FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
Commission File Number 0-20050
PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 36-3210283 |
|---|---|
| (State or other jurisdiction of incorporation or organization) |
(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 |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ||
| Accelerated filer | X | |
| Non-accelerated filer |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| Yes | No | X |
As of April 19, 2006, the registrant had outstanding 3,394,794 shares of its $5 par value common stock.
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 operation are presented in the schedules as follows:
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Schedule 1: |
Consolidated Balance Sheets |
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Schedule 2: |
Consolidated Statements of Income and Comprehensive Income | ||||||||
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Schedule 3: |
Consolidated Statements of Stockholders’ Equity |
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Schedule 4: |
Consolidated Statements of Cash Flows |
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Schedule 5: |
Notes to Consolidated Financial Statements |
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Schedule 6: |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Schedule 7: |
Controls and Procedures |
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Part II: OTHER INFORMATION
Item 1A. Risk Factors
An investment in PNBC’s common stock is subject to risks inherent to the Corporation’s business. An investor should carefully consider the risks described below and information contained in this Form 10-Q together before deciding to purchase PNBC common stock. The risks and uncertainties described below are not the only ones facing the Corporation. Additional risks and uncertainties that management is not aware of or focused on or deems immaterial may arise or become material in the future and affect PNBC’s business. If any of these risks actually occur, PNBC’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of PNBC common stock could decrease significantly.
PNBC’s concentration of agricultural loans is subject to risks that could adversely affect earnings.
PNBC’s agricultural and agricultural real estate loan portfolio total $138.1 million at March 31, 2006, comprising 24.4% of total loans. The primary risks associated with agricultural loans are weather and borrower’s management. In the event of catastrophic weather conditions, such as severe drought or flooding, these loans would represent a higher risk due to poor crop sales and reduced cash flow that could impact the borrowers’ ability to repay the loan on a timely basis.
Changes in interest rates could adversely impact the financial condition and results of operations.
PNBC’s ability to make a profit, like that of most financial institutions, substantially depends upon its net interest income. However, certain assets and liabilities may react differently to changes in market interest rates. In a period of changing rates, interest expense may increase at different rates than the interest earned. Accordingly, changes in interest rates could decrease net interest income.
2
The allowance for loan losses may not be sufficient to cover actual loan losses decreasing earnings.
In determining the appropriate level of allowance for loan losses, management considers, among other things, the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, potential substandard and doubtful loans, underlying collateral, and other factors that, in management’s best judgment, deserve evaluation. Although management monitors the allowance monthly and considers it adequate to absorb probable losses at March 31, 2006, if any of the assumptions are incorrect, the allowance may not be sufficient to cover future loan losses. Future adjustments may be necessary to allow for different economic conditions or adverse developments in the loan portfolio. Consequently, a problem with one or more loans could require the Corporation to significantly increase the level of its provision for loan losses resulting in a reduction of earnings.
The Internal Controls of PNBC may not be effective.
Management reviews and tests on a quarterly basis its system of internal controls, disclosure controls and procedures, and corporate governance polices and procedures. Any system of internal controls, however well designed, is based on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are actually being met. Any failure or circumvention of these controls could have a material adverse affect on the Corporation’s financial condition and results of operations.
There is competition within the PNBC market areas which may limit growth and profitability.
Because the banking business is highly competitive, PNBC faces significant competition both in originating loans and attracting deposits. Competition can not only be effected by the pricing of loans and deposits, but also by the variety of products offered. The ability of the Corporation to continue to grow in the markets served while effectively managing interest rate risk is contingent upon being able to operate in this competitive environment, which ultimately affects the Corporation’s profitability.
The success of PNBC is dependent on hiring and retaining key personnel.
PNBC’s performance is largely dependent on the talents and efforts of highly skilled individuals. The Corporation relies on key personnel to manage and operate its business and the loss of any of these individuals may adversely affect the Corporation’s ability to maintain and/or manage the business effectively. This could have a material adverse affect on the Corporation’s financial condition and results of operations.
PNBC operates in a highly regulated environment.
PNBC is subject to extensive regulation, supervision and examination. Any changes in the regulations or applicable laws and the failure of the Corporation to comply with any of the regulations and laws could have a material adverse effect on the Corporation’s financial condition and results of operations.
3
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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(a) |
The Corporation sold an aggregate of 4,837 shares of common stock for a total purchase price of $162,000 during the quarter ended March 31, 2006. The shares were sold pursuant to the Citizens First National Bank 401(k) and profit sharing plan. |
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(c) |
The following table provides information about purchases of the Corporation’s common stock by the Corporation during the quarter ended March 31, 2006: |
| Period | (a) Total number of shares purchased | (b) Average price paid per share | (c) Total number of shares purchased as part of publicly announced plans or programs | (d) Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1/1/06 - 1/31/06 | 0 | $ | 0.00 | 0 | 0 | |||||||||
| 2/1/06 - 2/28/06 | 0 | $ | 0.00 | 0 | 0 | |||||||||
| 3/1/06 - 3/31/06 | 0 | $ | 0.00 | 0 | 0 | |||||||||
| Total | 0 | $ | 0.00 | 0 | 0 | |||||||||
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(1) |
The Corporation completed the repurchase program of 100,000 shares announced on January 24, 2005 on December 1, 2005. |
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(2) |
On April 25, 2006, the Board of Directors approved the repurchase of up to an aggregate of 100,000 shares of our common stock pursuant to a repurchase program announced the same day (“the Program”). The expiration date of this Program is April 25, 2007. 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. |
Item 6. Exhibits
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31.1 |
Certification of Tony J. Sorcic required by Rule 13a-14(a). |
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31.2 |
Certification of Todd D. Fanning required by Rule 13a-14(a). |
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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. |
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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. |
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.
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By |
/s/ Tony J. Sorcic |
By |
/s/ Todd D. Fanning |
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Tony J. Sorcic |
Todd D. Fanning |
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President & Chief Executive Officer |
Sr. VP & Chief Financial Officer |
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| May 9, 2006 | May 9, 2006 |
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Schedule 1
PRINCETON NATIONAL
BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
| March 31, 2006 (unaudited) | December 31, 2005 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Cash and due from banks | $ | 14,449 | $ | 23,635 | ||||
| Interest-bearing deposits with financial institutions | 153 | 110 | ||||||
| Federal funds sold | 7,400 | 0 | ||||||
| Total cash and cash equivalents | 22,002 | 23,745 | ||||||
| Loans held for sale, at lower of cost or market | 3,526 | 2,587 | ||||||
| Investment securities: | ||||||||
| Available-for-sale, at fair value | 221,262 | 235,371 | ||||||
| Held-to-maturity, at amortized cost (fair value of $16,386 and $16,274) | 16,376 | 16,115 | ||||||
| Total investment securities | 237,638 | 251,486 | ||||||
| Loans: | ||||||||
| Loans, net of unearned interest | 566,906 | 581,724 | ||||||
| Allowance for loan losses | (3,010 | ) | (3,109 | ) | ||||
| Net loans | 563,896 | 578,615 | ||||||
| Premises and equipment, net of accumulated depreciation | 27,385 | 26,412 | ||||||
| Bank-owned life insurance | 20,765 | 20,434 | ||||||
| Accrued interest receivable | 7,419 | 8,714 | ||||||
| Goodwill | 22,673 | 22,665 | ||||||
| Intangible assets, net of accumulated amortization | 6,613 | 6,843 | ||||||
| Other real estate owned | 467 | 468 | ||||||
| Other assets | 16,081 | 3,294 | ||||||
| TOTAL ASSETS | $ | 928,465 | $ | 945,263 | ||||
| LIABILITIES | ||||||||
| Deposits: | ||||||||
| Demand | $ | 96,445 | $ | 103,622 | ||||
| Interest-bearing demand | 200,321 | 222,675 | ||||||
| Savings | 116,277 | 109,491 | ||||||
| Time | 374,997 | 362,770 | ||||||
| Total deposits | 788,040 | 798,558 | ||||||
| Borrowings: | ||||||||
| Customer repurchase agreements | 27,738 | 29,375 | ||||||
| Advances from the Federal Home Loan Bank | 8,352 | 8,346 | ||||||
| Interest-bearing demand notes issued to the U.S. Treasury | 176 | 2,154 | ||||||
| Federal funds purchased | 0 | 1,000 | ||||||
| Trust Preferred securities | 25,000 | 25,000 | ||||||
| Note payable | 6,650 | 6,700 | ||||||
| Total borrowings | 67,916 | 72,575 | ||||||
| Other liabilities | 8,114 | 10,986 | ||||||
| TOTAL LIABILITIES | 864,070 | 882,119 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Common stock: $5 par value, 7,000,000 shares authorized; 4,478,296 issued at | ||||||||
| March 31, 2006 and at December 31, 2005 | 22,392 | 22,392 | ||||||
| Surplus | 17,835 | 16,968 | ||||||
| Retained earnings | 46,151 | 45,786 | ||||||
| Accumulated other comprehensive loss, net of tax | (1,381 | ) | (482 | ) | ||||
| Less: Cost of 1,083,502 and 1,131,853 treasury shares at | ||||||||
| March 31, 2006 and December 31, 2005, respectively | (20,602 | ) | (21,520 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 64,395 | 63,144 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 928,465 | $ | 945,263 | ||||
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 Ended March 31 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | |||||||
| Interest income: | ||||||||
| Interest and fees on loans | $ | 9,744 | $ | 6,291 | ||||
| Interest and dividends on investment securities | 2,551 | 1,705 | ||||||
| Interest on federal funds sold | 14 | 1 | ||||||
| Interest on interest-bearing time deposits in other banks | 4 | 1 | ||||||
| Total interest income | 12,313 | 7,998 | ||||||
| Interest expense: | ||||||||
| Interest on deposits | 4,854 | 2,441 | ||||||
| Interest on borrowings | 930 | 182 | ||||||
| Total interest expense | 5,784 | 2,623 | ||||||
| Net interest income | 6,529 | 5,375 | ||||||
| Provision for loan losses | 10 | 0 | ||||||
| Net interest income after provision for loan losses | 6,519 | 5,375 | ||||||
| Non-interest income: | ||||||||
| Trust & farm management fees | 405 | 397 | ||||||
| Service charges on deposit accounts | 997 | 708 | ||||||
| Other service charges | 390 | 262 | ||||||
| Gain on sales of securities available-for-sale | 60 | 20 | ||||||
| Gain on sale of loans | 90 | 0 | ||||||
| Brokerage fee income | 144 | 160 | ||||||
| Mortgage banking income | 186 | 131 | ||||||
| Bank-owned life insurance income | 186 | 139 | ||||||
| Other operating income | 41 | 58 | ||||||
| Total non-interest income | 2,499 | 1,875 | ||||||
| Non-interest expense: | ||||||||
| Salaries and employee benefits | 4,032 | 2,954 | ||||||
| Occupancy | 471 | 342 | ||||||
| Equipment expense | 705 | 465 | ||||||
| Federal insurance assessments | 79 | 58 | ||||||
| Intangible assets amortization | 163 | 52 | ||||||
| Data processing | 305 | 194 | ||||||
| Advertising | 195 | 156 | ||||||
| Other operating expense | 1,132 | 776 | ||||||
| Total non-interest expense | 7,082 | 4,997 | ||||||
| Income before income taxes | 1,936 | 2,253 | ||||||
| Income tax expense | 286 | 545 | ||||||
| Net income | $ | 1,650 | $ | 1,708 | ||||
| Earnings per share: | ||||||||
| Basic | 0.49 | 0.56 | ||||||
| Diluted | 0.49 | 0.55 | ||||||
| Basic weighted average shares outstanding | 3,362,332 | 3,055,021 | ||||||
| Diluted weighted average shares outstanding | 3,385,248 | 3,081,018 | ||||||
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 Ended March 31 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | |||||||
| Net income | $ | 1,650 | $ | 1,708 | ||||
| Other comprehensive loss, net of tax | ||||||||
| Unrealized holding losses arising during the period, net of tax | (862 | ) | (1,100 | ) | ||||
| Less: Reclassification adjustment for realized gains on | ||||||||
| sales of securities included in net income | (37 | ) | (12 | ) | ||||
| Other comprehensive loss | (899 | ) | (1,112 | ) | ||||
| Comprehensive income | $ | 751 | $ | 596 | ||||
See accompanying notes to consolidated financial statements
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Schedule 3
PRINCETON NATIONAL
BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(dollars in thousands except per share data)
| For the Three Months Ended March 31, 2006 | Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive Income (loss) net of tax effect | Treasury Stock | Total | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance, January 1, 2006 | $ | 22,392 | $ | 16,968 | $ | 45,786 | ($ 482 | ) | ($21,520 | ) | $ | 63,144 | ||||||||
| Net income | 1,650 | 1,650 | ||||||||||||||||||
| Exercise of stock options and re-issuance of treasury stock (48,351 shares) | 867 | (480 | ) | 918 | 1,305 | |||||||||||||||
| Cash dividends ($.24 per share) | (805 | ) | (805 | ) | ||||||||||||||||
| Other comprehensive loss, net of $626 tax effect | (899 | ) | (899 | ) | ||||||||||||||||
| Balance, March 31, 2006 | $ | 22,392 | $ | 17,835 | $ | 46,151 | ($ 1,381 | ) | ($20,602 | ) | $ | 64,395 | ||||||||
| For the Three Months Ended March 31, 2005 | ||||||||||||||||||||
| Balance, January 1, 2005 | $ | 20,699 | $ | 7,810 | $ | 42,156 | $ | 951 | ($19,247 | ) | $ | 52,369 | ||||||||
| Net income | 1,708 | 1,708 | ||||||||||||||||||
| Sale of 2,348 shares of treasury stock | 30 | 39 | 69 | |||||||||||||||||
| Purchase of 35,100 shares of treasury stock | (1,075 | ) | (1,075 | ) | ||||||||||||||||
| Exercise of stock options and re-issuance of treasury stock (16,365 shares) | 298 | (213 | ) | 237 | 322 | |||||||||||||||
| Cash dividends ($.21 per share) | (642 | ) | (642 | ) | ||||||||||||||||
| Other comprehensive loss, net of $703 tax effect | (1,112 | ) | (1,112 | ) | ||||||||||||||||
| Balance, March 31, 2005 | $ | 20,699 | $ | 8,138 | $ | 43,009 | ($ 161 | ) | ($20,046 | ) | $ | 51,639 | ||||||||
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 Three Months Ended March 31 | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | |||||||
| Operating activities: | ||||||||
| Net income | $ | 1,650 | $ | 1,708 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | 531 | 336 | ||||||
| Provision for loan losses | 10 | 0 | ||||||
| Amortization of other intangible assets | 163 | 52 | ||||||
| Amortization of premiums on investment securities, net of accretion | 189 | 387 | ||||||
| Gain on sales of securities, net | (60 | ) | (20 | ) | ||||
| Gain on sale of loans | (90 | ) | 0 | |||||
| FHLB stock dividends | (24 | ) | (27 | ) | ||||
| Loans originated for sale | (10,495 | ) | (7,903 | ) | ||||
| Proceeds from sales of loans originated for sale | 9,556 | 7,028 | ||||||
| Increase in accrued interest payable | 154 | 151 | ||||||
| Decrease in accrued interest receivable | 1,295 | 756 | ||||||
| Increase in other assets | (13,125 | ) | (482 | ) | ||||
| (Decrease) increase in other liabilities | (2,457 | ) | 95 | |||||
| Net cash (used in) provided by operating activities | (12,703 | ) | 2,081 | |||||
| Investing activities: | ||||||||
| Proceeds from sales of investment securities available-for-sale | 4,004 | 1,106 | ||||||
| Proceeds from maturities of investment securities available-for-sale | 11,086 | 8,344 | ||||||
| Purchase of investment securities available-for-sale | (2,598 | ) | (5,726 | ) | ||||
| Proceeds from maturities of investment securities held-to-maturity | 852 | 35 | ||||||
| Purchase of investment securities held-to-maturity | (1,080 | ) | (695 | ) | ||||
| Proceeds from sale of loans | 16,590 | 0 | ||||||
| Net increase in loans | (1,699 | ) | (13,156 | ) | ||||
| Purchases of premises and equipment | (1,504 | ) | (449 | ) | ||||
| Net cash provided by (used in) investing activities | 25,651 | (10,541 | ) | |||||
| Financing activities: | ||||||||
| Net (decrease) increase in deposits | (10,526 | ) | 5,596 | |||||
| Net (decrease) increase in borrowings | (4,665 | ) | 1,180 | |||||
| Dividends paid | (805 | ) | (642 | ) | ||||
| Purchases of treasury stock | 0 | (1,075 | ) | |||||
| Exercise of stock options and issuance of treasury stock | 1,305 | 322 | ||||||
| Sales of treasury stock | 0 | 69 | ||||||
| Net cash (used in) provided by financing activities | (14,691 | ) | 5,450 | |||||
| Decrease in cash and cash equivalents | (1,743 | ) | (3,010 | ) | ||||
| Cash and cash equivalents at beginning of period | 23,745 | 14,090 | ||||||
| Cash and cash equivalents at March 31 | $ | 22,002 | $ | 11,080 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 5,630 | $ | 2,472 | ||||
| Income taxes | $ | 125 | $ | 125 | ||||
| Supplemental disclosures of non-cash flow activities: | ||||||||
| Loans transferred to other real estate owned | $ | 7 | $ | 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 2005 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 2005 consolidated financial statements have been reclassified to conform to the 2006 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 March 31, | ||||||||
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| 2006 | 2005 | |||||||
| Numerator: | ||||||||
| Net income | $ | 1,650 | $ | 1,708 | ||||
| Denominator: | ||||||||
| Basic earnings per share- | ||||||||
| weighted average shares | 3,362,332 | 3,055,021 | ||||||
| Effect of dilutive securities- | ||||||||
| stock options | 22,916 | 25,997 | ||||||
| Diluted earnings per share- | ||||||||
| adjusted weighted average shares | 3,385,248 | 3,081,018 | ||||||
| Net income per share: | ||||||||
| Basic | $ | 0.49 | $ | 0.56 | ||||
| Diluted | $ | 0.49 | $ | 0.55 | ||||
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The balance of goodwill, net of accumulated amortization, totaled $22,673,000 at March 31, 2006 and $22,665,000 at December 31, 2005, an increase of $8,000 for purchase accounting adjustments in the first quarter of 2006. The balance of intangible assets, net of accumulated amortization, totaled $6,613,000 and $6,843,000 at March 31, 2006 and December 31, 2005, respectively.
The following table summarizes the Corporation’s intangible assets, which are subject to amortization, as of March 31, 2006 and December 31, 2005.
(in thousands)
| 2006 | 2005 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||
| Core deposit intangible | $ | 9,004 | $ | (2,427 | ) | $ | 9,004 | $ | (2,199 | ) | ||||
| Other intangible assets | 160 | (124 | ) | 160 | (122 | ) | ||||||||
| Total | $ | 9,164 | $ | (2,551 | ) | $ | 9,164 | $ | (2,321 | ) | ||||
Amortization expense of the intangible assets in the table above totaled $230,000 for the three months ended March 31, 2006 and $52,000 for the three months ended March 31, 2005, respectively, with the increase related to the amortization of the core deposit intangible of $178,000, resulting from the acquisition in August, 2005. The amortization expense of these intangible assets will be approximately $690,000 for the remainder of 2006.
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 March 31, 2006, 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, 2006 | $ | 2,002 | |||
| Servicing rights capitalized | 279 | ||||
| Amortization of servicing rights | (52 | ) | |||
| Impairment of servicing rights | 0 | ||||
| Balance, March 31, 2006 | $ | 2,229 | |||
The Corporation services loans for others with unpaid principal balances at March 31, 2006 and December 31, 2005 of approximately $202,652,000, and $202,042,000, respectively.
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The following table shows the future estimated amortization expense for mortgage servicing rights based on existing balances as of March 31, 2006. 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.
| Amount (in thousands) | |||||
|---|---|---|---|---|---|
| For the nine months ended December 31, 2006 | $ | 198 | |||
| For the year ended December 31, 2007 | 252 | ||||
| For the year ended December 31, 2008 | 237 | ||||
| For the year ended December 31, 2009 | 222 | ||||
| For the year ended December 31, 2010 | 208 | ||||
| For the year ended December 31, 2011 | 195 | ||||
| Thereafter | 917 | ||||
Effective January 1, 2006, the Company adopted Financial Accounting Standards Board Statement No. 123R (“FASB 123R”) requiring the recording of future compensation expense based on grant date fair value with regard to stock options as opposed to recording compensation expense equal to the intrinsic value of stock options on grant date which generally resulted in no compensation expense being recorded. On December 20, 2005, the Company announced that the Personnel Policy and Salary Committee of the Board of Directors approved the accelerated vesting of all outstanding unvested stock options to purchase shares of common stock of PNBC granted through the Company’s non-qualified stock option plan. The unvested options related to awards granted in 2003 and 2004 to directors and officers of the Company. All of the unvested options were in the money at the date vesting was accelerated, in a range from $4.42 to $22.06 per share. There was no compensation cost recognized in the financial statements from the vesting decision. By accelerating the vesting of these options, the Company estimates approximately $925,000 of future compensation expense will be eliminated, which the Company believes is in the best interests of the shareholders. Options to purchase 142,133 shares of PNBC common stock, which otherwise would have vested from time to time over the next two years, became immediately exercisable as a result of this decision. The remaining terms for each of the options granted remain the same. This acceleration became effective as of December 31, 2005. Additionally, the Company announced the stock option award for 2005 of 80,700 shares was granted with full vesting. This decision was made to eliminate additional future compensation expense of approximately $163,000 for each of the next three years, beginning in 2006.
The number of shares of common stock authorized under the stock option plans is 502,500. The option exercise price must be at least 100% of the fair market value of the common stock on the date of grant, and the option term cannot exceed ten ears. A summary of the stock option activity and related information follows:
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| Three Months Ended March 31, 2006 | Twelve Months Ended December 31, 2005 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Average Exercise Price | Shares | Average Exercise Price | |||||||||||
| Beginning of period balance | 302,718 | $ | 27.52 | 271,184 | $ | 24.10 | ||||||||
| Granted | -0- | n/a | 80,700 | 33.25 | ||||||||||
| Exercised | 48,351 | 23.13 | 45,164 | 17.26 | ||||||||||
| Forfeited | -0- | n/a | 4,002 | 27.46 | ||||||||||
| End of period balance | 254,367 | $ | 28.35 | 302,718 | $ | 27.52 | ||||||||
| Options exercisable | 254,367 | 302,718 | ||||||||||||
| Fair value of options granted during the year | $ | 6.26 | $ | 6.07 | ||||||||||
| Average exercise price | $ | 28.35 | $ | 27.52 | ||||||||||
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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 quarters ended March 31, 2006 and 2005. 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 first quarter of 2006 was $1,650,000, or basic and diluted earnings per share of $0.49, as compared to net income of $1,708,000 in the first quarter of 2005, or basic earnings per share of $0.56 (diluted earnings per share of $0.55). This represents a decrease of $58,000 (3.4%) or $.07 per basic share and $.06 per diluted share. The lower net income figure is primarily due to the lower net yield on interest-earning assets discussed in the paragraph below and increased salary expenses from the hiring and training of the Aurora staff for the anticipated 2nd quarter opening of that office. The annualized return on average assets and return on average equity were 0.72% and 10.54%, respectively, for the first quarter of 2006, compared with 1.06% and 13.24% for the first quarter of 2005.
Net interest income before provision for loan losses was $6,529,000 for the first quarter of 2006, compared to $5,375,000 for the first quarter of 2005 (an increase of $1,154,000 or 21.5%). This increase is a result of an increase in average interest-earning assets of $230.3 million over the past twelve months, after the acquisition of Somonauk FSB Bancorp, Inc. (“FSB”) on August 1, 2005. For the three months ended March 31, 2006, average interest-earning assets were $825.9 million compared to $595.6 million for the three months ended March 31, 2005. However, the resulting net yield on interest-earning assets (on a fully taxable equivalent basis) decreased to 3.52% in the first quarter of 2006 from 3.94% in the first quarter of 2005, further contributing to the lower net income reported above. As interest rates have risen quickly over the past year, the yield on interest-earning assets (increased 64 basis points) has not been able to keep pace with the rising cost of interest-bearing liabilities (increased 106 basis points). A further increase to the cost of interest-bearing liabilities has occurred because more deposits are moving into time deposits away from lower-costing interest-bearing demand deposits.
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The Corporation’s provision for loan loss expense recorded each quarter is determined by management’s evaluation of the risk characteristics of the loan portfolio. For the first quarter of 2006, PNBC had net charge-offs of $109,000, compared to net charge-offs of $11,000 for the first quarter of 2005. PNBC recorded a loan loss provision of $10,000 in the first quarter of 2006 compared to a provision of $0 in the first quarter of 2005.
Non-interest income totaled $2,499,000 for the first quarter of 2006, compared to $1,875,000 in the first quarter of 2005, an increase of $624,000 (or 33.3%). Service charges on deposits and Other service charges had the largest increases of $289,000 and $128,000, respectively, due to a larger customer base following the FSB acquisition. The Corporation recorded gains from the sales of securities available-for-sale of $60,000 in the first three months of 2006 compared to $20,000 for the first three months of 2005. Additionally, the Corporation recorded a pre-tax gain of $90,000 in conjunction with the sale of $16,500,000 of first mortgage loans. These funds will be used to meet the Corporation’s short-term liquidity needs and fund future loans at higher interest rates, thus improving the net interest margin. The servicing of these loans was retained which will help further increase non-interest income. Annualized non-interest income as a percentage of total average assets decreased from 1.16% for the first three months of 2005, to 1.09% for the same period in 2006.
Total non-interest expense for the first quarter of 2006 was $7,082,000, an increase of $2,085,000 (or 41.7%) from $4,997,000 in the first quarter of 2005. All categories of non-interest expense were higher due to the increased number of employees and facilities resulting from the FSB acquisition and the opening of a new location in Plano during the 4th quarter of 2005. Additionally, as mentioned above, contributing to the increase in salaries/employee benefits, was the hiring in the first quarter of 2006 of the staff for the Aurora office which is scheduled to open in the second quarter of 2006. Annualized non-interest expense as a percentage of total average assets also increased to 3.09% for the first three months of 2006, compared to 3.06% for the same period in 2005.
Income tax expense totaled $286,000 for the first quarter of 2006, as compared to $545,000 for the first quarter of 2005. The effective tax rate was 14.8% for the three month period ended March 31, 2006 and 24.2% for the three month period ended March 31, 2005. The lower effective tax rate in 2006 is due to a significant increase in the amount of tax-exempt investment securities in the Corporation’s investment portfolio as well as a lower pre-tax income.
Total assets at March 31, 2006 decreased to $928,465,000 from $945,263,000 at December 31, 2005 (a decrease of $16.8 million or 1.8%). Investment balances totaled $237,638,000 at March 31, 2006, compared to $251,486,000 at December 31, 2005 (a decrease of $13.8 million or 5.5%). The decrease in the investment portfolio was a result of management’s decision to partially fund new loans with maturing investments rather than be overly competitive with the rising price of deposits. Accordingly, total deposits decreased to $788,040,000 at March 31, 2006 from $798,558,000 at December 31, 2005 (a decrease of $10.5 million or 1.3%).
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This decrease can also be attributed to many of our grain company customers and municipal accounts which had higher balances at December 31. Comparing categories of deposits at March 31, 2006 to December 31, 2005, time deposits increased by $12.2 million (or 3.3%) and savings deposits increased $6.8 million (or 6.2%). Conversely, interest-bearing demand deposits decreased $22.4 million (or 10.0%) and demand deposits decreased $7.2 million (or 6.9%). Borrowings, consisting of customer repurchase agreements, notes payable, treasury, tax, and loan (“TT&L”) deposits, federal funds purchased, and Federal Home Loan Bank advances, decreased from $72,575,000 at December 31, 2005 to $67,916,000 at March 31, 2006 (a decrease of $4.7 million or 6.4%).
Loan balances, net of unearned interest, decreased to $566,906,000 at March 31, 2006, compared to $581,724,000 at December 31, 2005 (a decrease of $14.8 million or 2.6%). This decease was the result of the aforementioned loan sale of residential real estate mortgages. Non-performing loans increased to $4,519,000 or 0.80% of net loans at March 31, 2006, as compared to $3,824,000 or 0.66% of net loans at December 31, 2005. The majority of this increase is seasonal and attributable to the Corporation’s agricultural loan portfolio as the loan renewal season occurred during the first quarter. Although non-performing loans have increased, all are individually evaluated and management continues to maintain adequate reserves in the allowance for loan losses.
For the three months ended March 31, 2006, the subsidiary bank charged off $148,000 of loans and had recoveries of $39,000, compared to charge-offs of $59,000 and recoveries of $48,000 during the three months ended March 31, 2005. 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 March 31, 2006, the allowance was $3,010,000 which is 66.1% of non-performing loans and 0.53% of total loans, compared with $3,109,000 which was 81.3% of non-performing loans and 0.53% of total loans at December 31, 2005. Although the ratio of allowance to non-performing loans is lower at March 31, this is due to seasonal factors and not any deterioration of the quality of the loan portfolio.
At March 31, 2006 non-accrual loans were $4,235,000 compared to $3,822,000 at December 31, 2005. Impaired loans totaled $2,206,000 at March 31, 2006 compared to $2,204,000 at December 31, 2005. The total amount of loans ninety days or more past due and still accruing interest at March 31, 2006 was $284,000 compared to $0 at December 31, 2005. There was a specific loan loss reserve of $50,000 established for impaired loans as of March 31, 2006 compared to a specific loan loss reserve of $111,000 at December 31, 2005. PNBC’s management analyzes the allowance for loan losses monthly and, again, believes the current level of allowance is adequate to meet probable losses as of March 31, 2006.
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 March 31, 2006 total risk-based capital of PNBC was 10.09%, compared to 9.76% at December 31, 2005. The Tier 1 capital ratio decreased from 7.83% at December 31, 2005, to 6.80% at March 31, 2006. Total stockholders’ equity to total assets at March 31, 2006 increased to 6.94% from 6.68% at December 31, 2005.
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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 used in operating and financing activities, offset by those provided by investing activities, resulted in a net decrease in cash and cash equivalents of $1,743,000 from December 31, 2005 to March 31, 2006. This decrease was primarily due to a net decrease in deposits and borrowings and a net increase in other assets, offset by the proceeds from the sale of 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.
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 March 31, 2006, commitments to extend credit and standby letters of credit were approximately $106,332,000 and $9,194,000, 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.
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The Corporation is in the final stages of construction with respect to the new facility in Aurora, Illinois. The facility will open on May 1, 2006. The Corporation also owns property in Elburn, Illinois which was purchased in July of 2003 as part of a long-term expansion plan.
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, 2005, as reported in PNBC’s 2005 Annual Report on Form 10-K.
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 did not have a material effect on the Corporation’s consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, with respect to the accounting for separately recognized servicing assets and liabilities. FAS 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in any of the following situations: a transfer of the servicer’s financial assets that meets the requirements for sale accounting, a transfer of the servicer’s financial assets to a qualifying special-purpose entity in a guaranteed mortgage securitization in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with FAS 115, “Accounting for Certain Investments in Debt and Equity Securities”, or an acquisition or assumption of an obligation to service a financial asset that does not relate to financial assets of the servicer or its consolidated affiliates. FAS 156 maintains the requirement set forth under FAS 140 that all separately recognized servicing assets and servicing liabilities are to be initially measured at fair value, if practicable. In regards to subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities, FAS 156 amends FAS 140 to allow for either an amortization method or a fair value measurement method. FAS 156 is effective as of the beginning of the fiscal year that begins after September 15, 2006. The Corporation does not expect the adoption of FAS 156 will have an impact on its results of operations, financial position, or liquidity.
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
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PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
The following table sets forth (in thousands) details of average balances, interest income and expense, and resulting annualized yields/costs for the Corporation for the periods indicated, reported on a fully taxable equivalent basis, using a tax rate of 34%.
| Three Months Ended, March 31, 2006 | Three Months Ended, March 31, 2005 | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average Balance | Interest | Yield/ Cost | Average Balance | Interest | Yield/ Cost | |||||||||||||||
| Average Interest-Earning Assets | ||||||||||||||||||||
| Interest-bearing deposits | $ | 335 | $ | 4 | 4.51 | % | $ | 249 | $ | 1 | 2.20 | % | ||||||||
| Taxable investment securities | 140,460 | 1,375 | 3.97 | % | 115,620 | 938 | 3.29 | % | ||||||||||||
| Tax-exempt investment securities | 106,648 | 1,783 | 6.78 | % | 69,860 | 1,162 | 6.75 | % | ||||||||||||
| Federal funds sold | 1,356 | 14 | 4.19 | % | 96 | 1 | 2.65 | % | ||||||||||||
| Net loans | 577,091 | 9,769 | 6.87 | % | 409,781 | 6,306 | 6.24 | % | ||||||||||||
| Total interest-earning assets | 825,889 | 12,945 | 6.36 | % | 595,605 | 8,408 | 5.72 | % | ||||||||||||
| Average non-interest earning assets | 104,612 | 57,761 | ||||||||||||||||||
| Total average assets | $ | 930,501 | $ | 653,366 | ||||||||||||||||
| Average Interest-Bearing Liabilities | ||||||||||||||||||||
| Interest-bearing demand deposits | $ | 208,803 | 918 | 1.78 | % | $ | 190,822 | 616 | 1.31 | % | ||||||||||
| Savings deposits | 112,568 | 85 | 0.30 | % | 68,341 | 50 | 0.30 | % | ||||||||||||
| Time deposits | 365,715 | 3,850 | 4.27 | % | 243,159 | 1,775 | 2.96 | % | ||||||||||||
| Interest-bearing demand notes issued to the U.S. Treasury | 651 | 7 | 4.51 | % | 604 | 3 | 1.97 | % | ||||||||||||
| Federal funds purchased | 5,412 | 60 | 4.53 | % | 4,819 | 32 | 2.67 | % | ||||||||||||
| Customer repurchase agreements | 29,862 | 303 | 4.12 | % | 14,411 | 69 | 1.93 | % | ||||||||||||
| Advances from Federal Home Loan Bank | 8,348 | 97 | 4.69 | % | 5,000 | 68 | 5.48 | % | ||||||||||||
| Trust preferred securities | 25,000 | 355 | 5.68 | % | 0 | 0 | 0.00 | % | ||||||||||||
| Note payable | 6,663 | 107 | 6.51 | % | 879 | 10 | 4.60 | % | ||||||||||||
| Total interest-bearing liabilities | 763,022 | 5,783 | 3.07 | % | 528,035 | 2,623 | 2.01 | % | ||||||||||||
| Net yield on average interest-earning assets | $ | 7,162 | 3.52 | % | $ | 5,784 | 3.94 | % | ||||||||||||
| Average non-interest-bearing liabilities | 103,994 | 73,022 | ||||||||||||||||||
| Average stockholders’ equity | 63,485 | 52,309 | ||||||||||||||||||
| Total average liabilities and stockholders’ equity | $ | 930,501 | $ | 653,366 | ||||||||||||||||
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 Three Months Ended March 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | |||||||
| Net interest income as stated | $ | 12,313 | $ | 7,998 | ||||
| Tax equivalent adjustment-investments | 606 | 395 | ||||||
| Tax equivalent adjustment-loans | 26 | 15 | ||||||
| Tax equivalent net interest income | $ | 12,945 | $ | 8,408 | ||||
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| (a) | Disclosure controls and procedures. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2006. 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 March 31, 2006 that could significantly affect those controls. |
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INDEX TO EXHIBITS
| Exhibit Number |
Exhibit |
| 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. |
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