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, 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 October 24, 2002, the registrant had outstanding 3,230,082 shares of
its $5 par value common stock.
Page 1 of 20 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
Schedule 7: Controls and Procedures
PART II: OTHER INFORMATION
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 September 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: November 13, 2002 By /s/ Tony J. Sorcic
----------------------------------------
Tony J. Sorcic
President & Chief Executive Officer
Date: November 13, 2002 By /s/ Todd D. Fanning
----------------------------------------
Todd D. Fanning
Vice-President & Chief Financial Officer
2
CERTIFICATIONS
I, Tony J. Sorcic, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Princeton
National Bancorp, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition , results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiary, is
made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Tony J. Sorcic
-----------------------------------
Tony J. Sorcic
President & Chief Executive Officer
3
I, Todd D. Fanning, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Princeton
National Bancorp, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition , results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiary, is
made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Todd D. Fanning
----------------------------------------
Todd D. Fanning
Vice-President & Chief Financial Officer
4
Schedule 1
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except share data
SEPTEMBER 30, December 31,
2002 2001
----------- -----------
ASSETS
Cash and due from banks $ 15,939 $ 16,740
Interest-bearing deposits with financial institutions 902 6,586
Federal funds sold 2,150 10,400
----------- -----------
Total cash and cash equivalents 18,991 33,726
Loans held for sale, at lower of cost or market 3,917 8,490
Investment securities:
Available-for-sale, at fair value 151,558 128,605
Held-to-maturity, at amortized cost 14,700 16,055
----------- -----------
Total investment securities 166,258 144,660
----------- -----------
Loans:
Gross loans, net of unearned interest 349,494 333,399
Allowance for loan losses -2,747 -2,300
----------- -----------
Net loans 346,747 331,099
----------- -----------
Premises and equipment, net of accumulated depreciation 13,447 13,766
Bank-owned life insurance 13,465 12,452
Interest receivable 5,713 5,799
Goodwill, net of accumulated amortization 3,070 3,218
Intangible assets, net of accumulated amortization 69 78
Other real estate owned held for sale 3,413 0
Other assets 2,152 2,037
----------- -----------
TOTAL ASSETS $ 577,242 $ 555,325
=========== ===========
LIABILITIES
Deposits:
Demand $ 49,735 $ 58,378
Interest-bearing demand 134,361 116,587
Savings 51,634 51,966
Time 263,797 254,807
----------- -----------
Total deposits 499,527 481,738
Borrowings:
Customer repurchase agreements 10,017 12,217
Advances from Federal Home Loan Bank 5,900 6,451
Interest-bearing demand notes issued to the U.S. Treasury 2,393 377
Notes payable 1,450 1,550
----------- -----------
Total borrowings 19,760 20,595
Other liabilities 5,924 5,492
----------- -----------
TOTAL LIABILITIES 525,211 507,825
----------- -----------
STOCKHOLDERS' EQUITY
Common stock: $5 par value, 7,000,000 shares
authorized; 4,139,841 issued 20,699 20,699
Surplus 6,560 6,416
Retained earnings 35,214 31,937
Accumulated other comprehensive income, net of tax 2,737 537
Less: Cost of 882,759 and 835,831 treasury shares at
September 30, 2002 and December 31, 2001, respectively -13,179 -12,089
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 52,031 47,500
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 577,242 $ 555,325
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
Schedule 2
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
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
2002 2001 2002 2001
---------- ---------- ---------- ----------
INTEREST INCOME:
Interest and fees on loans $ 6,170 $ 7,020 $ 18,715 $ 21,638
Interest and dividends on investment securities 1,925 1,780 5,736 5,300
Interest on federal funds sold 37 82 107 170
Interest on interest-bearing time deposits in other banks 29 61 73 120
---------- ---------- ---------- ----------
Total interest income 8,161 8,943 24,631 27,228
INTEREST EXPENSE:
Interest on deposits 3,316 4,303 9,975 12,961
Interest on borrowings 132 304 405 1,175
---------- ---------- ---------- ----------
Total interest expense 3,448 4,607 10,380 14,136
---------- ---------- ---------- ----------
NET INTEREST INCOME 4,713 4,336 14,251 13,092
Provision for loan losses 50 360 425 435
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 4,663 3,976 13,826 12,657
NON-INTEREST INCOME:
Trust & farm management fees 312 293 895 895
Service charges on deposit accounts 706 553 2,031 1,649
Other service charges 133 174 448 589
Gain on sales of securities available-for-sale 98 138 138 341
Brokerage fee income 157 149 501 453
Mortgage banking income 294 247 843 636
Other operating income 227 219 701 528
---------- ---------- ---------- ----------
Total non-interest income 1,927 1,773 5,557 5,091
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,534 2,358 7,405 6,926
Occupancy 292 324 892 881
Equipment expense 393 321 1,120 951
Federal insurance assessments 53 49 159 147
Goodwill amortization 49 107 147 317
Intangible assets amortization 3 3 9 9
Data processing 188 153 559 466
Other real estate owned expenses 178 1 178 4
Other operating expense 928 756 2,638 2,496
---------- ---------- ---------- ----------
Total non-interest expense 4,618 4,072 13,107 12,197
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,972 1,677 6,276 5,551
Income tax expense 444 401 1,647 1,487
---------- ---------- ---------- ----------
NET INCOME $ 1,528 $ 1,276 $ 4,629 $ 4,064
========== ========== ========== ==========
NET INCOME PER SHARE:
Basic 0.46 0.39 1.40 1.22
Diluted 0.46 0.38 1.39 1.21
Basic weighted average shares outstanding 3,292,127 3,306,408 3,300,654 3,339,416
Diluted weighted average shares outstanding 3,314,705 3,317,433 3,319,401 3,348,629
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
Schedule 2
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net Income 1,528 $ 1,276 $ 4,629 $ 4,064
Other comprehensive income, net of tax
Unrealized holding gain arising during the period 1,044 1,127 2,285 1,622
Less: Reclassification adjustment for realized gains
included in net income -60 -85 -85 -209
---------- ---------- ---------- ----------
Other comprehensive income 984 1,042 2,200 1,413
---------- ---------- ---------- ----------
Comprehensive income 2,512 $ 2,318 $ 6,829 $ 5,477
========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
Schedule 3
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Nine Months Ended
September 30
2002 2001
---------- ----------
Balance, January 1 $ 47,500 $ 47,476
Net income 4,629 4,064
Cash dividends ($0.40 per share in 2002, and $.61 per share in 2001) -1,322 -2,046
Other comprehensive income, net of tax 2,200 1,413
Purchases of treasury stock (57,300 shares in 2002, and 186,000 shares in 2001) -1,151 -2,912
Exercise stock options and re-issuance of treasury stock
(6,689 shares in 2002 and 0 in 2001) 105 0
Sales of treasury stock (3,683 shares in 2002, and 3,549 shares in 2001) 70 57
---------- ----------
Balance, September 30 $ 52,031 $ 48,052
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
Schedule 4
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Nine Months
Ended September 30
2002 2001
------- -------
OPERATING ACTIVITIES:
Net income $ 4,629 $ 4,064
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 950 906
Provision for loan losses 425 435
Amortization of goodwill 147 317
Amortization of other intangible assets 9 9
Amortization of premiums on investment
securities, net of accretion 698 47
Gain on securities transactions, net -138 -341
Gain on sale of premises and equipment 0 -122
FHLB stock dividends -67 -57
Loans originated for sale -23,015 -14,921
Proceeds from sales of loans originated for sale 27,588 14,289
(Decrease) increase in interest payable -367 61
Decrease (increase) in interest receivable 86 -1,116
Increase in other assets -1,127 -8,932
Decrease in other liabilities -431 -858
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 9,387 -6,219
------- -------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale 3,863 20,341
Proceeds from maturities of investment securities available-for-sale 31,243 24,779
Purchase of investment securities available-for-sale -53,510 -53,185
Proceeds from maturities of investment securities held-to-maturity 1,244 876
Purchase of investment securities held-to-maturity -1,501 -1,500
Proceeds from sales of premises and equipment 0 175
Net (increase) decrease in loans -19,486 4,782
Purchases of premises and equipment -631 -1,817
------- -------
NET CASH USED IN INVESTING ACTIVITIES -38,778 -5,549
------- -------
FINANCING ACTIVITIES:
Net increase in deposits 17,789 42,571
Net decrease in borrowings -835 -7,723
Dividends paid -1,322 -2,046
Purchases of treasury stock -1,151 -2,912
Exercise stock options 105 0
Sales of treasury stock 70 57
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,656 29,947
------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS -14,735 18,179
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,726 18,979
------- -------
CASH AND CASH EQUIVALENTS AT SEPTEMBER 30 $18,991 $37,158
======= =======
------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $10,747 $14,074
Income taxes $ 1,798 $ 1,954
Supplemental disclosures of non-cash flow activities:
Loans transferred to other real estate owned $ 3,413 $ 0
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator:
Net income $ 1,528 $ 1,276 $ 4,629 $ 4,064
Denominator:
Basic earnings per share-
weighted average shares 3,292,127 3,306,408 3,300,654 3,339,416
Effect of dilutive securities-
stock options 22,578 11,025 18,747 9,213
---------- ---------- ---------- ----------
Diluted earnings per share-
adjusted weighted average shares 3,314,705 3,317,433 3,319,401 3,348,629
Net income per share:
Basic $ 0.46 $ 0.39 $ 1.40 $ 1.22
Diluted $ 0.46 $ 0.38 $ 1.39 $ 1.21
10
(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 resulted from 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
third quarter of 2002 was $49,000 and $147,000 for the first nine months of
2002. The amortization expense will be approximately $49,000 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 nine months ended September 30, 2002 and 2001, as adjusted to remove
the amortization of goodwill:
Three Months Ended Sept. 30 Nine Months Ended, Sept. 30
--------------------------- ---------------------------
(in thousands, except per share data) 2002 2001 2002 2001
Net Income As Reported $ 1,528 $ 1,276 $ 4,629 $ 4,064
Add back goodwill amortization -- 58 -- 170
Net income as adjusted $ 1,528 $ 1,334 $ 4,629 $ 4,234
Basic Earnings Per Share As Reported $ 0.46 $ 0.39 $ 1.40 $ 1.22
Add back goodwill amortization -- .01 -- .05
Net income as adjusted $ 0.46 $ 0.40 $ 1.40 $ 1.27
Diluted Earnings Per Share As Reported $ 0.46 $ 0.38 $ 1.39 $ 1.21
Add back goodwill amortization -- . 02 -- .05
Net income as adjusted $ 0.46 $ 0.40 $ 1.39 $ 1.26
The following table summarizes the Corporation's intangible assets,
which are subject to amortization, as of September 30, 2002:
Gross Carrying Accumulated
Amount Amortization
---------- ------------
Mortgage servicing rights $ 1,660 $ (834)
Other intangible assets 160 (91)
---------- ----------
Total $ 1,820 $ (925)
========== ==========
11
AGGREGATE AMORTIZATION EXPENSE:
For the Quarter Ended September 30, 2002 $ 72
For the Nine Months Ended, September 30, 2002 $ 196
Amortization expense for mortgage servicing rights is included as part
of mortgage banking income.
ESTIMATED AMORTIZATION EXPENSE:
For the Three Months Ended December 31, 2002 $ 68
For the Year Ended December 31, 2003 $ 241
For the Year Ended December 31, 2004 $ 190
For the Year Ended December 31, 2005 $ 145
For the Year Ended December 31, 2006 $ 107
For the Year Ended December 31, 2007 $ 73
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.
In October 2002, the FASB issued Statement 147, "Acquisitions of
Certain Financial Institutions". This statement, which provides guidance on the
accounting for the acquisition of a financial institution, applies to all
acquisitions except transactions between two or more mutual enterprises. The
provisions of this statement that relate to the application of FAS 144 apply to
certain long-term customer-relationship intangible assets recognized in an
acquisition of a financial institution , including those acquired in
transactions between mutual enterprises. The excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired in a business combination represents goodwill that should be
accounted for under FAS 142. If certain criteria in this FAS 147 are met, the
amount of the unidentifiable intangible asset will be reclassified to goodwill
upon the adoption of FAS 142, and financial institutions meeting these
conditions will be required to restate previously issued financials. Provisions
of this statement that relate to the application of the purchase method of
accounting are effective for acquisitions on or after October 1, 2002. The
provision of this Statement relating to accounting for impairment or disposal of
certain long-term customer-relationship intangible assets are effective on
October 1, 2002, with earlier application permitted. Adoption of this statement
is not expected to have a material effect on the Corporation's consolidated
financial statements.
12
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, 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 nine months ended September 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 third quarter of 2002 was $1,528,000, or basic and
diluted earnings per share of $0.46, as compared to net income of $1,276,000 in
the third quarter of 2001, or basic earnings per share of $0.39 (diluted
earnings per share of $0.38). This represents an increase of $252,000 (19.8%) or
$.07 per basic share (18.0%). For the first nine months of 2002, net income was
$4,629,000, or basic earnings per share of $1.40 (diluted earnings per share of
$1.39). Net income for the first nine months of 2001 was $4,064,000, or basic
earnings per share of $1.22 (diluted earnings per share of $1.21). This
represents an increase of $565,000 (or 13.9%) during the first nine 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 nine 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 nine
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 third quarter of 2002, compared with 1.02% and 11.55% for
the third quarter of 2001. For the nine-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.
Net interest income before provision for loan losses was $4,713,000 for
the third quarter of 2002,
13
compared to $4,336,000 for the third quarter of 2001 (an increase of $377,000 or
8.7%). This increase is a result of both an increase in average interest-earning
assets and an improving net interest margin. For the three months ended
September 30, 2002, average interest-earning assets were $522.5 million compared
to $486.9 million for the three months ended September 30, 2001. Additionally,
the net yield on interest-earning assets (on a fully taxable equivalent basis)
increased from 3.76% in the third quarter of 2001 to 3.83% in the third quarter
of 2002.
Net interest income before provision for loan losses was $14,251,000
for the first nine months of 2002, compared to $13,092,000 for the first nine
months of 2001 (an increase of $1,159,000 or 8.9%). This increase is a result of
an increase in average interest-earning assets and an improving net interest
margin. For the nine months ended September 30, 2002, average interest-earning
assets were $506.6 million compared to $479.3 million for the nine months ended
September 30, 2001. Additionally, the net yield on interest-earning assets (on a
fully taxable equivalent basis) increased from 3.88% in the first nine months of
2001 to 4.02% in the first nine months of 2002.
PNBC recorded a loan loss provision of $50,000 in the third quarter of
2002 compared to $360,000 in the third quarter of 2001. For the nine-month
comparable periods, PNBC recorded a loan loss provision of $425,000 in 2002 and
$435,000 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. For the nine-month comparable periods, PNBC had net
recoveries of $22,000 in 2002 and net charge-offs of $893,000 in 2001.
Non-interest income totaled $1,927,000 for the third quarter of 2002,
as compared to $1,773,000 during the third quarter of 2001, an increase of
$154,000 (or 8.7%). The increase is the result of increases in service charges
on deposit accounts of $153,000 (or 27.7%), and an increase in mortgage banking
income of $47,000 (or 19.0%). These increases more than offset a decrease in
gains from sales of securities available-for-sale of $40,000. For the nine-month
periods, non-interest income totaled $5,557,000 in 2002, compared to $5,091,000
in 2001. This represents an increase of $466,000 (or 9.2%). Once again,
increases in service charges on deposit accounts (increase of $382,000, or
23.2%), other operating income (increase of $173,000, or 32.8%), and mortgage
banking income (increase of $207,000, or 32.6%) were the reason for the
increase, offsetting a decrease in gains from sales of available-for-sale
securities of $203,000 (or 59.5%). The increase in other operating income for
the nine-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 nine months of 2001.
Total non-interest expense for the third quarter of 2002 was
$4,618,000, an increase of $546,000 (or 13.4%) from $4,072,000 in the third
quarter of 2001. The largest increases was in salaries/employee benefits, which
increased $176,000 (or 7.5%) due to increases in commissions from mortgage
banking and brokerage activities as well as increased insurance costs. Other
notable increases were in other real estate owned expenses which increased from
$1,000 in third quarter of 2001 to $178,000 in the third quarter of 2002 and in
other operating expenses, which increased $172,000 (or 22.8%). These increases
offset the decrease in goodwill amortization of $58,000 from the third quarter
of 2001 as compared to the third quarter of 2002. Year- to-date non-interest
expenses for 2002 of $13,107,000 have increased $910,000 (or 7.5%) from the same
period in 2001, but are at expected levels. The most notable increases are again
in salaries/employee benefits ($479,000 or 6.9%), equipment expense ($169,000 or
17.8%), other operating expenses ($142,000 or 5.7%), and data processing
($93,000 or 20.0%), which were offset by the decrease in goodwill amortization
of $170,000 (or 53.6%).
14
INCOME TAXES
------------
Income tax expense totaled $444,000 for the third quarter of 2002, as
compared to $401,000 for the third quarter of 2001. For the first nine months of
2002, income tax expenses were $1,647,000 compared to $1,487,000 for the first
nine months of 2001. The effective tax rate was 26.2% for the nine months ended
September 30, 2002 compared to 26.8% for the nine months ended September 30,
2001.
ANALYSIS OF FINANCIAL CONDITION
-------------------------------
Total assets at September 30, 2002 increased to $577,242,000 from
$555,325,000 at December 31, 2001 (an increase of $21.9 million or 4.0%). Total
deposits at September 30, 2002 increased to $499,527,000 from $481,738,000 from
December 31, 2001 (an increase of $17.8 million or 3.7%). In comparing
categories of deposits at September 30, 2002 to the December 31, 2001 totals,
two categories had increasing balances: interest-bearing demand deposits
(increase of $17.8 million or 15.3%) and time deposits (increase of $9.0 million
or 3.5%); while demand deposits decreased by $8.6 million (or 14.8%) and savings
deposits decreased by $0.3 million (or 0.6%). 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 $19,760,000 at September 30, 2002 (decrease
of $0.8 million or 4.1%). Investments totaled $166,258,000 at September 30,
2002, compared to $144,660,000 at December 31, 2001 (an increase of $21.6
million or 14.9%).
Loan demand continued to increase during the third quarter of 2002,
primarily in the commercial sector. Loan balances, net of unearned interest,
increased to $353,411,000 at September 30, 2002, compared to $341,889,000 at
December 31, 2001 (an increase of $11.5 million or 3.4%). Non-performing loans
totaled $3,701,000 or 1.05% of net loans at September 30, 2002 (non-performing
assets totaled $7,114,000 including the balance of other real estate owned, or
2.01% of net loans), as compared to $5,718,000 or 1.72% of net loans at December
31, 2001.
For the nine months ended September 30, 2002, the subsidiary bank
charged off $391,000 of loans and had recoveries of $413,000, compared to
charge-offs of $1,114,000 and recoveries of $221,000 during the nine months
ended September 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 September
30, 2002, the allowance was $2,747,000 which is 74.2% 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 September 30, 2002, impaired loans totaled $2,167,000 compared to
$2,014,000 at December 31, 2001. Loans 90 days or more past due and still
accruing interest at September 30, 2002 were $29,000, 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 continues to be
concentrated in a few credits. There is a specific loan loss reserve of $225,000
established for impaired loans as of September 30, 2002, while there were no
specific loan loss reserves established for impaired loans as of December 31,
2001. During the third quarter of 2002, one loan with a balance of $3.4 million
was transferred into other real estate owned. It is anticipated that this
property will be sold by December 31, 2002. PNBC's management analyzes the
15
allowance for loan losses monthly and believes the current level of allowance is
adequate to meet probable losses as of September 30, 2002.
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, 2002 total risk-based capital of PNBC was 12.16%, compared to
12.29% at December 31, 2001. The Tier 1 capital ratio decreased from 8.10% at
December 31, 2001, to 8.04% at September 30, 2002. Total stockholders' equity to
total assets at September 30, 2002 increased to 9.01% 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, offset by those provided by operating
and financing activities, resulted in a net decrease in cash and cash
equivalents of $14,735,000 from December 31, 2001 to September 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.
16
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, SEPTEMBER 30, 2002 Nine Months Ended, September 30, 2001
------------------------------------------------------------------------------
AVERAGE YIELD/ Average Yield/
BALANCE INTEREST COST Balance Interest Cost
------- -------- ---- ------- -------- ----
AVERAGE INTEREST-EARNING ASSETS
Interest-bearing deposits $ 6,134 $ 73 1.59% $ 4,161 $ 120 3.87%
Taxable investment securities 102,642 3,896 5.07% 83,525 3,782 6.05%
Tax-exempt investment securities 49,746 2,788 7.49% 39,394 2,301 7.81%
Federal funds sold 8,958 107 1.60% 5,777 170 3.93%
Net loans 339,151 18,733 7.38% 346,488 21,660 8.36%
-------- ------- -------- -------
Total interest-earning assets 506,631 25,597 6.76% $479,346 28,033 7.82%
-------- ------- -------- -------
Average non-interest earning assets 52,314 44,184
-------- --------
Total average assets $558,945 $523,530
======== ========
AVERAGE INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits $125,420 1,747 1.86% $ 95,736 1,681 2.35%
Savings deposits 54,480 531 1.30% $ 48,413 810 2.24%
Time deposits 253,326 7,697 4.06% 250,737 10,471 5.58%
Interest-bearing demand notes
issued to the U.S. Treasury 1,108 13 1.57% 1,091 31 3.78%
Federal funds purchased and
securities repurchase agreements 10,885 91 1.12% 16,419 507 4.13%
Advances from Federal Home Loan Bank 6,236 258 5.53% 12,005 549 6.12%
Borrowings 1,499 43 3.84% 1,764 87 6.59%
-------- ------- -------- -------
Total interest-bearing liabilities 452,954 10,380 3.06% 426,166 14,135 4.43%
-------- ------- -------- -------
Net yield on average interest-earning assets $15,217 4.02% $13,898 3.88%
======= =======
Average non-interest-bearing liabilities 56,635 51,197
Average stockholders' equity 49,356 46,167
-------- --------
Total average liabilities and
stockholders' equity $558,945 $523,530
======== ========
17
SCHEDULE 7. CONTROLS AND PROCEDURES
(a) Disclosure controls and procedures. Within 90 days before filing this
report, we evaluated the effectiveness of the design and operation of
our disclosure controls and procedures. Our disclosure controls and
procedures are the controls and other procedures that we designed to
ensure that we record, process, summarize and report in a timely
manner the information we must disclose in reports that we file with
or submit to the SEC. Tony J. Sorcic, President and Chief Executive
Officer, and Todd D. Fanning, Vice-President and Chief Financial
Officer, reviewed and participated in this evaluation. Based on this
evaluation, Messrs. Sorcic and Fanning concluded that, as of the date
of their evaluation, our disclosure controls were effective.
(b) Internal controls. Since the date of the evaluation described above,
there have not been any significant changes in our internal accounting
controls or in other factors that could significantly affect those
controls.
18