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 June 30, 2002
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 July 31, 2002, the registrant had outstanding 3,306,826 shares of
its $5 par value common stock.
Page 1 of 17 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: Notes to Consolidated Financial Statements
Schedule 6: Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Princeton National Bancorp, Inc.
was held on April 9, 2002, for the purpose of electing four directors each to
serve for a term of three years. Proxies for the meeting were solicited by
Management pursuant to Regulation 14A under the Securities Exchange Act of 1934,
and there was no solicitation in opposition to Management's solicitation.
All four of Management's nominees for director listed in the proxy
statement were elected. The results of the vote were as follows:
Shares
Voted Shares
"For" "Withheld" Abstain
-------------- ------------ ------------
Craig O. Wesner 2,539,579 3,467 209,644
Don S. Browning 2,292,941 250,105 209,644
Donald E. Grubb 2,494,518 48,528 209,644
Ervin I. Pietsch 2,541,999 1,047 209,644
In addition, the following directors' terms of offices continued after
the meeting:
Gary C. Bruce Thomas R. Lasier
Sharon L. Covert Thomas M. Longman
John R. Ernat James B. Miller
Dr. Harold C. Hutchinson, Jr. Stephen W. Samet
Mark Janko Tony J. Sorcic
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Tony J. Sorcic
99.2 Certification of Todd D. Fanning
(b) No reports on Form 8-K were filed by the Corporation for the
quarter ended June 30, 2002.
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: August 12, 2002 By /s/ Tony J. Sorcic
-----------------------------------------
Tony J. Sorcic
President & Chief Executive Officer
Date: August 12, 2002 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)
JUNE 30, DECEMBER 31,
2002 2001
--------- ---------
ASSETS
Cash and due from banks $ 12,348 $ 16,740
Interest-bearing deposits with financial institutions 1,172 6,586
Federal funds sold 6,500 10,400
--------- ---------
Total cash and cash equivalents 20,020 33,726
Loans held for sale, at lower of cost or market 2,390 8,490
Investment securities:
Available-for-sale, at fair value 145,972 128,605
Held-to-maturity, at amortized cost 14,107 16,055
--------- ---------
Total investment securities 160,079 144,660
--------- ---------
Loans:
Gross loans, net of unearned interest 347,956 333,399
Allowance for loan losses (2,725) (2,300)
--------- ---------
Net loans 345,231 331,099
--------- ---------
Premises and equipment, net of accumulated depreciation 13,687 13,766
Bank-owned life insurance 13,317 12,452
Interest receivable 4,901 5,799
Goodwill, net of accumulated amortization 3,119 3,218
Intangible assets, net of accumulated amortization 845 668
Other assets 1,293 1,447
--------- ---------
TOTAL ASSETS $ 564,882 $ 555,325
========= =========
LIABILITIES
Deposits:
Demand $ 47,932 $ 58,378
Interest-bearing demand 129,661 116,587
Savings 53,331 51,966
Time 258,305 254,807
--------- ---------
Total deposits 489,229 481,738
Borrowings:
Customer repurchase agreements 9,913 12,217
Advances from Federal Home Loan Bank 6,067 6,451
Interest-bearing demand notes issued to the U.S. Treasury 1,623 377
Notes payable 1,450 1,550
--------- ---------
Total borrowings 19,053 20,595
Other liabilities 5,602 5,492
--------- ---------
TOTAL LIABILITIES 513,884 507,825
--------- ---------
STOCKHOLDERS' EQUITY
Common stock: $5 par value, 7,000,000 shares
authorized; 4,139,841 issued 20,699 20,699
Surplus 6,451 6,416
Retained earnings 34,168 31,937
Accumulated other comprehensive income, net of tax 1,753 537
Less: Cost of 833,018 and 835,831 treasury shares at
June 30, 2002 and December 31, 2001, respectively (12,073) (12,089)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 50,998 47,500
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 564,882 $ 555,325
========= =========
SEE ACCOMPANYING NOTES 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 Six Months
Ended June 30 Ended June 30
2002 2001 2002 2001
---------- ---------- ---------- ----------
INTEREST INCOME:
Interest and fees on loans $ 6,264 $ 7,165 $ 12,545 $ 14,618
Interest and dividends on investment securities 1,900 1,769 3,811 3,520
Interest on federal funds sold 35 35 70 88
Interest on interest-bearing time deposits in other banks 19 34 44 59
---------- ---------- ---------- ----------
Total interest income 8,218 9,003 16,470 18,285
INTEREST EXPENSE:
Interest on deposits 3,213 4,241 6,661 8,658
Interest on borrowings 129 388 272 871
---------- ---------- ---------- ----------
Total interest expense 3,342 4,629 6,933 9,529
---------- ---------- ---------- ----------
NET INTEREST INCOME 4,876 4,374 9,537 8,756
Provision for loan losses 150 25 375 75
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,726 4,349 9,162 8,681
NON-INTEREST INCOME:
Trust & farm management fees 280 274 583 602
Service charges on deposit accounts 655 575 1,326 1,096
Service charges on loans 25 76 68 182
Other service charges 124 79 247 233
Gain on sales of securities available-for-sale 1 108 41 203
Brokerage fee income 165 218 344 304
Mortgage banking income 278 236 549 389
Other operating income 211 85 474 309
---------- ---------- ---------- ----------
Total non-interest income 1,739 1,651 3,632 3,318
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,430 2,318 4,871 4,568
Occupancy 303 282 601 557
Equipment expense 371 321 727 630
Federal insurance assessments 53 49 106 98
Goodwill amortization 49 105 98 210
Intangible assets amortization 3 3 6 6
Data processing 187 162 371 313
Other operating expense 859 871 1,710 1,743
---------- ---------- ---------- ----------
Total non-interest expense 4,255 4,111 8,490 8,125
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,210 1,889 4,304 3,874
Income tax expense 627 580 1,203 1,086
---------- ---------- ---------- ----------
NET INCOME $ 1,583 $ 1,309 $ 3,101 $ 2,788
========== ========== ========== ==========
NET INCOME PER SHARE:
Basic 0.48 0.40 0.94 0.83
Diluted 0.48 0.39 0.93 0.83
Basic weighted average shares outstanding 3,305,532 3,312,858 3,304,989 3,356,194
Diluted weighted average shares outstanding 3,325,099 3,322,210 3,321,616 3,364,569
SEE ACCOMPANYING NOTES 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 Six Months
Ended June 30 Ended June 30
2002 2001 2002 2001
------- ------- ------- -------
Net Income 1,583 $ 1,309 $ 3,101 $ 2,788
Other comprehensive income, net of tax
Unrealized holding gain (loss) arising during the period 1,936 (123) 1,242 495
Less: Reclassification adjustment for realized gains
included in net income (1) (66) (26) (124)
------- ------- ------- -------
Other comprehensive income 1,935 (189) 1,216 371
------- ------- ------- -------
Comprehensive income 3,518 $ 1,120 $ 4,317 $ 3,159
======= ======= ======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Six Months Ended
Ended June 30
2002 2001
-------- --------
Balance, January 1 $ 47,500 $ 47,476
Net income 3,101 2,788
Cash dividends ($0.26 per share in 2002, and $.50 per share in 2001) (859) (1,683)
Other comprehensive income, net of tax 1,216 371
Purchases of treasury stock (0 shares in 2002, and 186,000 shares in 2001) 0 (2,912)
Exercise stock options and re-issuance of treasury stock
(686 shares in 2002 and 0 in 2001) 2 0
Sales of treasury stock (2,127 shares in 2002, and 2,606 shares in 2001) 38 41
-------- --------
Balance, June 30 $ 50,998 $ 46,081
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Six Months
Ended June 30
2002 2001
-------- --------
OPERATING ACTIVITIES:
Net income $ 3,101 $ 2,788
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 732 590
Provision for loan losses 375 75
Amortization of goodwill 98 210
Amortization of other intangible assets 6 6
Amortization of premiums on investment
securities, net of accretion 407 5
Gain on securities transactions, net (41) (203)
Gain on sale of premises and equipment 0 (122)
FHLB stock dividends (46) (57)
Loans originated for sale (9,166) (8,395)
Proceeds from sales of loans originated for sale 15,266 7,492
(Decrease) increase in interest payable (381) 103
Decrease in interest receivable 898 1,205
Increase in other assets (893) (8,727)
Decrease in other liabilities (117) (1,261)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 10,239 (6,291)
-------- --------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale 1,308 15,206
Proceeds from maturities of investment securities available-for-sale 22,855 14,510
Purchase of investment securities available-for-sale (38,394) (31,236)
Proceeds from maturities of investment securities held-to-maturity 1,105 531
Purchase of investment securities held-to-maturity (789) (1,275)
Proceeds from sales of premises and equipment 0 175
Net (increase) decrease in loans (14,507) 3,098
Purchases of premises and equipment (653) (1,712)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (29,075) (703)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposits 7,491 18,519
Net decrease in borrowings (1,542) (5,852)
Dividends paid (859) (1,683)
Purchases of treasury stock 0 (2,912)
Exercise stock options 2 0
Sales of treasury stock 38 41
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,130 8,113
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (13,706) 1,119
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,726 18,979
-------- --------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 20,020 $ 20,098
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,314 $ 9,426
Income taxes $ 943 $ 1,779
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
Schedule 5
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes 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 2001
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. Certain
amounts in the 2001 consolidated financial statements have been reclassified to
conform to the 2002 presentation.
(1) 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 Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator:
Net income $ 1,583 $ 1,309 $ 3,101 $ 2,788
Denominator:
Basic earnings per share-
weighted average shares 3,305,532 3,312,858 3,304,989 3,356,194
Effect of dilutive securities-
stock options 19,567 9,352 16,627 8,375
---------- ---------- ---------- ----------
Diluted earnings per share-
adjusted weighted average shares 3,325,099 3,322,210 3,321,616 3,364,569
Net income per share:
Basic $ 0.48 $ 0.40 $ 0.94 $ 0.83
Diluted $ 0.48 $ 0.39 $ 0.93 $ 0.83
8
(2) IMPACT OF NEW ACCOUNTING STANDARDS
--------------------------------------
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 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. As required under
FAS 142, the Corporation adopted FAS 142 effective January 1, 2002. The
Corporation completed its evaluation for impairment of goodwill during the six
months ended June 30, 2002. No impairment was deemed necessary as a result of
the Corporation's analysis. The balance of goodwill, net of accumulated
amortization, totaled $3,218,000 at December 31, 2001. Of this amount,
$1,355,000, which had annual amortization of $226,000, will no longer be
amortized. The remaining balance of $1,863,000 relates to branch acquisitions
and, in accordance with the pronouncement, will continue to be amortized. The
amortization expense for the second quarter of 2002 was $49,000 and $98,000 for
the first six months of 2002. The amortization expense will be approximately
$98,000 for the remainder of 2002 and will be approximately $196,000 for each of
the next five years.
The following is a summary of net income and earnings per share for the
three and six months ended June 30, 2002 and 2001, as adjusted to remove the
amortization of goodwill:
Three Months Ended June 30, Six Months Ended, June 30
--------------------------- -------------------------
(in thousands, except per share data) 2002 2001 2002 2001
Net Income As Reported $ 1,583 $ 1,309 $ 3,101 $ 2,788
Add back goodwill amortization -- 57 -- 114
Net income as adjusted $ 1,583 $ 1,366 $ 3,101 $ 2,902
Basic Earnings Per Share As Reported $ 0.48 $ 0.40 $ 0.94 $ 0.83
Add back goodwill amortization -- .01 -- .03
Net income as adjusted $ 0.48 $ 0.41 $ 0.94 $ 0.86
Diluted Earnings Per Share As Reported $ 0.48 $ 0.39 $ 0.93 $ 0.83
Add back goodwill amortization -- .02 -- .03
Net income as adjusted $ 0.48 $ 0.41 $ 0.93 $ 0.86
The following table summarizes the Corporation's intangible assets,
which are subject to amortization, as of June 30, 2002:
Gross Carrying Accumulated
Amount Amortization
------ ------------
Mortgage servicing rights $ 1,538 $ (765)
Other intangible assets 160 (88)
-------- -------
Total $ 1,698 $ (853)
======== =======
9
AGGREGATE AMORTIZATION EXPENSE:
For the Quarter Ended June 30, 2002 $ 60
For the Six Months Ended, June 30, 2002 $ 124
Amortization expense for mortgage servicing rights is included as part
of mortgage banking income.
ESTIMATED AMORTIZATION EXPENSE:
For the Six Months Ended December 31, 2002 $ 123
For the Year Ended December 31, 2003 $ 214
For the Year Ended December 31, 2004 $ 167
For the Year Ended December 31, 2005 $ 126
For the Year Ended December 31, 2006 $ 93
For the Year Ended December 31, 2007 $ 63
In June 2002, the FASB issued Statement 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This Statement
is effective for exit or disposal activities that are initiated after December
31, 2002. Adoption of this statement is not expected to have a material effect
on the Corporation's consolidated financial statements.
10
Schedule 6
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 2002
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 six months ended June 30, 2002. This discussion
should be read in conjunction with the attached consolidated financial
statements and notes 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 second quarter of 2002 was $1,583,000, or basic and
diluted earnings per share of $0.48, as compared to net income of $1,309,000 in
the second quarter of 2001, or basic earnings per share of $0.40 (diluted
earnings per share of $0.39). This represents an increase of $274,000 (20.9%) or
$.08 per basic share (20.0%). For the first six months of 2002, net income was
$3,101,000, or basic earnings per share of $0.94 (diluted earnings per share of
$0.93). Net income for the first six months of 2001 was $2,788,000, or basic and
diluted earnings per share of $0.83. This represents an increase of $313,000 (or
11.2%) during the first six months of 2002 over the same period in 2001, and an
increase of $0.11 per basic share (13.3%). Net income for the first six months
of 2002 was positively impacted by the discontinuing of a portion of the
Corporation's goodwill (consistent with the provisions of FAS 142) of $114,000,
as well as an improving net interest margin and increased fee income.
Additionally, net income for the first six months of 2001 includes a gain on
sale of premises of $122,000. The annualized return on average assets and return
on average equity were 1.16% and 12.97%, respectively, for the second quarter of
2002, compared with 1.02% and 11.55% for the second quarter of 2001. For the
six-month periods, the annualized return on average assets and average equity
were 1.14% and 12.92%, respectively for 2002, compared to 1.09% and 12.23%,
respectively for 2001.
11
Net interest income before provision for loan losses was $4,876,000 for
the second quarter of 2002, compared to $4,374,000 for the second quarter of
2001 (an increase of $502,000 or 11.5%). This increase is a result of both an
increase in average interest-earning assets over the past twelve months and an
improving net interest margin. For the three months ended June 30, 2002, average
interest-earning assets were $500.0 million compared to $474.4 million for the
three months ended June 30, 2001. Additionally, the net yield on
interest-earning assets (on a fully taxable equivalent basis) increased from
3.92% in the second quarter of 2001 to 4.17% in the second quarter of 2002.
Net interest income before provision for loan losses was $9,537,000 for
the first six months of 2002, compared to $8,756,000 for the first six months of
2001 (an increase of $781,000 or 8.9%). This increase is a result of an increase
in average interest-earning assets and an improving net interest margin. For the
six months ended June 30, 2002, average interest-earning assets were $498.5
million compared to $475.5 million for the six months ended June 30, 2001.
Additionally, the net yield on interest-earning assets (on a fully taxable
equivalent basis) increased from 3.93% in the first half of 2001 to 4.12% in the
first half of 2002.
PNBC recorded a loan loss provision of $150,000 in the second quarter
of 2002 compared to $25,000 in the second quarter of 2001. For the six-month
comparable periods, PNBC recorded a loan loss provision of $375,000 in 2002 and
$75,000 in 2001. 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.
Non-interest income totaled $1,739,000 for the second quarter of 2002,
as compared to $1,651,000 during the second quarter of 2001, an increase of
$88,000 (or 5.3%). The increase is a result of other operating income increasing
by $126,000 (or 148.2%) and service charges on deposit accounts increasing
$80,000 (or 13.9%). These increases more than offset a decrease in gains from
sales of securities available- for-sale of $107,000. For the six-month periods,
non-interest income totaled $3,632,000 in 2002, compared to $3,318,000 in 2001.
This represents an increase of $314,000 (or 9.5%). Once again, increases in
service charges on deposit accounts (increase of $230,000, or 21.0%) and other
operating income (increase of $165,000, or 53.4%) were the reason for the
increase, offsetting a decrease in gains from sales of available- for-sale
securities of $162,000 (or 79.8%). The increases in other operating income both
for the three-month and six-month comparable periods are due to the investment
by the Corporation in bank-owned life insurance policies in June, 2001, the
earnings from which are included in other operating income. Additionally, PNBC
recorded a $122,000 gain from the sale of the subsidiary bank's downtown Oglesby
branch building during the first six months of 2001.
Total non-interest expense for the second quarter of 2002 was
$4,255,000, an increase of $144,000 (or 3.5%) from $4,111,000 in the second
quarter of 2001. The largest increase was in salaries/employee benefits, which
increased $112,000 (or 4.8%). Equipment and data processing expenses also
increased from the second quarter of 2001 to the second quarter of 2002 by
$50,000 (15.6%) and $25,000 (15.4%), respectively. These increases offset the
decrease in goodwill amortization of $57,000 from the second quarter of 2001 as
compared to the second quarter of 2002. Year-to-date non-interest expenses for
2002 of $8,490,000 have increased $365,000 (or 4.5%) from the same period in
2001, but are at expected levels. The most notable increases are again in
salaries/employee benefits ($303,000 or 6.6%), equipment expense ($97,000 or
15.4%), and data processing ($58,000 or 18.5%), which were offset by the
decrease in goodwill amortization of $114,000 (or 54.3%).
12
INCOME TAXES
------------
Income tax expense totaled $627,000 for the second quarter of 2002, as
compared to $580,000 for the second quarter of 2001. For the first six months of
2002, income tax expenses were $1,203,000 compared to $1,086,000 for the first
six months of 2001. 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 28.0% for
the six months ended June 30, 2002 and June 30, 2001.
ANALYSIS OF FINANCIAL CONDITION
-------------------------------
Total assets at June 30, 2002 increased to $564,882,000 from
$555,325,000 at December 31, 2001 (an increase of $9.6 million or 1.7%). Total
deposits at June 30, 2002 increased to $489,229,000 from $481,738,000 from
December 31, 2001 (an increase of $7.5 million or 1.6%). In comparing categories
of deposits at June 30, 2002 to the December 31, 2001 totals, three categories
had increasing balances: interest- bearing demand deposits (increase of $13.1
million or 11.2%), time deposits (increase of $3.5 million or 1.4%), and savings
deposits (increase of $1.4 million or 2.6%), while demand deposits decreased by
$10.4 million (or 17.9%). 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 $20,595,000
at December 31, 2001 to $19,053,000 at June 30, 2002 (decrease of $1.5 million
or 8.1%). Investments totaled $160,079,000 at June 30, 2002, compared to
$144,660,000 at December 31, 2001 (an increase of $15.4 million or 10.7%).
Loan demand increased during the second quarter of 2002. Loan balances,
net of unearned interest, increased to $350,346,000 at June 30, 2002, compared
to $341,889,000 at December 31, 2001 (an increase of $8.5 million or 2.5%).
Non-performing loans totaled $6,872,000 or 1.96% of net loans at June 30, 2002,
as compared to $5,718,000 or 1.72% of net loans at December 31, 2001.
For the six months ended June 30, 2002, the subsidiary bank charged off
$289,000 of loans and had recoveries of $339,000, compared to charge-offs of
$461,000 and recoveries of $129,000 during the six months ended June 30, 2001.
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 June 30, 2002, the allowance
was $2,725,000 which is 39.7% of non-performing loans and 0.78% of total loans,
compared with $2,300,000 which was 40.2% of non-performing loans and 0.67% of
total loans at December 31, 2001.
At June 30, 2002, impaired loans totaled $5,582,000 compared to
$2,014,000 at December 31, 2001. Loans 90 days or more past due and still
accruing interest at June 30, 2002 were $10,000, compared to $42,000 at December
31, 2001. Although the balances of non-performing and impaired loans have
increased from the level of prior years, the total is concentrated in a few
credits that management believes will not result in any losses to the
Corporation. There is a specific loan loss reserve of $100,000 established for
an impaired loan as of June 30, 2002, while there were no specific loan loss
reserves established for impaired loans as of December 31, 2001. Subsequent to
June 30, 2002, one of the largest non-performing loans was transferred to other
real estate owned. PNBC's management analyzes the allowance for loan losses
monthly and believes the current level of allowance is adequate to meet probable
losses as of June 30, 2002.
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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
June 30, 2002 total risk-based capital of PNBC was 12.79%, compared to 12.29% at
December 31, 2001. The Tier 1 capital ratio increased from 8.10% at December 31,
2001, to 8.38% at June 30, 2002. Total stockholders' equity to total assets at
June 30, 2002 increased to 9.03% from 8.55% at December 31, 2001.
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 used for investing and financing activities, offset by
those provided by operating activities, resulted in a net decrease in cash and
cash equivalents of $13,706,000 from December 31, 2001 to June 30, 2002. This
decrease was due to a net increase in loans and investments, offset by a net
increase in deposits. For more detailed information, see PNBC's Consolidated
Statements of Cash Flows.
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,
2001, as reported in PNBC's 2001 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.
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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%.
Six Months Ended, June 30, 2002 Six Months Ended, June 30, 2001
------------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
AVERAGE INTEREST-EARNING ASSETS
Interest-bearing deposits $ 5,665 $ 44 1.57% $ 2,444 $ 59 4.87%
Taxable investment securities 98,778 2,592 5.29% 82,902 2,538 6.17%
Tax-exempt investment securities 49,493 1,847 7.53% 38,565 1,488 7.78%
Federal funds sold 8,740 70 1.62% 3,616 88 4.91%
Net loans 335,870 12,557 7.54% 347,975 14,634 8.48%
-------- -------- -------- --------
Total interest-earning assets 498,545 17,110 6.92% $475,502 18,807 7.98%
-------- -------- -------- --------
Average non-interest earning assets 51,770 41,135
-------- --------
Total average assets $550,315 $516,637
======== ========
AVERAGE INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits $120,506 1,095 1.83% $ 91,444 1,053 2.32%
Savings deposits 55,564 375 1.36% $ 47,331 473 2.02%
Time deposits 248,668 5,191 4.21% 248,684 7,132 5.78%
Interest-bearing demand notes
issued to the U.S. Treasury 993 8 1.63% 996 21 4.25%
Federal funds purchased and
securities repurchase agreements 11,397 62 1.10% 17,983 405 4.54%
Advances from Federal Home Loan Bank 6,330 173 5.52% 12,102 368 6.13%
Borrowings 1,523 29 3.81% 1,798 77 8.64%
-------- -------- -------- --------
Total interest-bearing liabilities 444,981 6,933 3.14% 420,338 9,529 4.57%
-------- -------- -------- --------
Net yield on average interest-earning assets $ 10,177 4.12% $ 9,278 3.93%
======== ========
Average non-interest-bearing liabilities 56,950 50,326
Average stockholders' equity 48,384 45,973
-------- --------
Total average liabilities and
stockholders' equity $550,315 $516,637
======== ========
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