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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________________ to _____________________
Commission file number: 0-15123
FIRST NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
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Illinois 31-1182986
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(State of Incorporation) (IRS Employer Identification No.)
78 North Chicago Street, Joliet, Illinois 60432
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (815) 726-4371
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $10.00 par value None
Securities registered pursuant to Section 12(g) of the Act: Common
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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 report(s), and (2) has been subject to
such filing requirements for the past 90 days. Yes X 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. [X]
The aggregate market value of Common Stock held by non-affiliates on March 6,
1998 was $153,203,652. Based on the last reported price of an actual
transaction in registrant's Common Stock on March 6, 1998, and reports of
beneficial ownership filed by directors and executive officers of registrant
and by beneficial owners of more than 5% of the outstanding shares of Common
Stock of registrant; however, such determination of shares owned by
affiliates does not constitute an admission of affiliate status or beneficial
interest in shares of Common Stock of registrant. At March 6, 1998 there
were 2,431,804 shares of registrant's sole class of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
There is incorporated by reference in this Annual Report on Form 10-K portions
of the information contained in the registrant's proxy statement for its annual
meeting of stockholders held March 12, 1998, to the extent indicated herein.
There is incorporated by reference in Parts II and IV of this Annual Report on
Form 10-K portions of the information contained in the registrant's 1997 annual
and financial reports to stockholders to the extent indicated herein.
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TABLE OF CONTENTS
Page
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PART I
ITEM 1. Business............................................. 1
ITEM 2. Properties........................................... 8
ITEM 3. Legal Proceedings.................................... 8
ITEM 4. Submission of Matters to a Vote of Security Holders.. 8
PART II
ITEM 5. Market for the Company's Common Stock and Related
Stockholder Matters.................................. 8
ITEM 6. Selected Financial Data.............................. 8
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 8
ITEM 8. Financial Statements and Supplementary Data.......... 9
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Matters.......... 10
PART III
ITEM 10. Directors and Executive Officers of the Registrant... 10
ITEM 11. Executive Compensation............................... 10
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management........................................... 10
ITEM 13. Certain Relationships and Related Transactions....... 10
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................... 10
SIGNATURES..................................................... 17
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PART I
ITEM 1. BUSINESS
OVERVIEW
First National Bancorp, Inc. ("First National" or the "Company") was formed
and became the parent holding company of First National Bank of Joliet
("FNB") on September 30, 1986. Upon shareholders' approval, First National
Bancorp, Inc. issued 625,000 shares of its $10 par value common stock for all
of the outstanding common stock of FNB. The merger was accounted for as a
pooling of interests and thus all financial statements and data include the
results of operations of First National Bank of Joliet as a wholly-owned
subsidiary.
On January 9, 1989, the Company acquired 100% of the outstanding shares of
Southwest Suburban Bank ("SWSB") located in Bolingbrook, Illinois at a total
cash purchase price of $4,681,000. The excess of acquisition cost over the
fair value of net assets acquired was $2,198,000. The acquisition has been
accounted for as a purchase.
On December 14, 1990, the Company acquired 100% of the outstanding shares of
Bank of Lockport ("BOL") located in Lockport, Illinois for $12,077,000 paid
through issuing 99,505 common shares of First National Bancorp, Inc. stock
valued at $7,167,000 plus cash of $4,910,000. The excess of acquisition cost
over the fair value of net assets acquired was $6,442,000. The acquisition
has been accounted for as a purchase.
On October 31, 1994, the Company acquired 100% of the outstanding shares of
Plano Bancshares, Inc. ("Bancshares") located in Plano, Illinois. Bancshares
is the parent holding company of Community Bank of Plano ("Plano"). The
purchase price of Bancshares was $10,737,000, paid through issuing debentures
of $3,776,000 plus cash of $6,961,000. The excess of acquisition cost over
the fair value of net assets acquired was $2,311,000. The acquisition has
been accounted for as a purchase with results of operations of Bancshares
since October 31, 1994 included in the consolidated financial statements.
FNB, SWSB, BOL and Plano are sometimes referred to as the "Banks". With the
close of business on March 14, 1998, SWSB, BOL and Plano will be merged into
FNB.
The Company has no employees and conducts no active business except through
its banking subsidiaries. The only significant asset of the Company is its
stock ownership of the Banks.
SUBSIDIARY DESCRIPTIONS
FNB is a commercial, national FDIC insured bank with its main office located
at 78 North Chicago Street, Joliet, Illinois 60432. FNB is located
approximately 45 miles southwest of Chicago and has Joliet and the western
portion of Will County as its primary service area. FNB was organized as a
national banking organization on June 6, 1933, and currently has ten branch
locations.
SWSB is a state chartered, FDIC insured bank, located at 224 Lily Cache Lane
in Bolingbrook, Illinois. SWSB is located approximately 25 miles southwest
of Chicago and has Bolingbrook, Romeoville, Woodridge, and Lemont as its
primary service area. Southwest Suburban Bank was organized as a state bank
on July 18, 1979.
BOL is a state chartered, FDIC insured bank, located at 826 East 9th Street
in Lockport, Illinois. The only branch of BOL is located at the intersection
of 159th Street and Cedar Road, approximately 3 miles from the main office.
BOL is located approximately 35 miles southwest of Chicago and has Lockport,
Joliet, Homer Township, New Lenox, Romeoville and Lemont as its primary
service area. BOL was organized as a state bank on June 11, 1971.
Bancshares is a bank holding company organized in Delaware in 1984 which owns
100% of the capital stock of Plano. Bancshares has no other subsidiaries and
conducts no other operations. Plano is a state chartered, FDIC insured bank
located at 2005 West Route 34 in Plano, Illinois. Plano is located
approximately 45 miles west of Chicago and has Plano, Sandwich and Yorkville
as its primary service area. Plano was organized as a state bank on October
1, 1943. Bancshares was liquidated into First National on January 26, 1998
and its corporate charter canceled.
Approximately 85% of the Banks' assets are located within Will County,
Illinois. Will County has become one of the fastest growing areas in Illinois
with an average population growth in excess of 3.0% per year since 1990.
Total
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population exceeds 430,000 with a labor force of over 215,000. Unemployment
has remained consistently under 6.0% since 1994. This population growth and
stable employment levels are factors contributing to the Banks' loan growth
in the last three years. In particular, commercial real estate, residential
real estate and consumer loan volumes have all been positively affected by
these economic conditions with increases of 33%, 36% and 22%, respectively in
the three years ending December 31, 1997.
COMPETITION
Active competition exists in all services offered by the Banks, not only with
other national and state banks, but also with savings and loan associations,
finance companies, personal loan companies, credit unions, money market mutual
funds, mortgage bankers and other financial institutions serving this market
area. The principal methods of competition in the financial services industry
are price, service and convenience.
BANK LOANS
The Banks' loan portfolios consist of commercial, commercial real estate,
construction, agricultural, residential real estate and consumer loans. The
loan portfolio is diversified so that slowdowns or problems in one specific area
would not cause a significant problem. The repayment terms and rates, credit
criteria employed, and risks associated with each loan category are governed by
a written lending policy approved by the Company's board of directors. Loans
greater than $30,000 require the approval of a lending committee consisting of
senior loan officers from each subsidiary bank which meets twice each week.
BANK DEPOSITS
No material portion of any of the Banks' deposits have been obtained from a
person or group that withdrawal of such deposits would have an adverse effect on
the business of the Company.
SEASONAL
Business is not affected in a material manner by change of seasons.
FOREIGN SOURCES
Neither the First National Bancorp, Inc. nor its subsidiaries, the First
National Bank of Joliet, Southwest Suburban Bank, Bank of Lockport, and
Community Bank of Plano are involved with foreign investments.
COMPLIANCE
Compliance with federal, state, and local provisions relating to the protection
of the environment should not have a material effect upon the capital
expenditures, earnings and competitive position of the Company.
EMPLOYMENT
As of December 31, 1997, the Banks had 304 full-time and 118 part-time
employees.
SERVICES
The Banks offer varied savings and certificate of deposit options, commercial
lending, consumer lending, along with credit card and regular checking services.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively regulated
under federal and state law. As a result, the growth and earnings performance
of the Company can be affected not only by management decisions and general
economic conditions, but also by the requirements of applicable state and
federal statutes and regulations and the policies of various governmental
regulatory authorities including, but not limited to, the Board of Governors of
the Federal Reserve System (the "FRB"), the Federal Deposit Insurance
Corporation (the "FDIC"), the Office of the Comptroller of the Currency (the
"OCC"), the Illinois Commissioner of Banks and Real Estate (the
"Commissioner"), the Internal Revenue Service and state taxing authorities and
the Securities and Exchange
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Commission (the "SEC"). The effect of such statutes, regulations and policies
can be significant, and cannot be predicted with a high degree of
certainty.
Federal and state laws and regulations generally applicable to financial
institutions, such as the Company and its subsidiaries, regulate, among other
things, the scope of business, investments, reserves against deposits,
capital levels relative to operations, the nature and amount of collateral
for loans, the establishment of branches, mergers, consolidations and
dividends. The system of supervision and regulation applicable to the Company
and its subsidiaries establishes a comprehensive framework for their
respective operations and is intended primarily for the protection of the
FDIC's deposit insurance funds and the depositors, rather than the
shareholders, of financial institutions.
The following references to material statutes and regulations affecting the
Company and its subsidiaries are brief summaries thereof and do not purport
to be complete, and are qualified in their entirety by reference to such
statutes and regulations. Any change in applicable laws or regulations may
have a material effect on the business of the Company and its subsidiaries.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION. Legislation is pending in the Congress that would allow
bank holding companies to engage in a wider range of nonbanking activities,
including greater authority to engage in securities and insurance activities.
The expanded powers generally would be available to a bank holding company
only if the bank holding company and its bank subsidiaries remain
well-capitalized and well-managed. Additionally, the pending legislation
would eliminate the federal thrift charter and merge the FDIC's Bank
Insurance Fund ("BIF") and Savings Association Insurance Fund ("SAIF"). At
this time, the Company is unable to predict whether the proposed legislation
will be enacted and, therefore, is unable to predict the impact such
legislation may have on the operations of the Company and the Bank.
THE COMPANY
GENERAL. The Company, as the sole shareholder of the Banks, is a bank
holding company. As a bank holding company, the Company is registered with,
and is subject to regulation by, the FRB under the Bank Holding Company Act,
as amended (the "BHCA"). In accordance with FRB policy, the Company is
expected to act as a source of financial strength to the Banks and to commit
resources to support the Banks in circumstances where the Company might not
do so absent such policy. Under the BHCA, the Company is subject to periodic
examination by the FRB and is required to file with the FRB periodic reports
of its operations and such additional information as the FRB may require.
The Company is also subject to regulation by the Commissioner under the
Illinois Bank Holding Company Act, as amended.
INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company must
obtain FRB approval before: (i) acquiring, directly or indirectly, ownership
or control of any voting shares of another bank or bank holding company if,
after such acquisition, it would own or control more than 5% of such shares
(unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank; or (iii)
merging or consolidating with another bank holding company. Subject to
certain conditions (including certain deposit concentration limits
established by the BHCA), the FRB may allow a bank holding company to acquire
banks located in any state of the United States without regard to whether the
acquisition is prohibited by the law of the state in which the target bank is
located. In approving interstate acquisitions, however, the FRB is required
to give effect to applicable state law limitations on the aggregate amount of
deposits that may be held by the acquiring bank holding company and its
insured depository institution affiliates in the state in which the target
bank is located (provided that those limits do not discriminate against
out-of-state depository institutions or their holding companies) or which
require that the target bank have been in existence for a minimum period of
time (not to exceed five years) before being acquired by an out-of-state bank
holding company.
The BHCA also prohibits, with certain exceptions, the Company from acquiring
direct or indirect ownership or control of more than 5% of the voting shares
of any company which is not a bank and from engaging in any business other
than that of banking, managing and controlling banks or furnishing services
to banks and their subsidiaries. The principal exception to this prohibition
allows bank holding companies to engage in, and to own shares of companies
engaged in, certain businesses found by the FRB to be "so closely related to
banking ... as to be a proper incident
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thereto." Under current regulations of the FRB, the Company and its non-bank
subsidiaries are permitted to engage in, among other activities, such
banking-related businesses as the operation of a thrift, sales and consumer
finance, equipment leasing, the operation of a computer service bureau,
including software development, and mortgage banking and brokerage. The BHCA
generally does not place territorial restrictions on the domestic activities
of non-bank subsidiaries of bank holding companies.
Federal law also prohibits acquisition of "control" of a bank, such as one of
the Banks, or bank holding company, such as the Company, without prior notice to
certain federal bank regulators. "Control" is defined in certain cases as
acquisition of 10% of the outstanding shares of a bank or bank holding company.
CAPITAL REQUIREMENTS. Bank holding companies are required to maintain minimum
levels of capital in accordance with FRB capital adequacy guidelines. If
capital falls below minimum guideline levels, a bank holding company, among
other things, may be denied approval to acquire or establish additional banks or
non-bank businesses.
The FRB's capital guidelines establish the following minimum regulatory capital
requirements for bank holding companies: a risk-based requirement expressed as a
percentage of total risk-weighted assets, and a leverage requirement expressed
as a percentage of total assets. The risk-based requirement consists of a
minimum ratio of total capital to total risk-weighted assets of 8%, at least
one-half of which must be Tier 1 capital. The leverage requirement consists of
a minimum ratio of Tier 1 capital to total assets of 3% for the most highly
rated companies, with minimum requirements of 4% to 5% for all others. For
purposes of these capital standards, Tier 1 capital consists primarily of
permanent stockholders' equity less intangible assets (other than certain
mortgage servicing rights and purchased credit card relationships) and total
capital means Tier 1 capital plus certain other debt and equity instruments
which do not qualify as Tier 1 capital and a portion of the company's allowance
for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements,
and higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the FRB's capital guidelines contemplate that additional capital may be required
to take adequate account of, among other things, interest rate risk, or the
risks posed by concentrations of credit, nontraditional activities or securities
trading activities. Further, any banking organization experiencing or
anticipating significant growth would be expected to maintain capital ratios,
including tangible capital positions (i.e., Tier 1 capital less all intangible
assets), well above the minimum levels.
As of December 31, 1997, the Company had regulatory capital in excess of the
FRB's minimum requirements, with a risk-based capital ratio of 12.9% and a
leverage ratio of 8.0%.
DIVIDENDS. The FRB has issued a policy statement with regard to the payment
of cash dividends by bank holding companies. In the policy statement, the
FRB expressed its view that a bank holding company should not pay cash
dividends which exceed its net income or which can only be funded in ways
that weaken the bank holding company's financial health, such as by
borrowing. Additionally, the FRB possesses enforcement powers over bank
holding companies and their non-bank subsidiaries to prevent or remedy
actions that represent unsafe or unsound practices or violations of
applicable statutes and regulations. Among these powers is the ability to
proscribe the payment of dividends by banks and bank holding companies. In
addition to the restrictions on dividends that may be imposed by the FRB, the
Illinois Business Corporation Act, as amended, prohibits the Company from
paying a dividend if, after giving effect to the dividend, the Company would
be insolvent or the net assets of the Company would be less than zero or less
than the maximum amount then payable to shareholders of the Company who would
have preferential distribution rights if the Company were liquidated.
FEDERAL SECURITIES REGULATION. The Company's common stock is registered with
the SEC under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, the
Company is subject to the information, proxy solicitation, insider trading and
other restrictions and requirements of the SEC under the Exchange Act.
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THE BANKS
GENERAL. SWSB, BOL and Plano (the "State Banks") are Illinois-chartered
banks, the deposit accounts of which are insured by the BIF of the FDIC. As
BIF-insured, Illinois-chartered banks, the State Banks are subject to the
examination, supervision, reporting and enforcement requirements of the
Commissioner, as the chartering authority for Illinois banks, and the FDIC,
as administrator of the BIF.
FNB is a national bank, chartered by the OCC under the National Bank Act. The
deposit accounts of FNB are insured by the BIF of the FDIC, and FNB is a member
of the Federal Reserve System. As a BIF-insured national bank, FNB is subject
to the examination, supervision, reporting and enforcement requirements of the
OCC, as the chartering authority for national banks, and the FDIC, as
administrator of the BIF.
DEPOSIT INSURANCE. As FDIC-insured institutions, the Banks are required to
pay deposit insurance premium assessments to the FDIC. The FDIC has adopted
a risk-based assessment system under which all insured depository
institutions are placed into one of nine categories and assessed insurance
premiums based upon their respective levels of capital and results of
supervisory evaluations. Institutions classified as well-capitalized (as
defined by the FDIC) and considered healthy pay the lowest premium while
institutions that are less than adequately capitalized (as defined by the
FDIC) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions is made by the FDIC
for each semiannual assessment period.
During the year ended December 31, 1997, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semiannual assessment period beginning
January 1, 1998, BIF assessment rates will continue to range from 0% of deposits
to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance if the institution
has no tangible capital. Management of the Company is not aware of any activity
or condition that could result in termination of the deposit insurance of any of
the Banks.
FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance assessments
paid by SAIF members has been used to cover interest payments due on the
outstanding obligations of the FICO, the entity created to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. Pursuant to federal legislation enacted
September 30, 1996, commencing January 1, 1997, both SAIF members and BIF
members became subject to assessments to cover the interest payments on
outstanding FICO obligations. Such FICO assessments are in addition to amounts
assessed by the FDIC for deposit insurance. Until January 1, 2000, the FICO
assessments made against BIF members may not exceed 20% of the amount of the
FICO assessments made against SAIF members. Between January 1, 2000 and the
maturity of the outstanding FICO obligations in 2019, BIF members and SAIF
members will share the cost of the interest on the FICO bonds on a pro rata
basis. During the year ended December 31, 1997, the FICO assessment rate for
SAIF members was approximately 0.063% of deposits while the FICO assessment rate
for BIF members was approximately 0.013% of deposits. During the year ended
December 31, 1997, the Banks paid FICO assessments totaling $86,000.
SUPERVISORY ASSESSMENTS. All Illinois banks and national banks are required to
pay supervisory fees to the Commissioner and the OCC, respectively, to fund the
operations of such agencies. The amount of such supervisory fees is based upon
each institution's total assets, including consolidated subsidiaries. During
the year ended December 31, 1997, the Banks paid supervisory fees totaling
$152,000.
CAPITAL REQUIREMENTS. Under federal regulations, the Banks are subject to the
following minimum capital standards: a leverage requirement consisting of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated
banks with minimum requirements of 4% to 5% for all others, and a risk-based
capital requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.
For purposes of these capital standards, Tier 1 capital and total capital
consist of substantially the same
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components as Tier 1 capital and total capital under the FRB's capital
guidelines for bank holding companies (see "--The Company--Capital
Requirements").
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances
or risk profiles of individual institutions. For example, federal
regulations provide that additional capital may be required to take adequate
account of, among other things, interest rate risk or the risks posed by
concentrations of credit, nontraditional activities or securities trading
activities.
During the year ended December 31, 1997, none of the Banks was required by
its primary federal regulator to increase its capital to an amount in excess
of the minimum regulatory requirements. As of December 31, 1997, each of the
Banks exceeded its minimum regulatory capital requirements. Actual
regulatory capital ratios of each bank as of December 31, 1997 are as follows:
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Risk-Based Leverage
Capital Ratio Capital Ratio
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FNB 13.5% 8.6%
SWSB 12.2 8.1
BOL 13.3 8.4
PLANO 13.7 8.9
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Federal law provides the federal banking regulators with broad power to take
prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Depending upon the capital category to which an
institution is assigned, the regulators' corrective powers include:
requiring the submission of a capital restoration plan; placing limits on
asset growth and restrictions on activities; requiring the institution to
issue additional capital stock (including additional voting stock) or to be
acquired; restricting transactions with affiliates; restricting the interest
rate the institution may pay on deposits; ordering a new election of
directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits
from correspondent banks; requiring the institution to divest certain
subsidiaries; prohibiting the payment of principal or interest on
subordinated debt; and ultimately, appointing a receiver for the institution.
Additionally, institutions insured by the FDIC may be liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with the default of commonly controlled FDIC insured depository institutions
or any assistance provided by the FDIC to commonly controlled FDIC insured
depository institutions in danger of default.
DIVIDENDS. Under the Illinois Banking Act, Illinois-chartered banks, such as
the State Banks, may not pay dividends in excess of their adjusted profits.
The National Bank Act similarly imposes limitations on the amount of
dividends that may be paid by a national bank, such as FNB. Generally, a
national bank may pay dividends out of its undivided profits, in such amounts
and at such times as the bank's board of directors deems prudent. Without
prior OCC approval, however, a national bank may not pay dividends in any
calendar year which, in the aggregate, exceed the bank's year-to-date net
income plus the bank's adjusted retained net income for the two preceding
years.
The payment of dividends by any financial institution or its holding company
is affected by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a financial
institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized. As described
above, each of the Banks exceeded its minimum capital requirements under
applicable guidelines as of December 31, 1997. As of December 31, 1997,
approximately $8.76 million was available to be paid as dividends to the
Company by the Banks. Notwithstanding the availability of funds for
dividends, however, the banking regulators may prohibit the payment of any
dividends by the Banks if such payment is deemed to constitute an unsafe or
unsound practice.
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INSIDER TRANSACTIONS. The Banks are subject to certain restrictions imposed by
the Federal Reserve Act on extensions of credit to the Company and its
subsidiaries, on investments in the stock or other securities of the Company and
its subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by each of the
Banks to its respective directors and officers, to directors and officers of the
Company and its subsidiaries, to principal stockholders of the Company, and to
"related interests" of such directors, officers and principal stockholders. In
addition, federal law and regulations may affect the terms upon which any person
becoming a director or officer of the Company or one of its subsidiaries or a
principal stockholder of the Company may obtain credit from banks with which one
of the Banks maintains a correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have adopted
guidelines which establish operational and managerial standards to promote the
safety and soundness of federally insured depository institutions. The
guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. In general, the guidelines prescribe the goals to be achieved in each
area, and each institution is responsible for establishing its own procedures to
achieve those goals. If an institution fails to comply with any of the
standards set forth in the guidelines, the institution's primary federal
regulator may require the institution to submit a plan for achieving and
maintaining compliance. The preamble to the guidelines states that the agencies
expect to require a compliance plan from an institution whose failure to meet
one or more of the guidelines is of such severity that it could threaten the
safety and soundness of the institution. Failure to submit an acceptable plan,
or failure to comply with a plan that has been accepted by the appropriate
federal regulator, would constitute grounds for further enforcement action.
BRANCHING AUTHORITY. Illinois banks, such as the State Banks, have the
authority under Illinois law to establish branches anywhere in the State of
Illinois, subject to receipt of all required regulatory approvals. National
banks head quartered in Illinois, such as FNB, have the same branching rights in
Illinois as banks chartered under Illinois law.
Effective June 1, 1997 (or earlier if expressly authorized by applicable
state law), the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") allows banks to establish interstate branch
networks through acquisitions of other banks, subject to certain conditions,
including certain limitations on the aggregate amount of deposits that may be
held by the surviving bank and all of its insured depository institution
affiliates. The establishment of de novo interstate branches or the
acquisition of individual branches of a bank in another state (rather than
the acquisition of an out-of-state bank in its entirety) is allowed by the
Riegle-Neal Act only if specifically authorized by state law. The
legislation allows individual states to "opt-out" of certain provisions of
the Riegle-Neal Act by enacting appropriate legislation prior to June 1,
1997. Illinois has enacted legislation permitting interstate mergers
beginning on June 1, 1997, subject to certain conditions, including a
prohibition against interstate mergers unless any Illinois bank involved has
been in existence and continuous operation for more than five years.
STATE BANK ACTIVITIES. Under federal law and FDIC regulations, FDIC insured
state banks are prohibited, subject to certain exceptions, from making or
retaining equity investments of a type, or in an amount, that are not
permissible for a national bank. Federal law and FDIC regulations also prohibit
FDIC insured state banks and their subsidiaries, subject to certain exceptions,
from engaging as principal in any activity that is not permitted for a national
bank or its subsidiary, respectively, unless the bank meets, and continues to
meet, its minimum regulatory capital requirements and the FDIC determines the
activity would not pose a significant risk to the deposit insurance fund of
which the bank is a member. Impermissible investments and activities must be
divested or discontinued within certain time frames set by the FDIC. These
restrictions have not had, and are not currently expected to have, a material
impact on the operations of the State Banks.
FEDERAL RESERVE SYSTEM. FRB regulations, as presently in effect, require
depository institutions to maintain noninterest earning reserves against their
transaction accounts (primarily NOW and regular checking accounts), as follows:
for transaction accounts aggregating $47.8 million or less, the reserve
requirement is 3% of total transaction accounts; and for transaction accounts
aggregating in excess of $47.8 million, the reserve requirement is $1.434
million plus 10% of the aggregate amount of total transaction accounts in excess
of $47.8 million. The first $4.7 million of otherwise reservable balances are
exempted from the reserve requirements. These reserve requirements are subject
to annual adjustment by the FRB. The Banks are in compliance with the foregoing
requirements.
7
<PAGE>
ITEM 2. PROPERTIES
The main building of the Company is located at 78 North Chicago Street, Joliet,
Illinois. FNB owns this building. The land on which it is located is owned by
the Company. FNB has ten additional facilities of which seven are owned and
three are leased. SWSB owns their building located at 225 Lily Cache Lane,
Bolingbrook, Illinois. BOL owns their main office at 826 East 9th Street,
Lockport, Illinois and has one additional facility. Plano owns their building
at 2005 West Route 34, Plano, Illinois. The address and approximate square
footage of each location are as follows:
<TABLE>
<CAPTION>
Approximate
Subsidiary Location Square Feet Status
- -------------------------------------------------------------------------------
<S> <C> <C>
FNB 78 N. Chicago St., Joliet 25,000 Owned
FNB Scott and Jefferson, Joliet 1,600 Owned
FNB Midland and Campbell, Joliet 4,200 Owned
FNB Black and Essington Roads, Joliet 12,000 Owned
FNB 1590 North Larkin, Joliet 1,100 Leased
FNB 191 South Larkin, Joliet 900 Leased
FNB 207 Mondamin St., Minooka 2,000 Owned
FNB 23841 W. Eames, Channahon 100 Leased
FNB Route 52 and Brookshore, Shorewood 1,200 Owned
FNB 24745 West Eames, Channahon 1,400 Owned
FNB 626 Townhall Drive, Romeoville 6,500 Owned
SWSB 225 Lily Cache Lane, Bolingbrook 8,800 Owned
BOL 826 E. 9th Street, Lockport 27,000 Owned
BOL Cedar Road and 159th St., Lockport 9,000 Owned
Plano 2005 W. Route 34, Plano 10,000 Owned
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company or its
subsidiaries is a party other than ordinary routine litigation incidental to
their respective businesses.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II.
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
As of December 31, 1997, the Company had 2,062
shareholders of its common stock. First National Common Stock is traded
primarily through the offices of Stofan, Agazzi & Co., Richard B. Vance &
Co., A. G. Edwards & Sons, Inc., Edward D. Jones & Co. and ABN AMBRO
Securities, Inc. Information on dividends paid and the price range of the
Company's common stock on a quarterly basis in 1997 and 1996 is presented on
page 9 of the Company's 1997 Annual Report and is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The five year summary of selected financial data is presented as Financial
Highlights on page 9 of the Company's 1997 Annual Report to Stockholders and is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's discussion and analysis appearing on pages 1 through 9 of the 1997
Financial Report to Stockholders is incorporated herein by reference.
8
<PAGE>
MARKET RISK
The Company does not engage in foreign currency transactions, forward
position or futures contracts, options, swaps or other types of complex
financial instruments, nor does it engage in trading account activities.
Thus, market risk is primarily limited to the interest rate risks associated
with the investing, lending, customer deposit taking and borrowing activities
of its banking subsidiaries. Except for a term note borrowing of $2.3
million payable to another financial institution that accrues interest based
on the London Interbank Offered Rate, the Company's exposure to interest rate
risk results from changes in either the short-term U. S. prime interest rate
or the rates offered for short and medium term bonds and notes of the U. S.
Treasury. The following table presents the interest rate sensitivity and
expected maturities of securities, fixed rate loans, time deposits,
short-term borrowings and long-term debt at December 31, 1997 fair value
amounts.
<TABLE>
<CAPTION>
Expected Maturity Amounts for Years Ending December 31,
-----------------------------------------------------------------
2000 Fair
Through After Value
1998 1999 2002 2002 Total Total
-------- -------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities, fixed rate:
Available-for-sale $ 2,008 $ 8,490 $ 1,000 $ 300 $11,798 $11,831
Average interest rate 4.92% 6.23% 6.49% 6.00% 6.03%
Held-to-maturity 36,938 27,619 102,168 38,145 204,870 206,269
Average interest rate 5.31% 5.93% 6.40% 6.15% 6.09%
Loans, fixed rate (1) 97,629 58,289 164,056 88,697 408,671 412,919
Average interest rate 8.72% 8.42% 8.77% 8.34% 8.61%
LIABILITIES
NOW, money market and
savings deposits (2) 281,087 - - - 281,087 281,087
Average interest rate 2.55% - - - 2.55%
Time deposits, fixed rate 280,041 20,634 15,151 - 315,826 317,179
Average interest rate 5.74% 5.71% 6.20% - 5.76%
Short-term borrowings, fixed rate 46,207 - - - 46,207 46,207
Average interest rate 5.28% - - - 5.28%
Long-term debt, variable rate 1,759 3,058 - - 4,817 4,817
Average interest rate 8.16% 7.79% - - 7.93%
</TABLE>
(1)Information on variable rate loans by maturity period is not readily
available. Interest rate risk on loan commitments, unused lines of credit and
standby letters of credit is minimal since most are for terms of ninety days
or less and include variable rate features.
(2)NOW and savings accounts are fixed rates deposits whereas money market
accounts are variable rate deposits. These deposit accounts, while shown as
maturing in 1998, are considered by management as core deposits for
asset/liability management purposes with account lives extending beyond one
year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes thereto appearing on pages 11
through 28 of the 1997 Financial Report are incorporated herein by reference.
See Item 14 for information concerning financial statements and schedules
filed with the report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
Notice of change in accountants was filed under Form 8-K on October 10, 1996 to
report the change in accountants from McGladrey & Pullen, LLP to Crowe, Chizek
and Company LLP, effective October 1, 1996. Further discussion of the change in
accountants appears on page 10 of the Notice of Annual Meeting of Stockholders
and Proxy
9
<PAGE>
Statement is incorporated herein by reference. No disagreements on
accounting and financial disclosure matters have occurred for the 24 months
prior to, or in months subsequent to, December 31, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information appearing on pages 2 through 4 of the Notice of Annual Meeting
of Stockholders and Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing on pages 5 through 8 of the Notice of Annual Meeting
of Stockholders and Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information appearing on pages 2 through 4 of the Notice of Annual Meeting
of Stockholders and Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information appearing on pages 2 through 4 of the Notice of Annual Meeting
of Stockholders and Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The Consolidated Financial Statements of the Company and report of
independent auditors are incorporated herein by reference from the 1997
Financial Report to Stockholders as listed below:
<TABLE>
<CAPTION>
Financial
Report
Pages
-----
<S> <C>
Consolidated balance sheets as of December 31, 1997 and 1996......... 11
Consolidated statements of income for the years ended
December 31, 1997, 1996, and 1995.................................... 12
Consolidated statements of changes in stockholders' equity for the
years ended December 31, 1997, 1996, and 1995........................ 13
Consolidated statements of cash flows for the years ended
December 31, 1997, 1996, and 1995.................................... 14
Notes to consolidated financial statements........................... 15-28
Report of Independent Auditors on the Consolidated Financial
Statements........................................................... 10
</TABLE>
10
<PAGE>
The following index provides the location of the statistical information
included in the 1997 Financial Report to Stockholders which is incorporated
herein by reference.
<TABLE>
<CAPTION>
Financial
Report Page
-----------
<S> <C>
Average Balance Sheets, Interest Margin, and Interest Rates......... 3
Non-accrual, Past Due and Impaired Loans............................ 4
Potential Problem Loans............................................. 4
Liquidity........................................................... 7
Disclosure of the Effect on Interest Income from Impaired Loans..... 18
Short-term Borrowings............................................... 21
Quarterly Financial Information 1997-1996 (Unaudited)............... 28
</TABLE>
INTEREST DIFFERENTIAL
The accompanying table allocates changes in interest income and interest expense
between amounts attributable to changes in rate and changes in volume for the
various categories of interest earning assets and interest bearing liabilities.
The changes in interest income and interest expense due to both volume and rate
have been allocated proportionally. Interest earned is assumed to be on a tax
equivalent basis using an income tax rate of 35%.
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
------------------------------------ -----------------------------------
Changes due to: Changes due to:
Volume Rate Change Volume Rate Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
INTEREST EARNED ON :
Interest-bearing deposits
In other financial
Institutions $ - $ - $ - $ (3) $ - $ (3)
Federal funds sold (978) 146 (832) 151 (383) (232)
Taxable securities 1,412 112 1,524 1,774 (222) 1,552
Tax-exempt securities (140) (51) (191) (371) (76) (447)
Loans 4,624 (176) 4,448 1,346 (225) 1,121
------ ------ ------ ------ ------ ------
Total interest income 4,918 31 4,949 2,897 (906) 1,991
------ ------ ------ ------ ------ ------
INTEREST EXPENSE ON:
Deposits:
NOW & Money Market 168 320 488 209 12 221
Savings 204 (5) 199 165 (30) 135
Time 1,846 164 2,010 2,094 419 2,513
Short-term borrowings (336) 206 (130) (1,274) (336) (1,610)
Long-term debt (85) 12 (73) (62) (39) (101)
------ ------ ------ ------ ------ ------
Total interest expense 1,797 697 2,494 1,132 26 1,158
------ ------ ------ ------ ------ ------
Net interest income $3,121 $ (666) $2,455 $1,765 $ (932) $ 833
------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------
</TABLE>
11
<PAGE>
SECURITIES
The following table presents the carrying value of securities of the Company by
category at year end for each of the past three years.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Available for Sale (at fair value)
U. S. Treasury Securities $ 8,029 $ 9,308 $ 12,643
U. S. government agencies 3,502 1,796 4,394
Other 300 300 300
--------- --------- ---------
Total available for sale 11,831 11,404 17,337
--------- --------- ---------
Held to Maturity (at amortized cost)
U. S. Treasury Securities 24,509 40,194 40,968
U. S. government agencies 147,37 127,472 106,661
Obligations of states and political 32,988 35,758 37,745
--------- --------- ---------
Total held to maturity 204,870 203,424 185,374
--------- --------- ---------
Total $ 216,701 $ 214,828 $ 202,711
--------- --------- ---------
--------- --------- ---------
</TABLE>
At December 31, 1997, the Company held no securities of any single issuer,
other than U. S. Treasury and U.S. government agencies, that exceeded 10% of
stockholders' equity.
SECURITIES MATURITIES
The following table shows the relative maturities of securities (at carrying
values) held by the Company at December 31, 1997 and the weighted average
interest rate for each maturity range. Yields on tax-exempt securities are
stated on a fully tax-equivalent basis, assuming a federal income tax rate of
35%.
<TABLE>
<CAPTION>
Available for Sale
--------------------------------------------------------------------
Weighted
U. S. U. S. Average
Treasury Government Other Interest
Securities Agencies Securities Total Rate
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Under 1 year $ 1,998 $ - $ - $ 1,998 4.92%
1 to 5 years 6,031 3,502 - 9,533 6.27%
5 to 10 years - - - - - %
Over 10 years - - 300 300 6.00%
---------- ---------- ---------- ---------
Total $ 8,029 $ 3,502 $ 300 $ 11,831
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
Held to Maturity
--------------------------------------------------------------------
Weighted
U. S. U. S. Average
Treasury Government Other Interest
Securities Agencies Securities Total Rate
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Under 1 year $ 8,494 $ 24,915 $ 3,529 $ 36,938 5.31%
1 to 5 years 16,015 94,773 18,999 129,787 6.30%
5 to 10 years - 26,743 10,360 37,103 6.15%
Over 10 years - 942 100 1,042 6.13%
---------- ---------- ---------- ---------
Total $ 24,509 $ 147,373 $ 32,988 $ 204,870
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
</TABLE>
12
<PAGE>
TYPES OF LOANS
Loans represent the principal source of revenue for the banks. Risk is
controlled through loan portfolio diversification and the avoidance of credit
concentrations. Loans are made primarily within the banks' geographic market
areas. The loan portfolio is evenly distributed among commercial, residential
real estate, and consumer loans. The banks have no foreign loans, no highly
leveraged transactions and no syndicated purchase participations.
COMMERCIAL, COMMERCIAL REAL ESTATE, CONSTRUCTION AND AGRICULTURAL LOANS
This portfolio is comprised primarily of loans to small and mid-sized
businesses, and agricultural operations within the banks' local markets.
Commercial real estate loans consist of loans made for the purchase of
commercial real estate, real estate development projects and loans for other
commercial purposes secured by real estate. Average loan size within this
portfolio at year-end was $110,000 for commercial and commercial real estate
loans, $300,000 for construction loans, and $50,000 for agricultural loans.
Total growth in this category was 12.2% from 1996.
RESIDENTIAL REAL ESTATE
This portfolio is comprised of mortgages on 1-4 family residences and
residential construction loans primarily for single family homes. This category
remained somewhat constant from 1996 to 1997, with a 4.4% increase.
Most residential loans are made on a basis to qualitfy them for sale to the
Federal National Mortgage Association (Fannie Mae). In addition to those
retained as part of the loan portfolio, the banks provide loan servicing for
approximately 900 loans totaling $65 million that have been sold to Fannie Mae.
Generally, the decision to retain or sell is based on rates and terms. Most
fixed rate loans with 15 or 30 year terms are sold.
CONSUMER LOANS
The consumer loan portfolio consists of direct and indirect automobile loans,
revolving credit card lines, and other loans made for consumer purposes.
Automobile loans account for 68% of this portfolio. Revolving credit card lines
represent 2% of the portfolio. Net loan charge offs for 1997 were .52% of
consumer loans outstanding as compared to .36% and .33% for 1996 and 1995,
respectively. The increase in 1997 is reflective of a recent national trend in
which personal bankruptcies have been on the rise despite high employment levels
and a healthy economy. Lending activity is concentrated in the geographic
markets served by the banks. This category experienced growth of 19.8% from
1996.
The Company's loan portfolio by major category as of December 31 for each of
the past five years is shown below.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial $ 90,009 $ 81,981 $ 79,967 $ 91,120 $ 82,942
Commercial real estate 91,334 76,354 70,046 68,743 47,417
Construction 14,106 16,810 16,933 7,775 3,793
Agricultural 10,769 8,692 8,815 8,485 6,907
Residential real estate 147,625 141,440 123,652 108,277 74,998
Consumer 172,695 144,162 134,344 141,611 126,273
---------- ---------- ---------- ---------- ----------
Total loans 526,538 469,439 433,757 426,011 342,330
Less:
Unearned discount (158) (653) (1,909) (4,011) (6,365)
Allowance for loan losses (4,437) (4,414) (3,931) (3,082) (2,722)
---------- ---------- ---------- ---------- ----------
Net Loans $ 521,943 $ 464,372 $ 427,917 $ 418,918 $ 333,243
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Ratio of net loans to
Total assets 60.64% 56.32% 57.06% 60.48% 52.75%
</TABLE>
13
<PAGE>
LOAN MATURITIES AND RATE SENSITIVITY
The following sets forth the maturity distribution and interest rate
sensitivity of certain loan categories at December 31, 1997.
<TABLE>
<CAPTION>
Fixed Rate Loans
--------------------------------------------------------
After One Floating
One year Through Over Rate Combined
or Less Five Years Five Years Total Loans Total
---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
MATURITY:
Commercial and
commercial real estate $ 20,680 $ 62,324 $ 35,833 $ 118,837 $ 62,506 $ 181,343
Construction 2,740 4,333 577 7,650 6,456 14,106
Agricultural 6,457 1,072 192 7,721 3,048 10,769
---------- ---------- ---------- ----------- ---------- -----------
$ 29,877 $ 67,729 $ 36,602 $ 134,208 $ 72,010 $ 206,218
---------- ---------- ---------- ----------- ---------- -----------
---------- ---------- ---------- ----------- ---------- -----------
</TABLE>
SUMMARY OF LOAN LOSS ACTIVITY
In determining the provision for loan losses, management considers the Company's
consistent loan growth and the amount of net charge offs each year. Other
factors, such as changes in the loan portfolio mix, delinquency trends, current
economic conditions and trends, reviews of larger loans and known problem
credits and the results of internal and regulatory loan examinations are also
considered by management in assessing the adequacy of the allowance for loan
losses. The following table details the component changes in the Company's
allowance for loan losses for each of the past five years.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Allowance, beginning of year $ 4,414 $ 3,931 $ 3,082 $ 2,722 $ 2,649
Loans charged off:
Commercial (227) (39) (60) (592) (398)
Commercial real estate - - - - (105)
Construction - - - - -
Agricultural - - - - -
Residential real estate - - - - -
Consumer (1,073) (661) (586) (358) (273)
--------- --------- --------- --------- ---------
Total loans charged off (1,300) (700) (646) (950) (776)
--------- --------- --------- --------- ---------
Loan Recoveries:
Commercial 30 19 145 21 15
Commercial real estate - - 10 - -
Construction - - - - -
Agricultural - - - - -
Residential real estate - - - - -
Consumer 175 140 149 156 147
--------- --------- --------- --------- ---------
Total loan recoveries 205 159 304 177 162
--------- --------- --------- --------- ---------
Net loans charged off (1,095) (541) (342) (773) (614)
Provision for loan losses 1,118 1,024 1,191 830 687
Other additions (1) - - - 303 -
--------- --------- --------- --------- ---------
Allowance, end of year $ 4,437 $ 4,414 $ 3,931 $ 3,082 $ 2,722
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net loans charged off to
average loans outstanding 0.22% 0.12% 0.08% 0.21% 0.20%
Allowance for loan losses to
ending loans outstanding 0.84% 0.94% 0.91% 0.73% 0.81%
</TABLE>
(1) Represents increases with the purchase of Plano in 1994.
14
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following table presents the allocation of the Company's allowance for loan
losses and the percent of each loan category to total loans net of unearned
discount at December 31 for the past five years. The total allowance for loan
losses is available to absorb losses in any category of loans, notwithstanding
management's allocation of the allowance.
<TABLE>
<CAPTION>
1997 % 1996 % 1995 % 1994 % 1993 %
------- --- ------- --- ------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 799 18 $ 795 18 $ 747 19 $ 678 22 $ 680 25
Commercial real estate 665 15 706 16 629 16 493 16 381 14
Construction 177 4 178 4 157 4 62 2 54 2
Agricultural 90 2 88 2 79 2 62 2 54 2
Residential real estate 1,109 25 1,280 29 1,100 28 739 24 487 18
Consumer 1,597 36 1,367 31 1,219 31 1,048 34 1,007 37
Unallocated - - - - - - - - 59 2
------- --- ------- --- ------- --- ------- --- ------- ---
Total $ 4,437 100 $4,414 100 $3,931 100 $3,082 100 $2,722 100
------- --- ------- --- ------- --- ------- --- ------- ---
------- --- ------- --- ------- --- ------- --- ------- ---
</TABLE>
DEPOSITS
The following table shows the maturity schedule and amounts for the Company's
time deposits of $100,000 or more at December 31, 1997.
<TABLE>
<CAPTION>
<S> <C>
Under 3 months $ 38,813
3 to 6 months 5,282
Over 6 to 12 months 18,134
Over 12 months 8,243
-----------
$ 70,472
-----------
-----------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
3. Exhibits
<S> <C>
2 Merger Agreement dated December 12, 1997 between First National Bank
of Joliet and Bank of Lockport, Southwest Suburban Bank and Community
Bank of Plano.
3.1a Articles of Incorporation of First National Bancorp, Inc.
(incorporated by reference to Appendix III of Registration Statement
Form S-4, File No. 0-15123, dated February 17, 1986).
3.1b Amendment to the Articles of Incorporation dated March 9, 1988
(Incorporated by reference to Part IV of Form 10-K for the year ended
December 31, 1987, File No. 0-15123).
3.2 By-laws of First National Bancorp, Inc. (incorporated by reference to
Part IV of Form 10-K for the year ended December 31, 1986, File No. 0-15123).
3 By-laws of First National Bank of Joliet as revised on March 12, 1998.
4 Instruments defining rights of security holders (incorporated by
reference to pages 31 through 33 of Registration Statement Form S-4,
File No. 0-15123, dated February 17, 1986).
4.1 Rights Agreement for Preferred Share Purchase Rights, dated November
14, 1996 (incorporated by reference to Form 8-A, File No. 0-15123).
10.1a First National Bank of Joliet Retirement Plan & Trust (incorporated by
reference to Part IV of Form 10-K for the year ended December 31,
1986, File No. 0-15123).
10.1b First National Bank of Joliet Retirement Plan & Trust as Amended
(incorporated by reference to Part IV of Form 10-K for the year ended
December 31, 1995, File No. 0-15123).
10.3a First National Bancorp, Inc. 401(k) plan, (incorporated by reference
to Part IV of Form 10-K for the year ended December 31, 1993, File No.
0-15123).
10.3b Amendment of the First National Bancorp, Inc. 401(K) Plan,
(incorporated by reference to Part IV of Form 10-K for the year ended
December 31, 1994, File No. 0-15123).
10.4 First National Bancorp, Inc. Employees' Cafeteria Plan, (incorporated
by reference to Part IV of Form 10-K for the year ended December 31,
1995, File No. 0-15123).
10.5 Synopsis of computer service contract dated December 11, 1996
between FISERV Solutions, Inc. (service provider) and First National
Bancorp, Inc. (customer), (incorporated by reference to Part IV of
Form 10-K for the year ended December 31, 1996, File No. 0-15123).
11 Statement re: computation of per share earnings
13 1997 annual and financial reports to shareholders
21 Subsidiaries of the Registrant
22 Notice of Annual Shareholders Meeting of First National Bancorp, Inc.
</TABLE>
(b) Reports on Form 8-K
There were no events or transactions requiring Form 8-K to be filed
during the fourth quarter of 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Joliet, State of
Illinois, on this 12th day of March, 1998.
FIRST NATIONAL BANCORP, INC.
-------------------------------------
(Registrant)
By: /s/ Kevin T. Reardon
-------------------------------------
Kevin T. Reardon
Chairman of the Board
& Chief Executive Officer
By: /s/ Albert G. D'Ottavio
-------------------------------------
Albert G. D'Ottavio
President & Director
(Chief Financial Officer)
Principal Accounting Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below on the 12th day of March, 1998 by the following persons on
behalf of the registrant in the capacities indicated.
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
/s/ Kevin T. Reardon Chairman of the Board
-------------------------------------------- and
Kevin T. Reardon Chief Executive Officer
/s/ Albert G. D'Ottavio President and Director
-------------------------------------------- (Chief Operating Officer)
Albert G. D'Ottavio (Chief Financial Officer)
/s/ Charles R. Peyla Director
--------------------------------------------
Charles R. Payla
/s/ Watson A. Healy Director
--------------------------------------------
Watson A. Healy
/s/ George H. Buck Director
--------------------------------------------
George H. Buck
/s/ Walter F. Nolan Director
--------------------------------------------
Walter F. Nolan
</TABLE>
17
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31,
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average number of shares outstanding 2,431,804 2,431,804 2,431,804
Net income (in thousands) $9,174 $8,521 $8,211
Earnings per share $3.77 $3.50 $3.38
</TABLE>
Note: Earnings per common share have been retroactively restated to reflect the
2 for 1 stock split effected in the form of a 100% stock dividend in 1997.
18
<PAGE>
FIRSTNATIONAL BANCORP, INC.
78 NORTH CHICAGO STREET
JOLIET, ILLINOIS 60432
<PAGE>
BUILDING UPON A
140 YEAR TRADITION.
FIRST NATIONAL BANCORP, INC.
ANNUAL REPORT 1997
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA 1997 1996 % Increase
<S> <C> <C> <C>
Total Assets at year end $ 860,756 $ 824,570 4.39%
Net Income $ 9,174 $ 8,521 7.66%
Earnings per share $ 3.77 $ 3.50
Stockholders' Equity $ 76,945 $ 71,391 7.78%
Equity Per Share $ 31.64 $ 29.36
</TABLE>
THREE YEAR COMPARISONS
<TABLE>
<CAPTION>
In thousands, except per share data 1996 1995 1994
<S> <C> <C> <C>
Total Assets at year end $ 860,756 $ 824,570 $ 749,990
Earnings per share $ 3.77 $ 3.50 $ 3.38
Net Income $ 9,174 $ 8,521 $ 8,211
Stockholders' Equity $ 76,945 $ 71,391 $ 66,425
</TABLE>
CONTENTS...
<TABLE>
<S> <C>
LETTER TO SHAREHOLDERS.............. 2
CONSOLIDATED BALANCE SHEETS......... 6
CONSOLIDATED STATEMENTS OF INCOME... 7
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY........ 8
REPORT OF INDEPENDENT AUDITORS...... 8
FINANCIAL HIGHLIGHTS &
COMMON STOCK DATA............. 9
DIRECTORS........................... 10
OFFICERS............................ 12
</TABLE>
<PAGE>
BUILDING UPON A TRADITION REQUIRES HISTORICAL PERSPECTIVE AND FUTURE PURPOSE.
FOR WHAT IS STRUCTURE WITHOUT DEFINED PURPOSE? OUR 140TH YEAR IS NOT MERELY A
MILESTONE BUT A MONUMENT TO PAST ACHIEVEMENT AND A BELLWETHER FOR FUTURE GROWTH.
1
<PAGE>
TO OUR SHAREHOLDERS
Though each year is a milestone in First National Bancorp's history, the
events of 1997 will profoundly influence the Bancorp's future course.
It was our 140th year. A time not only to build upon a rich tradition of
outstanding financial performance and consistent growth, but also a time to
position our banks for opportunities--unifying our corporate structure,
upgrading our support systems and renewing our commitment to the customer.
The tradition of exceptional performance is reflected in the financial
benchmarks at the front of this report and within the statements that follow
this letter. Paralleling the success in numbers is a continued pattern of
steady growth, increasing loan activity and expansion of our ATM network.
2
<PAGE>
1997 was another record breaking financial year. Buoyed by record asset
levels at each of the four banks, the Bancorp's Total Assets at year end
approached $861 million, a 4.4% increase over the previous year. Net Income
reached an all-time high of $9.17 million, representing a 7.7% gain over
1996. Earnings per Share increased 27 cents to $3.77 as adjusted to reflect
the two-for-one stock split approved by the Board of Directors in March, 1997.
Loan growth was a major factor in our success. Net Loans jumped 12.4% to
nearly $522 million. Spurred by a strong effort at First National Bank of
Joliet, Commercial Loans increased almost 12% to more than $195 million.
Consumer Loans posted the biggest gain, just under 20%, due in part to Bank
of Lockport doubling its portfolio.
Late in 1997, the boards of each bank approved a resolution to consolidate
Bank of Lockport, Southwest Suburban Bank and Community Bank of Plano under
the First National Bank of Joliet charter. The actual consolidation is
planned for March, 1998.
This step is a natural outcome of a trend toward unifying various Bancorp
operations in recent years. Departments such as auditing, accounting,
compliance and loan review, data processing and check processing have been
centralized. The banks have also been sharing resources in lending,
investment management, human resources and business development.
Besides improved operating efficiency, the consolidation will benefit Bancorp
customers who will be able to transact business at any of our fifteen offices
and to choose from a wider array of products. Along with the recent upgrade
of the Bancorp's information systems, the consolidation will enhance customer
service and convenience while competitively positioning the Bancorp for
future growth in the financial services industry.
The Bancorp's ATM network grew 55% in 1997. The network now includes ATM
sites in eleven communities throughout Will, Grundy, Kendall, Cook and DeKalb
counties. The increasing popularity of ATMs with customers has made network
expansion one of the Bancorp's top priorities.
The Bancorp has intensified its efforts toward branch expansion. Construction
of a new facility on Weber Road in Romeoville will be well underway by the
summer of 1998. The Bancorp is also poised for entry into Plainfield. Early
in 1998, negotiations were completed for the purchase of a site along Route
59. The anticipated opening of these new facilities will give the Bancorp an
opportunity to tap into two rapidly growing markets in Will County.
Building upon a 140 year old tradition involves dedication to the core values
of customer convenience, community involvement and consistent financial
growth. This building process also provides a perspective on future strategic
direction.
Another long-standing value, increased return for shareholders, is an
integral part of this First National tradition. We gratefully acknowledge
your loyalty and support as an inspiration toward higher goals and continued
success in the years ahead.
Sincerely,
/s/ Kevin T. Reardon
KEVIN T. REARDON
Chairman of the Board and Chief Executive Officer
/s/ Albert G. D'Ottavio
ALBERT G. D'OTTAVIO
President and Chief Operating Officer
3
<PAGE>
Local officers appear at autograph sessions to sign their bank-sponsored Cop
Cards.
Kevin Reardon and Bert D'Ottavio present a check to Joliet city officials for
site improvements at Richards Grove, a new subdivision for low income,
first-time homebuyers.
Seniors Club on tour.
Employee participation in the annual holiday toy drive is another example of
community involvement throughout the year.
First National co-sponsored a high school basketball tournament that drew
thousands of area fans.
4
<PAGE>
Building upon a 140 year tradition of...
...Customer Commitment
...Community Involvement
...Banking Convenience
Directors and employees respond enthusiastically to Kevin Reardon's remarks
during a Bancorp meeting on customer commitment during the technology upgrade.
A high school choir fills the bank with holiday cheer.
A rapidly expanding ATM network provides 24 hour banking for customers in
eleven communities.
5
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
FIRST NATIONAL BANCORP, INC.
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
1997 1996
-----------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 34,591 $ 35,785
Federal funds sold 50,800 73,241
Securities available-for-sale 11,831 11,404
Securities held-to-maturity (fair value
of $206,269 in 1997 and $203,500 in 1996) 204,870 203,424
Loans
Commercial 195,449 175,145
Agricultural 10,769 8,692
Residential real estate 147,625 141,440
Consumer 172,695 144,162
----------- ----------
Total loans 526,538 469,439
Unearned discount (158) (653)
Allowance for loan losses (4,437) (4,414)
----------- ----------
Loans, net 521,943 464,372
Premises and equipment, net 18,840 17,880
Accrued interest receivable and
other assets 8,392 7,954
Intangibles, net 9,489 10,510
----------- ----------
Total assets $ 860,756 $ 824,570
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand, noninterest-bearing $ 129,243 $ 116,147
NOW accounts 78,660 74,749
Money market accounts 37,086 37,130
Savings 165,341 160,653
Time deposits, $100,000 and over 70,472 63,189
Other time deposits 245,354 238,645
----------- ----------
Total deposits 726,156 690,513
Short-term borrowings 46,207 49,236
Long-term debt 4,817 6,951
Accrued interest and other liabilities 6,631 6,479
----------- ----------
Total liabilities 783,811 753,179
Stockholders' equity
Preferred stock, no par value, authorized
1,000,000 shares; none issued -- --
Common stock, par value $10; shares
authorized - 5,500,000 in 1997 and
2,750,000 in 1996; shares issued and
outstanding - 2,431,804 in 1997 and
1,215,902 in 1996 24,318 12,159
Additional paid-in capital -- 8,846
Retained earnings 52,607 50,394
Unrealized gain (loss) on securities
available-for-sale, net of taxes 20 (8)
----------- ----------
Total stockholders' equity 76,945 71,391
----------- ----------
Total liabilities and stockholders'
equity $ 860,756 $ 824,570
----------- ----------
----------- ----------
</TABLE>
6
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FIRST NATIONAL BANCORP, INC.
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
(In thousands, except share data)
1997 1996
----------------------------------
<S> <C> <C>
INTEREST INCOME
Loans $ 43,556 $ 39,148
Securities
Taxable 12,504 10,980
Tax-exempt 1,892 2,016
Federal funds sold 1,736 2,568
------- -------
Total interest income 59,688 54,712
INTEREST EXPENSE
Deposits 23,788 21,091
Short-term borrowings 2,470 2,600
Long-term debt 508 581
------- -------
Total interest expense 26,766 24,272
------- -------
Net interest income 32,922 30,440
Provision for loan losses 1,118 1,024
------- -------
Net interest income after provision
for loan losses 31,804 29,416
NONINTEREST INCOME
Trust fees 1,035 996
Service fees 3,534 3,058
Securities gains, net 13 175
Other income 1,317 1,262
------- -------
Total noninterest income 5,899 5,491
NONINTEREST EXPENSES
Salaries and employee benefits 12,562 11,122
Occupancy expense 1,800 1,799
Data processing 1,215 1,085
Equipment expense 1,449 1,329
Amortization of intangibles 1,021 1,070
Other expenses 6,180 5,844
------- -------
Total noninterest expenses 24,227 22,249
------- -------
INCOME BEFORE INCOME TAXES 13,476 12,658
Income tax expense 4,302 4,137
------- -------
NET INCOME $ 9,174 $ 8,521
------- -------
------- -------
Earnings per share (2,431,804 shares outstanding
after a 2-for-1 stock split effected
in the form of a 100% stock dividend in 1997) $ 3.77 $ 3.50
------- -------
------- -------
</TABLE>
7
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FIRST NATIONAL BANCORP, INC.
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
NET
UNREALIZED
COMMON STOCK GAIN (LOSS)
------------------------ ADDITIONAL ON SECURITIES
PAR PAID-IN RETAINED AVAILABLE-
SHARES VALUE CAPITAL EARNINGS FOR-SALE TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 1,215,902 $ 12,159 $ 8,846 $ 45,519 $ (99) $ 66,425
Net income -- -- -- 8,521 -- 8,521
Cash dividends declare-
$1.50 per share (1) -- -- -- (3,646) -- (3,646)
Net unrealized
gain on securities
available-for-sale,
net of taxes -- -- -- -- 91 91
--------- --------- -------- --------- -------- --------
Balance, December 31, 1996 1,215,902 12,159 8,846 50,394 (8) 71,391
Net income -- -- -- 9,174 -- 9,174
Cash dividends declare-
$1.50 per share -- -- -- (3,648) -- (3,648)
Net unrealized
gain on securities
available-for-sale,
net of taxes -- -- -- -- 28 28
2-for-1 stock split effected
in the form of a 100%
stock dividend 1,215,902 12,159 (8,846) (3,313) -- --
--------- --------- -------- --------- -------- --------
Balance, December 31, 1997 2,431,804 $ 24,318 $ -- $ 52,607 $ 20 $ 76,945
--------- --------- -------- --------- -------- --------
--------- --------- -------- --------- -------- --------
</TABLE>
(1) As restated for the 2-for-1 stock split effected in the form of a 100%
stock dividend in 1997.
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND STOCKHOLDERS
FIRST NATIONAL BANCORP, INC.
JOLIET, ILLINOIS
We have audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of First National Bancorp, Inc. as
of December 31, 1997 and 1996, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the years then
ended (not presented herein); and in our report dated January 24, 1998, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheets as of December 31, 1997 and 1996, and the
condensed consolidated statements of income and changes in stockholders'
equity for the years then ended is fairly stated, in all material respects,
in relation to the consolidated financial statements from which they have
been derived.
/s/ Crowe, Chizek and Company LLP
Oak Brook, Illinois [LOGO]
January 24, 1998
8
<PAGE>
FINANCIAL HIGHLIGHTS & COMMON STOCK DATA
(Table dollar amounts in thousands, except share data)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME:
Net interest income $32,922 $30,440 $29,451 $26,312 $25,096
Provision for loan losses 1,118 1,024 1,191 830 687
Noninterest income 5,899 5,491 5,124 3,838 3,770
Noninterest expense 24,227 22,249 21,419 18,540 17,730
Income before taxes 13,476 12,658 11,965 10,780 10,449
Net income 9,174 8,521 8,211 7,507 7,366
BALANCE SHEET - END OF YEAR
BALANCES:
Securities $216,701 $214,828 $202,711 $189,874 $190,872
Loans, net 521,943 464,372 427,917 418,918 333,243
Total assets 860,756 824,570 749,990 692,642 631,786
Deposits 726,156 690,513 605,137 556,162 491,014
Stockholders' equity 76,945 71,391 66,425 61,657 57,442
BALANCE SHEET - AVERAGE
BALANCES:
Securities $234,941 $213,653 $189,605 $192,890 $184,559
Loans, net 493,790 441,619 426,523 371,442 303,578
Total assets 829,878 773,792 729,801 640,388 604,202
Deposits 698,068 640,485 577,093 505,553 477,938
Stockholders' equity 74,040 68,269 63,741 59,090 55,068
WEIGHTED AVERAGE SHARES
OUTSTANDING (1) 2,431,804 2,431,804 2,431,804 2,431,804 2,431,804
PER SHARE DATA (1):
Book value $31.64 $29.36 $27.32 $25.35 $23.62
Earnings 3.77 3.50 3.38 3.09 3.03
Cash dividends 1.50 1.50 1.38 1.34 1.25
SELECTED FINANCIAL RATIOS:
Average net loans to
average deposits 70.74% 68.95% 73.91% 73.47% 63.52%
Return on average assets 1.11% 1.10% 1.13% 1.17% 1.22%
Return on average equity 12.39% 12.48% 12.88% 12.70% 13.38%
Net interest margin (2) 4.47% 4.47% 4.62% 4.72% 4.78%
Average equity to
average assets 8.92% 8.82% 8.73% 9.23% 9.11%
Dividend payout ratio 39.76% 42.80% 40.73% 43.40% 41.29%
</TABLE>
(1) Per share data for the years 1993 through 1996 has been restated for the
2-for-1 stock split effected in the form of a 100% stock dividend in 1997.
(2) Based on average interest earning assets with the computation on a fully
tax equivalent basis assuming an income tax rate of 35%.
COMMON STOCK PRICE RANGE, DIVIDENDS 1997-1996 (UNAUDITED)
<TABLE>
<CAPTION>
PRICE RANGE
----------- CASH DIVIDENDS DECLARED
HIGH LOW PER SHARE
---- --- ---------
<S> <C> <C> <C>
1997
4th Quarter $60 $56 $0.25
3rd Quarter 56 50 0.25
2nd Quarter 52 46 0.25
1st Quarter (1) 47 46 0.75
1996 (1)
4th Quarter $45 $45 $ --
3rd Quarter 44 43 0.75
2nd Quarter 43 39 --
1st Quarter 39 39 0.75
</TABLE>
(1) Per Share information restated for the 2-for-1 stock split effected in
the form of a 100% stock dividend in 1997.
9
<PAGE>
BOARD OF DIRECTORS
CHARLES R. PEYLA
KEVIN T. REARDON
HOWARD E. REEVES
HARVEY J. LEWIS
WATSON A. HEALY
LOUIS R. PEYLA
10
<PAGE>
FIRST NATIONAL BANCORP, INC. & FIRST NATIONAL BANK OF JOLIET
SHELDON C. BELL
PAUL A. LAMBRECHT
ALBERT G. D'OTTAVIO
KEVIN T. REARDON
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
ALBERT G. D'OTTAVIO
PRESIDENT AND CHIEF OPERATING OFFICER
SHELDON C. BELL
PRESIDENT, BELL REALTY, INC.
GEORGE H. BUCK
PRESIDENT, WERDEN BUCK COMPANY
WATSON A. HEALY
ARCHITECT
PAUL A. LAMBRECHT
RETIRED CHAIRMAN BROWN & LAMBRECHT EARTHMOVERS, INC.
HARVEY J. LEWIS
FARMER
WALTER F. NOLAN, CPA
MEMBER, CLIFTON GUNDERSON & CO., L.L.C.
CHARLES R. PEYLA
PRESIDENT, ILLINOIS SECURITIES
LOUIS R. PEYLA
CHAIRMAN, ILLINOIS SECURITIES
MICHAEL C. REARDON
SENIOR VICE PRESIDENT FIRST NATIONAL BANK OF JOLIET
HOWARD E. REEVES
PRESIDENT, HOW ENTERPRISES, INC.
MICHAEL C. REARDON
WALTER F. NOLAN
GEORGE H. BUCK
11
<PAGE>
FIRST NATIONAL BANK OF JOLIET
OFFICERS
CHAIRMAN OF THE BOARD AND CEO
KEVIN T. REARDON
PRESIDENT & COO
ALBERT G. D'OTTAVIO
COMMERCIAL & MORTGAGE LOAN DEPARTMENT
JOHN J. KEIGHER, SENIOR VICE PRESIDENT
TERRENCE P. HACKETT, VICE PRESIDENT
CARL D. HOLMQUIST, VICE PRESIDENT
GREGORY L. SCHAEFER, VICE PRESIDENT
HARRY R. MCSTEEN, ASSISTANT VICE PRESIDENT
CATHERINE E. CROWLEY, ASSISTANT VICE PRESIDENT
DANIEL J. MIHELICH, ASSISTANT VICE PRESIDENT
MICHAEL J. SCHUTZ, LOAN OFFICER
CONSUMER LOAN DEPARTMENT
STEVEN J. RANDICH, VICE PRESIDENT
MARK THELO, ASSISTANT VICE PRESIDENT
PATRICIA J. BRANNICK, ASSISTANT VICE PRESIDENT
LOWELL G. CONWAY, ASSISTANT VICE PRESIDENT
THOMAS A. MEYER, LOAN OFFICER
MICHELLE S. SCOTT, BUSINESS DEVELOPMENT OFFICER
INVESTMENT MANAGEMENT & TRUST DEPARTMENT
JAMES T. LIMACHER, SENIOR VICE PRESIDENT
WAYNE HUFFMAN, VICE PRESIDENT
ALLAN C. SOMERS, TRUST OFFICER
JERI L. MADISON, TRUST OFFICER
ANDREW MIDLOCK, JR., TRUST OFFICER
OPERATIONS DEPARTMENT
JACK A. PODLESNY, SENIOR VICE PRESIDENT & CASHIER
DOMINIC M. PAONE, ASSISTANT VICE PRESIDENT
LEIF HENDRICKSEN, BUILDING & FACILITIES OFFICER
COMPLIANCE DEPARTMENT
SCOTT D. NOLAN, VICE PRESIDENT & COMPLIANCE OFFICER
HUMAN RESOURCE DEPARTMENT
JUDITH R. CONNELLY, ASSISTANT VICE PRESIDENT
INFORMATION SYSTEMS DEPARTMENT
OLIVIER G. MAY, DIRECTOR OF INFORMATION SYSTEMS
DATA PROCESSING DEPARTMENT
BEVERLY I. BOOSTROM, ASSISTANT VICE PRESIDENT
AUDITING DEPARTMENT
RICHARD G. DEGRUSH, VICE PRESIDENT
MARK MIDLOCK, ASSISTANT AUDITOR
SAUNDRA K. LUCAS, AUDITING OFFICER
SALES & CUSTOMER SERVICE DEPARTMENT
MICHAEL C. REARDON, SENIOR VICE PRESIDENT
JAMES K. ALEXA, VICE PRESIDENT
DAVID E. GLASSCOCK, VICE PRESIDENT
DANIEL A. FRIANT, ASSISTANT VICE PRESIDENT
MARY LOU RUTHERFORD, ASSISTANT VICE PRESIDENT
STEPHEN P. MARCHIO, ASSISTANT VICE PRESIDENT
GAIL K. MOSS, LOAN OFFICER
SUZANNE M. GAZELLE, ASSISTANT CASHIER
KATHRYN G. PORTER, TRAINING OFFICER
BANK CONTROL
RONALD E. WENCEL, LOAN OFFICER
MARKETING DEPARTMENT
LAWRENCE M. RYAN, JR., DIRECTOR OF MARKETING
LAUREN A. MUELLER, MARKETING OFFICER
78 North Chicago Street (Y) Joliet, IL60432
815/726-4371
- --------------------------------------------------------------------------------
BANK OF LOCKPORT
BOARD OF DIRECTORS
BRUCE J. WOLFERSBERGER
DR. RENO G. CANEVA
EUGENE N. CORNOLO
ALBERT G. D'OTTAVIO
THOMAS E. DRAKE
MARK J. GRIGLIONE
SANDRA M. PESAVENTO
JACK A. PODLESNY
KEVIN T. REARDON
MICHAEL C. REARDON
RAY L. WOOCK
OFFICERS
PRESIDENT
BRUCE J. WOLFERSBERGER
COMMERCIAL & MORTGAGE LOAN DEPARTMENT
MARK J. GRIGLIONE, VICE PRESIDENT
SANDRA M. PESAVENTO, VICE PRESIDENT
MICHAEL J. TIERNEY, ASSISTANT VICE PRESIDENT
OPERATIONS DEPARTMENT
RHONDA L. BEBAR, ASSISTANT CASHIER
INSTALLMENT LOAN DEPARTMENT
PAMELA J. TARRANT, VICE PRESIDENT & CASHIER
PHYLLIS M. CLEAR, LOAN OPERATIONS OFFICER
826 East Ninth Street (Y) Lockport, IL 60441
815/838-8600
- --------------------------------------------------------------------------------
COMMUNITY BANK OF PLANO
BOARD OF DIRECTORS
ROGER D. GOSSETT
R. KEITH CAYWOOD
ALBERT G. D'OTTAVIO
RONALD J. HILL
THOMAS E. KLATT
PETER L. KRENTZ
JACK A. PODLESNY
KEVIN T. REARDON
OFFICERS
PRESIDENT
ROGER D. GOSSETT
SALES & CUSTOMER SERVICE
BETTY J. MCTEE, VICE PRESIDENT
EXECUTIVE VICE PRESIDENT & CASHIER
RONALD J. HILL
LOAN DEPARTMENT
ERIC H. LEGGETT, VICE PRESIDENT
TODD W. MEIER, MORTGAGE LOAN OFFICER
SHARON R. HAGGARD, INSTALLMENT LOAN OFFICER
PATRICIA R. HATCHER, ASSISTANT LOAN OFFICER
OPERATIONS DEPARTMENT
M. PATRICIA COULTRIP, ASSISTANT CASHIER
PATRICIA A. FIEDLER, ASSISTANT CASHIER
2005 West Route 34 (Y) Plano, IL 60545
630/552-3154
- --------------------------------------------------------------------------------
SOUTHWEST SUBURBAN BANK OF BOLINGBROOK
BOARD OF DIRECTORS
KEVIN T. REARDON, CHAIRMAN
ALBERT G. D'OTTAVIO
BRUCE J. WOLFERSBERGER
JACK A. PODLESNY
JOHN J. KEIGHER
MICHAEL W. NOLAN
OFFICERS
PRESIDENT
BRUCE J. WOLFERSBERGER
LOAN DEPARTMENT
MICHAEL W. NOLAN, VICE PRESIDENT
JEANNE SZYMANSKI, LOAN OFFICER
OPERATIONS DEPARTMENT
JEANIE BETTENHAUSEN, ASSISTANT CASHIER
ALICIA INGRAM, OPERATIONS OFFICER
225 Lily Cache Lane o Bolingbrook, IL 60440
630/759-1234
MEMBERS FDIC, EQUAL HOUSING LENDERS
A copy of the company's Annual Report on Form 10K for 1997 may be obtained by
writing to:
Executive Secretary, First National Bancorp, Inc., 78 N. Chicago Street,
Joliet, IL 60432
12
<PAGE>
FIRST NATIONAL BANCORP, INC.
1997 Financial Report
<PAGE>
FIRST NATIONAL BANCORP, INC.
1997 Financial Report
CONTENTS
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . . . . . 1
REPORT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . 10
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . 11
CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . . . . . . . . . . 12
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY. . . . . . 13
CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. . . . . . . . . . . . . . 15
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following presents management's discussion and analysis of the results of
operations and financial condition of the First National Bancorp, Inc. (the
Company) as of the dates and for the periods indicated. This discussion should
be read in conjunction with the Company's Consolidated Financial Statements and
the Notes thereto and other financial data appearing elsewhere in the Annual
Report.
The statements contained in this management's discussion and analysis that are
not historical facts are forward-looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Any risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the Securities and
Exchange Commission.
OVERVIEW
The Company is a multi-bank holding company providing financial and other
banking services to customers located primarily in the Will, Grundy and Kendall
Counties, Illinois area. The Company was originated on September 30, 1986 with
the merger of First National Bank of Joliet. While the principal office of the
Company and the First National Bank of Joliet continues to be Joliet, Illinois,
expansion has occurred through the acquisition in January 1989 of Southwest
Suburban Bank, located in Bolingbrook, Illinois (25 miles southwest of Chicago),
and the acquisition in December 1990 of Bank of Lockport (35 miles southwest of
Chicago). In March 1992, the First National Bank of Joliet acquired the Minooka
facility of Morris Federal Savings Bank. Plano Bancshares, Inc., the parent of
Community Bank of Plano (45 miles west of Chicago), was acquired in October
1994. At December 31, 1997, the Company, with its four wholly-owned
subsidiaries now has fifteen customer banking locations and total assets of
$860,756,000 compared to $824,570,000 at the end of 1996. Four new branch
offices have been opened in the past three years. These acquisitions and branch
openings are reflective of management's strategic plan to expand in areas where
the Company either already has market penetration or where the Company's present
customer service area borders the new market.
In 1998, the Company plans to merge Southwest Suburban Bank, Bank of Lockport,
and Community Bank of Plano into First National Bank of Joliet. This action
should produce certain operating efficiencies within the Company.
FINANCIAL CONDITION
In both 1997 and 1996, the Company experienced growth in deposits, earning
assets, total assets, and capital. Average earning assets for 1997 were
$759,778,000, an increase of $54,363, or 7.71%, from $705,415,000 in 1996. In
1996, average earning assets increased $41,645,000, or 6.27%, from $663,770,000
in 1995. The 1997 increase is primarily due to increases in the average loan
portfolio. The largest contributors to loan growth in 1997 were consumer and
commercial real estate loans, which was funded primarily through average deposit
growth of 8.99%. Also during 1997, the Company shifted earning assets from
federal funds sold into securities. The 1996 increase is primarily due to
increases in the loan and securities portfolio, funded by 10.98% growth in
average deposits. The largest contributors to loan growth in 1996 were consumer
and residential real estate loans. Economics factors are currently favorable,
and management expects loan growth to continue as the markets the Company serves
continue to expand.
Average interest bearing liabilities for 1997 were $632,751,000, an increase of
$41,015,000, or 6.93%, from $591,736,000 in 1996. In 1996, average interest
bearing liabilities increased $31,303,000, or 5.59%, from $560,433,000 in 1995.
Both years' increases are primarily due to increases in time deposits, although
each year also reflected increases in savings and NOW and money market accounts.
Average demand deposits for 1997 were $116,773,000, an increase of $8,792,000,
or 8.14%, from $107,981,000 in 1996. In 1996, average demand deposits increased
$8,803,000, or 8.88%, from $99,178,000 in 1995. An important source of deposit
growth in 1997 and 1996 has been the opening of new branch offices.
1
<PAGE>
As discussed under "Capital Resources", the Company's stockholders' equity
increased 7.78% and 7.48% in 1997 and 1996, respectively, based on year end
amounts. Retained earnings has been the primary source of growth in
stockholders' equity in 1997 and 1996. Total stockholders' equity at December
31, 1997 was $76,945,000, an increase of $5,554,000 from the prior year end.
Book value per share increased to a record high of $31.64 at December 31, 1997,
after the 2-for1 stock split effected in the form of a 100% stock dividend in
1997.
RESULTS OF OPERATIONS
For the year ended December 31, 1997, the Company earned $9,174,000 or $3.77 per
share as compared to $8,521,000 or $3.50 per share and $8,211,000 or $3.38 per
share for the years ended December 31, 1996 and 1995, respectively. Net income
for 1997 increased by 7.66% over that of 1996 while a 3.78% increase was
achieved in 1996 over 1995. The operating performance of bank holding companies
is often measured, and comparisons made, based on net income to average assets
and net income to average equity. The Company's return on average assets was
1.11% in 1997. Corresponding figures were 1.10% and 1.13% for 1996 and 1995,
respectively. Return on average equity was 12.39% in 1997, 12.48% in 1996 and
12.88% in 1995.
NET INTEREST INCOME
Net interest income, the difference between total interest earned on earning
assets and total interest expense on interest bearing liabilities, is the
Company's principal source of income. Net interest income is influenced by
changes in the volume and yield on earning assets as well as changes in the
volume and rates paid on interest bearing liabilities. The Company attempts to
favorably impact net interest income through investment decisions on interest
earning assets and monitoring interest rates its banking subsidiaries offer,
particularly rates for time deposits and short-term borrowings.
On a tax equivalent basis (35% income tax rate), the Company's net interest
income expressed as a percentage of average interest earning assets (net
interest margin) was 4.47% in 1997 and 1996, as compared to 4.62% in 1995. The
net interest margin remained consistent in 1997 as compared to 1996 while the
yield on earning assets increased 9 basis points to 8.00% and the yield on
interest bearing liabilities increased 13 basis points to 4.23%. The increase
in the yield on earning assets is due primarily to the increase in loan volume.
The increase in the yield on interest bearing liabilities is due primarily to a
combination of the increase in the volume of time deposits and the increase in
rates paid on those deposits. The decrease in net interest margin in 1996 is
due primarily to a drop in the yield on earning assets to 7.91% from 8.11% in
1995, as the yield on interest bearing liabilities remained relatively stable
during the year. The drop in the yield on interest earning assets was caused by
the combined volume of securities and federal funds sold becoming a larger
proportion of average earning assets during 1996, combined with a decrease in
yield on these earning assets during 1996.
Net interest income in 1997 increased by $2,455,000, or 7.8%, on a
tax-equivalent basis compared to 1996. The increase in the volume of earning
assets net of interest bearing liabilities produced $3,121,000 of the net
interest income increase while changes in interest rates reduced income by
$666,000. Net interest income in 1996 increased by $833,000, or 2.7%, compared
to 1995. The increase in the volume of earning assets net of interest bearing
liabilities produced $1,765,000 of the net interest income increase while
changes in interest rates reduced income by $932,000.
As the following table illustrates, the Company has maintained consistent levels
of average interest earning assets to total average assets and to average
interest bearing liabilities over the past three years. The ratio of average
time deposits and short-term borrowings to average interest bearing liabilities
has also remained stable during the past two years.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest-earning assets to total assets .92 .91 .91
Interest-earning assets to interest-
bearing liabilities 1.20 1.19 1.18
Time deposits and short-term borrowings
to interest-bearing liabilities .52 .53 .53
</TABLE>
2
<PAGE>
The following table sets forth certain information relating to the Company's
average consolidated balance sheets and reflects the yield on average earning
assets and cost of average interest bearing liabilities for the years indicated.
Such yields and costs are derived by dividing interest income or interest
expense by the average balance of assets or liabilities. Interest income is
measured on a tax-equivalent basis using a 35% income tax rate. The average
balance sheet amounts for loans include balances for non-performing loans and
the securities average balance sheet amounts are based on amortized cost.
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------------------
1 9 9 7 1 9 9 6 1 9 9 5
---------------------------- ---------------------------- -----------------------------
Yield/ Yield/ Yield/
Average Rate Average Rate Average Rate
Balance Interest (%) Balance Interest (%) Balance Interest (%)
--------- -------- ------ --------- -------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing deposits in
other financial institutions $ - $ - $ - $ - $ 70 $ 3 4.29%
Federal funds sold 31,047 1,736 5.59% 50,143 2,568 5.12% 47,572 2,800 5.89
Taxable securities 200,981 12,504 6.22 178,087 10,980 6.17 149,884 9,428 6.29
Tax-exempt securities 33,960 2,911 8.57 35,566 3,102 8.72 39,721 3,549 8.93
Loans 493,790 43,596 8.83 441,619 39,148 8.86 426,523 38,027 8.92
-------- -------- -------- -------- -------- --------
Total interest-
earning assets 759,778 60,747 8.00 705,415 55,798 7.91 663,770 53,807 8.11
-------- -------- -------- -------- -------- --------
NONINTEREST-EARNING ASSETS:
Cash and due from banks 33,266 32,368 30,469
Premises and equipment 18,300 16,898 14,861
Intangibles and other assets 18,534 19,111 20,701
-------- -------- --------
Total noninterest
earning assets 70,100 68,377 66,031
-------- -------- --------
Total assets $829,878 $773,792 $729,801
-------- -------- --------
-------- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits
NOW and
money market $115,855 $ 3,047 2.63% $108,735 $ 2,559 2.35% $ 99,827 $ 2,338 2.34%
Savings 168,397 4,206 2.50 160,224 4,007 2.50 153,661 3,872 2.52
Time 297,043 16,535 5.57 263,545 14,525 5.51 224,427 12,012 5.35
Short-term
borrowings 45,276 2,470 5.46 51,993 2,600 5.00 74,552 4,210 5.65
Long-term debt 6,180 508 8.22 7,239 581 8.03 7,966 682 8.56
-------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities 632,751 26,766 4.23 591,736 24,272 4.10 560,433 23,114 4.12
-------- -------- ---- -------- -------- ---- -------- -------- ----
NONINTEREST BEARING LIABILITIES:
Demand deposits 116,773 107,981 99,178
Other liabilities 6,314 5,806 6,449
STOCKHOLDERS' EQUITY 74,040 68,269 63,741
-------- -------- --------
Total liabilities and
stockholders' equity $829,878 $773,792 $729,801
-------- -------- --------
-------- -------- --------
NET INTEREST INCOME $ 33,981 $ 31,526 $ 30,693
-------- -------- --------
-------- -------- --------
NET INTEREST SPREAD 3.77% 3.81% 3.99%
---- ---- ----
---- ---- ----
NET INTEREST MARGIN
TO AVERAGE INTEREST
EARNING ASSETS 4.47% 4.47% 4.62%
---- ---- ----
---- ---- ----
</TABLE>
3
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses is based on management's judgment of the amount
necessary to maintain the allowance for loan losses at an adequate level. The
provision for loan losses amounted to $1,118,000 in 1997 as compared to
$1,024,000 and $1,191,000 in 1996 and 1995, respectively. The provision is
determined by management through an evaluation which takes into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions. On December 31, 1997, the allowance for loan losses was $4,437,000
or 0.84% of outstanding loans, compared to $4,414,000 or 0.94% of outstanding
loans at December 31, 1996.
One measurement used by management in assessing the risk inherent in the loan
portfolio is the level of nonperforming loans. Nonperforming loans are
comprised of those loans on which interest income is not being accrued and those
loans which are contractually in arrears as to principal or interest for ninety
days or more. Non-performing assets, which include other real estate acquired
in satisfaction of loans, at December 31 for each of the past five years are as
follows:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
---------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 1,153 $ 785 $ 169 $ 1,084 $ 449
Other loans contractually past
due ninety days or more 952 1,072 981 985 1,168
Other real estate 5 13 444 444 534
------- ------- ------- ------- -------
$ 2,110 $ 1,870 $ 1,594 $ 2,513 $ 2,151
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Nonperforming loans to
total loans .40% .40% .27% .49% .47%
Allowance for loan losses
to nonperforming loans 210.78% 237.70% 341.83% 148.96% 168.34%
Total nonperforming assets
to total stockholders' equity 2.74% 2.62% 2.40% 4.08% 3.74%
Total nonperforming assets
to total assets .25% .23% .21% .36% .34%
</TABLE>
Impaired loans totaled $876,000 and $580,000 at December 31, 1997 and 1996,
respectively. Impaired loans consist of commercial and commercial real estate
loans. Management has allocated $224,000 and $147,000 of the allowance for loan
losses specifically to impaired loans as of December 31, 1997 and 1996,
respectively. Interest income recognized on impaired loans during 1997 or 1996
was immaterial. No loans were considered impaired as of December 31, 1995.
There have been no restructured loans or leases in the past five years. As of
December 31, 1997 management has identified other potential problem loans by
type of loan in the table below. Generally, these loans are considered
substandard by management. These amounts exclude the non-accrual and past due
loans listed above in the Nonperforming Assets table.
<TABLE>
<S> <C>
Commercial $ 740
Commercial real estate 1,188
Residential real estate 497
Consumer 311
-------
$ 2,736
-------
-------
</TABLE>
4
<PAGE>
In determining the provision for loan losses, management was influenced by the
Company's consistent loan growth and amount of net charge offs in each year.
Other factors, such as changes in the loan portfolio mix, delinquency trends,
current economic trends, review of large and known problem credits at each
subsidiary, and the results of internal loan reviews and regulatory examinations
are also considered by management in assessing the adequacy of the allowance for
loan losses. The management process for evaluating the adequacy of the allowance
for loan losses includes reviewing each month's loan committee reports which
list all loans that do not meet certain internally developed criteria as to
collateral adequacy, payment performance, economic conditions and overall credit
risk. These reports, in narrative form, also address the current status and
actions in process on each listed loan.
The Company's ratio of the allowance for loan losses to nonperforming loans was
over 2:1 at December 31, 1997, 1996, and 1995. The ratio of nonperforming loans
to total loans has been .40% or less for the past three years, which management
considers relatively low. Lastly, the Company's ratio of net loan charge-offs
to average loans was .22%, .12%, and .08% in 1997, 1996, and 1995, respectively.
Based on the factors discussed above, management believes the allowance for loan
losses is adequate.
NONINTEREST INCOME
Noninterest income consists primarily of service charges on customer deposit
accounts and fees earned on trust department and farm management services.
Total noninterest income increased $408,000, or 7.4%, in 1997 compared with an
increase of $367,000, or 7.2%, in 1996. The ratio of noninterest income to
income before taxes was 44%, 43% and 43% in 1997, 1996 and 1995, respectively.
Trust fee income increased $39,000, or 3.9%, in 1997 as compared with an
increase of $164,000, or 19.7% in 1996. The 1997 increase relates to increases
in employee benefit trusts, personal trusts and agency trusts, partially offset
by decreases in farm management income, estates/guardianships and custodial
accounts. The 1996 increase is generally reflective of the increased emphasis
by management in marketing trust services. During 1996, the specific trust
revenues which had meaningful percentage increases over 1995 included
employee/benefit trusts, agency trusts, estates and guardianships, and custodial
accounts.
Service fees, which consist primarily of service fees on deposit accounts,
increased $476,000, or 15.6%, in 1997 after increasing $174,000, or 6.0%, in
1995. Both years increases are generally reflective of increases in overdraft
and demand deposit service charges as a result of increases in the number of
demand deposit accounts.
Other income increased $55,000, or 4.4%, in 1997 compared with an increase of
$163,000, or 14.8%, in 1996. The 1997 increase primarily relates to increases
in ATM surcharge fees, loan servicing fee income, and demand deposit check
charges/commissions, partially offset by decreases in merchant credit card fees,
credit life insurance income, and gains on sale of other real estate owned. The
1996 increase relates to many items, including increases in ATM fees, merchant
credit card fees, credit life insurance income, demand deposit check charges,
and gains on sales of other real estate owned, partially offset by a decrease of
$74,000 in gains on sales of mortgage loans.
5
<PAGE>
NONINTEREST EXPENSE
Total noninterest expense increased $2.0 million, or 8.9%, in 1996 after
increasing $830,000, or 3.9%, in 1996. Details of noninterest expenses for the
three years ended December 31, 1997 are presented in the following schedule:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Salaries and employee benefits $ 12,562 $ 11,122 $ 10,372
Occupancy expense 1,800 1,799 1,548
Data processing 1,215 1,085 945
Equipment expense 1,449 1,329 1,356
FDIC insurance and bank
examination assessments 238 160 893
Printing, stationery, and supplies 703 754 598
Postage 467 461 391
Amortization of intangibles 1,021 1,070 1,070
All other expenses 4,772 4,469 4,246
-------- -------- --------
Total noninterest expense $ 24,227 $ 22,249 $ 21,419
-------- -------- --------
-------- -------- --------
</TABLE>
Salaries and employee benefits, which represent the largest component of
noninterest expense, increased by $1.4 million, or 12.9%, in 1997 after
increasing $750,000, or 7.2%, in 1996. The increases are primarily due to 9.5%
and 6.9% increases in the average full-time equivalent number of employees at
the Company during 1997 and 1996, respectively. General pay increases and
retirement plan costs also contribute to the increased payroll expense in both
1997 and 1996. At December 31, 1997, 1996 and 1995, the Company's number of
full-time equivalent employees was 364, 352 and 301, respectively. The increase
in full-time equivalent employees in 1997 and 1996 is primarily due to opening
new branch offices.
In January 1998, the Board of Directors approved the formation of a new employee
retirement plan, with contributions to the new plan to be funded with Company
common stock. Also in January 1998, the Board approved the process of
terminating the pension plan. No credit will be given for participant service
after January 31, 1998. Management does not expect the net loss from
curtailment and termination of the pension plan to be material. Management
expects the termination process to be completed by October 31, 1998.
During 1995, the Federal Deposit Insurance Corporation (FDIC) lowered deposit
insurance rates and reduced the Company's premiums by $555,000. The 1996
expense reflects a full year at the lower premium rates established by the FDIC.
During each of the three years in the period ended December 31, 1997, the
subsidiary Banks were categorized as "well-capitalized" and, therefore, were
being assessed at the lowest deposit insurance premium rate. Deposit insurance
costs were $86,000 and $8,000 in 1997 and 1996, respectively. The 1996 insurance
costs reflect the fully funded status of the FDIC's Bank Insurance Fund.
Occupancy, printing stationary and supplies, and postage expense remained
relatively consistent in 1997 as compared to 1996. The increases in 1996 as
compared to 1995 are generally reflective of the Company's overall growth and
establishment of new branch office locations. Data processing expense increased
in 1997 as a result of the conversion to a different third-party data processing
service during the year. The 1997 expense includes non-recurring costs for the
data processing conversion. The increase in data processing expenses in 1996 as
compared with 1995 is a result of the former third-party data processing
contract converting to a variable-fee basis from a fixed-fee basis in 1995.
INCOME TAXES
The Company's income tax expense was $4,302,000 in 1997 compared to $4,137,000
in 1996 and $3,754,000 in 1995. Income tax expense as a percentage of income
before income taxes has remained relatively consistent over the past three years
at 31.9%, 32.7% and 31.4% in 1997, 1996 and 1995, respectively.
6
<PAGE>
ASSET/LIABILITY MANAGEMENT
The primary objectives of the Company's asset/liability management program are
to achieve a stable net interest margin, to follow prudent investment strategies
and to maintain adequate liquidity to meet the withdrawal requirements of
depositors and the financing needs of prospective borrowers. Management
continually monitors the liquidity requirements and rate sensitivity of its
short-term sources of funds. The accompanying schedule illustrates repricing of
the Company's rate sensitive assets and liabilities position at December 31,
1997.
<TABLE>
<CAPTION>
Less
Than 90 to 1 to 5 Over
90 Days 365 Days Years 5 Years
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Rate sensitive assets
Taxable securities $ 4,362 $ 31,300 $ 120,422 $ 27,983
Tax-exempt securities 938 2,336 18,898 10,462
Federal funds sold 50,800 - - -
Loans 141,336 70,351 225,996 88,697
--------- --------- --------- ---------
Total interest earning assets $ 197,436 $ 103,987 $ 365,316 $ 127,142
--------- --------- --------- ---------
--------- --------- --------- ---------
Cumulative interest earning assets $ 197,436 $ 301,423 $ 666,739 $ 793,881
--------- --------- --------- ---------
--------- --------- --------- ---------
Rate sensitive liabilities
Deposits
NOW and money market $ 115,746 $ - $ - $ -
Savings 165,341 - - -
Time 116,588 163,453 35,785 -
Short-term borrowings 41,550 4,657 - -
Long-term debt 4,817 - - -
--------- --------- --------- ---------
Total interest-bearing liabilities $ 444,042 $ 168,110 $ 35,785 $ -
--------- --------- --------- ---------
--------- --------- --------- ---------
Cumulative interest-bearing liabilities $ 444,042 $ 612,152 $ 647,937 $ 647,937
--------- --------- --------- ---------
--------- --------- --------- ---------
Excess interest earning assets (liabilities) $(246,606) $ (64,123) $ 329,531 $ 127,142
Cumulative excess interest-earning
assets (liabilities) (246,606) (310,729) 18,802 145,944
Cumulative rate sensitivity ratio
(interest-earning assets divided by
interest-bearing liabilities) .44 .49 1.03 1.23
</TABLE>
Included in "Less Than 90 Days" rate sensitive liabilities are $165,341,000 of
savings deposits and $115,746,000 of NOW and money market deposits which
management considers more core deposit in nature than time deposits.
Approximately $80 million of securities are callable in 1998, and are included
in the above table based upon their contractual terms. Most of these callable
securities are issued by U.S. Government Agencies.
While the shorter term negative GAP position represents a potential adverse
impact on the Company's net interest income position in periods of rising
interest rates, the same position generally results in a favorable impact when
interest rates remain constant or decline.
7
<PAGE>
The target GAP position, as defined by the Company's Asset & Liability Policy,
is to maintain a ratio (as adjusted) of rate sensitive assets to rate sensitive
liabilities of at least .75 and not more than 1.25 on a one year measurement
basis. Deviations from these prescribed parameters for three consecutive months
requires discussion of potential solutions and/or courses of action at the
subsequent month's Board of Directors meeting.
For purposes of the policy parameters, management does not consider savings, NOW
and money market account deposits to be repriceable within 90 days. If these
core deposits are assumed to reprice after one year, then the Company's
cumulative excess interest bearing liabilities would be $29,642,000 at the one
year time horizon, and the cumulative rate sensitivity ratio would be .91.
LIQUIDITY
The Company's primary sources of funds are deposits, proceeds from principal and
interest payments on loans, maturities of securities, federal funds sold, and
short term borrowings (consisting of securities sold under agreements to
repurchase and U.S. Treasury demand note accounts). While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions, and competition.
The Company's liquidity, represented by cash and due from banks, is a product of
its operating, investing and financing activities. Cash flows from operating
activities were greater than accrual basis net income by $3.0 million, $2.9
million and $5.5 million in 1997, 1996 and 1995, respectively. Management
expects ongoing operating activities to continue to be a primary source of cash
flows for the Company.
A primary investing activity of the Company is the origination of loans. Loans
made to customers, net of principal collections were $58.5 million, $37.0
million and $11.3 million in 1997, 1996 and 1995, respectively. The Company
also makes significant investments in securities and federal funds sold.
Investing activities related to these investments resulted in net cash inflows
of $20.8 million in 1997 and net cash outflows of $43.4 million and $50.2
million in 1996 and 1995, respectively.
Financing activities are centered primarily in deposits, short-term borrowings
(including securities sold under agreements to repurchase) and dividends paid.
The Company has experienced growing deposit levels over the past several years,
which has helped maintain an adequate level of cash for the Company's
activities. The Company has recently established new branch offices in an
effort to increase the deposit base of the Company. Deposits increased $35.6
million, $85.4 million and $49.0 million in 1997, 1996 and 1995, respectively.
As competition for deposits is expected to remain strong, future deposit growth
cannot be predicted with any certainty.
Many of the repurchase agreements are with municipalities, including county
governmental offices. As such, the amount of the funds borrowed fluctuates from
period to period. Short-term borrowings decreased by $3.0 million and $15.5
million in 1997 and 1996, respectively, and increased by $5.2 million in 1995.
Dividends paid to stockholders as a percentage of net income were 39.8%, 42.8%
and 40.7% in 1997, 1996 and 1995, respectively. Cash dividends per share were
consistent in 1997 and 1996 after increasing in each of three years prior to
1996.
Financing activities also include long-term debt. The Company's long-term debt
was incurred to acquire subsidiary banks. Cash flow activities related to
long-term debt obligations consist of debt service requirements. No additional
long term debt has been issued in the last three years. To help insure the
ability to meet its funding needs, including any unexpected strain on liquidity,
the Company has $40 million of federal funds lines of credit from three
independent banks.
The Company has made expenditures during recent years related to the opening of
new branch offices and currently plans to continue to open new branch offices.
Additionally, the Company plans to continue to make expenditures during 1998 to
update its current voice and data processing technologies. Management does not
believe these expenditures will have a significant impact on the liquidity of
the Company.
CAPITAL RESOURCES
In 1997, stockholders' equity increased by $5,554,000 to $76,945,000. The
amounts comprising this net increase were net income of $9,174,000 and a $28,000
change in unrealized gains on securities available for sale, offset by dividends
paid to stockholders of $3,648,000. At December 31, 1997, stockholders' equity
represented 8.94% of total assets compared to the year earlier position of
8.66%.
8
<PAGE>
Under rules adopted by federal bank regulatory agencies, bank holding companies
and financial institutions are subject to certain capital measurements. These
regulations establish minimum levels for risk-based Tier 1 Capital and Total
Capital ratios and the leverage ratio. The parent company (on a consolidated
basis) and its subsidiary Banks currently are considered "well-capitalized" and
exceed the capital requirements established by federal bank regulatory agencies.
Please refer to Note 13 to the Company's Consolidated Financial Statements for
further information with respect to compliance with regulatory capital
requirements.
EFFECTS OF INFLATION
A financial institution's assets and liabilities are primarily monetary. The
net monetary assets of a financial institution are affected more by the general
level of interest rates than by the prices of other goods and services. High
rates of inflation are generally accompanied by higher than normal interest
rates. Conversely, with a low inflation rate, or the anticipation of lower
rates of inflation, interest rates are usually lower. The Company generally is
able to offset the higher cost of funds predominant in periods of higher
inflation with increased yields on loans and securities. When inflation rates
drop, and interest rates follow that pattern, the Company's cost of funds and
interest earned on assets are likely to decrease proportionately. An analysis
of a financial institution's asset and liability structure provides the best
indication of how a financial institution is positioned to respond to changing
interest rates and maintain profitability.
Assets such as premises and equipment are considered non-monetary in nature and
are not directly affected by inflation in the normal flow of business. These
assets are directly affected by current rates of inflation only when purchased
or sold.
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities", was
issued by the Financial Accounting Standards Board in 1996. This Statement
revises the accounting for transfers of financial assets, such as loans and
securities, and for distinguishing between sales and secured borrowings.
Statement 125 is effective for some transactions in 1997 and others in 1998.
The effect of Statement 125 on the Company's financial statements is not
material.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", was issued by the Financial Accounting Standards Board in 1997. This
Statement established standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
It does not address issues of recognition or measurement for comprehensive
income and its components. Statement 130 is effective for fiscal years
beginning after December 15, 1997. Since the provisions of this Statement are
disclosure oriented, it will have no impact on the operations of the Company.
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information", was issued in 1997 by the Financial
Accounting Standards Board. This Statement established standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Statement 131 is
effective for periods beginning after December 15, 1997. Management does not
believe that the provisions of this Statement are applicable to the Company,
since substantially all of the Company's operations are banking activities.
YEAR 2000
The Company has conducted a review of its computer systems for those that could
be affected by the "Year 2000" issue and is developing an implementation plan to
resolve the issue. The Year 2000 problem is the result of computer programs
being written using two digits rather than four to define the applicable year.
The Company presently believes that, with modifications to existing software and
by converting to new software, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted. However, if such modifications and conversions are not completed
timely, the Year 2000 problem may have a material impact on the operations of
the Company. The Company has been in continual contact with its data processing
providers on Year 2000 issues, and does not anticipate significant problems.
9
<PAGE>
[LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
First National Bancorp, Inc.
Joliet, Illinois
We have audited the accompanying consolidated balance sheets of First National
Bancorp, Inc. as of December 31, 1997 and 1996 and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
accompanying consolidated financial statements of the Company for the year ended
December 31, 1995 were audited by other auditors whose report dated January 26,
1996 expressed an unqualified opinion on those statements.
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 First National
Bancorp, Inc. as of December 31, 1997 and 1996 and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 24, 1998
10
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 34,591 $ 35,785
Federal funds sold 50,800 73,241
Securities available-for-sale 11,831 11,404
Securities held-to-maturity (fair value of $206,269 in 1997
and $203,500 in 1996) 204,870 203,424
Loans, net of unearned discount 526,380 468,786
Allowance for loan losses (4,437) (4,414)
--------- ---------
Loans, net 521,943 464,372
Premises and equipment, net 18,840 17,880
Accrued interest receivable and other assets 8,392 7,954
Intangibles, net 9,489 10,510
--------- ---------
Total assets $ 860,756 $ 824,570
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest-bearing $ 129,243 $ 116,147
NOW accounts 78,660 74,749
Money market accounts 37,086 37,130
Savings 165,341 160,653
Time deposits, $100,000 and over 70,472 63,189
Other time deposits 245,354 238,645
--------- ---------
Total deposits 726,156 690,513
Short-term borrowings 46,207 49,236
Long-term debt 4,817 6,951
Accrued interest and other liabilities 6,631 6,479
--------- ---------
Total liabilities 783,811 753,179
Stockholders' equity
Preferred stock, no par value, authorized 1,000,000 shares; none issued - -
Common stock, par value $10; shares authorized - 5,500,000 in 1997
and 2,750,000 in 1996; shares issued and outstanding -
2,431,804 in 1997 and 1,215,902 in 1996 24,318 12,159
Additional paid-in capital - 8,846
Retained earnings 52,607 50,394
Unrealized gain (loss) on securities available-for-sale, net of taxes 20 (8)
--------- ---------
Total stockholders' equity 76,945 71,391
--------- ---------
Total liabilities and stockholders' equity $ 860,756 $ 824,570
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
11
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 43,556 $ 39,148 $ 38,027
Securities
Taxable 12,504 10,980 9,428
Tax-exempt 1,892 2,016 2,307
Federal funds sold 1,736 2,568 2,800
Deposits in other financial institutions - - 3
-------- -------- --------
Total interest income 59,688 54,712 52,565
INTEREST EXPENSE
Deposits 23,788 21,091 18,222
Short-term borrowings 2,470 2,600 4,210
Long-term debt 508 581 682
-------- -------- --------
Total interest expense 26,766 24,272 23,114
-------- -------- --------
Net interest income 32,922 30,440 29,451
Provision for loan losses 1,118 1,024 1,191
-------- -------- --------
Net interest income after provision for loan losses 31,804 29,416 28,260
NONINTEREST INCOME
Trust fees 1,035 996 832
Service fees 3,534 3,058 2,884
Securities gains, net 13 175 309
Other income 1,317 1,262 1,099
-------- -------- --------
Total noninterest income 5,899 5,491 5,124
NONINTEREST EXPENSE
Salaries and employee benefits 12,562 11,122 10,372
Occupancy expense 1,800 1,799 1,548
Data processing 1,215 1,085 945
Equipment expense 1,449 1,329 1,356
Amortization of intangibles 1,021 1,070 1,070
Other expenses 6,180 5,844 6,128
-------- -------- --------
Total noninterest expense 24,227 22,249 21,419
-------- -------- --------
INCOME BEFORE INCOME TAXES 13,476 12,658 11,965
Income tax expense 4,302 4,137 3,754
-------- -------- --------
NET INCOME $ 9,174 $ 8,521 $ 8,211
-------- -------- --------
-------- -------- --------
Earnings per share (2,431,804 shares outstanding after a 2-for-1
stock split effected in the form of a 100% stock dividend in 1997) $ 3.77 $ 3.50 $ 3.38
-------- -------- --------
-------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
12
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
NET
UNREALIZED
COMMON STOCK GAIN (LOSS)
------------ ADDITIONAL ON SECURITIES
PAR PAID-IN RETAINED AVAILABLE-
SHARES VALUE CAPITAL EARNINGS FOR-SALE TOTAL
--------- --------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 1,215,902 $ 12,159 $ 8,846 $ 40,652 $ - $ 61,657
Net income - - - 8,211 - 8,211
Cash dividends declared-
$1.375 per share (1) - - - (3,344) - (3,344)
Net unrealized
loss on securities
available-for-sale,
net of taxes - - - - (99) (99)
--------- --------- --------- --------- ------------ ---------
Balance, December 31, 1995 1,215,902 12,159 8,846 45,519 (99) 66,425
Net income - - - 8,521 - 8,521
Cash dividends declared-
$1.50 per share (1) - - - (3,646) - (3,646)
Net unrealized
gain on securities
available-for-sale,
net of taxes - - - - 91 91
--------- --------- --------- --------- ------------ ---------
Balance, December 31, 1996 1,215,902 12,159 8,846 50,394 (8) 71,391
Net income - - - 9,174 - 9,174
Cash dividends declared-
$1.50 per share - - - (3,648) - (3,648)
Net unrealized
gain on securities
available-for-sale,
net of taxes - - - - 28 28
2-for-1 stock split effected
in the form of a
100% stock dividend 1,215,902 12,159 (8,846) (3,313) - -
--------- --------- --------- --------- ------------ ---------
Balance, December 31, 1997 2,431,804 $ 24,318 $ - $ 52,607 $ 20 $ 76,945
--------- --------- --------- --------- ------------ ---------
--------- --------- --------- --------- ------------ ---------
</TABLE>
(1) As restated for the 2-for-1 stock split effected in the form of a 100%
stock dividend in 1997
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,174 $ 8,521 $ 8,211
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 1,556 1,321 1,288
Provision for loan losses 1,118 1,024 1,191
Deferred income tax benefit (222) (172) (190)
Amortization of securities premiums, net of accretion (234) (94) 195
Amortization of intangibles 1,021 1,070 1,070
Securities gains, net (13) (175) (309)
Proceeds from sales of loans 20,526 19,482 10,758
Loans originated for sale (20,626) (19,942) (10,650)
Net gains on sales of loans (42) (34) (108)
(Increase) decrease in accrued interest and other assets (438) (267) 2,946
Increase (decrease) in accrued interest and other
liabilities 356 649 (686)
-------- -------- --------
Net cash from operating activities 12,176 11,383 13,716
CASH FLOWS FROM INVESTING ACTIVITIES
Change in federal funds sold 22,441 (31,704) (41,537)
Decrease in interest-bearing deposits in other
financial institutions - - 4,198
Proceeds from maturities of securities held-to-maturity 98,587 85,143 58,051
Proceeds from sale of securities available-for-sale - 1,653 -
Proceeds from maturities of securities available-for-sale 10,100 10,028 -
Purchase of securities available-for-sale (10,486) (998) -
Purchase of securities held-to-maturity (99,781) (107,537) (70,924)
Loans made to customers, net of principal collections (58,547) (36,985) (11,313)
Purchase of premises and equipment (2,516) (3,622) (2,207)
-------- -------- --------
Net cash from investing activities (40,202) (84,022) (63,732)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 35,643 85,376 48,975
Net increase (decrease) in short-term borrowings (3,029) (15,535) 5,157
Principal paid on long-term debt (2,134) (750) (625)
Dividends paid (3,648) (3,646) (3,344)
-------- -------- --------
Net cash from financing activities 26,832 65,445 50,163
-------- -------- --------
Net change in cash and due from banks (1,194) (7,194) 147
CASH AND DUE FROM BANKS
Beginning of year 35,785 42,979 42,832
-------- -------- --------
End of year $ 34,591 $ 35,785 $ 42,979
-------- -------- --------
-------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
First National Bancorp, Inc. (the Company) is a multi-bank holding company
providing financial and other banking services to customers located primarily in
the Will, Grundy, and Kendall Counties, Illinois area. A major portion of loans
are secured by various forms of collateral including real estate, business
assets, consumer property, and other items, although borrower cash flow is
expected to be the primary source of repayment.
The following summarizes the significant accounting policies used in the
preparation of the accompanying consolidated financial statements.
USE OF ESTIMATES: In preparing the financial statements in accordance with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the reported amounts in the financial statements and the disclosures
provided, and future results could differ. The collectibility of loans, fair
values of financial instruments, and status of contingencies are particularly
subject to change. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, First National Bank
of Joliet, Southwest Suburban Bank, Bank of Lockport, and Plano Bancshares, Inc.
Plano Bancshares, Inc. owns 100% of the stock of Community Bank of Plano
(collectively, the Banks). All material intercompany items and transactions
have been eliminated in consolidation.
SECURITIES: Securities are classified as either held-to-maturity or
available-for-sale. Securities classified as held-to-maturity are those debt
securities that the Company has both the intent and ability to hold to maturity
regardless of changes in market conditions, liquidity needs, or changes in
general economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the interest
method over their contractual lives.
Securities classified as available-for-sale are those securities that the
Company intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available-for-sale
would be based on various factors, including significant movements in interest
rates, changes in the maturity mix of the Company's assets and liabilities,
liquidity needs, regulatory capital considerations, and other similar factors.
Securities available-for-sale are carried at fair value. Unrealized gains or
losses are reported as increases or decreases in stockholders' equity, net of
the related deferred income tax effect.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest income includes amortization of purchase
premiums and discounts.
LOANS AND ALLOWANCE FOR LOAN LOSSES: Loans are reported at their unpaid
principal outstanding, net of unearned discount, deferred loan fees, and the
allowance for loan losses. Interest on loans is calculated primarily by using
the simple interest method on daily balances of the principal amount
outstanding. Nonrefundable loan fees, net of related origination costs, are
initially deferred with the resulting deferred income recognized over the term
of the related loan as an adjustment to the yield.
Real estate loans held for sale are carried at the lower of cost or fair value
in the aggregate. Declines in fair value are charged to a valuation allowance.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. This
evaluation also takes into consideration such factors as changes in the nature
and volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrower's
ability to pay. While management uses the best information available to make
its evaluation, future adjustments to the allowance may be necessary if there
are significant changes in economic conditions.
15
<PAGE>
The Company adopted Financial Accounting Standards Board (FASB) Statement 114,
"Accounting by Creditors for Impairment of a Loan", as amended by Statement 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures", on January 1, 1995. Loans are considered impaired when, based on
current information and events, it is probable that the Company will not be able
to collect all amounts due according to the contractual terms of the loan
agreement. Under these statements, the impairment is measured based on the
present value of expected future cash flows or, alternatively, the observable
market price of the loans or the fair value of the collateral. However, for
those loans that are collateral dependent and for which management has
determined foreclosure is probable, the measure of impairment is based on the
fair value of the collateral.
For impaired loans and other loans, accrual of interest is discontinued on a
loan when management believes, after considering collection efforts and other
factors, that the borrower's financial condition is such that collection of
interest is doubtful. Cash collections on impaired loans are credited to the
loan receivable balance, and no interest income is recognized on those loans
until the principal balance has been collected.
PREMISES AND EQUIPMENT: Asset cost is reported net of accumulated depreciation.
Depreciation expense is calculated primarily on the straight-line method for
premises and 150% declining-balance method for equipment over the following
estimated useful lives of the assets.
<TABLE>
<CAPTION>
In Years
--------
<S> <C>
Land improvements 5-15
Buildings 15-40
Equipment 3-10
</TABLE>
INTANGIBLES: The portion of the purchase price of subsidiary banks which
represents the value assigned to the existing deposit base for which the annual
interest and servicing costs are below market rates (core deposit intangibles)
is being amortized on the straight-line method over five to ten years. The
excess of cost over fair value of net assets acquired (goodwill) in the purchase
of subsidiary banks is being amortized on the straight-line method over fifteen
and twenty years.
EMPLOYEE BENEFITS: The Company has a pension plan covering all full-time
employees of its subsidiary banks who have completed one year of service and
meet specific age requirements. The Company's funding policy is to make the
minimum annual contribution that is required by applicable regulations, plus
such amounts as the Company may determine to be appropriate.
The Company also has a defined contribution 401(k) plan. Substantially all the
Company's employees are covered under the 401(k) plan. Participants make tax
deferred contributions. The Company makes matching contributions equal to 50%
of each participant's contribution up to the first 6% of compensation that is
deferred.
INCOME TAXES: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
EARNINGS PER SHARE: Earnings per share are calculated on the basis of the
weighted average number of shares outstanding. Earnings per share in 1996 and
1995 have been restated to reflect the 2-for-1 stock split effected in the form
of a 100% stock dividend in 1997.
PRESENTATION OF CASH FLOWS: Cash flows from interest-bearing deposits in other
financial institutions, loans, federal funds sold, short-term borrowings, and
all customer deposit accounts are shown net.
SERVICING RIGHTS: The Company has not purchased rights to service loans for
others. Servicing rights resulting from the origination and sale of loans with
servicing retained are not material and have not been recorded by the Company.
Therefore, the effect of FASB Statement 122, "Accounting for Mortgage Servicing
Rights," effective for loan sales after December 31, 1995, has been immaterial.
16
<PAGE>
NOTE 2 - SECURITIES
The amortized cost and fair value of securities available-for-sale at year-end
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1997
U.S. Treasury $ 7,997 $ 41 $ (9) $ 8,029
U.S. government agencies 3,501 2 (1) 3,502
Other 300 - - 300
-------- -------- ------- --------
$ 11,798 $ 43 $ (10) $ 11,831
-------- -------- ------- --------
-------- -------- ------- --------
1996
U.S. Treasury $ 9,317 $ 24 $ (33) $ 9,308
U.S. government agencies 1,800 - (4) 1,796
Other 300 - - 300
-------- -------- ------- --------
$ 11,417 $ 24 $ (37) $ 11,404
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>
The amortized cost and fair value of securities held-to-maturity at year-end are
as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1997
U.S. Treasury $ 24,509 $ 156 $ (44) $ 24,621
U.S. government agencies 147,373 444 (189) 147,628
State and political subdivisions 32,988 1,037 (5) 34,020
-------- -------- ------- --------
$204,870 $ 1,637 $ (238) $206,269
-------- -------- ------- --------
-------- -------- ------- --------
1996
U.S. Treasury $ 40,194 $ 93 $ (155) $ 40,132
U.S. government agencies 127,472 177 (1,012) 126,637
State and political subdivisions 35,758 1,038 (65) 36,731
-------- -------- ------- --------
$203,424 $ 1,308 $(1,232) $203,500
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>
The amortized cost and fair value of securities as of December 31, 1997, by
earliest contractual maturity date, are shown below. Actual maturities may
differ from the maturities presented because borrowers may exercise rights to
call or prepay their obligations.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Due in 1 year or less $ 2,008 $ 1,998 $ 36,938 $ 35,875
Due after 1 through 5 years 9,490 9,533 129,787 131,891
Due after 5 through 10 years - - 37,103 37,426
Due after 10 years 300 300 1,042 1,077
-------- -------- -------- --------
$ 11,798 $ 11,831 $204,870 $206,269
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
17
<PAGE>
Securities with a carrying value of approximately $150,000,000 and $133,000,000
at December 31, 1997 and 1996 were pledged to secure public deposits, securities
sold under agreements to repurchase, and for other purposes required or
permitted by law.
No securities were sold in 1997 or 1995. Proceeds from the sales of securities
available-for-sale in 1996 were $1,653,000, resulting in gross losses of
$97,000. Securities called before their contractual maturity date resulted in
gains of $13,000, $272,000, and $309,000 in 1997, 1996, and 1995, respectively.
NOTE 3 - LOANS
The subsidiary banks make loans to both individuals and commercial entities in a
wide variety of industries. Loan terms vary as to interest rate, repayment
period, and collateral requirements based on the type of loan requested and the
credit worthiness of the prospective borrower. Credit risk tends to be
geographically concentrated in that the majority of the loan customers are
located in the markets served by the subsidiary banks.
Loans at year-end are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Commercial $ 90,009 $ 81,981
Commercial real estate 91,334 76,354
Construction 14,106 16,810
Agricultural 10,769 8,692
Residential real estate 147,625 141,440
Consumer 172,695 144,162
-------- --------
Total loans 526,538 469,439
Unearned discount (158) (653)
-------- --------
Loans, net of unearned discount 526,380 468,786
Allowance for loan losses (4,437) (4,414)
-------- --------
$521,943 $464,372
-------- --------
-------- --------
</TABLE>
Included in residential real estate loans are loans held for sale totaling
$602,000 and $460,000 at December 31, 1997 and 1996. The carrying value of
loans held for sale approximated fair value at December 31, 1997 and 1996.
Impaired loans are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Average balance of impaired loans during the year $ 695 $ 747 $ -
Impaired loans at year-end 876 580 -
Allowance for loan losses allocated to impaired
loans at year-end 224 147 -
</TABLE>
A portion of the allowance for loan losses has been allocated to each impaired
loan. Interest income recognized on impaired loans was immaterial in 1997. No
income was recognized on impaired loans in 1996 or 1995.
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $ 4,414 $ 3,931 $ 3,082
Provision charged to operations 1,118 1,024 1,191
Loans charged-off (1,300) (700) (646)
Recoveries 205 159 304
-------- -------- --------
Balance, end of year $ 4,437 $ 4,414 $ 3,931
-------- -------- --------
-------- -------- --------
</TABLE>
18
<PAGE>
Certain executive officers and directors and companies in which they have
management or beneficial ownership are loan customers of the Banks. These loans
have similar terms to other customer loans. An analysis of the aggregate
changes in these loans, which individually exceed $60,000 follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Total loans at beginning of year $ 5,358 $ 4,968
New loans 3,280 7,448
Repayments (3,204) (7,058)
-------- --------
Total loans at end of year $ 5,434 $ 5,358
-------- --------
-------- --------
</TABLE>
NOTE 4 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at
year-end.
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land and land improvements $ 5,024 $ 4,747
Buildings 14,747 14,515
Equipment 11,336 9,340
------- -------
31,107 28,602
Accumulated depreciation (12,267) (10,722)
------- -------
$18,840 $17,880
------- -------
------- -------
</TABLE>
NOTE 5 - INTANGIBLES
Intangible assets consist of goodwill, net of accumulated amortization, of
$6,880,000 and $7,503,000 as of December 31, 1997 and 1996, respectively, and
core deposit intangibles, net of accumulated amortization, of $2,609,000 and
$3,007,000 as of December 31, 1997 and 1996, respectively.
NOTE 6 - EMPLOYEE BENEFIT PLANS
The amount charged to expense for the Company's pension plan consisted of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost $ 394 $ 336 $ 272
Interest cost on projected benefit obligation 457 377 341
Actual return on plan assets (828) (590) (621)
Net amortization and deferral 444 236 322
-------- -------- --------
Pension expense $ 467 $ 359 $ 314
-------- -------- --------
-------- -------- --------
</TABLE>
19
<PAGE>
The following table sets forth the plan's funding status as of October 31, 1997
and 1996 and the amount recognized in the accompanying consolidated balance
sheets as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefits $ (4,235) $ (3,297)
-------- --------
-------- --------
Accumulated benefits $ (4,349) $ (3,390)
-------- --------
-------- --------
Projected benefit obligation $ (7,178) $ (5,396)
Plan assets at fair value 5,855 5,034
-------- --------
Plan assets (less than) projected benefit obligation (1,323) (362)
Unrecognized net loss 1,571 811
Unrecognized prior service cost (16) (18)
Unrecognized net transition asset (529) (561)
-------- --------
Accrued pension liability $ (297) $ (130)
-------- --------
-------- --------
</TABLE>
Assumptions used by the Company in the determination of pension plan information
consisted of the following as of October 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Discount rate 7.00% 7.75%
Rate of increase in compensation levels 4.50% 4.50%
Expected long-term rate of return on plan assets 8.00% 8.00%
</TABLE>
The actuarially determined obligation amounts for the pension plan in 1997 also
reflects change in assumptions with respect to lump sum payments.
Plan assets consist primarily of investments in common stocks and U.S.
government securities. Plan assets include common stock of the Company with a
market value of $950,000 and $777,000 at October 31, 1997 and 1996.
In January 1998, the Board of Directors approved the formation of a new employee
retirement plan, with contributions to the new plan to be funded with Company
common stock. Also in January 1998, the Board approved the process of
terminating the pension plan. No credit will be given for participant service
after January 31, 1998.
Contributions by the Banks to the 401(k) plan for the years ended December 31,
1997, 1996, and 1995 were $299,000, $266,000, and $255,000, respectively.
NOTE 7 - DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
1998 $ 280,041
1999 20,634
2000 8,053
2001 3,797
2002 3,301
---------
$ 315,826
---------
---------
</TABLE>
20
<PAGE>
NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings consist of securities sold under agreements to repurchase,
federal funds purchased, and U.S. Treasury demand note accounts. These
short-term borrowings are financing arrangements. Physical control is
maintained for securities sold under repurchase agreements.
Information concerning short-term borrowings follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
End of year
Outstanding balance $ 46,207 $ 49,236 $ 64,771
Weighted average interest rate 5.28% 5.25% 5.40%
During the year
Average outstanding balance $ 45,276 $ 51,993 $ 74,552
Maximum outstanding balance 54,899 64,771 92,986
Weighted average interest rate 5.46% 5.00% 5.65%
Securities underlying the agreements at December 31, 1997:
<CAPTION>
<S> <C>
Carrying value $ 77,529
Estimated fair value 76,584
</TABLE>
At December 31, 1997, the Company had unused lines of credit to purchase federal
funds from other banks totaling $40 million.
NOTE 9 - LONG-TERM DEBT
The Company has a term note payable to another financial institution of
$2,300,000 which accrues interest at the London Interbank Offered Rate plus 175
basis points (approximately 7.3% at December 31, 1997) and requires quarterly
principal payments of $125,000 plus interest until October 1999, when the
remaining principal is due. The note is unsecured.
The Company has debentures payable of $2,517,000 to certain former stockholders
of Plano Bancshares, Inc. The debentures require semi-annual interest payments
at the national prime interest rate (8.5% at December 31, 1997) and require that
one-half of the outstanding principal be paid annually in 1998 and 1999. The
debentures are unsecured.
Aggregate maturities of the notes and debentures payable are due as follows:
<TABLE>
<CAPTION>
Year Ending Note Debentures
December 31, Payable Payable
---------- ----------
<S> <C> <C>
1998 $ 500 $ 1,259
1999 1,800 1,258
---------- ----------
$ 2,300 $ 2,517
---------- ----------
---------- ----------
</TABLE>
21
<PAGE>
NOTE 10 - INCOME TAXES
Net deferred tax liabilities consist of the following components at year-end.
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets
Securities available-for-sale $ - $ 5
Allowance for loan losses 1,763 1,727
Other items, net 118 138
--------- ---------
1,881 1,870
Deferred tax liabilities
Securities available-for-sale (13) -
Premises and equipment (958) (1,008)
Intangibles (954) (1,103)
Purchase accounting adjustments and other items, net (357) (364)
--------- ---------
(2,282) (2,475)
--------- ---------
Net deferred tax liabilities $ (401) $ (605)
--------- ---------
--------- ---------
</TABLE>
Net deferred tax liabilities of $401,000 and $605,000 at December 31, 1997 and
1996 are included in accrued interest and other liabilities. No valuation
allowance was considered necessary for deferred tax assets.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Currently payable tax
Federal $ 4,379 $ 4,065 $ 3,622
State 145 244 322
Deferred tax benefit (222) (172) (190)
--------- --------- ---------
Income tax expense $ 4,302 $ 4,137 $ 3,754
--------- --------- ---------
--------- --------- ---------
</TABLE>
The reconciliation of the statutory income tax to income tax expense included in
the consolidated statements of income follows:
<TABLE>
<CAPTION>
1 9 9 7 1 9 9 6 1 9 9 5
----------------- ----------------- -----------------
Amount % Amount % Amount %
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rate $ 4,717 35.0% $ 4,430 35.0% $ 4,188 35.0%
Increase (decrease)
resulting from
State income taxes,
net of federal
income tax benefit 71 .5 139 1.1 199 1.7
Tax-exempt income (707) (5.3) (728) (5.8) (828) (6.9)
Goodwill amortization 218 1.6 218 1.7 195 1.6
Nondeductible
interest expense 80 .6 79 .7 84 .7
Other items, net (77) (.5) (1) - (84) (.7)
------- ----- ------- ----- ------- -----
Income tax expense $ 4,302 31.9% $ 4,137 32.7% $ 3,754 31.4%
------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- -----
</TABLE>
22
<PAGE>
NOTE 11 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
At December 31, 1997, reserves of approximately $11,361,000 were required as
deposits with the Federal Reserve Bank or as cash on hand. These reserves do
not earn interest.
The Banks are parties to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of their customers.
These financial instruments include commitments to extend credit and standby
letters of credit, which to varying degrees, involve elements of credit risk and
interest rate risk in excess of the amount recognized in the balance sheet.
The Banks' exposure to credit loss in the event of nonperformance by the
customer on commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The Banks use the
same credit policies in making commitments and conditional obligations as for
on-balance-sheet instruments.
A summary of the contract amounts of the Banks' exposure to off-balance-sheet
risk at year-end follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Loan commitments, including unused lines of credit $ 87,612 $ 96,059
Standby letters of credit 16,629 19,417
</TABLE>
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 begin drawn upon, the commitment amounts do not necessarily represent
future cash requirements. The Banks evaluate each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained is based on
management's credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan commitments to customers. Most of the Bank's standby letters
of credit are expected to expire without being drawn upon.
NOTE 12 - PREFERRED STOCK PURCHASE RIGHTS
Pursuant to a Rights Agreement dated November 14, 1996, there is attached to
each share of common stock of the Company one preferred stock purchase right
(Right). Each Right entitles the holder to buy from the Company one
one-thousandth of a share of preferred stock at an exercise price of $150,
subject to adjustment.
The Rights will expire on November 14, 2006 unless redeemed earlier and will not
be exercisable or transferable separately from the shares of common stock to
which they are attached until the earlier of (i) ten days following a public
announcement that a person or group of affiliated or associated persons (an
Acquiring Person) has acquired beneficial ownership of 10% or more of the then
outstanding shares of common stock of the Company (the Stock Acquisition Date)
or (ii) ten business days following a public announcement or the commencement of
a tender offer or exchange offer that would result in the offeror beneficially
owning 10% or more of the outstanding shares of common stock of the Company.
In the event that any party becomes an Acquiring Person (a Flip-In Event), each
holder of a Right, other than Rights beneficially owned by an Acquiring Person
(which Rights will be void), will thereafter have the right to acquire shares of
common stock at 50% of their current per share market price.
In the event that, at any time following a Flip-In Event, (i) the Company is
acquired in a merger or other business combination transaction or (ii) 50% or
more of the Company's assets or earning power is sold or transferred, each
holder of a Right (except Rights which have become void as set forth previously)
will thereafter have the right to acquire, upon exercise, shares of common stock
of the acquiring company at 50% of their current per share market price.
23
<PAGE>
The Board of Directors of the Company may authorize the redemption of the
Rights, at $ .01 per Right, at any time prior to a Flip-In Event. After a
Flip-In Event, the Company may exchange outstanding Rights for common stock at a
ratio of one share of common stock (or the equivalent value of preferred stock)
per Right. The Company cannot, however, exchange Rights for common stock after
an Acquiring Person becomes the beneficial owner of 50% or more of the Company's
common stock.
The Rights Agreement provides for adjustments in the event of such items as
stock splits, dividends, options, reclassifications, etc.
Until a Right is properly exercised, the holder thereof will have no rights as a
holder of the underlying preferred stock.
NOTE 13 - REGULATORY MATTERS
The Banks are limited in the amount of dividends that can be paid without prior
approval of the banking regulatory agencies. As of December 31, 1997, the Banks
could pay dividends to the Company of approximately $8,759,000 without obtaining
prior approval of the bank regulatory agencies.
The Company and the Banks are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital to Risk-
Weighted Assets Tier 1 Capital
Total Tier 1 to Average Assets
<S> <C> <C> <C>
Well capitalized 10% 6% 5%
Adequately capitalized 8% 4% 4%
Undercapitalized 6% 3% 3%
</TABLE>
24
<PAGE>
For the Company and the Banks, Tier I capital consists of stockholders' equity
(excluding unrealized gains and losses on securities available-for-sale), less
intangible assets and related deferred taxes. Total capital consists of Tier I
capital plus the allowance for loan losses. At December 31, 1997, consolidated
actual capital levels and minimum required levels for the consolidated Company
and the First National Bank of Joliet were:
<TABLE>
<CAPTION>
Minimum Amount
Required to be
Minimum Amount Well Capitalized
Actual Required for Capital Under Prompt Corrective
Ratio Amount Adequacy Purposes Action Regulations
<S> <C> <C> <C> <C>
Total capital (to risk-
weighted assets)
Consolidated 12.87% $ 72,908 $ 45,324 $ 56,656
First National Bank of Joliet 13.50% $ 57,480 $ 34,053 $ 42,567
Tier I capital (to risk-
weighted assets)
Consolidated 12.09% $ 68,471 $ 22,662 $ 33,993
First National Bank of Joliet 12.71% $ 54,089 $ 17,027 $ 25,540
Tier I capital (to average assets)
Consolidated 8.01% $ 68,471 $ 34,185 $ 42,732
First National Bank of Joliet 8.57% $ 54,089 $ 25,249 $ 31,562
</TABLE>
At December 31, 1997 and 1996, the Company and all of the Banks were categorized
as well capitalized per the banking regulations described above. There are no
conditions or events since that notification that management believes have
changed the Company and all of the Bank's categorization.
Actual capital ratios at year-end are summarized below:
<TABLE>
<CAPTION>
Consolidated First National
Company Bank of Joliet
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Total capital to risk-weighted assets 12.87% 13.07% 13.50% 13.99%
Tier I capital to risk-weighted assets 12.09 12.20 12.71 13.15
Tier I capital to average assets 8.01 7.66 8.57 8.49
</TABLE>
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISKS
The carrying amount and estimated fair value of financial instruments as of
December 31, follow:
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 34,591 $ 34,591 $ 35,785 $ 35,785
Federal funds sold 50,800 50,800 73,241 73,241
Securities available-for-sale 11,831 11,831 11,404 11,404
Securities held-to-maturity 204,870 206,269 203,424 203,500
Loans 521,943 526,252 464,372 468,079
Accrued interest receivable 7,729 7,729 6,692 6,692
Financial liabilities
Deposits 726,156 727,509 690,513 691,432
Short-term borrowings 46,207 46,207 49,236 49,236
Long-term debt 4,817 4,817 6,951 6,951
Accrued interest payable 4,206 4,206 4,136 4,136
</TABLE>
25
<PAGE>
FASB Statement 107, "Disclosures About Fair Value of Financial Instruments",
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, may not be realized in immediate
settlement of the instrument. Statement 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented above do not represent
the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating the
fair value of its financial instruments:
CASH, DUE FROM BANKS AND FEDERAL FUNDS SOLD: The carrying amounts reported in
the consolidated balance sheet for cash, due from banks and federal funds sold
approximate their fair values.
SECURITIES: Fair values for securities are based on quoted market prices, where
available. If quoted prices are not available, fair values are based on quoted
market prices of comparable instruments.
LOANS: Most commercial loans, and some real estate mortgage loans, are made on
a variable rate basis. For those variable-rate loans that reprice frequently,
and with no significant change in credit risk, fair values are based on carrying
values. The fair values for fixed rate and all other loans are estimated using
discounted cash flow analyses, applying the interest rates currently offered to
borrowers for loans of similar credit quality and comparable payment terms.
ACCRUED INTEREST: The carrying amount of accrued interest receivable and
payable approximate their fair value.
DEPOSIT LIABILITIES: The fair values disclosed for non-interest-bearing demand,
NOW, savings, and money market deposits equal their carrying amounts which
represent the amount payable on demand. Fair values for time deposits are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregate expected
maturities on time deposits.
SHORT-TERM BORROWINGS: The carrying amounts of securities sold under agreements
to repurchase and other short-term borrowings approximate their fair values.
LONG-TERM DEBT: The fair value of long-term debt is equal to the outstanding
principal amount because the interest rate is variable based on current interest
rates and on the expected ability of the Company to borrow additional funds at
the same rate and terms of the present existing debt.
LOAN COMMITMENTS AND LETTERS OF CREDIT: The fair values of loan commitments and
letters of credit are not material.
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed appropriate to manage interest rate risk. However,
borrowers with fixed rate obligations are more likely to prepay in a falling
rate environment and less likely to prepay in a rising rate environment.
Conversely, depositors who are receiving fixed rates are more likely to withdraw
funds before maturity in a rising rate environment and less likely to do so in a
falling rate environment. Management monitors rates and maturities of assets
and liabilities and attempts to manage interest rate risk by adjusting terms of
new loans and deposits and by investing in securities with terms that mitigate
the Company's overall interest rate risk.
26
<PAGE>
NOTE 15 - CASH FLOW INFORMATION
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash payments for
Interest $ 26,696 $ 23,515 $ 21,796
Income taxes 4,688 4,447 4,091
Supplemental schedule of noncash investing and
financing activities
Transfer of securities held-to-maturity to
securities available-for-sale - - 17,487
Other real estate acquired in settlement of loans - - 1,123
</TABLE>
NOTE 16 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements of First National Bancorp, Inc. (parent
company only) are presented below:
BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Cash $ 48 $ 444
Investments in subsidiaries 81,907 78,244
Land 106 106
Other assets 40 36
Total assets $ 82,101 $ 78,830
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Long-term debt $ 4,817 $ 6,951
Other liabilities 339 488
Stockholders' equity 76,945 71,391
Total liabilities and stockholders' equity $ 82,101 $ 78,830
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Dividends from subsidiaries $ 6,222 $ 5,183 $ 4,649
Interest and other expenses 1,132 1,070 1,126
Income before income taxes and equity
in undistributed net income of subsidiaries 5,090 4,113 3,523
Income tax benefit 449 379 436
Income before equity in undistributed net
income of subsidiaries 5,539 4,492 3,959
Equity in undistributed net income of subsidiaries 3,635 4,029 4,252
Net income $ 9,174 $ 8,521 $ 8,211
</TABLE>
27
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 9,174 $ 8,521 $ 8,211
Adjustments to reconcile net income to net
cash provided by operating activities
Undistributed earnings of subsidiaries (3,635) (4,029) (4,252)
Change in other assets and other liabilities (153) 57 (14)
Net cash from operating activities 5,386 4,549 3,945
Cash flows from financing activities
Principal payments on long-term debt (2,134) (750) (625)
Cash dividends paid (3,648) (3,646) (3,344)
Net cash from financing activities (5,782) (4,396) (3,969)
Net change in cash (396) 153 (24)
Cash
Beginning of year 444 291 315
End of year $ 48 $ 444 $ 291
</TABLE>
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended December 31, 1996
Three Months Ended Three Months Ended
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $ 8,483 $ 8,397 $ 8,231 $ 7,811 $ 7,921 $ 7,779 $ 7,527 $ 7,213
Provision for loan losses 459 229 228 202 208 209 300 307
Noninterest income 1,538 1,504 1,443 1,414 1,432 1,339 1,280 1,440
Noninterest expense 7,275 5,998 5,582 5,372 6,508 5,572 5,248 4,921
Income before income
taxes 2,287 3,674 3,864 3,651 2,637 3,337 3,259 3,425
Income tax expense 679 1,194 1,229 1,200 851 1,073 1,069 1,144
Net income $ 1,608 $ 2,480 $ 2,635 $ 2,451 $ 1,786 $ 2,264 $ 2,190 $ 2,281
Earnings per share (1) $ .66 $ 1.02 $ 1.08 $ 1.01 $ .73 $ .93 $ .90 $ .94
Average common
shares outstanding (1) 2,431,804 2,431,804 2,431,804 2,431,804 2,431,804 2,431,804 2,431,804 2,431,804
</TABLE>
(1) Earnings per share and average common shares outstanding in 1996 have been
restated to reflect the 2-for-1 stock split effected in the form of a 100% stock
dividend in 1997.
28
<PAGE>
[LOGO]
78 North Chicago Street, Joliet
Scott & Jefferson, Joliet
Midland & Campbell, Joliet
Black & Essington, Joliet
1590 N. Larkin, Joliet
191 S. Larkin, Joliet
207 W. Mondamin, Minooka
Rte. 52 & Brookshore, Shorewood
23841 W. Eames, (Inside Frank's), Channahon
24745 W. Eames, (Rte. 6), Channahon
626 Townhall Drive, Romeoville
[LOGO]
826 East Ninth Street, Lockport
159th Street & Cedar Road, Homer Township
[LOGO]
2005 West Route 34, Plano
[LOGO]
225 Lily Cache Lane, Bolingbrook
Members FDIC [LOGO]
<PAGE>
FIRST NATIONAL BANCORP, INC.
78 NORTH CHICAGO STREET
JOLIET, ILLINOIS 60432
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
State of Percent of Capital Stock
Name of Subsidiary Incorporation Owned at December 31, 1997
------------------ ------------- --------------------------
<S> <C> <C>
First National Bank of Joliet Illinois 100%
Southwest Suburban Bank Illinois 100%
Bank of Lockport Illinois 100%
Community Bank of Plano Illinois 100%
</TABLE>
19
