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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File Number 0-20050
PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-32110283
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
606 South Main Street
Princeton, Illinois 61356-2080
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (815) 875-4444
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange
------------------- on which registered
---------------------
Common Stock The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
__X__ YES ____ NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
At March 14, 1997, 2,723,966 shares of Common Stock, $5.00 Par Value,
were outstanding, and the aggregate market value of the common stock
(based upon the closing representative bid price of the common stock on
March 14, 1997, as reported by NASDAQ) held by nonaffiliates was
approximately $53,798,329.
Determination of stock ownership by nonaffiliates was made solely for the
purpose of responding to this requirement and the registrant is not bound
by this determination for any other purpose.
Portions of the following documents are incorporated by reference:
Annual Report to Stockholders for the year ended December 31, 1996 - Part
II
1997 Notice and Proxy Statement for the Annual Meeting of Stockholders
April 8, 1997 - Part III
2
PART I
ITEM 1. BUSINESS
Princeton National Bancorp, Inc. ("PNB" or the "Corporation") is a
single-bank holding company which conducts a full service commercial
banking and trust business through its subsidiary bank, Citizens First
National Bank ("Citizens Bank" or "the Bank"). At December 31, 1996, the
Company had consolidated total assets of $420,407,000 and stockholders'
equity of $40,197,000.
PNB was incorporated as a Delaware corporation in 1981 in
contemplation of the acquisition of all of the outstanding common stock
of Citizens Bank and other future acquisitions. Since the formation of
the holding company, PNB has made five acquisitions. In 1986, PNB
acquired Genoa State Bank (subsequently merged into Citizens Bank),
located approximately 90 miles from Princeton and just outside the
western suburbs of Chicago. In 1988, PNB acquired First National Bank of
Oglesby when it acquired all of the outstanding stock of USA Firstrust,
Inc. (subsequently merged into Citizens Bank), which gave PNB a market
presence in Oglesby and the Peru/LaSalle area, 27 and 22 miles from
Princeton, respectively. In 1992, PNB acquired all of the outstanding
capital stock of Illinois Valley Bancshares, Inc. ("Illinois Valley").
Through the acquisition of Illinois Valley, PNB acquired Colonial Bank
and Trust Company of Bureau County, located in Princeton, with a branch
in DePue (subsequently merged into Citizens Bank) and Colonial Bank and
Trust Company of LaSalle County, located in Peru (subsequently converted
into a national bank, renamed Citizens First National Bank of Peru, and
subsequently merged into Citizens Bank). In 1994, PNB acquired Heart of
Illinois Investment Corp. and its subsidiary, Heart of Illinois Bank,
F.S.B., with branches in Spring Valley, Henry, Plano and Princeton
(subsequently merged into Citizens Bank). In 1996, PNB acquired all of
the deposits, equipment and the facility of the Sandwich branch of
Superior Bank, FSB (subsequently merged into Citizens Bank), located
approximately 50 miles to the northeast of Princeton.
PNB operates the Bank as a community bank -- with offices located
for convenience with professional, highly motivated, progressive
employees who know the Bank's customers and are able to provide
individualized, quality service. As part of its community banking
approach, PNB requires officers of the Bank to actively participate in
community organizations. In addition, within credit and rate of return
parameters, PNB attempts to ensure that the Bank meets the lending needs
of the communities in which offices are located, and that the Bank
invests in local and municipal securities.
Corporate policy, strategy, and goals are established by the Board
of Directors of PNB. Pursuant to PNB's holding company philosophy,
operational and administrative policies for the Bank are also established
at the holding company level. Within this framework, the Bank focuses on
providing personalized services and quality products to its customers to
meet the needs of the communities in which offices are located. In 1996,
the majority of the directors of PNB also served as the directors of
Citizens Bank. This assists PNB in directly implementing its policies at
Citizens Bank.
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ACQUISITION AND EXPANSION STRATEGY
PNB seeks to diversify both its market area and asset base and
increase profitability through acquisitions and expansion. PNB's goal,
as reflected by its acquisition policy, is to expand through the
acquisition of established financial service organizations, primarily
commercial banks to the extent suitable candidates may be identified and
by expanding into potential high growth areas. In integrating
acquisitions, PNB focuses on, among other actions, implementing the
policies established at Citizens Bank, improving asset quality and the
net interest margin and encouraging community involvement.
Generally, PNB seeks to acquire banks or other financial
institutions with assets of $15 million to $60 million, located on the
fringe of metropolitan or potential high growth areas and within 100
miles of Princeton. In addition to price and terms, the other factors
considered by PNB in determining the desirability of an acquisition
candidate are the general financial condition, earnings potential and
quality of the management of the institution. There is no assurance that
any further acquisitions will be made.
PNB will also consider establishing branch facilities as a means of
expanding its presence into new market areas. PNB opened new branch
facilities in the Peru/LaSalle/Oglesby area early in 1994, in Minooka
late in 1994, and in Hampshire during 1995.
CITIZENS FIRST NATIONAL BANK
Citizens Bank was organized in 1865 as a national bank under the
National Bank Act. Currently in its one hundred and thirty-second year,
Citizens Bank has fifteen offices in eleven different communities in
north central Illinois: Princeton, DePue, Genoa, Hampshire, Henry,
Minooka, Oglesby, Peru, Plano, Sandwich and Spring Valley.
Citizens Bank serves individuals, businesses and governmental bodies
in Bureau, LaSalle, Marshall, Grundy, Kane, Kendall, DeKalb and
contiguous counties. Citizens Bank operates a full-service community
commercial bank and trust business that offers a broad range of financial
services to customers. Their services consist primarily of commercial,
real estate and agricultural lending, consumer deposit and financial
services, and trust and farm management services.
COMMERCIAL, REAL ESTATE AND AGRICULTURAL LENDING
Citizens Bank's commercial loan department provides secured and
unsecured loans, including real estate loans, to companies and
individuals for business purposes and to governmental units within the
Bank's market area. As of December 31, 1996, Citizens Bank had
commercial loans of $38.4 million (14.8% of the Bank's total loan
portfolio) and commercial real estate loans of $41.2 million (16.0% of
the Bank's total loan portfolio). Citizens Bank does not have a
concentration of commercial loans in any single industry or business.
Citizens Bank is one of the largest agricultural lenders in the
State of Illinois with all of its outstanding agricultural and
agricultural real estate loans primarily related to ventures within 30
miles of branch locations. As of December 31, 1996, Citizens Bank had
agricultural loans of $36.0 million and agricultural real estate loans of
$28.4 million, which represent approximately 14.0% and 11.0%,
4
respectively, of the Bank's total loan portfolio. Agricultural loans,
many of which are secured by crops, machinery and real estate, are
provided to finance capital improvements and farm operations as well as
acquisitions of livestock and machinery. The agricultural loan
department, which has four lending officers, works closely with all
agricultural customers, including companies and individual farmers, and
assists in the preparation of budgets and cash flow projections for the
ensuing crop year. These budgets and cash flow projections are monitored
closely during the year. In addition, Citizens Bank works closely with
governmental agencies, including the Farmers Home Administration, to
assist agricultural customers in obtaining credit enhancement products
such as loan guaranties.
In accordance with its loan policy, Citizens Bank maintains a
diversified loan portfolio. One of Citizens Bank's goals is to further
diversify its loan portfolio. Further diversification will be
accomplished through loans made by the Bank and through loans acquired as
a result of PNB's acquisition strategy. As part of its loan policy and
community banking approach, Citizens Bank does not actively buy loans
from or participate its non-consumer loans to other lending institutions,
particularly institutions outside its market area. In connection with
its credit relationships, Citizens Bank encourages commercial and
agricultural borrowers to maintain deposit accounts at the Bank.
PERSONAL FINANCIAL SERVICES
The principal consumer services offered by Citizens Bank are demand,
savings and time deposit accounts, home mortgage loans, installment
loans, credit cards, and brokerage services.
One of the strengths of Citizens Bank is the stability of its retail
deposit base. This is due primarily to the Bank's service oriented
competitive strategy and the economically diverse population of the
counties encompassing the fifteen banking offices. These locations
provide convenience for customers and visibility for Citizens Bank. A
variety of marketing strategies are used to attract and retain stable
depositors, the most important of which is the officer call program,
pursuant to which officers of the Bank call on customers and potential
customers of the Bank to maintain and develop deposit relationships.
Marketing efforts in 1996 also included the completion of three very
successful retail promotions. A credit card program was launched in
1995, and at year end 1996, Citizens Bank had 3,115 credit card holders
carrying $1.6 million in balances. Secondly, Citizens Bank introduced
its automated telephone service called TeleBanker, providing customers
with 24-hour access to account information, along with rate information
on loans and deposits. Finally, Citizens Bank introduced a new checking
account to compete with other institutions offering "Free Checking".
Citizens Bank now offers Advantage/Advantage Gold checking which is
better than free because customers receive many value-added benefits.
Citizens Bank is active in consumer lending with approximately $72.5
million in home mortgage loans (28.1% of the Bank's total loan portfolio)
and $37.5 million in consumer installment loans (14.5% of the Bank's
total loan portfolio) as of December 31, 1996. To better serve its
retail customers by providing access to longer term, fixed rate
residential real estate mortgages, Citizens Bank is active in the
secondary residential mortgage market. As a matter of policy, Citizens
Bank does not hold long-term, fixed rate loans.
5
Another means by which Citizens Bank seeks to attract and serve
retail customers in the market area is through the use of its thirteen
automated teller machines. The Bank is a member of Magic Line which
encompasses all of the major nationwide networks such as CIRUS, PLUS, and
STAR.
To further enhance its retail sales, Citizens Bank has undertaken a
commitment in developing a stronger sales culture through an all-
encompassing program with its major emphasis on customer focused banking.
Although the process includes a significant commitment to training, other
aspects such as team coaching, reward and recognition, goals and
measurements, product knowledge, and selection and placement are a vital
part of the success of the overall program.
TRUST DEPARTMENT AND FARM MANAGEMENT SERVICES
Trust Department assets as of December 31, 1996 were approximately
$150 million, an increase of 18.1% compared to the December 31, 1995
total of over $127 million. The increase in assets was due in part to an
adjustment in market values for certain farm real estate held in various
fiduciary accounts. Trust Department Income was $735,000 in 1996 versus
$709,000 in 1995. The increase of 3.7% comes from new business
development during 1996 as well as increased market value fees due to
higher equity values and increased equity investment as a percentage of
total trust assets. The assets managed by the Trust Department are
currently spread over 764 accounts with nearly 3,000 clients and
beneficiaries served.
Farm Management Income was $199,000 in 1996, up from $161,000 in
1995 (an increase of 23.6%). Favorable crop yields and prices as well as
new business development caused this increase. Acres under farm
management totaled 17,303 at December 31, 1996 with 86 farms and 126
clients served. This compares to the totals at December 31, 1995 of
13,746 acres over 61 farms and 104 clients.
COMPETITION
PNB is committed to community banking and to providing quality
products and services at competitive loan rates and deposit pricing in
order to remain competitive in its north central Illinois market.
Citizens Bank competes with both small, locally owned banks as well as
regional financial institutions which have numerous offices. The Bank
competes with these organizations, as well as with savings and loan
associations, credit unions, mortgage companies, insurance companies and
other local financial institutions, for deposits, loans and other
business. The principal methods of competition include loan and deposit
pricing, the types and quality of services provided and advertising and
marketing programs.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. The following information describes the material
banking provisions affecting PNB and the Bank, and such discussion is
qualified in its entirety by reference to such statutes and regulations.
Any change in applicable law or regulations may have a material effect on
the business of PNB and the Bank.
6
PNB is registered as a "bank holding company" with the Federal
Reserve, and is subject to supervision by the Federal Reserve Board (the
"FRB") under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). PNB is required to file with the FRB periodic reports and such
additional information as the FRB may require pursuant to the BHC Act.
The FRB examines PNB, and may examine the Bank.
The BHC Act requires prior FRB approval for, among other things, the
acquisition by a bank holding company of direct or indirect ownership or
control of more than 5% of the voting shares or substantially all the
assets of any bank, or for a merger or consolidation of a bank holding
company with another bank holding company. With certain exceptions, the
BHC Act prohibits a bank holding company from acquiring direct or
indirect ownership or control of voting shares of any company which is
not a bank or bank holding company and from engaging directly or
indirectly in any activity other than banking or managing or controlling
banks or performing services for its authorized subsidiaries. A bank
holding company may, however, engage in or acquire an interest in a
company that engages in activities which the FRB has determined by
regulation or order to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto.
PNB is a legal entity separate and distinct from the Bank. The
major source of PNB's revenue is dividends PNB receives from the Bank.
The right of PNB to participate as a stockholder in any distribution of
assets of the Bank upon its liquidation or reorganization or otherwise is
subject to the prior claims of creditors of the Bank. The Bank is
subject to claims by creditors for long-term and short-term debt
obligations, including substantial obligations for federal funds
purchased and securities sold under repurchase agreements, as well as
deposit liabilities.
For the Bank, prior approval of the Office of the Comptroller of the
Currency (the "OCC") is required if dividends declared by the Bank in any
calendar year will exceed its net profits for that year combined with its
retained profits for the preceding two years. In addition, a national
bank may not pay a dividend greater than its undivided profits then on
hand less the amount of any losses and the amount of statutory bad debts
in excess of the balance of the bank's allowance for possible credit
losses. "Bad debts" are generally defined to include the principal
amounts of loans which are in arrears with respect to interest by six
months or more unless such loans are well secured and in the process of
collection. As of December 31, 1996, due to the amount of dividends paid
to PNB during 1995, the Bank will not be able to pay dividends without
prior approval of the OCC. Additionally, future payment of dividends by
the Bank will be dependent on individual regulatory capital requirements
and levels of profitability. The ability of the Bank to pay dividends
may be further restricted as a result of regulatory policies and
guidelines relating to dividend payments and capital adequacy.
Federal laws limit the transfer of funds by the Bank to PNB in the
form of loans or extensions of credit, investments or purchases of
assets. Transfers of this kind to PNB by the Bank are limited to 10% in
the aggregate of the Bank's capital and surplus, and are also subject to
certain collateral requirements. These transactions, as well as other
transactions between the Bank and PNB, must also be on terms
substantially the same as, or at least as favorable as, those prevailing
at the time for comparable transactions with nonaffiliated companies or,
7
in the absence of comparable transactions, on terms, or under
circumstances, including credit standards, that would be offered to, or
would apply to, nonaffiliated companies.
It is the policy of the FRB that PNB is expected to act as a source
of financial strength to the Bank and to commit resources to support the
Bank. The FRB takes the position that in implementing this policy, it
may require PNB to provide such support when PNB otherwise would not
consider itself able to do so.
The various federal bank regulators, including the FRB and the OCC,
have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards establish minimum
capital standards in relation to assets and off-balance sheet exposures,
as adjusted for credit risks. Capital is classified into two tiers. For
bank holding companies, Tier 1 or "core" capital consists of common
shareholders' equity, perpetual preferred stock (subject to certain
limitations) and minority interests in the common equity accounts of
consolidated subsidiaries, and is reduced by goodwill and certain
investments in other corporations ("Tier 1 Capital"). Tier 2 capital
consists of (subject to certain conditions and limitations) the allowance
for possible credit losses, perpetual preferred stock, "hybrid capital
instruments," perpetual debt and mandatory convertible debt securities,
and term subordinated debt and intermediate-term preferred stock ("Tier 2
Capital"). Total capital is the sum of Tier 1 Capital and Tier 2 Capital
(limited to 100% of Tier 1 Capital).
Under the risk-adjusted capital standards, a minimum total capital
to risk-weighted assets ratio of 8% is required and Tier l Capital must
be at least 50% of total capital. The FRB and OCC also have adopted a
minimum leverage ratio of Tier 1 Capital to total assets of 3%. The 3%
Tier 1 Capital to total assets ratio constitutes the leverage standard
for bank holding companies and national banks, and is used in conjunction
with the risk-based ratio in determining the overall capital adequacy of
banking organizations.
The FRB and the OCC have emphasized that the foregoing standards are
supervisory minimums and that an institution would be permitted to
maintain such minimum levels of capital only if it were rated in the
highest category under the regulatory rating systems for bank holding
companies and banks. All other bank holding companies and banks are
required to maintain a leverage ratio of 3% plus at least 1% to 2% of
additional capital. These rules further provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain capital positions substantially above the minimum
supervisory levels and comparable to peer group averages, without
significant reliance on intangible assets. At December 31, 1996, PNB had
a risk-based total capital ratio of 13.88% and a Tier 1 capital to risk-
based assets ratio of 13.25%, which compare to the regulatory
requirements for a well-capitalized bank of 10% and 6%, respectively.
Additionally, PNB had a leverage ratio of 8.59%, which also compares
favorably to the regulatory requirement for a well-capitalized bank of
5%. Accordingly, PNB maintains a very strong capital position.
8
The FDIC has a risk-based assessment system for the deposit
insurance provided to depositors at depository institutions whereby
assessments to each institution are calculated upon the probability that
the insurance fund will incur a loss with respect to the institution, the
likely amount of such loss, and the revenue needs of the insurance fund.
The system utilizes nine separate assessment classifications based on an
entity's capital level and supervisory evaluation. Risk classifications
of all insured institutions is made by the FDIC for each quarterly
assessment period. During 1996, the Bank was classified as well-
capitalized, affording it the lowest premium assessment. The Bank's
deposits are predominantly insured through the Bank Insurance Fund (the
"BIF") and certain deposits held by the Bank are insured through the
Savings Association Insurance Fund (the "SAIF"). The BIF and SAIF are
both administered by the FDIC.
As of September 30, 1996, PNB paid a one-time SAIF assessment of
$336,000, which was mandated by the Federal government to recapitalize
that fund. Accordingly, the SAIF fund reached its required reserve ratio
of 1.25% of total insured deposits, and a partial refund was issued for
the first quarter of 1997 in the amount of $37,000.
The BIF assessment rate currently ranges from zero to 27 cents per
$100 of domestic deposits, with PNB assessed at a rate of zero. The FDIC
may increase or decrease the assessment rate schedule on a seminannual
basis. An increase in the rate assessed on PNB's banking subsidiary
could have an adverse effect on PNB's earnings, depending on the amount
of the increase.
Deposits insured by SAIF are currently assessed at the BIF rate of
zero to 27 cents per $100 of domestic deposits. The SAIF assessment rate
may increase or decrease as is necessary to maintain the designated SAIF
reserve ratio of 1.25% of SAIF insured deposits.
Effective January 1, 1997, all FDIC-insured depository institutions
must pay an annual assessment to provide funds for the payment of
interest on bonds issued by the Financing Corporation, a federal
corporation chartered under the authority of the Federal Housing Finance
Board. The bonds (commonly referred to as FICO bonds) were issued to
capitalize the Federal Savings and Loan Insurance Corporation. Until
December 31, 1999 or when the last savings and loan association ceases to
exist, whichever occurs first, depository institutions will pay
approximately 6.4 cents per $100 of SAIF-assessable deposits and
approximately 1.3 cents per $100 of BIF-assessable deposits.
Subject to certain conditions, BIF and SAIF will be merged into one
insurance fund effective January 1, 1999.
Since September 29, 1995, federal law has permitted adequately
capitalized and adequately managed bank holding companies to acquire
banks across state lines, without regard to whether the transaction is
prohibited by state law; however, they are required to maintain the
acquired institutions as separately chartered institutions. Any state
law relating to the minimum age of target banks (not to exceed five
years) applies. The FRB is not permitted to approve any acquisition if,
after the acquisition, the bank holding company would control more than
10% of the deposits of insured depository institutions nationwide or 30%
9
or more of the deposits in the state where the target bank is located.
The FRB could approve an acquisition, notwithstanding the 30% limit, if
the state waives the limit either by state regulation or order of the
appropriate state official.
In addition, beginning June 1, 1997, banks will be permitted to
merge with one another across state lines and thereby create a main bank
with branches in separate states. After establishing branches in a state
through an interstate merger transaction, the bank could establish and
acquire additional branches at any location in the state where any bank
involved in the merger could have established or acquired branches under
applicable federal or state law.
States may adopt legislation permitting interstate mergers before
June 1, 1997. In contrast, states may adopt legislation before June 1,
1997, subject to certain conditions, opting-out of interstate branching.
If a state opts-out of interstate branching, no out-of-state bank may
establish a branch in that state through an acquisition or de novo, and a
bank whose home state opts-out may not participate in an interstate
merger transaction. Illinois has adopted legislation permitting
interstate mergers beginning June 1, 1997.
PNB is currently permitted to acquire banks located in any state
outside Illinois and any organization located outside Illinois is
permitted to acquire PNB. These provisions should not materially affect
PNB because PNB does not have any current plans to acquire institutions
located outside Illinois and because Illinois law, for several years, has
permitted institutions located in any state of the United States to
acquire banks and bank holding companies within Illinois subject to the
ability of Illinois institutions to acquire banks and bank holding
companies in such other state on similar conditions as Illinois law. The
fact that Illinois has decided to permit interstate branching beginning
June 1, 1997, means that if PNB did acquire an institution outside
Illinois, PNB could, if it deemed it appropriate, convert such
institution's offices into branches of the Bank or any other banking
subsidiary then in existence. PNB, however, does not have any current
plans to acquire any banking organization located outside the state of
Illinois.
EMPLOYEES
PNB presently has no employees. Certain of the employees and
executive officers of Citizens Bank provide their services to PNB without
charge. As of December 31, 1996, Citizens Bank employed 178 full-time
and 37 part-time employees. The Bank offers a variety of employee
benefits. The management of PNB considers its employee relations to be
excellent.
PNB believes one of its strengths is its ability to attract and
retain experienced and well-trained personnel who have a knowledge of the
market areas in which it operates. Management believes that PNB
generally has an easier time attracting and retaining quality employees
than other banks in north central Illinois primarily because its size and
management style affords greater opportunities to employees and allows
direct participation and development of management and banking skills.
10
In order to implement PNB's community banking philosophy and to
promote themselves as community oriented organizations, the Bank has a
formal officer call program. Each officer of the Bank calls on existing
or potential customers and is expected to become actively involved in
leadership positions in community organizations. As of December 31,
1996, employees of the Bank participated in 116 community organizations,
serving over 14,000 hours of community service in 1996.
ITEM 2. PROPERTIES
PNB's headquarters and Citizens Bank's principal offices are located
at 606 South Main Street, Princeton, Illinois. Also located at this
address is an annex completed in 1991 that contains the trust and farm
management departments. The two buildings at this location are owned by
Citizens Bank and contain approximately 36,000 square feet of space, all
of which is occupied by PNB and Citizens Bank. Citizens Bank also has
two drive-up facilities in Princeton and branch offices in DePue, Genoa,
Hampshire, Henry, Minooka, Oglesby, Peru, Plano, Sandwich and Spring
Valley. Citizens Bank is the owner of each of these facilities, with the
exception of Plano where the entire space is rented. None of the
facilities owned by the Bank are subject to a mortgage.
ITEM 3. LEGAL PROCEEDINGS
The Bank is subject to legal proceedings and claims that arise in
the ordinary course of business. Although management of the Company
cannot predict the ultimate outcome of such matters, it believes that the
ultimate resolution of these matters will not have a material adverse
effect on the Company or the Bank, or the Company's consolidated
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
SUPPLEMENTAL ITEM - EXECUTIVE OFFICERS
D. E. Van Ordstrand President
Tony J. Sorcic Executive Vice-President
Mr. Van Ordstrand has been President and Chief Executive Officer of
PNB since January, 1983, and first became a director of PNB in 1981. He
joined Citizens Bank as loan manager in 1967 and became President in
January, 1983. In 1995, Mr. Van Ordstrand retired as President of
Citizens Bank, and on December 31, 1996 retired as President and Chief
Executive Officer of PNB.
Mr. Sorcic joined Citizens Bank in 1981 as Assistant Vice-President-
Operations and has been the Executive Vice-President and a director of
PNB since April 1986. In October, 1995, Mr. Sorcic was named President
and CEO of Citizens Bank. Effective January 1, 1997, he also became
President and Chief Executive Officer of PNB.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND DIVIDENDS
Since May 15, 1992, PNB's Common Stock has been listed on The NASDAQ
Stock Market under the symbol PNBC.
The table below indicates the high and low bid prices, and the
dividends declared per share for the Common Stock during the periods
indicated, in each case adjusted as if the three for two stock dividend
(split) paid on April 23, 1994 had occurred prior to such quarters. The
prices shown reflect interdealer prices and include retail markups,
markdowns or commissions and may not necessarily represent actual
transactions.
Prices Cash
Dividends
High Low Declared
---- --- ---------
1994
- ----
First Quarter $16 $14 3/4 $.08
Second Quarter 15 1/2 14 1/4 .08
Third Quarter 15 1/2 14 1/2 .08
Fourth Quarter 15 12 3/4 .09
1995
- ----
First Quarter $13 1/4 $12 1/4 $.09
Second Quarter 14 1/4 12 1/4 .09
Third Quarter 16 1/4 13 1/2 .09
Fourth Quarter 17 1/4 15 1/2 .09
1996
- ----
First Quarter $18 $16 1/2 $.09
Second Quarter 19 1/4 18 .09
Third Quarter 19 1/4 18 1/4 .10
Fourth Quarter 19 1/2 18 1/2 .10
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On December 31, 1996, PNB had 574 holders of record of its Common
Stock.
The holders of the Common Stock are entitled to receive such
dividends as are declared by the Board of Directors of PNB, which
considers payment of dividends quarterly. The ability of PNB to pay
dividends is dependent upon its receipt of dividends from the Bank. In
determining cash dividends, the Board of Directors considers the
earnings, capital requirements, debt servicing requirements, financial
ratio guidelines established by the Board, the financial condition of
PNB, and other relevant factors. The Bank's ability to pay dividends to
PNB is subject to regulatory restrictions. See "Supervision and
Regulation."
PNB has paid regular cash dividends on the Common Stock since it
commenced operations in 1982. PNB currently anticipates that cash
dividends comparable to those that have been paid in the past will
continue to be paid in the future. There can be no assurance, however,
that any such dividends will be paid by PNB or that such dividends will
not be reduced or eliminated in the future. The timing and amount of
dividends will depend upon the earnings, capital requirements and
financial condition of PNB and the Bank as well as the general economic
conditions and other relevant factors affecting PNB and the Bank. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations."
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ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
SUMMARY OF INCOME
Interest income $ 29,114 $ 27,645 $ 25,765 $ 22,439 $ 23,122
Interest expense 14,596 14,518 12,851 10,910 12,568
Net interest income 14,518 13,127 12,914 11,529 10,554
Provision (credit) for possible loan losses 41 (101) (286) (176) (95)
Non-interest income 2,860 2,553 2,574 2,346 2,058
Non-interest expense 12,864 16,247 11,035 9,240 8,591
Income (loss) before federal income tax 4,473 (466) 4,739 4,811 4,116
Federal income tax (benefit) 1,046 (824) 981 1,061 876
Net Income 3,427 358 3,758 3,750 3,240
PER SHARE DATA(A)
Net income $ 1.26 $ 0.13 $ 1.39 $ 1.38 $ 1.32
Book value (at end of period) 14.76 13.85 12.78 13.07 11.87
Cash dividends declared 0.38 0.36 0.33 0.32 0.30
Dividend payout ratio 30.20% 272.90% 23.80% 23.10% 21.90%
SELECTED BALANCES (AT END OF PERIOD)
Total assets $420,407 $402,393 $400,531 $345,604 $341,666
Earning assets 379,278 364,177 364,726 316,538 313,046
Investments 117,028 127,094 154,957 131,038 134,834
Gross loans 258,118 232,693 204,672 170,913 168,295
Allowance for possible loan losses 1,630 2,034 2,100 2,218 2,233
Deposits 358,701 346,285 352,987 302,208 300,427
Long-term debt 4,350 4,700 5,300 -0- 2,200
Stockholders' equity 40,197 37,646 34,636 35,424 32,156
SELECTED FINANCIAL RATIOS
Net income to average stockholders' equity 8.91% 1.01% 10.77% 11.24% 11.94%
Net income to average assets 0.84 0.09 0.94 1.12 1.08
Average stockholders' equity to average assets 9.48 9.03 8.74 10.00 9.08
Average earning assets to average assets 91.37 91.90 92.24 91.78 92.45
Non-performing loans to total loans at end of 0.45 0.39 0.47 0.37 0.49
period (net of unearned interest)
Tier 1 capital to average adjusted assets 8.59 8.96 8.87 10.20 10.43
Risk based capital to risk adjusted assets 13.88 15.17 16.81 18.56 16.65
Net loans charged off (recovered) to average loans 0.18 (0.02) 0.06 (0.10) 0.06
Allowance for possible loan losses to total loans 0.63 0.87 1.03 1.30 1.33
at end of period (net of unearned interest)
Average interest-bearing deposits to average 90.07 90.32 91.04 90.27 91.16
deposits
Average non-interest-bearing deposits to average 9.93 9.68 8.96 9.73 8.84
deposits
(a) Per share data prior to 1994 has been restated to reflect the stock
dividend (3 for 2) split declared in 1994.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis provides information
about the Corporation's financial condition and results of
operations for the years ended December 31, 1996, 1995, and 1994.
This discussion and analysis should be read in conjunction with
"Selected Statistical Data," and Princeton National Bancorp, Inc.'s
Consolidated Financial Statements and the Notes thereto included in
this report (dollar amounts in thousands unless otherwise
indicated).
OVERVIEW
Net income for 1996 was $3,427, a significant increase from
$358 in 1995. This represents $1.26 per share in 1996 and $.13 per
share in 1995. This increase resulted primarily from the
reimbursement in 1995 of the subsidiary bank's Trust customers for
losses in market value of various inverse floater securities held in
their trust accounts, which did not reoccur in 1996, as well as
increases in net interest income and other income.
Net interest income increased to $14,518 in 1996, a 10.7%
increase from $13,127 in 1995. This significant improvement
resulted from $28,000 in loan growth and the increase in the
Corporation's net interest margin to 4.15% from 3.86% in 1995.
Other income reached a record level of $2,860, a 12% increase
from $2,553 in 1995. Service charges on loans and deposits and
Trust and Farm Management fees experienced growth in 1996. The
Corporation's strategy to build a strong fee income base through
selling additional services to various customer segments proved
successful.
Total assets at year-end 1996 surpassed $420,400, an increase
from $402,400 at the prior year-end. The increase in deposits
resulted from the Sandwich acquisition.
15
The table below summarizes the changes in the Corporation's
assets, equity and net income during the period 1994 to 1996.
Assets at Percent Equity at Percent Net Percent
Year-End Change Year-End Change Income Change
--------- -------- ---------- ------- ------- --------
1996 $420,407 4.48% $40,197 6.78% $3,427 857.26%
1995 402,393 0.46 37,646 8.69 358 (90.47)
1994 400,531 15.89 34,636 (2.22) 3,758 0.21
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME. Net interest income increased 10.7% in
1996, as compared to increases of 1.5% in 1995 and 12.0% in 1994.
The net yield on interest-earning assets increased from 7.90% in
1995 to 8.09% in 1996, while the average rate on interest-bearing
liabilities decreased from 4.53% in 1995 to 4.44% in 1996. The
resulting net yield on interest-earning assets on a fully taxable
equivalent basis increased from 3.86% in 1995 to 4.15% in 1996.
This twenty-nine basis-point increase resulted from the increase in
loans outstanding and improvements in product pricing, and had a
positive impact on net income. The increase is notable considering
the Sandwich acquisition did not include loans.
16
The following table sets forth details of average balances,
interest income and expense, and resulting rates for the Corporation
for the past three years, reported on a fully taxable equivalent
basis using a tax rate of 34%.
1996 1995 1994
--------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ----- ------- -------- ---- ------- -------- ----
AVERAGE INTEREST-EARNING ASSETS
Interest-bearing time deposits $ 412 $ 23 5.58% $ 389 $ 23 5.91% $ 395 $ 12 3.04%
Taxable investment securities 92,313 5,135 5.56 115,124 5,940 5.16 140,654 7,118 5.06
Tax-exempt investment
securities (a) 30,049 2,473 8.23 24,724 2,177 8.81 23,878 2,135 8.94
Federal funds sold 2,654 140 5.28 1,989 112 5.63 3,680 126 3.42
Net loans (a) (b) 245,324 22,211 9.05 217,617 20,166 9.27 199,574 17,158 8.60
------- ------ ------- ------ ------- ------
Total interest-earning assets $370,752 29,982 8.09 $359,843 28,418 7.90 $368,181 26,549 7.21
======= ------ ======= ------ ======= ------
AVERAGE INTEREST-BEARING LIABILITIES
Interest-bearing demand $ 76,736 2,016 2.63 $ 79,267 2,310 2.91 $ 97,276 2,817 2.90
Savings 53,101 1,587 2.99 49,624 1,497 3.02 51,979 1,593 3.06
Time 186,054 10,170 5.47 180,424 9,906 5.49 170,537 7,850 4.60
Interest-bearing demand notes
issued to the U. S. Treasury 1,059 52 4.91 1,173 68 5.80 1,058 42 3.97
Federal funds purchased and
customer repurchase
agreements 6,975 350 5.02 5,065 283 5.59 3,328 143 4.30
Long-term borrowings 4,998 421 8.42 5,066 454 8.96 5,485 406 7.40
------- ------ ------ ------ ------- ------
Total interest-bearing
liabilities $328,923 14,596 4.44 $320,619 14,518 4.53 $329,663 12,851 3.90
======= ------ ======= ------ ======= ------
Net yield on interest-earning
assets $ 15,386 4.15% $ 13,900 3.86% $13,698 3.72%
======= ===== ====== ===== ======= ====
(a) Interest income on non-taxable investment securities and
non-taxable loans includes the effects of taxable equivalent
adjustments using a tax rate of 34% in adjusting interest on
tax-exempt securities and tax-exempt loans to a fully taxable basis.
(b) Includes $38 attributable to interest from non-accrual loans.
Net interest income held steady in 1995 as compared to 1994.
The net yield on interest-earning assets increased from 7.21% in
1994 to 7.90% in 1995, while the average rate on interest-bearing
liabilities increased from 3.90% in 1994 to 4.53% in 1995. The
resulting net yield on interest-earning assets on a fully taxable
17
equivalent basis increased from 3.72% in 1994 to 3.86% in 1995. The
fourteen basis-point increase resulted from a greater percentage of
loans in the Corporation's asset mix which had a positive impact on
1995 net income.
The following table describes changes in net interest income
attributable to changes in the volume of interest-earning assets and
interest-bearing liabilities compared to changes in interest rates.
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------
1996 Compared to 1995 1995 Compared to 1994 1994 Compared to 1993
Volume(a) Rate(a) Net Volume(a) Rate(a) Net Volume(a) Rate(a) Net
------ ---- --- ------ ---- --- ------ ---- ---
INTEREST FROM INTEREST-EARNING ASSETS
Interest-bearing
time deposits $ 1 $ (1) $ -0- $ -0- $ 11 $ 11 $ (14) $ 2 $ (12)
Taxable investment
securities (1,221) 416 (805) (1,305) 127 (1,178) 1,554 (286) 1,268
Tax-exempt
investment securities (b) 454 (158) 296 75 (33) 42 129 (109) 20
Federal funds sold 36 (8) 28 (67) 53 (14) (126) 22 (104)
Net loans (c) 2,546 (501) 2,045 1,611 1,397 3,008 2,936 (799) 2,137
----- ----- ----- ----- ----- ----- ----- ----- -----
Total income from interest-
earning assets 1,816 (252) 1,564 314 1,555 1,869 4,479 (1,170) 3,309
----- ----- ----- ----- ----- ----- ----- ----- -----
EXPENSE OF INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits (73) (221) (294) (519) 12 (507) 110 (191) (81)
Savings deposits 105 (15) 90 (74) (22) (96) 277 (252) 25
Time deposits 304 (40) 264 475 1,581 2,056 2,072 (475) 1,597
Interest-bearing demand
notes issued to
the U.S. Treasury (7) (9) (16) 6 20 26 3 11 14
Federal funds purchased
and customer
repurchase agreements 101 (34) 67 80 60 140 63 17 80
Long-term borrowings (6) (27) (33) (33) 81 48 292 14 306
----- ----- ----- ----- ----- ----- ----- ----- -----
Total expense from interest-
bearing liabilities 424 (346) 78 (65) 1,732 1,667 2,817 (876) 1,941
----- ----- ----- ----- ----- ----- ----- ----- -----
Net difference $1,392 $ 94 $1,486 $ 379 $ (177) $ 202 $1,662 $(294) $1,368
===== ===== ===== ===== ===== ===== ===== ===== =====
(a) The change in interest due both to rate and volume has been
allocated equally.
(b) Interest income on non-taxable investment securities includes the
effects of taxable equivalent adjustments using a tax rate of 34% in
adjusting interest on tax-exempt securities to a fully taxable basis.
(c) Includes loan fees of $823 in 1996, $707 in 1995, and $671 in
1994. Interest income on loans includes the effect of tax
equivalent adjustments for non-taxable loans using a tax rate of 34%
in adjusting interest on tax-exempt loans to a fully taxable basis.
Includes non-accrual loans, with year-end balances of $1,157 in
1996, $808 in 1995, and $573 in 1994.
18
NON-INTEREST INCOME. Non-interest income increased in 1996 by
$307 to $2,860, up 12.0% from $2,553 in 1995. Non-interest income as
a percentage of average assets increased from .65% in 1995 to .70%
in 1996. With the exception of a net loss from securities
transactions, all categories of non-interest income increased during
1996 when compared to 1995. The largest increase was in the other
service charges category which increased by $169 (or 65.5%), a
result of an increase in fee income generated during the first full
year of the subsidiary bank's credit card product. Service charges
on deposits also had a significant increase in 1996 ($83 or 7.6%) as
a result of an increase in overdraft charges and an increase in the
number and fee income from checking accounts. The following table
provides non-interest income by category, total non-interest income,
and non-interest income to average total assets for the periods
indicated.
YEAR ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
Trust income $ 735 $ 709 $ 702
Farm management fees 199 161 202
Service charges on deposit accounts 1,176 1,093 1,013
Other service charges 427 258 262
Securities transactions, net (24) 29 88
Other operating income 144 121 198
Loan servicing fees and other charges 203 182 109
Total non-interest income $2,860 $2,553 $2,574
====== ====== ======
Non-interest income
to average total assets .70% .65% .64%
Non-interest income decreased just $21 in 1995 to $2,553, from
$2,574 in 1994. As a percentage of average total assets, however,
non-interest income increased from .64% in 1994 to .65% in 1995.
Decreases in farm management fees, net securities transactions, and
miscellaneous operating income accounts, were offset by increases in
service charges on deposit accounts and secondary loan servicing
fees.
NON-INTEREST EXPENSE. Non-interest expense decreased by $3,383
(or 20.8%) in 1996 to $12,864 from $16,247 in 1995. Trust
department expenses decreased by $4,661 due to the vast majority of
the subsidiary bank's trust department matter being settled in 1995
(see Note 13 in the Notes to Consolidated Financial Statements).
However, all other categories showed increases with the largest
increases in salaries and employee benefits (up $490 or 8.3%), other
operating expenses (up $444 or 19.5%), and goodwill amortization (up
$143 or 67.1%). The Sandwich acquisition accounts for part of the
increase in salaries and benefits, and all of the increase in
goodwill amortization. The increase in other operating expenses is
attributable to a full year of expenses associated with the
subsidiary bank's credit card product, increased loan administrative
costs, and other increases resulting from the Sandwich acquisition.
In 1996, the Corporation paid a one-time SAIF assessment of $336,
which was mandated by the Federal government to recapitalize that
fund. This offset lower premiums paid during 1996 resulting in no
increase in FDIC/OCC assessments for 1996 compared to 1995. The
following table provides non-interest expense by category, total
non-interest expense, and non-interest expense to average total
assets for the periods indicated.
19
YEAR ENDED DECEMBER 31
---------------------------------------------
1996 1995 1994
Salaries and employee benefits $ 6,422 $ 5,932 $ 5,807
Occupancy 955 911 788
Equipment expense 851 810 777
FDIC/OCC assessments 580 572 888
Goodwill and intangible assets 356 213 213
amortization
Data processing 595 487 751
Trust customer charges 382 5,043 -0-
Other operating expense 2,723 2,279 1,811
------ ------ ------
Total non-interest expense $12,864 $16,247 11,035
====== ====== ======
Total non-interest expense
to average total assets 3.17% 4.15% 2.76%
Non-interest expense increased by $5,212 (or 47.2%) in 1995 to
$16,247 from $11,035 in 1994. As mentioned previously, this increase
is due almost entirely to the resolution of the subsidiary bank
trust department matter in 1995. However, with the addition of
facilities in Minooka and Hampshire, occupancy and equipment charges
also increased 15.6% and 4.3%, respectively. Additionally,
miscellaneous other operating expenses (such as legal fees, postage,
advertising, and loan administrative expenses) increased from $1,849
in 1994 to $2,273 in 1995 ($424 or 22.9%). Offsetting these
increases were decreases in data processing expense and FDIC/OCC
assessments. Data processing expenses dropped from $751 in 1994 to
$487 in 1995 (35.2%) as a result of reduced processing costs as well
as reductions resulting from adjustments to prior years' billings.
The FDIC/OCC assessments went down sharply from $888 in 1994 to $572
in 1995 (35.6%) as a result of lower premium rates charged by the
FDIC.
NET INCOME. Net income for 1996 was $3,427 (or $1.26 per
share), an increase of 857.3% from $358 in 1995 (or $0.13 per
share). The increase is attributable to the decrease from $5,043 in
1995 to $382 in 1996 of expenses incurred in resolving the trust
matter of the subsidiary bank. Accordingly, net income in 1995 was
much lower (90.5% decrease) than the $3,758 (or $1.39 per share)
reported in 1994.
ANALYSIS OF FINANCIAL CONDITION
Loans. The Corporation's loan portfolio largely reflects the
profile of the communities in which it operates. The Corporation
essentially makes four types of loans: agricultural, commercial,
real estate, and installment. The Corporation has no foreign loans.
The following table summarizes the Corporation's loan portfolio.
20
DECEMBER 31
-------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
---------------- --------------- --------------- -------------- --------------
Agricultural $ 36,030 14.0% $ 33,106 14.2% $30,977 15.1% $30,696 18.0% $31,793 18.9%
Commercial 38,410 14.8 34,687 14.9 35,863 17.5 41,973 24.5 36,572 21.7
Real Estate
1-4 family
residences 72,460 28.1 63,824 27.4 59,470 29.1 30,255 17.7 25,482 15.2
Agricultural 28,374 11.0 23,148 10.0 20,808 10.2 17,309 10.1 17,480 10.4
Construction 4,160 1.6 3,116 1.3 853 0.4 2,594 1.5 8,985 5.3
Commercial 41,170 16.0 37,378 16.1 31,272 15.3 27,334 16.0 25,609 15.2
------- ------- ------- ------- -------
Real Estate
Total 146,164 56.7 127,466 54.8 112,403 55.0 77,462 45.3 77,556 46.1
Installment 37,514 14.5 37,434 16.1 25,429 12.4 20,782 12.2 22,374 13.3
------- ------- ------- ------- -------
Total loans $258,118 100.0% $232,693 100.0% $204,672 100.0% $170,913 100.0% $168,295 100.0%
======= ======= ======= ======= =======
Total assets $420,407 $402,393 $400,531 $345,604 $341,666
Loans to total
assets 61.4% 57.8% 51.1% 49.5% 49.3%
Total loans increased $25 million or 11% in 1996 as compared to
an increase of $28 million or 14% in 1995. As in 1995, loan growth
occurred through demand in existing markets rather than through
acquisitions.
The agricultural loan portfolio increased $3 million or 9% in
1996 from 1995. The agricultural portfolio grew as customers
updated equipment, purchased additional farmland, and borrowed
additional operating funds due to increased production costs. From
1994 to 1995, the portfolio increased $2 million in volume. As of
year-end 1996, the Corporation had $1 million in agricultural loans
guaranteed by the Farm Service Agency (formerly Farmers Home
Administration). 1996 was a year of extremes in corn production
economics as short supplies, strong demand, and weather concerns for
the 1996 crop resulted in corn prices at all time record highs,
above $5 per bushel. Soybean prices, to a lesser degree, also
experienced favorable prices. Due to the Corporation's market
area's quality land, the majority of our customers experienced
average or above yields. Profitability in the livestock sector
continued to be pressured by high feed costs. Strong pork prices
offset the feed costs, but cattle feeders experienced another
difficult year.
While agricultural loan volume has continued to increase over
the past few years, the percentage of total loans in agricultural
production and agricultural real estate loans has decreased from 29%
in 1992 to 25% in 1996. This reflects the increased diversification
of the portfolio.
21
Short term commercial loans increased $3.7 million or 11% in
1996. This compares to a reduction of $1.2 million or 3% in 1995.
While business activity remains strong in markets served by the
Corporation, a large share of the commercial loan demand has been
for the acquisition or construction of longer term assets, such as
real estate loans. Competition for high quality commercial and
agricultural customers remains strong.
Real estate loan volume continued to increase in 1996, posting
an $18.7 million or 14.7% increase over 1995. During 1996,
residential loans increased $8.6 million to $72.5 million. These
loans comprise the largest single component of the portfolio at 28%.
Agricultural real estate loans posted an increase of $5.2 million
(or 23%) in a very competitive market. Commercial real estate loans
grew $3.8 million or 10%. Construction loans increased $1 million,
primarily in the commercial sector. Increased loan volumes reflect
the high level of business expansion in the Corporation's market
areas and successful sales efforts on the part of the staff.
Direct and indirect installment loans (loans to consumers)
reflect little change in volume in the portfolio in 1996. This
follows an increase of 47% in 1994 to 1995. The Corporation
implemented new products and marketing programs during the past
three years to increase penetration into its market areas. Long
term, these products and programs are expected to provide increased
diversification of risk and enhanced profitability. Increased focus
on underwriting quality and awareness of general consumer debt
levels has tempered growth in this area of the bank's portfolio.
Although the risk of non-payment for any reason exists with
respect to all loans, certain other more specific risks are
associated with each type of loan. The primary risks associated
with commercial loans are quality of the borrower's management and
the impact of national economic factors. With respect to
agricultural loans, the primary risks are weather and, like
commercial loans, quality of borrower's management. Risks
associated with real estate loans include concentrations of loans in
a loan type, such as commercial or agricultural, and fluctuating
land values. Installment loans also have risks associated with
concentrations of loans in a single type of loan. Installment loans
additionally face the risk of a borrower's unemployment as a result
of deteriorating economic conditions.
The Corporation's strategy with respect to addressing and
managing these types of risks, whether loan demand is weak or
strong, is for the subsidiary bank to follow its conservative loan
policies and underwriting practices, which include (i) granting
loans on a sound and collectible basis, (ii) investing funds
profitably for the benefit of the stockholders and the protection of
depositors, (iii) serving the legitimate needs of the community and
the bank's general market area while obtaining a balance between
maximum yield and minimum risk, (iv) ensuring that primary and
secondary sources of repayment are adequate in relation to the
amount of the loan, (v) administering loan policies through a
Directors ' Loan Committee and Officers' Loan Committees, (vi)
developing and maintaining adequate diversification of the loan
portfolio as a whole and of the loans within each loan category, and
22
(vii) ensuring that each loan is properly documented and, if
appropriate, secured or guaranteed by government agencies, and that
insurance coverage is adequate, especially with respect to certain
agricultural loans because of the risk of poor weather.
Non-Performing Loans and Other Real Estate Owned.
Non-performing loans amounted to .45% of total loans at year-end
1996 compared to .39% at year-end 1995. The overall low level of
non-performing loans is a reflection of the bank's lending staff,
credit policies and management's emphasis on asset quality.
Potential problem credits are closely monitored by the lending
staff, and an independent loan review staff provides further
assistance in identifying problem situations. Loans over 90 days
past due are normally either charged off, or if well secured and in
the process of collection, placed on a non-accrual status.
Reflecting the Corporation's sound credit policies, the allowance
for possible loan losses was 140.9% of non-performing loans at
year-end 1996. The Corporation does not have any significant
concentration of commercial real estate loans or commitments in
areas which are experiencing deteriorating economic conditions.
Total other real estate owned as of December 31, 1996 was $93. The
Corporation had no other real estate owned as of December 31, 1995.
The following table provides information on the Corporation's
non-performing loans since 1992.
DECEMBER 31
------------------------------------------------------------
1996 1995 1994 1993 1992
Non-accrual $1,157 $808 $573 $193 $375
90 days past due and -0- 109 13 54 40
accruing
Restructured -0- -0- 384 389 401
------ ------ ------ ------ ------
Total non-performing $1,157 $917 $970 $636 $816
loans ====== ====== ====== ====== ======
Non-performing loans to
total loans (net of 0.45% 0.39% 0.47% 0.37% 0.49%
unearned interest)
/TABLE>
As of December 31, 1996 and 1995, loans which the Corporation's
management had serious doubts as to the ability of borrowers to
comply with loan repayment terms that were not carried as
non-performing loans totaled approximately $287 (or .11% of the
total loan portfolio), and $220 (or .09% of the total loan
portfolio), respectively.
23
ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance shown in the
following table represents a general allowance available to absorb
future losses within the entire portfolio.
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------
1996 1995 1994 1993 1992
Amount of loans outstanding at end of period
(net of unearned interest) $257,931 $232,471 $204,154 $170,168 $167,278
Average amount of loans outstanding for the
period (net of unearned interest) $244,027 $218,091 $199,911 $166,347 $147,319
Allowance for possible loan losses at
beginning of period $ 2,034 $ 2,100 $ 2,218 $ 2,233 $ 2,000
Allowance of bank acquired -0- -0- 280 -0- 412
CHARGE-OFFS:
Agricultural -0- -0- 23 26 175
Commercial 140 6 55 19 47
Real estate-mortgage 4 -0- 22 -0- 4
Installment 1,221 557 268 123 176
------- ------- ------- ------- -------
Total charge-offs 1,365 563 368 168 402
------- ------- ------- ------- -------
RECOVERIES:
Agricultural 351 321 79 152 179
Commercial 31 23 11 24 16
Real estate-mortgage 4 10 5 -0- -0-
Installment 534 244 161 153 123
------- ------- ------- ------- -------
Total recoveries 920 598 256 329 318
------- ------- ------- ------- -------
Net loans charged off (recoveries) 445 (35) 112 (161) 84
Provision (credit) for possible loan losses 41 (101) (286) (176) (95)
------- ------- ------- ------- -------
Allowance for possible loan losses at end
of period $ 1,630 $ 2,034 $ 2,100 $ 2,218 $ 2,233
======= ======= ======= ======= =======
Net loans charged off (recoveries) to
average loans 0.18% (0.02)% 0.06% (0.10)% 0.06%
Allowance for possible loan losses to
non-performing loans 140.88% 221.81% 216.49% 348.74% 273.65%
Allowance for possible loan losses to
total loans at end of period (net of
unearned interest) 0.63% 0.87% 1.03% 1.30% 1.33%
The allowance for possible loan losses is based on factors that
include the overall composition of the loan portfolio, types of loans,
past loss experience, loan delinquencies, potential substandard and
doubtful loans, and such other factors that, in management's best
judgment, deserve evaluation in estimating possible loan losses. The
adequacy of the allowance for possible loan losses is monitored monthly
during the ongoing, systematic review of the loan portfolio by the loan
review staff of the audit department of the subsidiary bank. The results
of these reviews are reported to the Board of Directors of the subsidiary
bank on a monthly basis and to the Board of Directors of the Corporation
on a quarterly basis. Monitoring and addressing problem loan situations
are primarily the responsibility of the subsidiary bank's management and
its Board of Directors.
24
More specifically, the Corporation calculates the appropriate level
of the allowance for possible loan losses on a monthly basis using
historical charge-offs for each loan type, substandard loans, and
anticipated losses with respect to specific loans. The amount in the
allowance is based on the amount of outstanding loans for each loan type
multiplied by the ratio of actual charge-offs to total loans for each
loan type for the preceding five years, plus the amount of anticipated
losses with respect to specific loans, plus a percentage of identified
substandard or delinquent loans for each loan type. In addition to
management's assessment of the portfolio, the Corporation and the
subsidiary bank are examined periodically by regulatory agencies.
Although the regulatory agencies do not determine whether the subsidiary
bank's allowance for possible loan losses is adequate, such agencies do
review the procedures and policies followed by management of the
subsidiary bank in establishing the allowance.
Reflecting the Corporation's emphasis on asset quality, net
charge-offs were .18% of average total loans in 1996, and the allowance
for possible loan losses at year-end 1996 was $1.63 million, .63% of
total loans, net of unearned interest, and 140.9% of non-performing
loans. Management considers the allowance for possible loan losses
adequate to meet potential losses as of December 31, 1996.
During the period 1982 through 1988, the subsidiary bank charged off
a significant dollar amount of loans as a result of aggressive growth
during the late 1970's and early 1980's and a severe recession in the
agricultural sector of the economy in the mid 1980's. Strict
implementation of conservative credit policies that emphasize stringent
underwriting criteria for new loans, in conjunction with vigorous
collection efforts, resulted in recoveries on loans previously charged
off exceeding charge-offs in 1993 and 1995.
In 1996, for the first time in seven years, the Corporation took a
provision for possible loan losses, a result of direct and indirect
installment loan charge-offs during 1996. While the significant increase
in installment loan volume the past three years led to somewhat higher
dollar losses, management has strengthened installment loan underwriting
practices thereby reversing this trend.
Investment Securities. The objectives of the investment portfolio
are to provide the Corporation with a source of liquidity and a source of
earnings. The following table provides information on the book value of
investment securities as of the dates indicated.
December 31
1996 1995 1994
U.S. Treasury $ 45,267 $ 39,212 $ 51,323
U.S. Government Agencies 28,175 48,628 66,449
Obligations of state and political 30,776 28,245 23,950
subdivisions
Other securities 12,810 11,009 13,235
------- ------- -------
Total $ 117,028 $ 127,094 $ 54,957
======= ======= ========
25
Total investment securities decreased by $10.1 million to $117.0
million (or 7.9%) at December 31, 1996 compared to December 31, 1995.
The major reason for the decrease is due to the need to respond to
increased loan demand. Increases totaling $6.1 million occurred in the
U.S. Treasury category while decreases totaling $20.5 million occurred in
the U.S. Government Agencies category. The lack of adequate spread on
non-callable U.S. Government Agencies was the major reason for the shift
to U.S. Treasuries from U.S. Government Agencies. Primarily as a result
of loan demand, securities decreased by $27.9 million, to $127.1 million
(or 18.0%), at December 31, 1995 compared to December 31, 1994.
Deposits. Total average deposits increased $8.2 million (or 2.4%)
from 1995 to 1996 as a result of the Sandwich acquisition during 1996.
Interest-bearing demand deposits were the only type of deposit to
decrease in 1996 ($2.5 million). This reflects a continued trend by
customers to invest liquid funds into securities and other non-bank
products.
Average time deposits increased approximately $5.6 million (3.1%) in
1996, primarily a result of the Sandwich acquisition, in spite of
approximately $1.3 million of out-of-the-area brokered deposits acquired
from HOIIC being allowed to "run off" in 1996.
During 1996, average non-interest bearing demand deposits rose $1.7
million, a 5.0% increase. Non-interest-bearing demand deposits have grown
steadily since 1992, increasing by $11.6 million (or 56%) as a result of
acquisitions and continued efforts by the subsidiary bank to develop core
deposits.
The average interest rate paid on deposits in 1996 decreased to
3.93%, down from 4.00% in 1995, primarily as a result of the decline in
the rate paid on interest-bearing demand deposits.
Average deposits decreased $8.8 million from 1994 to 1995 (2.5%).
26
The following table sets forth the classification of average
deposits and rates from the indicated periods.
FOR THE YEAR ENDING DECEMBER 31
----------------------------------------------------
1996 1995 1994
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
Non-interest-bearing demand $ 34,824 N/A $ 33,165 N/A $ 31,485 N/A
Interest-bearing demand
(NOW and money market) 76,736 2.63% 79,267 2.91% 97,276 2.90%
Savings 53,101 2.99 49,624 3.02 51,979 3.06
Time deposits 186,054 5.47 180,424 5.49 170,537 4.60
Total -------- ------- -------
$350,715 3.93% $342,480 4.00% $351,277 3.49%
======= ==== ======= ==== ======= ====
The following table summarizes time deposits in amounts of $100 or more
by time remaining until maturity as of December 31, 1996. These time
deposits are made by individuals, corporations, and public entities.
Three months or less $17,394
Over three through six months 6,808
Over six months through one year 5,495
Over one year 5,015
-------
Total $34,712
=======
LIQUIDITY. Liquidity is measured by a financial institution's
ability to raise funds through deposits, borrowed funds, capital, or the
sale of assets. Additional sources of liquidity, including cash flow
from both the repayment of loans and the securitization of assets, are
also considered in determining whether liquidity is satisfactory. The
funds are used to meet deposit withdrawals, maintain reserve
requirements, fund loans, and operate the organization. Liquidity is
achieved through growth of core funds (including core deposits (defined
below), 50% of non-public entity certificates of deposit over $100,000,
and repurchase agreements issued to commercial customers) and liquid
assets, and accessibility to the money and capital markets. The ratio of
temporary investments (those maturing within one year, plus twelve
months' projected payments on mortgage-backed securities and
collateralized mortgage obligations) to volatile liabilities (50% of
non-public entity certificates of deposit over $100,000, repurchase
agreements issued to public entities, and deposits of public entities)
was 104.1% at December 31, 1996 compared to 159.3% at December 31, 1995.
Core deposits, defined as demand deposits, NOW accounts, total savings,
and certificates of deposit less than $100,000, were 85.7% of total
deposits at December 31, 1996, and 86.3% of total deposits at December
31, 1995. Money market accounts of approximately $22.4 million at
December 31, 1996, are classified by the Corporation as core deposits.
27
The Corporation experienced a net decrease in cash and cash
equivalents of $3.3 million in 1996. Net cash provided by operating
activities of $2.8 million provided a degree of liquidity. Financing
activities provided net cash of $13.9 million. A net increase of $12.4
million in deposits, the result of the Sandwich acquisition, was a major
component of the financing activities. Increases in the operating and
financing activities were offset by net cash used for investing
activities of $20.0 million. Net loan growth of $25.9 million in 1996
was the major component of this decrease, with payment for the Sandwich
acquisition representing another $2.9 million of the net cash used for
investing activities. Net cash of $9.7 million provided by securities
transactions ($2.3 million in proceeds from sales of securities and $67.7
million from maturities of securities, less $60.3 million in purchases of
securities) partially offset the cash used by the aforementioned
categories of investing activities. Cash and cash equivalents of $21.1
million at December 31, 1996, are deemed adequate to meet short-term
liquidity needs.
The cash flows generated by the operating and investing activities
and used by the financing activities of the Corporation in 1995 resulted
in a net increase in cash and cash equivalents of $2.7 million.
Investing activities contributed $5.4 million toward the increase in cash
and cash equivalents. Proceeds from sales and maturities of investment
securities of $53.7 million more than offset the purchase of investment
securities of $21.1 million, and the substantial growth of $26.6 million
experienced in the loan portfolio. Financing activities used $3.0
million of the funds generated, with the growth of short-term borrowings
(most notably repurchase agreements) only partially offsetting the
decrease in deposits during the course of 1995.
The long-term liquidity needs of the Corporation will be driven by
the necessity to grow and change in the marketplace to meet the needs of
its customers and to offset strategies of its competitors. The
Corporation's equity base, along with its low debt level and common stock
available for issuance, provide several options for future financing.
Proceeds from the sale of securities were $2.3 million, $17.0 million,
and $17.9 million in 1996, 1995 and 1994, respectively. Proceeds from
maturing securities were $67.7 million, $36.7 million, and $49.8 million
in 1996, 1995, and 1994, respectively.
Asset-Liability Management. The Corporation actively manages its
assets and liabilities through coordinating the levels of interest rate
sensitive assets and liabilities to minimize changes in net interest
income despite changes in market interest rates. The Corporation defines
interest rate sensitive assets and liabilities as any instrument that can
be repriced within 180 days, either because the instrument will mature
during the period or because it carries a variable interest rate.
Changes in net interest income occur when interest rates on loans and
investments change in a different time period from that of changes in
interest rates on liabilities, or when the mix and volume of earning
assets and interest-bearing liabilities change. The interest rate
sensitivity gap represents the dollar amount of difference between rate
sensitive assets and rate sensitive liabilities within a given time
period (GAP). A GAP ratio is determined by dividing rate sensitive
assets by rate sensitive liabilities. A ratio of 1.0 indicates a
perfectly matched position, in which case the effect on net interest
income due to interest rate movements would be zero.
28
The Corporation's strategy with respect to asset-liability
management is to maximize net interest income while limiting the
Corporation's exposure to risks associated with volatile interest rates.
The subsidiary bank's Funds Management Committee is responsible for
monitoring the subsidiary bank's GAP position. As a general rule, the
subsidiary bank's policy is to maintain GAP as a percent of total assets
within a range from +20% to -20% in any given time period. Based on the
simulation of various rising or falling interest rate scenarios in
comparison to one considered to be the most likely interest rate
scenario, management seeks to operate with net interest income within a
range of +10% to -10% of budgeted net interest income during any twelve
month period.
The Funds Management Committee monitors the effect of changes in
yields and rates paid on a monthly basis. The Committee considers the
subsidiary bank's current and anticipated positions during the next
twelve months and the effect of rising and falling interest rate
scenarios on net income. The Committee considers various contingency
plans if the results of this analysis with regard to the following key
ratios indicate a deviation from the funds management policy: loans to
assets, net loans to core funds, net loans to total deposits, equity
capital to total assets, rate sensitive assets to rate sensitive
liabilities, GAP, temporary investments to total assets, and temporary
investments to volatile liabilities. The contingency plans considered by
the Committee include generating funds through internal and external
sources, adjusting maturities within the investment portfolio, repricing
of assets, purchasing or selling loans, secondary mortgage activity and
liability rate adjustment. The Committee reports the results of their
meetings to the subsidiary bank's Board of Directors on a monthly basis.
29
DECEMBER 31, 1996
----------------------------------------------------------------------------
0-3 MO. 4-12 MO. 1-5 YRS. OVER 5 YRS. TOTAL
------- -------- -------- ----------- --------
Interest-earning assets:
Taxable investment securities $ 19,325 $ 30,231 $ 22,508 $ 14,188 $ 85,252
Tax-exempt investment securities 690 3,839 11,625 14,622 30,776
Fed funds sold 3,100 -0- -0- -0- 3,100
Loans 91,583 49,215 104,746 13,606 259,150
------- ------- ------- ------- -------
Total rate sensitive assets (RSA) $114,698 $ 83,285 $138,879 $ 42,416 $379,278
======= ======= ======= ======= =======
Interest-bearing liabilities:
Interest-bearing demand deposits $ 78,883 $ -0- $ -0- $ -0- $ 78,883
Savings deposits 55,077 -0- -0- -0- 55,077
Time deposits 49,132 76,353 57,683 315 183,483
Short-term debt 13,537 -0- -0- -0- 13,537
Long-term debt 4,350 -0- 0- -0- 4,350
------- ------- ------- ------- -------
Total rate sensitive liabilities (RSL $ 200,979 $ 76,353 $ 57,683 $ 315 $335,330
======= ======= ======= ======= =======
Interest rate sensitivity GAP (RSA less RSL) $(86,281) $ 6,932 $ 81,196 $ 42,101 $ -0-
Cumulative GAP $(86,281) $(79,349) $ 1,847 $ 43,948 $ -0-
RSA/RSL 0.57% 1.09% 2.41% 134.65% -
Cumulative RSA/RSL 0.57% 0.71% 1.01% 1.13% -
In the table above, NOW account balances and savings deposits are
included as rate sensitive in the amounts reflected in the 0-3 month
timeframe, as such interest-bearing liabilities are subject to immediate
withdrawal.
Management of the Corporation considers one-half of the NOW account
balances (one of the components of interest-bearing demand deposits) and
all savings deposits as core, or non-rate sensitive deposits, primarily
since interest-bearing demand and savings deposits historically have not
been rate sensitive. As a general rule, the subsidiary bank's policy is
to maintain RSA as a percent of RSL within a range of +70% to +120%
within a 182-day time period.
At December 31, 1996, one-half of the NOW account balances totaled
approximately $28.7 million and savings deposits totaled approximately
$55.1 million. If the amounts reflected in the 0-3 month timeframe are
adjusted to exclude these amounts, rate sensitive liabilities would be
approximately $117.2 million for a negative GAP of approximately $2.5
million. RSA as a percent of RSL would be 97.9%. Adjusting the
cumulative GAP and GAP ratio for the 4-12 month timeframe would result in
a positive cumulative GAP and GAP ratio of $4.4 million, and 102.3%,
respectively.
EFFECTS OF INFLATION. The consolidated financial statements and
related consolidated financial data presented herein have been prepared
in accordance with generally accepted accounting principles and practices
within the banking industry which require the measurement of financial
position and operating results in terms of historical dollars without
30
considering changes in the relative purchasing power of money over time
due to inflation. Unlike most industrial companies, virtually all the
assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of
inflation.
Selected Statistical Information. The following tables contain
information concerning the financial condition and results of operations
of the Corporation for the period or periods, or as of the date or dates,
shown in each table. All average information is provided on an average
daily basis.
INVESTMENT MATURITIES AND YIELDS. The following table sets forth
the contractual maturities of investment securities at December 31, 1996,
and the tax equivalent yields of such securities.
Due within Due after one but Due after five but Due after ten Other (no stated
one year within five years within ten years years maturity)
---------------- ----------------- ------------------ ---------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasury $28,824 5.67% $16,443 6.05% $-0- - $ -0- - $-0- -
U.S. Government
Agencies 9,560 5.10 10,847 5.54 81 7.50% 7,688 7.39% -0- -
Obligations of
states and
political
subdivisions 4,566 5.90 11,787 5.36 4,418 5.41 10,004 5.35 -0- -
Other securities 762 5.42 801 5.90 4,543 6.13 5,999 5.80 -0- -
Other
(no stated
maturity) -0- - -0- - -0- - -0- - 705 -
----- ------- ----- ------ -----
Total $43,712 5.57% $39,878 5.70% $9,042 5.79% $23,691 6.13% $ 705 -
======= ======= ====== ======= ======
31
LOAN MATURITIES. The following table sets forth scheduled loan repayments on
agricultural and commercial loans at December 31, 1996. Real estate
construction loans constitute less than 2% of the Corporation's total loans and
therefore are not included in the table. See note 4 in the Notes to
Consolidated Financial Statements.
Due within Due after one but Due after
one year within five years five years Total
---------- ----------------- ---------- -------
Agricultural $32,902 $2,937 $191 $36,030
Commercial 35,526 2,405 479 38,410
------- ------ ---- -------
Total $68,428 $5,342 $670 $74,440
======= ====== ==== =======
Of the loans shown above, the following table sets forth those loans
due after one year which have predetermined (fixed) interest rates or
adjustable (variable) interest rates at December 31,1996.
VARIABLE
FIXED RATE RATE TOTAL
---------- -------- ------
Due after one year $ 3,897 $2,115 $6,012
32
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES. The subsidiary
bank has allocated the allowance for possible loan losses to provide for
the possibility of losses being incurred within the categories of loans
set forth in the table below. The allocation of the allowance and the
ratio of loans within each category to total loans at December 31 are as
follows:
December 31
--------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
ALLOW- CATEGORY ALLOW- CATEGORY ALLOW- CATEGORY ALLOW- CATEGORY ALLOW- CATEGORY
ANCE TO TOTAL ANCE TO TOTAL ANCE TO TOTAL ANCE TO TOTAL ANCE TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Agricultural $ 325 14.0% $ 632 14.2% $ 650 15.1% $ 672 18.0% $ 698 18.9%
Commercial 422 14.8 470 14.9 500 17.5 769 24.5 736 21.7
Real estate-
mortgage 151 6.7 227 54.8 267 55.0 40 45.3 32 46.1
Installment 608 14.5 305 16.1 213 12.4 193 12.2 210 13.3
Unallocated 124 N/A 400 N/A 470 N/A 544 N/A 557 N/A
----- ----- ----- ----- ----- ----- ----- ------ ----- ------
Total $1,630 100.0% $2,034 100.0% $2,100 100.0% $2,218 100.0% $2,233 100.0%
===== ===== ===== ===== ===== ===== ===== ====== ===== =====
IMPACT OF NEW ACCOUNTING STANDARDS. In June 1996, the FASB issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (FAS 125). FAS 125, among other things,
applies a "financial-components approach" that focuses on control, whereby an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes assets when control has been
surrendered, and derecognizes liabilities when extinguished. FAS 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. FAS 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. The Corporation does not expect this
pronouncement to have a significant impact on its consolidated financial
condition or results of operations.
No other new accounting policies were adopted and the application of
existing policies was not changed during fiscal 1996.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31
1996 1995
---- ----
ASSETS
Cash and due from banks (note 2) $ 18,033 $ 18,734
Federal funds sold 3,100 5,700
Investment securities (note 3)
Available-for-sale, at fair value 105,893 115,596
Held-to-maturity, at amortized cost 11,135 11,498
Loans held for sale 2,849 946
Loans (note 4)
Gross loans 258,118 232,693
Less: Unearned interest (187) (222)
Allowance for possible loan losses (1,630) (2,034)
------- -------
Net loans 256,301 230,437
Interest receivable 5,725 5,505
Premises and equipment (note 5) 9,147 9,096
Goodwill and intangible assets, net of accumulated amortization 5,541 2,545
of $1,172 and $775, at December 31, 1996 and 1995
Other assets 2,683 2,336
------- -------
TOTAL ASSETS $420,407 $402,393
======= =======
LIABILITIES
Deposits (note 6):
Demand $ 41,258 $ 39,315
Interest-bearing demand 78,883 77,094
Savings 55,077 49,527
Time 183,483 180,349
------- -------
Total deposits 358,701 346,285
Short-term borrowings:
Customer repurchase agreements 11,597 9,172
Interest-bearing demand notes issued to the U.S. Treasury 1,940 1,571
------- -------
Total short-term borrowings 13,537 10,743
Long-term borrowings (note 7) 4,350 4,700
Other liabilities 3,622 3,019
------- -------
TOTAL LIABILITIES 380,210 364,747
------- -------
STOCKHOLDERS' EQUITY
Common stock: $5 par value, 4,000,000 shares authorized; 13,800 13,800
2,759,945 issued and outstanding at December 31, 1996 and 1995
Surplus 6,067 6,067
Retained earnings 20,250 17,857
Unrealized gain on investment securities available-for-sale, 300 243
net of tax effect
Less: Cost of 35,979 and 41,639 treasury shares (220) (321)
------- -------
TOTAL STOCKHOLDERS EQUITY 40,197 37,646
------- -------
Commitments & contingencies (note 13)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 420,407 $ 402,393
======= =======
See accompanying notes to consolidated financial statements.
34
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
INTEREST INCOME:
Interest and fees on loans $ 22,184 $ 20,133 $ 17,100
Interest and dividends on investment securities:
Taxable 5,135 5,940 7,118
Tax-exempt 1,632 1,437 1,409
Interest on federal funds sold 140 112 126
Interest on interest-bearing time deposits in
other banks 23 23 12
--------- --------- ---------
Total interest income 29,114 27,645 25,765
--------- --------- ---------
INTEREST EXPENSE:
Interest on deposits (note 6) 13,773 13,713 12,260
Interest on short-term borrowing 402 351 185
Interest on long-term borrowings 421 454 406
--------- --------- ---------
Total interest expense 14,596 14,518 12,851
--------- --------- ---------
NET INTEREST INCOME 14,518 13,127 12,914
Provision (credit) for possible loan losses (note 4) 41 (101) (286)
--------- --------- ---------
NET INTEREST INCOME AFTER PROVISION (CREDIT)
FOR POSSIBLE LOAN LOSSES 14,477 13,228 13,200
--------- --------- ---------
OTHER INCOME:
Trust & farm management fees 934 870 904
Service charges on deposit accounts 1,176 1,093 1,013
Other service charges 427 258 262
Securities transactions, net (note 3) (24) 29 88
Loan servicing fees and other charges 203 182 109
Other operating income 144 121 198
--------- --------- ---------
Total other income 2,860 2,553 2,574
--------- --------- ---------
OTHER EXPENSES:
Salaries and employee benefits 6,422 5,932 5,807
Occupancy 955 911 788
Equipment expense 851 810 777
FDIC/OCC assessments 580 572 888
Goodwill and intangible assets amortization 356 213 213
Data processing 595 487 751
Trust customer charges (note 14) 382 5,043 -0-
Other operating expense 2,723 2,279 1,811
--------- --------- ---------
Total other expenses 12,864 6,247 11,035
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 4,473 (466) 4,739
Income tax expense (benefit) (note 8) 1,046 (824) 981
--------- --------- ---------
NET INCOME $ 3,427 $ 358 $ 3,758
========= ========= =========
NET INCOME PER SHARE $ 1.26 $ 0.13 $ 1.39
========= ========= =========
Weighted average shares outstanding 2,720,511 2,713,558 2,710,662
See accompanying notes to consolidated financial statements.
35
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Unrealized Gain
(Loss) on Investment
Securities
Common Retained Available-for-sale Treasury
Stock Surplus Earnings net of tax effect Stock Total
----- ------- -------- ----------------- ----- -------
Balance, January 1, 1994 $ 9,200 $6,068 $20,213 $ 373 $ (430) $35,424
Net income 3,758 3,758
Cash dividends
($.33 per share) (895) (895)
Stock dividend (3 for 2
split, note 14) 4,600 (1) (4,600) (1)
Change in unrealized gain (loss)
on investment securities
available-for-sale, net of
$1,880 tax effect (3,650) (3,650)
------- ------- -------- -------- -------- -------
Balance, December 31, 1994 $13,800 $6,067 $18,476 $(3,277) $(430) $34,636
Net income 358 358
Sale of 7,633 shares
of treasury stock 109 109
Cash dividends
($.36 per share) (977) (977)
Change in unrealized gain (loss)
on investment securities
available-for-sale, net of
$1,813 tax effect 3,520 3,520
------- ------- -------- -------- -------- -------
Balance, December 31, 1995 $13,800 $6,067 $17,857 $ 243 (321) $37,646
Net income 3,427 3,427
Sale of 5,660 shares
of treasury stock 101 101
Cash dividends
($.38 per share) (1,034) (1,034)
Change in unrealized gain (loss)
on investment securities
available-for-sale, net of $30
tax effect 57 57
------- ------- -------- -------- -------- -------
BALANCE, DECEMBER 31, 1996 $13,800 $6,067 $20,250 $ 300 $ (220) $40,197
======= ======= ======== ========= ======== =======
See accompanying notes to consolidated financial statements.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 3,427 $ 358 $ 3,758
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 908 803 793
Provision (credit) for possible loan losses 41 (101) (286)
Deferred income taxes (benefit) 18 (409) (1,220)
Amortization of goodwill and other intangible assets 356 213 213
Amortization of premiums (discounts)
on investment securities, net of accretion 340 872 1,213
Loss (gain) on securities transactions, net 24 (29) (88)
Loss (gain) on sales of other real estate 5 (1) (41)
Loans originated for sale (12,155) (8,137) (7,327)
Proceeds from sales of loans originated for sale 10,252 7,664 6,065
Increase in accrued interest payable 73 376 336
Increase in accrued interest receivable (220) (123) (442)
Increase in other assets (768) (386) (797)
Increase (decrease) in other liabilities 483 (747) (408)
-------- -------- --------
Net cash provided by operating activities 2,784 353 1,769
-------- -------- --------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale 2,318 16,991 17,867
Proceeds from maturities of investment securities available-for sale 66,593 33,522 46,982
Purchase of investment securities available-for-sale (59,531) (16,855) 64,157)
Proceeds from maturities of investment securities held-to-maturity 1,144 3,189 2,776
Purchase of investment securities held-to-maturity (736) (4,294) (4,137)
Proceeds from sales of other real estate owned 11 80 207
Net (increase) decrease in loans (25,905) (26,630) 1,635
Purchase of premises and equipment (959) (619) (2,358)
Payment related to acquisitions, net of cash and cash equivalents acquired (2,947) -0- (663)
-------- -------- --------
Net cash provided (used) by investing activities (20,012) 5,384 (1,848)
-------- -------- --------
Financing activities:
Net increase (decrease) in deposits 12,416 (6,702) (12,984)
Net increase in short-term borrowings 2,794 5,121 322
Proceeds from long-term borrowings 1,000 -0- 6,000
Payments for long-term borrowings (1,350) (600) (700)
Dividends paid (1,034) (977) (895)
Sale of treasury stock 101 109 -0-
-------- -------- --------
Net cash (used) provided by financing activities 13,927 (3,049) (8,257)
-------- -------- --------
Increase (decrease) in cash and cash equivalents (3,301) 2,688 (8,336)
Cash and cash equivalents at beginning of year 24,434 21,746 30,082
-------- -------- --------
Cash and cash equivalents at end of year $ 21,133 $ 24,434 $ 21,746
======== ======== ========
Cash paid during the year for:
Interest $ 14,525 $ 14,161 $ 12,548
Income taxes $ 944 $ 325 $ 1,218
Supplemental disclosure of noncash investing activities:
Loans transferred to other real estate owned $ 109 $ 52 $ 198
Investments transferred to available-for-sale $ -0- $ 13,867 $ -0-
See accompanying notes to consolidated financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles and conform with general practices
within the banking industry. A description of the significant accounting
policies follows:
BASIS OF CONSOLIDATION - The consolidated financial statements of Princeton
National Bancorp, Inc. ("the Corporation") include the accounts of the
Corporation and its wholly-owned subsidiary, Citizens First National Bank
("Princeton" or the "subsidiary bank"). On June 7, 1996, the Corporation
acquired the deposits, equipment, and facility of the Sandwich, Illinois
branch of Superior Bank, FSB ("Sandwich"). On January 7, 1994, the
Corporation acquired Heart of Illinois Investment Corp. ("HOIIC"). At the
time of acquisition, the subsidiary of that corporation was immediately merged
into Princeton. Significant intercompany accounts and transactions have been
eliminated in consolidation. The cost in excess of the fair value (goodwill)
of net assets acquired in the aforementioned transactions is being amortized
over a fifteen-year period.
USE OF ESTIMATES - In order to prepare the Corporation's financial statements
in conformity with generally accepted accounting principles, management is
required to make certain estimates that affect the amounts reported in the
financial statements and accompanying notes. These estimates may differ from
actual results.
BASIS OF ACCOUNTING - The Corporation and its subsidiary bank follow the
accrual basis of accounting for all major sources of income and expense.
INVESTMENT SECURITIES - Investment securities which the Corporation has the
positive intent and ability to hold to maturity are classified as
held-to-maturity and recorded at amortized cost. All other investment
securities that are not classified as held-to-maturity are classified as
available-for-sale. Investments available-for-sale are recorded at fair value
with any changes in fair value reflected as a separate component of
stockholders' equity, net of related tax effects. Gains and losses on the sale
of securities are determined using the specific identification method.
LOANS - Loans are stated at the principal amount outstanding, net of unearned
interest and allowance for possible loan losses. Interest on commercial, real
estate, and selected installment loans is credited to operations as earned,
based upon the principal amount outstanding. Interest on the remaining
installment loans is credited to operations using a method which approximates
the interest method.
It is the subsidiary bank's policy to discontinue the accrual of interest
on any loan when, in the opinion of management, there is reasonable doubt as
to the collectibility of interest or principal. Interest on these loans is
credited to income only when the collection of principal has been assured and
only to the extent interest payments are received.
In addition, the terms and conditions of certain loans are restructured
with the borrower when it is deemed in the best interest of the subsidiary
bank. Restructured loans are loans on which interest is being accrued at less
than the original contractual rate of interest because of the inability of the
borrower to service the obligation under the original terms of the agreement.
Income is accrued at the lower rate so long as the borrower is current under
the revised terms and conditions of the agreement.
38
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standard No. 114 "Accounting by Creditors for Impairment of a Loan"
(FAS 114) and Statement of Financial Accounting Standard No. 118 "Accounting
by Creditors for Impairment of a Loan -- Income Recognition and Disclosures"
(FAS 118). A loan is considered impaired, based on current information and
events, if it is probable that the Corporation will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. FAS 114 and FAS 118 do not apply to
certain groups of small-balance homogenous loans which are collectively
evaluated for impairment and are generally represented by consumer and
residential mortgage loans or loans which are measured at fair value or at the
lower of cost or fair value. The Corporation generally identifies impaired
loans within the nonaccrual and restructured commercial and commercial real
estate portfolios on an individual loan-by-loan basis. The measurement of
impaired loans is generally based on the present value of expected future cash
flows discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral.
Certain non-refundable loan fees and direct costs of loan origination are
deferred at the time a loan is originated. Net deferred loan fees are
recognized as yield adjustments over the contractual life of the loan using
the interest method.
ALLOWANCE FOR POSSIBLE LOAN LOSSES - The allowance for possible loan losses is
increased by provisions charged to operating expense and decreased by
charge-offs, net of recoveries, and is available for losses incurred on loans.
The allowance is based on factors that include overall composition of loan
portfolio, types of loans, past loss experience, loan delinquencies, potential
substandard and doubtful credits, and such other factors that, in management's
best judgement, deserve evaluation in estimating potential loan losses.
SALES OF FIRST MORTGAGE LOANS AND LOAN SERVICING - The subsidiary bank sells
first mortgage loans on a non-recourse basis with yield rates to the buyer
based upon the current market rates which may differ from the contractual rate
on the loans sold. At the time that loans are sold (servicing retained), a
gain or loss is recorded which reflects the difference between the assumed
cash flow (prepayments are estimated) to be generated by the contractual
interest rates of the loans sold and the assumed cash flow resulting from the
yield to be paid to the buyer, adjusted for servicing and discounted to
reflect present value. Loan servicing fees are recognized over the lives of
the related loans. Loan servicing costs are charged to expense as incurred.
Loans held-for-sale are stated at the lower of aggregate cost or market. Real
estate loans serviced for others are not included in the accompanying
consolidated balance sheets.
In May 1995, the FASB issued Statement of Financial Accounting Standard No.
122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement
No. 65" (FAS 122). FAS 122 requires that a mortgage banking enterprise
recognize as separate assets the rights to service mortgage loans for others,
however those servicing rights are acquired, eliminating the previously
existing accounting distinction between servicing rights acquired through
purchase transactions and those acquired through loan originations. FAS 122
also requires the assessment of capitalized mortgage servicing rights for
impairment to be based on the current fair value of those rights. The
Corporation adopted FAS 122 effective January 1, 1995. At December 31, 1996
39
the fair value of the originated mortgage servicing rights was $151 and will
be amortized in future periods in proportion to, and over the period of,
estimated net servicing income similar to the interest method using an
accelerated amortization method. The amortization of capitalized mortgage
servicing rights is reflected in the statements of income as a reduction to
loan servicing fees and other charges.
NEW ACCOUNTING STANDARD - The FASB issued Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities," which requires an entity to recognize the financial and
servicing assets it controls and the liabilities it has incurred and to
derecognize financial assets when control has been surrendered in accordance
with the criteria provided in the Statement. The Corporation will apply the
new rates prospectively to transactions beginning in the first quarter of
1997. Based on current circumstances, the Corporation believes the
application of the new rules will not have a material impact on the financial
statements.
PREMISES AND EQUIPMENT - Premises and equipment are carried at cost, less
accumulated depreciation. Depreciation is computed on the straight-line basis
over the estimated useful lives of the assets, as follows: buildings, fifteen
to forty years; equipment, three to fifteen years. The carrying amounts of
assets sold or retired and the related allowance for depreciation are
eliminated from the accounts, and the resulting gains or losses are reflected
in income.
OTHER REAL ESTATE - Other real estate, which is included in other assets in
the consolidated balance sheets, represents assets to which the Corporation's
subsidiary bank has acquired legal title in satisfaction of indebtedness.
Such real estate is recorded at cost or its fair market value at the date of
acquisition, less estimated selling costs, whichever is lower. Subsequent
declines in estimated fair market value, based on changes in market
conditions, are recorded as expenses as incurred. Gains or losses on the
disposition of other real estate are recorded in the period in which they are
realized to other expenses.
EMPLOYEE BENEFIT PLANS - The subsidiary bank has a defined contribution
investment (401-K) plan. Under this plan, employees may elect to contribute,
on a tax-deferred basis, up to ten percent of their salary. In addition, the
subsidiary bank will match employees's contributions up to three percent of
each employee's salary.
The subsidiary bank also has a stock-purchase program in which the employee
contributes through payroll deductions. These amounts are pooled and used to
purchase shares of the Corporation's common stock on a quarterly basis.
Additionally, the subsidiary bank has a profit-sharing plan. Annual
contributions to the bank plan are based on a formula. The total contribution
is at the discretion of the Board of Directors.
INCOME TAXES - Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
40
NET INCOME PER SHARE - Net Income per share is computed by dividing net income
by the weighted average number of shares outstanding during the year.
CASH FLOWS - For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods.
2. CASH AND DUE FROM BANKS
The average compensating balances held at correspondent banks during 1996,
1995, and 1994 were $3,738, $3,703, and $5,307, respectively. The subsidiary
bank maintains such compensating balances with correspondent banks to offset
charges for services rendered by those banks. In addition, the Federal
Reserve Bank required the subsidiary bank to maintain average balances of
approximately $2,013, $1,334, and $738, for 1996, 1995, and 1994,
respectively, as a reserve requirement.
41
3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair value of available-for-sale and held-to-maturity securities by
major security type at December 31 were as follows:
1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Available-for-sale:
United States Treasury $ 45,150 $ 137 $ (20) $ 45,267
United States Government Agencies 28,249 112 (186) 28,175
State and Municipal 19,221 434 (14) 19,641
Other securities 12,818 92 (100) 12,810
-------- ------ ----- --------
Total 105,438 775 (320) 105,893
-------- ------ ----- --------
Held-to-maturity:
State and Municipal 11,135 94 (94) 11,135
-------- ------ ----- --------
Total $ 116,573 $ 869 $ (414) $ 117,028
======== ====== ===== ========
1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ----------- ---------
Available-for-sale:
United States Treasury $ 39,187 $ 90 $ (65) $ 39,212
United States Government Agencies 48,751 334 (457) 48,628
State and Municipal 16,297 465 (15) 16,747
Other securities 10,993 94 (78) 11,009
------- ----- ------ -------
Total 115,228 983 (615) 115,596
------- ----- ------ -------
Held-to-maturity:
State and Municipal 11,498 123 (120) 11,501
------- ----- ------ -------
Total $126,726 $1,106 $ (735) $127,097
======= ===== ===== =======
42
Maturities of investment securities classified as available-for-sale and
held-to-maturity were as follows at December 31, 1996:
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
Available-for-sale:
Due in one year or less $ 41,779 $ 41,827
Due after one year through five years 31,566 31,709
Due after five years through ten years 2,603 2,664
Due after ten years 9,282 9,440
------- -------
85,230 85,640
------- -------
United States Government Agency Mortgage-
Backed securities and collateralized mortgage obligations 19,530 19,548
Other (no stated maturity) 705 705
------- -------
$105,438 $105,893
======= =======
Held-to-maturity:
Due in one year or less $ 1,788 $ 1,795
Due after one year through five years 6,099 6,092
Due after five years through ten years 1,771 1,759
Due after ten years 1,477 1,489
------- -------
$ 11,135 $ 11,135
======= =======
Proceeds from sales of investment securities available-for-sale during
1996, 1995, and 1994 were $2,318, $16,991, and $17,867, respectively. Gross
gains of $15 in 1996, $238 in 1995, and $112 in 1994, and gross losses of $13
in 1996, $209 in 1995, and $24 in 1994, were realized on those sales. There
were no sales of investment securities held-to-maturity during 1996, 1995,
and 1994.
As of December 31, 1996, 1995, and 1994, the Corporation had $9.6, $11.8,
and $9.2 million, respectively, in structured notes, as defined by regulatory
agencies. These securities are obligations of U.S. Government agencies and
are comprised primarily of step-up bonds and deleveraged bonds. Step-up
bonds initially pay an above-market yield for a short noncall period; if not
called, the security steps-up to a higher coupon rate. The higher initial
yield is received because the investor has implicitly sold a call option.
Deleveraged bonds pay interest according to a formula based upon a fraction
on an increase of a specified index, such as the Constant Maturity Treasury
Rate (CMT). The deleveraging multiplier, for example 50% of 10 year CMT,
causes the coupon to lag overall movements in market yields. These
securities are carried in the Corporation's available-for-sale portfolio and
had unrealized losses of $119, $295, and $740 at December 31, 1996, 1995, and
1994, respectively, and will mature by December 31, 1997.
Certain investment securities are pledged to secure public and trust
deposits, and for other purposes required or permitted by law. The book
value of these pledged assets at December 31, 1996, 1995, and 1994 was
$68,072, $63,694, and $64,084, respectively.
43
On November 15, 1995, the Financial Accounting Standards Board issued its
Special Report on the implementation of FAS 115. Guidance in this special
report allowed entities to reclassify securities, including held-to-maturity
debt securities, without calling into question the intent of the entity to
hold debt securities to maturity in the future. The Special Report indicated
that the one-time reclassification permitted should occur as of a single date
between November 15, 1995 and December 31, 1995. In conjunction with the
provisions contained in the Special Report, the Corporation reclassified
approximately $13,867 of held-to-maturity securities, at amortized cost, into
the available-for-sale classification. Unrealized gains of approximately $78
were recognized as a result of this reclassification.
The Bank did not hold any securities of any one issuer, other than United
States Treasury and Agency obligations, for which the aggregate book value
exceeded 10% of stockholders' equity during any of the periods presented.
4. LOANS
The composition of the loan portfolio as of December 31 was as follows:
1996 1995
Gross loans:
Commercial $ 38,410 $ 34,687
Agricultural 36,030 33,106
Real estate-construction 4,160 3,116
Real estate-mortgage 142,004 124,350
Installment 37,514 37,434
------- -------
Total $258,118 $232,693
======= =======
Changes in the allowance for possible loan losses
for the years ended December 31 were as follows:
1996 1995 1994
Balance, January 1 $ 2,034 $ 2,100 $ 2,218
Allowance of banks acquired -0- -0- 280
Provision (credit) for possible loan losses 41 (101) (286)
Recoveries of loans previously charged off 920 598 256
Loans charged off (1,365) (563) (368)
------ ------ -------
Balance, December 31 $ 1,630 $ 2,034 $ 2,100
====== ====== =======
Loans on non-accrual status at December 31, 1996, 1995, and 1994 were
$1,157, $808, and $573, respectively. Interest income that would have been
recorded on these loans had they remained current was approximately $93, $49,
and $35, respectively.
44
Restructured loans at December 31, 1996, 1995, and 1994 were $0, $0, and
$384, respectively. For 1994, additional interest income that would have been
earned on these loans (had their terms not been restructured) was not
materially different than actual interest recognized. Interest rates on
restructured loans reflect changes in the original contractual rate and are
not considered to be significantly different than the rates on other loans.
At December 31, 1996 and 1995, the recorded investment in loans for which
impairment has been recognized in accordance with FAS 114 totaled $624 and
$189, respectively, all of which related to impaired loans which do not
require a related allowance for possible loan losses because the carrying
value of the loans exceeds the discounted present value of expected future
cash flows. For the year ended December 31, 1996 and 1995, the average
recorded investment in impaired loans was approximately $380 and $195,
respectively. Interest recognized on impaired loans during the portion of
the year that they were impaired is not considered material.
The Corporation's subsidiary bank had loans outstanding to directors,
executive officers, and to their related interests (related parties) of the
Corporation and its subsidiary of approximately $1,735, $1,180, and $892 at
December 31, 1996, 1995, and 1994, respectively. These loans were made in
the ordinary course of business on the same terms and conditions, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other customers and did not involve more than the normal
risk of collectibility. An analysis of the 1996 activity in loans made to
directors, executive officers, or principal holders of common stock or to any
associate of such persons for which the aggregate to any such person exceeds
$60,000 is as follows:
Balance Balance
January 1, 1996 Additions Payments December 31, 1996
--------------- --------- -------- -----------------
$1,180 $1,211 $ 656 $1,735
The Corporation services loans with unpaid principal balances at December
31, 1996, 1995, and 1994 of approximately $36,649, $33,072, and $27,967,
respectively. Additionally, the fair value of the originated mortgage
servicing rights was $151 at December 31, 1996 and $72 at December 31, 1995.
5. PREMISES AND EQUIPMENT
As of December 31, the components of premises and equipment (at cost),
less accumulated depreciation, were as follows:
1996 1995
Land $ 2,040 $ 1,836
Buildings 10,051 9,716
Furniture and Equipment 5,665 5,334
------- ------
17,756 16,886
Less accumulated depreciation 8,609 7,790
------- ------
Total $ 9,147 $ 9,096
======= ======
Depreciation expense charged to operating expense for 1996, 1995, and 1994
was $908, $803, and $793, respectively.
45
6. DEPOSITS
As of December 31, the aggregate amounts of time deposits in denominations
of $100 or more and the total interest expense for this category of time
deposits were as follows:
1996 1995 1994
Amount $34,712 $35,171 $32,059
Interest expense for the year 2,078 1,978 1,064
Total interest expense on deposits
was as follows:
1996 1995 1994
Interest-bearing demand $ 2,016 $ 2,310 $ 2,817
Savings 1,587 1,497 1,593
Time 10,170 9,906 7,850
------ ------ ------
Total $13,773 $13,713 $12,260
====== ====== ======
7. LONG-TERM BORROWINGS
The Corporation's long-term borrowings consisted of a note payable
totaling $4,350 and $4,700 at December 31, 1996 and 1995, respectively.
Proceeds of the note payable, which had an original balance of $6,000, were
used to fund the HOIIC acquisition and repay certain HOIIC indebtedness. An
additional $1,000 was borrowed in 1996 to partially fund the Sandwich
acquisition. The demand note carries a floating interest rate equal to the
lender's prime rate and is secured by 100% of the stock of Princeton.
Scheduled payments will be $600 annually through 2003, and $150 is scheduled
to be paid in 2004.
8. INCOME TAXES
Income tax expense (benefit) attributable to income from operations
consists of:
CURRENT DEFERRED TOTAL
------- -------- -----
Year ended December 31, 1996:
U.S. Federal $ 1,028 $ 18 $ 1,046
Year ended December 31, 1995:
U.S. Federal $ (415) $ (409) $ (824)
Year ended December 31, 1994:
U.S. Federal $ 1,138 $ (157) $ 981
There were no state income taxes for 1996, 1995 or 1994.
46
Income tax expense attributable to income from operations differed from the
amounts computed by applying the U.S. Federal income tax rate of 34 percent to
pretax income from operations as a result of the following:
1996 1995 1994
---- ---- ----
Computed "expected" tax expense $ 1,521 $ (159) $1,611
Increase (decrease) in income
taxes resulting from:
Tax-exempt income (554) (510) (500)
Non-deductible interest expense 68 45 54
Goodwill amortization 75 84 84
Other, net (64) (285) (268)
------ ----- ------
$ 1,046 $ (825) $ 981
====== ===== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are presented below:
1996 1995
---- ----
Deferred tax assets:
Deferred directors fees $ 120 $ 133
State NOL carryforwards 349 429
Other, net 15 42
----- ------
Total gross deferred tax assets 484 604
Less: Valuation allowance (148) (283)
------ ------
Net deferred tax assets 336 321
------ ------
Deferred tax liabilities:
Plant and equipment, principally due
to differences in depreciation (157) (102)
Provision for possible loan losses (436) (456)
Accretion ( 76) ( 43)
Core deposits ( 52) ( 49)
Unrealized gain on investment securities
available-for-sale (155) (125)
Purchase accounting adjustments (114) (152)
Other -0- -0-
----- ------
Total gross deferred tax liabilities (990) (927)
----- ------
Net deferred tax liabilities $ (654) $ (606)
===== ======
At December 31, 1996, the Corporation has net operating loss carryforwards
for state income tax purposes of approximately $7,400 which expire in the years
2002-2010 and are available to offset future state taxable income.
Approximately $2,600 of such carryforwards relate to purchased institutions.
47
The valuation allowance for deferred tax assets at December 31, 1995 was
$283. The net change in the total valuation allowance for the year ended
December 31, 1996 was a decrease of $135. Subsequently recognized tax benefits
of $125 relating to the valuation allowance for state net operating loss
carryforwards from purchased institutions will be utilized to reduce goodwill
from these purchases. The remaining $23 of valuation allowance relates
primarily to state net operating loss carryforwards which are available to
offset future state taxable income. Management believes that it is more likely
than not that the deferred tax assets, net of the valuation allowances, will be
realized.
9. REGULATORY MATTERS
The Corporation and its subsidiary bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and its subsidiary bank must meet specific capital
guidelines that involve quantitative measures of each entity's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Corporation's and its subsidiary bank's capital
amounts and classification are also subject to qualitative judgements by the
regulators about components, risk-weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and its subsidiary bank to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to average assets (as defined). As of December 31, 1996, the
Corporation and its subsidiary bank were both categorized as well capitalized
under the regulatory framework. There are no conditions or events since
year-end that management believes have changed the Corporation's or its
subsidiary bank's category.
48
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes: Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1996:
Total Capital (to risk-weighted assets):
Princeton National Bancorp, Inc. $36,121 13.88% $20,824 8.00% $26,029 10.00%
Citizens First National Bank 38,185 14.57 20,964 8.00 26,205 10.00
Tier 1 Capital (to risk-weighted assets):
Princeton National Bancorp, Inc. $34,491 13.25% $10,412 4.00% $15,618 6.00%
Citizens First National Bank 36,555 13.95 10,482 4.00 15,723 6.00
Tier 1 Capital (to average assets):
Princeton National Bancorp, Inc. $34,491 8.59% $16,486 4.00% $20,607 5.00%
Citizens First National Bank 36,555 8.91 16,413 4.00 20,517 5.00
49
10. EMPLOYEE BENEFIT PLANS
The subsidiary bank's contribution to the defined contribution investment
(401-K) plan for 1996, 1995, and 1994 was $129, $124, and $112, respectively.
The cost of the profit-sharing plan charged to operating expense was $162 in
1996, $9 in 1995, and $157 in 1994.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("FAS 107"),
"Disclosures about Fair Value of Financial instruments, requires all entities
to disclose the estimated fair value of its financial instrument assets and
liabilities. For the Corporation, as for most financial institutions, the
majority of its assets and liabilities are considered financial instruments as
defined in FAS 107. Many of the Corporation's financial instruments, however,
lack an available trading market as characterized by a willing buyer and
willing seller engaging in an exchange transaction. It is also the
Corporation's general practice and intent to hold its financial instruments to
maturity and not to engage in trading or sales activities except for loans
held-for-resale and available-for-sale securities. Therefore, significant
estimations and assumptions, as well as present value calculations, were used
by the Corporation for the purposes of this disclosure.
Estimated fair values have been determined by the Corporation using the best
available data and an estimation methodology suitable for each category of
financial instruments. For those loans and deposits with floating interest
rates it is presumed that estimated fair values generally approximate the
recorded book balances. The estimation methodologies used, the estimated fair
values, and the recorded book balances at December 31, 1996 and 1995, were as
follows:
1996 1995
------------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and due from banks $ 18,033 $ 18,033 $ 18,734 $ 18,734
Federal funds sold 3,100 3,100 5,700 5,700
Investment securities 116,573 117,028 126,726 127,097
Loans, net 259,150 259,007 231,383 231,793
Accrued interest receivable 5,725 5,725 5,505 5,505
------- ------- -------- --------
Total Financial Assets $402,581 $402,893 $388,048 $388,829
- ---------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES:
Non-interest-bearing demand deposits $ 41,258 $ 41,258 $ 39,315 $ 39,315
Interest-bearing deposits 317,443 318,681 306,970 308,518
Short-term borrowings 13,537 13,537 10,743 10,743
Accrued interest payable 1,937 1,937 1,864 1,864
Long-term borrowings 4,350 4,350 4,700 4,700
-------- -------- -------- --------
Total Financial Liabilities $378,525 $379,763 $363,592 $365,140
50
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices. Cash and due from banks, federal
funds sold, loans held-for-sale, and interest receivable are valued at book
value which approximates fair value.
Financial liability instruments with stated maturities have been valued
using a present value discounted cash flow with a discount rate approximating
current market for similar liabilities. Interest payable is valued at book
value which approximates fair value.
Financial instrument liabilities with no stated maturities have an
estimated fair value equal to both the amount payable on demand and the
recorded book balance.
The net loan portfolio has been valued using a present value discounted
cash flow. The discount rate used in these calculations is the current rate at
which similar loans would be made to borrowers with similar credit ratings,
same remaining maturities, and assumed prepayment risk.
Changes in assumptions or estimation methodologies may have a material
effect on these estimated fair values.
The Corporation's remaining assets and liabilities which are not
considered financial instruments have not been valued differently than has been
customary with historical cost accounting. No disclosure of the relationship
value of the Corporation's core deposit base is required by FAS 107. Because
the Corporation's 1996 cost of funds compares favorably with alternative
funding sources available to the Corporation, the relationship value of these
liabilities is believed by management to be significant. There is no material
difference between the notional amount and the estimated fair value of
off-balance-sheet items which total $44,649 and $43,847 at December 31, 1996
and December 31, 1995 respectively, and are primarily comprised of unfunded
loan commitments which are generally priced at market at the time of funding.
Fair value estimates are based on existing on and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the subsidiary bank has a substantial
trust department that contributes net fee income annually. The trust
department is not considered a financial instrument, and its value has not been
incorporated into the fair value estimates. Other significant assets and
liabilities that are not considered financial assets or liabilities include the
mortgage banking operation, brokerage network, deferred tax liabilities,
property, plant, equipment, and goodwill. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in many
of the estimates.
Management is concerned that reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques and numerous estimates which must be made given the absence of
active secondary markets for many of the financial instruments. This lack of
uniform valuation methodologies also introduces a greater degree of
subjectivity to these estimated fair values.
51
12. UNDISTRIBUTED EARNINGS OF SUBSIDIARY BANK
National banking regulations and capital guidelines limit the amount of
dividends that may be paid by banks. Due to the amount of dividends paid by
the subsidiary bank to the Corporation in 1996 and 1995, these regulations and
guidelines will not permit the subsidiary bank to distribute dividends in 1997
without prior approval from the national banking regulators. Future payment of
dividends by the subsidiary bank would be dependent on individual regulatory
capital requirements and levels of profitability. Since the Corporation is a
legal entity, separate and distinct from the bank, the dividends of the
Corporation are not subject to such bank regulatory guidelines.
13. COMMITMENTS AND CONTINGENCIES
The subsidiary bank is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contract amounts of
those instruments reflect the extent of involvement the subsidiary bank has in
particular classes of financial instruments.
The subsidiary bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments
to extend credit and standby letters of credit is represented by the
contractual notional amount of those instruments. The bank uses the same
credit policies in making commitments and conditional obligations as they do
for on-balance-sheet instruments. At December 31, 1996, commitments to extend
credit and standby letters of credit were approximately $44,253 and $396,
respectively.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The subsidiary bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary, by the subsidiary bank upon extension
of credit is based on management's credit evaluation of the counterparty.
Collateral held varies, but may include real estate, accounts receivable,
inventory, property, plant and equipment, and income-producing properties.
Standby letters of credit are conditional commitments issued by the
subsidiary bank to guarantee the performance of a customer to a third party.
The credit risk involved in issuing standby letters of credit is essentially
the same as that involved in extending loan facilities to customers. The
subsidiary bank secures the standby letters of credit with the same collateral
used to secure the loan.
There are various claims pending against the Corporation's subsidiary,
arising in the normal course of business. Management believes, based upon
consultation with counsel, that liabilities arising from these proceedings, if
any, will not be material to the Corporation's financial position.
52
14. SUBSIDIARY BANK TRUST DEPARTMENT
During the first quarter of 1995, the Corporation's subsidiary bank
decided to reimburse trust customers for losses in the market value of various
inverse floater securities held in their trust accounts. These losses were a
result of increases in interest rates which both extended the expected average
life and lowered the market value of these securities. As a result of
reimbursing customers for the market value loss, the Corporation recorded
charges totaling $5,043 ($3,126 after tax) to 1995 earnings.
In addition to the first quarter reimbursement, following a comprehensive
review of the subsidiary bank's trust department, a plan was implemented during
the third quarter of 1995 to provide for the purchase, on an ongoing basis, of
selected securities from the Trust Department by the Corporation. These
securities were purchased at the higher of current market value or original
cost to the individual trust customer. Purchased securities are held by the
Corporation in an available-for-sale account and will be held to maturity or
sold if market conditions permit or for liquidity purposes under the plan. The
excess, if any, of the cost of these securities to the Corporation over the
market value was expensed at the time of the purchase, resulting in a negative
effect on current income. For the years ended December 31, 1996 and 1995, the
Corporation incurred losses of $26 and $189, respectively, relating to the
purchase of these securities. This effect may be offset in the future by gains
from sales, or maturities of the securities, and/or possible proceeds from
claims that have been filed with the insurance carrier of the Corporation. At
December 31, 1996 and 1995, the market value of these available-for-sale
securities held by the Corporation was $930 and $1,971, respectively. As of
December 31, 1996, there were no additional securities remaining to be
purchased under the plan.
15. STOCK DIVIDENDS
In April, 1994, the Corporation declared a common stock split in the form
of a dividend at the rate of one additional half share of common stock for each
issued share of common stock resulting in 903,515 additional shares being
issued to stockholders of record on April 25, 1994. An additional amount of
retained earnings was transferred to common stock to properly reflect the
capitalization of the par value of the shares issued in accordance with legal
requirements. All share and per share data have been restated for all periods
presented to reflect the stock dividend.
16. ACQUISITIONS
On June 7, 1996, the Corporation acquired all of the deposits ($24.6
million), equipment, and facility of the Sandwich branch of Superior Bank, FSB
("Sandwich"). The acquisition of Sandwich was accounted for under the purchase
method of accounting and accordingly, the assets acquired were adjusted to
their fair market values as of the acquisition date. Goodwill and prepaid
acquisition costs in connection with this acquisition in the amount of $3,002
are being amortized over fifteen years on a straight-line basis. The
Corporation additionally entered into a three-year covenant not-to-compete in
the amount of $100, which is being amortized on a straight-line basis.
On January 7, 1994, the Corporation acquired Heart of Illinois Investment
Corp. ("Heart of Illinois"), a $70.3 million bank holding company with offices
in Spring Valley, Henry, Plano, and Princeton, Illinois, for a purchase price
of $4,131. At the time of the acquisition the subsidiary bank of that company
53
(Heart of Illinois Bank, FSB) was immediately merged into Citizens First
National Bank. The acquisition of Heart of Illinois was accounted for under the
purchase method of accounting, and accordingly, the assets and liabilities of
Heart of Illinois were adjusted to their fair market values as of the
acquisition date. The operating results of the acquired offices have been
consolidated with those of the Corporation from January 1, 1994. Goodwill in
connection with this acquisition in the original amount of $1,271 is being
amortized over fifteen years on a straight-line basis.
17. POST-RETIREMENT BENEFITS OTHER THAN PENSIONS
Effective January 1, 1995, the Corporation adopted Statement of Financial
Accounting Standard No. 106, "Employers' Accounting for Post-Retirement
Benefits Other than Pensions" (FAS 106). FAS 106 changes the practice of
accounting for post-retirement benefits on a pay-as-you-go (cash) basis by
requiring accrual of the expected cost of providing those benefits to an
employee, the employee's beneficiaries, and covered dependents. The expected
cost is to be accrued over the employee's period of service to the Corporation.
The Corporation's subsidiary bank offers its retirees the opportunity to
continue benefits in the subsidiary bank's Employee Health Benefit Plan
provided the retiree agrees to pay a portion of their monthly premiums. The
Corporation's level of contribution is based upon an age and service formula
and will provide benefits to active participants until age 65. The components
of the 1996 and 1995 net periodic post-retirement benefit cost are shown below:
1996 1995
---- ----
Service cost $ 26 $ 24
Interest cost 23 23
Net amortization of transition obligation 16 16
----- -----
Net periodic post-retirement benefit cost $ 65 $ 63
===== ======
As of December 31, 1996 and 1995, the accumulated post-retirement benefit
obligation totaled $328 and $327, respectively. For measurement purposes,
a 10% annual rate of increase in the cost of covered benefits (health care
cost trend rate) was assumed for 1996 and 1995 and the rate was further
assumed to decline to 5% after six years. The weighted average discount
rate used in determining the accumulated post-retirement benefit obligation
was 7% at December 31, 1996 and 1995.
54
18. CONDENSED FINANCIAL INFORMATION OF PRINCETON NATIONAL BANCORP, INC.
The following condensed financial statements are presented for the
Corporation alone (that is, without consolidation of the subsidiary bank's
financial information).
CONDENSED BALANCE SHEETS
December 31
--------------------------
1996 1995
ASSETS
Cash $ 87 $ 13
Interest-bearing deposits in subsidiary bank 938 302
Other assets 1,636 2,264
Investment in subsidiary bank 41,886 39,804
------ ------
TOTAL ASSETS $44,547 $42,383
====== ======
LIABILITIES
Long-term borrowings $ 4,350 $ 4,700
Other liabilities -0- 37
------ ------
TOTAL LIABILITIES 4,350 4,737
------ ------
STOCKHOLDERS' EQUITY
Common stock 13,800 13,800
Surplus 6,067 6,067
Retained earnings 20,250 17,857
Unrealized gain on investment securities
available-for-sale 300 243
Less: cost of treasury shares (220) (321)
------ ------
TOTAL STOCKHOLDERS' EQUITY 40,197 37,646
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,547 $42,383
====== ======
55
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
-------------------------------
1996 1995 1994
INCOME
Dividends received from subsidiary bank $2,350 $3,550 $1,975
Interest income 145 47 27
Gain on sale of investment securities 1 3 -0-
Other income -0- 13 11
------- ------- -------
TOTAL INCOME 2,496 3,613 2,013
------- ------- -------
EXPENSES
Interest expense 421 454 406
Amortization of goodwill and other intangible assets 63 63 63
Loss on purchase of investment securities 26 189 -0-
Other expenses 137 91 79
------- ------- -------
TOTAL EXPENSES 647 797 548
------- ------- -------
Income before income taxes and equity in
undistributed income of subsidiary bank 1,849 2,816 1,465
Applicable income taxes (benefit) (149) (228) (152)
------- ------- -------
Income before equity in undistributed
income of subsidiary bank 1,998 3,044 1,617
------- ------- -------
Equity in undistributed income (loss)
of subsidiary bank 1,429 (2,686) 2,141
------- ------- -------
NET INCOME $ 3,427 $ 358 $3,758
======= ======= =======
NET INCOME PER SHARE $ 1.26 $.13 $1.39
Weighted average shares outstanding 2,720,511 2,713,558 2,710,662
56
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
-------------------------------
1996 1995 1994
---- ---- ----
Operating activities:
Net income $3,427 $ 358 $ 3,758
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of investment securities,
net of accretion (4) (1) -0-
Loss on securities transactions, net 26 186 -0-
Equity in undistributed income 1,429) 2,686 (2,141)
Amortization of goodwill
and other intangible assets 63 63 63
Increase in other assets (987) (21) (212)
Increase (decrease) in other liabilities 7 (153) 12
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,103 3,118 1,480
------ ------ ------
Investing activities:
Proceeds from sales of investment securities
available-for-sale 1,067 281 -0-
Proceeds from maturities of investment securities
available-for-sale 196 2 -0-
Purchase of investment securities
available-for-sale (373) (2,309) -0-
Purchase of Heart of Illinois Inv. Corp.,
net of cash and cash equivalents acquired -0- -0- (3,859)
Payment of Heart of Illinois Inv. Corp.
liabilities at acquisition date -0- -0- (2,437)
------ ------- ------
NET CASH USED BY INVESTING ACTIVITIES 890 (2,026) (6,296)
------ ------- ------
Financing activities:
Payments for long-term borrowings (1,350) (600) (700)
Proceeds from long-term borrowings 1,000 -0- 6,000
Sale of treasury stock 101 109 -0-
Dividends paid (1,034) (977) (895)
------ ------ -------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (1,283) (1,468) 4,405
------ ------ -------
Increase (decrease) in cash and cash equivalents 710 (376) (411)
Cash and cash equivalents at beginning of year 315 691 1,102
------ ------ -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,025 $ 315 $ 691
====== ====== =======
57
INDEPENDENT AUDITORS' REPORT
KPMG Peat Marwick LLP
To the Board of Directors and Stockholders of Princeton National Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Princeton
National Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ending December 31,
1996. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Princeton National
Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the
three-year period ending December 31, 1996 in conformity with generally
accepted accounting principles.
KPMG PEAT MARWICK LLP
Chicago, Illinois
January 24, 1997
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information regarding executive officers of the Corporation is
included as a Supplementary Item at the end of Part I of this Form 10-K.
Information regarding executive officers and directors of the Corporation is
included in the Corporation's Definitive Proxy Statement for the Annual
Meeting of Stockholders to be held April 8, 1997 (the "Proxy Statement" under
the caption "Proposal 1-Election of Directors"), which information is hereby
incorporated by reference herein.
Information regarding compliance with Section 16(a) of the Exchange Act is
included in the Proxy Statement under the caption "Section 16(a) Beneficial
Ownership Compliance Reporting", which information is hereby incorporated by
reference herein.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is included in the Proxy
Statement under the captions "Proposal 1-Election of Directors--Board of
Directors and Committees", and "Executive Compensation -- Summary; -- Summary
Compensation Table; and Employment Agreements," which information is hereby
incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership is included in the Proxy Statement
under the captions "Election of Directors" and "Security Ownership of Certain
Beneficial Owners," which information is hereby incorporated by reference
herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding relationships and transactions is included in the Proxy
Statement under the caption "Certain Transactions," which information is hereby
incorporated by reference herein.
60
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following is a list of the Financial Statements included in Part
II, Item 8 of this report:
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Income for the years ended December 31,
1996, 1995 and 1994.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1995, and 1994.
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995, and 1994.
Notes to Consolidated Financial Statements.
Independent Auditors' Report
(a)(2) Financial Statement Schedules
No consolidated financial statement schedules are required to be
included in this Report on Form 10-K.
(a)(3) Exhibits
The exhibits filed herewith are listed on the Exhibit Index filed as
part of this report on Form 10-K. Each management contract or compensatory
plan or arrangement of the Corporation listed on the Exhibit Index is
separately identified by an asterisk.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Corporation for the quarter ended
December 31, 1996.
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registration has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PRINCETON NATIONAL BANCORP, INC.
By: /s/ Tony J. Sorcic
-------------------------
Tony J. Sorcic
President and Chief Executive Officer
Date: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Tony J. Sorcic President and Chief Executive March 24, 1997
- ---------------------------------- Officer and Director
Tony J. Sorcic (Principal Executive Officer)
/s/ Todd D. Fanning Controller March 24, 1997
- ---------------------------------- (Principal Financial and
Todd D. Fanning Accounting Officer)
/s/ Thomas R. Lasier Chairman of the Board March 24, 1997
- ----------------------------------
Thomas R. Lasier
Director
- ----------------------------------
Don S. Browning
Director
- ----------------------------------
John Ernat
/s/ Donald E. Grubb Director March 24, 1997
- ----------------------------------
Donald E. Grubb
/s/ Dr. Harold C. Hutchinson, Jr. Director March 24, 1997
- ----------------------------------
Dr. Harold C. Hutchinson, Jr.
/s/ Thomas M. Longman Director March 24, 1997
- ----------------------------------
Thomas M. Longman
/s/ Stephen W. Samet Director March 24, 1997
- ----------------------------------
Stephen W. Samet
Director
- ----------------------------------
Ervin L. Pietsch
/s/ Craig O. Wesner Director March 24, 1997
- ----------------------------------
Craig O. Wesner
62
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- ------- --------
3.1 Amended and Restated Certificate of Incorporation of Princeton
National Bancorp, Inc. ("PNB") (incorporated by reference to
Exhibit 3.1 to the PNB Registration Statement on Form S-1
(Registration No. 33-46362) (the "S-1 Registration Statement")).
3.2 By-Laws of PNB (as amended through January 23, 1995), (incorporated
by reference to Exhibit 3.2 to the PNB Annual Report on Form 10-K
for the year ended December 31, 1995 (the "1995 Form 10-K")).
10.1* Employment Agreement, dated as of October 16, 1995, between PNB and
Tony J. Sorcic (incorporated by reference to Exhibit 10.1 to the
1995 Form 10-K).
10.2* Employment Agreement, dated as of July 10, 1995, between PNB and
D. E. Van Ordstrand (incorporated by reference to Exhibit 10.2 to
the 1995 Form 10-K).
10.3* Citizens First National Bank Profit Sharing Plan, as amended and
restated January 1, 1989 (incorporated by reference to Exhibit 10.4
to the S-1 Registration Statement).
10.4* Citizens First National Bank Defined Contribution Plan and Trust, as
amended and restated January 1, 1989 (incorporated by reference to
Exhibit 10.5 to the S-1 Registration Statement).
21 Subsidiaries of PNB.
27 Financial Data Schedule.
* Management contract or compensatory plan.