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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-20050
PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-32110283
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
606 South Main Street
Princeton, Illinois 61356-2080
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (815) 875-4444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each
exchange on
Title of each class which registered
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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.
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X YES NO
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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. -----------
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At March 16, 2000, 3,484,343 shares of Common Stock, $5.00 Par Value,
were outstanding, and the aggregate market value of the common stock (based upon
the closing representative bid price of the common stock on March 15, 2000, as
reported by NASDAQ) held by nonaffiliates was approximately $36,585,602.
Determination of stock ownership by nonaffiliates was made solely for
the purpose of responding to this requirement and the registrant is not bound by
this determination for any other purpose.
Portions of the following documents are incorporated by reference:
2000 Notice and Proxy Statement for the Annual Meeting of Stockholders
April 11, 2000 (the "Proxy Statement") - Part III and portions of the
Corporation's 1999 Annual Report (the "Annual Report") - Parts II and III
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<PAGE>
PART I
ITEM 1. BUSINESS
Princeton National Bancorp, Inc. ("PNBC" or the "Corporation") is a
single-bank holding company which operates in one business segment and conducts
a full service commercial banking and trust business through its subsidiary
bank, Citizens First National Bank ("Citizens Bank", "the Bank", or the
"subsidiary bank"). PNBC was incorporated as a Delaware corporation in 1981 in
contemplation of the acquisition of all of the outstanding common stock of
Citizens Bank and other future acquisitions. At December 31, 1999, the
Corporation had consolidated total assets of $482,820,000 and stockholders'
equity of $40,946,000.
PNBC operates the Bank as a community bank with offices located for
convenience and with professional, highly motivated, progressive employees who
know the Bank's customers and are able to provide individualized, quality
service. As part of its community banking approach, PNBC requires officers of
the Bank to actively participate in community organizations. In addition, within
certain credit and rate of return parameters, PNBC attempts to ensure that the
Bank meets the lending needs of the communities in which offices are located,
and that the Bank invests in local and municipal securities.
Corporate policy, strategy, and goals are established by the Board of
Directors of PNBC. Pursuant to PNBC's holding company philosophy, operational
and administrative policies for the Bank are also established at the holding
company level. Within this framework, the Bank focuses on providing personalized
services and quality products to its customers to meet the needs of the
communities in which its offices are located. In 1999, the majority of the
directors of PNBC also served as the directors of Citizens Bank, which further
assists PNBC to directly implement its policies at Citizens Bank.
ACQUISITION AND EXPANSION STRATEGY
PNBC seeks to diversify both its market area and asset base and
increase profitability through acquisitions and expansion. PNBC's goal, as
reflected by its acquisition policy, is to expand through the acquisition of
established financial service organizations (primarily commercial banks to the
extent suitable candidates may be identified) and by expanding into potential
high growth areas. In integrating acquisitions, PNBC focuses on, among other
actions, implementing the policies established at Citizens Bank, improving asset
quality, the net interest margin, and encouraging community involvement.
PNBC will also consider establishing branch facilities as a means of
expanding its presence into new market areas. PNBC opened new branch facilities
in the Peru/LaSalle/Oglesby area in 1994, in Minooka in 1994, in Hampshire in
1995, in Henry in 1999, and will be opening a new branch facility in Huntley
during 2000.
CITIZENS FIRST NATIONAL BANK
Citizens Bank was organized in 1865 as a national bank under the
National Bank Act. Currently in its one hundred and thirty-fifth year, Citizens
Bank has fourteen offices in ten different communities in north central
Illinois: Princeton, DePue, Genoa, Hampshire, Henry, Minooka, Oglesby, Peru,
Sandwich and Spring Valley.
<PAGE>
Citizens Bank serves individuals, businesses and governmental bodies in
Bureau, LaSalle, Marshall, Grundy, Kane, Kendall, DeKalb and contiguous
counties. Citizens Bank operates a full-service community commercial bank and
trust business that offers a broad range of financial services to customers.
Citizens Bank's services consist primarily of commercial, real estate and
agricultural lending, consumer deposit and financial services, and trust and
farm management services.
COMMERCIAL, REAL ESTATE AND AGRICULTURAL LENDING
Citizens Bank's commercial loan department provides secured and to a
much lesser extent unsecured loans, including real estate loans, to companies
and individuals for business purposes and to governmental units within the
Bank's market area. As of December 31, 1999, Citizens Bank had commercial loans
of $48.0 million (15.6% of the Bank's total loan portfolio) and commercial real
estate loans of $57.3 million (18.6% of the Bank's total loan portfolio).
Citizens Bank does not have a concentration of commercial loans in any single
industry or business, except for loans to the agricultural industry as more
fully disclosed below.
Citizens Bank is one of the largest agricultural lenders in the State
of Illinois with its outstanding agricultural and agricultural real estate loans
primarily related to ventures within 30 miles of branch locations. As of
December 31, 1999, Citizens Bank had agricultural loans of $37.9 million and
agricultural real estate loans of $41.6 million, which represent approximately
12.3% and 13.5%, respectively, of the Bank's total loan portfolio.
Agricultural loans, many of which are secured by crops, machinery and
real estate, are provided to finance capital improvements and farm operations as
well as acquisitions of livestock and machinery. The agricultural loan
department, which has the equivalent of four lending officers, works closely
with all agricultural customers, including companies and individual farmers, and
assists in the preparation of budgets and cash flow projections for the ensuing
crop year. These budgets and cash flow projections are monitored closely by the
Bank during the year. In addition, Citizens Bank works closely with governmental
agencies, including the Farm Service Agency, to assist agricultural customers in
obtaining credit enhancement products, such as loan guaranties.
In accordance with its loan policy, Citizens Bank maintains a
diversified loan portfolio. As part of its loan policy and community banking
approach, Citizens Bank does not actively buy loans from or participate its
non-consumer loans to other lending institutions, particularly institutions
outside its market area. In connection with its credit relationships, Citizens
Bank encourages commercial and agricultural borrowers to maintain deposit
accounts at the Bank.
PERSONAL FINANCIAL SERVICES
The principal consumer services offered by Citizens Bank are demand,
savings and time deposit accounts, home mortgage loans, installment loans,
credit card loans, and brokerage services.
One of the strengths of Citizens Bank is the stability of its retail
deposit base. This stability is due primarily to the Bank's service oriented
competitive strategy and the economically diverse population of the counties
encompassing the fourteen banking offices. These locations provide convenience
for customers and visibility for Citizens Bank. A variety of marketing
strategies are used to attract and retain stable depositors,
<PAGE>
the most important of which is the officer call program. All officers of the
Bank call on customers and potential customers of the Bank to maintain and
develop deposit relationships.
Citizens Bank is active in consumer and mortgage lending with
approximately $67.9 million in home mortgage loans (22.0% of the Bank's total
loan portfolio) and $42.3 million in consumer installment loans (13.7% of the
Bank's total loan portfolio) as of December 31, 1999. To better serve its retail
customers, Citizens Bank is active in the secondary residential mortgage market.
As a matter of policy, Citizens Bank does not hold, in portfolio, long-term,
fixed-rate, single-family, home mortgage loans. However, servicing of those
loans is maintained, with approximately $58,870,000 of unpaid balances being
serviced as of December 31, 1999. Management believes customers receive a higher
level of quality service with this arrangement.
Citizens Bank maintains eighteen automated teller machines. The Bank is
a member of Magic Line which encompasses all of the major nationwide networks
such as CIRRUS, PLUS, and STAR. To enhance customer service and convenience,
Citizens Bank offers an ATM & Check Card, which can be used anywhere that
accepts VISA, and has been a tremendous benefit to our customers.
Citizens Bank continues to implement an intensive sales training
program, which includes team coaching, setting goals, measuring results, and
reward recognition. In 1999, the Bank achieved record levels of product
referrals, product sales, and total incentives paid to the employees.
TRUST DEPARTMENT AND FARM MANAGEMENT SERVICES
Gross revenue from Trust and Farm Management services in 1999 totaled
approximately $1,197,000, an increase of $78,000 (or 7.0%), compared to
$1,119,000 in 1998. Trust income alone amounted to $943,000 in 1999, compared to
$853,000 in 1998, while farm management fees were $254,000 in 1999, as compared
to $266,000 in 1998.
Total trust assets as of December 31, 1999 were $166,331,000,
representing an increase of approximately $12,573,000 (or 8.2%) over the total
at December 31, 1998. This increase is due primarily to an overall increase in
the number of accounts and corresponding increases in market value. The Trust
Department currently has 781 total accounts (compared to 683 total accounts at
December 31, 1998) and has 15,858 acres of farm land under management (compared
to 16,346 acres at December 31, 1998).
COMPETITION
PNBC is committed to community banking and to providing quality
products and services at competitive loan rates and deposit pricing in order to
remain competitive in its north central Illinois market. Citizens Bank competes
with both small, locally owned banks, as well as regional financial institutions
which have numerous offices. The Bank competes with these organizations, as well
as with savings and loan associations, credit unions, mortgage companies,
insurance companies and other local financial institutions for deposits, loans
and other business. The principal methods of competition include loan and
deposit pricing, the types and quality of services provided, and advertising and
marketing programs.
<PAGE>
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. The following information describes certain statutes and
regulations affecting PNBC and the Bank, and such discussion is qualified in its
entirety by reference to such statutes and regulations. Any change in applicable
law or regulations may have a material effect on the business of PNBC and the
Bank.
PNBC is registered as a bank holding company with the Board of
Governors of the Federal Reserve System (the "FRB"), and is subject to
supervision by the FRB under the Bank Holding Company Act of 1956, as amended
(the "BHC Act"). PNBC is required to file with the FRB periodic reports and such
additional information as the FRB may require pursuant to the BHC Act. The FRB
examines PNBC, and may examine the Bank.
The BHC Act requires prior FRB approval for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or control
of more than 5% of the voting shares or substantially all the assets of any
bank, or for a merger or consolidation of a bank holding company with another
bank holding company. With certain exceptions, the BHC Act prohibits a bank
holding company from acquiring direct or indirect ownership or control of voting
shares of any company which is not a bank or bank holding company and from
engaging directly or indirectly in any activity other than banking or managing
or controlling banks or performing services for its authorized subsidiaries. A
bank holding company may, however, engage in or acquire an interest in a company
that engages in activities which the FRB has determined by regulation or order
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
PNBC is a legal entity separate and distinct from the Bank. The major
source of PNBC's revenue is dividends received from the Bank. The right of PNBC
to participate as a stockholder in any distribution of assets of the Bank upon
its liquidation or reorganization or otherwise is subject to the prior claims of
creditors of the Bank. The Bank is subject to claims by creditors for long-term
and short-term debt obligations, including substantial obligations for federal
funds purchased and securities sold under repurchase agreements, as well as
deposit liabilities.
The Bank may declare dividends out of undivided profits, except that
until the surplus fund of the Bank is equal to its common capital, no dividend
can be declared until one-tenth of the Bank's net income for the applicable
period has been carried to the surplus fund. The Bank, however, cannot declare
or pay a dividend, if after making the dividend, the Bank would be
undercapitalized. In addition, prior approval of the Office of the Comptroller
of the Currency (the "OCC") is required if dividends declared by the Bank in any
calendar year will exceed its net income for that year combined with its
retained net income for the preceding two years. As of December 31, 1999,
national banking regulations and capital guidelines will permit the Bank to
distribute approximately $1,829,000 plus any 1999 net income of the Bank as
dividends without prior approval from the national banking regulators. Future
payments of dividends by the Bank will be dependent on individual regulatory
capital requirements and levels of profitability. The ability of the Bank to pay
dividends may be further restricted as a result of regulatory policies and
guidelines relating to dividend payments and capital adequacy.
Federal laws limit certain transactions between the Bank and its
affiliates, including PNBC. Such transactions include loans or extensions of
credit by the Bank to PNBC, the purchase of assets or securities
<PAGE>
of PNBC, the acceptance of PNBC's securities as collateral for loans, and the
issuance of a guaranty, acceptance or letter of credit on behalf of PNBC.
Transactions of this kind are limited to 10% of the Bank's capital and surplus
for transactions with one affiliate, and 20% of the Bank's capital and surplus
for transactions with all affiliates. Such transactions are also subject to
certain collateral requirements. These transactions, as well as other
transactions between the Bank and PNBC, must also be on terms substantially the
same as, or at least as favorable as, those prevailing at the time for
comparable transactions with nonaffiliated companies or, in the absence of
comparable transactions, on terms, or under circumstances, including credit
standards, that would be offered to, or would apply to, nonaffiliated companies.
FRB policy requires PNBC to act as a source of financial strength to
the Bank and commit resources to support the Bank. The FRB takes the position
that in implementing this policy, it may require PNBC to provide such support
when PNBC otherwise would not consider itself able to do so.
The various federal bank regulators, including the FRB and the OCC,
have adopted risk-based capital requirements for assessing bank holding company
and bank capital adequacy. These standards establish minimum capital standards
in relation to assets and off-balance sheet exposures, as adjusted for credit
risks. Capital is classified into two tiers. For bank holding companies, Tier 1
or "core" capital consists of common shareholders' equity, perpetual preferred
stock (subject to certain limitations) and minority interests in the equity
accounts of consolidated subsidiaries, and is reduced by goodwill and certain
other intangible assets ("Tier 1 Capital"). Tier 2 capital consists of (subject
to certain conditions and limitations) the allowance for possible credit losses,
perpetual preferred stock, "hybrid capital instruments," perpetual debt and
mandatory convertible debt securities, and term subordinated debt and
intermediate-term preferred stock ("Tier 2 Capital"). Total capital is the sum
of Tier 1 Capital and Tier 2 Capital (the latter being limited to 100% of Tier 1
Capital). Components of Tier 1 and Tier 2 Capital for national banks are
similar, but not identical, to those for holding companies.
Under the risk-adjusted capital standards, a minimum ratio of
qualifying total capital to risk-weighted assets of 8% and of Tier l Capital to
risk-weighted assets of 4% are required. The FRB and OCC also have adopted a
minimum leverage ratio of Tier 1 Capital to total assets of 3% for banks rated
"1" under the Uniform Financial Institutions Rating System or bank holding
companies rated "1" under the rating system of bank holding companies. All other
banks and bank holding companies must maintain a leverage ratio of 4%. In
addition, all banks and bank holding companies are expected to have capital
commensurate with the level and nature all risks to which they are exposed.
At December 31, 1999, PNBC had a total capital to risk-based assets
ratio of 12.31%, a Tier 1 capital to risk-based assets ratio of 11.71%, and a
leverage ratio of 8.21%. At December 31, 1999, the Bank had a total capital to
risk-based assets ratio of 12.85%, a Tier 1 capital to risk-based assets ratio
of 12.25%, and a leverage ratio of 8.59%.
The FDIC has a risk-based assessment system for the deposit insurance
provided to depositors at depository institutions whereby assessments to each
institution are calculated upon the probability that the insurance fund will
incur a loss with respect to the institution, the likely amount of such loss,
and the revenue needs of the insurance fund. The system utilizes nine separate
assessment classifications based on an entity's capital level and supervisory
evaluation. The Bank's deposits are predominantly insured through the Bank
<PAGE>
Insurance Fund (the "BIF") and certain deposits held by the Bank are insured
through the Savings Association Insurance Fund (the "SAIF"). The BIF and SAIF
are both administered by the FDIC.
The BIF semi-annual assessment rate currently ranges from 0 to 27 cents
per $100 of domestic deposits. The FDIC may increase or decrease the assessment
rate schedule on a semi-annual basis. An increase in the rate assessed on the
Bank could have an adverse effect on the earnings of PNBC and the Bank depending
on the amount of the increase.
Deposits insured by SAIF are currently assessed semi-annually at the
BIF rate of 0 to 27 cents per $100 of domestic deposits. The SAIF assessment
rate may increase or decrease as is necessary to maintain the designated SAIF
reserve ratio of 1.25% of SAIF-insured deposits.
All FDIC-insured depository institutions must pay a quarterly
assessment to provide funds for the payment of interest on bonds issued by the
Financing Corporation, a federal corporation chartered under the authority of
the Federal Housing Finance Board. The bonds (commonly referred to as FICO
bonds) were issued to capitalize the Federal Savings and Loan Insurance
Corporation. Since January 1, 2000, the same assessment rate has applied to all
deposits.
Since September 29, 1995, federal law has permitted adequately
capitalized and adequately managed bank holding companies to acquire banks
across state lines, without regard to whether the transaction is prohibited by
state law. Any state law relating to the minimum age of target banks (not to
exceed five years) or limits on the amount of deposits that may be controlled by
a single bank or bank holding company applies. The FRB is not permitted to
approve any acquisition if, after the acquisition, the bank holding company
would control more than 10% of the deposits of insured depository institutions
nationwide or 30% or more of the deposits in the state where the target bank is
located. The FRB could approve an acquisition, notwithstanding the 30% limit, if
the state waives the limit either by state regulation or order of the
appropriate state official.
Beginning on June 1, 1997, banks were permitted to merge with one
another across state lines and thereby create a main bank with branches in
separate states. Any state could, however, by adoption of a non-discriminatory
law elect to opt-out of this provision. Only Texas opted out of the interstate
merger provision. After establishing branches in a state through an interstate
merger transaction, a bank can establish and acquire additional branches at any
location in the state where any bank involved in the merger could have
established or acquired branches under applicable federal or state law.
PNBC does not have current plans to acquire banking organizations
located outside the state of Illinois.
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley
Act ("GLB Act"). Under the GLB Act, bank holding companies that meet certain
standards are permitted to engage in a wider range of activities than has been
permitted up to now, including securities and insurance activities.
Specifically, a bank holding company that elects to become a "financial holding
company" may engage in any activity that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines is (i) financial in
nature or incidental thereto, or (ii) complementary to any such
financial-in-nature activity, PROVIDED that such complementary activity does not
pose a substantial risk to the safety and soundness of depository institutions
or the financial system generally. A bank holding company may elect to become a
financial holding company
<PAGE>
only if each of its depository institution subsidiaries are well-capitalized,
well-managed, and have a Community Reinvestment Act rating of "satisfactory" or
better at their most recent examination.
This new law specifies many activities that are financial in nature,
including lending, exchanging, transferring, investing for others, or
safeguarding money or securities; underwriting and selling insurance; providing
financial, investment, or economic advisory services; underwritng, dealing in,
or making a market in securities; and those activities currently permitted for
bank holding companies that are so closely related to banking or managing or
controlling banks, as to be a proper incident thereto.
The GLB Act changes federal laws to facilitate affiliation between
banks and entities engaged in securities and insurance activities. The law also
establishes a system of functional regulation under which banking activities,
securities activities, and insurance activities conducted by financial holding
companies and their subsidiaries and affiliates will be separately regulated by
banking, securities, and insurance regulators, respectively.
National banks are also authorized by the GLB Act to engage, through
"financial subsidiaries," in activities that are permissible for financial
holding companies, and activities that the Secretary of the Treasury, in
consultation with the FRB, determines is financial in nature or incidental to
any such financial activity, except (i) insurance underwriting, (ii) real estate
development or real estate investment activities (unless otherwise permitted by
law), (iii) insurance company portfolio investments, and (iv) merchant banking.
A national bank's authority to invest in a financial subsidiary is subject to a
number of conditions, including, among other things, requirements that the bank
be well-managed and well-capitalized (after deducting from capital the bank's
outstanding investment in financial subsidiaries).
The GLB Act affects many other changes to federal law applicable to
PNBC and the Bank. One of these changes is a requirement that financial
institutions take steps to protect customers' "nonpublic personal information."
The new law requires the promulgation of several new regulations, which are
expected to be finalized by November 12, 2000 (i.e., one year after passage of
the law). At present, we are unable to predict the impact the Gramm-Leach-Bliley
Act will have on PNBC or the Bank.
EMPLOYEES
PNBC presently has no employees. However, certain of the employees and
executive officers of Citizens Bank provide their services to PNBC. A monthly
fee for these services is paid by PNBC to Citizens Bank. This fee is computed
annually and is based upon an average of the number of hours worked during the
year.
As of December 31, 1999, Citizens Bank employed 190 full-time and 42
part-time employees. The Bank offers a variety of employee benefits. Citizens
Bank employees are not represented by a union or a collective bargaining
agreement, and employee relations are considered to be excellent.
Citizens Bank believes one of its strengths is its ability to attract
and retain experienced and well- trained personnel who have a knowledge of the
market areas in which it operates. Management believes that PNBC generally has
an easier time attracting and retaining quality employees than other banks in
north central
<PAGE>
Illinois. This is due primarily to its size and management style, which affords
greater opportunities to employees for direct participation and development of
managerial and banking skills.
In order to implement PNBC's community banking philosophy and to
promote themselves as community oriented organizations, the Bank has a formal
officer call program. Each officer of the Bank calls on existing or potential
customers and is expected to become actively involved in leadership positions in
community organizations. As of December 31, 1999, employees of the Bank
participated in approximately 137 community organizations, serving over 13,500
hours of community service in 1999.
ITEM 2. PROPERTIES
PNBC's headquarters and Citizens Bank's principal offices are located
at 606 South Main Street, Princeton, Illinois. Also located at this address is
an annex completed in 1991 that contains, among others, the trust and farm
management departments. The two buildings at this location are owned by Citizens
Bank and contain approximately 36,000 square feet of space, all of which is
occupied by PNBC and Citizens Bank. Citizens Bank also has two drive-up
facilities in Princeton and branch offices in DePue, Genoa, Hampshire, Henry,
Minooka, Oglesby, Peru, Sandwich and Spring Valley. Citizens Bank is the owner
of each of these facilities. None of the facilities owned by the Bank are
subject to a mortgage. Citizens Bank also owns property in Huntley (Kane county)
on which a full-service branch facility is being constructed. It is anticipated
that this facility will open in the summer of 2000. For additional information
regarding these properties, see Footnote 5 of Item 8 of this report.
ITEM 3. LEGAL PROCEEDINGS
A ruling was received during the third quarter of 1998 on the
subsidiary bank's lawsuit, stemming from the 1995 Trust Department issue,
against Cincinnati Insurance Company. The case was heard in the United States
District Court for the Northern District of Illinois, Eastern Division, in
Chicago, Illinois. The judge ruled in favor of the subsidiary bank on all issues
and awarded $4,900,000 in damages, pre-judgment interest, post-judgment
interest, and reasonable attorney fees and costs. Cincinnati Insurance Company
filed an appeal to the ruling.
In January, 2000, the Seventh Circuit Court of Appeals issued its
decision on the appeal, affirming the Federal Division Court Award and
increasing the recovery under the policy by $100,000 though setting aside the
award of attorneys' fees. The subsidiary bank is therefore entitled to
$5,000,000 under the policy, pre-judgment interest of approximately $730,000,
and post-judgment interest accruing at the statutory rate from the date of the
original judgment in the lower court of approximately $400,000.
On February 17, 2000, the subsidiary bank received the settlement from
Cincinnati Insurance Company in the amount of $6,235,000, bringing the matter to
a conclusion.
The Bank is subject to legal proceedings and claims that arise in the
ordinary course of business. Although management of the Corporation cannot
predict the ultimate outcome of such matters, it believes that the ultimate
resolution of these matters will not have a material adverse effect on the
Corporation, the Bank, or the Corporation's financial position, liquidity, and
results of operations.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
fourth quarter of 1999.
SUPPLEMENTAL ITEM - EXECUTIVE OFFICERS
The following table sets forth information regarding the executive
officers:
Name Age Position
---- --- --------
Tony J. Sorcic 46 President & Chief Executive Officer
James B. Miller 44 Executive Vice-President
Tony J. Sorcic has been President and Chief Executive Officer of PNBC
since January, 1997, and first became a director of PNBC in 1986. He joined
Citizens Bank in 1981 as Assistant Vice-President of Operations and became
Executive Vice-President in 1986. Mr. Sorcic was named President in 1995.
James B. Miller joined Citizens Bank in 1979 as an agricultural loan
officer and has been the Executive Vice-President of PNBC since 1996. Mr. Miller
currently is the Executive Vice-President and Commercial Banking Manager of
Citizens Bank.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Since May 15, 1992, PNBC's Common Stock has been listed on The NASDAQ
Stock Market under the symbol PNBC.
The table below indicates the high and low bid prices, and the
dividends declared per share for the Common Stock during the periods indicated.
The prices shown reflect interdealer prices and include retail markups,
markdowns or commissions and may not necessarily represent actual transactions.
Cash
Prices Dividends
High Low Declared
---- --- --------
1999
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First Quarter 17.75 $16.38 $ .09
Second Quarter 17.38 14.63 .09
Third Quarter 15.38 10.75 .09
Fourth Quarter 13.13 10.75 .08
1998
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First Quarter $20.50 $15.25 $ .08
Second Quarter 22.50 17.50 .08
Third Quarter 21.00 16.50 .08
Fourth Quarter 17.75 16.00 .07
On March 16, 2000, PNBC had 588 holders of record of its Common Stock.
The holders of the Common Stock are entitled to receive such dividends
as are declared by the Board of Directors of PNBC, which considers payment of
dividends quarterly. The ability of PNBC to pay dividends is dependent upon its
receipt of dividends from the Bank. In determining cash dividends, the Board of
Directors considers the earnings, capital requirements, debt servicing
requirements, financial ratio guidelines established by the Board, the financial
condition of PNBC, and other relevant factors. The Bank's ability to pay
dividends to PNBC is subject to regulatory restrictions set forth under "Item 1.
Business - Supervision and Regulation" which is incorporated herein by
reference.
PNBC has paid regular cash dividends on the Common Stock since it
commenced operations in 1982. PNBC currently anticipates that cash dividends
comparable to those that have been paid in the past will continue to be paid in
the future. There can be no assurance, however, that any such dividends will be
paid
<PAGE>
by PNBC or that such dividends will not be reduced or eliminated in the future.
The timing and amount of dividends will depend upon the earnings, capital
requirements and financial condition of PNBC and the Bank, as well as the
general economic conditions and other relevant factors affecting PNBC and the
Bank. Information concerning the Bank analysis of financial condition is set
forth under "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information regarding the Corporation's selected financial data is
included on page 35 of the Corporation's Annual Report, which information is
incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information regarding the Corporation's management's discussion and
analysis of financial condition and results of operations is included on pages
24-33 in the Corporation's Annual Report, which information is incorporated by
reference herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 305 of Regulation S-K is contained in
the Corporation's Annual Report on pages 31 and 32, under the heading "Asset
Liability Management," which information is incorporated herein by reference.
Additionally, as mentioned in the section referred to above, the
Corporation performs an interest rate risk analysis on a quarterly basis
applying an immediate shift in interest rates of +200 basis points and -200
basis points to determine the impact on net interest income and net income. As
of December 31, 1999, if interest rates were to increase 200 basis points, net
interest income would decrease approximately $259,000 (or 1.6%) and net income
would decrease approximately $179,000 (or 4.6%). However, if interest rates were
to decrease 200 basis points, net interest income would increase approximately
$259,000 (or 1.6%) and net income would increase approximately $179,000 (or
4.6%).
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information regarding the Corporation's consolidated financial
statements and supplementary data is included on pages 9-23 in the Corporation's
Annual Report, which information is incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on
accounting and financial disclosure.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding executive officers of the Corporation is
included as a Supplementary Item at the end of Part I of this Form 10-K.
Information regarding executive officers and directors of the
Corporation is included in the Proxy Statement under the caption "Proposal
1-Election of Directors," which information is incorporated by reference herein.
Information regarding compliance with Section 16(a) of the Exchange Act
is included in the Proxy Statement under the caption "Section 16(a) Beneficial
Ownership Compliance Reporting," which information is incorporated by reference
herein.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is included in the Proxy
Statement under the captions "Proposal 1-Election of Directors--Board of
Directors Meetings and Committees" and "Executive Compensation -- Summary; --
Summary Compensation Table; and Employment Agreements," which information is
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership is included in the Proxy
Statement under the captions "Election of Directors" and "Security Ownership of
Certain Beneficial Owners," which information is incorporated by reference
herein.
Neither the Corporation nor the Bank is aware of any arrangements,
including any pledge by any person of securities of the Corporation or the Bank,
the operation of which may at a subsequent date result in a change in control of
the Corporation or Bank.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding relationships and transactions is included in the
Proxy Statement under the caption "Certain Transactions," which information is
incorporated by reference herein.
<PAGE>
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following is a list of the Financial Statements included in Part
II, Item 8 of this report:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December
31, 1999, 1998 and 1997.
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1999, 1998, and 1997.
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997.
Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
No consolidated financial statement schedules are required
to be included in this Report on Form 10-K.
(a)(3) Exhibits
The exhibits filed herewith are listed on the Exhibit Index
filed as part of this report on Form 10-K. Each management contract or
compensatory plan or arrangement of the Corporation listed on the
Exhibit Index is separately identified by an asterisk.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Corporation for the
quarter ended December 31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registration has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PRINCETON NATIONAL BANCORP, INC.
By: /s/ Tony J. Sorcic
---------------------------------
Tony J. Sorcic
President and Chief Executive Officer
Date: March 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Tony J. Sorcic President and Chief Executive March 27, 2000
- --------------------------------- Officer and Director
Tony J. Sorcic (Principal Executive Officer)
/s/ Todd D. Fanning Chief Financial Officer
- --------------------------------- (Principal Accounting and Financial Officer)
Todd D. Fanning
Chairman of the Board March 27, 2000
- ---------------------------------
Thomas R. Lasier
/s/Don S. Browning Director
- ---------------------------------
Don S. Browning
Director March 27, 2000
- ---------------------------------
John R. Ernat
/s/ Donald E. Grubb Director
- ---------------------------------
Donald E. Grubb
/s/ Dr. Harold C. Hutchinson, Jr. Director
- ---------------------------------
Dr. Harold C. Hutchinson, Jr.
/s/ Thomas M. Longman Director
- ---------------------------------
Thomas M. Longman
/s/ Stephen W. Samet Director
- ---------------------------------
Stephen W. Samet
Director March 27, 2000
- ---------------------------------
Ervin I. Pietsch
/s/ Craig O. Wesner Director
- ---------------------------------
Craig O. Wesner
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- ------ -------
3.1 Amended and Restated Certificate of Incorporation of Princeton National
Bancorp, Inc. ("PNBC") (incorporated by reference to Exhibit 3.1 to the
PNBC Registration Statement on Form S-1 (Registration No. 33-46362)
(the "S-1 Registration Statement")).
3.2 By-Laws of PNBC (as amended and restated January 17, 2000).
10.1* Employment Agreement, dated as of February 22, 1999, between PNBC and
James B. Miller.
10.2* Employment Agreement, dated as of October 16, 1995, between PNBC and
Tony J. Sorcic (incorporated by reference to Exhibit 10.1 to the 1995
Form 10-K).
10.3* Citizens First National Bank Profit Sharing Plan, as amended and
restated January 1, 1989 (incorporated by reference to Exhibit 10.4 to
the S-1 Registration Statement).
10.4* Citizens First National Bank Defined Contribution Plan and Trust, as
amended and restated January 1, 1989 (incorporated by reference to
Exhibit 10.5 to the S-1 Registration Statement).
10.5* Princeton National Bancorp, Inc. Stock Option Plan (incorporated by
reference to the Proxy statement for the Annual Meeting of Stockholders
held on April 14, 1998).
13 1999 Annual Report to Shareholders
21 Subsidiaries of PNBC.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
* Management contract or compensatory plan.
BYLAWS OF
PRINCETON NATIONAL BANCORP, INC.
AMENDED AND RESTATED JANUARY 17, 2000
ARTICLE I: MEETINGS OF STOCKHOLDERS
SECTION 1: The annual meeting of the stockholders of the Corporation shall be
held in Princeton, Illinois at a time and place to be determined by the Board of
Directors for the election of Directors and such other business as may properly
come before the meeting.
SECTION 2: Except as otherwise specifically provided by statute, special
meetings of the stockholders may be called for any purpose at any time by the
Board of Directors only. Every such special meeting, unless otherwise provided
by law, shall be called by mailing, postage prepaid, not less than ten days
prior to the date fixed for such meeting, to each stockholder at his address
appearing on the books of the Corporation a notice stating the place, date, hour
and purpose of the meeting.
SECTION 3: It shall be the duty of the President to give proper notice of the
place, day and hour of and other matters with respect to each meeting as may be
called pursuant to these Bylaws in the form and manner required or permitted by
the laws relating to the business for which such meeting is called.
SECTION 4: The Board of Directors may designate any place as the place of
meeting for any annual meeting. In the case of a special meeting, the meeting
shall be held at such place within Princeton, Illinois as may be designated in
the call.
SECTION 5: In lieu of closing the stock transfer books for the purpose of
determining stockholder entitled to notice of or to vote at any meeting of
stockholders, or stockholders entitled to receive payment of any dividend, or in
order to make a determination of stockholders for any other proper purpose, the
Board of Directors may fix in advance a date as the record date for any such
determination. In the absence of specific action by the Board closing the stock
transfer books or fixing a different record date, at each annual meeting of the
stockholders, and at each special meeting, each stockholder of record at the
close of business on the fifteenth (15th) day preceding the day of such meeting
shall be entitled to vote, in person or by proxy, the number of shares of stock
registered in his name on the stock books as of said record date.
Notwithstanding the foregoing, the record date with respect to a meeting of
stockholders to consider a merger or consolidation shall not be less than twenty
(20) days prior to such meeting.
SECTION 6: The Secretary shall make a record of the stockholders represented in
person or by proxy, giving the names of the stockholders present and the number
of shares of stock held by each; the names of stockholders represented by proxy;
the number of shares held by each and the names of the proxies. The record shall
show the number of shares voted, in person or by proxy, for each resolution and
for each candidate for Director and shall be filed with the minutes of the
Corporation.
<PAGE>
SECTION 7: A majority of the outstanding shares of the capital stock of the
Corporation, represented either by the holders thereof or by duly authenticated
proxies, shall constitute a quorum for the transaction of business at any
meeting of the stockholders, but in the absence of a quorum a meeting may be
adjourned from time to time without notice to the stockholders.
SECTION 8: (a) Business to be considered by the stockholders shall be brought
before an annual meeting (i) pursuant to the Corporation's notice of meeting,
(ii) by or at the direction of the Board or (iii) by any stockholder of the
Corporation who was a stockholder of record at the time of giving of notice
provided for in this Section, who is entitled to vote with respect thereto and
who complies with the notice procedures set forth in this Section. For business
to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation and such proposed business must otherwise be a proper matter for
stockholder action. To be timely, a stockholder's notice must be delivered to or
mailed to and received by the Secretary at the principal executive offices of
the Corporation not later than the close of business on the 120th day nor
earlier than the close of business on the 150th day prior to the anniversary of
the mailing date of the proxy statement for the preceding year's annual meeting.
In no event shall the public or other announcement of an adjournment of an
annual meeting or the adjournment thereof commence a new time period for the
giving of a stockholder's notice as described above. Such stockholder's notice
to the Secretary of the Corporation shall set forth (i) as to any business the
stockholder proposed to bring before the annual meeting, (A) a brief description
of the business desired to be brought before the annual meeting, (B) the reasons
for conducting such business at the annual meeting, (C) any material interest in
such business of such stockholder and (D) the beneficial owner, if any, on whose
behalf the proposal is made, and (ii) as to the stockholder giving the notice
and the beneficial owner, if any, on whose behalf the proposed business is to be
brought, (A) the name and address of such stockholder as they appear on the
Corporation's books, and the name and address of such beneficial owner and (B)
the class and number of shares of the Corporation's capital stock that are owned
beneficially and of record by such stockholder and such beneficial owner.
(b) At any special meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting.
(c) Notwithstanding anything in these Bylaws of the Corporation to the
contrary, only such business shall be brought before or conducted at a meeting
of stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in this Section. The officer of the Corporation or
other person presiding over the meeting shall, if the facts so warrant,
determine and declare to the meeting that business was not brought before the
meeting in accordance with the provisions of this Section and, if such person
should so determine, such person shall so declare to the meeting and any such
business so determined not to be properly before the meeting shall be
disregarded.
SECTION 9: (a) Nominations of candidates for election as directors at any
meeting of stockholders may be made: (i) by, or at the direction of, a majority
of the Board, or (ii) by any stockholder of
2
<PAGE>
record entitled to vote at such meeting; provided that only persons nominated in
accordance with procedures set forth in this Section shall be eligible for
election as directors.
(b) Nominations, other than those made by, or at the direction of, the
Board, may only be made pursuant to timely notice in writing to the Secretary of
the Corporation as set forth in this Section. To be timely, a stockholder's
notice shall be delivered to, or mailed and received by the Secretary of the
Corporation, for an annual meeting, not later than the close of business on the
120th day nor earlier than the close of business on the 150th day prior to the
anniversary of the mailing date of the proxy statement for the previous year's
annual meeting. Such stockholder notice shall set forth: (i) as to each person
whom the stockholder proposes to nominate for election as a director: (A) the
name, age, business address and residential address of such person; (B) the
principal occupation or employment of such person; (C) the class and number of
shares of the Corporation's stock which are beneficially owned by such person on
the date of such stockholder notice; and (D) any other information relating to
such person that would be required to be disclosed on Schedule 13D pursuant to
Regulation 13D-G under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), in connection with the solicitation of proxies with respect to
nominees for election as directors, regardless of whether such person is subject
to the provisions of such regulations, including, but not limited to,
information required to be disclosed by Items 4(b) and 6 of Schedule 14A of
Regulation 14A with the Securities and Exchange Commission; and (ii) as to the
stockholder giving the notice: (A) the name and address, as they appear on the
Corporation's books, of such stockholder and the name and principal business or
residential address of any other beneficial stockholders known by such
stockholder to support such nominees; and (B) the class and number of shares of
the Corporation's stock which are beneficially owned by such stockholder on the
date of such stockholder notice and the number of shares owned beneficially by
any other record or beneficial stockholders known by such stockholder to be
supporting such nominees on the date of such stockholder notice. At the request
of the Board, any person nominated by, or at the request of, the Board for
election as a director shall furnish to the Secretary of the Corporation that
information required to be set forth in a stockholder's notice of nomination
which pertains to the nominee.
(c) The Board may reject any nomination by a stockholder not timely
made in accordance with the requirements of this Section. If the Board, or a
committee designated by the Board, determines that the information provided in a
stockholder's notice does not satisfy the informational requirements of this
Section in any material respect, the Secretary of the Corporation shall promptly
notify such stockholder of the deficiency in the notice. The stockholder may
cure the deficiency by providing additional information to the Secretary within
such period of time, not less than five days from the date such deficiency
notice is given to the stockholder, as the Board or such committee shall
determine. If the deficiency is not cured within such period, or if the Board or
such committee determines that the additional information provided by the
stockholder, together with information previously provided, does not satisfy the
requirements of this Section in any material respect, then the Board may reject
such stockholder's notice and the proposed nominations shall not be accepted if
presented at the stockholder meeting to which the notice relates. The Secretary
of the Corporation shall notify a stockholder in writing whether his or her
nomination has been made in accordance with the time and informational
requirements of this Section. Notwithstanding the procedure set forth in this
3
<PAGE>
Section, if neither the Board nor such committee makes a determination as to the
validity of any nominations by a stockholder, the presiding officer of the
stockholder's meeting shall determine and declare at the meeting whether a
nomination was not made in accordance with the terms of this Section. If the
presiding officer determines that a nomination was not made in accordance with
the terms of this Section, he or she shall so declare at the meeting and the
defective nomination shall not be accepted.
ARTICLE II: DIRECTORS
SECTION 1: The business and affairs of the Corporation shall be managed by the
Board of Directors. Except as expressly limited by law, all corporate powers of
the Corporation shall be vested in and may be exercised by said Board.
SECTION 2: The number of directors of the Corporation and the term of office of
each director shall be as set forth in the Amended and Restated Certificate of
Incorporation. Any director may resign at any time upon written notice to the
Corporation.
SECTION 3: (a) The Board of Directors may adopt such rules and regulations for
the conduct of its meeting and the management of the affairs of the Corporation
as it may deem proper, not inconsistent with the law of the United States, of
the state of Delaware, or these Bylaws; and all officers and employees shall
strictly adhere to and be bound by such rules and regulations.
(b) The Board of Directors shall have power to appoint such committees
as it may deem necessary, and from time to time, suspend or continue the powers
and duties of any committee.
SECTION 4: A meeting for the organization of the Board of Directors shall be
held immediately after adjournment of the annual stockholder meeting for the
election of Directors at such hour and at such place as shall be announced by
the President at such annual meeting as soon as the result of the election is
known. Regular meetings of the Board of Directors shall be held without other
notice than this Bylaw on the second Monday of each month at the main office of
the Citizens First National Bank, Princeton, Illinois, unless such day be a
legal holiday, in which case, the regular meeting shall be held at the same time
on the next business day, or at such other time as the Board of Directors may
determine. Special meetings may be called by the President or by or at the
written request of any three or more Directors. Except to the extent the time or
method of giving notice is regulated by statute, twenty-four hours' notice of
any special meeting shall be given by telegram, letter, or in person to each
Director, stating the time and place of each special meeting. Any Director may
waive notice of any meeting, by waiver signed either before or after such
meeting. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting with the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at nor the purpose of any meeting need be specified in
the notice or waiver.
4
<PAGE>
SECTION 5: (a) A majority of the members of the Board of Directors shall
constitute a quorum for the transaction of business. If, at any time fixed for
the meeting, a quorum is not present, the directors in attendance may adjourn
the meeting from time to time until a quorum is obtained.
(b) Except as otherwise provided herein, the majority of those
Directors present and voting at any meeting of the Board of Directors shall
decide each matter considered. A Director cannot vote by proxy, or otherwise act
by proxy, at a meeting of the Board of Directors.
SECTION 6: The Board of Directors may appoint a Secretary of the Board of
Directors who may or may not be a member of the Board and who shall keep the
minutes of the meeting of the Board of Directors and perform such other duties
as the Board of Directors shall from time to time prescribe.
SECTION 7: Unless otherwise restricted by the Certificate of Incorporation or
Bylaws, any action required or permitted to be taken at any meeting of the Board
of Directors, or any committee thereof, may be taken without a meeting if all
members of the Board or Committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or Committee.
ARTICLE III: OFFICERS AND MANAGERS
SECTION 1: The officers of the Corporation shall be a Chairman of the Board of
Directors, a President, one or more vice Presidents, a Secretary, a Treasurer
and any other officers designated by the Board. Said officers shall be elected
by the Board of Directors and shall hold their respective offices until the next
organizational meeting of the board of Directors, or until their successors are
elected and qualified. The President and Chairman of the Board of Directors
shall be persons who are duly elected members of the Board of Directors.
Election or appointment of an officer or agent shall not of itself create
contract rights. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever in its judgment the
best interests of the Corporation would be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed. Any two or more offices may be held by the same person. A vacancy in
any office because of death, resignation, removal, disqualification or
otherwise, may be filled by the Board of Directors for the unexpired portion of
the term.
SECTION 2: All officers shall be subject to the supervision and direction of the
Board of Directors.
SECTION 3: (a) CHAIRMAN OF THE BOARD OF DIRECTORS - The Chairman of the Board of
Directors shall participate in the supervision of the policies of the
Corporation and shall have such other duties as shall be assigned to him by the
Board of Directors. He shall preside at meetings of the stockholders and at
meetings of the Board of Directors.
(b) PRESIDENT - The President shall be the chief executive officer of
the Corporation and as such, shall have, subject to the supervision and
direction of the Board of Directors, general supervision of the business,
property and affairs of the Corporation and all of
5
<PAGE>
the powers vested in him by law or by these Bylaws, or which usually attach or
pertain to such office. He shall be an EX OFFICIO member of all committees. He
shall have power on behalf of the Corporation to execute any and all contracts,
and sign certificates, checks, drafts, orders, receipts or other instruments or
documents not required by the Bylaws or by any resolution of the Board of
Directors or by law to be signed by another officer or officers. He shall have
power on behalf of the Corporation to accept any office, duty or position of
trust or confidence which the Corporation may be by law authorized to accept. He
shall have power to declare defaults, employ counsel and direct the taking of
any legal action in reference to any matter or thing touching the interests of
the Corporation. He shall make a report at each regular meeting of the Board of
Directors of such matters as the Board of Directors may request or he
determines.
(c) VICE PRESIDENTS - The Vice President, or each of the Vice
Presidents if there is more than one, shall have and perform such duties as the
President may delegate, and is authorized, subject to the supervision and
direction of the President and within the limits authorized by the Board of
Directors, to execute contracts and agreements in relation to loans and other
borrowings incurred in the ordinary course of business, sign authentications and
certificates in connection with certificates of stock and sign or countersign
checks, drafts, and all similar instruments or obligations issued by this
Corporation.
(d) TREASURER - The Treasurer hall have the custody of the corporate
funds and securities and shall keep full and accurate account of receipts and
disbursements in books belonging to the Corporation. The Treasurer shall deposit
all monies and other valuables in the name and to the credit of the Corporation
in such depositories as may be designated by the Board of Directors.
The Treasurer shall disburse such funds of the Corporation as may be
ordered by the Board of Directors, or the President, taking proper vouchers for
such disbursements. The Treasurer shall render to the President and Board of
Directors at the regular meetings of the Board of Directors, or whenever they
may request it, an account of all his transactions as Treasurer and of the
financial condition of the Corporation. If required by the Board of Directors,
the Treasurer shall give the Corporation a bond for the faithful discharge of
their duties in such amount and with such surety as the Board shall prescribe.
(e) SECRETARY - The Secretary shall give, or cause to be given, notice
of all meetings of stockholders and directors, and all other notice required by
law or by these Bylaws, and in case of the Secretary's absence or refusal or
neglect to do so, any such notice may be given by any person thereunto directed
by the President, or by the Directors, or stockholders, upon whose requisition
the meeting is called as provided in these Bylaws. The Secretary shall record
all the proceedings of the meetings of the Corporation and of the Directors in a
book to be kept for that purpose, and shall perform such other duties as may be
assigned to the Secretary by the Directors or the President. The Secretary shall
have the custody of the seal of the Corporation and shall affix the same to all
instruments requiring it, when authorized by the Directors or the President and
attest the same.
(f) OTHER OFFICERS - The Board of Directors may appoint one or more
Assistant Treasurers, one or more Assistant Secretaries, and such other officers
as from time to time may
6
<PAGE>
appear to the Board of Directors to be required or desirable to transact the
business of the Corporation. Such officers shall respectively exercise such
powers and perform such duties as may be delegated to the several offices, or as
may be conferred upon, or assigned to them, by the Board of Directors or by the
President.
ARTICLE IV: COMMITTEES
The Board of Directors may appoint from time to time such committees of
Directors for such purpose and with such powers as the Board may determine.
ARTICLE V: SEAL
The Board of Directors shall provide a seal for the Corporation, which
shall be in the charge of the Secretary or any other officer designated by them
or by the President, such seal or a facsimile thereof to be affixed to or
otherwise reproduced on certificates of stock and any other documents in
accordance with the directions of the Board of Directors, the President, any
Vice President or the Secretary.
ARTICLE VI: CAPITAL STOCK
SECTION 1: Every holder of stock in the Corporation shall be entitled to have a
certificate, signed by, or in the name of the Corporation by, the Chairman of
the Board of Directors or by the President or a Vice President and the Treasurer
or an Assistant Treasurer or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by them in the Corporation.
Where a certificate is countersigned (1) by a transfer agent other than the
Corporation or its employee, or (2) by a registrar other than the Corporation or
its employee, any other signature on the certificate may be facsimile. In case
of any officer, transfer agent or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, it may
be issued by the Corporation with the same effect as if they were such officer,
transfer agent or registrar at the date of issue.
SECTION 2: If the Corporation shall be authorized to issue more than one class
of stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preference and/or rights shall be as determined by the
Board of Directors in accordance with then applicable provisions of the General
Corporation Law of the State of Delaware.
SECTION 3: A new certificate of stock may be issued in the place of any
certificate theretofore issued by the Corporation, alleged to have been lost or
destroyed, and the Directors may in their discretion, require the owner of the
lost or destroyed certificate, or their legal representative, to give the
Corporation a bond, in such sum as they may direct, not exceeding double the
value of the stock to indemnify the Corporation against any claim that may be
made against it on account of the alleged loss of any such certificate, or the
issuance of any such new certificate.
7
<PAGE>
SECTION 4: The shares of stock of the Corporation shall be transferable only
upon its books by the holders thereof in person or by their duly authorized
attorneys or legal representatives, and upon such transfer the old certificates
shall be surrendered to the Corporation by the delivery thereof to the person in
charge of the stock and transfer books and ledgers, or to such other person as
the directors may designate, by whom they shall be canceled, and new
certificates shall thereupon be issued. A record shall be made of each transfer
and whenever a transfer shall be made for collateral security, and not
absolutely, it shall be so expressed in the entry of the transfer, if when the
certificates are presented for transfer, both the transferor and the transferee
request the Corporation to do so.
ARTICLE VII: PROHIBITED LOANS
This Corporation shall make no loans in whole or in part upon the stock
of this Corporation as collateral.
ARTICLE VIII: INDEMNIFICATION OF DIRECTORS OR OFFICERS
SECTION 1: The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation), by reason of the
fact that such person is or was a director, officer, employee or agent of the
Corporation, or is or was a director, officer, employee or agent of the
Corporation serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in, or not opposed
to, the best interests of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which the person reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his or her
conduct was unlawful.
SECTION 2: The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director, officer, employee or agent of the
Corporation serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
Corporation, and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to
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the extent that the Delaware Court of Chancery of the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of 1iability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Delaware Court of Chancery or such other court shall deem proper.
SECTION 3: Any indemnification under Sections (1) and (2) of this ARTICLE VIII
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because such person
has met the applicable standard of conduct set forth in Sections (1) and (2) of
this ARTICLE VIII. Such determination shall be made (i) by a majority vote of
the directors who are not parties to such action, suit or proceeding, even
though less than a quorum, or (ii) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion, or (iii)
by the stockholders.
SECTION 4: Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the Corporation as authorized in this ARTICLE VIII. Such expenses
(including attorneys' fees) incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the Board of Directors deem
appropriate.
SECTION 5: The indemnification and advancement of expenses provided by, or
granted pursuant to, the other Sections of this ARTICLE VIII shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in such
person's official capacity and as to action in another capacity while holding
such office.
SECTION 6: The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
such person and incurred by such person in any such capacity, or arising out of
such person's status as such, whether or not the Corporation would have the
power to indemnify such person against such liability under this ARTICLE VIII or
otherwise.
SECTION 7: For purposes of this ARTICLE VIII, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent or a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this ARTICLE VIII with respect to the
resulting
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or surviving corporation as such person would have with respect to such
constituent corporation if its separate existence had continued.
SECTION 8: For purposes of this ARTICLE VIII, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee or
agent with respect to an employee benefit plan, its participants or
beneficiaries; and a person who acted in good faith and in a manner such person
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this ARTICLE
VIII.
SECTION 9: The indemnification and advancement of expenses provided by, or
granted pursuant to this ARTICLE VIII shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
SECTION 10: The Delaware Court of Chancery is vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or indemnification
brought under this ARTICLE VIII. The Delaware Court of Chancery may summarily
determine the Corporation's obligation to advance expenses (including attorneys'
fees).
SECTION 11: Notwithstanding any other Article of these Bylaws, no amendment,
modification, restatement or repeal of the Bylaws shall limit or impair in any
manner the rights of any person to indemnification or advancement of expenses
under this ARTICLE VIII in respect of any action or failure to act occurring
prior to such amendment, modification, restatement or repeal.
SECTION 12: The provisions of this ARTICLE VIII shall be deemed to be a contract
between the Corporation and each person who serves as such officer or director
in any such capacity at any time while this ARTICLE III and the relevant
provisions of the General Corporation Law of Delaware or other applicable laws,
if any, are in effect, and any repeal or modification of any such law or this
ARTICLE III shall not affect any rights or obligations then existing with
respect to any state of facts then or theretofore existing or any action, suit
or proceeding theretofore or thereafter brought or threatened based in whole or
in part upon any such state of fact.
ARTICLE IX MISCELLANEOUS
SECTION 1: The registered office shall be established and maintained at 606
South Main Street, in the City of Princeton, in Bureau County, in the State of
Illinois.
SECTION 2: The Corporation may have other offices, either within or without the
State of Illinois, at such place or places as the Board of Directors may from
time to time appoint or the business of the Corporation may require.
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SECTION 3: The fiscal year of the Corporation shall be fixed by resolution of
the Board of Directors.
ARTICLE X AMENDMENT OR REPEAL
These Bylaws may be amended, altered or repealed, at any regular
meeting of the Board of Directors by vote of a majority of the total number of
Directors.
Adopted by unanimous vote of the Board of Directors of Princeton
National Bancorp, Inc. this 17th day of January, A.D., 2000.
/s/ Lou Ann Birkey
----------------------------------------
Lou Ann Birkey, Secretary
11
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into as of this
February 22, 1999 by and between Princeton National Bancorp, Inc., a Delaware
corporation ("Bancorp"), and James Miller ("Executive").
WITNESSETH:
WHEREAS, Executive is currently employed by Bancorp, as its Executive
Vice President;
WHEREAS, Executive is currently employed by Citizens First National
Bank, a national banking association (the "Bank"), as its Executive Vice
President; and
WHEREAS, the Bank is a wholly-owned subsidiary of Bancorp; and
WHEREAS, Executive and Bancorp desire to enter into this Agreement
pertaining to the terms of the continued employment of Executive with Bancorp
and the Bank and the security Bancorp is providing to Executive with respect to
his employment;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties agree as follows:
1. Employment. Bancorp hereby agrees to continue to employ
Executive as its Executive Vice President, and to cause the
Bank to continue to employ Executive as its Executive Vice
President until December 31, 2000, and Executive hereby
accepts such continued employment by Bancorp and the bank upon
the terms and conditions herein set forth. The primary place
of employment shall be at Bancorp's and the Bank's principal
offices, located at 606 South Main Street, Princeton, Illinois
61356.
2. Term. The initial term of this Agreement shall commence on
February 22, 1999 and shall expire on December 31, 2000 unless
sooner terminated as hereinafter set forth in Paragraphs 7, 8
and 9. After expiration of the initial term, and subject to
the termination provisions hereinafter contained, this
Agreement shall be automatically renewed for a period of one
year as of each anniversary date of this Agreement; provided
that neither Bancorp nor Executive has not given written
notice to the other party of its or his intent not to renew at
least ninety (90) days prior to the automatic renewal date. If
this Agreement is not renewed beyond the initial expiration
date due to written notice from Bancorp to Executive for any
reason other than Good Cause (as defined in Paragraph 7) or
due to written notice from Executive to Bancorp for Good
Reason (as defined in Paragraph 7), Executive shall receive
severance benefits from Bancorp in accordance with its
customary practice then in effect, in addition to all other
amounts payable from Bancorp or under any Incentive,
Retirement or
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Welfare Plan (as defined in Paragraph 6).
3. Duties. Executive will, during the term hereof:
(a) faithfully and diligently do and perform all such
acts and duties and furnish such services as the
Boards of Directors of Bancorp or the Bank shall
direct;
(b) do and perform any acts in the ordinary course of
Bancorp's or the Bank's businesses (with such limits
as the Boards of Directors of Bancorp or the Bank may
prescribe) necessary and conducive to Bancorp's and
the Bank's best interests;
(c) execute all duties attendant to his office; and
(d) devote his full time, energy, and skill to the
business of Bancorp and the Bank and to the promotion
of Bancorp's and the Bank's best interests, except
for vacations, absences made necessary because of
illness, authorized leaves of absence, holidays,
professional meetings, and seminars.
During the term of this Agreement, Executive shall not, without the
consent of the Boards of Directors of Bancorp or the Bank, accept other
employment or perform other services for compensation, or have any direct or
indirect ownership interest in any business in competition with the Bank.
Notwithstanding anything to the contrary contained herein, the expenditure of
reasonable amounts of time on personal investments and charitable activities
shall not be deemed a breach of this Agreement, provided that such activities do
not materially interfere with the performance by Executive of his obligations
under this Agreement. The Board of Directors of the Bank shall not unreasonably
withhold consent to Executive's service as a member of the board of directors of
other companies.
4. Compensation. Bancorp shall cause the Bank to pay to Executive
for all services to be performed by Executive during the term
of this Agreement:
(a) a base salary at the rate of $110,240 Per annum,
payable in substantially equal periodic monthly
payments in accordance with Bancorp's and the Bank's
practices for other executives, managerial, and
supervisory employees, as such practices may be
determined from time to time (the "Base Salary"); and
(b) any annual increase in Base Salary, additional or
special compensation, such as incentive pay or other
bonuses, based upon Executive's performance, as the
Board of Directors of the Bank, in its discretion,
may from time to time determine, based upon annual
incentive opportunities made available to Executive
by the Bank and upon other discretionary criteria
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deemed appropriate by the Board of Directors of the
Bank.
All such payments will be subject to such deductions
as may be required to be made pursuant to law,
government regulation or order, or by agreement with,
or consent of, Executive.
5. Fringe Benefits. During the term of this Agreement:
(a) MEMBERSHIPS. Bancorp will cause the Bank to pay or
reimburse Executive for the following:
(i) all reasonable annual dues and membership
expenses in one club selected and joined by
Executive in which memberships are used for
or necessary to the performance of
Executive's duties hereunder and all
reasonable expenses incurred in furtherance
of or in connection with the transaction of
the business of Bancorp or the Bank
hereunder at such club; and
(ii) all reasonable annual dues and membership
expenses in such civic and lunch clubs
selected by Executive as are necessary or
useful to the performance of Executive's
duties hereunder and all reasonable expenses
incurred in furtherance of or in connection
with the transaction of the business of
Bancorp or the Bank hereunder at such civic
and lunch clubs.
All of the aforementioned amounts subject to
reimbursement by the Bank to Executive shall be
subject to an accounting by Executive and approval by
the Bank.
6. Additional Benefits. Bancorp shall cause the Bank to provide
the following additional benefits to Executive during the term
of this Agreement:
(a) Executive shall be eligible to participate in any
incentive plans or arrangements ("Incentive Plans")
that Bancorp or the Bank may establish or practices
it may follow for the benefit of its executives as in
effect from time to time, and shall be entitled to
receive any other bonus or discretionary compensation
payments as Bancorp or the Bank may determine from
time to time.
(b) Executive shall be entitled to paid vacations in
accordance with the Bank's customary vacation
practice. Executive shall also be entitled to all
paid holidays given by the Bank to its other
executives.
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(c) Executive and his dependents shall be entitled to
participate in and receive benefits under any
qualified or supplemental employee pension plan,
including any defined benefit retirement plan or
defined contribution retirement plan ("Retirement
Plans"), health and dental plan, disability plan,
survivor income plan, and life insurance plan, or
arrangement ("Welfare Plans") made available by the
Bank in which Executive is currently eligible to
participate, and any additional or substitute
Retirement or Welfare Plans Bancorp or the Bank may
make available in the future to its executives,
subject to and on a basis consistent with the terms,
conditions, and overall administration of such
Retirement or Welfare Plans.
7. Termination.
(a) GOOD CAUSE. The Board of Directors of Bancorp may
terminate the employment of Executive with Bancorp
and the Bank at any time for "Good Cause". For
purposes of the preceding sentence, "Good Cause"
shall be deemed to exist if:
(i) Executive shall engage in an act or omission
constituting dishonesty, willful misconduct,
intentional breach of fiduciary obligation
or intentional wrongdoing or malfeasance;
(ii) Executive shall be convicted of a felony; or
(iii) Executive shall continue to substantially
non-perform his assigned duties for a period
of thirty (30) days after the Bank has given
written notice to Executive of such
non-performance and its intention to
terminate the employment of Executive with
Bancorp and the Bank because of such
non-performance.
Without limiting the generality of the foregoing, the
following shall not constitute cause for the
termination of employment of Executive or the
modification or diminution of any of his authority
hereunder:
(i) any personal or policy disagreement between
Executive and Bancorp or the Bank or any
member of the board of Directors of Bancorp
or Bank; or
(ii) any action taken by Executive in connection
with his duties hereunder if Executive acted
in good faith and in a manner he reasonably
believed to be in, and not opposed to, the
best interest of Bancorp or the Bank and had
no reasonable cause
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to believe this conduct was unlawful.
Notwithstanding anything herein to the contrary, in the event
Bancorp shall terminate the employment of Executive for cause
hereunder, Bancorp shall give at least thirty (30) days prior written
notice to Executive.
(b) VOLUNTARY TERMINATION. Executive shall have the right
at any time during the term of this Agreement to
terminate his employment with Bancorp upon giving
ninety (90) days written notice of said termination
to Bancorp. In the event of termination of this
Agreement by Executive for any reason prior to
December 31, 2000 , Bancorp shall have no further
liability hereunder from and after the date of
termination other than the payment of all
compensation (including payments under Incentive,
Retirement, and Welfare Plans) to Executive or his
beneficiary for all periods prior to such
termination.
(c) GOOD REASON. Executive may terminate his employment
with Bancorp and the Bank at any time for "Good
Reason". "Good Reason" shall be deemed to exist if
Executive terminates his employment because, without
his express written consent: (i) Bancorp breaches any
of the terms of this Agreement; (ii) He is assigned
duties materially inconsistent with the duties and
responsibilities stated in the by-laws of Bancorp and
the Bank for his positions; (iii) The duties and
responsibilities for the Executive Vice President
stated in the by-laws of Bancorp and the Bank,
respectively, are amended to be materially
inconsistent with the duties and responsibilities
that would typically be expected of an Executive Vice
President of Bancorp and the Bank, respectively; or
(iv) Bancorp or the Bank changes by 50 miles or more
the principal location in which Executive is required
to perform services.
(d) CHANGE IN CONTROL. At the option of Executive, the
employment of Executive hereunder shall terminate
upon the effective date of a Change in Control. A
"Change in Control" shall be deemed to occur on the
earliest of:
(i) the acquisition by any individual, entity or
group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the
"Exchange Act")) of beneficial ownership, as
that term is defined in rule 13d-3 under the
Exchange Act, of capital stock of Bancorp
entitled to exercise more than twenty-five
percent (25%) or more of the outstanding
voting power of all capital stock of Bancorp
entitled to vote for the election of
directors ("Voting
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Stock");
(ii) the commencement by any entity, person, or
group (other than Bancorp or a subsidiary of
Bancorp) of a tender offer or an exchange
offer for more than twenty percent (20%) of
the outstanding Voting Stock of Bancorp;
(iii) the effective time of (A) a merger or
consolidation of Bancorp with one or more
other corporations as a result of which the
holders of the outstanding Voting Stock of
Bancorp immediately prior to such merger or
consolidation hold less than twenty-five
percent (25%) of the Voting Stock of the
surviving or resulting corporation or (B) a
transfer of twenty-five percent (25%) or
more of the Voting Stock, or substantially
all of the property of Bancorp, other than
to an entity of which Bancorp owns at least
fifty percent (50%) of the Voting Stock; or
(iv) the effective time of (A) a merger or
consolidation of the Bank with one or more
other corporations as a result of which the
holders of the outstanding Voting Stock of
the Bank immediately prior to such merger or
consolidation hold less than twenty-five
percent (25%) of the Voting Stock of the
surviving or resulting corporation or (B) a
transfer of twenty-five percent (25%) or
more of the Voting Stock, or substantially
all of the property of the Bank, other than
to an entity of which Bancorp or the Bank
owns at least fifty percent (50%) of the
Voting Stock.
(e) BENEFITS UPON TERMINATION. The following provisions
will apply during the initial or any renewal term of
this agreement: (i) if the employment of Executive
with Bancorp or the Bank is terminated by Bancorp or
the Bank for any reason other than Good Cause, (ii)
if Executive terminates his employment with Bancorp
or the Bank for Good Reason, (iii) if Executive
terminates his employment following a Change in
Control, or (iv) if the employment of Executive with
Bancorp or the Bank is terminated by Bancorp or the
Bank during the twenty-four month period following a
Change in Control:
(i) An amount equal to Executive's aggregate
Base Salary (at the rate most recently
determined) for a period equal to the
greater of (x) twelve months or (y) the
balance of the term of this Agreement
pursuant to Paragraph 2 (the "Severance
Period"), shall be paid to Executive in a
lump sum within thrity (30) days after the
date of termination.
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(ii) Executive or any other person entitled to
receive benefits with respect to Executive
under any Incentive Plan, Retirement Plan,
or any other plan or program maintained by
Bancorp or the Bank shall receive any and
all benefits accrued under such Plan or
other plan or program, to the date of
termination of employment, the amount, form
and time of payment of such benefits to be
determined by the terms of such Incentive
Plan and Retirement Plan and other plan or
program, the Executive's employment shall be
deemed to have terminated by reason of
retirement under each such Plan or other
plan or program under circumstances that
have the most favorable result for Executive
thereunder. Payment shall be made at the
earliest date permitted under any such Plan
or other plan or program.
(iii) During the Severance Period, Executive and
his spouse and other dependents will
continue to be covered by all Welfare Plans
in which he and his spouse and other
dependants were participating immediately
prior to the date of his termination as if
he continued to be an employee of Bancorp or
the Bank, and Bancorp will, or will cause
the Bank to, continue to pay the costs of
coverage of Executive and his spouse and
other dependents under such Welfare Plans on
the same basis as is applicable to active
employees covered thereunder; provided that,
if participation in any one or more of such
Welfare Plans is not possible under the
terms thereof, Bancorp will, or will cause
the Bank to, provide substantially identical
benefits.
(iv) If the employment of Executive with Bancorp
or the Bank is terminated by Bancorp or the
Bank for Good Cause or by the voluntary
action of Executive without Good Reason,
other than due to a Change in Control,
Executive's Base Salary (at the rate most
recently determined) and a bonus (a pro-rata
portion of the bonus paid for the most
recent calendar year) shall be paid through
the date of his termination, and Bancorp
shall have no obligation to Executive or any
other person under this Agreement. Such
termination shall have no effect upon
Executive's other rights, including but not
limited to rights under any Incentive,
Retirement or Welfare Plan.
(8) Death. If Executive dies during the term of this Agreement,
Bancorp agrees to cause the Bank:
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(a) during the Death Benefit Period, to cover the spouse
and other dependants of Executive under all Welfare
Plans in which Executive and his spouse and other
dependents were participating immediately prior to
the date of his death as if he continued to be an
employee of Bancorp or the Bank; provided that, if
participation in any one or more of such plans and
arrangements is not possible under the terms thereof,
Bancorp will, or will cause the Bank to, provide
substantially identical benefits; and
(b) for a period of twenty-four (24) months following the
Death Benefit Period, to cover the spouse and other
dependents of Executive under all Welfare Plans in
which Executive and his spouse and other dependents
were participating immediately prior to the date of
his death as if he were a retired employee of Bancorp
or the Bank; provided that, if participation in any
one or more of such plans and arrangements is not
possible under the terms thereof, Bancorp will, or
will cause the Bank to, provide substantially
identical benefits.
Any death benefits payable under this Paragraph 8 are in
addition to any other benefits due to Executive or his
beneficiary or dependents from Bancorp, including, but not
limited to, payments under any of the Incentive, Retirement,
and Welfare Plans.
9. Disability. If Executive incurs a Disability during the term
of this Agreement, Executive's obligation to perform such
services hereunder will terminate and in such event Bancorp
agrees to cause the Bank:
(a) to continue to pay Executive his aggregate Base
Salary (at the rate most recently determined) from
the date of onset of such Disability until such time
as Executive is eligible to receive disability
benefits under the Bank's disability plan, as
presently or hereafter in effect (the "Disability
Period"); and
(b) during the Disability Period and such period of time
as Executive is eligible to receive disability
benefits under the Bank's disability plan, to
continue to cover Executive and his dependents under
all Welfare Plans in which Executive and his spouse
and other dependents were participating immediately
prior to the date of onset of such Disability as if
Executive continued to be an employee of Bancorp or
the Bank; provided that, if participating in any one
or more of such plans and arrangements is not
possible under the terms thereunder, Bancorp will
provide, or cause the Bank to provide, substantially
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identical benefits.
Notwithstanding the foregoing, any payments to Executive
pursuant to this Paragraph 9 shall be reduced by the amount of
any disability benefits otherwise payable to Executive under
any disability program maintained by Bancorp or the Bank.
Amounts payable to Executive under this Paragraph 9 shall
continue to be paid to a beneficiary designated in writing by
him if he dies during the Disability Period. If Executive is
receiving benefits hereunder and his disability ceases, his
benefits under this Paragraph 9 shall terminate, provided that
if his employment with Bancorp and the Bank does not
recommence (because no offer of re-employment in the same
position is made), the benefits he is then receiving under
this Paragraph 9 shall continue for a period of twelve (12)
additional months. For purposes of this Agreement, the term
"Disability" shall mean a physical or mental disability, as
determined by an independent physician selected with the
approval of both Bancorp and Executive, which will render
Executive incapable of performing his duties under this
Agreement for six consecutive months.
10. Indemnity. Bancorp shall indemnify Executive to the extent
provided in Article VIII, Sections 1, 2, 3, 4 and 5 of the
by-laws of Bancorp, as restated March 10, 1992.
11. Setoff. The payments or benefits payable to or with respect to
Executive or his spouse or beneficiary pursuant to this
Agreement shall not be reduced by the amount of any claim,
counterclaim, recoupment defense or other right of Bancorp or
the Bank against Executive or his spouse or other beneficiary
or obligation of Executive or his spouse or other beneficiary
owing to Bancorp or the Bank. The payment of benefits payable
to or with respect to Executive or his spouse or other
beneficiary after termination of employment as a result of a
change in control shall be absolute and unconditional. No
payments or benefits payable to or with respect to Executive
pursuant to this Agreement shall be reduced by any amount
Executive or his spouse or other beneficiary may earn or
receive from employment with another employer or from any
other source. All amounts so payable by Bancorp or the Bank
shall be paid without notice or demand. Each and every such
payment made by Bancorp or the Bank shall be final, and
Bancorp and the Bank will not seek to recover all or any part
of such payment from Executive or from whomsoever may be
entitled thereto, for any reason whatsoever.
12. Confidentiality. Executive acknowledges that preservation of a
continuing business relationship between Bancorp, the Bank and
their respective customers, representatives and employees is
of
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critical importance to the continued business success of
Bancorp and the Bank and that it is the active policy of
Bancorp and the Bank to guard as confidential certain
information not available to the public and relating to the
business affairs of Bancorp and the Bank. In view of the
foregoing, Executive agrees that he shall not during the term
of this Agreement and at any time thereafter, without the
prior written consent of Bancorp, disclose to any person or
entity any such confidential information that was obtained by
Executive in the course of his employment with Bancorp or the
Bank. This section shall not be applicable if and to the
extent Executive is required to testify in a legislative,
judicial, or regulatory proceeding pursuant to an order of
Congress, any state or local legislature, a judge, or an
administrative law judge or is otherwise required by law to
disclose such information.
13. Bancorp Assignment. Neither, Bancorp nor Executive may assign
this Agreement without the other party's prior written
consent, except that Bancorp's obligations hereunder shall be
binding legal obligations of any successor to all or
substantially all of Bancorp's business by purchase, merger,
consolidation, or otherwise.
14. Executive Assignment. No interest of Executive or his spouse
or other beneficiary under this Agreement, or any right to
receive any payment or distribution hereunder, shall be
subject in any manner to sale, transfer, assignment, pledge,
attachment, garnishment or other alienation or encumbrance of
any kind, nor may such interest or right to receive payment or
distribution be taken, voluntarily or involuntarily, for the
satisfaction of the obligations or debts of, or other claims
against, Executive or his spouse or other beneficiary,
including claims for alimony, support, separate maintenance
and claims in bankruptcy proceedings.
15. Benefits Unfunded. All rights under this Agreement of
Executive and his spouse or other beneficiary, shall at all
times be entirely unfunded, and no provision shall at any time
be made with respect to segregating any assets of Bancorp or
the Bank for payment of any amounts due hereunder. Neither
Executive nor his spouse or other beneficiary, shall have any
interest in or rights against any specific assets of Bancorp
or the Bank, and Executive and his spouse and other
beneficiary shall have only the rights of a general unsecured
creditor of Bancorp and the Bank.
16. Waiver. No waiver by any party at any time of any breach by
the other party of, or compliance with, any condition or
provision of this Agreement to be performed by such other
party shall be deemed a waiver of any other provisions or
conditions at the same time or at any prior or
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subsequent time.
17. Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original.
18. Severability. In the event any provision of this Agreement is
held illegal or invalid, the remaining provisions of this
Agreement shall not be affected thereby.
19. Successors. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs,
representatives, and successors.
20. Notice. Notices required under this Agreement shall be in
writing and sent by registered mail, return receipt requested,
to the following addresses or to such address as the party
being notified may have previously furnished to the other
party by written notice.
If to Bancorp: Princeton National Bancorp, Inc.
606 South Main Street
Princeton, Illinois 61356
Attention: Chairman of the Board
If to Executive: James Miller
C/O Princeton National Bancorp, Inc.
606 South Main Street
Princeton, Illinois 61356
21. Applicable Law. This Agreement shall be construed and
interpreted pursuant to the laws of the State of Illinois.
22. Entire Agreement. This Agreement contains the entire agreement
between Bancorp and Executive and supersedes any and all
previous agreements, written or oral, between the parties
relating to the subject matter hereof. No amendment or
modification of the terms of this Agreement shall be binding
upon the parties hereto unless reduced to writing and signed
by Bancorp and Executive.
23. Withholding. Bancorp or the Bank may withhold from any payment
that is required to make under this Agreement amounts
sufficient to satisfy applicable withholding requirements
under any federal, state or local law.
24. Headings. The headings contained herein are for reference
purposes only and shall not in any way affect the meaning or
interpretation of any provision of this Agreement.
Page 11
<PAGE>
IN WITNESS WHEREOF, Executive has hereunto set his hand, and Bancorp
has caused this Agreement to be executed in its name and on its behalf, all as
of the day and year first above written.
PRINCETON NATIONAL BANCORP, INC.
/s/ Thomas R. Lasier
----------------------------------------
Thomas R. Lasier
Chairman of the Board of Directors
/s/ James Miller
----------------------------------------
James Miller, Executive
Page 12
EXHIBIT 13
[LOGO] KPMG
The Board Of Directors and Stockholders
Princeton National Bancorp, Inc.
Princeton, Illinois
We have audited the accompanying consolidated balance sheets of Princeton
National Bancorp, Inc. and subsidiary (Corporation) as of December 31, 1999
and 1998, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Princeton
National Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1999 in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
Chicago, Illinois
January 28, 2000, except for Note 14, which is as of February 17, 2000
9
<PAGE>
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (note 2) $ 19,325 $ 31,133
Federal funds sold 7,900 23,000
Investment securities (note 3):
Available-for-sale, at fair value 100,043 109,530
Held-to-maturity, at amortized cost 13,923 21,396
Loans held for sale, at lower of cost or market 8,646 5,363
Loans (note 4):
Gross loans 308,356 265,655
Less: Unearned interest (9) (181)
Allowance for possible loan losses (1,950) (1,800)
--------- ---------
Net loans 306,397 263,674
Interest receivable 5,799 5,604
Premises and equipment, net of accumulated depreciation (note 5) 12,127 10,627
Goodwill and intangible assets, net of accumulated
amortization of $2,551 and $2,103,
at December 31, 1999 and 1998 4,600 5,023
Other assets 4,060 3,561
--------- ---------
TOTAL ASSETS $ 482,820 $ 478,911
========= =========
- ---------------------------------------------------------------------------------------------------
LIABILITIES
Deposits (note 6):
Demand $ 45,514 $ 47,355
Interest-bearing demand 93,521 93,982
Savings 52,277 54,378
Time 213,496 212,123
--------- ---------
Total deposits 404,808 407,838
Borrowings (note 7):
Customer repurchase aggreements 15,663 13,768
Advances from Federal Home Loan Bank 13,320 9,111
Interest-bearing demand notes issued to the U.S. Treasury 2,366 217
Notes payable 2,150 1,200
--------- ---------
Total Borrowings 33,499 24,296
Other liabilities 3,567 4,171
--------- ---------
TOTAL LIABILITIES 441,874 436,305
--------- ---------
STOCKHOLDERS' EQUITY
Common stock: $5 par value, 7,000,000 shares authorized at
December 31, 1999 and 1998; 4,139,841 shares issued at
December 31, 1999 and 1998 20,699 20,699
Surplus 6,335 6,305
Retained earnings 22,118 19,588
Accumulated other comprehensive income (loss), net of tax (1,031) 862
Less: Cost of 472,112 and 312,061 treasury shares at December 31, 1999
and 1998, respectively (7,175) (4,848)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 40,946 42,606
Commitments & contingencies
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 482,820 $ 478,911
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
10
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $24,684 $24,705 $24,150
Interest and dividends on investment securities:
Taxable 5,082 5,494 4,976
Tax-exempt 1,844 1,729 1,622
Interest on federal funds sold 268 388 297
Interest on interest-bearing time deposits in
other banks 247 335 267
------- ------- -------
Total interest income 32,125 32,651 31,312
------- ------- -------
INTEREST EXPENSE:
Interest on deposits (note 6) 14,025 15,297 14,716
Interest on borrowings 1,385 1,207 825
------- ------- -------
Total interest expense 15,410 16,504 15,541
------- ------- -------
NET INTEREST INCOME 16,715 16,147 15,771
Provision for possible loan losses (note 4) 651 337 590
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR POSSIBLE LOAN LOSSES 16,064 15,810 15,181
------- ------- -------
NON-INTEREST INCOME:
Trust & farm management fees 1,197 1,119 1,067
Service charges on deposit accounts 1,583 1,498 1,368
Other service fees 696 515 445
Net gain on securities transactions (note 3) 41 96 97
Loan servicing fees and other charges 201 374 177
Other operating income 288 241 211
------- ------- -------
Total non-interest income 4,006 3,843 3,365
------- ------- -------
NON-INTEREST EXPENSE:
Salaries and employee benefits 7,829 7,479 6,866
Occupancy 1,000 1,007 964
Equipment expense 1,174 822 858
FDIC/OCC assessments 188 185 144
Goodwill and intangible assets amortization 448 467 464
Data processing 514 609 677
Trust litigation expenses (note 14) 141 256 73
Other operating expense 3,366 3,149 2,616
------- ------- -------
Total non-interest expense 14,660 13,974 12,662
------- ------- -------
INCOME BEFORE INCOME TAXES 5,410 5,679 5,884
Income tax expense (note 8) 1,556 1,420 1,525
------- ------- -------
NET INCOME $ 3,854 $ 4,259 $ 4,359
======= ======= =======
NET INCOME PER SHARE:
Basic $ 1.02 $ 1.08 $ 1.07
Diluted $ 1.02 $ 1.08 $ 1.07
Basic weighted average shares outstanding 3,768,055 3,950,771 4,063,820
Diluted weighted average shares outstanding 3,781,299 3,951,374 4,063,820
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
11
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $ 3,854 $ 4,259 $ 4,359
Other comprehensive income (loss), net of tax
Unrealized holding gains (losses) arising during the period (1,866) 365 324
Less: Reclassification adjustment for net realized (gains)
losses included in net income (27) (63) (64)
------- ------- -------
Other comprehensive income (loss) (1,893) 302 260
------- ------- -------
COMPREHENSIVE INCOME $ 1,961 $ 4,561 $ 4,619
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON RETAINED INCOME (LOSS) TREASURY
STOCK SURPLUS EARNINGS NET OF TAX EFFECT STOCK TOTAL
------ ------- -------- ----------------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $20,700 $ 6,193 $ 13,350 $ 300 $ (346) $40,197
Net income 4,359 4,359
Sale of 5,364 shares
of treasury stock 42 34 76
Purchase of 75,000 shares
of treasury stock (1,084) (1,084)
Cash dividends
($.28 per share) (1,140) (1,140)
Other comprehensive income,
net of $133 tax effect 260 260
------- ------- -------- ------- ------- -------
Balance, December 31, 1997 $20,700 $ 6,235 $ 16,569 $ 560 $(1,396) $42,668
Net income 4,259 4,259
Sale of 6,700 shares
of treasury stock 72 44 116
Purchase of 195,156 shares
of treasury stock (3,496) (3,496)
Cash dividends
($.31 per share) (1,241) (1,241)
Effect of fractional shares retired
(77 shares) related to 1998
stock dividend (1) (2) 1 (2)
Other comprehensive income,
net of $156 tax effect 302 302
------- ------- -------- ------- ------- -------
Balance, December 31, 1998 $20,699 $ 6,305 $ 19,588 $ 862 $(4,848) $42,606
Net income 3,854 3,854
Sale of 4,378 shares
of treasury stock 30 29 59
Purchase of 164,429 shares
of treasury stock (2,356) (2,356)
Cash dividends
($.35 per share) (1,324) (1,324)
Other comprehensive loss,
net of $975 tax effect (1,893) (1,893)
------- ------- -------- ------- ------- -------
BALANCE, DECEMBER 31, 1999 $20,699 $ 6,335 $ 22,118 $(1,031) $(7,175) $40,946
======= ======= ======== ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
12
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,854 $ 4,259 $ 4,359
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,153 822 876
Provision for possible loan losses 651 337 590
Deferred income tax (benefit) expense (282) 191 (208)
Amortization of goodwill and other intangible assets 448 467 464
Amortization of premiums on investment securities,
net of accretion 206 187 76
Gain on securities transactions, net (41) (96) (97)
Loans originated for sale (14,208) (32,742) (7,431)
Proceeds from sales of loans originated for sale 10,925 28,955 8,704
Increase (decrease) in accrued interest payable 71 (12) 420
(Increase) decrease in accrued interest receivable (195) 204 (83)
Increase in other assets (899) (727) (481)
Increase (decrease) in other liabilities 582 (39) 98
-------- -------- --------
Net cash provided by operating activities 2,265 1,806 7,287
-------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale 4,054 7,440 6,586
Proceeds from maturities of investment securities available-for-sale 39,788 35,749 46,080
Purchase of investment securities available-for-sale (33,689) (45,864) (55,191)
Proceeds from maturities of investment securities held-to-maturity 15,489 14,611 4,385
Purchase of investment securities held-to-maturity (11,715) (21,015) (6,452)
Proceeds from sales of other real estate owned 375 79 200
Net (increase) decrease in loans (43,374) 6,270 (14,570)
Purchase of premises and equipment (2,653) (2,697) (481)
-------- -------- --------
Net cash used by investing activities (31,725) (5,427) (19,443)
-------- -------- --------
FINANCING ACTIVITIES:
Net (decrease) increase in deposits (3,030) 21,898 27,239
Proceeds from borrowings 10,244 10,650 1,200
Payments for borrowings (1,041) (3,341) (2,100)
Dividends paid (1,324) (1,241) (1,140)
Purchase of treasury stock (2,356) (3,496) (1,084)
Sale of treasury stock 59 116 76
-------- -------- --------
Net cash provided by financing activities 2,552 24,586 24,191
-------- -------- --------
Increase (decrease) in cash and cash equivalents (26,908) 20,965 12,035
Cash and cash equivalents at beginning of year 54,133 33,168 21,133
-------- -------- --------
Cash and cash equivalents at end of year $ 27,225 $ 54,133 $ 33,168
======== ======== ========
Cash paid during the year for:
Interest $ 15,339 $ 16,516 $ 15,121
Income taxes $ 1,609 $ 1,454 $ 1,600
Supplemental disclosure of non-cash investing activities:
Loans transferred to other real estate owned $ 200 $ 375 $ 158
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and conform with general practices
within the banking industry. A description of the significant accounting
policies follows:
BASIS OF CONSOLIDATION - The consolidated financial statements of Princeton
National Bancorp, Inc. ("Corporation") include the accounts of the Corporation
and its wholly-owned subsidiary, Citizens First National Bank ("subsidiary
bank"). Intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES - In order to prepare the Corporation's consolidated financial
statements in conformity with generally accepted accounting principles,
management is required to make certain estimates that affect the amounts
reported in the consolidated financial statements and accompanying notes. These
estimates may differ from actual results.
INVESTMENT SECURITIES - Investment securities which the Corporation has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and recorded at amortized cost. The Corporation does not have a
trading portfolio. All other investment securities that are not classified as
held-to-maturity are classified as available-for-sale. Investment securities
available-for-sale are recorded at fair value with any changes in fair value
reflected as a separate component of stockholders' equity, net of related tax
effects. Gains and losses on the sale of securities are determined using the
specific identification method. Premiums and discounts on investment securities
are amortized or accreted over the contractual lives of those securities. The
method of amortization or accretion results in a constant effective yield on
those securities (the interest method).
LOANS - Loans are stated at the principal amount outstanding, net of unearned
interest and allowance for possible loan losses. Interest on commercial, real
estate, and certain installment loans is credited to operations as earned, based
upon the principal amount outstanding. Interest on other installment loans is
credited to operations using a method which approximates the interest method.
It is the subsidiary bank's policy to discontinue the accrual of interest on
any loan when, in the opinion of management, there is reasonable doubt as to the
collectibility of interest or principal. Interest on these loans is credited to
income only when the collection of principal has been assured and only to the
extent interest payments are received.
Impaired loans are measured based on current information and events, if it is
probable that the Corporation will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. Certain groups of small-balance homogenous loans, which are
collectively evaluated for impairment and are generally represented by consumer
and residential mortgage loans or loans which are measured at the lower of cost
or market, are not analyzed individually for impairment. The Corporation
generally identifies impaired loans within the non-accrual and restructured
commercial and commercial real estate portfolios on an individual loan-by-loan
basis. The measurement of impaired loans is generally based on the present value
of expected future cash flows discounted at the historical effective interest
rate, except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral.
Non-refundable loan fees and certain direct costs of loan originations are
deferred at the time a loan is originated. Net deferred loan fees or costs are
recognized as yield adjustments over the contractual life of the loan using the
interest method.
ALLOWANCE FOR POSSIBLE LOAN LOSSES - The allowance for possible loan losses is
increased by provisions charged to operating expense and decreased by
charge-offs, net of recoveries, and is available to absorb losses on loans.
The allowance is based on factors that include overall composition of loan
portfolio, types of loans, past loss experience, loan delinquencies, watchlist,
substandard and doubtful credits, and such other factors that, in management's
best judgment, deserve evaluation in estimating potential loan losses.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the subsidiary bank's allowance for
possible loan losses. Such agencies may require the subsidiary bank to recognize
additions to the allowance for possible loan losses based on their judgments of
information available to them at the time of their examination.
SALES OF FIRST MORTGAGE LOANS AND LOAN SERVICING - The subsidiary bank sells
first mortgage loans on a non-recourse basis. The total cost of these loans is
allocated between loans and servicing rights based on the relative fair value of
each. A gain or loss on the sale is recorded which reflects the difference
between the cash received and the loan value. Loan servicing fees are recognized
over the lives of the related loans. Loan servicing costs are charged to expense
as incurred. Loans held-for-sale are stated at the lower of aggregate cost or
market. Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets.
At December 31, 1999 and 1998, the amount of originated mortgage servicing
rights was $438 and $414, respectively, and is amortized in future periods in
proportion to, and over the period of, estimated net servicing income similar to
the interest method using an accelerated amortization method. The amortization
of capitalized mortgage servicing rights is reflected in the statements of
income as a reduction to loan servicing fees and other charges.
PREMISES AND EQUIPMENT - Premises and equipment are carried at cost, less
accumulated depreciation. Depreciation is computed on the straight-line basis
over the estimated useful lives of the assets, as follows: buildings, fifteen to
forty years; furniture and equipment, three to fifteen years. The carrying
amounts of assets sold or retired and the related accumulated depreciation are
eliminated from the accounts, and any resulting gains or losses are reflected in
income.
COST IN EXCESS OF FAIR VALUE OF NET ASSETS - The cost in excess of the fair
value (goodwill) of net assets acquired is being amortized over a fifteen-year
period using the straight-line method. Long lived assets, including premises and
goodwill, are evaluated for impairment using the guidance provided by Statement
of Financial Accounting Standard 121 (FAS 121) "Accounting for the Impairment of
Long Lived Assets and Long Lived Assets to be Impaired".
OTHER REAL ESTATE - Other real estate, which is included in other assets in the
consolidated balance sheets, represents assets to which the Corporation's
subsidiary bank has acquired legal title in satisfaction of indebtedness. Such
real estate is recorded at cost or its fair value at the date of acquisition,
less estimated selling costs, whichever is lower. Any deficiency is charged to
the allowance for possible loan losses. Subsequent declines in value, based on
changes in market conditions, are recorded in expense as incurred. Gains or
losses on the disposition of other real estate are recorded in expense in the
period in which they are realized.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
14
<PAGE>
NET INCOME PER SHARE - Basic net income per share is computed by dividing net
income by the weighted average number of shares outstanding during the year,
which were 3,768,055, 3,950,771, and 4,063,820 for 1999, 1998, and 1997,
respectively. Diluted weighted average shares outstanding included potential
common stock relating to outstanding stock options. Diluted weighted average
shares outstanding were 3,781,299 for 1999 and 3,951,374 for 1998. There was no
potential common stock in 1997.
CASH FLOWS - For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and federal funds sold. Generally, federal funds
are sold for one-day periods.
RESTATEMENT AND RECLASSIFICATION - Certain amounts in the 1998 and 1997
consolidated financial statements have been reclassified to conform to the 1999
presentation.
IMPACT OF FUTURE NEW ACCOUNTING STANDARDS - In June 1998, the FASB issued
Statement 133, "Accounting for Derivative Instruments and Hedging Activities"
(FAS 133). FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
In June 1999, the FASB issued Statement 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement 133, an Amendment of FASB Statement 133" (FAS 137). FAS 137 defers the
effective date to no later than January 1, 2001. Management, at this time, does
not anticipate the adoption of this statement will have a material effect on the
consolidated financial statements of the Corporation.
2. CASH AND DUE FROM BANKS
The average compensating balances held at correspondent banks during 1999 and
1998 were $7,875 and $9,066, respectively. The subsidiary bank maintains such
compensating balances with correspondent banks to offset charges for services
rendered by those banks. In addition, the subsidiary bank was not required to
maintain reserve requirement balances at the Federal Reserve Bank in either 1999
or 1998.
3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair value of available-for-sale and held-to-maturity securities by
major security type at December 31 were as follows:
<TABLE>
<CAPTION>
1999
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale:
United States Treasury $ 2,003 $ -0- $ -0- $ 2,003
United States Government Agencies 45,143 2 (405) 44,740
State and Municipal 22,878 182 (593) 22,467
Collateralized mortgage obligations 29,451 7 (755) 28,703
Other securities 2,130 -0- -0- 2,130
-------- ------ -------- --------
Total 101,605 191 (1,753) 100,043
-------- ------ -------- --------
Held-to-maturity:
State and Municipal 13,923 56 (367) 13,612
-------- ------ -------- --------
Total $115,528 $ 247 $(2,120) $113,655
======== ====== ======== ========
<CAPTION>
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available-for-sale:
United States Treasury $ 16,099 $ 104 $ -0- $16,203
United States Government Agencies 31,771 304 (23) 32,052
State and Municipal 22,685 929 (47) 23,567
Collateralized mortgage obligations 35,618 158 (119) 35,657
Other securities 2,051 -0- -0- 2,051
-------- ------ -------- --------
Total 108,224 1,495 (189) 109,530
-------- ------ -------- --------
Held-to-maturity:
State and Municipal 12,508 238 (3) 12,743
Other securities 8,888 12 -0- 8,900
-------- ------ -------- --------
Total $129,620 $1,745 $ (192) $131,173
======== ====== ======== ========
</TABLE>
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands except per share data)
Maturities of investment securities classified as available-for-sale and
held-to-maturity were as follows at December 31, 1999:
ESTIMATED
AMORTIZED FAIR
COST VALUE
-------- --------
Available-for-sale:
Due in one year or less $ 20,381 $ 20,500
Due after one year through five years 29,757 29,341
Due after ten years 17,930 17,452
-------- --------
68,068 67,293
-------- --------
Mortgage-backed securities 1,956 1,917
Collateralized mortgage obligations 29,451 28,703
Other securities 2,130 2,130
-------- --------
$101,605 $100,043
======== ========
Held-to-maturity:
Due in one year or less $ 2,598 $ 2,604
Due after one year through five years 4,914 4,909
Due after five years through ten years 3,914 3,815
Due after ten years 2,497 2,284
-------- --------
$ 13,923 $ 13,612
======== ========
Proceeds from sales of investment securities available-for-sale during 1999,
1998, and 1997 were $4,054, $7,440, and $6,586, respectively. Gross gains of $41
in 1999, $96 in 1998, and $108 in 1997, and gross losses of $ 0 in 1999, $0 in
1998, and $11 in 1997, were realized on those sales. There were no sales of
investment securities classified as held-to-maturity during 1999, 1998, and
1997.
Certain investment securities are pledged to secure public and trust
deposits, and for other purposes required or permitted by law. The fair value of
these pledged assets at December 31, 1999, 1998, and 1997 was $88,039, $78,682,
and $77,273, respectively.
4. LOANS
The composition of the loan portfolio as of December 31 was as follows:
Gross loans: 1999 1998
Commercial $ 47,963 $ 44,147
Agricultural 37,891 37,520
Real estate-construction 13,316 6,299
Real estate-mortgage 166,837 141,739
Installment 42,349 35,950
-------- --------
Total $308,356 $265,655
======== ========
Changes in the allowance for possible loan losses for the years ended
December 31 were as follows:
1999 1998 1997
Balance, January 1 $ 1,800 $ 1,830 $ 1,630
Provision for possible
loan losses 651 337 590
Recoveries of loans
previously charged off 333 651 616
Loans charged off (834) (1,018) (1,006)
------- ------- -------
Balance, December 31 $ 1,950 $ 1,800 $ 1,830
======= ======= =======
Non-accrual loans at December 31, 1999, 1998, and 1997 were $1,274, $1,390,
and $810, respectively. Interest income that would have been recorded on these
loans had they remained current was approximately $126, $85, and $75,
respectively.
At December 31, 1999, 1998, and 1997, the recorded investment in impaired
loans totaled $845, $957, and $489, respectively, all of which related to
impaired loans which do not require a related allowance for possible loan losses
as the carrying value of the loans is less than the discounted present value of
expected future cash flows. For the years ended December 31, 1999, 1998, and
1997, the average recorded investment in impaired loans was approximately $933,
$537, and $596, respectively. Interest recognized on impaired loans during the
portion of the year that they were impaired was not considered material.
The Corporation's subsidiary bank had loans outstanding to directors,
executive officers, and to their related interests (related parties) of the
Corporation and its subsidiary of approximately $1,540, $1,865, and $1,639, at
December 31, 1999, 1998, and 1997, respectively. These loans were made in the
ordinary course of business on the same terms and conditions, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other customers and did not involve more than the normal risk
of collectibility. An analysis of the activity in 1999 for loans made to
directors, executive officers or principal holders of common stock or to any
associate of such persons for which the aggregate to any such person exceeds $60
is as follows:
Balance Balance
January 1, 1999 Additions Payments December 31, 1999
--------------- --------- -------- -----------------
$1,865 $797 $1,122 $1,540
The Corporation services loans for others with unpaid principal balances at
December 31, 1999, 1998, and 1997 of approximately $58,870, $56,267, and
$42,399, respectively.
16
<PAGE>
5. PREMISES AND EQUIPMENT
As of December 31, the components of premises and equipment (at cost), less
accumulated depreciation, were as follows:
1999 1998
Land $ 2,280 $ 2,280
Buildings 12,192 10,488
Furniture and Equipment 9,110 8,166
------- -------
23,582 20,935
Less accumulated depreciation 11,455 10,307
------- -------
Total $12,127 $10,627
======= =======
Depreciation expense charged to operating expense for 1999, 1998, and 1997
was $1,153, $822, and $876, respectively.
6. DEPOSITS
As of December 31, the aggregate amounts of time deposits in denominations of
$100 or more and related interest expense were as follows:
1999 1998 1997
Amount $57,229 $50,578 $40,420
Interest expense for the year 2,462 2,207 2,162
Total interest expense on deposits for the years ending December 31, was as
follows:
1999 1998 1997
Interest-bearing demand $ 2,161 $ 2,492 $2,420
Savings 1,143 1,536 1,631
Time 10,721 11,269 10,665
------- ------- -------
Total $14,025 $15,297 $14,716
======= ======= =======
7. BORROWINGS
As of December 31, borrowings consisted of the following:
1999 1998
WEIGHTED Weighted
AVERAGE Average
AMOUNT RATE Amount Rate
------ ---- ------ ----
Customer repurchase agreements $15,663 4.57% $13,768 4.20%
Advances from the Federal Home Loan
Bank of Chicago due:
September 22, 2000 351 6.21 399 6.21
June 18, 2002 419 6.46 562 6.46
March 7, 2004 2,550 5.94 3,150 5.94
October 7, 2004 5,000 5.55 -0- --
February 27, 2008 2,500 5.37 2,500 5.37
June 19, 2008 2,500 5.44 2,500 5.44
Interest-bearing demand notes issued
to the U.S. Treasury 2,366 4.52 217 4.11
Notes payable 2,150 7.50 1,200 6.75
------- ---- ------- ----
Total $33,499 5.17% $24,296 4.89%
======= ==== ======= ====
The subsidiary bank has adopted a collateral pledge agreement whereby the
bank has agreed to keep on hand at all times, free of all other pledges, liens,
and encumbrances, first mortgages with unpaid principal balances aggregating no
less than 167% of the outstanding secured advances from the Federal Home Loan
Bank of Chicago (FHLB). All advances from the FHLB have fixed interest rates.
The advance maturing in June, 2008 has a one-time callable feature in June,
2003, while the advance maturing in February, 2008 also has a callable feature
beginning in February, 2003 and quarterly thereafter. The advance maturing in
October, 2004 also has a callable feature, beginning in October, 2000 and
quarterly thereafter. All stock in the FHLB is also pledged as additional
collateral for these advances.
The Corporation had notes payable totaling $2,150 and $1,200 at December
31, 1999 and 1998, respectively. There are three notes, all of which are demand
notes that carry a floating interest rate equal to the lender's prime rate less
one percent (7.50% at December 31, 1999). The notes, which are unsecured, have
various maturities in 2000.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands except per share data)
8. INCOME TAXES
Income tax expense (benefit) consisted of the following:
CURRENT DEFERRED TOTAL
------- -------- -----
Year ended December 31, 1999:
U.S. Federal $1,516 $ (247) $1,269
State 322 (35) 287
------ ------ ------
Total $1,838 $ (282) $1,556
Year ended December 31, 1998:
U.S. Federal $1,229 $ 191 $1,420
Year ended December 31, 1997:
U.S. Federal $1,733 $ (208) $1,525
The Corporation was not liable for state income taxes for 1998 or 1997.
Income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 34 percent to pretax income as a result of the
following:
1999 1998 1997
------ ------ ------
Computed "expected" tax expense $1,839 $1,931 $2,000
Increase (decrease) in income taxes
resulting from:
Tax-exempt income (673) (630) (582)
Non-deductible interest expense 89 86 77
State income taxes, net of federal
tax benefit 174 -0- -0-
Goodwill amortization 88 88 87
Other, net 39 (55) (57)
------ ------ ------
$1,556 $1,420 $1,525
====== ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are presented below:
Deferred tax assets: 1999 1998
------ -----
Deferred directors' fees $ 116 $ 125
State NOL carryforwards -0- 7
Unrealized loss on investment securities
available-for-sale 531 -0-
Other, net 13 -0-
------ -----
Total gross deferred tax assets 660 132
------ -----
Deferred tax liabilities:
Building and equipment, principally due to
differences in depreciation (202) (216)
Provision for possible loan losses (82) (301)
Accretion (21) (73)
Unrealized gain on investment securities
available-for-sale -0- (444)
Purchase accounting adjustments (24) (24)
------ -----
Total gross deferred tax liabilities (329) (1,058)
------ -----
Net deferred tax assets (liabilities) $ 331 $(926)
====== =====
Management believes it is more likely than not the deferred tax assets will
be realized.
9. REGULATORY MATTERS
The Corporation and its subsidiary bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and its subsidiary bank must meet specific capital guidelines
that involve quantitative measures of each entity's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Corporation's and its subsidiary bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Corporation and its subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital to
risk-weighted assets, and of Tier 1 capital to average adjusted assets. As of
December 31, 1999 and 1998, the Corporation and its subsidiary bank were
categorized as well capitalized under the regulatory framework.
The most recent notification, as of June 7, 1999, from the federal banking
agencies categorized the Corporation and the subsidiary bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Corporation and the subsidiary bank must maintain total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table that follows. There are no conditions or events since that notification
which have changed the Corporation's or the subsidiary bank's category.
18
<PAGE>
The Corporation's and the subsidiary bank's actual capital amounts and ratios
at December 31, 1999 and 1998 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> <C>
As of December 31, 1999:
Total Capital (to risk-weighted assets):
Princeton National Bancorp, Inc. $39,721 12.31% $25,810 8.00% $32,263 10.00%
Citizens First National Bank 41,422 12.85 25,787 8.00 32,234 10.00
Tier 1 Capital (to risk-weighted assets):
Princeton National Bancorp, Inc. $37,771 11.71% $12,905 4.00% $19,358 6.00%
Citizens First National Bank 39,472 12.25 12,893 4.00 19,340 6.00
Tier 1 Capital (to average adjusted assets):
Princeton National Bancorp, Inc. $37,771 8.21% $18,395 4.00% $22,994 5.00%
Citizens First National Bank 39,472 8.59 18,384 4.00 22,980 5.00
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------
As of December 31, 1998:
Total Capital (to risk-weighted assets):
Princeton National Bancorp, Inc. $38,894 13.68% $22,745 8.00% $28,431 10.00%
Citizens First National Bank 39,593 13.94 22,721 8.00 28,401 10.00
Tier 1 Capital (to risk-weighted assets):
Princeton National Bancorp, Inc. $37,094 13.05% $11,373 4.00% $17,059 6.00%
Citizens First National Bank 37,793 13.31 11,360 4.00 17,040 6.00
Tier 1 Capital (to average adjusted assets):
Princeton National Bancorp, Inc. $37,094 8.35% $17,771 4.00% $22,213 5.00%
Citizens First National Bank 37,793 8.51 17,762 4.00 22,202 5.00
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
10. EMPLOYEE, OFFICER, AND DIRECTOR BENEFIT PLANS
The subsidiary bank has a defined contribution investment (401k) plan. Under
this plan, employees may elect to contribute, on a tax-deferred basis, up to ten
percent of their salary. In addition, the subsidiary bank will match employees'
contributions up to three percent of each employee's salary. The subsidiary
bank's contribution to the defined contribution investment (401k) plan for 1999,
1998, and 1997 was $141, $136, and $124, respectively.
The subsidiary bank also has a stock purchase program in which the employee
contributes through payroll deductions. These amounts are pooled and used to
purchase shares of the Corporation's common stock on a quarterly basis at the
opening bid price on the last business day of the quarter.
The subsidiary bank also has a profit sharing plan. Annual contributions to
the subsidiary bank's plan are based on a formula. The total contribution is at
the discretion of the Board of Directors. The cost of the profit-sharing plan
charged to operating expense was $196 in 1999, $193 in 1998, and $222 in 1997.
Additionally, in 1998, the Corporation's shareholders approved a
non-qualifying stock option plan for the benefit of employees and directors of
the Bank. The Corporation applies APB Opinion 25, "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its stock option
plan. Accordingly, no compensation cost has been recognized for its stock option
plans. The fair value of each option grant in 1999 was estimated using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 3.22%; expected volatility of 33%; risk-free
interest rate of 6.40%; expected life of ten years.
The number of shares of common stock authorized under the stock option plan
is 202,500. The option exercise price must be at least 100% of the fair value of
the common stock on the date of grant, and the option term cannot exceed ten
years. A summary of the stock option activity and related information follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1999 1998
--------------- ---------------
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Beginning of period 12,950 $17.19 -0- --
Granted 21,500 11.19 12,950 $17.19
Exercised -0- -- -0-
------ ------ ------ ------
End of period 34,450 $13.45 12,950 $17.19
Options exercisable 4,317 -0-
Fair value of options granted during period $3.99 $6.49
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. There is no
difference between the stated and pro forma net income per share in 1998.
Proforma diluted earnings would be $.01 less than stated in 1999 and the same in
1998.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands except per share data)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("FAS 107"), "Disclosures
about Fair Value of Financial Instruments," requires all entities to disclose
the estimated fair value of its financial instrument assets and liabilities. For
the Corporation, as for most financial institutions, the majority of its assets
and liabilities are considered financial instruments as defined in FAS 107. Many
of the Corporation's financial instruments, however, lack an available trading
market as characterized by a willing buyer and willing seller engaging in an
exchange transaction. It is also the Corporation's general practice and intent
to hold its financial instruments to maturity and to not engage in trading or
sales activities except for loans held-for-resale and available-for-sale
securities. Therefore, significant estimations and assumptions, as well as
present value calculations, were used by the Corporation for the purposes of
this disclosure.
Estimated fair values have been determined by the Corporation using the best
available data and an estimation methodology suitable for each category of
financial instruments. For those loans and deposits with floating interest
rates, it is presumed that estimated fair values generally approximate the
recorded book balances. The estimation methodologies used, the estimated fair
values, and the recorded book balances at December 31, 1999 and 1998, were as
follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- ---------------------
AMORTIZED FAIR Amortized Fair
COST VALUE Cost Value
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks $ 19,325 $ 19,325 $ 31,133 $ 31,133
Federal funds sold 7,900 7,900 23,000 23,000
Investment securities 115,528 113,655 129,620 131,173
Loans, net 315,043 313,359 269,037 269,349
Accrued interest receivable 5,799 5,799 5,604 5,604
-------- -------- -------- --------
Total Financial Assets $463,595 $460,038 $458,394 $460,259
- ------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Non-interest-bearing
demand deposits $ 45,514 $ 45,514 $ 47,355 $ 47,355
Interest-bearing deposits 359,294 359,833 360,483 362,159
Borrowings 33,499 33,499 24,296 24,296
Accrued interest payable 2,423 2,423 2,345 2,345
-------- -------- -------- --------
Total Financial Liabilities $440,730 $441,269 $434,479 $436,155
- ------------------------------------------------------------------------------------
</TABLE>
Financial instruments actively traded in a secondary market have been valued
using quoted available market prices. Cash and due from banks, interest-bearing
time deposits in other banks, federal funds sold, loans held-for-sale, and
interest receivable are valued at book value which approximates fair value.
Financial liability instruments with stated maturities have been valued using
a present value discounted cash flow with a discount rate approximating current
market for similar liabilities. Interest payable is valued at book value which
approximates fair value.
Financial instrument liabilities with no stated maturities have an estimated
fair value equal to both the amount payable on demand and the recorded book
balance.
The net loan portfolio has been valued using a present value discounted cash
flow. The discount rate used in these calculations is the current rate at which
similar loans would be made to borrowers with similar credit ratings, same
remaining maturities, and assumed prepayment risk.
Changes in assumptions or estimation methodologies may have a material effect
on these estimated fair values.
The Corporation's remaining assets and liabilities, which are not considered
financial instruments, have not been valued differently than has been customary
with historical cost accounting. No disclosure of the relationship value of the
Corporation's core deposit base is required by FAS 107. Because the
Corporation's 1999 cost of funds compares favorably with alternative funding
sources available to the Corporation, the relationship value of these
liabilities is believed by management to be significant. There is no material
difference between the notional amount and the estimated fair value of
off-balance sheet items, which total $70,342 and $64,102 at December 31, 1999
and 1998 respectively, and are primarily comprised of unfunded loan commitments
which are generally priced at market at the time of funding.
Fair value estimates are based on existing on-and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. For example, the subsidiary bank has a large trust
department that contributes net fee income annually. The trust department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage banking
operation, brokerage network, deferred tax liabilities, property, plant and
equipment, and goodwill. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in many of the estimates.
Management is concerned reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques and numerous estimates which must be made given the absence of active
secondary markets for many of the financial instruments. This lack of uniform
valuation methodologies also introduces a greater degree of subjectivity to
these estimated fair values.
12. UNDISTRIBUTED EARNINGS OF BANK SUBSIDIARY
National banking regulations and capital guidelines limit the amount of
dividends that may be paid by banks. At December 31, 1999, the subsidiary bank
had $1,829 available for dividends. Future dividend payments by the subsidiary
bank would be dependent on individual regulatory capital requirements and levels
of profitability. Since the Corporation is a legal entity, separate and distinct
from the bank, the dividends of the Corporation are not subject to such bank
regulatory guidelines.
20
<PAGE>
13. COMMITMENTS AND CONTINGENCIES
The subsidiary bank is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. The contract amounts of those instruments
reflect the extent of involvement the subsidiary bank has in particular classes
of financial instruments.
The subsidiary bank's exposure to credit loss in the event of non-performance
by the other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The subsidiary bank uses the same credit policies in
making commitments and conditional obligations as they do for on-balance sheet
instruments. At December 31, 1999, commitments to extend credit and standby
letters of credit were approximately $69,177 and $1,165, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiary bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary, by the subsidiary bank upon extension of credit
is based on management's credit evaluation of the counterparty. Collateral held
varies, but may include real estate, accounts receivable, inventory, property,
plant and equipment, and income-producing properties.
Standby letters of credit are conditional commitments issued by the
subsidiary bank to guarantee the performance of a customer to a third party. The
credit risk involved in issuing standby letters of credit is essentially the
same as that involved in extending loan facilities to customers. The subsidiary
bank secures the standby letters of credit with the same collateral used to
secure the loan.
There are various claims pending against the Corporation's subsidiary bank,
arising in the normal course of business. Management believes, based upon
consultation with counsel, liabilities arising from these proceedings, if any,
will not be material to the Corporation's financial position.
14. SUBSIDIARY BANK TRUST DEPARTMENT LITIGATION
A ruling was received during the third quarter of 1998 on the Corporation's
subsidiary bank's lawsuit, stemming from the 1995 Trust Department issue,
against Cincinnati Insurance Company. The case was heard in the United States
District Court for the Northern District of Illinois, Eastern Division, in
Chicago, Illinois. The judge ruled in favor of the subsidiary bank on all issues
and awarded $4,900 in damages, pre-judgment interest, post-judgment interest,
and reasonable attorney fees and costs. Cincinnati Insurance Company filed an
appeal to the ruling.
In January, 2000, the Seventh Circuit Court of Appeals issued its decision on
the appeal, affirming the Federal District Court Award and increasing the
recovery under the policy by $100 though setting aside the award of attorneys'
fees. The subsidiary bank is therefore entitled to $5,000 under the policy,
pre-judgment interest of approximately $730, and post-judgment interest accruing
at the statutory rate from the date of the original judgment in the lower court
of approximately $400.
On February 17, 2000, the subsidiary bank received the settlement from
Cincinnati Insurance Company in the amount of $6,235, bringing the matter to a
conclusion. Due to the uncertainty of the litigation, none of these amounts had
been accrued for at December 31,1999.
15. STOCK DIVIDEND
In April, 1998, the Corporation announced a 3-for-2 stock split which was
paid on May 15, 1998 to shareholders of record as of April 24, 1998. All amounts
for 1998 and 1997 have been adjusted to reflect this stock split.
16. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation offers their retirees the opportunity to continue benefits in
the subsidiary bank's Employee Health Benefit Plan provided the retiree agrees
to pay a portion of their monthly premiums. The Corporation's level of
contribution is based upon an age and service formula and will provide benefits
to active participants until age 65. The components of the 1999, 1998, and 1997
net periodic post-retirement benefit cost are shown below:
1999 1998 1997
Service cost $ 31 $ 29 $ 27
Interest cost 29 26 25
Net amortization of transition obligation 16 16 16
---- ----- ----
Net periodic post-retirement benefit cost $ 76 $ 71 $ 68
==== ===== ====
At December 31, 1999, 1998, and 1997, the accumulated post-retirement benefit
obligation totaled $413, $371, and $349, respectively. For measurement purposes,
a 10% annual rate of increase in the cost of covered benefits (healthcare cost
trend rate) was assumed for 1999, 1998, and 1997 and the rate was further
assumed to decline to 5% after six years. The weighted average discount rate
used in determining the accumulated post-retirement benefit obligation was 7.0%
at December 31, 1999, 1998, and 1997.
Assumed healthcare cost trend rates have a significant effect on the amounts
reported for the healthcare plans. A one-percentage point change in assumed
healthcare cost trend rates would have the following effects:
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
Effect on total of service and interest
cost components $ 5 $ (4)
Effect on post-retirement benefit
obligation 44 (38)
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(dollar amounts in thousands except per share data)
17. CONDENSED FINANCIAL INFORMATION OF PRINCETON NATIONAL BANCORP, INC.
The following condensed financial statements are presented for the
Corporation on a stand alone basis.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1999 1998
<S> <C> <C>
ASSETS
Cash $ 14 $ 14
Interest-bearing deposits in subsidiary bank 136 295
Other assets 519 552
Investment in subsidiary bank 42,384 43,005
-------- --------
TOTAL ASSETS $ 43,053 $ 43,866
======== ========
LIABILITIES
Borrowings $ 2,150 $ 1,200
Other liabilities (43) 60
-------- --------
TOTAL LIABILITIES 2,107 1,260
-------- --------
STOCKHOLDERS' EQUITY
Common stock 20,699 20,699
Surplus 6,335 6,305
Retained earnings 22,118 19,588
Accumulated other comprehensive income (loss),
net of tax (1,031) 862
Less: Cost of treasury shares (7,175) (4,848)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 40,946 42,606
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 43,053 $ 43,866
======== ========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
----------------------------------
1999 1998 1997
<S> <C> <C> <C>
INCOME
Dividends received from subsidiary bank $ 2,800 $ 6,200 $ 2,400
Interest income 11 18 62
Gain on sale of investment securities -0- -0- 2
Other income 20 36 1
-------- -------- --------
TOTAL INCOME 2,831 6,254 2,465
-------- -------- --------
EXPENSES
Interest expense 96 114 353
Amortization of goodwill and other intangible assets 63 63 63
Other expenses 169 161 118
-------- -------- --------
TOTAL EXPENSES 328 338 534
-------- -------- --------
Income before income taxes and equity
in undistributed income of subsidiary bank 2,503 5,916 1,931
Applicable income taxes (benefit) (80) (75) (138)
-------- -------- --------
Income before equity in undistributed income
of subsidiary bank 2,583 5,991 2,069
Equity in undistributed income (loss) of subsidiary bank 1,271 (1,732) 2,290
-------- -------- --------
NET INCOME $ 3,854 $ 4,259 $ 4,359
======== ======== ========
</TABLE>
22
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1999 1998 1997
<S> <C> <C> <C>
Operating activities:
Net income $ 3,854 $ 4,259 $ 4,359
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of investment securities,
net of accretion -0- -0- (1)
Gain on securities transactions, net -0- -0- (2)
Equity in undistributed income (1,271) 1,732 (2,290)
Amortization of goodwill
and other intangible assets 63 63 63
(Increase) decrease in other assets (32) (101) 261
Increase (decrease) in other liabilities (102) 983 (1,056)
------- ------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,512 6,936 1,334
------- ------- -------
Investing activities:
Proceeds from sales of investment securities
available-for-sale -0- -0- 925
Proceeds from maturities of investment securities
available-for-sale -0- -0- 8
------- ------- -------
NET CASH PROVIDED BY
INVESTING ACTIVITIES -0- -0- 933
------- ------- -------
Financing activities:
Payments for borrowings (250) (4,750) (600)
Proceeds from borrowings 1,200 2,200 --
Sale of treasury stock 59 116 76
Purchase of treasury stock (2,356) (3,496) (1,084)
Dividends paid (1,324) (1,241) (1,140)
------- ------- -------
NET CASH USED BY
FINANCING ACTIVITIES (2,671) (7,171) (2,748)
------- ------- -------
Decrease in cash and cash equivalents (159) (235) (481)
Cash and cash equivalents at beginning of year 309 544 1,025
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 150 $ 309 $ 544
======= ======= =======
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollar amounts in thousands except per share data)
The following discussion and analysis provides information about the
Corporation's financial condition and results of operations for the years ended
December 31, 1999, 1998, and 1997. This discussion and analysis should be read
in conjunction with "Selected Statistical Data", and the Corporation's
Consolidated Financial Statements and the Notes thereto included in this report
(dollar amounts in thousands unless otherwise indicated).
OVERVIEW
Assets increased to $482,820 at year-end. The structure of the balance sheet
changed significantly throughout 1999. Loans increased and short-term funds
decreased. This had a positive effect on net interest income. The net interest
margin improved to 4.27% in the fourth quarter as compared to 4.15% for all of
1999 and 4.12% for 1998.
The decrease in equity resulted from a negative fair market value adjustment
of the subsidiary bank's investment portfolio, which was caused by an increase
in interest rates during 1999.
The stock repurchase plan increased treasury shares and also contributed to
the decrease in capital. The balance sheet leverage did improve as a result of
this change in capital.
Net income decreased 9.51% during 1999. Operating expenses were negatively
impacted by increases in equipment depreciation, provision for loan loss
expense, and salary expenses. Additionally, income tax expense increased as a
result of the Company's increase in pre-tax income and utilizing all available
state net operating loss carryforwards in 1998 and becoming taxable for state
income tax purposes in 1999. Loan growth contributed to the improvement in net
interest income in 1999.
ASSETS AT PERCENT EQUITY AT PERCENT NET PERCENT
YEAR-END CHANGE YEAR-END CHANGE INCOME CHANGE
-------- ------ -------- ------ ------ ------
1999 $482,820 0.82% $40,946 (3.90)% $3,854 (9.51)%
1998 478,911 6.51 42,606 (0.15) 4,259 (2.29)
1997 449,660 6.96 42,668 6.15 4,359 27.20
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income increased by $638 (on a taxable
equivalent basis) to $17,732 in 1999 from $17,094 in 1998, an increase of 3.7%.
This increase is not only a result of an increase in the volume of
interest-earning assets, but, more importantly, a change in the composition of
interest-earning assets with a higher percentage being in net loans, which earns
the highest return. As a result, the net yield on interest-earning assets
increased to 4.15% in 1999, from 4.12% in 1998. The yield on average earning
assets decreased from 8.10% in 1998 to 7.77% in 1999. However, the cost of
interest-bearing liabilities also dropped from 4.53% in 1998 to 4.07% in 1999.
24
<PAGE>
The following table sets forth certain unaudited income and expense and per
share data on a quarterly basis for the three-month periods indicated:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- ---------------------------- ---------------------------
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 $ 5,260 $ 247 4.70% $ 6,401 $ 335 5.23% $ 4,911 $ 267 5.44%
Taxable investment securities 89,818 5,082 5.66 92,643 5,494 5.93 82,200 4,976 6.05
Tax-exempt investment securities (a) 37,262 2,794 7.50 34,340 2,620 7.63 30,824 2,458 7.97
Federal funds sold 5,664 268 4.73 7,380 388 5.26 5,465 297 5.43
Net loans (a) (b) 288,773 24,751 8.57 274,272 24,761 9.03 267,918 24,185 9.03
-------- -------- -------- -------- -------- --------
Total interest-earning assets 426,777 33,142 7.77 415,036 33,598 8.10 391,318 32,183 8.22
-------- -------- -------- -------- -------- --------
Average non-interest-earning assets 37,945 34,343 35,696
-------- -------- --------
Total average assets $464,722 $449,379 $427,014
======== ======== ========
AVERAGE INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits $ 92,448 2,161 2.34% $ 86,874 2,492 2.87% $ 84,424 2,420 2.87%
Savings deposits 54,998 1,143 2.08 53,630 1,536 2.86 54,543 1,631 2.99
Time deposits 203,365 10,721 5.27 201,598 11,269 5.59 192,250 10,665 5.55
Interest-bearing demand notes
issued to the U. S. Treasury 1,093 52 4.76 1,015 55 5.42 1,117 64 5.73
Federal funds purchased and
customer repurchase agreements 15,053 667 4.43 12,963 626 4.83 7,741 375 4.84
Advances from Federal Home Loan Bank 10,008 570 5.70 7,011 412 5.88 521 33 6.33
Borrowings 1,342 96 7.15 1,397 114 8.16 4,120 353 8.57
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 378,307 15,410 4.07 364,488 16,504 4.53 344,716 15,541 4.51
-------- -------- -------- -------- -------- --------
Net yield on average
interest-earning assets $ 17,732 4.15% $ 17,094 4.12% $ 16,642 4.25%
======== ==== ======== ==== ======== ====
Average non-interest-bearing liabilities 44,536 41,999 41,039
Average stockholders' equity 41,879 42,892 41,259
-------- -------- --------
Total average liabilities and
stockholders' equity $464,722 $449,379 $427,014
======== ======== ========
</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 $63 in 1999, $329 in 1998, and $116 in 1997, attributable to
interest from non-accrual loans.
In 1998, net interest income improved by 2.7% to $17,094, a result of an
increase in the volume of interest-earning assets, offset by falling interest
rates and a flattening yield curve throughout 1998, which reduced the net yield
on interest-earning assets and the average cost of interest-bearing liabilities.
The net yield on interest-earning assets decreased to 8.10% from 8.22% in 1997.
The average rate on interest-bearing liabilities increased to 4.53% from 4.51%.
The resulting net yield on average interest-earning assets on a fully taxable
equivalent basis decreased to 4.12% from 4.25% in 1997.
25
<PAGE>
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>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------------------
1999 COMPARED TO 1998 1998 COMPARED TO 1997 1997 COMPARED TO 1996
VOLUME(a) RATE(a) NET VOLUME(a) RATE(a) NET VOLUME(a) RATE(a) NET
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST FROM INTEREST-EARNING ASSETS
Interest-bearing time deposits $ (57) $ (31) $ (88) $ 79 $ (11) $ 68 $ 251 $ (7) $ 244
Taxable investment securities (164) (248) (412) 624 (106) 518 (587) 428 (159)
Tax-exempt investment securities (b) 221 (47) 174 274 (112) 162 63 (78) (15)
Federal funds sold (86) (34) (120) 102 (11) 91 151 6 157
Net loans (c) 1,280 (1,290) (10) 576 -0- 576 2,034 (60) 1,974
------- ------- ------- ------- ------- ------- ------- ------- -------
Total income from interest-
earning assets 1,194 (1,650) (456) 1,655 (240) 1,415 1,912 289 2,201
------- ------- ------- ------- ------- ------- ------- ------- -------
EXPENSE OF INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits 144 (475) (331) 72 -0- 72 211 193 404
Savings deposits 32 (425) (393) (26) (69) (95) 44 -0- 44
Time deposits 98 (646) (548) 523 81 604 343 152 495
Interest-bearing demand notes issued
to the U.S. Treasury 4 (7) (3) (6) (3) (9) 3 9 12
Federal funds purchased and customer
repurchase agreements 97 (56) 41 250 1 251 31 (6) 25
Advances from Federal Home Loan Bank 174 (16) 158 397 (18) 379 33 -0- 33
Borrowings (4) (14) (18) (228) (11) (239) (75) 7 (68)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total expense from interest-
bearing liabilities 545 (1,639) (1,094) 982 (19) 963 590 355 945
------- ------- ------- ------- ------- ------- ------- ------- -------
Net difference $ 649 $ (11) $ 638 $ 673 $ (221) $ 452 $ 1,322 $ (66) $ 1,256
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(a) The change in interest due both to rate and volume has been allocated
equally.
(b) Interest income on non-taxable investment securities includes the effects of
taxable equivalent adjustments using a tax rate of 34% in adjusting interest
on tax-exempt securities to a fully-taxable basis.
(c) Includes loan fees of $1,048 in 1999, $986 in 1998, and $787 in 1997.
Interest income on loans includes the effect of tax equivalent adjustments
for non-taxable loans using a tax rate of 34% in adjusting interest on
tax-exempt loans to a fully-taxable basis. Includes non-accrual loans, with
year-end balances of $1,274 in 1999, $1,390 in 1998, and $810 in 1997.
NON-INTEREST INCOME. Non-interest income increased in 1999 by $163 to $4,006,
up 4.2% from 1998's total of $3,843. As a percentage of average assets,
non-interest income remained at .86% for 1999, the same level as in 1998. The
biggest increase was in other service charges, which increased by $181 (or
35.2%). This was a result of income generated by the subsidiary bank's new debit
card product and a 168% increase in brokerage fee income. Notable increases were
also seen in trust income (up $90 or 10.6%) as a result of the increase in trust
accounts and assets, and in service charges on deposit accounts (up $85 or 5.7%)
as a result of an increase in the number of deposit accounts at the subsidiary
bank. There was a decrease in loan servicing fees and other charges of $173 (or
46.3%), a result of higher interest rates which reduced loan originations and
related sales in the secondary market. The following table provides non-interest
income by category, total non-interest income, and non-interest income to
average total assets for the periods indicated:
YEAR ENDED DECEMBER 31
--------------------------------
1999 1998 1997
Trust income $ 943 $ 853 $ 817
Farm management fees 254 266 250
Service charges on deposit accounts 1,583 1,498 1,368
Other service charges 696 515 445
Securities transactions, net 41 96 97
Other operating income 288 241 211
Loan servicing fees and other charges 201 374 177
------ ------ ------
Total non-interest income $4,006 $3,843 $3,365
====== ====== ======
Non-interest income
to average total assets .86% .86% .79%
In 1998, non-interest income increased by $478 to $3,843, up 14.2% from
1997's total of $3,365. Likewise, non-interest income as a percentage of average
assets increased from .79% to .86% over the same period. With the exception of
securities transactions, which decreased only $1, all categories showed
increases in 1998 when compared to 1997. The biggest increase was seen in loan
servicing fees and other charges which increased by $197 (or 111.3%) due to
heavy refinancing activity in the real estate market. Service charges on deposit
accounts also showed a healthy increase of $130 (or 9.5%) due to an overall
increase in the number of deposit accounts at the subsidiary bank.
26
<PAGE>
NON-INTEREST EXPENSE. In 1999, non-interest expenses increased by $686, or
4.9%, to $14,660 compared to $13,974 in 1998. As a percentage of average assets,
non-interest expense was 3.15% in 1999, up just slightly from 3.11% in 1998. Two
categories accounted for the majority of the increase: salaries and employee
benefits, and equipment. Salaries and employee benefits increased by $350 (or
4.7%), due to normal salary increases and a slight increase in the number of
employees. Equipment expense increased by $352 (or 42.8%), due to the
installation of new computer systems in the latter part of 1998 and the
resulting depreciation expense beginning in 1999. In 1998, the older equipment
became fully depreciated, thereby lowering depreciation expense. Collectively,
all other categories of non-interest expense decreased by $16. The following
table provides non-interest expense, and non-interest expense to average total
assets for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1999 1998 1997
<S> <C> <C> <C>
Salaries and employee benefits $ 7,829 $7,479 $ 6,866
Equipment 1,174 822 858
Occupancy 1,000 1,007 964
Loan administrative expenses 550 586 451
Data processing 514 609 677
Goodwill and intangible assets amortization 448 467 464
Postage 335 326 316
Supplies 269 242 203
FDIC/OCC assessments 188 185 144
Trust litigation expenses 141 256 73
Other operating expense 2,212 1,995 1,646
------- ------- -------
Total non-interest expense $14,660 $13,974 $12,662
======= ======= =======
Non-interest expense
to average total assets 3.15% 3.11% 2.97%
</TABLE>
Non-interest expenses increased in 1998 by $1,312 (or 10.4%) to $13,974 from
$12,662 in 1997. Salaries and employee benefits increased by $613 (or 8.9%), a
result of an increase in the number of full-time equivalent employees in 1998,
which has been required as the subsidiary bank continues to grow. Trust
litigation expenses also increased in 1998 to $256 from $73 in 1997. FDIC/OCC
assessments were up 28.5% from 1997, due to the fact that the Corporation
received a refund in the first quarter of 1997. Other operating expenses also
increased during 1998, the result of several smaller accounts such as postage,
advertising, supplies, etc. showing marginal increases. Data processing expenses
decreased by $68 (or 10.0%), partially as a result of the subsidiary bank
changing to in-house item processing.
NET INCOME. Net income for 1999 was $3,854 (or $1.02 per diluted share), a
decrease of $405 (or 9.5%) from $4,259 (or $1.08 per diluted share) in 1998.
This decrease is a result of the subsidiary bank becoming state taxable in 1999
and an increase in the provision for loan losses as well as the aforementioned
increases in non-interest expenses.
Net income for 1998 decreased by $100 (or 2.3%) from $4,359 in 1997. This
decrease was attributable to a narrowing of the net interest margin as well as
increases in non-interest expenses, which more than offset increases in
non-interest income.
ANALYSIS OF FINANCIAL CONDITION
LOANS. The Corporation's loan portfolio largely reflects the profile of the
communities in which it operates. The Corporation essentially offers four types
of loans: agricultural, commercial, real estate, and installment. The
Corporation has no foreign loans. The following table summarizes the
Corporation's loan portfolio:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
% 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 $ 37,891 12.3% $ 37,520 14.1% $ 38,991 14.3% $ 36,030 14.0% $ 33,106 14.2%
Commercial 47,963 15.6 44,147 16.6 41,241 15.1 38,410 14.8 34,687 14.9
Real Estate
1-4 family residences 67,936 22.0 66,243 24.9 75,607 27.8 72,460 28.1 63,824 27.4
Agricultural 41,641 13.5 33,491 12.6 30,434 11.2 28,374 11.0 23,148 10.0
Construction 13,316 4.3 6,299 2.4 6,030 2.2 4,160 1.6 3,116 1.3
Commercial 57,260 18.6 42,005 15.8 42,617 15.7 41,170 16.0 37,378 16.1
-------- -------- -------- -------- --------
Real Estate Total 180,153 58.4 148,038 55.7 154,688 56.9 146,164 56.7 127,466 54.8
Installment 42,349 13.7 35,950 13.6 37,480 13.7 37,514 14.5 37,434 16.1
-------- -------- -------- -------- --------
Total loans $308,356 100.0% $265,655 100.0% $272,400 100.0% $258,118 100.0% $232,693 100.0%
======== ======== ======== ======== ========
Total assets $482,820 $478,911 $449,660 $420,407 $402,393
Loans to total assets 63.9% 55.5% 60.6% 61.4% 57.8%
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollar amounts in thousands except per share data)
Total loans increased $42.7 million (or 16.1%) in 1999, as compared to a
decrease of $6.7 million (or 2.5%) in 1998. This substantial increase reflects
the overall strong economy of the market area served by the subsidiary bank and
successful efforts of the staff to build profitable relationships with
customers.
Commercial loans increased $3.8 million (or 8.6%) in 1999. This compares to
an increase of $2.9 million (or 7.1%) in 1998. Commercial growth remains
particularly active in the eastern and northeastern markets. More established
areas posted increases also, largely due to the success of relationship building
with customers. Competition for high quality commercial and agricultural
customers remains strong.
The agricultural loan portfolio was virtually unchanged in 1999 compared to
1998. This is after a decrease of $1.5 million (or 3.8%) in 1998. During 1999
and 1998, a number of short-term agricultural credits were converted to well
secured agricultural real estate loans. Agriculture commodity prices remain low,
causing reduced cash flow for many farmers; however, increased yields and cash
injected from the government have helped mitigate the low commodity prices.
The largest area of growth in the portfolio was in real estate loans. These
loans increased $32.1 million (or 21.7%) from 1998 compared to a decrease of
$6.7 million (or 4.3%) in 1998. The decrease in 1998 was due to heavy
refinancing of residential real estate loans into fixed rate loans that were
sold into the secondary market. Due to increasing interest rates, such
refinancing did not occur in 1999. All types of real estate loans increased in
1999 with commercial and agricultural real estate loans showing the largest
gains. Construction loans are primarily commercial projects.
Consumer installment loans increased $6.4 million (or 17.8%) in 1999 from
1998. This follows a slight decline in 1998. Most of the increase is in home
equity loans and auto financing.
Although the risk of non-payment for any reason exists with respect to all
loans, certain other more specific risks are associated with each type of loan.
The primary risks associated with commercial loans are the quality of the
borrower's management and the impact of national economic factors. With respect
to agricultural loans, the primary risks are weather and, like commercial loans,
quality of the borrower's management. Risks associated with real estate loans
include concentrations of loans in a loan type, such as commercial or
agricultural, and fluctuating land values. Installment loans also have risks
associated with concentrations of loans in a single type of loan. Installment
loans additionally carry the risk of a borrower's unemployment as a result of
deteriorating economic conditions.
The Corporation's strategy with respect to addressing and managing these
types of risks, whether loan demand is weak or strong, is for the subsidiary
bank to follow its conservative loan policies and underwriting practices, which
include (i) granting loans on a sound and collectible basis, (ii) investing
funds profitably for the benefit of the shareholders and the protection of
depositors, (iii) serving the legitimate needs of the community and the
subsidiary bank's general market area while obtaining a balance between maximum
yield and minimum risk, (iv) ensuring primary and secondary sources of repayment
are adequate in relation to the amount of the loan, (v) administering loan
policies through a Directors' Loan Committee and an Officers' Loan Committee,
(vi) developing and maintaining adequate diversification of the loan portfolio
as a whole and of the loans within each loan category, and (vii) ensuring each
loan is properly documented and, if appropriate, secured or guaranteed by
government agencies, and insurance coverage is adequate, especially with respect
to certain agricultural loans because of the risk of poor weather.
NON-PERFORMING LOANS AND OTHER REAL ESTATE OWNED. Non-performing loans
amounted to .44% of total loans at year-end 1999 compared to .52% at year-end
1998. The overall low level of non-performing loans is a reflection of the
subsidiary bank's lending staff, credit policies, and management's emphasis on
asset quality. Potential problem credits are closely monitored by the lending
staff, and an independent loan review staff provides further assistance in
identifying problem situations. Loans over 90 days past due are normally either
charged off, or if well secured and in the process of collection, placed on a
non-accrual status. Reflecting the Corporation's sound credit policies, the
allowance for possible loan losses was 141% and 128% of nonperforming loans at
year-end 1999 and 1998, respectively. The Corporation does not have any
significant concentration of commercial real estate loans or commitments in
areas which are experiencing deteriorating economic conditions. Total other real
estate owned as of December 31,1999 was $92. The Corporation had $217 in other
real estate owned as of December 31, 1998. The following table provides
information on the Corporation's non-performing loans since 1995:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Non-accrual $1,274 $1,390 $ 810 $1,157 $ 808
90 days past due and accruing 111 16 27 -0- 109
Restructured -0- -0- -0- -0- -0-
------ ------ ------ ------ ------
Total non-performing loans $1,385 $1,406 $ 837 $1,157 $ 917
====== ====== ====== ====== ======
Non-performing loans to total loans
(net of unearned interest) .44% .52% .31% .45% .39%
</TABLE>
As of December 31, 1999 and 1998, loans which the Corporation's management
had serious doubts as to the ability of borrowers to comply with loan repayment
terms not carried as non-performing loans totaled approximately $235 (or .08% of
the total loan portfolio), compared to $279 (or .10% of the total loan
portfolio), respectively.
28
<PAGE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance shown in the following
table represents the allowance available to absorb losses within the entire
portfolio:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding at end of
period (net of unearned interest) $308,347 $265,474 $272,111 $257,931 $ 232,471
Average amount of loans outstanding for
the period (net of unearned interest) $283,845 $274,076 $265,756 $244,027 $ 218,091
Allowance for possible loan
losses at beginning of period $ 1,800 $ 1,830 $ 1,630 $ 2,034 $ 2,100
Charge-offs:
Agricultural -0- 84 -0- -0- -0-
Commercial 155 279 171 140 6
Real estate-mortgage 74 26 1 4 -0-
Installment 605 629 834 1,221 557
-------- -------- -------- -------- ---------
Total charge-offs 834 1,018 1,006 1,365 563
-------- -------- -------- -------- ---------
Recoveries:
Agricultural 6 243 66 351 321
Commercial 28 28 65 31 23
Real estate-mortgage 1 1 -0- 4 10
Installment 298 379 485 534 244
-------- -------- -------- -------- ---------
Total recoveries 333 651 616 920 598
-------- -------- -------- -------- ---------
Net loans charged off (recovered) 501 367 390 445 (35)
Provision (credit) for possible
loan losses 651 337 590 41 (101)
-------- -------- -------- -------- ---------
Allowance for possible loan
losses at end of period $ 1,950 $ 1,800 $ 1,830 $ 1,630 $ 2,034
======== ======== ======== ======== =========
Net loans charged off
(recovered) to average loans .18% .13% .15% .18% (.02)%
Allowance for possible loan
losses to non-performing loans 140.79% 128.02% 218.64% 140.88% 221.81%
Allowance for possible loan
losses to total loans at end of
period (net of unearned interest) .63% .68% .67% .63% .87%
</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, and other factors such as the historical
loan loss experience by loan type, specific loan loss reserves, and the level of
substandard and delinquent loans. In addition to management's assessment of the
portfolio, the Corporation and the subsidiary bank are examined periodically by
regulatory agencies. Although the regulatory agencies do not determine whether
the subsidiary bank's allowance for possible loan losses is adequate, such
agencies do review the procedures and policies followed by management of the
subsidiary bank in establishing the allowance.
Reflecting the Corporation's emphasis on asset quality, net charge-offs were
.18% of average total loans in 1999, and the allowance for possible loan losses
at year-end 1999 was $1.95 million, .63% of total loans, net of unearned
interest, and 141% of non-performing loans. Management considers the allowance
for possible loan losses adequate to meet potential losses as of December 31,
1999.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollar amounts in thousands except per share data)
INVESTMENT SECURITIES. The objectives of the investment portfolio are to
provide the Corporation with a source of earnings and liquidity. The following
table provides information on the book value of investment securities as of the
dates indicated:
DECEMBER 31
------------------------
1999 1998
U.S. Treasury Notes $ 2,003 $ 16,203
U.S. Government Agencies 44,740 32,052
State and Municipal 36,390 36,075
Collateralized mortgage obligations 28,703 35,657
Commercial paper -0- 8,888
Other securities 2,130 2,051
-------- --------
Total $113,966 $130,926
======== ========
Total investment securities decreased by $17.0 million (or 12.9%) to $114.0
million, at December 31, 1999, compared to December 31, 1998. The major reason
for the decrease was an increase in loan demand. A decrease of $14.2 million
occurred in the U.S. Treasury category, while an increase totaling $12.7 million
occurred in the U.S. Government Agency category. The return of an attractive
spread in the U.S. Government Agencies over Treasuries was responsible for the
shift from Treasuries to Agencies. Maturing investments of $6.2 million and $8.9
million, respectively, in Collateralized mortgage obligations and Commercial
paper were used to fuel the increase in loan demand.
DEPOSITS. Total deposits declined slightly in 1999 by $3.0 million from 1998.
However, total deposits remain up from 1997 by $18.9 million (or 4.9%). 1999's
decline was less than 1%. The average rate for deposits in 1999 was 3.59%, down
from 3.95% in 1998. While this had a positive impact on the subsidiary bank's
interest margin, it precipitated the deposit decline as investors seeking higher
returns continued to look outside the subsidiary bank. With rates declining and
the stock market surging, the slight decline in total deposits is not alarming
to management.
The decrease in deposits occurred primarily in savings and
non-interest-bearing demand accounts. This reflects the customers' continued
desire for higher rates while maintaining liquidity. Time deposits increased
slightly over 1998, by $1.4 million.
Over the last three years, the subsidiary bank has seen consistent growth in
most deposit categories. Total deposits have increased 12.9% ( $46.1 million)
with the largest increase coming in the interest-bearing demand accounts, 18.6%
($14.6 million).
The following table sets forth the classification of deposits with year-end
balances and the average rates paid for the indicated periods:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31
---------------------------------------------------------------------
1999 1998 1997
BALANCE RATE Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C>
Non-interest-bearing demand $ 45,514 N/A $ 47,355 N/A $ 42,333 N/A
Interest-bearing demand 93,521 2.34% 93,982 2.87% 87,364 2.87%
Savings 52,277 2.08% 54,378 2.86% 52,193 2.99%
Time deposits 213,496 5.27% 212,123 5.59% 204,050 5.55%
-------- -------- --------
Total $404,808 3.59% $407,838 3.95% $385,940 3.99%
======== ======== ========
</TABLE>
The following table summarizes time deposits in amounts of $100 or more by
time remaining until maturity as of December 31, 1999. These time deposits are
made by individuals, corporations, and public entities:
Three months or less $30,233
Over three months through six months 13,359
Over six months through one year 9,759
Over one year 3,878
-------
Total $57,229
=======
30
<PAGE>
LIQUIDITY. Liquidity is measured by a financial institution's ability to
raise funds through deposits, borrowed funds, capital, or the sale of assets.
Additional sources of liquidity, including cash flow from both the repayment of
loans and the securitization of assets, are also considered in determining
whether liquidity is satisfactory. The funds are used to meet deposit
withdrawals, maintain reserve requirements, fund loans, and operate the
organization. Liquidity is achieved through growth of core funds (defined as
core deposits, 50% of non-public entity certificates of deposit over $100, and
repurchase agreements issued to commercial customers) and liquid assets, and
accessibility to the money and capital markets. The Corporation's subsidiary
bank has access to short-term funds through its correspondent banks, as well as
access to the Federal Home Loan Bank of Chicago, which can provide longer-term
funds to help meet liquidity needs.
The ratio of temporary investments and other short-term available funds
(those investments maturing within one year plus twelve months' projected
payments on mortgage-backed securities and collateralized mortgage obligations,
cash and due from bank balances) to volatile liabilities (50% of non-public
entity certificates of deposit over $100, repurchase agreements issued to public
entities, Treasury tax and loan deposits, short-term borrowings from banks, and
deposits of public entities) was 62.67% at December 31, 1999 and 138.8% at
December 31, 1998, respectively. The reduction in this ratio is reflective of
the shift in assets from investments to loans during the course of the year.
Core deposits, defined as demand deposits, interest-bearing checking accounts,
total savings, and certificates of deposit less than $100, were 81.9% of total
deposits at December 31, 1999 and 84.8% of total deposits at December 31, 1998.
Money market accounts of approximately $36.7 million at December 31, 1999 are
classified by the Corporation as core deposits.
The Corporation experienced a net decrease of $26.9 million in cash and cash
equivalents in 1999. This decrease was primarily the result of net cash used by
investing activities of $31.7 million. A net increase in loans of $43.4 million,
plus $2.7 million for the purchase of premises and equipment were major
components of cash used by investing activities. These were partially offset by
net funds of $13.9 million provided by securities transactions. Financing
activities provided $2.6 million in net cash, while operating activities
provided $2.3 million in net cash. Cash and cash equivalents of $27.2 million at
December 31, 1999 are deemed adequate to meet short-term liquidity needs.
A net increase of $21.0 million in cash and cash equivalents was experienced
by the Corporation in 1998. Financing activities provided net cash of $24.6
million. Increases of $21.9 million in net deposits and $9.9 million in
short-term borrowings were offset by $3.5 million used to buy back stock of the
Corporation and a decrease of $2.5 million in long-term borrowings. Funds used
by investing activities of $5.4 million partially offset the funds provided by
financing activities. Major components of the investing activities were net cash
used of $9.1 million for securities transactions and $2.7 million for the
purchase of premises and equipment, offset by a $6.3 million reduction in loans.
The long-term liquidity needs of the Corporation will be driven by the
necessity to grow and change in the marketplace to meet the needs of its
customers and to offset strategies of its competitors. The Corporation's equity
base, along with its low debt level and common stock available for issuance,
provide several options for future financing.
ASSET/LIABILITY MANAGEMENT. The Corporation actively manages its assets and
liabilities through coordinating the levels of interest rate sensitive assets
and liabilities to minimize changes in net interest income despite changes in
market interest rates. The Corporation defines interest rate sensitive assets
and liabilities as any instrument that can be repriced within 180 days, either
because the instrument will mature during the period or because it carries a
variable interest rate. Changes in net interest income occur when interest rates
on loans and investments change in a different time period from that of changes
in interest rates on liabilities, or when the mix and volume of earning assets
and interest-bearing liabilities change. The interest rate sensitivity gap
represents the dollar amount difference between rate sensitive assets and rate
sensitive liabilities within a given time period (GAP). A GAP ratio is
determined by dividing rate sensitive assets by rate sensitive liabilities. A
ratio of 1.0 indicates a perfectly matched position, in which case the effect on
net interest income due to interest rate movements would be zero.
The Corporation's strategy with respect to asset/liability management is to
maximize net interest income while limiting the Corporation's exposure to risks
associated with volatile interest rates. The subsidiary bank's Asset/Liability
Management Committee is responsible for monitoring the subsidiary bank's GAP
position. As a general rule, the subsidiary bank's policy is to maintain GAP as
a percent of total assets within a range from +20% to -20% in any given time
period. Based on the simulation of various rising or falling interest rate
scenarios in comparison to one considered to be the most likely interest rate
scenario, management seeks to operate with net interest income within a range of
+10% to -10% of budgeted net interest income during any twelve-month period. The
Corporation also performs an interest rate risk analysis, on a quarterly basis,
on the assets and liabilities of the subsidiary bank. This analysis applies an
immediate shift in interest rates of +200 basis points and -200 basis points to
the assets and liabilities to determine the impact on the net interest income
and net income of the subsidiary bank, when compared to a flat rate scenario.
The subsidiary bank strives to maintain the net interest income variance within
a range of +10% to -10% and net income variance within a range of +5% to -5%.
Applying these analyses at December 31, 1999 resulted in no material change to
net interest income or net income of the Corporation.
The Asset/Liability Management Committee monitors the effect of changes in
yield and rates paid on a monthly basis. The Committee considers the subsidiary
bank's current and anticipated positions during the next twelve months and the
effect of rising and falling interest rate scenarios on net income. The
Committee considers various contingency plans if the results of this analysis
with regard to the following key ratios indicate a deviation from the
asset/liability management policy: loans to assets, net loans to core funds, net
loans to total deposits, net loans to total assets, equity capital to total
assets, rate sensitive assets to rate sensitive liabilities, GAP, temporary
investments to total assets, and temporary investments to volatile liabilities.
The contingency plans considered by the Committee include generating funds
through internal and external sources, adjusting maturities within the
investment portfolio, repricing of assets, purchasing or selling loans,
secondary mortgage activity, and liability rate adjustment. The Committee
reports the results of their meetings to the subsidiary bank's Board of
Directors on a monthly basis.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
(dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------------------------------------------------
0-3 MO. 4-12 MO. 1-5 YRS. OVER 5 YRS. TOTAL
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 1,851 $ -0- $ -0- $ -0- $ 1,851
Taxable investment securities 7,844 20,606 35,244 14,337 78,031
Tax-exempt investment securities 723 2,192 8,957 24,928 36,800
Federal funds sold 7,900 -0- -0- -0- 7,900
Loans 96,539 48,184 152,642 18,227 315,592
--------- --------- --------- --------- ---------
Total rate sensitive assets ("RSA") $ 114,857 $ 70,982 $ 196,843 $ 57,492 $ 440,174
========= ========= ========= ========= =========
Interest-bearing liabilities:
Interest-bearing demand deposits $ 93,521 $ -0- $ -0- $ -0- $ 93,521
Savings deposits 52,277 -0- -0- -0- 52,277
Time deposits 66,261 93,144 53,985 106 213,496
Customer repurchase agreements 15,663 -0- -0- -0- 15,663
Advances from Federal Home Loan Bank -0- 5,351 7,969 -0- 13,320
Interest-bearing demand notes issued
to the U.S. Treasury 2,366 -0- -0- -0- 2,366
Borrowings 2,150 -0- -0- -0- 2,150
--------- --------- --------- --------- ---------
Total rate sensitive liabilities ("RSL") $ 232,238 $ 98,495 $ 61,954 $ 106 $ 392,793
========= ========= ========= ========= =========
Interest rate sensitivity GAP (RSA less RSL) $(117,381) $ (27,513) $ 134,889 $ 57,386
Cumulative GAP $(117,381) $(144,894) $ (10,005) $ 47,381
RSA/RSL .49% .72% 3.18% 542.38%
Cumulative RSA/RSL .49% .56% .97% 1.12%
</TABLE>
In the table above, interest-bearing demand deposits and savings deposits are
included as rate sensitive in the amounts reflected in the 0-3 month timeframe,
as such interest-bearing liabilities are subject to immediate withdrawal.
Management of the Corporation considers $40.0 million of the interest-bearing
checking account balances and $18.4 million (one-half) of the money market
account balances (both being the components of interest-bearing demand deposits)
and all savings deposits as core, or non-rate sensitive deposits, primarily
since interest-bearing demand and savings deposits historically have not been
rate sensitive. As a general rule, the subsidiary bank's policy is to maintain
RSA as a percent of RSL within a range of +70% to +120% within a six-month time
period.
At December 31, 1999, savings deposits totaled approximately $52.3 million.
If that amount, along with the $40.0 million of interest-bearing checking
account balances and $18.4 million in money market account balances reflected in
the 0-3 month timeframe, are adjusted to exclude these amounts (consistent with
the consideration mentioned in the paragraph above), rate sensitive liabilities
would be approximately $121.5 million for a negative GAP of approximately $6.7
million. RSA as a percent of RSL would be 94.5%. Adjusting the cumulative GAP
and GAP ratio for the 4-12 month timeframe would result in a negative cumulative
GAP and GAP ratio of $34.2 million, and 84.5%, respectively.
YEAR 2000 COMPLIANCE. The Corporation, under the direction of the subsidiary
bank's Year 2000 Committee, continued to address the four major steps outlined
by the committee (and regulators) that must be accomplished to achieve a
position of year 2000 readiness. During the course of 1999, the committee
successfully completed the testing of all systems deemed mission-critical by the
Corporation. The year was also spent verifying the readiness of third-party
vendors, counter-parties, customers, and payment systems.
As of June 30, 1999, the subsidiary bank had successfully met the last of the
critical timeframes established by federal regulatory agencies. The remainder of
the year involved the review and retesting of any systems that had received
upgrades since the performance of the testing (clean management). During the
course of 1999, contingency plans were also reviewed and tested for
reasonableness.
The Corporation has not incurred any significant operational issues relating
to the Year 2000 change, nor is it aware of any significant Year 2000 issues
relating to its customers or vendors used by the Corporation.
The Corporation completed the replacement of non-compliant computer
equipment, which was fully depreciated and scheduled for replacement, during the
first half of 1999. These costs, which were capitalized and amortized over the
equipment's useful lives, were met from existing resources.
In total, the Corporation incurred the following costs in solving the year
2000 issue, including the regular replacement of equipment:
Capital costs of technology upgrades $1.43 million
Testing costs .03 million
-------------
Total spending $1.46 million
32
<PAGE>
EFFECTS OF INFLATION. The consolidated financial statements and related
consolidated financial data presented herein have been prepared in accordance
with generally accepted accounting principles and practices within the banking
industry which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects of
general levels of inflation.
INVESTMENT MATURITIES AND YIELDS. The following table sets forth the
contractual maturities of investment securities at December 31, 1999, and the
tax equivalent yields of such securities:
<TABLE>
<CAPTION>
DUE WITHIN DUE AFTER ONE BUT DUE AFTER OTHER
ONE YEAR WITHIN FIVE YEARS FIVE YEARS (NO STATED MATURITY)
------------------ ------------------ ----------------- --------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 2,003 5.80% $ -0- -- $ -0- -- $ -0- --
U.S. Government
Agencies 19,856 5.79 25,260 5.68 27 7.23% (403) --
State and Municipal 2,915 7.03 8,957 7.34 24,928 7.65 (410) --
Collateralized
mortgage obligations -0- -- 109 5.56 29,341 6.08 (747) --
Other
(no stated maturity) -0- -- -0- -- -0- -- 2,130 --
------- ------ ------- -------
Total $24,774 5.94% $34,326 6.11% $54,296 6.80% $ 570 --
======= ======= ======= =======
</TABLE>
LOAN MATURITIES. The following table sets forth scheduled loan repayments on
agricultural, commercial, and real estate construction loans at December 31,
1999. See note 4 in the Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
DUE WITHIN DUE AFTER ONE BUT DUE AFTER
ONE YEAR WITHIN FIVE YEARS FIVE YEARS TOTAL
-------- ----------------- ---------- -----
<S> <C> <C> <C> <C>
Agricultural $30,098 $ 7,126 $ 367 $37,891
Commercial 33,952 12,194 1,817 47,963
Real Estate-Construction 11,510 1,806 -0- 13,316
------- ------- ------ -------
Total $75,860 $21,126 $2,184 $99,170
======= ======= ====== =======
</TABLE>
Of the loans shown above, the following table sets forth loans due after one
year which have predetermined (fixed) interest rates and adjustable (variable)
interest rates at December 31,1999.
<TABLE>
<CAPTION>
FIXED RATE VARIABLE RATE TOTAL
---------- ------------- -----
<S> <C> <C> <C>
Due after one year $ 15,291 $ 8,021 $23,312
</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
-----------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
PERCENT Percent Percent Percent Percent
OF LOANS of loans of loans of loans of loans
IN EACH in each in each in each in each
CATEGORY category category category category
ALLOWANCE TO TOTAL Allowance to total Allowance to total Allowance to total Allowance to total
AMOUNT LOANS amount loans amount loans amount loans amount loans
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Agricultural $ 293 12.3% $ 311 14.1% $ 342 14.3% $ 325 14.0% $ 632 14.2%
Commercial 428 15.6 454 16.6 453 15.1 422 14.8 470 14.9
Real estate-mortgage 333 58.4 175 55.7 156 56.9 151 56.7 227 54.8
Installment 709 13.7 628 13.6 623 13.7 608 14.5 305 16.1
Unallocated 187 N/A 232 N/A 256 N/A 124 N/A 400 N/A
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $1,950 100.0% $1,800 100.0% $1,830 100.0% $1,630 100.0% $2,034 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
33
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF INCOME
Interest income $ 32,125 $ 32,651 $ 31,312 $ 29,114 $ 27,645
Interest expense 15,410 16,504 15,541 14,596 14,518
Net interest income 16,715 16,147 15,771 14,518 13,127
Provision (credit) for possible loan losses 651 337 590 41 (101)
Non-interest income 4,006 3,843 3,365 2,860 2,553
Non-interest expense 14,660 13,974 12,662 12,864 16,247
Income (loss) before income tax expense 5,410 5,679 5,884 4,473 (466)
Income tax expense (benefit) 1,556 1,420 1,525 1,046 (824)
Net income 3,854 4,259 4,359 3,427 358
PER SHARE DATA (a)
Basic net income $ 1.02 $ 1.08 $ 1.07 $ 0.84 $ 0.09
Diluted net income 1.02 1.08 1.07 0.84 0.09
Book value (at end of period) 11.16 11.13 10.62 9.84 9.23
Cash dividends declared 0.35 0.31 0.28 0.25 0.24
Dividend payout ratio 34.4% 29.1% 26.2% 30.2% 272.9%
SELECTED BALANCES (AT END OF PERIOD)
Total assets $ 482,820 $ 478,911 $ 449,660 $ 420,407 $ 402,393
Earning assets 438,760 435,789 412,974 379,278 364,177
Investments 113,966 130,926 122,034 117,028 127,094
Gross loans 308,356 265,655 272,400 258,118 232,693
Allowance for possible loan losses 1,950 1,800 1,830 1,630 2,034
Deposits 404,808 407,838 385,940 358,701 346,285
Borrowings 33,499 24,296 16,987 17,887 5,443
Stockholders' equity 40,946 42,606 42,668 40,197 37,646
SELECTED FINANCIAL RATIOS
Net income to average
stockholders' equity 9.20% 9.94% 10.56% 8.91% 1.01%
Net income to average assets 0.83 0.95 1.02 0.84 0.09
Average stockholders' equity
to average assets 9.01 9.54 9.66 9.48 9.03
Average earning assets
to average assets 91.83 92.36 91.64 91.37 91.90
Non-performing loans to total
loans at end of period
(net of unearned interest) 0.44 0.52 0.31 0.45 0.39
Tier 1 capital to average adjusted assets 8.10 8.35 8.78 8.59 8.96
Risk based capital to risk
adjusted assets 12.31 13.68 13.88 13.88 15.17
Net loans charged off (recovered) to
average loans 0.18 0.13 0.15 0.18 (0.02)
Allowance for possible loan losses
to total loans at end of period
(net of unearned interest) 0.63 0.68 0.67 0.63 0.87
Average interest-bearing deposits
to average deposits 89.70 90.13 90.00 90.07 90.32
Average non-interest-bearing deposits
to average deposits 10.30 9.87 10.00 9.93 9.68
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Per share data prior to 1998 has been restated to reflect the stock dividend
(3 for 2) split declared in 1998.
35
EXHIBIT 21. SUBSIDIARY OF PRINCETON NATIONAL BANCORP, INC.
Citizens First National Bank Princeton National Bancorp, Inc.
owns 100 percent of the shares
Citizens First National Bank.
Exhibit 23. Consent of KPMG LLP.
[KPMG LETTERHEAD]
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Princeton National Bancorp, Inc:
We consent to incorporation by reference in the registration statements (No.'s
333-62643, 333-10641, 333-69010) on Form S-8 of Princeton National Bancorp,
Inc., of our report dated January 28, 2000, except for Note 14, which is as of
February 17, 2000, relating to the consolidated balance sheets of Princeton
National Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999, which report appears in the December 31, 1999
annual report on Form 10-K of Princeton National Bancorp, Inc.
/s/ KPMG LLP
Chicago, Illinois
March 27, 2000
<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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,325
<INT-BEARING-DEPOSITS> 359,294
<FED-FUNDS-SOLD> 7,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 100,043
<INVESTMENTS-CARRYING> 13,923
<INVESTMENTS-MARKET> 13,612
<LOANS> 316,993
<ALLOWANCE> 1,950
<TOTAL-ASSETS> 482,820
<DEPOSITS> 404,808
<SHORT-TERM> 33,499
<LIABILITIES-OTHER> 3,567
<LONG-TERM> 0
0
0
<COMMON> 20,699
<OTHER-SE> 20,247
<TOTAL-LIABILITIES-AND-EQUITY> 482,820
<INTEREST-LOAN> 24,684
<INTEREST-INVEST> 6,926
<INTEREST-OTHER> 515
<INTEREST-TOTAL> 32,125
<INTEREST-DEPOSIT> 14,025
<INTEREST-EXPENSE> 15,410
<INTEREST-INCOME-NET> 16,715
<LOAN-LOSSES> 651
<SECURITIES-GAINS> 41
<EXPENSE-OTHER> 14,660
<INCOME-PRETAX> 5,410
<INCOME-PRE-EXTRAORDINARY> 5,410
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,854
<EPS-BASIC> 1.02
<EPS-DILUTED> 1.02
<YIELD-ACTUAL> 4.15
<LOANS-NON> 1,274
<LOANS-PAST> 111
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 235
<ALLOWANCE-OPEN> 1,800
<CHARGE-OFFS> 834
<RECOVERIES> 333
<ALLOWANCE-CLOSE> 1,950
<ALLOWANCE-DOMESTIC> 1,763
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 187
</TABLE>
