Back to GetFilings.com
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003
Commission File No. 0-20050
PRINCETON NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-32110283
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) 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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No _X_
As of July 15, 2003, the registrant had outstanding 3,174,658 shares of its
$5 par value common stock.
Page 1 of 23 pages
PART I: FINANCIAL INFORMATION
The unaudited consolidated financial statements of Princeton National
Bancorp, Inc. and Subsidiary and management's discussion and analysis of
financial condition and results of operations are presented in the schedules as
follows:
Schedule 1: Consolidated Balance Sheets
Schedule 2: Consolidated Statements of Income and Comprehensive Income
Schedule 3: Consolidated Statements of Stockholders' Equity
Schedule 4: Consolidated Statements of Cash Flows
Schedule 5: Notes to Consolidated Financial Statements
Schedule 6: Management's Discussion and Analysis of
Financial Condition and Results of Operations
Schedule 7: Controls and Procedures
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Princeton National Bancorp, Inc. was
held on April 29, 2003, for the purpose of electing four directors each to serve
for a term of three years. Proxies for the meeting were solicited by Management
pursuant to Regulation 14A under the Securities Exchange Act of 1934, and there
was no solicitation in opposition to Management's solicitation.
All four of Management's nominees for director listed in the proxy
statement were elected. The results of the vote were as follows:
Shares
Voted Shares
"For" "Withheld" Abstain
----------- ------------ -----------
Gary C. Bruce 2,659,588 94,657 0
John R. Ernat 2,677,573 76,672 0
Thomas M. Longman 2,667,030 87,215 0
Tony J. Sorcic 2,573,772 180,463 0
In addition, the following directors' terms of offices continued after the
meeting:
Daryl Becker James B. Miller
Don S. Browning Ervin I. Piersch
Sharon L. Covert Stephen W. Samet
Donald E. Grubb Craig O. Wesner
Mark Janko
Other matters submitted at the meeting and approved by the shareholders
were as follows:
Shares Shares
Voted Voted
"For" "Against" Abstain
----------- ------------ -----------
1) Stock Option Plan 1,774,854 701,913 76,865
2) Preferred Stock Authorization 1,674,231 814,922 64,979
3) Adopt "Fair Price" Provision 1,783,950 686,431 83,751
1) The purpose of the Stock Option Plan is to advance the interests of the
Corporation by helping the Corporation and its subsidiary attract and retain the
services of highly qualified employees, officers, and directors, upon whose
judgment, initiative and efforts the Corporation is substantially dependent, and
to provide those persons with further incentives to advance the interests of the
Corporation. The Plan is also established with the objective of encouraging
stock ownership by such employees, officers and directors and aligning their
interests with those of stockholders.
2) The Preferred Stock authorization gives the Board of Directors the express
authority, without further action of the shareholders, to issue up to 100,000
shares of Preferred Stock from time to time in one or more series. These shares
are available in connection with possible future transactions, such as
financings, strategic alliances, corporate mergers, acquisitions, possible
funding of new products or programs or businesses and other uses not presently
determinable.
3) The purpose of the "Fair Price" provision is to advance the interests of the
Corporation and its stockholders by protecting the Corporation from certain
takeover attempts and other transactions that have not been negotiated with, and
approved by, the Board of Directors. The Board of Directors believes that it is
in the best interests of the Corporation and its stockholders to encourage
potential acquirers to negotiate directly with the Board of Directors, and the
Board of Directors believes that these fair price provisions will encourage such
negotiations and discourage hostile takeover attempts.
2
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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 Certificaton of Tony J. Sorcic required by Rule 13a-14(b) and
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350.
32.2 Certificaton of Todd D. Fanning required by Rule 13a-14(b)
and Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350.
(b) The Corporation filed an 8-K on May 1, 2003 related to the announcement
of first quarter 2003 earnings.
The Corporation filed an 8-K on May 5, 2003 related to its
implementation of a stock repurchase program.
The Corporation filed an 8-K on June 16, 2003 related to its quarterly
letter to shareholders.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRINCETON NATIONAL BANCORP, INC.
Date: August 6, 2003 By /s/ Tony J. Sorcic
----------------------------------------
Tony J. Sorcic
President & Chief Executive Officer
Date: August 6, 2003 By /s/ Todd D. Fanning
----------------------------------------
Todd D. Fanning
Vice-President & Chief Financial Officer
3
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 1
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except share data)
JUNE 30, December 31,
2003 2002
--------- ---------
ASSETS
Cash and due from banks $ 18,301 $ 13,939
Interest-bearing deposits with financial institutions 7,389 1,706
Federal funds sold 8,575 3,225
--------- ---------
Total cash and cash equivalents 34,265 18,870
Loans held for sale, at lower of cost or market 2,432 6,761
Investment securities:
Available-for-sale, at fair value 149,832 157,881
Held-to-maturity, at amortized cost 18,490 11,437
--------- ---------
Total investment securities 168,322 169,318
--------- ---------
Loans:
Loans, net of unearned interest 366,374 357,359
Allowance for loan losses (2,430) (2,660)
--------- ---------
Net loans 363,944 354,699
--------- ---------
Premises and equipment, net of accumulated depreciation 13,260 13,388
Bank-owned life insurance 14,103 13,566
Interest receivable 4,081 5,180
Goodwill, net of accumulated amortization 1,355 1,355
Intangible assets, net of accumulated amortization 1,628 1,732
Other real estate owned 0 75
Other assets 2,224 2,431
--------- ---------
TOTAL ASSETS $ 605,614 $ 587,375
========= =========
LIABILITIES
Deposits:
Demand $ 60,956 $ 58,655
Interest-bearing demand 165,464 155,549
Savings 55,627 51,750
Time 249,080 245,313
--------- ---------
Total deposits 531,127 511,267
Borrowings:
Customer repurchase agreements 9,051 10,044
Advances from the Federal Home Loan Bank 5,450 5,750
Interest-bearing demand notes issued to the U.S. Treasury 2,397 2,397
Note payable 1,251 1,300
--------- ---------
Total borrowings 18,149 19,491
Other liabilities 4,638 5,543
--------- ---------
TOTAL LIABILITIES 553,914 536,301
--------- ---------
STOCKHOLDERS' EQUITY
Common stock: $5 par value, 7,000,000 shares
authorized; 4,139,841 issued 20,699 20,699
Surplus 6,904 6,612
Retained earnings 37,280 35,255
Accumulated other comprehensive income, net of tax 2,032 2,218
Less: Cost of 959,383 and 906,155 treasury shares at
June 30, 2003 and December 31, 2002, respectively (15,215) (13,710)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 51,700 51,074
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 605,614 $ 587,375
========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 2
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
INTEREST INCOME:
Interest and fees on loans $ 5,958 $ 6,264 $ 11,942 $ 12,545
Interest and dividends on investment securities 633 1,900 2,437 3,811
Interest on federal funds sold 28 35 48 70
Interest on interest-bearing time deposits in other banks 21 19 37 44
---------- ---------- ---------- ----------
Total interest income 6,640 8,218 14,464 16,470
INTEREST EXPENSE:
Interest on deposits 2,671 3,213 5,441 6,661
Interest on borrowings 106 129 214 272
---------- ---------- ---------- ----------
Total Interest expense 2,777 3,342 5,655 6,933
---------- ---------- ---------- ----------
NET INTEREST INCOME 3,863 4,876 8,809 9,537
Provision for loan losses 165 150 265 375
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,698 4,726 8,544 9,162
NON-INTEREST INCOME:
Trust & farm management fees 318 280 640 583
Service charges on deposit accounts 746 655 1,468 1,326
Other service charges 275 252 538 500
Gain on sales of securities available-for-sale 935 1 935 41
Brokerage fee income 135 165 266 344
Mortgage banking income, net 440 176 943 364
Bank-owned life insurance income 150 184 300 369
Other operating income 12 26 84 105
---------- ---------- ---------- ----------
Total non-interest income 3,011 1,739 5,174 3,632
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,683 2,430 5,254 4,871
Occupancy 315 303 622 601
Equipment expense 396 371 792 727
Federal insurance assessments 54 53 109 106
Intangible assets amortization 52 52 104 104
Data processing 180 187 359 371
Advertising 128 114 218 218
Other operating expense 862 745 1,740 1,492
---------- ---------- ---------- ----------
Total non-interest expense 4,670 4,255 9,198 8,490
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,039 2,210 4,520 4,304
Income tax expense 555 627 1,264 1,203
---------- ---------- ---------- ----------
NET INCOME $ 1,484 $ 1,583 $ 3,256 $ 3,101
========== ========== ========== ==========
NET INCOME PER SHARE:
Basic 0.47 0.48 1.02 0.94
Diluted 0.46 0.48 1.01 0.93
Basic weighted average shares outstanding 3,189,877 3,305,532 3,205,497 3,304,989
Diluted weighted average shares outstanding 3,225,468 3,325,099 3,238,085 3,321,616
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Three Months For the Six Months
Ended June 30 Ended June 30
2003 2002 2003 2002
------- ------- ------- -------
Net income $ 1,484 $ 1,583 $ 3,256 $ 3,101
Other comprehensive income (loss), net of tax
Unrealized holding income (loss) arising during the period 614 1,936 387 1,242
Less: Reclassification adjustment for realized gains
included in net income (573) (1) (573) (26)
------- ------- ------- -------
Other comprehensive income (loss) 41 1,935 (186) 1,216
------- ------- ------- -------
Comprehensive income $ 1,525 $ 3,518 $ 3,070 $ 4,317
======= ======= ======= =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Six Months Ended
Ended June 30
2003 2002
-------- --------
Balance, January 1 $ 51,074 $ 47,500
Net income 3,256 3,101
Cash dividends ($0.31 per share in 2003, and $.26 per share in 2002) (998) (859)
Other comprehensive income (loss), net of tax (186) 1,216
Purchases of treasury stock (75,000 shares in 2003, and 0 shares in 2002) (1,717) 0
Exercise of stock options and re-issuance of treasury stock
(20,419 shares in 2003 and 686 shares in 2002) 241 2
Sales of treasury stock (1,353 shares in 2003, and 2,127 shares in 2002) 30 38
-------- --------
Balance, June 30 $ 51,700 $ 50,998
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY Schedule 4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
For the Six Months
Ended June 30
2003 2002
-------- --------
OPERATING ACTIVITIES:
Net income $ 3,256 $ 3,101
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 703 732
Provision for loan losses 265 375
Amortization of other intangible assets 104 104
Amortization of premiums on investment
securities, net of accretion 1,882 407
Gain on securities transactions, net (935) (41)
Gain on sale of premises and equipment (2) 0
FHLB stock dividends (22) (46)
Loans originated for sale (45,107) (9,166)
Proceeds from sales of loans originated for sale 49,436 15,266
Decrease in interest payable (294) (381)
Decrease in interest receivable 1,099 898
Increase in other assets (255) (893)
Decrease in other liabilities (493) (117)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,637 10,239
-------- --------
INVESTING ACTIVITIES:
Proceeds from sales of investment securities available-for-sale 9,681 1,308
Proceeds from maturities of investment securities available-for-sale 36,097 22,855
Purchase of investment securities available-for-sale (46,185) (38,394)
Proceeds from maturities of investment securities held-to-maturity 814 1,105
Purchase of investment securities held-to-maturity (640) (789)
Proceeds from sales of premises and equipment 2 0
Net increase in loans (9,510) (14,507)
Purchases of premises and equipment (575) (653)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (10,316) (29,075)
-------- --------
FINANCING ACTIVITIES:
Net increase in deposits 19,860 7,491
Net decrease in borrowings (1,342) (1,542)
Dividends paid (998) (859)
Purchases of treasury stock (1,717) 0
Exercise of stock options 241 2
Sales of treasury stock 30 38
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,074 5,130
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,395 (13,706)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 18,870 33,726
-------- --------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 34,265 $ 20,020
======== ========
- ------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,949 $ 7,314
Income taxes $ 1,315 $ 943
Supplemental disclosures of non-cash flow activities:
Loans transferred to other real estate owned $ 27 $ 0
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
Schedule 5
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information required by accounting principles generally accepted in the United
States of America for complete financial statements and related footnote
disclosures. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) considered for a fair presentation of the results for
the interim period have been included. For further information, refer to the
consolidated financial statements and notes included in the Registrant's 2002
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 2002 consolidated financial statements have been reclassified to
conform to the 2003 presentation.
(1) EARNINGS PER SHARE CALCULATION
- ----------------------------------
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated (in thousands, except share data):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Numerator:
Net income $ 1,484 $ 1,583 $ 3,256 $ 3,101
Denominator:
Basic earnings per share-
weighted average shares 3,189,877 3,305,532 3,205,497 3,304,989
Effect of dilutive securities-
stock options 35,591 19,567 32,588 16,627
---------- ---------- ---------- ----------
Diluted earnings per share-
adjusted weighted average shares 3,225,468 3,325,099 3,238,085 3,321,616
Net income per share:
Basic $ 0.47 $ 0.48 $ 1.02 $ 0.94
Diluted $ 0.46 $ 0.48 $ 1.01 $ 0.93
9
(2) GOODWILL AND INTANGIBLE ASSETS
- ----------------------------------
The balance of goodwill, net of accumulated amortization, totaled
$1,355,000 at June 30, 2003 and December 31, 2002. The balance of intangible
assets, net of accumulated amortization, totaled $1,628,000 and $1,732,000 at
June 30, 2003 and December 31, 2002, respectively.
The following table summarizes the Corporation's intangible assets,
which are subject to amortization, as of June 30, 2003 and December 31, 2002.
2003 2002
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------- ------- ------- -------
Core deposit intangible $ 2,968 $(1,402) $ 2,968 $(1,303)
Other intangible assets 160 (98) 160 (93)
------- ------- ------- -------
Total $ 3,128 $(1,500) $ 3,128 $(1,396)
======= ======= ======= =======
Amortization expense totaled $52,000 and $104,000 both for the three
and six months ended June 30, 2003 and June 30, 2002, respectively. The
amortization expense will be approximately $104,000 for the remainder of 2003
and will be approximately $205,000 for each of the next five years.
The Corporation's other intangible assets consist of 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 similar to the interest
method using an accelerated amortization method and are subject to periodic
impairment testing. As of June 30, 2003 no impairment had been recorded. Changes
in the carrying value of capitalized mortgage servicing rights are summarized as
follows:
(in thousands)
Balance, January 1 $ 970
Servicing rights capitalized 470
Amortization of servicing rights (277)
Impairment of servicing rights 0
--------
Balance, June 30 $ 1,163
========
Amortization expense for the mortgage servicing rights asset are based
on assumptions made during each reporting period. Such assumptions include, but
are not limited to, the current level of interest rates and the forecasted
prepayment speeds. Actual amortization expense is also affected by the amount of
loans sold with servicing retained.
The Corporation services loans for others with unpaid principal
balances at June 30, 2003 and December 31, 2002 of approximately $121,788,000,
and $94,678,000, respectively.
10
The following table shows the future estimated amortization expense for
mortgage servicing rights based on existing balances as of June 30, 2003. 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,
estimated prepayment speeds, and market conditions.
ESTIMATED AMORTIZATION EXPENSE:
Amount (in thousands)
---------------------
For the six months ended December 31, 2003 $ 185
For the year ended December 31, 2004 309
For the year ended December 31, 2005 238
For the year ended December 31, 2006 176
For the year ended December 31, 2007 117
For the year ended December 31, 2008 65
Thereafter 73
(3) STOCK OPTION PLAN
- ---------------------
The Corporation accounts for the stock-based compensation plan under
APB Opinion No. 25. For the stock option program, no compensation cost is
recognized in connection with the granting of stock options with an exercise
price equal to the fair market value of the stock on the date of the grant. In
accordance with the disclosure requirements of FAS 123, as amended by FAS 148,
the following table provides the pro forma effect on net income and earnings per
share if the fair value method of accounting for stock-based compensation had
been used for all awards:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------- -------------------------
(in thousands, except per share data) 2003 2002 2003 2002
Net Income as reported $ 1,484 $ 1,583 $ 3,256 $ 3,101
Deduct: Stock-based compensation, net of
tax, that would have been reported
if the fair value based method had
been applied to all awards (60) (30) (120) (60)
--------- --------- --------- ---------
Pro forma net income $ 1,424 $ 1,553 $ 3,136 $ 3,041
========= ========= ========= =========
Basic Earnings Per Share As Reported $ 0.47 $ 0.48 $ 1.02 $ 0.94
Pro Forma 0.45 0.47 0.98 0.92
Diluted Earnings Per Share As Reported $ 0.46 $ 0.48 $ 1.01 $ 0.93
Pro Forma 0.44 0.47 0.97 0.92
11
Schedule 6
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
The following discussion provides information about Princeton National
Bancorp, Inc.'s ("PNBC" or the "Corporation") financial condition and results of
operations for the quarter and six months ended June 30, 2003 and 2002. This
discussion should be read in conjunction with the attached consolidated
financial statements and notes thereto. Certain statements in this report
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including, but not limited to those statements that include the words
"believes", "expects", "anticipates", "estimates", or similar expressions. PNBC
cautions that such forward-looking statements involve risks and uncertainties
that may cause actual results to differ materially from those expressed or
implied. Such risks and uncertainties include potential change in interest
rates, competitive factors in the financial services industry, general economic
conditions, the effect of new legislation, and other risks detailed in documents
filed by the Corporation with the Securities and Exchange Commission from time
to time.
RESULTS OF OPERATIONS
- ---------------------
Net income for the second quarter of 2003 was $1,484,000, or basic
earnings per share of $0.47 (diluted earnings per share of $0.46), as compared
to net income of $1,583,000 in the second quarter of 2002, or basic and diluted
earnings per share of $0.48. This represents a decrease of $99,000 (6.3%) or
$.01 per basic share and $.02 per diluted share. A compression of the net
interest margin, along with an increase in non-interest expenses, more than
offset increases in non-interest income causing the decrease in net income. Net
income for the first six months of 2003 was $3,256,000, or basic earnings per
share of $1.02 (diluted earnings per share of $1.01), compared to net income of
$3,101,000, or basic earnings per share of $0.94 (diluted earnings per share of
$0.93) for the first six months of 2002. This represents an increase of $155,000
(or 5.0%) during the first six months of 2003 over the same period in 2002, and
an increase of $.08 per basic and diluted share (or 8.5% and 8.6%,
respectively). The increase in net income for the first six months of 2003 is a
result of increases in non-interest income, partially offset by an increase in
non-interest expense and a lower net interest margin. The annualized return on
average assets and return on average equity were 1.00% and 11.57%, respectively,
for the second quarter of 2003, compared with 1.16% and 12.97% for the second
quarter of 2002. For the six-month periods, the annualized return on average
assets and average equity were 1.11% and 12.84%, respectively for 2003, compared
to 1.14% and 12.92%, respectively for 2002.
Net interest income before provision for loan losses was $3,863,000 for
the second quarter of 2003, compared to $4,876,000 for the second quarter of
2002 (a decrease of $1,013,000 or 20.8%). This decrease resulted from premium
amortization of $1,184,000 due to accelerated prepayments in the collateralized
mortgage obligation ("CMO") portfolio causing the yield on taxable investment
securities to decrease from
12
5.29% for the six months ended June 30, 2002 to 2.09% for the six months ended
June 30, 2003. The resulting net yield on interest-earning assets (on a fully
taxable equivalent basis) decreased from 4.17% in the second quarter of 2002 to
3.10% in the second quarter of 2003. For the first six months of 2003, the net
yield on interest-earning assets (on a fully taxable equivalent basis) decreased
to 3.51% from 4.12% for the first six months of 2002.
PNBC recorded a loan loss provision of $165,000 in the second quarter
of 2003 compared to $150,000 in the second quarter of 2002. For the six-month
comparable periods, PNBC recorded a loan loss provision of $265,000 in 2003 and
$375,000 in 2002. The provision expense recorded each quarter is determined by
management's evaluation of the risk characteristics of the loan portfolio. For
the second quarter of 2003, PNBC had net charge-offs of $280,000, compared to
net recoveries of $141,000 for the second quarter of 2002. For the six-month
comparable periods, PNBC had net charge-offs of $495,000 in 2003 and net
recoveries of $50,000 in 2002.
Non-interest income totaled $3,011,000 for the second quarter of 2003,
as compared to $1,739,000 during the second quarter of 2002, an increase of
$1,272,000 (or 73.2%). This is a result of the gains on sales of securities,
along with an increase in mortgage banking income of $264,000 (or 150.0%) due to
fee income generated from continued origination/refinancing and subsequent sales
and servicing of mortgage loans in the secondary market. Year-to-date in 2003,
non-interest income totals $5,174,000 compared to $3,632,000 for the first six
months of 2002 (an increase of $1,542,000 or 42.5%). Gains on sales of
securities have increased by $894,000 during the first half of 2003. Other
notable increases have been seen in mortgage banking income ($579,000 or
159.1%), service charges on deposit accounts ($142,000 or 10.7%) and in trust
and farm management fees ($57,000 or 9.8%).
Total non-interest expense for the second quarter of 2003 was
$4,670,000, an increase of $415,000 (or 9.8%) from $4,255,000 in the second
quarter of 2002. The largest increases was in salaries/employee benefits, which
increased $253,000 (or 10.4%) due to increases in commissions from mortgage
banking operations as well as increased insurance costs. Other notable increases
were in other operating expenses, which increased $117,000 (or 15.7%).
Year-to-date non-interest expenses for 2003 of $9,198,000 have increased
$708,000 (or 8.3%) from the year-to-date totals at June 30, 2002, but are below
budgeted expectations. The most notable increases are again in salaries/employee
benefits ($383,000 or 7.9%), other operating expense ($248,000 or 16.6%), and in
equipment expense, which increased $65,000 (8.9%) due to increased depreciation
from the upgrade of bank technology. Additionally impacting other operating
expense was the Corporation's decision to outsource the internal audit function.
Given the continued growth of the organization and the current focus on
corporate accounting procedures, PNBC believes this decision adds value to the
organization.
INCOME TAXES
- ------------
Income tax expense totaled $555,000 for the second quarter of 2003, as
compared to $627,000 for the second quarter of 2002. The effective tax rate was
27.2% for the three months ended June 30, 2003 compared to 28.4% for the three
months ended June 30, 2002. Income tax expense totaled $1,264,000 for the first
six months of 2003, as compared to $1,203,000 for the same time period of 2002.
The effective tax rate was 28.0% for the six months ended June 30, 2003 compared
to 27.9% for the six months ended June 30, 2002.
13
ANALYSIS OF FINANCIAL CONDITION
- -------------------------------
Total assets at June 30, 2003 increased to $605,614,000 from
$587,375,000 at December 31, 2002 (an increase of $18.2 million or 3.1%). Total
deposits at June 30, 2003 increased to $531,127,000 from $511,267,000 at
December 31, 2002 (an increase of $19.9 million or 3.9%). As interest rates
continue to decrease, there continues to be a shift to savings and
interest-bearing demand deposits (which would include money market and interest
checking accounts) and less of an increase in time deposits. Comparing
categories of deposits at June 30, 2003 to the December 31, 2002 totals:
interest-bearing demand deposits increased $9.9 million (or 6.4%), savings
deposits increased $3.9 million (or 7.5%), time deposits increased $3.8 million
(or 1.5%); and demand deposits increased by $2.3 million (or 3.9%). 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 $19,491,000 at December 31, 2002 to $18,149,000 at June
30, 2003 (decrease of $1.3 million or 6.9%). Investments totaled $168,322,000 at
June 30, 2003, compared to $169,318,000 at December 31, 2002 (a decrease of
$996,000 or 0.6%).
Loan balances, net of unearned interest, increased to $368,806,000 at
June 30, 2003, compared to $364,120,000 at December 31, 2002 (an increase of
$4.7 million or 1.3%). Non-performing loans totaled $2,951,000 or 0.81% of net
loans at June 30, 2003, as compared to $3,820,000 or 1.07% of net loans at
December 31, 2002.
For the six months ended June 30, 2003, the subsidiary bank charged off
$579,000 of loans and had recoveries of $84,000, compared to charge-offs of
$289,000 and recoveries of $339,000 during the six months ended June 30, 2002.
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 June 30, 2003, the
allowance was $2,430,000 which is 82.3% of non-performing loans and 0.66% of
total loans, compared with $2,660,000 which was 69.6% of non-performing loans
and 0.73% of total loans at December 31, 2002.
At June 30, 2003, impaired loans totaled $1,718,000 compared to
$2,230,000 at December 31, 2002. Loans 90 days or more past due and still
accruing interest at June 30, 2003 were $0, compared to $23,000 at December 31,
2002. The balances of non-performing and impaired loans have steadily decreased
throughout 2003 and are now well below industry averages. There is a specific
loan loss reserve of $175,000 established for impaired loans as of June 30, 2003
compared to a specific loan loss reserve of $173,000 at December 31, 2002.
PNBC's management analyzes the allowance for loan losses monthly and believes
the current level of allowance is adequate to meet probable losses as of June
30, 2003.
CAPITAL RESOURCES
- -----------------
Federal regulations require all financial institutions to evaluate
capital adequacy by the risk-based capital method, which makes capital
requirements more sensitive to the differences in the level of risk assets. At
June 30, 2003 total risk-based capital of PNBC was 11.97%, compared to 11.74% at
December 31, 2002. The Tier 1 capital ratio increased from 7.80% at December 31,
2002, to 7.85% at June 30, 2003. Total stockholders' equity to total assets at
June 30, 2003 decreased to 8.54% from 8.70% at December 31, 2002.
14
LIQUIDITY
- ---------
Liquidity is measured by a financial institution's ability to raise
funds through deposits, borrowed funds, capital, or the sale of assets.
Additional sources of liquidity include cash flow from the repayment of loans.
Major uses of cash include the origination of loans and purchase of investment
securities. Cash flows provided by operating and financing activities, offset by
those used in investing activities, resulted in a net increase in cash and cash
equivalents of $15,395,000 from December 31, 2002 to June 30, 2003. This
increase was due to a net increase in deposits, offset by a net increase in
loans. For more detailed information, see PNBC's Consolidated Statements of Cash
Flows.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
- -------------------------------------------------
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 they do for
on-balance-sheet instruments. At June 30, 2003 commitments to extend credit and
standby letters of credit were approximately $94,740,000 and $1,903,000,
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.
LEGAL PROCEEDINGS
- -----------------
There are various claims pending against PNBC's subsidiary bank,
arising in the normal course of business. Management believes, based upon
consultation with legal counsel, that liabilities arising from these
proceedings, if any, will not be material to PNBC's financial condition.
15
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
There has been no material change in market risk since December 31,
2002, as reported in PNBC's 2002 Annual Report on Form 10-K.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities"
which provides new accounting guidance on when to consolidate a variable
interest entity. A variable interest entity exists when either the total equity
investment at risk is not sufficient to permit the entity to finance its
activities by itself, or the equity investors lack one of three characteristics
associated with owning a controlling financial interest. Those characteristics
include the direct or indirect ability to make decisions about an entity's
activities through voting rights or similar rights, the obligation to absorb the
expected loss of an entity if they occur, and the right to receive the expected
residual return of the entity to occur. The Corporation does not expect the
adoption of the Interpretation will have any impact on the consolidated
financial statements.
In April 2003, the FASB issued FAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
Statement is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The
Corporation does not expect the adoption of this Statement will have any impact
on the consolidated financial statement.s
In May 2003, the FASB issued FAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
would require that certain financial instruments with characteristics of both
liabilities and equity be classified on the consolidated balance sheet as
liabilities. The Statement is effective for financial instruments entered into
or modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. The Corporation does not
expect the adoption of this Statement will have any impact on the consolidated
financial statements
EFFECTS OF INFLATION
- --------------------
The consolidated financial statements and related consolidated
financial data presented herein have been prepared in accordance with accounting
principles generally accepted in the United States of America and practices
within the banking industry which require the measurement of financial condition
and operating results in terms of historical dollars, without considering the
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on a financial institution's performance than the
effects of general levels of inflation.
16
PRINCETON NATIONAL BANCORP, INC. AND SUBSIDIARY
The following table sets forth (in thousands) details of average balances,
interest income and expense, and resulting annualized rates for the Corporation
for the periods indicated, reported on a fully taxable equivalent basis, using a
tax rate of 34%.
------------------------------------------------------------------------------
SIX MONTHS ENDED, JUNE 30, 2003 Six Months Ended, June 30, 2002
------------------------------------------------------------------------------
AVERAGE YIELD/ Average Yield/
BALANCE INTEREST COST Balance Interest Cost
-------- -------- -------- -------- -------- --------
AVERAGE INTEREST-EARNING ASSETS
Interest-bearing deposits $ 6,899 $ 37 1.10% $ 5,665 $ 44 1.57%
Taxable investment securities 114,365 1,183 2.09% 98,778 2,592 5.29%
Tax-exempt investment securities 52,302 1,906 7.35% 49,493 1,847 7.53%
Federal funds sold 8,313 48 1.17% 8,740 70 1.62%
Net loans 361,612 11,942 6.66% 335,870 12,557 7.54%
-------- -------- -------- --------
Total interest-earning assets 543,491 15,116 5.61% 498,545 17,110 6.92%
-------- -------- -------- --------
Average non-interest earning assets 49,286 51,770
-------- --------
Total average assets $592,777 $550,315
======== ========
AVERAGE INTEREST-BEARING LIABILITIES
Interest-bearing demand deposits $160,721 1,075 1.35% $120,506 1,095 1.83%
Savings deposits 54,898 192 0.70% 55,564 375 1.36%
Time deposits 247,868 4,174 3.40% 248,668 5,191 4.21%
Interest-bearing demand notes
issued to the U.S. Treasury 728 4 1.02% 993 8 1.63%
Federal funds purchased and
securities repurchase agreements 9,200 35 0.76% 11,397 62 1.10%
Advances from Federal Home Loan Bank 5,677 156 5.54% 6,330 173 5.52%
Borrowings 1,275 21 3.32% 1,523 29 3.81%
-------- -------- -------- --------
Total interest-bearing liabilities 480,368 5,655 2.37% 444,981 6,933 3.14%
-------- -------- -------- --------
Net yield on average interest-earning assets $ 9,461 3.51% $ 10,177 4.12%
======== ========
Average non-interest-bearing liabilities 61,264 56,950
Average stockholders' equity 51,145 48,384
-------- --------
Total average liabilities and
stockholders' equity $592,777 $550,315
======== ========
17
SCHEDULE 7. CONTROLS AND PROCEDURES
(1) Disclosure controls and procedures. We evaluated the effectiveness of
the design and operation of our disclosure controls and procedures as
of June 30, 2003. Our disclosure controls and procedures are the
controls and other procedures that we designed to ensure that we
record, process, summarize and report in a timely manner the
information we must disclose in reports that we file with or submit to
the SEC. Tony J. Sorcic, President and Chief Executive Officer, and
Todd D. Fanning, Vice-President and Chief Financial Officer, reviewed
and participated in this evaluation. Based on this evaluation, Messrs.
Sorcic and Fanning concluded that, as of the date of their evaluation,
our disclosure controls were effective.
(2) Internal controls. There have not been any significant changes in our
internal accounting controls or in other factors during the quarter
ended June 30, 2003 that could significantly affect those controls.
18
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.
19