<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Washington, D. C. 20549
(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, 1998
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)
<TABLE>
<S> <C>
Illinois 31-1182986
- ------------------------------------------------------- -----------------------------------------------------
(State of Incorporation) (IRS Employer Identification No.)
78 North Chicago Street, Joliet, Illinois 60432
- ------------------------------------------------------- -----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (815) 726-4371
-----------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------------------------------------------- -----------------------------------------------------
Common Stock, $10.00 par value None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: Common
---------------------
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 __
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 9,
1999 was $175,481,610. Based on the last reported price of an actual transaction
in registrant's Common Stock on March 9, 1999, 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 9, 1999 there were 2,420,436 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 11, 1999, 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 1998 annual
and financial reports to stockholders to the extent indicated herein.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
PART I
ITEM 1. Business....................................................... 1
ITEM 2. Properties..................................................... 7
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.................... 8
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure Matters.................... 9
PART III
ITEM 10. Directors and Executive Officers of the Registrant............. 9
ITEM 11. Executive Compensation......................................... 9
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 9
ITEM 13. Certain Relationships and Related Transactions................. 9
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................... 9
SIGNATURES ............................................................... 12
</TABLE>
<PAGE>
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" or the
"Bank") 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.
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 was 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 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 was 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 was accounted for
as a purchase. On March 14, 1998, SWSB, BOL and Plano merged into FNB.
The Company has no employees and conducts no active business except through its
banking subsidiary. The only significant asset of the Company is its stock
ownership of the Bank.
SUBSIDIARY DESCRIPTION
The Bank is a commercial, national FDIC insured bank with its main office
located at 78 North Chicago Street, Joliet, Illinois 60432. The Bank is located
approximately 45 miles southwest of Chicago and has Joliet and the western
portion of Will County as its primary service area. The Bank was organized as a
national banking organization on June 6, 1933, and currently has 14 branches in
addition to the main bank location.
Approximately 85% of the Bank's 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
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 Bank's loan growth in the last
three years. In particular, commercial and consumer loan volumes have all been
positively affected by these economic conditions with increases of 44% and 46%,
respectively in the three years ending December 31, 1998.
COMPETITION
Active competition exists in all services offered by the Bank, 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.
1
<PAGE>
BANK LOANS
The Bank's loan portfolio consists 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 which meets twice each week.
BANK DEPOSITS
No material portion of the Bank's 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 Company nor its subsidiary, the Bank, 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, 1998, the Bank had 285 full-time and 142 part-time employees.
SERVICES
The Bank offers varied savings and certificate of deposit options, commercial
lending and 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 the Office of the Comptroller of the Currency
(the "OCC"), the Board of Governors of the Federal Reserve System (the "Federal
Reserve"), the Federal Deposit Insurance Corporation (the "FDIC"), the Internal
Revenue Service and state taxing authorities and the Securities and Exchange
Commission (the "SEC"). The effect of applicable statutes, regulations and
regulatory 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.
2
<PAGE>
The following is a summary of the material elements of the regulatory
framework that applies to the Company and the Bank. It does not describe all of
the statutes, regulations and regulatory policies that apply to the Company and
the Bank, nor does it restate all of the requirements of the statutes,
regulations and regulatory policies that are described. As such, the following
is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of the Company
and the Bank.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION. Legislation has been introduced 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 banking subsidiaries remain
well-capitalized and well-managed. 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 Company and the
Bank.
THE COMPANY
GENERAL. The Company, as the sole shareholder of the Bank, is a bank holding
company. As a bank holding company, the Company is registered with, and is
subject to regulation by, the Federal Reserve under the Bank Holding Company
Act, as amended (the "BHCA"). In accordance with Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances where the Company might
not otherwise do so. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve. The Company is also required to file with
the Federal Reserve periodic reports of the Company's operations and such
additional information regarding the Company and its subsidiaries as the Federal
Reserve may require.
INVESTMENTS AND ACTIVITIES. Under the BHCA, a bank holding company must obtain
Federal Reserve approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after the acquisition, it would own or control more than 5% of the
shares of the other bank or bank holding company (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 Federal Reserve 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 Federal Reserve 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) and state laws 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 generally prohibits 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. This general prohibition is subject to a number of exceptions. The
principal exception allows bank holding companies to engage in, and to own
shares of companies engaged in, certain businesses found by the Federal Reserve
to be "so closely related to banking ... as to be a proper incident thereto."
Under current regulations of the Federal Reserve, the Company and its non-bank
subsidiaries are permitted to engage in a variety of banking-related businesses,
including 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.
3
<PAGE>
Federal law also prohibits any person or company from acquiring "control" of a
bank or a bank holding company without prior notice to the appropriate federal
bank regulator. "Control" is defined in certain cases as the 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 Federal Reserve 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 Federal Reserve'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 a minimum requirement of 4% 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).
Total capital consists primarily of 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.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve'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, 1998, the Company had regulatory capital in excess of the
Federal Reserve's minimum requirements, with a risk-based capital ratio of
13.43% and a leverage ratio of 8.43%.
DIVIDENDS. The Illinois Business Corporation Act, as amended, prohibits the
Company from paying a dividend if, after giving effect to the dividend: (i) the
Company would be insolvent; or (ii) the net assets of the Company would be less
than zero; or (iii) the net assets of the Company would be less than the maximum
amount then payable to shareholders of the Company who would have preferential
distribution rights if the Company were liquidated. Additionally, the Federal
Reserve has issued a policy statement with regard to the payment of cash
dividends by bank holding companies. The policy statement provides 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. The Federal Reserve also 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.
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.
THE BANK
GENERAL. The Bank is a national bank, chartered by the OCC under the National
Bank Act. The deposit accounts of the Bank are insured by the FDIC's Bank
Insurance Fund ("BIF"), and the Bank is a member of the Federal Reserve System.
As a BIF-insured national bank, the Bank is subject to the examination,
supervision, reporting
4
<PAGE>
and enforcement requirements of the OCC, as the chartering authority for
national banks, and the FDIC, as administrator of the BIF.
DEPOSIT INSURANCE. As an FDIC-insured institution, the Bank is 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 semi-annual assessment period.
During the year ended December 31, 1998, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 1999, 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 (i)
has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe
or unsound condition to continue operations or (iii) 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 the Bank.
FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance assessments
paid by members of the FDIC's Savings Association Insurance Fund ("SAIF") has
been used to cover interest payments due on the outstanding obligations of the
Financing Corporation ("FICO"). FICO was created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance Corporation, the
SAIF's predecessor insurance fund. As a result of federal legislation enacted in
1996, beginning as of January 1, 1997, both SAIF members and BIF members became
subject to assessments to cover the interest payments on outstanding FICO
obligations. These 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 final 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, 1998, the FICO assessment rate for SAIF members ranged
between approximately 0.061% of deposits and approximately 0.063% of deposits,
while the FICO assessment rate for BIF members ranged between approximately
0.012% of deposits and approximately 0.013% of deposits. During the year ended
December 31, 1998, the Bank paid FICO assessments totaling $86,000.
SUPERVISORY ASSESSMENTS. All national banks are required to pay supervisory
assessments to the OCC to fund the operations of the OCC. The amount of the
assessment is calculated using a formula which takes into account the bank's
size and its supervisory condition (as determined by the composite rating
assigned to the bank as a result of its most recent OCC examination). During the
year ended December 31, 1998 the Bank paid supervisory assessments to the OCC
totaling $ 163,000.
CAPITAL REQUIREMENTS. The OCC has established the following minimum capital
standards for national banks, such as the Bank: a leverage requirement
consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the
most highly-rated banks with a minimum requirement of at least 4% 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 components as Tier 1 capital
and total capital under the Federal Reserve's capital guidelines for bank
holding companies (SEE "--The Company--Capital Requirements").
5
<PAGE>
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, the regulations of the
OCC 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, 1998, the Bank was not required by the OCC to
increase its capital to an amount in excess of the minimum regulatory
requirement. As of December 31, 1998, the Bank exceeded its minimum regulatory
capital requirements with a leverage ratio of 8.67% and a risk-based capital
ratio of 13.78%.
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," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a capital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired; restricting transactions between the
institution and its 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. As of December 31, 1998, the Bank was well capitalized, as defined
by OCC regulations.
DIVIDENDS. The National Bank Act imposes limitations on the amount of dividends
that may be paid by a national bank, such as the Bank. Generally, a national
bank may pay dividends out of its undivided profits, in such amounts and at such
times as the bank 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
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, the Bank exceeded
its minimum capital requirements under applicable guidelines as of December 31,
1998. As of December 31, 1998, approximately $6.7 million was available to be
paid as dividends to the Company by the Bank. Notwithstanding the availability
of funds for dividends, however, the OCC may prohibit the payment of any
dividends by the Bank if the OCC determines such payment would constitute an
unsafe or unsound practice.
INSIDER TRANSACTIONS. The Bank is subject to certain restrictions imposed by
federal law on extensions of credit to the Company, on investments in the stock
or other securities of the Company and the acceptance of stock or other
securities of the Company as collateral for loans. Certain limitations and
reporting requirements are also placed on extensions of credit by the Bank to
its directors and officers, to directors and officers of the Company, 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 a principal stockholder of the Company may obtain
credit from banks with which the Bank 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 addition, in October 1998, the federal banking regulators issued
safety and
6
<PAGE>
soundness standards for achieving Year 2000 compliance, including standards for
developing and managing Year 2000 project plans, testing remediation efforts and
planning for contingencies.
In general, the safety and soundness 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. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
BRANCHING AUTHORITY. National banks headquartered in Illinois, such as the Bank,
have the same branching rights in Illinois as banks chartered under Illinois
law. Illinois law grants Illinois-chartered banks the authority to establish
branches anywhere in the State of Illinois, subject to receipt of all required
regulatory approvals.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("the Riegle-Neal Act"), both state and national banks are allowed 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 new 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
allowed 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 involving an Illinois bank that has been in existence and continuous
operation for fewer than five years.
FEDERAL RESERVE SYSTEM. Federal Reserve regulations, as presently in effect,
require depository institutions to maintain non-interest earning reserves
against their transaction accounts (primarily NOW and regular checking
accounts), as follows: for transaction accounts aggregating $46.5 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $46.5 million, the reserve
requirement is $1.395 million plus 10% of the aggregate amount of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The Bank is in compliance with the foregoing requirements.
ITEM 2. PROPERTIES
The main building of the Company is located at 78 North Chicago Street, Joliet,
Illinois. The Bank owns this building. The land on which it is located is owned
by the Company. The Bank has fourteen additional facilities, of which eleven are
owned and three are leased. The address and approximate square footage of each
location are as follows:
<TABLE>
<CAPTION>
Approximate
Location Square Feeet Status
- --------------------------------------------------------------------------------
<S> <C> <C>
78 North Chicago St., Joliet 25,000 Owned
Scott and Jefferson, Joliet 1,600 Owned
Midland and Campbell, Joliet 4,200 Owned
Black and Essington Roads, Joliet 12,000 Owned
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
1590 North Larkin, Joliet 1,100 Leased
191 South Larkin, Joliet 900 Leased
207 Mondamin St., Minooka 2,000 Owned
23841 West Eames, Channahon 100 Leased
Route 52 and Brookshore, Shorewood 1,200 Owned
24745 West Eames, Channahon 1,400 Owned
626 Townhall Drive, Romeoville 6,500 Owned
225 Lily Cache Lane, Bolingbrook 8,800 Owned
826 East 9th Street, Lockport 27,000 Owned
Cedar Road. and 159th St., Lockport 9,000 Owned
2005 West Route 34, Plano 10,000 Owned
</TABLE>
In addition, the Bank plans opening two additional branches in 1999 on sites
that are owned. The first facility scheduled to open is at 80 South Weber Road,
Romeoville, Illinois and will be approximately 1,600 square feet. The second
facility will be at 15900 South Division Street, Plainfield, Illinois and will
be approximately 2,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company or its
subsidiary 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, 1998, the Company had 2,180 shareholders of record 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 AMRO Securities, Inc. Information on
dividends paid and the price range of the Company's common stock on a quarterly
basis in 1998 and 1997 is presented on page 9 of the Company's 1998 Annual
Report to Stockholders 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 1998 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 16 of the 1998
Financial Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes thereto appearing on pages 18
through 35 of the 1998 Financial Report are incorporated herein by reference.
See Item 14 for information concerning financial statements and schedules filed
with the report.
8
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
No disagreements on accounting and financial disclosure matters have occurred
for the 24 months prior to, or in months subsequent to, December 31, 1998.
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 page 6 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 and 3 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 1998
Financial Report to Stockholders as listed below:
<TABLE>
<CAPTION>
Financial
Report
Pages
-----
<S> <C>
Consolidated balance sheets as of
December 31, 1998 and 1997 .............................................. 18
Consolidated statements of income for the years ended
December 31, 1998, 1997, and 1996 ....................................... 19
Consolidated statements of stockholders' equity for the years ended
December 31, 1998, 1997, and 1996 ....................................... 20
Consolidated statements of cash flows for the years ended
December 31, 1998, 1997, and 1996 ....................................... 21
Notes to consolidated financial statements .............................. 22-35
Report of Independent Auditors on the Consolidated Financial Statements . 17
</TABLE>
9
<PAGE>
The following index provides the location of the statistical information
included in the 1998 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 ..................................................... 5
Asset/Liability Management (liquidity)....................................... 7
Disclosure of the Effect on Interest Income from Impaired Loans ............. 25
Short-term Borrowings ....................................................... 28
Quarterly Results of Operations 1998-1997 (Unaudited)........................ 35
</TABLE>
3. Exhibits
<TABLE>
<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 (incorporated by reference to Part
IV of Form 10-K for the year ended December 31, 1997, File No.
0-15123).
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).
3.3 By-laws of First National Bank of Joliet as revised on March
12, 1998 (incorporated by reference to Part IV of Form 10-K
for the year ended December 31, 1997, File No. 0-15123).
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).
10.2 First National Bancorp, Inc. Employee Profit Sharing and
Retirement Plan.
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).
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
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 1998 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 a Form 8-K to be filed
during the fourth quarter of 1998.
11
<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 11th day of March, 1999.
FIRST NATIONAL BANCORP, INC.
(Registrant)
By: Kevin T. Reardon
------------------------------------
Kevin T. Reardon
Chairman of the Board
& Chief Executive Officer
By: 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 11th day of March, 1999 by the following persons on behalf
of the registrant in the capacities indicated.
<TABLE>
<CAPTION>
Name Title
---- -----
<S> <C>
KEVIN T. REARDON Chairman of the Board
- ----------------------------------- and
Chief Executive Officer
ALBERT G. D'OTTAVIO President and Director
- ----------------------------------- (Chief Operating Officer)
(Chief Financial Officer)
MICHAEL C. REARDON Director
- -----------------------------------
SHELDON C. BELL Director
- -----------------------------------
CHARLES R. PEYLA Director
- -----------------------------------
GEORGE H. BUCK Director
- -----------------------------------
</TABLE>
12
<PAGE>
FIRST NATIONAL BANCORP, INC.
EMPLOYEE PROFIT SHARING AND RETIREMENT PLAN
JANUARY 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1-1. ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1-2. CODE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1-3. COMMITTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1-4. COMPANY STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1-5. COMPANY STOCK ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . .2
1-6. COMPENSATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1-7. CONTROLLED GROUP. . . . . . . . . . . . . . . . . . . . . . . . . . .2
1-8. EMPLOYEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1-9. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1-10. FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1-11. LIMITATION YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . .3
1-12. OTHER INVESTMENTS ACCOUNT. . . . . . . . . . . . . . . . . . . . . .3
1-13. PARTICIPANT. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1-14. RELATED PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1-15. TRUST FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1-16. VALUATION DATE . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ARTICLE II SERVICE COMPUTATIONS. . . . . . . . . . . . . . . . . . . . . . . .4
2-1. SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2-2. HOUR OF SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . .4
2-3. ONE-YEAR BREAK-IN-SERVICE . . . . . . . . . . . . . . . . . . . . . .4
(a) GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
(b) PREGNANCY OR BIRTH OR ADOPTION OF A CHILD. . . . . . . . . . . .5
2-4. YEAR OF SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2-5. SERVICE WITH AFFILIATED COMPANIES . . . . . . . . . . . . . . . . . .5
ARTICLE III PLAN PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . . .6
3-1. ELIGIBILITY FOR PARTICIPATION . . . . . . . . . . . . . . . . . . . .6
ARTICLE IV ANNUAL COMPANY CONTRIBUTIONS. . . . . . . . . . . . . . . . . . . .7
4-1. ANNUAL COMPANY CONTRIBUTION . . . . . . . . . . . . . . . . . . . . .7
4-2. LIMITATION ON AMOUNT OF ANNUAL COMPANY CONTRIBUTION . . . . . . . . .7
4-3. WHEN CONTRIBUTIONS MADE . . . . . . . . . . . . . . . . . . . . . . .7
4-4. MANNER OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE V INVESTMENT OF TRUST ASSETS . . . . . . . . . . . . . . . . . . . . .8
5-1. INVESTMENT POLICY . . . . . . . . . . . . . . . . . . . . . . . . . .8
5-2. SALES OF COMPANY STOCK. . . . . . . . . . . . . . . . . . . . . . . .8
ARTICLE VI PARTICIPANTS' ACCOUNTS AND ANNUAL ADJUSTMENTS . . . . . . . . . . .9
6-1. ACCOUNTS FOR PARTICIPANTS . . . . . . . . . . . . . . . . . . . . . .9
6-2. CHARGES TO ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . .9
6-3. COMPANY STOCK ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . .9
i
<PAGE>
6-4. OTHER INVESTMENTS ACCOUNT . . . . . . . . . . . . . . . . . . . . . .9
6-5. ALLOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
6-6. LIMITATION ON ALLOCATIONS TO PARTICIPANTS . . . . . . . . . . . . . .9
(a) GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
(b) ALLOCATIONS OF EXCESS AMOUNTS. . . . . . . . . . . . . . . . . . 10
(c) DIVIDEND RECHARACTERIZATION. . . . . . . . . . . . . . . . . . . 10
6-7. ADJUSTING TO VALUE OF TRUST FUND. . . . . . . . . . . . . . . . . . 11
6-8. PARTICIPANT STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE VII RETIREMENT DATES, TERMINATION DATE . . . . . . . . . . . . . . . 12
7-1. NORMAL RETIREMENT DATE. . . . . . . . . . . . . . . . . . . . . . . 12
7-2. DISABILITY RETIREMENT DATE. . . . . . . . . . . . . . . . . . . . . 12
7-3. EARLY RETIREMENT DATE . . . . . . . . . . . . . . . . . . . . . . . 12
7-4. RETIREMENT DATE . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7-5. TERMINATION DATE. . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE VIII VESTING OF ACCOUNT BALANCES . . . . . . . . . . . . . . . . . . 13
8-1. VESTING ON RETIREMENT . . . . . . . . . . . . . . . . . . . . . . . 13
8-2. VESTING ON DEATH. . . . . . . . . . . . . . . . . . . . . . . . . . 13
8-3. VESTING ON OTHER TERMINATION. . . . . . . . . . . . . . . . . . . . 13
8-4. DETERMINATION OF ACCOUNT BALANCES . . . . . . . . . . . . . . . . . 13
ARTICLE IX DISTRIBUTION OF PLAN BENEFITS . . . . . . . . . . . . . . . . . . 14
9-1. METHOD OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . 14
9-2. FORM OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . 14
9-3. DISTRIBUTIONS AFTER DEATH . . . . . . . . . . . . . . . . . . . . . 14
9-4. TIME OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . 14
(a) GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(b) DEFERRAL OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . 15
(c) SPECIAL RULES . . . . . . . . . . . . . . . . . . . . . . . . . 15
9-5. IN-SERVICE DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . 15
(a) DIVIDENDS . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(b) WITHDRAWALS . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9-6. DISTRIBUTIONS TO PERSONS UNDER DISABILITY . . . . . . . . . . . . . 16
9-7. BENEFITS MAY NOT BE ASSIGNED OR ALIENATED . . . . . . . . . . . . . 16
9-8. NO GUARANTEE OF BENEFITS. . . . . . . . . . . . . . . . . . . . . . 16
9-9. BENEFICIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9-10. BENEFITS OF PERSONS WHO CANNOT BE LOCATED. . . . . . . . . . . . . 17
9-11. DISTRIBUTION WITHHOLDING . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE X SHAREHOLDER RIGHTS AND RESTRICTIONS. . . . . . . . . . . . . . . . 18
10-1. VOTING OF COMPANY STOCK. . . . . . . . . . . . . . . . . . . . . . 18
10-2. PUT OPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
10-3. RIGHT OF FIRST REFUSAL . . . . . . . . . . . . . . . . . . . . . . 18
(a) COMPANY AND TRUSTEE RIGHT OF FIRST REFUSAL. . . . . . . . . . . 18
(b) ENDORSEMENT ON STOCK CERTIFICATES . . . . . . . . . . . . . . . 19
ii
<PAGE>
ARTICLE XI PLAN ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . 20
11-1. PLAN ADMINISTRATION. . . . . . . . . . . . . . . . . . . . . . . . 20
11-2. THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
11-3. CLAIMS PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . 20
(a) PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(b) PROCEDURE FOR REVIEW OF A DENIED CLAIM. . . . . . . . . . . . . 20
11-4. PROCEDURES WITH RESPECT TO DOMESTIC RELATIONS ORDERS . . . . . . . 21
(a) DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(b) PROCEDURES. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(c) NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
(d) SEGREGATION OF ACCOUNT. . . . . . . . . . . . . . . . . . . . . 22
ARTICLE XII THE COMMITTEE. . . . . . . . . . . . . . . . . . . . . . . . . . 23
12-1. MEMBERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
12-2. RIGHTS, POWERS, AND DUTIES OF THE COMMITTEE. . . . . . . . . . . . 23
12-3. APPLICATION OF RULES . . . . . . . . . . . . . . . . . . . . . . . 24
12-4. REMUNERATION AND EXPENSES. . . . . . . . . . . . . . . . . . . . . 24
12-5. EXERCISE OF COMMITTEE'S DUTIES . . . . . . . . . . . . . . . . . . 24
12-6. RESIGNATION OR REMOVAL OF COMMITTEE MEMBERS. . . . . . . . . . . . 24
12-7. APPOINTMENT OF SUCCESSOR COMMITTEE MEMBERS . . . . . . . . . . . . 24
ARTICLE XIII AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . . . . 25
13-1. AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
13-2. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
13-3. MERGER OR CONSOLIDATION OF PLAN, TRANSFER OF PLAN ASSETS . . . . . 25
13-4. VESTING AND DISTRIBUTION ON TERMINATION AND PARTIAL TERMINATION. . 25
ARTICLE XIV TOP-HEAVY PROVISIONS . . . . . . . . . . . . . . . . . . . . . . 26
14-1. TOP-HEAVY DETERMINATION. . . . . . . . . . . . . . . . . . . . . . 26
14-2. MINIMUM CONTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . 26
14-3. AGGREGATION OF PLANS . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE XV MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . 27
15-1. NO REVERSION TO COMPANY. . . . . . . . . . . . . . . . . . . . . . 27
15-2. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
15-3. INDEPENDENT APPRAISER. . . . . . . . . . . . . . . . . . . . . . . 27
15-4. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . 27
15-5. SUBSIDIARY AND AFFILIATED COMPANIES. . . . . . . . . . . . . . . . 27
15-6. PARTICIPATION NOT GUARANTEE OF EMPLOYMENT. . . . . . . . . . . . . 27
15-7. GENDER AND NUMBER. . . . . . . . . . . . . . . . . . . . . . . . . 28
15-8. GOVERNING LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . 28
15-9. TEXT TO CONTROL. . . . . . . . . . . . . . . . . . . . . . . . . . 28
</TABLE>
iii
<PAGE>
FIRST NATIONAL BANCORP, INC.
EMPLOYEE PROFIT SHARING AND RETIREMENT PLAN
RECITALS
WHEREAS, First National Bancorp, Inc., an Illinois corporation (the
"Company"), desires to recognize and reward the contribution by its employees,
to its successful operation, and to provide incentive for such employees, to
increase their productivity, by enabling them to acquire stock ownership
interests in the Company and to share in the profits of the Company; and
WHEREAS, the Company has entered into a trust agreement, known as the
"First National Bancorp, Inc. Employee Profit Sharing and Retirement Plan Trust"
(the "Trust Agreement"), with First National Bank of Joliet, as "Trustee", dated
as of the date hereof, pursuant to which all contributions made by the Company
under this plan will be held, managed, and controlled by the Trustee;
NOW, THEREFORE, the Company hereby adopts the First National Bancorp, Inc.
Employee Profit Sharing and Retirement Plan (the "Plan"), effective as of
January 1, 1998 (the "Effective Date").
<PAGE>
ARTICLE I
DEFINITIONS
Whenever used herein, the following words and phrases shall have the
meanings stated below, unless a different meaning is plainly required by the
context:
1-1. ACCOUNTS. The term "Accounts" means, collectively, a Participant's
Company Stock Account and Other Investments Account.
1-2. CODE. The term "Code" means the Internal Revenue Code of 1986, as
amended from time to time. Reference to a section of the Code shall include
that section and any comparable section or sections of any future legislation
that amend, supplement, or supersede such section.
1-3. COMMITTEE. The term "Committee" means the committee appointed by
the Board of Directors of the Company to administer the Plan.
1-4. COMPANY STOCK. The term "Company Stock" means the shares of common
stock issued by the Company, provided that such shares constitute "employer
securities" as that term is defined in Section 409(l) of the Code.
1-5. COMPANY STOCK ACCOUNT. The term "Company Stock Account" means the
account established for a Participant by the Administrator pursuant to Section
6-1 and to which the Participant's share of the Company's contribution made or
invested in Company Stock shall be allocated pursuant to Sections 6-3 and 6-5.
1-6. COMPENSATION. Except as otherwise provided in Section 6-6, the term
"Compensation" means a Participant's total earnings from the Company or member
of the Controlled Group paid during a Fiscal Year for services rendered within
the meanings of Section 3401(a) of the Code, including bonuses, overtime, and
commissions and any amounts deferred pursuant to Code Sections 401(k) and 125.
However, the term "Compensation" shall not include any earnings in excess of
such amount as is determined under Section 401(a)(17) of the Code. In any case
where a Participant commences his participation in the Plan, or resumes his
active participation in the Plan after incurring a One-Year Break-in-Service, on
any day other than the first day of a Fiscal Year, his Compensation for that
Fiscal Year shall be that portion of his compensation as determined under this
Section 1-6 paid during the period of his participation in the Plan for that
Fiscal Year.
1-7. CONTROLLED GROUP. The term "Controlled Group" means: (a) the
Company and one (1) or more other corporations which are members of a
"controlled group" of corporations within the meaning of Section 414(b) of the
Code and the regulations thereunder; (b) the Company and one (1) or more
unincorporated trades or businesses that are under "common control" within the
meaning of Section 414(c) of the Code and the regulations thereunder; (c) the
Company and one (1) or more other organizations that are members of an
"affiliated service group", as determined under Section 414(m) of the Code and
the regulations
2
<PAGE>
thereunder; and (d) the Company and such other entities as must be treated as
a "controlled group" under Section 414(o) of the Code and the regulations
thereunder.
1-8. EMPLOYEE. The term "Employee" means any person employed by the
Company or a member of the Controlled Group, including any officer, who receives
regular Compensation other than retirement benefits under this Plan.
1-9. ERISA. The term "ERISA" means Public Law No. 93-406, the Employee
Retirement Income Security Act of 1974, as amended from time to time.
1-10. FISCAL YEAR. The term "Fiscal Year" means the year that begins on
January 1 and that ends on December 31.
1-11. LIMITATION YEAR. The term "Limitation Year" means the period of
twelve (12) consecutive months to be used in determining whether the Plan is in
compliance with the provisions of Section 415 of the Code and of the regulations
thereunder. The Company shall take all actions necessary to ensure that the
Limitation Year is the same twelve (12)-month period as the Fiscal Year.
1-12. OTHER INVESTMENTS ACCOUNT. The term "Other Investments Account"
means the account established for a Participant by the Administrator pursuant to
Section 6-1 and to which the Participant's share of the Company's contributions
made in cash or property other than Company Stock shall be allocated pursuant to
Sections 6-4 and 6-5.
1-13. PARTICIPANT. The term "Participant" means an Employee who becomes a
participant in the Plan under the provisions of Section 3-1.
1-14. RELATED PLAN. The term "Related Plan" means any other defined
contribution plan (as defined in Section 415 of the Code) maintained by the
Company or by any other employer that is: (a) a member of a "controlled group"
of corporations (as defined in Section 414(b) of the Code, as modified by
Section 415(h) thereof) that includes the Company; (b) under "common control"
(as defined in Section 414(c) of the Code, as modified by Section 415(h)
thereof) with the Company; (c) part of an "affiliated service group" (as defined
in Section 414(m) of the Code) that includes the Company; or (d) required to be
treated as a member of a "controlled group" under Section 414(o) of the Code and
the regulations thereunder that includes the Company.
1-15. TRUST FUND. The term "Trust Fund" means all property held by the
Trustee under the Trust Agreement.
1-16. VALUATION DATE. The term "Valuation Date" means the date of
termination or partial termination of the Plan, the last day of each Fiscal
Year, and such other dates as may be determined by the Company.
3
<PAGE>
ARTICLE II
SERVICE COMPUTATIONS
2-1. SERVICE. The term "Service" means the period of employment of an
Employee or Participant for which he receives credit pursuant to the provisions
of this Article II.
2-2. HOUR OF SERVICE. The term "Hour of Service" means, with respect to
any Employee or Participant:
(a) Each hour for which he is directly or indirectly paid, or
entitled to payment, by the Company for the performance of
duties during the applicable computation period;
(b) Each hour for which he has been awarded back pay or for which
the Company has agreed to award him back pay, irrespective of
mitigation of damages; and
(c) Each hour for which he is directly or indirectly paid, or
entitled to payment, by the Company for reasons other than the
performance of duties during the applicable computation period
(such as for vacation, sickness, injury, or disability).
Hours of Service shall not be credited under more than one (1) of the preceding
subsections. Hours described in clause (a) above shall be credited to the
Employee or Participant for the computation periods in which the duties were
performed. Employees for whom the Company does not maintain records of their
hours worked shall be credited with Hours of Service on the basis of a forty
(40)-hour workweek or, in the case of a partial workweek, on the basis of an
eight (8)-hour workday. Hours described in clause (b) above shall be credited
to the Employee or Participant for the computation periods to which the award or
agreement pertains, rather than for the computation periods in which either
payment is actually made or amounts payable to the Employee or Participant
become due. Hours described in clause (c) above shall be credited to the
Employee or Participant for the computation periods during which the events
giving rise to the payments occurred. Hours of service shall be computed in
accordance with paragraphs (b) and (c) of Section 2530.200b-2 of the Department
of Labor Regulations under ERISA and any successor regulations. The provisions
of this Section 2-2 shall be construed so as to resolve any ambiguities in favor
of crediting an Employee or Participant with Hours of Service.
2-3. ONE-YEAR BREAK-IN-SERVICE.
(a) GENERAL. The term "One-Year Break-in-Service" means any
Fiscal Year during which a Participant completes five hundred
(500) or fewer Hours of Service with the Company.
4
<PAGE>
(b) PREGNANCY OR BIRTH OR ADOPTION OF A CHILD. For purposes of
determining whether a One-Year Break-in-Service has occurred,
an Employee or Participant shall be given credit for the Hours
of Service which normally would have been credited to such
Employee or Participant but for an absence from work for any
period for any of the following reasons: (i) by reason of the
pregnancy of such Employee or Participant; (ii) by reason of
the birth of a child of such Employee or Participant; (iii) by
reason of the placement of a child with such Employee or
Participant in connection with the adoption of such child by
such Employee or Participant; or (iv) for purposes of caring
for such child for a period beginning immediately following
such birth or placement. If the Administrator is unable to
determine the hours which normally would have been credited to
an Employee or Participant but for an absence of the kind
described above, there shall be credited to such Employee or
Participant eight (8) Hours of Service per day of such
absence; provided, however, that the total number of hours
treated as Hours of Service by reason of an absence of the
kind described above shall not exceed five hundred and one
(501) hours. The hours described in the preceding sentence
shall be treated as Hours of Service either: (i) only in the
year in which the absence from work begins, if a Participant
would be prevented from incurring a One-Year Break-in-Service
in such year solely because the period of absence is treated
as Hours of Service; or (ii) in any other case, in the
immediately following year.
2-4. YEAR OF SERVICE. The term "Year of Service" means any Fiscal Year
during which an Employee or Participant has completed at least one thousand
(1,000) Hours of Service with the Company; provided, however, that for purposes
of eligibility to participate in the Plan as provided in Article III, the term
"Year of Service" shall mean the twelve (12)-consecutive month period beginning
on the date on which the Employee first completes an Hour of Service and each
anniversary thereof, in which the Employee has completed at least one thousand
(1,000) Hours of Service with the Company. Each Employee and each Participant
shall receive credit for each Year of Service for all purposes of the Plan,
including Years of Service with the Company prior to the Effective Date, except
that Years of Service completed by an Employee or Participant prior to the
attainment of age eighteen (18) shall be disregarded.
2-5. SERVICE WITH AFFILIATED COMPANIES. For purposes of determining
Hours of Service and Years of Service under this Article II and the vested
portion of a Participant's Accounts under Article VIII, credit shall be granted
for service with another entity which, together with the Company, is a member of
a Controlled Group.
5
<PAGE>
ARTICLE III
PLAN PARTICIPATION
3-1. ELIGIBILITY FOR PARTICIPATION. Each Employee shall become a
Participant in this Plan on the January 1st or July 1st after which he first
meets the following requirements:
(a) He has completed one (1) Year of Service;
(b) He has attained age twenty one (21); and
(c) He is not included in a unit of Employees covered by a
collective bargaining agreement between Employee
representatives and the Company, if retirement benefits were
the subject of good faith bargaining between such Employee
representatives and the Company and if, as a result of such
negotiations, either he is covered by another retirement plan
to which the Company makes contributions or there has been no
agreement between such parties for his coverage under this
Plan.
Each Participant who incurs a One-Year Break-in-Service and who returns to
the employ of the Company shall again become a Participant immediately upon
his reemployment by the Company if he was at least twenty percent (20%)
vested in his Company Stock and Other Investment Accounts pursuant to Section
8-3. If an employee or a Participant is not at least twenty percent (20%)
vested in his Company Stock and Other Investment Accounts and incurs five (5)
consecutive One-Year Breaks-in-Service, then for purposes of this Section
3-1, his Years of Service prior to such One-Year Breaks-in-Service shall be
disregarded.
6
<PAGE>
ARTICLE IV
ANNUAL COMPANY CONTRIBUTIONS
4-1. ANNUAL COMPANY CONTRIBUTION. Subject to the following provisions of
this Article IV, for any Fiscal Year the Company may pay over to the Trustee, as
an annual contribution to the Plan for that year, such sum, if any, as is
determined by resolution of the Board of Directors of the Company. Payment of
such contributions shall be conditioned on qualification of the Plan under
Section 401(a) of the Code and on deductibility of the contributions under
Section 404 of the Code.
4-2. LIMITATION ON AMOUNT OF ANNUAL COMPANY CONTRIBUTION. In no event
shall the amount of the Company's contribution under the Plan for any Fiscal
Year exceed the maximum amount allowable as a deduction in computing its taxable
income for that year for federal income tax purposes.
4-3. WHEN CONTRIBUTIONS MADE. The Company's contribution under the Plan
for any Fiscal Year shall be due on the last day of that Fiscal Year and shall
be paid over to the Trustee not later than the time prescribed by law for filing
the Company's federal income tax return for that Fiscal Year (including any
extensions thereof).
4-4. MANNER OF PAYMENT. The Company's contributions shall be made in
cash or shares of Company Stock. Any shares of Company Stock contributed to the
Plan shall be valued at their fair market value as of the date of the
contribution, as determined by the Trustee based upon a valuation by an
independent appraiser.
7
<PAGE>
ARTICLE V
INVESTMENT OF TRUST ASSETS
5-1. INVESTMENT POLICY. Assets held in the Trust Fund may be invested by
the Trustee primarily in Company Stock. Contributions made by the Company to
the Plan and other assets of the Trust Fund may be used to acquire shares of
Company Stock from any shareholder of the Company or from the Company. The
Trustee also may invest assets of the Trust Fund in such other properties as the
Trustee deems appropriate for the Trust Fund, as provided in Section III of the
Trust Agreement. All purchases of Company Stock by the Trustee shall be made
only at prices which do not exceed the fair market value of the shares
purchased, as determined by the Trustee based upon a valuation by an independent
appraiser.
5-2. SALES OF COMPANY STOCK. The Trustee may sell shares of Company
Stock to any person, including the Company. Any such sale must be made at a
price not less than the fair market value of the shares, as determined by the
Trustee. If such sale is between the Trustee and a "disqualified person," as
defined in Section 4975(e)(2) of the Code, the fair market value of the shares
shall be determined as of the date of the sale. If such sale is between the
Trustee and a person who is not a "disqualified person," the fair market value
of the shares shall be determined as of the most recent Valuation Date. The
Trustee may not sell shares of Company Stock in a sale that would be a
"prohibited transaction" within the meaning of the Code and ERISA.
8
<PAGE>
ARTICLE VI
PARTICIPANTS' ACCOUNTS AND ANNUAL ADJUSTMENTS
6-1. ACCOUNTS FOR PARTICIPANTS. The Administrator shall establish and
maintain a Company Stock Account and an Other Investments Account for each
Participant.
6-2. CHARGES TO ACCOUNTS. When a Valuation Date occurs, any
distributions made to or on behalf of any Participant or beneficiary since the
last preceding Valuation Date shall be charged to the proper Accounts maintained
for such Participant or beneficiary.
6-3. COMPANY STOCK ACCOUNT. Subject to the provisions of Section 6-6, as
of the last day of each Fiscal Year, the Trustee shall credit to each
Participant's Company Stock Account: (a) the Participant's allocable share of
Company Stock purchased by the Trustee or contributed by the Company to the
Trust Fund for that year; (b) the Participant's allocable share of any
forfeitures of Company Stock arising under the Plan during that year; and (c)
any stock dividends declared and paid during that year on Company Stock
allocated to the Participant's Company Stock Account.
6-4. OTHER INVESTMENTS ACCOUNT. As of the last day of each Fiscal Year,
the Trustee shall credit to each Participant's Other Investments Account: (a)
the Participant's allocable share of any contribution for that year made by the
Company in cash or in property other than Company Stock; (b) the Participant's
allocable share of any forfeitures from the Other Investments Accounts of other
Participants; (c) any cash dividends paid during that year on Company Stock
allocated to the Participant's Company Stock Account; and (d) the share of the
net income or loss of the Trust Fund properly allocable to that Participant's
Other Investments Account, as provided in Section 6-7.
6-5. ALLOCATIONS. Subject to the provisions of this Section 6-5 and
Section 6-6, the Company's contribution for any Fiscal Year and the forfeitures
arising under the Plan during that year shall be allocated among Participants
who are credited with a Year of Service for such Fiscal Year; and who are
employed by the Company on the last day of such Fiscal Year or who died or
retired on a Retirement Date (as defined in Section 7-4) during such Fiscal
Year, in the proportion that each Participant's Compensation for the year bears
to all Participants' Compensation for that year.
6-6. LIMITATION ON ALLOCATIONS TO PARTICIPANTS.
(a) GENERAL. Notwithstanding any other provisions of the Plan to
the contrary, the amounts credited to a Participant's Accounts
in accordance with this Article VI for any Limitation Year,
other than allocations of earnings and losses of the Trust
Fund and amounts excepted by Section 415 of the Code and the
Treasury Regulations thereunder, shall not exceed an amount
equal to the lesser of:
9
<PAGE>
(i) thirty thousand dollars ($30,000), adjusted each
Limitation Year to take into account any cost-of-living
increase adjustment provided for that year under Section
415(d) of the Code; or
(ii) twenty-five percent (25%) of the Compensation paid to
the Participant by the Company in that Limitation Year.
If the limitations of this Section 6-6 shall apply to the
Accounts of any Participant for any Limitation Year, the
amount credited to his accounts under this Plan shall be
reduced to the extent required under this Section 6-6 before
any reduction is made in the amount credited to his Accounts
under any Related Plan. For purposes of this Section 6-6 the
term "Compensation" shall include only those items specified
in Section 1.415-2(d)(1)(i) of the Treasury Regulations and
shall exclude all items listed in Section 1.415-2(d)(2)
thereof.
(b) ALLOCATIONS OF EXCESS AMOUNTS. Subject to the limitations of
this Section 6-6, the portions of any Company contributions
and of any forfeitures which have been allocated to a
Participant under this Plan for a Limitation Year but which
cannot be credited to his Accounts because of the limitations
imposed by this Section 6-6 (the "excess amounts"), shall be
held in a suspense account. The amounts held in the suspense
account with respect to a Participant shall be allocated to
his Accounts in the following year before any Company
contributions are allocated to his Accounts for such following
year. If such Participant is not covered by the Plan as of
the last day of such following Limitation Year, then such
excess amounts shall again be held in a suspense account and
shall be allocated in the following year as if they were
forfeitures occurring on the first day of the following year.
All amounts held in a suspense account pursuant to this
Section 6-6(b) shall not share in the increase or decrease in
the net worth of the Trust Fund.
(c) DIVIDEND RECHARACTERIZATION. If any dividend paid on Company
Stock shall be recharacterized to be a Company contribution to
the Plan for any Limitation Year, and if such
recharacterization would cause an allocation to a
Participant's Accounts to exceed the limits allowed under
Section 415 of the Code for any Limitation Year, the
Participant's Accounts then shall be retroactively reduced by
an amount equal to the sum of (i) the excess of the amount
credited to the Participant's Accounts over the maximum amount
that was properly allocable to his Accounts (the "excess
amount"), plus (ii) all earnings of the Trust Fund credited to
the Participant's Accounts that are attributable to the excess
amount. This provision shall be administered in such a way as
to assure that no Participant receives any benefit from an
allocation of any excess amount to his Accounts. Any excess
amount and any earnings
10
<PAGE>
attributable thereto shall be placed in the suspense
account referred to in subsection (b) of this Section 6-6.
It shall be conclusively presumed that any error with
respect to the characterization of any dividend payment by
the Company was a mistake of fact with respect to the which
the Trustee or the Administrator shall be entitled to make
corrective adjustments to Participant Accounts.
6-7. ADJUSTING TO VALUE OF TRUST FUND. As of each Valuation Date, the
Trustee shall determine: (i) the net worth of that portion of the Trust Fund
which consists of properties other than Company Stock (which portion of the
Trust Fund hereinafter is referred to as the "Investment Fund"); and (ii) the
increase or decrease in the net worth of the Investment Fund since the last
Valuation Date. The net worth of the Investment Fund shall be the fair market
value of all properties held by the Trustee under the Trust Agreement other than
Company Stock, net of liabilities other than liabilities to Participants and
their beneficiaries. The Trustee shall allocate to the Other Investments
Account of each Participant that percentage of the increase or decrease in the
net worth of the Investment Fund equal to the ratio which the balances credited
to such Participant's Other Investments Account bear to the total amount
credited to all Other Investments Account.
6-8. PARTICIPANT STATEMENTS. Each Fiscal Year, the Trustee will provide
each Participant with a statement of his Account balances as of the most recent
Valuation Date. Such statement shall show the value of the Company Stock
credited to a Participant's Company Stock Account, which value shall be
determined by the Trustee based upon a valuation by an independent appraiser.
11
<PAGE>
ARTICLE VII
RETIREMENT DATES, TERMINATION DATE
7-1. NORMAL RETIREMENT DATE. The term "Normal Retirement Date" means the
date on which a Participant's employment with the Company is terminated for any
reason on or after the date on which he attains age fifty-nine and one-half
(59-1/2) and completes five (5) Years of Service.
7-2. DISABILITY RETIREMENT DATE. The term "Disability Retirement Date"
means the date that the Participant's employment with the Company is terminated
because of disability. For purposes of this Section 7-2, a Participant shall be
deemed to be disabled if, because of a physical or mental disability, is not
expected to live or the Participant is, or is expected to be, unable to perform
the duties of his customary position of employment (or is unable to engage in
any substantial gainful activity) for an indefinite period of at least twelve
(12) months. A Participant also is disabled if he incurs the permanent loss or
loss of use of a member or function of the body, or is permanently disfigured,
and his employment with the Company is terminated because of such loss, loss of
use or disfigurement. The Administrator may require a Participant to submit to
a physical examination in order to confirm disability.
7-3. EARLY RETIREMENT DATE. The term "Early Retirement Date" means the
date on which a Participant's employment with the Company is terminated for any
reason on or after the date on which he attains age fifty-five (55) and
completes twenty-five (25) Years of Service.
7-4. RETIREMENT DATE. The term "Retirement Date" means a Participant's
Normal Retirement Date, Early Retirement Date or Disability Retirement Date as
the case may be.
7-5. TERMINATION DATE. The term "Termination Date" means the date on
which a Participant's employment with the Company is terminated for any reason
prior to a Retirement Date.
12
<PAGE>
ARTICLE VIII
VESTING OF ACCOUNT BALANCES
8-1. VESTING ON RETIREMENT. If a Participant retires or is retired on a
Retirement Date, the balances credited to his Accounts will be fully vested and
will be distributed to the Participant or for his benefit, as provided in
Article IX.
8-2. VESTING ON DEATH. If a Participant dies while in the employ of the
Company, the balances credited to his Accounts will be fully vested and will be
distributed to his beneficiary or for his beneficiary's benefit, as provided in
Article IX.
8-3. VESTING ON OTHER TERMINATION. A Participant shall have a vested and
nonforfeitable right to a percentage of the balances credited to his Company
Stock and Other Investments Accounts according to the following schedule:
YEARS OF SERVICE VESTED PERCENTAGE
fewer than 2 0%
2 20%
3 40%
4 60%
5 80%
6 100%
If a Participant's employment with the Company is terminated on a Termination
Date and before he is completely vested, the forfeitable balances credited to
his Company Stock and Other Investments Accounts will be forfeited and will be
allocated and credited in accordance with Section 6-5.
8-4. DETERMINATION OF ACCOUNT BALANCES. All determinations of the
balances credited to the Accounts of Participants required pursuant to this
Article VIII shall be made as of the Valuation Date coincident with or
immediately preceding the event giving rise to the determination. All Other
Investments Accounts shall continue to share in the changes in the value of the
Investment Fund, pursuant to Section 6-8, until such Accounts are distributed.
13
<PAGE>
ARTICLE IX
DISTRIBUTION OF PLAN BENEFITS
9-1. METHOD OF DISTRIBUTION. Subject to the provisions of this Article
IX, distribution of the balances credited to a Participant's Accounts will be
made by the Trustee by payment in a lump sum.
9-2. FORM OF DISTRIBUTION. Distribution of the balance credited to a
Participant's Company Stock Account shall be made in whole shares of Company
Stock, except that the value of any fractional shares shall be paid in cash, and
the balance credited to his Other Investments Account shall be made in cash.
9-3. DISTRIBUTIONS AFTER DEATH. If a Participant dies before the entire
balance credited to his Accounts has been distributed, such balance shall be
payable in full upon the death of the Participant to the Participant's surviving
spouse. However, such balance may be paid to a beneficiary designated by the
Participant in accordance with Section 9-9 if one of the following conditions is
satisfied: either (a) the surviving spouse of such Participant has consented in
writing to the payment of the balance credited to the Participant's Accounts to
such beneficiary and the spouse's consent acknowledges the effect of such
consent and has been witnessed by the Administrator or by a notary public; or
(b) it is established to the satisfaction of the Administrator that such consent
could not be obtained because the Participant was not married, because the
Participant's spouse cannot be located, or because of such other circumstances
as the Secretary of the Treasury may prescribe by regulation. Any consent by a
spouse under this Section 9-3, or any establishment that the consent of a spouse
cannot be obtained, shall be effective only with respect to that spouse. Any
consent by a spouse under this Section 9-3 must acknowledge the beneficiary
designated by the Participant, including any class of beneficiaries or any
contingent beneficiaries; and the Participant may not subsequently change
beneficiaries without the consent of his or her spouse. Any consent by a spouse
pursuant to this Section 9-3 shall be irrevocable. If there is no surviving
spouse upon the death of a Participant, the balance in such Participant's
Accounts shall be paid to the beneficiary designated by such Participant in
accordance with Section 9-9.
9-4. TIME OF DISTRIBUTION.
(a) GENERAL. If a Participant dies, becomes disabled, or retires,
distribution of the balance credited to his Accounts shall be
made within one (1) year after the close of the Fiscal Year in
which he terminates his employment with the Company. If a
Participant's service with the Company is terminated for any
reason other than death, disability, or retirement,
distribution of the balances credited to his Accounts shall
be made not later than one (1) year after the close of the
Fiscal Year which is the fifth (5th) Fiscal Year following the
Fiscal Year in which the Participant's employment with the
Company is terminated (unless the Participant is
14
<PAGE>
reemployed by the Company before distributions are required
to be made or commence).
(b) DEFERRAL OF DISTRIBUTION. A Participant whose Account
balances exceed five thousand dollars ($5,000) may elect to
defer distribution of his benefits hereunder until a date not
later than April 1st of the year immediately following the
year in which he attains age seventy and one-half (70-1/2).
Distributions made or commenced due to the Participant's
attainment of age seventy and one-half (70-1/2) shall be made
in accordance with Section 401(a)(9) of the Code and the
regulations thereunder.
(c) SPECIAL RULES. Notwithstanding anything to the contrary set
forth in paragraphs (a) or (b) of this Section 9-4, unless a
Participant elects a later date, distribution of his benefits
shall be made not later than the sixtieth (60th) day after the
close of the Fiscal Year in which the later of the following
events occurs: (1) the attainment of age sixty-five (65) or
normal retirement age, if earlier, by the Participant; or (2)
the termination of the Participant's service with the Company.
However, if the Participant is a "five percent owner," as such
term is defined in Section 416 of the Code, in no event shall
the balance credited to such a Participant's Accounts begin to
be distributed later than April 1st of the calendar year
immediately following the calendar year in which he attains
the age seventy and one-half (70-1/2).
9-5. IN-SERVICE DISTRIBUTIONS.
(a) DIVIDENDS. If so determined by the Board of Directors of the
Company, any cash dividend received by the Trustee on Company
Stock allocated to the Company Stock Accounts of Participants
may be paid currently (or within ninety (90) days after the
end of the Limitation Year in which the dividends are paid to
the Trustee) in cash by the Trustee to the Participants (or to
their beneficiaries), in proportion to the amounts of Company
Stock allocated to their Company Stock Accounts as of the
record date of the dividend. Alternatively, the Company may
pay such dividends directly to Participants or beneficiaries.
Any distribution of cash dividends may be limited to dividends
on shares of Company Stock which are then vested or may be
applicable to cash dividends on all shares allocated to
Participants' Company Stock Accounts.
(b) WITHDRAWALS. A Participant who has attained age fifty-five
(55) and who has completed at least ten (10) years of
participation in the Plan after the Effective Date shall be
notified of his right to withdraw a portion of the balance
credited to his Company Stock Account. An election to
withdraw must be made on the prescribed form and be filed
with the
15
<PAGE>
Administrator within the ninety (90)-day period immediately
following the close of any Limitation Year within the
"Election Period". The "Election Period" is the period of
six (6) consecutive Fiscal Years beginning with the
Limitation Year in which the Participant first becomes
eligible to make a withdrawal. For each of the first five
(5) Limitation Years in the Election Period, the
Participant may elect to withdraw an amount which does not
exceed twenty-five percent (25%) of the balance credited to
his Company Stock Account, less all amounts previously
withdrawn under this Section 10-5. In the case of the last
Limitation Year in the Election Period, the Participant may
elect to withdraw an amount which does not exceed fifty
percent (50%) of the balance credited to his Company Stock
Account, less all amounts previously withdrawn. Any amount
which a Participant elects to withdraw under this Section
9-5 shall be distributed within ninety (90) days after the
ninety (90)-day period in which the election may be made. A
withdrawal shall be treated as a distribution which is
subject to the provisions of this Article X.
9-6. DISTRIBUTIONS TO PERSONS UNDER DISABILITY. Notwithstanding any
provisions of this Article IX to the contrary, if a Participant, surviving
spouse, or beneficiary is declared incompetent and a conservator or other person
legally charged with the care of his or her person or of his or her estate is
appointed, any benefits to which such Participant, surviving spouse, or
beneficiary is entitled shall be paid to such conservator or other person.
Except as provided above in this Section 9-6, when the Administrator, in its
sole discretion, determines that a Participant, surviving spouse, or beneficiary
is unable to manage his or her financial affairs, the Administrator may direct
the Trustee to make distributions to any person for the benefit of the
Participant, surviving spouse, or beneficiary.
9-7. BENEFITS MAY NOT BE ASSIGNED OR ALIENATED. The benefits payable to
any person under this Plan may not be voluntarily or involuntarily assigned or
alienated. However, the provisions of this Section 9-7 shall not apply to the
creation, assignment, or recognition of a right to any benefit payable with
respect to a Participant pursuant to a "qualified domestic relations order," as
that term is defined in Section 414(p) of the Code.
9-8. NO GUARANTEE OF BENEFITS. The benefits provided under the Plan for
any Participant shall be paid solely from that Participant's Accounts.
9-9. BENEFICIARIES. Subject to the provisions of Section 9-3, each
Participant may designate any legal or natural person to receive any benefits
payable under the Plan on account of his death. Each designation by a
Participant shall be in writing and shall be filed with the Administrator in
such form as it may require. Subject to the provisions of Section 9-3, a
beneficiary may change or revoke a direction as to the manner in which his
benefits are to be paid, or may make such a direction if none has been made, at
any time prior to the payment of his benefits by the Trustee. Subject to the
provisions of Section 9-3, by a writing filed with the Administrator, a
Participant may change his beneficiary designation at any time and from
16
<PAGE>
time to time without the consent of or notice to any person or persons
previously designated by him. If no person or persons have been designated
by a Participant, or if all persons so designated predecease the Participant
or die prior to complete distribution of his benefits, then the
Administrator, in its sole discretion, shall direct the Trustee to distribute
the Participant's benefits to:
(a) one (1) or more of the Participant's relatives by blood,
adoption, or marriage, as the Trustee decides; or
(b) the Participant's executor or administrator.
In no event may the beneficiary of a deceased Participant designate a
beneficiary.
9-10. BENEFITS OF PERSONS WHO CANNOT BE LOCATED. If the Administrator
notifies a Participant or a beneficiary designated in accordance with Sections
9-3 and 9-9 in writing at his last known address that he is entitled to benefits
under the Plan and the Participant or beneficiary fails to claim his benefits
within seven (7) calendar years after notification, his benefits will be
distributed to one (1) or more of the Participant's or beneficiary's relatives
by blood, adoption, or marriage, as the Administrator shall in its sole
discretion decide.
9-11. DISTRIBUTION WITHHOLDING. Unless a Participant or beneficiary
elects under Section 401(a)(31)(A) of the Code to have his benefits paid
directly to an "eligible retirement plan," the Trustee shall withhold federal
tax in an amount equal to twenty percent (20%) of such benefits; provided
however, that the maximum amount that the Trustee may withhold shall be the
value of any non-Company Stock amounts held under the Plan. An "eligible
retirement plan" is a plan described in Section 401(a)(31)(D) of the Code.
Within a reasonable period of time before distributing a Participant's benefits,
the Trustee shall provide the Participant or beneficiary with a written
explanation of the following matters: (a) the provisions of this Plan under
which the Participant or beneficiary may have his benefits transferred directly
to another eligible retirement plan; (b) the Code provision which requires the
withholding of tax on the distribution if it is not directly transferred to
another eligible retirement plan; (c) the provisions of the Code under which the
distribution will not be subject to tax if transferred to an eligible retirement
plan within sixty (60) days after the date on which the recipient receives the
distribution; and (d) such other matters as to which an explanation is required
by law.
17
<PAGE>
ARTICLE X
SHAREHOLDER RIGHTS AND RESTRICTIONS
10-1. VOTING OF COMPANY STOCK. If the Company has a registration-type
class of securities, then each Participant will be entitled to direct the
Trustee as to how to vote the shares of Company Stock allocated to his Company
Stock Account with respect to all matters. If the Company does not have a
registration-type class of securities, each Participant will be entitled to
direct the Trustee as to how to vote the shares of Company Stock allocated to
his Company Stock Account with respect to any proposed merger or consolidation,
recapitalization, reclassification, liquidation, dissolution, sale of
substantially all the assets of a trade or business, or such similar
transactions as are specified in Treasury Regulations under Section 409(c)(3) of
the Code. The Trustee shall vote all shares of Company Stock which are not
allocated to any Participant's Company Stock Account, including shares placed in
the suspense account referred to in Section 6-6(b), and the shares of allocated
Company Stock with respect to which no direction is received from the
Participants to whose Accounts the shares are allocated in the manner it deems
appropriate.
10-2. PUT OPTION. Subject to any required regulatory approval of any
state or federal bank regulatory agency, and except as provided in Section
409(h)(3) of the Code, in the case where the Company Stock is not readily
tradable on an established securities market, the Company shall provide a put
option to any Participant or beneficiary who receives a distribution of Company
Stock. Pursuant to this option, the Participant or beneficiary shall have the
right to sell his Company Stock to the Company at any time during two (2) option
periods, at a price equal to the fair market value of the stock determined as of
the most recent Valuation Date. The first put option period shall be for at
least sixty (60) days, beginning on the date of the distribution of the stock.
The second put option period shall be for at least sixty (60) days beginning
after the new determination of fair market value of the stock in the following
Fiscal Year (and after the delivery of notice thereof to the Participant or
beneficiary). The Company may allow the Trustee to purchase shares of Company
Stock tendered to the Company under a put option. The Company shall have the
option to pay the purchase price for any Company stock sold under a put option
in one (1) lump sum within thirty days of the exercise of the option or in
substantially equal, annual installments over a period not exceeding five (5)
years, with adequate security provided and interest payable at a reasonable rate
on any unpaid installment balance (as determined by the Company).
10-3. RIGHT OF FIRST REFUSAL.
(a) COMPANY AND TRUSTEE RIGHT OF FIRST REFUSAL. Any shares of
Company Stock that are distributed by the Trustee shall be
subject to rights of first refusal held by the Company and by
the Trustee. Pursuant to these rights, any person who
receives shares of Company Stock from the Trust shall be
required to offer in writing to sell such shares first to the
Company, and then to the Trustee, at fair market value before
transferring such shares to any other person. A bona fide
written offer
18
<PAGE>
from an independent prospective buyer shall be deemed to be
the fair market value of the shares for purposes of this
Section 10-3. The Company and the Trustee shall have
fourteen (14) days from the date that they receive notice
of the shareholder's desire to transfer his shares to
exercise their rights of first refusal. The Company may
require that a Participant or Beneficiary entitled to a
distribution of Company Stock execute an appropriate stock
transfer agreement evidencing the right of first refusal
prior to receiving a certificate for shares of Company
Stock.
(b) ENDORSEMENT ON STOCK CERTIFICATES. Shares of Company Stock
held or distributed by the Trustee shall include such legend
restrictions on transferability as the Company may reasonably
require in order to assure compliance with the rights of first
refusal provided for in Section 10-3 and with applicable
federal and state securities laws. Except as otherwise
provided in this Article X, no shares of Company Stock held or
distributed by the Trustee may be subject to a put, call, or
other option or to a buy-sell or similar arrangement.
19
<PAGE>
ARTICLE XI
PLAN ADMINISTRATION
11-1. PLAN ADMINISTRATION. The authority to control and manage the
operation and administration of the Plan is vested in a Committee, as described
in Article XI. The Committee shall designate a responsible person as the
Administrator of the Plan, having the rights, duties and obligations of an
"administrator" under the provisions of ERISA. If the Committee fails to
designate an Administrator, the Company shall be the Administrator of the Plan.
The Company shall be the "Named Fiduciary" (as described in Section 402 of
ERISA) under the Plan.
11-2. THE TRUST. All contributions made under the Plan will be held,
managed, and controlled by a trustee acting under a trust which forms a part of
the Plan. The terms of the trust are set forth in a Trust Agreement known as
the First National Bancorp, Inc. Employee Profit Sharing and Retirement Plan
Trust Agreement. All rights which may accrue to any person under the Plan shall
be subject to all of the terms and provisions of the Trust Agreement as in
effect from time to time.
11-3. CLAIMS PROCEDURE.
(a) PROCEDURE. Claims for benefits under the Plan shall be made
in writing to the Committee. The Committee shall have full
discretion to render a decision with respect to any claim. If
a claim for benefits is wholly or partially denied by the
Committee, the Committee shall notify the claimant in writing
of the denial of the claim within a reasonable period of time,
not to exceed ninety (90) days after receipt of the claim. A
notice of denial shall be written in a manner calculated to be
understood by the claimant, and it shall set forth: (i) the
specific reason or reasons for denial of the claim; (ii) a
specific reference to the pertinent Plan provisions upon which
the denial is based; (iii) a description of any additional
material or information necessary for the claimant to perfect
the claim, together with an explanation of why such material
or information is necessary; and (iv) appropriate information
regarding the steps to be taken if the claimant wishes to
submit his claim for review. If the Committee shall fail to
notify the claimant either that his claim has been granted or
that it has been denied within ninety (90) days after the
claim is received by the Committee, the claim shall be deemed
to have been denied.
(b) PROCEDURE FOR REVIEW OF A DENIED CLAIM. Within sixty (60)
days of the receipt by the claimant of a written notice of
denial of his claim, or within sixty (60) days after the claim
is deemed denied as set forth in subsection (a) above, if
applicable, the claimant may file a written request with the
Committee that it conduct a full and fair review of the
20
<PAGE>
denial of his claim for benefits. In connection with the
claimant's appeal of the denial of his benefits, the
claimant may review pertinent documents and may submit
issues and comments in writing. The Committee shall have
full discretion to fully and fairly review the claim, and
the Committee shall render a decision on the claim appeal
promptly. Such decision shall be rendered not later than
sixty (60) days after the receipt of the claimant's request
for review, unless special circumstances (such as the need
to hold a hearing) require an extension of time for
processing, in which case the sixty (60)-day period may be
extended to one hundred and twenty (120) days. The
Committee shall notify the claimant in writing of any such
extension. The decision upon review shall: (i) include
specific reasons for the decision; (ii) be written in a
manner calculated to be understood by the claimant; and
(iii) contain specific references to the pertinent Plan
provisions upon which the decision is based.
11-4. PROCEDURES WITH RESPECT TO DOMESTIC RELATIONS ORDERS.
(a) DEFINITIONS. For purposes of this Section 11-4, the following
terms shall have the following meanings: (i) the term
"domestic relations order" shall mean any judgment, decree, or
order (including approval of a property settlement agreement)
which relates to the provision of child support, alimony
payments, or marital property rights to a spouse, former
spouse, child, or other dependent of a Participant and which
is made pursuant to a state domestic relations law, including
a community property law; (ii) the term "qualified domestic
relations order" shall have the meaning set forth in Section
414(p) of the Code; and (iii) the term "alternate payee" shall
mean any spouse, former spouse, child, or other dependent of a
Participant who is recognized by a domestic relations order as
having a right to receive all or a portion of the benefits
payable under the Plan with respect to such Participant.
(b) PROCEDURES. The Committee shall establish reasonable
procedures with respect to the following matters: (i) the
manner for determining whether a domestic relations order
constitutes a qualified domestic relations order; and (ii) the
administration of distributions under such qualified orders.
(c) NOTICE. Promptly following the receipt of any domestic
relations order, the Committee shall notify the Participant
affected by such order, and any other alternate payee, of the
receipt of such order and of the procedures established under
the Plan for determining the qualified status of domestic
relations orders. Within a reasonable period of time after
receipt of any domestic relations order, the Committee shall
determine whether such order is a qualified domestic relations
order and
21
<PAGE>
shall notify the Participant affected by such order and each
alternate payee of such determination.
(d) SEGREGATION OF ACCOUNT. During any period in which the issue
whether a domestic relations order is a qualified domestic
relations order is being determined by the Committee, by a
court of competent jurisdiction, or otherwise, the Committee
shall instruct the Trustee to segregate in a separate account
under the Trust Fund or to deposit in an escrow account the
amounts which would have been payable to the alternate payee
during such period if the order had been determined to be a
qualified domestic relations order. If the order or any
modification thereof is determined to be a qualified domestic
relations order within eighteen months, the Committee shall
pay the segregated amounts, plus any interest thereon, to the
persons entitled thereto. If within eighteen (18) months
either it is determined that the order is not a qualified
domestic relations order or the issue whether such order is a
qualified domestic relations order is not resolved, then the
Committee shall pay the segregated amounts, plus any interest
thereon, to the persons who would have been entitled to such
amounts if there had been no order. Any determination that an
order is a qualified domestic relations order which is made
after the close of the eighteen (18)-month period described
above shall be applied prospectively only.
22
<PAGE>
ARTICLE XII
THE COMMITTEE
12-1. MEMBERSHIP. The Committee referred to in Section 11-1 shall consist
of three (3) or more members, who shall be appointed by the Board of Directors
of the Company. In controlling and managing the operation and administration of
the Plan, the Committee shall act by the concurrence of a majority of its
members at a meeting or by writing without a meeting. By unanimous written
consent, the Committee may authorize any one (1) of its members to execute any
document, instrument or direction on its behalf. A written statement by a
majority of the Committee members or by an authorized Committee member shall be
conclusive in favor of any person (including the Trustee) acting in reliance
thereon.
12-2. RIGHTS, POWERS, AND DUTIES OF THE COMMITTEE. The Committee shall
have such discretionary authority as may be necessary to efficiently administer
the Plan. The rights, powers, and duties of the Committee shall include the
following:
(a) to interpret and construe the provisions of the Plan;
(b) to determine all questions relating to the eligibility,
benefits, and other rights of Employees, Participants, and
beneficiaries under the Plan;
(c) to adopt such rules of procedure and regulations as are
consistent with the provisions of the Plan and as the
Committee deems necessary and proper;
(d) to maintain and keep adequate records concerning the Plan, and
concerning the proceedings and acts of the Committee, in such
form and detail as the Committee may decide;
(e) to appoint investment managers to manage any assets of the
Trust Fund, and to authorize such managers to acquire and
dispose of assets of the Trust Fund;
(f) to employ one or more persons to render advice with respect to
any responsibility which the Committee has under the Plan;
(g) to delegate such authority and duties, including the authority
to execute any documents, as the Committee may deem
appropriate to the Trustee or to other agents, provided that
the Committee shall exercise reasonable care in the selection
of any agents; and
(h) to act as the agent for the service of legal process.
23
<PAGE>
12-3. APPLICATION OF RULES. In operating and administering the Plan, the
Committee shall apply all rules of procedure and regulations adopted by it in a
uniform and non-discriminatory manner.
12-4. REMUNERATION AND EXPENSES. No remuneration shall be paid to any
Committee member as such. However, the reasonable expenses of a Committee
member incurred in the performance of a Committee function shall be reimbursed
by the Company.
12-5. EXERCISE OF COMMITTEE'S DUTIES. Notwithstanding any other
provisions of the Plan, the Committee shall discharge its duties hereunder
solely in the interests of the Plan Participants and their beneficiaries, and:
(a) for the exclusive purpose of providing benefits to Plan
Participants and their beneficiaries; and
(b) with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in
a like capacity and familiar with such matters would use in
the conduct of an enterprise of a like character and with like
aims.
12-6. RESIGNATION OR REMOVAL OF COMMITTEE MEMBERS. A Committee member may
resign at any time by giving ten (10) days' advance written notice to the
Company, the Trustee and the other members of the Committee. The Company may
remove a Committee member by giving advance written notice to him, the Trustee
and the other members of the Committee. A Committee member who is a Participant
shall be automatically removed on his Retirement or Termination Date.
12-7. APPOINTMENT OF SUCCESSOR COMMITTEE MEMBERS. The Board of Directors
of the Company may fill any vacancy in the membership of the Committee and shall
give prompt written notice thereof to the other Committee members and to the
Trustee. While there is a vacancy in the membership of the Committee, the
remaining Committee members shall have the same powers as the full Committee
until the vacancy is filled.
24
<PAGE>
ARTICLE XIII
AMENDMENT AND TERMINATION
13-1 AMENDMENT. Subject to the provisions of Section 15-1, the Company
reserves the right to amend the Plan at any time by action of its Board of
Directors or of a person designated by resolution of its Board of Directors.
However, no amendment shall divest a Participant of any amount that he would
have received had he resigned from the Company's employ immediately prior to the
effective date of the amendment.
13-2. TERMINATION. The Company reserves the right to terminate the Plan
at any time by action of its Board of Directors. The Plan will terminate on the
earliest of the following dates:
(a) the date the Company is judicially declared bankrupt or
insolvent;
(b) the date the Company completely discontinues its contributions
under the Plan; or
(c) the date the Company is dissolved, merged, consolidated, or
reorganized, or sells all or substantially all of its assets,
except that, subject to the provisions of Section 13-3,
provision may be made by the successor or purchaser for
continuing the Plan (and in that event, the successor or
purchaser shall be substituted for the Company under the
Plan).
13-3. MERGER OR CONSOLIDATION OF PLAN, TRANSFER OF PLAN ASSETS. In the
case of any merger or consolidation with, or transfer of assets and liabilities
to, any other pension or profit sharing plan, provision shall be made so that
each Participant in the Plan on the date of the merger, consolidation, or
transfer would receive a benefit immediately after the merger, consolidation, or
transfer if the Plan then terminated which is equal to or greater than the
benefit he would have been entitled to receive immediately prior to the merger,
consolidation, or transfer if the Plan had terminated then.
13-4. VESTING AND DISTRIBUTION ON TERMINATION AND PARTIAL TERMINATION.
Notwithstanding any other provision of the Plan to the contrary, on termination
of the Plan in accordance with Section 13-2 or on partial termination of the
Plan by operation of law, the date of termination or partial termination will be
a Valuation Date and, after all adjustments required on a Valuation Date have
been made, each affected Participant's benefits will be nonforfeitable. On
termination of the Plan the Company may instruct the Trustee to (a) liquidate
the Trust Fund and distribute all benefits as soon as administratively possible;
or (b) retain the Trust Fund and distribute all benefits in accordance with the
provisions of Article VI. The provisions of Article VI will continue to apply
until the benefits of all affected Participants have been distributed to them.
25
<PAGE>
ARTICLE XIV
TOP-HEAVY PROVISIONS
14-1. TOP-HEAVY DETERMINATION. The Plan will be top-heavy if, as of the
first day of the first Fiscal Year or, as of the day next preceding the first
day of any later Fiscal Year (the "Determination Date"), the aggregate present
value of the Account balances of all "Key Employees," as defined in Section
416(i) of the Code, and their beneficiaries exceeds sixty percent (60%) of the
aggregate present value of the Account balances of all Participants and
beneficiaries. The aggregate present value of the Account balances of a
Participant who has not performed any services for the Company or a member of
the Controlled Group during the five (5)-year period ending on the Determination
Date shall not be taken into account.
14-2. MINIMUM CONTRIBUTION. For each Fiscal Year that the Plan is
top-heavy, the aggregate amount of Company contributions allocated to the
accounts of each Participant who is not a Key Employee and who is employed by
the Company or a member of the Controlled Group as of the last day of the
Fiscal Year shall not be less than the lesser of:
(a) three percent (3%) of his Compensation for the Fiscal Year; or
(b) that percent of his Compensation equal to the percentage of
Company contributions allocated to the Accounts of the Key
Employee with the highest allocation percentage.
14-3. AGGREGATION OF PLANS. As required by Section 416(g)(2) of the Code,
other plans maintained by the Company or a member of the Controlled Group shall
be aggregated with this Plan for purposes of determining whether the Plan is
top-heavy.
26
<PAGE>
ARTICLE XV
MISCELLANEOUS
15-1. NO REVERSION TO COMPANY. No part of the corpus or income of the
Trust Fund shall revert to the Company or be used for or diverted to purposes
other than for the exclusive benefit of Participants and their beneficiaries,
except as specifically provided in Article V of the Trust Agreement.
15-2. NOTICES. Any notice required to be filed with any person under the
Plan will be properly filed if delivered or mailed to such person, in care of
the Company, at 78 North Chicago Street, Joliet, Illinois 60432, or at such
other address as the Company may designate from time to time.
15-3. INDEPENDENT APPRAISER. If the Company Stock is not readily tradable
on an established securities market, then all determinations of fair market
value required under the Plan shall be based upon a valuation by an independent
appraiser.
15-4. INDEMNIFICATION. The Company shall indemnify the Trustee, the
Administrator, and any other person acting as a fiduciary with respect to the
Plan for, and hold them harmless against, any and all liabilities, losses,
costs, or expenses of any kind or nature which may be imposed on, incurred by,
or asserted against them at any time by reason of their service under this Plan
(including legal fees and expenses), to the extent such liability, loss, cost,
or expense is not insured against or exceeds any insurance recovery. However,
no person shall be entitled to indemnity under this Section if he acted
dishonestly or in willful or grossly negligent violation of the law or
regulation under which such liability, loss, cost, or expense arises.
15-5. SUBSIDIARY AND AFFILIATED COMPANIES. With the approval of the Board
of Directors of the Company, any subsidiary or affiliate of the Company may
become a party to this Plan, and become entitled to all of the benefits and
subjected to all of the obligations hereof, by executing an acceptance of this
Plan in such form as the Company and the Trustee shall approve. Upon acceptance
of this Plan by any subsidiary or affiliate, employees of such subsidiary or
affiliate may become Participants upon meeting the eligibility requirements
herein provided; and when so qualified such employees shall be subject to the
same obligations and entitled to the same rights and benefits as if they were
employees of the Company. The contributions to be made in respect of employees
of any subsidiary or affiliate of the Company which becomes a party to this Plan
shall be made by the subsidiary or affiliate and not by the Company. The
subsidiary or affiliate shall have no right to defer payment of its contribution
or to terminate the Plan in respect of itself or its participating employees
without the written consent of the Board of Directors of the Company.
15-6. PARTICIPATION NOT GUARANTEE OF EMPLOYMENT. Participation in the
Plan does not constitute a guarantee or contract of employment with the Company.
27
<PAGE>
15-7. GENDER AND NUMBER. In this Plan, where the context admits, words in
the masculine gender include the feminine and neuter genders, words in the
singular include the plural, and the plural includes the singular.
15-8. GOVERNING LAWS. The Plan shall be construed and administered
according to the laws of the State of Illinois, to the extent that such laws are
not preempted by the laws of the United States of America.
15-9. TEXT TO CONTROL. The Article and Section headings and numbers in
this Plan are included solely for convenience of reference, and if there be any
conflict between such headings and numbers and the text of this Plan, the text
shall control.
The foregoing is a true and correct copy of the First National Bancorp,
Inc. Employee Profit Sharing and Retirement Plan.
Dated at Joliet, Illinois, this 10th day of December, 1998.
FIRST NATIONAL BANCORP, INC.
By: Albert G. D'Ottavio
-------------------------
Its President
28
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31,
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average number of shares outstanding 2,423,494 2,431,804 2,431,804
Net income (in thousands) $9,727 $9,174 $8,521
Earnings per share $4.01 $3.77 $3.50
</TABLE>
Note: Earnings per common share for 1996 have been retroactively restated to
reflect the 2 for 1 stock split effected in the form of a 100% stock dividend in
1997.
<PAGE>
Annual
Report
1998
[Logo] FIRST NATIONAL BANCORP, INC.
<PAGE>
FINANCIAL
HIGHLIGHTS
- ---------------------------------------
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA 1998 1997 % Increase
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Assets At Year End $ 902,675 $ 860,756 4.87%
Net Income $ 9,727 $ 9,174 6.03%
Earnings Per Share $ 4.01 $ 3.77 6.37%
Stockholders' Equity $ 82,108 $ 76,945 6.71%
Book Value Per Share $ 33.92 $ 31.64 7.21%
</TABLE>
TOTAL ASSETS AT YEAR END
(IN THOUSANDS)
<TABLE>
<S> <C> <C> <C>
$902,675
$900,000
$860,756
$824,570
$800,000
$700,000
$600,000
1996 1997 1998
</TABLE>
NET INCOME
(IN THOUSANDS)
<TABLE>
<S> <C> <C> <C>
$10,000
$9,727
$9,174
$ 9,000
$8,521
$ 8,000
$ 7,000
$ 6,000
1996 1997 1998
</TABLE>
<TABLE>
<CAPTION>
CONTENTS
- ------------------------------------------------------------
<S> <C>
Letter to Shareholders . . . . . . . . . . . . . . . . . . 2
First National People. . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Balance Sheets. . . . . . . . . . . 6
Condensed Consolidated Statements of Income. . . . . . . . 7
Condensed Consolidated Statements
of Stockholders' Equity . . . . . . . . . . . . . . . . 8
Report of Independent Auditors . . . . . . . . . . . . . . 8
Financial Highlights & Common
Stock Data. . . . . . . . . . . . . . . . . . . . . . . 9
Directors. . . . . . . . . . . . . . . . . . . . . . . . .10
Officers . . . . . . . . . . . . . . . . . . . . . . . . .12
</TABLE>
<PAGE>
FINANCIAL
HIGHLIGHTS
---------------------------------------
A NEW SYMBOL FOR A PROUD TRADITION
On the cover and throughout this year's report, we have featured a new logo,
which symbolizes our new structure and the strategic vision inside First
National Bancorp.
While the look is new, the meaning is unchanged. It is a new symbol of our
commitment to customer convenience, community involvement and consistent
financial growth - core values which our shareholders, customers and employees
understand and endorse.
EARNINGS PER SHARE
<TABLE>
<S> <C> <C> <C>
$4.01
$4.00
$3.77
$3.75
$3.50 $3.50
$3.25
$3.00
1996 1997 1998
</TABLE>
STOCKHOLDERS' EQUITY AT YEAR END
(IN THOUSANDS)
<TABLE>
<S> <C> <C> <C>
$82,108
$80,000
$76,945
$75,000
$71,391
$70,000
$65,000
$60,000
1996 1997 1998
</TABLE>
1
<PAGE>
TO OUR
SHAREHOLDERS
- ---------------------------------------
[PHOTO]
Positioning First National Bancorp to compete in today's changing financial
world requires a mix of traditional values and fresh ideas. This concept has
been captured in our new logo which symbolizes readiness for the future and
eagerness to continue our community banking philosophy - a philosophy whose
success was evident in our performance during 1998.
This year was again marked by record-setting financials. By year end, Total
Assets had grown to nearly $903 million. Net Income rose to an all-time high
of $9.7 million, representing a 6% increase over last year. For the first
time in history, Earnings Per Share exceeded $4.00. Acknowledging the
Bancorp's performance, the Board of Directors authorized an increase in the
December quarterly cash dividend to 42 1/2 cents.
The refinancing "frenzy" experienced in '97 continued throughout 1998 as
consumers took full advantage of the low rates. Despite this fierce interest
rate competition, we experienced noticeable growth in our total loan
portfolio, while at the same time increasing our net interest income. Within
the company, increased consumer credit clearly spearheaded this loan growth.
Our loan-to-deposit ratio averaged a desirable 73% for 1998 with our deposit
growth continuing to be the primary source of funds.
The Bancorp's on-going effort to develop fee-generating business added stability
to both retail and commercial income. Lending produced over $1.3 million in fee
income from loan sales, closing costs and servicing fees. Fees collected from
commercial service charges, investment management and our ATM network reached
all-time highs.
2
<PAGE>
TO OUR
SHAREHOLDERS
---------------------------------------
Our consolidation of subsidiary banks in Lockport, Bolingbrook and Plano into
First National Bank of Joliet was completed in March of 1998. This has not only
produced additional on-going cost savings, but has also developed a greater
sense of teamwork between our community banks. Sharing the Bancorp's most
valuable resource - our people - strengthens our corporate structure.
To enhance customer convenience and follow our community banking philosophy, the
Bancorp will be opening branches in two rapidly growing communities in Will
County. Construction should be completed in 1999 for our facilities on Weber
Road in Romeoville and Route 59 in Plainfield.
Knowing and using the right technology is a foundation of banking success.
During 1995 and 1996, First National undertook a comprehensive technology study.
The results of this study and our ongoing research is the basis for our current
Technology Plan which addresses issues into the next century, including Y2K
readiness. Please be assured that your Bancorp will be well prepared to serve
you efficiently in the 21st century.
Technology enhancements scheduled for 1999 will include a comprehensive on-line
banking product. This new internet service will be available for First National
customers to conduct traditional banking transactions from the convenience of
their home or office. In addition, clients of our Investment Management and
Trust division will be able to review their investment transactions and receive
daily pricing of their securities via their personal computers.
First National Bancorp is ready for the future, yet we will never forget the
basics - who we are and what our customers and shareholders expect of us. These
basics have not changed since we opened our doors in 1857, and we pledge to
continue our efforts to provide the best in community banking.
On behalf of the directors, officers and employees, we wish to thank you, the
shareholders, for your continued confidence and support.
/s/ Kevin T. Reardon /s/ Albert G. D'Ottavio
- ------------------------- -------------------------------------
KEVIN T. REARDON ALBERT G. D'OTTAVIO
Chairman of the Board and President and Chief Operating Officer
Chief Executive Officer
3
<PAGE>
FIRST NATIONAL
PEOPLE
- ---------------------------------------
FIRST NATIONAL PEOPLE
ARE LEADING THE WAY...
Unifying four subsidiary banks into one organization has required a great
deal of expertise, dedication and creativity. We salute the people featured
on these pages, and all of our people at First National who have exemplified
the true meaning of teamwork.
[PHOTO]
Whether in Joliet, Lockport, Plano, Bolingbrook or a neighboring community,
our BUSINESS DEVELOPMENT OFFICERS have delivered our message of tradition,
integrity and experience to the business community.
FROM LEFT TO RIGHT: STEVE LAKEN, JIM ALEXA AND MIKE NOLAN
[PHOTO]
While helping to streamline our operations and implement new technologies,
our BANKING CENTER TEAMS have worked closely with our customers to keep them
informed and in control of their financial futures.
FROM LEFT TO RIGHT: JOANNE LANGBEIN, RON HILL, BETTY MCTEE (PRESIDENT, PLANO
BANKING CENTER), BRUCE WOLFERSBERGER (PRESIDENT, LOCKPORT & BOLINGBROOK
BANKING CENTERS), ALICIA INGRAM AND RHONDA BEBAR
[PHOTO]
While many banks and investment firms have turned their attention to size and
fee changes, our INVESTMENT MANAGEMENT SPECIALISTS remain committed to
personal service and financial performance.
FROM LEFT TO RIGHT: TOM PAXSON, JERI MADISON, JIM LIMACHER, ANDY MIDLOCK AND
ALLAN SOMERS
4
<PAGE>
FIRST NATIONAL
PEOPLE
---------------------------------------
[PHOTO]
With competitive rates, numerous products and added conveniences, our
MORTGAGE LOAN SPECIALISTS make it easier for our customers to obtain a home
loan.
SEATED BEHIND DESK: STEVE MARCHIO
[PHOTO]
Our team of experienced COMMERCIAL LENDERS weave their personal approach
throughout our complete range of business services to help companies manage
their growth and capitalize on new opportunities.
FROM LEFT TO RIGHT: CARL HOLMQUIST, TERRY HACKETT, MARK GRIGLIONE, MIKE TIERNEY
AND ERIC LEGGETT
[PHOTO]
In 1998, our team of INFORMATION SYSTEMS PROFESSIONALS not only improved the
way we communicate and process customer transactions, but positioned First
National to help its customers bank in new and more efficient ways in 1999.
FROM LEFT TO RIGHT: OLIVIER MAY, CHERYL GLADKOWSKI AND BRAD PEDERSON
5
<PAGE>
CONDENSED CONSOLIDATED
BALANCE SHEETS
- ---------------------------------------
<TABLE>
<CAPTION>
First National Bancorp, Inc.
December 31, 1998 & 1997
------------------------
(In thousands, except share data) 1998 1997
------------------------
<S> <C> <C>
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . . . . . $ 39,710 $ 34,591
Federal funds sold . . . . . . . . . . . . . . . . . . . . . 31,000 50,800
Securities available-for-sale. . . . . . . . . . . . . . . . 66,927 11,831
Securities held-to-maturity (fair value of $195,526 in
1998 and $206,269 in 1997). . . . . . . . . . . . . . . . 193,733 204,870
Loans
Commercial. . . . . . . . . . . . . . . . . . . . . . . 200,612 195,449
Agricultural. . . . . . . . . . . . . . . . . . . . . . 9,763 10,769
Residential real estate . . . . . . . . . . . . . . . . 136,894 147,625
Consumer . . . . . . . . . . . . . . . . . . . . . . . 193,677 172,537
-------- --------
Total loans. . . . . . . . . . . . . . . . . . . . 540,946 526,380
Allowance for loan losses . . . . . . . . . . . . . . . (4,946) (4,437)
-------- --------
Loans, net . . . . . . . . . . . . . . . . . . . . 536,000 521,943
Premises and equipment, net. . . . . . . . . . . . . . . . . 18,753 18,840
Accrued interest receivable and other assets . . . . . . . . 8,067 8,392
Intangibles, net . . . . . . . . . . . . . . . . . . . . . . 8,485 9,489
-------- --------
Total assets. . . . . . . . . . . . . . . . . $902,675 $860,756
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest-bearing . . . . . . . . . . . $142,427 $129,243
NOW accounts . . . . . . . . . . . . . . . . . . . 87,611 78,660
Money market accounts. . . . . . . . . . . . . . . 45,736 37,086
Savings. . . . . . . . . . . . . . . . . . . . . . 172,329 165,341
Time deposits, $100,000 and over . . . . . . . . . 69,871 70,472
Other time deposits. . . . . . . . . . . . . . . . 228,342 245,354
-------- --------
Total deposits. . . . . . . . . . . . . . . . 746,316 726,156
Short-term borrowings . . . . . . . . . . . . . . . . . 65,540 46,207
Long-term debt. . . . . . . . . . . . . . . . . . . . . 3,059 4,817
Accrued interest and other liabilities. . . . . . . . . 5,652 6,631
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . 820,567 783,811
Stockholders' equity
Preferred stock, no par value, 1,000,000 shares authorized;
none issued . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, $10 par value; 5,500,000 shares authorized;
2,431,804 shares issued . . . . . . . . . . . . . . . . 24,318 24,318
Additional paid-in capital. . . . . . . . . . . . . . . 14 -
Retained earnings . . . . . . . . . . . . . . . . . . . 58,578 52,607
Unrealized gain (loss) on securities available-for-sale,
net of tax. . . . . . . . . . . . . . . . . . . . . . . (52) 20
Treasury stock, at cost (11,368 shares in 1998) . . . . (750) -
-------- --------
Total stockholders' equity . . . . . . . . . . . . 82,108 76,945
-------- --------
Total liabilities and stockholders' equity. . $902,675 $860,756
-------- --------
-------- --------
</TABLE>
6
<PAGE>
First National Bancorp, Inc.
Years Ended December 31, 1998 & 1997
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
------------------------
(In thousands, except share data) 1998 1997
------------------------
<S> <C> <C>
INTEREST INCOME
Loans . . . . . . . . . . . . . . . . . . . . . . . $ 46,483 $ 43,556
Securities
Taxable. . . . . . . . . . . . . . . . . . . . . . 11,025 12,504
Tax-exempt . . . . . . . . . . . . . . . . . . . . 1,709 1,892
Federal funds sold. . . . . . . . . . . . . . . . . . . 2,981 1,736
--------- ---------
Total interest income . . . . . . . . . . . . 62,198 59,688
INTEREST EXPENSE
Deposits . . . . . . . . . . . . . . . . . . . . . . . 24,053 23,788
Short-term borrowings . . . . . . . . . . . . . . . . . 2,711 2,470
Long-term debt. . . . . . . . . . . . . . . . . . . . . 366 508
--------- ---------
Total interest expense . . . . . . . . . . . . . . 27,130 26,766
--------- ---------
Net interest income. . . . . . . . . . . . . . . . . . . . . 35,068 32,922
Provision for loan losses. . . . . . . . . . . . . . . . . . 2,034 1,118
--------- ---------
Net interest income after provision for loan losses. . . . . 33,034 31,804
NONINTEREST INCOME
Trust fees. . . . . . . . . . . . . . . . . . . . . . . 1,153 1,035
Service charges on deposit accounts . . . . . . . . . . 3,915 3,662
Securities gains, net . . . . . . . . . . . . . . . . . 121 13
Other income. . . . . . . . . . . . . . . . . . . . . . 1,950 1,189
--------- ---------
Total noninterest income . . . . . . . . . . . . . 7,139 5,899
NONINTEREST EXPENSE
Salaries and employee benefits. . . . . . . . . . . . . 13,099 12,562
Occupancy expense . . . . . . . . . . . . . . . . . . . 1,857 1,800
Data processing . . . . . . . . . . . . . . . . . . . . 1,485 1,215
Equipment expense . . . . . . . . . . . . . . . . . . . 1,681 1,449
Amortization of intangibles . . . . . . . . . . . . . . 1,004 1,021
Other expenses. . . . . . . . . . . . . . . . . . . . . 6,506 6,180
--------- ---------
Total noninterest expense. . . . . . . . . . . . . 25,632 24,227
--------- ---------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . 14,541 13,476
Income tax expense . . . . . . . . . . . . . . . . . . . . . 4,814 4,302
--------- ---------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . $ 9,727 $ 9,174
--------- ---------
--------- ---------
Earnings per share . . . . . . . . . . . . . . . . . . . . . $4.01 $3.77
Weighted average shares outstanding . . . . . . . . . . . . 2,423,494 2,431,804
</TABLE>
7
<PAGE>
CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------
<TABLE>
<CAPTION>
First National Bancorp, Inc.
Years Ended December 31, 1998 & 1997
--------------------------------------------------------------------------------
(In thousands, except share data)
Unrealized
Gain
(Loss) on
Common Stock Additional Securities
--------------------- Paid-In Retained Available- Treasury
Shares Par Value Capital Earnings for-Sale Stock Total
--------- --------- ---------- -------- ---------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 1,215,902 $12,159 $8,846 $50,394 $ (8) $ $71,391
Comprehensive income
Net income - - - 9,174 - - 9,174
Other comprehensive income, net of tax
Unrealized gains on securities,
net of reclassification adjustment - - - - 28 - 28
------
Total comprehensive income 9,202
Cash dividends declared - $1.50 per share - - - (3,648) - - (3,648)
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
Comprehensive income
Net income - - - 9,727 - - 9,727
Other comprehensive income, net of tax
Unrealized losses on securities,
net of reclassification adjustment - - - - (72) - (72)
------
Total comprehensive income 9,655
Cash dividends declared - $1.55 per share - - - (3,756) - - (3,756)
17,268 shares of common stock purchased
from terminated pension plan - - - - - (1,140) (1,140)
5,900 shares of common stock contributed
to profit sharing plan - - 14 - - 390 404
--------- --------- ---------- -------- ---------- --------- -------
Balance, December 31, 1998 2,431,804 $24,318 $ 14 $58,578 $ (52) $ (750) $82,108
--------- --------- ---------- -------- ---------- --------- -------
--------- --------- ---------- -------- ---------- --------- -------
</TABLE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
First National Bancorp, Inc.
Joliet, Illinois
[LOGO]
CROWE CHIZEK
We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheets of First National Bancorp, Inc. as of December 31,
1998 and 1997 and the related consolidated statements of income, stockholders'
equity, and cash flows for the years then ended (not presented herein); and in
our report dated January 22, 1999 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, 1998 and 1997 and the condensed
consolidated statements of income and 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
January 22, 1999
8
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
& COMMON STOCK DATA
-------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(In thousands, except share data) 1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
Net interest income $ 35,068 $ 32,922 $ 30,440 $ 29,451 $ 26,312
Provision for loan losses 2,034 1,118 1,024 1,191 830
Noninterest income 7,139 5,899 5,491 5,124 3,838
Noninterest expense 25,632 24,227 22,249 21,419 18,540
Income before taxes 14,541 13,476 12,658 11,965 10,780
Net income 9,727 9,174 8,521 8,211 7,507
BALANCE SHEET -
END OF YEAR BALANCES
Securities $260,660 $216,701 $214,828 $202,711 $189,874
Loans, net 536,000 521,943 464,372 427,917 418,918
Total assets 902,675 860,756 824,570 749,990 692,642
Deposits 746,316 726,156 690,513 605,137 556,162
Stockholders' equity 82,108 76,945 71,391 66,425 61,657
BALANCE SHEET -
AVERAGE BALANCES
Securities $211,946 $234,941 $213,653 $189,605 $192,890
Loans, net 529,752 493,790 441,619 426,523 371,442
Total assets 867,915 829,878 773,792 729,801 640,388
Deposits 724,894 698,068 640,485 577,093 505,553
Stockholders' equity 80,098 74,040 68,269 63,741 59,090
WEIGHTED AVERAGE
SHARES OUTSTANDING (1) 2,423,494 2,431,804 2,431,804 2,431,804 2,431,804
PER SHARE DATA (1)
Book value $ 33.92 $ 31.64 $ 29.36 $ 27.32 $ 25.35
Earnings 4.01 3.77 3.50 3.38 3.09
Cash dividends 1.55 1.50 1.50 1.38 1.34
SELECTED FINANCIAL RATIOS
Average net loans to
average deposits 73.08% 70.74% 68.95% 73.91% 73.47%
Return on average assets 1.12% 1.11% 1.10% 1.13% 1.17%
Return on average equity 12.14% 12.39% 12.48% 12.88% 12.70%
Net interest margin (2) 4.53% 4.47% 4.47% 4.62% 4.72%
Average equity to
average assets 9.23% 8.92% 8.82% 8.73% 9.23%
Dividend payout ratio 38.61% 39.76% 42.80% 40.73% 43.40%
- -------------------------
(1) Per share data for the years 1994 through 1996 have been restated for a 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%.
</TABLE>
COMMON STOCK PRICE RANGE,
DIVIDENDS 1998-1997 (UNAUDITED)
<TABLE>
<CAPTION>
Cash
Price Range Dividends
------------------- Declared
High Low Per Share
---- --- ---------
<S> <C> <C> <C>
1998
4th quarter $72 $68 $0.425
3rd quarter 76 63 0.375
2nd quarter 69 61 0.375
1st quarter 69 57 0.375
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
- ---------------------
(1) Per Share information restated for the 2-for-1 stock split effected in the
form of a 100% stock dividend in 1997.
</TABLE>
9
<PAGE>
BOARD OF
DIRECTORS
- ---------------------------------------
[PHOTO]
10
<PAGE>
BOARD OF
DIRECTORS
---------------------------------------
LEFT TO RIGHT:
MICHAEL C. REARDON
Senior Vice President
First National Bank of Joliet
GEORGE H. BUCK
President, Werden Buck Company
HARVEY J. LEWIS
Farmer
WATSON A. HEALY
Architect
HOWARD E. REEVES
President, HOW Enterprises, Inc.
KEVIN T. REARDON
Chairman of the Board
and Chief Executive Officer
SHELDON C. BELL
President, Bell Realty, Inc.
ALBERT G. D'OTTAVIO
President and Chief Operating Officer
WALTER F. NOLAN, CPA
Member, Clifton Gunderson & Co., L.L.C.
LOUIS R. PEYLA
Chairman, Illinois Securities
CHARLES R. PEYLA
President, Illinois Securities
PAUL A. LAMBRECHT
Retired Chairman
Brown & Lambrecht Earthmovers, Inc.
11
<PAGE>
BANK
OFFICERS
- ---------------------------------------
FIRST NATIONAL BANK OF JOLIET
- ---------------------------------------
CHAIRMAN OF THE BOARD & 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, VICE PRESIDENT
CATHERINE E. CROWLEY, ASSISTANT VICE PRESIDENT
DANIEL J. MIHELICH, ASSISTANT VICE PRESIDENT
STEPHEN P. MARCHIO, ASSISTANT VICE PRESIDENT
MICHAEL J. SCHUTZ, LOAN OFFICER
CATHY A. ALBERTSON, 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
GAIL MOSS, LOAN OFFICER
ROBERT A. DILORENZO, LOAN OFFICER
INVESTMENT MANAGEMENT
& TRUST DEPARTMENT
- ---------------------
JAMES T. LIMACHER, SENIOR VICE PRESIDENT
THOMAS E. PAXSON, SENIOR INVESTMENT SPECIALIST
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, VICE PRESIDENT
LEIF HENDRICKSEN, BUILDING & FACILITIES OFFICER
JEANIE BETTENHAUSEN, OPERATIONS 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, VICE PRESIDENT
DATA PROCESSING DEPARTMENT
- --------------------------
BEVERLY I. BOOSTROM, ASSISTANT VICE PRESIDENT
AUDITING DEPARTMENT
- -------------------
RICHARD G. DEGRUSH, SENIOR VICE PRESIDENT
MARK MIDLOCK, ASSISTANT AUDITOR
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
SAUNDRA K. LUCAS, RETAIL BANKING OFFICER
SUZANNE M. GAZELLE, RETAIL BANKING OFFICER
KATHRYN G. PORTER, RETAIL BANKING OFFICER
THOMAS A. MEYER, LOAN OFFICER
MAX T. ZIESMER, BUSINESS DEVELOPMENT OFFICER
STEVEN T. LAKEN, BUSINESS DEVELOPMENT OFFICER
BANK CONTROL DEPARTMENT
- -----------------------
RONALD E. WENCEL, BANK CONTROL OFFICER
MARKETING DEPARTMENT
- --------------------
LAUREN A. MUELLER, MARKETING OFFICER
A copy of the company's Annual Report on Form 10K for 1998 may be obtained by
writing to: Executive Secretary, First National Bancorp, Inc., 78 N. Chicago
Street, Joliet, IL 60432
MEMBER FDIC [LOGO]
12
<PAGE>
BANK
OFFICERS
---------------------------------------
LOCKPORT BANKING CENTER
- ---------------------------------------
ADVISORY BOARD MEMBERS
- ----------------------
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
PRESIDENT
- ---------
BRUCE J. WOLFERSBERGER
COMMERCIAL &
MORTGAGE LOAN DEPARTMENT
- ------------------------
MARK J. GRIGLIONE, VICE PRESIDENT
SANDRA M. PESAVENTO, VICE PRESIDENT
MICHAEL J. TIERNEY, ASSISTANT VICE PRESIDENT
DEPOSIT SERVICES DEPARTMENT
- ---------------------------
RHONDA L. BEBAR, ASSISTANT VICE PRESIDENT
INSTALLMENT LOAN DEPARTMENT
- ---------------------------
PAMELA J. TARRANT, VICE PRESIDENT
PHYLLIS M. CLEAR, LOAN OPERATIONS OFFICER
PLANO BANKING CENTER
- ---------------------------------------
ADVISORY BOARD MEMBERS
- ----------------------
BETTY J. MCTEE
R. KEITH CAYWOOD
ALBERT G. D'OTTAVIO
ROGER D. GOSSETT
RONALD J. HILL
THOMAS E. KLATT
PETER L. KRENTZ
JACK A. PODLESNY
KEVIN T. REARDON
PRESIDENT
- ---------
BETTY J. MCTEE
EXECUTIVE VICE PRESIDENT
- ------------------------
RONALD J. HILL
LOAN DEPARTMENT
- ---------------
ERIC H. LEGGETT, VICE PRESIDENT
TODD W. MEIER, MORTGAGE LOAN OFFICER
MICHAEL JACKSON, LOAN OFFICER
SHARON R. HAGGARD, INSTALLMENT LOAN OFFICER
PATRICIA R. HATCHER, ASSISTANT LOAN OFFICER
CUSTOMER SERVICE DEPARTMENT
- ---------------------------
M. PATRICIA COULTRIP, CUSTOMER SERVICE OFFICER
PATRICIA A. FIEDLER, OPERATIONS OFFICER
BOLINGBROOK BANKING CENTER
- ---------------------------------------
ADVISORY BOARD MEMBERS
- ----------------------
KEVIN T. REARDON
ALBERT G. D'OTTAVIO
BRUCE J. WOLFERSBERGER
JACK A. PODLESNY
JOHN J. KEIGHER
MICHAEL W. NOLAN
PRESIDENT
- ---------
BRUCE J. WOLFERSBERGER
LOAN DEPARTMENT
- ---------------
MICHAEL W. NOLAN, VICE PRESIDENT
JEANNE SZYMANSKI, LOAN OFFICER
CUSTOMER SERVICE DEPARTMENT
- ---------------------------
ALICIA INGRAM, OPERATIONS OFFICER
<PAGE>
First National Bancorp, Inc.
78 North Chicago Street
Joliet, Illinois 60432
<PAGE>
FIRST NATIONAL BANCORP, INC.
[LOGO]
Financial Report 1998
<PAGE>
[LOGO]
FIRST NATIONAL BANCORP, INC.
FINANCIAL REPORT 1998
- -----------------------------------------------------------------
CONTENTS
Management's Discussion and Analysis . . . . . . . . . . . . . .1
Additional Statistical Information . . . . . . . . . . . . . . 12
Report of Independent Auditors . . . . . . . . . . . . . . . . 17
Financial Statements
--Consolidated Balance Sheets. . . . . . . . . . . . . . . 18
--Consolidated Statements of Income. . . . . . . . . . . . 19
--Consolidated Statements of Stockholders' Equity. . . . . 20
--Consolidated Statements of Cash Flows. . . . . . . . . . 21
--Notes to Consolidated Financial Statements . . . . . . . 22
<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. Factors which could have a material adverse effect
on the operations and future prospects of the Company and its subsidiary
banks include, but are not limited to, changes in: interest rates; general
economic conditions; legislative/regulatory changes; monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and
the Federal Reserve Board; the quality or composition of the loan or
securities investment portfolios; demand for loan products; deposit flows;
competition; demand for financial services in the Company's market area; and
accounting principles, policies, and guidelines. These 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 bank holding company providing banking and other financial
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, 1998, the Company has fifteen customer banking locations
with total assets of $902.7 million compared to $860.8 million at the end of
1997. In 1998, the Company merged Southwest Suburban Bank, Bank of Lockport,
and Community Bank of Plano into First National Bank of Joliet. Four new branch
offices have been opened in the past four 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.
FINANCIAL CONDITION
In both 1998 and 1997, the Company experienced continued growth in deposits,
earning assets, total assets, and capital. Average earning assets for 1998 were
$796.6 million, an increase of $36.8 million, or 4.85%, from $759.8 million in
1997. In 1997, average earning assets increased $54.4 million, or 7.71%, from
$705.4 million in 1996. Both years' average earning asset growth is primarily
due to increases in the average loan portfolio. In 1998, growth in consumer and
commercial loans was partially offset by decreases in commercial and residential
real estate loans. This growth was funded through average deposit growth of
3.84% and average short-term borrowing growth of 14.09%. The largest
contributors to loan growth in 1997 were consumer and commercial real estate
loans which were funded primarily through average deposit growth of 8.99%.
Economic factors remain favorable, and management expects loan growth to
continue as the markets the Company serves continue to expand.
Total average deposits continued to grow in 1998, as they have for several
years in a row. Each deposit category experienced growth in both 1998 and
1997. An important source of deposit growth has been the opening of new
branch offices during the past few years. Average interest-bearing
liabilities for 1998 were $654.6 million, an increase of 3.45% from 1997. In
1997, average interest-bearing liabilities increased 6.93% from 1996.
Average savings, NOW, and money market deposits increased $13.0 million, or
4.58%, in 1998 and $15.3 million, or 5.69%, in 1997. Average time deposits
increased $4.3 million, or 1.46%, in 1998 after increasing by $33.5 million,
or 12.71%, in 1997.
1
<PAGE>
Average demand deposits for 1998 were $126.3 million, an increase of 8.13%,
from $116.8 million in 1997. In 1997, average demand deposits increased
8.14%, from $108.0 million in 1996.
As discussed under "Capital Resources," stockholders' equity increased 6.71% and
7.78% in 1998 and 1997, respectively, based on year-end amounts. Retained
earnings has been the primary source of growth in stockholders' equity in 1998
and 1997.
During 1998, the Company curtailed and terminated its defined benefit pension
plan. The plan held 17,268 shares of the Company's stock, which the Company
purchased from the plan in 1998. The Company paid the plan $1.1 million for the
stock, based on an independent appraisal. In December 1998, the Company
contributed 5,900 of the shares to a new profit sharing plan covering
substantially all full-time employees, and recorded $404,000 of expense based on
the fair value of the contributed shares. Management believes that the new
profit sharing plan will provide an incentive for all of the Company's
employees, since employer contributions can be made in Company stock or cash.
The effect of these treasury stock transactions reduced stockholders' equity by
$736,000 in 1998.
Total stockholders' equity at December 31, 1998 was $82.1 million, an increase
of $5.2 million from the prior year end. Book value per share increased to a
record high of $33.92 at December 31, 1998. Total equity and book value per
share have increased for several consecutive years.
RESULTS OF OPERATIONS
For the year ended December 31, 1998, the Company earned $9.7 million or $4.01
per share as compared to $9.2 million or $3.77 per share and $8.5 million or
$3.50 per share for the years ended December 31, 1997 and 1996, respectively.
Net income for 1998 increased by 6.03% over that of 1997 while a 7.66% increase
was achieved in 1997. 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 1.12%
in 1998. Corresponding figures were 1.11% and 1.10% for 1997 and 1996,
respectively. Return on average equity was 12.14% in 1998, 12.39% in 1997, and
12.48% in 1996.
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 and monitoring
interest rates offered to customers, particularly 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 4.53% in 1998, as compared to 4.47% in both 1997 and 1996.
In 1998, the yield on earning assets decreased 6 basis points to 7.94% and the
yield on interest-bearing liabilities decreased 9 basis points to 4.14%. The
decrease in the yield on earning assets is due primarily to the general decline
in interest rates that occurred during 1998. The decrease in the yield on
interest-bearing liabilities is due primarily to a combination of the increase
in the volume of lower cost savings, NOW, and money market deposits and the
decrease in rates paid on higher cost time deposits and short-term borrowings.
Net interest income in 1998 increased by $2.1 million, or 6.22%, on a
tax-equivalent basis compared to 1997. The increase in the volume of earning
assets net of interest-bearing liabilities produced $2.1 million of the
increase in net interest income while changes in interest rates reduced
income by $24,000. Net interest income in 1997 increased by $2.5 million, or
7.79%, on a tax-equivalent basis compared to 1996. The increase in the
volume of earning assets net of interest-bearing liabilities produced $3.1
million of the net interest income increase while changes in interest rates
reduced income by $666,000.
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
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 8 1 9 9 7 1 9 9 6
----------------------------- ------------------------------ -----------------------------
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:
Federal funds sold $ 54,945 $ 2,981 5.43% $ 31,047 $ 1,736 5.59% $ 50,143 $ 2,568 5.12%
Taxable securities 181,130 11,025 6.09 200,981 12,504 6.22 178,087 10,980 6.17
Tax-exempt securities 30,816 2,629 8.53 33,960 2,911 8.57 35,566 3,102 8.72
Loans 529,752 46,589 8.79 493,790 43,596 8.83 441,619 39,148 8.86
-------- ------- -------- ------- -------- -------
Total interest-
earning assets 796,643 63,224 7.94 759,778 60,747 8.00 705,415 55,798 7.91
-------- ------- -------- ------- -------- -------
NON-INTEREST-EARNING ASSETS:
Cash and due from banks 35,750 33,266 32,368
Premises and equipment 18,693 18,300 16,898
Intangibles and other
assets 16,829 18,534 19,111
-------- -------- -------
Total noninterest
earning assets 71,272 70,100 68,377
-------- -------- --------
Total assets $867,915 $829,878 $773,792
-------- -------- --------
-------- -------- --------
INTEREST-BEARING LIABILITIES:
Deposits
NOW and money market $123,460 $ 3,436 2.78% $115,855 $3,047 2.63% $108,735 $ 2,559 2.35%
Savings 173,803 4,264 2.45 168,397 4,206 2.50 160,224 4,007 2.50
Time 301,369 16,353 5.43 297,043 16,535 5.57 263,545 14,525 5.51
Short-term borrowings 51,656 2,711 5.25 45,276 2,470 5.46 51,993 2,600 5.00
Long-term debt 4,315 366 8.48 6,180 508 8.22 7,239 581 8.03
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 654,603 27,130 4.14 632,751 26,766 4.23 591,736 24,272 4.10
-------- ------- ----- -------- ------- ----- -------- ------- -----
NON-INTEREST-BEARING LIABILITIES:
Demand deposits 126,262 116,773 107,981
Other liabilities 6,952 6,314 5,806
STOCKHOLDERS' EQUITY 80,098 74,040 68,269
-------- -------- --------
Total liabilities and
stockholders' equity $867,915 $829,878 $773,792
-------- -------- --------
-------- -------- --------
NET INTEREST INCOME $36,094 $33,981 $31,526
------- ------- -------
------- ------- -------
NET INTEREST SPREAD 3.80% 3.77% 3.81%
----- ----- -----
----- ----- -----
NET INTEREST MARGIN
TO AVERAGE INTEREST
EARNING ASSETS 4.53% 4.47% 4.47%
----- ----- -----
----- ----- -----
</TABLE>
3
<PAGE>
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 this period.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest-earning assets to total assets .92 .92 .91
Interest-earning assets to interest-
bearing liabilities 1.22 1.20 1.19
Time deposits and short-term borrowings
to interest-bearing liabilities .54 .52 .53
</TABLE>
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 $2.0 million in 1998 as compared to $1.1
million and $1.0 million in 1997 and 1996, 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, 1998, the allowance for loan losses was $4.9
million, or .91% of outstanding loans, compared to $4.4 million, or 0.84% of
outstanding loans at December 31, 1997.
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 other
loans which are past due ninety days or more. Nonperforming 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
------------------------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 955 $1,153 $ 785 $ 169 $1,084
Other loans contractually past
due ninety days or more 2,209 952 1,072 981 985
Other real estate 56 5 13 444 444
------ ------ ------ ------ ------
$3,220 $2,110 $1,870 $1,594 $2,513
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Nonperforming loans to
total loans .59% .40% .40% .27% .49%
Allowance for loan losses
to nonperforming loans 156.32 210.78 237.70 341.83 148.96
Total nonperforming assets
to total stockholders' equity 3.92 2.74 2.62 2.40 4.08
Total nonperforming assets
to total assets .36 .25 .23 .21 .36
</TABLE>
Impaired loans totaled $786,000 and $876,000 at December 31, 1998 and 1997,
respectively. Impaired loans consist of commercial and commercial real estate
loans. Management has allocated $118,000 and $224,000 of the allowance for loan
losses specifically to impaired loans as of December 31, 1998 and 1997,
respectively. Interest income recognized on impaired loans during 1998 or 1997
was immaterial.
4
<PAGE>
There have been no restructured loans or leases in the past five years. As of
December 31, 1998, 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>
<CAPTION>
<S> <C>
Commercial $336
Commercial real estate 113
Consumer 109
----
$558
----
----
</TABLE>
In determining the provision for loan losses, management was influenced by the
Company's 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, 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 also 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 provision for loan losses in 1998 is significantly higher than the provision
in each of the prior four years due to increases in nonperforming loans and net
charge offs. In addition, the loan portfolio mix in 1998 shifted to a higher
percentage of commercial and consumer loans, which generally have more risk than
real estate loans.
The Company's ratio of the allowance for loan losses to nonperforming loans
has been over 1.5:1 for the past four years. The ratio of nonperforming
loans to total loans has been .59% or less for each of the past five years,
which management considers relatively low. The Company's ratio of net loan
charge-offs to average loans was .29%, .22%, and .12% in 1998, 1997, and
1996, respectively. Net loan charge-offs are primarily attributable to the
consumer loan portfolio and have increased in recent years along with the
growth of the portfolio.
Based on the manageable levels of nonperforming loans and historical losses, as
well as the increased loan loss provision in 1998 as 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 $1.2 million, or 21.0%, in 1998 compared with
an increase of $408,000, or 7.4%, in 1997. The ratio of noninterest income to
income before taxes was 49%, 44%, and 43% in 1998, 1997, and 1996, respectively.
Trust fee income increased $118,000, or 11.4%, in 1998 as compared with an
increase of $39,000, or 3.9%, in 1997. The 1998 increase relates to improved
revenues from employee benefit trusts, personal trusts, agency trusts, and
estates/guardianships. The 1997 increase also relates to increases in employee
benefit trusts, personal trusts, and agency trusts, partially offset by
decreases in farm management income, and fees from estates/guardianships and
custodial accounts.
The market value of trust assets increased approximately 12.6% during 1998,
totaling $274.0 million at year end. Growth in trust assets, due to favorable
market conditions and more trust accounts, resulted in greater fees in both 1998
and 1997.
Service charges on deposit accounts increased $253,000, or 6.9%, in 1998 after
increasing $536,000, or 17.1%, in 1997. Both years' increases are generally
reflective of greater overdraft and demand deposit service charges as a result
of increases in the number of demand deposit accounts. Additionally, during
1998 overdraft fees were increased from $20 to $25.
5
<PAGE>
Other income increased $761,000, or 64%, in 1998 compared with a decrease of
$5,000, or .4%, in 1997. The 1998 increase is primarily due to increases in
gains on sales of loans, ATM surcharge fees, demand deposit check commissions,
and letters of credit fees. Real estate loan sales were $76.2 million in 1998,
compared to sales of $20.5 million in 1997 and $19.9 million in 1996. Gains on
loan sales increased significantly to $396,000 in 1998, compared to $42,000 and
$34,000 in 1997 and 1996, respectively. Lower market interest rates in 1998
were key to greater loan origination volume. ATM surcharge fees increased to
$347,000 in 1998 from $184,000 in 1997 as a result of additions to the ATM
network and an increase in per item charges to nonbank customers.
NONINTEREST EXPENSE
Total noninterest expense increased $1.4 million, or 5.8%, in 1998 after
increasing $2.0 million, or 8.9%, in 1997. Details of noninterest expense
for the three years in the period ended December 31, 1998 are presented in
the following schedule:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Salaries and employee benefits $13,099 $12,562 $11,122
Occupancy expense 1,857 1,800 1,799
Data processing 1,485 1,215 1,085
Equipment expense 1,681 1,449 1,329
FDIC insurance and bank
examination assessments 256 238 160
Printing, stationery, and supplies 665 703 754
Postage 538 467 461
Amortization of intangibles 1,004 1,021 1,070
All other expenses 5,047 4,772 4,469
------- ------- -------
Total noninterest expense $25,632 $24,227 $22,249
------- ------- -------
------- ------- -------
</TABLE>
Salaries and employee benefits, which represent the largest component of
noninterest expense, increased by $537,000, or 4.3%, in 1998 after increasing
$1.4 million, or 12.9%, in 1997. The 1998 increase is attributable to general
pay increases and an increase in health insurance costs. The increase in 1997
was primarily due to a 4.5% increase in the average full-time equivalent number
of employees at the Company. General pay increases and retirement plan costs
also contributed to increased payroll expense in both 1998 and 1997. At
December 31, 1998, 1997, and 1996, the Company's number of full-time equivalent
employees was 356, 364, and 352, respectively.
Growth in the volume of loan and deposit accounts contributed to higher data
processing expense in 1998 and 1997. Data processing expense in 1998 includes a
full year with the third party processing service converted to during 1997, in
which enhancements to the data processing services were added including loan
collection systems, query (report writer), and expanded voice response
capabilities. The 1997 expense includes non-recurring costs for the data
processing conversion.
The increase in equipment expense during 1998 and 1997 relates to increased
depreciation expenses associated with new computer equipment and a new telephone
system installed during the latter half of 1997.
Printing, stationery, and supplies decreased during 1998 and 1997 as a result of
the Company's efforts to reduce existing inventory of materials on hand, since
there is a plan to change the Company's logo. Additionally, as a result of the
merger of the subsidiary banks, the Company has begun ordering on a centralized
basis for all locations and purchasing items in larger quantities to take
advantage of discounts available from vendors.
Postage increased during 1998 primarily as a result of the merger and increased
marketing efforts. Each of the subsidiary banks had special notification
mailings to customers informing them of the merger. Marketing materials were
also distributed to Bank customers regarding the merger. Lastly, there were
increased direct mailing programs distributed to market the Bank's home equity
product.
6
<PAGE>
INCOME TAXES
The Company's income tax expense was $4.8 million in 1998 compared to $4.3
million in 1997 and $4.1 million in 1996. Income tax expense as a percentage of
income before income taxes has remained relatively consistent over the past
three years at 33.1%, 31.9%, and 32.7% in 1998, 1997, and 1996, respectively.
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, 1998.
<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 $ 14,067 $ 2,001 $175,552 $ 39,001
Tax-exempt securities 1,082 2,677 20,082 6,198
Federal funds sold 31,000 - - -
Loans 145,550 71,494 240,641 83,261
-------- -------- -------- --------
Total interest earning assets $191,699 $ 76,172 $436,275 $128,460
-------- -------- -------- --------
-------- -------- -------- --------
Cumulative interest earning assets $191,699 $267,871 $704,146 $832,606
-------- -------- -------- --------
-------- -------- -------- --------
Rate sensitive liabilities
Deposits
NOW and money market $133,347 $ - $ - $ -
Savings 172,329 - - -
Time 148,133 118,514 31,566 -
Short-term borrowings 65,540 - - -
Long-term debt 3,059 - - -
-------- -------- -------- --------
Total interest-bearing liabilities $522,408 $118,514 $31,566 $ -
-------- -------- -------- --------
-------- -------- -------- --------
Cumulative interest-bearing liabilities $522,408 $640,922 $672,488 $672,488
-------- -------- -------- --------
-------- -------- -------- --------
Excess interest earning assets (liabilities) $(330,709) $(42,342) $404,709 $128,460
Cumulative excess interest-earning
assets (liabilities) (330,709) (373,051) 31,658 160,118
Cumulative rate sensitivity ratio
(interest-earning assets divided by
interest-bearing liabilities) .37 .42 1.05 1.24
</TABLE>
Included in "Less Than 90 Days" rate sensitive liabilities are $172.3 million of
savings deposits and $133.3 million of NOW and money market deposits which
management considers more core deposit in nature than time deposits.
Approximately $181.0 million of securities are callable in 1999 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 cumulative 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 require 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 $67.5 million at the
one-year time horizon and the cumulative rate sensitivity ratio would be .80.
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 subsidiary. Except for a term note borrowing of
$1.8 million payable to another financial institution that accrues interest
based on the London Interbank Offered Rate, the Company's exposure to
interest rate risk primarily 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 tables present the
interest rate sensitivity and expected maturities of securities, fixed rate
loans, time deposits, short-term borrowings, and long-term debt as of
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Analysis as of December 31, 1998
--------------------------------
Expected Maturity Amounts for Years Ending December 31,
--------------------------------------------------------------------
2001 Fair
Through After Value
1999 2000 2003 2003 Total Total
------ ------ --------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities, fixed rate
Available-for-sale $ 4,999 $ - $ 47,008 $15,006 $ 67,013 $ 66,927
Average interest rate 6.05 - 5.35 6.04 5.55
Held-to-maturity 14,821 12,126 136,638 30,148 193,733 195,526
Average interest rate 5.85 6.09 5.90 5.78 5.89
Loans, fixed rate(1) 97,040 52,838 187,935 83,262 421,075 425,351
Average interest rate 8.63 8.74 8.46 8.07 8.46
LIABILITIES
NOW, money market, and
savings deposits(2) $305,676 $ - $ - $ - $305,676 $305,676
Average interest rate 2.50 - - - 2.50
Time deposits, fixed rate 266,648 16,586 14,979 - 298,213 300,001
Average interest rate 4.98 5.68 5.77 - 5.06
Short-term borrowings, fixed rate 65,540 - - - 65,540 65,540
Average interest rate 4.92 - - - 4.92
Long-term debt, variable rate 3,059 - - - 3,059 3,059
Average interest rate 7.49 - - - 7.49
</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, money market and savings accounts are variable rate deposits. These
deposit accounts, while shown as maturing in 1999, are considered by management
as core deposits for asset/liability management purposes with account lives
extending beyond one year.
8
<PAGE>
<TABLE>
<CAPTION>
Analysis as of December 31, 1997
--------------------------------
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, money market and savings 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.
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 $645,000, $3.0 million,
and $2.9 million in 1998, 1997, and 1996, 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 $12.3 million, $58.5
million, and $37.0 million in 1998, 1997, and 1996, respectively. The Company
also makes significant investments in securities and federal funds sold.
Investing activities related to these investments resulted in net cash outflows
of $24.2 million in 1998, net cash inflows of $20.9 million in 1997, and net
cash outflows of $43.4 million in 1996.
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 $20.1
million, $35.6 million, and $85.4 million in 1998, 1997, and 1996, respectively.
As competition for deposits is expected to remain strong, future deposit growth
cannot be predicted with any certainty.
9
<PAGE>
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 increased by $19.3 million in 1998, and
decreased by $3.0 million and $15.5 million in 1997 and 1996, respectively.
Dividends paid to stockholders as a percentage of net income were 38.6%, 39.8%,
and 42.8% in 1998, 1997, and 1996, respectively. Cash dividends per share were
$1.55 in 1998, and $1.50 in both 1997 and 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 four years. To help
ensure 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 of which $5 million was drawn upon as of
December 31, 1998.
CAPITAL RESOURCES
In 1998, stockholders' equity increased by $5.2 million to $82.1 million. The
amounts comprising this net increase were net income of $9.7 million, offset by
dividends paid to stockholders of $3.8 million, net treasury stock transactions
aggregating $736,000, and a $72,000 change in unrealized losses (net of tax) on
securities available-for-sale. At December 31, 1998, stockholders' equity
represented 9.10% of total assets compared to the year earlier position of
8.94%.
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 Bank 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 useful
information on 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.
NEW ACCOUNTING PRONOUNCEMENTS
In 1999 and 2000, new accounting pronouncements that have been issued will take
effect. These pronouncements and their expected effects on the Company, are
summarized below.
Statement of Financial Accounting Standards (Statement) 133 on derivatives will,
in 2000, require all derivatives to be recorded at fair value in the balance
sheet, with changes in fair value charged or credited to income. If derivatives
are documented and effective as hedges, the change in the derivative fair value
will be offset by an equal change in the fair value of the hedged item. Under
the new standard, securities held-to maturity can no longer be hedged, except
for changes in the issuer's creditworthiness. Therefore, upon adoption of
Statement 133, companies will have another one-time window of opportunity to
reclassify held-to-maturity securities to either trading or available-for-sale,
provided certain criteria are met. This Statement may be adopted early at the
start of a calendar quarter. Since the Company has no significant derivative
instruments or hedging activities, adoption of Statement 133 is not expected to
have a material impact on the Company's financial statements. However, the
Company may take advantage of the opportunity provided by Statement 133 to
reclassify held-to-maturity securities to available-for-sale. Management has
not decided whether to adopt Statement 133 early.
10
<PAGE>
Statement 134 on mortgage banking will, in 1999, allow mortgage loans that are
securitized to be classified as trading, available-for-sale, or, in certain
circumstances, held-to-maturity. Currently, these must be classified as
trading. Since the Company has not securitized mortgage loans, Statement 134 is
not expected to affect the Company.
AICPA Statement of Position 98-1, effective in 1999, sets the accounting
requirement to capitalize costs incurred to develop or obtain software that is
to be used solely to meet internal needs. Costs to capitalize are those direct
costs incurred after the preliminary project stage, up to the date when all
testing has been completed and the software is substantially ready for use. All
training costs, research and development costs, costs incurred to convert data,
and all other general and administrative costs are to be expensed as incurred.
The capitalized cost of internal-use software is amortized over its useful life
and reviewed for impairment using the criteria in Statement 121. Statement of
Position 98-1 is not expected to have a material impact on the Company.
AICPA Statement of Position 98-5, also effective in 1999, requires all start-up,
pre-opening, and organization costs to be expensed as incurred. Any such costs
previously capitalized for financial reporting purposes must be written off to
income at the start of the year. Statement 98-5 is not expected to have a
material impact on the Company.
YEAR 2000
Many current computer programs use only two digits to identify the calendar year
in the date field. These programs were designed and developed with little or no
consideration of the upcoming change in the century. If not rectified, many
computer applications could fail or incur errors when the year 2000 arrives.
The Year 2000 issue affects nearly all companies. The federal banking
regulators have issued several statements providing guidance to financial
institutions on steps the regulators expect financial institutions to take to
ensure Year 2000 compliance.
The Company is taking a proactive approach to this problem and is evaluating the
impact of the Year 2000 issue on its computer systems and software applications.
The Company utilizes and is dependent upon data processing systems and software
to conduct its business. The data processing systems and software include those
developed and maintained by the Company's data processing provider and purchased
software which is run on in-house computer networks and workstations.
The Company has developed a strategic plan for Year 2000 compliance which is
being administered by a committee comprised of individuals from all functional
areas of the Company as well as being reviewed by senior management and the
Board of Directors. The plan follows guidelines set forth by the Federal
Financial Institutions Examinations Council (FFEIC). The Company's overall
readiness is reviewed quarterly by the Comptroller of Currency, and their
current review schedule will continue throughout 1999. The Company has also
developed contingency plans to deal with system failures should they occur
internally or externally.
The Company's data processing provider and other vendors have been contacted and
have indicated that their hardware and software will be Year 2000 compliant by
the first quarter of 1999. This will allow time for testing compliance. In
addition, alarms, heating and cooling systems, and other computer controlled
mechanical devices which the Company relies on will be evaluated.
The Company has not identified any situations that will require material cost
expenditures in order to become fully complaint. An unknown element at this
time is the impact of the year 2000 on the Company's borrowing customers. The
Company has started a program to communicate with key customers to help ensure
that they are aware of and are properly prepared for the year 2000.
11
<PAGE>
ADDITIONAL STATISTICAL INFORMATION
INTEREST DIFFERENTIAL
The following 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>
1998 Compared to 1997 1997 Compared to 1996
Changes Due To: Changes Due To:
Volume Rate Change Volume Rate Change
------- ------ -------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Federal funds sold $ 1,298 $ (53) $ 1,245 $ (978) $146 $ (832)
Taxable securities (1,201) (278) (1,479) 1,412 112 1,524
Tax-exempt securities (268) (14) (282) (140) (51) (191)
Loans 3,163 (170) 2,993 4,624 (176) 4,448
-------- ------ -------- ------ --------- -------
Total interest income 2,992 (515) 2,477 4,918 31 4,949
-------- ------ -------- ------ --------- -------
INTEREST EXPENSE ON:
Deposits:
NOW and money market 303 86 389 168 320 488
Savings 133 (75) 58 204 (5) 199
Time 239 (421) (182) 1,846 164 2,010
Short-term borrowings 338 (97) 241 (336) 206 (130)
Long-term debt (158) 16 (142) (85) 12 (73)
-------- ------ -------- ------ --------- -------
Total interest expense 855 (491) 364 1,797 697 2,494
-------- ------ -------- ------ --------- -------
Net interest income $ 2,137 $ (24) $ 2,113 $3,121 $(666) $2,455
-------- ------ -------- ------ --------- -------
-------- ------ -------- ------ --------- -------
</TABLE>
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>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Available-for-sale (at fair value)
U.S. Treasury securities $ 6,048 $ 8,029 $ 9,308
U.S. Government agencies 58,845 3,502 1,796
Corporates 1,027 - -
Federal Reserve Bank stock 1,007 300 300
-------- -------- --------
Total available-for-sale 66,927 11,831 11,404
-------- -------- --------
Held-to-maturity (at amortized cost)
U.S. Treasury securities 16,021 24,509 40,194
U.S. Government agencies 147,673 147,373 127,472
States and political subdivisions 30,039 32,988 35,758
-------- -------- --------
Total held-to-maturity 193,733 204,870 203,424
-------- -------- --------
Total $260,660 $216,701 $214,828
-------- -------- --------
-------- -------- --------
</TABLE>
At December 31, 1998, the Company held no securities of any single issuer, other
than U.S. Treasury and U.S. Government agencies, which exceeded 10% of
stockholders' equity.
12
<PAGE>
SECURITIES MATURITIES
The following table shows the relative maturities of debt securities (at
carrying values) held by the Company at December 31, 1998 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 $5,006 $ - $ - $ 5,006 6.05%
1 to 5 years 1,042 44,801 1,027 46,870 5.35
5 to 10 years - 14,044 - 14,044 6.04
---------- ---------- ---------- -------
Total $6,048 $58,845 $1,027 $65,920
---------- ---------- ---------- -------
---------- ---------- ---------- -------
Held-to-Maturity
----------------
Weighted
U.S. U.S. States and Average
Treasury Government Political Interest
Securities Agencies Subdivisions Total Rate
---------- ---------- ------------ -------- --------
Under 1 year $ 8,997 $ 2,065 $ 3,759 $ 14,821 6.58%
1 to 5 years 7,024 121,658 20,082 148,764 6.30
5 to 10 years - 23,697 5,823 29,520 6.27
Over 10 years - 253 375 628 6.83
---------- ---------- ---------- --------
Total $16,021 $147,673 $30,039 $193,733
---------- ---------- ---------- --------
---------- ---------- ---------- --------
</TABLE>
TYPES OF LOANS
Loans represent the principal source of revenue for the Company. Risk is
controlled through loan portfolio diversification and the avoidance of credit
concentrations. Loans are made primarily within the Company's geographic market
area. The loan portfolio is distributed among commercial, residential real
estate, and consumer loans. The Company has 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 Company's local market. 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
$159,000 for commercial and commercial real estate loans, $325,000 for
construction loans, and $52,000 for agricultural loans. This category increased
in 1998 by 2.0% from 1997.
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
decreased in 1998 by 7.3% from 1997.
Most residential loans are made on a basis to qualify them for sale to the
Federal National Mortgage Association (Fannie Mae). In addition to those
retained as part of the loan portfolio, the Bank provides loan servicing for
approximately 1,300 loans totaling $105 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.
13
<PAGE>
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 69% of this portfolio. Revolving credit card lines
represent 2% of the portfolio. Net loan charge-offs for 1998 were .53% of
consumer loans outstanding as compared to .52% and .36% for 1997 and 1996,
respectively. The increase in 1998 and 1997 is generally reflective of a
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 Company. This category experienced growth
of 12.3% in 1998 from 1997.
The Company's loan portfolio by major category as of December 31 for each of the
past five years is shown below.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial $115,152 $ 90,009 $ 81,981 $ 79,967 $ 91,120
Commercial real estate 69,836 91,334 76,354 70,046 68,743
Construction 15,624 14,106 16,810 16,933 7,775
Agricultural 9,763 10,769 8,692 8,815 8,485
Residential real estate 136,894 147,625 141,440 123,652 108,277
Consumer 193,703 172,695 144,162 134,344 141,611
-------- -------- -------- -------- --------
Total loans 540,972 526,538 469,439 433,757 426,011
Less:
Unearned discount (26) (158) (653) (1,909) (4,011)
Allowance for loan losses (4,946) (4,437) (4,414) (3,931) (3,082)
-------- -------- -------- -------- --------
Net loans $536,000 $521,943 $464,372 $427,917 $418,918
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Ratio of net loans to
total assets 59.38% 60.64% 56.32% 57.06% 60.48%
</TABLE>
LOAN MATURITIES AND RATE SENSITIVITY
The following table sets forth the maturity distribution and interest rate
sensitivity of certain loan categories at December 31, 1998.
<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>
MATURITY:
Commercial $20,048 $28,882 $ 9,954 $ 58,884 $56,268 $115,152
Commercial real estate 6,095 35,791 23,465 65,351 4,485 69,836
Construction 1,199 1,459 123 2,781 12,843 15,624
Agricultural 6,332 1,249 345 7,926 1,837 9,763
-------- -------- -------- -------- -------- --------
$33,674 $67,381 $33,887 $134,942 $75,433 $210,375
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
14
<PAGE>
SUMMARY OF LOAN LOSS ACTIVITY
In determining the provision for loan losses, management considers the Company's
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>
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Allowance, beginning of year $4,437 $4,414 $3,931 $3,082 $2,722
Loans charged off:
Commercial (411) (227) (39) (60) (592)
Commercial real estate (2) - - - -
Construction - - - - -
Agricultural - - - - -
Residential real estate (113) - - - -
Consumer (1,340) (1,073) (661) (586) (358)
------ ------ ------ ------ ------
Total loans charged off (1,866) (1,300) (700) (646) (950)
------ ------ ------ ------ ------
Loan recoveries:
Commercial 14 30 19 145 21
Commercial real estate - - - 10 -
Construction - - - - -
Agricultural 10 - - - -
Residential real estate - - - - -
Consumer 317 175 140 149 156
------ ------ ------ ------ ------
Total loan recoveries 341 205 159 304 177
------ ------ ------ ------ ------
Net loans charged off (1,525) (1,095) (541) (342) (773)
Provision for loan losses 2,034 1,118 1,024 1,191 830
Other additions (1) - - - - 303
------ ------ ------ ------ ------
Allowance, end of year $4,946 $4,437 $4,414 $3,931 $3,082
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Net loans charged off to
average loans outstanding 0.29% 0.22% 0.12% 0.08% 0.21%
Allowance for loan losses to
ending loans outstanding 0.91 0.84 0.94 0.91 0.73
</TABLE>
(1) Represents increase with purchase of Plano Bancshares, Inc. in 1994.
15
<PAGE>
ALLOCATION OF THE 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>
Loan Type 1998 % 1997 % 1996 % 1995 % 1994 %
- --------- ------ --- ------ --- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $989 21 $799 18 $795 18 $747 19 $678 22
Commercial
real estate 495 13 665 15 706 16 629 16 493 16
Construction 148 3 177 4 178 4 157 4 62 2
Agriculture 99 2 90 2 88 2 79 2 62 2
Residential
real estate 742 25 1,109 25 1,280 29 1,100 28 739 24
Consumer 2,473 36 1,597 36 1,367 31 1,219 31 1,048 34
Unallocated - - - - - - - - - -
------ --- ------ --- ------ --- ------ --- ------ ---
Total $4,946 100 $4,437 100 $4,414 100 $3,931 100 $3,082 100
------ --- ------ --- ------ --- ------ --- ------ ---
------ --- ------ --- ------ --- ------ --- ------ ---
</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, 1998.
<TABLE>
<S> <C>
Under 3 months $ 31,968
3 to 6 months 16,527
Over 6 to 12 months 17,441
Over 12 months 3,935
--------
$ 69,871
--------
--------
</TABLE>
16
<PAGE>
[CROWE CHIZEK LOGO]
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, 1998 and 1997 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First National
Bancorp, Inc. as of December 31, 1998 and 1997 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 22, 1999
17
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 39,710 $ 34,591
Federal funds sold 31,000 50,800
Securities available-for-sale 66,927 11,831
Securities held-to-maturity (fair value of $195,526 in 1998
and $206,269 in 1997) 193,733 204,870
Loans, net of unearned discount 540,946 526,380
Allowance for loan losses (4,946) (4,437)
-------- --------
Loans, net 536,000 521,943
Premises and equipment, net 18,753 18,840
Accrued interest receivable and other assets 8,067 8,392
Intangibles, net 8,485 9,489
-------- --------
Total assets $902,675 $860,756
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest-bearing $142,427 $129,243
NOW accounts 87,611 78,660
Money market accounts 45,736 37,086
Savings 172,329 165,341
Time deposits, $100,000 and over 69,871 70,472
Other time deposits 228,342 245,354
-------- --------
Total deposits 746,316 726,156
Short-term borrowings 65,540 46,207
Long-term debt 3,059 4,817
Accrued interest and other liabilities 5,652 6,631
-------- --------
Total liabilities 820,567 783,811
Stockholders' equity
Preferred stock, no par value, 1,000,000 shares authorized;
none issued - -
Common stock, $10 par value; 5,500,000 shares authorized;
2,431,804 shares issued 24,318 24,318
Additional paid-in capital 14 -
Retained earnings 58,578 52,607
Unrealized gain (loss) on securities available-for-sale,
net of tax (52) 20
Treasury stock, at cost (11,368 shares in 1998) (750) -
-------- --------
Total stockholders' equity 82,108 76,945
-------- --------
Total liabilities and stockholders' equity $902,675 $860,756
-------- --------
-------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
18
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME
Loans $46,483 $43,556 $39,148
Securities
Taxable 11,025 12,504 10,980
Tax-exempt 1,709 1,892 2,016
Federal funds sold 2,981 1,736 2,568
------- ------- -------
Total interest income 62,198 59,688 54,712
INTEREST EXPENSE
Deposits 24,053 23,788 21,091
Short-term borrowings 2,711 2,470 2,600
Long-term debt 366 508 581
------- ------- -------
Total interest expense 27,130 26,766 24,272
------- ------- -------
Net interest income 35,068 32,922 30,440
Provision for loan losses 2,034 1,118 1,024
------- ------- -------
Net interest income after provision for loan losses 33,034 31,804 29,416
NONINTEREST INCOME
Trust fees 1,153 1,035 996
Service charges on deposit accounts 3,915 3,662 3,126
Securities gains, net 121 13 175
Other income 1,950 1,189 1,194
------- ------- -------
Total noninterest income 7,139 5,899 5,491
NONINTEREST EXPENSE
Salaries and employee benefits 13,099 12,562 11,122
Occupancy expense 1,857 1,800 1,799
Data processing 1,485 1,215 1,085
Equipment expense 1,681 1,449 1,329
Amortization of intangibles 1,004 1,021 1,070
Other expenses 6,506 6,180 5,844
------- ------- -------
Total noninterest expense 25,632 24,227 22,249
------- ------- -------
INCOME BEFORE INCOME TAXES 14,541 13,476 12,658
Income tax expense 4,814 4,302 4,137
------- ------- -------
NET INCOME $9,727 $9,174 $8,521
------- ------- -------
------- ------- -------
Earnings per share $4.01 $3.77 $3.50
Weighted average shares outstanding 2,423,494 2,431,804 2,431,804
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
19
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK GAIN
------------ (LOSS) ON
ADDITIONAL SECURITIES
PAR PAID-IN RETAINED AVAILABLE- TREASURY
SHARES VALUE CAPITAL EARNINGS FOR-SALE STOCK TOTAL
--------- ------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 1,215,902 $12,159 $8,846 $45,519 $(99) $ - $66,425
Comprehensive income
Net income - - - 8,521 - - 8,521
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification adjustment - - - - 91 - 91
-------
Total comprehensive income 8,612
Cash dividends declared -
$1.50 per share (1) - - - (3,646) - - (3,646)
--------- ------- ------- -------- -------- -------- -------
Balance, December 31, 1996 1,215,902 12,159 8,846 50,394 (8) - 71,391
Comprehensive income
Net income - - - 9,174 - - 9,174
Other comprehensive income,
net of tax
Unrealized gains on securities,
net of reclassification adjustment - - - - 28 - 28
-------
Total comprehensive income 9,202
Cash dividends declared -
$1.50 per share - - - (3,648) - - (3,648)
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
Comprehensive income
Net income - - - 9,727 - - 9,727
Other comprehensive income,
net of tax
Unrealized losses on securities,
net of reclassification adjustment - - - - (72) - (72)
-------
Total comprehensive income 9,655
Cash dividends declared -
$1.55 per share - - - (3,756) - - (3,756)
17,268 shares of common stock
purchased from terminated
pension plan - - - - - (1,140) (1,140)
5,900 shares of common stock
contributed to profit sharing plan - - 14 - - 390 404
--------- ------- ------- -------- -------- -------- -------
Balance, December 31, 1998 2,431,804 $24,318 $ 14 $58,578 $(52) $(750) $82,108
--------- ------- ------- -------- -------- -------- -------
--------- ------- ------- -------- -------- -------- -------
</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.
20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,727 $ 9,174 $ 8,521
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 1,805 1,556 1,321
Provision for loan losses 2,034 1,118 1,024
Deferred income tax expense (benefit) 40 (222) (172)
Amortization of securities premiums, net of accretion 56 (234) (94)
Amortization of intangibles 1,004 1,021 1,070
Common stock contributed to profit sharing plan 404 - -
Securities gains, net (121) (13) (175)
Proceeds from sales of loans 76,174 20,526 19,482
Loans originated for sale (79,772) (20,626) (19,942)
Net gains on sales of loans (396) (42) (34)
Net gains on sales of other real estate owned (14) - -
(Increase) decrease in accrued interest and other assets 377 (438) (267)
Increase (decrease) in accrued interest and other
liabilities (946) 356 649
------- ------- -------
Net cash from operating activities 10,372 12,176 11,383
CASH FLOWS FROM INVESTING ACTIVITIES
Change in federal funds sold 19,800 22,441 (31,704)
Proceeds from maturities of securities held-to-maturity 192,130 98,587 85,143
Proceeds from sale of securities available-for-sale - - 1,653
Proceeds from maturities of securities available-for-sale 3,500 10,100 10,028
Purchase of securities available-for-sale (58,715) (10,486) (998)
Purchase of securities held-to-maturity (180,928) (99,781) (107,537)
Loans made to customers, net of payments (12,254) (58,547) (36,985)
Purchase of premises and equipment (1,718) (2,516) (3,622)
Proceeds from sales of other real estate owned 119 - -
------- ------- -------
Net cash from investing activities (38,066) (40,202) (84,022)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 20,134 35,643 85,376
Net increase (decrease) in short-term borrowings 19,333 (3,029) (15,535)
Principal paid on long-term debt (1,758) (2,134) (750)
Dividends paid (3,756) (3,648) (3,646)
Common stock purchased from terminated pension plan (1,140) - -
------- ------- -------
Net cash from financing activities 32,813 26,832 65,445
------- ------- -------
Net change in cash and due from banks 5,119 (1,194) (7,194)
CASH AND DUE FROM BANKS
Beginning of year 34,591 35,785 42,979
------- ------- -------
End of year $39,710 $34,591 $35,785
------- ------- -------
------- ------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
First National Bancorp, Inc. (the Company), through the branch network of its
subsidiary, First National Bank of Joliet, provides financial and other banking
services to customers located primarily in the Will, Grundy, and Kendall
Counties, Illinois area. Customers in these areas are the primary users of the
Company's loan, deposit, and trust services. 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.
While the Company's chief decision makers monitor the revenue streams of the
various products and services, operations are managed and financial performance
is evaluated on a Company-wide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
The following summarizes the significant accounting policies used in the
preparation of the accompanying consolidated financial statements.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, First National Bank of
Joliet.
In 1998, the Company merged all of its banking subsidiaries together under the
charter of First National Bank of Joliet. Previously, these subsidiaries
operated as four separate banks known as First National Bank of Joliet,
Southwest Suburban Bank, Bank of Lockport, and Community Bank of Plano. Also in
1998, Plano Bancshares, Inc. (Plano) was merged into the Company. Prior to the
merger, Plano was a wholly-subsidiary of the Company and Plano owned 100% of the
stock of Community Bank of Plano. The separate bank subsidiaries are sometimes
referred to collectively as "the Bank" in these financial statements.
All material intercompany items and transactions have been eliminated in
consolidation.
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.
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 accretion of purchase 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 a valuation allowance for probable credit
losses. The allowance is increased by the provision for loan losses charged to
expense. The allowance is decreased by loan charge-offs, net of recoveries.
22
<PAGE>
Loans are charged against the allowance for loan losses when management believes
that the collectibility of the principal is unlikely. The allowance balance is
estimated by management 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. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged off.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage and consumer loans, and on an individual loan basis
for other loans. If a loan is impaired, a portion of the allowance is allocated
so that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral.
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.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, net of
accumulated depreciation. Depreciation expense is calculated primarily on the
straight-line method over the following estimated useful lives of the assets.
<TABLE>
Years
-----
<S> <C>
Land improvements 5-15
Buildings 15-40
Equipment 3-10
</TABLE>
INTANGIBLES: The portion of the purchase price of acquired 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 acquired banks is being amortized on the straight-line method over fifteen
and twenty years.
EMPLOYEE BENEFITS PLANS: In 1998, the Company curtailed and terminated its
defined benefit pension plan. The pension plan covered all full-time employees
of subsidiary banks who completed one year of service and met specific age
requirements. The Company's funding policy was to make the minimum annual
contribution required by applicable regulations, plus any such amounts as the
Company determined to be appropriate.
In 1998, the Company established a new profit sharing plan covering
substantially all the Company's employees. The plan only allows for
contributions at the discretion of the Company's Board of Directors. The plan
does not provide for employee contributions. The Company's contributions may be
made in cash or Company stock.
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.
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 125, "Accounting for Mortgage Servicing
Rights," effective for loan sales after December 31, 1995, has been immaterial.
EARNINGS PER SHARE: Earnings per share are calculated on the basis of the
weighted average number of shares outstanding. Earnings per share in 1996 have
been restated to reflect the 2-for-1 stock split effected in the form of a 100%
stock dividend in 1997.
23
<PAGE>
COMPREHENSIVE INCOME: Under a new accounting standard, comprehensive income is
now reported for all periods. Comprehensive income includes both net income and
other comprehensive income. Other comprehensive income consists of the change
in unrealized gains and losses on securities available-for-sale, net of
reclassification adjustments and tax effects. Such reclassification adjustments
and tax effects were not material.
PRESENTATION OF CASH FLOWS: Cash flows from loans, federal funds sold,
deposits, and short-term borrowings are shown net.
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>
1998
U.S. Treasury $ 5,998 $ 50 $ - $ 6,048
U.S. Government agencies 58,985 65 (205) 58,845
Corporate 1,023 4 - 1,027
------- ------ ------- -------
Total debt securities 66,006 119 (205) 65,920
Federal Reserve Bank stock 1,007 - - 1,007
------- ------ ------- -------
$67,013 $119 $(205) $66,927
------- ------ ------- -------
------- ------ ------- -------
1997
U.S. Treasury $ 7,997 $ 41 $ (9) $ 8,029
U.S. Government agencies 3,501 2 (1) 3,502
------- ------ ------- -------
Total debt securities 11,498 43 (10) 11,531
Federal Reserve Bank stock 300 - - 300
------- ------ ------- -------
$11,798 $ 43 $ (10) $11,831
------- ------ ------- -------
------- ------ ------- -------
The amortized cost and fair value of securities held-to-maturity at year-end are
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
1998
U.S. Treasury $ 16,021 $ 229 $ - $ 16,250
U.S. Government agencies 147,673 736 (174) 148,235
States and political subdivisions 30,039 1,005 (3) 31,041
--------- ---------- ---------- -------
$193,733 $1,970 $(177) $195,526
--------- ---------- ---------- -------
--------- ---------- ---------- -------
1997
U.S. Treasury $ 24,509 $ 156 $ (44) $ 24,621
U.S. Government agencies 147,373 444 (189) 147,628
States and political subdivisions 32,988 1,037 (5) 34,020
--------- ---------- ---------- -------
$204,870 $1,637 $(238) $206,269
--------- ---------- ---------- -------
--------- ---------- ---------- -------
</TABLE>
24
<PAGE>
The amortized cost and fair value of debt securities as of December 31, 1998, 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 $ 4,999 $ 5,006 $ 14,821 $ 14,884
Due after 1 through 5 years 47,008 46,870 148,764 150,303
Due after 5 through 10 years 13,999 14,044 29,520 29,705
Due after 10 years - - 628 634
------- ------- -------- --------
$66,006 $65,920 $193,733 $195,526
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
Securities with a carrying value of approximately $155,000,000 and $150,000,000
at December 31, 1998 and 1997 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 1998 or 1997. 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 $121,000, $13,000, and $272,000 in 1998, 1997, and 1996, respectively.
NOTE 3 - LOANS
Loans at year-end are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Commercial $115,152 $ 90,009
Commercial real estate 69,836 91,334
Construction 15,624 14,106
Agricultural 9,763 10,769
Residential real estate 136,894 147,625
Consumer 193,677 172,537
-------- --------
Total loans 540,946 526,380
Allowance for loan losses (4,946) (4,437)
-------- --------
Loans, net $536,000 $521,943
-------- --------
-------- --------
</TABLE>
Included in residential real estate loans are loans held for sale totaling
$4,596,000 and $602,000 at December 31, 1998 and 1997. The carrying value of
loans held for sale approximated fair value at December 31, 1998 and 1997.
Impaired loans are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Average balance of impaired loans during
the year $920 $695 $747
Impaired loans at year-end 786 876 580
Allowance for loan losses allocated to impaired
loans at year-end 118 224 147
</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 1998 and
1997. No income was recognized on impaired loans in 1996.
25
<PAGE>
Activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $4,437 $4,414 $3,931
Provision charged to operations 2,034 1,118 1,024
Loans charged-off (1,866) (1,300) (700)
Recoveries 341 205 159
------ ------ ------
Balance, end of year $4,946 $4,437 $4,414
------ ------ ------
------ ------ ------
</TABLE>
Certain executive officers and directors and companies in which they have
management or beneficial ownership are loan customers of the Bank. These loans
have similar terms to other customer loans. An analysis of the changes in these
loans, which exceed $60,000 in the aggregate per borrower, follows:
<TABLE>
<CAPTION>
1998
------
<S> <C>
Total loans at beginning of year $5,434
New loans 324
Repayments (559)
------
Total loans at end of year $5,199
------
------
</TABLE>
Loans serviced for other investors which are not reported as assets in the
financial statements approximated $105,000,000 at December 31, 1998.
NOTE 4 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at
year-end.
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land and land improvements $ 5,888 $ 5,024
Buildings 14,854 14,747
Equipment 10,695 11,336
------- -------
Total cost 31,437 31,107
Accumulated depreciation (12,684) (12,267)
------- -------
Carrying value $18,753 $18,840
------- -------
------- -------
</TABLE>
NOTE 5 - INTANGIBLES
Intangible assets consist of goodwill, net of accumulated amortization, of
$6,258,000 and $6,880,000 as of December 31, 1998 and 1997, respectively, and
core deposit intangibles, net of accumulated amortization, of $2,227,000 and
$2,609,000 as of December 31, 1998 and 1997, respectively.
26
<PAGE>
NOTE 6 - EMPLOYEE BENEFIT PLANS
In January 1998, the Board of Directors approved the termination of the pension
plan. No credit was given for participant service after January 31, 1998.
Final distributions aggregating $6.5 million were made to participants in
September 1998.
The amount charged to expense for the Company's pension plan consisted of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $119 $394 $336
Interest cost on projected benefit obligation 444 457 377
Expected return on plan assets (448) (402) (590)
Net amortization 19 18 236
Settlement loss, net of curtailment gain 287 - -
---- ---- ----
Pension expense $421 $467 $359
---- ---- ----
---- ---- ----
Assumptions used
Discount rate 7.00% 7.00% 7.75%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 4.50% 4.50% 4.50%
</TABLE>
The following table sets forth information regarding the plan's funding status
as of October 31, 1998 and 1997 and the amount recognized in the accompanying
consolidated balance sheets as of December 31, 1997:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Change in benefit obligation
Beginning benefit obligation $7,178 $5,396
Service cost 119 394
Interest cost 444 457
Actuarial (gain) loss (919) 1,237
Settlement loss, net of curtailment gain 287 -
Benefits and final distribution paid (7,109) (306)
------ ------
Ending benefit obligation - 7,178
Change in plan assets
Beginning fair value 5,855 5,034
Investment income, net of administrative expenses 536 828
Employer contribution 718 299
Benefits and final distribution paid (7,109) (306)
------ ------
Ending fair value - 5,855
Funded status - (1,323)
Unrecognized net actuarial loss - 1,571
Unrecognized net transition asset - (529)
Unrecognized prior service cost - (16)
------ ------
Accrued benefit liability $ - $ (297)
------ ------
------ ------
</TABLE>
Contributions to the 401(k) plan for the years ended December 31, 1998, 1997,
and 1996 were $177,000, $176,000, and $160,000, respectively.
27
<PAGE>
The Company's contribution to the new profit sharing plan in 1998 consisted of
5,900 shares of the Company's common stock valued at $404,000. All 5,900 shares
are to be allocated to participants as of December 31, 1998. A participant or
beneficiary who receives Company stock from the plan has the right to require
the Company to purchase the stock at fair market value during two sixty-day put
option periods. The second put option expires sixty days after the participant
receives notice of the next valuation of the stock following the distribution.
The Company anticipates obtaining a valuation on an annual basis. The fair
value of the stock held by the profit sharing plan is considered immaterial to
the Company's total stockholders' equity at December 31, 1998.
NOTE 7 - DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $266,648
2000 16,586
2001 7,950
2002 3,608
2003 3,421
--------
$298,213
--------
--------
</TABLE>
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>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
End of year
Outstanding balance $65,540 $46,207 $49,236
Weighted average interest rate 4.92% 5.28% 5.25%
During the year
Average outstanding balance $51,656 $45,276 $51,993
Maximum outstanding balance 65,540 54,899 64,771
Weighted average interest rate 5.25% 5.46% 5.00%
Securities underlying the agreements at December 31, 1998:
Carrying value $69,074
Fair value 69,482
</TABLE>
At December 31, 1998, the Company had unused lines of credit to purchase federal
funds from other banks totaling $35,000,000.
NOTE 9 - LONG-TERM DEBT
The Company has a term note payable to another financial institution of
$1,800,000 which accrues interest at the London Interbank Offered Rate plus 175
basis points (approximately 7.3125% at December 31, 1998) 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 $1,259,000 to certain former stockholders
of Plano Bancshares, Inc. The debentures require semi-annual interest payments
at the national prime interest rate (7.75% at December 31, 1998) and require
that the outstanding principal be paid in 1999. The debentures are unsecured.
28
<PAGE>
NOTE 10 - INCOME TAXES
Net deferred tax liabilities consist of the following components at year-end.
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Deferred tax assets
Securities available-for-sale $ 34 $ -
Allowance for loan losses 1,962 1,763
Other items, net 104 118
------ ------
2,100 1,881
Deferred tax liabilities
Securities available-for-sale - (13)
Premises and equipment (1,236) (958)
Intangibles (811) (954)
Purchase accounting adjustments and other items, net (447) (357)
------ ------
(2,494) (2,282)
------ ------
Net deferred tax liabilities $ (394) $ (401)
------ ------
------ ------
</TABLE>
Net deferred tax liabilities of $394,000 and $401,000 at December 31, 1998 and
1997 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>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Currently payable tax
Federal $4,464 $4,379 $4,065
State 310 145 244
Deferred tax expense (benefit) 40 (222) (172)
------ ------ ------
Income tax expense $4,814 $4,302 $4,137
------ ------ ------
------ ------ ------
</TABLE>
A reconciliation of income tax expense and the amount computed by applying the
statutory federal income tax rate of 35% to income before income taxes follows:
<TABLE>
<CAPTION>
1 9 9 8 1 9 9 7 1 9 9 6
-------------- -------------- --------------
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rate $5,089 35.0% $4,717 35.0% $4,430 35.0%
Increase (decrease)
resulting from
State income taxes,
net of federal benefit 190 1.3 71 .5 139 1.1
Tax-exempt income (675) (4.6) (707) (5.3) (728) (5.8)
Goodwill amortization 218 1.5 218 1.6 218 1.7
Nondeductible
interest expense 79 .5 80 .6 79 .7
Other items, net (87) (.6) (77) (.5) (1) -
------ ----- ------ ----- ------ -----
Income tax expense $4,814 33.1% $4,302 31.9% $4,137 32.7%
------ ----- ------ ----- ------ -----
------ ----- ------ ----- ------ -----
</TABLE>
29
<PAGE>
NOTE 11 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
At December 31, 1998, reserves of approximately $18.7 million were required as
deposits with the Federal Reserve Bank or as cash on hand. These reserves do
not earn interest.
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of 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 Bank's exposure to credit loss on commitments to extend credit and standby
letters of credit in the event of nonperformance by the customer is represented
by the contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as for
on-balance-sheet instruments.
A summary of the contract amounts of the Bank's exposure to off-balance-sheet
risk at year-end follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Loan commitments, including unused lines of credit $69,092 $87,612
Standby letters of credit 16,833 16,629
</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 being drawn upon, the commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates 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 Bank 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.
30
<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 - CAPITAL REQUIREMENTS
The Bank is limited in the amount of dividends that can be paid without prior
approval of the banking regulatory agencies. As of December 31, 1998, the Bank
could pay dividends to the Company of approximately $6,700,000 without obtaining
prior approval of the bank regulatory agencies.
The Company and the Bank 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 are 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>
31
<PAGE>
For the Company and the Bank, 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, 1998, consolidated
actual capital levels and minimum required levels for the consolidated Company
and the Bank were:
<TABLE>
<CAPTION>
Minimum Amount
Required to Be
Actual Minimum Amount Well Capitalized
----------------- Required for Capital Under Prompt Corrective
Ratio Amount Adequacy Purposes Action Regulations
------ ------- -------------------- -----------------------
<S> <C> <C> <C> <C>
Total capital (to risk-weighted
assets)
Consolidated 13.43% $79,504 $47,362 $59,203
Bank 13.78% $81,474 $47,297 $59,121
Tier I capital (to risk-weighted
assets)
Consolidated 12.59% $74,558 $23,681 $35,521
Bank 12.94% $76,528 $23,649 $35,473
Tier I capital (to average assets)
Consolidated 8.43% $74,558 $35,379 $44,224
Bank 8.67% $76,528 $35,309 $44,136
</TABLE>
At December 31, 1998 and 1997, the Company and the Bank were categorized as well
capitalized per the banking regulations described above. There are no
conditions or events since December 31, 1998 that management believes have
changed the Company and the Bank's categorization.
Actual capital ratios at year-end are summarized below:
<TABLE>
<CAPTION>
Consolidated
Company Bank
----------------- ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Total capital to risk-weighted assets 13.43% 12.87% 13.78% 13.50%
Tier I capital to risk-weighted assets 12.59 12.09 12.94 12.71
Tier I capital to average assets 8.43 8.01 8.67 8.57
</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>
1998 1997
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 39,710 $ 39,710 $ 34,591 $ 34,591
Federal funds sold 31,000 31,000 50,800 50,800
Securities available-for-sale 66,927 66,927 11,831 11,831
Securities held-to-maturity 193,733 195,526 204,870 206,269
Loans 536,000 540,276 521,943 526,252
Accrued interest receivable 7,142 7,142 7,729 7,729
Financial liabilities
Deposits 746,316 748,104 726,156 727,509
Short-term borrowings 65,540 65,540 46,207 46,207
Long-term debt 3,059 3,059 4,817 4,817
Accrued interest payable 3,550 3,550 4,206 4,206
</TABLE>
32
<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 AND DUE FROM BANKS AND FEDERAL FUNDS SOLD: The carrying amounts reported
in the consolidated balance sheet for cash and 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.
33
<PAGE>
NOTE 15 - CASH FLOW INFORMATION
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash payments for
Interest $27,786 $26,696 $23,515
Income taxes 4,634 4,688 4,447
Noncash investing and financing activities
Other real estate acquired in settlement
of loans 157 - -
Common stock contributed
to profit sharing plan 404 - -
</TABLE>
NOTE 16 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements of First National Bancorp, Inc. (parent
company only) are presented below:
<TABLE>
<CAPTION>
BALANCE SHEETS
December 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
ASSETS
Cash $ 15 $ 48
Investment in subsidiary 84,962 81,907
Land 106 106
Other assets 447 40
------- -------
Total assets $85,530 $82,101
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Long-term debt $ 3,059 $4,817
Other liabilities 363 339
Stockholders' equity 82,108 76,945
------- -------
Total liabilities and stockholders' equity $85,530 $82,101
------- -------
------- -------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Years Ended December 31,
---------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Dividends from subsidiary $7,227 $6,222 $5,183
Interest and other expenses 1,070 1,132 1,070
------ ------ ------
Income before income taxes and equity
in undistributed net income of subsidiary 6,157 5,090 4,113
Income tax benefit 443 449 379
------ ------ ------
Income before equity in undistributed net
income of subsidiary 6,600 5,539 4,492
Equity in undistributed net income of subsidiary 3,127 3,635 4,029
------ ------ ------
Net income $9,727 $9,174 $8,521
------ ------ ------
------ ------ ------
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,727 $ 9,174 $ 8,521
Adjustments to reconcile net income to net
cash provided by operating activities
Undistributed earnings of subsidiary (3,127) (3,635) (4,029)
Change in other assets and other liabilities 21 (153) 57
------- ------- -------
Net cash from operating activities 6,621 5,386 4,549
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (1,758) (2,134) (750)
Common stock purchased from terminated
pension plan (1,140) - -
Cash dividends paid (3,756) (3,648) (3,646)
------- ------- -------
Net cash from financing activities (6,654) (5,782) (4,396)
------- ------- -------
Net change in cash (33) (396) 153
CASH
Beginning of year 48 444 291
------- ------- -------
End of year $ 15 $ 48 $ 444
------- ------- -------
------- ------- -------
Noncash financing activity
Common stock contributed to profit sharing plan
in exchange for receivable due from subsidiary $ 404 $ - $ -
</TABLE>
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997
---------------------------- ----------------------------
Three Months Ended Three Months Ended
---------------------------------------- -------------------------------------------
Dec. 31 Sep. 30 June 30 March 31 Dec. 31 Sep. 30 June 30 March 31
------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income $9,102 $8,756 $8,695 $8,515 $8,483 $8,397 $8,231 $7,811
Provision for loan losses 975 375 375 309 459 229 228 202
Noninterest income 1,931 1,774 1,732 1,702 1,538 1,504 1,443 1,414
Noninterest expense 7,350 6,112 6,210 5,960 7,275 5,998 5,582 5,372
------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes 2,708 4,043 3,842 3,948 2,287 3,674 3,864 3,651
Income tax expense 844 1,356 1,281 1,333 679 1,194 1,229 1,200
------ ------ ------ ------ ------ ------ ------ ------
Net income $1,864 $2,687 $2,561 $2,615 $1,608 $2,480 $2,635 $2,451
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Earnings per share $ .77 $ 1.11 $ 1.05 $1.08 $.66 $1.02 $1.08 $1.01
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Average common
shares outstanding 2,414,600 2,416,038 2,431,804 2,431,804 2,431,804 2,431,804 2,431,804 2,431,804
</TABLE>
35
<PAGE>
This page intentionally left blank.
36
<PAGE>
FIRST NATIONAL BANK OF JOLIET
JOLIET
78 North Chicago Street
Scott & Jefferson
Midland & Campbell
Black & Essington
1590 N. Larkin (Inside Cub Foods)
191 S. Larkin (Inside Cub Foods)
SHOREWOOD BANKING CENTER
Route 52 & Brookshore
CHANNAHON BANKING CENTERS
24745 W. Eames
Route 6 & I-55 (Inside Franks)
MINOOKA BANKING CENTER
207 W. Mondamin
ROMEOVILLE BANKING CENTER
626 Townhall Drive
LOCKPORT BANKING CENTER
826 East Ninth Street
HOMER TOWNSHIP BANKING CENTER
159th Street & Cedar Road
BOLINGBROOK BANKING CENTER
225 Lily Cache Lane
PLANO BANKING CENTER
2005 West Route 34
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
State of Percent of Capital Stock
Name Of Subsidiary Incorporation Owned At December 31, 1998
------------------ ------------- --------------------------
<S> <C> <C>
First National Bank of Joliet Illinois 100%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 39,710
<INT-BEARING-DEPOSITS> 603,889
<FED-FUNDS-SOLD> 31,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,927
<INVESTMENTS-CARRYING> 193,733
<INVESTMENTS-MARKET> 195,526
<LOANS> 540,946
<ALLOWANCE> 4,946
<TOTAL-ASSETS> 902,675
<DEPOSITS> 746,316
<SHORT-TERM> 65,540
<LIABILITIES-OTHER> 5,652
<LONG-TERM> 3,059
0
0
<COMMON> 24,318
<OTHER-SE> 57,790
<TOTAL-LIABILITIES-AND-EQUITY> 902,675
<INTEREST-LOAN> 46,483
<INTEREST-INVEST> 12,734
<INTEREST-OTHER> 2,981
<INTEREST-TOTAL> 62,198
<INTEREST-DEPOSIT> 24,053
<INTEREST-EXPENSE> 27,130
<INTEREST-INCOME-NET> 35,068
<LOAN-LOSSES> 2,034
<SECURITIES-GAINS> 121
<EXPENSE-OTHER> 25,632
<INCOME-PRETAX> 14,541
<INCOME-PRE-EXTRAORDINARY> 14,541
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,727
<EPS-PRIMARY> 4.01
<EPS-DILUTED> 4.01
<YIELD-ACTUAL> 4.53
<LOANS-NON> 955
<LOANS-PAST> 2,209
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 558
<ALLOWANCE-OPEN> 4,437
<CHARGE-OFFS> 1,866
<RECOVERIES> 341
<ALLOWANCE-CLOSE> 4,946
<ALLOWANCE-DOMESTIC> 4,946
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
