UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
36-3210283 (I.R.S. Employer Identification No.) |
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 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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of October 14, 2005, the registrant had outstanding 3,360,036 shares of its $5 par value common stock.
Page 1 of 226 pages
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 |
| (a) | In July 2005, a trust formed by the Corporation issued $25 million in trust preferred securities (“TPS”). LaSalle Bank National Association serves as trustee of the trust. The Corporation received a total of $25 million in net proceeds in the transaction by the issuance of debentures to the trust, as described in Note 2 of the Consolidated Financial Statements included elsewhere in this report. The trust sold the TPS in a non-public offering pursuant to Section 4(2) of the Securities Act of 1933, as amended. |
| (c) | The following table provides information about purchases of the Corporation’s common stock by the Corporation during the quarter ended September 30, 2005: |
| Period | (a) Total number of shares purchased | (b) Average price paid per share | (c) Total number of shares purchased as part of a publicly announced plans or programs | (d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 7/1/05 – 7/31/05 | 0 | $ | 0.00 | 0 | 32,400 | |||||||||
| 8/1/05 – 8/31/05 | 5,000 | $ | 33.00 | 5,000 | 27,400 | |||||||||
| 9/1/05 – 9/30/05 | 12,000 | $ | 33.74 | 12,000 | 15,400 | |||||||||
| Total | 17,000 | $ | 33.52 | 17,000 | 15,400 | |||||||||
| (1) | We purchased an aggregate of 35,100 shares of our common stock pursuant to the repurchase program that we announced on January 24, 2005 (the “Program”). |
| (2) | Our Board of Directors approved the repurchase by us of up to an aggregate of 100,000 shares of our common stock pursuant to the Program. The expiration date of this Program is January 24, 2006. Unless terminated earlier by resolution of our Board of Directors, the Program will expire on the earlier of such expiration date or when we have repurchased all shares authorized for repurchase under the Program. |
| 4.1 | Trust Preferred Securities Indenture |
| 10.1 | Trust Preferred Securities Purchase Agreement |
| 10.2 | Trust Preferred Securities Declaration of Trust |
| 10.3 | Trust Preferred Securities Guaranty Agreement |
| 31.1 | Certification of Tony J. Sorcic required by Rule 13a-14(a). |
| 31.2 | Certification of Todd D. Fanning required by Rule 13a-14(a). |
| 32.1 | Certificaton of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
| 32.2 | Certificaton of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
2
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 8, 2005 | By | /s/ Tony J. Sorcic |
| Tony J. Sorcic President & Chief Executive Officer | ||
| Date: November 8, 2005 | By | /s/ Todd D. Fanning |
| Todd D. Fanning Senior Vice-President & Chief Financial Officer | ||
3
Schedule 1
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
| September 30, 2005 (unaudited) | December 31, 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Cash and due from banks | $ | 17,771 | $ | 14,025 | ||||
| Interest-bearing deposits with financial institutions | 288 | 65 | ||||||
| Federal funds sold | 500 | 0 | ||||||
| Total cash and cash equivalents | 18,559 | 14,090 | ||||||
| Loans held for sale, at lower of cost or market | 1,882 | 1,301 | ||||||
| Investment securities: | ||||||||
| Available-for-sale, at fair value | 241,445 | 175,129 | ||||||
| Held-to-maturity, at amortized cost (fair value of $18,260 and $14,111) | 18,014 | 13,680 | ||||||
| Total investment securities | 259,459 | 188,809 | ||||||
| Loans: | ||||||||
| Loans, net of unearned interest | 565,744 | 410,044 | ||||||
| Allowance for loan losses | (3,336 | ) | (2,524 | ) | ||||
| Net loans | 562,408 | 407,520 | ||||||
| Premises and equipment, net of accumulated depreciation | 22,801 | 17,924 | ||||||
| Bank-owned life insurance | 20,515 | 15,870 | ||||||
| Accrued interest receivable | 8,898 | 5,000 | ||||||
| Goodwill | 20,416 | 1,355 | ||||||
| Intangible assets, net of accumulated amortization | 7,126 | 1,317 | ||||||
| Other real estate owned | 532 | 0 | ||||||
| Other assets | 4,933 | 2,552 | ||||||
| TOTAL ASSETS | $ | 927,529 | $ | 655,738 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Demand | $ | 82,264 | $ | 75,015 | ||||
| Interest-bearing demand | 240,849 | 191,271 | ||||||
| Savings | 107,268 | 58,675 | ||||||
| Time | 353,789 | 248,600 | ||||||
| Total deposits | 784,170 | 573,561 | ||||||
| Borrowings: | ||||||||
| Customer repurchase agreements | 28,866 | 16,870 | ||||||
| Advances from the Federal Home Loan Bank | 9,341 | 5,000 | ||||||
| Interest-bearing demand notes issued to the U.S. Treasury | 2,411 | 1,765 | ||||||
| Federal funds purchased | 0 | 1,000 | ||||||
| Trust Preferred securities | 25,000 | 0 | ||||||
| Note payable | 6,700 | 900 | ||||||
| Total borrowings | 72,318 | 25,535 | ||||||
| Other liabilities | 7,857 | 4,273 | ||||||
| TOTAL LIABILITIES | 864,345 | 603,369 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock: $5 par value, 7,000,000 shares authorized; 4,478,296 issued at | ||||||||
| September 30, 2005 and 4,139,841 issued at December 31, 2004 | 22,392 | 20,699 | ||||||
| Surplus | 16,944 | 7,810 | ||||||
| Retained earnings | 44,926 | 42,156 | ||||||
| Accumulated other comprehensive (loss) income, net of tax | (39 | ) | 951 | |||||
| Less: Cost of 1,118,260 and 1,081,841 treasury shares at | ||||||||
| September 30, 2005 and December 31, 2004, respectively | (21,039 | ) | (19,247 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 63,184 | 52,369 | ||||||
| TOTAL LIABILITIES AND | ||||||||
| STOCKHOLDERS' EQUITY | $ | 927,529 | $ | 655,738 | ||||
See accompanying notes to consolidated financial statements
4
Schedule 2
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except share data)
| For the Three Months Ended September 30 | For the Nine Months Ended September 30 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2005 | 2004 | |||||||||||
| Interest income: | ||||||||||||||
| Interest and fees on loans | $ | 8,547 | $ | 5,900 | $ | 21,609 | $ | 17,414 | ||||||
| Interest and dividends on investment securities | 2,419 | 1,530 | 5,838 | 4,549 | ||||||||||
| Interest on federal funds sold | 65 | 2 | 75 | 8 | ||||||||||
| Interest on interest-bearing time deposits in other banks | 34 | 2 | 43 | 6 | ||||||||||
| Total interest income | 11,065 | 7,434 | 27,565 | 21,977 | ||||||||||
| Interest expense: | ||||||||||||||
| Interest on deposits | 3,866 | 2,114 | 9,098 | 6,278 | ||||||||||
| Interest on borrowings | 673 | 116 | 1,072 | 321 | ||||||||||
| Total interest expense | 4,539 | 2,230 | 10,170 | 6,599 | ||||||||||
| Net interest income | 6,526 | 5,204 | 17,395 | 15,378 | ||||||||||
| Provision for loan losses | 0 | 75 | 0 | 375 | ||||||||||
| Net interest income after provision | ||||||||||||||
| for loan losses | 6,526 | 5,129 | 17,395 | 15,003 | ||||||||||
| Non-interest income: | ||||||||||||||
| Trust & farm management fees | 364 | 343 | 1,192 | 1,045 | ||||||||||
| Service charges on deposit accounts | 936 | 845 | 2,416 | 2,377 | ||||||||||
| Other service charges | 357 | 278 | 953 | 877 | ||||||||||
| Gain on sales of securities available-for-sale | 21 | 0 | 50 | 182 | ||||||||||
| Gain on sale of loans | 0 | 0 | 0 | 465 | ||||||||||
| Brokerage fee income | 212 | 135 | 504 | 513 | ||||||||||
| Mortgage banking income | 198 | 123 | 527 | 406 | ||||||||||
| Bank-owned life insurance income | 169 | 137 | 444 | 420 | ||||||||||
| Other operating income | 38 | 39 | 120 | 124 | ||||||||||
| Total non-interest income | 2,295 | 1,900 | 6,206 | 6,409 | ||||||||||
| Non-interest expense: | ||||||||||||||
| Salaries and employee benefits | 3,621 | 2,770 | 9,608 | 8,228 | ||||||||||
| Occupancy | 428 | 354 | 1,105 | 1,018 | ||||||||||
| Equipment expense | 494 | 398 | 1,418 | 1,188 | ||||||||||
| Federal insurance assessments | 63 | 55 | 179 | 174 | ||||||||||
| Intangible assets amortization | 81 | 52 | 185 | 156 | ||||||||||
| Data processing | 202 | 187 | 605 | 556 | ||||||||||
| Advertising | 218 | 191 | 536 | 523 | ||||||||||
| Other operating expense | 1,095 | 880 | 2,861 | 2,667 | ||||||||||
| Total non-interest expense | 6,202 | 4,887 | 16,497 | 14,510 | ||||||||||
| Income before income taxes | 2,619 | 2,142 | 7,104 | 6,902 | ||||||||||
| Income tax expense | 580 | 509 | 1,665 | 1,719 | ||||||||||
| Net income | $ | 2,039 | $ | 1,633 | $ | 5,439 | $ | 5,183 | ||||||
| Earnings per share: | ||||||||||||||
| Basic | 0.63 | 0.53 | 1.75 | 1.67 | ||||||||||
| Diluted | 0.62 | 0.52 | 1.73 | 1.64 | ||||||||||
| Basic weighted average shares outstanding | 3,252,157 | 3,074,308 | 3,114,303 | 3,098,357 | ||||||||||
| Diluted weighted average shares outstanding | 3,283,682 | 3,127,810 | 3,139,371 | 3,167,894 | ||||||||||
See accompanying notes to consolidated financial statements
5
Schedule 2
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands)
| For the Three Months Ended September 30 | For the Nine Months Ended September 30 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2005 | 2004 | |||||||||||
| Net income | $ | 2,039 | $ | 1,633 | $ | 5,439 | $ | 5,183 | ||||||
| Other comprehensive income (loss), net of tax | ||||||||||||||
| Unrealized holding gains (losses) arising during the period, net of tax | (1,126 | ) | 1,550 | (959 | ) | 182 | ||||||||
| Less: Reclassification adjustment for realized gains on | ||||||||||||||
| sales of securities included in net income | (13 | ) | 0 | (31 | ) | (111 | ) | |||||||
| Other comprehensive income (loss) | (1,139 | ) | 1,550 | (990 | ) | 71 | ||||||||
| Comprehensive income | $ | 900 | $ | 3,183 | $ | 4,449 | $ | 5,254 | ||||||
See accompanying notes to consolidated financial statements
6
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(dollars in thousands except per share data)
| For the Nine Months Ended September 30, 2005 | Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive Income (loss) net of tax effect | Treasury Stock | Total | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2005 | $ | 20,699 | $ | 7,810 | $ | 42,156 | $ | 951 | ($ | 19,247 | ) | $ | 52,369 | ||||||||
| Net income | 5,439 | 5,439 | |||||||||||||||||||
| Sale of 4,290 shares | |||||||||||||||||||||
| of treasury stock | 50 | 79 | 129 | ||||||||||||||||||
| Purchase of 84,600 shares | |||||||||||||||||||||
| of treasury stock | (2,633 | ) | (2,633 | ) | |||||||||||||||||
| Exercise of stock options and | |||||||||||||||||||||
| re-issuance of treasury | |||||||||||||||||||||
| stock (43,891 shares) | 777 | (610 | ) | 762 | 929 | ||||||||||||||||
| Cash dividends | |||||||||||||||||||||
| ($.65 per share) | (2,059 | ) | (2,059 | ) | |||||||||||||||||
| Issuance of 338,600 shares | |||||||||||||||||||||
| of common stock | 1,693 | 8,307 | 10,000 | ||||||||||||||||||
| Other comprehensive loss, | |||||||||||||||||||||
| net of $626 tax effect | (990 | ) | (990 | ) | |||||||||||||||||
| Balance, September 30, 2005 | $ | 22,392 | $ | 16,944 | $ | 44,926 | ($ | 39 | ) | ($ | 21,039 | ) | $ | 63,184 | |||||||
| For the Nine Months Ended September 30, 2004 | |||||||||||||||||||||
| Balance, January 1, 2004 | $ | 20,699 | $ | 7,020 | $ | 38,726 | $ | 1,275 | ($ | 16,845 | ) | $ | 50,875 | ||||||||
| Net income | 5,183 | 5,183 | |||||||||||||||||||
| Sale of 3,174 shares | |||||||||||||||||||||
| of treasury stock | 46 | 45 | 91 | ||||||||||||||||||
| Purchase of 92,000 shares | |||||||||||||||||||||
| of treasury stock | (2,651 | ) | (2,651 | ) | |||||||||||||||||
| Exercise of stock options and | |||||||||||||||||||||
| re-issuance of treasury | |||||||||||||||||||||
| stock (29,821 shares) | 610 | (475 | ) | 423 | 558 | ||||||||||||||||
| Cash dividends | |||||||||||||||||||||
| ($.56 per share) | (1,740 | ) | (1,740 | ) | |||||||||||||||||
| Other comprehensive loss, | |||||||||||||||||||||
| net of $45 tax effect | 71 | 71 | |||||||||||||||||||
| Balance, September 30, 2004 | $ | 20,699 | $ | 7,676 | $ | 41,694 | $ | 1,346 | ($ | 19,028 | ) | $ | 52,387 | ||||||||
See accompanying notes to consolidated financial statements
7
Schedule 4
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
| For the Nine Months Ended September 30 |
||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | |||||||
|
| ||||||||
| Operating activities: | ||||||||
| Net income | $ | 5,439 | $ | 5,183 | ||||
| Adjustments to reconcile net income to net | ||||||||
| cash provided by operating activities: | ||||||||
| Depreciation | 1,100 | 994 | ||||||
| Provision for loan losses | 0 | 375 | ||||||
| Amortization of other intangible assets | 185 | 156 | ||||||
| Amortization of premiums on investment | ||||||||
| securities, net of accretion | 1,029 | 1,294 | ||||||
| Gain on securities transactions, net | (50 | ) | (182 | ) | ||||
| Gain on sale of loans | 0 | (465 | ) | |||||
| FHLB stock dividends | (78 | ) | (85 | ) | ||||
| Loans originated for sale | (28,405 | ) | (28,858 | ) | ||||
| Proceeds from sales of loans originated for sale | 27,824 | 29,546 | ||||||
| Increase in accrued interest payable | 1,185 | 45 | ||||||
| Increase in accrued interest receivable | (1,642 | ) | (531 | ) | ||||
| Increase in other assets | (5,517 | ) | (439 | ) | ||||
| Increase (decrease) in other liabilities | 1,975 | (583 | ) | |||||
|
| ||||||||
| Net cash provided by operating activities | 3,045 | 6,450 | ||||||
|
| ||||||||
| Investing activities: | ||||||||
| Proceeds from sales of investment securities available-for-sale | 22,798 | 8,461 | ||||||
| Proceeds from maturities of investment securities available-for-sale | 25,232 | 20,869 | ||||||
| Purchase of investment securities available-for-sale | (37,645 | ) | (31,498 | ) | ||||
| Proceeds from maturities of investment securities held-to-maturity | 241 | 388 | ||||||
| Purchase of investment securities held-to-maturity | (900 | ) | (870 | ) | ||||
| Proceeds from sale of credit card loans | 0 | 2,585 | ||||||
| Net increase in loans | (40,432 | ) | (15,175 | ) | ||||
| Purchases of premises and equipment | (2,041 | ) | (4,207 | ) | ||||
| Payment related to acquisition, net of cash and cash equivalents acquired | (43,501 | ) | 0 | |||||
|
| ||||||||
| Net cash used in investing activities | (76,248 | ) | (19,447 | ) | ||||
|
| ||||||||
| Financing activities: | ||||||||
| Net increase in deposits | 28,859 | 8,153 | ||||||
| Issuance of trust preferred securities | 25,000 | 0 | ||||||
| Net increase in borrowings | 17,447 | 7,282 | ||||||
| Issuance of common stock | 10,000 | 0 | ||||||
| Dividends paid | (2,059 | ) | (1,740 | ) | ||||
| Purchases of treasury stock | (2,633 | ) | (2,651 | ) | ||||
| Exercise of stock options and issuance of treasury stock | 929 | 558 | ||||||
| Sales of treasury stock | 129 | 91 | ||||||
|
| ||||||||
| Net cash provided by financing activities | 77,672 | 11,693 | ||||||
|
| ||||||||
| Increase (decrease) in cash and cash equivalents | 4,469 | (1,304 | ) | |||||
| Cash and cash equivalents at beginning of period | 14,090 | 16,414 | ||||||
|
| ||||||||
| Cash and cash equivalents at September 30 | $ | 18,559 | $ | 15,110 | ||||
|
| ||||||||
|
| ||||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 8,985 | $ | 6,554 | ||||
| Income taxes | $ | 1,246 | $ | 1,980 | ||||
| Supplemental disclosures of non-cash flow activities: | ||||||||
| Loans transferred to other real estate owned | $ | 532 | $ | 32 | ||||
See accompanying notes to consolidated financial statements
8
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 2004 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 2004 consolidated financial statements have been reclassified to conform to the 2005 presentation.
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 September 30, | Nine Months Ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | 2005 | 2004 | |||||||||||
| Numerator: | ||||||||||||||
| Net income | $ | 2,039 | $ | 1,633 | $ | 5,439 | $ | 5,183 | ||||||
| Denominator: | ||||||||||||||
| Basic earnings per share – | ||||||||||||||
| weighted average shares | 3,252,157 | 3,074,308 | 3,114,303 | 3,098,357 | ||||||||||
| Effect of dilutive securities – | ||||||||||||||
| stock options | 31,525 | 53,502 | 25,068 | 69,537 | ||||||||||
| Diluted earnings per share – | ||||||||||||||
| adjusted weighted average shares | 3,283,682 | 3,127,810 | 3,139,371 | 3,167,894 | ||||||||||
| Net income per share: | ||||||||||||||
| Basic | $ | 0.63 | $ | 0.53 | $ | 1.75 | $ | 1.67 | ||||||
| Diluted | $ | 0.62 | $ | 0.52 | $ | 1.73 | $ | 1.64 | ||||||
9
On July 31, 2005, the Corporation acquired 100% of the outstanding stock of Somonauk FSB Bancorp, Inc. (“Somonauk”), a $211.6 million bank holding company with offices in Somonauk, Newark, Sandwich, Plano and Millbrook, Illinois. The Corporation completed this acquisition in order to expand its market presence in this area. Somonauk was acquired for a purchase price of $49.6 million; $39.6 million paid in cash and the remaining $10 million paid in common stock resulting in the issuance of 338,600 shares. In conjunction with the acquisition, the Corporation issued $25.0 million in trust preferred securities and borrowed $15.0 million in secured notes. Of the $15.0 million in notes payable, $9.0 million was immediately repaid after the closing of the transaction.
The following unaudited pro forma condensed combined financial information presents the results of operations of the Corporation had the acquisition taken place at the beginning of each period:
| (in thousands) | Nine Months Ended September 30, 2005 | Nine Months Ended September 30, 2004 | ||||||
|---|---|---|---|---|---|---|---|---|
| Net interest income | $ | 20,174 | $ | 19,108 | ||||
| Provision for loan losses | 126 | 470 | ||||||
| Non-interest income | 6,823 | 7,178 | ||||||
| Non-interest expense | 20,470 | 19,249 | ||||||
| Income before income taxes | 6,401 | 6,567 | ||||||
| Income tax expense | 1,407 | 1,162 | ||||||
| Net income | $ | 4,994 | $ | 5,405 | ||||
| Earnings per share: | ||||||||
| Basic | $ | 1.48 | $ | 1.57 | ||||
| Diluted | $ | 1.47 | $ | 1.54 | ||||
| Basic weighted average | ||||||||
| shares outstanding | 3,377,245 | 3,436,957 | ||||||
| Diluted weighted average | ||||||||
| shares outstanding | 3,408,770 | 3,506,494 | ||||||
The unaudited pro forma condensed consolidated financial statements do not reflect any anticipated cost savings and revenue enhancements. Additionally, the Somonauk income statement for the first six months of 2005 includes merger-related expenses. Accordingly, the pro forma consolidated financial condition and results of operations of PNBC as of and after the merger may not be indicative of the results that actually would have occurred if the merger had been in effect during the periods presented or of the results that may be attained in the future.
At the time of the acquisition, the subsidiary bank of Somonauk (Farmers State Bank) was immediately merged into Citizens First National Bank. The acquisition of Somonauk was accounted for under the purchase method of accounting, and accordingly, the assets and liabilities of Somonauk were adjusted to their fair market values as of the acquisition date. As of the date of this report, not all fair market value information has been obtained. Accordingly, the figures contained herein are estimates and will be adjusted to actual when the fair market value information is received. It is anticipated the final figures will not be materially different from the estimated amounts. The operating results of Somonauk have been consolidated with those of the Corporation from August 1, 2005. Goodwill was recorded in the amount of $19.1 million was recorded along with a core deposit intangible of $6.0 million which is being amortized over a fifteen year period.
10
The balance of goodwill, net of accumulated amortization, totaled $20,416,000 at September 30, 2005 and $1,355,000 at December 31, 2004. The balance of intangible assets, net of accumulated amortization, totaled $7,126,000 and $1,317,000 at September 30, 2005 and December 31, 2004, respectively. The following table provides a reconciliation of the purchase price paid for the Somonauk acquisition and the amount of goodwill recorded:
| Purchase Price | 49,649,981 | |||||||
| Less: Somonauk equity | (24,303,800 | ) | ||||||
| Recorded Goodwill | 25,346,181 | |||||||
| Add: Direct Acquisition Costs | 574,467 | |||||||
| Less Purchase Accounting Adjustments: | ||||||||
| Loans | 1,227,130 | |||||||
| CD’s | (63,900 | ) | ||||||
| FHLB Advances | (71,876 | ) | ||||||
| Core Deposit Intangible | (6,036,000 | ) | ||||||
| (4,944,646 | ) | |||||||
| Deferred Taxes on purchase accounting | ||||||||
| adjustments | (1,915,556 | ) | ||||||
| Resulting Goodwill from Somonauk acquisition | 19,060,446 | |||||||
The following table summarizes the Corporation’s intangible assets, which are subject to amortization, as of September 30, 2005 and December 31, 2004.
| 2005 | 2004 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||
| Core deposit intangible | $ | 9,004 | $ | (1,922 | ) | $ | 2,968 | $ | (1,699 | ) | ||||
| Other intangible assets | 160 | (116 | ) | 160 | (112 | ) | ||||||||
| Total | $ | 9,164 | $ | (2,038 | ) | $ | 3,128 | $ | (1,811 | ) | ||||
11
Amortization expense totaled $185,000 for the nine months ended September 30, 2005 and $156,000 for the nine months ended September 30, 2004, respectively. The amortization expense will be approximately $137,000 for the remainder of 2005.
The Corporation has originated mortgage servicing rights which are included in other assets on the consolidated balance sheets. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income on a basis similar to the interest method using an accelerated amortization method and are subject to periodic impairment testing. As of September 30, 2005 no impairment had been recorded during the year. Changes in the carrying value of capitalized mortgage servicing rights are summarized as follows:
| (in thousands) | |||||
|---|---|---|---|---|---|
| Balance, January 1, 2005 | $ | 1,405 | |||
| Servicing rights capitalized | 358 | ||||
| Amortization of servicing rights | (188 | ) | |||
| Impairment of servicing rights | 0 | ||||
| Balance, September 30, 2005 | $ | 1,575 | |||
The Corporation services loans for others with unpaid principal balances at September 30, 2005 and December 31, 2004 of approximately $197,284,000, and $147,958,000, respectively.
The following table shows the future estimated amortization expense for mortgage servicing rights based on existing balances as of September 30, 2005. The Corporation’s actual amortization expense in any given period may be significantly different from the estimated amounts displayed depending on the amount of additional servicing rights, changes in mortgage interest rates, actual prepayment speeds, and market conditions.
| Estimated Amortization Expense: | Amount (in thousands) | ||||
|---|---|---|---|---|---|
| For the three months ended December 31, 2005 | $ | 48 | |||
| For the year ended December 31, 2006 | 190 | ||||
| For the year ended December 31, 2007 | 179 | ||||
| For the year ended December 31, 2008 | 167 | ||||
| For the year ended December 31, 2009 | 157 | ||||
| For the year ended December 31, 2010 | 147 | ||||
| Thereafter | 687 | ||||
12
The Corporation accounts for the stock-based compensation plan under APB Opinion No. 25. For the stock option program, no compensation cost is recognized in connection with the granting of stock options with an exercise price equal to the fair market value of the stock on the date of the grant. In accordance with the disclosure requirements of FAS 123, as amended by FAS 148, the following table provides the pro forma effect on net income and earnings per share if the fair value method of accounting for stock-based compensation had been used for all awards:
| For the Three Months Ended Sept. 30, | For the Nine Months Ended Sept. 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | 2005 | 2004 | 2005 | 2004 | ||||||||||
| Net Income as reported | $ | 2,039 | $ | 1,633 | $ | 5,439 | $ | 5,183 | ||||||
| Deduct: Stock-based compensation, net of | ||||||||||||||
| tax, that would have been reported | ||||||||||||||
| if the fair value based method had | ||||||||||||||
| been applied to all awards | (126 | ) | (100 | ) | (387 | ) | (299 | ) | ||||||
| Pro forma net income | $ | 1,913 | $ | 1,533 | $ | 5,052 | $ | 4,884 | ||||||
| Basic Earnings Per Share | As Reported | $ | 0.63 | $ | 0.53 | $ | 1.75 | $ | 1.67 | |||||
| Pro Forma | 0.59 | 0.50 | 1.62 | 1.58 | ||||||||||
| Diluted Earnings Per Share | As Reported | $ | 0.62 | $ | 0.52 | $ | 1.73 | $ | 1.64 | |||||
| Pro Forma | 0.58 | 0.49 | 1.61 | 1.54 | ||||||||||
13
Schedule 6
The following discussion provides information about Princeton National Bancorp, Inc.‘s (“PNBC” or the “Corporation”) financial condition and results of operations for the three and nine month periods ended September 30, 2005 and 2004. 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.
Net income for the third quarter of 2005 was $2,039,000, or basic earnings per share of $0.63 (diluted earnings per share of $0.62), as compared to net income of $1,633,000 in the second quarter of 2004, or basic earnings per share of $0.53 (diluted earnings per share of $0.52). This represents an increase of $406,000 (24.9%) or $.10 per basic and diluted share and is primarily attributable to the acquisition as mentioned in Note 2 of the Notes to Consolidated Financial Statements. Net income for the first nine months of 2005 was $5,439,000, or basic earnings per share of $1.75 (diluted earnings per share of $1.73), as compared to net income of $5,183,000, or basic earnings per share of $1.67 (diluted earnings per share of $1.64) for the first nine months of 2004. This represents an increase of $256,000 (4.9%) or $.08 per basic share and $.09 per diluted share and is due to the acquisition of Somonauk FSB Bancorp, Inc. (“Somonauk”) which more than offsets the income generated in 2004 from the sale of the subsidiary bank’s credit card portfolio ($285,000 after-tax). The annualized return on average assets and return on average equity were 0.94% and 13.71%, respectively, for the third quarter of 2005, compared with 1.05% and 12.76% for the third quarter of 2004. For the nine-month periods, the annualized return on average assets and return on average equity were 1.00% and 13.34%, respectively for 2005, compared with 1.13% and 13.63%, respectively for 2004.
Net interest income before provision for loan losses was $6,526,000 for the third quarter of 2005, compared to $5,204,000 for the third quarter of 2004 (an increase of $1,322,000 or 25.4%). This improvement is the result of an increase in average interest-earning assets from the Somonauk acquisition in the third quarter compared to the prior year. As loan growth has continued and increases in the prime rate over the last twelve months have positively impacted the net interest margin, this improvement has been negatively impacted by interest rates increasing more rapidly on interest-bearing liabilities.
14
Accordingly, the Corporation’s net interest margin declined to 3.65% in the third quarter of 2005, a decrease from 3.88% in the second quarter of 2005 and 3.94% in the third quarter of 2004. Net interest income before provision for loan losses was $17,395,000 for the first nine months of 2005, compared to $15,378,000 for the first nine months of 2004 (an increase of $2,017,000 or 13.1%). For the nine months ended September 30, 2005, average interest-earning assets were $660.7 million compared to $557.5 million for the nine months ended September 30, 2004. The resulting net yield on interest-earning assets (on a fully taxable equivalent basis) decreased from 3.95% in the first three-quarters of 2004 to 3.80% in the first three-quarters of 2005.
PNBC did not record a loan loss provision in the first nine months of 2005, due to an improving credit environment, compared to a provision of $75,000 in the third quarter of 2004 and $375,000 for the first nine months of 2004. Although the ratio of non-performing loans to total loans at September 30, 2005 of 0.44% is up from 0.12% at September 30, 2004, the increase is attributable to a commercial line of credit being transferred to non-accrual in January 2005. The loan continues to be in a paydown status and paydowns are being received on the line on a regular basis. The provision expense recorded is determined monthly by management’s evaluation of the risk characteristics of the loan portfolio. For the third quarter of 2005, PNBC had net charge-offs of $6,000, compared to net recoveries of $22,000 for the third quarter of 2004. For the nine-month comparable periods, PNBC had net charge-offs of $28,000 in 2005 and net charge-offs of $82,000 in 2004.
Non-interest income totaled $2,295,000 for the third quarter of 2005, as compared to $1,900,000 in the third quarter of 2004, an increase of $395,000 (or 20.8%). This is a result of an increase in service charges on deposit accounts of $91,000 (or 10.8%), a result of the Somonauk acquisition, as well as increases in other service charges of $79,000 (or 28.4%), brokerage fee income of $77,000 (or 57.0%), and mortgage banking income of $75,000 (or 61.0%). Annualized non-interest income as a percentage of total average assets decreased to 1.06% for the third quarter of 2005, compared to 1.23% for the same period in 2004. Year-to-date in 2005, non-interest income totals $6,206,000 compared to $6,409,000 for the first nine months of 2004, a decrease of $203,000 (or 3.2%). The primary reason for the decrease is the sale of the subsidiary bank’s credit card portfolio ($465,000) in 2004, coupled with a decrease in the gains on sales of securities from $182,000 to $50,000 over the comparable time frames. Partially offsetting the decrease was an increase in trust and farm management fees of $147,000, an increase of 14.1% as assets under management have increased. Annualized non-interest income as a percentage of total average assets decreased to 1.14% for the first nine months of 2005, compared to 1.40% for the same period in 2004.
Total non-interest expense for the third quarter of 2005 was $6,202,000, an increase of $1,315,000 (or 26.9%) from $4,887,000 in the third quarter of 2004. This increase was seen in all categories and is attributable to the Somonauk acquisition and non-capitalizable acquisition-related expenditures. Annualized non-interest expense as a percentage of total average assets decreased to 2.86% for the third quarter of 2005, compared to 3.16% for the third quarter of 2004. Year-to-date non-interest expenses for 2005 were $16,497,000, an increase of $1,987,000 (or 13.7%) from the $14,510,000 for the first nine months of 2004. This increase is also due the acquisition, particularly in salaries/employee benefits ($1,380,000 or 16.8%) and in equipment expenses of $230,000 (or 19.4%). Annualized non-interest expense as a percentage of total average assets have decreased to 3.03% for the first nine months of 2005, compared to 3.17% for the same period in 2004.
15
Income tax expense totaled $580,000 for the third quarter of 2005, as compared to $509,000 for the third quarter of 2004. The effective tax rate was 22.2% for the three month period ended September 30, 2005 compared to 23.8% for the three month period ended September 30, 2004. Income tax expense totaled $1,665,000 for the first nine months of 2005, compared to $1,719,000 for the first nine months of 2004. The effective tax rate was 23.4% for the nine months ended September 30, 2005 compared to 24.9% for the nine months ended September 30, 2004. The effective tax rate is lower quarter over quarter and year-to-date 2005 versus year-to-date 2004 due to an increase in the amount of tax-exempt investment securities.
Total assets at September 30, 2005 increased to $927,529,000 from $655,738,000 at December 31, 2004 (an increase of $271.8 million or 41.4%), with $211.6 million coming from the Somonauk acquisition. Total deposits at September 30, 2005 increased to $784,170,000 from $573,561,000 at December 31, 2004 (an increase of $210.6 million or 36.7%). This increase also is due to the acquisition with $181.8 million attributable to Somonauk. Borrowings, consisting of customer repurchase agreements, notes payable, treasury, tax, and loan (“TT&L”) deposits, federal funds purchased, and Federal Home Loan Bank advances, increased from $25,535,000 at December 31, 2004 to $72,318,000 at September 30, 2005 (an increase of $46.8 million or 183.2%). As mentioned in the Notes to Consolidated Financial Statements, the Corporation issued $25.0 million in trust preferred securities and also increased notes payable by $6.0 million. Additionally, customers repurchase agreements increased by $12.0 million in the past nine months, as interest rates have become more favorable. Investment balances totaled $259,459,000 at September 30, 2005, compared to $188,809,000 at December 31, 2004 (an increase of $70.7 million or 37.4%) with $82.9 million coming from the Somonauk acquisition.
Loan balances, net of unearned interest, increased to $565,744,000 at September 30, 2005, compared to $410,044,000 at December 31, 2004 (an increase of $155.7 million or 38.0%). $115.67 million of this increase is attributable to Somonauk loans with the remaining increase coming primarily in the commercial and residential real estate areas. Non-performing loans increased to $2,514,000 or 0.44% of net loans at September 30, 2005, as compared to $328,000 or 0.08% of net loans at December 31, 2004. Although non-performing loans increased from the low level at December 31, 2004, this increase is primarily due to one commercial credit, which continues to pay down and for which management expects no future losses.
For the nine months ended September 30, 2005, the subsidiary bank charged off $171,000 of loans and had recoveries of $143,000, compared to charge-offs of $315,000 and recoveries of $233,000 during the nine months ended September 30, 2004. The allowance for loan losses is based on factors that include the overall composition of the loan portfolio, types of loans, underlying collateral, past loss experience, loan delinquencies, 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, 2005, the allowance was $3,336,000 which is 132.7% of non-performing loans and 0.59% of total loans, compared with $2,524,000 which was 769.5% of non-performing loans and 0.62% of total loans at December 31, 2004.
16
At September 30, 2005, impaired loans totaled $1,841,000 compared to $175,000 at December 31, 2004. This increase is also attributable to the aforementioned commercial credit in non-performing loans. The total amount of loans ninety days or more past due and still accruing interest at September 30, 2005 was $27,000 and at December 31, 2004 was $0. There was a specific loan loss reserve of $62,000 established for impaired loans as of September 30, 2005 compared to a specific loan loss reserve of $3,000 at December 31, 2004. 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 September 30, 2005.
In July 2005, a trust formed by the Corporation issued $25 million in trust preferred securities (“TPS”). LaSalle Bank National Association serves as trustee of the trust. The Corporation received a total of $25 million in net proceeds in the transaction by the issuance of debentures to the trust, as described in Note 2 of the Consolidated Financial Statements included elsewhere in this report. The trust sold the TPS in a non-public offering pursuant to Section 4(2) of the Securities Act of 1933, as amended. Additionally, the Corporation issued 338,600 shares of common stock in conjunction with the Somonauk acquisition.
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, 2005, total risk-based capital of PNBC was 11.19%, compared to 11.49% at December 31, 2004. The Tier 1 capital ratio decreased from 7.62% at December 31, 2004, to 7.05% at September 30, 2005, which is part of the Corporation’s long-term capital management plan. Total stockholders’ equity to total assets at September 30, 2005 decreased to 6.8% from 8.0% at December 31, 2004. The Corporation continues to be well-capitalized according to regulatory requirements.
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 and the maturity of investment securities. Major uses of cash include the origination of loans and purchase of investment securities. Cash flows provided by operating and financing activities, offset by those used in investing activities, resulted in a net increase in cash and cash equivalents of $4,469,000 from December 31, 2004 to September 30, 2005. This increase was primarily due to a net increase in deposits, the trust preferred issuance, net increase in borrowings, and the issuance of common stock, offset by the payment related to the acquisition and a net increase in loans. For more detailed information, see PNBC’s Consolidated Statements of Cash Flows.
The subsidiary bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the subsidiary bank has in particular classes of financial instruments.
17
The subsidiary bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The subsidiary bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. At September 30, 2005, commitments to extend credit and standby letters of credit were approximately $126,239,000 and $8,528,000, respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The subsidiary bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the subsidiary bank upon extension of credit is based on management’s credit evaluation of the counter party. Collateral held varies, but may include real estate, accounts receivable, inventory, property, plant and equipment, and income-producing properties.
Standby letters of credit are conditional commitments issued by the subsidiary bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. The subsidiary bank secures the standby letters of credit with the same collateral used to secure the loan.
On October 11, 2005 the Corporation opened a new full-service branch location in Plano, Illinois. Also, the Corporation has begun construction of a new branch facility in Aurora, Illinois. Construction will continue throughout the remainder of 2005, with an expected opening in the spring of 2006. Plans to build new full-service bank facility at the Elburn, Illinois property which was purchased in July of 2003, will begin in the fall of 2006.
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.
There has been no material change in market risk since December 31, 2004, as reported in PNBC’s 2004 Annual Report on Form 10-K.
18
On December 16, 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (SOP 03-3). SOP 03-3 provides guidance on the accounting for differences between contractual and expected cash flows from the purchaser’s initial investment in loans or debt securities acquired in a transfer, if those differences are attributable, at least in part, to credit quality. Among other things, SOP 03-3: (1) prohibits the recognition of the excess of contractual cash flows over expected cash flows as an adjustment of yield, loss accrual, or valuation allowance at the time of purchase; (2) requires that subsequent increases in expected cash flows be recognized prospectively through an adjustment of yield; and (3) requires the subsequent decreases in cash flows be recognized as an impairment. In addition, SOP 03-3 prohibits the creation or carrying over of a valuation allowance in the initial accounting of all loans within it scope that are acquired in a transfer. SOP 03-3 becomes effective for loans or debt securities acquired in fiscal years beginning after December 15, 2004. The Corporation is currently completing its evaluation of the impact of SOP 03-3 with respect to the Corporation’s acquisition of Somonauk.
In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The EITF reached a consensus on an other-than-temporary impairment model for debt and equity securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and cost method investments. The new guidance prescribes a three-step process to identify impairment of investment securities, classify impairment as either temporary or other-than-temporary, and recognize loss in the case of other-than-temporary impairment of investment securities. In September 2004, FASB issued a proposed FASB Staff Position, FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The proposed FSP would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of Issue 03-1. FASB has delayed the effective date for the measurement and recognition guidance contained in paragraphs 10 through 20 of Issue 03-1. This delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The delay of the effective date for paragraphs 10 through 20 of Issue 03-1 will be superceded concurrent with the final issuance of FSP EITF Issue 03-1-a. The disclosure guidance in paragraphs 21 and 22 of Issue 03-1 remains effective. The amount of any other-than-temporary impairment that may need to be recognized in the future will be dependent on market conditions, the occurrence of certain events or changes in circumstances relative to an investee, and the Corporation’s intent to hold the impaired investments at the time of the valuation.
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) (123R), “Share-Based Payment”, an amendment of FASB Statements No. 123 and 95. SFAS No. 123R will require compensation cost relating to share-based payment transactions be recognized in the consolidated financial statements, effective for the Corporation’s fiscal year beginning January 1, 2006 based on recent SEC guidance. The Corporation has summarized the pro forma impact of FAS 123R in Note 4 of the Notes to Consolidated Financial Statements, and anticipates that it will result in a reduction in earnings and earnings per share, beginning with the first quarter of 2006.
In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3” (FAS 154). FAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle and also applies to all voluntary changes in accounting principle. FAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of this statement is not expected to have a material effect on the Corporation’s consolidated financial statements.
19
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.
20
The following table sets forth (in thousands) details of average balances, interest income and expense, and resulting annualized yields/costs 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, 2005 | Nine Months Ended, September 30, 2004 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Balance | Interest | Yield/ Cost | Average Balance | Interest | Yield/ Cost |
|||||||||||||||
| Average Interest-Earning Assets | ||||||||||||||||||||
| Interest-bearing deposits | $ | 1,861 | $ | 43 | 3.12 | % | $ | 944 | $ | 6 | 0.92 | % | ||||||||
| Taxable investment securities | 124,324 | 3,214 | 3.46 | % | 104,358 | 2,408 | 3.08 | % | ||||||||||||
| Tax-exempt investment securities | 79,984 | 3,976 | 6.65 | % | 63,927 | 3,244 | 6.78 | % | ||||||||||||
| Federal funds sold | 2,844 | 75 | 3.50 | % | 1,020 | 8 | 1.04 | % | ||||||||||||
| Net loans | 451,661 | 21,660 | 6.41 | % | 387,238 | 17,441 | 6.02 | % | ||||||||||||
|
|
| |||||||||||||||||||
| Total interest-earning assets | 660,674 | 28,968 | 5.86 | % | 557,487 | 23,107 | 5.54 | % | ||||||||||||
|
|
| |||||||||||||||||||
| Average non-interest earning assets | 67,838 | 55,056 | ||||||||||||||||||
|
| ||||||||||||||||||||
| Total average assets | $ | 728,512 | $ | 612,543 | ||||||||||||||||
|
| ||||||||||||||||||||
| Average Interest-Bearing Liabilities | ||||||||||||||||||||
| Interest-bearing demand deposits | $ | 200,155 | 2,182 | 1.46 | % | $ | 182,239 | 1,451 | 1.06 | % | ||||||||||
| Savings deposits | 79,312 | 191 | 0.32 | % | 59,672 | 159 | 0.36 | % | ||||||||||||
| Time deposits | 273,152 | 6,725 | 3.29 | % | 233,292 | 4,668 | 2.67 | % | ||||||||||||
| Interest-bearing demand notes | ||||||||||||||||||||
| issued to the U.S. Treasury | 726 | 15 | 2.82 | % | 650 | 4 | 0.89 | % | ||||||||||||
| Federal funds purchased and | ||||||||||||||||||||
| securities repurchase agreements | 22,437 | 456 | 2.72 | % | 11,741 | 85 | 0.97 | % | ||||||||||||
| Advances from Federal Home Loan Bank | 6,014 | 240 | 5.34 | % | 5,000 | 210 | 5.61 | % | ||||||||||||
| Borrowings | 9,463 | 361 | 5.10 | % | 1,025 | 22 | 2.82 | % | ||||||||||||
|
|
| |||||||||||||||||||
| Total interest-bearing liabilities | 591,260 | 10,171 | 2.30 | % | 493,619 | 6,599 | 1.79 | % | ||||||||||||
|
|
| |||||||||||||||||||
| Net yield on average interest-earning assets | $ | 18,797 | 3.80 | % | $ | 16,508 | 3.95 | % | ||||||||||||
|
| ||||||||||||||||||||
| Average non-interest-bearing liabilities | 82,755 | 68,119 | ||||||||||||||||||
| Average stockholders’ equity | 54,497 | 50,806 | ||||||||||||||||||
|
| ||||||||||||||||||||
| Total average liabilities and | ||||||||||||||||||||
| stockholders’ equity | $ | 728,512 | $ | 612,543 | ||||||||||||||||
|
| ||||||||||||||||||||
The following table reconciles tax-equivalent net interest income (as shown above) to net interest income as reported on the Consolidated Statements of Income.
| For the Nine Months Ended Septmber 30, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2005 | 2004 | |||||||
| Net interest income as stated | $ | 17,395 | $ | 15,378 | ||||
| Tax equivalent adjustment-investments | 1,352 | 1,103 | ||||||
| Tax equivalent adjustment-loans | 51 | 27 | ||||||
| Tax equivalent net interest income | $ | 18,798 | $ | 16,508 | ||||
21
| (a) | Disclosure controls and procedures. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2005. 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, Senior 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. There have not been any significant changes in our internal accounting controls or in other factors during the quarter ended September 30, 2005 that could significantly affect those controls. |
22
| Exhibit Number |
Exhibit | |
| 4.1 | Trust Preferred Securities Indenture | |
| 10.1 | Trust Preferred Securities Purchase Agreement | |
| 10.2 | Trust Preferred Securities Declaration of Trust | |
| 10.3 | Trust Preferred Securities Guaranty Agreement | |
| 31.1 | Certification of Tony J. Sorcic required by Rule 13a-14(a). | |
| 31.2 | Certification of Todd D. Fanning required by Rule 13a-14(a). | |
| 32.1 | Certification of Tony J. Sorcic required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. | |
| 32.2 | Certification of Todd D. Fanning required by Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
23