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, 2008
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
(Registrants 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
o |
Accelerated filer |
x |
Non-accelerated filer |
o |
Smaller reporting company |
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 20, 2008, the registrant had outstanding 3,296,669 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 managements discussion and analysis of financial condition and results of operation are presented in the schedules as follows:
Schedule 1: |
Consolidated Balance Sheets |
Schedule 2: |
Consolidated Statements of Income |
Schedule 3: |
Consolidated Statements of Stockholders Equity |
Schedule 4: |
Consolidated Statements of Cash Flows |
Schedule 5: |
Notes to Consolidated Financial Statements |
Schedule 6: |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
Schedule 7: |
Controls and Procedures |
Part II: OTHER INFORMATION
Item 1A. Risk Factors
The current volatility in economic conditions and the financial markets may adversely affect our industry, business and financial performance. The second half of 2008 has witnessed unprecedented disruptions in financial markets, including volatility in asset values and constraints on the availability of credit. In response to these developments, the U.S. government has taken, and may take further, steps designed to stabilize markets generally and strengthen financial institutions in particular. The impact, if any, that these financial market events or these governmental actions might have on the Company and its business is uncertain and cannot be estimated at this time. Item 1A (Risk Factors) of the Companys Annual Report on Form 10-K for the year ended December 31, 2007 discusses some of the principal risks inherent in the Companys business, including interest rate risks, liquidity risks, credit risks, operational risks, risks from economic or market conditions and general business risks among others. The current upheaval in financial markets has accentuated each of these risks and magnified their potential effect on the Company.
At the same time, there appears to be a general weakening of the U.S. economy. To the extent these economic developments continue to worsen, and to the extent legislation or regulatory action adversely affects the U.S. economy, the Companys access to capital or the credit quality of the Companys loan portfolio, or imposes additional limitations or costs on the Companys business, there could be an adverse impact on the Companys costs, credit losses, access to capital or liquidity.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
|
(c) |
The following table provides information about purchases of the Corporations common stock by the Corporation during the quarter ended September 30, 2008: |
Period |
|
(a) Total number of |
|
(b) Average price paid |
|
(c) Total number |
|
(d) Maximum number |
| ||||
7/1/08 -7/31/08 |
|
|
0 |
|
$ |
0.00 |
|
|
0 |
|
|
20,000 |
|
8/1/08 -8/31/08 |
|
|
0 |
|
$ |
0.00 |
|
|
0 |
|
|
20,000 |
|
9/1/08 9/30/08 |
|
|
0 |
|
$ |
0.00 |
|
|
0 |
|
|
20,000 |
|
Total |
|
|
0 |
|
$ |
0.00 |
|
|
0 |
|
|
20,000 |
|
On April 24, 2007, the Board of Directors approved the repurchase of up to an aggregate of 50,000 shares of our common stock pursuant to a repurchase program announced the same day (the Program). The original expiration date of this Program was April 24, 2008, but was extended to October 24, 2008 by the Board of Directors at their meeting held on April 28, 2008. On October 27, 2008, the Board of Directors approved a new 50,000 share repurchase program that will expire on October 27, 2009. 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
|
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. |
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.
By |
/s/ Tony J. Sorcic |
|
By |
/s/ Todd D. Fanning |
|
Tony J. Sorcic |
|
|
Todd D. Fanning |
Schedule 1
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
|
|
September 30, |
|
December 31, |
| ||
ASSETS |
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
17,289 |
|
$ |
25,801 |
|
Federal Funds sold |
|
$ |
800 |
|
$ |
0 |
|
Interest-bearing deposits with financial institutions |
|
|
100 |
|
|
1,803 |
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
18,189 |
|
|
27,604 |
|
|
|
|
|
|
|
|
|
Loans held for sale, at lower of cost or market |
|
|
2,654 |
|
|
928 |
|
|
|
|
|
|
|
|
|
Investment securities: |
|
|
|
|
|
|
|
Available-for-sale, at fair value |
|
|
230,495 |
|
|
218,095 |
|
Held-to-maturity, at amortized cost (fair value of $15,398 and $14,799) |
|
|
15,296 |
|
|
14,578 |
|
|
|
|
|
|
|
|
|
Total investment securities |
|
|
245,791 |
|
|
232,673 |
|
|
|
|
|
|
|
|
|
Loans: |
|
|
|
|
|
|
|
Loans, net of unearned interest |
|
|
762,109 |
|
|
722,647 |
|
Allowance for loan losses |
|
|
(3,842 |
) |
|
(3,248 |
) |
|
|
|
|
|
|
|
|
Net loans |
|
|
758,267 |
|
|
719,399 |
|
|
|
|
|
|
|
|
|
Premises and equipment, net of accumulated depreciation |
|
|
30,290 |
|
|
30,801 |
|
Land held for sale, at lower of cost or market |
|
|
1,344 |
|
|
1,344 |
|
Bank-owned life insurance |
|
|
21,478 |
|
|
22,461 |
|
Accrued interest receivable |
|
|
10,253 |
|
|
10,876 |
|
Goodwill |
|
|
24,521 |
|
|
24,521 |
|
Intangible assets, net of accumulated amortization |
|
|
4,428 |
|
|
5,090 |
|
Other real estate owned |
|
|
1,330 |
|
|
833 |
|
Other assets |
|
|
5,027 |
|
|
4,172 |
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
|
$ |
1,123,572 |
|
$ |
1,080,702 |
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
Demand |
|
$ |
97,430 |
|
$ |
102,452 |
|
Interest-bearing demand |
|
|
260,056 |
|
|
241,749 |
|
Savings |
|
|
59,871 |
|
|
58,401 |
|
Time |
|
|
520,089 |
|
|
488,805 |
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
937,446 |
|
|
891,407 |
|
|
|
|
|
|
|
|
|
Borrowings: |
|
|
|
|
|
|
|
Customer repurchase agreements |
|
|
34,420 |
|
|
34,217 |
|
Federal funds purchased |
|
|
0 |
|
|
26,500 |
|
Advances from the Federal Home Loan Bank |
|
|
30,490 |
|
|
6,984 |
|
Interest-bearing demand notes issued to the U.S. Treasury |
|
|
1,805 |
|
|
1,838 |
|
Trust preferred securities |
|
|
25,000 |
|
|
25,000 |
|
Note payable |
|
|
16,050 |
|
|
14,550 |
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
107,765 |
|
|
109,089 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
9,080 |
|
|
11,599 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
|
1,054,291 |
|
|
1,012,095 |
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
Common stock: $5 par value, 7,000,000 shares authorized; 4,478,295 shares issued |
|
|
22,391 |
|
|
22,391 |
|
Surplus |
|
|
18,391 |
|
|
18,275 |
|
Retained earnings |
|
|
54,225 |
|
|
51,279 |
|
Accumulated other comprehensive income (loss), net of tax |
|
|
(1,631 |
) |
|
344 |
|
Less: Cost of 1,181,626 and 1,169,848 treasury shares at September 30, 2008 and December 31, 2007, respectively |
|
|
(24,095 |
) |
|
(23,682 |
) |
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS EQUITY |
|
|
69,281 |
|
|
68,607 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
|
$ |
1,123,572 |
|
$ |
1,080,702 |
|
See accompanying notes to unaudited consolidated financial statements
Schedule 2
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollars in thousands, except share data)
|
|
For the Three Months |
|
For the Nine Months |
| ||||||||
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| ||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
|
$ |
11,977 |
|
$ |
12,980 |
|
$ |
36,129 |
|
$ |
36,880 |
|
Interest on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
1,766 |
|
|
1,592 |
|
|
5,063 |
|
|
5,211 |
|
Non-taxable |
|
|
1,006 |
|
|
1,027 |
|
|
3,047 |
|
|
3,261 |
|
Interest on federal funds sold |
|
|
37 |
|
|
24 |
|
|
66 |
|
|
246 |
|
Interest on interest-bearing time deposits in other banks |
|
|
26 |
|
|
9 |
|
|
46 |
|
|
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
14,812 |
|
|
15,632 |
|
|
44,351 |
|
|
45,683 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
|
|
5,771 |
|
|
7,677 |
|
|
18,250 |
|
|
22,777 |
|
Interest on borrowings |
|
|
869 |
|
|
1,105 |
|
|
2,658 |
|
|
3,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
6,640 |
|
|
8,782 |
|
|
20,908 |
|
|
25,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
8,172 |
|
|
6,850 |
|
|
23,443 |
|
|
19,829 |
|
Provision for loan losses |
|
|
550 |
|
|
250 |
|
|
1,368 |
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
7,622 |
|
|
6,600 |
|
|
22,075 |
|
|
19,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust & farm management fees |
|
|
309 |
|
|
353 |
|
|
1,120 |
|
|
1,124 |
|
Service charges on deposit accounts |
|
|
1,174 |
|
|
1,174 |
|
|
3,376 |
|
|
3,259 |
|
Other service charges |
|
|
563 |
|
|
535 |
|
|
1,587 |
|
|
1,492 |
|
Gain on sales of securities available-for-sale |
|
|
54 |
|
|
149 |
|
|
331 |
|
|
358 |
|
Brokerage fee income |
|
|
249 |
|
|
224 |
|
|
676 |
|
|
641 |
|
Mortgage banking income |
|
|
243 |
|
|
257 |
|
|
879 |
|
|
666 |
|
Bank-owned life insurance income |
|
|
227 |
|
|
203 |
|
|
648 |
|
|
608 |
|
Other operating income |
|
|
32 |
|
|
40 |
|
|
138 |
|
|
154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
|
|
2,851 |
|
|
2,935 |
|
|
8,755 |
|
|
8,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
4,459 |
|
|
4,257 |
|
|
13,082 |
|
|
12,574 |
|
Occupancy |
|
|
619 |
|
|
569 |
|
|
1,908 |
|
|
1,770 |
|
Equipment expense |
|
|
698 |
|
|
756 |
|
|
2,168 |
|
|
2,371 |
|
Federal insurance assessments |
|
|
99 |
|
|
84 |
|
|
267 |
|
|
254 |
|
Intangible assets amortization |
|
|
178 |
|
|
177 |
|
|
535 |
|
|
528 |
|
Data processing |
|
|
272 |
|
|
268 |
|
|
852 |
|
|
797 |
|
Advertising |
|
|
195 |
|
|
188 |
|
|
524 |
|
|
539 |
|
Other operating expense |
|
|
1,108 |
|
|
1,088 |
|
|
3,360 |
|
|
3,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense |
|
|
7,628 |
|
|
7,387 |
|
|
22,696 |
|
|
22,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
2,845 |
|
|
2,148 |
|
|
8,134 |
|
|
5,529 |
|
Income tax expense |
|
|
658 |
|
|
408 |
|
|
1,836 |
|
|
806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,187 |
|
$ |
1,740 |
|
$ |
6,298 |
|
$ |
4,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
0.66 |
|
|
0.53 |
|
|
1.91 |
|
|
1.42 |
|
Diluted |
|
|
0.66 |
|
|
0.52 |
|
|
1.90 |
|
|
1.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
3,295,200 |
|
|
3,314,913 |
|
|
3,298,408 |
|
|
3,331,852 |
|
Diluted weighted average shares outstanding |
|
|
3,305,195 |
|
|
3,322,292 |
|
|
3,309,560 |
|
|
3,342,689 |
|
See accompanying notes to unaudited consolidated financial statements
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 Nine Months Ended |
Common |
Surplus |
|
Retained |
|
Accumulated |
|
Treasury |
|
Total |
| |||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance, January 1, 2008 |
$ |
22,391 |
$ |
18,275 |
|
$ |
51,279 |
|
$ |
344 |
|
$ |
(23,682 |
) |
$ |
68,607 |
| |
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income |
|
|
|
|
6,298 |
|
|
|
|
|
|
6,298 |
| |||||
Purchase of 20,000 shares of treasury stock |
|
|
|
|
|
|
|
|
(554 |
) |
|
(554 |
) | |||||
Sale of 3,722 shares of treasury stock |
|
|
33 |
|
|
|
|
|
|
64 |
|
|
97 |
| ||||
Exercise of stock options and re-issuance of treasury stock (4,500 shares) |
|
|
20 |
|
|
|
|
|
|
77 |
|
|
97 |
| ||||
Cash dividends ($.84 per share) |
|
|
|
|
(2,773 |
) |
|
|
|
|
|
(2,773 |
) | |||||
Stock option compensation expense |
|
|
63 |
|
|
|
|
|
|
|
|
63 |
| |||||
Adjustment to apply EITF 06-4 |
|
|
|
|
(579 |
) |
|
|
|
|
|
(579 |
) | |||||
Other comprehensive loss, net of $1,249 tax effect |
|
|
|
|
|
|
(1,975 |
) |
|
|
|
(1,975 |
) | |||||
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance, September 30, 2008 |
$ |
22,391 |
$ |
18,391 |
|
$ |
54,225 |
|
$ |
(1,631 |
) |
$ |
(24,095 |
) |
$ |
69,281 |
| |
|
|
|
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||
For the Nine Months Ended |
|
|
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance, January 1, 2007 |
$ |
22,391 |
$ |
18,158 |
|
$ |
48,109 |
|
$ |
(960 |
) |
$ |
(22,343 |
) |
$ |
65,355 |
| |
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income |
|
|
|
|
4,723 |
|
|
|
|
|
|
4,723 |
| |||||
Purchase of 40,000 shares of treasury stock |
|
|
|
|
|
|
|
|
(1,204 |
) |
|
(1,204 |
) | |||||
Sale of 4,314 shares of treasury stock |
|
|
46 |
|
|
|
|
|
|
74 |
|
|
120 |
| ||||
Exercise of stock options and re-issuance of treasury stock (500 shares) |
|
|
7 |
|
|
(4 |
) |
|
|
|
8 |
|
|
11 |
| |||
Cash dividends ($.81 per share) |
|
|
|
|
(2,702 |
) |
|
|
|
|
|
(2,702 |
) | |||||
Stock option compensation expense |
|
|
35 |
|
|
|
|
|
|
|
|
35 |
| |||||
Other comprehensive income, net of $133 tax effect |
|
|
|
|
|
|
210 |
|
|
|
|
210 |
| |||||
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance, September 30, 2007 |
$ |
22,391 |
$ |
18,246 |
|
$ |
50,126 |
|
$ |
(750 |
) |
$ |
(23,465 |
) |
$ |
66,548 |
|
See accompanying notes to unaudited consolidated financial statements
Schedule 4
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
|
|
For the Nine Months Ended |
|
||||
|
|
2008 |
|
2007 |
| ||
Operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
6,298 |
|
$ |
4,723 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation |
|
|
1,664 |
|
|
1,872 |
|
Provision for loan losses |
|
|
1,368 |
|
|
550 |
|
Amortization of intangible assets and other purchase accounting adjustments, net |
|
|
535 |
|
|
528 |
|
Amortization (accretion) of premiums and discounts on investment securities, net |
|
|
5 |
|
|
(212 |
) |
Gain on sales of securities available-for-sale, net |
|
|
(331 |
) |
|
(358 |
) |
Compensation expense for vested stock options |
|
|
63 |
|
|
35 |
|
Loss on sales of other real estate owned, net |
|
|
2 |
|
|
35 |
|
Loans originated for sale |
|
|
(69,867 |
) |
|
(41,155 |
) |
Proceeds from sales of loans originated for sale |
|
|
68,141 |
|
|
44,728 |
|
(Decrease) increase in accrued interest payable |
|
|
(673 |
) |
|
434 |
|
Decrease in accrued interest receivable |
|
|
623 |
|
|
564 |
|
Decrease (increase) in other assets |
|
|
142 |
|
|
(1,989 |
) |
Decrease in other liabilities |
|
|
(1,168 |
) |
|
(731 |
) |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
6,802 |
|
|
9,024 |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
Proceeds from sales of investment securities available-for-sale |
|
|
16,170 |
|
|
12,872 |
|
Proceeds from maturities of investment securities available-for-sale |
|
|
45,326 |
|
|
48,925 |
|
Purchase of investment securities available-for-sale |
|
|
(77,409 |
) |
|
(15,187 |
) |
Proceeds from maturities of investment securities held-to-maturity |
|
|
1,615 |
|
|
995 |
|
Purchase of investment securities held-to-maturity |
|
|
(1,769 |
) |
|
(1,450 |
) |
Proceeds from sales of other real estate owned |
|
|
798 |
|
|
375 |
|
Net increase in loans |
|
|
(41,367 |
) |
|
(44,095 |
) |
Purchases of premises and equipment |
|
|
(1,153 |
) |
|
(1,340 |
) |
Payments related to acquisition, net of cash and cash equivalents acquired |
|
|
0 |
|
|
(10,110 |
) |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(57,789 |
) |
|
(9,015 |
) |
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
Net increase (decrease) in deposits |
|
|
46,039 |
|
|
6,854 |
|
Net (decrease) increase in borrowings |
|
|
(1,334 |
) |
|
7,248 |
|
Dividends paid |
|
|
(2,773 |
) |
|
(2,702 |
) |
Purchases of treasury stock |
|
|
(554 |
) |
|
(1,204 |
) |
Exercise of stock options and issuance of treasury stock |
|
|
97 |
|
|
11 |
|
Sales of treasury stock |
|
|
97 |
|
|
120 |
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
41,572 |
|
|
10,327 |
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(9,415 |
) |
|
10,336 |
|
Cash and cash equivalents at beginning of period |
|
|
27,604 |
|
|
39,185 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at September 30 |
|
$ |
18,189 |
|
$ |
49,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
Interest |
|
$ |
21,581 |
|
$ |
25,420 |
|
Income taxes |
|
$ |
2,368 |
|
$ |
1,335 |
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash flow activities: |
|
|
|
|
|
|
|
Loans transferred to other real estate owned |
|
$ |
1,297 |
|
$ |
1,076 |
|
Land transferred to held for sale |
|
$ |
0 |
|
$ |
1,344 |
|
See accompanying notes to unaudited consolidated financial statements
Schedule 5
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods ended September 30, 2008 and 2007, and all such adjustments are of a normal recurring nature. The 2007 year-end consolidated balance sheet data was derived from audited financial statements, but do not include all disclosures required by generally accepted accounting principles.
The 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 Registrants 2007 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 2007 consolidated financial statements have been reclassified to conform to the 2008 presentation.
(1) EARNINGS PER SHARE CALCULATION
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated (in thousands, except share data):
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,187 |
|
$ |
1,740 |
|
$ |
6,298 |
|
$ |
4,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share- |
|
|
3,295,200 |
|
|
3,314,913 |
|
|
3,298,408 |
|
|
3,331,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities- |
|
|
9,995 |
|
|
7,379 |
|
|
11,152 |
|
|
10,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share- |
|
|
3,305,195 |
|
|
3,322,292 |
|
|
3,309,560 |
|
|
3,342,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.66 |
|
$ |
0.53 |
|
$ |
1.91 |
|
$ |
1.42 |
|
Diluted |
|
$ |
0.66 |
|
$ |
0.52 |
|
$ |
1.90 |
|
$ |
1.41 |
|
The earnings per share calculation for the three and nine-month periods ended September 30, 2008 and 2007 does not include 279,816 shares which were anti-dilutive.
(2) ACQUISITION
On February 23, 2007, the Corporation completed the acquisition of the Plainfield office of HomeStar Bank in Manteno, Illinois, for $10.2 million in cash, including goodwill of $1.5 million, in order to expand its market presence in the area. The Corporation purchased the existing facility for $4.5 million plus $17.0 million in loans (at book value) and assumed $12.9 million in deposit liabilities. The Plainfield office operates as a branch of the subsidiary bank.
The transaction has been accounted for as a purchase, and the results of operations of the Plainfield office since the acquisition date have been included in the consolidated financial statements. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of this transaction (in thousands):
Cash and cash equivalents |
|
$ |
93 |
|
Loans |
|
|
17,043 |
|
Premises and equipment |
|
|
4,500 |
|
Goodwill |
|
|
1,492 |
|
Other assets |
|
|
85 |
|
|
|
|
|
|
Total assets acquired |
|
|
23,213 |
|
|
|
|
|
|
Deposits |
|
|
12,865 |
|
Other liabilities |
|
|
145 |
|
|
|
|
|
|
Total liabilities assumed |
|
|
13,010 |
|
|
|
|
|
|
Net assets acquired |
|
$ |
10,203 |
|
Transaction costs related to the completion of the transaction were considered immaterial. The total fair value of the assets and liabilities acquired exceeded the book value, resulting in goodwill of $1,492,000 which is not subject to amortization.
The following unaudited pro forma condensed combined financial information presents the results of operations of the Corporation, including the effects of the purchase accounting adjustments, had the acquisition taken place at the beginning of each period (in thousands):
|
|
Pro Forma |
| |
Net interest income |
|
$ |
19,869 |
|
Provision for loan losses |
|
|
550 |
|
Non-interest income |
|
|
8,337 |
|
Non-interest expense |
|
|
22,067 |
|
|
|
|
|
|
Income before income taxes |
|
|
5,589 |
|
Income tax expense |
|
|
830 |
|
|
|
|
|
|
Net income |
|
$ |
4,759 |
|
|
|
|
|
|
Earnings per share |
|
|
|
|
Basic |
|
$ |
1.43 |
|
Diluted |
|
$ |
1.42 |
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
|
3,331,852 |
|
Diluted weighted average shares outstanding |
|
|
3,342,689 |
|
The unaudited pro forma condensed combined financial statements do not reflect any anticipated cost savings and revenue enhancements. Additionally, the income statement for the first nine months of 2007 includes merger-related expenses. Accordingly, the pro forma results of operations of the Corporation 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 period presented or of the results that may be attained in the future.
(3) GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill, net of accumulated amortization, totaled $24,521,000 at September 30, 2008 and December 31, 2007. The balance of intangible assets, net of accumulated amortization, totaled $4,428,000 and $5,090,000 at September 30, 2008 and December 31, 2007, respectively.
The following table summarizes the Corporations intangible assets, which are subject to amortization, as of September 30, 2008 and December 31, 2007:
(in thousands) |
| ||||||||||||||
|
|
September 30, 2008 |
|
December 31, 2007 |
| ||||||||||
|
|
Gross Carrying |
|
|
Accumulated |
|
Gross Carrying |
|
|
|
Accumulated |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible |
|
$ |
9,004 |
|
|
$ |
(4,653 |
) |
$ |
9,004 |
|
|
$ |
(4,006 |
) |
Other intangible assets |
|
|
234 |
|
|
|
(157 |
) |
|
234 |
|
|
|
(142 |
) |
Total |
|
$ |
9,238 |
|
|
$ |
(4,810 |
) |
$ |
9,238 |
|
|
$ |
(4,148 |
) |
Amortization expense of all intangible assets totaled $535,000 for the nine months ended September 30, 2008 and $528,000 for the nine months ended September 30, 2007, respectively. The amortization expense of these intangible assets will be approximately $179,000 for the remaining quarter in 2008.
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. No impairment had been recorded during the year through September 30, 2008. Changes in the carrying value of capitalized mortgage servicing rights are summarized as follows:
(in thousands) |
|
| ||
|
|
| ||
Balance, January 1, 2008 |
|
$ |
2,498 |
|
Servicing rights capitalized |
|
|
724 |
|
Amortization of servicing rights |
|
|
(324 |
) |
Impairment of servicing rights |
|
|
0 |
|
Balance, September 30, 2008 |
|
$ |
2,898 |
|
The Corporation services loans for others with unpaid principal balances at September 30, 2008 and December 31, 2007 of approximately $302,306,000, and $268,391,000, respectively.
The following table shows the future estimated amortization expense for mortgage servicing rights based on existing balances as of September 30, 2008. The Corporations actual amortization expense in any given period may be significantly different from the estimated amounts displayed depending on the amount of additional mortgage servicing rights, changes in mortgage interest rates, estimated prepayment speeds, and market conditions.
Estimated Amortization Expense:
|
|
Amount (in thousands) |
| |
For the three months ended December 31, 2008 |
|
$ |
81 |
|
For the year ended December 31, 2009 |
|
|
320 |
|
For the year ended December 31, 2010 |
|
|
300 |
|
For the year ended December 31, 2011 |
|
|
281 |
|
For the year ended December 31, 2012 |
|
|
264 |
|
For the year ended December 31, 2013 |
|
|
247 |
|
Thereafter |
|
|
1,405 |
|
(4) OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes for the nine months ended September 30, 2008 and 2007 were as follows:
(in thousands)
|
|
2008 |
|
2007 |
| ||
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities available-for-sale |
|
$ |
(2,905 |
) |
$ |
701 |
|
Less: Reclassification adjustment for realized gains included in income |
|
|
331 |
|
|
358 |
|
|
|
|
(3,236 |
) |
|
343 |
|
|
|
|
|
|
|
|
|
Amortization of transition obligation of post retirement health care |
|
|
12 |
|
|
0 |
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), before tax effect |
|
|
(3,224 |
) |
|
343 |
|
|
|
|
|
|
|
|
|
Tax (expense) benefit |
|
|
1,249 |
|
|
(133 |
) |
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
$ |
(1,975 |
) |
$ |
210 |
|
The components of accumulated other comprehensive loss, included in stockholders equity at September 30, 2008 and 2007 are as follows:
|
|
2008 |
|
2007 |
| ||
|
|
|
|
|
|
|
|
Net unrealized loss on securities available-for-sale |
|
$ |
(2,110 |
) |
$ |
(2,240 |
) |
Net unrealized benefit obligations |
|
|
(552 |
) |
|
(1,016 |
) |
|
|
|
(2,662 |
) |
|
(1,224 |
) |
|
|
|
|
|
|
|
|
Tax effect |
|
|
1,031 |
|
|
474 |
|
|
|
|
|
|
|
|
|
Net-of-tax amount |
|
$ |
(1,631 |
) |
$ |
(750 |
) |
(5) FEDERAL HOME LOAN BANK STOCK
Investment securities available-for-sale includes Federal Home Loan Bank stock totaling $2,373,000 at September 30, 2008 and December 31, 2007. During the third quarter of 2007, the Federal Home Loan Bank of Chicago received a Cease and Desist Order from their regulator, the Federal Housing Finance Board. The Federal Home Loan Bank will continue to provide liquidity and funding through advances, however, the order prohibits capital stock repurchases and redemptions until a time to be determined by the Federal Housing Finance Board and requires their approval for dividends. With regard to dividends, the Federal Home Loan Bank will continue to assess its dividend capacity each quarter and make appropriate request for approval. There were no dividends paid by the Federal Home Loan Bank of Chicago during the first nine months of 2008. Management performed an analysis and deemed the investment in Federal Home Loan Bank stock was not impaired as of September 30, 2008 or December 31, 2007.
(6) FDIC ONE-TIME ASSESSMENT CREDIT
Effective November 17, 2006, the FDIC implemented a one-time credit of $4.7 billion to eligible institutions. The purpose of the credit was to recognize contributions made by certain institutions to capitalize the Bank Insurance Fund and Savings Association Insurance Fund, which have now been merged into the Deposit Insurance Fund. The Bank is an eligible institution and received notice from the FDIC that its share of the credit was $647,000. This amount was not reflected in the accompanying financial statements as it represented contingent future credits against future insurance assessment payments. For the nine months ended September 30, 2008 and 2007, FDIC premium credits received totaled $266,000 and $381,000, respectively, against the premium expense, leaving a remaining credit of $0, as of September 30, 2008, to offset future premium expense.
(7) CHANGE IN ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board Emerging Issues Task Force (EITF) issued EITF No. 06-4 Accounting for Deferred Compensation and Post Retirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements, which requires the Company to recognize a liability and compensation expense for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to post retirement periods. The benefit to the employees is the payment of the premiums by the Company. The Company adopted EITF 06-4 as of January 1, 2008, through a cumulative effect adjustment as a liability and a decrease to retained earnings of $579,000. Beginning January 1, 2008, an expense is being recorded as the remaining benefit is earned with a corresponding addition to the post retirement benefit obligation. The amount of the expense for 2008 is estimated to be approximately $59,000. For the period from retirement to the estimated date of death for the participants, this liability is reversed into income.
(8) FAIR VALUE OF ASSETS AND LIABILITIES
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157 (FAS 157), Fair Value Measurements. FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 has been applied prospectively as of the beginning of the period.
FAS 157 defines the fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
In accordance with FAS 157, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
|
Level 1 |
Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. |
|
Level 2 |
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities. |
|
Level 3 |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying balance sheet.
Available-for-Sale Securities
The fair value of available-for-sale securities are determined by various valuation methodologies. Where quoted market prices are available in an active market, securities are classified within Level 1. The Company has no securities classified within Level 1. If quoted market prices are not available, then fair values are estimated by using pricing models or quoted prices of securities with similar characteristics. Level 2 securities include U.S. Treasury securities, Obligations of U.S. government corporations and agencies, Obligations of states and political subdivisions, mortgage-backed securities, collateralized mortgage obligations and corporate bonds. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no securities classified within Level 3.
The following table presents the Companys assets that are measured at fair value on a recurring basis and the level within the FAS 157 hierarchy in which the fair value measurements fall as of September 30, 2008 (in thousands):
|
|
|
Fair Value Measurements Using |
| |||||||||
|
|
Fair Value |
|
Quoted Prices in |
|
|
Significant Other |
|
Significant |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
|
$ |
230,495 |
|
$ |
0 |
|
$ |
230,495 |
|
$ |
0 |
|
In February 2007, the FASB issued SFAS No. 159 (FAS 159), The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115. FAS 159 allows companies to report selected financial assets and liabilities at fair value. The changes in fair value are recognized in earnings and the assets and liabilities measured under this methodology are required to be displayed separately in the balance sheet. The main intent of the Statement is to mitigate the difficulty in determining reported earnings caused by a mixed-attribute model (or reporting some assets at fair value and others using a different valuation attribute such as amortized cost). The project is separated into two phases. This first phase addresses the creation of a fair value option for financial assets and liabilities. A second phase will address creating a fair value option for selected non-financial items. FAS 159 is effective for all financial statements issued for fiscal years beginning after November 15, 2007. The Corporation has not elected the fair value option for any financial assets or liabilities at September 30, 2008.
(9) IMPACT OF NEW ACCOUNTING STANDARDS
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (FAS 158), Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements 87, 88, 106, and 132 (R), which requires recognition of a net liability or asset to report the funded status of defined benefit pension and other postretirement plans on the balance sheet and recognition (as a component of other comprehensive income) of changes in the funded status in the year in which the changes occur. Additionally, FAS 158 requires measurement of a plans assets and obligations as of the balance sheet date and additional annual disclosures in the notes to the financial statements. The recognition and disclosure provisions of FAS 158 were adopted during 2006, while the requirement to measure a plans assets and obligations as of the balance sheet date is effective for fiscal years ending after December 15, 2008. The Corporation does not expect the adoption of the measurement provisions to have a material impact on its financial reporting and disclosures.
In December 2007, the FASB issued SFAS No. 141R (FAS 141R), Business Combinations, which revises FAS 141 and changes multiple aspects of the accounting for business combinations. Under the guidance in FAS 141R, the acquisition method must be used, which requires the acquirer to recognize most identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree at their full fair value on the acquisition date. Goodwill is to be recognized as the excess of the consideration transferred plus the fair value of the non-controlling interest over the fair values of the identifiable net assets acquired. Subsequent changes in the fair value of contingent consideration classified as a liability are to be recognized in earnings, while contingent consideration classified as equity is not to be re-measured. Costs such as transaction costs are to be excluded from acquisition accounting, generally leading to recognizing expense and additionally, restructuring costs that do not meet certain criteria at acquisition date are to be subsequently recognized as post-acquisition costs. FAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact that this issuance will have on its financial position and results of operations; however, it anticipates that the standard will lead to more volatility in the results of operations during the periods subsequent to an acquisition.
In March 2008, the FASB issued SFAS No. 161 (FAS 161), Disclosures About Derivative Instruments and Hedging Activities an amendment of FAS 133. FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for fiscal years beginning after November 15, 2008. The Company does not expect the implementation of FAS 161 to have a material impact on its consolidated financial statements.
In October 2008, the FASB issued FASB Staff Position No. 157-3 (FSP 157-3), Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active. FSP 157-3 clarifies the application of Statement of Financial Accounting Standards No. 157 (FAS 157), Fair Value Measurements, in a market that is not active and provides an example to illustrate key considerations in determining fair value of financial assets when the market for that financial asset is not active. FSP 157-3 applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with FAS 157. FSP 157-3 was effective upon issuance and included prior periods for which financial statements had not been issued. The application of FSP 157-3 did not have a material impact on the Companys consolidated financial statements.
Schedule 6
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three and nine months ended September 30, 2008 and 2007
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, 2008 and 2007. This discussion should be read in conjunction with the attached consolidated financial statements and notes thereto. This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act), such as discussions of the Companys pricing and fee trends, credit quality and outlook, liquidity, new business results, expansion plans, anticipated expenses and planned schedules. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by use of the words believe, expect, intend, anticipate, estimate, project, or similar expressions. Actual results could differ materially from the results indicated by these statements because the realization of those results is subject to many risks and uncertainties including: the effect of the current severe disruption in financial markets and the United States government programs introduced to restore stability and liquidity, changes in interest rates, general economic conditions and the weakening state of the United States economy, legislative/regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Companys market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including a discussion of these and additional factors that could materially affect the Companys financial results, is included in the Companys 2007 Annual Report on Form 10-K under the headings Item 1. Business and Item 1A. Risk Factors.
RESULTS OF OPERATIONS
The Company continues to generate strong earnings in 2008, once again realizing a significant improvement in earnings during the third quarter and the first nine months of the year. Net income for the third quarter of 2008 was $2,187,000, or basic and diluted earnings per share of $0.66, as compared to net income of $1,740,000 in the third quarter of 2007, or basic earnings per share of $0.53 (diluted earnings per share of $0.52). This represents an increase of $447,000 (or 25.7%), $0.13 basic earnings per share and $0.14 diluted earnings per share. The earnings expansion is attributable to an increase in net interest income, discussed below, due to growth in the balance sheet and an improving net interest margin. Net income for the first nine months of 2008 was $6,298,000 or basic earnings per share of $1.91 and diluted earnings per share of $1.90, compared to net income of $4,723,000, or basic earnings per share of $1.42 and diluted earnings per share of $1.41 for the first nine months of 2007. This represents an increase of $1,575,000, (33.3%) or $0.49 per basic share and diluted share. The higher net income figure is primarily attributed to an increase in the net yield on interest-earning assets from 3.17% for the first nine months of 2007 to 3.46% for the first nine months of 2008. The annualized return on average assets and return on average equity were 0.78% and 12.54%, respectively, for the third quarter of 2008, compared with 0.67% and 10.65% for the third quarter of 2007. For the nine-month periods, the annualized return on average assets and return on average equity were 0.77% and 12.17%, respectively for 2008, compared with 0.61% and 9.67%, respectively for 2007.
Net interest income before provision for loan losses was $8,172,000 for the third quarter of 2008, compared to $6,850,000 for the third quarter of 2007 (an increase of $1,322,000 or 19.3%). This improvement is a result of an increase in average interest-earning assets of $78.7 million over the past twelve months. For the three months ended September 30, 2008, average interest-earning assets were $988.9 million compared to $910.2 million for the three months ended September 30, 2007. Additionally, the resulting net yield on interest-earning assets (on a fully taxable equivalent basis) increased to 3.50% in the third quarter of 2008 compared to 3.23% in the third quarter of 2007, contributing to the higher net income reported above. Net interest income before any provision for loan losses for the first nine months of 2008 was $23,443,000, an increase of $3.6 million, or 18.2%, from the $19,829,000 reported for the first nine months of 2007. This is attributable to an increase in average interest-earning assets of $56.0 million over the past twelve months, along with the resulting net yield on interest-earning assets (on a fully taxable equivalent basis) increasing to 3.46% in the first three-quarters of 2008 from 3.17% for the same time frame of 2007, an improvement of 9.1%.
The Corporations provision for loan loss expense recorded each quarter is determined by managements evaluation of the risk characteristics of the loan portfolio. For the third quarter of 2008, PNBC had net charge-offs of $103,000, (0.06% of total loans) comparable to net charge-offs of $139,000 for the third quarter of 2007. For the nine-month comparable periods, PNBC had net charge-offs of $774,000 in 2008 and net charge-offs of $382,000 in 2007. PNBC recorded a loan loss provision of $550,000 in the third quarter of 2008 and $1,368,000 in the first nine months of 2008 compared to a provision of $250,000 in the third quarter of 2007 and $550,000 in the first nine months of 2007. The ratio of non-performing loans to total loans at September 30, 2008 has increased to 2.15% compared to 0.93% at September 30, 2007, but remains low by industry standards, particularly in light of the current economic situation. The Corporation has no sub-prime loans in the loan portfolio, nor is there any sub-prime exposure to securities in the investment portfolio.
Non-interest income totaled $2,851,000 for the third quarter of 2008, compared to $2,935,000 in the third quarter of 2007, a decrease of $84,000 (or 2.9%). Annualized non-interest income as a percentage of average total assets decreased to 1.02% for the third quarter of 2008 from 1.13% for the same period in 2007. This decrease was the result of $95,000 less in gains from the sale of investment securities quarter over quarter. Year-to-date in 2008, non-interest income totaled $8,755,000 compared to $8,302,000 for the first nine months of 2007, an increase of $453,000 (or 5.5%). The primary reason for the positive change is the increase in mortgage banking income which has improved by $213,000 (or 32.0%) in 2008 over 2007. Additionally, the categories of service charges on deposits and other service charges saw increases of $117,000 and $95,000, respectively. Annualized non-interest income as a percentage of average total assets decreased from 1.08% for the first nine months of 2007, to 1.07% for the same period in 2008.
Total non-interest expense for the third quarter of 2008 was $7,628,000, an increase of $241,000 (or 3.3%) from $7,387,000 in the third quarter of 2007. The largest increase was in salaries and employee benefits which went up $202,000, or 4.7%. Annualized non-interest expense as a percentage of total average assets decreased to 2.72% for the third quarter of 2008, compared to 2.85% for the same period in 2007, continuing a positive trend in the effort to control operating expenses as the Corporation grows and expands. The annualized percentage of 2.72% is the lowest the Corporation has reported since 1988. Year-to-date non-interest expense for the first three-quarters of 2008 was $22,696,000, an increase of $644,000 (or 2.9%) from the $22,052,000 for the same period in 2007. Again, the majority of the increase is in salaries and employee benefits which rose $508,000 (or 4.0%), due to an increase in the number of employees. Annualized non-interest expense as a percentage of total average assets also decreased to 2.77% for the first nine months of 2008, compared to 2.87% for the same period in 2007.
INCOME TAXES
Income tax expense totaled $658,000 for the third quarter of 2008, as compared to $408,000 for the third quarter of 2007. The effective tax rate was 23.1% for the three month period ended September 30, 2008 and 19.0% for the three month period ended September 30, 2007. Income tax expense totaled $1,836,000 for the first nine months of 2008, as compared to $806,000 for the first nine months of 2007. The effective tax rate was 22.6% for the nine month period ended September 30, 2008 and 14.6% for the nine month period ended September 30, 2007. The higher effective tax rate in 2008 is due to a higher pre-tax income.
ANALYSIS OF FINANCIAL CONDITION
Total assets at September 30, 2008 increased to $1,123,572,000 from $1,080,702,000 at December 31, 2007 (an increase of $42.9 million or 4.0%). Investment balances totaled $245,791,000 at September 30, 2008, compared to $232,673,000 at December 31, 2007 (an increase of $13.1 million or 5.6%). Total deposits increased to $937,446,000 at September 30, 2008 from $891,407,000 at December 31, 2007 (an increase of $46.0 million or 5.2%). Comparing categories of deposits at September 30, 2008 to December 31, 2007, interest-bearing demand deposits increased $18.3 million (or 7.6%), time deposits increased $31.3 million (or 6.4%), and savings deposits increased $1.5 million (or 2.5%), while demand deposits decreased $5.0 million (or 4.9%). Borrowings, consisting of customer repurchase agreements, notes payable, treasury, tax, and loan (TT&L) deposits, and Federal Home Loan Bank advances, decreased from $109,089,000 at December 31, 2007 to $107,765,000 at September 30, 2008 (a decrease of $1.3 million or 1.2%).
Loan balances, net of unearned interest, increased to $762,109,000 at September 30, 2008, compared to $722,647,000 at December 31, 2007 (an increase of $39.5 million or 5.5%). Non-performing loans increased to $16,383,000 or 2.15% of net loans at September 30, 2008, as compared to $7,434,000 or 1.03% of net loans at December 31, 2007. Although non-performing loans have increased in terms of total dollars since year-end, the majority of the increase occurred in the first quarter of 2008 and is comprised of two larger credits with substantial collateral. All loans are individually evaluated and management continues to maintain adequate reserves in the allowance for loan losses.
ASSET QUALITY
For the nine months ended September 30, 2008, the subsidiary bank charged off $915,000 of loans and had recoveries of $141,000, compared to charge-offs of $569,000 and recoveries of $187,000 during the nine months ended September 30, 2007. 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 managements reasonable judgment, warrant consideration. The adequacy of the allowance is monitored monthly. At September 30, 2008, the allowance was $3,842,000 which is 23.5% of non-performing loans and 0.50% of total loans, compared with $3,248,000 which was 43.7% of non-performing loans and 0.45% of total loans at December 31, 2007. Although the balance of non-performing loans has increased, management has reviewed these loans and deemed they are adequately collateralized.
At September 30, 2008 non-accrual loans were $15,167,000 compared to $7,361,000 at December 31, 2007. Impaired loans totaled $10,903,000 at September 30, 2008 compared to $4,523,000 at December 31, 2007. The total amount of loans ninety days or more past due and still accruing interest at September 30, 2008 was $1,215,000 compared to $73,000 at December 31, 2007. There was a specific loan loss reserve of $140,000 established for impaired loans as of September 30, 2008 compared to a specific loan loss reserve of $207,000 at December 31, 2007. PNBCs 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, 2008.
CAPITAL RESOURCES
Federal regulations require all financial institutions to evaluate capital adequacy by the risk-based capital method, which makes capital requirements more sensitive to the differences in the level of risk assets. At September 30, 2008, total risk-based capital of PNBC was 8.44%, compared to 8.41% at December 31, 2007. The Tier 1 capital ratio decreased slightly from 6.16% at December 31, 2007, to 6.14% at September 30, 2008. Total stockholders' equity to total assets at September 30, 2008 decreased to 6.17% from 6.35% at December 31, 2007.
The Company is currently evaluating the possibility of raising capital and the opportunities under the recently announced Capital Purchase Program (CPP) of the U.S. Department of the Treasury (the Treasury). Under the CPP, qualified U.S. banking organizations whose applications to participate are approved would sell preferred stock and grant warrants purchasing common stock to the Treasury. The Company is currently evaluating whether it will apply for participation in the CPP and any effects participation would have on the Companys capital structure. There are a variety of factors to be evaluated, including the cost of the capital to be provided and restrictions that would be imposed on the Company by participating in the CPP (such as restrictions on dividend increases and stock buy-backs), as well as the significant opportunities of the program. The Company does not expect to make further announcements with respect to participation in the CPP unless and until it decides to participate.
LIQUIDITY
Liquidity is measured by a financial institutions 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 investing activities, offset by those provided by financing and operating activities, resulted in a net decrease in cash and cash equivalents of $9,415,000 from December 31, 2007 to September 30, 2008. This decrease was primarily due to a net increase in loans and investments, offset by an increase in deposits. For more detailed information, see PNBCs Consolidated Statements of Cash Flows.
In response to the overall economy, the Company has made a concerted effort during 2008 to increase its available liquidity sources to levels which management believes are appropriate given the current state of the economy and the banking industry. As a result, the remaining borrowing sources available to the Company have increased to $95.6 million as of September 30, 2008 compared to $60.9 million as of December 31, 2007.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation generates agribusiness, commercial, mortgage and consumer loans to customers located primarily in North Central Illinois. The Corporations loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Corporation has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon economic conditions in the agricultural industry.
In the normal course of business to meet the financing needs of its customers, the subsidiary bank is party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit and standby letters of credit. These 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 banks 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 they do for on-balance-sheet instruments. At September 30, 2008, commitments to extend credit and standby letters of credit were approximately $162,998,000 and $6,597,000 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 customers 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 managements credit evaluation of the counterparty. 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. The maximum amount of credit that would be extended under standby letters of credit is equal to the off-balance sheet contract amount. The standby letters of credit have terms that expire in one year or less.
MERGERS AND ACQUISITIONS
On February 23, 2007, the Company completed the acquisition, for $10.2 million in cash, of the fixed assets and loans while assuming the deposit liabilities of the Plainfield, Illinois branch of HomeStar Bank in order to expand its market presence in this area. The Company financed the purchase price with existing cash and federal funds sold on the balance sheet at the time of purchase. Since the completion of the merger, the Plainfield location operates as a branch of the Companys subsidiary bank.
The transaction has been accounted for as a purchase, and the results of operations of Plainfield since the acquisition date have been included in the consolidated financial statements.
LAND HELD FOR SALE
In 2004, the Corporation purchased approximately 14 acres of land in Aurora, Illinois in anticipation of the construction of a new branch facility. Construction of the facility was completed in May, 2006 with the remaining acreage sub-divided in two lots and the necessary infrastructure completed. These lots, with a cost basis of $1,344,000, were determined to be held for sale as of March 31, 2007. A real estate appraisal has been completed indicating the market value of each lot to be approximately $2,000,000. Accordingly, these lots were removed from the land balance and are now shown on the Corporations balance sheet as land held-for-sale, at the lower of cost or market.
LEGAL PROCEEDINGS
There are various claims pending against the Corporations 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 the Corporations financial position or results of operation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in market risk since December 31, 2007, as reported in PNBCs 2007 Annual Report on Form 10-K.
EFFECTS OF INFLATION
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America and practices within the banking industry which require the measurement of financial condition and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institutions performance than the effects of general levels of inflation.
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%.
|
|
Nine Months Ended, September 30, 2008 |
|
Nine Months Ended, September 30, 2007 |
| ||||||||||||||
|
|
Average |
|
Interest |
|
Yield/ |
|
Average |
|
Interest |
|
Yield/ |
| ||||||
Average Interest-Earning Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
|
$ |
2,872 |
|
$ |
46 |
|
|
2.14% |
|
$ |
2,208 |
|
$ |
85 |
|
|
5.15% |
|
Taxable investment securities |
|
|
142,115 |
|
|
5,063 |
|
|
4.76% |
|
|
145,095 |
|
|
5,211 |
|
|
4.80% |
|
Tax-exempt investment securities |
|
|
93,179 |
|
|
4,616 |
|
|
6.62% |
|
|
100,568 |
|
|
4,942 |
|
|
6.57% |
|
Federal funds sold |
|
|
4,222 |
|
|
66 |
|
|
2.09% |
|
|
6,414 |
|
|
246 |
|
|
5.13% |
|
Net loans |
|
|
725,138 |
|
|
36,182 |
|
|
6.66% |
|
|
657,233 |
|
|
36,949 |
|
|
7.52% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
967,526 |
|
|
45,973 |
|
|
6.35% |
|
|
911,518 |
|
|
47,433 |
|
|
6.96% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average non-interest earning assets |
|
|
125,445 |
|
|
|
|
|
|
|
|
116,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average assets |
|
$ |
1,092,971 |
|
|
|
|
|
|
|
$ |
1,028,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Interest-Bearing Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
$ |
255,116 |
|
$ |
3,523 |
|
|
1.84% |
|
$ |
233,016 |
|
$ |
4,951 |
|
|
2.84% |
|
Savings deposits |
|
|
62,229 |
|
|
52 |
|
|
0.11% |
|
|
64,890 |
|
|
202 |
|
|
0.42% |
|
Time deposits |
|
|
495,282 |
|
|
14,675 |
|
|
3.96% |
|
|
478,101 |
|
|
17,624 |
|
|
4.93% |
|
Interest-bearing demand notes issued to the U.S. Treasury |
|
|
937 |
|
|
14 |
|
|
1.99% |
|
|
1,072 |
|
|
39 |
|
|
4.86% |
|
Federal funds purchased |
|
|
6,075 |
|
|
124 |
|
|
2.72% |
|
|
759 |
|
|
31 |
|
|
5.46% |
|
Customer repurchase agreements |
|
|
36,196 |
|
|
543 |
|
|
2.00% |
|
|
31,663 |
|
|
1,102 |
|
|
4.65% |
|
Advances from Federal Home Loan Bank |
|
|
15,530 |
|
|
406 |
|
|
3.49% |
|
|
6,975 |
|
|
271 |
|
|
5.19% |
|
Trust preferred securities |
|
|
25,000 |
|
|
1,065 |
|
|
5.69% |
|
|
25,000 |
|
|
1,065 |
|
|
5.70% |
|
Note payable |
|
|
15,043 |
|
|
506 |
|
|
4.50% |
|
|
10,575 |
|
|
569 |
|
|
7.19% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
911,408 |
|
|
20,908 |
|
|
3.06% |
|
|
852,051 |
|
|
25,854 |
|
|
4.06% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net yield on average interest-earning assets |
|
|
|
|
$ |
25,065 |
|
|
3.46% |
|
|
|
|
$ |
21,579 |
|
|
3.17% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average non-interest-bearing liabilities |
|
|
112,431 |
|
|
|
|
|
|
|
110,926 |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average stockholders' equity |
|
|
69,132 |
|
|
|
|
|
|
|
|
65,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and stockholders' equity |
|
$ |
1,092,971 |
|
|
|
|
|
|
|
$ |
1,028,244 |
|
|
|
|
|
|
|
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 |
| ||||
|
|
2008 |
|
2007 |
| ||
Net interest income as stated |
|
$ |
23,443 |
|
$ |
19,829 |
|
Tax equivalent adjustment-investments |
|
|
1,569 |
|
|
1,680 |
|
Tax equivalent adjustment-loans |
|
|
53 |
|
|
70 |
|
|
|
|
|
|
|
|
|
Tax equivalent net interest income |
|
$ |
25,065 |
|
$ |
21,579 |
|
Schedule 7. Controls and Procedures
(a) |
Disclosure controls and procedures. We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2008. 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, 2008 that could significantly affect those controls. |
INDEX TO EXHIBITS
Exhibit |
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. |