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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1999
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
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Commission file number: 0-15123
FIRST NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Illinois 31-1182986
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(State of Incorporation) (IRS Employer Identification No.)
78 North Chicago Street, Joliet, Illinois 60432
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (815) 726-4371
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $10.00 par value None
Securities registered pursuant to Section 12(g) of the Act: Common
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-k or any amendment to this
Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates on March 6,
2000 was $203,770,224. Based on the last reported price of an actual transaction
in registrant's Common Stock on March 6, 2000, and reports of beneficial
ownership filed by directors and executive officers of registrant and by
beneficial owners of more than 5% of the outstanding shares of Common Stock of
registrant; however, such determination of shares owned by affiliates does not
constitute an admission of affiliate status or beneficial interest in shares of
Common Stock of registrant. At March 6, 2000 there were 2,425,836 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 9, 2000, 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 1999 annual
and financial reports to stockholders to the extent indicated herein.
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TABLE OF CONTENTS
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PART I
ITEM 1. Business....................................................... 1
ITEM 2. Properties..................................................... 8
ITEM 3. Legal Proceedings.............................................. 8
ITEM 4. Submission of Matters to a Vote of Security Holders............ 8
PART II
ITEM 5. Market for the Company's Common Stock and Related
Stockholder Matters............................................ 8
ITEM 6. Selected Financial Data......................................... 9
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 9
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk...... 9
ITEM 8. Financial Statements and Supplementary Data..................... 9
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.................................................... 10
SIGNATURES................................................................ 12
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PART I
ITEM 1. BUSINESS
OVERVIEW
First National Bancorp, Inc. ("First National" or the "Company") was formed and
became the parent holding company of First National Bank of Joliet ("FNB" 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 16 branches in
addition to the main bank location.
Approximately 90% 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 450,000 with a labor force of over 240,000. 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 52% and 55%,
respectively in the three years ending December 31, 1999.
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.
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
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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, 1999, the Bank had 316 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 subsidiary, 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 subsidiary
establishes a comprehensive framework for their respective operations and is
intended primarily for the protection of the FDIC's deposit insurance funds and
the depositors, rather than the shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory framework
that applies to the Company and its subsidiary. It does not describe all of the
statutes, regulations and regulatory policies that apply to the Company and its
subsidiary, 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 its subsidiary.
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RECENT REGULATORY DEVELOPMENTS
On November 12, 1999, President Clinton signed legislation that will allow bank
holding companies to engage in a wider range of nonbanking activities, including
greater authority to engage in securities and insurance activities. Under the
Gramm-Leach-Bliley Act (the "Act"), a bank holding company that elects to become
a financial holding company may engage in any activity that the Federal Reserve,
in consultation with the Secretary of the Treasury, determines by regulation or
order is (i) financial in nature, (ii) incidental to any such financial
activity, or (iii) complementary to any such financial activity and does not
pose a substantial risk to the safety or soundness of depository institutions or
the financial system generally. The Act specifies certain activities that are
deemed to be financial in nature, including lending, exchanging, transferring,
investing for others, or safeguarding money or securities; underwriting and
selling insurance; providing financial, investment, or economic advisory
services; underwriting, dealing in or making a market in, securities; and any
activity currently permitted for bank holding companies by the Federal Reserve
under section 4(c)(8) of the Bank Holding Company Act. A bank holding company
may elect to be treated as a financial holding company only if all depository
institution subsidiaries of the holding company are well-capitalized,
well-managed and have at least a satisfactory rating under the Community
Reinvestment Act.
National banks are also authorized by the Act to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve, determines is financial in
nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities
(unless otherwise permitted by law), (iii) insurance company portfolio
investments and (iv) merchant banking. The authority of a national bank to
invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national bank investments in financial subsidiaries.
At this time, it is not possible to predict the impact the Act may have on the
Company. Various bank regulatory agencies have just begun issuing regulations as
mandated by the Act. The Federal Reserve has issued an interim rule that sets
forth procedures by which bank holding companies may become financial holding
companies, the criteria necessary for such a conversion, and the Federal
Reserve's enforcement powers should a holding company fail to maintain
compliance with the criteria. The Office of the Comptroller of the Currency has
issued a final rule discussing the procedures by which national banks may
establish financial subsidiaries as well as the qualifications and safeguards
that will be required. In addition, in February, 2000 all federal bank
regulatory agencies jointly issued a proposed rule that would implement the
financial privacy provisions of the Act.
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),
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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.
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 nonbank 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, 1999, the Company had regulatory capital in excess of the
Federal Reserve's minimum requirements, with a risk-based capital ratio of
13.41% and a leverage ratio of 8.33%.
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
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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 nonbank 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 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, 1999, BIF assessments ranged from 0% of
deposits to 0.27% of deposits. For the semi-annual assessment period beginning
January 1, 2000, 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. 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, 1999, the FICO assessment rate for SAIF members ranged
between approximately 0.058% of deposits and approximately 0.061% of deposits,
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while the FICO assessment rate for BIF members ranged between approximately
0.0116% of deposits and approximately 0.0122% of deposits. During the year ended
December 31, 1999, the Bank paid FICO assessments totaling $86,245.
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, 1999, the Bank paid supervisory assessments to the OCC
totaling $184,266.
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").
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, 1999, 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, 1999, the Bank exceeded its minimum regulatory
capital requirements with a leverage ratio of 8.34% and a risk-based capital
ratio of 13.28%.
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, 1999, 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's board of directors deems prudent. Without prior OCC
approval, however, a national bank may not pay dividends in any calendar year
which, in the aggregate, exceed the bank's year-to-date net income plus the
bank's 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,
1999. As of December 31, 1999, approximately $ 6.8 million was available to be
paid as dividends to the Company by the Bank. Notwithstanding the availability
of funds for dividends, however,
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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 and its subsidiary, on
investments in the stock or other securities of the Company and its subsidiary
and the acceptance of the stock or other securities of the Company or its
subsidiary 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 and its
subsidiary, 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 its subsidiary 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. Since the fourth quarter of 1998, and through the first quarter of
2000, the federal banking regulators have issued safety and 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 $44.3 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $44.3 million, the reserve
requirement is $1.329 million plus 10% of the aggregate amount of total
transaction accounts in excess of $44.3
7
<PAGE>
million. The first $5.0 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 sixteen additional facilities, of which thirteen
are owned and three are leased. The address and approximate square footage of
each location are as follows:
<TABLE>
<CAPTION>
Approximate
Location Square Feet 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
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
80 South Weber Road, Romeoville 1,600 Owned
15900 South Division Street, Plainfield 2,000 Owned
</TABLE>
The Weber Road, Romeoville and South Division Street, Plainfield facilities were
opened during 1999.
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, 1999, the Company had 2,294 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 1999 and 1998 is presented on page 9 of the Company's 1999 Annual
Report to Stockholders and is incorporated herein by reference.
8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The five year summary of selected financial data is presented as Selected
Financial Data on page 9 of the Company's 1999 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 11 of the 1999
Financial Report and the additional statistical information appearing on pages
12 through 16 of the 1999 Financial Report are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information regarding quantitative and qualitative disclosures about market risk
appearing on pages 8 and 9 of the 1999 Financial Report are incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Notes thereto appearing on pages 17
through 36 of the 1999 Financial Report are incorporated herein by reference.
See Item 14 for information concerning financial statements and schedules filed
with the report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
No disagreements on accounting and financial disclosure matters have occurred
for the 24 months prior to, or in months subsequent to, December 31, 1999.
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 Notice of Annual Meeting of
Stockholders and Proxy Statement is incorporated herein by reference.
9
<PAGE>
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 1999
Financial Report to Stockholders as listed below:
<TABLE>
<CAPTION>
Financial
Report Pages
------------
<S> <C>
Consolidated balance sheets as of December 31, 1999 and 1998............... 18
Consolidated statements of income for the years ended
December 31, 1999, 1998, and 1997.......................................... 19
Consolidated statements of stockholders' equity for the years
ended December 31, 1999, 1998, and 1997..................................... 20
Consolidated statements of cash flows for the years ended
December 31, 1999, 1998, and 1997.......................................... 21
Notes to consolidated financial statements................................. 22-36
Report of Independent Auditors on the Consolidated Financial
Statements................................................................. 17
</TABLE>
The following index provides the location of the statistical information
included in the 1999 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
Nonperforming Loans.................................................... 4
Potential Problem Loans................................................ 5
Asset/Liability Management (liquidity)................................ 7
Interest Differential (Rate/Volume Analysis)........................... 12
Securities............................................................. 12
Securities Maturities and Weighted Average Interest Rate............... 13
Loan Portfolio......................................................... 14
Loan Maturities and Rate Sensitivity................................... 14
Summary of Loan Loss Activity.......................................... 15
Allocation of the Allowance for Loan Losses............................ 16
Time Deposits of $100,000 or More...................................... 16
Disclosure of the Effect on Interest Income from Impaired Loans........ 26
Short-term Borrowings.................................................. 28
Quarterly Results of Operations 1999-1998 (Unaudited).................. 36
</TABLE>
3. Exhibits
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).
10
<PAGE>
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, (incorporated by reference to Part IV of
Form 10-K for the year ended December 31, 1998, File No.
0-15123).
10.3a First National Bancorp, Inc. 401(k) Plan, (incorporated by
reference to Part IV of Form 10-K for the year ended December
31, 1993, File No. 0-15123).
10.3b Amendment of the First National Bancorp, Inc. 401(K) Plan,
(incorporated by reference to Part IV of Form 10-K for the
year ended December 31, 1994, File No. 0-15123).
10.4 First National Bancorp, Inc. Employees' Cafeteria Plan,
(incorporated by reference to Part IV of Form 10-K for the
year ended December 31, 1995, File No. 0-15123).
10.5 Synopsis of computer service contract dated December 11, 1996
between FISERV Solutions, Inc. (service provider) and First
National Bancorp, Inc. (customer), (incorporated by reference
to Part IV of Form 10-K for the year ended December 31, 1996,
File No. 0-15123).
11 Statement re: computation of per share earnings
13 1999 annual and financial reports to shareholders
21 Subsidiaries of the Registrant
22 Notice of Annual Shareholders Meeting of First National
Bancorp, Inc.
27 Financial Data Schedule
(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 1999.
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 9th day of March, 2000.
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 9th day of March, 2000 by the following persons on behalf of
the registrant in the capacities indicated.
Name Title
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
- ----------------------------------------------------
Howard E. Reeves Director
- ----------------------------------------------------
Sheldon C. Bell Director
- ----------------------------------------------------
Harvey J. Lewis Director
- ----------------------------------------------------
12
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average number of shares outstanding 2,420,451 2,423,494 2,431,804
Net income (in thousands) $ 10,435 $ 9,727 $ 9,174
Earnings per share $ 4.31 $ 4.01 $ 3.77
</TABLE>
<PAGE>
A Proud Tradition...
One
Billion
Strong
[LOGO]
<PAGE>
FINANCIAL HIGHLIGHTS
- ---------------------------
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA 1999 1998 % Increase
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Assets At Year End $ 1,014,840 $ 902,675 12.43%
Net Income $ 10,435 $ 9,727 7.28%
Earnings Per Share $ 4.31 $ 4.01 7.48%
Stockholders' Equity $ 87,265 $ 82,108 6.28%
Book Value Per Share $ 35.97 $ 33.92 6.04%
</TABLE>
EARNINGS PER SHARE
[GRAPHIC]
TOTAL ASSETS AT YEAR END
(IN THOUSANDS)
[GRAPHIC]
<TABLE>
<CAPTION>
CONTENTS
- ------------------------------------------------------------------
<S> <C>
Letter to Shareholders .......................................... 2
1999 Highlights ................................................. 4
Condensed Consolidated Balance Sheets ........................... 6
Condensed Consolidated Statements of Income ..................... 7
Condensed Consolidated Statements of Stockholders' Equity ....... 8
Report of Independent Auditors .................................. 8
Selected Financial & Common Stock Data .......................... 9
Directors .......................................................10
Officers ........................................................12
</TABLE>
<PAGE>
FINANCIAL HIGHLIGHTS
---------------------------
A PROUD TRADITION...ONE BILLION STRONG
In 1999, we surpassed $1 billion in total assets, opened new, full service
locations in Romeoville and Plainfield and implemented new technologies
including 24 hour internet banking.
These accomplishments have positioned us to continue a tradition of profitable
growth for our shareholders and to deliver the products andservices our
customers will need to pursue their financial goals in the future.
STOCKHOLDERS' EQUITY AT YEAR END
(IN THOUSANDS)
[GRAPHIC]
NET INCOME
(IN THOUSANDS)
[GRAPHIC]
Annual Report 1999 1
<PAGE>
TO OUR SHAREHOLDERS
- ------------------------------
For First National Bank of Joliet, 1999 could be characterized as a
year of strength... strength in terms of financial condition and
profitability, strength and soundness of our banking philosophy, and
strength in our ability to perform within changing conditions and
situations. First National Bank has remained a cornerstone in our
communities and has a reputation of staying true to its charted
course of traditional values while embracing the forefront of
technology.
[PHOTO]
Total assets soared to over 1 billion dollars, an increase of 12.4%,
resulting in one of the best years in the Bancorp's history.
Investment Management/Trust assets had exceptional growth of almost
50% over last year. Net income of $10,435,000 was a 7.3% increase
over 1998. Earnings per share increased $.30 to $4.31.
Solid growth was apparent in our complete loan portfolio. Our
experienced lenders have kept up with the changing market. Loans
grew to $585 million, a growth of almost $50 million over last year.
The Investment Management/Trust Department's fee income grew over
17% which was primarily due to the acquisition of new managed assets.
The foundation laid so many years ago is still sound. The importance
of building strong customer relationships, active community
involvement, and a spirit of teamwork are all part of our primary
values. Today, we continue to lay the stones... some are masonry in
our new branches in Plainfield and Romeoville, while others are cast
from the new stones of technology.
2 First National Bancorp, Inc.
<PAGE>
TO OUR SHAREHOLDERS
------------------------------
The opening of our Weber Road office in early August proved to be a great
success with record breaking ATM transactions as well as new customer accounts.
In late October, following true to form, another new bank in the Plainfield
community came to life, mirroring Weber Road's accomplishments.
We continue to understand the importance of technology and traditional banking.
Approximately 50% of banking transactions now bypass the traditional "teller
window" in favor of electronic channels. ATM transactions and locations again
grew substantially in 1999. Our website, www.fnbj.com exposed us to a much wider
base of potential customers, while leading existing clients to our Internet
banking products. "First on the Net" provides complete 24 hour access to your
FNBJ accounts. Investment Management/Trust clients also enjoy access to daily
pricing of their investments and the ability to design a personal investment
statement. Check imaging, our latest technological advancement, symbolizes First
National's commitment to customer convenience. As these technologies usher us
into the 21st century, we continue to provide substantial profit for our
shareholders.
Our strong dedication to the communities in which we live is a standard for
First National. The officers and employees of Joliet, Lockport, Homer Township,
Bolingbrook, Plano, Minooka, Channahon, Shorewood, Romeoville and Plainfield
willingly contribute their time and money to foster the communities where they
work and live. The desire to support these areas was evident with our employee's
community involvement totaling more than 32,000 hours in 1999.
As we begin our third century, we will continue to offer the latest in
technology for our customers without forgetting the personal service that has
been the cornerstone of our organization. With the excellent leadership provided
by our Board of Directors and the dedication of our officers and employees,
First National Bancorp will continue in a position of strength as a financial
institution. We are committed to the understanding that we must learn from our
past, manage our present and plan our future. We stand on this foundation
eagerly awaiting the challenges of tomorrow.
/s/ Kevin T. Reardon /s/ Albert G. D'Ottavio
- --------------------------- -------------------------------------
Kevin T. Reardon Albert G. D'Ottavio
Chairman of the Board President and Chief Operating Officer
and Chief Executive Officer
Annual Report 1999 3
<PAGE>
1999 HIGHLIGHTS
- ------------------------------
PEOPLE YOU CAN COUNT ON
- -------------------------------------------------------------------------------
TODAY, AN INSTITUTION CAN RESPOND SUCCESSFULLY TO THE DEMANDS OF GROWTH WHEN
EVERYONE PITCHES IN AND WORKS A LITTLE HARDER. AND THAT'S EXACTLY THE LEVEL OF
EFFORT AND ENTHUSIASM WE RECEIVED FROM OUR ENTIRE STAFF DURING THE PAST YEAR.
WHILE WE HAVE FEATURED ONLY A FEW, WE CONGRATULATE ALL OUR PEOPLE ON A WONDERFUL
YEAR AND THANK THEM FOR THEIR EXTRAORDINARY WORK AND DEDICATION.
[PHOTO]
Installment Loan Specialists (from left to right): Mark Thelo, Pat Brannick,
Steve Randich, Jordan Ruiz, Randy Burton, Lowell Conway and Bob DiLorenzo
[PHOTO]
Tellers and Customer Service Representatives (from left to right): Jessica
Medrano, Tabitha Fleming, Donna Collins and John Ballantine
[PHOTO]
Home Mortgage Lenders (from left to right): Steve Marchio, Gail Moss and Cathy
Albertson
[PHOTO]
Commercial Lenders (from left to right): Dan Mihelich, Terry Hackett, Harry
McSteen, Carl Holmquist and Greg Schaefer
4 First National Bancorp, Inc.
<PAGE>
1999 HIGHLIGHTS
---------------------
MORE LOCATIONS
- -------------------------------------------------------------------------------
New banking centers in Plainfield and
Romeoville brought our total number of
locations to 17 and positioned us to meet [PHOTO]
the needs of a rapidly expanding region.
EXPANDING ATM NETWORK
- -------------------------------------------------------------------------------
As a result of cooperative arrangements with
J.C. Penney, service stations and convenience
[PHOTO] stores, our ATM network expanded significantly
during 1999.
INTERNET BANKING
- -------------------------------------------------------------------------------
Customers looking for added ease and
convenience received more good news in
1999 with the introduction of our internet
banking technology... First on the Net. Now,
in addition to 24 hour telephone access,
authorized bank customers can review [PHOTO]
account activity, monitor balances, transfer
funds, print statements or pay bills by
accessing www.fnbj.com. Trust and
Investment Management customers can
review their investment portfolios with ease.
Annual Report 1999 5
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
- ------------------------------------------
First National Bancorp, Inc.
December 31, 1999 & 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and due from banks $ 57,449 $ 39,710
Federal funds sold 64,700 31,000
Securities available-for-sale 71,250 66,927
Securities held-to-maturity (fair value of $193,667 in 1999 and $195,526 in 1998) 198,166 193,733
Loans
Commercial 225,386 200,612
Agricultural 11,015 9,763
Residential real estate 131,671 136,894
Consumer 222,856 193,677
----------- -----------
Total loans 590,928 540,946
Allowance for loan losses (5,870) (4,946)
----------- -----------
Loans, net 585,058 536,000
Premises and equipment, net 20,034 18,753
Accrued interest receivable and other assets 10,703 8,067
Intangibles, net 7,480 8,485
----------- -----------
Total assets $ 1,014,840 $ 902,675
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest-bearing $ 148,893 $ 142,427
NOW accounts 90,321 87,611
Money market accounts 49,308 45,736
Savings 176,076 172,329
Time deposits, $100,000 and over 86,681 69,871
Other time deposits 258,330 228,342
------------ ------------
Total deposits 809,609 746,316
Short-term borrowings 112,191 65,540
Long-term debt - 3,059
Accrued interest and other liabilities 5,775 5,652
------------ ------------
Total liabilities 927,575 820,567
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 106 14
Retained earnings 64,899 58,578
Accumulated other comprehensive income (loss) (1,664) (52)
Treasury stock, at cost (5,968 shares in 1999 and 11,368 shares in 1998) (394) (750)
----------- --------
Total stockholders' equity 87,265 82,108
----------- --------
Total liabilities and stockholders' equity $1,014,840 $ 902,675
=========== ============
</TABLE>
6 First National Bancorp, Inc.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
------------------------------------------------
First National Bancorp, Inc.
Years Ended December 31, 1999 & 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
---- ----
INTEREST INCOME
<S> <C> <C>
Loans $ 46,847 $ 46,483
Securities
Taxable 13,612 11,025
Tax-exempt 1,547 1,709
Federal funds sold 1,965 2,981
--------- ----------
Total interest income 63,971 62,198
INTEREST EXPENSE
Deposits 23,580 24,053
Short-term borrowings 3,166 2,711
Long-term debt 100 366
--------- ----------
Total interest expense 26,846 27,130
--------- ----------
Net interest income 37,125 35,068
Provision for loan losses 2,300 2,034
--------- ----------
Net interest income after provision for loan losses 34,825 33,034
NONINTEREST INCOME
Trust fees 1,353 1,153
Service charges on deposit accounts 3,981 3,915
Securities gains, net 15 121
Other income 1,869 1,950
--------- ----------
Total noninterest income 7,218 7,139
NONINTEREST EXPENSE
Salaries and employee benefits 13,388 13,099
Occupancy expense 1,878 1,857
Equipment expense 1,776 1,681
Data processing 1,553 1,485
Amortization of intangibles 1,005 1,004
Other expenses 6,802 6,506
--------- ----------
Total noninterest expense 26,402 25,632
--------- ----------
INCOME BEFORE INCOME TAXES $ 15,641 $ 14,541
Income tax expense 5,206 4,814
--------- ----------
NET INCOME $ 10,435 $ 9,727
--------- ----------
--------- ----------
Earnings per share $ 4.31 $ 4.01
Weighted average shares outstanding 2,420,451 2,423,494
</TABLE>
Annual Report 1999 7
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -------------------------------------------------------------
First National Bancorp, Inc.
Years Ended December 31, 1999 & 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock Accumulated
------------ Additional Other
Paid-In Retained Comprehensive Treasury
Shares Par Value Capital Earnings Income (Loss) Stock Total
--------- --------- ---------- -------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 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
Comprehensive income
Net income - - - 10,435 - - 10,435
Other comprehensive income, net of tax
Unrealized losses on securities,
net of reclassification adjustment - - - - (1,612) - (1,612)
Total comprehensive income -------
8,823
Cash dividends declared - $1.70 per share - - (4,114) - - (4,114)
5,400 shares of common stock
contributed to profit sharing plan - - 92 - - 356 448
--------- --------- ---------- --------- --------- ---------- -----------
Balance, December 31, 1999 2,431,804 $ 24,318 $ 106 $ 64,899 $ (1,664) $ (394) $ 87,265
--------- --------- ---------- --------- --------- ---------- -----------
--------- --------- ---------- --------- --------- ---------- -----------
</TABLE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
First National Bancorp, Inc.
Joliet, Illinois
We have audited, in accordance with generally accepted auditing standards,
the consolidated balance sheets of First National Bancorp, Inc. as of
December 31, 1999 and 1998 and the related consolidated statements of
income, stockholders' equity, and cash flows (not presented herein) for the
years then ended; and in our report dated January 21, 2000, 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, 1999 and 1998 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 it has been
derived.
/s/ Crowe, Chizek and Company LLP [LOGO]
Oak Brook, Illinois
January 21, 2000
8 First National Bancorp, Inc.
<PAGE>
SELECTED FINANCIAL & COMMON STOCK DATA
---------------------------------------------
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
Net interest income $ 37,125 $ 35,068 $ 32,922 $ 30,440 $ 29,451
Provision for loan losses 2,300 2,034 1,118 1,024 1,191
Noninterest income 7,218 7,139 5,899 5,491 5,124
Noninterest expense 26,402 25,632 24,227 22,249 21,419
Income before taxes 15,641 14,541 13,476 12,658 11,965
Net income 10,435 9,727 9,174 8,521 8,211
BALANCE SHEET - END OF YEAR BALANCES
Securities $ 269,416 $ 260,660 $ 216,701 $ 214,828 $ 202,711
Loans, net 585,058 536,000 521,943 464,372 427,917
Total assets 1,014,840 902,675 860,756 824,570 749,990
Deposits 809,609 746,316 726,156 690,513 605,137
Stockholders' equity 87,265 82,108 76,945 71,391 66,425
BALANCE SHEET - AVERAGE BALANCES
Securities $ 260,583 $ 211,946 $ 234,941 $ 213,653 $ 189,605
Loans, net 560,077 529,752 493,790 441,619 426,523
Total assets 936,199 867,915 829,878 773,792 729,801
Deposits 781,893 724,894 698,068 640,485 577,093
Stockholders' equity 85,232 80,098 74,040 68,269 63,741
WEIGHTED AVERAGE SHARES OUTSTANDING (1)
2,420,451 2,423,494 2,431,804 2,431,804 2,431,804
PER SHARE DATA (1)
Book value $ 35.97 $ 33.92 $ 31.64 $ 29.36 $ 27.32
Earnings 4.31 4.01 3.77 3.50 3.38
Cash dividends 1.70 1.55 1.50 1.50 1.38
SELECTED FINANCIAL RATIOS
Average net loans to average deposits 71.63% 73.08% 70.74% 68.95% 73.91%
Return on average assets 1.11% 1.12% 1.11% 1.10% 1.13%
Return on average equity 12.24% 12.14% 12.39% 12.48% 12.88%
Net interest margin (2) 4.44% 4.53% 4.47% 4.47% 4.62%
Average equity to average assets 9.10% 9.23% 8.92% 8.82% 8.73%
Dividend payout ratio 39.43% 38.61% 39.76% 42.80% 40.73%
</TABLE>
(1) Per share data for the years 1995 and 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%.
COMMON STOCK PRICE RANGE, DIVIDENDS 1999-1998 (UNAUDITED)
<TABLE>
<CAPTION>
Price Range Cash Dividends
----------- Declared
High Low Per Share
---- --- ---------
<S> <C> <C> <C>
1999
4th quarter $ 85 $ 80 $ 0.425
3rd quarter 83 78 0.425
2nd quarter 80 73 0.425
1st quarter 75 69 0.425
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
</TABLE>
Annual Report 1999 9
<PAGE>
BOARD OF DIRECTORS
- -------------------------
[PHOTO]
George H. Buck
PRESIDENT, WERDEN BUCK COMPANY
Walter F. Nolan, CPA
MEMBER, CLIFTON GUNDERSON & CO., L.L.C.
Albert G. D'Ottavio
PRESIDENT AND CHIEF OPERATING OFFICER
[PHOTO]
Watson A. Healy
ARCHITECT
Michael C. Reardon
SENIOR VICE PRESIDENT
Harvey J. Lewis
FARMER
10 First National Bancorp, Inc.
<PAGE>
BOARD OF DIRECTORS
-------------------------
[PHOTO]
Charles R. Peyla
PRESIDENT, ILLINOIS SECURITIES
Sheldon C. Bell
PRESIDENT, BELL REALTY, INC.
Louis R. Peyla
CHAIRMAN, ILLINOIS SECURITIES
[PHOTO]
Howard E. Reeves
PRESIDENT, HOW ENTERPRISES, INC.
Paul A Lambrecht*
RETIRED CHAIRMAN, BROWN & LAMBRECHT EARTHMOVERS, INC.
Kevin T. Reardon
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
* Denotes Director Emeritus
Annual Report 1999 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
Daniel J. Mihelich, ASSISTANT VICE PRESIDENT
Michael J. Schutz, LOAN OPERATIONS OFFICER
Cathy A. Albertson, LOAN OFFICER
Gail Moss, 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
Robert A. DiLorenzo, LOAN OFFICER
Jordan C. Ruiz, LOAN OFFICER
Max T. Ziesmer, LOAN OFFICER
Investment Management & Trust Department
- ----------------------------------------
James T. Limacher, SENIOR VICE PRESIDENT
Carl D. Lindokken, SENIOR INVESTMENT SPECIALIST
Jeri L. Madison, TRUST OFFICER
Andrew Midlock, Jr., TRUST OFFICER
Allan C. Somers, TRUST OFFICER
Operations Department
- ---------------------
Jack A. Podlesny, SENIOR VICE PRESIDENT & CASHIER
Dominic M. Paone, VICE PRESIDENT
Leif R. Hendricksen, BUILDING & FACILITIES OFFICER
Jeanie Bettenhausen, OPERATIONS OFFICER
Compliance Department
- ---------------------
Scott D. Nolan, VICE PRESIDENT & COMPLIANCE OFFICER
Cathy E. Crowley, ASSISTANT VICE PRESIDENT
Human Resource Department
- -------------------------
Michael W. Nolan, VICE PRESIDENT
Peg Arnold, TRAINING OFFICER
Information Systems Department
- ------------------------------
Olivier G. May, VICE PRESIDENT
Cheryl L. Gladkowski, INFORMATION SYSTEMS OFFICER
Brad T. Pedersen, INFORMATION SYSTEMS OFFICER
Data Processing Department
- --------------------------
Beverly I. Boostrom, ASSISTANT VICE PRESIDENT
Auditing Department
- -------------------
Richard G. DeGrush, SENIOR VICE PRESIDENT
Mark Midlock, ASSISTANT VICE PRESIDENT
Sales & Customer Service Department
- -----------------------------------
Michael C. Reardon, SENIOR VICE PRESIDENT
James K. Alexa, VICE PRESIDENT
David E. Glasscock, VICE PRESIDENT
Mark J. Griglione, VICE PRESIDENT
Daniel A. Friant, ASSISTANT VICE PRESIDENT
Stephen P. Marchio, ASSISTANT VICE PRESIDENT
Suzanne M. Gazelle, ASSISTANT VICE PRESIDENT
Kathryn G. Porter, ASSISTANT VICE PRESIDENT
Thomas A. Meyer, RETAIL BANKING OFFICER
Steven T. Laken, BUSINESS DEVELOPMENT OFFICER
Saundra K. Lucas, RETAIL BANKING OFFICER
Alma R. Martinez, RETAIL BANKING OFFICER
Bank Control Department
- -----------------------
Ronald E. Wencel, BANK CONTROL OFFICER
Marketing Department
- --------------------
Carole L. Sienko, MARKETING OFFICER
Member FDIC
A copy of the company's Annual Report on Form 10K for 1999 may be obtained by
writing to: Executive Secretary, First National Bancorp, Inc., 78 N. Chicago
Street, Joliet, IL 60432
12 First National Bancorp, Inc.
<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
- -------------------------------------
Sandra M. Pesavento, VICE PRESIDENT
Michael J. Tierney, VICE PRESIDENT
Deposit Services Department
- ---------------------------
Rhonda L. Bebar, ASSISTANT VICE PRESIDENT
Installment Loan Department
- ---------------------------
Pamela J. Tarrant, VICE PRESIDENT
PLANO BANKING CENTER
Advisory Board Members
- ----------------------
Betty J. McTee
R. Keith Caywood
Albert G. D'Ottavio
Roger D. Gossett
Thomas E. Klatt
Peter L. Krentz
Jack A. Podlesny
Kevin T. Reardon
President
- ---------
Betty J. McTee
Loan Department
- ---------------
Eric H. Leggett, VICE PRESIDENT
Todd W. Meier, ASSISTANT VICE PRESIDENT
Sharon R. Haggard, INSTALLMENT LOAN OFFICER
Patricia R. Hatcher, ASSISTANT LOAN OFFICER
Customer Service Department
- ---------------------------
M. Patricia Coultrip, CUSTOMER SERVICE 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
- ---------------
Jeanne Szymanski, LOAN OFFICER
Customer Service Department
- ---------------------------
Alicia L. Ingram, OPERATIONS OFFICER
<PAGE>
First National Bancorp, Inc.
1999 Financial Report
<PAGE>
[LOGO] FIRST NATIONAL BANCORP, INC.
FINANCIAL REPORT 1999
- -------------------------------------------------------------------------------
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 bank include, but are not limited to, changes in:
interest rates; general economic conditions; legislation and regulation;
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 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 financial and other banking
services to customers located primarily in the Will, Grundy, and Kendall
Counties, Illinois areas. 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 continue to be located in 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. In 1998, the Company merged Southwest Suburban Bank, Bank of
Lockport, and Community Bank of Plano into First National Bank of Joliet. At
December 31, 1999, the Company now has 17 customer banking locations and total
assets of $1.0 billion compared to $902.7 million at the end of 1998. Six new
branch offices have been opened in the past five 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 1999 and 1998, the Company experienced continued growth in deposits,
earning assets, total assets, and stockholders' equity. Average earning assets
for 1999 were $860.3 million, an increase of $63.7 million, or 8.0%, from $796.6
million in 1998. The 1999 average earning asset growth is primarily related to
increases in the average loan portfolio and the average taxable securities
portfolio. The 1998 average earning asset growth is primarily due to increases
in the average loan portfolio. This growth was funded through average deposit
growth of 7.9% in 1999 and 3.8% in 1998 and average short-term borrowing growth
of 22.3% in 1999 and 14.1% in 1998. Economic factors remain favorable, and
management expects loan and deposit growth to continue as the markets the
Company serves continue to expand.
Total deposits continued to grow in 1999, as they have for several years in a
row. Each category of deposits experienced growth in both 1999 and 1998. An
important source of deposit growth has been the opening of new branch offices
during the past few years. Average interest-bearing liabilities for 1999 were
$706.9 million, an increase of 8.0% from 1998. Average savings, NOW, and money
market deposits increased $35.6 million, or 12.0%, in 1999 and $13.0 million, or
4.6%, in 1998. Average time deposits increased $8.2 million, or 2.7%, in 1999
after increasing by $4.3 million, or 1.46%, in 1998. Average
non-interest-bearing demand deposits for 1999 were $139.4 million, an increase
of 10.4% from $126.3 million in 1998.
1
<PAGE>
In addition to deposits, short-term borrowings have been a source of funding for
asset growth. Short-term borrowings consist of securities sold under agreements
to repurchase, federal funds purchased, and U.S. Treasury demand note accounts.
Average short-term borrowings increased $11.5 million, or 22.3%, in 1999 after
increasing by $6.4 million, or 14.1%, in 1998.
The Company's stockholders' equity increased 6.3% and 6.7% in 1999 and 1998,
respectively, based on year-end amounts. Retained earnings has been the primary
source of growth in stockholders' equity in 1999 and 1998.
During 1999, the fair value of the Company's securities available-for-sale
decreased in value as market interest rates increased, resulting in an
increase in unrealized losses on securities available-for-sale, net of tax,
of $1.6 million. 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.
Total stockholders' equity at December 31, 1999 was $87.3 million, an increase
of $5.2 million from the prior year end. Book value per share increased to a
record high of $35.97 at December 31, 1999. Total equity and book value per
share have increased for several consecutive years.
RESULTS OF OPERATIONS
For the year ended December 31, 1999, the Company earned $10.4 million, or $4.31
per share, as compared to $9.7 million, or $4.01 per share, and $9.2 million or
$3.77 per share, for the years ended December 31, 1998 and 1997, respectively.
Net income for 1999 increased by 7.3% over that of 1998, while a 6.0% increase
was achieved in 1998. The operating performance of bank holding companies is
often measured and comparisons made, based on net income to average assets and
net income to average equity. The Company's return on average assets was 1.11%
in 1999. Corresponding figures were 1.12% and 1.11% for 1998 and 1997,
respectively. Return on average equity was 12.24% in 1999, 12.14% in 1998, and
12.39% in 1997.
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 4.44% in 1999, as compared to 4.53% in 1998 and 4.47% in
1997. In 1999, the yield on earning assets decreased 38 basis points to 7.56%
and the yield on interest-bearing liabilities decreased 34 basis points to
3.80%. 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% in 1998.
The decrease in the yield on earning assets was due primarily to the general
decline in interest rates which occurred during 1999 and 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 on a tax-equivalent basis increased in both 1999 and 1998 by
$2.1 million. In 1999, the increase in volume of earning assets net of
interest-bearing liabilities produced $3.0 million of the net interest income
increase while changes in interest rates reduced income by $856,000. The
increase in the volume of earning assets net of interest-bearing liabilities
produced $2.1 million of the net interest income increase while changes in
interest rates reduced income by $24,000 during 1998.
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 9 1 9 9 8 1 9 9 7
--------------------------- ---------------------------- -------------------------
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 $ 39,669 $ 1,965 4.95% $ 54,945 $ 2,981 5.43% $ 31,047 $ 1,736 5.59%
Taxable securities 231,278 13,612 5.89 181,130 11,025 6.09 200,981 12,504 6.22
Tax-exempt securities 29,305 2,380 8.12 30,816 2,629 8.53 33,960 2,911 8.57
Loans 560,077 47,094 8.41 529,752 46,589 8.79 493,790 43,596 8.83
------- -------- -------- -------- -------- --------
Total interest-
earning assets 860,329 65,051 7.56 796,643 63,224 7.94 759,778 60,747 8.00
------- -------- -------- -------- -------- --------
NON-INTEREST-EARNING ASSETS:
Cash and due from banks 40,499 35,750 33,266
Premises and equipment 19,256 18,693 18,300
Intangibles and other
assets 16,115 16,829 18,534
------- -------- --------
Total non-interest-
earning assets 75,870 71,272 70,100
------- -------- --------
Total assets $936,199 $867,915 $829,878
======== ======== ========
INTEREST-BEARING LIABILITIES:
Deposits
NOW and
money market $144,378 $ 4,015 2.78% $123,460 $ 3,436 2.78% $115,855 $ 3,047 2.63%
Savings 188,505 4,093 2.17 173,803 4,264 2.45 168,397 4,206 2.50
Time 309,563 15,472 5.00 301,369 16,353 5.43 297,043 16,535 5.57
Short-term
borrowings 63,198 3,166 5.01 51,656 2,711 5.25 45,276 2,470 5.46
Long-term debt 1,245 100 8.03 4,315 366 8.48 6,180 508 8.22
------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities 706,889 26,846 3.80 654,603 27,130 4.14 632,751 26,766 4.23
------- -------- ------ -------- -------- ------ -------- -------- ----
NON-INTEREST-BEARING LIABILITIES:
Demand deposits $139,447 $126,262 116,773
Other liabilities 4,631 6,952 6,314
STOCKHOLDERS' EQUITY 85,232 80,098 74,040
------- ------- ------
Total liabilities and
stockholders' equity $936,199 $867,915 $829,878
======== ======== ========
NET INTEREST INCOME $38,205 $36,094 $33,981
======= ======= =======
NET INTEREST SPREAD 3.76% 3.80% 3.77%
==== ==== ====
NET INTEREST MARGIN
TO AVERAGE INTEREST
EARNING ASSETS 4.44% 4.53% 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest-earning assets to total assets .92 .92 .92
Interest-earning assets to interest-
bearing liabilities 1.22 1.22 1.20
Time deposits and short-term borrowings
to interest-bearing liabilities .53 .54 .54
</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 $2.3 million in 1999 as compared to $2.0
million and $1.1 million in 1998 and 1997, 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, 1999, the allowance for loan losses was $5.9
million, or .99% of outstanding loans, compared to $4.9 million, or 0.91% of
outstanding loans, at December 31, 1998.
One measurement used by management in assessing the risk inherent in the loan
portfolio is the level of nonperforming loans. Nonperforming loans are comprised
of those loans on which interest income is not being accrued and those loans
which are past due ninety days or more. Nonperforming assets, which include
other real estate and other assets (primarily automobiles) acquired in
satisfaction of loans, at December 31 for each of the past five years are as
follows:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
---------------------------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 870 $ 955 $ 1,153 $ 785 $ 169
Other loans contractually past
due ninety days or more 624 2,209 952 1,072 981
Other real estate and repossessions 416 56 5 13 444
------- ------- ------- ------- -------
$ 1,910 $ 3,220 $ 2,110 $ 1,870 $ 1,594
======= ======= ======= ======= =======
Nonperforming loans to
total loans .25% .59% .40% .40% .27%
Allowance for loan losses
to nonperforming loans 392.90 156.32 210.78 237.70 341.83
Total nonperforming assets
to total stockholders' equity 2.19 3.92 2.74 2.62 2.40
Total nonperforming assets
to total assets .19 .36 .25 .23 .21
</TABLE>
4
<PAGE>
Impaired loans totaled $1,076,000 and $786,000 at December 31, 1999 and 1998,
respectively. Impaired loans consist of commercial and commercial real estate
loans. Management has allocated $175,000 and $118,000 of the allowance for loan
losses specifically to impaired loans as of December 31, 1999 and 1998,
respectively. Interest income recognized on impaired loans during 1999 or 1998
was immaterial.
There have been no restructured loans or leases in the past five years. As of
December 31, 1999, management has identified other potential problem loans by
type of loan in the table below. Generally, these loans are considered
substandard by management. These amounts exclude the non-accrual and past due
loans listed above in the Nonperforming Assets table.
<TABLE>
<S> <C>
Commercial $ 95
Commercial real estate 172
Agriculture 480
Residential real estate 326
Consumer 109
-------
$ 1,182
=======
</TABLE>
In determining the provision for loan losses, management was influenced by the
Company's consistent loan growth and amount of net charge offs in each year.
Other factors, such as changes in the loan portfolio mix, delinquency trends,
current economic trends, review of large and known problem credits, 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 provisions for loan losses recorded in 1999 and 1998 are significantly
higher than the provisions in each of the prior three years due to increases in
net charge offs. In addition, the loan portfolio mix began to shift in 1998 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 five years. The
ratio of nonperforming loans to total loans has been .59% or less for the past
five years, which management considers relatively low. The Company's ratio of
net loan charge-offs to average loans was .25%, .29%, and .22% in 1999, 1998,
and 1997, 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 1999 as discussed above, management
believes that 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 services. Total noninterest income increased
$79,000, or 1.1%, in 1999 compared with an increase of $1.2 million, or 21.0%,
in 1998. The ratio of noninterest income to income before taxes was 46%, 49%,
and 44% in 1999, 1998, and 1997, respectively.
Trust fee income increased $200,000, or 17.3%, in 1999 as compared with an
increase of $118,000, or 11.4%, in 1998. The market value of trust assets
increased approximately 49.8% and 12.6% during 1999 and 1998, respectively,
totaling $419.6 million at December 31, 1999. The 1999 growth included one
significant account which contains approximately $70 million in assets. Absent
this one significant account, growth in 1999 was approximately 24.9%. Growth in
trust assets, due to favorable market conditions and more trust accounts,
resulted in greater fees in both 1999 and 1998.
Service charges on deposit accounts increased $66,000, or 1.7%, in 1999 after
increasing $253,000, or 6.9%, in 1998. 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 decreased $81,000, or 4.2%, in 1999 compared with an increase of
$761,000, or 64%, in 1998. The 1999 decrease is primarily a result of decreases
in gains on sales of loans partially offset by an increase in loan servicing
income. Real estate loan sales were $34.7 million in 1999 compared to $76.2
million in 1998 and $20.5 million in 1997. Gains on loan sales decreased to
$217,000 in 1998 compared to $396,000 in 1998. In 1997, gains on loan sales were
$42,000. Lower market interest rates in 1998 were key to greater loan
origination volume. Loans serviced for others increased to approximately $120
million as of December 31, 1999 compared to $105 million as of December 31,
1998. The 1998 increase in other income is primarily due to increases in gains
on sales of loans, ATM surcharge fees, demand deposit check commissions, and
letters of credit fees. ATM surcharge fees increased to $347,000 in 1998 from
$184,000 in 1997 as a result of an increase in charges to nonbank customers.
NONINTEREST EXPENSE
Total noninterest expense increased $770,000, or 3.0%, in 1999 after increasing
$1.4 million, or 5.8%, in 1998. Details of noninterest expense for the three
years in the period ended December 31, 1999 are presented in the following
schedule:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Salaries and employee benefits $ 13,388 $ 13,099 $ 12,562
Occupancy expense 1,878 1,857 1,800
Data processing 1,553 1,485 1,215
Equipment expense 1,776 1,681 1,449
FDIC insurance and bank examination assessments 271 256 238
Printing, stationery, and supplies 635 665 703
Postage 468 538 467
Advertising 596 501 407
Amortization of intangibles 1,005 1,004 1,021
All other expenses 4,832 4,546 4,365
--------- --------- ---------
Total noninterest expense $ 26,402 $ 25,632 $ 24,227
========= ========= =========
</TABLE>
Salaries and employee benefits, which represent the largest component of
noninterest expense, increased by $289,000, or 2.2%, in 1999 after increasing
$537,000, or 4.3%, in 1998. The 1999 increase is attributable to general pay
increases and a higher number of employees partially offset by reductions in
health insurance costs and retirement plan costs. The 1998 increase is
attributable to general pay increases and an increase in health insurance costs.
At December 31, 1999, 1998, and 1997, the Company's number of full-time
equivalent employees was 384, 356, and 364, respectively.
Growth in the volume of loan and deposit accounts contributed to higher data
processing expense in 1999 and 1998. Data processing expense in 1998 includes a
full year of expenses attributable to the third party processing service
converted to during 1997. Additionally, enhancements to the data processing
services were also added in 1998 including six-day processing, query (report
writer), and voice response capabilities.
Equipment expense was fairly consistent in 1999 compared to 1998 as it
increased 5.7%. The increase in equipment expense during 1998 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 expense was consistent in 1999 compared to
1998 as it decreased 4.5%. This expense decrease during 1998 was a result of the
Company's efforts to reduce existing inventory of materials on hand as a result
of the change in the Company's logo. Additionally, as a result of the merger of
the subsidiary banks in 1998, 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 decreased 13.0% in 1999 after increasing 15.2% during 1998 as a
result of the merger and increased marketing efforts. During 1998, each of
the subsidiary banks had special notification mailings to customers informing
them of the merger. Marketing materials were also distributed to the Bank's
customers regarding the merger. Lastly, there were increased direct mailing
programs distributed to market the Bank's home equity product during 1998.
Advertising increased 19.0% in 1999 after increasing 23.1% during 1998. The
Company has increased its marketing and advertising expenditures as a result of
the merger. Additionally, the Company has focused advertising efforts on
specific products, such as home equity loans.
6
<PAGE>
INCOME TAXES
The Company's income tax expense was $5.2 million in 1999 compared to $4.8
million in 1998 and $4.3 million in 1997. Income tax expense as a percentage of
income before income taxes has remained relatively consistent over the past
three years at 33.3%, 33.1%, and 31.9% in 1999, 1998, and 1997, 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, 1999.
<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 $ 1,000 $ 7,507 $ 225,028 $ 7,914
Tax-exempt securities 2,008 2,076 17,854 6,029
Federal funds sold 64,700 - - -
Loans 161,992 72,308 266,562 90,066
---------- ---------- ---------- ----------
Total interest earning assets $ 229,700 $ 81,891 $ 509,444 $ 104,009
========== ========== ========== ==========
Cumulative interest earning assets $ 229,700 $ 311,591 $ 821,035 $ 925,044
========== ========== ========== ==========
Rate sensitive liabilities
Deposits
NOW and money market $ 139,629 $ - $ - $ -
Savings 176,076 - - -
Time 128,667 174,231 42,113 -
Short-term borrowings 80,436 31,755 - -
---------- ---------- ---------- ----------
Total interest-bearing liabilities $ 524,808 $ 205,986 $ 42,113 $ -
========== ========== ========== ==========
Cumulative interest-bearing liabilities $ 524,808 $ 730,794 $ 772,907 $ 772,907
========== ========== ========== ==========
Excess interest-earning assets (liabilities) $ (295,108) $ (124,095) $ 467,331 $ 104,009
Cumulative excess interest-earning
assets (liabilities) (295,108) (419,203) 48,128 152,137
Cumulative rate sensitivity ratio
(interest-earning assets divided by
interest-bearing liabilities) 0.44 0.43 1.06 1.20
</TABLE>
Included in "Less Than 90 Days" rate sensitive liabilities are $176 million of
savings deposits and $140 million of NOW and money market deposits which
management considers more core deposit in nature than time deposits.
Approximately $201 million of securities are callable in 2000 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 $103 million at the
one-year time horizon and the cumulative rate sensitivity ratio would be .75.
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. 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 tables below and on page 9
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, 1999 and 1998.
Analysis as of December 31, 1999
--------------------------------
Expected Maturity Amounts for Years Ending December 31,
-------------------------------------------------------
<TABLE>
<CAPTION>
2002 Fair
Through After Value
2000 2001 2004 2004 Total Total
---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Securities, fixed rate
Available-for-sale $ - $ 16,996 $ 49,008 $ 8,005 $ 74,009 $ 71,250
Average interest rate - 5.43% 5.63% 6.44% 5.67%
Held-to-maturity 12,591 33,243 146,160 6,172 198,166 193,667
Average interest rate 6.10% 5.72% 5.87% 4.65% 5.82%
Loans, fixed rate(1) 101,653 60,284 207,795 90,066 459,798 456,854
Average interest rate 8.52% 8.52% 8.28% 7.96% 8.30%
LIABILITIES
NOW, money market, and
savings deposits(2) $ 315,705 $ - $ - $ - $ 315,705 $315,705
Average interest rate 2.57% - - - 2.57%
Time deposits, fixed rate 302,898 23,761 18,352 - 345,011 345,736
Average interest rate 4.96% 5.44% 5.65% - 5.03%
Short-term borrowings,
fixed rate 112,191 - - - 112,191 112,191
Average interest rate 5.47% - - - 5.47%
</TABLE>
(1) Information on variable rate loans by maturity period is not readily
available. Interest rate risk on loan commitments, unused lines of credit,
and standby letters of credit is minimal since most are for terms of ninety
days or less and include variable rate features.
(2) NOW and savings accounts are fixed rate deposits whereas money market
accounts are variable rate deposits. These deposit accounts, while shown as
maturing in 2000, are considered by management as core deposits for
asset/liability management purposes with account lives extending beyond one
year.
8
<PAGE>
Analysis as of December 31, 1998
--------------------------------
Expected Maturity Amounts for Years Ending December 31,
-------------------------------------------------------
<TABLE>
<CAPTION>
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 and savings accounts are fixed rate deposits whereas money market
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.
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. Calls of securities are
also influenced by market interest rates.
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 $8.4 million, $645,000,
and $3.0 million in 1999, 1998, and 1997, 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 $55.6 million, $12.3
million, and $58.5 million in 1999, 1998, and 1997, 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 $45.1 million in 1999 and $24.2 million in 1998 and net cash inflow of $20.9
million in 1997.
9
<PAGE>
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 have 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 $63.3 million,
$20.1 million, and $35.6 million in 1999, 1998, and 1997, respectively. As
competition for deposits is expected to remain strong, future deposit growth
cannot be predicted with any certainty.
Many of the repurchase agreements are with municipalities, including county
governmental offices. As such, the amount of the funds borrowed fluctuates from
period to period. Short-term borrowings increased by $46.7 million and $19.3
million in 1999 and 1998, respectively, and decreased by $3.0 million in 1997.
Dividends paid to stockholders as a percentage of net income were 39.4%, 38.6%,
and 39.8% in 1999, 1998, and 1997, respectively. Cash dividends per share were
$1.70 in 1999, $1.55 in 1998, and $1.50 in 1997.
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 five years. All of the Company's
long-term debt was repaid in 1999. 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. None of
these lines were drawn upon as of December 31, 1999.
CAPITAL RESOURCES
In 1999, stockholders' equity increased by $5.2 million to $87.3 million. The
amounts comprising this net increase were net income of $10.4 million, offset by
dividends paid to stockholders of $4.1 million, net treasury stock transactions
aggregating $448,000, and a $1.6 million change in unrealized losses (net of
tax) on securities available-for-sale. At December 31, 1999, stockholders'
equity represented 8.6% of total assets compared to the year earlier position of
9.1%.
Under rules adopted by federal bank regulatory agencies, bank holding companies
and financial institutions are subject to certain capital requirements. 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
Beginning January 1, 2001, Statement of Financial Accounting Standards
(Statement) 133 on derivatives will require all derivatives to be recorded at
fair value in the balance sheet. Unless designated as hedges, changes in these
fair values will be recorded in the income statement. Fair value changes
involving hedges will generally be recorded by offsetting gains and losses on
the hedge and on the hedged item, even if the fair value of the hedged item is
not otherwise recorded. Since the Company has no significant derivative
instruments of hedging activities, adoption of Statement 133 is not expected to
have a material effect on the Company's financial statements, but the effect
will depend on derivative holdings when this standard applies.
10
<PAGE>
YEAR 2000
The Company tested its critical systems for the century date change. No
significant problem was encountered during the testing phase. The Company also
developed a business resumption plan to address potential problems arising with
the century date change. The century date change has not affected any of the
Company's critical or non-critical systems.
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>
1999 Compared to 1998 1998 Compared to 1997
--------------------- ---------------------
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 $ (774) $ (242) $(1,016) $ 1,298 $ (53) $ 1,245
Taxable securities 2,962 (375) 2,587 (1,201) (278) (1,479)
Tax-exempt securities (126) (123) (249) (268) (14) (282)
Loans 2,601 (2,096) 505 3,163 (170) 2,993
------ ----- ------ ------- ----- ------
Total interest income 4,663 (2,836) 1,827 2,992 (515) 2,477
------ ----- ------ ------- ----- ------
INTEREST EXPENSE ON:
Deposits:
NOW and money market $ 582 $ (3) $ 579 $ 303 $ 86 $ 389
Savings 343 (514) (171) 133 (75) 58
Time 436 (1,317) (881) 239 (421) (182)
Short-term borrowings 583 (128) 455 338 (97) 241
Long-term debt (248) (18) (266) (158) 16 (142)
------ ----- ------ ------- ----- ------
Total interest expense 1,696 (1,980) (284) 855 (491) 364
------ ----- ------ ------- ----- ------
Net interest income $ 2,967 $ (856) $ 2,111 $ 2,137 $ (24) $ 2,113
------ ----- ------ ------- ----- ------
------ ----- ------ ------- ----- ------
</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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Available-for-sale (at fair value)
U.S. Treasury securities $ - $ 6,048 $ 8,029
U.S. Government agencies 69,257 58,845 3,502
Corporates 986 1,027 -
Federal Reserve Bank stock 1,007 1,007 300
------ ------ ------
Total available-for-sale 71,250 66,927 11,831
------ ------ ------
Held-to-maturity (at amortized cost)
U.S. Treasury securities 7,007 16,021 24,509
U.S. Government agencies 163,192 147,673 147,373
States and political subdivisions 27,967 30,039 32,988
------ ------ ------
Total held-to-maturity 198,166 193,733 204,870
------ ------ ------
Total $ 269,416 $ 260,660 $ 216,701
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1999, the Company held no securities of any single issuer, other
than U.S. Treasury and U.S. Government agencies, that exceeded 10% of
stockholders' equity.
12
<PAGE>
SECURITIES MATURITIES
The following table shows the relative maturities of debt securities (at
carrying values) held by the Company at December 31, 1999 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. Average
Government Interest
Agencies Corporates Total Rate
-------- ---------- ----- ----
<S> <C> <C> <C> <C>
1 to 5 years $ 62,493 $ 986 $ 63,479 5.62%
5 to 10 years 6,764 - 6,764
-------- ---------- ------ 6.50
Total $ 69,257 $ 986 $ 70,243
-------- ---------- ------
-------- ---------- ------
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity
----------------
Weighted
U.S. U.S. States and Average
Treasury Government Political Interest
Securities Agencies Subdivisions Total Rate
---------- -------- ------------ ----- ----
<S> <C> <C> <C> <C> <C>
Under 1 year $ 5,006 $ 3,501 $ 4,084 $ 12,591 7.09%
1 to 5 years 2,001 159,548 17,854 179,403 6.12
5 to 10 years - 143 5,363 5,506 7.15
Over 10 years - - 666 666 7.11
--------- ---------- -------- ----------
Total $ 7,007 $ 163,192 $ 27,967 $ 198,166
--------- ---------- -------- ----------
--------- ---------- -------- ----------
</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
$198,000 for commercial and commercial real estate loans, $300,000 for
construction loans, and $57,000 for agricultural loans. This category increased
in 1999 by 12.4% from 1998.
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 1999 by 3.8% from 1998.
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 Company provides loan servicing
for approximately 1,480 loans totaling $120 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 70% of this portfolio. Revolving credit card lines
represent 2% of the portfolio. Net loan charge-offs for 1999 were .71% of
consumer loans outstanding as compared to .53% and .52% for 1998 and 1997,
respectively. The increase in 1999 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 15.1% in 1999
from 1998.
The Company's loan portfolio by major category as of December 31 for each of the
past five years is shown below.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial $ 124,965 $ 115,152 $ 90,009 $ 81,981 $ 79,967
Commercial real estate 87,507 69,836 91,334 76,354 70,046
Construction 12,914 15,624 14,106 16,810 16,933
Agricultural 11,015 9,763 10,769 8,692 8,815
Residential real estate 131,671 136,894 147,625 141,440 123,652
Consumer 222,859 193,703 172,695 144,162 134,344
------- ------- ------- ------- -------
Total loans 590,931 540,972 526,538 469,439 433,757
Less:
Unearned discount (3) (26) (158) (653) (1,909)
Allowance for loan losses (5,870) (4,946) (4,437) (4,414) (3,931)
------- ------- ------- ------- -------
Net loans $ 585,058 $ 536,000 $ 521,943 $ 464,372 $ 427,917
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Ratio of net loans to
total assets 57.65% 59.38% 60.64% 56.32% 57.06%
</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, 1999.
<TABLE>
<CAPTION>
Fixed Rate Loans
----------------------------------------------------
After One Floating
One Year Through Over Rate Combined
or Less Five Years Five Years Total Loans Total
--------- ----------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Maturity:
Commercial $ 21,541 $ 31,310 $ 9,095 $ 61,946 $ 63,019 $ 124,965
Commercial real estate 5,047 48,485 27,494 81,026 6,481 87,507
Construction 806 1,007 116 1,929 10,985 12,914
Agricultural 6,038 1,950 710 8,698 2,317 11,015
--------- ----------- ---------- --------- --------- ----------
$ 33,432 $ 82,752 $ 37,415 $ 153,599 $ 82,802 $ 236,401
--------- ----------- ---------- --------- --------- ----------
--------- ----------- ---------- --------- --------- ----------
</TABLE>
14
<PAGE>
SUMMARY OF LOAN LOSS ACTIVITY
In determining the provision for loan losses, management considers the Company's
consistent loan growth and the amount of net charge-offs each year. Other
factors, such as changes in the loan portfolio mix, delinquency trends, current
economic conditions and trends, reviews of larger loans and known problem
credits, and the results of internal and regulatory loan examinations, are also
considered by management in assessing the adequacy of the allowance for loan
losses.
The following table details the component changes in the Company's allowance for
loan losses for each of the past five years.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Allowance, beginning of year $ 4,946 $ 4,437 $ 4,414 $ 3,931 $ 3,082
Loans charged off:
Commercial (70) (411) (227) (39) (60)
Commercial real estate (7) (2) - - -
Construction (13) - - - -
Agricultural - - - - -
Residential real estate (10) (113) - - -
Consumer (2,115) (1,340) (1,073) (661) (586)
------- ------- ------- ------- -------
Total loans charged off (2,215) (1,866) (1,300) (700) (646)
------- ------- ------- ------- -------
Loan recoveries:
Commercial 298 14 30 19 145
Commercial real estate 1 - - - 10
Construction - - - - -
Agricultural - 10 - - -
Residential real estate - - - - -
Consumer 540 317 175 140 149
------- ------- ------- ------- -------
Total loan recoveries 839 341 205 159 304
------- ------- ------- ------- -------
Net loans charged off (1,376) (1,525) (1,095) (541) (342)
Provision for loan losses 2,300 2,034 1,118 1,024 1,191
------- ------- ------- ------- -------
Allowance, end of year $ 5,870 $ 4,946 $ 4,437 $ 4,414 $ 3,931
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net loans charged off to
average loans outstanding 0.25% 0.29% 0.22% 0.12% 0.08%
Allowance for loan losses to
ending loans outstanding 0.99 0.91 0.84 0.94 0.91
</TABLE>
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 1999 % 1998 % 1997 % 1996 % 1995 %
- --------- ---- -- ---- -- ---- -- ---- -- ---- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 968 21 $ 989 21 $ 799 18 $ 795 18 $ 747 19
Commercial
real estate 687 15 495 13 665 15 706 16 629 16
Construction 106 2 148 3 177 4 178 4 157 4
Agriculture 117 2 99 2 90 2 88 2 79 2
Residential
real estate 1,174 22 742 25 1,109 25 1,280 29 1,100 28
Consumer 2,818 38 2,473 36 1,597 36 1,367 31 1,219 31
Unallocated - - - - - - - - - -
------ ---- ------ --- ------ --- ------ --- ------ ---
Total $5,870 100% $4,946 100% $4,437 100% $4,414 100% $3,931 100%
====== ==== ====== === ====== === ====== === ====== ===
</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, 1999.
<TABLE>
<S> <C>
Under 3 months $ 41,368
3 to 6 months 23,746
Over 6 to 12 months 9,595
Over 12 months 11,972
---------
$ 86,681
=========
</TABLE>
16
<PAGE>
CROWE CHIZEK
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, 1999 and 1998 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. 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, 1999 and 1998 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999 in conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 21, 2000
17
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
ASSETS
<S> <C> <C>
Cash and due from banks $ 57,449 $ 39,710
Federal funds sold 64,700 31,000
Securities available-for-sale 71,250 66,927
Securities held-to-maturity (fair value of $193,667 in 1999
and $195,526 in 1998) 198,166 193,733
Loans 590,928 540,946
Allowance for loan losses (5,870) (4,946)
----------- -----------
Loans, net 585,058 536,000
Premises and equipment, net 20,034 18,753
Accrued interest receivable and other assets 10,703 8,067
Intangibles, net 7,480 8,485
----------- -----------
Total assets $ 1,014,840 $ 902,675
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand, non-interest-bearing $ 148,893 $ 142,427
NOW accounts 90,321 87,611
Money market accounts 49,308 45,736
Savings 176,076 172,329
Time deposits, $100,000 and over 86,681 69,871
Other time deposits 258,330 228,342
----------- -----------
Total deposits 809,609 746,316
Short-term borrowings 112,191 65,540
Long-term debt - 3,059
Accrued interest and other liabilities 5,775 5,652
----------- -----------
Total liabilities 927,575 820,567
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 106 14
Retained earnings 64,899 58,578
Accumulated other comprehensive income (loss) (1,664) (52)
Treasury stock, at cost (5,968 shares in 1999 and 11,368 shares in 1998) (394) (750)
----------- -----------
Total stockholders' equity 87,265 82,108
----------- -----------
Total liabilities and stockholders' equity $ 1,014,840 $ 902,675
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 46,847 $ 46,483 $ 43,556
Securities
Taxable 13,612 11,025 12,504
Tax-exempt 1,547 1,709 1,892
Federal funds sold 1,965 2,981 1,736
---------- ---------- ----------
Total interest income 63,971 62,198 59,688
INTEREST EXPENSE
Deposits 23,580 24,053 23,788
Short-term borrowings 3,166 2,711 2,470
Long-term debt 100 366 508
---------- ---------- ----------
Total interest expense 26,846 27,130 26,766
---------- ---------- ----------
Net interest income 37,125 35,068 32,922
Provision for loan losses 2,300 2,034 1,118
---------- ---------- ----------
Net interest income after provision for loan losses 34,825 33,034 31,804
NONINTEREST INCOME
Trust fees 1,353 1,153 1,035
Service charges on deposit accounts 3,981 3,915 3,662
Securities gains, net 15 121 13
Other income 1,869 1,950 1,189
---------- ---------- ----------
Total noninterest income 7,218 7,139 5,899
NONINTEREST EXPENSE
Salaries and employee benefits 13,388 13,099 12,562
Occupancy expense 1,878 1,857 1,800
Equipment expense 1,776 1,681 1,449
Data processing 1,553 1,485 1,215
Amortization of intangibles 1,005 1,004 1,021
Other expenses 6,802 6,506 6,180
---------- ---------- ----------
Total noninterest expense 26,402 25,632 24,227
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 15,641 14,541 13,476
Income tax expense 5,206 4,814 4,302
---------- ---------- ----------
NET INCOME $ 10,435 $ 9,727 $ 9,174
========== ========== ==========
Earnings per share $ 4.31 $ 4.01 $ 3.77
Weighted average shares outstanding 2,420,451 2,423,494 2,431,804
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
-------------------- ADDITIONAL COMPRE-
PAR PAID-IN RETAINED HENSIVE TREASURY
SHARES VALUE CAPITAL EARNINGS INCOME (LOSS) 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
Comprehensive income
Net income - - - 10,435 - - 10,435
Other comprehensive income,
net of tax
Unrealized losses on securities,
net of reclassification adjustment - - - - (1,612) - (1,612)
---------
Total comprehensive income 8,823
Cash dividends declared -
$1.70 per share - - - (4,114) - - (4,114)
5,400 shares of common stock
contributed to profit sharing plan - - 92 - - 356 448
--------- -------- ---------- -------- --------- ------ ---------
Balance, December 31, 1999 2,431,804 $ 24,318 $ 106 $ 64,899 $ (1,664) $(394) $ 87,265
========= ======== ========== ======== ========= ====== =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(IN THOUSANDS)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,435 $ 9,727 $ 9,174
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 1,967 1,805 1,556
Provision for loan losses 2,300 2,034 1,118
Deferred income tax expense (benefit) (754) 40 (222)
Amortization of securities premiums, net of accretion (13) 56 (234)
Amortization of intangibles 1,005 1,004 1,021
Common stock contributed to profit sharing plan 448 404 -
Securities gains, net (15) (121) (13)
Proceeds from sales of loans 34,709 76,174 20,526
Loans originated for sale (30,444) (79,772) (20,626)
Net gains on sales of loans (217) (396) (42)
Net gains on sales of other real estate owned - (14) -
(Increase) decrease in accrued interest and other assets (668) 377 (438)
Increase (decrease) in accrued interest and other
liabilities 123 (946) 356
--------- --------- ---------
Net cash from operating activities 18,876 10,372 12,176
CASH FLOWS FROM INVESTING ACTIVITIES
Change in federal funds sold (33,700) 19,800 22,441
Proceeds from maturities of securities held-to-maturity 76,831 192,130 98,587
Proceeds from sale of securities available-for-sale 6,982 - -
Proceeds from maturities of securities available-for-sale 6,000 3,500 10,100
Purchase of securities available-for-sale (19,994) (58,715) (10,486)
Purchase of securities held-to-maturity (81,220) (180,928) (99,781)
Loans made to customers, net of payments (55,559) (12,254) (58,547)
Purchase of premises and equipment (3,248) (1,718) (2,516)
Proceeds from sales of other real estate owned - 119 -
--------- --------- ---------
Net cash from investing activities (103,908) (38,066) (40,202)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts 63,293 20,134 35,643
Net increase (decrease) in short-term borrowings 46,651 19,333 (3,029)
Principal paid on long-term debt (3,059) (1,758) (2,134)
Dividends paid (4,114) (3,756) (3,648)
Common stock purchased from terminated pension plan - (1,140) -
--------- --------- ---------
Net cash from financing activities 102,771 32,813 26,832
--------- --------- ---------
Net change in cash and due from banks 17,739 5,119 (1,194)
CASH AND DUE FROM BANKS
Beginning of year 39,710 34,591 35,785
--------- --------- ---------
End of year $ 57,449 $ 39,710 $ 34,591
========= ========= =========
</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 areas. 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 decisionmakers 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 (the Bank).
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-owned subsidiary of the Company and Plano owned 100%
of the stock of Community Bank of Plano.
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 allowance for loan losses, 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.
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 movements in interest rates, changes in
the maturity mix of the Company's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. Securities
available-for-sale are carried at fair value. Unrealized gains or losses are
reported as increases or decreases in stockholders' equity, net of the related
deferred income tax effect.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest income includes amortization of purchase
premiums and discounts.
LOANS AND ALLOWANCE FOR LOAN LOSSES: Loans are reported at their unpaid
principal outstanding, net of 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 and is decreased by loan charge-offs less recoveries. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is
22
<PAGE>
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. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available or as future events change.
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.
Interest income on loans is discontinued at the time the loan is 90 days
delinquent unless the loan is well secured and in the process of collection.
Loans are placed on nonaccrual or charged off at an earlier date if collection
of principal and interest is doubtful. Interest accrued but not collected is
reversed against interest income. Interest received is recognized on the cash
basis until qualifying for return to accrual status. Accrual is resumed when all
contractually due payments are brought current and future payments are
reasonably assured.
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.
Years
-----
Land improvements 5-15
Buildings 15-40
Equipment 3-10
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 to
twenty years.
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.
LONG-TERM ASSETS: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
discounted amounts.
REPURCHASE AGREEMENTS: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities which are not covered by federal deposit insurance.
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.
23
<PAGE>
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.
FINANCIAL INSTRUMENTS: Financial instruments include off-balance-sheet credit
instruments such as unused lines of credit and commitments to make loans and
standby letters of credit which are issued to meet customers' financing needs.
The face amount for these items represents the exposures to loss before
considering customers' collateral or ability to repay. Such financial
instruments are recorded when they are funded.
EARNINGS PER SHARE: Earnings per share are calculated on the basis of the
weighted average number of shares outstanding.
COMPREHENSIVE INCOME: 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.
LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded when and if the
likelihood of loss is probable and an amount or range of loss can be estimated.
Management does not believe that any such contingencies now exist that could
have a material effect on the Company's financial statements.
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>
1999
- ----
U.S. Government agencies $ 71,984 $ - $ (2,727) $ 69,257
Corporate 1,018 - (32) 986
-------- --------- -------- --------
Total debt securities 73,002 - (2,759) 70,243
Federal Reserve Bank stock 1,007 - - 1,007
-------- --------- -------- --------
$ 74,009 $ - $ (2,759) $ 71,250
======== ========= ======== ========
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
======== ========= ======== ========
</TABLE>
24
<PAGE>
The amortized cost and fair value of securities held-to-maturity at year end are
as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1999
- ----
U.S. Treasury $ 7,007 $ 17 $ - $ 7,024
U.S. Government agencies 163,192 6 (4,559) 158,639
States and political subdivisions 27,967 255 (218) 28,004
--------- ---------- ---------- ---------
$ 198,166 $ 278 $ (4,777) $ 193,667
========= ========== ========== =========
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
========= ========== ========== =========
</TABLE>
The amortized cost and fair value of debt securities as of December 31, 1999, 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 $ - $ - $ 12,591 $ 12,612
Due after 1 through 5 years 66,004 63,479 179,403 175,045
Due after 5 through 10 years 6,998 6,764 5,506 5,392
Due after 10 years - - 666 618
--------- ---------- ---------- ---------
$ 73,002 $ 70,243 $198,166 $ 193,667
========= ========== ========== =========
</TABLE>
Securities with a carrying value of approximately $215,000,000 and $155,000,000
at December 31, 1999 and 1998 were pledged to secure public deposits, securities
sold under agreements to repurchase, and for other purposes required or
permitted by law.
Proceeds from the sales of securities available-for-sale in 1999 were $6,982,000
resulting in gross losses of $16,000. No securities were sold in 1998 or 1997.
Securities called before their contractual maturity date resulted in gains of
$31,000, $121,000, and $13,000 in 1999, 1998, and 1997, respectively.
NOTE 3 - LOANS
Loans at year end are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Commercial $ 124,965 $ 115,152
Commercial real estate 87,507 69,836
Construction 12,914 15,624
Agricultural 11,015 9,763
Residential real estate 131,671 136,894
Consumer 222,856 193,677
--------- ----------
Total loans 590,928 540,946
Allowance for loan losses (5,870) (4,946)
--------- ----------
Loans, net $ 585,058 $ 536,000
========= ==========
</TABLE>
25
<PAGE>
Included in residential real estate loans are loans held for sale totaling
$548,000 and $4,596,000 at December 31, 1999 and 1998. The carrying value of
loans held for sale approximated fair value at December 31, 1999 and 1998.
Impaired loans are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Average balance of impaired loans during
the year $ 835 $ 920 $ 695
Impaired loans at year end 1,076 786 876
Allowance for loan losses allocated to impaired
loans at year end 175 118 224
</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 1999, 1998,
and 1997.
Activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $ 4,946 $ 4,437 $ 4,414
Provision charged to operations 2,300 2,034 1,118
Loans charged-off (2,215) (1,866) (1,300)
Recoveries 839 341 205
---------- ---------- ----------
Balance, end of year $ 5,870 $ 4,946 $ 4,437
========== ========== ==========
</TABLE>
Certain executive officers and directors and companies in which they have
management or beneficial ownership are loan customers of the Company. 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>
1999
---------
<S> <C>
Total loans at beginning of year $ 5,199
New loans 2,076
Repayments (2,301)
---------
Total loans at end of year $ 4,974
=========
</TABLE>
Loans serviced for other investors which are not reported as assets in the
financial statements approximated $120,000,000 and $105,000,000 at December 31,
1999 and 1998, respectively.
NOTE 4 - PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows at
year end.
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Land and land improvements $ 6,038 $ 5,888
Buildings 16,103 14,854
Equipment 11,507 10,695
--------- ----------
Total cost 33,648 31,437
Accumulated depreciation (13,614) (12,684)
--------- ----------
Carrying value $ 20,034 $ 18,753
========= ==========
</TABLE>
26
<PAGE>
NOTE 5 - INTANGIBLES
Goodwill of $11,059,000 is reported net of accumulated amortization of
$5,424,000 and $4,801,000 as of December 31, 1999 and 1998, respectively. Core
deposit intangibles of $4,147,000 are reported net of accumulated amortization
of $2,302,000 and $1,920,000 as of December 31, 1999 and 1998, respectively.
NOTE 6 - EMPLOYEE BENEFIT PLANS
In January 1998, the Board of Directors approved the process of terminating 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 during 1998 and
1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Service cost $ 119 $ 394
Interest cost on projected benefit obligation 444 457
Expected return on plan assets (448) (402)
Net amortization 19 18
Settlement loss, net of curtailment gain 287 -
--------- ----------
Pension expense $ 421 $ 467
========= ==========
Assumptions used
Discount rate 7.00% 7.00%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 4.50% 4.50%
</TABLE>
The following table sets forth information regarding the plan's funding status
as of October 31, 1998 and the amount recognized in the accompanying
consolidated balance sheet as of December 31, 1998:
<TABLE>
<S> <C>
Change in benefit obligation
Beginning benefit obligation $ 7,178
Service cost 119
Interest cost 444
Actuarial gain (919)
Settlement loss, net of curtailment gain 287
Benefits and final distributions paid (7,109)
------
Ending benefit obligation $ -
======
Change in plan assets
Beginning fair value 5,855
Investment income, net of administrative expenses 536
Employer contribution 718
Benefits and final distributions paid (7,109)
------
Ending fair value $ -
======
</TABLE>
Contributions to the 401(k) plan for the years ended December 31, 1999, 1998,
and 1997 were $188,000, $177,000, and $176,000, respectively.
27
<PAGE>
The Company's contribution to the profit sharing plan was 5,400 and 5,900 shares
of the Company's common stock valued at $448,000 and $404,000 in 1999 and 1998,
respectively. All shares contributed were allocated to participants as of
December 31, 1999 and 1998, respectively. 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
obtains a valuation of the stock 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, 1999.
NOTE 7 - DEPOSITS
At December 31, 1999, the scheduled maturities of time deposits are as follows:
<TABLE>
<S> <C>
2000 $ 302,898
2001 23,761
2002 12,477
2003 3,757
2004 2,118
---------
$ 345,011
---------
---------
</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>
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
End of year
Outstanding balance $ 112,191 $ 65,540 $ 46,207
Weighted average interest rate 5.47% 4.92% 5.28%
During the year
Average outstanding balance $ 63,198 $ 51,656 $ 45,276
Maximum outstanding balance 112,191 65,540 54,899
Weighted average interest rate 5.01% 5.25% 5.46%
</TABLE>
The carrying value and fair value of the securities underlying the above
agreements at December 31, 1999 follow:
<TABLE>
<S> <C>
Carrying value $ 121,496
Fair value 119,437
</TABLE>
At December 31, 1999, securities sold under agreements to repurchase are
summarized below:
<TABLE>
<CAPTION>
Collateral
----------
U.S. Treasury
Weighted and Government
Average Agency Securities
-------------------------------
Original Repurchase Interest Amortized Fair
Term Liability Rate Cost Value
------------- ----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Up to 30 days $ 1,825 5.27% $ 3,046 $ 2,968
30 to 90 days 39,591 5.55 46,260 45,111
Over 90 days 65,079 5.51 64,845 63,199
----------- -------- ----------- -----------
$ 106,495 5.52% $ 114,151 $ 111,278
----------- -------- ----------- -----------
</TABLE>
28
<PAGE>
At December 31, 1999, the Company had unused lines of credit to purchase federal
funds from other banks totaling $40,000,000.
NOTE 9 - LONG-TERM DEBT
The Company had a term note payable to another financial institution of
$1,800,000 which accrued interest at the London Interbank Offered Rate plus 175
basis points and required quarterly principal payments of $125,000 plus
interest. The note was paid off in its entirety in February 1999.
The Company had debentures payable of $1,259,000 to certain former stockholders
of Plano Bancshares, Inc. The debentures required semi-annual interest payments
at the national prime interest rate. The remaining principal balance was paid
off in October 1999.
NOTE 10 - INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ---------
<S> <C> <C> <C>
Currently payable tax
Federal $ 5,680 $ 4,464 $ 4,379
State 280 310 145
Deferred tax expense (benefit) (754) 40 (222)
--------- ---------- ---------
Income tax expense $ 5,206 $ 4,814 $ 4,302
--------- ---------- ---------
--------- ---------- ---------
</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>
1999 1998 1997
------------------ -------------------- --------------------
Amount % Amount % Amount %
--------- ----- -------- ---- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rate $ 5,474 35.0% $ 5,089 35.0% $ 4,717 35.0%
Increase (decrease)
resulting from
State income taxes,
net of federal benefit 117 .7 190 1.3 71 .5
Tax-exempt income (659) (4.2) (675) (4.6) (707) (5.3)
Nondeductible
interest expense 73 .5 79 .5 80 .6
Goodwill amortization 218 1.4 218 1.5 218 1.6
Other items, net (17) (.1) (87) (.6) (77) (.5)
--------- ----- -------- ---- ------- -----
Income tax expense $ 5,206 33.3% $ 4,814 33.1% $ 4,302 31.9%
--------- ----- -------- ---- ------- -----
--------- ----- -------- ---- ------- -----
</TABLE>
29
<PAGE>
Net deferred tax assets and liabilities included in the balance sheet consist of
the following components at year end.
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Deferred tax assets
Securities available-for-sale $ 1,095 $ 34
Allowance for loan losses 2,328 1,962
Other items, net 170 104
--------- ----------
3,593 2,100
Deferred tax liabilities
Premises and equipment (1,057) (1,236)
Intangibles (732) (811)
Purchase accounting adjustments and other items, net (383) (447)
--------- ----------
(2,172) (2,494)
--------- ----------
Net deferred tax assets (liabilities) $ 1,421 $ (394)
--------- ----------
--------- ----------
</TABLE>
No valuation allowance was considered necessary for deferred tax assets.
NOTE 11 - COMMITMENTS AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
At December 31, 1999, reserves of approximately $19.4 million were required as
deposits with the Federal Reserve Bank or as cash on hand. These reserves do not
earn interest.
The Company 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 Company'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 Company 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 Company's exposure to off-balance-sheet
risk at year end follows:
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Loan commitments, including unused lines of credit $ 63,133 $ 69,092
Standby letters of credit 12,509 16,833
</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 Company 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.
30
<PAGE>
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.
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, 1999, the Bank
could pay dividends to the Company of $6,776,000 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 under the prompt corrective action regulations 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, 1999, consolidated
actual capital levels and minimum required levels for the consolidated Company
and the Bank were:
<TABLE>
<CAPTION>
Minimum Amount Required
-----------------------
To Be Well
For Capitalized
Actual Capital Under Prompt
-------------------- Adequacy Corrective Action
Ratio Amount Purposes Regulations
--------------------- -------- -----------------
<S> <C> <C> <C> <C>
Total capital (to risk-weighted
assets)
Consolidated 13.41% $ 88,051 $ 52,515 $ 65,643
Bank 13.28 87,052 52,445 65,557
Tier I capital (to risk-weighted
assets)
Consolidated 12.52 82,181 26,257 39,386
Bank 12.38 81,182 26,223 39,334
Tier I capital (to average assets)
Consolidated 8.33 82,181 39,469 49,336
Bank 8.34 81,182 38,931 48,663
</TABLE>
At December 31, 1999 and 1998, the Company and the Bank were categorized as well
capitalized per the banking regulations described above. There are no conditions
or events since that notification that management believes have changed the
Company and the Bank's categorization.
Actual capital ratios at year end are summarized below:
<TABLE>
<CAPTION>
Consolidated
Company Bank
----------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total capital to risk-weighted assets 13.41% 13.43% 13.28% 13.78%
Tier I capital to risk-weighted assets 12.52 12.59 12.38 12.94
Tier I capital to average assets 8.33 8.43 8.34 8.67
</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>
1999 1998
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- --------- -------
<S> <C> <C> <C> <C>
Financial assets
Cash and due from banks $ 57,449 $ 57,449 $ 39,710 $ 39,710
Federal funds sold 64,700 64,700 31,000 31,000
Securities available-for-sale 71,250 71,250 66,927 66,927
Securities held-to-maturity 198,166 193,667 193,733 195,526
Loans, net 585,058 582,114 536,000 540,276
Accrued interest receivable 7,006 7,006 7,142 7,142
Financial liabilities
Deposits 809,609 810,334 746,316 748,104
Short-term borrowings 112,191 112,191 65,540 65,540
Long-term debt - - 3,059 3,059
Accrued interest payable 3,523 3,523 3,550 3,550
</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 and information about the issuer.
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 amounts of accrued interest receivable and
payable approximate their fair value.
DEPOSIT LIABILITIES: The fair values of 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash payments for
Interest $ 26,873 $ 27,786 $ 26,696
Income taxes 6,509 4,634 4,688
Noncash investing and financing activities
Other real estate acquired in settlement
of loans 153 157 -
Common stock contributed
to profit sharing plan 448 404 -
</TABLE>
NOTE 16 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements of First National Bancorp, Inc. (parent
company only) are presented below:
BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash $ 614 $ 15
Investments in subsidiary 86,999 84,962
Land 106 106
Other assets 26 447
--------- ---------
Total assets $ 87,745 $ 85,530
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Long-term debt $ - $ 3,059
Other liabilities 480 363
Stockholders' equity 87,265 82,108
--------- ---------
Total liabilities and stockholders' equity $ 87,745 $ 85,530
--------- ---------
--------- ---------
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Dividends from subsidiary $ 7,241 $ 7,227 $ 6,222
Interest and other expenses 741 1,070 1,132
------- ------- -------
Income before income taxes and equity
in undistributed net income of subsidiary 6,500 6,157 5,090
Income tax benefit 286 443 449
------- ------- -------
Income before equity in undistributed net
income of subsidiary 6,786 6,600 5,539
Equity in undistributed net income of subsidiary 3,649 3,127 3,635
------- ------- -------
Net income $10,435 $ 9,727 $ 9,174
======= ======= =======
</TABLE>
34
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 10,435 $ 9,727 $ 9,174
Adjustments to reconcile net income to net
cash provided by operating activities
Undistributed net income of subsidiary (3,649) (3,127) (3,635)
Change in other assets and other liabilities 538 21 (153)
-------- -------- --------
Net cash from operating activities 7,324 6,621 5,386
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (3,059) (1,758) (2,134)
Common stock purchased from terminated
pension plan - (1,140) -
Common stock contributed to profit sharing plan
in exchange for cash received from subsidiary 448 - -
Cash dividends paid (4,114) (3,756) (3,648)
-------- -------- --------
Net cash from financing activities (6,725) (6,654) (5,782)
-------- -------- --------
Net change in cash 599 (33) (396)
CASH
Beginning of year 15 48 444
-------- -------- --------
End of year $ 614 $ 15 $ 48
======== ======== ========
Noncash financing activity
Common stock contributed to profit sharing plan
in exchange for receivable due from subsidiary $ - $ 404 $ -
</TABLE>
NOTE 17 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Unrealized holding gains and losses on
available-for-sale securities $(2,658) $ 2 $ 59
Less reclassification adjustments for gains
later recognized in income (15) (121) (13)
------- -------- --------
Net unrealized gains and loses (2,673) (119) 46
Tax effect 1,061 47 (18)
------- -------- --------
Other comprehensive income (loss) $(1,612) $ (72) $ 28
------- -------- --------
------- -------- --------
</TABLE>
35
<PAGE>
NOTE 18 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Year Ended December 31, 1999 Year Ended December 31, 1998
------------------------------------------ ----------------------------------------
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 $ 9,468 $ 9,487 $ 9,261 $ 8,909 $ 9,102 $ 8,756 $ 8,695 $ 8,515
Provision for loan losses 1,025 525 375 375 975 375 375 309
Noninterest income 1,836 1,803 1,808 1,771 1,931 1,774 1,732 1,702
Noninterest expense 7,797 6,452 6,334 5,819 7,350 6,112 6,210 5,960
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes 2,482 4,313 4,360 4,486 2,708 4,043 3,842 3,948
Income tax expense 761 1,440 1,478 1,527 844 1,356 1,281 1,333
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 1,721 $ 2,873 $ 2,882 $ 2,959 $ 1,864 $ 2,687 $ 2,561 $ 2,615
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share $ .71 $ 1.19 $ 1.19 $ 1.22 $ .77 $ 1.11 $ 1.05 $ 1.08
======= ======= ======= ======= ======= ======= ======= =======
Average common
shares outstanding 2,420,495 2,420,436 2,420,436 2,420,436 2,414,600 2,416,038 2,431,804 2,431,804
</TABLE>
NOTE 19 - SUBSEQUENT EVENT
On January 13, 2000, the Company's Board of Directors approved a resolution to
increase the number of authorized common stock shares from 5,500,000 shares to
10,000,000 shares. Such resolution is subject to stockholder approval at the
March 9, 2000 annual meeting.
36
<PAGE>
[LOGO] 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
PLAINFIELD BANKING CENTER
-------------------------
Route 59 & Renwick Road
ROMEOVILLE BANKING CENTERS
--------------------------
626 Townhall Drive
80 S. Weber Road
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>
[LOGO] FIRST NATIONAL BANCORP, INC.
78 North Chicago Street
Joliet, Illinois 60432
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
State of Percent of Capital Stock Owned at
Name of Subsidiary Incorporation December 31, 1999
------------------ ------------- -----------------
<S> <C> <C>
First National Bank of Joliet Illinois 100%
</TABLE>
<PAGE>
NOTICE OF THE ANNUAL SHAREHOLDERS MEETING OF
FIRST NATIONAL BANCORP, INC.
To the Shareholders of First National Bancorp, Inc.:
NOTICE IS HEREBY GIVEN that the Annual Shareholders Meeting of First National
Bancorp, Inc. (the "Company"), will be held on Thursday, March 9, 2000, at 3:00
p.m. at the main office of the First National Bank of Joliet, 78 North Chicago
Street, Joliet, Illinois, for the purpose of considering and voting upon the
following matters:
1. The election of nine (9) directors of the Company.
2. To amend the Articles of Incorporation of the Company to increase the
authorized common stock to 10,000,000 shares.
3. The transaction of such other business as may properly be brought before
the meeting or any adjournments or postponements thereof.
The Board of Directors knows of no other business to be brought before the
meeting. The close of business of the Company on Tuesday, February 1, 2000, has
been fixed by the Board of Directors as the record date for the determination of
Shareholders of the Company entitled to notice of and to vote at the Annual
Shareholders Meeting and any adjournments or postponements thereof. In the
event there are not sufficient votes for a quorum or to approve any of the
foregoing proposals at the time of the Annual Shareholders Meeting, the meeting
may be adjourned or postponed in order to permit further solicitation of proxies
by the Company.
Dated: February 10, 2000
By Order of the Board of Directors
Kevin T. Reardon
Chairman of the Board
and Chief Executive Officer
IMPORTANT
WHETHER YOU EXPECT TO ATTEND THE MEETING OR NOT, PLEASE MARK, SIGN, DATE AND
PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENCLOSED, SELF-ADDRESSED ENVELOPE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 57,449
<INT-BEARING-DEPOSITS> 660,716
<FED-FUNDS-SOLD> 64,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71,250
<INVESTMENTS-CARRYING> 198,166
<INVESTMENTS-MARKET> 193,667
<LOANS> 590,928
<ALLOWANCE> 5,870
<TOTAL-ASSETS> 1,014,840
<DEPOSITS> 809,609
<SHORT-TERM> 112,191
<LIABILITIES-OTHER> 5,775
<LONG-TERM> 0
0
0
<COMMON> 24,318
<OTHER-SE> 62,947
<TOTAL-LIABILITIES-AND-EQUITY> 1,014,840
<INTEREST-LOAN> 46,847
<INTEREST-INVEST> 15,159
<INTEREST-OTHER> 1,965
<INTEREST-TOTAL> 63,971
<INTEREST-DEPOSIT> 23,580
<INTEREST-EXPENSE> 26,846
<INTEREST-INCOME-NET> 37,125
<LOAN-LOSSES> 2,300
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 26,402
<INCOME-PRETAX> 15,641
<INCOME-PRE-EXTRAORDINARY> 15,641
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,435
<EPS-BASIC> 4.31
<EPS-DILUTED> 4.31
<YIELD-ACTUAL> 4.44
<LOANS-NON> 870
<LOANS-PAST> 624
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,182
<ALLOWANCE-OPEN> 4,946
<CHARGE-OFFS> 2,215
<RECOVERIES> 839
<ALLOWANCE-CLOSE> 5,870
<ALLOWANCE-DOMESTIC> 5,870
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
