits -0- (52)
Unrealized gain on investment securities
available-for-sale (288) (155)
Purchase accounting adjustments (24) (114)
----- -----
Total gross deferred tax liabilities (864) (990)
----- -----
Net deferred tax liabilities $(579) $(654)
===== =====
</TABLE>
At December 31, 1997, the Corporation has net operating loss carryforwards
for state income tax purposes of approximately $3,800 which expire in the years
2008-2010 and are available to offset future state taxable income.
The valuation allowance for deferred tax assets at December 31, 1997 was
$13. The net change in the total valuation allowance for the year ended
December 31, 1997 was a decrease of $135. Management believes that it is more
likely than not that the deferred tax assets, net of the valuation allowances,
will be realized.
10. 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 entities' 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, 1997 and 1996, the Corporation and its subsidiary bank were all
categorized as well capitalized under the regulatory framework.
The most recent notification, February 20, 1997, from the federal banking
agencies categorized the Corporation and the subsidiary bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Corporation and the subsidiary bank must
maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set
forth in the table that follows. There are no conditions or events since that
notification that have changed the Corporation's or the subsidiary bank's
category.
<PAGE> 36
The Corporation's and the subsidiary bank's actual capital amounts and
ratios as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to risk-weighted assets):
Princeton National Bancorp, Inc. $38,843 13.88% $22,384 8.00% $27,980 10.00%
Citizens First National Bank 40,948 14.66 22,347 8.00 27,934 10.00
Tier 1 Capital (to risk-weighted assets):
Princeton National Bancorp, Inc. $37,013 13.23% $11,192 4.00% $16,788 6.00%
Citizens First National Bank 39,118 14.00 11,174 4.00 16,760 6.00
Tier 1 Capital (to average adjusted assets):
Princeton National Bancorp, Inc. $37,013 8.78% $16,863 4.00% $21,078 5.00%
Citizens First National Bank 39,118 9.30 16,832 4.00 21,040 5.00
- -------------------------------------------------------------------------------------------------------
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to risk-weighted assets):
Princeton National Bancorp, Inc. $36,121 13.88% $20,824 8.00% $26,029 10.00%
Citizens First National Bank 38,185 14.57 20,964 8.00 26,205 10.00
Tier 1 Capital (to risk-weighted assets):
Princeton National Bancorp, Inc. $34,491 13.25% $10,412 4.00% $15,618 6.00%
Citizens First National Bank 36,555 13.95 10,482 4.00 15,723 6.00
Tier 1 Capital (to average adjusted assets):
Princeton National Bancorp, Inc. $34,491 8.59% $16,486 4.00% $20,607 5.00%
Citizens First National Bank 36,555 8.91 16,413 4.00 20,517 5.00
- -------------------------------------------------------------------------------------------------------
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The subsidiary bank's contribution to the defined contribution investment
(401k) plan for 1997, 1996, and 1995 was $124, $129, and $124, respectively.
The cost of the profit sharing plan charged to operating expense for 1997,
1996, and 1995 was $222, $162, and $9, respectively.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("FAS 107"),
"Disclosures about Fair Value of Financial Instruments", requires all entities
to disclose the estimated fair value of its financial instrument assets and
liabilities. For the Corporation, as for most financial institutions, the
majority of its assets and liabilities are considered financial instruments as
defined in FAS 107. Many of the Corporation's financial instruments, however,
lack an available trading market as characterized by a willing buyer and
willing seller engaging in an exchange transaction. It is also the
Corporation's general practice and intent to hold its financial instruments to
maturity and to not engage in trading or sales activities except for loans
held-for-resale and available-for-sale securities. Therefore, significant
estimations and assumptions, as well as present value calculations, were used
by the Corporation for the purposes of this disclosure.
Estimated fair values have been determined by the Corporation using the
best available data and an estimation methodology suitable for each category of
financial instruments. For those loans and deposits with floating interest
rates it is presumed that estimated fair values generally approximate the
recorded book balances. The estimation methodologies used, the estimated fair
values, and the recorded book balances at December 31, 1997 and 1996, were as
follows:
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 21,268 $ 21,268 $ 18,033 $ 18,033
Federal funds sold 11,900 11,900 3,100 3,100
Investment securities 118,692 119,703 116,573 117,028
Loans, net 274,351 274,350 259,150 259,007
Accrued interest receivable 5,808 5,808 5,725 5,725
-------- -------- -------- --------
Total Financial Assets $432,019 $433,029 $402,581 $402,893
- -------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Non-interest-bearing
demand deposits $ 42,333 $ 42,333 $ 41,258 $ 41,258
Interest-bearing deposits 343,607 345,087 317,443 318,681
Short-term borrowings 13,237 13,237 13,537 13,537
Accrued interest payable 2,357 2,357 1,937 1,937
Long-term borrowings 3,750 3,750 4,350 4,350
-------- -------- -------- --------
Total Financial Liabilities $405,284 $406,764 $378,525 $379,763
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands except per share data)
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices. Cash and due from banks,
interest-bearing time deposits in other banks, federal funds sold, loans
held-for-sale and interest receivable are valued at book value which
approximates fair value.
Financial liability instruments with stated maturities have been valued
using a present value discounted cash flow with a discount rate approximating
current market for similar liabilities. Interest payable is valued at book
value which approximates fair value.
Financial instrument liabilities with no stated maturities have an
estimated fair value equal to both the amount payable on demand and the
recorded book balance.
The net loan portfolio has been valued using a present value discounted
cash flow. The discount rate used in these calculations is the current rate at
which similar loans would be made to borrowers with similar credit ratings,
same remaining maturities, and assumed prepayment risk.
Changes in assumptions or estimation methodologies may have a material
effect on these estimated fair values.
The Corporation's remaining assets and liabilities which are not
considered financial instruments have not been valued differently than has been
customary with historical cost accounting. No disclosure of the relationship
value of the Corporation's core deposit base is required by FAS 107. Because
the Corporation's 1997 cost of funds compares favorably with alternative
funding sources available to the Corporation, the relationship value of these
liabilities is believed by management to be significant. There is no material
difference between the notional amount and the estimated fair value of off
balance-sheet items which total $62,555 and $58,072 at December 31, 1997 and
December 31, 1996 respectively, and are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding.
Fair value estimates are based on existing on and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the subsidiary bank has a substantial trust
department that contributes net fee income annually. The trust department is
not considered a financial instrument, and its value has not been incorporated
into the fair value estimates. Other significant assets and liabilities that
are not considered financial assets or liabilities include the mortgage banking
operation, brokerage network, deferred tax liabilities, property, plant,
equipment, and goodwill. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in many of the estimates.
Management is concerned that reasonable comparability among 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.
13. UNDISTRIBUTED EARNINGS OF SUBSIDIARY BANK
National banking regulations and capital guidelines limit the amount of
dividends that may be paid by banks. During 1998, these regulations and
guidelines will permit the subsidiary bank of the Corporation to distribute
approximately $3,719 plus the 1998 income of the bank, without prior approval
from the national banking regulators. Future dividend payments by the
subsidiary bank would be dependent on individual regulatory capital
requirements and levels of profitability. Since the Corporation is a legal
entity, separate and distinct from the bank, the dividends of the Corporation
are not subject to such bank regulatory guidelines.
14. 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, 1997, commitments to
extend credit and standby letters of credit were approximately $61,713 and
$842, 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.
15. SUBSIDIARY BANK TRUST DEPARTMENT
During the first quarter of 1995, the Corporation's subsidiary bank
decided to reimburse trust customers for losses in the market value of various
inverse floater securities held in their trust accounts. These losses were a
result of increases in interest rates which both extended the expected average
life and lowered the market value of these securities. As a result of
reimbursing customers for the market value loss, the Corporation recorded
charges totaling $5,043 ($3,126 after tax) to 1995 earnings.
In addition to the first quarter reimbursement, following a comprehensive
review of the subsidiary bank's trust department, a plan was implemented during
the third quarter of 1995 to provide for the purchase, on an ongoing basis, of
selected securities from the subsidiary bank's trust department by the
Corporation. These securities were purchased at the higher of current market
value or original cost to the individual trust customer. Purchased securities
were held by the Corporation in an available-for-sale account and sold as
market conditions permitted. The excess, if any, of the cost of these
securities to the Corporation over the market value was expensed at the time of
the purchase, resulting in a negative effect on current income. For the years
ended December 31, 1996 and 1995, the Corporation incurred losses of $26 and
$189, respectively, relating to the purchase of these securities. There were no
additional purchases in 1997. However, during 1997, the remainder of the
securities was sold resulting in a net gain of $2. The losses in previous years
may be offset in the future by possible proceeds from claims that have been
filed with the insurance carrier by the Corporation.
<PAGE> 38
16. ACQUISITION
On June 7, 1996, the Corporation acquired all of the deposits ($24.6
million), equipment, and facility of the Sandwich branch of Superior Bank, FSB
(Sandwich). The acquisition of Sandwich was accounted for under the purchase
method of accounting and, accordingly, the assets acquired were adjusted to
their fair market values as of the acquisition date. Goodwill and prepaid
acquisition costs in connection with this acquisition in the amount of $3,002
are being amortized over fifteen years on a straight-line basis. Additionally,
a three-year not-to-compete covenant was also established in the amount of
$100, and is being amortized on a straight-line basis.
17. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation offers their retirees the opportunity to continue benefits
in the subsidiary bank's Employee Health Benefit Plan provided the retiree
agrees to pay a portion of their monthly premiums. The Corporation's level of
contribution is based upon an age and service formula and will provide benefits
to active participants until age 65. The components of the 1997, 1996, and 1995
net periodic post-retirement benefit cost are shown below:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Service cost $ 27 $ 26 $ 24
Interest cost 25 23 23
Net amortization of transition obligation 16 16 16
---- ---- ----
Net periodic post-retirement benefit cost $ 68 $ 65 $ 63
==== ==== ====
</TABLE>
As of December 31, 1997, 1996, and 1995 the accumulated post-retirement
benefit obligation totaled $349, $328, and $327, respectively. For measurement
purposes, a 10% annual rate of increase in the cost of covered benefits (health
care cost trend rate) was assumed for 1997, 1996, and 1995 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, 1997, 1996, and 1995.
18. CONDENSED FINANCIAL INFORMATION OF PRINCETON NATIONAL BANCORP, INC.
The following condensed financial statements are presented for the
Corporation alone (that is, without consolidation of the subsidiary bank's
financial information).
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1997 1996
<S> <C> <C>
ASSETS
Cash $ 14 $ 87
Interest-bearing deposits in subsidiary bank 530 938
Other assets 516 1,636
Investment in subsidiary bank 44,435 41,886
------- -------
TOTAL ASSETS $45,495 $44,547
======= =======
LIABILITIES
Long-term borrowings $ 3,750 $ 4,350
Other liabilities (923) -0-
------- -------
TOTAL LIABILITIES 2,827 4,350
------- -------
STOCKHOLDERS' EQUITY
Common stock 13,800 13,800
Surplus 6,235 6,193
Retained earnings 23,469 20,250
Unrealized gain on investment securities
available-for-sale 560 300
Less: Cost of treasury shares (1,396) (346)
------- -------
TOTAL STOCKHOLDERS' EQUITY 42,668 40,197
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $45,495 $44,547
======= =======
</TABLE>
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands except per share data)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
<S> <C> <C> <C>
INCOME
Dividends received from subsidiary bank $2,400 $ 2,350 $3,550
Interest income 62 145 47
Gain on sale of investment securities 2 1 3
Other income 1 -0- 13
------ ------- ------
TOTAL INCOME 2,465 2,496 3,613
------ ------- ------
EXPENSES
Interest expense 353 421 454
Amortization of goodwill and other intangible assets 63 63 63
Loss on purchase of investment securities -0- 26 189
Other expenses 118 137 91
------ ------- ------
TOTAL EXPENSES 534 647 797
------ ------- ------
Income before income taxes and equity
in undistributed income of subsidiary bank 1,931 1,849 2,816
Applicable income taxes (benefit) (138) (149) (228)
------ ------- ------
Income before equity in undistributed income
of subsidiary bank 2,069 1,998 3,044
Equity in undistributed income (loss) of
subsidiary bank 2,290 1,429 (2,686)
------ ------- ------
NET INCOME $4,359 $3,427 $358
====== ======= ======
NET INCOME PER SHARE:
Basic $1.61 $1.26 $0.13
Diluted $1.61 $1.26 $0.13
Weighted average shares outstanding 2,709,213 2,720,511 2,713,558
</TABLE>
<PAGE> 40
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1997 1996 1995
<S> <C> <C> <C>
Operating activities:
Net income $4,359 $3,427 $ 358
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of investment securities,
net of accretion (1) (4) (1)
(Gain) loss on securities transactions, net (2) 26 186
Equity in undistributed (income) loss (2,290) (1,429) 2,686
Amortization of goodwill
and other intangible assets 63 63 63
Decrease (increase) in other assets 261 (987) (21)
(Decrease) increase in other liabilities (1,056) 7 (153)
------- ------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,334 1,103 3,118
------- ------- -------
Investing activities:
Proceeds from sales of investment securities
available-for-sale 925 1,067 281
Proceeds from maturities of investment securities
available-for-sale 8 196 2
Purchase of investment securities
available-for-sale -0- (373) (2,309)
------- ------- -------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 933 890 (2,026)
------- ------- -------
Financing activities:
Payments for long-term borrowings (600) (1,350) (600)
Proceeds from long-term borrowings -0- 1,000 -0-
Sale of treasury stock 76 101 109
Purchase of treasury stock (1,084) -0- -0-
Dividends paid (1,140) (1,034) (977)
------- ------- -------
NET CASH USED BY
FINANCING ACTIVITIES (2,748) (1,283) (1,468)
------- ------- -------
(Decrease) increase in cash and cash equivalents (481) 710 (376)
Cash and cash equivalents at beginning of year 1,025 315 691
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 544 $1,025 $ 315
======= ======= =======
</TABLE>
<PAGE> 41
KPMG Peat Marwick LLP
The Board of Directors and Stockholders
Princeton National Bancorp, Inc.
Princeton, Illinois
We have audited the accompanying consolidated balance sheets of Princeton
National Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Princeton National Bancorp, Inc. and subsidiary as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
January 30, 1998
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding executive officers of the Corporation is
included as a Supplementary Item at the end of Part I of this Form 10- K.
Information regarding executive officers and directors of the Corporation is
included in the Corporation's Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held April 14, 1998 (the "Proxy Statement" under
the caption "Proposal 1-Election of Directors"), which information is hereby
incorporated by reference herein.
Information regarding compliance with Section 16(a) of the Exchange Act is
included in the Proxy Statement under the caption "Section 16(a) Beneficial
Ownership Compliance Reporting", which information is hereby incorporated by
reference herein.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is included in the Proxy
Statement under the captions "Proposal 1-Election of Directors--Board of
Directors and Committees", and "Executive Compensation -- Summary; -- Summary
Compensation Table; and Employment Agreements," which information is hereby
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information regarding security ownership is included in the Proxy Statement
under the captions "Election of Directors" and "Security Ownership of Certain
Beneficial Owners," which information is hereby incorporated by reference
herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding relationships and transactions is included in the
Proxy Statement under the caption "Certain Transactions," which information
is hereby incorporated by reference herein.
<PAGE> 43
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) The following is a list of the Financial Statements
included in Part II, Item 8 of this report:
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997, 1996, and 1995.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996, and 1995.
Notes to Consolidated Financial Statements.
Independent Auditors' Report
(a)(2) Financial Statement Schedules
No consolidated financial statement schedules are required to
be included in this Report on Form 10-K.
(a)(3) Exhibits
The exhibits filed herewith are listed on the Exhibit Index
filed as part of this report on Form 10-K. Each management contract
or compensatory plan or arrangement of the Corporation listed on the
Exhibit Index is separately identified by an asterisk.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Corporation for the
quarter ended December 31, 1997.
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registration has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PRINCETON NATIONAL BANCORP, INC.
By: /s/ Tony J. Sorcic
--------------------------------
Tony J. Sorcic
President and Chief Executive Officer
Date: March 23, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Tony J. Sorcic President and Chief Executive
- ------------------------------------- Officer and Director
Tony J. Sorcic (Principal Executive Officer)
/s/ Todd D. Fanning Controller
- ------------------------------------- (Principal Accounting and
Todd D. Fanning Financial Officer
Chairman of the Board
- -------------------------------------
Thomas R. Lasier
/s/ Don S. Browning Director
- -------------------------------------
Don S. Browning
Director
- -------------------------------------
John R. Ernat
Director
- -------------------------------------
Donald E. Grubb
/s/ Dr. Harold C. Hutchinson, Jr. Director
- -------------------------------------
Dr. Harold C. Hutchinson, Jr.
Director
- -------------------------------------
Thomas M. Longman
/s/ Stephen W. Samet Director
- -------------------------------------
Stephen W. Samet
Director
- -------------------------------------
Ervin I. Pietsch
/s/ Craig O. Wesner Director
- -------------------------------------
Craig O. Wesner
</TABLE>
<PAGE> 45
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Princeton
National Bancorp, Inc. ("PNB") (incorporated by reference to Exhibit
3.1 to the PNB Registration Statement on Form S-1 (Registration No.
33-46362) (the "S-1 Registration Statement")).
3.2 By-Laws of PNB (as amended through January 23, 1995),
(incorporated by reference to Exhibit 3.2 to the PNB Annual Report on
Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K")).
10.1* Employment Agreement, dated as of October 16, 1995, between PNB
and Tony J. Sorcic (incorporated by reference to Exhibit 10.1 to the
1995 Form 10-K).
10.2* Employment Agreement, dated as of July 10, 1995, between PNB
and D. E. Van Ordstrand (incorporated by reference to Exhibit 10.2 to
the 1995 Form 10-K).
10.3* Citizens First National Bank Profit Sharing Plan, as amended
and restated January 1, 1989 (incorporated by reference to Exhibit 10.4
to the S-1 Registration Statement).
10.4* Citizens First National Bank Defined Contribution Plan and
Trust, as amended and restated January 1, 1989 (incorporated by
reference to Exhibit 10.5 to the S-1 Registration Statement).
21 Subsidiaries of PNB.
27 Financial Data Schedule.
</TABLE>
* Management contract or compensatory plan.
<PAGE> 1
EXHIBIT 21. SUBSIDIARY OF PRINCETON NATIONAL BANCORP, INC.
Citizens First National Bank Princeton National Bancorp,
Inc. owns 100 percent of
the shares of Citizens
First National Bank.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS AND
STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 21,268
<INT-BEARING-DEPOSITS> 343,607
<FED-FUNDS-SOLD> 11,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 107,042
<INVESTMENTS-CARRYING> 12,498
<INVESTMENTS-MARKET> 12,661
<LOANS> 276,181
<ALLOWANCE> 1,830
<TOTAL-ASSETS> 449,660
<DEPOSITS> 385,940
<SHORT-TERM> 13,237
<LIABILITIES-OTHER> 4,065
<LONG-TERM> 3,750
0
0
<COMMON> 13,800
<OTHER-SE> 28,868
<TOTAL-LIABILITIES-AND-EQUITY> 449,660
<INTEREST-LOAN> 24,150
<INTEREST-INVEST> 6,598
<INTEREST-OTHER> 564
<INTEREST-TOTAL> 31,312
<INTEREST-DEPOSIT> 14,716
<INTEREST-EXPENSE> 15,541
<INTEREST-INCOME-NET> 15,771
<LOAN-LOSSES> 590
<SECURITIES-GAINS> 97
<EXPENSE-OTHER> 12,662
<INCOME-PRETAX> 5,884
<INCOME-PRE-EXTRAORDINARY> 5,884
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,359
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.61
<YIELD-ACTUAL> 4.25
<LOANS-NON> 810
<LOANS-PAST> 27
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 396
<ALLOWANCE-OPEN> 1,630
<CHARGE-OFFS> 1,006
<RECOVERIES> 616
<ALLOWANCE-CLOSE> 1,830
<ALLOWANCE-DOMESTIC> 1,574
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 256
</TABLE>
