FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
Commission File No. 0-20050
PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-32110283
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
606 S. MAIN STREET, PRINCETON, IL 61356
(Address of principal executive offices and Zip Code)
(815) 875-4444
(Registrant's telephone number, including area code)
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.
Yes ___X___ No _______
As of October 24, 2001, the registrant had outstanding 3,307,320 shares
of its $5 par value common stock.
Page 1 of 14 pages
PART I: FINANCIAL INFORMATION
The unaudited consolidated financial statements of Princeton National
Bancorp, Inc. and Subsidiary and management's discussion and analysis of
financial condition and results of operations are presented in the schedules as
follows:
Schedule 1: Consolidated Balance Sheets
Schedule 2: Consolidated Statements of Income and Comprehensive Income
Schedule 3: Consolidated Statements of Stockholders' Equity
Schedule 4: Consolidated Statements of Cash Flows
Schedule 5: Note to Consolidated Financial Statements
Schedule 6: Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) No reports on Form 8-K were filed by the Corporation for the quarter
ended September 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRINCETON NATIONAL BANCORP, INC.
Date: November 6, 2001 By /s/ Tony J. Sorcic
-----------------------------------
Tony J. Sorcic
President & Chief Executive Officer
Date: November 6, 2001 By /s/ Todd D. Fanning
-----------------------------------
Todd D. Fanning
Chief Financial Officer
2
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 1
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except share data)
SEPTEMBER 30, December 31,
2001 2000
------------ ------------
ASSETS
Cash and due from banks $ 23,358 $ 16,779
Federal funds sold 13,800 2,200
Loans held for sale, at lower of cost or market 4,544 3,912
Investment securities:
Available-for-sale, at fair value 116,543 105,440
Held-to-maturity, at amortized cost 13,864 13,677
------------ ------------
Total investment securities 130,407 119,117
------------ ------------
Loans:
Gross loans, net of unearned interest 341,471 347,147
Allowance for loan losses (2,201) (2,660)
------------ ------------
Net loans 339,270 344,487
------------ ------------
Premises and equipment, net of accumulated depreciation 13,810 12,952
Interest receivable 7,897 6,781
Goodwill and intangible assets, net of accumulated amortization 3,841 4,082
Other assets 13,774 4,870
------------ ------------
TOTAL ASSETS $ 550,701 $ 515,180
============ ============
LIABILITIES
Deposits:
Demand $ 54,964 $ 49,140
Interest-bearing demand 110,540 92,690
Savings 50,125 47,079
Time 252,246 236,395
------------ ------------
Total deposits 467,875 425,304
Borrowings:
Customer repurchase agreements 12,902 20,166
Advances from Federal Home Loan Bank 11,643 12,216
Interest-bearing demand notes issued to the U.S. Treasury 2,400 2,086
Notes payable 1,650 1,850
------------ ------------
Total borrowings 28,595 36,318
Other liabilities 6,179 6,082
------------ ------------
TOTAL LIABILITIES 502,649 467,704
------------ ------------
STOCKHOLDERS' EQUITY
Common stock: $5 par value, 7,000,000 shares
authorized; 4,139,841 issued 20,699 20,699
Surplus 6,399 6,364
Retained earnings 30,981 28,963
Accumulated other comprehensive income, net of tax 1,993 580
Less: Cost of 832,521 treasury shares at September 30, 2001
and 650,070 treasury shares at December 31, 2000 (12,020) (9,130)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 48,052 47,476
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 550,701 $ 515,180
============ ============
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
3
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 2
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
INTEREST INCOME:
Interest and fees on loans $ 7,342 $ 7,462 $ 22,549 $ 21,293
Interest and dividends on investment securities 1,780 1,713 5,300 4,987
Interest on short-term funds 143 25 290 187
------------ ------------ ------------ ------------
Total interest income 9,265 9,200 28,139 26,467
INTEREST EXPENSE:
Interest on deposits 4,303 4,035 12,961 11,328
Interest on borrowings 303 517 1,174 1,375
------------ ------------ ------------ ------------
Total interest expense 4,606 4,552 14,135 12,703
------------ ------------ ------------ ------------
NET INTEREST INCOME 4,659 4,648 14,004 13,764
Provision for loan losses 360 50 435 770
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,299 4,598 13,569 12,994
NON-INTEREST INCOME:
Trust & farm management fees 293 288 895 900
Service charges on deposit accounts 553 515 1,649 1,406
Other service charges 237 219 774 648
Loss on sale of loans 0 0 0 (259)
Gain on sales of securities available-for-sale 138 124 341 38
Loan servicing fees and other charges 92 24 213 68
Settlement of trust litigation 0 0 0 6,235
Gain on sale of fixed assets 0 0 122 0
Other operating income 219 64 406 296
------------ ------------ ------------ ------------
Total non-interest income 1,532 1,234 4,400 9,332
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,358 2,203 6,926 6,421
Occupancy 324 241 881 744
Equipment expense 321 302 951 933
Federal deposit insurance assessments 49 47 147 141
Goodwill and intangible assets amortization 108 109 324 326
Data processing 152 142 465 433
Other operating expense 842 1,049 2,724 2,955
------------ ------------ ------------ ------------
Total non-interest expense 4,154 4,093 12,418 11,953
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 1,677 1,739 5,551 10,373
Income tax expense 401 509 1,487 3,567
------------ ------------ ------------ ------------
NET INCOME $ 1,276 $ 1,230 $ 4,064 $ 6,806
============ ============ ============ ============
NET INCOME PER SHARE:
Basic 0.39 0.35 1.22 1.93
Diluted 0.38 0.35 1.21 1.91
Basic weighted average shares outstanding 3,306,408 3,486,565 3,339,416 3,529,818
Diluted weighted average shares outstanding 3,317,433 3,521,015 3,348,629 3,564,268
Dividends per share 0.110 0.095 0.610 0.280
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
4
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net Income 1,276 $ 1,230 $ 4,064 $ 6,806
Other comprehensive income, net of tax
Unrealized holding gain arising during the period 1,127 421 1,622 606
Less: Reclassification adjustment for realized gains
included in net income (85) (76) (209) (23)
---------- ---------- ---------- ----------
Other comprehensive income 1,042 345 1,413 583
---------- ---------- ---------- ----------
Comprehensive income 2,318 $ 1,575 $ 5,477 $ 7,389
========== ========== ========== ==========
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
5
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Nine Months
Ended September 30
2001 2000
---------- ----------
Balance, January 1 $ 47,476 $ 40,946
Net income 4,064 6,806
Cash dividends ($0.61 per share in 2001, and $.28 per share in 2000) (2,046) (992)
Other comprehensive income, net of tax 1,413 583
Purchases of treasury stock (186,000 shares in 2001, and 183,386 (2,912) (1,990)
shares in 2000)
Sales of treasury stock (3,549 shares in 2001, and 2,890 shares in 2000) 57 33
---------- ----------
Balance, September 30 $ 48,052 $ 45,386
========== ==========
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
6
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Nine Months
Ended September 30
2001 2000
---------- ----------
OPERATING ACTIVITIES:
Net income $ 4,064 $ 6,806
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 906 856
Provision for loan losses 435 770
Amortization of goodwill and intangible assets 324 326
Amortization of premiums on investment
securities, net of accretion 47 52
Gain on securities transactions, net (341) (38)
Loans originated for sale (14,921) (3,923)
Proceeds from sales of loans originated for sale 14,289 7,482
Loss on sale of loans 0 (259)
Gain on sale of fixed assets (122) 0
Increase in interest payable 61 272
Increase in interest receivable (1,116) (1,370)
Increase in other assets (8,987) (984)
(Decrease) increase in other liabilities (858) 644
---------- ----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (6,219) 10,634
---------- ----------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale 20,341 4,758
Proceeds from maturities of investment securities available-for-sale 24,779 26,224
Purchase of investment securities available-for-sale (53,185) (30,581)
Proceeds from maturities of investment securities held-to-maturity 876 1,055
Purchase of investment securities held-to-maturity (1,500) (2,752)
Proceeds from sales of fixed assets 175 0
Proceeds from sales of other real estate owned 0 160
Net decrease (increase) in loans 4,782 (27,310)
Purchases of premises and equipment (1,817) (1,689)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (5,549) (30,135)
---------- ----------
FINANCING ACTIVITIES:
Net increase in deposits 42,571 12,106
Net decrease in borrowings (7,723) (1,512)
Dividends paid (2,046) (992)
Purchases of treasury stock (2,912) (1,990)
Sales of treasury stock 57 33
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,947 7,645
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,179 (11,856)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,979 27,225
---------- ----------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $ 37,158 $ 15,369
========== ==========
------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 14,074 $ 11,209
Income taxes $ 1,954 $ 3,255
Supplemental disclosures of non-cash flow activities:
Loans transferred to other real estate owned $ 0 $ 177
SEE ACCOMPANYING NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
7
Schedule 5
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
Note to Consolidated Financial Statements
(Unaudited)
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information required by accounting principles generally accepted in the United
States of America for complete financial statements and related footnote
disclosures. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered for a fair presentation of the results for
the interim period have been included. For further information, refer to the
consolidated financial statements and notes included in the Registrant's 2000
Annual Report on Form 10-K. Results of operations for interim periods are not
necessarily indicative of the results that may be expected for the year.
EARNINGS PER SHARE CALCULATION
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated (in thousands, except share data):
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
2001 2000 2001 2000
---- ---- ---- ----
Numerator:
Net income $ 1,276 $ 1,230 $ 4,064 $ 6,806
Denominator:
Basic earnings per share-
weighted average shares 3,306,408 3,486,565 3,339,416 3,529,818
Effect of dilutive securities-
stock options 11,025 34,450 9,213 34,450
---------- ---------- ---------- ----------
Diluted earnings per share-
adjusted weighted average
shares 3,317,433 3,521,015 3,348,629 3,564,268
Net income per share:
Basic $ 0.39 $ 0.35 $ 1.22 $ 1.93
Diluted $ 0.38 $ 0.35 $ 1.21 $ 1.91
8
Schedule 6
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2001
The following discussion provides information about Princeton National
Bancorp, Inc.'s ("PNBC" or the "Corporation") financial condition and results of
operations for the quarter and nine months ended September 30, 2001. This
discussion should be read in conjunction with the attached consolidated
financial statements and note thereto. Certain statements in this report
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including, but not limited to those statements that include the words
"believes", "expects", "anticipates", "estimates", or similar expressions. PNBC
cautions that such forward-looking statements involve risks and uncertainties
that may cause actual results to differ materially from those expressed or
implied. Such risks and uncertainties include potential change in interest
rates, competitive factors in the financial services industry, general economic
conditions, the effect of new legislation, and other risks detailed in documents
filed by the Corporation with the Securities and Exchange Commission from time
to time.
RESULTS OF OPERATIONS
Net income for the third quarter of 2001 was $1,276,000, or basic
earnings per share of $0.39 (diiluted earnings per share of $0.38) as compared
to net income of $1,230,000 in the third quarter of 2000, or basic and diluted
earnings per share of $0.35. This represents an increase of $46,000 (3.7%) or
$.04 per basic share (11.4%). For the first nine months of 2001, net income was
$4,064,000, or basic earnings per share of $1.22 (diluted earnings per share of
$1.21). Net income for the first nine months of 2000 was $6,806,000, or basic
earnings per share of $1.93 (diluted earnings per share of $1.91). Net income
was higher during the first nine months of 2000 due to PNBC's subsidiary bank
receiving $6,234,888 in March, 2000, which represented the settlement proceeds
from the lawsuit against Cincinnati Insurance Company. The annualized return on
average assets and return on average equity were 0.94% and 10.88%, respectively,
for the third quarter of 2001, compared with 0.99% and 11.01% for the third
quarter of 2000. For the nine-month periods, the annualized return on average
assets and average equity were 1.04% and 11.77%, respectively, for 2001,
compared to 1.88% and 21.08% in 2000, which includes the proceeds from the
aforementioned lawsuit.
Net interest income before provision for loan losses was $4,659,000 for
the third quarter of 2001, compared to $4,648,000 for the third quarter of 2000
(an increase of $11,000 or 0.2%). With the declining interest-rate environment,
this increase is again a result of an increase in average interest-earning
assets.
9
For the three months ended September 30, 2000, average interest-earning assets
were $452.6 million compared to $486.9 million for the three months ended
September 30, 2001. This increase more than offset the decrease in the net yield
on interest-earning assets (on a fully taxable equivalent basis) from 4.34% in
the third quarter of 2000 to 4.03% in the third quarter of 2001. While the
effect of falling rates is more immediate with respect to adjustable-rate loans,
PNBC is positioned for an improving net interest margin in future quarters as
certificate of deposit repricing opportunities occur.
For the nine-month periods, net interest income before provision for
loan losses was $14,004,000 for 2001, as compared to $13,764,000 for 2000,
representing an increase of $240,000 (or 1.7%). Again, the nine- month increase
is due to an increase in average interest-earning assets from $445.3 million for
the nine months ended September 30, 2000, to $479.3 million for the nine months
ended September 30, 2001. For the comparative nine-month periods, the net yield
on interest-earnings assets (on a fully taxable-equivalent basis) is 4.13% in
2001, compared to 4.36% in 2000.
PNBC recorded a loan loss provision of $360,000 in the third quarter of
2001 compared to $50,000 in the third quarter of 2000. The provision expense
taken each quarter is determined by the risk characteristics of the loan
portfolio, as well as the net charge-off activity for the quarter. For the first
nine months of 2001, PNBC has recorded $435,000 in loan loss provision compared
to $770,000 for the same period in 2000.
Non-interest income totaled $1,532,000 for the third quarter of 2001,
as compared to $1,234,000 during the third quarter of 2000, an increase of
$298,000 (or 24.2%). Service charges on deposit accounts increased $38,000 (or
7.4%) during this time. Also, PNBC had $138,000 from gains on securities sales
for the third quarter of 2001, compared to $124,000 in the third quarter of
2000. Other operating income increased by $155,000 (or 242.2%) from the third
quarter of 2000 of $64,000 to the third quarter of 2001 of $219,000, due to an
increase in fee income from Prime Vest brokerage services as well as earnings
from bank-owned life insurance. Loan servicing fees increased from $24,000 in
the third quarter of 2000 to $92,000 in the third quarter of 2001 due to an
increase in loan refinancing activity. For the first nine months of 2001,
non-interest income was $4,400,000, a decrease of $4,932,000 (or 52.9%) from the
$9,332,000 reported in the first nine months of 2000. After excluding the
settlement from trust litigation of $6,235,000 from the 2000 total, non-
interest income increased by $1,303,000 (or 42.1%). Year-to-date, PNBC has
recorded net gains from sales of securities in the first nine months of 2001 of
$341,000, compared to $38,000 during the first nine months of 2000; and there
were no losses on loan sales in 2001, compared to a loss of $259,000 in 2000.
For the comparative nine-month periods, service charges on deposit accounts have
increased by $243,000 (17.3%), loan servicing fees have increased by $145,000
(213.2%), and other operating income has increased by $110,000 (37.2%).
Additionally, PNBC recorded a $122,000 gain from the sale of the subsidiary
bank's downtown Oglesby branch building during the first quarter of 2001.
Total non-interest expense for the third quarter of 2001 was
$4,154,000, an increase of $61,000 (or 1.5%) from $4,093,000 in the third
quarter of 2000. The largest increase was in salaries/employee benefits, which
increased $155,000 (or 7.0%), a result of adding the Huntley office location in
2001. Year-to-date non- interest expenses for 2001 of $12,418,000 have increased
$465,000 (or 3.9%) from the same period in 2000, but are at expected levels.
Again, with the addition of the Huntley office, the most notable increase is in
salaries and employee benefits which has increased $505,000 (or 7.9%) in
comparing the nine-month periods.
10
INCOME TAXES
Income tax expense totaled $401,000 for the third quarter of 2001, as
compared to $509,000 for the third quarter of 2000. For the first nine months of
2001, income tax expense was $1,487,000 compared to $3,567,000 for the first
nine months of 2000. The primary cause for the decrease for the nine-month
period was the impact of the settlement proceeds from the trust litigation
received in the first quarter of 2000. Additionally, PNBC also recognized a tax
benefit of approximately $90,000 from the previously mentioned sale of the
Oglesby facility in the first quarter of 2001. As a result, the effective tax
rate was 26.8% for the nine months ended September 30, 2001 compared to 34.4%
for the same period in 2000.
ANALYSIS OF FINANCIAL CONDITION
Total assets at September 30, 2001 increased to $550,701,000 from
$515,180,000 at December 31, 2000 (an increase of $35.5 million or 6.9%). Total
deposits have increased by $42,571,000 from December 31, 2000 to September 30,
2001 (or 10.0%). In comparing categories of deposits at September 30, 2001 to
the December 31, 2000 totals, all categories had increasing balances: time
deposits (increase of $15.8 million or 6.7%), interest-bearing demand deposits
(increase of $17.9 million or 19.3%), demand deposits (increase of $5.8 million
or 11.9%), and savings deposits (increase of $3.0 million or 6.5%). Borrowings,
consisting of customer repurchase agreements, notes payable, treasury, tax, and
loan ("TT&L") deposits, federal funds purchased, and Federal Home Loan Bank
advances, decreased from $36,318,000 at December 31, 2000 to $28,595,000 at
September 30, 2001 (decrease of $7.7 million or 21.3%). This decrease is
attributable to lower demand in customer repurchase agreements and TT&L
deposits, as well as scheduled repayments of Federal Home Loan Bank advances and
notes payable. Investments totaled $130,407,000 at September 30, 2001, compared
to $119,117,000 at December 31, 2000 (an increase of $11.3 million or 9.5%).
Loan demand, consistent with the economy in general, has slowed in the
first nine months of 2001. This, combined with seasonal pay downs, contributed
to a decrease in loan balances, net of unearned interest, to $346,015,000 at
September 30, 2001, compared to $351,059,000 at December 31, 2000 (a decrease of
$5.0 million or 1.4%). Non-performing loans totaled $4,050,000 or 1.17% of net
loans at September 30, 2001, as compared to $909,000 or 0.26% of net loans at
December 31, 2000.
For the nine months ended September 30, 2001, the subsidiary bank
charged off $1,114,000 of loans and had recoveries of $221,000, compared to
charge-offs of $397,000 and recoveries of $301,000 during the nine months ended
September 30, 2000. The allowance for 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 credits, and
such other factors that, in management's reasonable judgment, warrant
consideration. The adequacy of the allowance is monitored monthly. At September
30, 2001, the allowance was $2,201,000 which is 54.4% of non-performing loans
and 0.64% of total loans, compared with $2,660,000 which was 292.6% of
non-performing loans and 0.77% of total loans at December 31, 2000.
At September 30, 2001, impaired loans totaled $2,504,000 compared to
$513,000 at December 31, 2000, all of which related to impaired loans which do
not have a specific allowance, as the carrying value of the loans is less than
the discounted present value of expected future cash flows or collateral value.
Loans 90 days or more past due and still accruing interest at September 30, 2001
were $591,000, compared to $12,000 at December 31, 2000.
11
The current economic trend is a concern. The subsidiary bank's asset
quality ratios have declined during the quarter, as non-performing loans
increased to 1.17% of net loans, impaired loans increased to .72%, and net
charge-offs to .26%. Although these levels are higher, the increases in
non-accrual and impaired loans are primarily concentrated in a few loans. PNBC's
management analyzes the reserve for loan losses monthly and believes the current
level of allowance is adequate. PNBC will continue to focus on diversifying
revenue sources, resulting in net income being less dependent on the net
interest margin.
CAPITAL RESOURCES
Federal regulations require all financial institutions to evaluate
capital adequacy by the risk-based capital method, which makes capital
requirements more sensitive to the differences in the level of risk assets. At
September 30, 2001, total risk-based capital of PNBC was 12.03%, compared to
12.71% at December 31, 2000. The Tier 1 capital ratio decreased from 8.89% at
December 31, 2000, to 7.99% at September 30, 2001. Total stockholders' equity to
total assets at September 30, 2001 decreased to 8.73% from 9.22% at December 31,
2000.
During the first quarter of 2001, PNBC began the stock repurchase
program announced in December, 2000. As of September 30, a total of 186,000
shares have been repurchased, at an average cost of $15.65.
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 include cash flow from the repayment of loans.
Major uses of cash include the origination of loans and purchase of investment
securities. Cash flows provided by financing activities, offset by those used
for investing and operating activities, resulted in a net increase in cash and
cash equivalents of $18,179,000 from December 31, 2000 to September 30, 2001.
This increase was due to a net increase in deposits and a net decrease in loans,
partially offset by an net increase in investment securities and other assets as
well as a decrease in borrowings. For more detailed information, see PNBC's
Consolidated Statements of Cash Flows.
IMPACT OF NEW ACCOUNTING STANDARDS
In September, 2000, the FASB issued Statement 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
(FAS 140). FAS 140 supercedes and replaces Statement 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities".
Accordingly, FAS 140 is now the authoritative accounting literature for
transfers and servicing of financial assets and extinguishment of liabilities.
FAS 140 also includes several additional disclosure requirements in the area of
securitized financial assets and collateral arrangements. The provisions of FAS
140 related to transfers of financial assets are to be applied to all transfers
of financial assets occurring after March 31, 2001. The collateral recognition
and disclosure provisions in FAS 140 are effective for fiscal years ending after
December 15, 2000. The adoption of FAS 140 did not have a material impact on the
financial condition or results of operations of the Corporation.
In July 2001, the FASB issued Statement 141, "Business Combinations"
(FAS 141) and Statement 142, "Goodwill and Other Intangible Assets" (FAS 142).
FAS 141 required that all business combinations initiated
12
after June 30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. FAS 142 addresses the initial recognition
and measurement of intangible assets acquired outside of a business combination
and the accounting for goodwill and other intangible assets subsequent to their
acquisition. FAS 142 provides that intangible assets with finite useful lives be
amortized and that goodwill and intangible assets with indefinite lives will not
be amortized, but will rather be tested at least annually for impairment. FAS
142 is effective January 1, 2002 for calendar year companies, however, any
acquired goodwill or intangible assets recorded in transactions closed
subsequent to June 30, 2001 will be subject immediately to the non-amortization
and amortization provisions of FAS 142. As required under FAS 142, the Company
will discontinue the amortization of goodwill with an expected net carrying
value of approximately $3.1 million at the date of adoption and annual
amortization of $397,000 that resulted from business combinations prior to the
adoption of FAS 141. However, the Company continues to evaluate the additional
effect, if any, that adoption of FAS 141 and FAS 142 will have on the Company's
consolidated financial statements.
LEGAL PROCEEDINGS
There are various claims pending against PNBC's subsidiary bank,
arising in the normal course of business. Management believes, based upon
consultation with legal counsel, that liabilities arising from these
proceedings, if any, will not be material to PNBC's financial condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in market risk since December 31,
2000, as reported in PNBC's 2000 Annual Report on Form 10-K.
EFFECTS OF INFLATION
The consolidated financial statements and related consolidated
financial data presented herein have been prepared in accordance with accounting
principles generally accepted in the United States of America and practices
within the banking industry which require the measurement of financial condition
and operating results in terms of historical dollars, without considering the
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.
13
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
The following table sets forth (in thousands) details of average balances,
interest income and expense, and resulting annualized rates for the Corporation
for the periods indicated, reported on a fully taxable equivalent basis, using a
tax rate of 34%.
--------------------------------------------------------------------------------
NINE MONTHS ENDED, SEPT. 30, 2001 Nine Months Ended, Sept. 30, 2000
------------------------------------------------------------------------------
AVERAGE YIELD/ Average Yield/
BALANCE INTEREST COST Balance Interest Cost
---------- ---------- --------- ---------- ---------- ---------
AVERAGE INTEREST-EARNING ASSETS
Interest-bearing deposits $ 4,161 $ 120 3.87% $ 2,090 $ 89 5.69%
Taxable investment securities 83,525 3,782 6.05% 78,898 3,598 6.09%
Tax-exempt investment securities 39,394 2,301 7.81% 36,613 2,105 7.68%
Federal funds sold 5,777 170 3.93% 2,236 98 5.85%
Net loans 346,488 22,571 8.71% 325,506 21,339 8.76%
---------- ---------- ---------- ----------
Total interest-earning assets 479,346 28,944 8.07% $ 445,343 27,229 8.17%
---------- ---------- ---------- ----------
Average non-interest earning assets 44,184 38,781
---------- ----------
Total average assets $ 523,531 $ 484,124
========== ==========
AVERAGE INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits $ 95,736 1,681 2.35% $ 93,521 1,728 2.47%
Savings deposits 48,413 810 2.24% $ 51,680 786 2.03%
Time deposits 250,737 10,471 5.58% 214,697 8,814 5.48%
Interest-bearing demand notes
issued to the U.S. Treasury 1,091 31 3.78% 1,261 54 5.72%
Federal funds purchased and
securities repurchase agreements 16,419 507 4.13% 15,283 638 5.58%
Advances from Federal Home Loan Bank 12,005 549 6.12% 13,095 557 5.68%
Borrowings 1,764 87 6.59% 2,092 126 8.05%
---------- ---------- ---------- ----------
Total interest-bearing liabilities 426,166 14,135 4.43% 391,629 12,703 4.33%
---------- ---------- ---------- ----------
Net yield on average interest-earning assets $ 14,809 4.13% $ 14,526 4.36%
========== ==========
Average non-interest-bearing liabilities 51,197 49,362
Average stockholders' equity 46,167 43,133
---------- ----------
Total average liabilities and
stockholders' equity $ 523,531 $ 484,124
========== ==========
14